<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 3, 2000
REGISTRATION NO. 333-87547
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 3
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 3, 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 8.
-------------------------
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
March 3, 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
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TABLE OF CONTENTS
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PAGE
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Prospectus Summary.................. 3
Risk Factors........................ 8
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.............................. 34
Management's Discussion and Analysis
of Financial Condition and Results
of Operations..................... 35
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PAGE
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Business............................ 46
Management.......................... 65
Related Party Transactions.......... 77
Principal Stockholders.............. 85
Description of Capital Stock........ 89
Rescission Offer.................... 92
Shares Eligible For Future Sale..... 93
Underwriters........................ 95
Legal Matters....................... 97
Experts............................. 97
Where You Can Find Information...... 98
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.
2
<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 60,000,000 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.
3
<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.
4
<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.; and
- excludes approximately 100,000 shares of common stock to be issued as
accrued but unpaid dividends on preferred stock after December 31, 1999.
5
<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 78;
- 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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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; and
- the termination of the put option described in a "Related Party
Transactions -- Transaction with Scott Blum" on page 81, 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.
6
<PAGE> 10
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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>
7
<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
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<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 60.
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 61 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.
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<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.
20
<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 74.6% 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 74.6% 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
21
<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
22
<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 27,640,201 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.
23
<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.
24
<PAGE> 28
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> 29
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 80 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 92 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.
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<PAGE> 30
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 81, 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; and
- the exclusion of up to 900,000 shares of common stock to be issued to
acquire Mjuice.com, Inc.
27
<PAGE> 31
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.
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<PAGE> 32
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> 33
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> 34
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)
=========== ======= ===========
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> 35
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;
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<PAGE> 36
- 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.
33
<PAGE> 37
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.
34
<PAGE> 38
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.
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
35
<PAGE> 39
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 8 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 38. 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
36
<PAGE> 40
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
37
<PAGE> 41
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
38
<PAGE> 42
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> 43
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.
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
40
<PAGE> 44
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.
41
<PAGE> 45
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. Any additional financings, if needed,
might not be available on reasonable terms or at all. Failure to raise capital
when needed could seriously harm our business and operating results. If
additional funds are raised through the issuance of equity securities, the
percentage of ownership of our stockholders would be reduced. Furthermore, these
equity securities might have rights, preferences or privileges senior to our
common stock.
YEAR 2000
Many existing computer programs use only two digits to identify a year.
These programs were designed and developed without addressing the impact of the
recent change in the century. If not
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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.
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
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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 60,000,000 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 $30.0 million in
connection with this strategic relationship.
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<PAGE> 51
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 81. An
affiliate of Cisneros Television Group invested $20.0 million in ARTISTdirect in
connection with this strategic relationship.
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<PAGE> 52
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 92 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
49
<PAGE> 53
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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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.
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
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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
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
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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 Short
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, one advertiser 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
the Company's 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>
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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, Columbia House, a unit of Time Warner and Sony, announced that they
have agreed to merge with CDnow. In addition, 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 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 81. 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.
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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. ARTISTdirect has not granted stock
appreciation rights or restricted stock awards and has no long-term compensation
benefits other than stock options.
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 deferred compensation arrangement,
please see "Related Party Transactions -- Deferred Compensation Agreement on
page 80.
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
5,250,000 shares of our common stock for issuance to our employees,
non-employee members of our board of directors and consultants. This
share reserve will automatically increase on the first trading day in
January each calendar year, beginning 2001, by an amount equal to 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
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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 1,250,000 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 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, 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
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.
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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 this offering is signed
and will end on the last business day in October 2001. The next offering period
will start on the first business day in November 2001, and subsequent offering
periods will be set by our compensation committee.
Eligible Employees. Individuals scheduled to work more than 20 hours per
week for more than 5 calendar months per year may join an offering period on the
start date or any semi-annual entry date within that period. Semi-annual entry
dates will occur on the first business day of May and November each year.
Individuals who become eligible employees after the start date of an offering
period may join the plan on any subsequent semi-annual entry date within that
offering period.
Payroll Deductions. A participant may contribute up to 15% of his or her
total cash earnings through payroll deductions, and the accumulated deductions
will be applied to the purchase of shares on each semi-annual purchase date. The
purchase price per share will be equal to 85% of the fair market value per share
on the participant's entry date into the offering period or, if lower, 85% of
the fair market value per share on the semi-annual purchase date. Semi-annual
purchase dates will occur on the last business day of April and October each
year. However, a participant may not purchase more than 750 shares on any
purchase date, and not more than 500,000 shares may be purchased in total by all
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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
(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.
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- 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 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
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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 80 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.
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.
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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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ISSUANCES OF ARTISTDIRECT, LLC SERIES A PREFERRED UNITS
Between July 1998 and December 1998, ARTISTdirect, LLC sold a total of
9,458,340 of its Series A preferred units at a purchase price of approximately
$0.31 per unit to the following purchasers:
<TABLE>
<CAPTION>
AGGREGATE
SERIES A PREFERRED PURCHASE
PURCHASER UNITS PRICE
--------- -------------------- ----------
<S> <C> <C>
Constellation Venture Capital, L.P........................ 5,850,520 $1,800,000
Psilos Group Partners, L.P................................ 1,950,172 600,000
DreamMedia Internet Ventures, LLC......................... 1,462,632 450,000
Carl Kawabe............................................... 195,016 60,000
</TABLE>
In January 1999, ARTISTdirect, LLC redeemed 780,068 of its Series A
preferred units from Psilos Group Partners, L.P. for a purchase price of
$240,080 and re-issued those units to CCP/Psilos ARTISTdirect, LLC for the same
price. Mr. Friedman, one of our directors, is the General Partner of
Constellation Venture Capital, L.P. and Mr. Krupa, one of our directors, is the
Managing Director of Psilos Group Managers, L.P.
ISSUANCES OF UBL, LLC UNITS
Between July 1998 and December 1998, UBL, LLC, sold an aggregate of
1,940,000 of its Series A preferred units, and 1,940,000 of its Series B
preferred units, at a purchase price of $1.00 per unit to the following
purchasers:
<TABLE>
<CAPTION>
AGGREGATE
SERIES A PREFERRED SERIES B PREFERRED PURCHASE
PURCHASER UNITS UNITS PRICE
--------- -------------------- -------------------- ----------
<S> <C> <C> <C>
Constellation Venture Capital,
L.P................................ 1,200,000 -- $1,200,000
Psilos Group Partners, L.P........... 400,000 -- 400,000
DreamMedia Internet Ventures, LLC.... 300,000 -- 300,000
Carl Kawabe.......................... 40,000 -- 40,000
ADNM................................. -- 1,940,000 1,940,000
</TABLE>
In January 1999, UBL, LLC redeemed 160,000 of its Series A preferred units
from Psilos Group Partners, L.P. for a purchase price of $160,000 and re-issued
those units to CCP/Psilos UBL, LLC for the same price.
In February 1999, UBL, LLC issued 392,134 of its common units to Scott
Blum, President of iMusic and our Vice President, Research and Development, in
consideration of his contribution of 540,000 shares of common stock of iMusic,
Inc. All information with respect to units of UBL, LLC in this section gives
effect to a 1,000-for-1 unit split that occurred in April 1999.
EXCHANGE TRANSACTION AND ISSUANCE OF ARTISTDIRECT, LLC SERIES B PREFERRED
UNITS
In May 1999, we completed an exchange transaction in which the holders of
common and/or Series A preferred units of UBL, LLC, other than ADNM exchanged a
total of 8,042,134 UBL, LLC common units and 1,940,000 UBL, LLC preferred units
for a total of 13,982,207 common units and 3,372,920 Series A preferred units of
ARTISTdirect, LLC. At the same time, ADNM distributed units in UBL, LLC to
ARTISTdirect, LLC and to ARTISTdirect Holdings LLC, so that after giving effect
to the exchange and distribution transactions, UBL, LLC was 99% owned by
ARTISTdirect, LLC and 1% owned by ARTISTdirect Holdings LLC. In connection with
this transaction, Messrs. Geiger and Muller contributed 491,467 and 995,819
common units, respectively, to the capital of ARTISTdirect, LLC. These units
were then reissued to Mr. Rubin.
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In May 1999, ARTISTdirect, LLC also sold an aggregate of 15,000,000 of its
Series B preferred units at a purchase price of $1.00 per unit to the following
purchasers:
<TABLE>
<CAPTION>
SERIES B AGGREGATE
PREFERRED PURCHASE
PURCHASER UNITS PRICE
--------- --------------- ----------
<S> <C> <C>
Chase Capital Partners...................................... 4,800,000 $4,800,000
CCP/Psilos ARTISTdirect, LLC................................ 922,509 922,509
Flatiron Fund............................................... 200,000 200,000
Bowman Capital Management LLC............................... 4,000,000 4,000,000
Constellation Venture Capital, L.P.......................... 2,500,000 2,500,000
Psilos Group Partners, L.P.................................. 1,383,764 1,383,764
Cassandra/ARTISTdirect Partners, LLC........................ 1,000,000 1,000,000
Toronto Dominion Investments, Inc........................... 193,727 193,727
</TABLE>
In connection with this financing, the holders of Series A preferred units
in ARTISTdirect, LLC received 354,526 common units in ARTISTdirect, LLC and
$96,000 in exchange for accrued and unpaid preferred returns.
The preferred and common units of ARTISTdirect, LLC 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 85 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 87. 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 47 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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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.
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.
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.
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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;
- 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
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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".
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
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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.
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.
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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 1.1
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 82 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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<PAGE> 95
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
81 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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<PAGE> 96
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 24,948,000 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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<PAGE> 97
- 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 81 for more information
on these rights.
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<PAGE> 98
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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<PAGE> 99
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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<PAGE> 100
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 45,457 shares of our common stock 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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<PAGE> 101
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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<PAGE> 102
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> 103
The Reverse Stock Split as described in Note 2 to the consolidated
financial statements has not been consummated at March 3, 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> 104
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 3,750,000 shares, issued and outstanding
3,207,815 shares in 1998 and 1999....................... 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................................ -- 15,350 --
Series C redeemable preferred stock, $.01 par value.
Authorized 8,550,000, issued and outstanding 5,905,374
shares in 1999.......................................... -- 82,188 --
Redeemable common securities, $.01 par value. Authorized
10,800,000 shares....................................... 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> 105
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)
====== ======= ===========
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> 106
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> 107
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> 108
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"). 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 "Exchange Transaction").
PRINCIPLES OF CONSOLIDATION
The accompanying financial statements include the consolidated accounts of
the Company and its subsidiaries in which it has controlling interests. 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> 109
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> 110
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> 111
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> 112
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>
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> 113
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> 114
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> 115
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> 116
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> 117
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> 118
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> 119
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 redemption value of the
Series A Preferred shares was $5.0 million as of December 31, 1998 and 1999.
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,
F-18
<PAGE> 120
ARTISTDIRECT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 holder has communicated to the Company that he will not exercise the
redemption right and will retain the common shares. 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 Redeemable Stock was initially recorded at its fair value which shall be
accreted to the redemption value through February 2002. The Redeemable Stock has
liquidation preference over the common shares. The accreted value of the
Redeemable Stock was $2.4 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 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.
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.
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.
F-19
<PAGE> 121
ARTISTDIRECT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
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
F-20
<PAGE> 122
ARTISTDIRECT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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>
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.
F-21
<PAGE> 123
ARTISTDIRECT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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> 124
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> 125
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> 126
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
</TABLE>
F-25
<PAGE> 127
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>
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)
====== ======= ========
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.
F-26
<PAGE> 128
ARTISTDIRECT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 expected to close shortly following the
Company's initial public offering.
F-27
<PAGE> 129
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> 130
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> 131
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> 132
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> 133
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> 134
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> 135
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> 136
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> 137
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> 138
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> 139
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> 140
Section 145 of the GCL further provides that to the extent a director or
officer of a corporation has been successful in the defense of any action, suit
or proceeding referred to in subsections (a) and (b) or in the defense of any
claim, issue or matter therein, he or she shall be indemnified against expenses
(including attorneys' fees) actually and reasonably incurred by him or her in
connection therewith; that indemnification provided for by Section 145 shall not
be deemed exclusive of any other rights to which the indemnified party may be
entitled; and that the corporation shall have power to purchase and maintain
insurance on behalf of a director or officer of the corporation against any
liability asserted against him or her or incurred by him or her in any such
capacity or arising out of his or her status as such whether or not the
corporation would have the power to indemnify him or her against such
liabilities under Section 145.
Reference is made to the Form of Underwriting Agreement (to be filed as
Exhibit 1.1 to this Registration Statement) which provides for indemnification
by the Underwriters under certain circumstances of the directors and officers of
the Company signing the Registration Statement and certain controlling persons
of the Company against certain liabilities, including those arising under the
Securities Act.
The Company carries directors' and officers' liability insurance covering
its directors and officers.
Insofar as indemnification for liabilities under the Securities Act may be
permitted to directors, officers or persons controlling the Company pursuant to
the foregoing provisions, the Company has been informed that, in the opinion of
the Commission, such indemnification is against public policy as expressed in
the Securities Act and is therefore unenforceable.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
The following is a summary of the transactions by ARTISTdirect LLC,
predecessor to the Company since it was organized in August 1996, involving
sales of the Company's securities that were not registered under the Securities
Act. All of the numbers reflect the 35-for-1 forward unit split that occurred in
May 1999 with respect to common and preferred securities of ARTISTdirect, LLC,
but do not reflect the one-for-four reverse stock split of ARTISTdirect, Inc.
that will occur 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,
II-2
<PAGE> 141
including affiliates of Constellation Venture Capital, L.P., Chase
Capital Partners, Psilos Group Partners, DreamMedia Internet Ventures
and Carl Kawabe.
(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 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!.
(j) 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.
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 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
II-3
<PAGE> 142
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.
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.
</TABLE>
II-4
<PAGE> 143
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
-------- -----------
<S> <C>
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.
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>
II-5
<PAGE> 144
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
-------- -----------
<S> <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 (See page II-6).
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> 145
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Amendment No. 3 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 th day of March 2000.
ARTISTDIRECT, INC.
By: /s/ MARC P. GEIGER
------------------------------------
Marc P. Geiger
Chief Executive Officer and
Chairman of the Board
KNOW ALL MEN BY THESE PRESENTS, that each of Carlos E. Cisneros and Dara
Khosrowshahi, whose signatures appear below, constitutes and appoints Marc P.
Geiger and James B. Carroll and each of them, his true and lawful
attorneys-in-fact and agents, with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all such
capacities, to sign any and all amendments (including post-effective amendments)
to this Registration Statement, as well as any registration statement (or
amendment thereto) related to this Registration Statement that is to be
effective upon filing pursuant to Rule 462(b) under the Securities Act, and to
file the same, with all exhibits thereto, and all documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or any of them, or their or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act, this Amendment No. 3 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 3, 2000
- ----------------------------------------------------- Chairman of the Board
Marc P. Geiger (Principal Executive Officer)
DONALD P. MULLER * President, ARTISTdirect March 3, 2000
- ----------------------------------------------------- Agency and Kneeling Elephant
Donald P. Muller Records and Director
KEITH YOKOMOTO * Chief Operating Officer, March 3, 2000
- ----------------------------------------------------- President and Director
Keith Yokomoto
/s/ JAMES B. CARROLL Executive Vice President and March 3, 2000
- ----------------------------------------------------- Chief Financial Officer
James B. Carroll (Principal Financial and
Accounting Officer)
</TABLE>
II-7
<PAGE> 146
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
ALLEN D. LENARD * Director March 3, 2000
- -----------------------------------------------------
Allen D. Lenard
CLIFFORD H. FRIEDMAN * Director March 3, 2000
- -----------------------------------------------------
Clifford H. Friedman
STEPHEN KRUPA * Director March 3, 2000
- -----------------------------------------------------
Stephen Krupa
RICK RUBIN * Director March 3, 2000
- -----------------------------------------------------
Rick Rubin
/s/ CARLOS E. CISNEROS Director March 3, 2000
- -----------------------------------------------------
Carlos E. Cisneros
/s/ DARA KHOSROWSHAHI Director March 3, 2000
- -----------------------------------------------------
Dara Khosrowshahi
* Power of attorney
By: /s/ JAMES B. CARROLL
- -----------------------------------------------------
James B. Carroll
Attorney-in-Fact
</TABLE>
II-8
<PAGE> 147
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> 148
<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> 149
<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 (See page II-6)..........................
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.
<PAGE> 1
EXHIBIT 1.1
5,000,000 SHARES
ARTISTDIRECT, INC.
COMMON STOCK $.01 PAR VALUE PER SHARE
UNDERWRITING AGREEMENT
__________, 1999
<PAGE> 2
_____________, 2000
Morgan Stanley & Co. Incorporated
Bear, Stearns & Co. Inc.
Deutsche Bank Securities Inc.
c/o Morgan Stanley & Co. Incorporated
1585 Broadway
New York, New York 10036
Dear Sirs and Mesdames:
ARTISTdirect, Inc., a Delaware corporation (the "COMPANY"), proposes to
issue and sell to the several Underwriters named in Schedule I hereto (the
"UNDERWRITERS") 5,000,000 shares of its common stock, $.01 par value per share
(the "FIRM SHARES"). The Company also proposes to issue and sell to the several
Underwriters not more than an additional 750,000 shares of its common stock,
$.01 per value per share (the "ADDITIONAL SHARES") if and to the extent that
you, as Managers of the offering, shall have determined to exercise, on behalf
of the Underwriters, the right to purchase such shares of common stock granted
to the Underwriters in Section 2 hereof. The Firm Shares and the Additional
Shares are hereinafter collectively referred to as the "SHARES". The shares of
Common Stock, $.01 par value per share of the Company to be outstanding after
giving effect to the sales contemplated hereby are hereinafter referred to as
the "COMMON STOCK."
The Company has filed with the Securities and Exchange Commission (the
"COMMISSION") a registration statement, including a prospectus, relating to the
Shares. The registration statement as amended at the time it becomes effective,
including the information (if any) deemed to be part of the registration
statement at the time of effectiveness pursuant to Rule 430A under the
Securities Act of 1933, as amended (the "SECURITIES ACT"), is hereinafter
referred to as the "REGISTRATION STATEMENT"; the prospectus in the form first
used to confirm sales of Shares is hereinafter collectively referred to as the
"PROSPECTUS". If the Company has filed an abbreviated registration statement to
register additional shares of Common Stock pursuant to Rule 462(b) under the
Securities Act (the "RULE 462 REGISTRATION STATEMENT"), then any reference
herein to the term "REGISTRATION STATEMENT" shall be deemed to include such Rule
462 Registration Statement.
Morgan Stanley & Co. Incorporated ("MORGAN STANLEY") has agreed to
reserve up to 575,000 of the Shares to be purchased by it under this Agreement
for sale to the Company's directors, officers, employees and business associates
and other parties related to the Company (collectively, "PARTICIPANTS"), as set
forth in the Prospectus under the heading "Underwriters" (the "DIRECTED SHARE
PROGRAM"). The Shares to be sold by Morgan Stanley and its affiliates pursuant
to the Directed Share Program are referred to hereinafter as the "DIRECTED
SHARES." Any Directed Shares not orally confirmed for purchase by any
Participants by the end of the business day on which this Agreement is executed
will be offered to the public by the Underwriters as set forth in the
Prospectus.
<PAGE> 3
1. Representations and Warranties of the Company. The Company represents
and warrants to and agrees with each of the Underwriters that:
(a) The Registration Statement has become effective; no stop
order suspending the effectiveness of the Registration Statement is in
effect, and no proceedings for such purpose are pending before or, to
the Company's knowledge, threatened by the Commission.
(b) (i) The Registration Statement, when it became effective,
did not contain and, as amended or supplemented, if applicable, will not
contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the
statements therein not misleading, (ii) the Registration Statement and
the Prospectus comply and, as amended or supplemented, if applicable,
will comply in all material respects with the Securities Act and the
applicable rules and regulations of the Commission thereunder and (iii)
the Prospectus does not contain and, as amended or supplemented, if
applicable, will not contain any untrue statement of a material fact or
omit to state a material fact necessary to make the statements therein,
in the light of the circumstances under which they were made, not
misleading, except that the representations and warranties set forth in
this paragraph do not apply to statements or omissions in the
Registration Statement or the Prospectus based upon information relating
to any Underwriter furnished to the Company in writing by such
Underwriter through you expressly for use therein.
(c) The Company has been duly incorporated, is validly existing
as a corporation in good standing under the laws of the jurisdiction of
its incorporation, has the corporate power and authority to own its
property and to conduct its business as described in the Prospectus and
is duly qualified to transact business and is in good standing in each
jurisdiction in which the conduct of its business or its ownership or
leasing of property requires such qualification, except to the extent
that the failure to be so qualified or be in good standing would not
have a material adverse effect on the Company and its subsidiaries,
taken as a whole.
(d) Each subsidiary of the Company that is a corporation has
been duly incorporated, is validly existing as a corporation in good
standing under the laws of the jurisdiction of its incorporation and has
the corporate power and authority to own its property and to conduct its
business as described in the Prospectus. Each subsidiary of the Company
that is a limited liability company has been duly formed, is validly
existing as a limited liability company under the laws of the
jurisdiction of its formation and has the power and authority to own its
property and to conduct its business as described in the Prospectus.
Each subsidiary of the Company is duly qualified to transact business
and is in good standing in each jurisdiction in which the conduct of its
business or its ownership or leasing of property requires such
qualification, except to the extent that the failure to be so qualified
or be in good standing would not have a material adverse effect on the
Company and its subsidiaries, taken as a whole; all of the issued shares
of capital stock or membership interests, as the case may be, of each
subsidiary of the Company have been duly and validly authorized and
issued, are fully paid and non-assessable and are owned
2
<PAGE> 4
directly or indirectly by the Company, free and clear of all liens,
encumbrances, equities or claims.
(e) This Agreement has been duly authorized, executed and
delivered by the Company, and the Company has all requisite corporate
power and authority to (i) execute, deliver and perform its obligations
under this Agreement, (ii) execute, deliver and perform its obligations
under all other agreements and instruments executed and delivered by the
Company pursuant to or in connection with this Agreement, and (iii)
issue the Shares, in the manner and for the purpose contemplated by this
Agreement.
(f) The authorized capital stock of the Company conforms as to
legal matters to the description thereof contained in the Prospectus.
(g) The shares of Common Stock outstanding prior to the issuance
of the Shares have been duly authorized and are validly issued, fully
paid and non-assessable.
(h) The Shares have been duly authorized and, when issued and
delivered in accordance with the terms of this Agreement, will be
validly issued, fully paid and non-assessable, and the issuance of such
Shares will not be subject to any preemptive or similar rights.
(i) The execution and delivery by the Company of, and the
performance by the Company of its obligations under, this Agreement will
not contravene any provision of applicable law or the certificate of
incorporation or by-laws of the Company or any agreement or other
instrument binding upon the Company or any of its subsidiaries that is
material to the Company and its subsidiaries, taken as a whole, or any
judgment, order or decree of any governmental body, agency or court
having jurisdiction over the Company or any subsidiary, and no consent,
approval, authorization or order of, or qualification with, any
governmental body or agency is required for the performance by the
Company of its obligations under this Agreement, except such as may be
required by the securities or Blue Sky laws of the various states in
connection with the offer and sale of the Shares.
(j) There has not occurred any material adverse change, or any
development involving a prospective material adverse change, in the
condition, financial or otherwise, or in the earnings, business or
operations of the Company and its subsidiaries, taken as a whole, from
that set forth in the Prospectus (exclusive of any amendments or
supplements thereto subsequent to the date of this Agreement).
(k) There are no legal or governmental proceedings pending or,
to the Company's knowledge, threatened to which the Company or any of
its subsidiaries is a party or to which any of the properties of the
Company or any of its subsidiaries is subject that are required to be
described in the Registration Statement or the Prospectus and are not so
described or any statutes, regulations, contracts or other documents
that are required to be described in the Registration Statement or the
Prospectus or to be filed as exhibits to the Registration Statement that
are not described or filed as required.
(l) Each preliminary prospectus filed as part of the
registration statement as originally filed or as part of any amendment
thereto, or filed pursuant to Rule 424 under
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<PAGE> 5
the Securities Act, complied when so filed in all material respects with
the Securities Act and the applicable rules and regulations of the
Commission thereunder.
(m) The Company is not and, after giving effect to the offering
and sale of the Shares and the application of the proceeds thereof as
described in the Prospectus, will not be required to register as an
"investment company" as such term is defined in the Investment Company
Act of 1940, as amended.
(n) The Company and its subsidiaries have no actual knowledge
that they are not in compliance with all federal, state, local and
foreign statutes, executive orders, proclamations, regulations, rules,
directives, decrees, ordinances and similar provisions having the force
or effect of law and all judicial and administrative orders, rulings,
determinations and common law concerning the importation of merchandise,
the export or reexport of products, services and technology, and the
terms and conduct of international transactions applicable to the
Company and its subsidiaries in connection with the conduct of the
Company's or any subsidiary's business (including as the same relates to
record keeping requirements) ("INTERNATIONAL TRADE LAWS AND
REGULATIONS"); neither the Company nor any of its subsidiaries has
knowingly made or provided any false statement or omission to any agency
of any federal, state or local government, purchasers of products, or
foreign government or foreign agency, in connection with the exportation
of merchandise (including with respect to export licenses, exceptions
and other export authorizations and any filings required for or related
to exportation of any item), the importation of merchandise or other
approvals required by a foreign government or agency or any other
requirement relating to any International Trade Laws and Regulations,
except to the extent that any such false statement or omission would not
have a material adverse effect on the Company and its subsidiaries,
taken as a whole; neither the Company nor any of its subsidiaries has
made any payment, offer, gift, promise to give, or authorized or
otherwise participated in, assisted or facilitated any payment or gift
related to the Company's or any subsidiary's business that is prohibited
by the United States Foreign Corrupt Practices Act.
(o) The Company and its subsidiaries (i) are in compliance with
any and all applicable foreign, federal, state and local laws and
regulations relating to the protection of human health and safety, the
environment or hazardous or toxic substances or wastes, pollutants or
contaminants ("ENVIRONMENTAL LAWS"), (ii) have received all permits,
licenses or other approvals required of them under applicable
Environmental Laws to conduct their respective businesses and (iii) are
in compliance with all terms and conditions of any such permit, license
or approval, except where such noncompliance with Environmental Laws,
failure to receive required permits, licenses or other approvals or
failure to comply with the terms and conditions of such permits,
licenses or approvals would not, singly or in the aggregate, have a
material adverse effect on the Company and its subsidiaries, taken as a
whole.
(p) There are no costs or liabilities associated with
Environmental Laws (including, without limitation, any capital or
operating expenditures required for clean-up, closure of properties or
compliance with Environmental Laws or any permit, license or approval,
any related constraints on operating activities and any potential
liabilities to
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<PAGE> 6
third parties) which would, singly or in the aggregate, have a material
adverse effect on the Company and its subsidiaries, taken as a whole.
(q) There are no contracts, agreements or understandings between
the Company and any person granting such person the right to require the
Company to file a registration statement under the Securities Act with
respect to any securities of the Company or to require the Company to
include such securities with the Shares registered pursuant to the
Registration Statement, except with respect to the Third Amended and
Restated Registration Rights Agreement, dated as of November 12, 1999
(the "REGISTRATION RIGHTS AGREEMENT"), which rights to piggyback
registration under Section 4 of the Registration Rights Agreement have
been waived.
(r) Subsequent to the respective dates as of which information
is given in the Registration Statement and the Prospectus, (1) the
Company and its subsidiaries have not incurred any material liability or
obligation, direct or contingent, nor entered into any material
transaction not in the ordinary course of business; (2) neither the
Company nor any of its subsidiaries has purchased any of its outstanding
capital stock or membership interests, as the case may be, nor declared,
paid or otherwise made any dividend or distribution of any kind on its
capital stock or membership interests, as the case may be, other than
repurchases of shares from employees, artists and others described in
the Prospectus and ordinary and customary dividends; and (3) there has
not been any material change in the capital stock or membership
interests, as the case may be, short-term debt or long-term debt of the
Company and its subsidiaries, except in each case as described in the
Prospectus.
(s) The Company and its subsidiaries have good and marketable
title in fee simple to all real property and good and marketable title
to all personal property owned by them which is material to the business
of the Company and its subsidiaries, in each case free and clear of all
liens, encumbrances and defects except such as are described in the
Prospectus or such as do not materially affect the value of such
property and do not interfere with the use made and proposed to be made
of such property by the Company and its subsidiaries; and any real
property and buildings held under lease by the Company and its
subsidiaries are held by them under valid, subsisting and enforceable
leases with such exceptions as are not material and do not interfere
with the use made and proposed to be made of such property and buildings
by the Company and its subsidiaries, in each case except as described in
the Prospectus.
(t) The Company and its subsidiaries own or possess, or can
acquire on reasonable terms, all material patents, patent rights,
licenses, inventions, copyrights, know-how (including trade secrets and
other unpatented and/or unpatentable proprietary or confidential
information, systems or procedures), trademarks, service marks and trade
names currently employed by them in connection with the business now
operated by them, and neither the Company nor any of its subsidiaries,
nor to their actual knowledge, any recording artist or other person or
entity that provides content for the Company's Web sites,
www.artistdirect.com, www.imusic.com, www.ubl.com,
www.downloadsdirect.com, or the ARTIST channels has received any notice
of infringement of or conflict with asserted rights of others with
respect to any of the
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<PAGE> 7
foregoing which, singly or in the aggregate, if the subject of an
unfavorable decision, ruling or finding, would have a material adverse
affect on the Company and its subsidiaries, taken as a whole.
(u) No material labor dispute with the employees of the Company
or any of its subsidiaries exists, except as described in the
Prospectus, or, to the knowledge of the Company, is imminent; and the
Company is not aware of any existing, threatened or imminent labor
disturbance by the employees of any of its principal suppliers,
manufacturers or contractors that could have a material adverse effect
on the Company and its subsidiaries, taken as a whole.
(v) The Company and its subsidiaries are insured by the insurers
of recognized financial responsibility against such losses and risks and
in such amounts as are prudent and customary in the businesses in which
they are engaged; neither the Company nor any of its subsidiaries has
been refused any insurance coverage sought or applied for; and neither
the Company nor any of its subsidiaries has any reason to believe that
it will not be able to renew its existing insurance coverage as and when
such coverage expires or to obtain similar coverage from similar
insurers as may be necessary to continue its business at a cost that
would not have a material adverse effect on the Company and its
subsidiaries, taken as a whole, except as described in the Prospectus.
(w) The Company and its subsidiaries possess all certificates,
authorizations and permits issued by the appropriate federal, state or
foreign regulatory authorities necessary to conduct their respective
businesses, except where the failure to possess such certificates,
authorizations and permits would not have a material adverse effect on
the Company and its subsidiaries taken as a whole, and neither the
Company nor any of its subsidiaries has received any notice of
proceedings relating to the revocation or modification of any such
certificate, authorization or permit which, singly or in the aggregate,
if the subject of an unfavorable decision, ruling or finding, would have
a material adverse effect on the Company and its subsidiaries, taken as
a whole, except as described the Prospectus.
(x) The Company and each of its subsidiaries maintain a system
of internal accounting controls sufficient to provide reasonable
assurance that (1) transactions are executed in accordance with
management's general or specific authorizations; (2) transactions are
recorded as necessary to permit preparation of financial statements in
conformity with generally accepted accounting principles and to maintain
asset accountability; (3) access to assets is permitted only in
accordance with management's general or specific authorization; and (4)
the recorded accountability for assets is compared with the existing
assets at reasonable intervals and appropriate action is taken with
respect to any differences.
(y) As of the date hereof, except as set forth in the
Prospectus, (i) there are no outstanding subscriptions, options,
warrants, rights, convertible securities or other binding agreements or
commitments of any character obligating the Company or its subsidiaries
to issue any securities and (ii) there is no agreement, understanding or
arrangement among the Company or its subsidiaries and their respective
securityholders
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<PAGE> 8
or any other Person relating to the ownership or disposition of any
capital stock in the Company or its subsidiaries or the governance of
the Company's or its subsidiaries' affairs, and such agreements,
arrangements or understandings will not be breached or violated as a
result of the execution and delivery of, or the consummation of the
transactions contemplated by, this Agreement.
(z) The consolidated financial statements of the Company
together with related notes set forth in the Prospectus fairly present
the financial condition of the Company and its subsidiaries, as of the
dates indicated, and the results of operations and changes in financial
position for the periods therein specified in conformity with generally
accepted accounting principles consistently applied throughout the
periods involved (except as otherwise stated therein); the summary and
selected financial data in the Prospectus present fairly the financial
information shown therein and have been prepared and compiled on a basis
consistent with audited financial statements included therein, except as
otherwise stated therein; and the pro forma financial information and
the related notes thereto included in the Prospectus have been prepared
using reasonable assumptions and have been prepared in accordance with
the applicable requirements of the Securities Act and include all
adjustments necessary to present fairly the pro forma financial
information included in the Prospectus at the respective dates and for
the respective periods indicated. KPMG LLP, which has reported upon the
audited financial statements included in the Prospectus, is an
independent public accounting firm as required by the Securities Act and
the rules and regulations thereunder.
(bb) The Company has reviewed its operations and that of its
subsidiaries to evaluate the extent to which the business or operations
of the Company or any of its subsidiaries will be affected by the Year
2000 Problem (that is, any significant risk that computer hardware or
software applications used by the Company and its subsidiaries will not,
in the case of dates or time periods occurring after December 31, 1999,
function at least as effectively as in the case of dates or time periods
occurring prior to January 1, 2000); as a result of such review, the
Company has no reason to believe, and does not believe, that (A) there
are any issues related to the Company's preparedness to address the Year
2000 Problem that are of a character required to be described or
referred to in the Registration Statement or Prospectus which have not
been accurately described in the Registration Statement or Prospectus
and (B) the Year 2000 Problem will have a material adverse effect on the
condition, financial or otherwise, or on the earnings, business or
operations of the Company and its subsidiaries, taken as a whole, or
result in any material loss or interference with the business or
operations of the Company and its subsidiaries, taken as a whole.
(cc) The Nasdaq Stock Market, Inc. has approved the Shares for
quotation on the Nasdaq National Market, subject only to official notice
of issuance.
(dd) Except for the Shares, all outstanding shares of Common
Stock, and all securities convertible into or exercisable or
exchangeable for Common Stock, are subject to valid and binding
agreements (collectively, the "LOCK-UP AGREEMENTS") that restrict the
holders thereof from selling, making any short sale of, granting any
option for the purchase of, or otherwise transferring or disposing of,
any of such shares of Common
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<PAGE> 9
Stock, or any such securities convertible into or exercisable or
exchangeable for Common Stock, for a period of 180 days after the date
of the Prospectus without the prior written consent of Morgan Stanley &
Co. Incorporated.
(ee) The Company has imposed a stop-transfer instruction with
the Company's transfer agent in order to enforce the foregoing lock-up
provision imposed pursuant to the Registration Rights Agreement.
(ff) The merger of ARTISTdirect, LLC with and into the Company
pursuant to the Agreement and Plan of Merger, dated as of October 6,
1999 (the "MERGER AGREEMENT"), by and between ARTISTdirect, LLC and the
Company was duly and validly authorized by all necessary corporate
action on the part of both such entities, and the transactions
contemplated by the Merger Agreement have been consummated in accordance
with its terms.
(gg) The Registration Statement, the Prospectus and any
preliminary prospectus comply, and any amendments or supplements thereto
will comply, with any applicable laws or regulations of foreign
jurisdictions in which the Prospectus or any preliminary prospectus, as
amended or supplemented, if applicable, are distributed in connection
with the Directed Share Program.
(jj) No consent, approval, authorization or order of, or
qualification with, any governmental body or agency, other than those
obtained, is required in connection with the offering of the Directed
Shares in any jurisdiction where the Directed Shares are being offered,
except such as may be required by the securities or Blue Sky laws of the
various states in connection with the offer and sale of the Directed
Shares.
(jj) The Company has not offered, or caused Morgan Stanley or
its affiliates to offer, Shares to any person pursuant to the Directed
Share Program with the specific intent to unlawfully influence (i) a
customer or supplier of the Company to alter the customer's or
supplier's level or type of business with the Company, or (ii) a trade
journalist or publication to write or publish favorable information
about the Company or its products.
2. Agreements to Sell and Purchase. The Company hereby agrees to
sell to the several Underwriters, and each Underwriter, upon the basis of the
representations and warranties herein contained, but subject to the conditions
hereinafter stated, agrees, severally and not jointly, to purchase from the
Company the respective numbers of Firm Shares set forth in Schedule I hereto
opposite its name at $______ a share (the "PURCHASE PRICE").
On the basis of the representations and warranties contained in this
Agreement, and subject to its terms and conditions, the Company agrees to sell
to the Underwriters the Additional Shares, and the Underwriters shall have a
one-time right to purchase, severally and not jointly, up to 750,000 Additional
Shares at the Purchase Price. If you, on behalf of the Underwriters, elect to
exercise such option, you shall so notify the Company in writing not later than
30 days after the date of this Agreement, which notice shall specify the number
of Additional Shares to be purchased by the Underwriters and the date on which
such shares are to
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<PAGE> 10
be purchased. Such date may be the same as the Closing Date (as defined below)
but not earlier than the Closing Date nor later than ten business days after the
date of such notice. Additional Shares may be purchased as provided in Section 4
hereof solely for the purpose of covering over-allotments made in connection
with the offering of the Firm Shares. If any Additional Shares are to be
purchased, each Underwriter agrees, severally and not jointly, to purchase the
number of Additional Shares (subject to such adjustments to eliminate fractional
shares as you may determine) that bears the same proportion to the total number
of Additional Shares to be purchased as the number of Firm Shares set forth in
Schedule I hereto opposite the name of such Underwriter bears to the total
number of Firm Shares.
The Company hereby agrees 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 the Prospectus, (i) 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 (ii) 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 such transaction described in
clause (i) or (ii) above is to be settled by delivery of Common Stock or such
other securities, in cash or otherwise. The foregoing sentence shall not apply
to (A) the Shares to be sold hereunder, (B) the issuance by the Company of
shares of Common Stock upon the exercise of an option or warrant or the
conversion of a security outstanding on the date hereof of which the
Underwriters have been advised in writing (C) transactions by any person other
than the Company relating to shares of Common Stock or other securities acquired
in open market transactions after the completion of the offering of the Shares,
(D) the grant of options, or the issuance of shares of Common Stock pursuant to
the exercise of options outstanding, under the Company's 1999 Employee Stock
Option Plan, 1999 Artist Stock Option Plan and/or 1999 Artist and Advisor Stock
Option Plan or (E) transactions related to the recission offer described in the
Registration Statement and/or Prospectus on the terms and conditions described
therein.
3. Terms of Public Offering. The Company is advised by you that the
Underwriters propose to make a public offering of the Shares as soon after the
Registration Statement and this Agreement have become effective as in your
judgment is advisable. The Company is further advised by you that the Shares are
to be offered to the public initially at $_____________ a share (the "PUBLIC
OFFERING PRICE") and to certain dealers selected by you at a price that
represents a concession not in excess of $______ a share under the Public
Offering Price, and that any Underwriter may allow, and such dealers may
reallow, a concession, not in excess of $_____ a share, to any Underwriter or to
certain other dealers.
4. Payment and Delivery. Payment for the Firm Shares shall be made to
the Company in Federal or other funds immediately available in New York City
against delivery of such Firm Shares for the respective accounts of the several
Underwriters at 10:00 a.m., New York City time, on ____________, 2000, or at
such other time on the same or such other date, not later than _________, 2000,
as shall be designated in writing by you. The time and date of such payment are
hereinafter referred to as the "CLOSING DATE".
Payment for any Additional Shares shall be made to the Company in
Federal or
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<PAGE> 11
other funds immediately available in New York City against delivery of such
Additional Shares for the respective accounts of the several Underwriters at
10:00 a.m., New York City time, on the date specified in the notice described in
Section 2 or at such other time on the same or on such other date, in any event
not later than ___________, 2000, as shall be designated in writing by you. The
time and date of such payment are hereinafter referred to as the "OPTION CLOSING
DATE".
The Firm Shares and Additional Shares shall be in book-entry form and
registered in such names and in such denominations as you shall request in
writing not later than one full business day prior to the Closing Date or the
Option Closing Date, as the case may be, with any transfer taxes payable in
connection with the transfer of the Shares to the Underwriters duly paid,
against payment of the Purchase Price therefor.
5. Conditions to the Underwriters' Obligations. The obligations of the
Company to sell the Shares to the Underwriters and the several obligations of
the Underwriters to purchase and pay for the Shares on the Closing Date are
subject to the condition that the Registration Statement shall have become
effective not later than 5:00 p.m. (New York City time) on the date hereof.
The several obligations of the Underwriters are subject to the following
further conditions:
(a) Subsequent to the execution and delivery of this Agreement
and prior to the Closing Date:
(i) there shall not have occurred any downgrading, nor
shall any notice have been given of any intended or potential
downgrading or of any review for a possible change that does not
indicate the direction of the possible change, in the rating
accorded any of the Company's securities by any "nationally
recognized statistical rating organization," as such term is
defined for purposes of Rule 436(g)(2) under the Securities Act;
and
(ii) there shall not have occurred any change, or any
development involving a prospective change, in the condition,
financial or otherwise, or in the earnings, business or
operations of the Company and its subsidiaries, taken as a
whole, from that set forth in the Prospectus (exclusive of any
amendments or supplements thereto subsequent to the date of this
Agreement) that, in your judgment, is material and adverse and
that makes it, in your judgment, impracticable to market the
Shares on the terms and in the manner contemplated in the
Prospectus.
(b) The Underwriters shall have received on the Closing Date a
certificate, dated the Closing Date and signed by an executive officer
of the Company, to the effect set forth in Section 5(a)(i) above and to
the effect that the representations and warranties of the Company
contained in this Agreement are true and correct as of the Closing Date
and that the Company has complied with all of the agreements and
satisfied all of the
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<PAGE> 12
conditions on its part to be performed or satisfied hereunder on or
before the Closing Date.
The officer signing and delivering such certificate may rely
upon the best of his or her knowledge as to proceedings threatened.
(c) The Underwriters shall have received on the Closing Date an
opinion of Brobeck, Phleger & Harrison LLP, outside counsel for the
Company, dated the Closing Date, to the effect that:
(i) the Company has been duly incorporated, is validly
existing as a corporation in good standing under the laws of the
jurisdiction of its incorporation, has the corporate power and
authority to own its property and to conduct its business as
described in the Prospectus and is duly qualified to transact
business and is in good standing in each jurisdiction in which
the conduct of its business or its ownership or leasing of
property requires such qualification, except to the extent that
the failure to be so qualified or be in good standing would not
have a material adverse effect on the Company and its
subsidiaries, taken as a whole;
(ii) each subsidiary of the Company that is a
corporation has been duly incorporated, is validly existing as a
corporation in good standing under the laws of the jurisdiction
of its incorporation, has the corporate power and authority to
own its property and to conduct its business as described in the
Prospectus and is duly qualified to transact business and is in
good standing in each jurisdiction in which the conduct of its
business or its ownership or leasing of property requires such
qualification, except to the extent that the failure to be so
qualified or be in good standing would not have a material
adverse effect on the Company and its subsidiaries, taken as a
whole;
(iii) each subsidiary of the Company that is a limited
liability company is a duly formed and existing limited
liability company in good standing under the laws of the
jurisdiction of its organization, has the power and authority to
own its property and to conduct its business as described in the
Prospectus and is duly qualified to transact business and is in
good standing in each jurisdiction in which the conduct of its
business or its ownership or leasing of property requires such
qualification, except to the extent that the failure to be so
qualified or be in good standing would not have a material
adverse effect on the Company and its subsidiaries, taken as a
whole;
(iv) the authorized capital stock of the Company
conforms as to legal matters to the description thereof
contained in the Prospectus;
(v) the shares of Common Stock outstanding prior to the
issuance of the Shares have been duly authorized and are validly
issued, fully paid and non-assessable;
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(vi) all of the issued shares of capital stock or
membership interests, as the case may be, of each subsidiary of
the Company have been duly and validly authorized and issued,
are fully paid and non-assessable and are owned directly by the
Company, or indirectly through one or more subsidiaries, free
and clear of all liens, encumbrances, equities or claims;
(vii) the Shares have been duly authorized and, when
issued and delivered in accordance with the terms of this
Agreement, will be validly issued, fully paid and
non-assessable, and the issuance of such Shares will not be
subject to any preemptive or similar rights;
(viii) this Agreement has been duly authorized, executed
and delivered by the Company;
(ix) the merger of ARTISTdirect, LLC with and into the
Company pursuant to the Merger Agreement was duly and validly
authorized by all necessary corporate action on the part of both
such entities, and the transactions contemplated by the Merger
Agreement have been consummated in accordance with its terms;
(x) the execution and delivery by the Company of, and
the performance by the Company of its obligations under, this
Agreement will not contravene any existing provision of New
York, California or federal law other than applicable state
securities laws and Blue Sky laws as to which such counsel need
express no opinion, or the certificate of incorporation or
by-laws of the Company or, to the best of such counsel's
knowledge, any agreement or other instrument binding upon the
Company or any of its subsidiaries that is an exhibit to the
Registration Statement, or, to the best of such counsel's
knowledge, any judgment, order or decree of any governmental
body, agency or court having jurisdiction over the Company or
any subsidiary, and no consent, approval, authorization or order
of, or qualification with, any governmental body or agency is
required for the performance by the Company of its obligations
under this Agreement, except such as may be required by the
securities or Blue Sky laws of the various states as to which
such counsel need express no opinion in connection with the
offer and sale of the Shares;
(xi) the statements (A) in the Prospectus under the
captions "Risk Factors - We depend upon intellectual property
rights and licensed material," "Risk Factors - Because our users
provide us with private information, we may be subject to
liability if this information were misused," "Risk Factors - We
may need to change the manner in which we conduct our business
if government regulation increases," "Risk Factors - Our
certificate of incorporation and bylaws, Delaware law and other
agreements contain provisions that could discourage a takeover,"
"Business - Government Regulation," "Business Intellectual
Property," "Management - Employment Agreements," "Management
Indemnification of Directors and Executive Officers and
Limitation of Liability," "Principal Stockholders, " "Certain
Transactions," "Description of Capital Stock,"
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and "Shares Eligible for Future Sale" (B) under the caption
"Underwriters" insofar as such statements relate to this
Agreement and (C) in the Registration Statement in Items 14 and
15, in each case insofar as such statements constitute summaries
of the legal matters, documents or proceedings referred to
therein, fairly present the information called for with respect
to such legal matters, documents and proceedings and fairly
summarize the matters referred to therein;
(xii) such counsel does not know of any legal or
governmental proceedings pending or threatened to which the
Company or any of its subsidiaries is a party or to which any of
the properties of the Company or any of its subsidiaries is
subject that are required to be described in the Registration
Statement or the Prospectus and are not so described or of any
statutes, regulations, contracts or other documents that are
required to be described in the Registration Statement or the
Prospectus or to be filed as exhibits to the Registration
Statement that are not described or filed as required;
(xiii) such counsel (A) is of the opinion that the
Registration Statement and Prospectus (except for financial
statements and schedules and other financial and statistical
data included therein as to which such counsel need not express
any opinion) comply as to form in all material respects with the
Securities Act and the applicable rules and regulations of the
Commission thereunder, (B) has no reason to believe that (except
for financial statements and schedules and other financial and
statistical data as to which such counsel need not express any
belief) the Registration Statement and the Prospectus included
therein at the time the Registration Statement became effective
contained any untrue statement of a material fact or omitted to
state a material fact required to be stated therein or necessary
to make the statements therein not misleading and (C) has no
reason to believe that (except for financial statements and
schedules and other financial and statistical data as to which
such counsel need not express any belief) the Prospectus
contains any untrue statement of a material fact or omits to
state a material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were
made, not misleading.
(d) The Underwriters shall have received on the Closing Date an
opinion of O'Melveny & Myers LLP, counsel for the Underwriters, dated
the Closing Date, covering the matters referred to in Sections
5(c)(vii), 5(c)(viii), 5(c)(xi), (but only as to the statements in the
Prospectus under "Description of Capital Stock" and "Underwriters") and
5(c)(xiv) above.
With respect to Section 5(c)(xiv) above, Brobeck, Phleger &
Harrison LLP and O'Melveny & Myers LLP may state that their opinion and
belief are based upon their participation in the preparation of the
Registration Statement and Prospectus and any
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<PAGE> 15
amendments or supplements thereto and review and discussion of the
contents thereof, but are without independent check or verification,
except as specified.
The opinion of Brobeck, Phleger & Harrison LLP described in
Section 5(c) above shall be rendered to the Underwriters at the request
of the Company and shall so state therein.
(e) The Underwriters shall have received on the Closing Date an
opinion, dated the closing date, of counsel reasonably acceptable to
the Underwriters to the effect that the Company is not and, after giving
effect to the offering and sale of the Shares and the application of the
proceeds thereof as described in the Prospectus, will not be an
"investment company" as such term is defined in the Investment Company
Act of 1940, as amended.
(f) The Underwriters shall have received, on each of the date
hereof and the Closing Date, a letter dated the date hereof or the
Closing Date, as the case may be, in form and substance satisfactory to
the Underwriters, from KPMG LLP, independent public accountants,
containing statements and information of the type ordinarily included in
accountants' "comfort letters" to underwriters with respect to the
financial statements and certain financial information (including the
pro forma financial statements) contained in the Registration Statement
and the Prospectus; provided that the letter delivered on the Closing
Date shall use a "cut-off date" not earlier than the date hereof.
(g) The "lock-up" agreements, each substantially in the form of
Exhibit A hereto, between you and the stockholders, officers and
directors of the Company relating to sales and certain other
dispositions of shares of Common Stock or certain other securities,
delivered to you on or before the date hereof, shall be in full force
and effect on the Closing Date.
The several obligations of the Underwriters to purchase Additional
Shares hereunder are subject to the delivery to you on the Option Closing Date
of such documents as you may reasonably request with respect to the good
standing of the Company and its subsidiaries, the due authorization and issuance
of the Additional Shares and other matters related to the issuance of the
Additional Shares.
6. Covenants of the Company. In further consideration of the agreements
of the Underwriters herein contained, the Company covenants with each
Underwriter as follows:
(a) To furnish to you, without charge, four signed copies of the
Registration Statement (including exhibits thereto) and for delivery to
each other Underwriter a conformed copy of the Registration Statement
(without exhibits thereto) and to furnish to you in New York City,
without charge, prior to 10:00 a.m. New York City time on the business
day next succeeding the date of this Agreement and during the period
mentioned in Section 6(c) below, as many copies of the Prospectus and
any supplements and amendments thereto or to the Registration Statement
as you may reasonably request.
(b) Before amending or supplementing the Registration Statement
or the Prospectus, to furnish to you a copy of each such proposed
amendment or supplement and not to file any such proposed amendment or
supplement to which you reasonably object, and to file with the
Commission within the applicable period specified in Rule 424(b) under
the Securities Act any prospectus required to be filed pursuant to such
Rule.
(c) If, during such period after the first date of the public
offering of the Shares as in the opinion of counsel for the Underwriters
the Prospectus is required by law to be delivered in connection with
sales by an Underwriter or dealer, any event shall
14
<PAGE> 16
occur or condition exist as a result of which it is necessary to amend
or supplement the Prospectus in order to make the statements therein, in
the light of the circumstances when the Prospectus is delivered to a
purchaser, not misleading, or if, in the opinion of counsel for the
Underwriters, it is necessary to amend or supplement the Prospectus to
comply with applicable law, forthwith to prepare, file with the
Commission and furnish, at its own expense, to the Underwriters and to
the dealers (whose names and addresses you will furnish to the Company)
to which Shares may have been sold by you on behalf of the Underwriters
and to any other dealers upon request, either amendments or supplements
to the Prospectus so that the statements in the Prospectus as so amended
or supplemented will not, in the light of the circumstances when the
Prospectus is delivered to a purchaser, be misleading or so that the
Prospectus, as amended or supplemented, will comply with law.
(d) To endeavor to qualify the Shares for offer and sale under
the securities or Blue Sky laws of such jurisdictions as you shall
reasonably request.
(e) To make generally available to the Company's security
holders and to you as soon as practicable an earning statement covering
the twelve-month period ending ___________, 2001 that satisfies the
provisions of Section 11(a) of the Securities Act and the rules and
regulations of the Commission thereunder.
(f) To place stop transfer orders on any Directed Shares that
have been sold to Participants subject to the three month restriction on
sale, transfer, assignment, pledge or hypothecation imposed by NASD
Regulation, Inc. under its Interpretative Material 2110-1 on free-riding
and withholding to the extent necessary to ensure compliance with the
three month restrictions. Morgan Stanley will notify the Company as to
which Participants will need to be so restricted.
(g) To comply with all applicable securities and other
applicable laws, rules and regulations in each jurisdiction in which the
Directed Shares are offered in connection with the Directed Share
Program.
7. Expenses. Whether or not the transactions contemplated in this
Agreement are consummated or this Agreement is terminated, the Company agrees to
pay or cause to be paid all expenses incident to the performance of its
obligations under this Agreement, including: (i) the fees, disbursements and
expenses of the Company's counsel and the Company's accountants in connection
with the registration and delivery of the Shares under the Securities Act and
all other fees or expenses in connection with the preparation and filing of the
Registration Statement, any preliminary prospectus, the Prospectus and
amendments and supplements to any of the foregoing, including all printing costs
associated therewith, and the mailing and delivering of copies thereof to the
Underwriters and dealers, in the quantities hereinabove specified, (ii) all
costs and expenses related to the transfer and delivery of the Shares to the
Underwriters, including any transfer or other taxes payable thereon, (iii) the
cost of printing or producing any Blue Sky or Legal Investment memorandum in
connection with the offer and sale of the Shares under state securities laws and
all expenses in connection with the qualification of the Shares for offer and
sale under state securities laws as provided in Section 6(d) hereof, including
filing fees and the reasonable fees and disbursements of counsel for the
15
<PAGE> 17
Underwriters in connection with such qualification and in connection with the
Blue Sky or Legal Investment memorandum, (iv) all filing fees and the reasonable
fees and disbursements of counsel to the Underwriters incurred in connection
with the review and qualification of the offering of the Shares by the National
Association of Securities Dealers, Inc., including any fees incurred by counsel
on behalf of or disbursements by Morgan Stanley in its capacity as "qualified
independent underwriter" (v) all fees and expenses in connection with the
preparation and filing of the registration statement on Form 8-A relating to the
Common Stock and all costs and expenses incident to quotation of the Shares on
the Nasdaq National Market, (vi) the cost of printing certificates representing
the Shares, (vii) the costs and charges of any transfer agent, registrar or
depositary, (viii) the costs and expenses of the Company relating to investor
presentations on any "road show" undertaken in connection with the marketing of
the offering of the Shares, including, without limitation, expenses associated
with the production of road show slides and graphics, fees and expenses of any
consultants engaged in connection with the road show presentations with the
prior approval of the Company, travel and lodging expenses of the
representatives and officers of the Company and any such consultants, and the
cost of any aircraft chartered in connection with the road show, (ix) all fees
and disbursements of counsel incurred by the Underwriters in connection with the
Directed Share Program and stamp duties, similar taxes or duties or other taxes,
if any, incurred by the Underwriters in connection with the Directed Share
Program and (x) all other costs and expenses incident to the performance of the
obligations of the Company hereunder for which provision is not otherwise made
in this Section. It is understood, however, that except as provided in this
Section, Section 8 entitled "Indemnity and Contribution", and the last paragraph
of Section 11 below, the Underwriters will pay all of their costs and expenses,
including fees and disbursements of their counsel, stock transfer taxes payable
on resale of any of the Shares by them and any advertising expenses connected
with any offers they may make.
8. Indemnity and Contribution.
(a) The Company and each subsidiary of the Company, whether
direct or indirect, jointly and severally, agree to indemnify and hold
harmless each Underwriter and each person, if any, who controls any
Underwriter within the meaning of either Section 15 of the Securities
Act or Section 20 of the Securities Exchange Act of 1934, as amended
(the "EXCHANGE ACT"), from and against any and all losses, claims,
damages and liabilities (including, without limitation, any legal or
other expenses reasonably incurred in connection with defending or
investigating any such action or claim) caused by any untrue statement
or alleged untrue statement of a material fact contained in the
Registration Statement or any amendment thereof, any preliminary
prospectus or the Prospectus (as amended or supplemented if the Company
shall have furnished any amendments or supplements thereto), or caused
by any omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements
therein not misleading, except insofar as such losses, claims, damages
or liabilities are caused by any such untrue statement or omission or
alleged untrue statement or omission based upon information relating to
any Underwriter furnished to the Company in writing by such Underwriter
through you expressly for use therein. The Company also agrees to
indemnify and hold harmless Morgan Stanley and each person, if any, who
controls Morgan Stanley within the meaning of either Section 15 of the
Act, or Section 20 of the Exchange Act, from and against any and all
losses, claims, damages,
16
<PAGE> 18
liabilities and judgments incurred as a result of Morgan Stanley's
participation as a "qualified independent underwriter" within the
meaning of Rule 2720 of the National Association of Securities Dealers'
Conduct Rules in connection with the offering of the Shares, except for
any losses, claims, damages, liabilities, and judgments resulting from
Morgan Stanley's, or such controlling person's, willful misconduct.
(b) Each Underwriter agrees, severally and not jointly, to
indemnify and hold harmless the Company, the directors of the Company,
the officers of the Company who sign the Registration Statement and each
person, if any, who controls the Company within the meaning of either
Section 15 of the Securities Act or Section 20 of the Exchange Act from
and against any and all losses, claims, damages and liabilities
(including, without limitation, any legal or other expenses reasonably
incurred in connection with defending or investigating any such action
or claim) caused by any untrue statement or alleged untrue statement of
a material fact contained in the Registration Statement or any amendment
thereof, any preliminary prospectus or the Prospectus (as amended or
supplemented if the Company shall have furnished any amendments or
supplements thereto), or caused by any omission or alleged omission to
state therein a material fact required to be stated therein or necessary
to make the statements therein not misleading, but only with reference
to information relating to such Underwriter furnished to the Company in
writing by such Underwriter through you expressly for use in the
Registration Statement, any preliminary prospectus, the Prospectus or
any amendments or supplements thereto.
(c) In case any proceeding (including any governmental
investigation) shall be instituted involving any person in respect of
which indemnity may be sought pursuant to Section 8(a)or 8(b), such
person (the "INDEMNIFIED PARTY") shall promptly notify the person
against whom such indemnity may be sought (the "INDEMNIFYING PARTY") in
writing and the indemnifying party, upon request of the indemnified
party, shall retain counsel reasonably satisfactory to the indemnified
party to represent the indemnified party and any others the indemnifying
party may designate in such proceeding and shall pay the fees and
disbursements of such counsel related to such proceeding. In any such
proceeding, any indemnified party shall have the right to retain its own
counsel, but the fees and expenses of such counsel shall be at the
expense of such indemnified party unless (i) the indemnifying party and
the indemnified party shall have mutually agreed to the retention of
such counsel or (ii) the named parties to any such proceeding (including
any impleaded parties) include both the indemnifying party and the
indemnified party and representation of both parties by the same counsel
would be inappropriate due to actual or potential differing interests
between them. It is understood that the indemnifying party shall not, in
respect of the legal expenses of any indemnified party in connection
with any proceeding or related proceedings in the same jurisdiction, be
liable for the fees and expenses of more than one separate firm (in
addition to any local counsel) for all such indemnified parties, and
that all such fees and expenses shall be reimbursed as they are
incurred. Such firm shall be designated in writing by Morgan Stanley, in
the case of parties indemnified pursuant to Section 8(a) and by the
Company, in the case of parties indemnified pursuant to Section 8(b).
The indemnifying party shall not be liable for any settlement of any
proceeding effected without its written consent, but if settled with
such consent or if there be a final judgment for the plaintiff, the
indemnifying party agrees to
17
<PAGE> 19
indemnify the indemnified party from and against any loss or liability
by reason of such settlement or judgment. Notwithstanding the foregoing
sentence, if at any time an indemnified party shall have requested an
indemnifying party to reimburse the indemnified party for fees and
expenses of counsel as contemplated by the second and third sentences of
this paragraph, the indemnifying party agrees that it shall be liable
for any settlement of any proceeding effected without its written
consent if (i) such settlement is entered into more than 30 days after
receipt by such indemnifying party of the aforesaid request and (ii)
such indemnifying party shall not have reimbursed the indemnified party
in accordance with such request prior to the date of such settlement. No
indemnifying party shall, without the prior written consent of the
indemnified party, effect any settlement of any pending or threatened
proceeding in respect of which any indemnified party is or could have
been a party and indemnity could have been sought hereunder by such
indemnified party, unless such settlement includes an unconditional
release of such indemnified party from all liability on claims that are
the subject matter of such proceeding. Notwithstanding anything
contained herein to the contrary, if indemnity may be sought pursuant to
Section 8(a) hereof in respect of such action or proceeding, then in
addition to such separate firm for the indemnified parties, the
indemnifying party shall be liable for the reasonable fees and expenses
of not more than one separate firm (in addition to any local counsel)
for Morgan Stanley in its capacity as a "qualified independent
underwriter" and all persons, if any, who control Morgan Stanley within
the meaning of either Section 15 of the Act or Section 20 of the
Exchange Act.
(d) To the extent the indemnification provided for in Section
8(a) or 8(b) is unavailable to an indemnified party or insufficient in
respect of any losses, claims, damages or liabilities referred to
therein, then each indemnifying party under such paragraph, in lieu of
indemnifying such indemnified party thereunder, shall contribute to the
amount paid or payable by such indemnified party as a result of such
losses, claims, damages or liabilities (i) in such proportion as is
appropriate to reflect the relative benefits received by the Company on
the one hand and the Underwriters on the other hand from the offering of
the Shares or (ii) if the allocation provided by clause 8(d)(i) above is
not permitted by applicable law, in such proportion as is appropriate to
reflect not only the relative benefits referred to in clause 8(d)(i)
above but also the relative fault of the Company on the one hand and of
the Underwriters on the other hand in connection with the statements or
omissions that resulted in such losses, claims, damages or liabilities,
as well as any other relevant equitable considerations. The relative
benefits received by the Company on the one hand and the Underwriters on
the other hand in connection with the offering of the Shares shall be
deemed to be in the same respective proportions as the net proceeds from
the offering of the Shares (before deducting expenses) received by the
Company and the total underwriting discounts and commissions received by
the Underwriters, in each case as set forth in the table on the cover of
the Prospectus, bear to the aggregate Public Offering Price of the
Shares. The relative fault of the Company on the one hand and the
Underwriters on the other hand shall be determined by reference to,
among other things, whether the untrue or alleged untrue statement of a
material fact or the omission or alleged omission to state a material
fact relates to information supplied by the Company or by the
Underwriters and the parties' relative intent, knowledge, access to
information and opportunity to correct or
18
<PAGE> 20
prevent such statement or omission. The Underwriters' respective
obligations to contribute pursuant to this Section 8 are several in
proportion to the respective number of Shares they have purchased
hereunder, and not joint.
(e) The Company and the Underwriters agree that it would not be
just or equitable if contribution pursuant to this Section 8 were
determined by pro rata allocation (even if the Underwriters were treated
as one entity for such purpose) or by any other method of allocation
that does not take account of the equitable considerations referred to
in Section 8(d). The amount paid or payable by an indemnified party as a
result of the losses, claims, damages and liabilities referred to in the
immediately preceding paragraph shall be deemed to include, subject to
the limitations set forth above, any legal or other expenses reasonably
incurred by such indemnified party in connection with investigating or
defending any such action or claim. Notwithstanding the provisions of
this Section 8, no Underwriter shall be required to contribute any
amount in excess of the amount by which the total price at which the
Shares underwritten by it and distributed to the public were offered to
the public exceeds the amount of any damages that such Underwriter has
otherwise been required to pay by reason of such untrue or alleged
untrue statement or omission or alleged omission. No person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the
Securities Act) shall be entitled to contribution from any person who
was not guilty of such fraudulent misrepresentation. The remedies
provided for in this Section 8 are not exclusive and shall not limit any
rights or remedies which may otherwise be available to any indemnified
party at law or in equity.
(f) The indemnity and contribution provisions contained in this
Section 8 and the representations, warranties and other statements of
the Company contained in this Agreement shall remain operative and in
full force and effect regardless of (i) any termination of this
Agreement, (ii) any investigation made by or on behalf of any
Underwriter or any person controlling any Underwriter or by or on behalf
of the Company, its officers or directors or any person controlling the
Company and (iii) acceptance of and payment for any of the Shares.
9. Directed Share Program Indemnification.
(a) The Company and each subsidiary of the Company, whether
direct or indirect, jointly and severally, agree to indemnify and hold
harmless Morgan Stanley and its affiliates and each person, if any, who
controls Morgan Stanley or its affiliates within the meaning of either
Section 15 of the Securities Act or Section 20 of the Exchange Act
("MORGAN STANLEY ENTITIES"), from and against any and all losses,
claims, damages and liabilities (including, without limitation, any
legal or other expenses reasonably incurred in connection with defending
or investigating any such action or claim) (i) caused by any untrue
statement or alleged untrue statement of a material fact contained in
any material prepared by or with the consent of the Company for
distribution to Participants in connection with the Directed Share
Program, or caused by any omission or alleged omission to state therein
a material fact required to be stated therein or necessary to make the
statements therein not misleading; or (ii) related to, arising out of,
or in connection with the Directed Share Program other than losses,
claims, damages or liabilities (or
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<PAGE> 21
expenses relating thereto) that are (A) caused by the failure of any
Participant to pay for and accept delivery of Directed Shares that the
Participant has agreed to purchase, (B) caused by the indication of
interest form prepared by Morgan Stanley Entities for use in connection
with the Directed Share Program or (C) finally judicially determined to
have resulted from the bad faith or gross negligence of Morgan Stanley
Entities.
