<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 27, 2000
REGISTRATION NO. 333-87547
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 6
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
ARTISTDIRECT, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 7375 95-4760230
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION NUMBER) IDENTIFICATION NO.)
</TABLE>
------------------------
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:
<TABLE>
<S> <C>
RICHARD A. FINK, ESQ. STEVEN L. GROSSMAN, ESQ.
JOSEPH H. CHI, ESQ. ROBERT E. BENFIELD, ESQ.
CHRISTINE P. LE, ESQ. O'MELVENY & MYERS LLP
CHRISTOPHER S. COSTA, ESQ. 1999 AVENUE OF THE STARS, SUITE 700
BROBECK, PHLEGER & HARRISON LLP LOS ANGELES, CALIFORNIA 90067
38 TECHNOLOGY DRIVE (310) 553-6700
IRVINE, CALIFORNIA 92618
(949) 790-6300
</TABLE>
------------------------
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.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<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 27, 2000
5,000,000 Shares
[ARTISTDIRECT LOGO]
COMMON STOCK
-------------------------
ARTISTDIRECT, INC. IS OFFERING 5,000,000 SHARES OF ITS COMMON STOCK. THIS IS OUR
INITIAL PUBLIC OFFERING AND NO PUBLIC MARKET CURRENTLY EXISTS FOR OUR SHARES. WE
ANTICIPATE THAT THE INITIAL PUBLIC OFFERING PRICE WILL BE BETWEEN $10.00 AND
$12.00 PER SHARE.
-------------------------
WE HAVE APPLIED TO HAVE THE SHARES OF COMMON STOCK APPROVED FOR QUOTATION ON THE
NASDAQ NATIONAL MARKET UNDER THE SYMBOL "ARTD."
-------------------------
INVESTING IN THE COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON
PAGE 9.
-------------------------
PRICE $ A SHARE
-------------------------
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS ARTISTDIRECT
-------- ------------- ------------