(b) In case any proceeding (including any governmental
investigation) shall be instituted involving any Morgan Stanley Entity
in respect of which indemnity may be sought pursuant to Section 9(a),
the Morgan Stanley Entity seeking indemnity shall promptly notify the
Company in writing and the Company, upon request of the Morgan Stanley
Entity, shall retain counsel reasonably satisfactory to the Morgan
Stanley Entity to represent the Morgan Stanley Entity and any other the
Company may designate in such proceeding and shall pay the fees and
disbursements of such counsel related to such proceeding. In any such
proceeding, any Morgan Stanley Entity shall have the right to retain its
own counsel, but the fees and expenses of such counsel shall be at the
expense of such Morgan Stanley Entity unless (i) the Company shall have
agreed to the retention of such counsel or (ii) the named parties to any
such proceeding (including any impleaded parties) include both the
Company and the Morgan Stanley Entity and representation of both parties
by the same counsel would be inappropriate due to actual or potential
differing interests between them. The Company shall not, in respect of
the legal expenses of the Morgan Stanley Entities in connection with any
proceeding or related proceedings the same jurisdiction, be liable for
the fees and expenses of more than one separate firm (in addition to any
local counsel) for all Morgan Stanley Entities. Any such firm for the
Morgan Stanley Entities shall be designated in writing by Morgan
Stanley. The Company shall not be liable for any settlement of any
proceeding effected without its written consent, but if settled with
such consent or if there be a final judgment for the plaintiff, the
Company agrees to indemnify the Morgan Stanley Entities from and against
any loss or liability by reason of such settlement or judgment.
Notwithstanding the foregoing sentence, if at any time a Morgan Stanley
Entity shall have requested the Company to reimburse it for fees and
expenses of counsel as contemplated by the second and third sentences of
this paragraph, the Company agrees that it shall be liable for any
settlement of any proceeding effected without its written consent if (i)
such settlement is entered into more than 30 days after receipt by the
Company of the aforesaid request and (ii) the Company shall not have
reimbursed the Morgan Stanley Entity in accordance with such request
prior to the date of such settlement. The Company shall not, without the
prior written consent of Morgan Stanley, effect any settlement of any
pending or threatened proceeding in respect of which any Morgan Stanley
Entity is or could have been a party and indemnity could have been
sought hereunder by such Morgan Stanley Entity, unless such settlement
includes an unconditional release of the Morgan Stanley Entities from
all liability on claims that are the subject matter of such proceeding.
(c) To the extent the indemnification provided for in Section
9(a) is unavailable to a Morgan Stanley Entity or insufficient in
respect of any losses, claims, damages or liabilities referred to
therein, then the Company, in lieu of indemnifying the Morgan Stanley
Entity thereunder, shall contribute to the amount paid or payable by the
Morgan Stanley Entity as a result of such losses, claims, damages or
liabilities (i) in such proportion as is appropriate to reflect the
relative benefits received by the Company on the one hand and the Morgan
Stanley Entities on the other hand from the offering of the
20
<PAGE> 22
Directed Shares or (ii) if the allocation provided by clause 9(c)(i)
above is not permitted by applicable law, in such proportion as is
appropriate to reflect not only the relative benefits referred to in
clause 9(c)(i) above but also the relative fault of the Company on the
one hand and of the Morgan Stanley Entities on the other hand in
connection with the statements or omissions that resulted in such
losses, claims, damages or liabilities, as well as any other relevant
equitable considerations. The relative benefits received by the Company
on the one hand and of the Morgan Stanley Entities on the other hand in
connection with the offering of the Directed Shares shall be deemed to
be in the same respective proportions as the net proceeds from the
offering of the Directed Shares (before deducting expenses) and the
total underwriting discounts and commissions received by the Morgan
Stanley Entities for the Directed Shares, bear to the aggregate Public
Offering Price of the Shares. If the loss, claim, damage or liability is
caused by an untrue or alleged untrue statement of a material fact, the
relative fault of the Company on the one hand and the Morgan Stanley
Entities on the other hand shall be determined by reference to, among
other things, whether the untrue or alleged untrue statement or the
omission or alleged omission relates to information supplied by the
Company or by the Morgan Stanley Entities and the parties' relative
intent, knowledge, access to information and opportunity to correct or
prevent such statement or omission.
(d) The Company and the Morgan Stanley Entities agree that it
would not be just or equitable if contribution pursuant to this Section
9 were determined by pro rata allocation (even if the Morgan Stanley
Entities were treated as one entity for such purpose) or by any other
method of allocation that does not take account of the equitable
considerations referred to in Section 9(c). The amount paid or payable
by the Morgan Stanley Entities as a result of the losses, claims,
damages and liabilities referred to in the immediately preceding
paragraph shall be deemed to include, subject to the limitations set
forth above, any legal or other expenses reasonably incurred by the
Morgan Stanley Entities in connection with investigating or defending
any such action or claim. Notwithstanding the provisions of this Section
9, no Morgan Stanley Entity shall be required to contribute any amount
in excess of the amount by which the total price at which the Directed
Shares distributed to the public were offered to the public exceeds the
amount of any damages that such Morgan Stanley Entity has otherwise been
required to pay by reason of such untrue or alleged untrue statement or
omission or alleged omission. The remedies provided for in this Section
9 are not exclusive and shall not limit any rights or remedies which may
otherwise be available to any Morgan Stanley Entity at law or in equity.
(e) The indemnity and contribution provisions contained in this
Section 9 shall remain operative and in full force and effect regardless
of (i) any termination of this Agreement, (ii) any investigation made by
or on behalf of any Morgan Stanley Entity or the Company, its officers
or directors or any person controlling the Company and (iii) acceptance
of and payment for any of the Directed Shares.
10. Termination. This Agreement shall be subject to termination by
notice given by you to the Company, if (a) after the execution and delivery of
this Agreement and prior to the Closing Date (i) trading generally shall have
been suspended or materially limited on or by, as the case may be, any of the
New York Stock Exchange, the American Stock Exchange, the
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<PAGE> 23
National Association of Securities Dealers, Inc., the Chicago Board of Options
Exchange, the Chicago Mercantile Exchange or the Chicago Board of Trade, (ii)
trading of any securities of the Company shall have been suspended on any
exchange or in any over-the-counter market, (iii) a general moratorium on
commercial banking activities in New York shall have been declared by either
Federal or New York State authorities or (iv) there shall have occurred any
outbreak or escalation of hostilities or any change in financial markets or any
calamity or crisis that, in your judgment, is material and adverse and (b) in
the case of any of the events specified in clauses 10(a)(i) through 10(a)(iv),
such event, singly or together with any other such event, makes it, in your
judgment, impracticable to market the Shares on the terms and in the manner
contemplated in the Prospectus.
11. Effectiveness; Defaulting Underwriters. This Agreement shall become
effective upon the execution and delivery hereof by the parties hereto.
If, on the Closing Date or the Option Closing Date, as the case may be,
any one or more of the Underwriters shall fail or refuse to purchase Shares that
it has or they have agreed to purchase hereunder on such date, and the aggregate
number of Shares which such defaulting Underwriter or Underwriters agreed but
failed or refused to purchase is not more than one-tenth of the aggregate number
of the Shares to be purchased on such date, the other Underwriters shall be
obligated severally in the proportions that the number of Firm Shares set forth
opposite their respective names in Schedule I bears to the aggregate number of
Firm Shares set forth opposite the names of all such non-defaulting
Underwriters, or in such other proportions as you may specify, to purchase the
Shares which such defaulting Underwriter or Underwriters agreed but failed or
refused to purchase on such date; provided that in no event shall the number of
Shares that any Underwriter has agreed to purchase pursuant to this Agreement be
increased pursuant to this Section 11 by an amount in excess of one-ninth of
such number of Shares without the written consent of such Underwriter. If, on
the Closing Date, any Underwriter or Underwriters shall fail or refuse to
purchase Firm Shares and the aggregate number of Firm Shares with respect to
which such default occurs is more than one-tenth of the aggregate number of Firm
Shares to be purchased, and arrangements satisfactory to you and the Company for
the purchase of such Firm Shares are not made within 36 hours after such
default, this Agreement shall terminate without liability on the part of any
non-defaulting Underwriter or the Company. In any such case either you or the
Company shall have the right to postpone the Closing Date, but in no event for
longer than seven days, in order that the required changes, if any, in the
Registration Statement and in the Prospectus or in any other documents or
arrangements may be effected. If, on the Option Closing Date, any Underwriter
shall fail or refuse to purchase Additional Shares and the aggregate number of
Additional Shares with respect to which such default occurs is more than
one-tenth of the aggregate number of Additional Shares to be purchased, the
non-defaulting Underwriters shall have the option to (i) terminate their
obligation hereunder to purchase Additional Shares or (ii) purchase not less
than the number of Additional Shares that such non-defaulting Underwriters would
have been obligated to purchase in the absence of such default. Any action taken
under this paragraph shall not relieve any defaulting Underwriter from liability
in respect of any default of such Underwriter under this Agreement.
If this Agreement shall be terminated by the Underwriters, or any of
them, because of any failure or refusal on the part of the Company to comply
with the terms or to fulfill any of the conditions of this Agreement, or if for
any reason the Company shall be unable to
22
<PAGE> 24
perform its obligations under this Agreement, the Company will reimburse the
Underwriters or such Underwriters as have so terminated this Agreement with
respect to themselves, severally, for all out-of-pocket expenses (including the
fees and disbursements of their counsel) reasonably incurred by such
Underwriters in connection with this Agreement or the offering contemplated
hereunder.
12. Counterparts. This Agreement may be signed in two or more
counterparts, each of which shall be an original, with the same effect as if the
signatures thereto and hereto were upon the same instrument.
13. Applicable Law. This Agreement shall be governed by and construed in
accordance with the internal laws of the State of New York.
14. Headings. The headings of the sections of this Agreement have been
inserted for convenience of reference only and shall not be deemed a part of
this Agreement.
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Very truly yours,
ARTISTdirect, INC.
By:
---------------------------------
Name:
Title:
Agreed to Sections 8 and 9:
ARTISTdirect HOLDINGS, L.L.C.
By:
---------------------------------
Name:
Title:
ARTISTdirect AGENCY, LLC
By:
---------------------------------
Name:
Title:
ARTISTdirect NEW MEDIA, LLC
By:
---------------------------------
Name:
Title:
KNEELING ELEPHANT RECORDS, LLC
By:
---------------------------------
Name:
Title:
S-1
<PAGE> 26
THE ULTIMATE BAND LIST, LLC
By:
---------------------------------
Name:
Title:
IMUSIC, INC.
By:
---------------------------------
Name:
Title:
Accepted as of the date hereof
MORGAN STANLEY & CO. INCORPORATED
BEAR, STEARNS & CO. INC.
DEUTSCHE BANK SECURITIES INC.
Acting severally on behalf of themselves
and the several Underwriters named
in Schedule I hereto.
By: Morgan Stanley & Co. Incorporated
By:
--------------------------------
Name:
Title:
S-2
<PAGE> 27
SCHEDULE I
UNDERWRITERS
<TABLE>
<CAPTION>
NUMBER OF
FIRM SHARES
UNDERWRITER TO BE PURCHASED
<S> <C>
Morgan Stanley & Co. Incorporated
Bear, Stearns & Co. Inc.
Deutsche Bank Securities Inc.
----------------
Total
================
</TABLE>
Schedule 1
1
<PAGE> 28
EXHIBIT A
FORM OF LOCK-UP LETTER
____________, 2000
Morgan Stanley & Co. Incorporated
Bear, Stearns & Co. Inc.
Deutsche Bank Securities Inc.
c/o Morgan Stanley & Co. Incorporated
1585 Broadway
New York, NY 10036
Dear Sirs and Mesdames:
The undersigned understands that Morgan Stanley & Co. Incorporated
("MORGAN STANLEY") proposes to enter into an Underwriting Agreement (the
"UNDERWRITING AGREEMENT") with ARTISTdirect, Inc., a Delaware corporation (the
"COMPANY"), providing for the public offering (the "PUBLIC OFFERING") by the
several Underwriters, including Morgan Stanley (the "UNDERWRITERS"), of
5,000,000 shares (the "SHARES") of the Common Stock, $.01 par value per share,
of the Company (the "COMMON STOCK").
To induce the Underwriters that may participate in the Public Offering
to continue their efforts in connection with the Public Offering, the
undersigned hereby agrees that, without the prior written consent of Morgan
Stanley on behalf of the Underwriters, it will not, during the period commencing
on the date hereof and ending 180 days after the date of the final prospectus
relating to the Public Offering (the "PROSPECTUS"), (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, 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, whether any such transaction described in clause (1) or (2)
above is to be settled by delivery of Common Stock or such other securities, in
cash or otherwise. The foregoing sentence shall not apply to (a) transactions
relating to shares of Common Stock or other securities acquired in open market
transactions after the completion of the Public Offering or (B) the exercise of
options to purchase Common Stock granted under the Company's 1999 Employee Stock
Option Plan, 1999 Artist Stock Option Plan and/or 1999 Artist and Advisor Stock
Option Plan; provided, however, that the shares of Common Stock purchase upon
exercise of such options shall be otherwise subject to this Lock-Up Agreement.
In addition, the undersigned agrees that, without the prior written consent of
Morgan Stanley on behalf of the Underwriters, it will not, during the period
commencing on the date hereof and ending 180 days after the date of the
Prospectus, make any demand for or exercise any right with respect to, the
registration of any shares of Common Stock or any security convertible into or
exercisable or exchangeable for Common Stock. Notwithstanding the foregoing (i)
gifts and transfers by will or intestacy or (ii) transfers to (A) the
undersigned's members, partners, affiliates or immediate family or (B) a trust,
the
Exhibit A
1
<PAGE> 29
beneficiaries of which are the undersigned and/or members of the undersigned's
immediate family, shall not be prohibited by this agreement; provided that (x)
the donee or transferee agrees in writing to be bound by the foregoing in the
same manner as it applies to the undersigned and (y) if the donor or transferor
is a reporting person subject to Section 16(a) of the Securities Exchange Act of
1934 (the "EXCHANGE ACT"), any gifts or transfers made in accordance with this
paragraph shall not require such person to, and such person shall not
voluntarily, file a report of such transaction of Form 4 under the Exchange Act.
"Immediate family" shall mean spouse, lineal descendants, father, mother,
brother or sister of the transferor and father, mother, brother or sister of the
transferor's spouse.
Whether or not the Public Offering actually occurs depends on a number
of factors, including market conditions. Any Public Offering will only be made
pursuant to an Underwriting Agreement, the terms of which are subject to
negotiation between the Company and the Underwriters.
Very truly yours,
------------------------------------
(Name)
------------------------------------
(Address)
Exhibit A
2
<PAGE> 1
EXHIBIT 10.39
STRATEGIC MARKETING AGREEMENT
THIS STRATEGIC MARKETING AGREEMENT (the "Agreement") is made as of the
first Closing Date under the Stock Purchase Agreement, 1999 by and between
Universal Music Group, Inc., a California corporation ("UMG") and ARTISTdirect,
Inc., a Delaware corporation (the "Company").
Whereas, as of the date hereof, UMG (together with its Affiliates) is a
significant company in the music industry, and
Whereas, there are synergies between UMG's business and that of the
Company, and
Whereas, UMG (or one of its Affiliates) has become a significant equity
owner in the Company, and
Whereas, in connection with the foregoing, UMG and the Company deem it
to be in their respective best interests to set forth certain understandings
between them with respect to strategic marketing and other commitments which
each believes will advantage its business.
NOW, THEREFORE, in consideration of the premises and mutual covenants
and obligations hereinafter set forth, the Company and UMG hereby agree as
follows.
1. DEFINITIONS.
As used in this Agreement, the following terms shall have the
following meanings.
"Affiliate" of an entity shall mean another entity controlled
by, under common control with or controlling such entity.
"Availability Date" shall mean the date on which the UMG
Entity makes the relevant Content available to Company Entities, provided that
the Availability Date for any particular Content shall be no later than the
first date on which such Content is made available on a nonexclusive basis to
third parties. The parties acknowledge and agree that the Availability Date as
to any particular Content shall not occur if such Content is provided (i) only
to then-current Affiliates of UMG (including, without limitation, GetMusic LLC),
and/or (ii) exclusively as to any particular Content only to one or more third
parties prior to being made available generally to third parties (e.g., certain
Content may be provided to a third party providing special support to a
promotion or in connection with a third party specific promotion).
"Commencement Date" shall have the meaning set forth in
Section 2 hereof.
"Company Contact Person" shall have the meaning set forth in
Section 4.E. hereof.
<PAGE> 2
"Company Entities" shall have the meaning set forth in Section
4.A. hereof.
"Company Term Minimum Commitment" shall have the meaning set
forth in Section 4.D. hereof.
"Company Yearly Minimum Commitment" shall have the meaning set
forth in Section 4.D. hereof.
"Complying Party" shall have the meaning set forth in Section
5.B. hereof.
"Content" shall mean music and music related content (i) made
available on a non-exclusive basis for marketing and promotional purposes by
labels to third parties (e.g., materials related to new artists and new
releases, music videos, music audio samples, cybercasts, photographs, album
covers, concert film clips, biographical information, promotional merchandise
and similar materials), or (ii) designated by a UMG Entity, in its sole
discretion, as Content for the purposes of this Agreement.
"Derived Analyses" shall mean analyses based upon or related
to data generated from web sites, if any, which analyses are created by or for a
UMG Entity or a Company Entity during the Term, (i) in the case of a UMG Entity,
primarily through the analysis of Other Data, and (ii) in the case of a Company
Entity, (A) primarily through the analysis of Other Data, or (B) provided by a
Company Entity to any unaffiliated third party, or (C) related solely to UMG
Data. Derived Analyses shall not include any individual level data (i.e. data
which would permit an entity to identify a single consumer by his or her name or
e-mail address).
"Generally Available Content" shall have the meaning set forth
in Section 3.A.i. hereof.
"Marketing Support" shall mean (i) advertising space, (ii)
marketing services, (iii) promotional products or services, (iv) Other Data or
Derived Analyses, and (v) other marketing or promotional products or services.
"Noncomplying Party" shall have the meaning set forth in
Section 5.B. hereof.
"Other Data" shall mean any and all data owned or controlled
by a Company Entity and made available by a Company Entity to any unaffiliated
third party (other than (i) UMG Data, (ii) data owned by an unaffiliated third
party, and (iii) data as to a particular web site made available solely to the
person or entity controlling the rights to substantially all the content on such
web site (e.g., an artist, such artist's label or a branding entity (e.g., "Dick
Clark Presents"))). Notwithstanding the foregoing, Other Data shall not include
any data which cannot be provided to UMG without such artists' or branding
entity's consent (unless such consent has been obtained) or consumer consent.
2
<PAGE> 3
"Set-Off Right" shall have the meaning set forth in Section
5.A. hereof.
"Special Content" shall have the meaning set forth in Section
3.A.ii. hereof.
"Term" shall have the meaning set forth in Section 2 hereof.
"Term Minimum Commitment" shall mean the UMG Term Minimum
Commitment or the Company Term Minimum Commitment, as applicable.
"Term Year" shall have the meaning set forth in Section 3.B.
hereof.
"Third Party Payments" shall mean any payments required by
contract or law to a person or entity other than UMG or one of its Affiliates.
For purposes of clarity, a payment made to UMG or one of its Affiliates in its
capacity as an agent of a third party shall be a Third Party Payment (e.g., a
payment made to a UMG Affiliate which is a music publishing company for the
benefit of an artist shall be a Third Party Payment hereunder).
"True Up Payment" shall have the meaning set forth in Section
5.B. hereof.
"UMG Affiliates" shall mean UMG and its Affiliates including,
without limitation, the UMG Entities.
"UMG Artist Site" shall mean any web site (whether or not
located on the World Wide Web) owned or operated by a Company Entity that (i)
uses the name of, or predominantly features one or more artists under contract
to a UMG Entity, and (ii) Company Entity institutes, operates or continues to
operate during the Term at least in material part as the result of the efforts
of one or more UMG Entities, including through an introduction or recommendation
by a UMG Affiliate to such artist (or such artist's management), or other
arrangement entered into between a UMG Affiliate and such artist. For purposes
of clarity, web sites existing or in development pursuant to an agreement
existing as of the Commencement Date shall not be UMG Artist Sites unless and
until the agreement or other arrangement pursuant to which the relevant Company
Entity acquired the rights to institute or operate such web site would have
expired or terminated but for the material contributing efforts of a UMG
Affiliate in causing the relevant artist to continue such site (whether on the
same or different terms). Notwithstanding the foregoing, any UMG Artist Site
shall cease to be a UMG Artist Site on the expiration or termination of the
applicable artist's agreement with the relevant UMG Entity, subject to clause
(iii) of the definition of UMG Data.
"UMG Contact Person" shall have the meaning set forth in
Section 3.D. hereof.
"UMG Data" shall mean any and all data collected by a Company
Entity (i) with respect to a consumer that registers with a Company Entity
through a UMG Artist Site, (ii) with respect to any transaction by a consumer
related to a UMG Artist Site, and (iii) with respect to any transaction by a
consumer (A) related to a former UMG Artist Site, and (B) a product released by
the artist during the period(s) such artist was subject to an agreement with a
UMG Entity. Notwithstanding the foregoing, UMG Data shall not include any data
which cannot be provided to UMG without artists' consent (unless such consent
has been obtained) or consumer consent.
3
<PAGE> 4
"UMG Entities" shall have the meaning set forth in Section
3.A. hereof.
"UMG Term Minimum Commitment" shall have the meaning set forth
in Section 3.B. hereof.
"UMG Yearly Minimum Commitment" shall have the meaning set
forth in Section 3.B. hereof.
"Yearly Compliance Notice" shall have the meaning set forth in
Section 5.B. hereof.
"Yearly Minimum Commitment" shall mean the UMG Yearly Minimum
Commitment or the Company Yearly Minimum Commitment, as applicable.
2. TERM.
The "Term" of this Agreement shall commence on the date first
set forth above (the "Commencement Date") and end on the earlier of: (i) the
third anniversary of the Commencement Date and (ii) the termination of the
Agreement pursuant to Section 6.A. hereof.
3. UMG OBLIGATIONS.
A. Availability of Content. During the Term, UMG shall, and
shall cause those entities over which it exercises actual control regularly to
(UMG and such entities, for the period that such actual control exists,
collectively and individually the "UMG Entities"), make Content available to the
Company at the times and on the terms as set forth herein.
i. Generally Available Content. "Generally Available
Content" is Content which the UMG Entities make available to unaffiliated third
parties for use on web sites. The UMG Entities shall regularly provide to the
Company the right to use Generally Available Content, and may provide additional
Content on a non-exclusive basis, all of which may be used by Company solely on
one or more web sites owned by Company Entities and web sites operated by the
Company as part of a joint venture in which the Company owns fifty percent (50%)
or more of the economic interest, and solely for the promotion and marketing of
UMG Entity artists (it being understood and agreed that the Company Entities
acquire no right, title or interest in such Content other than the same rights
to use such Content generally provided by the relevant UMG Entity to other
unaffiliated web sites) and shall be provided by the relevant UMG Entity on the
Availability Date for such Content. If such Generally Available Content is
provided by the relevant UMG Entity to other unaffiliated third parties on
other terms and conditions ("Standard Terms") (e.g., limitations in use, period
of time for use, financial terms), it shall be provided to the Company Entities
on the same Standard Terms (which shall be no less favorable to the Company as
the terms the relevant UMG Entity offers to unaffiliated third parties) as a
condition of receiving such Generally Available Content.
ii. Special Content. "Special Content" is content
which the UMG Entities make available only to one or more Company Entities, or
only to one or more Company Entities and a limited number of other unaffiliated
third parties. The UMG Entities shall
4
<PAGE> 5
regularly provide to the Company Entities the right to license Special Content
(i) for an exclusive period prior to the Availability Date, or (ii) exclusively,
or (iii) on a limited non-exclusive basis (i.e., such Special Content shall be
available for some period of time only to the Company Entities and a limited
number of other third parties). The parties acknowledge and agree that Special
Content may be made available only on the payment by the Company Entities of a
(x) license or similar fee, or (y) in return for the cost of developing and
creating such Special Content, or (z) on payment of the UMG Entities costs for
such Special Content. All financial terms and other terms and conditions
applicable to any particular Special Content shall be negotiated in good faith
by the parties, provided if such Special Content is also to be made available at
the same time to another unaffiliated third party, the financial terms and
conditions shall be the most favorable financial terms offered to any comparable
third party. Examples of Special Content might be instances where a UMG Entity
has the right to license or provide: (A) a cybercast, made available first and
exclusively to the Company for a limited period of time or a limited number of
broadcasts, and for which Company would pay a fee and any required Third Party
Payments; (B) an exclusive chat with a UMG artist on terms which may or may not
include a fee; and (C) prizes or promotional items provided at the UMG Entities'
cost. The UMG Entities, collectively, shall in each Term Year offer sufficient
Special Content to the Company Entities so that the Company Entities could, if
they choose to license such Special Content, meet the Company Yearly Minimum
Commitment and assuming the Agreement is not terminated pursuant to Section
6.A.(ii), the Company Term Minimum Commitment.
iii. For purposes of clarity, the UMG Entities'
obligation hereunder is to make Content available to the Company; subject to
Section 4.D. hereof, the Company shall have no obligation to license, acquire or
use such Content. On each license or purchase by a Company Entity of Content
(i.e., where a Company Entity will be required to pay for such Content), the
parties shall promptly memorialize the financial and all other terms applicable
to such purchase and promptly provide a copy of such memorialization to each of
the Company Contact Person and the UMG Contact Person (it being acknowledged and
agreed that failure so to provide such a copy shall not invalidate or otherwise
affect such license or purchase or the terms applicable thereto).
B. Minimum Purchase Commitment. Subject to the further terms
and provisions of this Agreement, (i) in each twelve month period commencing on
the Commencement Date or the first or second anniversary thereof and ending on
the day immediately preceding the next such anniversary of the Commencement Date
(each such period, a "Term Year"), UMG and its Affiliates shall purchase, in the
aggregate, not less than One Million Dollars ($1,000,000) of Marketing Support
from the Company Entities (the "UMG Yearly Minimum Commitment"), and (ii) during
the Term, the UMG Affiliates shall purchase not less than Four Million Dollars
($4,000,000) of Marketing Support from the Company Entities (the "UMG Term
Minimum Commitment"). If, as a result of a termination of the Agreement by UMG
pursuant to Section 6.A. hereof the Term of this Agreement terminates prior to
the third anniversary of the Commencement Date, the obligations under this
Section 3.B. shall be pro rated to take into account such early termination.
5
<PAGE> 6
C. Derived Analyses. Each UMG Entity shall promptly after its
completion make each Derived Analysis available to the Company, at no charge,
provided the Company shall not transfer, assign, sell or disclose such Derived
Analyses to any unaffiliated third party without UMG's consent, provided a
Derived Analysis related to a particular artist or entity controlling the rights
to substantially all the content underlying such Derived Analysis may be made
available (without rights to further assign, sell or disclose) to the applicable
artist or entity. The parties shall hereafter agree on the form and media in
which such Derived Analyses shall be provided to the Company.
D. Contact Person. The UMG Entities, collectively, shall
promptly hereafter appoint (and shall maintain throughout the Term) at least one
person to be the primary contact person (the "UMG Contact Person") who shall
coordinate with the Company Contact Person with respect to all operational and
similar purposes under this Agreement, which person may change from time to time
as designated by UMG in its sole discretion.
4. COMPANY OBLIGATIONS.
A. Availability of Marketing Support. During the Term and
subject to the further provisions of this Section 4, the Company shall, and
shall cause entities over which it exercises actual control to (the Company and
such entities, collectively and individually, the "Company Entities"), make any
Marketing Support the Company Entities make available to third parties available
to the UMG Affiliates, it being understood that all material financial and other
terms shall be the most favorable financial terms then offered by the relevant
Company Entity to any unaffiliated third party for comparable Marketing Support.
For purposes of clarity, the Company Entities' obligation hereunder is to make
Marketing Support available to UMG Affiliates; subject to Section 3.B. hereof,
the UMG Affiliates shall have no obligation to acquire or use any particular
Marketing Support product or service. The parties shall promptly memorialize the
financial and all other terms applicable to the provision of such marketing
support and promptly provide a copy of such memorialization to each of the UMG
Contact Person and the Company Contact Person (it being acknowledged and agreed
that the failure so to provide such a copy shall not invalidate or otherwise
affect such transaction or the terms applicable thereto).
B. Provision of UMG Data. The Company shall, and shall cause
each Company Entity to provide to UMG copies of all UMG Data from time to time
as requested by UMG, but not less frequently than monthly. The parties shall
hereafter agree on the form and media in which such data shall be provided to
UMG, it being understood and agreed that UMG shall be entitled to the UMG Data
in digital format, and that the Company shall reasonably cooperate with UMG in
creating data collection fields for UMG Artist Sites. Notwithstanding the
foregoing, the parties acknowledge and agree that the provision of UMG Data to
UMG may be subject to artist consent.
C. Provision of Other Data, Derived Analyses. During the Term,
the Company shall, and shall cause each Company Entity to, notify UMG promptly
after the date on which such Company Entity makes any Other Data or Derived
Analyses available to any unaffiliated third party, identifying in reasonable
detail: (i) the nature of such Other Data or
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<PAGE> 7
Derived Analyses, and (ii) the financial and other terms applicable to such
Other Data or Derived Analyses provided that the Company Entities shall provide
to UMG the most favorable (a) financial terms and (b) access and use rights to
such Other Data and/or Derived Analyses as in each case are offered to any
unaffiliated third party with respect to such Other Data and/or Derived
Analyses. The Company shall not, and shall not permit any Company Entity to,
create or impose any term which would preclude a UMG Entity from having the same
or more extensive rights to the relevant Other Data or Derived Analyses as does
the third party to which such Other Data or Derived Analyses is initially
disclosed. Notwithstanding anything contained in this Agreement to the
contrary, no Company Entity shall be obligated under this Agreement to provide
any UMG Entity with any data (x) if the artist has the right to approve the
dissemination of such data to a UMG Entity and has not give such approval, (y)
subject to Section 4.F. hereof, the dissemination of such data would violate the
privacy policy of the applicable Company Entity, or (z) the dissemination of
such data would violate any law, statute or regulation then in effect including
if applicable The Children's Online Privacy Protection Act and any regulation
promulgated by the Federal Trade Commission or any other governmental entity
(whether United States or foreign) and, in the case of (y) and (z), such data is
not being provided to other unaffiliated third parties. Without the relevant
Company Entity's prior written consent, or as permitted by the terms applicable
to such Other Data or Derived Analyses consistent with clause (ii)(b) of the
first sentence of this Section 4.C., UMG shall not be entitled to transfer,
assign, sell or disclose such Other Data or Derived Analyses other than to UMG
Entities, and shall (and shall permit the UMG Entities to) use such Other Data
or Derived Analyses solely for internal marketing research and analysis.
Notwithstanding the immediately preceding sentence, Other Data or a Derived
Analysis related to a particular artist may be made available (without rights to
further assign, sell or disclose) to the applicable artist.
D. Minimum Purchase Commitment. Subject to the further terms
and provisions of this Agreement, (i) in each Term Year the Company Entities
shall purchase, in the aggregate, not less than One Million Dollars ($1,000,000)
of Content from the UMG Entities (the "Company Yearly Minimum Commitment"), and
(ii) during the Term, the Company Entities shall purchase not less than Four
Million Dollars ($4,000,000) of Content from the UMG Entities (the "Company Term
Minimum Commitment"). If as a result of a termination of this Agreement by the
Company pursuant to Section 6.A. hereof the Term of this Agreement terminates
prior to the third anniversary of the Commencement Date, the obligations under
this Section 4.D. shall be pro rated to take into account such early
termination.
E. Contact Person. The Company Entities, collectively, shall
promptly hereafter appoint (and shall maintain throughout the Term) at least one
person to be the primary contact person (the "Company Contact Person") to
coordinate with the UMG Contact Person with respect to operational and similar
purposes under this Agreement, which person may change from time to time as
designated by the Company in its sole discretion.
F. Efforts to Obtain Consents; Anti-Discrimination. The
Company Entities shall use their commercially reasonable efforts to seek and
obtain each and every consent, waiver, agreement or other action necessary to
afford UMG the rights to data set forth in this Section 4, including, without
limitation, artists' and consumer consents. The Company and UMG shall consult
with one another as to the actions to be taken to obtain necessary consents, and
the Company shall promptly notify UMG if it has been unable to obtain an artist
consent necessary to afford UMG the rights set forth in this Section 4.
The Company shall not, and shall ensure that the other Company Entities do not
implement or use a consumer privacy policy (including "opt-out" provisions) or
other policies or procedures which would be more restrictive with respect to
disclosure to (or opt-out with respect to) UMG Affiliates than are the
restrictions and opt-out provisions applicable to any entity other than Company
Entities.
7
<PAGE> 8
5. SET-OFF AND TERM YEAR PAYMENTS.
A. Set-Off Right. Notwithstanding any other provision of this
Agreement to the contrary, the Company Entities shall be entitled to set-off all
amounts owed by them to any UMG Entity under this Agreement against all amounts
owed to any of them by any UMG Affiliate under this Agreement, and the UMG
Affiliates shall be entitled to set-off all amounts owed by them to any Company
Entity under this Agreement against all amounts owed to any of them by any
Company Entity under this Agreement (the "Set-Off Right"). Not later than 30
days after the end of each Term Year, each of UMG and the Company shall provide
to the other a schedule listing in sufficient detail to identify the
transaction, all purchases made by an entity from the other and for which UMG or
the Company, as the case may be, can and will set-off under this Agreement.
B. True Up Payments. Due to the availability of the Set-Off
Right, the parties acknowledge and agree that no payments shall be due from one
to the other hereunder with respect to any Term Year unless (i) at the end of
such Term Year, only one of UMG or the Company has met its Yearly Minimum
Commitment, and (ii) the entity meeting its Yearly Minimum Commitment (the
"Complying Party") notifies the other, within forty-five days of the end of such
Term Year that the Complying Party has met its Yearly Minimum Commitment, and
that the other party (the "Noncomplying Party") has not, demands that the
Noncomplying Party meet its Yearly Minimum Commitment for such Term Year, and
specifies the amount of the Yearly Minimum Commitment outstanding at the end of
the relevant Term Year (such notice, the "Yearly Compliance Notice"). If the
Noncomplying Party has not, within 60 days of such Yearly Compliance Notice (the
"Extension Period") purchased such amount of Marketing Support or Content, as
applicable, within such Extension Period as would (when aggregated whether with
the purchases made during the applicable Term Year) meet its Yearly Minimum
Commitment, it shall, not later than the 60th day after such Yearly Compliance
Notice pay such amount of the Yearly Minimum Commitment (the "True Up Payment")
which remains unmet as of the end of such 60 day period, in cash, to the
Complying Party. Purchases of Marketing Support or Content, as applicable, made
in the Extension Period after a Yearly Compliance notice and included in
calculating a True Up Payment may not be included for purposes of ascertaining
whether the Noncomplying Party has met its Yearly Minimum Commitment in any
other Term Year but (for purposes of clarity) shall be included in calculating
whether a party has made its Term Minimum Commitment. Notwithstanding the
foregoing, if the UMG Entities have not made Special Content available to the
Company in the first or second Term Year in an amount sufficient for the Company
Entities to actually expend amounts sufficient to meet the Company Yearly
Minimum Commitment during the applicable Term Year (including the Extension
Period), the amount of such shortfall (the "Yearly Shortfall Amount") shall not
be required to be paid in cash by Company at the end of such Term Year, the
Yearly Shortfall Amount shall be deemed paid by the Company for purposes of
calculating whether the Company has met its Term Minimum Commitment, and UMG
shall pay the Company in cash the amount
8
<PAGE> 9
by which (A) the lesser of (i) the aggregate amounts spent by the UMG Entities
in the aggregate for Marketing Support in such Term Year and (ii) $1 million,
exceed (B) the aggregate amounts spent by the Company Entities in such Term
Year, for Content. At the end of the Term, the parties' (and their Affiliates')
respective aggregate purchases of Marketing Support and Content, respectively,
during the entire Term shall be calculated. If, as of the end of the Term,
either party has failed to meet its Term Minimum Commitment, and has not, within
60 days of the end of the Term, purchased such amount of Marketing Support or
Content, as applicable, within such 60 day period as would (when aggregated with
all other purchases made during the Term) meet its Term Minimum Commitment, such
non-complying party shall, not later than the 60th day after the end of the Term
pay to the other party the difference between the non-complying party's Term
Minimum Commitment and the amount actually spent by it during the Term and such
60 day post-Term period. Notwithstanding the foregoing, if at the end of the
Term the UMG Entities have not made Special Content available to the Company
during the Term in an amount sufficient for the Company Entities to actually
expend amounts sufficient to meet the Company Term Minimum Commitment, the
amount of such shortfall (the "Term Shortfall Amount") shall not be required to
be paid in cash by Company at the end of the Term, and UMG shall pay the Company
in cash the amount by which (A) the lesser of (i) the aggregate amounts spent by
the UMG Entities in the aggregate for Marketing Support during the Term and (ii)
$4 million, exceed (B) the aggregate amounts spent by the Company Entities
during the Term for Content (taking into account the "deemed paid" amounts set
forth above). Notwithstanding any provision of this Agreement to the contrary,
the remedy provided for in this Section 5.B. shall be the sole and exclusive
remedy for any breach or alleged breach of the parties' respective obligations
under Sections 3.B. and 4.D.
C. Limitations on Set Off. Notwithstanding anything in this
Agreement to the contrary, a party which purchases Content or Marketing Support,
as the case may be, (i) in excess of $1.5 million in any Term Year, or (ii) in
excess of $4 million during the Term shall, for each and every purchase over
either such limit, pay cash for such purchase in accordance with the payment
terms otherwise applicable to such transaction. Unless and until the aggregate
of all cash payments made by a party (and its affiliates) hereunder exceeds
(together with all amounts set-off or eligible for set-off hereunder) $4
million, such cash payments shall be included in any calculation of whether such
party has met its Term Minimum Commitment.
D. Other Purchases. By mutual agreement of the parties, any
purchase made by one party (or its Affiliates) from the other (or its
Affiliates) which does not otherwise fall under the categories described in this
Agreement (e.g., a purchase by the Company of marketing or promotional services
or advertising from a UMG Entity or the provision of music digital downloads by
a UMG Entity to the Company) may be deemed to be "Content" or "Marketing
Support" for the purpose of calculating whether a party has met its Yearly
Minimum Commitment or Term Minimum Commitment hereunder.
6. TERMINATION FOR BREACH.
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A. Early Termination. Either party may terminate this
Agreement (i) on the material breach of the other party, subject to notice and a
reasonable (not to exceed 30 days) period to cure, or on the occurrence of an
insolvency event with respect to the other party, or (ii) if the UMG Entities
fail to make sufficient Special Content available in the first two Term Years so
that the Company Entities fail to meet the Company Yearly Minimum Commitment
hereunder in each of such years.
7. MISCELLANEOUS.
A. Counterparts; Facsimile Signatures. This Agreement may be
signed in multiple counterparts. Each counterpart will be considered an
original, but all of them in the aggregate shall constitute one agreement. This
Agreement and any amendments hereto, to the extent signed and delivered by means
of a facsimile machine, shall be treated in all manner and respects as an
original agreement or instrument and shall be considered to have the same
binding effect as if it were the original signed version thereof delivered in
person.
B. Successors and Assigns. This Agreement may not be assigned,
in whole or in part, whether voluntarily or by operation of law without the
consent of the other party hereto.
C. Entire Agreement. This Agreement is intended by the parties
as a final expression of their agreement and is intended to be a complete and
exclusive statement of the agreement and understanding of the parties hereto in
respect of the subject matter hereof. This Agreement supersedes all prior
letters of intent, agreements and understandings between the parties with
respect to the subject matter hereof.
D. Amendments. This Agreement may be amended, modified or
supplemented only in a writing executed by each of the parties hereto.
E. Notices. All notices and other communications provided for
or permitted hereunder shall be made in writing by hand-delivery, first class
mail or overnight courier, shall be deemed given on the date received, if
delivered by hand or courier, and four days after deposit into the United States
mail, if mailed, and shall be delivered to the addresses for notice indicated on
the signature pages hereof, or at such other addresses as a party may hereafter
designate by notice delivered pursuant to this Section 7.E.
F. Relationship of the Parties. Notwithstanding any other
relationship between the parties hereto, or between or among them and their
respective Affiliates, nothing herein shall be deemed to constitute the parties
a partnership or joint venture.
G. Governing Law. This Agreement and all matters or issues
related thereto or arising hereunder shall be governed by the laws of the State
of California without regard to the application of principles of conflicts of
laws.
H. Headings and Examples. The headings in this Agreement are
for the convenience of reference only and shall not limit or otherwise affect
the meaning hereof.
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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.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first written above.
ARTISTdirect, INC. UNIVERSAL MUSIC GROUP, INC.
By: /s/ KEITH YOKOMOTO By: /s/ MICHAEL OSTROFF
------------------------------- --------------------------------
Keith Yokomoto Senior Vice President
ARTISTdirect, Inc. 70 Universal City Plaza
17835 Ventura Boulevard Universal City, CA 91608
Suite 310 Attn: President, Global E-Commerce
Encino, CA 91316 and Advanced Technology
Attn: Chief Executive Officer AND Attn: Senior Vice President,
Business and Legal Affairs
With a copy to: With a copy to:
Lenard & Gonzalez LLP Munger, Tolles & Olson LLP
25th Floor 35th Floor
1900 Ave. Of the Stars 355 S. Grand Ave.
Los Angeles, CA 90067 Los Angeles, CA 90071-1560
Attn: Allen D. Lenard Attn: Ruth E. Fisher
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EXHIBIT 10.40
ARTISTDIRECT - CISNEROS TELEVISION GROUP
MEMORANDUM OF UNDERSTANDING
(As of November 15, 1999)
1. Overview and Definitions.
1.1. This Memorandum of Understanding ("Agreement") sets forth the
terms for the formation, capitalization and operation of a Delaware limited
liability company (the "Company"), the members of which will be ARTISTdirect
Latin America, LLC, a Delaware limited liability company ("AD"), an affiliate of
ARTISTdirect, Inc., a Delaware corporation ("AD Parent") and Lakeport Overseas
Ltd., a British Virgin Islands corporation ("CTG"), an affiliate of Hampstead
Management Co., a British Virgin Islands corporation ("CTG Parent"), that will
be the vehicle for both AD and CTG to develop and conduct the "Service" as
defined in Section 1.2. [AD, together with its Affiliate Transferees (as defined
in Section 10.2.1); and CTG, together with its Affiliate Transferees (as defined
in Section 10.2.1) will each hereinafter be referred to individually as a
"Member" or "party" and collectively as the "Members" or "parties".] Pursuant to
Section 2 below, this Agreement will be binding upon execution by the parties.
1.2. The Company will develop customized music "portals" (the "Front
End Sites") which will be distributed through various media to individual
interactive communication devices, including but not limited to, any device
utilizing IP protocols for delivery to another device including personal
computers, hand-held devices and cellular phones, in the Spanish and Portuguese
languages (the "Service") in the Territory (as defined in Section 7.1). These
Front End Sites will be based on the structure and content of the ARTISTdirect
network, which includes the ARTISTdirect home page and the Ultimate Band List
and iMusic websites (the "AD Network") as it currently operates in the United
States and provides comprehensive music content, including streaming video and
audio and community features focused on the artists and music popular in a given
country or region. These Front End Sites will be linked to the existing AD
Network to provide users with access to even greater resources. In addition, the
Company may develop Spanish and Portuguese language translations of existing and
future AD Network content.
1.3. The Company will initially concentrate on the development and
launch of content-oriented sites with revenue derived from the sale of
advertising, promotions and sponsorships. The Company will have access to
existing AD e-commerce infrastructure to fulfill purchase orders received
through the Front End Sites; provided, however, that the Company will be
responsible for all transaction costs and expenses associated with such purchase
orders and their fulfillment. The Company will explore the development of
e-commerce opportunities for sale of the recorded music and music-related
merchandise, subject to the Company's ability to develop satisfactory
relationships for the local or regional procurement and fulfillment of such
goods and related customer support services.
1.4. For the purposes of this Agreement, "Person" means any general
partnership, limited partnership, corporation, limited liability company, joint
venture, trust, business trust, governmental
<PAGE> 2
agency, cooperative, association, individual or other entity, and the heirs,
executors, administrators, legal representatives, successors and assigns of such
Person, as the context may require. An "Affiliate" of a Person (the "subject
Person") will mean such other Person that is controlled by, controlling of, or
under common control with the subject Person. "Control," when used with respect
to a Person, means the right or power to direct the operation of such Person,
whether by ownership of voting securities, contract or otherwise. For the
purposes of this Agreement, "eCTG" (i.e., an entity to be formed by CTG Parent
or by an Affiliate of CTG Parent to hold direct or indirect investments in
Internet companies) will be deemed to be an Affiliate of CTG; furthermore, if
"eCTG" becomes the holder, directly or indirectly, of one hundred percent (100%)
of CTG's membership interests in the Company, then eCTG shall be deemed to be
CTG Parent.
1.5. Purposes. The purposes of the Company are to engage in any
activity and/or business for which limited liability companies may be formed
under applicable law and subject to the terms of this Agreement. The Company
will have all the powers necessary or convenient to effect any purpose for which
it is formed, including all powers granted under applicable law. However, except
as set forth in this Agreement, the Company will not enter into any transaction
or contract, or otherwise act, unless its actions are approved by the Management
Committee.
1.6. No State-Law Partnership. No provisions of this Agreement will be
deemed or construed to constitute the Company a partnership (including, without
limitation, a limited partnership) or joint venture, or any Member or Manager a
partner or joint venturer of or with any other Member or Manager, for any
purposes other than federal and state tax purposes.
1.7. No Fiduciary Duties. No fiduciary duty will be imposed upon any
Member by virtue of or in connection with this Agreement, and the Company and
each other Member, by their execution hereof, expressly accepts and acknowledges
the foregoing. EACH OF THE COMPANY AND EACH MEMBER, BY ITS EXECUTION HEREOF,
EXPRESSLY WAIVES ANY FIDUCIARY DUTY OR DUTIES THAT MAY BE IMPOSED ON ITS BEHALF
UPON ANY OTHER MEMBER IN CONNECTION WITH THIS AGREEMENT.
2. Superseding Agreements.
AD and CTG agree to use their respective good faith best efforts to
negotiate and execute more formal agreements (the "Superseding Agreements") as
soon as reasonably practicable, and the Members intend that such agreements will
be executed within sixty (60) days of the date hereof. Such agreements will
incorporate the terms of this Agreement and such other terms as the parties may
mutually agree. Until such agreements are executed, and if such agreements are
never executed, this Agreement, when executed by both AD and CTG, will
constitute a binding agreement between the Members with regard to all matters
covered herein. Specifically, any terms described herein to be included in a
Superseding Agreement will, until such Superseding Agreement is executed, and if
such Superseding Agreement is never executed, be fully operative as terms of
this Agreement.
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Upon execution of the Superseding Agreements, this Agreement will terminate and
be of no further force and effect. Superseding Agreements will include (i) the
Company Operating Agreement, (ii) License of AD Network on-line content, (iii)
License of MuchMusic, HTV and AEI programming, if necessary and subject to the
availability of such rights, (iv) License of the AD Marks and License of the CTG
Marks (see Sections 9.1 and 9.2), (v) Management Services Contract between the
Company and CTSI (see Section 4.5), and (vi) any additional agreements the
parties deem necessary to carry out the business of the Company.
3. Key Dates Defined and Transition Issues.
3.1. Key Dates.
3.1.1. Execution Date. The date on which the parties execute
and deliver this Agreement will be the "Execution Date." The parties anticipate
that the Execution Date will be on or about November 15, 1999.
3.1.2. Fiscal Year. The Fiscal Year for the Company will be
the calendar year. "Fiscal Year 1" will mean the first fiscal year of the
Company, "Fiscal Year 2" will mean the second fiscal year and so on.
3.1.3. Commencement Date. The date on which the Company
launches the Service.
4. Governance Provisions and Operating Responsibilities.
4.1. Management Committee. AD and CTG will be the managers of the
Company and will govern the Company through representatives to a management
committee (the "Management Committee"). The Management Committee will consist of
three (3) representatives of AD (the "AD Directors"), three (3) representatives
of CTG (the "CTG Directors") and three (3) Independent Directors (the AD
Directors and CTG Directors will be referred to collectively as the
"Non-Independent Directors). AD and CTG will each appoint one (1) of the
Independent Directors and those two (2) Independent Directors will appoint the
third (3rd) Independent Director whose appointment will be subject to the mutual
approval of AD and CTG. The AD Directors and the CTG Directors will collectively
vote the percentage interest of the Member appointing them and will collectively
exercise their respective Member's approval rights. If at any time and for
whatever reason either CTG or AD ceases to be a Member of the Company, it will
no longer be entitled to designate any representatives to the Management
Committee. In no event will either Member be entitled to appoint more than three
(3) persons in the aggregate per party to the Management Committee.
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4.2. Voting. All matters submitted to the Management Committee will be
determined on the basis of a majority in percentage interests of the Members, as
determined by a vote of the Non-Independent Directors; provided, however, that
subject to Section 10.3.3 below, the following matters will require the approval
of both the AD Directors and the CTG Directors: (i) any amendment to the
Superseding Agreements; (ii) any merger or other reorganization of the Company;
(iii) the issuance of additional interests in the Company whether by private
placement, public offering, or otherwise, subject to Section 14.2; (iv) any
distribution by the Company with respect to the interests therein other than
distributions of excess cash as provided in Section 12 (including, but not
limited to, any distribution of non-cash assets); (v) the appointment or removal
of the General Manager (as defined below); (vi) the approval of any Business
Plan (as defined below) or Annual Budget (as defined below) or taking actions
that are inconsistent with an approved Business Plan or Annual Budget, or which
are otherwise outside the ordinary course of business, including but not limited
to the incurrence of indebtedness in excess of the levels contemplated by the
applicable Business Plan or Annual Budget; (vii) the Company entering into any
business activities except as contemplated herein; (viii) any transaction with
an Affiliate of any Member (other than the Superseding Agreements); (ix) except
as expressly provided herein, the termination, dissolution or liquidation of the
Company, or the decision to cause the Company to file a bankruptcy petition or
make an assignment for the benefit of creditors; and (x) the selection of
outside auditors. Deadlocks of the Management Committee with respect to matters
(v), (vi), (ix) and (x) above will be resolved by a majority vote of the
Independent Directors.
4.3. General Manager. The Management Committee will delegate the
day-to-day management of the Company to a General Manager ("GM"). The GM's
duties will include: the supervision of all key functions of the Company
[including launching and managing the Service; content acquisition and
development; strategic planning; marketing; accounting and financial planning
(including responsibility for the preparation of Business Plans and Annual
Budgets); and legal and business affairs], the ability to hire and fire
employees (except employees with compensation packages worth more than $150,000
per year, in which case such hiring or termination must be approved by the
Management Committee); expending funds in accordance with the approved Business
Plan and Annual Budget; and reporting to the Management Committee on a regular
basis regarding the operations of the Company
4.4. Headquarters. The Company's headquarters will be located at the
offices of CTG in Miami Beach, Florida, or at a nearby location in the Miami
area.
4.5. Management Services. Pursuant to a contract, the term of which
shall commence on the Execution Date and terminate on the date which is the
second (2nd) anniversary of the Commencement Date (the "CTSI Term"), Cisneros
Television Services, Inc. ("CTSI") will provide the following functions on
behalf of the Company:
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4.5.1. Cash Management. Maintain one or more bank accounts
(the "Account") in trust for, and for the benefit of the Company, monitor and
collect accounts receivable and monitor and pay the Company's payables from and
out of collections. Within 45 days after the end of each calendar month during
the term of the Agreement, CTSI will provide the Company with a report listing
in detail all receipts into and disbursements from the Company's Account.
4.5.2. Accounting and Financial Reporting. Maintain general
ledger; prepare, on a periodic basis, all financial reports requested by the GM;
compile data required by the Company and its tax accountants for preparation of
the Company's tax returns and similar filings.
4.5.3. Human Resources. Administer payroll and benefits for
the Company's employees.
4.5.4. Facilities Management. Procure and maintain office and
facility space for the Company's administrative and operational functions;
provide janitorial and maintenance services; arrange the procurement,
installation, and maintenance of telephones, computers, telecopiers and other
business equipment required by the Company.
4.5.5. Extension of Term. The CTSI Term may be extended by
mutual agreement of CTSI and the Company. If the CTSI Term is not extended, CTSI
will facilitate the transition to a new management service provider.
4.6. CTSI Compensation. In consideration for the management and
back-office services to be provided by CTSI, the Company will pay to CTSI (i) a
fee at the rate of [***]* per year for the period from the Execution Date
through the first (1st) anniversary of the Commencement Date and (ii) [***]* for
the period from the first (1st) anniversary of the Commencement Date through the
second (2nd) Anniversary of the Commencement Date. To the extent any of the
services set forth in Section 4.5 above are provided by AD, AD will be entitled
to reimbursement on a cost plus basis and such services will be included as a
line item in the Business Plan.
4.7. Financial Reports/Audit Rights.
4.7.1. The General Manager will oversee the preparation of
regular periodic financial statements and annual financial statements to be
prepared in accordance with GAAP. The Company's books and records will be
audited annually by an independent nationally-recognized accounting firm.
4.7.2. The Company, at the request of the GM or AD, will have
the right to audit CTSI's books and records, as such books and records pertain
to the Company, once every twelve
- ------------
* 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> 6
(12) months. The Company will give reasonable notice of its intent to audit and
the parties will attempt to schedule such audit so as not to unnecessarily
interfere with the operations of CTSI.
5. Business Plan/Annual Fiscal Year Budgets.
5.1. The Management Committee will agree to an initial 5-year business
plan for the Company prior to the Execution Date (the "Business Plan"). The
first Business Plan and Annual Budget (as defined below) are attached hereto as
Exhibit "A". The Business Plan is the financial model for the operation of the
Service and, subject to such changes thereto as approved by the Management
Committee, will be incorporated into the Operating Agreement. The Business Plan
will be updated annually and extended for an additional year, such that the
Business Plan will continue to have rolling five (5) years of coverage
throughout the term of the Company.
5.2. The Business Plan will be updated annually by individual budgets
for the Company (each, an "Annual Budget") for the coming Fiscal Year. The
General Manager will prepare the updated Business Plan and Annual Budget and
present it to the Management Committee for approval at least ninety (90) days
prior to the commencement of the applicable Fiscal Year. The approved Annual
Budget for a given Fiscal Year will supersede the data contained in the original
Business Plan for that Fiscal Year. In the event the Non-Independent Directors
fail to agree on a Business Plan or Annual Budget by a date no later than
seventy-five (75) days prior to the end of the then current Fiscal Year, the
Non-Independent Directors will negotiate in good faith for fifteen (15) business
days to resolve the deadlock. If such negotiations are not successful, then such
deadlocked matter will be determined by a majority vote of the Independent
Directors.
5.3. In the event the Members agree to develop or market the Service in
any additional region outside of the Territory, the Members agree that any
Business Plan or Annual Budget will segregate the data for each such region.
6. Term and Termination.
6.1. Term. The initial term of the Company will commence on the date
the Certificate of Formation is filed with the Secretary of State of Delaware
and will terminate on the earlier of the fiftieth (50th) anniversary of the
Company as provided in the Certificate of Formation or the earlier dissolution
of the Company pursuant to the terms hereof. The initial term will be
automatically renewable for additional 10-year periods, so long as the Company
is substantially meeting then current projections, as reflected in the
then-current Business Plan and Annual Budget.
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6.2. Dissolution Events. In addition to whatever other remedies it may
have, a Member may elect to terminate this Agreement and dissolve the Company by
notice in writing to the other Member upon or after the occurrence of any of the
following (each, a "Dissolution Event"):
6.2.1. The commission of one or more material breaches of this
Agreement by the other Member which are not capable of cure;
6.2.2. The commission of a material breach of this Agreement
by the other Member which is capable of cure (a "Curable Breach") which has not
been remedied within 30 days after the Member in breach was given notice in
writing by the other Member specifying the nature of such breach in reasonable
detail and requiring it to be cured; provided, however, that such 30-day period
will be extended for such additional periods as will be reasonably necessary if
the Curable Breach is incapable of cure within 30 days, and if during the 30-day
period the Member in breach has diligently endeavored to cure such breach and
for so long as it continues to do so;
6.2.3. The Bankruptcy (as defined below) of the Company or the
other Member, or the appointment of a trustee, receiver or similar person for
the Company or the other Member. "Bankruptcy" means, with respect to any Person,
the happening of any one or more of the following events: (a) a person (or, in
the case of any Person which is a partnership, any general partner thereof); (i)
makes an assignment for the benefit of creditors; (ii) files a voluntary
petition in bankruptcy; (iii) is adjudged bankrupt or insolvent, or there has
been entered against such Person (or general partner) an order for relief, in
any bankruptcy or insolvency proceedings; (iv) files a petition or answer
seeking in respect of such Person (or general partner) any reorganization,
arrangement, composition, readjustment, liquidation, dissolution or similar
relief under any statute, law or regulation; (v) files an answer of other
pleading admitting or failing to contest the material allegations of a petition
filed against such Person (or such general partner) in any proceeding of a
nature described above; or (vi) seeks, consents or acquiesces in the appointment
of a trustee, receiver or liquidator of such Person (or such general partners)
or of all or substantial part of such commencement of any proceeding against any
person (or such general partner) seeking reorganization, arrangement,
composition, readjustment, liquidation, dissolution or similar relief under any
statute, law or regulation, if such proceedings have not been dismissed, or
within ninety (90) days after the appointment without such Person's (or such
general partner's) consent or acquiescence of a trustee, receiver or liquidator
of the Person (or such general partner) or of all of any substantial part of
such Person's (or such general partner's) properties, if such appointment is not
vacated or stayed, or within ninety (90) days after the expiration of any such
stay, if such appointment is not vacated;
6.2.4. The failure of the other Member to fund a Mandatory
Capital Contribution and the expiration of the cure period provided in Section
10.3.2.2.
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6.3. Procedure for Dissolution Election. A Member electing to dissolve
the Company pursuant to Section 6.2 above will deliver written notice of such
election to the other Member and to the Company within sixty (60) days after the
occurrence of the Dissolution Event. In the case of a remediable breach or a
failure to fund a Mandatory Capital Contribution, the Dissolution Event will be
deemed to occur upon the expiration of the cure period for such breach or
failure, as the case may be.
6.4. Buy-Out Right. Upon the occurrence of an event of default of the
type described in Section 6.2 above, the non-defaulting Member (in lieu of
electing to dissolve the Company) may elect, within sixty (60) days of the date
of the event of default, to purchase the defaulting Member's interest in the
Company for a price equal to the "Fair Market Value" of the interest, less a
twenty percent (20%) discount. The "Fair Market Value" means the fair market
value which will be computed as set forth in the attached Exhibit "B". If prior
to the date which is the fifth anniversary of the Commencement Date ("the Fifth
Anniversary") a non-defaulting Member elects to purchase the defaulting Member's
interest, the defaulting Member's obligations with respect to Section 10.3.1.1
will continue until the Fifth Anniversary, and thereafter all then existing
licenses, including without limitation any trademark licenses, content licenses
and other intellectual property or proprietary information licenses, from the
defaulting Member to the Company will continue and remain in full force and
effect in accordance with the terms and conditions of such licenses, except that
such licenses will not include any rights in intellectual property, content or
other proprietary information developed or acquired by the defaulting Member
after the Fifth Anniversary. Notwithstanding the foregoing, all trademark
licenses will remain in effect on an exclusive basis until such licenses
automatically terminate upon the earlier of the dissolution of the Company as
set forth in Section 6.6 below or by such licenses' terms.
6.5. The Company will not terminate upon the dissolution or withdrawal
of any of its Members, unless the remaining Member so elects.
6.6. Effect of Dissolution. Upon dissolution of the Company, all rights
and licenses granted pursuant to this Agreement and all Superseding Agreements
will automatically terminate, except that such licenses and agreements will
remain in effect for a reasonable period of time, not to exceed six (6) months
so as to permit an orderly wind up of the Company. Unless the Members mutually
agree otherwise, upon termination and wind up of the Company's operations, the
remaining assets of the Company (after payment of all of the Company's
liabilities) will be liquidated and the proceeds will be distributed to the
Members in accordance with their then percentage ownership interest balances in
the Company. In the event a Member agrees to accept a distribution in kind of a
Company asset, the value of such asset will be mutually agreed-to by the
Members, and in the absence of such agreement will be determined by a
third-party appraiser with experience in valuing assets of that type.
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7. Territory.
7.1. The Company will distribute and market the Service to end-users
located in the United States, Mexico, Central America, South America, the
Caribbean, and such other territories as the Members may mutually agree, in the
Spanish and Portuguese languages (the "Territory"). The parties acknowledge that
it may be possible for end-users outside the Territory to access the Service and
such access will not be deemed a breach by either party to this Agreement,
unless a party knowingly markets or promotes the Service to end-users located
outside the Territory.
7.2. If AD or any of its Affiliates develop and/or market an on-line
music business in Spain and/or Portugal (the "Iberia Business"), the Company
will grant a perpetual, fully-paid, royalty free, non-exclusive license for the
Company's on-line content and marketing materials to the Iberia Business;
provided, however, that if CTG does not have at least a twenty-five percent
(25%) ownership interest in the Iberia Business, then the Company's license of
such content and marketing materials will be subject to the approval of the
Non-Independent Directors, or, in the event of a deadlock, by the Independent
Directors and with no intent by the Management Committee to delay the
implementation of or frustrate the purpose of the Iberia Business.
8. Non-Competition.
"Noncompete Period" means with respect to each party the later of (i)
the date that is the Fifth Anniversary of the Commencement Date, or (ii) for so
long as such party is a Member plus one (1) year from the date such party ceases
to be a Member. During the Noncompete Period, neither CTG nor AD, except as set
forth in this Agreement, will engage in the operation, management or promotion
of a music portal service in the Spanish and/or Portuguese language(s) that is
substantially similar to the Service in the Territory (a "Competing Business").
During the Noncompete Period, the "CTG Pay Television Channels" will neither
contribute nor provide without consideration Promotional Support to a Competing
Business. For the purposes of this Agreement, "CTG Pay Television Channels"
means Space, I-Sat, Infinito, Jupiter, Uniseries, Locomotion, Cl@se, HTV,
MuchMusic, AEI, Playboy TV Latin America, AdultTVision and Venus.
9. Trademark.
9.1. AD Marks. AD grants to the Company an exclusive, fully-paid,
non-assessable and royalty-free, limited right and license to use the
"ARTISTdirect", "UBL" and "iMusic" marks, and certain other names, marks and
logos which are owned by AD and are currently used on, or are created in the
future and used on, the AD Network (the "AD Marks"), in the Territory only,
solely in connection with the operation, promotion and distribution of the
Service; provided, that any such use of the AD Marks, and the services offered
in connection with the AD Marks, will conform to AD's quality standards. Any
goodwill that should arise from such use will inure solely to the benefit
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of AD. The rights and license granted by AD to the Company will continue for so
long as the Company operates, promotes and distributes the Service. Should the
Company cease to operate, promote or distribute the Service, or notify AD of its
intention to cease use of the AD Marks, then the license granted herein to the
AD Marks will terminate. AD also explicitly reserves the right to terminate the
license to the AD Marks granted herein for a breach of this license. The Company
may not sub-license any AD Marks without the prior written consent of AD,
provided, however, that the Company may grant other parties the right to use the
AD Marks in connection with marketing/advertising activities for the Service
only. The Company will provide to AD copies of all such marketing/advertising
materials as reasonably requested by AD, and any such use of the AD Marks will
be subject to AD's approval. Should AD notify the Company in writing that it
does not approve of any such use of the AD Marks in any marketing/advertising
activities, then the Company will immediately cease such use of the AD Marks.
The Company agrees to cooperate with AD to facilitate AD's control of the use of
the AD Marks, and the quality of the services offered in connection with the AD
Marks. The Company agrees to display such trademark notices as are provided by
AD, and not to alter, obscure or delete any such notices. If AD disapproves of
any use of the AD Marks by the Company, AD will notify the Company in writing
and the Company will immediately cease such use of the AD Marks. The Company may
not use the AD Marks in combination with any other marks, names or logos, or
create derivative marks based on the AD Marks, without the prior approval of AD,
all of which, when approved, will be the property of AD, and will be licensed to
the Company by AD under the terms hereof. The Company will execute any documents
which AD deems desirable to secure AD's ownership in and protection of, any and
all such marks, including any assignments, recordations or licenses. Nothing
herein will be deemed to transfer or assign to the Company any right, title or
interest in or to the AD Marks, except for the limited license granted herein.
9.2. CTG Marks. CTG grants to the Company an exclusive, fully-paid,
non-assessable and royalty-free, limited right and license to use the "HTV"
mark, and all related marks and logos currently existing or created in the
future (the "CTG Marks"), in the Territory only, solely in connection with the
operation, promotion and distribution of the Service; provided that any such use
of the CTG Marks, and the services offered in connection with the CTG Marks,
will conform to CTG quality standards. Any goodwill that should arise from such
use will inure solely to the benefit of CTG. The rights and license granted by
CTG to the Company will continue for so long as the Company operates, promotes
and distributes the Service. Should the Company cease to operate, promote or
distribute the Service, or notify CTG of its intention to cease use of the CTG
Marks, then the license granted herein to the CTG Marks will terminate. CTG also
explicitly reserves the right to terminate the license to the CTG Marks granted
herein for a breach of this license. The Company may not sub-license any CTG
Marks without the prior written consent of CTG, provided, however, that the
Company may grant other parties the right to use the CTG marks in connection
with marketing/advertising activities for the Service only. The Company will
provide to CTG copies of all such marketing/advertising materials, as reasonably
requested by CTG, and any such use of the CTG Marks will be subject to CTG's
approval. Should CTG notify the Company in writing that it does not approve of
any such use of the CTG Marks in any marketing/advertising activities, then the
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Company will immediately cease such use of the CTG Marks. The Company agrees to
cooperate with CTG to facilitate CTG's control of the use of the CTG Marks, and
the quality of the services offered in connection with the CTG Marks. The
Company agrees to display such trademark notices as are provided by CTG, and not
to alter, obscure or delete any such notices. If CTG disapproves of any use of
the CTG Marks by the Company, CTG will notify the Company in writing and the
Company will immediately cease such use of the CTG Mark. The Company may not use
the CTG Marks in combination with any other marks, names or logos, or create
derivative marks based on the CTG Marks, without the prior approval of CTG, all
of which, when approved, will be the property of CTG, and will be licensed to
the Company by CTG under the terms hereof. The Company will execute any
documents which CTG deems desirable to secure CTG's ownership in and protection
of, any and all such marks, including any assignments, recordations or licenses.
Nothing herein will be deemed to transfer or assign to the Company any right,
title or interest in or to the CTG Marks, except for the limited license granted
herein. When and if the rights to license the [***]* trademarks [***]* with
respect to the Service become available, CTG will use commercially reasonable
best efforts to obtain such rights and license the [***]* to the Company on the
terms set forth in this Section 9.2, subject to the scope of CTG's license of
the [***]*.
9.3. Foreign Registration. The Company agrees not to apply to register,
or to register, the AD Marks or the CTG Marks in any country or jurisdiction
worldwide, or apply to register, or to register, in any country or jurisdiction
worldwide, any service marks, trademarks, trade names, domain names or other
designations that resemble or are likely to cause confusion with the AD Marks or
the CTG Marks, including any variation or translation of the AD Marks or the CTG
Marks, or any other trademark or service mark in combination with the AD Marks
or the CTG Marks. The Company will assist a requesting Member, as reasonably
requested at the requesting Member's cost, to register the Member's Marks in the
Territory in the name of such Member and will execute all documents necessary to
record the Company as a licensed user of such marks in the Territory.
9.4. Continuation of Licenses. For purposes of Section 365(n) of the
United States Bankruptcy Code, all licenses granted hereunder will be considered
licenses of rights to "intellectual property" as defined thereunder.
Notwithstanding any provision contained herein to the contrary, if the
applicable licensor under any proceeding under the United States Bankruptcy Code
and the trustee in bankruptcy of said licensor, or said licensor, as a debtor in
possession rightfully elects to reject this Agreement, the applicable licensee
may, pursuant to 11 U.S.C. Section 365(n)(1) and (2), retain any and all of said
licenses's rights hereunder, to the maximum extent permitted by law, subject to
said licensee's making the payments, if any, specified herein.
9.5. Cross-Promotion. The Members will cause the Company to provide
reasonable cross-promotion opportunities for the Members' respective other
business (e.g., promotion of the MuchMusic and HTV television channels and the
AD Network). In addition, AD Parent will provide reasonable cross-promotion
opportunities for the Company on the AD Network. AD Parent and the Company will
provide each other with quarterly traffic reports detailing the total number of
click-throughs of the other party's links. The parties will conduct a joint
quarterly review of the traffic reports and in the event that the reports
indicate an unequal amount of traffic being driven to the Company's Front End
Sites or the AD Network, the parties will work together in good
- ------------
* 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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faith to balance traffic by adjusting or including additional or more prominent
links or other features designed to balance traffic. The first reporting period
will begin on the date that is six (6) months from the Commencement Date and end
ninety (90) days later. Subsequent reporting periods will begin immediately
after the end of the then current reporting period.
10. Company Ownership and Capitalization.
10.1. Formation of the Company.
10.1.1. The Company will be organized as a limited liability
company under the laws of the state of Delaware. The Members intend that the
terms of the limited liability company be sufficient to qualify the Company to
be taxed as if it were a partnership.
10.1.2. The Company will initially be owned 50% by AD and 50%
by CTG.
10.1.3. The name of the Company will require the approval of
both Members.
10.2. Transfers of Interests and Change in Control.
10.2.1. Transfers to Affiliates. Either Member may transfer
all or a portion of its interest in the Company to one or more of its
Affiliates, without the consent of the other Member, provided, however, (i) that
such affiliate transferee ("Affiliate Transferee") agrees, in writing, to be
bound by this Agreement or by the Superseding Agreements, as the case may be,
and (ii) that such assignment will not relieve the transferring Member from its
obligations under this Agreement or the Superseding Agreements, as the case may
be.
10.2.2. Transfers to Third Parties. Except as set forth in
Section 10.2.1 above and subject to Section 10.2.3 below, neither Member may
transfer all or any portion of its ownership interest in the Company prior to
the third (3rd) anniversary of the Execution Date. On or after the third (3rd)
anniversary of the Execution Date, either Member may transfer all or a portion
of its ownership interest to a third party, subject to Section 10.2.3 below
(provided that such Member is not then in default with respect to any of its
obligations under this Agreement or any of the Superseding Agreements, as the
case may be), pursuant to the following mechanism:
10.2.2.1. A Member wishing to transfer all or part of its
interest (the "Offeror") must first offer, by written notice (the "Notice"), the
relevant portion of its interest in the Company to the other Member (the
"Offeree"). For a period of thirty (30) days after receipt of the Notice (the
"Notice Period"), the Offeror and Offeree will negotiate in good faith with
respect to the purchase by the Offeree of all or a portion of the Offeror's
interest in the Company and, if agreement with respect to the price and other
material terms is reached with respect to such interest in the Company, the
Offeror and Offeree will execute and deliver a binding memorandum with respect
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thereto (the "Memorandum"). If the Memorandum is not executed and delivered
prior to the expiration of the Notice Period, the Offeror may proceed in
accordance with Section 10.2.2.2.
(i) If the Offeror and Offeree execute and deliver
the Memorandum within the Notice Period , the Offeror will, within thirty (30)
days after such execution and delivery, execute such documents and instruments
reasonably required by Offeree to sell and transfer all or the applicable
portion of the Offeror's interest, as the case may be, in the Company to the
Offeree at the purchase price and on the other terms specified in the
Memorandum, and the closing of such sale will take place as soon as practicable
thereafter. At such closing, the Offeror will sell and transfer such interest in
the Company to the Offeree free and clear of any and all liens, mortgages,
pledges, security interest or other restrictions or encumbrances.
10.2.2.2. If the Offeror and Offeree are unable to consummate
the sale and purchase of the Offeror's interest pursuant to Section 10.2.2.1,
the Offeror may solicit offers from third parties. If the Offeror wishes to
accept any third party's offer, it will give the Offeree written notice of the
identity of the purchaser and the price and other terms of the purchaser's offer
(the "Last Chance Notice") not later than twenty (20) business days prior to the
consummation thereof. The Offeree will have the right, exercisable by written
notice (the "Last Chance Notice of Election") to the Offeror within ten (10)
business days after receipt of the Last Chance Notice ("Last Chance Period") to
substitute itself or its designee for such purchaser and purchase the Offeror's
interest in the Company by matching the offer from the purchaser; provided,
however, that if the third party offer includes non-cash consideration, the
Offeree may match such offer by paying cash in an amount equal to the Fair
Market Value of the total consideration of such third party offer. The failure
to deliver a Last Chance Notice of Election within the Last Chance Period will
permit the Offeror to consummate the sale to the third party. If the Offeror
does not consummate the sale by transferring its interest in the Company to the
third party as provided in this Section 10.2.2. within one hundred twenty (120)
days after the expiration of the Last Chance Period, any transfer by the Offeror
of its interest in the Company shall again be subject to the terms of this
Section 10.2.2.
10.2.2.3. If the mechanism set forth above in Sections
10.2.2.1 and 10.2.2.2 is triggered by a "Change in Control" (as defined Section
10.2.3) where (i) the Offeror is transferring directly or indirectly its
membership interests in the Company along with other assets; and (ii) for the
purpose of determining the amount of the Offeree's matching offer, the Offeror
and Offeree cannot agree on the allocation of the third party's offer between
the value of the Offeror's membership interests in the Company and the value of
the other assets being transferred by the Offeror, then such allocation shall be
determined by experts appointed pursuant to the same procedure regarding the
appointment of experts for a fair market valuation, as set forth in Exhibit "B"
attached hereto. Any time periods for providing notice, for accepting or
rejecting offers or for taking any other actions prescribed in Sections 10.2.2.1
and 10.2.2.2 will be reasonably extended to permit the experts to determine the
allocation.
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10.2.2.4. No Member may sell, assign, pledge, encumber or
dispose of, or otherwise transfer, whether voluntarily or by operation of law,
any portion of its ownership interest in the Company now or hereafter held by
such Member, except as provided above or with the prior written consent of all
other Members, which consent may be given or withheld by such other Members at
their sole and absolute discretion. Any purported transfer of any portion of an
ownership interest in violation of the provisions of this Agreement will be
wholly void and will not effectuate the transfer contemplated thereby.
10.2.2.5. Transfer: Management Committee, Voting.
Notwithstanding Sections 10.2.1 and 10.2.2 above, without the written consent of
the non-transferring Member, no transferee or all or any part of the Member's
interest in the Company will become a manager of the Company, have any right to
designate a representative to the Management Committee, or have any approval
rights pursuant to Section 4.1 and 4.2 above.
10.2.3. Change in Control. Except as provided in this Section 10.2.3, a
"Change in Control" of any Member or of any Person which Controls such Member
directly or indirectly (a "Member Parent") is (i) prohibited until the date
which is the third (3rd) anniversary of the Commencement Date; and (ii)
permissible thereafter, subject to the right of first negotiation and matching
rights set forth in Section 10.2.2 above. For purposes of this Agreement, a
"Change in Control" means (i) the disposition of all or substantially all of the
assets of, or equity interests in, a Member Parent to a third party unaffiliated
with such Member Parent, or (ii) any transaction or series of related
transactions (including without limitation any merger, reorganization,
consolidation or purchase of outstanding equity interests) resulting in the
transfer of fifty percent (50%) or more of the outstanding voting power of the
Member or of a Member Parent to a third party unaffiliated with such Member or
Member Parent. Notwithstanding the foregoing the following transfers will not be
considered a Change in Control for the purposes of this Agreement: (i) the
transfer, either directly or indirectly, by a Member Parent of its membership
interests in the Company ("Transferred Membership Interest") as long as the Fair
Market Value of the Transferred Membership Interest accounts for less than
twenty-five percent (25%) of the total Fair Market Value of the assets being
transferred by the Member Parent, (ii) the issuance of any Member Parent's
shares in a widely dispersed public offering, and (iii) any Change in Control at
the level, or higher, of AD Parent or CTG Parent. In the event of the transfer
of voting power of an entity, as distinguished from a direct transfer of assets,
the assets being transferred should be deemed to include all of the assets of
the entity (and of all of the entities of which it is a direct or indirect
Parent) whose voting power is being transferred.
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10.3. Capitalization.
10.3.1. Procedure for Capital Calls. When any capital
contribution is required pursuant to the terms of this Agreement or the Annual
Budget or Business Plan, the General Manager or either Member will give written
notice (a "Capital Call Notice") to each Member at least ten (10) business days
prior to the due date, stating: (i) the total capital to be contributed pursuant
to the then current Annual Budget or Business Plan; (ii) the pro rata amount
owed by each Member in accordance with their percentage interest; and (iii) the
date by when such amount is due. The Members will fund their capital
contributions in cash.
10.3.1.1. Initial Capitalization. To provide for the
initial capitalization of the Company, each Member will contribute the
following:
AD will contribute the following:
(i) An exclusive, non-transferable license to
the Company for so long as the Company operates the Service to (a) translate
into Spanish and Portuguese all content currently displayed on and distributed
through the AD Network and all content produced or acquired by AD in the future
for distribution through the AD Network (collectively, "AD Content") solely for
the operation, promotion, and distribution of the Front End Sites and the
Service in the Territory, (b) display and distribute such translated content on
and through the Internet solely in connection with the operation, promotion, and
distribution of the Service in the Territory, (c) use such translated content in
advertising, sponsorship, marketing materials, and promotion of the Front End
Sites and the Company directed to end-users located within the Territory, and
(d) display and distribute on and through the Front End Sites for distribution
in the Territory such specific elements of the English language version of the
AD Content as approved in advance by AD in its sole discretion. All of the
foregoing will be subject to the restrictions and limitations applicable to AD
under license agreements with third party providers of such AD Content. AD will
use its commercially reasonable efforts to obtain from third party licensors of
the AD Content all rights necessary in order to grant the foregoing rights. The
Company will not (1) use or reference any portion of the English language
version of the AD Content in any advertising, sponsorship, marketing materials
or promotion of the Company or (2) display the English language version of the
AD Content on any of the Front End Sites in a manner that is substantially
similar to the "look and feel" of any AD web site within the AD Network. As
between the Company and AD, AD will own all right, title and interest (except as
licensed herein) in and to the AD Content and all translations and localized
versions of the AD Content created by or on behalf of the Company.
Notwithstanding the foregoing, if AD licenses such translations of the AD
Content to an entity in which CTG does not have at least a twenty-five percent
(25%) ownership interest, AD will pay the Company a license fee for such
translated content subject to the approval of the Non-Independent Directors, or
in the event of a deadlock, by the Independent Directors. The Company agrees to
assign and does hereby assign to
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AD any and all right, title and interest that it may acquire in the AD Content
or any translation or localized version of the AD Content. Any and all amounts
payable by AD to third party licensors in connection with the granting of the
foregoing license or the Company's use of such licensed content will be
reimbursed by the Company subject to its prior approval of such expense.
(ii) A non-transferable license to use, for so long as
the Company operates the Service and for purposes of operating, maintaining and
enhancing the Front End Sites and the Service within the Territory, all
proprietary software solutions used by AD during the term of this Agreement in
connection with the AD Network, subject to the restrictions and limitations
applicable to AD under license agreements with third party licensors of such
proprietary software solutions, for:
(ii)(a) Site hosting
(ii)(b) Database management
(ii)(c) HTML page publishing
(ii)(d) Media streaming
(ii)(e) Digital downloading
(ii)(f) Chat
(ii)(g) Search engine
(ii)(h) Enterprise Resource Planning
(ii)(i) Ad serving
(ii)(j) Auctioning
(ii)(k) e-commerce
With respect to any and all amounts payable by AD to third party licensors in
connection with the granting of the foregoing license or the Company's use of
such licensed content: (i) AD will pay all amounts payable in connection with
the Pollstar and AMG content licenses and any and all payments required under
any other currently existing content and/or technology licenses, (ii) the
Company will either pay directly or reimburse, as applicable, AD for all future
amounts payable under such content and technology licenses as such amounts are
approved in the Business Plan as such Plan is amended from time to time, and
(iii) if the cost or part of the cost of acquiring a content license is a
license back to the licensor of the Company's translation of such content, the
Company will consent to such use.
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(iii) Integration of the Front End Sites with the
existing AD Network.
(iv) Marketing and promotion of the Front End Sites on
the existing AD Network for the English speaking Latin American audience.
(v) The infrastructure, office space, and technical
support necessary to provide customer support, accounting services, and product
fulfillment with third party providers, in connection with online purchases and
other e-commerce made by or through stores on the Front End Sites. For the
avoidance of doubt, gross revenue generated through e-commerce will be recorded
by the Company, and correspondingly, risks (e.g. credit card risks), reserves,
expenses, and transaction costs also will be recorded by the Company.
Any incremental direct costs or additional human resource costs incurred by AD
while assisting the Company with e-commerce and the establishment of the
e-commerce infrastructure, including but not limited to customer support,
accounting, and product fulfillment, and any incremental costs incurred by AD in
connection with the technical implementation, integration, or maintenance of the
Front End Sites will be reimbursed on a cost plus basis.
The parties agree that the foregoing contributions of AD have a value
of Fifty Five Million Dollars ($55,000,000).
CTG will contribute the following:
Content
(i) Coordination of CTG Affiliates otherwise engaged
in such businesses in the development and repurposing of existing and future
localized and global content, including acquisition, where available, and
streaming video and audio, generated by (a) HTV and (b) by [***]* (including
existing and future [***]* channels such as [***]* and [***]* if and when
the rights to such content become available for the Service.
(ii) A license to the existing programming and all
future programming developed for HTV, for so long as the Company operates the
Service, subject to all existing restrictions and license agreements
(collectively, the "CTG Content"). CTG will use commercially reasonable best
efforts to secure the rights to exploit the CTG Content and [***]*, if and when
such rights become available, on the Internet or any successor thereof.
(iii) Best efforts to facilitate access to [***]*.
(iv) All rights necessary to develop, operate,
maintain and update the HTV website and, if and when the rights become available
and subject to Section 9.2 above, the [***]* website.
- ------------
* 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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(v) Access to studio facilities on terms to be
negotiated.
Marketing
(vi) Promotional support for the Company in the form
of advertising inventory and other media via CTG affiliated or controlled
broadcast television, cable television, direct satellite and radio properties,
on a rotational basis, including Chiron placement, :15 and :30 second-spot
commercial inventory, scrolls and bumpers aimed at promoting page-views,
contests and promotions as needed by the Company ("Promotional Support"). CTG
will place a commercially reasonable percentage of the Promotional Support in
afternoon and evening primetime dayparts. On a quarterly basis, CTG will provide
the Company with a log of the Promotional Support provided to the Company during
the preceding period. CTG's initial contribution of Promotional Support will
have a value of Thirty Nine Million Dollars ($39,000,000), and any Promotional
Support provided by CTG to the Company with a value greater than Thirty Nine
Million Dollars ($39,000,000) will be paid for by the Company on terms to be
negotiated in good faith by the parties hereto. Attached to this Agreement as
Exhibit "C" is a schedule setting forth valuations for the Promotional Support
to be contributed by CTG to the Company.
The parties agree that the foregoing contributions of CTG have a value
of Fifty Five Million Dollars ($55,000,000).
10.3.2. Mandatory Capital Contributions. The Members will
contribute additional capital on a pro rata basis in accordance with their
respective initial percentage interests, up to an aggregate amount not to exceed
Forty Million Dollars ($40,000,000) (a "Mandatory Capital Contribution"). Each
Member's Mandatory Capital Contributions will be made pursuant to Section 10.3.1
above.
10.3.2.1. Failure to Make Mandatory Capital
Contributions. If a Member does not contribute a Mandatory Capital Contribution
within ten (10) business days following the due date of the Mandatory Capital
Contribution (a "Defaulting Member"), the General Manager will deliver a written
notice of such default to both Members, and the non-Defaulting Member may, at
any time after thirty (30) days from the date of delivery of the default notice
from the General Manager, elect any of the following remedies by giving written
notice to the Defaulting Member and the Company:
(i) Contribute and Dilute. The
non-Defaulting Member may contribute both its share and the Defaulting Member's
share of the Mandatory Capital Contribution. Upon such payment by the
non-Defaulting Member, the percentage interests of the Members will be
recalculated, with the amount of the entire Mandatory Capital Contribution made
by the non-Defaulting Member treated as the actual amount of such contribution
plus twenty percent (20%).
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(ii) Dissolution. The non-Defaulting Member
may elect to dissolve the Company pursuant to Section 6.2 above, in which event
the Company would be wound up, liquidated, and terminated.
(iii) Purchase Interest. The non-Defaulting
Member may elect to purchase the Defaulting Member's entire interest pursuant to
Section 6.4 above.
10.3.2.2. Right to Cure. At any time prior to the
delivery of a notice from a non-Defaulting Member of its election to invoke the
remedies set forth in Section 10.3.2.1 above, the Defaulting Member may cure by
contributing its delinquent Mandatory Capital Contributions plus interest at the
per annum rate equal to the Bank of America reference rate, as of the date such
cure payment is made, plus 2% (the "Effective Rate"), accruing from the date
each such delinquent Mandatory Capital Contribution was originally due.
10.3.2.3. Other Effects. Until a Defaulting Member has
cured its obligation to make a Mandatory Capital Contribution or the
non-Defaulting Member has elected to contribute the Defaulting Member's share of
the Mandatory Capital Contribution pursuant to Section 10.3.2.1(i) above, the
Defaulting Member will, in addition to the remedies described above, be subject
to the following:
(i) No Distributions. A Defaulting Member
will have no right to receive any distributions from the Company until the
non-Defaulting Member has first received distributions in an amount equal to the
Mandatory Capital Contributions contributed by the non-Defaulting Member, if
any, in excess of the Mandatory Capital Contributions made by the Defaulting
Member, plus interest at the Effective Rate.
(ii) No Voting. A Defaulting Member will
lose its voting and approval rights under the Certificate of Formation and this
Agreement until such time as the Defaulting Member cures the default or the
non-Defaulting Member contributes the Defaulting Member's share of the Capital
Contribution and dilutes the Defaulting Member's percentage interest.
(iii) No Participation in Management. The
Defaulting Member will lose its ability (whether as a Member, a manager or
through its designees to the Management Committee) to actively participate in
the management operation of the Company until such time as the Defaulting Member
cures the default or the non-Defaulting Member contributes the Defaulting
Member's share of the Capital Contribution and dilutes the Defaulting Member's
percentage interest.
10.3.2.4. Each Member acknowledges and agrees that the
remedies described in Section 10.3.2.1 bear a reasonable relationship to the
damages that the Members estimate may be suffered by the Company and the
non-Defaulting Member by reason of the failure of the Defaulting Member to make
Mandatory Capital Contributions and that the election of any or all of the above
remedies is not unreasonable under the circumstances existing as of the date
hereof.
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The enumeration of remedies herein or a party's election of such remedies will
not be deemed to constitute a waiver of any other legal or equitable rights or
remedies such party may have.
10.3.3. Additional Capital Contributions. To the extent
unanimously approved by the Management Committee, from time to time, the Members
may be permitted to make Additional Capital Contributions above the amounts of
the Mandatory Capital Contributions (each an "Additional Capital Contribution").
The Members will have the opportunity, but not obligation, to participate in
such Additional Capital Contributions on a pro rata basis in accordance with
their then current percentage interests. In the event a Member (a "Declining
Member") declines to make an Additional Capital Contribution, it will notify the
other Member and the Company in writing within ten (10) business days of
delivery of the Capital Call Notice requesting such Additional Capital
Contribution. Within ten (10) business days after receipt of notice from the
Declining Member, the non-Declining Member may elect to contribute both its
share and the Declining Member's share of the Additional Capital Contribution,
and thereafter, the percentage interests of the Members will be adjusted, on a
dollar-for-dollar basis, to reflect the new relative proportions of the capital
accounts of the Members. In the event that as a result of a failure to fund an
Additional Capital Contribution or Mandatory Capital Contribution, a Declining
Member's or Defaulting Member's ownership interest is diluted to less than 25%
(if there are two (2) non-affiliated members) or to less than 15% (if there are
three (3) or more non-affiliated members), the Declining Member or Defaulting
Member will lose all approval rights set forth in Section 4.2 above (until such
time as the Declining Member's or Defaulting Member's ownership interest
increases to more than fifteen percent (15%) or twenty-five percent (25%), as
the case may be), and the non-Declining or non-Defaulting Member may elect to
purchase the Declining or Defaulting Member's entire membership interest for a
price equal to the Fair Market Value of such interest, as determined in
accordance with the procedures set forth in Exhibit "B" attached hereto. For the
purposes of this Section 10.3.3, a Declining or Defaulting Member's ownership
interest will be inclusive of such Member's Affiliates' ownership interests in
the Company.
10.3.4. Capital Accounts. Each Member agrees that a single
capital account (each a "Capital Account") will be established and maintained
for each Member and will be credited, charged and otherwise adjusted in the
manner provided herein, subject to the regulations promulgated under Section
704(b) of the Internal Revenue Code of 1986, as amended. Except as set forth in
this Section, no Member will be entitled to receive any interest on its capital
contributions.
11. Use of the Company's End-User Database and Content.
11.4. Subject to Section 11.1.1 below, each Member will have a
perpetual, non-exclusive, non-transferable, limited license to use, for its own
internal business purposes, data relating to end-users of the Front End Sites
collected by the Company in the course of operating the Front End Sites. At each
Member's request, the Company will provide the requesting Member, via File
Transfer Protocol to an IP address designated by the requesting Member, such
end-user data within thirty (30)
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days following the commercial launch of the first of the Front End Sites and,
thereafter, the Company will provide the requesting Member with updates of such
data on a monthly basis. The requesting Member's use of end-user data provided
by the Company will at all times comply with all applicable laws and
regulations, privacy standards and the Company's published privacy policy, as
may be updated from time to time.
11.4.1. In consideration of the Company's license and delivery
of end-user data to the requesting Member, the requesting Member will pay the
Company a fee for every one thousand unique end-users for which the Company
receives complete data records, which fee will be determined by calculating the
average fee quoted by Yahoo, Lycos, and Excite for comparable use rights for one
thousand unique end-users' data records containing comparable information to the
Company's data records. A complete data record for an end-user will comprise, at
a minimum, the user's name, email address and, to the extent available, mailing
address, telephone number and Social Security number or other established form
of identification used in the country where the user is domiciled as such
information is submitted to the Company by the end-user. No fee will be payable
with respect to any end-user for whom the requesting Member already possesses
the minimum data record, or for any duplicate or update of a data record for
which the requesting Member has already paid a fee.
11.4.2. The Company will not sell, rent or otherwise make
available or allow others to sell, rent or otherwise make available to any third
party any data contained in the Company's end-user database, except as mutually
agreed by the Members.
11.5. The Company grants to AD a perpetual, non-exclusive,
non-transferable, royalty-free license to translate into English all content
produced or acquired by the Company (other than content licensed by AD) for
display on the Front End Sites (collectively, "Company Content") and (b)
distribute such translated Company Content through Web sites in the AD Network
and successor thereof, all subject to the restrictions and limitations
applicable to the Company pursuant to agreements with third party providers of
such Company Content. The Company will use its commercially reasonable efforts
to obtain from third party licensors of the Company Content all rights necessary
in order to grant the foregoing rights. As between the Company and AD, the
Company will own all right, title and interest (except as licensed herein) in
and to the Company Content and all translations and localized versions of the
Company Content created by or on behalf of AD. AD agrees to assign and does
hereby assign to the Company any and all right, title and interest that it may
acquire in the Company Content or any translation or localized version of the
Company Content. Any and all amounts payable by the Company to third party
licensors in connection with the granting of the foregoing license or AD's use
of such licensed content will be reimbursed by AD, subject, however, to AD's
prior approval of such expense.
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12. Distribution of Profits.
The Company will make distributions of operating profits on a quarterly
basis to each Member, in proportion to its percentage interests at the end of
that quarter. The Company will not withhold distributions except as necessary to
provide for the reasonable conduct of the Company's business as detailed in the
Business Plan (as modified by the Annual Budget for a given fiscal year).
13. AD's Obligation to Sign Artists.
13.1. During the thirty (30) days prior to the commencement of each of
the first five (5) Fiscal Years, the Management Committee will meet and mutually
select the following two (2) groups of recording artists: (i) twenty (20) of the
top recording artists (the "Website Selected Artists") from a blended list based
on MuchMusic's and HTV's play list (the "Blended List") and (ii) forty (40) of
the top recording artists (the "Content Selected Artists") from the Blended
List. The parties agree that overlap between the Website Selected Artists and
the Content Selected Artists is permissible. During each of the first five (5)
Fiscal Years, AD will (i) enter into Internet website agreements with at least
five (5) of the Website Selected Artists chosen with respect to the applicable
Fiscal Year ("Performance Target 1"); and (ii) AD will contribute or procure
content or customized content for at least ten (10) of the Content Selected
Artists (with five (5) of the ten (10) Content Selected Artists selected from
the top twenty (20) of the forty (40) Content Selected Artists) chosen with
respect to the applicable Fiscal Year ("Performance Target 2"). If AD signs up a
Website Selected Artist for an Internet website agreement and such website
agreement includes e-commerce and content rights, then AD will be deemed to have
signed such Website Selected Artist under Performance Target 1 AND as a Content
Selected Artist under Performance Target 2.
13.2. If AD fails to satisfy Performance Target 1 or Performance Target
2 for any Fiscal Year, CTG will have the right to decrease proportionately the
Promotional Support contributed to the Company as set forth in Section 10.3.1.1.
for the succeeding Fiscal Year. For example, (i) if in a given Fiscal Year, AD
satisfies Performance Target 1, but only signs five (5) Content Selected Artists
under Performance Target 2, then during the successive Fiscal Year, CTG has the
right to reduce its Promotional Support by 33.3% (i.e., 5 divided by 15), (ii)
if during a given Fiscal Year, AD signs four (4) Website Selected Artists under
Performance Target 1 and seven (7) Content Selected Artists under Performance
Target 2, then during the successive Fiscal Year, CTG has the right to reduce
its Promotional Support by 26.67% (i.e., (1 + 3) divided by 15).
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14. Roll-up: Initial Public Offering.
14.1. Provided CTG has not (i) failed to make a Mandatory Capital
Contribution without curing such failure pursuant to Section 10.3.2.2, (ii)
materially breached the Agreement or requirements of the Business Plan or Annual
Budget, or (iii) previously transferred fifty percent (50%) or more of its
ownership interest in the Company to a non-affiliated third party, then at any
time after the date thirty (30) months from the Execution Date, CTG will have
the right to cause its equity interest in the Company to be "rolled up" into AD
Parent (the "Roll-up Transaction") pursuant to the following: (a) the Company
and AD Parent will be valued pursuant to the Fair Market Value procedure set
forth in Exhibit "B"; (b) the Company will be merged into AD Parent; and (c) CTG
will receive AD Parent stock equal in value to CTG's then pro rata equity
interest in the Fair Market Value of the Company. For the purposes of this
Section 14, the AD Parent stock, and the stock of the Company if the Company is
publicly offering its shares, will be valued as of its average closing price for
the twenty (20) business days prior to the date AD receives written notice of
CTG's election to roll-up its equity interest in the Company.
14.1.1. In the event that a transaction described in Section
14.1 above is completed, CTG shall agree to a customary 180-day lock-up with
respect to the shares of AD Parent stock received in such transaction (the
"Roll-up Shares"). After the expiration of such period, CTG shall be permitted
to sell such shares from time to time, so long as CTG (i) receives net proceeds
from such sale(s) in any 90-day-period not in excess of the greater of (x) $25
million or (y) 1% of the then-current AD Parent market capitalization, in each
case pursuant to a valid exemption from registration of such shares or an
effective registration statement therefor; (ii) effects such sale through an
underwritten offering for which the lead underwriter is at least one of the
underwriters listed on Exhibit "D" attached hereto or is otherwise reasonably
acceptable to AD Parent; or (iii) AD Parent consents to such sale.
Notwithstanding anything herein to the contrary, AD shall not be obligated to
effect any registration for such shares which AD is not otherwise obligated to
do pursuant to the Third Amended and Restated Registration Rights Agreement by
and between AD Parent, Securityholders (as defined therein), Marc P. Geiger and
Donald Muller .
14.2. At any time after the Execution Date of this Agreement, if any
two (2) of the approved investment banks listed on the attached Exhibit "D" or
such investment banks' successors present the Company with a plan to take the
Company through an initial public offering, either Member will have the right to
cause the Company to engage one (1) of the two (2) investment banks for such
purpose and the other Member will provide all cooperation, approvals, and
authorizations as may be necessary to consummate the proposed transaction on
terms that apply pro rata to the Members according to their percentage ownership
interest in the Company.
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15. Dispute Resolution.
15.9. Subject to the authority of the Independent Directors to resolve
deadlocks pursuant to this Agreement, in the event of any dispute or claim
arising out of or related to this Agreement, the parties agree to use best
efforts to resolve such dispute or claim on a consensual basis before commencing
an arbitration proceeding. Such best efforts will include an in-person meeting
between members of senior management of both parties. If the parties' best
efforts fail, any controversy or claim arising out of or relating to this
Agreement, its enforcement or interpretation, or because of an alleged breach,
default or misrepresentation in connection with any of its provisions, or
arising out of or relating in any way to the relationship between the parties,
will be determined by binding arbitration. The arbitration proceedings will be
held and conducted in accordance with California Code of Civil Procedure
Sections 1282-1284.2, with the power to grant equitable relief, including
injunctions and temporary restraining orders. California Code of Civil Procedure
Section 1283.05, which provides for certain discovery rights, will apply to any
such arbitration, and said code section is hereby incorporated by reference. In
reaching a decision, the arbitrator will have no authority to change, extend,
modify or suspend any of the terms of this Agreement. The arbitration will be
commenced and heard in Los Angeles County, California. The arbitrator will apply
the substantive law (and the law of remedies, if applicable) of California or
federal law, or both, as applicable to the claim(s) asserted. Judgment on the
award may be entered in any court of competent jurisdiction. The parties may
seek, from a court of competent jurisdiction, provisional remedies or injunctive
relief in support of their respective rights and remedies hereunder without
waiving any right to arbitration. However, the merits of any action that
involves such provisional remedies or injunctive relief, including, without
limitation, the terms of any permanent injunction, will be determined by
arbitration under this Section 15.1. If the parties do not agree upon an
arbitrator within ten (10) days after a written demand for arbitration is served
upon one party by the other, the arbitrator will be appointed pursuant to
Section 1281.6 of the California Code of Civil Procedure; provided, however,
that only persons who are retired Superior Court, California Appellate Court or
federal judges or lawyers admitted to the bar for at least twenty (20) years and
classified as "A-v" by the Martindale Hubbell Law Directory will be eligible to
be selected as an arbitrator.
15.10. If any legal action, arbitration or other proceeding is brought
for the enforcement of this Agreement, or because of any alleged dispute,
breach, default or misrepresentation in connection with any of the provisions of
this Agreement, the successful or prevailing party will be entitled to recover
reasonable attorneys' fees and other costs incurred therein, in addition to any
other relief to which it or they may be entitled. The court or arbitrator will
consider, in determining the prevailing party, which party obtains relief which
most nearly reflects the remedy or relief which the parties sought.
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16. Currency; Payments.
Except where otherwise expressly provided to the contrary in the
Superseding Agreements:
16.11. All amounts due from either party to the other or from the
Company to a Member or Affiliate pursuant to this Agreement will be paid in U.S.
Dollars. If any portion of such payment is calculated on the basis of revenues
received in other currencies, such revenues will be calculated using the
exchange rate published in the Wall Street Journal as of the business day
immediately preceding the date on which the payment initially is due. Such
exchange rate will also apply to any portion of a payment which is permitted to
be deferred, regardless of whether such deferred payment is represented by a
promissory note or other instrument. If laws or currency regulations in the
Territory now or at any time during the term of this Agreement prohibit or
restrict any party ("payer") from paying any sums due to any other party
("payee"), payee may, in its sole and absolute discretion, elect to accept funds
in a currency other than United States dollars. If payee elects to accept funds
in a currency other than United States dollars, payee will notify payer of such
election and payer will deposit sums due payee in a bank or banks in the
Territory approved by payee or promptly pay such sums to such person or persons
in the Territory as the payee may designate in writing. In the event that,
pursuant to the legal requirements imposed upon payer by a duly-organized
governmental taxing authority, payer is required to withhold from the amount
payable to payee hereunder any sales, remittance, value added, turnover and/or
any other tax, levy and/or charge (collectively, "Required Taxes"), the
following shall apply: (i) payer shall only withhold from payment to payee the
minimum amount of such Required Taxes which must be paid to the taxing
authority; (ii) payer shall only withhold from payment to payee the actual
amount of such minimum Required Taxes which have been paid by payer to the
taxing authority; (iii) payer shall provide payee concurrently with, or promptly
after, the payment to payee of the applicable installment of the amount payable
hereunder, any official receipt issued by the taxing authority to the payer
certifying the amount and basis of such Required Taxes and the date upon which
payment of such Required Taxes was received by the taxing authority (or in the
absence of such a receipt, the payer shall furnish the foregoing information to
payee promptly after the payment); (iv) payer shall promptly refund to payee any
amount of the Required Taxes which was deducted or withheld from or offset
against any installment of the amounts payable hereunder which amount was
subsequently refunded or credited to payer; and (v) payer shall promptly refund
to payee any amount of the Required Taxes which was deducted or withheld from or
offset against any installment of the amounts payable to the payee hereunder to
the extent the payer has received or will receive a benefit (either directly or
indirectly) by or from such taxing authority for such amount.
16.12. All payments owing pursuant to this Agreement will be made by
wire transfer of immediately available funds, net of any withholding required by
applicable law. Each party will from time to time designate one or more accounts
into which such payments will be made and may designate one or more Affiliates
to receive such payments.
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16.13. Any payment hereunder not made when due, after a ten (10) day
grace period, will bear interest from the date due to and including the date of
payment in full at a rate equal to the Effective Rate as in effect on the date
payment was due.
17. HSR Filing.
By no later than November 24, 1999 (the "Filing Deadline"), the Members
will file notifications (with a request for early termination of the waiting
period) under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended, (the "HSR Act") in connection with the transactions contemplated hereby
and will respond as promptly as practicable to any inquiries of the Federal
Trade Commission (the "FTC"), the Antitrust Division of the Department of
Justice (the "DOJ") or any other applicable state or federal agency's request
for additional information or documentation in connection with antitrust matters
related to transactions contemplated by this Agreement. Each Member will bear
its costs and expenses and attorneys' fees relating to the HSR Act filings
(including one-half ( 1/2) of the HSR Act filing fee, if only one filing for the
transactions contemplated by this Agreement is required) and will, to the extent
necessary, provide appropriate information to the other party to coordinate and
permit the filing on or before the Filing Deadline. If, pursuant to the HSR Act,
the FTC or DOJ objects to the transactions contemplated by this Agreement, the
Members will negotiate in good faith with respect to restructuring the
transactions to address such objection. If (i) the Members fail to agree on a
restructuring or (ii) any applicable waiting period under the HSR Act has not
expired or been terminated by one hundred eighty (180) days from the Execution
Date, this Agreement will terminate of its own accord and the Members will not
have any further rights or obligations pursuant hereto.
18. Miscellaneous Provisions.
18.14. Expenses.
18.14.1. All legal and other expenses incurred by the Company
in connection with its formation will be paid by the Company and, to the extent
paid by either Member, will be reimbursed by the Company to such Member.
18.14.2. Subject to Section 18.1.1 above, each Member will be
responsible for legal fees incurred by the Member in connection with the
negotiation and execution of this Agreement and the Superseding Agreements.
18.15. Counterparts. This Agreement may be executed in several
counterparts, each of which will be deemed an original but all of which will
constitute one and the same.
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18.16. Partial Invalidity. Wherever possible, each provision hereof
will be interpreted in such manner as to be effective and valid under applicable
law, but in case any one or more of the provisions contained herein will, for
any reason, be held to be invalid, illegal or unenforceable in any respect, such
provision will be ineffective to the extent, but only to the extent, of such
invalidity, illegality or unenforceability without invalidating the remainder of
such invalid, illegal or unenforceable provision or provisions or any other
provisions hereof, unless such a construction would be unreasonable.
18.17. Binding Effect. Subject to the provisions of this Agreement
relating to transferability, this Agreement will be binding upon and will inure
to the benefit of the parties, and their respective distributees, heirs,
successors and assigns.
18.18. Further Assurances. In connection with this Agreement and the
transaction contemplated hereby, each Member will execute and deliver any
additional documents and instruments and perform any additional acts that may be
necessary or appropriate to effectuate and perform the provisions of this
Agreement and such transactions.
18.19. Representations and Warranties: Limitation of Liability
18.19.1. Authority. Each Member represents that (i) it has
full power and authority to enter into and perform this Agreement, (ii) the
Agreement is the valid and binding obligation of such Member, enforceable
against it in accordance with its terms, and (iii) the performance by such
Member of its obligations under this Agreement does not violate any law, rule or
regulation binding on such party, including any contractual rights of or
obligations to third parties, or such Member's charter documents.
18.19.2. Intellectual Property; Content. Each Member and its
Affiliates represent and warrant to the other and to the Company that the
intellectual property licensed or provided to the Company pursuant to this
Agreement, including any trademarks, copyrights, patents, software, content or
other confidential or proprietary information, when used pursuant to this
Agreement, does not infringe or violate any intellectual property right of any
third party, or violate any license or other agreement governing such
intellectual property; provided, however, that any and all representations and
warranties made by a Member or its Affiliates to the other with respect to
patent, software or other technology licenses shall be made to the best of such
Member's (or such Affiliate's) knowledge.
18.19.3. Limitation of Liability. Each Member acknowledges and
agrees that the other Member does not guarantee the accuracy, completeness,
timeliness or availability of the content or other proprietary or confidential
information provided to the Company, and that except for the willful misconduct
or gross negligence of a Member regarding any content or other proprietary or
confidential information provided to the Company, neither Member will have any
liability whatsoever for such content, or any reliance thereon. IN NO EVENT WILL
EITHER
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MEMBER HAVE ANY LIABILITY FOR LOST PROFITS, INDIRECT, CONSEQUENTIAL, SPECIAL OR
PUNITIVE DAMAGES, OF ANY KIND ARISING OUT OF OR ATTRIBUTABLE TO, OR RELATING TO
THIS AGREEMENT, OR ANY CONTENT OR OTHER PROPRIETARY OR CONFIDENTIAL INFORMATION
PROVIDED PURSUANT TO THIS AGREEMENT, EVEN IF ADVISED OF THE POSSIBILITY OF THE
SAME.
18.19.4. No Other Warranties. EXCEPT FOR THE WARRANTIES
EXPRESSLY PROVIDED FOR HEREIN, EACH MEMBER DISCLAIMS TO THE FULLEST EXTENT
ALLOWABLE UNDER APPLICABLE LAW, ALL OTHER WARRANTIES, EXPRESS OR IMPLIED,
INCLUDING WITHOUT LIMITATION THE IMPLIED WARRANTIES OF MERCHANTABILITY AND
FITNESS FOR A PARTICULAR PURPOSE, REGARDING THE INTELLECTUAL PROPERTY, CONTENT,
SOFTWARE, AND OTHER PROPRIETARY OR CONFIDENTIAL INFORMATION PROVIDED TO THE
COMPANY, WHETHER OR NOT ADVISED OR AWARE OF ANY SUCH PURPOSE.
18.20. Assignment; No Third Party Beneficiary. Subject to Section 10.2,
no party hereto will assign its rights or delegate its obligations hereunder
without written consent of the other party except to an Affiliate of such party;
provided that no such assignment will relieve the assignor of its obligations.
The provisions of this Agreement are for the benefit only of the parties, and no
third party may seek to enforce or benefit from these provisions.
18.21. Waivers, Remedies Cumulative, Amendments.
18.21.1. No failure or delay by any of the parties hereto in
exercising any right, power or privilege under this Agreement will operate as a
waiver thereof nor will any single or partial exercise by any of the parties
hereto of any right, power or privilege preclude any further exercise thereof or
the exercise of any other right, power or privilege.
18.21.2. The rights and remedies herein provided are
cumulative and not exclusive of any rights and remedies provided by law.
18.21.3. No provision of this Agreement may be amended,
modified, waived, discharged or terminated, other than by the express written
agreement of the parties hereto nor may any breach of any provision of this
Agreement be waived or discharged except with the express written consent of the
party not in breach.
18.22. Notices. All notices, requests, demands and other communications
required to be given under this Agreement will be in writing and will
conclusively deemed to have been duly given (a) when hand delivered to the other
party, (b) the next business day if sent by a generally recognized overnight
courier services that provides written acknowledgment by the addressee of
receipt, or (c) when received, if sent by facsimile or other generally accepted
means of electronic transmission.
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if to AD:
17835 Ventura Boulevard
Suite 310
Encino, CA 91316
Attention: Keith Yokomoto
Fax: (818) 758-8722
with a copy to:
Lenard & Gonzalez LLP
1900 Avenue of the Stars
25th Floor
Los Angeles, CA 90067
Attention: Allen D. Lenard, Esq.
Fax: (310) 552-0740
if to CTG:
c/o Cisneros Television Group
404 Washington Avenue
Miami Beach, FL
Attn: Director of Legal and Business Affairs
Fax: (305) 531-9446
with a copy to:
Greenberg Glusker Fields Claman &
Machtinger LLP
1900 Avenue of the Stars
Suite 2100
Los Angeles, CA 90067
Attn: Glenn Dryfoos, Esq.
Fax Number: (310) 553-0687
or to such other address, or facsimiles transmission number as the relevant
addressee may hereafter by notice hereunder substitute.
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18.23. Indemnity.
18.23.1. By AD. Notwithstanding Section 18.6.3, AD will
indemnify and hold harmless CTG and its shareholders, managers, directors,
officers, employees, agents, representatives, Affiliates, successors and assigns
(collectively, the "CTG Indemnified Parties"), from and against all claims,
losses, damages (including loss of profits and consequential damages awarded to
unrelated third parties, if any, but excluding loss of profits and consequential
damages otherwise suffered by the CTG Indemnified Parties), expenses,
judgements, costs and liabilities (including reasonable attorneys' fees and
costs) incurred by the CTG Indemnified Parties arising from AD's breach of any
covenants, agreements, representations or warranties contained in this
Agreement.
18.23.2. By CTG. Notwithstanding Section 18.6.3, CTG will
indemnify and hold harmless AD and its managers, shareholders, directors,
officers, employees, agents, representatives, Affiliates, successors and assigns
(collectively, the "AD Indemnified Parties"), from and against all claims,
losses, damages (including loss of profits and consequential damages awarded to
unrelated third parties, if any, but excluding loss of profits and consequential
damages otherwise suffered by the AD Indemnified Parties), expenses, judgements,
costs and liabilities (including reasonable attorneys' fees and costs) incurred
by the AD Indemnified Parties arising from CTG's breach of any covenants,
agreements, representations or warranties contained in this Agreement.
18.23.3. If a claim by a third party is made against an
indemnified party, the indemnified party will promptly notify the indemnifying
party of such claim. Failure to so notify the indemnifying party will not
relieve the indemnifying party of any liability which the indemnifying party
might have, except to the extent that such failure materially prejudices the
indemnifying party's legal rights. The indemnifying party will have thirty (30)
days after receipt of such notice to undertake, conduct and control through
counsel of its own choosing (subject to the approval of the indemnified party,
such approval not to be unreasonably withheld) and at its expense, the
settlement or defense of such claim, and the indemnified party will cooperate
with the indemnifying party in connection therewith; provided, however, that (i)
the indemnifying party will permit the indemnified party to participate in such
settlement or defense through counsel chosen by the indemnified party, provided
that the fees and expenses of such counsel will be borne by the indemnified
party and (ii) the indemnifying party will reimburse the indemnified party for
the full amount of any loss resulting from such claim and all related expenses
incurred by the indemnified party within the limits of this Section 18.10 as
such are incurred. If the indemnifying party does not notify the indemnified
party within thirty (30) days after actual receipt of the indemnified party's
notice of a claim of indemnity hereunder that it elects to undertake the defense
thereof (which may be with a reservation of rights by such indemnifying party)
or so notifies the indemnified party but fails to undertake or maintain such
defense promptly and in good faith so that a default is threatened, the
indemnified party will promptly notify the indemnifying party whether it desires
to undertake the defense of such claim. If the indemnifying party does not
within ten (10) business days thereafter elect to undertake the defense thereof,
the indemnified party will have the right to contest, settle or compromise the
claim in the exercise of its reasonable judgment and without prejudice to
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the rights of the indemnified party to indemnification hereunder.
Notwithstanding anything contained herein, the indemnified party will not enter
into any settlement or compromise that provides for any remedy other than money
damages without the prior written approval of the indemnifying party, which
approval will not be unreasonably withheld.
18.23.4. Indemnification of Agents. The Company will indemnify
any Person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding by reason of the
fact that he or she is or was a Member, Management Committee member, General
Manager, officer, employee or other agent of the Company or that, being or
having been such a Member, Management Committee member, General Manager,
officer, employee or agent, he or she is or was serving at the request of the
Company as a manager, director, officer, employee or other agent of another
limited liability company, corporation, partnership, joint venture, trust or
other enterprise (all such persons being referred to hereinafter as an "agent"),
to the fullest extent permitted by applicable law in effect on the date hereof
and to such greater extent as applicable law may hereafter from time to time
permit.
18.23.5. Insurance. The Company will have the power to
purchase and maintain insurance on behalf of any Person who is or was an agent
of the Company against any liability asserted against such Person and incurred
by such Person in any such capacity, or arising out of such Person's status as
an agent, whether or not the Company would have the power to indemnify such
Person against such liability under the provisions of Section 18.10.4. or under
applicable law.
18.23.6. Notwithstanding anything in this Section 18.10 to the
contrary, neither Member will have any obligation to indemnify or advance
expenses to the other Member, or to the Company, either separately or together,
with respect to any third party claim, action, suit, proceeding, issue or matter
resulting from a breach of this Agreement by the other Member or the Company
including the use or distribution of any of the Company's or Members' Marks,
Content, or other licensed intellectual property other than as provided for
herein.
18.24. Confidentiality. Each Member (the "receiving Member"), its
respective Affiliates and the Company will (i) hold all information of a
confidential or proprietary nature that it receives regarding the customers,
business, finances, assets or affairs of the Company or the other Member or any
of its Affiliates ("Proprietary Information" of the disclosing party) in strict
confidence and will take reasonable precautions to protect Proprietary
Information of the disclosing party (including, without limitation, all
precautions that itself employs with respect to its own confidential materials),
(ii) not divulge any Proprietary Information of the disclosing party or any
information derived therefrom to any third party (except to employees,
contractors and consultants who have a legitimate need to know such information
and who have previously executed a written nondisclosure agreement which is then
in effect restricting the use and disclosure of confidential information that
the receiving Member receives from third parties), (iii) not make any use
whatsoever of Proprietary Information of the disclosing party except to the
extent permitted under this Agreement or to the extent necessary to perform its
obligations under this Agreement. Without granting any right or license, the
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restrictions set forth in clauses (i) - (iii) above will terminate on the date
five (5) years following the later of the termination of this Agreement, the
term of the Company, or the withdrawal of a Member, nor will such restrictions
apply to any information that the receiving Member can document (a) is or
becomes (through no improper action or inaction of such Member or any of its
Affiliates, agents, contractors, consultants or employees) generally available
to the public , or (b) was in its possession or known by it without restriction
on use or disclosure prior to receipt from the disclosing party or (c) was
rightfully disclosed to it by a third party without restriction on use or
disclosure, or (d) was independently developed without use of any Proprietary
Information of the disclosing party by employees of the receiving Member who
have had no access to such information. The receiving Member may make
disclosures required by law or court order provided the receiving Member so
notifies the disclosing party in writing as soon as practicable, uses diligent
efforts to limit disclosure and to obtain confidential treatment or a protective
order and has allowed the disclosing party to participate in the proceeding.
/ / /
/ / /
/ / /
/ / /
/ / /
/ / /
/ / /
/ / /
/ / /
/ / /
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18.25. This Agreement constitutes the entire agreement between the
parties with respect to the subject matter hereof and supersedes all proposals,
oral or written, all negotiations, conversations, or discussions between the
parties and all past dealing or industry custom.
AGREED AND ACCEPTED:
"CTG" "AD"
Lakeport Overseas Ltd. ARTISTdirect Latin America, LLC
By ARTISTdirect International Holdings,
By: /s/ [ILLEGIBLE] LLC, its Member
--------------------------------
Name:
Title: By ARTISTdirect, Inc., its Member
By: /s/ KEITH YOKOMOTO
------------------------------
Name: Keith Yokomoto
Title: President and COO
As to Section 10.2.3 As to Sections 9.5 and 10.2.3
"CTG Parent" "AD Parent"
Hampstead Management Co. ARTISTdirect, Inc.
By: /s/ [ILLEGIBLE] By: /s/ KEITH YOKOMOTO __
-------------------------------- ----------------------------------
Name: Name: Keith Yokomoto
Title: Title: President and COO
As to Sections 4.5 and 4.6
"CTSI"
Cisneros Television Services, Inc.
By: /s/ [ILLEGIBLE]
--------------------------------
Name:
Title:
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EXHIBIT "A"
BUSINESS PLAN AND ANNUAL BUDGET
See attached.
34
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EXHIBIT "B"
FAIR MARKET VALUE PROCEDURE
As used in this Agreement, the term "Fair Market Value" will mean the
price at which a willing seller would sell and a willing buyer would buy the
asset for which the determination of value is being made, having full knowledge
of the facts, in an arm's length transaction without time constraints, and
without being under any compulsion to buy or sell. The Fair Market Value of a
fractional interest in an asset will be equal to the appropriate pro rata
portion of the Fair Market Value for the entire asset, without any further
reduction on account of the fractional ownership.
As soon as practicable after the receipt of any notice or the
occurrence of any event requiring the determination of the Fair Market Value of
the Company or other asset, the Members will confer and use their reasonable
best efforts to determine the same; however, if either Member will give notice
to the other Member requesting determination of such amount or value by
appraisal, or the parties have been unable to agree on the Fair Market Value,
then the parties will consult for the purpose of appointing a
mutually-acceptable qualified independent expert. If the Members are unable to
agree on an expert within a three-day period, each Member will select its own
expert, and the Fair Market Value will be (i) the average of the valuation of
each Member's experts; or (ii) if the higher valuation exceeds the lower
valuation by more than 15%, the two experts will pick a third expert (the "Third
Expert"), and the Fair Market Value will be the average of the valuation of the
Third Expert and the valuation of the expert whose valuation was closest to that
of the Third Expert.
The experts selected pursuant to this provision will not be affiliated
with any Member and will be an investment banker or other qualified person with
prior experience in appraising assets comparable to the asset at issue. If the
Members agree on an expert, then the Company will pay the fees and costs of the
appraisal; otherwise, each Member will pay the fees and costs of the expert it
selects and the fees and costs of the Third Expert will be split 50/50 between
the Members.
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EXHIBIT "C"
PROMOTIONAL SUPPORT
MEDIA & PROMOTIONAL BREAKOUT
Properties available for media, sponsorships, promotional tie-ins & programming
opportunities:
Cable/Pay TV Properties
<TABLE>
<S> <C>
HTV Pan-Regional 24 hour Latin music channel
INFINITO Pan-Regional documentary channel focusing on the mysteries of the universe
LOCOMOTION Pan-Regional animation channel for teens & young adults
MUCHMUSIC Southern Cone 24 hour music channel
I-SAT Music & Movie channel for teens and young adults
SPACE Blockbuster movie channel
UNISERIES Classic TV
</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.
36
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EXHIBIT "D"
INVESTMENT BANKERS
1. Goldman Sachs
2. Morgan Stanley
3. Salomon Smith Barney
4. Lehman Brothers
5. Merrill Lynch
6. Bear Stearns
7. Deutsche Bank Alex Brown
8. Donaldson Lufkin & Jenrette
9. Paine Webber
10. BancBoston Robertson Stephens
11. Banc of America Securities
12. Credit Suisse First Boston
13. UBS (Warburg Dillon Read)
14. Thomas Weisel Partners
37
<PAGE> 1
EXHIBIT 10.41
STRATEGIC LICENSING AGREEMENT
Agreement made as of December 6, 1999, between ARTISTdirect, Inc., 17835 Ventura
Boulevard, Suite 310, Encino, California 91316 (hereinafter "ARTISTdirect" or
"you") and Sony Music, a Group of Sony Music Entertainment Inc., 550 Madison
Avenue, New York, New York 10022-3211 (hereinafter "Sony").
WHEREAS, ARTISTdirect is in the business of producing, designing and
maintaining an integrated network of music entertainment websites;
WHEREAS, ARTISTdirect acknowledges the need to obtain a license
enabling it to transmit to end-users intellectual property and content owned and
controlled by Sony, and Sony desires to grant such license to ARTISTdirect on
the terms hereof, solely for use on ARTISTdirect Sites and solely for the
purpose of promoting the sale of Phonograph Records or for such other uses as
may be approved by Sony; and
WHEREAS, Sony owns and controls intellectual property and content,
including various Master Recordings featuring the performances of various Sony
recording artists (each, a "Sony Artist") and related Artwork, and the
intellectual property rights therein.
NOW, THEREFORE, in consideration of the mutual promises contained
herein and other good valuable consideration, the receipt and sufficiency of
which is hereby acknowledged, the parties agree as follows:
1. TERM AND TERRITORY
1.01. The term of this license agreement ("Term") will begin on the
date hereof, and will continue for a period ending on December 31, 2001, unless
sooner terminated pursuant to Article 9 below.
1.02. The territory of the License is the United States ("Territory").
Notwithstanding the preceding sentence, Sony hereby acknowledges and agrees that
the license granted herein includes the right to exploit the Sony Content
licensed to you hereunder via the Internet, which by its nature extends beyond
the Territory. You shall not be deemed in breach of this license agreement if
the unintended effect and unavoidable consequence of your transmitting the Sony
Content to an end-user in the United States via the ARTISTdirect Network as
permitted herein results in Internet users located outside the United States
accessing the Sony Content (i.e., viewing the Artwork or listening to the Sound
Clips) directly from Web Sites that are a part of the ARTISTdirect Network
located in the Territory. For the avoidance of doubt, you shall not be entitled
to transmit any Sony Content other than via the ARTISTdirect Network as
permitted herein hosted and maintained at an Internet server residing in the
United States.
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2. GRANT OF RIGHTS; SOUND CLIP AND ARTWORK UPLOAD RESTRICTIONS AND
PROCEDURES
2.01. (a) Only in respect of the rights Sony (or its
Licensees, as the case may be) owns or controls in and to the Sound Clips and
the Artwork (individually and collectively, the "Sony Content"), and subject to
all of the terms and conditions of this license agreement, Sony (on behalf of
itself and its Licensees) grants to you a non-exclusive, limited license during
the Term and throughout the Territory to use Sony Content for sole purpose of
serving the Sony Content relating to the Sony Artist concerned to end-users in
conjunction with and as a part of the Web Site hosted on the ARTISTdirect
Network for or relating to the Sony Artist concerned, which Web Site contains an
online offer to end-users in the United States for the mail order fulfillment of
Phonograph Records distributed by Sony containing the featured performances of
such Sony Artist, provided that such Web Site contains a Buy Link in close
proximity to the corresponding Sony Content (the "License"). For the avoidance
of doubt, the License includes a non-exclusive, limited license during the Term
and throughout the Territory to reproduce as part of the Artwork any of Sony's
trademarks, trade names and logos as they are embodied in the Artwork.
(b) Omitted without implication.
(c) You shall not include on the ARTISTdirect Network at any
time more than (i) five (5) Sound Clips from any one (1) album or (ii) one (1)
Sound Clip in respect of each Sony Recording.
(d) (1) Each Sound Clip shall be transmitted to end-users
solely by so-called "streaming" technology (i.e., technology which transmits and
plays or displays, as applicable, the Sound Clip concerned to remote users in
real time). For the avoidance of doubt, examples of such so-called "streaming"
technology as of the date hereof include RealNetworks' RealAudio, Microsoft's
Windows Media Audio, and so-called "WAV" files. Neither you nor any other Person
shall create or facilitate the creation of "downloadable" copies of any Sony
Recording.
(2) Provided that you have used commercially
reasonable efforts to prevent the creation of "downloadable" copies of any Sony
Recording embodied in each Sound Clip and have used a so-called "streaming"
technology that is designed to prevent the facilitation of or circumvention of
such so-called "streaming" technology the end result of which may be the
creation of "downloaded" copies of any Sony Recording, you shall not be deemed
to have breached the foregoing provisions of section 2.01(d)(1) above. In the
event that you become aware that the so-called "streaming" technology employed
by you is capable of such facilitation or circumvention and/or is otherwise
resulting in the creation of "downloaded" copies of any Sony Recording, you
shall immediately advise Sony thereof. Upon being so advised by you, or,
alternatively, upon Sony's advising you that Sony has become aware that the
so-
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<PAGE> 3
called "streaming" technology employed by you is capable of such facilitation or
circumvention and/or is otherwise resulting in the creation of "downloaded"
copies of any Sony Recording, you shall take such steps and give Sony such
assurances as Sony may deem reasonably satisfactory evidencing your plans to
prevent the possibility of the creation of such "downloaded" copies of the Sony
Recordings concerned on a prospective basis. In the event that Sony advises you
that such steps and/or assurances are not so reasonably satisfactory to Sony in
any instance(s), you shall then be required to immediately remove the Sony
Content concerned from all Web Sites on the ARTISTdirect Network.
2.02. (a) In the case of each Sony Recording you wish to use on the
ARTISTdirect Network, you shall use your reasonable best efforts to determine
the so-called "hook" of the Sony Recording concerned, and to use a Sound Clip of
such so-called "hook"; provided, however, that Sony may designate such so-called
"hook" in each instance and require you to include a Sound Clip embodying such
so-called "hook" (in lieu of any other Sound Clip). Notwithstanding the
foregoing provisions of this subparagraph 2.02(a), in the event of any dispute
between what Sony determines to be the so-called "hook" of the Sony Recording
concerned and what the Sony Artist concerned determines to be the so-called
"hook" of the Sony Recording concerned, the decision of the Sony Artist
concerned shall be deemed the so-called "hook" of the Sony Recording determined
by Sony for the purposes hereof, provided that in each instance you secure and
deliver to Sony the written consent of the Sony Artist concerned which specifies
with reasonable particularity the so-called "hook" as determined by such Sony
Artist.
(b) You shall also be required to include on the ARTISTdirect
Network Sound Clips of particular Sony Recordings which Sony may designate from
time to time, promptly following Sony's request therefor. Notwithstanding the
foregoing provisions of this subparagraph 2.02(b), in the event that Sony so
designates any particular Sony Recording for such inclusion on the ARTISTdirect
Network and the Sony Artist concerned objects to Sony's selection of such Sound
Recording for such purpose, the decision of the Sony Artist concerned shall be
deemed Sony's selection for the purposes hereof, provided that in each instance
you secure and deliver to Sony the written consent of the Sony Artist concerned
which specifies with reasonable particularity the Sony Recording desired by such
Sony Artist.
3. OTHER LIMITATION OF RIGHTS
3.01. (a) The License is limited to the use of the Sony Content solely
in the manner set forth in Article 2 above and this Article 3. Any and all other
rights in connection with the Sony Content are specifically reserved by Sony.
(b) You warrant and represent that, except as expressly set
forth herein (i) the Sony Content will not be edited, modified or otherwise
altered (except to the extent required to create Sound clips derived from Sony
Recordings), (ii) you will not include the Sony Content other than in computer
files created for use in accordance
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<PAGE> 4
with paragraph 2.01 above, and (iii) you shall be solely responsible for any and
all costs, fees, expenses or other charges in connection with the permitted uses
of the Sony Content permitted hereunder (excluding any audio Record royalty
payments Sony may be required to make, if any, under any agreement to which Sony
is a party or is honoring in connection with the sale of Phonograph Records
embodying the Sony Content concerned, but including (x) any monies which may be
required to be paid to labor unions and guilds with appropriate jurisdiction and
(y) Persons owning or controlling an interest in musical compositions embodied
in Sony Content for the right to use such musical compositions). Sony shall use
reasonable efforts to cause Sony/ATV Music Publishing LLC ("Sony/ATV") to
negotiate with you in good faith regarding a license for the right under
copyright to reproduce and/or publicly perform musical compositions owned and
controlled by Sony/ATV which are embodied in Sound Clips and Videos licensed to
you under the License in accordance with industry standards and the arms-length
market for such licenses; provided, however, that in no event shall you be
required to pay to Sony/ATV consideration in respect of any such license in
excess of the consideration then being charged by Sony/ATV to any other third
party for comparable uses of such musical compositions.
3.02. You will not sublicense, assign or convey in any manner any
rights under this license agreement, including, but not limited to, the right to
use the Sony Content in conjunction with the ARTISTdirect Network, except to a
Person owning or acquiring all or substantially all of your stock or assets. No
Sony Content, Sony Recordings or Sony Artwork provided to you hereunder will be
sold, licensed or otherwise conveyed by you or on your behalf to others, except
to a Person owning or acquiring all or substantially all of your stock or
assets.
3.03. Omitted without implication.
3.04. (a) You shall include on all Web Sites containing Sony Content in
the ARTISTdirect Network: (i) The title of the musical composition embodied in
the Sony Recording concerned and the name of the artist performing such
composition, (ii) the appropriate copyright (P) and (c) notices applicable to
each item of Sony Content used on the Web Site concerned, in close juxtaposition
to the title(s) of the Sony Recordings concerned, and (iii) the legend:
"WARNING: All rights reserved. Unauthorized duplication is a violation of
applicable laws." The items prescribed in clauses (i) and (ii) will be included
on the same page(s) of the underlying musical compositions and Recordings
licensed to you by third-parties in an easily legible manner and not less than
the size, prominence and type style of such musical compositions and such
Recordings licensed to you by third-parties.
3.05. As between you and Sony, the Sony Recordings, all performances
embodied thereon, the Sony Content, and all copyrights and other rights in and
to the Sony Recordings and Sony Content are the sole property of Sony and shall
remain the sole and exclusive property of Sony. You warrant, represent and agree
that you will not, directly or indirectly, sell or otherwise dispose of, pledge,
mortgage or in any way
4
<PAGE> 5
encumber the Sony Recordings or any other related materials licensed to or
created by you with respect thereto.
3.06. Upon termination of the License, or at the termination or
expiration of the Term, or if any Sony Content cease for any reason to be
subject to the License, all rights herein granted to you to include the Sony
Content concerned on the ARTISTdirect Network shall forthwith terminate;
provided, however, that in the event that any Sony Content cease for any reason
to be subject to the License, such termination shall be effective five (5)
business days following the date of Sony's notice to you of the cessation
concerned. You shall thereafter have no right to include such Sony Content on
the ARTISTdirect Network. You shall promptly cease to use any computer files and
Sound Clips constituting Sony Content then in your possession or control and
used in conjunction with the ARTISTdirect Network (together with all master
tapes of Sony Recordings and other reproducing devices relating thereto), and
shall promptly thereafter furnish Sony with a sworn affidavit confirming that
you shall not at any time sell, transfer, assign, or convey, or send, transmit
or copy by any means or medium, to any Person, any of such computer files.
Within sixty (60) days of any such termination, you will cause any computer
files embodying the Sony Content not in your possession or control at the time
of termination to be returned to you and you shall promptly thereafter furnish
Sony with a sworn affidavit confirming that you shall not at any time sell,
transfer, assign, or convey, or send, transmit or copy by any means or medium,
to any Person, any of such computer files.
3.08. Except as expressly provided for herein, you may not use the Sony
Content for any original programming, products or marketing campaigns of any
type or nature, including but not limited to use in any games or trivia
contests, nor may you exploit the Sony Content in any commercial on-line
services, interactive television, telephone, cable or other technology or
format, whether now known or hereafter created.
3A. [***]*
4. CONSIDERATION
4.01. In consideration of the rights granted to you hereunder, each Web
Site hosted on the ARTISTdirect Network containing Sony Content or any of the
elements described in sections 3A.03(b)(1), (2) or (3) above shall at all times
during the Term contain an active link to a Web Site created, hosted and
maintained by Sony in respect of such Sony Artist (each, a "Sony Artist Site"),
if any. Each such link shall be solely to such locations and/or addresses on the
Sony Artist Site as Sony shall designate in writing in each instance, and shall
be equal in size and prominence as the link from the corresponding Sony Artist
Site to such ARTISTdirect Network Web Site placed by Sony pursuant to paragraph
4A.01 below.
- --------
* 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> 6
4.02 If at any time during the Term any third party receives any
consideration in connection with the licensing or other furnishing to you of any
digital sound files of Phonograph Records embodying Recordings that are not Sony
Recordings of no greater than thirty (30) seconds in length (or, solely in the
case of Recordings in the classical or jazz genre, no greater than sixty (60)
seconds in length) ("Third Party Sound Clips") or so-called "thumbnail" images
of the front album cover art used in the packaging of Phonograph Records
containing Recordings that are not Sony Recordings ("Third Party Artwork") used
or to be used in connection with the ARTISTdirect Network, or any rights
therein, which consideration is more favorable to such third party than the
consideration accorded to Sony hereunder, then such more favorable consideration
shall be deemed immediately accorded to Sony and incorporated in this license
agreement on a prospective basis only. You represent and warrant that, as of the
date hereof, no record label, artist or other third party has received any such
more favorable consideration.
4.03. At all times during the Term, ARTISTdirect shall maintain
standard management reporting systems regarding the ARTISTdirect Network, and
will prepare for Sony monthly management reports to the extent reasonably
available to you, which may include such information as usage of Sound Clips
containing Sony Recordings and the correlation between such usage and sales of
Phonograph Records by you. Each such monthly management report shall be
delivered to Sony by no later than five (5) business days following the calendar
month in respect of which the monthly management report concerned covers. During
the Term, you and Sony shall discuss in good faith incorporating such additional
information as the parties may mutually agree to be included in such monthly
management reports.
4A. CROSS-MARKETING OPPORTUNITIES
4A.01. Each Sony Artist Site for a Sony Artist with a corresponding
ARTISTchannel Site on the ARTISTdirect Network shall at all times during the
Term contain an active link to the ARTISTchannel Site for the Sony Artist
concerned containing Sony Content relating to such Sony Artist, or, if there is
no ARTISTchannel Site for the Sony Artist concerned containing Sony Content
relating to such Sony Artist, the ARTISTchannel Store for the Sony Artist
concerned. Each such link shall be solely to such locations and/or addresses on
the ARTISTdirect Network as you shall designate in writing in each instance, and
shall be equal in size and prominence as the link from the corresponding
ARTISTdirect Network Web Site to such Sony Artist Site placed by you pursuant to
paragraph 4.01 above.
4A.02. During the Term, Sony shall consider in good faith any
reasonable request made by ARTISTdirect regarding the participation of Sony in
promotions involving Sony Artists that have an ARTISTchannel Site via the
ARTISTdirect Network to help market Phonograph Records containing such Sony
Artist's performances and the cross-promotion of the ARTISTchannel Site, the
Sony Artist Site for the Sony Artist concerned and the other Internet properties
of ARTISTdirect and Sony.
5. TRADEMARKS, TRADE NAMES, NAMES, LIKENESSES, CREDITS AND MARKETING
LIMITATIONS
5.01. You may advertise the Sony Recordings in connection with the
ARTISTdirect Network, provided that you have obtained the written consent of the
Sony Artist concerned in connection with such advertisements. You agree that
you will not use Sony's trademarks or logotypes, or Sony's name, directly or
indirectly, except as provided in paragraphs 2.01 and 3.04 above, and paragraphs
5.02 and 5.03 below, in conjunction with the License granted herein.
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5.02. Omitted without implication.
5.03. If you become aware of any unauthorized manufacture, advertising,
distribution, lease or sale by any third party of the Sony Recordings, or any
other Master Recordings the copyrights to which are owned by Sony or its
licensors, you shall promptly notify Sony thereof and shall cooperate with Sony,
at Sony's cost and expense, in the event that Sony commences any action or
proceeding against such third party.
6. Omitted without implication.
7. ADDITIONAL REPRESENTATIONS, WARRANTIES AND INDEMNITIES
7.01. You warrant and represent that:
(a) You have the right and power to enter into and fully
perform this license agreement and to make the commitments you make herein, and
have obtained or will obtain all necessary licenses, permissions and consents.
(b) Sony shall not be subject to any costs, fees or other
charges (including, without limitation, any royalties) in respect of
ARTISTdirect's use of any Sound Clips and/or Artwork files or in respect of the
ARTISTdirect Network.
(c) You are fully-qualified to digitize and create Sound Clip
and Artwork files and to operate the ARTISTdirect Network as described herein.
(d) Subject to clause (i) of the last sentence of paragraph
9.01 below, you own, and will own at all times during the Term, all right, title
and interest in and to the ARTISTdirect Network, and all copyrights and other
rights therein (other than the underlying rights in the content and intellectual
property included therein, to the extent such content and intellectual property
is owned by third parties and licensed to you), throughout the Territory, free
and clear of any and all claims or encumbrances whatsoever. Subject to the
representations and warranties made by Sony hereunder, the operation and use of
ARTISTdirect Network for the purposes described herein, do not, and at no time
shall during the Term, violate any law (including, without limitation, any
federal law or regulation) or infringe upon or violate the rights of any Person.
(e) You have obtained from third parties all licenses and
other rights necessary in order to create and operate the ARTISTdirect Network.
(f) You are a corporation duly organized and in good standing
under the laws of the State of Delaware.
7.02. You will at all times indemnify and hold harmless Sony and any
licensor of Sony from and against any and all claims, damages, liabilities,
costs and expenses (including reasonable legal expenses and counsel fees)
arising out of any breach or
7
<PAGE> 8
alleged breach by you of any representation, warranty or agreement made by you
herein, including, without limitation, your representation and warranty to
secure and pay for all third-party licenses, permissions and consents. You will
reimburse Sony and/or its licensors on demand for any payment made at any time
after the date hereof in respect of any liability or claim in respect of which
Sony or its licensors are entitled to be indemnified.
7.03. Sony will at all times indemnify and hold you harmless from and
against any and all claims, damages, liabilities, costs and expenses (including
reasonable legal expenses and counsel fees) arising out of any breach by Sony of
any representation or warranty made by Sony herein up to, in the aggregate,
$200,000 plus any financial consideration paid by you to Sony under this
agreement. Sony will reimburse you on demand for any payment made at any time
after the date hereof in respect of any liability or claim in respect of which
you are entitled to be indemnified, up to the amount prescribed in the preceding
sentence.
7A. SONY'S WARRANTIES AND REPRESENTATIONS
7A.01. Sony warrants and represents that:
(a) Sony has the right and power to enter into and fully perform this
license agreement.
(b) Subject to the terms, conditions, restrictions and limitations
provided elsewhere herein, Sony owns or controls all rights in and to the Sony
Content necessary to grant you the License under this agreement.
8. DEFINITIONS
8.01. (a) "Web Site" - means that specific computerized area and
system, including any computer servers, transmission systems, electronic files,
and electronic data retrieval systems, associated with the international
computer network known as the "Internet" and more specifically the "World Wide
Web".
(b) "ARTISTchannel Site" - an English language, Portuguese
language and/or Spanish language Web Site created, maintained and hosted by
ARTISTdirect in the United States featuring, among other elements, music, music
related merchandise and other music related content (e.g., so-called "samples"
of sound recordings, Phonograph Records, collectibles, artist-hosted clubs, fan
clubs, message boards, news, tour information and special offers) relating to
one (1) musical recording artist, which Web Site is referred to on the
applicable Web Site as the "official" Web Site of the musical recording artist
concerned and does not constitute an ARTISTchannel Store for such musical
recording artist. Each ARTISTchannel Site is individually designed for, and is
owned by (other than any intellectual property which may be owned by a third
party) the musical recording artist featured on the Web Site concerned pursuant
to a
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<PAGE> 9
contractual arrangement between ARTISTdirect and such musical recording artist.
For the avoidance of doubt, any Web Site that is not referred to such Web Site
as the "official" Web Site of the musical recording artist concerned is not an
ARTISTchannel Site.
(c) "ARTISTchannel Superstore" - an English language,
Portuguese language and/or Spanish language Web Site created, maintained and
hosted by ARTISTdirect in the United States featuring online distribution of
products and services such as Phonograph Records, digital downloads of Master
Recordings, merchandise, tickets, tour memorabilia and collectible items
relating to more than one (1) musical recording artist.
(d) "ARTISTchannel Store" - an English language, Portuguese
language and/or Spanish language Web Site that is not an ARTISTchannel Site
created, maintained and hosted by ARTISTdirect in the United States featuring
online distribution of products and services relating to one (1) musical
recording artist, such as Phonograph Records, digital downloads of Master
Recordings, merchandise, tickets, tour memorabilia and collectible items.
(e) "ARTISTdirect Network" - an integrated network of English
language, Portuguese language and/or Spanish language Web Sites created,
maintained and hosted by ARTISTdirect in the United States, consisting solely of
(i) ARTISTchannel Sites, (ii) the ARTISTchannel Superstore, (iii) ARTISTchannel
Stores, and (iv) a comprehensive online music search engine and resource for
music information created, maintained and hosted by ARTISTdirect called "The
Ultimate Band List" located at "www.ubl.com" as the Uniform Resource Locator,
address or domain name (the "Ultimate Band List").
(f) "Buy Link" - an active link on a Web Site that is part of
the ARTISTdirect Network, which links such Web Site to a Web Site created,
maintained and hosted by ARTISTdirect in the United States that processes and
fulfills mail order sales of the Phonograph Records concerned to end-users in
the United States. For purposes of the preceding sentence, banner advertisements
that contain an active link to another Web Site shall not constitute an active
link with prominent and preferred placement.
8.02. "Artwork" - so-called "thumbnail" images of the front album cover
art, only, used in the packaging of the Records in which the Sony Recordings
concerned were originally released by Sony in the United States.
8.03. "Sound Clips" - digital sound files of Phonograph Records
embodying Sony Recordings. Solely with respect to Sony Recordings, such sound
files shall be no greater than thirty (30) seconds in length (except for Sony
Recordings in the classical or jazz genre, which shall be no
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<PAGE> 10
greater than sixty (60) seconds in length), except as otherwise agreed upon in
writing by Sony for the particular Sony Recording concerned.
8.04. "Sony Recordings" - any audio-only sound recording embodied on
the selection of Phonograph Records listed within the United States catalogs of
Sony's Columbia, Epic, Sony Classical, WORK, 550 and Legacy labels or contained
in Sony's so-called "DJ mailing list", subject to paragraph 3.01.
8.05. "Master Recordings" or "Recordings" - every recording of sound,
whether or not coupled with a visual image, by any method and on any substance
or material, or in any other form or format, whether now or hereafter known,
which is used or useful in the recording, production and/or manufacture of
Records or for any other commercial exploitation.
8.06. "Records" - all forms of reproductions, transmissions or
communications of Recordings now or hereafter known, manufactured, distributed,
transmitted or communicated primarily for home use, school use, juke box use or
use in means of transportation, including, without limitation, Records embodying
or reproducing sound alone and Audiovisual Records. A "Phonograph Record" is a
Record as embodied by the manufacturer and/or distributor in a physical,
non-interactive Record configuration (e.g., vinyl LP's, cassettes, compact
discs, videocassettes) prior to its distribution to the consumer, as opposed to
the transmission or communication of a Record to the consumer prior to being
embodied in a physical Record configuration, whether or not it may at some point
be embodied in a physical Record configuration, by the consumer or under the
consumer's direction or control.
8.07. "Person" - any natural person, legal entity, or other organized
group of persons or entities. (All pronouns, whether personal or impersonal,
which refer to Persons include natural persons and other Persons.)
8.08. "Licensee" - the principal licensee of rights from Sony in the
country concerned, which licensee is owned wholly by Sony Corporation, directly
or indirectly.
8.09. "Video" - an audiovisual work owned or controlled by Sony
featuring, primarily, the audio soundtrack of one (1) Sony Recording.
9. DEFAULT
9.01. (a) If you fail to timely make payments and render statements to
Sony, and/or to make payments to third parties within ten (10) business days
after you receive notice from Sony of your failure to make such payment, render
such statement and/or make such payment to such third party, as the case may be;
or
(b) In the event of any breach by you or any of your
representations, warranties or obligations hereunder, which breach is not cured
promptly following Sony's notice to you thereof, or in the event that you fail
to fulfill any
10
<PAGE> 11
of your obligations hereunder, which failure is not cured promptly following
Sony's notice to you thereof; or
(c) In the event of your dissolution or the liquidation of
your assets, or the filing of a petition in bankruptcy or insolvency or for an
arrangement or reorganization by, for or against you, or in the event of the
appointment of a receiver or a trustee for all or a portion of your property, or
in the event that you shall make an assignment for the benefit of creditors or
become bankrupt or insolvent;
then, you shall be deemed in material breach and default hereof and Sony, in
addition to such other rights and remedies which Sony has at law or otherwise
under this license agreement, may upon notice to you, immediately terminate the
License and the Term without prejudice to any right or claims Sony may have.
Notwithstanding the foregoing: (i) Sony shall not exercise Sony's rights under
subparagraph 9.01(b) above if the default concerned is solely attributable to
any claims or encumbrances asserted against you (and are not asserted against
Sony or any of its licensees) resulting from a breach or alleged breach of your
representations and warranties under subparagraph 7.01(d) above solely insofar
as it pertains to copyrights and other rights in any content or intellectual
property or other property or rights of any Person not owned or controlled by
Sony or its licensees; and (ii) Sony shall not exercise Sony's rights under
subparagraph 9.01(c) above by reason of the filing of a petition against you by
a third party under Title 11 of the United States Code or any similar statute,
unless (A) Sixty (60) days elapse after the filing of the petition and the
petition is not dismissed by order of the court within that time; or (B) Sony
determines in Sony's sole judgment that deferment of exercise of the option
during that sixty (60) day period might jeopardize Sony's interests (e.g. Title
11 of the United States Code or any similar statute or law does not permit up to
sixty (60) days to so dismiss such petition.
10. NOTICES
10.01. Except as otherwise specifically provided herein, all notices
hereunder shall be in writing and shall be given by personal delivery,
registered or certified mail or telegraph (prepaid), at the addresses shown
above, or such other address or addresses as may be designated by either party.
Notices shall be deemed given when mailed or delivered to a telegraph office,
except that notice of change of address shall be effective only from the date of
its receipt. Each notice sent to Sony shall be directed to its Senior
Vice-President, Business Affairs and Administration, and a copy of each such
notice shall be sent simultaneously to Sony Music Entertainment Inc., Law
Department, 550 Madison Avenue, New York, New York 10022-3211, Attention: Senior
Vice President and General Counsel. Sony shall undertake to send a copy of each
notice sent to you to Allen D. Lenard, Esq., Lenard & Gonzalez, LLP, 1900 Avenue
of the Stars, 25th Floor, Los Angeles, California 90067, but Sony's failure to
send any such copy shall not constitute a breach of this agreement or impair the
effectiveness of the notice concerned.
11
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11. MISCELLANEOUS
11.01. This license agreement contains the entire understanding of the
parties relating to its subject matter. No change or modification of this
license agreement will be binding upon unless it is made by an instrument signed
by an officer of Sony. No change of this agreement shall be binding upon you
unless it is made by an instrument signed by you. A waiver by either party of
any provision of this license agreement in any instance shall not be deemed to
waive it for the future. All remedies, rights, undertakings, and obligations
contained in this license agreement shall be cumulative and none of them shall
be in limitation of any other remedy, right, undertaking, or obligation of
either party. The captions of the Articles in this agreement are included for
convenience only and shall not affect the interpretation of any provision.
11.02. Those provisions of any applicable collective bargaining
agreement between Sony and any labor organization which are required, by the
terms of such agreement, to be included in this license agreement shall be
deemed incorporated herein.
11.03. Sony may assign Sony's rights under this agreement in whole or
in part to any subsidiary, affiliated or controlling corporation, to any Person
owning or acquiring a substantial portion of the stock or assets of Sony, or to
any partnership or other venture in which Sony participates, and such rights may
be similarly assigned by any assignee. No such assignment shall relieve Sony of
any of Sony's obligations hereunder. Sony may also assign Sony's rights to any
of Sony's Licensees if advisable in Sony's sole discretion to implement the
license granted.
11.04. If Sony breaches any of its obligations hereunder, you shall
permit Sony a reasonable time to remedy such breach, and you shall not be
entitled to recover damages or terminate the Term by reason of such breach until
such reasonable time has passed.
11.05. THIS LICENSE AGREEMENT HAS BEEN ENTERED INTO IN THE STATE OF NEW
YORK, AND THE VALIDITY, INTERPRETATION AND LEGAL EFFECT OF THIS LICENSE
AGREEMENT SHALL BE GOVERNED BY THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO
CONTRACTS ENTERED INTO AND PERFORMED ENTIRELY WITHIN THE STATE OF NEW YORK, WITH
RESPECT TO THE DETERMINATION OF ANY CLAIM, DISPUTE OR DISAGREEMENT WHICH MAY
ARISE OUT OF THE INTERPRETATION, PERFORMANCE, OR BREACH OF THIS LICENSE
AGREEMENT. ANY PROCESS IN ANY ACTION OR PROCEEDING COMMENCED IN THE COURTS OF
THE STATE OF NEW YORK OR ELSEWHERE ARISING OUT OF ANY SUCH CLAIM, DISPUTE OR
DISAGREEMENT MAY, AMONG OTHER METHODS, BE SERVED UPON YOU BY DELIVERING IT OR
MAILING IT, BY REGISTERED OR CERTIFIED MAIL, DIRECTED TO THE ADDRESS FIRST ABOVE
WRITTEN OR SUCH OTHER ADDRESS AS YOU MAY DESIGNATE PURSUANT TO PARAGRAPH 10.01.
ANY SUCH PROCESS MAY, AMONG OTHER METHODS, BE SERVED UPON ANY
12
<PAGE> 13
PARTY WHO APPROVES, RATIFIES, OR ASSENTS TO THIS LICENSE AGREEMENT TO INDUCE
SONY TO ENTER INTO IT, BY DELIVERING THE PROCESS OR MAILING IT BY REGISTERED OR
CERTIFIED MAIL, DIRECTED TO THE ADDRESS FIRST ABOVE WRITTEN OR SUCH OTHER
ADDRESS AS THE PERSON CONCERNED MAY DESIGNATE IN THE MANNER PRESCRIBED IN
PARAGRAPH 10.01. ANY SUCH DELIVERY OR MAIL SERVICE SHALL BE DEEMED TO HAVE THE
SAME FORCE AND EFFECT AS PERSONAL SERVICE WITHIN THE STATE OF NEW YORK OR THE
JURISDICTION IN WHICH SUCH ACTION OR PROCEEDING MAY BE COMMENCED.
11.06. This license agreement shall not become effective until executed
by all proposed parties hereto. This license agreement may be executed in
counterparts and by facsimile signature, each of which shall be deemed an
original and all of which together shall constitute one (1) agreement.
12. PRESS RELEASES
12.01. Neither party hereto shall, without the consent of the other
party, issue any press release or make any other public announcement relating to
the transactions contemplated by (i) this agreement or (ii) the Stock Purchase
Agreement dated as of December __, 1999 between the parties and the other
Transaction Agreements, as defined in such Stock Purchase Agreement (the
"Investment Documents" and together with this agreement, the "Confidential
Information"), provided that any party may make any disclosure required to be
made by it under applicable law if it determines in good faith that it is
required to do so and gives prior notice to the other party, provided further
that ARTISTdirect shall provide Sony with a reasonable opportunity to review and
comment on the disclosure regarding the Confidential Information in
ARTISTdirect's registration statement in connection with its public offering.
ARTISTdirect further agrees to use reasonable efforts (i) To obtain confidential
treatment of the portions of this agreement and the Investment Documents
relating to pricing terms and commitment levels in connection with the filing of
such registration statement, and (ii) in connection with the filing of such
registration statement, to obtain confidential treatment of (x) each of the
provisions contained in Article 3A of this agreement, and (y) any and all other
terms contained in this agreement that are more favorable to ARTISTdirect than
the corresponding terms granted by ARTISTdirect to a similarly situated third
party record company or other Person.
SONY MUSIC, A Group of
Sony Music Entertainment Inc.
By: /s/ RON WILCOX
----------------------------------------
Senior Vice President
Business Affairs and Administration
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ARTISTDIRECT, INC.
By: /s/ MARC P. GEIGER
------------------------
Title: CEO
14
<PAGE> 1
EXHIBIT 10.42
STRATEGIC MARKETING AGREEMENT
THIS STRATEGIC MARKETING AGREEMENT (this "Agreement"), dated as of
December 20, 1999, is being entered into by and between BMG Music d/b/a BMG
Entertainment, a New York general partnership ("Group") and ARTISTdirect, Inc.,
a Delaware corporation ("Company"):
WHEREAS, as of the date hereof, Group together with its Affiliates (as
defined below) is an active participant in the music industry;
WHEREAS, Group and Company believe there are synergies between Group's
business and Company's business;
WHEREAS, Group (or one of its Affiliates) has become a significant
equity owner in Company; and
WHEREAS, Group and Company desire to set forth certain understandings
between them with respect to strategic marketing and other commitments which
each believes will advantage its business.
NOW, THEREFORE, in consideration of the premises, covenants, agreements
and obligations hereinafter set forth and other good and valuable consideration,
the receipt and adequacy of which are hereby acknowledged, and intending to be
legally bound hereby, Company and Group hereby agree as follows.
1. Certain Definitions. As used in this Agreement, the following terms
shall have the following meanings:
(a) "Action" means any claim, action, suit, arbitration, inquiry,
proceeding, notice of violation, or investigation by or before any Governmental
Authority.
(b) "Affiliate" means, with respect to any specified Person, any other
Person that directly, or indirectly through one or more intermediaries,
controls, is controlled by, or is under common control with, such specified
Person. Affiliates also include, with respect to Company, any other person in
which the Company or one of its Affiliates serves as a general partner or as a
trustee (or similar capacity). For purposes of this definition, "control"
(including "controlled by" and "under common control with") means, with respect
to the relationship between or among two or more Persons, the possession,
directly or indirectly, or as trustee, personal representative, or executor, of
the power to direct or cause the direction of the affairs or management of a
Person, whether through the ownership of voting securities, as trustee, personal
representative, or executor, by contract or otherwise, including, the ownership,
directly or indirectly, of securities having the power to elect a majority of
the board of directors or similar body governing the affairs of such Person.
(c) "Business Days" means any day except a Saturday, Sunday or other
day on which banks are required or authorized by law to be closed in the City of
New York.
(d) "Commencement Date" shall have the meaning set forth in paragraph 2
below.
(e) "Company" shall have the meaning set forth in the preamble.
<PAGE> 2
2
(f) "Company Contact Person" shall have the meaning set forth in
paragraph 4(g) below.
(g) "Content" means music and music related content related to a Group
Artist (i) made available by Group or its Affiliates for marketing and
promotional purposes to non-Affiliated Persons (e.g., materials related to new
artists and new releases, electronic press kits, music audio samples, music
digital downloads, cybercasts, photographs, album covers, concert film clips,
biographical information, promotional merchandise and similar materials), or
(ii) designated by Group, in its sole discretion, as "Content" for the purposes
of this Agreement.
(h) "Controlled Affiliates", means any separately-branded or -imprinted
music label in which Group owns or holds, directly or indirectly, a fifty
percent or greater equity interest; provided, however, that a "50/50" joint
venture music label shall only be deemed a Controlled Affiliate if the
day-to-day management of such Controlled Affiliate is actually controlled,
directly or indirectly, by Group.
(i) "Derived Analyses" means analyses created by or for Company or an
Affiliate thereof during the Term and (A) created primarily through the analysis
of Other Data and provided by Company or an Affiliate thereof to any
non-Affiliated Person (other than a Person who is featured on a web site
operated by Company or an Affiliate thereof and Company or an Affiliate thereof
is contractually prohibited from disclosing such Derived Analysis), or (B)
related solely to Group Data. Derived Analyses shall not include any individual
level data (i.e. data which would permit an entity to identify a single consumer
by his or her name or email address).
(j) "Exclusive Content" means Content related to a Group Artist that
Group or its Affiliates makes available to Company or an Affiliate thereof
during the Term and with respect to which at least one of the following is true:
(i) such Content has not been and is not available (whether for online or
off-line use) and remains unavailable to any Person other than Company and/or
its Affiliates; (ii) such Content has not been and is not available (whether for
online or off-line use) and remains unavailable to any Person other than Company
and/or its Affiliates for a period of time to be agreed on a case-by-case basis
by, on the one hand, Company and/or its Affiliates and, on the other hand, Group
or its Affiliate providing such Content; or (iii) such Content has not been and
is not available and remains unavailable to any Person other than Company and/or
its Affiliates for online use, although it is made available to other Persons
solely for off-line use.
(k) "Generally Available Content" means Content related to a Group
Artist that Group or a Controlled Affiliate thereof makes generally available
during the Term to Online Music Companies for use on web sites.
(l) "Governmental Authority" means any national, federal, state,
municipal, local, or other government, governmental, regulatory, or
administrative authority, agency, or commission, or any court, tribunal, or
judicial or arbitral body.
(m) "Group" shall have the meaning set forth in the preamble.
(n) "Group Artist" means a recording artist who is, as of any date of
determination, subject to (i) an exclusive recording agreement (with customary
industry carve outs) with Group or an Affiliate of Group; (ii) an exclusive
license agreement (with customary
<PAGE> 3
3
industry carve outs) with Group or an Affiliate of Group; or (iii) an
arrangement wherein Group or an Affiliate thereof exclusively distributes
product of such artist.
(o) "Group Artist Site" means any web site (whether or not located on
the World Wide Web) owned or operated by Company or an Affiliate thereof that
(i) uses the name of, or predominantly features, a Group Artist, and (ii) is
owned or operated by Company or an Affiliate thereof as a result of the
substantial efforts during the Term of Group or an Affiliate thereof. For
purposes of clarity, any web site owned or operated by Company or an Affiliate
thereof pursuant to a written agreement or arrangement entered into by Company
or an Affiliate thereof prior to the Commencement Date shall not be a "Group
Artist Site"; provided, however, that if the Group Artist who is featured on
such web site (or an entity furnishing such Group Artist's services) agrees, as
a result of Group's or an Affiliate's thereof substantial efforts during the
Term, to extend such agreement or arrangement beyond the term thereof (as such
term exists as of the Commencement Date), then such web site shall be deemed a
"Group Artist Site" during such extension. Notwithstanding the foregoing, any
"Group Artist Site" shall cease to be a "Group Artist Site" upon the date the
applicable artist is no longer a Group Artist and has executed an exclusive
recording agreement (subject to customary carve outs in the recording industry)
with a Third Party.
(p) "Group Contact Person" shall have the meaning set forth in
paragraph 3(d) below.
(q) "Group Data" means any and all data collected by Company or an
Affiliate thereof (i) with respect to a consumer that registers with Company or
an Affiliate of Company through a Group Artist Site, (ii) with respect to any
transaction by a consumer related to a Group Artist Site or any transaction with
respect to product distributed by Group or an Affiliate thereof, and (iii) with
respect to any transaction by a consumer related to (A) a former Group Artist
Site, and (B) product distributed by the Group or Affiliate thereof.
Notwithstanding the foregoing, Group Data shall not include any data that
Company or an Affiliate thereof is prohibited from providing to Group or an
Affiliate thereof without such artist's consent (unless such consent has been
obtained) or a consumer's consent.
(r) "Indemnitee" shall have the meaning specified in paragraph 9(a).
(s) "Indemnitor" shall have meaning specified in paragraph 9(a).
(t) "Law" means any international, national, federal, state,
provincial, municipal, local, or other statute, law, ordinance, regulation,
rule, code, order, or other requirement or rule of law.
(u) "Licensed Content" shall have the meaning set forth in paragraph
7(a).
(v) `Licensor Marks" shall have the meaning set forth in paragraph
7(c).
(w) "Losses" means, with respect to any specified Person, all debts,
liabilities, obligations, losses, damages, claims, costs, expenses, amounts paid
in settlement, interest, awards, judgments, penalties, or fines of any kind,
nature, or description whatsoever (including all reasonable fees and
disbursements of counsel, accountants, experts, and consultants) suffered,
incurred, or sustained by such Person or to which such Person becomes subject
(including in connection with any Action brought or otherwise initiated by or on
behalf of such
<PAGE> 4
4
Person, whether against an Indemnitor hereunder or any other Person), based
upon, resulting from, arising out of, or relating to any specified facts or
circumstances.
(x) "Marketing Support" shall mean the following: (i) advertising
space, (ii) marketing services, (iii) promotional products or services, (iv)
Other Data, (v) Derived Analyses, and (vi) other marketing or promotional
products or services.
(y) "Online Music Company" means any Person who engages, as more than
an incidental portion of its commercial activities, in the online sale of music
or music/artist-related merchandise or the online publication of music-related
content online.
(z) "Other Data" means any and all data owned or controlled by Company
or an Affiliate thereof and made available by Company or an Affiliate thereof to
any Person, non-Affiliated to Company and shall specifically exclude (i) Group
Data, (ii) data owned by a Person non-Affiliated to Company, and (iii) data as
to a particular web site made available solely to the Person controlling the
rights to substantially all the content on such web site for example, an artist,
such artist's record label or a branding entity (e.g., "Dick Clark Presents").
Further, Other Data shall not include any data that Company or an Affiliate
thereof is prohibited from providing to Group or an Affiliate thereof without
such artist's or branding entity's consent (unless such consent has been
obtained) or a consumer's consent (unless such consent has been obtained).
(aa) "Permitted Web Sites" shall have the meaning set forth in
paragraph 7(a) below.
(bb) "Person" means any individual, partnership, firm, corporation,
limited liability company, joint venture, association, trust, unincorporated
organization, or other entity.
(cc) "Representative" means, with respect to any specified Person, any
Affiliate, manager, director, officer, employee, agent, accountant, or counsel
of, or other Person empowered to act for, such Person.
(dd) "Special Content" means Content related to a Group Artist (other
than Exclusive Content) that Group or its Affiliates makes available during the
Term and with respect to which at least one of the following is true: (i) such
Content has not been and is not available (whether for online or off-line use)
and remains unavailable except that it is made available to (A) Company and/or
its Affiliates and (B) a limited number of Online Music Companies (which may
include Affiliates of Group); (ii) such Content has not been and is not
available (whether for online or off-line use) and remains unavailable except
that it is made available to (A) Company and/or its Affiliates and (B) a limited
number of Online Music Companies (which may include Affiliates of Group) for a
period of time to be agreed on a case-by-case basis by, on the one hand, the
recipient of such Content and, on the other hand, Group or its Affiliate
providing such Content; or (iii) such Content has not been and is not available
and remains unavailable except that it is made available to (A) Company and/or
its Affiliates and (B) a limited number of Online Music Companies (which may
include Affiliates of Group) for online use, although it is made available to
other Persons for off-line use.
(ee) "Term" shall have the meaning set forth in paragraph 2 below.
(ff) "Third Party" shall mean any Person anywhere in the universe who
is not, as of any date of determination, then an Affiliate of Group or Company.
<PAGE> 5
5
(gg) "Third-Party Claims" shall have meaning specified in paragraph
9(b).
(hh) "Third Party Payments" shall mean any payments required by
contract or law to a Person other than Group or one of its Affiliates. For
purposes of clarity, a payment made to Group or one of its Affiliates in its
capacity as an agent of a third party shall be a Third Party Payment (e.g., a
payment made to a Group Affiliate which is a music publishing company for the
benefit of an artist shall be a Third Party Payment hereunder).
2. Term. The term of this Agreement (the "Term") shall commence on the
date of this Agreement (the "Commencement Date") and end on the earlier of (a)
the third anniversary of the Commencement Date and (b) the termination of the
Agreement pursuant to paragraph 8 below.
3. Group Obligations.
(a) Generally Available Content. During the Term, Group shall, and
shall cause its Affiliates to, regularly make available and grant the right to
use, Generally Available Content to Company and its Affiliates in the same
manner that Group or the applicable Group Affiliate allows Online Music
Companies to use the applicable Generally Available Content (it being understood
and agreed that, unless Group or an Affiliate thereof specifically grants such
rights to Company or an Affiliate thereof, Company shall not acquire any rights
in Generally Available Content greater than those rights generally granted by
Group or an Affiliate thereof to other Online Music Companies). If Generally
Available Content is generally provided by Group or an Affiliate thereof to the
Online Music Companies on specific terms and conditions ("Standard Terms")
(e.g., limitations in use, period of time for use, financial terms), Group and
its Affiliates shall provide the Generally Available Content to Company and its
Affiliates on the same Standard Terms. Group shall use commercially reasonable
efforts to make available, or cause to be made available, to Company all
Generally Available Content of a general promotional nature no later than such
content is generally made available to Online Music Companies; provided that
Group shall have no liability whatsoever for its failure to comply with the
requirements of this sentence. Notwithstanding the foregoing, Group shall not be
deemed to be in breach of this paragraph 3(a) for any purpose hereunder if such
breach is caused by the failure of any Group Affiliate (other than Controlled
Affiliates) to comply with this paragraph 3(a).
(b) Special Content and Exclusive Content. (i) Group shall, and shall
cause its Controlled Affiliates to, from time to time provide the opportunity
for Company and its Affiliates to obtain the right to use Special Content or
Exclusive Content. All terms and conditions applicable to Company's or its
Affiliates' use of any particular Special Content or Exclusive Content shall be
negotiated in good faith by the parties. The parties acknowledge and agree that,
at the discretion of Group and its Controlled Affiliates, Special Content and
Exclusive Content may be made available to Company and its Affiliates only upon
the payment by Company or its Affiliates of mutually agreed consideration e.g.,
(A) a license or similar fee, or (B) an amount equal to all or a reasonable
portion of the Group's or its Controlled Affiliate's cost of developing and
creating such Special Content or Exclusive Content, or (C) an amount equal to
the costs of duplicating and shipping of the Special Content or Exclusive
Content. Examples of Special Content or Exclusive Content may be instances where
a Group or its Controlled Affiliate has the right to license or provide: (1) a
cybercast, made available first and exclusively to Company for a limited period
of time or a limited number of broadcasts, and for which Company would pay a fee
and any required Third Party Payments; (2) an exclusive chat with a Group Artist
on terms that may or may not include a fee; (3) prizes or promotional items
provided by Group or its Controlled Affiliate at no cost to Company or its
Affiliates; and (4) digital music downloads on terms that may or may not include
a fee. Notwithstanding anything to the contrary contained in this Agreement,
this Agreement does not place any restrictions whatsoever on Group and its
Affiliates' provision of Content (of any kind, type or nature) to any Person.
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6
(ii) Notwithstanding paragraph 3(b)(i) above, Group shall, and shall
cause its Controlled Affiliates, to grant Company and its Affiliates the right
to use, three items of Exclusive Content, in the aggregate, relating to the
Group Artists each calendar quarter.
(c) Use of Content. For purposes of clarity, Company and its Affiliates
shall have no obligation to license, acquire or use any Content. With respect to
each license or purchase by a Company or an Affiliate thereof of Content (i.e.,
where Company or an Affiliate thereof is required to pay for such Content), the
parties shall promptly memorialize the financial and all other terms applicable
to such purchase and promptly provide a copy of such memorialization to each the
of Company Contact Person and the Group Contact Person (it being acknowledged
and agreed that failure so to provide such a copy shall not invalidate or
otherwise affect such license or purchase or the terms applicable thereto).
(d) Group Contact Person. Group shall promptly after the execution of
this Agreement appoint (and shall maintain throughout the Term) one person to be
the primary contact person on behalf of Group and its Affiliates (the "Group
Contact Person"), which person may change from time to time as designated by
Group in its sole discretion. The Group Contact Person shall coordinate with the
Company Contact Person with respect to all operational and similar purposes
under this Agreement.
4. Company Obligations.
(a) Group Artist Web Sites. During the Term, Group shall have the right
to designate, not more than once each calendar quarter, up to 25 Group Artist
web sites owned or operated by Group or any of its Affiliates to be seamlessly
integrated into the listings or directories (or other display of the
availability of artist web sites) of artist web sites accessible by the UBL.com
search engine such that a user of such search engine will not be able to tell
which artist web sites are operated by Company and its Affiliates as opposed to
artist web sites operated by Group and its Affiliates; provided that Group shall
not designate any Group Artist web sites for which there exists, as of the date
hereof, a Group Artist Site. Company shall integrate the Group designated artist
web sites as provided above within 5 Business Days of receipt of Group's
designation notice. Company's placement of the Group designated artist web sites
in the UBL.com search engine shall be made in a manner which is no less
favorable to such web sites than the treatment accorded in Group Artist Sites,
and all other artist web sites referred to in the UBL.com search engine. If,
during the Term, Company or its Affiliates provides other listings or
directories of artist web sites (or other display of the availability of artist
web sites) or redesigns of same, Group designated artist web sites shall be
integrated into such listings in the same manner as is contemplated in the
UBL.com search engine.
(b) Designated Group Artists. During the Term, Group shall have the
right to designate, not more than once each calendar quarter, two Group Artists
to be featured prominently on the Company and its Affiliates web sites,
including the UBL.com search engine, for a continuous period of not less than
two weeks; provided that Group shall not designate more than one Group Artist
each calendar quarter whose last album released within 36 months prior thereto
was certified "Gold" in the United States.
(c) Availability of Marketing Support. During the Term and subject to
the further provisions of this paragraph 4, Company shall, and shall cause its
Affiliates to, make available to Group and its Affiliates any Marketing Support
that Company and its Affiliates make available to Third Parties (it being
understood that all terms and conditions of such Marketing Support shall be the
most favorable terms and conditions then offered by the relevant Company
Affiliate to any third party non-Affiliated to Company for comparable Marketing
Support). For purposes of clarity, Group and its Affiliates shall have no
obligation to acquire or use any particular Marketing Support. The parties shall
promptly
<PAGE> 7
7
memorialize the terms and conditions applicable to the provision of such
Marketing Support and promptly provide a copy of such memorialization to each of
the Group Contact Person and the Company Contact Person (it being acknowledged
and agreed that the failure so to provide such a copy shall not invalidate or
otherwise affect such transaction or the terms applicable thereto).
(d) Provision of Group Data. During the Term, Company shall provide,
and shall cause its Affiliates to provide, to Group copies of all Group Data
from time to time as requested by Group, but not less frequently than monthly.
The parties shall agree on the form and media in which such data shall be
provided to Group, and that Company shall reasonably cooperate with Group in
creating data collection fields for Group Artist Sites and with respect to the
sale of Group product. Notwithstanding the foregoing, the parties acknowledge
and agree that the provision of Group Data to Group may be subject to the
consent of the applicable Group Artist. Notwithstanding anything to the
contrary contained herein, at all times during the Term, the Group Data
provided to Group shall not be less comprehensive (i.e. as to type, scope and
depth) than similar data provided to similarly-situated Third Parties (e.g.,
record companies.
(e) Provision of Other Data, Derived Analyses. During the Term, Company
shall notify, and shall cause each Company Affiliate to notify, Group promptly
after the date Company or an Affiliate thereof first makes available any Other
Data or Derived Analyses created by Company or an Affiliate thereof, to any
Third Party. Such notice shall identify in reasonable detail: (i) the nature of
such Other Data or Derived Analyses, and (ii) the terms and conditions such
Other Data or Derived Analyses was provided to such Third Party (provided that
such Other Data or Derived Analysis shall be provided to Group and its
Affiliates on the most favorable terms such Other Data or Derived Analyses is
then being provided by Company or its Affiliate to any Third Party). Company
shall not, and shall not permit any Affiliate thereof to, create or impose any
term on Group or an Affiliate thereof that would preclude Group or an Affiliate
thereof from having the same or more extensive rights to the relevant Other Data
or Derived Analyses as does the Third Party to which such Other Data or Derived
Analyses is initially provided. Notwithstanding anything contained in this
Agreement to the contrary, Company and its Affiliates shall not be obligated
under this Agreement to provide Group or any Affiliate thereof with any data (A)
if the applicable artist or entity has the right to approve the dissemination of
such data and has not give such approval, (B) the dissemination of such data
would violate the privacy policy of Company or the applicable Company Affiliate,
or (C) the dissemination of such data would violate any law, statute or
regulation then in effect including, if applicable, The Children's Online
Privacy Protection Act and any regulation promulgated by the Federal Trade
Commission or any other governmental entity (whether United States or foreign).
Without Company's prior written consent, or as permitted by the terms applicable
to such Other Data or Derived Analyses consistent with clause (ii) of the first
sentence of this paragraph 4(e), Group and its Affiliates shall not be entitled
to transfer, assign, sell or disclose any Other Data or Derived Analyses to any
Person other than to a Group Affiliate (and the Group Affiliate shall be so
restricted). Notwithstanding the immediately preceding sentence, Other Data or
Derived Analysis related to a particular Group Artist may be made available by
Group and its Affiliates to the applicable Group Artist (provided such artist
agrees that it shall not further assign, sell or disclose same). Notwithstanding
anything to the contrary contained herein, at all times during the Term, the
Other Data and Derived Analysis provided to Group shall not be less
comprehensive (i.e., as to type, scope and depth) than similar data and analysis
provided to similarly-situated Third Parties (e.g., record companies).
(f) Obtaining Consents. Company shall use all commercially reasonable
efforts to obtain the consent of any artist or other Person required to maximize
the benefits accruing to Group and its Affiliates under paragraphs 1(g), 1(bb),
4(d) and 4(e). Furthermore, Company and its Affiliates shall use all
commercially reasonable efforts to negotiate agreements with Third Parties that
do not require the consent of such Third Party in order to maximize the benefits
accruing to Group and its affiliates under paragraphs 1(g), 1(bb), 4(d) and
4(e).
<PAGE> 8
8
(g) Company Contact Person. Company shall promptly after the execution
of this Agreement appoint (and shall maintain throughout the Term) one person to
be the primary contact person on behalf of Company and its Affiliates (the
"Company Contact Person"), which person may change from time to time as
designated by Company in its sole discretion. The Company Contact Person shall
coordinate with the Group Contact Person with respect to all operational and
similar purposes under this Agreement.
5. Links. It is the parties intention to mutually agree on a series of
links between web sites owned or operated by the Group and its Affiliates, on
the one hand, and the Company and its Affiliates, on the other hand. In
particular, it is the parties intention to mutually agree on a series of links
between (a) the GetMusic LLC genre web sites and appropriate artist web sites
owned or operated by the Company and its Affiliates; (b) unique programming on
the GetMusic LLC web sites and appropriate web sites (including artist web
sites) owned or operated by the Company and its Affiliates; and (c) web sites
owned or operated by Group and its Affiliates, on the one hand, and the Company
and its Affiliates, on the other hand, relating to the same Group Artists. The
nature, size, type and prominence of such links will be negotiated in good faith
by the parties hereto.
6. Intellectual Property. All of the intellectual property held, used
or provided by each party hereto and its respective Affiliates, including the
Limited Content provided pursuant to paragraph 7 below, is directly or
indirectly owned thereby or held thereby pursuant to valid and subsisting
licenses or sublicenses. The rights of each party hereto and its respective
Affiliates in, to, or under such intellectual property or its use thereof do not
conflict with or infringe on the rights of any other person. Except as expressly
provided in paragraph 8(b) below, paragraph 9 will be the sole and exclusive
remedy of the parties hereto for a breach of this paragraph 6.
7. Content Use License. (a) Content License. Upon the delivery by Group
or any of its Affiliates to Company or any of its Affiliates of any Content
("Licensed Content") pursuant to this Agreement, such Group or Affiliate, as the
case may be (for purposes of this paragraph 7, "Licensor"), shall be deemed to
have granted to Company during the Term a revocable, non-royalty-bearing (except
as provided in paragraph 3), non-exclusive license (except as provided in
paragraph 3(b)) for use on English language only .com and .net web sites
targeted at U.S.-based consumers ("Permitted Web Sites"): (i) to reproduce the
Licensed Content in digital form (alone or in combination with other works,
including text, data, images, photographs, illustrations, animation, graphics,
video and audio segments, and hypertext links) and (ii) to reproduce, transmit,
display, distribute, perform, or otherwise communicate the Licensed Content
through electronic, magnetic, wireless, cellular, cable telephonic, terrestrial,
satellite, radiophonic, or any other communications technology, whether now
known or hereafter developed, as part of or in conjunction with any Permitted
Web Site owned or operated by Company or any of its Affiliates.
(b) Ownership. Subject to the license granted hereby, as between
Company and its Affiliates on the one hand, and its Group and its Affiliates on
the other hand, the Licensed Content and all right, title, and interest therein
is and shall remain the exclusive property of Licensor.
(c) Trademark License and Usage. (i) Licensor hereby grants to Company
during the Term a revocable, non-roaylty-bearing, non-exclusive license for use
on Permitted Web Sites to use
<PAGE> 9
9
the trademarks, trade names, service marks, and logos owned, controlled, or
licensed by Licensor or any of its Affiliates and described in Schedule I
hereto; and upon the delivery by any Licensor to Company of any Licensed Content
pursuant to this Agreement, such Licensor shall be deemed to have granted to
Company during the Term a revocable, non-royalty-bearing, non-exclusive license
for use on Permitted Web Sites to use any trademarks, trade names, service
marks, or logos owned, controlled, or licensed by Licensor or any of its
Affiliates and incorporated in such Licensed Content (collectively, as they now
exist and as they may hereafter be modified, the "Licensor Marks"), solely for
purposes of and in connection with exploiting and otherwise using as permitted
herein the Licensed Content on any Permitted Web Site owned or operated by
Company or any of its Affiliates.
(ii) Company shall: (A) prospectively after notice from Group to
Company thereof, comply with the standards established from time to time by the
applicable Licensor with respect to the form of such its Licensor Marks and
their usage; and (B) maintain good business standards in compliance with all
applicable Laws in all matters relating to the Licensor Marks.
(iii) Company shall not: (A) use the Licensor Marks in any manner not
expressly contemplated by this Agreement; (B) use the Licensor Marks in any
manner which could reasonably be expected to diminish the commercial value of
such Licensor Marks, including in close proximity with any other trademark,
trade name, service mark, logo, name, or image which could reasonably be
expected to create any form of composite mark; (C) permit any unauthorized Third
Party to use the Licensor Marks; or (D) use or permit the use of any trademark,
trade name, service mark, logo, name, or image in a way which could reasonably
be expected to cause confusion with the Licensor Marks.
(iv) As between as Company and its Affiliates, on the one hand, and
Group and its Affiliates on the other hand, the Licensor Marks and all right,
title, and interest therein are and shall remain the exclusive property of
Licensor, Company shall acquire no proprietary rights in, to, or under the
Licensor Marks by virtue of this Agreement or its use of the Licensor Marks
hereunder, and Company's use of the Licensor Marks hereunder shall inure solely
to the benefit of Licensor.
(d) Right to Sublicense. Company shall have the right to sublicense to
any Affiliate thereof which is engaged in a substantially similar business, upon
the terms and subject to the conditions set forth in this paragraph 7, all of
its rights under this paragraph 7 with respect to the Licensed Content and the
Licensed Marks. Company shall have no other rights to sublicense the Licensed
Content and the Licensed Marks.
(e) Revocability of Licenses. Notwithstanding the revocability of the
licenses granted pursuant to clauses (a) and (b) of this paragraph 7, Licensor
agree not to use the revocable nature of the licenses to frustrate the purposes
of this Agreement. Furthermore, Licensor agrees that it will not revoke the
license hereunder with respect to any Licensed Content unless any one of the
following is true: (i) Licensor or Group believes, in good faith, that the
Licensed Content or the use of the Licensed Content is causing, or may
reasonably be expected to cause, an artist relationship or label relationship
issue, (ii) the Licensor's rights in or to the Licensed Content expire, (iii)
the Licensor or any of its Affiliates become aware of any Action or threatened
Action regarding the Licensed Content or the use of the Licensed Content, or
(iv) Licensor or Group believes, in good faith, that the use of the Licensed
Content has, or will have, an adverse effect on Licensor or any its Affiliates
or any of their respective artists.
<PAGE> 10
10
8. Termination. (a) Either party hereto may terminate this Agreement at
any time by delivery of written notice of termination to the other party: (i) if
any representation or warranty of the other party contained herein (other than
with respect to paragraph 6 above) was not true and complete in all material
respects when made, and such other party fails to cure any such breach or
default, if curable, within thirty days of receipt of written notice thereof
from the terminating party; (ii) if the other party fails timely to comply in
all material respects with each covenant or agreement thereof contained in this
Agreement, and such other party fails to cure any such breach or default, if
curable, within thirty days of receipt of written notice thereof from the
terminating party; or (iii) if the other party makes a general assignment for
the benefit of creditors, or any proceeding is instituted by or against the
other party seeking to adjudicate it a bankrupt or insolvent, or seeking
liquidation, winding up or reorganization, arrangement, adjustment, protection,
relief or composition of its debts under any law relating to bankruptcy,
insolvency or reorganization; provided that, in the event of any such proceeding
instituted against the other party, such proceeding has not been stayed or
dismissed for a period of sixty days.
(b) Notwithstanding anything to the contrary contained herein, either
party shall have the right to terminate this Agreement upon 30 days notice to
the other party in the event such party or its Affiliates are subject to an
Action directly related to a breach of Section 6, so long as such breach was not
caused by the party electing to terminate this Agreement. Notwithstanding
anything to the contrary contained herein, Group shall have the right to
terminate this Agreement upon 30 days notice to Company in the event Company or
its Affiliates becomes owned or controlled (as defined in the definition of
Affiliate) by a Competitor (as defined below) or this Agreement is assigned to a
Competitor; provided that Group shall not have such right of termination so long
as two of James Carroll, Marc Geiger, Steve Rennie and Keith Yokomoto remain
executives of the Company during the Term with responsibilities, which include,
the day-to-day management of the Company and its Affiliates. As used herein
"Competitor" means any Person that owns, operates, or manages an Online Music
Company or has significant operations involving the creation (i.e., traditional
"music label" activities) and/or distribution of music in a physical format.
(c) The termination or expiration of this Agreement shall not release
either party hereto from any obligation accruing prior to the date of such
termination or expiration or which, in accordance with the terms hereof,
survives such termination or expiration, nor release a defaulting party from
liability for its default hereunder and for the Losses incurred by the other
party as a result of any such default hereunder.
(d) Neither party will be liable to the other for incidental,
consequential, special, punitive or indirect damages, including, loss of profit,
loss of business or business opportunity.
9. Indemnification. (a) General. Each party hereto (each such party in
its capacity as indemnitor under this paragraph 9, the "Indemnitor") shall
indemnify each other party hereto, each Affiliate of such other party, each
successor and assign of each such Person, and each Representative of each of the
foregoing (each such Person in its capacity as indemnitee under this paragraph
9, an "Indemnitee"), with respect to, and hold each of them harmless from and
against, all Losses based upon, resulting from, arising out of, or relating to
any breach or alleged breach by Indemnitor of any representation, warranty,
covenant, or agreement of such Indemnitor contained in this Agreement. To the
extent that any obligations of Indemnitor set forth in this paragraph 9 may be
invalid, illegal, or unenforceable, Indemnitor shall, to the fullest extent
permitted under applicable Law, contribute to the payment and
<PAGE> 11
11
satisfaction of all Losses incurred by any Indemnitee. Each Indemnitee shall
promptly give Indemnitor notice of any matter which such Indemnitee has
determined has given or could reasonably be expected to give rise to a right of
indemnification hereunder, stating the amount of the Loss, if known, and method
of computation thereof, and describing in reasonable detail the facts and
circumstances upon which such determination is based; provided, however that any
failure to provide such notice shall not release Indemnitor from any of its
obligations under this paragraph 9 except to the extent that the Indemnitor is
materially prejudiced by such failure.
(b) Third-Party Claims. The obligations and liabilities of Indemnitor
under this paragraph 9 with respect to Losses arising from claims of any Third
Party which are subject to the indemnification provided for in this paragraph 9
("Third-Party Claims") shall be governed by and contingent upon the following
additional terms and conditions:
(i) If an Indemnitee receives notice of any Third-Party Claim,
such Indemnitee shall give Indemnitor notice of such Third-Party Claim
within ten Business Days after the receipt by such Indemnitee of such
notice; provided, however, that the failure to provide such notice
shall not release Indemnitor from any of its obligations under this
paragraph 9 except to the extent Indemnitor is materially prejudiced by
such failure and shall not relieve Indemnitor from any other obligation
or liability that it may have to any Indemnitee otherwise than under
this paragraph 9;
(ii) If Indemnitor acknowledges in writing its obligation to
indemnify such Indemnitee under this Agreement against any Losses that
may result from such Third-Party Claim, then Indemnitor shall be
entitled to assume and control the defense of such Third-Party Claim at
its expense and through counsel of its choice (which counsel shall be
reasonably acceptable to such Indemnitee) if it gives notice of its
intention to do so to such Indemnitee within five Business Days after
the receipt of such notice. In the event that Indemnitor exercises the
right to undertake any such defense against any such Third-Party Claim
as provided above, such Indemnitee shall cooperate with Indemnitor in
such defense and make available to Indemnitor all witnesses, pertinent
records, materials, and information in such Indemnitee's possession or
under its control relating thereto as is reasonably required by
Indemnitor. Similarly, in the event that such Indemnitee is conducting
the defense against any such Third-Party Claim, Indemnitor shall
cooperate with such Indemnitee in such defense and make available to
such Indemnitee all such witnesses, records, materials, and information
in Indemnitor's possession or under its control relating thereto as is
reasonably required by such Indemnitee. Indemnitor shall not compromise
or settle any Third-Party Claim without the prior written consent of
the Indemnitee, unless in connection therewith, such Indemnitee is
given a full and complete release with respect to such Third-Party
Claim, in form and substance reasonably satisfactory to such
Indemnitee.
10. Miscellaneous.
(a) Counterparts; Facsimile Signatures. This Agreement may be signed in
multiple counterparts. Each counterpart will be considered an original, but all
of them in the aggregate shall constitute one agreement. This Agreement and any
amendments hereto, to the extent signed and delivered by means of a facsimile
machine, shall be treated in all manner and respects as an original agreement or
instrument and shall be considered to have the same binding effect as if it were
the original signed version thereof delivered in person.
<PAGE> 12
12
(b) Successors and Assigns. Subject to paragraph 8 above, this
Agreement may be assigned to any Affiliate of the assigning party or to any
Person who purchases all of substantially all of the stock or assets of the
assigning party, provided that the assigning party shall remain primarily liable
under this Agreement for its obligations hereunder. In all other respects, this
Agreement shall not be assigned, in whole or in part, whether voluntarily or by
operation of law, without the consent of the other party hereto, and any such
purported assignment shall be deemed null and void and without force or effect.
(c) Entire Agreement. This Agreement is intended by the parties as a
final expression of their agreement and is intended to be a complete and
exclusive statement of the agreement and understanding of the parties hereto in
respect of the subject matter hereof. This Agreement supersedes all prior
letters of intent, agreements and understandings between the parties with
respect to the subject matter hereof.
(d) Amendments. This Agreement may be amended, modified or supplemented
only in a writing executed by each of the parties hereto.
(e) Notices. All notices and other communications provided for or
permitted hereunder shall be made in writing by hand-delivery, first class mail
or overnight courier, shall be deemed given on the date received, if delivered
by hand or courier, and four days after deposit into the United States mail, if
mailed, and shall be delivered to the addresses for notice indicated on Schedule
II attached hereto, or at such other addresses as a party may hereafter
designate by notice delivered pursuant to this paragraph 10.
(f) Relationship of the Parties. Notwithstanding any other relationship
between the parties hereto, or between or among them and their respective
Affiliates, nothing herein shall be deemed to constitute the parties a
partnership or joint venture.
(g) Severability. If any term or other provision hereof is determined
by any court of competent jurisdiction to be invalid, illegal, or unenforceable,
in whole or in part, by reason of any applicable law or public policy now or
hereafter existing, and such determination becomes final and nonappealable, such
term or other provision shall remain in full force and effect to the fullest
extent permitted by law, and all other terms and provisions hereof shall remain
in full force and effect in their entirety.
(h) Governing Law; Jurisdiction; Jury Trial. This Agreement shall be
governed by the laws of the State of New York. Each party hereto hereby
unconditionally and irrevocably submits, for itself and its property, to the
exclusive jurisdiction of any court of the State of New York and any federal
court of the United States of America, in either case, sitting in the City and
County of New York, and any appellate court therefrom, over any action, suit, or
proceeding based upon, resulting from, arising out of, or relating to this
letter agreement or any transaction or agreement contemplated hereby, or for the
recognition or enforcement of any judgment resulting from any such action, suit,
or proceeding. Each party hereto hereby unconditionally and irrevocably waives
all right to trial by jury in any action, suit, or proceeding (whether based on
contract, tort, or otherwise) based upon, resulting from, arising out of, or
relating to this letter agreement or any transaction or agreement contemplated
hereby.
(i) Preparation and Negotiation of This Agreement. Each party hereto
has participated equally in the preparation and negotiation of this Agreement,
including all annexes, appendices, exhibits, and schedules hereto, and each
party hereto hereby unconditionally and irrevocably waives to the fullest extent
permitted by law any rule of interpretation or construction
<PAGE> 13
13
requiring that this Agreement, including any annex, appendix, exhibit, or
schedule hereto, be interpreted or construed against the drafting party.
(j) Survival of Representations and Warranties and Certain Covenants
and Agreements. Each party's representations and warranties contained herein,
and the covenants and agreements contained in paragraphs 9 and 10, shall survive
the termination or expiration hereof.
(k) Headings and Examples. The headings in this Agreement are for the
convenience of reference only and shall not limit or otherwise affect the
meaning 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.
(l) Publicity. Neither party hereto shall, and each party hereto shall
cause its respective Representatives not to, make or cause to be made any press
release or public announcement with respect to this Agreement or the related
equity investment by Group or one of its Affiliates in Company without the
express written consent of the other party hereto (which consent the other party
may give or withhold in its sole discretion).
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
<PAGE> 14
14
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first written above.
ARTISTdirect, INC.
By: /s/ KEITH YOKOMOTO
---------------------------------------
Keith Yokomoto
President and Chief Operating Officer
BMG MUSIC d/b/a BMG ENTERTAINMENT
By: /s/ THOMAS W. MCINTYRE
---------------------------------------
Name: Thomas W. McIntyre
Title: Executive Vice President and
Chief Financial Officer
<PAGE> 15
SCHEDULE I
LICENSED MARKS
TO BE PROMPTLY PROVIDED FOLLOWING EXECUTION OF THE AGREEMENT
<PAGE> 16
SCHEDULE II
ADDRESSES FOR NOTICES
If to Company: ARTISTdirect. Inc.
17835 Ventura Boulevard, Suite 310
Encino, CA 91316
Attention: President and Chief Operating Officer
With a copy to: Lenard & Gonzalez LLP
1900 Avenue of the Stars
25th Floor
Los Angeles, CA 90067
Attention: Allen D. Lenard, Esq.
If to BMG: BMG Music d/b/a BMG Entertainment
1540 Broadway
New York, New York 10036-4098
Attention: Executive Vice President and
Chief Financial Officer
With copies to: BMG Music d/b/a BMG Entertainment
1540 Broadway
New York, New York 10036-4098
Attention: Senior Vice President and General Counsel
and Levin & Srinivasan, LLP
1776 Broadway, Suite 1900
New York, New York 10019
Attention: Notices (100/045)
2
<PAGE> 1
EXHIBIT 10.47
5670 WILSHIRE BOULEVARD
OFFICE LEASE
This Office Lease (the "Lease"), dated as of the date set forth in Section
1 of the Summary of Basic Lease Information (the "Summary"), below, is made by
and between 5670 WILSHIRE L.P., a California limited partnership ("Landlord"),
and ARTISTDIRECT NETWORK a Delaware corporation ("Tenant").
SUMMARY OF BASIC LEASE INFORMATION
TERMS OF LEASE DESCRIPTION
1. Date: December 13, 1999
2. Premises
(Article 1).
2.1 Building: 5670 Wilshire Boulevard
2.2 Premises: Approximately 63,955 rentable (56,365 usable)
square feet of space in the aggregate,
comprised of the entire second (2nd) (29,870
rentable, 26,257 usable, square feet) (the
"Second Floor Premises") and third (3rd)
(34,085 rentable, 30,108 usable, square feet)
(the "Third Floor Premises") floors of the
Building, as further set forth in Exhibit A
to the Office Lease.
3. Lease Term
(Article 2).
3.1 Length of Term: Approximately ten (10) years and three (3)
months.
3.2 Lease Commencement Date: The earlier to occur of (i) the expiration of
the applicable "Construction Period," as that
term is defined in Section 1 of the "Tenant
Work Letter" attached hereto as Exhibit B,
for the Second Floor Premises, and (ii) the
expiration of the applicable Construction
Period for the Third Floor Premises, after
the delivery of any such space by Landlord
pursuant to the terms of Section 1 of the
Tenant Work Letter.
3.3 Lease Expiration Date: April 30, 2010.
<PAGE> 2
<TABLE>
4. Base Rent
(Article 3):
Monthly
Monthly Rental Rate
Period During Annual Installment per Rentable
Lease Term Base Rent* of Base Rent* Square Foot
- ---------- ---------- ------------- ------------
<S> <C> <C> <C>
Lease Commencement Date $997,698.00 $83,141.50 $1.30
through April 30, 2001
May 1, 2001, through $1,742,134.20 $145,177.85 $2.27
April 30, 2005
May 1, 2005 through $1,933,999.20 $161,166.60 $2.52
April 30, 2010
</TABLE>
* The total monthly Base
Rent payable for any
particular period of the
Lease Term shall equal
the product of (i) the
total rentable square
footage of the portion
of the Premises for
which the applicable
Construction Period has
expired, and (ii) the
Monthly Rental Rate set
forth above.
5. Base Year
(Article 4): The calendar year 2000.
6. Tenant's Share
(Article 4): Approximately 7.32% for the Second Floor
Premises, 8.35% for the Third Floor
Premises; provided that Tenant's Share
for any particular period of the Lease
Term shall be calculated by multiplying
the total rentable square footage of the
portion of the Premises for which the
applicable Construction Period has
expired, by 100, and dividing the
product by the total rentable square
footage of the Building.
7. Permitted Use
(Article 5): General office use
and uses incidental to
the conduct of Tenant's
business of internet and
music/entertainment and
broadband broadcasting
only, consistent with a
first-class office
building which allows
such uses.
8. Letter of Credit
(Article 21): $2,258,136.38.
9. Parking Pass Ratio
(Article 28): Four (4) unreserved
parking passes for every
1,000 usable square feet
of the Premises, of
which six-tenths (.6) of
a pass for every 1,000
usable square feet of
the Premises shall be
for the use of a
reserved parking space.
10. Address of Tenant
(Section 29.18): ARTISTdirect network
17835 Ventura Boulevard
Suite 310
Encino, California 91316
Attention: Mr. James Carroll
-2-
<PAGE> 3
with a copy to:
Troop Steuber Pasich Reddick & Tobey,
LLP 2029 Century Park East, Suite 2400
Los Angeles, California 90067
Attention: Robert J. Plotkowski, Esq.
(Prior to Lease Commencement Date)
and
ARTISTdirect network
5670 Wilshire Boulevard
Los Angeles, California 90036
Attention: Mr. James Carroll
with a copy to:
Troop Steuber Pasich Reddick & Tobey, LLP
2029 Century Park East, Suite 2400
Los Angeles, California 90067
Attention: Robert J. Plotkowski, Esq.
(After Lease Commencement Date)
11. Address of Landlord
(Section 29.18): See Section 29.16 of the Lease.
12. Broker(s) JSG Realty, Inc.
(Section 29.24): 5757 Wilshire Boulevard
Penthouse 30
Los Angeles, California 90036
and
Julien J. Studley
10960 Wilshire Boulevard
Suite 1500
Los Angeles, California 90024
-3-
<PAGE> 4
ARTICLE 1
PREMISES, BUILDING, PROJECT, AND COMMON AREAS; VERIFICATION OF
RENTABLE SQUARE FEET; RIGHT OF FIRST OFFER
.1 PREMISES, BUILDING, PROJECT AND COMMON AREAS; LANDLORD MODIFICATION OF
PROJECT.
.1.1 THE PREMISES. Landlord hereby leases to Tenant and Tenant hereby
leases from Landlord the premises set forth in Section 2.2 of the Summary (the
"Premises"). The outline of the Premises is set forth in Exhibit A attached
hereto and each floor or floors of the Premises has the number of rentable
square feet as set forth in Section 2.2 of the Summary. The parties hereto agree
that the lease of the Premises is upon and subject to the terms, covenants and
conditions herein set forth, and Tenant covenants as a material part of the
consideration for this Lease to keep and perform each and all of such terms,
covenants and conditions by it to be kept and performed and that this Lease is
made upon the condition of such performance. The parties hereto hereby
acknowledge that the purpose of Exhibit A is to show the approximate location of
the Premises in the "Building," as that term is defined in Section 1.1.2, below,
only, and such Exhibit is not meant to constitute an agreement, representation
or warranty as to the size of the Premises. Tenant also acknowledges that
neither Landlord nor any agent of Landlord has made any representation or
warranty regarding the condition of the Premises, the Building or the Project or
with respect to the suitability of any of the foregoing for the conduct of
Tenant's business, except as specifically set forth in this Lease and the Tenant
Work Letter attached hereto as Exhibit B (the "Tenant Work Letter").
.1.2 THE BUILDING AND THE PROJECT. The Premises are a part of the
building set forth in Section 2.1 of the Summary (the "Building"). The term
"Project," as used in this Lease, shall mean (i) the Building and the Common
Areas, (ii) the land (which is improved with landscaping, subterranean parking
facilities and other improvements) upon which the Building and the Common Areas
are located, and (iii) at Landlord's discretion, any additional real property,
areas, land, buildings or other improvements added thereto outside of the
Project.
.1.3 COMMON AREAS. Tenant shall have the non-exclusive right to use in
common with other tenants in the Project, and subject to the rules and
regulations referred to in Article 5 of this Lease, those portions of the
Project which are provided, from time to time, for use in common by Landlord,
Tenant and any other tenants of the Project (such areas, together with such
other portions of the Project designated by Landlord, in its discretion,
including certain areas designated for the exclusive use of certain tenants, or
to be shared by Landlord and certain tenants, are collectively referred to
herein as the "Common Areas"). The term "Building Common Areas," as used in this
Lease, shall mean the portions of the Common Areas located within the Building.
The manner in which the Common Areas are maintained and operated shall be at the
sole discretion of Landlord and the use thereof shall be subject to such rules,
regulations and restrictions as Landlord may make from time to time (the "Rules
and Regulations"). Landlord shall use reasonable efforts to cause other tenants
or occupants of the Project to comply with the Rules and Regulations and to
avoid any unreasonable, material interference of Tenant's use of the Premises as
a result of the failure of such other tenants or occupants to comply with the
Rules and Regulations. The Rules and Regulations of the Project, attached to and
made a part of the Lease as Exhibit "D," shall not be changed or revised or
enforced in any unreasonable way by Landlord, nor enforced or changed by
Landlord in such a way as to substantially interfere with "Tenant's Lease
Rights," as that term is defined in Section 1.1.4 of this Lease. In the event of
any conflict between this Lease and this Rules and Regulations, the Lease shall
prevail and control and the inconsistent provisions of the Rules and Regulations
shall not be inapplicable to Tenant. Landlord reserves the right to close
temporarily, make alterations or additions to, or change the location of
elements of the Project and the Common Areas.
.1.4 LANDLORD MODIFICATION OF THE PROJECT. Notwithstanding anything to
the contrary set forth in Section 1.1.2, Section 1.1.3, the Rules and
Regulations or elsewhere in the Lease, Landlord shall not modify the Common Area
or any other portion of the Project in such a manner which shall (i) materially
reduce the common facilities available to the Building, (ii) materially diminish
the amount of visitor parking available to the Building; or (iii) unreasonably
obstruct or interfere with the accessibility of the Premises, the Building or
the parking areas, the
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visibility of Tenant's signage or Tenant's use and enjoyment of the Premises or
the Building or the parking areas ("Tenant's Lease Rights").
.2 VERIFICATION OF RENTABLE SQUARE FEET OF FIRST OFFER SPACE. The rentable
and usable square feet of the initial Premises shall be as set forth in Section
2.2 of the Summary and shall not be subject to remeasurement or modification.
The usable areas of any "First Offer Space" and any "Expansion Space," as those
terms are defined in Sections 1.3 and 1.4, respectively, of this Lease, shall be
determined in accordance with the standards set forth in ANSI Z65.1-1996, as
promulgated by the Building Owners and Managers Association (the "BOMA
Standard"). The rentable square footage of any First Offer Space and/or any
Expansion Space shall equal the product of (i) the usable square footage of the
applicable space measured pursuant to the BOMA Standard, and (ii) the applicable
"Load Factor," as set forth below. Landlord and Tenant shall each have the
right, upon notice (the "Remeasurement Notice") delivered to the other party
within ninety (90) days following the date Tenant completes construction of the
tenant improvements in any First Offer Space and/or any Expansion Space to
remeasure the applicable space in accordance with the BOMA Standard. In the
event that any remeasurement pursuant to the terms of this Section 1.2 indicates
that the square footage measurement previously set forth in an amendment to this
Lease or otherwise agreed upon by Landlord and Tenant is in excess of or lower
than the square footage number which would have resulted had the BOMA Standard
been properly utilized, any payments due either party (or other rights between
Landlord and Tenant) based upon the amount of rentable or usable square feet
contained in the applicable space shall be proportionally, retroactively and
prospectively reduced or increased, as appropriate, to reflect the actual number
of rentable square feet as properly remeasured under the BOMA Standard. If
either party disagrees with the other party's remeasurement and if a dispute
occurs regarding the final accuracy of the measurement of any space in
accordance with the BOMA Standard, upon five (5) business days notice by either
party to the other, the parties shall mutually and reasonably select a third
party architect to finally and conclusively determine the applicable square
footage in accordance with the standards set forth in this Section 1.2. In the
event that a Remeasurement Notice is not timely delivered in accordance with the
terms of this Section 1.2, the rentable and usable square footage of the
applicable space shall not be subject to remeasurement, and the rentable and
usable square footage previously set forth in an amendment to this Lease or
otherwise agreed upon by Landlord and Tenant shall be binding and conclusive.
For purposes of this Section 1.2, the "Load Factors" shall be as follows:
Multi-Tenant Floor
Floor Load Factors Full Floor Load Factors
----- ------------ -----------------------
1 1.18827 N/A
4 1.18827 1.06246
5 1.18827 1.08995
.3 RIGHT OF FIRST OFFER. Landlord hereby grants to the Tenant named in this
Lease (the "Original Tenant") or any assignee permitted or approved pursuant to
the terms of Article 14 of this Lease (a "Permitted Assignee"), an ongoing right
of first offer with respect to all of the space located on the first (1st),
fourth (4th) and fifth (5th) floors of the Building (other than space which is
(i) included in the initial Premises, or (ii) leased by Tenant pursuant to
Section 1.4, below) (the "First Offer Space"). Notwithstanding the foregoing,
such first offer right of Tenant shall commence only following the expiration or
earlier termination of any existing, as of the date of this Lease, lease
(including renewals) of the First Offer Space. Any First Offer Space offered to
Tenant shall be of a commercially reasonable configuration. Any First Offer
Space leased by Tenant shall be subject to remeasurement in accordance with, and
subject to the terms of, Section 1.2 of this Lease. Upon Tenant's lease of First
Offer Space, the number of parking spaces available to Tenant shall be increased
in accordance with the ratio set forth in Section 9 of the Summary, and the
parking charges applicable to such spaces shall be as set forth in Article 28 of
this Lease. Tenant's right of first offer shall be on the terms and conditions
set forth in this Section 1.3.
.3.1 PROCEDURE FOR OFFER. Landlord shall notify Tenant (the "First
Offer Notice") from time to time when the First Offer Space becomes available
for lease to third
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parties. Pursuant to such First Offer Notice, Landlord shall offer to lease to
Tenant the then available First Offer Space. The First Offer Notice shall
describe the space so offered to Tenant and shall set forth the "First Offer
Rent," as that term is defined in Section 1.3.3 below, and the other economic
terms upon which Landlord is willing to lease such space to Tenant.
.3.2 PROCEDURE FOR ACCEPTANCE. If Tenant wishes to exercise Tenant's
right of first offer with respect to the space described in the First Offer
Notice, then within ten (10) business days of delivery of the First Offer Notice
to Tenant, Tenant shall deliver notice (the "Election Notice") to Landlord
indicating Tenant's election to exercise its right of first offer with respect
to all of the space described in the First Offer Notice on the terms contained
in such notice. Notwithstanding the foregoing, in the event that Landlord shall
materially increase or decrease the size of the First Offer Space from that
offered to Tenant, Landlord shall "re-offer" such space to Tenant in accordance
with the terms of this Section 1.3. Tenant agrees that it shall respond to any
such "re-offer" within seven (7) business days, rather than the ten (10)
business days otherwise set forth in this Section 1.3.2. Upon and concurrent
with such exercise, Tenant may, at its option, object to the First Offer Rent,
in which case the parties shall follow the procedure, and such First Offer Rent
shall be determined, as set forth in Section 2.2.4, below. If Tenant does not so
notify Landlord within the ten (10) business day period, then Landlord shall be
free to lease the space described in the First Offer Notice to anyone to whom
Landlord desires on any terms Landlord desires; provided, however, that upon the
expiration or earlier termination of any lease (an "Intervening Lease") entered
into by Landlord following Tenant's failure to lease any applicable First Offer
Space, including any renewal or extension of such lease and regardless of
whether such renewal or extension is pursuant to an express written provision in
such lease or whether such renewal or extension is consummated pursuant to a
lease amendment or a new lease, Landlord shall re-offer such First Offer Space
to Tenant in accordance with the terms of this Section 1.3.
.3.3 FIRST OFFER SPACE RENT. The "Rent," as that term is defined in
Section 4.1, below, payable by Tenant for the First Offer Space (the "First
Offer Rent") shall be equal to the "Market Rent," as that term is defined below,
for such First Offer Space. For purposes of this Lease, the term "Market Rent"
shall mean the rent (including additional rent and considering any "base year"
or "expense stop" applicable thereto), including all escalations, at which
tenants, pursuant to transactions completed during the "Market Rent Review
Period," as that term is defined in this Section 1.3.3, below, are leasing
non-sublease, non-encumbered, non-equity space comparable in size, location and
quality to the First Offer Space, or, in connection with the Option Term, the
Premises, as the case may be, for a "Comparable Term," as that term is defined,
below (the "Comparable Deals"), which comparable space is located in the
Building and the "Comparable Buildings," as that term is defined in this Section
1.3.3, below, giving appropriate consideration to the annual rental rates per
rentable square foot, the standard of measurement by which the rentable square
footage is measured, the ratio of rentable square feet to usable square feet,
and taking into consideration only, and granting only, the following concessions
(collectively, the "Rent Concessions"): (a) rental abatement concessions, if
any, being granted such tenants in connection with such Comparable Deals; (b)
tenant improvements or allowances provided or to be provided for such Comparable
Deals, but deducting therefrom the value of the existing improvements in the
First Offer Space, or Premises, as the case may be, such value to be based upon
the age, quality and layout of the improvements and the extent to which the same
could be utilized by general office users, (c) the condition of the "Base
Building," as that term is defined in Section 8.2, below, as compared to the
condition of the base building provided to tenants in Comparable Deals, and (d)
all other economic concessions, if any, being granted such tenants in connection
with such Comparable Deals; provided, however, that notwithstanding anything to
the contrary herein, no consideration shall be given to (x) the fact that
Landlord is or is not required to pay a real estate brokerage commission in
connection with the applicable term or the fact that the Comparable Deals do or
do not involve the payment of real estate brokerage commissions, and (y) only in
connection with the calculation of the Market Rent for the Option Terms, any
period of rental abatement, if any, granted to tenants in Comparable Deals in
connection with the design, permitting and construction of tenant improvements
in such comparable spaces. In determining the Market Rent, the terms of
Comparable Deals may be equitably adjusted to reflect the square footage leased,
whether the rental payable was determined by use of a discounted fair market
formula, and other factors relevant and appropriate to an analysis and
comparison of the terms of the Comparable Deals. The term "Comparable Term"
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shall refer to the length of the lease term, without consideration of options to
extend such term, for the space in question. In no event shall the Rent payable
by Tenant with respect to the initial Premises, as set forth in this Lease, be
considered in determining the Market Rent. For purposes of this Lease, the term
"Comparable Buildings" shall mean first class office buildings which are
comparable in size and age (based upon the date of completion of construction or
major renovation) to the Building and located on that section of Wilshire
Boulevard which is bordered on the West by San Vicente Boulevard and on the East
by La Brea. The Market Rent Review Period shall be the period which commences
three (3) months prior to the date Tenant exercises the right which triggers the
calculation of Market Rent and concludes as of the date of Landlord's delivery
of the applicable space to Tenant (or in the case of an Option Term, as of the
commencement of the Option Term).
.3.4 CONSTRUCTION IN FIRST OFFER SPACE. Tenant shall take the First
Offer Space in its "as is" condition except as provided in items (b) and (c)
below, provided that (a) in no event shall the foregoing modify the calculation
of the Market Rent pursuant to the terms of Section 1.3.3 of this Lease, (b)
Landlord shall deliver the Base Building portion of such First Offer Space to
Tenant in the condition set forth in Section 1 of the Tenant Work Letter
(provided that the calculation of the Market Rent pursuant to the terms of
Section 1.3.3 of this Lease shall reflect the terms of this item (b)), and (c)
Landlord shall be responsible, at Landlord's sole cost and expense, for the
removal and/or remediation of any asbestos or asbestos containing material from
the Building to the extent required by "Applicable Laws," as that term is
defined in Article 24 of this Lease, in connection with the improvement or
occupancy of the First Offer Space by Tenant. The construction of improvements
in the First Offer Space shall comply with the terms of Article 8 of this Lease.
.3.5 AMENDMENT TO LEASE. If Tenant timely exercises Tenant's right to
lease the First Offer Space as set forth herein, Landlord and Tenant shall
within thirty (30) days thereafter execute an amendment to this Lease for such
First Offer Space upon the terms and conditions as set forth in the First Offer
Notice and this Section 1.3. Tenant shall commence payment of Rent for the First
Offer Space, and the term of the First Offer Space shall commence upon the date
(the "First Offer Commencement Date") which is 120 days (as the same may be
extended as a result of Force Majeure and Landlord caused delays) (the "First
Offer Space Buildout Period") following the date of delivery of the First Offer
Space to Tenant with the work required of Landlord, as set forth in Section
1.3.4(b), above, substantially complete, and shall terminate on the date set
forth in the First Offer Notice. In connection with the foregoing, Landlord and
Tenant hereby acknowledge and agree that the Market Rent for First Offer Space
shall be adjusted to reflect the length of the First Offer Space Buildout Period
as compared to the length of the construction period granted to tenants in
Comparable Deals.
.3.6 TERMINATION OF RIGHT OF FIRST OFFER. The rights contained in this
Section 1.3 shall be personal to the Original Tenant or any Permitted Assignee,
and may only be exercised by the Original Tenant or such Permitted Assignee (and
not any other assignee, sublessee or transferee of the Original Tenant's or such
Permitted Assignee's interest in this Lease) if the Original Tenant or such
Permitted Assignee occupies not less than seventy-five percent (75%) of the
Premises. Tenant shall not have the right to lease First Offer Space, as
provided in this Section 1.3, if, as of the date of the attempted exercise of
any right of first offer by Tenant, or, at Landlord's option, as of the
scheduled date of delivery of such First Offer Space to Tenant, Tenant is in
default under Section 19.1.1 of this Lease or in material nonmonetary default of
this Lease, in either event after the expiration of the applicable notice and
cure period (a "Triggering Default").
.4 Expansion Space. Landlord hereby grants to the Original Tenant or any
Permitted Assignee the right to lease 12,458 rentable (11,726 usable) square
feet of space located on the fourth (4th) floor of the Building (the "Expansion
Space"), on the terms and conditions set forth in this Section 1.4.
.4.1 Method of Exercise. The expansion option contained in this
Section 1.4 shall be exercised only by Tenant's delivery of Notice ("Expansion
Notice") to Landlord at any time on or before June 30, 2000, of Tenant's
irrevocable intent to lease the Expansion Space.
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.4.2 Delivery of the Expansion Space. Provided that Tenant timely
exercises its option to lease the Expansion Space, Landlord shall deliver the
Expansion Space to Tenant on May 1, 2001 (the "Anticipated Expansion Space
Delivery Date"). Tenant hereby acknowledges that the Expansion Space is
currently occupied by another tenant. If Landlord is unable for any reason to
deliver possession of the Expansion Space on the Anticipated Expansion Space
Delivery Date, Landlord shall not be subject to any liability for its failure to
do so.
.4.3 Expansion Space Rent. The rent payable by Tenant for the
Expansion Space (the "Expansion Space Rent") shall be equal to the then-current
Rent (per rentable square foot applicable as of that time) payable, as same may
be increased from time to time pursuant to the terms of this Lease, for the
initial Premises, including the same Base Year, and all other terms and
conditions of this Lease applicable to the Premises, including the Tenant
Improvement Allowance (based upon the number of usable square feet of such
Expansion Space), and all other concessions, shall also apply. The Expansion
Space Rent payable by Tenant for the Expansion Space is not subject to
negotiation or the arbitration procedure set forth in Section 2.2.4.
.4.4 Construction In Expansion Space. Tenant shall take the Expansion
Space in its "as is" condition, subject to the terms of Section 1 of the Tenant
Work Letter. The construction of improvements in the Expansion Space shall be
performed in compliance with the terms of the Tenant Work Letter.
.4.5 Amendment to Lease. If Tenant timely exercises Tenant's right to
lease the Expansion Space as set forth herein, Landlord and Tenant shall within
fifteen (15) days thereafter execute an amendment to this Lease for such
Expansion Space upon the same terms and conditions as the initial Premises,
except as otherwise set forth in this Section 1.4. Tenant agrees that it shall
commence payment of rent for any Expansion Space, and the term of the Expansion
Space shall commence upon the date (the "Expansion Commencement Date") which is
one hundred five (105) days (as the same may be extended as a result of Force
Majeure and Landlord caused delays) (the "Expansion Space Construction Period")
following the date of delivery of the Expansion Space to Tenant in accordance
with the terms of Section 1 of the Tenant Work Letter, and shall terminate on
the "Lease Expiration Date," as that term is defined in Article 2, below.
.4.6 Termination of Expansion Right. The rights contained in this
Section 1.4 may only be exercised by Tenant on or before June 30, 2000. Tenant
shall not have the right to lease the Expansion Space, as provided in this
Section 1.4, if, as of the date of the attempted exercise of the expansion right
by Tenant, or as of the scheduled date of delivery of such Expansion Space to
Tenant, a Triggering Default exists.
ARTICLE 2
INITIAL LEASE TERM; OPTION TERM; TENANT TERMINATION RIGHT
.1 INITIAL LEASE TERM. The terms and provisions of this Lease shall be
effective as of the date of this Lease. The term of this Lease (the "Lease
Term") shall be as set forth in Section 3.1 of the Summary, shall commence on
the date set forth in Section 3.2 of the Summary (the "Lease Commencement
Date"), and shall terminate on the date set forth in Section 3.3 of the Summary
(the "Lease Expiration Date") unless this Lease is sooner terminated as
hereinafter provided. Tenant shall have the right to occupy the Second Floor
Premises and/or the Third Floor Premises subsequent to the delivery of such
space by Landlord pursuant to the terms of Section 1 of the Tenant Work Letter
and prior to the expiration of the applicable Construction Period for such space
for the conduct of Tenant's business, provided that (A) Tenant shall give
Landlord at least ten (10) days' prior notice of any such occupancy of any such
portion of the Premises, (B) a temporary certificate of occupancy, or its
equivalent, shall have been issued by the appropriate governmental authorities
for any such portion of the Premises, and (C) all of the terms and conditions of
the Lease shall apply, other than Tenant's obligation to pay "Base Rent," as
that term is defined in Article 3, below, and "Tenant's Share" of the annual
"Direct Expenses," as those terms are defined in Article 4, below, as though the
Lease Commencement Date had occurred (although the Lease Commencement Date shall
not actually occur until the occurrence of the same pursuant to the terms of the
second sentence of this Article 2.1) upon such occupancy of any such portion of
the Premises by Tenant. For purposes of this Lease, the term "Lease Year" shall
mean each consecutive twelve (12) month period during the Lease Term; provided,
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however, that the first Lease Year shall commence on the Lease Commencement Date
and end on the last day of the twelfth month thereafter and the second and each
succeeding Lease Year shall commence on the first day of the next calendar
month; and further provided that the last Lease Year shall end on the Lease
Expiration Date. Within thirty (30) days following the Lease Commencement Date
(and, if applicable, the commencement of any Option Term), Landlord may deliver
to Tenant a notice in the form as set forth in Exhibit C, attached hereto, as a
confirmation only of the information set forth therein, which Tenant shall
execute and return to Landlord within ten (10) days of receipt thereof, provided
that in the event that such notice is not factually correct, Tenant shall have
the right to make such changes as may be necessary to make the same factually
correct and shall thereafter execute and return the same to Landlord within such
ten (10) day period.
.2 OPTION TERM.
.2.1 OPTION RIGHT. Landlord hereby grants the Original Tenant or any
Permitted Assignee two (2) options to extend the Lease Term for a period of five
(5) years each (each, an "Option Term"), which options shall be exercisable only
by written notice delivered by Tenant to Landlord as provided below, provided
that, as of the date of delivery of the applicable notice, a Triggering Default
does not exist. Upon the proper exercise of such option to extend, and, at
Landlord's option, provided that, as of the end of the then Lease Term, a
Triggering Default does not exist, the Lease Term, as it applies to the
Premises, shall be extended for a period of five (5) years. The rights contained
in this Section 2.2 shall be personal to the Original Tenant or any Permitted
Assignee and may only be exercised by the Original Tenant or such Permitted
Assignee (and not any other assignee, sublessee or transferee of the Original
Tenant's or such Permitted Assignee's interest in this Lease). Landlord and
Tenant hereby knowledge and agree that the first Option Term shall be applicable
following the Lease Term set forth in Section 3.1 of the Summary.
.2.2 OPTION RENT. The Rent payable by Tenant during each Option Term
(the "Option Rent") shall be equal to ninety-five percent (95%) of the then
applicable Market Rent for the Premises; provided that if the Original Tenant or
any Permitted Assignee occupies less than fifty percent (50%) of the Premises,
then the Option Rent shall be equal to one hundred percent (100%) of the then
applicable Market Rent for the Premises.
.2.3 EXERCISE OF OPTIONS. The options contained in this Section 2.2
shall be exercised by Tenant, if at all, and only in the following manner: (i)
Tenant shall deliver written notice (the "Interest Notice") to Landlord not more
than twenty-one (21) months nor less than fifteen (15) months prior to the
expiration of the then Lease Term, stating that Tenant is interested in
exercising its option; (ii) Landlord, after receipt of Tenant's notice, shall
deliver notice (the "Option Rent Notice") to Tenant not less than fourteen (14)
months prior to the expiration of the then Lease Term, setting forth the Option
Rent; and (iii) if Tenant wishes to exercise such option, Tenant shall, on or
before the date occurring twelve (12) months prior to the expiration of the then
Lease Term, exercise the option by delivering written notice (the "Option
Exercise Notice") thereof to Landlord, and upon, and concurrent with, such
exercise, Tenant may, at its option, object to the Option Rent contained in the
Option Rent Notice, in which case the parties shall follow the procedure, and
the Option Rent shall be determined, as set forth in Section 2.2.4 below.
Notwithstanding the foregoing, in the event that Tenant shall fail to deliver
the Interest Notice, Tenant shall nonetheless have the right to deliver the
Option Exercise Notice within the time period set forth above, in which case the
parties shall follow the procedure, and the Option Rent shall be determined, as
set forth in Section 2.2.4, below.
.2.4 DETERMINATION OF MARKET RENT. In the event Tenant timely and
appropriately objects to the First Offer Rent or Option Rent, as the case may
be, Landlord and Tenant shall attempt to agree upon the Market Rent using their
best good-faith efforts. If Landlord and Tenant fail to reach agreement within
ten (10) days following Tenant's objection to the First Offer Rent or Option
Rent, as the case may be (the "Outside Agreement Date"), then each party shall
make a separate determination of the Market Rent, as the case may be, within
five (5) days, and such determinations shall be submitted to arbitration in
accordance with Sections 2.2.4.1 through 2.2.4.7 below.
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.2.4.1 Landlord and Tenant shall each appoint one arbitrator who
shall by profession be a real estate broker who shall have been active over the
five (5) year period ending on the date of such appointment in the leasing (or
appraisal, as the case may be) of commercial office buildings in the Miracle
Mile and East Beverly Hills area of Los Angeles, California. The determination
of the arbitrators shall be limited solely to the issue area of whether
Landlord's or Tenant's submitted Market Rent, is the closest to the actual
Market Rent as determined by the arbitrators, taking into account the
requirements of Section 1.3.3 of this Lease. Each such arbitrator shall be
appointed within fifteen (15) days after the applicable Outside Agreement Date.
.2.4.2 The two arbitrators so appointed shall within ten (10)
days of the date of the appointment of the last appointed arbitrator agree upon
and appoint a third arbitrator who shall be qualified under the same criteria
set forth hereinabove for qualification of the initial two arbitrators.
.2.4.3 The three arbitrators shall within thirty (30) days of the
appointment of the third arbitrator reach a decision as to whether the parties
shall use Landlord's or Tenant's submitted Market Rent, and shall notify
Landlord and Tenant thereof.
.2.4.4 The decision of the majority of the three arbitrators
shall be binding upon Landlord and Tenant.
.2.4.5 If either Landlord or Tenant fails to appoint an
arbitrator within fifteen (15) days after the applicable Outside Agreement Date,
the arbitrator appointed by one of them shall reach a decision, notify Landlord
and Tenant thereof, and such arbitrator's decision shall be binding upon
Landlord and Tenant.
.2.4.6 If the two arbitrators fail to agree upon and appoint a
third arbitrator, or both parties fail to appoint an arbitrator, then the
appointment of the third arbitrator or any arbitrator shall be dismissed and the
matter to be decided shall be forthwith submitted to binding, final,
non-applicable arbitration before a J.A.M.S. arbitrator mutually agreed upon by
Landlord and Tenant. If Landlord and Tenant cannot agree on the arbitrator, the
parties will so inform J.A.M.S., who will then be authorized to select a
J.A.M.S. judge to arbitrate the matter. Each party shall have the right of
discovery pursuant to the California Code of Civil Procedure and evidentiary
hearings shall be governed by the California Evidence Code, but subject to the
instruction set forth in this Section 2.2.4.
.2.4.7 The cost of arbitration shall be paid by Landlord and
Tenant equally.
.3 TENANT TERMINATION RIGHT. Notwithstanding anything to the contrary
contained in this Lease, Tenant shall have the option to terminate and cancel
this Lease effective as of the date (the "Termination Date") which is six (6)
months after Tenant's delivery of written notice to Landlord (the "Termination
Notice"), provided that such Termination Date shall be on or after the first day
of the eighty-fourth (84th) month of the Lease Term. In connection with, and as
a condition precedent to, such termination, Tenant shall deliver to Landlord a
fee (the "Termination Fee"). Fifty percent (50%) of the Termination Fee shall be
paid to Landlord by Tenant concurrently with Tenant's delivery of the
Termination Notice and fifty percent (50%) of the Termination shall be paid to
Landlord by Tenant on or before the Termination Date. The Termination Fee shall
be equal to the sum of (A) six (6) months of Base Rent payable pursuant to the
terms of this Lease, in the amount payable as of the Termination Date, (B) the
product of (1) a fraction, with a numerator equal to the number of unexpired
days in the initial Lease Term as of the Termination Date, and a denominator
equal to the number 3,650, and (2) the sum of the dollar value of (i) the total,
aggregate amount of any moving allowances, tenant improvement allowances in
connection with Tenant's occupancy of the Premises, and (ii) any brokerage
commissions paid by Landlord with respect to the Premises, and (C) the product
of (1) a fraction, with a numerator equal to the number of unexpired days in the
initial Lease Term as of the Termination Date, and a denominator equal to the
total number of days in the term of any lease by Tenant of any First Offer
Space, and (2) the sum of the dollar value of (i) the total, aggregate amount of
any moving allowances, tenant improvement allowances in connection with Tenant's
occupancy of any First Offer Space, and (ii) any brokerage commissions paid by
Landlord with
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respect to any First Offer Space. Subject to Landlord's timely receipt of the
Termination Notice and Termination Fee, this Lease as it pertains to the entire
Premises shall automatically terminate and be of no further force or effect,
Landlord shall return the "L-C," as that term is defined in Section 21.1, below,
to Tenant undrawn and Landlord and Tenant shall be relieved of their respective
obligations under this Lease, as of the Termination Date, except with respect to
those obligations set forth in this Lease which specifically survive the
expiration or earlier termination of this Lease, including, without limitation,
the payment by Tenant of all amounts owed by Tenant under this Lease.
ARTICLE 3
BASE RENT
Tenant shall pay, without prior notice or demand, to Landlord or Landlord's
agent at the management office of the Project, or, at Landlord's option, at such
other place as Landlord may from time to time designate in writing, by a check
for currency which, at the time of payment, is legal tender for private or
public debts in the United States of America, base rent ("Base Rent") as set
forth in Section 4 of the Summary, payable in equal monthly installments as set
forth in Section 4 of the Summary in advance on or before the first day of each
and every calendar month during the Lease Term, without any setoff or deduction
except as otherwise provided in this Lease. The Base Rent for the first full
month of the Lease Term which occurs after the expiration of any free rent
period shall be paid at the time of Tenant's execution of this Lease. If any
Rent payment date (including the Lease Commencement Date) falls on a day of the
month other than the first day of such month or if any payment of Rent is for a
period which is shorter than one month, the Rent for any fractional month shall
accrue on a daily basis for the period from the date such payment is due to the
end of such calendar month or to the end of the Lease Term at a rate per day
which is equal to 1/365 of the applicable annual Rent. All other payments or
adjustments required to be made under the terms of this Lease that require
proration on a time basis shall be prorated on the same basis.
ARTICLE 4
ADDITIONAL RENT
.1 GENERAL TERMS. In addition to paying the Base Rent specified in Article
3 of this Lease, Tenant shall pay Tenant's Share of the annual Direct Expenses
which are in excess of the amount of Direct Expenses applicable to the "Base
Year," as that term is defined in Section 4.2.1, below; provided, however, that
in no event shall any decrease in Direct Expenses for any Expense Year below
Direct Expenses for the Base Year entitle Tenant to any decrease in Base Rent or
any credit against sums due under this Lease. Such payments by Tenant, together
with any and all other amounts payable by Tenant to Landlord pursuant to the
terms of this Lease, are hereinafter collectively referred to as the "Additional
Rent", and the Base Rent and the Additional Rent are herein collectively
referred to as "Rent." All amounts due under this Article 4 as Additional Rent
shall be payable for the same periods and in the same manner as the Base Rent.
Without limitation on other obligations of Tenant which survive the expiration
of the Lease Term, the obligations of Tenant to pay the Additional Rent provided
for in this Article 4 shall survive the expiration of the Lease Term but shall
be payable only for periods included within the Lease Term. Notwithstanding the
foregoing, other than Tax Expenses and costs incurred for utilities (the
"Excluded Expenses"), Tenant shall not be responsible for Tenant's Share of any
Direct Expenses which are first billed to Tenant more than two (2) calendar
years after the end of the Expense Year to which such Direct Expenses relate,
provided that Tenant shall be responsible for Excluded Expenses first billed to
Tenant more than two (2) calendar years after the end of the Expense Year to
which such Excluded Expenses relate only to the extent that Landlord becomes
aware of such increased Excluded Expenses following such two (2) year period due
to governmental revision, supplementation or other governmental action which
results in the adjustment of the Excluded Expenses. Notwithstanding anything to
the contrary set forth in this Lease, Tenant shall not be obligated to pay any
Direct Expenses attributable to the first twelve (12) months of the initial
Lease Term.
.2 DEFINITIONS OF KEY TERMS RELATING TO ADDITIONAL RENT. As used in this
Article 4, the following terms shall have the meanings hereinafter set forth:
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.2.1 "Base Year" shall mean the period set forth in Section 5 of the
Summary.
.2.2 "Direct Expenses" shall mean "Operating Expenses" and "Tax
Expenses."
.2.3 "Expense Year" shall mean each calendar year in which any portion
of the Lease Term falls, through and including the calendar year in which the
Lease Term expires, provided that Landlord, upon notice to Tenant, may change
the Expense Year from time to time to any other twelve (12) consecutive month
period, and, in the event of any such change, Tenant's Share of Direct Expenses
shall be equitably adjusted for any Expense Year involved in any such change.
.2.4 "Operating Expenses" shall mean all expenses, costs and amounts
of every kind and nature which Landlord pays or accrues during any Expense Year
because of or in connection with the ownership, management, maintenance,
security, repair, replacement, restoration or operation of the Project, or any
portion thereof. Without limiting the generality of the foregoing, Operating
Expenses shall specifically include any and all of the following: (i) the cost
of supplying all utilities, the cost of operating, repairing, and maintaining,
the utility, mechanical, sanitary, storm drainage, and elevator systems, and the
cost of maintenance and service contracts in connection therewith; (ii) the cost
of licenses, certificates, permits and inspections and the cost of contesting
any governmental enactments which may affect Operating Expenses, and the costs
incurred in connection with any governmentally mandated transportation system
management program or similar program; (iii) the cost of all insurance carried
by Landlord in connection with the Project; (iv) the cost of landscaping,
relamping with similar items, and all supplies, tools, equipment and materials
used in the operation, repair and maintenance of the Project, or any portion
thereof, or any area adjacent to the Project in connection with which Landlord
is required to perform such services; (v) costs incurred in connection with the
parking areas servicing the Building; (vi) reasonable fees and other costs,
including management fees, consulting fees, legal fees and accounting fees, of
all contractors and consultants in connection with the management, operation,
maintenance and repair of the Project; (vii) payments under any equipment rental
agreements and the fair rental value of any management office space; (viii)
reasonable wages, salaries and other compensation and benefits, including taxes
levied thereon, of all persons engaged in the operation, maintenance and
security of the Project; (ix) reasonable costs under any instrument currently in
force pertaining to the sharing of costs by the Project; (x) operation, repair
and maintenance of all systems and equipment and components thereof of the
Building; (xi) the reasonable cost of janitorial, alarm, security and other
services, reasonable replacement of wall and floor coverings, ceiling tiles and
fixtures in common areas with similar items, maintenance and replacement of
curbs and walkways, repair to roofs; (xii) amortization (including interest on
the unamortized cost) of the cost of acquiring or the rental expense of personal
property used in the maintenance, operation and repair of the Project, or any
portion thereof; (xiii) the cost of capital improvements or other costs incurred
in connection with the Project (A) which are reasonably intended to effect
economies operation or maintenance of the Project, or any portion thereof, but
only to the extent of reasonably intended cost savings, or (B) that are required
under any governmental law or regulation enacted after the Lease Commencement
Date; provided, however, that any capital expenditure shall be amortized with
interest over its useful life as reasonably determined; (xiv) costs, fees,
charges or assessments imposed by, or resulting from any mandate currently in
force imposed on Landlord by, any federal, state or local government for fire
and police protection, trash removal, community services, or other services
which do not constitute "Tax Expenses" as that term is defined in Section 4.2.5,
below; and (xv) payments under any easement, license, operating agreement,
declaration, restrictive covenant, or instrument currently in force pertaining
to the sharing of costs by the Building.
.2.4.1 OPERATING EXPENSE EXCLUSIONS. Notwithstanding anything to
the contrary contained in the Lease, "Operating Expenses" shall not include the
following:
A. Landlord's brokerage fees or commissions, finder's fees, space
planning costs, attorneys' fees and other costs incurred by Landlord in leasing
or attempting to lease space or operate concessions in the Project, including
design, construction and construction management costs relating to tenant
improvements of other tenants;
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B. costs of design, entitlement, site preparation, planning,
marketing, construction, and/ or acquisition of new buildings, additional land
or any expansion of or major physical change to the Building or the Project;
C. except as set forth in Section 4.2.4 (xii) and (xiii), costs of
items considered capital repairs, replacements, improvements and equipment, or
amortization or depreciation under generally accepted accounting principles
consistently applied or otherwise except for minor capital improvements, tools
or expenditures to the extent each such improvement or acquisition costs less
than Three Thousand Dollars ($3,000) and the total cost of same are not in
excess of Ten Thousand Dollars ($10,000) in any twelve (12) month period;
D. except as set forth in Section 4.2.4 (xii) and (xiii) and except to
the extent reasonably required in connection with the operation, maintenance, or
repair of the Project, costs for equipment or machinery incurred by Landlord
after the Lease Commencement Date (unless same are reasonably anticipated to
effectuate an annual reduction in Operating Expenses greater than the annual
expense thereof to be included in Operating Expenses pursuant to the other terms
and provisions hereof);
E. except as set forth in Section 4.2.4 (xii) and (xiii), interest,
principal, points and fees on debt or amortization on any mortgage, deed of
trust or other debt secured, or unsecured, by the Project;
F. repairs or replacements to any utility systems which are dedicated
to the use of a single other tenant or concession operator;
G. amounts paid for goods or services to any persons or entities
related to Landlord in excess of the prevailing cost of such goods or services
from competitive unrelated sources;
H. any fee to or charge by Landlord (or any person and/or entity
related to Landlord) for management, supervision, employee costs, profit and/or
general overhead, and any bookkeeping and accounting costs or expenses, except
to the extent (i) incurred in connection with Landlord's in-house accountant, or
(ii) included in the management fee permitted hereunder;
I. any cost which is the responsibility of any utility company,
governmental agency, or other third party to the extent such cost is reimbursed
to Landlord from such company, agency or other third party, or to the extent
such cost is reimbursable but Landlord has failed to seek such reimbursement
with due diligence;
J. reserves for future expenses beyond current year anticipated
expenses;
K. any costs or expenses for which Landlord is paid or reimbursed by
insurance or a past or present tenant of the Project to the extent Landlord has
failed to seek payment or reimbursement with due diligence;
L. all interest and penalties incurred as a result of Landlord's
failure to pay bills as the same become due;
M. charitable or political contributions;
N. accountants' fees, arbitration fees, and other costs and expenses
incurred in connection with any audits conducted by Landlord or any past or
present tenant or any existing or prospective leasing, lease renewal, lease
termination, lease modification or other negotiations or disputes with employees
or contractors, present or prospective tenants or other occupants of the
Project, or their assignees or sublessees, or lenders or ground lessors;
O. costs associated with the operation of the business of the entity
which constitutes Landlord as the same are distinguished from the costs of
operation of the Project, including accounting and legal matters, costs of
selling, syndicating, financing, mortgaging or hypothecating any of Landlord's
interest in the Project or the entity constituting Landlord, and costs incurred
by Landlord, in whole or in part, in connection with or as a result of
Landlord's ownership, operation or management of any properties other than the
Project;
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P. expenses in connection with services, repairs or other benefits for
which Tenant is charged directly but which are provided without charge to
another tenant or occupant of the Project, and costs for which tenants contract
directly with the applicable service provider;
Q. costs incurred to comply with laws relating to the removal of
hazardous material (as defined under applicable law as of the Lease Commencement
Date) which was in existence in the Building or on the Project prior to the
Lease Commencement Date; and costs incurred to remove, remedy, contain, or treat
hazardous material (as defined by then applicable law), which hazardous material
is brought into the Building or onto the Project after the date hereof by
Landlord or any other tenant of the Project;
R. advertising and promotional expenditures, costs of installing,
lighting or maintaining signs in or on the Project identifying the owner,
manager, leasing agent or tenants of the Project;
S. any compensation paid or costs incurred in connection with
commercial concessions operated by Landlord or third party operators;
T. rent for space occupied as a Project management office to the
extent such space is larger than 2,000 rentable square feet; to the extent such
management office is used for other purposes, including, without limitation,
leasing activities, the rent and other charges associated with such office shall
be prorated in an equitable manner;
U. costs arising from the gross negligence or willful misconduct of
Landlord's agents or tenants of the Project, and costs incurred due to the
violation by Landlord of any law or the terms and conditions of any lease of
space in the Project;
V. costs incurred for the repair of damage or destruction or eminent
domain/taking governed by the destruction and condemnation provisions of the
Lease, except as provided in item II, below;
W. cost of meals, beverages and bottled water;
X. automobile or travel expense for Landlord or its agents;
Y. any bad debt loss, rent loss or reserves for bad debts or rent
loss;
Z. costs for acquisition and refurbishment (as opposed to ordinary
repair) of sculpture, murals, paintings or other objects of art;
AA. except as specifically permitted in Sections 4.2.4 (ii), (iv),
(ix) and (xv), fees and payments to obtain or arising under any REA or any
recorded easements, development agreements, participation agreements, covenants,
conditions or restricting conditional use permits, traffic management programs,
mitigation fees, conservation fees, housing replacement or linkage fees, or
similar fees;
BB. rentals and other related expenses incurred in leasing HVAC
systems, elevators or other equipment ordinarily considered to be Capital Items,
except for (1) expenses in connection with making repairs on or keeping Building
Systems in operation while repairs are being made and (2) costs of equipment not
affixed to the Building which is used in providing janitorial or similar
services;
CC. The cost of any electric power provided to the rentable area of
the Building (i) in excess of the amount provided to Tenant without charge to
the extent that Landlord actually charges Tenant directly for such overstandard
use, and (ii) which any tenant directly contracts with the local public service
company or for which any tenant is separately or submetered and pays Landlord
directly;
DD. Any management fees whether paid to Landlord or a third party, in
excess of those management fees which are normally and customarily charged by
landlords of comparable buildings, or otherwise in excess of an amount (the
"Maximum Amount") equal to the product of
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(A) three percent (3%) and (B) the amount of gross revenues for the Building,
from office tenants;
EE. Costs of any "tap fees" or any sewer or water connection fees for
the benefit of any particular tenant in the Building;
FF. Any entertainment, dining or travel expenses for any purpose;
GG. Any "finders fees", brokerage commissions, job placement costs or
job advertising cost;
HH. The cost of any training or incentive programs, other than for
tenant life safety information services;
II. In no event shall Operating Expenses include insurance deductible
amounts in excess of Two Hundred Fifty Thousand and No/100 Dollars ($250,000.00)
in any Expense Year;
JJ. Tax Expenses;
KK. Costs incurred in removing and storing the property of former
tenants or occupants of the Building;
LL. The cost of any work or services performed for any tenant
(including Tenant) at such tenant's cost (unless such cost is an allowable part
of Operating Expenses);
MM. "Takeover" expenses, including, but not limited to, the expenses
incurred by Landlord with respect to space located in another building of any
kind or nature in connection with the leasing of space in the Project;
NN. Costs of renovating the Building or preparing the Base Building
for Tenant's occupancy;
OO. Cost of work or replacements covered by warranties;
PP. Costs, expenses and charges incurred during the Lease Term which
are of the nature of a cost, expense or charge incurred during the Base Year but
not included therein as an Operating Expense (unless the cost, expense or charge
is imputed to have been included in Operating Expenses for the Base Year so that
the Operating Expenses for the Base Year are appropriately adjusted);
QQ. Costs of installing, maintaining and operating any specialty
service operated by Landlord including without limitation, any luncheon club or
athletic facility, or the repair thereof;
RR. Costs resulting from the failure of the Project, as of the Lease
Commencement Date, to comply with laws applicable to the Project as of the Lease
Commencement Date; and
SS. Costs to repair the tenant improvements within space occupied by
any other tenant of the Building to the extent Tenant is charged directly for
comparable repairs to the tenant improvements within the Premises.
The foregoing schedule of exclusions from Operating Expenses is intended to
function solely as an exclusionary listing and shall not be interpreted to
permit or authorize any cost or expense which would not otherwise be considered
to be an Operating Expense under the other terms and conditions of this Lease.
In no event shall Landlord bill tenants of the Project in the aggregate for more
than 100% of the cost actually incurred by Landlord for any item of Operating
Expense. Landlord shall not include in Operating Expenses for any Expense Year
after the Base Year any new category of Operating Expenses relating to (i)
earthquake insurance, (ii) parking garage operation expenses, or (iii) services
provided by Landlord, unless such new category is (a) required to comply with
applicable governmental law or regulation, (b) reasonably necessary to maintain
the safe occupancy and use of the Premises, Building and/or Project by Tenant
and the other tenants of the Project, in which event such new category shall be
included in the Base Year,
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such Expense Year and each Expense Year thereafter, or (c) reasonably approved
by Tenant. Operating Expenses shall be calculated in a manner consistent with
sound real estate accounting principles, consistently applied.
If Landlord is not furnishing any particular work or service (the cost of
which, if performed by Landlord, would be included in Operating Expenses) to a
tenant who has undertaken to perform such work or service in lieu of the
performance thereof by Landlord, Operating Expenses shall be deemed to be
increased by an amount equal to the additional Operating Expenses which would
reasonably have been incurred during such period by Landlord if it had at its
own expense furnished such work or service to such tenant. If Landlord does not
carry earthquake insurance for the Building during the Base Year but
subsequently obtains earthquake insurance for the Building during the Lease
Term, then from and after the date upon which Landlord obtains such earthquake
insurance and continuing throughout the period during which Landlord maintains
such insurance, Operating Expenses for the Base Year shall be deemed to be
increased by the amount of the premium Landlord would have incurred had Landlord
maintained such insurance for the same period of time during the Base Year as
such insurance is maintained by Landlord during such subsequent Expense Year. If
the Project is not at least one hundred percent (100%) occupied during all or a
portion of the Base Year or any Expense Year, Landlord shall elect to make an
appropriate adjustment to the components of Operating Expenses for such year to
determine the amount of Operating Expenses that would have been incurred had the
Project been one hundred percent (100%) occupied; and the amount so determined
shall be deemed to have been the amount of Operating Expenses for such year. In
no event shall Landlord's grossed-up calculations for any particular expense
result in a determination of such particular expense which, if applied to all
tenants of the Building, would result in more than 100% of such expense being
reimbursable to Landlord by all tenants of the Building, and if such
calculations result in an excess, Tenant's Share of the amount in excess of 100%
shall be returned to Tenant. All exclusions to Operating Expenses, as set forth
above, shall be deducted prior to applying a gross-up methodology to any item of
Operating Expenses. Only those items, or components of items, which are variable
(i.e., costs which vary as a result of changes in occupancy of the Building such
as cleaning, repair, maintenance, HVAC operation, etc.), as opposed to fixed
costs (i.e., costs which do not vary as a result of changes in occupancy of the
Building such as annual contracted inspections of systems of equipment, fixed
security and insurance costs, etc.) shall be grossed-up. In the gross-up
treatment, reasonable projections shall be used and sound real estate accounting
principles, consistently applied, utilized.
.2.5 TAXES.
.2.5.1 "Tax Expenses" shall mean all federal, state, county, or
local governmental or municipal taxes, fees, charges or other impositions of
every kind and nature, whether general, special, ordinary or extraordinary,
(including, without limitation, real estate taxes, general and special
assessments, transit taxes, leasehold taxes or taxes based upon the receipt of
rent, including gross receipts or sales taxes applicable to the receipt of rent,
unless required to be paid by Tenant, personal property taxes imposed upon the
fixtures, machinery, equipment, apparatus, systems and equipment, appurtenances,
furniture and other personal property used in connection with the Project, or
any portion thereof), which shall be paid or accrued during any Expense Year
(without regard to any different fiscal year used by such governmental or
municipal authority) because of or in connection with the ownership, leasing and
operation of the Project, or any portion thereof. Tax Expenses for the Base Year
shall be increased to equal the Taxes Expenses, including ad valorem taxes and
gross receipts taxes, which would be payable if the Building were fully occupied
by tenants paying rental comparable to Tenant's rent, built out at a level
comparable to Tenant's improvements, and the Project fully assessed as a result
of the foregoing.
.2.5.2 Tax Expenses shall include, without limitation: (i) Any
tax on the rent, right to rent or other income from the Project, or any portion
thereof, or as against the business of leasing the Project, or any portion
thereof; (ii) Any assessment, tax, fee, levy or charge in addition to, or in
substitution, partially or totally, of any assessment, tax, fee, levy or charge
previously included within the definition of real property tax, it being
acknowledged by Tenant and Landlord that Proposition 13 was adopted by the
voters of the State of California in the June 1978 election ("Proposition 13")
and that assessments, taxes, fees, levies and charges may be imposed by
governmental agencies for such services as fire protection, street, sidewalk
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and road maintenance, refuse removal and for other governmental services
formerly provided without charge to property owners or occupants, and, in
further recognition of the decrease in the level and quality of governmental
services and amenities as a result of Proposition 13, Tax Expenses shall also
include any governmental or private assessments or the Project's contribution
towards a governmental or private cost-sharing agreement for the purpose of
augmenting or improving the quality of services and amenities normally provided
by governmental agencies; (iii) Any assessment, tax, fee, levy, or charge
allocable to or measured by the area of the Premises or the Rent payable
hereunder, including, without limitation, any gross rents or gross income tax or
excise tax with respect to the receipt of such rent, or upon or with respect to
the possession, leasing, operating, management, maintenance, alteration, repair,
use or occupancy by Tenant of the Premises, or any portion thereof; and (iv) Any
assessment, tax, fee, levy or charge, upon this transaction or any document to
which Tenant is a party, creating or transferring an interest or an estate in
the Premises.
.2.5.3 Any reasonable costs and expenses (including, without
limitation, reasonable attorneys' fees) incurred in attempting to protest,
reduce or minimize Tax Expenses shall be included in Tax Expenses in the Expense
Year such expenses are paid. Tax refunds shall be credited against Tax Expenses
and refunded to Tenant regardless of when received, based on the Expense Year to
which the refund is applicable, provided that in no event shall the amount to be
refunded to Tenant for any such Expense Year exceed the total amount paid by
Tenant as Additional Rent under this Article 4 for such Expense Year. If Tax
Expenses for any period during the Lease Term or any extension thereof are
increased after payment thereof for any reason, including, without limitation,
error or reassessment by applicable governmental or municipal authorities,
Tenant shall pay Landlord within thirty (30) days following demand by Landlord,
Tenant's Share of any such increased Tax Expenses included by Landlord as
Building Tax Expenses pursuant to the terms of this Lease. Notwithstanding
anything to the contrary contained in this Section 4.2.5 (except as set forth in
Section 4.2.5.1, above), there shall be excluded from Tax Expenses (i) all
excess profits taxes, franchise taxes, gift taxes, capital stock taxes,
inheritance and succession taxes, estate taxes, federal and state income taxes,
and other taxes to the extent applicable to Landlord's general or net income (as
opposed to rents, receipts or income attributable to operations at the Project),
(ii) any items included as Operating Expenses, (iii) any items paid by Tenant or
other tenants under Section 4.5 of this Lease, and (iv) Operating Expense
exclusions E, J, K, L and AA.
.2.5.4 The amount of Tax Expenses for the Base Year attributable
to the valuation of the Project, inclusive of tenant improvements, shall be
known as the base taxes.
.2.6 "Tenant's Share" shall mean the percentage set forth in Section 6
of the Summary.
.3 ALLOCATION OF DIRECT EXPENSES. Landlord shall have the right, from time
to time, to equitably allocate some or all of the Direct Expenses for the
Project among different portions or occupants of the Project (the "Cost Pools"),
in a reasonable and equitable manner. Such Cost Pools may include, but shall not
be limited to, the office space tenants of a building of the Project or of the
Project, and the retail space tenants of a building of the Project or of the
Project. The Direct Expenses within each such Cost Pool shall be allocated and
charged to the tenants within such Cost Pool in a reasonable and equitable
manner.
.4 CALCULATION AND PAYMENT OF ADDITIONAL RENT. If for any Expense Year
ending or commencing within the Lease Term, Tenant's Share of Direct Expenses
for such Expense Year exceeds Tenant's Share of Direct Expenses applicable to
the Base Year, then Tenant shall pay to Landlord, in the manner set forth in
Section 4.4.1, below, and as Additional Rent, an amount equal to the excess (the
"Excess").
.4.1 STATEMENT OF ACTUAL DIRECT EXPENSES AND PAYMENT BY TENANT.
Landlord shall give to Tenant within 180 days following the end of each Expense
Year, a statement (the "Statement") which shall state the Direct Expenses
incurred or accrued for such preceding Expense Year, and which shall indicate
the amount of the Excess. Each Statement shall be itemized with reasonable
detail as to general categories and shall specifically note the amount of each
such category. Upon receipt of the Statement for each Expense Year commencing or
ending during the Lease Term, if an Excess is present, Tenant shall pay, with
its next installment
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of Base Rent due or within 30 days following Tenant's receipt of the Statement,
whichever is later, the full amount of the Excess for such Expense Year, less
the amounts, if any, paid during such Expense Year as "Estimated Excess," as
that term is defined in Section 4.4.2, below. If the amount of the Excess is
less than the amount paid by Tenant as Estimated Excess during the applicable
Expense Year, Tenant shall receive a credit for such overpayment against the
Rent next due under this Lease, provided that if the Lease Term has expired,
Landlord shall pay the amount of Tenant's overpayment to Tenant. The failure of
Landlord to timely furnish the Statement for any Expense Year shall not
prejudice Landlord or Tenant from enforcing its rights under this Article 4.
Even though the Lease Term has expired and Tenant has vacated the Premises, when
the final determination is made of Tenant's Share of Direct Expenses for the
Expense Year in which this Lease terminates, if an Excess if present, Tenant
within thirty (30) days following demand by Landlord shall pay to Landlord such
amount. The provisions of this Section 4.4.1 shall survive the expiration or
earlier termination of the Lease Term. Notwithstanding anything in this Section
4.4.1 to the contrary, except in connection with the Excluded Expenses, Tenant
shall not be responsible for Tenant's Share of any Direct Expenses which are
first billed to Tenant more than two (2) calendar years after the end of the
Expense Year to which such Direct Expenses relate, provided that Tenant shall be
responsible for Excluded Expenses first billed to Tenant more than two (2)
calendar years after the end of the Expense Year to which such Excluded Expenses
relate only to the extent that Landlord becomes aware of such increased Excluded
Expenses following such two (2) year period due to governmental revision,
supplementation or other governmental action which results in the adjustment of
the Excluded Expenses.
.4.2 STATEMENT OF ESTIMATED DIRECT EXPENSES. In addition, Landlord
shall endeavor to give Tenant within 180 days following the commencement of each
Expense Year a yearly expense estimate statement (the "Estimate Statement")
which shall set forth Landlord's reasonable estimate (the "Estimate") of what
the total amount of Direct Expenses for the then-current Expense Year shall be
and the estimated excess (the "Estimated Excess") as calculated by comparing the
Direct Expenses for such Expense Year, which shall be based upon the Estimate,
to the amount of Direct Expenses for the Base Year. The failure of Landlord to
timely furnish the Estimate Statement for any Expense Year shall not preclude
Landlord from enforcing its rights to collect any Estimated Excess under this
Article 4, nor shall Landlord be prohibited from revising any Estimate Statement
or Estimated Excess theretofore delivered to the extent necessary. Thereafter,
Tenant shall pay, with its next installment of Base Rent due or within 30 days
following Tenant's receipt of the Estimate Statement, whichever is later, a
fraction of the Estimated Excess for the then-current Expense Year (reduced by
any amounts paid pursuant to the next to last sentence of this Section 4.4.2).
Such fraction shall have as its numerator the number of months which have
elapsed in such current Expense Year, including the month of such payment, and
twelve (12) as its denominator. Until a new Estimate Statement is furnished
(which Landlord shall have the right to deliver to Tenant at any time), Tenant
shall pay monthly, with the monthly Base Rent installments, an amount equal to
one-twelfth (1/12) of the total Estimated Excess set forth in the previous
Estimate Statement delivered by Landlord to Tenant.
.5 TAXES AND OTHER CHARGES FOR WHICH TENANT IS DIRECTLY RESPONSIBLE.
.5.1 Tenant shall be liable for and shall pay ten (10) days before
delinquency, taxes levied against Tenant's equipment, furniture, fixtures and
any other personal property located in or about the Premises. If any such taxes
on Tenant's equipment, furniture, fixtures and any other personal property are
levied against Landlord or Landlord's property or if the assessed value of
Landlord's property is increased by the inclusion therein of a value placed upon
such equipment, furniture, fixtures or any other personal property and if
Landlord pays the taxes based upon such increased assessment, which Landlord
shall have the right to do regardless of the validity thereof but only under
proper protest if requested by Tenant, Tenant shall upon demand repay to
Landlord the taxes so levied against Landlord or the proportion of such taxes
resulting from such increase in the assessment, as the case may be.
.5.2 If the tenant improvements in the Premises, whether installed
and/or paid for by Landlord or Tenant and whether or not affixed to the real
property so as to become a part thereof, are assessed for real property tax
purposes at a valuation in excess the highest value for tenant improvements
which Landlord includes in Tax Expenses without direct charge to the applicable
tenant of the Building, then the Tax Expenses levied against Landlord or the
property
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by reason of such excess assessed valuation shall be deemed to be taxes levied
against personal property of Tenant and shall be governed by the provisions of
Section 4.5.1, above.
.5.3 Notwithstanding any contrary provision herein, Tenant shall pay
prior to delinquency any (i) rent tax or sales tax, service tax, transfer tax or
value added tax, or any other applicable tax on the rent or services herein or
otherwise respecting this Lease; or (ii) taxes assessed upon this transaction or
any document to which Tenant is a party creating or transferring an interest or
an estate in the Premises.
.6 TENANT'S PAYMENT OF CERTAIN TAX EXPENSES. Notwithstanding anything to
the contrary contained in this Lease, in the event that, at any time during the
initial Lease Term, any sale, or change in ownership of the Project at arm's
length is consummated, and as a result thereof, and to the extent that in
connection therewith, the Project is reassessed (the "Reassessment") for real
estate tax purposes by the appropriate governmental authority pursuant to the
terms of Proposition 13, then the terms of this Section 4.6 shall apply to the
first such Reassessment of the Project.
.6.1 THE TAX INCREASE. For purposes of this Article 4, the term "Tax
Increase" shall mean that portion of the Tax Expenses, as calculated immediately
following the Reassessment, which is attributable solely to the Reassessment.
Accordingly, the term Tax Increase shall not include any portion of the Tax
Expenses, as calculated immediately following the Reassessment, which (i) is
attributable to assessments which were pending immediately prior to the
Reassessment which assessments were conducted during, and included in, such
Reassessment, or which assessments were otherwise rendered unnecessary following
the Reassessment, or (ii) is attributable to the annual inflationary increase of
real estate taxes, but not in excess of two percent (2.0%) per annum, or (iii)
is attributable to any Tax Expenses incurred during the Base Year (with such Tax
Expenses incurred during the Base Year calculated without regard to any
Proposition 8 reduction in Tax Expenses for the Base Year).
.6.2 PROTECTION. During the first five (5) Lease Years of the initial
Lease Term, Tenant shall not be obligated to pay any portion of any Tax Increase
attributable to such five (5) Lease Years.
.6.3 LANDLORD'S RIGHT TO PURCHASE THE PROPOSITION 13 PROTECTION AMOUNT
ATTRIBUTABLE TO A PARTICULAR REASSESSMENT. The amount of Tax Expenses which
Tenant is not obligated to pay or will not be obligated to pay during the Lease
Term in connection with a particular Reassessment pursuant to the terms of this
Section 4.6, shall be sometimes referred to hereafter as a "Proposition 13
Protection Amount." If, in connection with a pending or anticipated sale of the
Project by Landlord, the occurrence of a Reassessment is reasonably foreseeable
by Landlord and the Proposition 13 Protection Amount attributable to such
Reassessment can be reasonably quantified or estimated for each Lease Year
commencing with the Lease Year in which the Reassessment will occur, the terms
of this Section 4.6.3 shall apply to each such Reassessment. Upon notice to
Tenant, Landlord shall have the right to purchase the Proposition 13 Protection
Amount relating to the applicable Reassessment (the "Applicable Reassessment"),
within a reasonable period of time prior to the pending or anticipated sale of
the Project by Landlord, by paying to Tenant an amount equal to the "Proposition
13 Purchase Price," as that term is defined below, provided that the right of
any successor of Landlord to exercise its right of repurchase hereunder shall
not apply to any Reassessment which results from the event pursuant to which
such successor of Landlord became the Landlord under this Lease. As used herein,
"Proposition 13 Purchase Price" shall mean the present value of the Proposition
13 Protection Amount remaining during the Lease Term, as of the date of payment
of the Proposition 13 Purchase Price by Landlord. Such present value shall be
calculated (i) by using the portion of the Proposition 13 Protection Amount
attributable to each remaining Lease Year (as though the portion of such
Proposition 13 Protection Amount benefited Tenant at the end of each Lease
Year), as the amounts to be discounted, and (ii) by using discount rates for
each amount to be discounted equal to the average rates of yield for United
States Treasury Obligations with maturity dates as close as reasonably possible
to the end of each Lease Year during which the portions of the Proposition 13
Protection Amount would have benefited Tenant, which rates shall be those in
effect as of Landlord's exercise of its right to purchase, as set forth in this
Section 4.6.3. Upon such payment of the Proposition 13 Purchase Price, the
provisions of Section 4.6.2 of this Lease shall not apply to any Tax Increase
attributable to the Applicable
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Reassessment. Since Landlord is estimating the Proposition 13 Purchase Price
because a Reassessment has not yet occurred, then when such Reassessment occurs,
if Landlord has underestimated the Proposition 13 Purchase Price, then upon
notice by Landlord to Tenant, Tenant's Rent next due shall be credited with the
amount of such underestimation, and if Landlord overestimates the Proposition 13
Purchase Price, then upon notice by Landlord to Tenant, Rent next due shall be
increased by the amount of the overestimation.
.7 LANDLORD'S BOOKS AND RECORDS. In the event that Tenant disputes the
amount of Additional Rent set forth in any annual Statement delivered by
Landlord, then within two (2) years after receipt of such Statement by Tenant,
Tenant shall have the right to notify Landlord in writing that it intends to
cause an independent certified public accountant (which accountant must be
qualified and experienced, must be employed by a firm which derives its primary
revenues from its accounting practice) (the "Third Party Auditor") to inspect
Landlord's accounting records at Landlord's office in the Building for the
Expense Year covered by such Statement during normal business hours ("Tenant's
Review"), provided that as a condition precedent to any such inspection, Tenant
shall deliver to Landlord a copy of Tenant's written agreement with such Third
Party Auditor, which agreement shall include a provision which states that such
Third Party Auditor shall maintain in strict confidence any and all information
obtained in connection with the Tenant Review and shall not disclose such
information to any person or entity other than to the management personnel of
Tenant. Tenant shall provide Landlord with not less than two (2) weeks' prior
written notice of its desire to conduct Tenant's review. In connection with the
foregoing review, Landlord shall furnish Tenant with such reasonable supporting
documentation relating to the subject Statement (and the Statement for the Base
Year, provided that such supporting documentation relating to the Statement for
the Base Year shall be for informational purposes only and not for the purpose
of any audit of the Base Year Statement if the time period for Tenant's audit of
the Base Year Statement shall have expired) as Tenant may reasonably request. In
no event shall Tenant have the right to conduct Tenant's Review if Tenant is
then in default under the Lease with respect to any of Tenant's monetary
obligations (following the expiration of all notice and cure periods set forth
in Article 19), including, without limitation, the payment by Tenant of all
Additional Rent amounts described in the Statement which is the subject of
Tenant's Review, which payment, at Tenant's election, may be made under dispute.
In the event that Tenant shall fail to provide Landlord with written
notification within two (2) years following receipt of a particular Statement of
Tenant's desire to conduct a Tenant's Review, Tenant shall have no further right
to dispute the amounts of Additional Rent set forth on such Statement. In the
event that following Tenant's Review Tenant continues to dispute the amounts of
Additional Rent shown on Landlord's Statement and Landlord and Tenant are unable
to resolve such dispute, then Landlord shall cause a final and determinative
audit to be made by an independent accountant mutually and reasonably agreed
upon by Landlord and Tenant, of the proper amount of the disputed items and/or
categories of Direct Expenses to be shown on such Statement (the "Final Audit").
The results of such Final Audit shall be conclusive and binding upon both
Landlord and Tenant unless either party objects to the results of such Final
Audit by written notice delivered to the other party within ten (10) days
following receipt by the parties of the result of the Final Audit, which
objection must be accompanied by a request that the correctness of the
Additional Rent determination for such Expense Year in question be determined
pursuant to binding arbitration ("Arbitration") under J.A.M.S., as set forth in
Section 2.2.4.6 of this Lease. If the resolution of the parties' dispute with
regard to the Additional Rent shown on the Statement, whether pursuant to
Tenant's Review, the Final Audit or the Arbitration reveals an error in the
calculation of Tenant's Share of Building Direct Expenses to be paid for such
Expense Year, the parties' sole remedy shall be for the parties to make
appropriate payments or reimbursements, as the case may be, to each other as are
determined to be owing. Any such payments shall be made within thirty (30) days
following the resolution of such dispute, along with interest at the "Interest
Rate," as that term is defined in Article 25, below, from the date such amounts
were originally due, until the date of such payment. At Tenant's election,
Tenant may treat any overpayments (plus the interest described above) resulting
from the foregoing resolution of such parties' dispute as a credit against Rent
until such amounts are otherwise paid by Landlord. Tenant shall be responsible
for all costs and expenses associated with Tenant's Review and any Final Audit,
provided that if the parties' final resolution of the dispute involves the
overstatement by Landlord of Direct Expenses for such Expense Year in excess of
two and three quarters percent (2.75%), then Landlord shall be responsible for
all reasonable, out-of-pocket costs and expenses associated with Tenant's Review
and any Final Audit. In the event
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that the parties' dispute is resolved pursuant to Arbitration, Tenant shall be
responsible for all costs and expenses associated with such Arbitration,
provided that if the arbitrator's decision reveals that Landlord's determination
of Tenant's Share of Direct Expenses as submitted to arbitration was overstated
by more than two and three quarters percent (2.75%), then Landlord shall be
responsible for all reasonable, out-of-pocket costs and expenses of such
Arbitration. If another tenant of the Building audits Direct Expenses for the
Building and, as a result of that audit, Landlord discovers a material error in
Direct Expenses previously paid or to be payable by Tenant, Landlord shall make
an appropriate adjustment to Direct Expenses to correct such error and shall
provide Tenant with supporting documentation of such error at the time of such
correction.
ARTICLE 5
USE OF PREMISES
.1 PERMITTED USE. Tenant shall use the Premises solely for the Permitted
Use set forth in Section 7 of the Summary and Tenant shall not use or permit the
Premises or the Project to be used for any other purpose or purposes whatsoever
without the prior written consent of Landlord, which may be withheld in
Landlord's sole discretion.
.2 PROHIBITED USES. The uses prohibited under this Lease shall include any
use other than the Permitted Use, provided that notwithstanding anything in
Section 7 of the Summary to the contrary, the Permitted Use shall specifically
exclude, without limitation, the use of the Premises or a portion thereof for
(i) offices of any agency or bureau of the United States or any state or
political subdivision thereof; (ii) offices or agencies of any foreign
governmental or political subdivision thereof; (iii) offices of any health care
professionals or health care service organization (except to the extent utilized
primarily for general office purposes); (iv) schools or other training
facilities which are not ancillary to corporate, executive or professional
office use; (v) retail or restaurant uses; or (vi) communications firms such as
radio and/or television stations (except to the extent utilized primarily for
general office purposes). Tenant further covenants and agrees that Tenant shall
not use, or suffer or permit any person or persons to use, the Premises or any
part thereof for any use or purpose contrary to the provisions of the Rules and
Regulations set forth in Exhibit D, attached hereto, or in violation of the laws
of the United States of America, the State of California, or the ordinances,
regulations or requirements of the local municipal or county governing body or
other lawful authorities having jurisdiction over the Project) including,
without limitation, any such laws, ordinances, regulations or requirements
relating to hazardous materials or substances, as those terms are defined by
applicable laws now or hereafter in effect. Tenant shall not do or permit
anything to be done in or about the Premises which will unreasonably obstruct or
interfere with the rights of other tenants or occupants of the Building, or
injure or annoy them or use or allow the Premises to be used for any improper,
unlawful or objectionable purpose, nor shall Tenant cause, maintain or permit
any nuisance in, on or about the Premises. Tenant shall comply with all recorded
covenants, conditions, and restrictions affecting the Project as of the date of
this Lease.
ARTICLE 6
SERVICES AND UTILITIES
.1 STANDARD TENANT SERVICES. Landlord shall provide the following services
on all days (unless otherwise stated below) during the Lease Term.
.1.1 Subject to limitations imposed by all governmental rules,
regulations and guidelines applicable thereto, Landlord shall provide heating
and air conditioning ("HVAC") when necessary for normal comfort for normal
office use in the Premises from 8:00 A.M. to 6:00 P.M. Monday through Friday,
and on Saturdays from 9:00 A.M. to 1:00 P.M. (collectively, the "Building
Hours"), except for the date of observation of New Year's Day, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day, Christmas Day and, at Landlord's
discretion, other locally or nationally recognized holidays recognized by
landlords of the Comparable Buildings (collectively, the "Holidays").
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.1.2 Landlord shall provide adequate electrical wiring and facilities
for connection to Tenant's lighting fixtures and incidental use equipment,
provided that (i) the demand electrical load of the incidental use equipment
does not exceed an average of 3 watts per usable square foot of the Premises
during the Building Hours on a monthly basis, and the electricity so furnished
for incidental use equipment will be at a nominal one hundred twenty (120) volts
and no electrical circuit for the supply of such incidental use equipment will
require a current capacity exceeding twenty (20) amperes, and (ii) the demand
electrical load of Tenant's fluorescent lighting fixtures does not exceed an
average of 1.5 watts per usable square foot of the Premises during the Building
Hours on a monthly basis, and the electricity so furnished for Tenant's lighting
will be at a nominal one hundred twenty (120) volts, which electrical usage
shall be subject to applicable laws and regulations, including Title 24.
Engineering plans shall include a calculation of Tenant's fully connected
electrical design load with and without demand factors and shall indicate the
number of watts of unmetered and submetered loads. Tenant shall bear the cost of
replacement of lamps, starters and ballasts for non-Building standard lighting
fixtures within the Premises to the extent such cost exceeds the cost of
replacing the same components in Building standard fixtures.
.1.3 Landlord shall provide city water from the regular Building
outlets for drinking, lavatory and toilet purposes in the Building Common Areas.
.1.4 Landlord shall provide janitorial services to the Premises,
except the date of observation of the Holidays, in and about the Premises and
window washing services in a manner and with a frequency consistent with those
of the Comparable Buildings.
.1.5 Landlord shall provide nonexclusive, non-attended automatic
passenger elevator service during the Building Hours, shall have one elevator
available at all other times, except on the Holidays.
.1.6 Landlord shall provide nonexclusive freight elevator service
subject to scheduling by Landlord.
.1.7 Tenant may, at its own expense, install its own security system
("Tenant's Security System") in the Premises pursuant to the terms of Article 8,
below; provided, however, that Tenant shall coordinate the installation and
operation of Tenant's Security System with Landlord to assure that Tenant's
Security does not interfere with Landlord's security system in place as of the
Lease Commencement Date and the Building systems and equipment and to the extent
that Tenant's Security System unreasonably interferes with Landlord's security
system and the Building systems and equipment, Tenant shall not be entitled to
install or operate it. Tenant shall be solely responsible, at Tenant's sole cost
and expense, for the monitoring, operation and removal of Tenant's Security
System.
.1.8 Notwithstanding anything to the contrary in this Lease, Landlord
agrees that Landlord shall maintain and operate the Building in a condition and
repair materially consistent with that undertaken by landlords of the Comparable
Buildings.
Tenant shall cooperate reasonably with Landlord at all times and abide by
all regulations and requirements that Landlord may reasonably prescribe for the
proper functioning and protection of the HVAC, electrical, mechanical and
plumbing systems.
.2 OVERSTANDARD TENANT USE. Tenant shall not, without Landlord's prior
written consent, use heat-generating machines, machines other than normal
fractional horsepower office machines, or equipment or lighting other than
Building standard lights in the Premises, which may affect the temperature
otherwise maintained by the air conditioning system or increase the water
normally furnished for the Premises by Landlord pursuant to the terms of Section
6.1 of this Lease except as permitted in this Lease. If Tenant uses water or
electricity in excess of that supplied by Landlord pursuant to Section 6.1 of
this Lease, Tenant shall pay to Landlord, upon billing, the actual, reasonable
and documented cost paid to third parties at arms length, without profit or
overhead or penalty (the "Actual Cost"), in connection with such excess
consumption. Furthermore, if Tenant uses electricity in an aggregate amount in
excess of that supplied by Landlord pursuant to Section 6.1 of this Lease,
Landlord may, at its option, install devices to separately meter such excess
electrical use, and provided that such meters indicate excess usage
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by Tenant when measured on a monthly basis, Tenant shall pay to Landlord, within
thirty (30) days following demand by Landlord, the Actual Cost of any such
devices. Tenant's use of electricity shall never exceed "Capacity," as that term
is defined, below. If Tenant desires to use heat, ventilation or air
conditioning during hours other than those for which Landlord is obligated to
supply such utilities pursuant to the terms of Section 6.1 of this Lease (the
"After Hours HVAC"), Landlord shall supply such utilities to Tenant at
Landlord's Actual Cost for such After Hours HVAC (which shall be treated as
Additional Rent). For purposes of this Section 6.2, "Capacity" shall mean seven
(7) watts per usable square foot, provided that the foregoing "Capacity" shall
be (a) inclusive of the 1.5 watts per usable square foot available for Tenant's
fluorescent lighting, and (b) exclusive of the electricity utilized by the
Building HVAC system.
ARTICLE 7
REPAIRS
.1 DUTIES OF REPAIR. Landlord shall maintain, repair and replace (i) the
structural portions of the Building, including the foundation, floor/ceiling
slabs, roof, curtain wall, exterior glass and mullions, columns, beams, shafts
(including elevator shafts), exit stairs, Project parking facility, elevator
cabs, and Building mechanical, electrical and telephone closets and Base
Building (collectively, "Building Structure"), and (ii) the mechanical,
electrical, life safety, plumbing, sprinkler systems and HVAC systems installed
or furnished by Landlord and not located within the Premises (the "Building
Systems"), in good order and repair and in a first class condition. In addition,
Landlord shall, at all times during the Lease Term, cause the Building Systems
(including the Building HVAC units servicing the second floor of the Building)
to operate in such a manner which does not result in a level of noise and/or a
level of vibration which unreasonably interferes with Tenant's use of the
Premises. Except as to Landlord's obligations set forth above in this Section
7.1, Tenant shall, at Tenant's own expense, keep the Premises, including all
Alterations, "Tenant Improvements," as that term is defined in the Tenant Work
Letter, improvements, fixtures and furnishings therein, in good order, repair
and condition at all times during the Lease Term. In addition, except as
provided as part of Landlord's repair obligations set forth above or elsewhere
in this Lease, Tenant shall, at Tenant's own expense but under the supervision
and subject to the prior approval of Landlord, and within a reasonable period of
time, promptly and adequately complete all repairs which Tenant in obligated to
complete; provided however, that, at Landlord's option, if Tenant fails to make
such repairs, Landlord may, but need not, on not less that ten (10) business
days prior notice to Tenant (except in case of an emergency) make such repairs,
and to the extent Tenant was obligated to undertake such repair at Tenant's sole
cost, Tenant shall pay Landlord the cost thereof, including a reasonable
percentage of the cost thereof sufficient to reimburse Landlord for the Actual
Cost arising from Landlord's involvement with such repairs and replacements
forthwith upon being billed for same. Notwithstanding the foregoing, following
reasonable prior notice from Tenant, Landlord shall repair any items required to
be repaired by Tenant pursuant to the terms of this Section 7.1, provided that,
in such event, Tenant shall pay to Landlord, within thirty (30) days following
demand by Landlord, the Actual Cost incurred by Landlord in connection with such
repairs. Landlord may, but shall not be required to, enter the Premises at all
reasonable times to make repairs, alterations, improvements and additions to the
Premises or to the Building or to any equipment located in the Building as
Landlord shall desire or deem necessary or as Landlord may be required to do by
governmental or quasi-governmental authority or court order or decree. Subject
to Section 7.2, Tenant hereby waives and releases its right to make repairs at
Landlord's expense under Sections 1941 and 1942 of the California Civil Code; or
under any similar law, statute, or ordinance now or hereafter in effect.
.2 TENANT'S RIGHT TO MAKE REPAIRS. If Tenant provides written notice to
Landlord of an event or circumstance which requires the action of Landlord with
respect to the provision of utilities and/or services and/or repairs and/or
maintenance to the Premises or Project, and Landlord fails to provide such
action as required by the terms of this Lease within ten (10) business days
after receipt of such written notice (or such longer period of time if the
nature of such action is such that the same cannot reasonably be completed
within a ten (10) business day period, provided Landlord has diligently and
continuously commenced such action within such period and thereafter diligently
proceeds to complete said action as soon as possible), and such action relates
to items contained on the floor or floors of the Building upon which the
Premises
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are located Tenant may proceed to take the required action upon delivery of an
additional five (5) business days notice to Landlord specifying that Tenant is
taking such required action, and if such action was required under the terms of
this Lease to be taken by Landlord, then Tenant shall be entitled to prompt
reimbursement by Landlord of Tenant's reasonable costs and expenses in taking
such action plus interest at the Interest Rate during the period from the date
Tenant incurs such costs and expenses until such time as payment is made by
Landlord. In the event Tenant takes the action permitted above, and such work
may create a "Deficiency," as that term is defined in Section 3.1 of the Tenant
Work Letter, Tenant shall use reputable contractors with experience in similar
work. Further, if Landlord does not deliver a detailed written objection to
Tenant, within thirty (30) days after receipt of an invoice by Tenant of its
costs of taking action which Tenant claims should have been taken by Landlord,
and if such invoice from Tenant sets forth a reasonably particularized breakdown
of its costs and expenses in connection with taking such action on behalf of
Landlord, then Tenant shall be entitled to deduct from Rent payable by Tenant
under this Lease, the amount set forth in such invoice together with interest at
the Interest Rate. If, however, Landlord is in good faith delivers to Tenant
within thirty (30) days after receipt of Tenant's invoice, a written objection
to the payment of such invoice, setting forth with reasonable particularity
Landlord's reasons for its claim that such action did not have to be taken by
Landlord pursuant to the terms of this Lease or that specifically enumerated
charges are excessive (in which case Landlord shall pay all of the charges not
so enumerated, and further, with respect to the charges not so enumerated, the
amount it contends would not have been excessive), then Tenant shall not be
entitled to such deduction from Rent, but as Tenant's sole remedy, Tenant
proceed to claim a default by Landlord under this Lease.
ARTICLE 8
ADDITIONS AND ALTERATIONS
.1 LANDLORD'S CONSENT TO ALTERATIONS. Tenant may make any improvements,
alterations, additions or changes to the Premises or any mechanical, plumbing or
HVAC facilities or systems pertaining to the Premises (collectively, the
"Alterations") upon ten (10) days notice to Landlord by Tenant but without first
procuring the prior written consent of Landlord to such Alterations, provided
that Tenant shall obtain Landlord's prior consent with respect to (i) any
Alteration which relates to, or is required in connection with the use by,
Tenant of any hazardous materials or hazardous substances in the Premises, (ii)
any Alteration which adversely affects the structural portions or the systems or
equipment of the Building, or (iii) any Alteration which is visible from the
exterior of the Building. The construction of the initial improvements to the
Premises shall be governed by the terms of the Tenant Work Letter and not the
terms of this Article 8.
.2 MANNER OF CONSTRUCTION. Landlord may impose, as a condition to any
Alteration requiring Landlord's consent, the requirement that Tenant utilize for
such purposes only contractors and subcontractors approved by Landlord, in
Landlord's reasonable discretion. With respect to Alterations not requiring
Landlord's consent, Tenant shall utilize only reputable and skilled contractors
and subcontractors which are comparable to the contractors and subcontractors
utilized by tenants at the Comparable Buildings. If such Alterations will
involve the use of or disturb hazardous materials or substances existing in the
Premises, Tenant shall comply with Landlord's rules and regulations concerning
such hazardous materials or substances. Tenant shall construct such Alterations
and perform such repairs in a good and workmanlike manner, in conformance with
any and all applicable federal, state, county or municipal laws, rules and
regulations and pursuant to a valid building permit, issued by the City of Los
Angeles, all in conformance with Landlord's construction rules and regulations.
In the event Tenant performs any Alterations which are not customary general
office improvements which require or give rise to governmentally required
changes to the Base Building, then Landlord shall, at Tenant's expense, make
such changes to the Base Building. The "Base Building" shall include the
structural portions of the Building, and the public restrooms and the systems
and equipment located in the internal core of the Building on the floor or
floors on which the Premises are located. In performing the work of any such
Alterations, Tenant shall have the work performed in such manner so as not to
unreasonably obstruct access to the Project or any portion thereof, by any other
tenant of the Project, and so as not to unreasonably obstruct the business of
Landlord or other tenants in the Project. Tenant shall not use (and upon notice
from Landlord shall cease
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using) contractors, services, workmen, labor, that would disturb labor harmony
with the workforce or trades engaged in performing other work, labor or services
in or about the Building or the Common Areas. In addition to Tenant's
obligations under Article 9 of this Lease, upon completion of any Alterations,
Tenant agrees to cause a Notice of Completion to be recorded in the office of
the Recorder of the County of Los Angeles in accordance with Section 3093 of the
Civil Code of the State of California or any successor statute, and Tenant shall
deliver to the Project management office a reproducible copy of the "as built"
drawings of the Alterations as well as all permits, approvals and other
documents issued by any governmental agency in connection with the Alterations.
.3 PAYMENT FOR IMPROVEMENTS. If payment for any Alteration in excess of
Three and No/100 Dollars ($3.00) for each usable square foot of the subject area
is made directly to contractors, Tenant shall comply with Landlord's
requirements for final lien releases and waivers in connection with Tenant's
payment for work to contractors, provided that Tenant's obligations under
Article 9 of this Lease shall apply with respect to all Alterations undertaken
by Tenant. If Tenant orders any work directly from Landlord, Tenant shall pay to
Landlord a percentage (such percentage to be uniformly established for the
Building) of the cost of such work sufficient to compensate Landlord for all
overhead, general conditions, fees and other costs and expenses arising from
Landlord's involvement with such work. If Tenant does not order any work from
Landlord, Tenant shall not be required to pay Landlord any supervision fee or
other compensation in connection with such work, but if such work shall involve
any matter which reasonably requires review or consultation by Landlord's
management staff with third-party consultants, Tenant shall reimburse Landlord
for Landlord's Actual Cost in connection with such review or consultation.
.4 CONSTRUCTION INSURANCE. In addition to the requirements of Article 10 of
this Lease, in the event that Tenant makes any Alterations, prior to the
commencement of such Alterations, Tenant shall provide Landlord with evidence
that Tenant carries "Builder's All Risk" insurance in an amount approved by
Landlord covering the construction of such Alterations, and such other insurance
as Landlord may require, it being understood and agreed that all of such
Alterations shall be insured by Tenant pursuant to Article 10 of this Lease
immediately upon completion thereof.
.5 LANDLORD'S PROPERTY. All Alterations, improvements, fixtures, equipment
and/or appurtenances which may be installed or placed in or about the Premises,
from time to time, shall be at the sole cost of Tenant and shall be and become
the property of Landlord, except that Tenant may remove any Alterations,
improvements, fixtures and/or equipment which have not been paid for with any
Tenant improvement allowance funds provided to Tenant by Landlord, provided
Tenant repairs any damage to the Premises and Building caused by such removal.
Furthermore, Landlord may, by written notice to Tenant given at the time
Landlord grants its consent to any Alteration (which notice shall specify the
reasonable grounds for such requirement), require Tenant, at Tenant's expense,
to remove any Alterations or improvements in the Premises upon the expiration or
earlier termination of this Lease, and to repair any damage to the Premises and
Building caused by such removal. If Tenant fails to complete such removal and/or
to repair any damage caused by the removal of any Alterations or improvements in
the Premises, provided that Tenant does not fulfill such obligation within ten
(10) days following notice from Landlord, Landlord may do so and may charge the
Actual Cost thereof to Tenant. Tenant hereby protects, defends, indemnifies and
holds Landlord harmless from any liability, cost, obligation, expense or claim
of lien in any manner relating to the installation, placement, removal or
financing of any such Alterations, improvements, fixtures and/or equipment in,
on or about the Premises, which obligations of Tenant shall survive the
expiration or earlier termination of this Lease.
ARTICLE 9
COVENANT AGAINST LIENS
Tenant shall keep the Project and Premises free from any liens or
encumbrances arising out of the work performed, materials furnished or
obligations incurred by or on behalf of Tenant, and shall protect, defend,
indemnify and hold Landlord harmless from and against any claims, liabilities,
judgments or costs (including, without limitation, reasonable attorneys' fees
and costs)
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arising out of same or in connection therewith. Tenant shall give Landlord
notice at least twenty (20) days prior to the commencement of any such work on
the Premises (or such additional time as may be necessary under applicable laws)
to afford Landlord the opportunity of posting and recording appropriate notices
of non-responsibility. Tenant shall remove any such lien or encumbrance by bond
or otherwise within twenty (20) days after notice by Landlord, and if Tenant
shall fail to do so, Landlord may pay the amount necessary to remove such lien
or encumbrance, without being responsible for investigating the validity
thereof. The amount so paid shall be deemed Additional Rent under this Lease
payable within thirty (30) days following demand by Landlord , without
limitation as to other remedies available to Landlord under this Lease. Nothing
contained in this Lease shall authorize Tenant to do any act which shall subject
Landlord's title to the Building or Premises to any liens or encumbrances
whether claimed by operation of law or express or implied contract. Any claim to
a lien or encumbrance upon the Building or Premises arising in connection with
any such work or respecting the Premises not performed by or at the request of
Landlord shall be null and void, or at Landlord's option shall attach only
against Tenant's interest in the Premises and shall in all respects be
subordinate to Landlord's title to the Project, Building and Premises.
ARTICLE 10
INSURANCE
.1 INDEMNIFICATION AND WAIVER. Except to the extent arising from matters
set forth in items (i), (ii) and (iii), below, Tenant hereby assumes all risk of
damage to property or injury to persons in, upon or about the Premises from any
cause whatsoever and agrees that Landlord, its partners, members, subpartners,
parents, subsidiaries, affiliates and their respective officers, agents,
servants, employees, and independent contractors (collectively, "Landlord
Parties") shall not be liable for, and are hereby released from any
responsibility for, any damage either to person or property or resulting from
the loss of use thereof, which damage is sustained by Tenant or by other persons
claiming through Tenant. Tenant shall indemnify, defend, protect, and hold
harmless the from any and all loss, cost, damage, expense and liability
(including without limitation court costs and reasonable attorneys' fees)
("Claims and Expenses") incurred in connection with or arising from any cause
in, on or about the Premises, any acts, omissions or negligence of Tenant or of
any person claiming by, through or under Tenant, or of the contractors, agents,
servants, employees, of Tenant or any such person, in, on or about the Project
or any breach of the terms of this Lease, either prior to, during, or after the
expiration of the Lease Term, provided that the terms of the foregoing indemnity
shall not apply to the negligence or willful misconduct of Landlord Parties.
Should Landlord be named as a defendant in any suit brought against Tenant in
connection with or arising out of Tenant's occupancy of the Premises, Tenant
shall pay to Landlord its costs and expenses incurred in such suit, including
without limitation, its actual professional fees such as appraisers',
accountants' and attorneys' fees. Further, Tenant's agreement to indemnify
Landlord pursuant to this Section 10.1 is not intended and shall not relieve any
insurance carrier of its obligations under policies required to be carried by
Tenant pursuant to the provisions of this Lease, to the extent such policies
cover the matters subject to Tenant's indemnification obligations; nor shall
they supersede any inconsistent agreement of the parties set forth in any other
provision of this Lease. Notwithstanding any contrary provision of this Lease,
neither Landlord nor Tenant shall be liable to the other party for any
consequential damages for a breach or default under this Lease, provided that
this sentence shall not be applicable to any consequential damages which may be
incurred by Landlord relating to, or in connection with (i) any storage, use,
treatment, manufacture, sale, disposal or discharge of any hazardous materials
or substances (as those terms are defined by applicable law) in, on, under or
about the Premises, Building or Project by Tenant, its agents, representatives,
employees, contractors, subtenants or assigns, or any actions taken by Tenant or
such parties in connection therewith, or (ii) any holdover by Tenant following
the expiration of the Lease Term, subject to and in accordance with the
provisions of Article 16 hereof. The provisions of this Section 10.1 shall
survive the expiration or sooner termination of this Lease with respect to any
claims or liability arising in connection with any event occurring prior to such
expiration or termination. Subject to the provisions of this Section 10.1,
Landlord shall indemnify, defend, protect and hold Tenant and its partners,
officers, agents, servants and employees (collectively, "Tenant Parties")
harmless from and against any and all Claims and Expenses incurred in connection
with, or arising form (i) any cause in or about the Project, the Land, the
Building or
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the Common Areas (in each case other than the Premises), to the extent the same
would be covered under a customary CGL Policy of insurance or is otherwise
covered by Landlord's insurance; (ii) any negligence or willful misconduct of
Landlord or of any Landlord Party or any Landlord contractor, whether in or
about the Project, the Land, the Building, the Common Areas or the Premises, or
(ii) a breach of this Lease by Landlord; provided, however, that the foregoing
indemnity shall not apply to the extent of the negligence or willful misconduct
of Tenant or its partners, members, subpartners, parents, subsidiaries,
affiliates and their respective officers, agents, servants, employees, and
independent contractors.
.2 LANDLORD'S INSURANCE. Landlord shall carry commercial general liability
insurance with respect to the Building and Project during the Lease Term, and
shall further insure the full replacement cost of the Building and Project
during the Lease Term against loss or damage due to fire and other casualties
covered within the classification of fire and extended coverage, vandalism
coverage and malicious mischief, sprinkler leakage, water damage and special
extended coverage. Landlord's insurance coverage shall be in such amounts, from
such companies, and on such other terms and conditions, as Landlord may from
time to time reasonably determine. Additionally, at the option of Landlord, such
insurance coverage may include the risks of earthquakes and/or flood damage and
additional hazards, and one or more loss payee endorsements in favor of the
holders of any mortgages or deeds of trust encumbering the interest of Landlord
in the Building or Project or the ground or underlying lessors of the Building,
Project, or any portion thereof. Notwithstanding the foregoing provisions of
this Section 10.2, the coverage and amounts of insurance carried by Landlord in
connection with the Building and Project shall, at a minimum, be comparable to
the coverage and amounts of insurance which are carried by reasonably prudent
landlords of Comparable Buildings, and Worker's Compensation and Employer's
Liability coverage as required by applicable law. The minimum limits of policies
of insurance required of Landlord under the Lease shall not limit the liability
of Landlord under this Lease with respect to claims covered by such insurance.
The insurance obtained by Landlord shall specifically cover the indemnification
liability of Landlord under this Lease. Tenant shall, at Tenant's expense,
comply with all insurance company requirements pertaining to the use of the
Premises. If Tenant's conduct or use of the Premises causes any increase in the
premium for such insurance policies then Tenant shall reimburse Landlord for any
such increase. Tenant, at Tenant's expense, shall comply with all rules, orders,
regulations or requirements of the American Insurance Association (formerly the
National Board of Fire Underwriters) and with any similar body.
.3 TENANT'S INSURANCE. Tenant shall maintain the following coverages in the
following amounts. Tenant may utilize blanket policies of insurance (and
combinations of primary and excess/umbrella policies).
.3.1 Commercial General Liability Insurance covering the insured
against claims of bodily injury, personal injury and property damage (including
loss of use thereof) arising out of Tenant's operations, and contractual
liabilities (covering the performance by Tenant of its indemnity agreements)
including a Broad Form endorsement covering the insuring provisions of this
Lease and the performance by Tenant of the indemnity agreements set forth in
Section 10.1 of this Lease, for limits of liability of:
Bodily Injury and $5,000,000 each occurrence
Property Damage Liability $5,000,000 annual aggregate
Personal Injury Liability $5,000,000 each occurrence
$5,000,000 annual aggregate
0% Insured's participation
.3.2 Physical Damage Insurance covering (i) all office furniture,
business and trade fixtures, office equipment, free-standing cabinet work,
movable partitions, merchandise and all other items of Tenant's property on the
Premises installed by, for, or at the expense of Tenant, (ii) the "Tenant
Improvements," as that term is defined in Section 2.1 of the Tenant Work Letter,
and any other improvements which exist in the Premises as of the Lease
Commencement Date (excluding the Base Building) (the "Original Improvements"),
and (iii) all other improvements, alterations and additions to the Premises
installed by or for Tenant. Such insurance shall be written on "special causes"
of loss or damage basis, for the full replacement cost value (subject to
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reasonable deductible amounts) new without deduction for depreciation of the
covered items and in amounts that meet any co-insurance clauses of the policies
of insurance and shall include coverage for damage or other loss caused by fire
or other peril including, but not limited to, vandalism and malicious mischief,
theft, water damage of any type, including sprinkler leakage, bursting or
stoppage of pipes, and explosion.
.3.3 Worker's Compensation and Employer's Liability or other similar
insurance pursuant to all applicable state and local statutes and regulations.
.4 FORM OF POLICIES. The minimum limits of policies of insurance required
of Tenant under this Lease shall in no event limit the liability of Tenant under
this Lease. Such insurance shall (i) name Landlord, and any other party
reasonably specified by Landlord, as an additional insured, including Landlord's
managing agent, if any; (ii) specifically cover the liability assumed by Tenant
under this Lease, including, but not limited to, Tenant's obligations under
Section 10.1 of this Lease; (iii) be issued by an insurance company having a
rating of not less than A-X in Best's Insurance Guide or which is otherwise
acceptable to Landlord and licensed to do business in the State of California;
(iv) be primary insurance as to all claims thereunder and provide that any
insurance carried by Landlord is excess and is non-contributing with any
insurance requirement of Tenant; and (v) provide that said insurance shall not
be canceled or coverage changed unless thirty (30) days' (ten (10) days' in the
event of nonpayment of premiums) prior written notice shall have been given to
Landlord and any mortgagee of Landlord. Tenant shall deliver said policy or
policies or certificates thereof to Landlord on or before the Lease Commencement
Date and at least thirty (30) days before the expiration dates thereof. In the
event Tenant shall fail to procure such insurance, or to deliver such policies
or certificate, Landlord may, after delivery of five (5) days' notice to Tenant,
at Landlord's option, procure such policies for the account of Tenant, and the
cost thereof shall be paid to Landlord within five (5) days after delivery to
Tenant of bills therefor. If either party fails to carry the amounts and types
of insurance required to be carried by it pursuant to this Lease, such failure
shall be deemed to be a covenant and agreement by such party to self-insure with
respect to the type and amount of insurance which such party so failed to carry,
with full waiver of subrogation with respect thereto.
.5 SUBROGATION. Landlord and Tenant intend that their respective property
loss risks shall be borne by reasonable insurance carriers to the extent above
provided, and Landlord and Tenant hereby agree to look solely to, and seek
recovery only from, their respective insurance carriers in the event of a
property loss to the extent that such coverage is agreed to be provided
hereunder. The parties each hereby waive all rights and claims against each
other for such losses, and waive all rights of subrogation of their respective
insurers, provided such waiver of subrogation shall not affect the right to the
insured to recover thereunder. The parties agree that their respective insurance
policies are now, or shall be, endorsed such that the waiver of subrogation
shall not affect the right of the insured to recover thereunder, so long as no
material additional premium is charged therefor.
.6 ADDITIONAL INSURANCE OBLIGATIONS. Tenant shall carry and maintain during
the entire Lease Term, at Tenant's sole cost and expense, increased amounts of
the insurance required to be carried by Tenant pursuant to this Article 10 and
such other reasonable types of insurance coverage and in such reasonable amounts
covering the Premises and Tenant's operations therein, as may be reasonably
requested by Landlord. Notwithstanding any provisions of this Lease to the
contrary, the obligations of Tenant to provide increased or new insurance
hereunder shall be limited to the extent the same is (i) then customarily
required by landlords of Comparable Buildings in connection with comparable
tenants occupying comparable sized premises and (ii) reasonably available for
purchase by Tenant at a commercially reasonable cost.
ARTICLE 11
DAMAGE AND DESTRUCTION
.1 REPAIR OF DAMAGE TO PREMISES BY LANDLORD. Tenant shall promptly notify
Landlord of any damage to the Premises resulting from fire or any other
casualty. If the Premises or any Common Areas serving or providing access to the
Premises shall be damaged by fire or other casualty, Landlord shall promptly and
diligently, subject to reasonable delays for insurance
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adjustment or other matters beyond Landlord's reasonable control, and subject to
all other terms of this Article 11, restore the Base Building and such Common
Areas. Such restoration shall be to substantially the same condition of the Base
Building and the Common Areas prior to the casualty, except for modifications
required by zoning and building codes and other laws or by the holder of a
mortgage on the Building or Project or any other modifications to the Common
Areas deemed desirable by Landlord, provided that access to the Premises and any
common restrooms serving the Premises shall not be materially impaired. Upon the
occurrence of any damage to the Premises, Tenant shall repair any injury or
damage to the Tenant Improvements and the Original Improvements installed in the
Premises and shall return such Tenant Improvements and Original Improvements to
their original condition. Prior to the commencement of construction, Tenant
shall submit to Landlord, for Landlord's review and approval, all plans,
specifications and working drawings relating thereto, and Landlord shall
reasonably approve the contractors to perform such improvement work. If such
fire or other casualty shall have damaged the Premises, or Common Areas which
render the Premises unfit of occupancy for the purposes permitted under this
Lease, Landlord shall allow Tenant a proportionate abatement of Rent during the
time and to the extent the Premises are unfit for occupancy for the purposes
permitted under this Lease, and not occupied for the conduct of business by
Tenant as a result thereof. Tenant's right to rent abatement pursuant to the
preceding sentence shall continue until Tenant has been provided a reasonable
period to rebuild the portion of the Premises it is required to rebuild under
this Article 11 (subject to Force Majeure), to install Tenant's property,
furniture, fixtures, and equipment, and to move in over one (1) weekend.
.2 LANDLORD'S OPTION TO REPAIR. Notwithstanding the terms of Section 11.1
of this Lease, Landlord may elect not to rebuild and/or restore the Premises,
Building and/or Project, and instead terminate this Lease, by notifying Tenant
in writing of such termination within sixty (60) days after the date of
discovery of the damage, such notice to include a termination date giving Tenant
one hundred twenty(120) days to vacate the Premises, but Landlord may so elect
only if the Building or Project shall be damaged by fire or other casualty or
cause, whether or not the Premises are affected, Landlord terminates the leases
of all tenants of the Building that are affected by the casualty in a manner
similar to Tenant, and one or more of the following conditions is present: (i)
in Landlord's reasonable judgment, repairs cannot reasonably be completed within
three hundred sixty and (360) days after the date of discovery of the damage
(when such repairs are made without the payment of overtime or other premiums);
(ii) except for an amount not to exceed the "Threshold Amount," as that term is
defined below, the damage is not fully covered by Landlord's insurance policies;
or (iii) the damage occurs during the last nine (9) months of the Lease Term.
Notwithstanding the foregoing, if Landlord does not elect to terminate this
Lease pursuant to Landlord's termination right as provided above, and the
repairs cannot, in the reasonable opinion of Landlord, be completed within three
hundred sixty and (360) days after being commenced, Tenant may elect, no earlier
than sixty (60) days after the date of the damage and not later than ninety (90)
days after the date of such damage, to terminate this Lease by written notice to
Landlord effective as of the date specified in the notice, which date shall not
be less than thirty (30) days nor more than 120 days after the date such notice
is given by Tenant. For purposes of this Section 11.2, the "Threshold Amount"
shall equal $2,000,000.00; provided, however, that such amount shall be reduced
by an amount equal to $55,555.55 on the first day of each month following the
last day of the seventh (7th) Lease Year.
.3 WAIVER OF STATUTORY PROVISIONS. The provisions of this Lease, including
this Article 11, constitute an express agreement between Landlord and Tenant
with respect to any and all damage to, or destruction of, all or any part of the
Premises, the Building or the Project, and any statute or regulation of the
State of California, including, without limitation, Sections 1932(2) and 1933(4)
of the California Civil Code, with respect to any rights or obligations
concerning damage or destruction in the absence of an express agreement between
the parties, and any other statute or regulation, now or hereafter in effect,
shall have no application to this Lease or any damage or destruction to all or
any part of the Premises, the Building or the Project.
ARTICLE 12
NONWAIVER
No provision of this Lease shall be deemed waived by either party hereto
unless expressly waived in a writing signed thereby. The waiver by either party
hereto of any breach of any term,
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covenant or condition herein contained shall not be deemed to be a waiver of any
subsequent breach of same or any other term, covenant or condition herein
contained. The subsequent acceptance of Rent hereunder by Landlord shall not be
deemed to be a waiver of any preceding breach by Tenant of any term, covenant or
condition of this Lease, other than the failure of Tenant to pay the particular
Rent so accepted, regardless of Landlord's knowledge of such preceding breach at
the time of acceptance of such Rent. No acceptance of a lesser amount than the
Rent herein stipulated shall be deemed a waiver of Landlord's right to receive
the full amount due, nor shall any endorsement or statement on any check or
payment or any letter accompanying such check or payment be deemed an accord and
satisfaction, and Landlord may accept such check or payment without prejudice to
Landlord's right to recover the full amount due. Except as provided in Section
16, no receipt of monies by Landlord from Tenant after the termination of this
Lease shall in any way alter the length of the Lease Term or of Tenant's right
of possession hereunder, or after the giving of any notice shall reinstate,
continue or extend the Lease Term or affect any notice given Tenant prior to the
receipt of such monies, it being agreed that after the service of notice or the
commencement of a suit, or after final judgment for possession of the Premises,
Landlord may receive and collect any Rent due, and the payment of said Rent
shall not waive or affect said notice, suit or judgment.
ARTICLE 13
CONDEMNATION
If the whole or any material part of the Premises, Building or Project
shall be taken by power of eminent domain or condemned by any competent
authority for any public or quasi-public use or purpose, or if Landlord shall
grant a deed or other instrument in lieu of such taking by eminent domain or
condemnation, provided that Landlord terminates all of the leases of all tenants
of the Building that are affected by the taking (or a deed or other instrument
in lieu thereof) in a manner comparable to Tenant, Landlord shall have the
option to terminate this Lease effective as of the date possession is required
to be surrendered to the authority. If more than twenty-five percent (25%) of
the rentable square feet of the Premises is taken, or if access to the Premises
is substantially impaired, in each case for a period in excess of one hundred
eighty (180) days, Tenant shall have the option to terminate this Lease
effective as of the date possession is required to be surrendered to the
authority. Tenant shall not because of such taking assert any claim against
Landlord or the authority for any compensation because of such taking and
Landlord shall be entitled to the entire award or payment in connection
therewith, except that Tenant shall have the right to file any separate claim
available to Tenant for any taking of Tenant's personal property and fixtures
belonging to Tenant and removable by Tenant upon expiration of the Lease Term
pursuant to the terms of this Lease, and for moving expenses, provided in each
event that such claim by Tenant is payable to Tenant or is otherwise separately
identifiable, and provided further that if the recovery from the condemnor shall
be paid into a common fund or paid to Landlord only, so long as amounts are
specifically designated as payment for claims which are due Tenant pursuant to
the terms of this Article 13. In addition, Tenant shall be entitled to 50% of
the bonus value of this Lease (which bonus value shall be equal to the
difference between the Rent payable under this Lease and the sum established by
the condemning authority as the award for compensation for the leasehold
estate). All Rent shall be apportioned as of the date of such termination. If
any part of the Premises shall be taken, and this Lease shall not be so
terminated, the Rent shall be proportionately abated. Tenant hereby waives any
and all rights it might otherwise have pursuant to Section 1265.130 of The
California Code of Civil Procedure. Notwithstanding anything to the contrary
contained in this Article 13, in the event of a temporary taking of all or any
portion of the Premises for a period of one hundred and eighty (180) days or
less, then this Lease shall not terminate but the Base Rent and the Additional
Rent shall be abated for the period of such taking in proportion to the ratio
that the amount of rentable square feet of the Premises taken bears to the total
rentable square feet of the Premises. Landlord shall be entitled to receive the
entire award made in connection with any such temporary taking.
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ARTICLE 14
ASSIGNMENT AND SUBLETTING
.1 TRANSFERS. Tenant shall not, without the prior written consent of
Landlord, assign, mortgage, pledge, hypothecate, encumber, or permit any lien to
attach to, or otherwise transfer, this Lease or any interest hereunder, permit
any assignment, or other transfer of this Lease or any interest hereunder,
sublet the Premises or any part thereof, or enter into any license or concession
agreements or otherwise permit the occupancy or use of the Premises or any part
thereof by any persons other than Tenant and its employees and contractors (all
of the foregoing are hereinafter sometimes referred to collectively as
"Transfers" and any person to whom any Transfer is made or sought to be made is
hereinafter sometimes referred to as a "Transferee"). If Tenant desires
Landlord's consent to any Transfer, Tenant shall notify Landlord in writing,
which notice (the "Transfer Notice") shall include (i) the proposed effective
date of the Transfer, which shall not be less than thirty (30) days nor more
than two hundred seventy (270) days after the date of delivery of the Transfer
Notice, (ii) a description of the portion of the Premises to be transferred (the
"Subject Space"), (iii) all of the terms of the proposed Transfer and the
consideration therefor, including calculation of the "Transfer Premium", as that
term is defined in Section 14.3 below, in connection with such Transfer, the
name and address of the proposed Transferee, and a copy of all existing executed
and/or proposed documentation pertaining to the proposed Transfer, including all
existing operative documents to be executed to evidence such Transfer, (iv)
current financial statements of the proposed Transferee certified by an officer,
partner or owner thereof, business credit and personal references and history of
the proposed Transferee and any other information required by Landlord which
will enable Landlord to determine the financial responsibility, character, and
reputation of the proposed Transferee, nature of such Transferee's business and
proposed use of the Subject Space and (v) an executed estoppel certificate from
Tenant in the form attached hereto as Exhibit E. Any Transfer made without
Landlord's prior written consent shall, at Landlord's option, be null, void and
of no effect, and shall, at Landlord's option, constitute a default by Tenant
under this Lease. Whether or not Landlord consents to any proposed Transfer,
Tenant shall pay Landlord's review and processing fees, as well as any
reasonable professional fees (including, without limitation, attorneys',
accountants', architects', engineers' and consultants' fees) incurred by
Landlord, within thirty (30) days after written request by Landlord, provided
that (I) in no event shall such fees and costs exceed $2,500.00 for a Transfer,
and (II) no such fees and costs shall be due in connection with an assignment or
sublease which does not require the consent of Landlord pursuant to the terms of
this Article 14.
.2 LANDLORD'S CONSENT. Landlord shall not unreasonably withhold its consent
to any proposed Transfer of the Subject Space to the Transferee on the terms
specified in the Transfer Notice. Landlord shall grant or deny its consent to a
proposed Transfer within ten (10) business days following the date Landlord
receives the Transfer Notice. Any denial of Landlord's consent shall be
accompanied by a statement indicating the reasonable grounds upon which Landlord
denied such consent. In the event that Landlord shall fail to grant or deny its
consent within the foregoing ten (10) business day period, and shall fail to
grant or deny its consent within three (3) business days following receipt of
notice thereof from Tenant, Landlord's consent shall be deemed granted. Without
limitation as to other reasonable grounds for withholding consent, the parties
hereby agree that it shall be reasonable under this Lease and under any
applicable law for Landlord to withhold consent to any proposed Transfer where
one or more of the following apply:
.2.1 The Transferee is of a character or reputation or engaged in a
business which is not consistent with the quality of the Building or the
Project;
.2.2 The Transferee intends to use the Subject Space for purposes
which are not permitted under this Lease;
.2.3 The Transferee is either a governmental agency or instrumentality
thereof;
.2.4 The Transferee is not a party of reasonable financial worth
and/or financial stability in light of the responsibilities to be undertaken in
connection with the Transfer on the date consent is requested;
.2.5 The proposed Transfer would cause a violation of another lease
for space in the Project, or would give an occupant of the Project a right to
cancel its lease; or
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.2.6 Either the proposed Transferee, or any person or entity which
directly or indirectly, controls, is controlled by, or is under common control
with, the proposed Transferee, occupies space in the Project at the time of the
request for consent and Landlord has space in the Building which is reasonably
sufficient, and has tenant improvements which are reasonably adequate, to
satisfy the proposed Transferee's requirements, provided that the terms of this
Section 14.2.6 shall be inapplicable in connection with a proposed sublease to
be entered into by Tenant during the last twenty-four (24) months of the Lease
Term which is for a term (inclusive of renewals) of twenty-four (24) months or
less.
If Landlord consents to any Transfer pursuant to the terms of this Section
14.2 (and does not exercise any recapture rights Landlord may have under Section
14.4 of this Lease), Tenant may within six (6) months after Landlord's consent,
but not later than the expiration of said six-month period, enter into such
Transfer of the Premises or portion thereof, upon substantially the same terms
and conditions as are set forth in the Transfer Notice furnished by Tenant to
Landlord pursuant to Section 14.1 of this Lease, provided that if there are any
material changes in the terms and conditions from those specified in the
Transfer Notice (i) such that Landlord would initially have been entitled to
refuse its consent to such Transfer under this Section 14.2, or (ii) which would
cause the proposed Transfer to be more materially favorable to the Transferee
than the terms set forth in Tenant's original Transfer Notice (and Landlord
retains or based upon the changes would retain a right of recapture pursuant to
Section 14.4 of this Lease), Tenant shall again submit the Transfer to Landlord
for its approval and other action under this Article 14 (including Landlord's
right of recapture, if any, under Section 14.4 of this Lease).
.3 TRANSFER PREMIUM. If Landlord consents to a Transfer, as a condition
thereto which the parties hereby agree is reasonable, Tenant shall pay to
Landlord fifty percent (50%) of any Transfer Premium received by Tenant from
such Transferee. "Transfer Premium" shall mean all rent, additional rent or
other consideration payable by such Transferee in connection with the Transfer
in excess of the Rent and Additional Rent payable by Tenant under this Lease
during the term of the Transfer on a per rentable square foot basis if less than
all of the Premises is transferred, after deducting the reasonable expenses (the
"Transfer Costs") incurred by Tenant for (i) any changes, alterations and
improvements to the Premises in connection with the Transfer, (ii) any free base
rent reasonably provided to the Transferee, (iii) any reasonable brokerage
commissions and attorneys fees incurred in connection with the Transfer, (iv)
marketing costs; (v) attorneys' fees paid by Tenant to Landlord in connection
with the Transfer, (vi) tenant improvement allowances granted in connection with
the Transfer, (vii) free rent and concessions granted to the Transferee, and
(viii) the amount of Base Rent and Additional Rent paid by Tenant to Landlord
with respect to the Subject Space during the period commencing on the later of
(A) the date Tenant contracts with a reputable broker to market the Subject
Space, and (B) the date Tenant vacates the Subject Space, until the commencement
of the term of the Transfer. The Transfer Costs shall also be deemed to include
the value of any permanently affixed improvements in the Subject Space which
were paid for by Tenant (specifically excluding any improvements in the Subject
Space funded by Landlord as part of the Tenant Improvement Allowance). "Transfer
Premium" shall also include, but not be limited to, key money, bonus money or
other cash consideration paid by Transferee to Tenant in connection with such
Transfer, and any payment in excess of fair market value for services rendered
by Tenant to Transferee or for assets, fixtures, inventory, equipment, or
furniture transferred by Tenant to Transferee in connection with such Transfer.
Tenant shall not artificially structure any Transfer as a subterfuge in order to
intentionally circumvent the provisions of this Section 14.3. Tenant shall be
required to pay Landlord its portion of any Transfer Premium on a monthly basis
when received by Tenant, provided that Tenant shall be entitled to recover all
of its Transfer Costs prior to owing to Landlord any Transfer Premium pursuant
to the terms of this Section 14.3.
.4 LANDLORD'S OPTION AS TO SUBJECT SPACE. Notwithstanding anything to the
contrary contained in this Article 14, in the event Tenant contemplates a
Transfer (specifically excluding an assignment or sublease under Section 14.7 of
this Lease) which, when aggregated with all other Transfers, would constitute a
Transfer of more than fifty percent (50%) of the rentable area of the Premises,
Tenant shall give Landlord notice (the "Intention to Transfer Notice") of such
contemplated Transfer (whether or not the contemplated Transferee or the terms
of such contemplated Transfer have been determined). The Intention to Transfer
Notice shall specify the portion of and amount of rentable square feet of the
Premises which Tenant intends to Transfer (the "Contemplated Transfer Space"),
the contemplated date of commencement of the
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Contemplated Transfer (the "Contemplated Effective Date"), and the contemplated
length of the term of such contemplated Transfer, and shall specify that such
Intention to Transfer Notice is delivered to Landlord pursuant to this Section
14.4 in order to allow Landlord to elect to recapture the Contemplated Transfer
Space for the term set forth in the Intention to Transfer Notice. Thereafter,
Landlord shall have the option, by giving written notice to Tenant within thirty
(30) days after receipt of any Intention to Transfer Notice, to recapture the
Contemplated Transfer Space. Such recapture shall cancel and terminate this
Lease with respect to such Contemplated Transfer Space as of the Contemplated
Effective Date until the last day of the term of the contemplated Transfer as
set forth in the Intention to Transfer Notice. In the event of a recapture by
Landlord, if this Lease shall be canceled with respect to less than the entire
Premises, the Rent, Security Deposit and L-C amounts reserved herein shall be
prorated on the basis of the number of rentable square feet retained by Tenant
in proportion to the number of rentable square feet contained in the Premises,
and this Lease as so amended shall continue thereafter in full force and effect,
and upon request of either party, the parties shall execute written confirmation
of the same. Landlord shall be responsible for installing, at its cost, any
demising wall and other improvements necessary to separate the recaptured space
from the balance of the Premises. If Landlord declines, or fails to elect in a
timely manner, to recapture such Contemplated Transfer Space under this Section
14.4, then, subject to the other terms of this Article 14, for a period of nine
(9) months (the "Nine Month Period") commencing on the last day of such sixty
(60) day period, Landlord shall not have any right to recapture the Contemplated
Transfer Space with respect to any Transfer made during the Nine Month Period,
provided that any such Transfer is substantially on the terms set forth in the
Intention to Transfer Notice; provided however, that any such Transfer shall be
subject to the remaining terms of this Article 14. If such a Transfer is not so
consummated within the Nine Month Period (or if a Transfer is so consummated,
then upon the expiration of the term of any Transfer of such Contemplated
Transfer Space consummated within such Nine Month Period), Tenant shall again be
required to submit a new Intention to Transfer Notice to Landlord with respect
any contemplated Transfer, as provided above in this Section 14.4.
.5 EFFECT OF TRANSFER. If Landlord consents to a Transfer, (i) the terms
and conditions of this Lease shall in no way be deemed to have been waived or
modified, (ii) such consent shall not be deemed consent to any further Transfer
by either Tenant or a Transferee, (iii) Tenant shall deliver to Landlord,
promptly after execution, an original executed copy of all documentation
pertaining to the Transfer, (iv) Tenant shall furnish upon Landlord's request a
complete statement, setting forth in detail the computation of any Transfer
Premium Tenant has derived and shall derive from such Transfer, and (v) no
Transfer relating to this Lease or agreement entered into with respect thereto,
whether with or without Landlord's consent, shall relieve Tenant or any
guarantor of the Lease from any liability under this Lease, including, without
limitation, in connection with the Subject Space (except to the extent Landlord
exercises its right of recapture, as set forth in Section 14.4 of this Lease).
Landlord or its authorized representatives shall have the right at all
reasonable times to audit the books, records and papers of Tenant relating to
any Transfer, and shall have the right to make copies thereof. If the Transfer
Premium respecting any Transfer shall be found understated, Tenant shall, within
thirty (30) days after demand, pay the deficiency, and if understated by more
than three percent (3%), Tenant shall pay Landlord's costs of such audit.
.6 OCCURRENCE OF DEFAULT. Any Transfer hereunder shall be subordinate and
subject to the provisions of this Lease, and if this Lease shall be terminated
during the term of any Transfer, Landlord shall have the right to treat such
Transfer as canceled and repossess the Subject Space by any lawful means unless
Landlord has contractually agreed to recognize the sublessee. Upon the
occurrence of a Triggering Default, Landlord is hereby irrevocably authorized,
as Tenant's agent and attorney-in-fact, to direct any Transferee to make all
payments under or in connection with the Transfer directly to Landlord (which
Landlord shall apply towards Tenant's obligations under this Lease) until such
default is cured. Such Transferee shall rely on any representation by Landlord
that Tenant is in default hereunder, without any need for confirmation thereof
by Tenant. Upon any assignment, the assignee shall assume in writing all
obligations and covenants of Tenant thereafter to be performed or observed under
this Lease. No collection or acceptance of rent by Landlord from any Transferee
shall be deemed a waiver of any provision of this Article 14 or the approval of
any Transferee or a release of Tenant from any obligation under this Lease,
whether theretofore or thereafter accruing. In no event shall Landlord's
enforcement of any
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provision of this Lease against any Transferee be deemed a waiver of Landlord's
right to enforce any term of this Lease against Tenant or any other person. If
Tenant's obligations hereunder have been guaranteed, Landlord's consent to any
Transfer shall not be effective unless the guarantor also consents to such
Transfer.
.7 NON-TRANSFERS. Notwithstanding anything to the contrary contained in
this Lease, neither (i) an assignment to a transferee of all or substantially
all of the assets of Tenant, (ii) an assignment of the Premises to a transferee
which is the resulting entity of a merger or consolidation of Tenant with
another entity, nor (iii) an assignment or subletting of all or a portion of the
Premises to an affiliate of Tenant (an entity which is controlled by, controls,
or is under common control with, Tenant) (an "Affiliate"), shall be deemed a
Transfer under Article 14 of this Lease, provided that Tenant notifies Landlord
of any such assignment or sublease and promptly supplies Landlord with any
documents or information reasonably requested by Landlord regarding such
transfer or transferee as set forth in items (i) through (iii) above, that such
assignment or sublease is not a subterfuge by Tenant to avoid its obligations
under this Lease. "Control," as used in this Section 14.7, shall mean the
ownership, directly or indirectly, of at least fifty-one percent (51%) of the
voting securities of, or possession of the right to vote, in the ordinary
direction of its affairs, of at least fifty-one percent (51%) of the voting
interest in, any person or entity.
.8 PERMITTED OCCUPANTS. Notwithstanding any contrary provision of this
Article 14, Tenant shall have the right without the payment of a Transfer
Premium and without the receipt of Landlord's consent, but on prior written
notice to Landlord, to sublease, license, or otherwise grant rights of occupancy
or up to ten percent (10%) of the rentable square footage of the Premises, in
the aggregate, to attorneys, accountants, agents or other professionals on and
subject to the following conditions: (i) such individuals or entities shall not
be permitted to occupy a separately demised portion of the Premises which
contains an entrance to such portion of the Premises other than the primary
entrance to the Premises; (ii) all such individuals or entities shall be of a
character and reputation consistent with the quality of the Building and the
Project; and (iii) such occupancy shall not be a subterfuge by Tenant to avoid
its obligations under this Lease or the restrictions on Transfers pursuant to
this Article 14. Tenant shall promptly supply Landlord with any documents or
information reasonably requested by Landlord regarding any such occupancy. Any
occupancy permitted under this Section 14.8 shall not be deemed a Transfer under
this Article 14. Notwithstanding the foregoing, no such occupancy shall relieve
Tenant from any liability under this Lease.
ARTICLE 15
SURRENDER OF PREMISES; OWNERSHIP AND
REMOVAL OF TRADE FIXTURES
.1 SURRENDER OF PREMISES. No act or thing done by Landlord or any agent or
employee of Landlord during the Lease Term shall be deemed to constitute an
acceptance by Landlord of a surrender of the Premises unless such intent is
specifically acknowledged in writing by Landlord. The delivery of keys to the
Premises to Landlord or any agent or employee of Landlord shall not constitute a
surrender of the Premises or effect a termination of this Lease, whether or not
the keys are thereafter retained by Landlord, and notwithstanding such delivery
Tenant shall be entitled to the return of such keys at any reasonable time upon
request until this Lease shall have been properly terminated. The voluntary or
other surrender of this Lease by Tenant, whether accepted by Landlord or not, or
a mutual termination hereof, shall not work a merger, and at the option of
Landlord shall operate as an assignment to Landlord of all subleases or
subtenancies affecting the Premises or terminate any or all such .
.2 REMOVAL OF TENANT PROPERTY BY TENANT. Upon the expiration of the Lease
Term, or upon any earlier termination of this Lease, Tenant shall, subject to
the provisions of this Article 15, quit and surrender possession of the Premises
to Landlord in as good order and condition as when Tenant took possession and as
thereafter improved by Landlord and/or Tenant, reasonable wear and tear, repairs
which are specifically made the responsibility of Landlord hereunder, and
casualty excepted. Upon such expiration or termination, Tenant shall, without
expense to Landlord, remove or cause to be removed from the Premises all debris
and rubbish, and such items of furniture, equipment, business and trade
fixtures, free-standing cabinet work, movable
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partitions and other articles of personal property owned by Tenant or installed
or placed by Tenant at its expense in the Premises, and such similar articles of
any other persons claiming under Tenant, and Tenant shall repair at its own
expense all damage to the Premises and Building resulting from such removal.
ARTICLE 16
HOLDING OVER
If Tenant holds over after the expiration of the Lease Term or earlier
termination thereof, with or without the express or implied consent of Landlord,
such tenancy shall be from month-to-month only, and shall not constitute a
renewal hereof or an extension for any further term, and in such case Rent shall
be payable at a monthly rate equal to one hundred twenty-five (125%) of the Rent
applicable during the last rental period of the Lease Term under this Lease for
the first one hundred twenty (120) days of any such holdover, and one hundred
fifty percent (150%) thereafter. Such month-to-month tenancy shall be subject to
every other applicable term, covenant and agreement contained herein. Nothing
contained in this Article 16 shall be construed as consent by Landlord to any
holding over by Tenant, and Landlord expressly reserves the right to require
Tenant to surrender possession of the Premises to Landlord as provided in this
Lease upon the expiration or other termination of this Lease. The provisions of
this Article 16 shall not be deemed to limit or constitute a waiver of any other
rights or remedies of Landlord provided herein or at law. If Tenant fails to
surrender the Premises upon the termination or expiration of this Lease, in
addition to any other liabilities to Landlord accruing therefrom, Tenant shall
protect, defend, indemnify and hold Landlord harmless from all loss, costs
(including reasonable attorneys' fees) and liability resulting from such
failure, including, without limiting the generality of the foregoing, any claims
made by any succeeding tenant founded upon such failure to surrender and any
lost profits to Landlord resulting therefrom.
ARTICLE 17
ESTOPPEL CERTIFICATES
Within ten (10) business days following a request in writing by Landlord,
Tenant shall execute, acknowledge and deliver to Landlord an estoppel
certificate, which, as submitted by Landlord, shall be substantially in the form
of Exhibit E, attached hereto (or such other form as may be reasonably required
by any prospective mortgagee or purchaser of the Project, or any portion
thereof), indicating therein any exceptions thereto that may exist at that time,
and shall also contain any other information reasonably requested by Landlord or
Landlord's mortgagee or prospective mortgagee. Any such certificate may be
relied upon by any prospective mortgagee or purchaser of all or any portion of
the Project. Within ten (10) business days following request by Tenant, Landlord
shall deliver an estoppel certificate in substantially the form attached hereto
as Exhibit E (with such changes as are reasonably required in order to reflect
that the same shall be executed by Landlord in favor of Tenant rather than
Tenant in favor of Landlord), or such other form as may be reasonably requested
by Tenant or a purchaser or lender of Tenant, indicating therein any exceptions
thereto that may exist at that time. At any time during the Lease Term, if
Tenant is not a public company reporting under applicable federal securities
laws, Landlord may require Tenant to provide Landlord with a current financial
statement and financial statements of the two (2) years prior to the current
financial statement year. Failure of Tenant to timely execute, acknowledge and
deliver such estoppel certificate or other instruments shall constitute an
acceptance of the Premises and an acknowledgment by Tenant that statements
included in the estoppel certificate are true and correct, without exception.
ARTICLE 18
SUBORDINATION
Landlord shall use commercially reasonable efforts to provide Tenant with a
commercially reasonable form of non-disturbance agreement in favor of Tenant,
from the current, as of the date of this Lease, holder of all ground leases, if
any, and holders of a deed of trust against the Project. Subject to the terms of
this Article 18, this Lease shall be subject and subordinate to all present and
future ground or underlying leases of the Building or Project and to
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the lien of any mortgage, trust deed or other encumbrances now or hereafter in
force against the Building or Project or any part thereof, if any, and to all
renewals, extensions, modifications, consolidations and replacements thereof,
and to all advances made or hereafter to be made upon the security of such
mortgages or trust deeds, unless the holders of such mortgages, trust deeds or
other encumbrances, or the lessors under such ground lease or underlying leases,
require in writing that this Lease be superior thereto. Landlord agrees to
provide Tenant with commercially reasonable non-disturbance agreements in favor
of Tenant, from any ground lessors, mortgage holders or lien holders of Landlord
acquiring or modifying such interests at any time subsequent to the execution
and delivery of the Lease in consideration of, and as a condition precedent to,
Tenant's agreement to be bound by Section 18 of the Lease. Tenant covenants and
agrees in the event any proceedings are brought for the foreclosure of any such
mortgage or deed in lieu thereof (or if any ground lease is terminated), to
attorn, to the lienholder or purchaser or any successors thereto upon any such
foreclosure sale or deed in lieu thereof (or to the ground lessor), if so
requested to do so by such purchaser or lienholder or ground lessor, and to
recognize such purchaser or lienholder or ground lessor as the lessor under this
Lease, provided such lienholder or purchaser or ground lessor shall agree to
accept this Lease and not disturb Tenant's occupancy, so long as Tenant timely
pays the rent and observes and performs the terms, covenants and conditions of
this Lease to be observed and performed by Tenant. Landlord's interest herein
may be assigned as security at any time to any lienholder. Tenant shall, within
ten (10) days of request by Landlord, execute such further instruments or
assurances as Landlord may reasonably deem necessary to evidence or confirm the
subordination or superiority of this Lease to any such mortgages, trust deeds,
ground leases or underlying leases.
ARTICLE 19
DEFAULTS; REMEDIES
.1 EVENTS OF DEFAULT. The occurrence of any of the following shall
constitute a default of this Lease by Tenant:
.1.1 Any failure by Tenant to pay any Rent or any other charge
required to be paid under this Lease, or any part thereof, when due unless such
failure is cured within seven (7) days after written notice; or
.1.2 Except where a specific time period is otherwise set forth for
Tenant's performance in this Lease, in which event the failure to perform by
Tenant within such time period shall be a default by Tenant under this Section
19.1.2, any failure by Tenant to observe or perform any other provision,
covenant or condition of this Lease to be observed or performed by Tenant where
such failure continues for thirty (30) days after written notice thereof from
Landlord to Tenant; provided that if the nature of such default is such that the
same cannot reasonably be cured within a thirty (30) day period, Tenant shall
not be deemed to be in default if it diligently commences such cure within such
period and thereafter diligently proceeds to rectify and cure such default; or
.1.3 To the extent permitted by law, a general assignment by Tenant or
any guarantor of this Lease for the benefit of creditors, or the taking of any
corporate action in furtherance of bankruptcy or dissolution whether or not
there exists any proceeding under an insolvency or bankruptcy law, or the filing
by or against Tenant or any guarantor of any proceeding under an insolvency or
bankruptcy law, unless in the case of a proceeding filed against Tenant or any
guarantor the same is dismissed within sixty (60) days, or the appointment of a
trustee or receiver to take possession of all or substantially all of the assets
of Tenant or any guarantor, unless possession is restored to Tenant or such
guarantor within thirty (30) days, or any execution or other judicially
authorized seizure of all or substantially all of Tenant's assets located upon
the Premises or of Tenant's interest in this Lease, unless such seizure is
discharged within sixty (60) days; or
.1.4 The failure by Tenant to observe or perform according to the
terms and conditions of Articles 17 or 18 of this Lease where such failure
continues for more than ten (10) days after notice from Landlord.
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All notices to be given pursuant to this Section 19 shall be in addition
to, and not in lieu of, the notice requirements of California Code of Civil
Procedure Section 1161.
If Tenant disputes that any amount is due and payable by Tenant pursuant to
the Lease, Tenant shall have the right, without waiving any of its rights at law
or in equity, to pay any such amount under protest and thereafter to seek
recovery of all or any part thereof by Landlord.
.2 REMEDIES UPON DEFAULT. Upon the occurrence of any event of default by
Tenant, Landlord shall have, in addition to any other remedies available to
Landlord at law or in equity (all of which remedies shall be distinct, separate
and cumulative), the option to pursue any one or more of the following remedies,
each and all of which shall be cumulative and nonexclusive, without any notice
or demand whatsoever.
.2.1 Terminate this Lease, in which event Tenant shall immediately
surrender the Premises to Landlord, and if Tenant fails to do so, Landlord may,
without prejudice to any other remedy which it may have for possession or
arrearages in rent, enter upon and take possession of the Premises and expel or
remove Tenant and any other person who may be occupying the Premises or any part
thereof, without being liable for prosecution or any claim or damages therefor;
and Landlord may recover from Tenant the following:
(i) The worth at the time of any unpaid rent which has been
earned at the time of such termination; plus
(ii) The worth at the time of award of the amount by which the
unpaid rent which would have been earned after termination until the time of
award exceeds the amount of such rental loss that Tenant proves could have been
reasonably avoided; plus
(iii) The worth at the time of award of the amount by which the
unpaid rent for the balance of the Lease Term after the time of award exceeds
the amount of such rental loss that Tenant proves could have been reasonably
avoided; plus
(iv) Any other amount necessary to compensate Landlord for all
the detriment proximately caused by Tenant's failure to perform its obligations
under this Lease or which in the ordinary course of things would be likely to
result therefrom, specifically including but not limited to, brokerage
commissions and advertising expenses incurred, expenses of remodeling the
Premises or any portion thereof for a new tenant, whether for the same or a
different use, and any special concessions made to obtain a new tenant; provided
that to the extent any new lease involves space other than the Premises or
extends beyond the then Lease Term, only those costs, expenses, commissions and
concessions attributable to the Premises or the remainder of the then Lease
Term, as determined on a straight line basis, shall be recoverable by Landlord;
and
(v) At Landlord's election, such other amounts in addition to or
in lieu of the foregoing as may be permitted from time to time by applicable
law.
The term "rent" as used in this Section 19.2 shall be deemed to be and to
mean all sums of every nature required to be paid by Tenant pursuant to the
terms of this Lease, whether to Landlord or to others. As used in Paragraphs
19.2.1(i) and (ii), above, the "worth at the time of award" shall be computed by
allowing interest at the rate set forth in Article 25 of this Lease, but in no
case greater than the rate described in Article 25. As used in Paragraph
19.2.1(iii) above, the "worth at the time of award" shall be computed by
discounting such amount at the discount rate of the Federal Reserve Bank of San
Francisco at the time of award plus one percent (1%).
.2.2 Landlord shall have the remedy described in California Civil Code
Section 1951.4 (lessor may continue lease in effect after lessee's breach and
abandonment and recover rent as it becomes due, if lessee has the right to
sublet or assign, subject only to reasonable limitations). Accordingly, if
Landlord does not elect to terminate this Lease on account of any default by
Tenant, Landlord may, from time to time, without terminating this Lease, enforce
all of its rights and remedies under this Lease, including the right to recover
all rent as it becomes due.
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.2.3 Landlord shall at all times have the rights and remedies (which
shall be cumulative with each other and cumulative and in addition to those
rights and remedies available under Sections 19.2.1 and 19.2.2, above, or any
law or other provision of this Lease), without prior demand or notice except as
required by applicable law, to seek any declaratory, injunctive or other
equitable relief, and specifically enforce this Lease, or restrain or enjoin a
violation or breach of any provision hereof.
.3 SUBLEASES OF TENANT. If Landlord elects to terminate this Lease on
account of any default by Tenant, as set forth in this Article 19, Landlord
shall have the right to terminate any and all subleases, licenses, concessions
or other consensual arrangements for possession entered into by Tenant and
affecting the Premises.
.4 EFFORTS TO RELET. No re-entry or repossession, repairs, maintenance,
changes, alterations and additions, reletting, appointment of a receiver to
protect Landlord's interests hereunder, or any other action or omission by
Landlord shall be construed as an election by Landlord to terminate this Lease
or Tenant's right to possession, or to accept a surrender of the Premises, nor
shall same operate to release Tenant in whole or in part from any of Tenant's
obligations hereunder, unless express written notice of such intention is sent
by Landlord to Tenant. The foregoing shall not constitute a waiver of any of
Tenant's rights under applicable law, all of which are hereby expressly
reserved.
.5 LANDLORD DEFAULT.
.5.1 GENERAL. Notwithstanding anything to the contrary set forth in this
Lease, Landlord shall not be in default in the performance of any obligation
required to be performed by Landlord pursuant to this Lease unless Landlord
fails to perform such obligation within thirty (30) days after the receipt of
notice from Tenant specifying in detail Landlord's failure to perform; provided,
however, if the nature of Landlord's obligation is such that more than thirty
(30) days are required for its performance, then Landlord shall not be in
default under this Lease if it shall commence such performance within such
thirty (30) day period and thereafter diligently pursue the same to completion.
Upon any such default by Landlord under this Lease, Tenant may, except as
otherwise specifically provided in this Lease to the contrary, exercise any of
its rights provided at law or in equity.
.5.2 ABATEMENT OF RENT. In the event that Tenant is prevented from using,
and does not use, the Premises or any portion thereof, as a result of (i) any
repair, maintenance or alteration performed by Landlord, or which Landlord
failed to perform, after the Lease Commencement Date and required by this Lease,
which substantially interferes with Tenant's use of the Premises, (ii) any
failure to provide services, utilities or access to the Premises, (iii) damage
and destruction of or eminent domain proceedings in connection with the
Premises, the Project or the parking facility servicing the Project, or (iv) the
presence of hazardous materials not brought on the Premises by Tenant, its
employees, agents, invitees or customers (any such set of circumstances as set
forth in items (i) through (iv), above, to be known as an "Abatement Event"),
then Tenant shall give Landlord notice of such Abatement Event, and if such
Abatement Event continues for five (5) consecutive business days after
Landlord's receipt of any such notice (the "Eligibility Period"), then the Base
Rent, Tenant's Share of Direct Expenses, and Tenant's obligation to pay for
parking shall be abated or reduced, as the case may be, from the commencement of
the Eligibility Period for such time that Tenant continues to be so prevented
from using, and does not use, the Premises or a portion thereof, in the
proportion that the rentable area of the portion of the Premises that Tenant is
prevented from using, and does not use, bears to the total rentable area of the
Premises; provided, however, in the event that Tenant is prevented from using,
and does not use, a portion of the Premises for a period of time from the
commencement of the Eligibility Period and the remaining portion of the Premises
is not sufficient to allow Tenant to effectively conduct its business therein,
and if Tenant does not conduct its business from such remaining portion, then
for such time after expiration of the Eligibility Period during which Tenant is
so prevented from effectively conducting its business therein, the Base Rent and
Tenant's Share of Building Direct Expenses and Tenant's obligation to pay for
parking for the entire Premises shall be abated for such time as Tenant
continues to be so prevented from using, and does not use, the Premises. If,
however, Tenant reoccupies any portion of the Premises during such period, the
Rent allocable to such reoccupied portion, based on the proportion that the
rentable area of such reoccupied portion of the Premises bears to
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the total rentable area of the Premises, shall be payable by Tenant from the
date Tenant reoccupies such portion of the Premises. Such right to abate Base
Rent, Tenant's Share of Direct Expenses, and Tenant's parking charges shall be
Tenant's sole and exclusive remedy at law or in equity for an Abatement Event.
If Tenant's right to abatement occurs because of an eminent domain taking and/or
because of damage or destruction to the Premises, the Project's parking
facility, and/or the Project, Tenant's abatement period shall continue until
Tenant has been given sufficient time, and sufficient access to the Premises, to
rebuild such portion it is required to rebuild, to install its property,
furniture, fixtures, and equipment to the extent the same shall have been
removed as a result of such damage or destruction and to move in over a weekend.
Except as provided in this Section 19.5.2, nothing contained herein shall be
interpreted to mean that Tenant is excused from paying Rent due hereunder.
ARTICLE 20
COVENANT OF QUIET ENJOYMENT
Landlord covenants that Tenant, on paying the Rent, charges for services
and other payments herein reserved and on keeping, observing and performing all
the other terms, covenants, conditions, provisions and agreements herein
contained on the part of Tenant to be kept, observed and performed, shall,
during the Lease Term, peaceably and quietly have, hold and enjoy the Premises
subject to the terms, covenants, conditions, provisions and agreements hereof
without interference by any persons lawfully claiming by or through Landlord.
ARTICLE 21
LETTER OF CREDIT
.1 LETTER OF CREDIT. Tenant shall deliver to Landlord concurrently with the
parties' full execution and unconditional delivery of this Lease, an
unconditional, clean, irrevocable letter of credit (the "L-C") in the initial
amount of $2,258,136.38 (the "Initial L-C Amount"), which L-C shall be issued by
a money-center bank (a bank which accepts deposits, maintains accounts, has a
local Los Angeles office which will negotiate a letter of credit, and whose
deposits are insured by the FDIC) reasonably acceptable to Landlord, and which
L-C shall be substantially in form and content as set forth in Exhibit J
attached hereto. Tenant shall pay all expenses, points and/or fees incurred by
Tenant in obtaining the L-C.
.2 APPLICATION OF THE L-C. The L-C shall be held by Landlord as security
for the faithful performance by Tenant of all the terms, covenants, and
conditions of this Lease to be kept and performed by Tenant during the Lease
Term. The L-C shall not be mortgaged, assigned or encumbered in any manner
whatsoever by Tenant without the prior written consent of Landlord. If Tenant
defaults with respect to any provisions of this Lease, including, but not
limited to, the provisions relating to the payment of Rent, or if Tenant fails
to renew the L-C at least thirty (30) days before its expiration, Landlord may,
but shall not be required to, draw upon all or any portion of the L-C for
payment of any Rent or any other sum in default, or for the payment of any
amount that Landlord may reasonably spend or may become obligated to spend by
reason of Tenant's default, or to compensate Landlord for any other loss or
damage that Landlord may suffer by reason of Tenant's default. The use,
application or retention of the L-C, or any portion thereof, by Landlord shall
not (a) prevent Landlord from exercising any other right or remedy provided by
this Lease or by law, it being intended that Landlord shall not first be
required to proceed against the L-C, nor (b) operate as a limitation on any
recovery to which Landlord may otherwise be entitled. Any amount of the L-C
which is drawn upon by Landlord, but is not used or applied by Landlord, shall
be held by Landlord and deemed a security deposit (the "L-C Security Deposit").
If any portion of the L-C is drawn upon or if any portion of the L-C Security
Deposit is utilized, Tenant shall, within five (5) days after written demand
therefor, either (i) deposit cash with Landlord (which cash shall be applied by
Landlord to the L-C Security Deposit) in an amount sufficient to cause the sum
of the L-C Security Deposit and the amount of the remaining L-C to be equivalent
to the amount of the L-C then required under this Lease or (ii) reinstate the
L-C to the amount then required under this Lease, and Tenant's failure to do so
shall be a default under this Lease. Tenant acknowledges that Landlord has the
right to transfer or mortgage its interest in the Building and the Project and
in this Lease and Tenant agrees that in the event of any such transfer or
mortgage, Landlord shall have the right to transfer or assign the
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L-C Security Deposit and/or the L-C to the transferee or mortgagee, and in the
event of such transfer, Tenant shall look solely to such transferee or mortgagee
for the return of the L-C Security Deposit and/or the L-C. If Tenant is not in
default under this Lease beyond the applicable cure period provided in this
Lease, then the amount of the L-C shall be reduced as follows: on May 1, 2002,
the amount of the L-C shall be reduced to One Million Eight Hundred Six Thousand
Five Hundred Nine and 10/100 Dollars ($1,806,509.10); on May 1, 2003, the amount
of the L-C shall be reduced to One Million Three Hundred Fifty-Four Thousand
Eight Hundred Eighty-One and 82/100 Dollars ($1,354,881.82); on May 1, 2004, the
amount of the L-C shall be reduced to Nine Hundred Three Thousand Two Hundred
Fifty-Four and 54/100 Dollars ($903,254.54); on May 1, 2005, the amount of the
L-C shall be reduced to Four Hundred Fifty-One Thousand Six Hundred Twenty-Seven
and 26/100 Dollars ($451,627.26); and on May 1, 2006, the amount of the L-C
shall be reduced to Zero and No/100 Dollars ($0.00).
In the event that the L-C is not reduced as set forth above because Tenant
is in default of this Lease as of a Reduction Date and Tenant shall thereafter
cure such default, the L-C shall be reduced as set forth above upon the first
day of the month following the cure of such default by Tenant. If Tenant shall
fully and faithfully perform every provision of this Lease to be performed by
it, the L-C Security Deposit and/or the L-C, or any balance thereof, shall be
returned to Tenant within thirty (30) days following the expiration of the Lease
Term, or earlier termination of this Lease for any reason other than a default
by Tenant.
ARTICLE 22
INTENTIONALLY OMITTED
ARTICLE 23
SIGNS
.1 FULL FLOORS. Subject to Landlord's prior written approval, in its
reasonable discretion, and provided all signs are in keeping with the quality,
design and style of the Building and Project, Tenant, if the Premises comprise
an entire floor of the Building (other than the ground floor of the Building),
at its sole cost and expense, may install identification signage anywhere in the
Premises including in the elevator lobby of the Premises, provided that such
signs must not be visible from the exterior of the Building.
.2 MULTI-TENANT FLOORS. If other tenants occupy space on the floor on which
the Premises is located, Tenant's identifying signage shall be provided by
Landlord, at Tenant's cost, and such signage shall be comparable to that used by
Landlord for other similar floors in the Building and shall comply with
Landlord's Building standard signage program.
.3 PROHIBITED SIGNAGE AND OTHER ITEMS. Any signs, notices, logos, pictures,
names or advertisements which are installed and that have not been separately
approved by Landlord may be removed without notice by Landlord at the sole
expense of Tenant. Tenant may not install any signs on the exterior or roof of
the Project or the Common Areas, except as provided in Section 23.5, below. Any
signs, window coverings, or blinds (even if the same are located behind the
Landlord-approved window coverings for the Building), or other items visible
from the exterior of the Premises or Building, shall be subject to the prior
approval of Landlord, in its sole discretion.
.4 BUILDING DIRECTORY. A building directory will be located in the lobby of
the Building. Tenant shall have the right to designate names to be displayed
under Tenant's entry in such directory at a rate of one (1) strip for each three
thousand (3,000) rentable square feet of the Premises.
.5 TENANT'S SIGNAGE. Tenant shall be entitled to install (i) one (1)
eyebrow sign (the "Eyebrow Signage") in the location above the third (3rd) floor
of the Building facing Wilshire Boulevard which location is currently, as of the
date of this Lease, occupied by the signage of E! Entertainment Television,
Inc., a Delaware corporation, and (ii) two (2) monument signs (the "Monument
Signage") on the existing monument located on the corner of Wilshire Boulevard
and Hauser Street in the location set forth on Exhibit I attached hereto, at
Tenant's sole cost and
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expense (the Eyebrow Signage and Monument Signage may be collectively referred
to herein as "Tenant's Signage"). Landlord shall not grant to any other tenant
the right to install signage on the exterior of the Building at the same level
as the Eyebrow Signage.
Notwithstanding the foregoing, (a) the location of Tenant's Signage shall
be consistent with Exhibit I and otherwise reasonably acceptable to Landlord and
Tenant, (b) the size, materials, design, graphics, color, illumination and
specifications of Tenant's Signage shall be subject to Landlord's approval,
which approval shall not be unreasonably withheld (provided that the graphics,
color, and design of Tenant's existing logo are hereby approved), (c) Tenant's
Signage shall comply with all applicable governmental rules and regulations, (d)
Tenant's Signage shall be personal to the Original Tenant and any Permitted
Assignee, provided that Tenant may not transfer less than all of Tenant's
Signage to such Permitted Assignee, and (e) Tenant's right to Tenant's Signage
shall terminate in the event that less than 40,000 rentable square feet of the
Premises are occupied by the Original Tenant or any Permitted Assignee. If,
following such termination Landlord requires the removal of Tenant's Signage,
Landlord shall be responsible for the cost of such removal and any repair of the
Project resulting therefrom. Tenant's Signage may, at Tenant's option, include
Tenant's name and/or logo. Tenant shall be responsible for all costs incurred by
Tenant in connection with the design, construction, installation, illumination,
maintenance and repair of Tenant's Signage. Subject to Landlord's reasonable
needs in connection with renovations of and/or in connection with the repair and
maintenance of the Building or Project, Landlord shall not (x) affix any
structures to the Building or Project which will materially obstruct the
visibility of Tenant's Signage, and (y) permit landscaping on the Project to
materially obstruct the visibility of Tenant's Signage. Upon the expiration or
earlier termination of Tenant's rights to Tenant's Signage or upon the
expiration of the Lease Term, Tenant shall, at its sole cost and expense, remove
Tenant's Signage and repair any and all damage to the Building and Project
caused by such removal. In the event Tenant fails to comply with the terms of
the proceeding sentence, Landlord shall have the right, at Tenant's sole cost
and expense after thirty (30) days advance written notice, to remove Tenant's
Signage and to repair any and all damage to the Building caused by such removal.
ARTICLE 24
COMPLIANCE WITH LAW
Tenant shall not do anything or suffer anything to be done in or about the
Premises which will in any way conflict with any law, statute, ordinance or
other governmental rule, regulation or requirement now in force or which may
hereafter be enacted or promulgated ("Applicable Laws"). Subject to Landlord's
obligations as set forth in this Article 24, at its sole cost and expense,
Tenant shall promptly comply with all such governmental measures which relate to
(i) Tenant's use of the Premises, (ii) the Alterations and Tenant Improvements
(as to the Alterations and Tenant Improvements only but not as to any other part
of the Building triggered thereby, except as set forth in item (iii), below),
(iii) the Base Building, Building Systems and Building Structure, but only to
the extent such obligations are triggered by Tenant's Tenant Improvements which
are not customary general office improvements, Tenant's Alterations which are
not customary general office improvements, or Tenant's non-general office use;
provided, however, that Tenant's obligation to comply with Applicable Laws shall
only apply to the extent Tenant's failure to comply therewith would (a) prohibit
Landlord or any tenant of the Building from obtaining or maintaining a
certificate of occupancy for all or any portion of the Building, (b)
unreasonably and materially affect the safety of any tenants, occupants,
invitees, employees or any other person at the Building, (c) impose an
unreasonable health hazard for any such persons, and/or (d) otherwise materially
adversely affect Landlord and/or the Building (items (a) through (d) to be
referred to herein as "Tenant's Compliance Conditions"). Should any standard or
regulation now or hereafter be imposed on Tenant by a state, federal or local
governmental body charged with the establishment, regulation and enforcement of
occupational, health or safety standards for employers, employees, or tenants,
then Tenant agrees, at its sole cost and expense, to comply promptly with such
standards or regulations. Subject to the foregoing terms of this Article 24, and
the terms of this Lease, Landlord shall, at its sole cost and expense, comply
with laws relating to the Base Building, Building Systems, Building Structure
and the Common Areas; provided, however, that Landlord's obligation to comply
with such Applicable Laws shall only apply to the extent that failure to comply
with therewith would (I) impose an unreasonable health hazard to the occupants
of the Premises, (II) prohibit Tenant from obtaining or maintaining a
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certificate of occupancy for the Premises, (III) unreasonably and materially
affect the safety of any tenants, occupants, invitees, employees or any other
person at the Building, or (IV) otherwise materially adversely affect Tenant
and/or the Premises (items (I) through (IV) to be referred to herein is
"Landlord's Compliance Conditions"). Notwithstanding anything to the contrary
set forth in this Article 24, Tenant's and Landlord's obligation under this
Article 24 shall commence upon the Lease Commencement Date.
ARTICLE 25
LATE CHARGES
If any installment of Rent or any other sum due from Tenant shall not be
received by Landlord or Landlord's designee within five (5) days after said
amount is due more than once in a Lease Year, then Tenant shall pay to Landlord
a late charge equal to three and one half percent (3.5%) of the overdue amount.
The late charge shall be deemed Additional Rent and the right to require it
shall be in addition to all of Landlord's other rights and remedies hereunder or
at law and shall not be construed as liquidated damages or as limiting
Landlord's remedies in any manner. In addition to the late charge described
above, any Rent or other amounts owing hereunder which are not paid within ten
(10) days after the date they are due shall bear interest from the date when due
until paid at a rate per annum (the "Interest Rate") equal to the lesser of (i)
the annual "Bank Prime Loan" rate cited in the Federal Reserve Statistical
Release Publication G.13(415), published on the first Tuesday of each calendar
month (or such other comparable index as Landlord and Tenant shall reasonably
agree upon if such rate ceases to be published) plus two (2) percentage points,
and (ii) the highest rate permitted by applicable law.
ARTICLE 26
LANDLORD'S RIGHT TO CURE DEFAULT; PAYMENTS BY TENANT
.1 LANDLORD'S CURE. All covenants and agreements to be kept or performed by
Tenant under this Lease shall be performed by Tenant at Tenant's sole cost and
expense and without any reduction of Rent, except to the extent, if any,
otherwise expressly provided herein. If Tenant shall fail to perform any
obligation under this Lease, and such failure shall continue in excess of the
time allowed under Section 19.1.2, above, unless a specific time period is
otherwise stated in this Lease, Landlord may, but shall not be obligated to,
make any such payment or perform any such act on Tenant's part without waiving
its rights based upon any default of Tenant and without releasing Tenant from
any obligations hereunder.
.2 TENANT'S REIMBURSEMENT. Except as may be specifically provided to the
contrary in this Lease, Tenant shall pay to Landlord, within thirty (30) days
following demand by Landlord to Tenant, sums equal to expenditures reasonably
made and obligations incurred by Landlord in connection with the remedying by
Landlord of Tenant's defaults pursuant to the provisions of Section 26.1.
Tenant's obligations under this Section 26.2 shall survive the expiration or
sooner termination of the Lease Term.
ARTICLE 27
ENTRY BY LANDLORD
Landlord reserves the right at all reasonable times and upon reasonable
notice to Tenant (except in the case of an emergency) to enter the Premises to
(i) inspect them; (ii) show the Premises to prospective purchasers, mortgagees
or, during the last nine (9) months of the Lease Term (provided Tenant has not
exercised its right to lease the Premises during an Option Term), tenants, or to
current or prospective mortgagees, ground or underlying lessors or insurers;
(iii) post notices of nonresponsibility; or (iv) make repairs to the Premises
(to the extent permitted pursuant to the terms of this Lease) or to the Building
or the Building's systems and equipment. Notwithstanding anything to the
contrary contained in this Article 27, Landlord may enter the Premises at any
time to (A) perform services required of Landlord, including janitorial service;
(B) take possession due to any breach of this Lease in the manner provided
herein; and (C) perform any covenants of Tenant which Tenant fails to perform.
Any such entries shall be performed by Landlord as expeditiously as reasonably
possible and in a manner so as to
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minimize any interference with the conduct of Tenant's business. Landlord may
make any such entries and may take such reasonable steps as required to
accomplish the stated purposes. For each of the above purposes, Landlord shall
at all times have a key with which to unlock all the doors in the Premises,
excluding Tenant's vaults, safes and special security areas designated in
advance by Tenant. In an emergency, Landlord shall have the right to use any
means that Landlord may deem proper to open the doors in and to the Premises. No
provision of this Lease shall be construed as obligating Landlord to perform any
repairs, alterations or decorations except as otherwise expressly agreed to be
performed by Landlord herein. Tenant may designate certain areas of the Premises
as "Secured Areas" should Tenant require such areas for the purpose of securing
certain valuable property or confidential information. In connection with the
foregoing, Landlord shall not enter such Secured Areas except in the event of an
emergency. Landlord need not clean any area designated by Tenant as a Secured
Area and shall only maintain or repair such secured areas to the extent (i) such
repair or maintenance is required in order to maintain and repair the Building
Structure and/or the Building Systems; (ii) as required by Applicable Law, or
(iii) in response to specific requests by Tenant and in accordance with a
schedule reasonably designated by Tenant, subject to Landlord's reasonable
approval.
ARTICLE 28
TENANT PARKING
Tenant may rent from Landlord, commencing on the Lease Commencement Date,
up to the amount of parking passes set forth in Section 9 of the Summary, on a
monthly basis throughout the Lease Term, which parking passes shall pertain to
the Project parking facility. Subject to the foregoing, Tenant shall be entitled
to increase or decrease the number of parking passes rented by Tenant upon not
less than thirty (30) days notice to Landlord. Upon notice to Landlord prior to
the date which is ninety (90) days after the Lease Commencement Date, Tenant
shall be entitled to lease any or all of the reserved parking spaces in the
locations designated on Exhibit G attached to this Lease. In the event that
Tenant shall fail to lease any of the reserved parking spaces designated on
Exhibit G, Tenant shall no longer have the right to lease the specific spaces
Tenant failed to so lease, provided that Tenant shall continue to have the right
to lease reserved parking spaces in the amount set forth in Section 9 of the
Summary. Tenant shall pay to Landlord for automobile parking passes on a monthly
basis the prevailing rate charged from time to time at the location of such
parking passes, provided that such rate (i) is currently, as of the date of this
Lease, One Hundred Thirty-Two and No/100 Dollars ($132.00) for each reserved
parking space and Eighty-Two and 50/100 Dollars ($82.50) for each unreserved
parking pass, (ii) shall be inclusive of any taxes imposed by any governmental
authority in connection with the renting of such parking passes by Tenant or the
use of the parking facility by Tenant, and (iii) shall not exceed the parking
rates charged by landlords of Comparable Buildings. Tenant's continued right to
use the parking passes is conditioned upon Tenant abiding by all rules and
regulations which are prescribed from time to time for the orderly operation and
use of the parking facility where the parking passes are located, including any
sticker or other identification system established by Landlord, Tenant's
cooperation in seeing that Tenant's employees and visitors also comply with such
rules and regulations and Tenant not being in default under this Lease. Landlord
specifically reserves the right to change the size, configuration, design,
layout and all other aspects of the Project parking facility at any time and
Tenant acknowledges and agrees that Landlord may, on a temporary basis or in
connection with Landlord's compliance with applicable laws, without incurring
any liability to Tenant and without any abatement of Rent under this Lease
(except as specifically set forth in Section 19.5.2 of this Lease), to the
extent reasonably required, from time to time, close-off or restrict access to
the Project parking facility for purposes of permitting or facilitating any such
construction, alteration or improvements. Landlord may delegate its
responsibilities hereunder to a parking operator in which case such parking
operator shall have all the rights of control attributed hereby to the Landlord.
The parking passes rented by Tenant pursuant to this Article 28 are provided to
Tenant solely for use by Tenant's own personnel and such passes may not be
transferred, assigned, subleased or otherwise alienated by Tenant separate and
apart from a transfer of Tenant's interest in this Lease, without Landlord's
prior approval. Tenant may validate visitor parking by such method or methods as
the Landlord may establish, at the validation rate from time to time generally
applicable to visitor parking.
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.1 OTHER TERMS. Notwithstanding anything to the contrary set forth in
Section 28 or elsewhere in the Lease (i) Tenant may use and have access to the
parking areas twenty-four hours a day, seven days a week; and (ii) no delegation
of Landlord's obligations with respect to the parking areas shall relieve
Landlord from responsibility for its obligations with respect thereto, and no
extra charges shall be imposed upon Tenant as a result of such delegation.
ARTICLE 29
MISCELLANEOUS PROVISIONS
.1 TERMS; CAPTIONS. The words "Landlord" and "Tenant" as used herein shall
include the plural as well as the singular. The necessary grammatical changes
required to make the provisions hereof apply either to corporations or
partnerships or individuals, men or women, as the case may require, shall in all
cases be assumed as though in each case fully expressed. The captions of
Articles and Sections are for convenience only and shall not be deemed to limit,
construe, affect or alter the meaning of such Articles and Sections.
.2 BINDING EFFECT. Subject to all other provisions of this Lease, each of
the covenants, conditions and provisions of this Lease shall extend to and
shall, as the case may require, bind or inure to the benefit not only of
Landlord and of Tenant, but also of their respective heirs, personal
representatives, successors or assigns, provided this clause shall not permit
any assignment by Tenant contrary to the provisions of Article 14 of this Lease.
.3 NO AIR RIGHTS. No rights to any view or to light or air over any
property, whether belonging to Landlord or any other person, are granted to
Tenant by this Lease.
.4 MODIFICATION OF LEASE. Should any current or prospective mortgagee or
ground lessor for the Building or Project require a modification of this Lease,
which modification will not cause an increased cost or expense to Tenant or in
any other way materially and adversely change the rights and obligations of
Tenant hereunder, then and in such event, Tenant agrees that this Lease may be
so modified and agrees to execute whatever documents are reasonably required
therefor and to deliver the same to Landlord within twenty (20) days following a
request therefor, provided Landlord reimburses Tenant for its attorneys' fees,
subject to the same limitation applicable to Landlord's reimbursement in the
event Tenant proposes a Transfer. At the request of Landlord or any mortgagee or
ground lessor, Tenant agrees to execute a short form of Lease and deliver the
same to Landlord within ten (10) days following the request therefor.
.5 TRANSFER OF LANDLORD'S INTEREST. Tenant acknowledges that Landlord has
the right to transfer all or any portion of its interest in the Project or
Building and in this Lease, and Tenant agrees that in the event of any such
transfer to an entity which has contractually assumed the obligations of
Landlord under this Lease, Landlord shall automatically be released from all
liability under this Lease following the date of the Transfer and Tenant agrees
to look solely to such transferee for the performance of Landlord's obligations
hereunder after the date of transfer provided such transferee shall have fully
assumed and be liable for all obligations of this Lease to be performed by
Landlord, including the return of any Security Deposit, and Tenant shall attorn
to such transferee. Tenant further acknowledges that Landlord may assign its
interest in this Lease to a mortgage lender as additional security and agrees
that such an assignment shall not release Landlord from its obligations
hereunder and that Tenant shall continue to look to Landlord for the performance
of its obligations hereunder.
.6 MEMO OF LEASE. Following request by Tenant, Landlord shall execute and
acknowledge a memorandum of this Lease in the form attached to this Lease as
Exhibit H (the "Memo of Lease"). Tenant shall be permitted to record such Memo
of Lease, at Tenant's sole cost and expense.
.7 LANDLORD'S TITLE. Landlord's title is and always shall be paramount to
the title of Tenant. Nothing herein contained shall empower Tenant to do any act
which can, shall or may encumber the title of Landlord.
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.8 RELATIONSHIP OF PARTIES. Nothing contained in this Lease shall be deemed
or construed by the parties hereto or by any third party to create the
relationship of principal and agent, partnership, joint venturer or any
association between Landlord and Tenant.
.9 TIME OF ESSENCE. Time is of the essence with respect to the performance
of every provision of this Lease in which time of performance is a factor.
.10 PARTIAL INVALIDITY. If any term, provision or condition contained in
this Lease shall, to any extent, be invalid or unenforceable, the remainder of
this Lease, or the application of such term, provision or condition to persons
or circumstances other than those with respect to which it is invalid or
unenforceable, shall not be affected thereby, and each and every other term,
provision and condition of this Lease shall be valid and enforceable to the
fullest extent possible permitted by law.
.11 NO WARRANTY. In executing and delivering this Lease, Tenant has not
relied on any representations, including, but not limited to, any representation
as to the amount of any item comprising Additional Rent or the amount of the
Additional Rent in the aggregate or that Landlord is furnishing the same
services to other tenants, at all, on the same level or on the same basis, or
any warranty or any statement of Landlord which is not set forth herein or in
one or more of the exhibits attached hereto.
.12 LANDLORD EXCULPATION. The liability of Landlord or the Landlord Parties
to Tenant for any default by Landlord under this Lease or arising in connection
herewith or with Landlord's operation, management, leasing, repair, renovation,
alteration or any other matter relating to the Project or the Premises shall be
limited solely and exclusively to an amount which is equal to the interest of
Landlord in the Building and any sales, condemnation or insurance proceeds
received by Landlord or the Landlord Parties in connection with the Project,
Building or Premises. Neither Landlord, nor any of the Landlord Parties shall
have any personal liability therefor, and Tenant hereby expressly waives and
releases such personal liability on behalf of itself and all persons claiming
by, through or under Tenant. The limitations of liability contained in this
Section 29.13 shall inure to the benefit of Landlord's and the Landlord Parties'
present and future partners, beneficiaries, officers, directors, trustees,
shareholders, agents and employees, and their respective partners, heirs,
successors and assigns. Under no circumstances shall any present or future
partner of Landlord (if Landlord is a partnership), or trustee or beneficiary
(if Landlord or any partner of Landlord is a trust), have any liability for the
performance of Landlord's obligations under this Lease.
.13 ENTIRE AGREEMENT. It is understood and acknowledged that there are no
oral agreements between the parties hereto affecting this Lease and this Lease
constitutes the parties' entire agreement with respect to the leasing of the
Premises and supersedes and cancels any and all previous negotiations,
arrangements, brochures, agreements and understandings, if any, between the
parties hereto or displayed by Landlord to Tenant with respect to the subject
matter thereof, and none thereof shall be used to interpret or construe this
Lease. None of the terms, covenants, conditions or provisions of this Lease can
be modified, deleted or added to except in writing signed by the parties hereto.
.14 RIGHT TO LEASE. Landlord reserves the absolute right to effect such
other tenancies in the Project as Landlord in the exercise of its sole business
judgment shall determine to best promote the interests of the Building or
Project.
.15 FORCE MAJEURE. Any prevention, delay or stoppage due to strikes,
lockouts, labor disputes, acts of God, inability to obtain services, labor, or
materials or reasonable substitutes therefor, governmental actions, civil
commotions, fire or other casualty, and other causes beyond the reasonable
control of the party obligated to perform, except with respect to the
obligations imposed with regard to Rent and other charges to be paid by Tenant
pursuant to this Lease (collectively, a "Force Majeure"), notwithstanding
anything to the contrary contained in this Lease, shall excuse the performance
of such party for a period equal to any such prevention, delay or stoppage and,
therefore, if this Lease specifies a time period for performance of an
obligation of either party, that time period shall be extended by the period of
any delay in such party's performance caused by a Force Majeure, provided that,
except as set forth in Section 5 of
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the Tenant Work Letter, no time periods giving rise to Tenant's right to
abatement of Rent or termination of this Lease shall be subject to extension as
a result of a Force Majeure.
.16 NOTICES. All notices, demands, statements, designations, approvals or
other communications (collectively, "Notices") given or required to be given by
either party to the other hereunder or by law shall be in writing, shall be (A)
sent by United States certified or registered mail, postage prepaid, return
receipt requested ("Mail"), (B) transmitted by telecopy, if such telecopy is
promptly followed by a Notice sent by Mail, (C) delivered by a nationally
recognized overnight courier, or (D) delivered personally. Any Notice shall be
sent, transmitted, or delivered, as the case may be, to Tenant at the
appropriate address set forth in Section 10 of the Summary, or to such other
place as Tenant may from time to time designate in a Notice to Landlord, or to
Landlord at the addresses set forth below, or to such other places as Landlord
may from time to time designate in a Notice to Tenant. Any Notice will be deemed
given (i) three (3) days after the date it is posted if sent by Mail, (ii) the
date the telecopy is transmitted, (iii) the date the overnight courier delivery
is made, or (iv) the date personal delivery is made or attempted to be made. If
Tenant is notified of the identity and address of Landlord's mortgagee or ground
or underlying lessor, Tenant shall give to such mortgagee or ground or
underlying lessor written notice of any default by Landlord under the terms of
this Lease by means constituting notice hereunder and such mortgagee or ground
or underlying lessor shall be given a reasonable opportunity to cure such
default, not to exceed thirty (30) days following the time period granted to
Landlord under this Lease, prior to Tenant's exercising any remedy available to
Tenant. As of the date of this Lease, any Notices to Landlord must be sent,
transmitted, or delivered, as the case may be, to the following addresses:
5670 Wilshire L.P.
5670 Wilshire Boulevard
Los Angeles, California 90036
Attention: Office of the Building
and
Allen, Matkins, Leck, Gamble & Mallory
1999 Avenue of the Stars, Suite 1800
Los Angeles, California 90067
Attention: Anton N. Natsis, Esq.
.17 AUTHORITY. If Tenant is a corporation, trust or partnership, each
individual executing this Lease on behalf of Tenant hereby represents and
warrants that Tenant is a duly formed and existing entity qualified to do
business in California and that Tenant has full right and authority to execute
and deliver this Lease and that each person signing on behalf of Tenant is
authorized to do so. In such event, Tenant shall, within ten (10) days after
execution of this Lease, deliver to Landlord satisfactory evidence of such
authority and, if a corporation, upon demand by Landlord, also deliver to
Landlord satisfactory evidence of (i) good standing in Tenant's state of
incorporation and (ii) qualification to do business in California.
.18 ATTORNEYS' FEES. In the event that either Landlord or Tenant should
bring suit for the possession of the Premises, for the recovery of any sum due
under this Lease, or because of the breach of any provision of this Lease or for
any other relief against the other, then all costs and expenses, including
reasonable attorneys' fees, incurred by the prevailing party therein shall be
paid by the other party, which obligation on the part of the other party shall
be deemed to have accrued on the date of the commencement of such action and
shall be enforceable whether or not the action is prosecuted to judgment.
.19 GOVERNING LAW/WAIVER OF TRAIL BY JURY. This Lease shall be construed
and enforced in accordance with the laws of the State of California. IN ANY
ACTION OR PROCEEDING ARISING HEREFROM, LANDLORD AND TENANT HEREBY CONSENT TO (I)
THE JURISDICTION OF ANY COMPETENT COURT WITHIN THE STATE OF CALIFORNIA, (II)
SERVICE OF PROCESS BY ANY MEANS AUTHORIZED BY CALIFORNIA LAW, AND (III) IN THE
INTEREST OF SAVING TIME AND EXPENSE, TRIAL WITHOUT A JURY IN ANY ACTION,
PROCEEDING OR COUNTERCLAIM
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BROUGHT BY EITHER OF THE PARTIES HERETO AGAINST THE OTHER OR THEIR SUCCESSORS IN
RESPECT OF ANY MATTER ARISING OUT OF OR IN CONNECTION WITH THIS LEASE, THE
RELATIONSHIP OF LANDLORD AND TENANT, TENANT'S USE OR OCCUPANCY OF THE PREMISES,
AND/OR ANY CLAIM FOR INJURY OR DAMAGE, OR ANY EMERGENCY OR STATUTORY REMEDY.
.20 SUBMISSION OF LEASE. Submission of this instrument for examination or
signature by Tenant does not constitute a reservation of, option for or option
to lease, and it is not effective as a lease or otherwise until execution and
delivery by both Landlord and Tenant.
.21 BROKERS.
.21.1 IN GENERAL. Landlord and Tenant hereby warrant to each other
that they have had no dealings with any real estate broker or agent in
connection with the negotiation of this Lease, excepting only the real estate
brokers or agents specified in Section 12 of the Summary (the "Brokers"), and
that they know of no other real estate broker or agent who is entitled to a
commission in connection with this Lease. Each party agrees to indemnify and
defend the other party against and hold the other party harmless from any and
all claims, demands, losses, liabilities, lawsuits, judgments, costs and
expenses (including without limitation reasonable attorneys' fees) with respect
to any leasing commission or equivalent compensation alleged to be owing on
account of any dealings with any real estate broker or agent, other than the
Brokers, occurring by, through, or under the indemnifying party.
.21.2 TENANT OFFSET RIGHT FOR COMMISSIONS DUE STUDLEY. Landlord shall
pay all brokerage commissions owing to Julien J. Studley ("Studley") pursuant to
a separate written agreement with Studley (the "Commission Agreement"). Landlord
and Tenant hereby acknowledge and agree that the Commission Agreement provides
for the payment to Studley of certain commissions in connection with Tenant's
lease of certain additional space in the Building, as more particularly set
forth in the Commission Agreement. To the extent that Landlord fails to pay to
Studley any amounts due under the Commission Agreement on or before the date due
thereunder, then Tenant may send written notice to Landlord of such failure and
if Landlord fails to pay such amounts within thirty (30) days after said notice,
Tenant shall have the right, but not the obligation, to offset such amounts owed
to Studley against Tenant's next rental obligations which become due under this
Lease. Any amounts so offset from Tenant's rental obligations hereunder shall no
longer be owed from Landlord to Studley under the Commission Agreement, but will
become due from Tenant to Studley.
.22 COUNTERPARTS. This Lease may be executed in counterparts with the same
effect as if both parties hereto had executed the same document. Both
counterparts shall be construed together and shall constitute a single lease.
.23 TRANSPORTATION MANAGEMENT. Tenant shall fully comply with all present
or future legally mandated programs intended to manage parking, transportation
or traffic in and around the Building, and in connection therewith, Tenant shall
take responsible action for the transportation planning and management of all
employees located at the Premises by working directly with Landlord, any
governmental transportation management organization or any other
transportation-related committees or entities.
.24 TELECOMMUNICATIONS EQUIPMENT. At any time during the Lease Term, Tenant
may install, at Tenant's sole cost and expense, telecommunication equipment upon
the roof of the Building. Tenant shall not be required to pay monthly rent for
the space utilized by Tenant on the roof of the Building, provided that Tenant
shall pay to Landlord, as additional rent, for the costs of all utilities
necessary to Tenant's operation of the telecommunication equipment.
Notwithstanding the foregoing, if Tenant utilizes parking spaces on the roof of
the Project parking facility in connection with Tenant's telecommunication
equipment, then Tenant shall pay to Landlord the prevailing rate charged by
Landlord from time to time at the location of such parking spaces, which rate is
currently, as of the date of this Lease, Fifty-Five and No/100 Dollars ($55.00).
The physical appearance and location of any such installation and the size of
the equipment shall be subject to Landlord's reasonable approval, and Landlord
may require Tenant to install screening around such equipment, at Tenant's sole
cost and expense, as reasonably designated by Landlord. Tenant shall maintain
such equipment, at Tenant's sole cost
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and expense. In the event Tenant elects to exercise its right to install
telecommunication equipment as set forth in this Section 29.24, then Tenant
shall give Landlord prior written notice thereof and Landlord and Tenant shall
execute an amendment to this Lease covering the installation and maintenance of
such equipment, Tenant's indemnification of Landlord with respect thereto,
Tenant's obligation to remove such equipment upon the expiration or earlier
termination of this Lease, and other related matters.
.25 NO VIOLATION. Tenant hereby warrants and represents that neither its
execution of nor performance under this Lease shall cause Tenant to be in
violation of any agreement, instrument, contract, law, rule or regulation by
which Tenant is bound, and Tenant shall protect, defend, indemnify and hold
Landlord harmless against any claims, demands, losses, damages, liabilities,
costs and expenses, including, without limitation, reasonable attorneys' fees
and costs, arising from Tenant's breach of this warranty and representation.
.26 COMMUNICATIONS AND COMPUTER LINES. Tenant may install, maintain,
replace, remove or use any communications or computer wires and cables
(collectively, the "Lines") at the Project in or serving the Premises, provided
that (i) Tenant shall obtain Landlord's prior written consent, use an
experienced and qualified contractor approved in writing by Landlord, and comply
with all of the other provisions of Articles 7 and 8 of this Lease, (ii) an
acceptable number of spare Lines and space for additional Lines shall be
maintained for existing and future occupants of the Project, as determined in
Landlord's reasonable opinion, (iii) the Lines therefor (including riser cables)
shall be appropriately insulated to prevent excessive electromagnetic fields or
radiation, and shall be surrounded by a protective conduit reasonably acceptable
to Landlord, (iv) any new or existing Lines servicing the Premises shall comply
with all applicable governmental laws and regulations and (v) Tenant shall pay
all costs in connection therewith. Landlord reserves the right to require that
Tenant remove any Lines located in or serving the Premises which are installed
in violation of these provisions, or which are at any time in violation of any
laws or represent a dangerous or potentially dangerous condition.
.27 ASBESTOS DISCLOSURES. Tenant specifically acknowledges that Tenant has
been advised that asbestos and/or asbestos-containing materials were used in the
initial construction of the Building, and may have been used in connection with
various additions and improvements made thereafter from time to time. Tenant
shall have no obligation to clean up, remediate, monitor, abate, regarding or
reimburse, release, indemnify, or defend Landlord with respect to any hazardous
materials which Tenant did not cause to be introduced onto the Premises or any
other portion of the Project, provided that the foregoing shall in no event
limit or preclude Landlord from including costs incurred in connection with
hazardous materials in Operating Expenses to the extent permitted pursuant to
the terms of Article 4 of this Lease. Landlord covenants and agrees that
Landlord shall, at Landlord's sole cost and expense, cause a licensed asbestos
abatement contractor selected by Landlord under the supervision of an
environmental consultant selected by Landlord to remove and properly dispose of,
to the extent practicable, pursuant to Landlord's asbestos-containing materials
("ACM") removal program, which program shall be in accordance with all
applicable environmental laws, ACM located at the Premises.
.28 PAYMENTS. Whenever in the Lease a payment is required to be made by one
party to the other, but a specific date for payment is not set forth or a
specific number of days within which payment is to be made is not set forth, or
the words "at once," "immediately," "promptly" and/or "on demand," "on billing,"
or their equivalent, are used to specify when such payment is due, then such
payment shall be due thirty (30) days after the party which is entitled to such
payment sends written notice to the other party demanding such payment.
.29 GOOD FAITH. Wherever in the Lease Landlord or Tenant is granted the
right to grant or withhold consent or approval, exercise discretion or make a
determination, calculation or allocation, except as otherwise expressly set
forth in this Lease, Landlord or Tenant, as the case may be, shall act
reasonably and in good faith.
.30 INTERNAL STAIRWAY. Tenant shall use commercially reasonable efforts to
cooperate with E! Entertainment Television, Inc., a Delaware corporation ("E!")
in connection with security concerns arising in connection with the internal
stairway located within the Premises during the period of time commencing on the
date of delivery of the Second Floor Premises and terminating on the date of
delivery of the Third Floor Premises.
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<PAGE> 49
IN WITNESS WHEREOF, Landlord and Tenant have caused this Lease to be
executed the day and date first above written.
"Landlord":
5670 WILSHIRE L.P.,
a California limited partnership
By:
---------------------------------
Its:
--------------------------
"Tenant":
ARTISTDIRECT NETWORK,
a Delaware corporation
By:
---------------------------------
Its:
--------------------------
By:
---------------------------------
Its:
--------------------------
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EXHIBIT A
5670 WILSHIRE BOULEVARD
OUTLINE OF PREMISES
SECOND FLOOR PREMISES
EXHIBIT A
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<PAGE> 51
THIRD FLOOR PREMISES
EXHIBIT A
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<PAGE> 52
EXHIBIT B
5670 WILSHIRE BOULEVARD
TENANT WORK LETTER
This Tenant Work Letter shall set forth the terms and conditions relating
to the construction of the Premises. This Tenant Work Letter is essentially
organized chronologically and addresses the issues of the construction of the
Premises, in sequence, as such issues will arise during the actual construction
of the Premises. All references in this Tenant Work Letter to Articles or
Sections of "this Lease" shall mean the relevant portions of Articles 1 through
29 of the Office Lease to which this Tenant Work Letter is attached as Exhibit
B, and all references in this Tenant Work Letter to Sections of "this Tenant
Work Letter" shall mean the relevant portions of Sections 1 through 5 of this
Tenant Work Letter.
SECTION 1
DELIVERY OF THE PREMISES
1.1 Delivery. In accordance with the terms and conditions of this Lease,
Landlord shall deliver the Premises and Base Building to Tenant on or after the
applicable Anticipated Delivery Dates set forth below (except that Landlord may
upon not less than seven [7] days prior written notice deliver to Tenant the
Third Floor Premises prior to the applicable Anticipated Delivery Date, provided
that in no event shall Landlord deliver the Third Floor Premises to Tenant prior
to January 21, 2000), and Tenant shall accept the Premises and Base Building
from Landlord in their presently existing, "as-is" condition, except (i) as
otherwise provided in the Lease and in this Tenant Work Letter, (ii) that the
Premises shall be in a "broom-clean" condition, and (iii) that the Premises
shall not contain the items listed on Schedule 1 attached hereto. The applicable
Construction Periods set forth below shall commence upon the delivery of the
applicable portions of the Premises.
<TABLE>
<CAPTION>
=======================================================================================================
Portion of the Premises Anticipated Delivery Date Construction Period
=======================================================================================================
<S> <C> <C>
Second Floor Premises December 14, 1999 Thirty (30) days
=======================================================================================================
Third Floor Premises January 31, 2000 One hundred five (105) days
=======================================================================================================
</TABLE>
If Landlord does not cause the Third Floor Premises to be delivered by
January 31, 2000, Tenant shall receive five (5) days of free Base Rent
attributable to the Second Floor Premises for each day that elapses from January
31, 2000, to the date of delivery of the Third Floor Premises pursuant to the
terms of this Section 1. If Landlord causes the Third Floor Premises to be
delivered before January 31, 2000, Tenant shall pay to Landlord an amount equal
to one (1) day of free Base Rent attributable to the Second Floor Premises for
each day that elapses from the date of delivery of the Third Floor Premises
pursuant to the terms of this Section 1.1 to January 31, 2000.
1.2 Base Building Deficiencies. Subject to special or unusual requirements
of Tenant's design or intended particular manner of use (as opposed to
reasonably customary design elements for general office use), in no event shall
Tenant be obligated to (i) correct deficiencies in or legal violations with
respect to the Base Building; (ii) cause the Base Building to comply with laws
which would be applicable regardless of whether Tenant, or another tenant using
reasonably customary design elements for general office use, is improving the
Premises; or (iii) expend any funds or any portion of the Tenant Improvement
Allowance for the foregoing. Landlord shall deliver the Base Building portions
of the Premises in compliance with applicable building codes and other
governmental laws and regulations enacted prior to the Lease Commencement Date
only to the extent the same are (a) applicable to unoccupied space, and (b)
necessary to allow Tenant to obtain a temporary certificate of occupancy or its
equivalent. Nothing in this Section 1 shall serve to modify Landlord's and
Tenant's respective obligations set forth in Article 24 of the Lease. Landlord
shall provide Tenant with a complete set of Base Building drawings pertaining to
the Premises (the "Base Building Drawings") without representation as to
accuracy, except that Tenant shall field verify the accuracy of the dimensions
EXHIBIT B
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and conditions within the usable square footage of its Premises that can be
determined by visual inspection without penetration of walls, slabs or core
areas. Tenant shall have the right, within sixty (60) days following the
expiration of the applicable Construction Period to notify Landlord of any
material defects in the Base Building which materially or adversely effect
Tenant's use of the Second Floor Premises and/or the Third Floor Premises in
which event Landlord shall promptly repair such items to Tenant's reasonable
satisfaction.
1.3 Base Building Definition. The Base Building shall include the following
items:
(a) Primary heating, ventilating and air-conditioning service ("HVAC")
including the main distribution loop and base system and base building
thermostatic control system (all delivered in good working order).
(b) Primary electrical system which will service the floor of the
Building on which the Premises are located (delivered in good working order).
(c) Main loop Fire/Life-safety systems as required by applicable
building code on an unoccupied basis.
(d) Main telephone terminal panel located in the telephone/electrical
room designated by Landlord and available for secondary branching by Tenant of
lines to the Premises.
(e) Building standard window coverings in "as-is" condition.
SECTION 1
TENANT IMPROVEMENTS
.1 Tenant Improvement Allowance. Tenant shall be entitled to a one-time
tenant improvement allowance (the "Tenant Improvement Allowance") in the amount
of $30.00 per usable square foot of the Premises for the costs relating to the
initial design and construction of Tenant's improvements, which are affixed to
the Premises (the "Tenant Improvements"). In addition, Landlord shall contribute
an amount not to exceed $0.10 per usable square foot of the Premises
("Landlord's Drawing Contribution") toward the cost of one (1) preliminary space
plan to be prepared by "Architect," as that term is defined in Section 3.1,
below, and no portion of the Landlord's Drawing Contribution, if any, remaining
after the completion of the Tenant Improvements shall be available for use by
Tenant. Landlord hereby acknowledges and agrees that, as a part of Tenant's
construction of the Tenant Improvements, subject to the requirements of this
Tenant Work Letter, Tenant shall be entitled to improve the stairwells between
the floors leased by Tenant pursuant to the terms of this Lease, notwithstanding
anything in this Tenant Work Letter to the contrary, the specifications and
plans for such work shall be subject to Landlord's approval, which approval
shall not be unreasonably withheld. In no event shall Landlord be obligated to
make disbursements pursuant to this Tenant Work Letter in a total amount which
exceeds the Tenant Improvement Allowance, Landlord's Drawing Contribution and
the "Moving Allowance," as that term is defined in Section 2.4 of this Tenant
Work Letter.
.2 Disbursement of the Tenant Improvement Allowance.
.2.1 Tenant Improvement Allowance Items. Except as otherwise set forth
in this Tenant Work Letter, the Tenant Improvement Allowance shall be disbursed
by Landlord only for the following items and costs (collectively the "Tenant
Improvement Allowance Items"):
.2.1.1 Payment of the fees of the Architect and the "Engineers,"
as that term is defined in Section 3.1 of this Tenant Work Letter and other
consultants ("Architect and Engineers Fees"), which Architect and Engineers Fees
shall, notwithstanding anything to the contrary contained in this Tenant Work
Letter, not exceed an aggregate amount equal to $6.00 per usable square foot of
the Premises (the "Soft Cost Cap");
.2.1.2 The payment of plan check, permit and license fees
relating to construction of the Tenant Improvements;
EXHIBIT B
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<PAGE> 54
.2.1.3 The cost of construction of the Tenant Improvements,
including, without limitation, (i) testing and inspection costs, (ii) freight
elevator usage, hoisting and trash removal costs, (iii) costs of cabling,
conduit, wiring, and connections for voice and data lines, (iv) cost of
designing, fabricating, installing and lighting (if applicable) Tenant's signs,
sign structures, lettering, logos and sign panels (including, without
limitation, identification on multi-tenant monuments or signs), (v) costs of
millwork, installation and finishing of built-in work stations, (vi) costs of
Tenant's security systems, including design and consulting fees and connection
costs or costs of modifying such systems to be compatible with the Building
systems, and (vii) costs of corrective work and contractors' fees and general
conditions (subject to Section 6.5 below);
.2.1.4 The cost of any changes in the Base Building when such
changes are required by the Construction Drawings (including if such changes are
due to the fact that such work is prepared on an unoccupied basis), such cost to
include all direct architectural and/or engineering fees and expenses incurred
in connection therewith;
.2.1.5 The cost of any changes to the Construction Drawings or
Tenant Improvements required by all applicable building codes (the "Code");
.2.1.6 Sales and use taxes and Title 24 fees; and
.2.1.7 The cost of delivering, installing and purchasing Tenant's
communications equipment and cabling and Tenant's furniture, fixtures and
equipment (collectively, "FF&E"), provided that the reimbursement for such costs
does not, in the aggregate, exceed Ten and No/100 Dollars ($10.00) per usable
square foot of the Premises (such portion of the Tenant Improvement Allowance
shall be referred to herein as the "FF&E Allowance").
.2.1.8 All other costs to be expended by or at the direction of
Tenant in connection with the construction of the Tenant Improvements.
.2.2 Disbursement of Tenant Improvement Allowance. During the
construction of the Tenant Improvements, Landlord shall make monthly
disbursements of the Tenant Improvement Allowance for Tenant Improvement
Allowance Items for the benefit of Tenant and shall authorize the release of
monies for the benefit of Tenant as follows.
.2.2.1 Monthly Disbursements. On or before the first day of each
calendar month (the "Submittal Date"), during the construction of the Tenant
Improvements (or such other date as Landlord may designate), Tenant shall
deliver to Landlord: (i) a request for payment of the "Contractor," as that term
is defined in Section 4.1 of this Tenant Work Letter, or other payees
(including, without limitation, Tenant's Agents or Tenant) approved by Tenant,
in a form to be provided by Landlord, and, if applicable, showing the schedule,
by trade, of percentage of completion of the Tenant Improvements in the
Premises, detailing the portion of the work completed and the portion not
completed; (ii) invoices from all of "Tenant's Agents," as that term is defined
in Section 4.1.2 of this Tenant Work Letter, for labor rendered and materials
delivered to the Premises; (iii) if applicable, executed mechanic's lien
releases from all of Tenant's Agents which shall comply with the appropriate
provisions, as reasonably determined by Landlord, of California Civil Code
Section 3262(d); and (iv) all other information reasonably requested by Landlord
(collectively, "Allowance Documentation") . Upon delivery of any request for
payment, Tenant shall be deemed to have waived any claim against Landlord with
respect to the work furnished and/or the materials supplied as set forth in
Tenant's payment request. Notwithstanding the foregoing, Tenant may obtain
reimbursement, within ten (10) business days following request, for one hundred
percent (100%) of the cost of direct order items (such as long lead time
purchase of materials) and other costs for which items (i) and (iii) above are
not applicable, by providing invoices to Landlord. Such reimbursement shall be
paid out of the Tenant Improvement Allowance, up to the amount of the Tenant
Improvement Allowance (subject to the Soft Cost Cap, if applicable), without
retention. Within thirty (30) days thereafter, Landlord shall deliver a check to
payees designated by Tenant in payment of the lesser of: (A) the amounts so
requested by Tenant, as set forth in this Section 2.2.2.1, above, less a ten
percent (10%) retention (the aggregate amount of such retentions to be known as
the "Final Retention"), and (B) the balance of any remaining available portion
of the Tenant Improvement
EXHIBIT B
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<PAGE> 55
Allowance (not including the Final Retention), provided that Landlord does not
dispute any request for payment based on non-compliance of any work with the
"Approved Working Drawings," as that term is defined in Section 3.4 below, or
due to any "Substandard Work," as that term is defined below. Landlord's payment
of such amounts shall not be deemed Landlord's approval or acceptance of the
work furnished or materials supplied as set forth in Tenant's payment request.
Although Landlord will retain the Final Retention in accordance with the terms
of this Section 2.2.2, such Final Retention shall not be in addition to a final
retention provided for in the "Contract," as that term is defined in Section
4.2.1 below, but rather the requirement herein for a Final Retention of ten
percent (10%) shall be applied in conjunction with the amount required as the
final retention in the Contract. "Substandard Work" shall mean work which
adversely affects the mechanical, electrical, plumbing, heating, ventilating and
air conditioning, life-safety or other systems of the Building, the curtain wall
of the Building, the structure or exterior appearance of the Building.
.2.2.2 Final Retention. Subject to the provisions of this Tenant
Work Letter, a check for the Final Retention payable jointly to Tenant and
Contractor shall be delivered by Landlord to Tenant following the completion of
construction of the Premises, provided that (i) Tenant delivers to Landlord
properly executed mechanics lien releases in compliance with both California
Civil Code Section 3262(d)(2) and either Section 3262(d)(3) or Section
3262(d)(4), (ii) Landlord has determined that no Substandard Work or
"Deficiency," as that term is defined in Section 3.1 of this Tenant Work Letter,
exists and (iii) Architect delivers to Landlord a certificate, in a form
reasonably acceptable to Landlord, certifying that the construction of the
Tenant Improvements in the Premises has been substantially completed.
.2.2.3 Additional Terms. In the event that Landlord identifies
any Substandard Work or a Deficiency, Landlord shall fund any portion of the
draw request which is not required to correct the Substandard Work or
Deficiency. Landlord shall advise Tenant within three (3) business days of a
Submittal Date if Tenant's submittal is incomplete. Landlord may only disapprove
any aspect of the Tenant Improvements in the event of Substandard Work or a
Deficiency. Landlord shall not disapprove any aspect of the Tenant Improvements
following payment of the installment of the Tenant Improvement Allowance, except
to the extent that the matter permitting disapproval becomes evident only
following Landlord's disbursement of the applicable portion of the Tenant
Improvement Allowance. Any disapproval by Landlord pursuant to the terms of this
Tenant Work Letter shall include a description of the disapproved item and the
reasonable grounds for the disapproval. Landlord shall not disapprove any change
to the Approved Working Drawings or Tenant Improvements which is required by law
or change in law or the interpretation thereof.
.2.2.4 Other Terms. Landlord shall only be obligated to make
disbursements from the Tenant Improvement Allowance to the extent costs are
incurred by Tenant for Tenant Improvement Allowance Items.
.3 Standard Tenant Improvement Package. Landlord has established
specifications (the "Specifications") for certain components to be used in the
construction of the Tenant Improvements in the Premises. The quality of Tenant
Improvements shall comply with the Specifications and Tenant shall use Building
standard window coverings in the Premises.
.4 Moving Allowance. Tenant shall be entitled to an allowance (the "Moving
Allowance") in the amount $1.00 per usable square foot of the Premises for
Tenant's moving expenses. In no event shall Landlord be obligated to disburse
any portion of the Moving Allowance for any purpose other than reimbursement for
out-of-pocket costs and expenses actually incurred by Tenant in relocating to
the Premises (collectively, "Tenant's Moving Expenses"). After the occurrence of
the Lease Commencement Date and the completion of the relocation of Tenant's
business to the Premises, Landlord shall disburse the Moving Allowance for
Tenant's Moving Expenses upon receipt by Landlord of invoices marked as having
been paid or other evidence in form and content satisfactory to Landlord in
support of such costs and expenses and Tenant's payment thereof. Landlord shall
only be obligated to disburse any component of the Moving Allowance to the
extent the same is expended by Tenant. In no event shall the Moving Allowance
provided for herein be available to Tenant as a credit against rent or other
amounts owing to Landlord pursuant to the Lease or in any manner other than as
expressly provided herein.
EXHIBIT B
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<PAGE> 56
.5 Failure to Disburse Tenant Improvement Allowance. In the event that (i)
Landlord fails to fulfill its obligation to disburse the Tenant Improvement
Allowance in accordance with the terms of Section 2.2.2, above, within thirty
(30) days following notice from Tenant, (ii) Tenant shall, following the
expiration of such 30-day period, provide notice to Landlord of such failure,
and (iii) Landlord shall fail to fulfill its obligation to disburse the Tenant
Improvement Allowance within ten (10) business days following receipt of such
second notice, Tenant shall have the right to offset such due but unpaid portion
of the Tenant Improvement Allowance against Tenant's obligation for Rent next
due under this Lease.
.6 Surplus Tenant Improvement Allowance. In the event that, following the
completion of the Tenant Improvements, the Tenant Improvement Allowance is not
fully used or committed for Tenant Improvement Allowance Items, then, so long as
Tenant is not in default of the Lease after the expiration of all applicable
cure periods, upon Landlord's receipt of written notice from Tenant, Tenant
shall have the right to utilize any such remaining portions of the Tenant
Improvement Allowance for Alterations to the Premises pursuant to Article 8 this
Lease.
SECTION 2
CONSTRUCTION DRAWINGS
.1 Selection of Architect/Construction Drawings. Tenant shall retain the
architect/space planner approved by Landlord (the "Architect") to prepare the
"Construction Drawings," as that term is defined in this Section 3.1. Landlord
hereby approves Gensler & Associates as Architect. Tenant shall retain the
engineering consultants (the "Engineers") approved by Landlord. Landlord hereby
approves Syska and Hennesey as Engineers. The Engineers shall prepare all plans
and engineering working drawings relating to the structural, mechanical,
electrical, plumbing, and HVAC work in the Premises, which work is not part of
the Base Building. The plans and drawings to be prepared by Architect and the
Engineers hereunder shall be known collectively as the "Construction Drawings."
All Construction Drawings shall comply with the drawing format and
specifications determined by Landlord, and shall be subject to Landlord's
approval. Landlord shall grant such approval unless Landlord provides Tenant
with reasonable supporting documentation for the conclusion that the work
provided for in the Construction Drawings would violate applicable code or the
Specifications or materially and adversely affect the mechanical, electrical,
plumbing, heating, ventilating and air conditioning, life-safety or other
systems of the Building, or materially adversely affects the curtain wall of the
Building, or the structure or exterior appearance of the Building (collectively
referred to herein as a "Deficiency"). Tenant and Architect shall verify, in the
field, the dimensions and conditions as shown on the relevant portions of the
Base Building Drawings, and Tenant and Architect shall be solely responsible for
the same, and Landlord shall have no responsibility in connection therewith,
except as specifically set forth in Section 6.8 of this Tenant Work Letter.
Landlord's review of the Construction Drawings as set forth in this Section 3,
shall be for its sole purpose and shall not imply Landlord's review of the same,
or obligate Landlord to review the same, for quality, design, Code compliance or
other like matters. Accordingly, notwithstanding that any Construction Drawings
are reviewed by Landlord or its space planner, architect, engineers and
consultants, and notwithstanding any advice or assistance which may be rendered
to Tenant by Landlord or Landlord's space planner, architect, engineers, and
consultants, Landlord shall have no liability whatsoever in connection therewith
and shall not be responsible for any omissions or errors contained in the
Construction Drawings, except to the extent resulting from (a) Landlord's
determination that a Deficiency exists, or (b) changes requested by Landlord for
any other reason. Tenant's waiver and indemnity set forth in this Lease shall
specifically apply to the Construction Drawings.
.2 Final Space Plan. Tenant shall supply Landlord with two (2) copies
signed by Tenant of its final space plan for the Premises before any
architectural working drawings or engineering drawings have been commenced. The
final space plan (the "Final Space Plan") shall include a layout and designation
of all offices, rooms and other partitioning, their intended use, and equipment
to be contained therein. Landlord may request clarification or more specific
drawings for special use items not included in the Final Space Plan. Landlord
shall advise Tenant within three (3) business days after Landlord's receipt of
the Final Space Plan for the Premises if the same is unsatisfactory or
incomplete in any respect. Landlord may only disapprove aspects of the Final
Space Plan which would constitute a Deficiency. If Tenant is so advised, Tenant
shall
EXHIBIT B
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<PAGE> 57
promptly cause the Final Space Plan to be revised to correct any deficiencies or
other matters Landlord may reasonably require.
.3 Final Working Drawings. After the Final Space Plan has been approved by
Landlord, Tenant shall supply the Engineers with a complete listing of standard
and non-standard equipment and specifications, including, without limitation,
B.T.U. calculations, electrical requirements and special electrical receptacle
requirements for the Premises, to enable the Engineers and the Architect to
complete the "Final Working Drawings" (as that term is defined below) in the
manner as set forth below. Upon the approval of the Final Space Plan by Landlord
and Tenant, Tenant shall promptly cause the Architect and the Engineers to
complete the architectural and engineering drawings for the Premises, and
Architect shall compile a fully coordinated set of architectural, structural,
mechanical, electrical and plumbing working drawings in a form which is complete
to allow subcontractors to bid on the work and to obtain all applicable permits
(collectively, the "Final Working Drawings") and shall submit the same to
Landlord for Landlord's approval. Tenant shall supply Landlord with two (2)
copies signed by Tenant of such Final Working Drawings. Landlord shall advise
Tenant within five (5) business days after Landlord's receipt of the Final
Working Drawings for the Premises if the same is unsatisfactory or incomplete in
any respect. If Tenant is so advised, Tenant shall immediately revise the Final
Working Drawings in accordance with such review and any disapproval of Landlord
in connection therewith.
.4 Approved Working Drawings. The Final Working Drawings shall be approved
by Landlord (the "Approved Working Drawings") prior to the commencement of
construction of the Premises by Tenant. Concurrently with Landlord's review of
the Final Working Drawings, Tenant may submit the same to the appropriate
municipal authorities for all applicable building permits. Tenant hereby agrees
that neither Landlord nor Landlord's consultants shall be responsible for
obtaining any building permit or certificate of occupancy for the Premises and
that obtaining the same shall be Tenant's responsibility; provided, however,
that Landlord shall cooperate with Tenant in executing permit applications and
performing other ministerial acts reasonably necessary to enable Tenant to
obtain any such permit or certificate of occupancy. No changes, modifications or
alterations in the Approved Working Drawings may be made without the prior
written consent of Landlord, which consent may not be unreasonably withheld.
.5 Landlord's Approval. Landlord may only disapprove aspects of the Final
Working Drawings which are inconsistent with the approved Final Space Plan or
which create a Deficiency. In the event that (i) Landlord shall fail to timely
approve or disapprove of the Final Space Plan and/or the Final Working Drawings
as set forth in this Section 3, (ii) Tenant shall deliver notice to Landlord of
such failure, and (iii) Landlord shall fail to approve of the Final Space Plan
and/or Final Working Drawings within three (3) business days following receipt
of Tenant's second notice, then Landlord's approval shall be deemed granted.
Landlord's failure to disapprove any aspect of any revision to the Final Space
Plan or Final Working Drawings or Approved Working Drawings and provide detailed
reasons for such disapproval within three (3) business days shall constitute
Landlord's approval thereto. Landlord may only withhold consents to revisions to
the Final Space Plan, Final Working Drawings or Approved Working Drawings for
the reasons enumerated above.
SECTION 3
CONSTRUCTION OF THE TENANT IMPROVEMENTS
.1 Tenant's Selection of Contractors.
.1.1 The Contractor. A general contractor ("Contractor") selected by
Tenant and approved by Landlord, in Landlord's reasonable discretion, shall be
retained by Tenant to construct the Tenant Improvements. Landlord approves
Taslimi Construction as Contractor. Tenant shall deliver to Landlord notice of
its selection of the Contractor upon such selection.
.1.2 Tenant's Agents. All subcontractors performing work which
materially affects the structural elements of the Building or the mechanical,
electrical, plumbing, heating, ventilating, air conditioning or security systems
of the Building used by Tenant (such subcontractors, and the Contractor to be
known collectively as "Tenant's Agents") must be
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approved in writing by Landlord, which approval shall not be unreasonably
withheld or delayed. If Landlord does not approve any of Tenant's proposed
subcontractors, laborers, materialmen or suppliers, Tenant shall submit other
proposed subcontractors, laborers, materialmen or suppliers for Landlord's
written approval.
.2 Construction of Tenant Improvements by Tenant's Agents.
.2.1 Construction Contract; Cost Budget. Prior to Tenant's execution
of the construction contract and general conditions with Contractor (the
"Contract"), Tenant shall submit the Contract to Landlord for its approval,
which approval shall not be unreasonably withheld or delayed. Prior to the
commencement of the construction of the Tenant Improvements, and after Tenant
has accepted all bids for the Tenant Improvements, Tenant shall provide Landlord
with a detailed breakdown, by trade, of the final costs to be incurred or which
have been incurred, as set forth more particularly in Sections 2.2.1.1 through
2.2.1.11, above, in connection with the design and construction of the Tenant
Improvements to be performed by or at the direction of Tenant or the Contractor,
which costs form a basis for the amount of the Contract (the "Final Costs").
Prior to Tenant's first delivery of Allowance Documentation, Tenant shall pay to
Landlord fifty percent (50%) of the "Over-Allowance Amount," as that term is
defined, below; provided that if the Over-Allowance Amount is less than Fifteen
and No/100 Dollars ($15.00) per usable square foot of the Premises, then Tenant
shall not be obligated to pay such amount to Landlord but shall, at Tenant's
election, pay all costs of completing the Tenant Improvements directly to all
applicable service and materials providers, provided that Tenant shall continue
to provide Landlord with the Allowance Documentation in accordance with the
terms of this Tenant Work Letter. For purposes of this Section 4.2.1, the
"Over-Allowance Amount" shall be equal to the difference between the amount of
the Final Costs and the amount of the Tenant Improvement Allowance (less any
portion thereof already disbursed by Landlord, or in the process of being
disbursed by Landlord, on or before the commencement of construction of the
Tenant Improvements). The Over-Allowance Amount shall be disbursed by Landlord
pursuant to the same procedure as the Tenant Improvement Allowance. After the
Tenant Improvement Allowance and the portion of the Over-Allowance Amount which
Tenant has paid to Landlord has been fully disbursed, Tenant shall pay all costs
of completing the Tenant Improvements directly to all applicable service and
materials providers, provided that Tenant shall continue to provide Landlord
with the Allowance Documentation in accordance with the terms of this Tenant
Work Letter.
.2.2 Tenant's Agents.
.2.2.1 Landlord's General Conditions for Tenant's Agents and Tenant
Improvement Work. Tenant's and Tenant's Agent's construction of the Tenant
Improvements shall comply with the following: (i) the Tenant Improvements shall
be constructed in strict accordance with the Approved Working Drawings; (ii)
Tenant's Agents shall submit schedules of all work relating to the Tenant's
Improvements to Contractor and Contractor shall, within five (5) business days
of receipt thereof, inform Tenant's Agents of any changes which are necessary
thereto, and Tenant's Agents shall adhere to such corrected schedule; and (iii)
Tenant shall abide by all rules made by Landlord's Building manager with respect
to the use of freight, loading dock and service elevators, storage of materials,
coordination of work with the contractors of other tenants, and any other matter
in connection with this Tenant Work Letter, including, without limitation, the
construction of the Tenant Improvements, except during Tenant's initial
construction and move-in period, when Tenant shall have absolute priority over
other construction in the Building, whether by or on behalf of other tenants or
Landlord.
.2.2.2 Indemnity. Tenant's indemnity of Landlord as set forth in this
Lease shall also apply with respect to Tenant's non-payment of any amount
arising out of the Tenant Improvements and/or Tenant's disapproval of all or any
portion of any request for payment. Such indemnity by Tenant, as set forth in
this Lease, shall also apply with respect to any and all costs, losses, damages,
injuries and liabilities related in any way to Landlord's performance of any
ministerial acts reasonably necessary to enable Tenant to obtain any building
permit or certificate of occupancy for the Premises.
.2.2.3 Requirements of Tenant's Agents. Contractor shall guarantee to
Tenant and for the benefit of Landlord that the portion of the Tenant
Improvements for which it
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is responsible shall be free from any defects in workmanship and materials for a
period of not less than one (1) year from the date of completion thereof. Each
of Tenant's Agents shall be responsible for the replacement or repair, without
additional charge, of all work done or furnished in accordance with its contract
that shall become defective within one (1) year after the later to occur of (i)
completion of the work performed by such contractor or subcontractors and (ii)
the Lease Commencement Date. The correction of such work shall include, without
additional charge, all additional expenses and damages incurred in connection
with such removal or replacement of all or any part of the Tenant Improvements,
and/or the Building and/or common areas that may be damaged or disturbed
thereby. All such warranties or guarantees as to materials or workmanship of or
with respect to the Tenant Improvements shall be contained in the Contract or
subcontract and shall be written such that such guarantees or warranties shall
inure to the benefit of both Landlord and Tenant, as their respective interests
may appear, and can be directly enforced by either.
.2.2.4 Insurance Requirements.
.2.2.4.1 General Coverages. Contractor shall carry worker's
compensation insurance covering all of their respective employees, and shall
also carry public liability insurance, including property damage, all with
limits, in form and with companies as are required to be carried by Tenant as
set forth in this Lease.
.2.2.4.2 Special Coverages. Tenant shall carry "Builder's All
Risk" insurance in an amount approved by Landlord covering the construction of
the Tenant Improvements, and such other insurance as Landlord may require, it
being understood and agreed that the Tenant Improvements shall be insured by
Tenant pursuant to this Lease immediately upon completion thereof. Such
insurance shall be in amounts and shall include such extended coverage
endorsements as may be reasonably required by Landlord including, but not
limited to, the requirement that all of Tenant's Contractor shall carry excess
liability and Products and Completed Operation Coverage insurance, each in
amounts not less than $500,000 per incident, $1,000,000 in aggregate, and in
form and with companies as are required to be carried by Tenant as set forth in
this Lease.
.2.2.4.3 General Terms. Certificates for all insurance carried
pursuant to this Section 4.2.2.4 shall be delivered to Landlord before the
commencement of construction of the Tenant Improvements and before the
Contractor's equipment is moved onto the site. All such policies of insurance
must contain a provision that the company writing said policy will give Landlord
ten (10) days prior written notice of any cancellation or lapse of the effective
date or any reduction in the amounts of such insurance. All policies carried
under this Section 4.2.2.4 shall insure Landlord and Tenant, as their interests
may appear, as well as Contractor. All insurance, except Workers' Compensation,
maintained by Tenant's Agents shall preclude subrogation claims by the insurer
against anyone insured thereunder. Such insurance shall provide that it is
primary insurance as respects the owner and that any other insurance maintained
by owner is excess and noncontributing with the insurance required hereunder.
The requirements for the foregoing insurance shall not derogate from the
provisions for indemnification of Landlord by Tenant under Section 4.2.2.2 of
this Tenant Work Letter.
.2.3 Governmental Compliance. The Tenant Improvements shall comply in
all respects with the following: (i) the Code and other state, federal, city or
quasi-governmental laws, codes, ordinances and regulations, as each may apply
according to the rulings of the controlling public official, agent or other
person; and (ii) applicable standards of the American Insurance Association
(formerly, the National Board of Fire Underwriters) and the National Electrical
Code.
.2.4 Inspection by Landlord. Landlord shall have the right to inspect
the Tenant Improvements at all times, provided however, that Landlord's failure
to inspect the Tenant Improvements shall in no event constitute a waiver of any
of Landlord's rights hereunder nor shall Landlord's inspection of the Tenant
Improvements constitute Landlord's approval of the same. Should Landlord
disapprove any portion of the Tenant Improvements in accordance with the terms
of this Tenant Work Letter, Landlord shall notify Tenant in writing of such
disapproval and shall specify the items disapproved. Any defects or deviations
in, and/or disapproval by Landlord of, the Tenant Improvements shall be
rectified by Tenant at no expense to Landlord,
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provided however, that in the event Landlord determines that a defect or
deviation exists or disapproves of any matter in connection with any portion of
the Tenant Improvements and such defect, deviation or matter adversely affects
the mechanical, electrical, plumbing, heating, ventilating and air conditioning
or life-safety systems of the Building, the structure or exterior appearance of
the Building and Tenant does not correct such defect within thirty (30) days
following written notice from Landlord, Landlord may, take such action as
Landlord deems necessary, at Tenant's expense and without incurring any
liability on Landlord's part, to correct any such defect, deviation and/or
matter.
.2.5 Meetings. Commencing upon the execution of this Lease, Tenant
shall hold weekly meetings at a reasonable time, with the Architect and the
Contractor regarding the progress of the preparation of Construction Drawings
and the construction of the Tenant Improvements, and Landlord and/or its agents
shall receive prior notice of, and shall have the right to attend, all such
meetings. In addition, minutes shall be taken at all such meetings, a copy of
which minutes shall be promptly delivered to Landlord. One such meeting each
month shall include the review of Contractor's current request for payment.
.3 Notice of Completion; Copy of Record Set of Plans. Within ten (10) days
after completion of construction of the Tenant Improvements, Tenant shall cause
a Notice of Completion to be recorded in the office of the Recorder of the
county in which the Building is located in accordance with Section 3093 of the
Civil Code of the State of California or any successor statute, and shall
furnish a copy thereof to Landlord upon such recordation. If Tenant fails to do
so, Landlord may execute and file the same on behalf of Tenant as Tenant's agent
for such purpose, at Tenant's sole cost and expense. At the conclusion of
construction, Tenant shall cause the Architect and Contractor (A) to update the
Approved Working Drawings to become "field grade" drawings as necessary to
reflect all changes made to the Approved Working Drawings during the course of
construction, and (B) to deliver to Landlord two (2) sets of copies of such
drawings within ninety (90) days following issuance of a certificate of
occupancy for the Premises.
SECTION 4
DELAY OF LEASE COMMENCEMENT DATE
.1 Lease Commencement Date Delays. The Lease Commencement Date shall occur
as provided in Article 2 of this Lease and the commencement of the payment of
Base Rent shall occur as set forth in the Lease, provided that the applicable
Construction Period shall be delayed by the number of days of delay of the
"substantial completion of the Tenant Improvements," as that term is defined
below in this Section 5, in the portion of the Premises to which such
Construction Period relates which is caused solely by a "Lease Commencement Date
Delay." As used herein, the term "Lease Commencement Date Delay" shall mean only
a "Force Majeure Delay" or a "Landlord Caused Delay," as those terms are defined
below in this Section 5.1 of this Tenant Work Letter. As used herein, the term
"Force Majeure Delay" shall mean only an actual delay resulting from strikes,
fire, wind, damage or destruction to the Building, explosion, casualty, flood,
hurricane, tornado, the elements, acts of God or the public enemy, sabotage,
war, invasion, insurrection, rebellion, civil unrest, riots, or earthquakes. As
used in this Tenant Work Letter, "Landlord Caused Delay" shall mean delays in
Tenant's construction of the Tenant Improvements resulting from (i) any breach
of the Lease by Landlord (including, without limitation, failure to timely fund
an installment of the Tenant Improvement Allowance); (ii) Landlord's failure to
grant Tenant reasonable access to the Premises, parking areas, and loading
facilities, (iii) delays in granting or denying Landlord's approval beyond the
applicable period of time set forth in this Tenant Work Letter, (iv) material
interference with Tenant's construction of the Tenant Improvements to the extent
resulting from Landlord's failure to deliver the Base Building portions of the
Premises in the condition set forth in Section 1 of this Tenant Work Letter; (v)
material and unreasonable interference by Landlord in Tenant's completion of the
Tenant Improvements (provided that Landlord's disapproval on any item requiring
Landlord's consent subject to and in accordance with the terms of this Tenant
Work Letter shall not be a Lease Commencement Date Delay), and (vi) failure of
Landlord to provide one (1) elevator for Tenant's use during the construction
the Tenant Improvements, the delivery of Tenant's furniture, and Tenant's move
into the Premises.
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.2 Determination of Lease Commencement Date Delay. If Tenant contends that
a Lease Commencement Date Delay has occurred, Tenant shall notify Landlord in
writing of (i) the event which constitutes the Lease Commencement Date Delay,
and (ii) the date upon which such Lease Commencement Date Delay ends. If such
actions, inaction or circumstances described in the notice set forth in clause
(i), above (the "Delay Notice") qualify as a Lease Commencement Date Delay, then
a Lease Commencement Date Delay shall be deemed to have occurred commencing as
of the date of Landlord's receipt of the Delay Notice and ending as of the date
the applicable delay ends.
.3 Definition of Substantial Completion of the Tenant Improvements. For
purposes of this Section 5, "substantial completion of the Tenant Improvements"
shall mean completion of construction of the Tenant Improvements in the Premises
pursuant to the "Approved Working Drawings," with the exception of any punch
list items, any freestanding furniture, freestanding work-stations.
SECTION 5
MISCELLANEOUS
.1 Tenant's Representative. Tenant has designated Mr. James Carroll as its
sole representative with respect to the matters set forth in this Tenant Work
Letter, who shall have full authority and responsibility to act on behalf of the
Tenant as required in this Tenant Work Letter.
.2 Landlord's Representative. Landlord has designated Mr. Daniel Grathwohl
as its sole representative with respect to the matters set forth in this Tenant
Work Letter, who, until further notice to Tenant, shall have full authority and
responsibility to act on behalf of the Landlord as required in this Tenant Work
Letter. Landlord shall make Landlord's Representative available, on a reasonable
basis, to assist Tenant in design, construction and relocation related issues,
at no cost to Tenant.
.3 Time of the Essence in This Tenant Work Letter. Unless otherwise
indicated, all references herein to a "number of days" shall mean and refer to
calendar days. If any item requiring approval is timely disapproved by Landlord,
the procedure for preparation of the document and approval thereof shall be
repeated until the document is approved by Landlord.
.4 Tenant's Lease Default. Notwithstanding any provision to the contrary
contained in this Lease, if an event of default as described in the Lease or
this Tenant Work Letter has occurred at any time on or before the Substantial
Completion of the Premises, then in addition to all other rights and remedies
granted to Landlord pursuant to this Lease, Landlord shall have the right to
withhold payment of all or any portion of the Tenant Improvement Allowance (in
which case, Tenant shall be responsible for any delay in the substantial
completion of the Premises caused by such withholding), and .
.5 Landlord's Actions. Wherever Landlord is required or authorized to
perform any action (or supervise such performance by others) pursuant to the
terms of this Work Letter, Landlord shall perform such action without charge to
Tenant or Tenant's Agents, without reimbursement and without deduction from the
Tenant Improvement Allowance.
.6 Miscellaneous Charges. Neither Tenant nor Tenant's Agents shall not be
charged for reasonable amounts of parking in the Building or for use of freight
elevators, loading docks or electricity or, during Building Hours, for HVAC, in
each event to the extent utilized during the construction of the Tenant
Improvements and Tenant's move into the Premises.
.7 Staging Area. Subject to availability, Landlord shall provide a
reasonable area within the Building for staging Tenant's initial move into the
Premises and/or for Tenant's furniture assembly. Landlord shall have no
obligation to provide a staging area to be utilized by Tenant in connection with
the construction of the Tenant Improvements.
.8 Expenses Due to Error. If Tenant reasonably incurs increased design or
construction expenses because of material inaccuracies in the Base Building
Drawings then Landlord shall bear any increased costs in the design and
construction of the Tenant Improvements resulting therefrom separate and apart
from, and in addition to, the Tenant Improvement Allowance and
EXHIBIT B
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any delays encountered by Tenant in the design or construction of the Tenant
Improvement or Alteration or a result thereof shall be considered a Landlord
Caused Delay as described in Section 5.1 above of this Tenant Work Letter.
EXHIBIT B
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SCHEDULE 1 TO EXHIBIT B
EXCLUDED ITEMS
SCHEDULE 1 TO
EXHIBIT B
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EXHIBIT C
5670 WILSHIRE BOULEVARD
NOTICE OF LEASE TERM DATES
To: __________________________
__________________________
__________________________
__________________________
Re: Office Lease dated ____________, 19__ between ____________________, a
_____________________ ("Landlord"), and _______________________, a
_______________________ ("Tenant") concerning Suite ______ on floor(s)
__________ of the office building located at ____________________________,
Los Angeles, California.
Gentlemen:
In accordance with the Office Lease (the "Lease"), we wish to advise you
and/or confirm as follows:
1. The Lease Term shall commence on or has commenced on ______________
for a term of __________________ ending on __________________.
2. Rent commenced to accrue on __________________, in the amount of
________________.
3. If the Lease Commencement Date is other than the first day of the
month, the first billing will contain a pro rata adjustment. Each
billing thereafter, with the exception of the final billing, shall be
for the full amount of the monthly installment as provided for in the
Lease.
4. Your rent checks should be made payable to __________________ at
___________________.
5. The exact number of rentable/usable square feet within the Premises is
____________ square feet.
6. Tenant's Share as adjusted based upon the exact number of usable
square feet within the Premises is _______%.
"Landlord":
------------------------------------,
a
------------------------------------
By:
----------------------------------
Its:
----------------------------
Agreed to and Accepted
as of ____________, 19___.
"Tenant":
- ---------------------------
a
-------------------------
By:
------------------------
Its:
-----------------------
EXHIBIT C
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EXHIBIT D
5670 WILSHIRE BOULEVARD
RULES AND REGULATIONS
Tenant shall faithfully observe and comply with the following Rules and
Regulations. Landlord shall not be responsible to Tenant for the nonperformance
of any of said Rules and Regulations by or otherwise with respect to the acts or
omissions of any other tenants or occupants of the Project. Landlord shall use
reasonable efforts to cause other tenants or occupants of the Project to comply
with the Rules and Regulations and to avoid any unreasonable interference of
Tenant's use of the Premises as a result of the failure of such other tenants or
occupants to comply with the Rules and Regulations. The Rules and Regulations of
the Project, attached to and made a part of the Lease as Exhibit "D," shall not
be changed or revised or enforced in any unreasonable way by Landlord, nor
enforced or changed by Landlord in such a way as to substantially interfere with
Tenant's Lease Rights. In the event of any conflict between the Lease and the
Rules and Regulations, the Lease shall prevail and control and the inconsistent
provisions of the Rules and Regulations shall not be inapplicable to Tenant. In
the event of any conflict between the Rules and Regulations and the other
provisions of this Lease, the latter shall control.
1. Tenant shall not alter any lock or install any new or additional locks
or bolts on any doors or windows of the Premises without obtaining Landlord's
prior written consent. Tenant shall bear the cost of any lock changes or repairs
required by Tenant. Upon the termination of this Lease, Tenant shall restore to
Landlord one set of all keys relating to the Premises.
2. All doors opening to public corridors shall be kept closed at all times
except for normal ingress and egress to the Premises.
3. Landlord reserves the right to close and keep locked all entrance and
exit doors of the Building during such hours as are customary for Comparable
Buildings. Tenant, its employees and agents must be sure that the doors to the
Building are securely closed and locked when leaving the Premises if it is after
the normal hours of business for the Building. Any tenant, its employees, agents
or any other persons entering or leaving the Building at any time when it is so
locked, or any time when it is considered to be after normal business hours for
the Building, may be required to sign the Building register. Access to the
Building may be refused unless the person seeking access has proper
identification or has a previously arranged pass for access to the Building.
Landlord will furnish passes to persons for whom Tenant requests same in
writing. Tenant shall be responsible for all persons for whom Tenant requests
passes and shall be liable to Landlord for all acts of such persons. The
Landlord and his agents shall in no case be liable for damages for any error
with regard to the admission to or exclusion from the Building of any person. In
case of invasion, mob, riot, public excitement, or other commotion, Landlord
reserves the right to prevent access to the Building or the Project during the
continuance thereof by any means it deems appropriate for the safety and
protection of life and property.
4. No furniture, freight or equipment of any kind shall be brought into the
Building without prior notice to Landlord. All moving activity into or out of
the Building shall be scheduled with Landlord and done only at such time and in
such manner as Landlord designates except during Tenant's initial construction
and move-in period, when Tenant shall have absolute priority over other
construction in the Building, whether by or on behalf of other tenants or
Landlord. Landlord shall have the right to prescribe the weight, size and
position of all safes and other heavy property brought into the Building and
also the times and manner of moving the same in and out of the Building. Safes
and other heavy objects shall, if considered necessary by Landlord, stand on
supports of such thickness as is necessary to properly distribute the weight.
Landlord will not be responsible for loss of or damage to any such safe or
property in any case. Any damage to any part of the Building, its contents,
occupants or visitors by moving or maintaining any such safe or other property
shall be the sole responsibility and expense of Tenant.
EXHIBIT D
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5. No furniture, packages, supplies, equipment or merchandise will be
received in the Building or carried up or down in the elevators, except between
such hours, in such specific elevator and by such personnel as shall be
designated by Landlord, except during Tenant's initial construction and move-in
period, when Tenant shall have absolute priority over other construction in the
Building, whether by or on behalf of other tenants or landlord..
6. The requirements of Tenant will be attended to only upon application at
the management office for the Project or at such office location designated by
Landlord. Employees of Landlord shall not perform any work or do anything
outside their regular duties unless under special instructions from Landlord.
7. Except as otherwise provided in this Lease, no sign, advertisement,
notice or handbill shall be exhibited, distributed, painted or affixed by Tenant
on any part of the Premises or the Building without the prior written consent of
the Landlord. Tenant shall not disturb, solicit, peddle, or canvass any occupant
of the Project and shall cooperate with Landlord and its agents of Landlord to
prevent same.
8. The toilet rooms, urinals, wash bowls and other apparatus shall not be
used for any purpose other than that for which they were constructed, and no
foreign substance of any kind whatsoever shall be thrown therein. The expense of
any breakage, stoppage or damage resulting from the violation of this rule shall
be borne by the tenant who, or whose servants or employees shall have caused
same.
9. Tenant shall not overload the floor of the Premises or drywall, nor in
any way deface the Premises or any part thereof without Landlord's prior written
consent. Tenant shall not purchase spring water, ice, towel, linen, maintenance
or other like services from any person or persons not approved by Landlord.
10. Intentionally Deleted.
11. Tenant shall not use or keep in or on the Premises, the Building, or
the Project any kerosene, gasoline, explosive material, corrosive material,
material capable of emitting toxic fumes, or other inflammable or combustible
fluid chemical, substitute or material. Tenant shall provide to applicable
governmental authorities material safety data sheets for any Hazardous Material
used or kept on the Premises.
12. Except as otherwise provided in this Lease, Tenant shall not without
the prior written consent of Landlord use any method of heating or air
conditioning other than that supplied by Landlord.
13. Tenant shall not use or allow the Premises to be occupied or used in a
manner offensive or objectionable to Landlord or other occupants of the Project
by reason of noise, odors, or vibrations, or interfere with other tenants or
those having business therein, whether by the use of any musical instrument,
radio, phonograph, or in any other way. Tenant shall not throw anything out of
doors, windows or skylights or down passageways.
14. Tenant shall not bring into or keep within the Project, the Building or
the Premises any animals, birds, aquariums, or, except in areas designated by
Landlord, bicycles or other vehicles. Notwithstanding the foregoing, animals
serving the disabled and wheelchairs shall be permitted.
15. No cooking shall be done or permitted on the Premises, for lodging or
for any improper, objectionable or immoral purposes. Notwithstanding the
foregoing, Underwriters' laboratory-approved equipment and microwave ovens may
be used in the Premises for heating food and brewing coffee, tea, hot chocolate
and similar beverages for employees and visitors, provided that such use is in
accordance with all applicable federal, state, county and city laws, codes,
ordinances, rules and regulations.
16. The Premises shall not be used for manufacturing or for the storage of
merchandise except as such manufacturing and/or storage may be incidental to the
use of the Premises provided for in the Summary. Tenant shall not occupy or
permit any portion of the Premises to be occupied as an office for a
messenger-type operation or dispatch office, public
EXHIBIT D
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stenographer or typist, or for the manufacture or sale of liquor, narcotics, or
tobacco in any form, or as a medical office, or as a barber or manicure shop, or
as an employment bureau without the express prior written consent of Landlord.
Tenant shall not engage or pay any employees on the Premises except those
actually working for such tenant on the Premises nor advertise for laborers
giving an address at the Premises.
17. Landlord reserves the right to exclude or expel from the Project any
person who, in the judgment of Landlord, is intoxicated or under the influence
of liquor or drugs, or who shall in any manner do any act in violation of any of
these Rules and Regulations.
18. Tenant, its employees and agents shall not loiter in or on the
entrances, corridors, sidewalks, lobbies, courts, halls, stairways, elevators,
vestibules or any Common Areas for the purpose of smoking tobacco products or
for any other purpose, nor in any way obstruct such areas, and shall use them
only as a means of ingress and egress for the Premises.
19. Tenant shall not waste electricity, water or air conditioning and
agrees to cooperate fully with Landlord to ensure the most effective operation
of the Building's heating and air conditioning system, and shall refrain from
attempting to adjust any controls. Tenant shall participate in recycling
programs undertaken by Landlord.
20. Tenant shall store all its trash and garbage within the interior of the
Premises. No material shall be placed in the trash boxes or receptacles if such
material is of such nature that it may not be disposed of in the ordinary and
customary manner of removing and disposing of trash and garbage in Los Angeles,
California without violation of any law or ordinance governing such disposal.
All trash, garbage and refuse disposal shall be made only through entry-ways and
elevators provided for such purposes at such times as Landlord shall designate.
If the Premises is or becomes infested with vermin as a result of the use or any
misuse or neglect of the Premises by Tenant, its agents, servants, employees,
contractors, visitors or licensees, Tenant shall forthwith, at Tenant's expense,
cause the Premises to be exterminated from time to time to the satisfaction of
Landlord and shall employ such licensed exterminators as shall be approved in
writing in advance by Landlord.
21. Tenant shall comply with all safety, fire protection and evacuation
procedures and regulations established by any governmental agency.
22. Any persons employed by Tenant to do janitorial work shall be subject
to the prior written approval of Landlord, and while in the Building and outside
of the Premises, shall be subject to and under the control and direction of the
Building manager (but not as an agent or servant of such manager or of
Landlord).
23. Except as otherwise provided in this Lease no awnings or other
projection shall be attached to the outside walls of the Building without the
prior written consent of Landlord, and, except as set forth below, no curtains,
blinds, shades or screens shall be attached to or hung in, or used in connection
with, any window or door of the Premises other than Landlord standard window
coverings. Notwithstanding the foregoing, Tenant shall be permitted to apply
privacy tinting to the exterior windows on the ground floor portion of the
Premises, provided that the color and other specifications relating to the
tinting shall be subject to the approval of Landlord, which approval shall not
be unreasonably withheld. Tenant shall be responsible for any damage to the
window film on the exterior windows of the Premises caused by Tenant and shall
promptly repair any such damage at Tenant's sole cost and expense.
24. The sashes, sash doors, skylights, windows, and doors that reflect or
admit light and air into the halls, passageways or other public places in the
Building shall not be covered or obstructed by Tenant.
25. Tenant must comply with requests by the Landlord concerning the
informing of their employees of items of importance to the Landlord.
26. Tenant shall comply with all applicable governmental laws, rules,
regulations and ordinances concerning smoking.
EXHIBIT D
-3-
<PAGE> 68
27. Except as specifically set forth set forth in this Lease, (i) Tenant
hereby acknowledges that Landlord shall have no obligation to provide guard
service or other security measures for the benefit of the Premises, the Building
or the Project, and (ii) Tenant hereby assumes all responsibility for the
protection of Tenant and its agents, employees, contractors, invitees and
guests, and the property thereof, from acts of third parties. Tenant shall
cooperate in any reasonable safety or security program developed by Landlord or
required by law.
28. All office equipment of any electrical or mechanical nature shall be
placed by Tenant in the Premises in a manner reasonably calculated to eliminate
unreasonable vibration, noise and annoyance.
29. Tenant shall not use in any space or in the public halls of the
Building, any hand trucks except those equipped with rubber tires and rubber
side guards.
30. No auction, liquidation, fire sale, going-out-of-business or bankruptcy
sale shall be conducted in the Premises without the prior written consent of
Landlord.
31. No tenant shall use or permit the use of any portion of the Premises
for living quarters, sleeping apartments or lodging rooms.
Landlord reserves the right to change or rescind any one or more of these
Rules and Regulations, in Landlord's reasonable discretion, or to make such
other and further reasonable Rules and Regulations. Tenant shall be deemed to
have read these Rules and Regulations and to have agreed to abide by them as a
condition of its occupancy of the Premises. Landlord shall enforce the Rules and
Regulations in a reasonable and nondiscriminatory manner.
EXHIBIT D
-4-
<PAGE> 69
EXHIBIT E
5670 WILSHIRE BOULEVARD
FORM OF TENANT'S ESTOPPEL CERTIFICATE
The undersigned as Tenant under that certain Office Lease (the "Lease")
made and entered into as of ___________, 199 by and between _______________ as
Landlord, and the undersigned as Tenant, for Premises on the ______________
floor(s) of the office building located at ______________, Los Angeles,
California ____________, certifies as follows:
1. Attached hereto as Exhibit A is a true and correct copy of the Lease and
all amendments and modifications thereto. The documents contained in Exhibit A
represent the entire agreement between the parties as to the Premises.
2. The undersigned currently occupies the Premises described in the Lease,
the Lease Term commenced on __________, and the Lease Term expires on
___________, and the undersigned has no option to terminate or cancel the Lease
or to purchase all or any part of the Premises, the Building and/or the Project.
3. Base Rent became payable on ____________.
4. The Lease is in full force and effect and has not been modified,
supplemented or amended in any way except as provided in Exhibit A.
5. Tenant has not transferred, assigned, or sublet any portion of the
Premises nor entered into any license or concession agreements with respect
thereto except as follows:
6. Tenant shall not modify the documents contained in Exhibit A without the
prior written consent of Landlord's mortgagee.
7. All monthly installments of Base Rent, all Additional Rent and all
monthly installments of estimated Additional Rent have been paid when due
through ___________. The current monthly installment of Base Rent is
$______________.
8. To the actual knowledge of Tenant, all conditions of the Lease to be
performed by Landlord necessary to the enforceability of the Lease have been
satisfied and Landlord is not in default thereunder. In addition, the
undersigned has not delivered any notice to Landlord regarding a default by
Landlord thereunder.
9. No rental has been paid more than thirty (30) days in advance and no
security has been deposited with Landlord except as provided in the Lease.
10. As of the date hereof, to the actual knowledge of Tenant, there are no
existing defenses or offsets, or, to the undersigned's knowledge, claims or any
basis for a claim, that the undersigned has against Landlord.
11. If Tenant is a corporation or partnership, each individual executing
this Estoppel Certificate on behalf of Tenant hereby represents and warrants
that Tenant is a duly formed and existing entity qualified to do business in
California and that Tenant has full right and authority to execute and deliver
this Estoppel Certificate and that each person signing on behalf of Tenant is
authorized to do so.
EXHIBIT E
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<PAGE> 70
12. There are no actions pending against the undersigned under the
bankruptcy or similar laws of the United States or any state.
13. To the undersigned's knowledge, all initial tenant improvement work to
be performed by Landlord under the Lease has been completed in accordance with
the Lease and has been accepted by the undersigned and all reimbursements and
allowances due to the undersigned under the Lease in connection with any initial
tenant improvement work have been paid in full.
The undersigned acknowledges that this Estoppel Certificate may be
delivered to Landlord or to a prospective mortgagee or prospective purchaser,
and acknowledges that said prospective mortgagee or prospective purchaser will
be relying upon the statements contained herein in making the loan or acquiring
the property of which the Premises are a part and that receipt by it of this
certificate is a condition of making such loan or acquiring such property.
Executed at ______________ on the ____ day of ___________, 19 .
"Tenant":
- ----------------------------------,
a
--------------------------------
By:
------------------------------
Its:
-----------------------
By:
------------------------------
Its:
-----------------------
EXHIBIT E
-2-
<PAGE> 71
EXHIBIT F
INTENTIONALLY OMITTED
EXHIBIT F
-1-
<PAGE> 72
EXHIBIT G
LOCATION OF RESERVED PARKING SPACES
EXHIBIT G
-1-
<PAGE> 73
EXHIBIT H
MEMORANDUM OF LEASE
RECORDING REQUESTED BY
AND WHEN RECORDED RETURN TO:
ARTISTDIRECT NETWORK
c/o Troop Steuber Pasich Reddick & Tobey, LLP
2029 Century Park East, Suite 2400
Los Angeles, California 90067
Attention: Robert J. Plotkowski. Esq.
- --------------------------------------------------------------------------------
MEMORANDUM OF OFFICE LEASE
THIS MEMORANDUM OF OFFICE LEASE (this "Memorandum") is entered into as of
the __ day of ________, 199_, by and between _________________________________
("Landlord"), and _________________________________ ("Tenant").
1. Terms and Premises. Landlord leases to Tenant, and Tenant leases from
Landlord, certain premises (the "Premises") to be located on a portion of the
real property (the "Property") legally described on Exhibit A attached hereto
(known by the street address of 5670 Wilshire Boulevard (the "Building")) in
accordance with the provisions of that certain Office Lease, dated ___________,
between the parties hereto (the "Lease"). The provisions of the Lease are
incorporated herein.
2. Term. The initial term of the Lease expires on the date set forth in the
Lease. Tenant also has one (1) option to extend the Lease for a period of five
(5) years.
3. Provisions Binding on Parties. The provisions of the Lease to be
performed by Landlord or Tenant, whether affirmative or negative in nature, are
intended to and shall bind or benefit the respective parties and their assigns
or successors, as applicable, at all times.
4. Purpose of Memorandum of Lease. This Memorandum is prepared solely for
purposes of recordation, and in no way modifies the provisions of the Lease.
"Landlord":
----------------------,
a
----------------------------------
By:
-------------------------------
Its:
-----------------------
"Tenant":
-------------------------,
----------------------,
a
----------------------------------
By:
-------------------------------
Its:
-----------------------
EXHIBIT H
-1-
<PAGE> 74
STATE OF )
---------------------------
) ss.
COUNTY OF )
--------------------------
On ________________________, before me, ________________________, a Notary
Public in and for said state, personally appeared _______________________,
personally known to me (or proved to me on the basis of satisfactory evidence)
to be the person whose name is subscribed to the within instrument and
acknowledged to me that he/she executed the same in his/her authorized capacity,
and that by his/her signature on the instrument, the person, or the entity upon
behalf of which the person acted, executed the instrument.
WITNESS my hand and official seal.
--------------------------------------------
Notary Public in and for said State
STATE OF )
----------------------------
) ss.
COUNTY OF )
--------------------------
On ________________________, before me, ________________________, a Notary
Public in and for said state, personally appeared _______________________,
personally known to me (or proved to me on the basis of satisfactory evidence)
to be the person whose name is subscribed to the within instrument and
acknowledged to me that he/she executed the same in his/her authorized capacity,
and that by his/her signature on the instrument, the person, or the entity upon
behalf of which the person acted, executed the instrument.
WITNESS my hand and official seal.
--------------------------------------------
Notary Public in and for said State
EXHIBIT H
-2-
<PAGE> 75
STATE OF )
----------------------------
) ss.
COUNTY OF )
--------------------------
On ________________________, before me, ________________________, a Notary
Public in and for said state, personally appeared _______________________,
personally known to me (or proved to me on the basis of satisfactory evidence)
to be the person whose name is subscribed to the within instrument and
acknowledged to me that he/she executed the same in his/her authorized capacity,
and that by his/her signature on the instrument, the person, or the entity upon
behalf of which the person acted, executed the instrument.
WITNESS my hand and official seal.
--------------------------------------------
Notary Public in and for said State
STATE OF )
----------------------------
) ss.
COUNTY OF )
--------------------------
On ________________________, before me, ________________________, a Notary
Public in and for said state, personally appeared _______________________,
personally known to me (or proved to me on the basis of satisfactory evidence)
to be the person whose name is subscribed to the within instrument and
acknowledged to me that he/she executed the same in his/her authorized capacity,
and that by his/her signature on the instrument, the person, or the entity upon
behalf of which the person acted, executed the instrument.
WITNESS my hand and official seal.
--------------------------------------------
Notary Public in and for said State
EXHIBIT H
-3-
<PAGE> 76
EXHIBIT A
LEGAL DESCRIPTION OF THE PROPERTY
The land referred to is situated in the County of Los Angeles, State of
California, and is described as follows:
[ATTACHED]
EXHIBIT A
-1-
<PAGE> 77
EXHIBIT I
LOCATION OF TENANT'S SIGNAGE
EXHIBIT I
-1-
<PAGE> 78
EXHIBIT J
5670 WILSHIRE BOULEVARD
FORM OF LETTER OF CREDIT
DATE OF ISSUE: ------------------------------
EXPIRY DATE: (ONE YEAR FROM DATE OF ISSUE)
PLACE OF PRESENTATION OF REPUBLIC BANK CALIFORNIA N.A.
DOCUMENTS FOR PAYMENT 445 NORTH BEDFORD DRIVE
BEVERLY HILLS, CALIFORNIA 90210
CURRENCY/AMOUNT USD $2,258,136.38
(U.S. DOLLARS ONLY)
------------------
APPLICANT: ARTIST DIRECT, INC.
17836 VENTURA BLVD., NO. 330
ENCINO, CALIFORNIA 91316
BENEFICIARY: 5670 WILSHIRE L.P.
A CALIFORNIA LIMITED PARTNERSHIP
5670 WILSHIRE BOULEVARD
LOS ANGELES, CALIFORNIA 90036
ATTN: OFFICE OF THE BUILDING
WE HEREBY ESTABLISH OUR IRREVOCABLE STANDBY LETTER OF CREDIT IN YOUR FAVOR
WHICH IS AVAILABLE BY PAYMENT OF YOUR DRAFT(S) AT SIGHT DRAWN ON US BEARING THE
CLAUSE "DRAWN UNDER REPUBLIC BANK CALIFORNIA N.A. BEVERLY IRREVOCABLE STANDBY
LETTER OF CREDIT NO. ________ DATED MM/DD/YY" AND ACCOMPANIED BY THIS ORIGINAL
STANDBY LETTER OF CREDIT, AMENDMENT(S) HERETO (IF ANY), AND THE DOCUMENT(S) AS
SPECIFIED BELOW:
A. A STATEMENT PURPORTEDLY SIGNED BY AN AUTHORIZED REPRESENTATIVE OF 5670
WILSHIRE, L.P., A CALIFORNIA LIMITED PARTNERSHIP, CERTIFY THAT SUCH MONEYS ARE
DUE AND OWING TO 5670 WILSHIRE, L.P., A CALIFORNIA LIMITED PARTNERSHIP.
SPECIAL CONDITIONS:
A. THIS STANDBY LETTER OF CREDIT SHALL BE AUTOMATICALLY EXTENDED WITHOUT
AMENDMENT FOR ADDITIONAL PERIOD(S) OF ONE (1) YEAR EACH FROM THE PRESENT AND
EACH FUTURE EXTENDED EXPIRY DATE HEREOF, WITH A FINAL EXPIRY DATE OF UNLESS WE
ELECT NOT TO RENEW THIS STANDBY LETTER OF CREDIT AND DELIVER TO YOU WRITTEN
NOTICE OF SUCH ELECTION AT LEAST THIRTY (30) DAYS PRIOR TO ANY SUCH EXPIRY DATE,
ANY SUCH NOTICE SHALL BE DELIVERED BY REGISTERED MAIL OR COURIER SERVICE TO YOU
AT THE ABOVE ADDRESS.
B. THIS LETTER OF CREDIT IS TRANSFERABLE AT YOUR OPTION PROVIDED THE
ATTACHED TRANSFER FORM IS COMPLETED AND RETURNED TO US WITH THIS ORIGINAL LETTER
OF CREDIT (AND AMENDMENTS, IF ANY) AND YOUR CHECK FOR OUR TRANSFER FEE AT USDLRS
1,000.00, PLUS DELIVERY CHARGES USDLRS 25.00.
C. IN CASE THIS LETTER OF CREDIT IS TRANSFERRED, THE NAME AND ADDRESS OF
THE ORIGINAL BENEFICIARY WILL BE SUPERSEDED BY THE NAME AND ADDRESS OF THE
TRANSFEREE WHEREVER IT APPEARS IN THE TEXT OF
EXHIBIT J
-1-
<PAGE> 79
THIS ORIGINAL LETTER OF CREDIT AND THE WORD "BENEFICIARY" WHEREVER IT APPEARS IN
THE TEXT OF THIS CREDIT MEANS THE TRANSFEREE (AS WELL AS AMENDMENTS, IF ANY) AND
THE TRANSFEREE SHALL HAVE THE SOLE RIGHTS AS BENEFICIARY THEREOF, INCLUDING SOLE
RIGHTS RELATING TO ANY AMENDMENTS WHETHER INCREASES OR EXTENSIONS OR OTHER
AMENDMENTS AND WHETHER EXISTING OR HEREAFTER MADE AND THE REQUIRED SIGNED
STATEMENT TO BE PURPORTEDLY SIGNED BY THE TRANSFEREE.
D. PROVIDED THAT APPLICANT IS NOT IN DEFAULT UNDER THE TERMS OF THAT
CERTAIN OFFICE LEASE DATED DECEMBER 13, 1999, BY AND BETWEEN APPLICANT AND
BENEFICIARY (THE "LEASE"), BEYOND THE APPLICABLE CURE PERIOD PROVIDED IN THE
LEASE, THEN THE AMOUNT OF THIS LETTER OF CREDIT SHALL BE REDUCED AS FOLLOWS: ON
MAY 1, 2002, THE AMOUNT OF THE L-C SHALL BE REDUCED TO ONE MILLION EIGHT HUNDRED
SIX THOUSAND FIVE HUNDRED NINE AND 10/100 DOLLARS ($1,806,509.10); ON MAY 1,
2003, THE AMOUNT OF THE L-C SHALL BE REDUCED TO ONE MILLION THREE HUNDRED
FIFTY-FOUR THOUSAND EIGHT HUNDRED EIGHTY-ONE AND 82/100 DOLLARS ($1,354,881.82);
ON MAY 1, 2004, THE AMOUNT OF THE L-C SHALL BE REDUCED TO NINE HUNDRED THREE
THOUSAND TWO HUNDRED FIFTY-FOUR AND 54/100 DOLLARS ($903,254.54); ON MAY 1,
2005, THE AMOUNT OF THE L-C SHALL BE REDUCED TO FOUR HUNDRED FIFTY-ONE THOUSAND
SIX HUNDRED TWENTY-SEVEN AND 26/100 DOLLARS ($451,627.26); AND ON MAY 1, 2006,
THE AMOUNT OF THE L-C SHALL BE REDUCED TO ZERO AND NO/100 DOLLARS ($0.00).
WE HEREBY AGREE WITH YOU THAT DRAFT DRAWN UNDER AND IN COMPLIANCE WITH THE
TERMS OF THIS STANDBY LETTER OF CREDIT WILL BE DULY HONORED IF PRESENTED TO THIS
OFFICE AT 445 NORTH BEDFORD DRIVE, BEVERLY HILLS, CALIFORNIA 90210 ON OR BEFORE
OUR CLOSE OF BUSINESS HOUR (3:00 P.M.) OF THE ABOVE-STATED EXPIRY DATE OR ANY
EXTENDED EXPIRY DATE.
ANY DOCUMENTS PRESENTED HEREUNDER WITH DISCREPANCY(IES) WILL BE SUBJECT TO
A DISCREPANCY FEE OF USD 50.00 PAYABLE BY THE BENEFICIARY, IN ADDITION, OUR
TELECOMMUNICATION EXPENSES, PLUS ANY OTHER APPLICABLE FEES/CHARGES RELATED TO
DISCREPANT DOCUMENT AND PAYMENT ARE ALSO FOR BENEFICIARY'S ACCOUNT WHICH WILL BE
DEDUCTED FROM REMITTANCE MADE UNDER THIS CREDIT.
EXCEPT AS OTHERWISE EXPRESSLY STATED, THIS STANDBY LETTER OF CREDIT IS
SUBJECT TO UNIFORM CUSTOMS AND PRACTICE FOR DOCUMENTARY CREDIT (1993 REVISION)
INTERNATIONAL CHAMBER OF COMMERCE PUBLICATION NUMBER 500.
EXHIBIT J
-2-
<PAGE> 80
THIS FORM IS TO BE USED WHERE A LETTER OF CREDIT IS TRANSFERRED
IN ITS ENTIRETY AND NO SUBSTITUTION OF INVOICE IS INVOLVED
Date:
[LETTERHEAD OF REPUBLIC ----------------------------
BANK CALIFORNIA, N.A.] Re: Credit issued by:
------------------
Your Advice No.
-------------------
Gentlemen:
For value received, the undersigned beneficiary hereby irrevocably transfers to:
- --------------------------------- ----------------------------
(Name of Transferee) (Address)
all rights of the undersigned beneficiary to draw under the above Letter of
Credit in its entirety.
By this transfer, all rights of the undersigned beneficiary in such Letter of
Credit are transferred to the transferee and the transferee shall have the sole
rights as beneficiary thereof, including sole rights relating to any amendments
whether increases or extensions or other amendments and whether now existing or
hereafter made. All amendments are to be advised direct to the transferee
without necessity of any consent of or notice to the undersigned beneficiary.
The advice of such Letter of Credit is returned herewith together with any and
all amendments, and we ask you to endorse the transfer on the reverse of the
advise, and forward it direct to the Transferee with your customary notice of
transfer.
We enclose our check for $ representing your transfer commission at $1,000.00,
plus $ representing Telex/courier charges and in addition thereto we agree to
pay to you on demand any other expenses which may be incurred by you in
connection with this transfer.
SIGNATURE AUTHENTICATED Yours very truly,
The signer is an authorized
signatory who is authorized to
execute this instrument for
and on behalf of
- ----------------------------- -----------------------------------
(Bank) (Signature of Beneficiary)
- ----------------------------- -----------------------------------
(Authorized Signature)
EXHIBIT J
-3-
<PAGE> 81
TRANSFERABLE CREDIT
A. A transferable Credit is a Credit under which the Beneficiary (First
Beneficiary) may request the bank authorized to pay, incur a deferred
payment undertaking, accept or negotiate (the "Transferring Bank"), or in
the case of a freely negotiable Credit, the bank specifically authorized in
the Credit as a Transferring Bank, to make the Credit available in whole or
in part to one or more other Beneficiary(ies) (Second Beneficiary(ies)).
B. A Credit can be transferred only if it is expressly designated as
"transferable" by the Issuing Bank. Terms such as "divisible,"
"fractionable," "assignable," and transmissible" do not render the Credit
transferable. If such terms are used they shall be disregarded.
C. The Transferring Bank shall be under no obligation to effect such transfer
except to the extent and in the manner expressly consented to by such bank.
D. At the time of making a request for transfer and prior to transfer of the
Credit, the First Beneficiary must irrevocably instruct the Transferring
Bank whether or not he retains the right to refuse to allow the
Transferring Bank to advise amendments to the Second Beneficiary(ies). If
the Transferring Bank consents to the transfer under these conditions, it
must, at the time of transfer, advise the Second Beneficiary(ies) of the
First Beneficiary's instructions regarding amendments.
E. If a Credit is transferred to more than one Second Beneficiary(ies),
refusal of an amendment by one or more Second Beneficiary(ies) does not
invalidate the acceptance(s) by the other Second Beneficiary(ies) with
respect to whom the Credit will be amended accordingly. With respect to the
Second Beneficiary(ies) who rejected the amendment, the Credit will remain
unamended.
F. Transferring Bank charges in respect of transfers including commissions,
fees, costs or expenses are payable by the First Beneficiary, unless
otherwise agreed. If the Transferring Bank agrees to transfer the Credit it
shall be under no obligation to effect the transfer until such charges are
paid.
G. Unless otherwise stated in the Credit, a transferable Credit can be
transferred once only. Consequently, the Credit cannot be transferred at
the request of the Second Beneficiary to any subsequent Third Beneficiary.
For the purpose of this Article, a retransfer to the First Beneficiary does
not constitute a prohibited transfer.
Fractions of a transferable Credit (not exceeding in the aggregate the
amount of the Credit) can be transferred separately, provided partial
shipments/drawings are not prohibited, and the aggregate of such transfers
will be considered as constituting only one transfer of the Credit.
H. The Credit can be transferred only on the terms and conditions specified in
the original Credit, with the exception of:
B. the amount of the Credit,
C. any unit price stated therein,
D. the expiry date,
E. the last date for presentation of documents in accordance with
Article 43,
F. the period for shipment.
The percentage for which insurance cover must be effected may be increased
in such a way as to provide the amount of cover stipulated in the original
Credit, or these Articles.
In addition, the name of the First Beneficiary can be substituted for that
of the Applicant, but if the name of the Applicant is specifically required
by the original Credit to appear in any document(s) other than the invoice,
such requirement must be fulfilled.
EXHIBIT J
-4-
<PAGE> 82
A. The First Beneficiary has the right to substitute his own invoice(s) (and
Draft(s))for those of the Second Beneficiary(ies), for amounts not in
excess of the original amount stipulated in the Credit and for the original
unit prices if stipulated in the Credit, and upon such substitution of
invoice(s) (and Draft(s)) the First Beneficiary can draw under the Credit
for the difference, if any, between his invoice(s) and the Second
Beneficiary's(ies') invoices(s).
When a Credit has been transferred and the First Beneficiary is to supply
his own invoice(s) (and Draft(s)) in exchange for the Second
Beneficiary's(ies') invoice(s) (and Draft(s)) but fails to do so on first
demand, the Transferring Bank has the right to deliver to the Issuing Bank
the documents received under the transferred Credit, including the Second
Beneficiary's(ies') invoice(s) (and Draft(s)) without further
responsibility to the First Beneficiary.
The First Beneficiary may request that payment or negotiation be effected
to the Second Beneficiary(ies) at the place to which the Credit has been
transferred up to and including the expiry date of the Credit, unless the
original Credit expressly states that it may not be made available for payment
or negotiation at a place other than that stipulated in the Credit. This is
without prejudice to the First Beneficiary's right to substitute subsequently
his own invoice(s) (and Draft(s)) for those of the Second Beneficiary(ies) and
to claim any difference due to him.
EXHIBIT J
-5-
<PAGE> 83
OFFICE LEASE
5670 WILSHIRE BOULEVARD
5670 WILSHIRE L.P.,
a California limited partnership,
as Landlord,
and
ARTISTDIRECT NETWORK,
a Delaware corporation,
as Tenant.
<PAGE> 84
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE 1 PREMISES, BUILDING, PROJECT, AND COMMON AREAS; VERIFICATION OF RENTABLE QUARE
FEET; RIGHT OF FIRST OFFER....................................................................4
ARTICLE 2 INITIAL LEASE TERM; OPTION TERM...............................................................8
ARTICLE 3 BASE RENT....................................................................................10
ARTICLE 4 ADDITIONAL RENT..............................................................................11
ARTICLE 5 USE OF PREMISES..............................................................................20
ARTICLE 6 SERVICES AND UTILITIES.......................................................................21
ARTICLE 7 REPAIRS......................................................................................22
ARTICLE 8 ADDITIONS AND ALTERATIONS....................................................................23
ARTICLE 9 COVENANT AGAINST LIENS.......................................................................25
ARTICLE 10 INSURANCE....................................................................................25
ARTICLE 11 DAMAGE AND DESTRUCTION.......................................................................28
ARTICLE 12 NONWAIVER....................................................................................29
ARTICLE 13 CONDEMNATION.................................................................................29
ARTICLE 14 ASSIGNMENT AND SUBLETTING....................................................................30
ARTICLE 15 SURRENDER OF PREMISES; OWNERSHIP AND REMOVAL OF TRADE FIXTURES...............................33
ARTICLE 16 HOLDING OVER.................................................................................34
ARTICLE 17 ESTOPPEL CERTIFICATES........................................................................34
ARTICLE 18 SUBORDINATION................................................................................34
ARTICLE 19 DEFAULTS; REMEDIES...........................................................................35
ARTICLE 20 COVENANT OF QUIET ENJOYMENT..................................................................38
ARTICLE 21 LETTER OF CREDIT.............................................................................38
ARTICLE 22 INTENTIONALLY OMITTED........................................................................39
ARTICLE 23 SIGNS........................................................................................39
ARTICLE 24 COMPLIANCE WITH LAW..........................................................................40
ARTICLE 25 LATE CHARGES.................................................................................40
ARTICLE 26 LANDLORD'S RIGHT TO CURE DEFAULT; PAYMENTS BY TENANT.........................................41
ARTICLE 27 ENTRY BY LANDLORD............................................................................41
ARTICLE 28 TENANT PARKING...............................................................................42
ARTICLE 29 MISCELLANEOUS PROVISIONS.....................................................................42
</TABLE>
<PAGE> 85
Page
----
EXHIBITS
A OUTLINE OF PREMISES
B TENANT WORK LETTER
C FORM OF NOTICE OF LEASE TERM DATES
D RULES AND REGULATIONS
E FORM OF TENANT'S ESTOPPEL CERTIFICATE
F INTENTIONALLY OMITTED
G TENANT'S RESERVED PARKING
H MEMORANDUM OF LEASE
I LOCATION OF TENANT'S SIGNAGE
J FORM OF LETTER OF CREDIT
(iii)
<PAGE> 86
INDEX
Page(s)
-------
Abatement Event..........................................................37
ACM......................................................................47
Actual Cost..............................................................22
Affiliate................................................................33
After Hours HVAC.........................................................22
Alterations..............................................................23
Anticipated Expansion Space Delivery Date.................................7
Applicable Laws..........................................................40
Applicable Reassessment..................................................19
Arbitration..............................................................20
Bank Prime Loan..........................................................41
Base Building............................................................24
Base Rent................................................................10
Base Year................................................................11
BOMA Standard.............................................................5
Brokers..................................................................45
Builder's All Risk.......................................................24
Building..................................................................4
Building Hours...........................................................21
Building Structure.......................................................22
Building Systems.........................................................22
Capacity.................................................................22
Claims and Expenses......................................................25
Commission Agreement.....................................................45
Common Areas..............................................................4
Comparable Buildings......................................................6
Comparable Deals..........................................................6
Comparable Term...........................................................6
Contemplated Effective Date..............................................32
Contemplated Transfer Space..............................................32
Cost Pools...............................................................17
Direct Expenses..........................................................11
E!.......................................................................47
Election Notice...........................................................6
Eligibility Period.......................................................37
Estimate.................................................................17
Estimate Statement.......................................................17
Estimated Excess.........................................................17
Excess...................................................................17
Excluded Expenses........................................................11
Expansion Commencement Date...............................................8
Expansion Notice..........................................................7
Expansion Space...........................................................7
Expansion Space Construction Period.......................................8
Expansion Space Rent......................................................7
Expense Year.............................................................11
Eyebrow Signage..........................................................39
Final Audit..............................................................20
First Offer Commencement Date.............................................7
First Offer Notice........................................................5
First Offer Rent..........................................................6
First Offer Space.........................................................5
First Offer Space Buildout Period.........................................7
Force Majeure............................................................44
Holidays.................................................................21
HVAC.....................................................................21
Initial L-C Amount.......................................................38
<PAGE> 87
Page(s)
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Intention to Transfer Notice.............................................32
Interest Notice...........................................................9
Interest Rate............................................................41
Intervening Lease.........................................................6
Landlord..................................................................1
Landlord Parties.........................................................25
Landlord's Compliance Conditions.........................................40
L-C......................................................................38
L-C Security Deposit.....................................................38
Lease.....................................................................1
Lease Commencement Date...................................................8
Lease Expiration Date.....................................................8
Lease Term................................................................8
Lease Year................................................................8
Lines....................................................................46
Mail.....................................................................44
Market Rent...............................................................6
Maximum Amount...........................................................14
Memo of Lease............................................................43
Monument Signage.........................................................39
Nine Month Period........................................................32
Notices..................................................................44
Operating Expenses.......................................................11
Option Exercise Notice....................................................9
Option Rent...............................................................9
Option Rent Notice........................................................9
Option Term...............................................................9
Original Improvements....................................................27
Original Tenant...........................................................5
Outside Agreement Date....................................................9
Permitted Assignee........................................................5
Premises..................................................................4
Proposition 13...........................................................16
Proposition 13 Purchase Price............................................19
Reassessment.............................................................18
Remeasurement Notice......................................................5
Rent Concessions..........................................................6
Rules and Regulations.....................................................4
Second Floor Premises.....................................................1
Secured Areas............................................................41
Statement................................................................17
Studley..................................................................45
Subject Space............................................................30
Summary...................................................................1
Tax Expenses.............................................................16
Tax Increase.............................................................18
Tenant....................................................................1
Tenant Parties...........................................................26
Tenant Work Letter........................................................4
Tenant's Lease Rights.....................................................4
Tenant's Compliance Conditions...........................................40
Tenant's Review..........................................................19
Tenant's Security System.................................................21
Tenant's Share...........................................................17
Tenant's Signage.........................................................39
Termination Date.........................................................10
Termination Fee..........................................................10
Termination Notice.......................................................10
Third Floor Premises......................................................1
<PAGE> 88
Page(s)
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Third Party Auditor......................................................19
Threshold Amount.........................................................28
Transfer Costs...........................................................31
Transfer Notice..........................................................30
Transfer Premium.........................................................31
Transferee...............................................................30
Transfers................................................................30
Triggering Default........................................................7
<PAGE> 89
FIRST AMENDMENT TO LEASE
THIS FIRST AMENDMENT TO LEASE ("FIRST AMENDMENT") is made and entered into
as of the _____ day of March, 2000, by and between 5670 WILSHIRE L.P., a
California limited partnership ("LANDLORD") and ARTISTDIRECT NETWORK a Delaware
corporation ("TENANT").
R E C I T A L S :
A. Landlord and Tenant entered into that certain Office Lease dated
December 13, 1999 (the "Lease"), whereby Landlord leased to Tenant and Tenant
leased from Landlord certain office space consisting of Approximately 63,955
rentable (56,365 usable) square feet of space (the "PREMISES"), located on the
second (2nd) and third (3rd) floors of that certain building located and
addressed at 5670 Wilshire Boulevard, Los Angeles, California (the "BUILDING").
B. Landlord and Tenant desire to modify the Lease on the terms and
conditions set forth in this First Amendment.
A G R E E M E N T:
NOW, THEREFORE, in consideration of the foregoing recitals and the mutual
covenants contained herein, and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
hereby agree as follows.
1. CAPITALIZED TERMS. All capitalized terms when used herein shall have the
same meaning as is given such terms in the Lease unless expressly superseded by
the terms of this First Amendment.
2. TENANT'S SIGNAGE. Section 23.5 of the Lease is hereby entirely deleted
and replaced with the following:
"23.5 TENANT'S SIGNAGE. Tenant shall be entitled to install (i) one
(1) eyebrow sign (the "Eyebrow Signage") in the location above the third
(3rd) floor of the Building facing Wilshire Boulevard which location is
currently, as of the date of this Lease, occupied by the signage of E!
Entertainment Television, Inc., a Delaware corporation, (ii) two (2)
monument signs (the "Monument Signage") on the existing monument located on
the corner of Wilshire Boulevard and Hauser Street in the location set
forth on Exhibit I attached hereto, and (iii) four (4) building top signs
(one (1) on each side of the fascia of the Building) (the "Building Top
Signage"), at Tenant's sole cost and expense (the Eyebrow Signage, Monument
Signage, and Building Top Signage may be collectively referred to herein as
"Tenant's Signage"). Landlord shall not grant to any other tenant the
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<PAGE> 90
right to install signage on the exterior of the Building at the same level
as the Eyebrow Signage or above the Eyebrow Signage.
23.5.1 SPECIFICATIONS, REQUIREMENTS AND TRANSFERABILITY.
Notwithstanding anything to the contrary set forth in this Section 23.5,
(a) the location of the Eyebrow Signage and the Monument Signage shall be
consistent with Exhibit I and otherwise reasonably acceptable to Landlord
and Tenant, (b) the location of the Building Top Signage, and the size,
materials, design, graphics, color, illumination and specifications of
Tenant's Signage shall be subject to Landlord's approval, which approval
shall not be unreasonably withheld (provided that the graphics, color, and
design of Tenant's existing logo are hereby approved), (c) Tenant's Signage
shall comply with all applicable governmental rules and regulations, (d)
Tenant's Eyebrow Signage and the Monument Signage shall be personal to the
Original Tenant and any Permitted Assignee, provided that Tenant may not
transfer less than all of Tenant's Eyebrow Signage and the Monument Signage
to such Permitted Assignee, (e) Tenant's right to Tenant's Eyebrow Signage
and the Monument Signage shall terminate in the event that less than 40,000
rentable square feet of the Premises are occupied by the Original Tenant or
any Permitted Assignee (if, following such termination, Landlord requires
the removal of Tenant's Signage, Landlord shall be responsible for the cost
of such removal and any repair of the Project resulting therefrom), and (f)
Tenant may transfer Tenant's Building Top Signage to any "Qualified
Tenant," as that term is defined in Section 23.5.2, below. The Eyebrow
Signage and the Monument Signage may, at Tenant's option, include Tenant's
name and/or logo. The Building Top Signage shall include (A) Tenant's name
and logo on two (2) of the four (4) locations of the Building Top Signage,
and (B) Tenant's logo only on two (2) of the four (4) locations of the
Building Top Signage; provided that Tenant shall, in Tenant's sole
discretion, decide which locations shall include Tenant's name and logo and
which locations shall include only Tenant's logo. Should Tenant change
Tenant's name and/or logo (the "New Designation"), Tenant shall be entitled
to modify, at Tenant's sole cost and expense, Tenant's name and/or logo on
Tenant's Signage so long as Tenant's New Designation is not an
"Objectionable Designation." The term "Objectionable Designation" shall
mean any name and/or logo which relates to an entity which is of a
character or reputation, or is associated with a political orientation or
faction, which is inconsistent with the quality of the Project, or which
would otherwise reasonably offend a landlord of the Comparable Buildings.
Tenant shall be responsible for all costs incurred by Tenant in connection
with the design, construction, installation, illumination, maintenance and
repair of Tenant's Signage. Landlord, at Tenant's expense, shall clean,
replace light bulbs as necessary, and provide adequate electricity to the
Building Top Signage. On or before June 1, 2000, Landlord, at Landlord's
sole cost and expense, shall remove the signage currently, as of the date
hereof, existing in the location of Tenant's Building Top Signage. Subject
to Landlord's reasonable needs in connection with renovations of and/or in
connection with the repair and maintenance of the Building or Project,
Landlord
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<PAGE> 91
shall not (x) affix any structures to the Building or Project which will
materially obstruct the visibility of Tenant's Signage, and (y) permit
landscaping on the Project to materially obstruct the visibility of
Tenant's Signage. Upon the expiration or earlier termination of Tenant's
rights to Tenant's Signage or upon the expiration of the Lease Term, Tenant
shall, at its sole cost and expense, remove Tenant's Signage and repair any
and all damage to the Building and Project caused by such removal. In the
event Tenant fails to comply with the terms of the proceeding sentence,
Landlord shall have the right, at Tenant's sole cost and expense after
thirty (30) days advance written notice, to remove Tenant's Signage and to
repair any and all damage to the Building caused by such removal.
23.5.2 QUALIFIED TENANT. For purposes of this Section 23.5, a
"QUALIFIED TENANT" shall mean an entity that (i) has a name and/or logo,
and (ii) is in a business line, for which institutional landlords of
comparable buildings in the West Los Angeles area ("COMPARABLE LANDLORDS")
would typically lease building top signage in connection with the lease of
a significant amount of office space (e.g., "The Coca-Cola Company" is a
large, well-known, reputable entity, but operates a business (manufacturing
and sale of soft-drinks) to which Comparable Landlords do not typically
lease building top signage, while "First Bank of Brazil" may be a less
well-known or reputable entity, but financial institutions are a business
line to which Comparable Landlords typically lease building top signage).
In the event that Landlord and Tenant, using their best good-faith efforts,
are unable to agree on whether or not the entity to whom Tenant desires to
transfer the Building Top Signage is a Qualified Tenant, then such question
shall be submitted to arbitration in accordance with Sections 23.5.2.1
through 23.5.2.7 below.
23.5.2.1 Landlord and Tenant shall each appoint one arbitrator
who shall by profession be a real estate broker who shall have been active
over the five (5) year period ending on the date of such appointment in the
leasing (or appraisal, as the case may be) of commercial office buildings
in the West Los Angeles area. The determination of the arbitrators shall be
limited solely to the issue area of whether or not the entity to whom
Tenant desires to transfer the Building Top Signage is a Qualified Tenant,
taking into account the requirements of Section 23.5.2 of this Lease. Each
such arbitrator shall be appointed within fifteen (15) days after the issue
is submitted to arbitration.
23.5.2.2 The two arbitrators so appointed shall within ten (10)
days of the date of the appointment of the last appointed arbitrator agree
upon and appoint a third arbitrator who shall be qualified under the same
criteria set forth hereinabove for qualification of the initial two
arbitrators.
23.5.2.3 The three arbitrators shall within thirty (30) days of
the appointment of the third arbitrator reach a decision as to whether or
not the entity to whom Tenant desires to transfer the Building Top Signage
is a Qualified Tenant, and shall notify Landlord and Tenant thereof.
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<PAGE> 92
23.5.2.4 The decision of the majority of the three arbitrators
shall be binding upon Landlord and Tenant.
23.5.2.5 If either Landlord or Tenant fails to appoint an
arbitrator within fifteen (15) days after the issue is submitted to
arbitration, the arbitrator appointed by one of them shall reach a
decision, notify Landlord and Tenant thereof, and such arbitrator's
decision shall be binding upon Landlord and Tenant.
23.5.2.6 If the two arbitrators fail to agree upon and appoint a
third arbitrator, or both parties fail to appoint an arbitrator, then the
appointment of the third arbitrator or any arbitrator shall be dismissed
and the matter to be decided shall be forthwith submitted to binding,
final, non-applicable arbitration before a J.A.M.S. arbitrator mutually
agreed upon by Landlord and Tenant. If Landlord and Tenant cannot agree on
the arbitrator, the parties will so inform J.A.M.S., who will then be
authorized to select a J.A.M.S. judge to arbitrate the matter. Each party
shall have the right of discovery pursuant to the California Code of Civil
Procedure and evidentiary hearings shall be governed by the California
Evidence Code, but subject to the instruction set forth in this Section
23.5.2.
23.5.2.7 The cost of arbitration shall be paid by Landlord and
Tenant equally."
3. BROKERS. Landlord and Tenant hereby warrant to each other that they have
had no dealings with any real estate broker or agent in connection with the
negotiation of this First Amendment, excepting only the Brokers, and that they
know of no other real estate broker or agent who is entitled to a commission in
connection with this First Amendment. Each party agrees to indemnify and defend
the other party against and hold the other party harmless from any and all
claims, demands, losses, liabilities, lawsuits, judgments, costs and expenses
(including without limitation reasonable attorneys' fees) with respect to any
leasing commission or equivalent compensation alleged to be owing on account of
any dealings with any real estate broker or agent, other than the Brokers,
occurring by, through, or under the indemnifying party.
4. NO FURTHER MODIFICATION. Except as set forth in this First Amendment,
all of the terms and provisions of the Lease shall remain unmodified and in full
force and effect.
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<PAGE> 93
IN WITNESS WHEREOF, this First Amendment has been executed as of the day
and year first above written.
"LANDLORD" 5670 WILSHIRE L.P.,
a California limited partnership
By:
-------------------------------------------
Its:
-----------------------------------
By:
-------------------------------------------
Its:
-----------------------------------
"TENANT"
ARTISTDIRECT NETWORK, a Delaware corporation
By:
-------------------------------------------
Its:
-----------------------------------
By:
-------------------------------------------
Its:
-----------------------------------
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<PAGE> 1
EXHIBIT 21.1
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
Name of State of Doing
Subsidiary Organization Business As
---------- ------------ -----------
<S> <C> <C>
Kneeling Elephant Records, LLC California Kneeling Elephant Records
The Ultimate Band List, LLC California The UBL*
ARTISTdirect New Media, LLC California ARTISTdirect New Media
ARTISTdirect Agency, LLC California ARTISTdirect Agency
ARTISTdirect Holdings, LLC California ARTISTdirect Holdings
ARTISTdirect International Delaware
Holdings, LLC
ARTISTdirect Latin America, LLC Delaware
ADMJ Acquisition Corp. Delaware
</TABLE>
* iMusic, Inc. is a wholly owned subsidiary of the Ultimate Band List, LLC.
<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 3, 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 3, 2000
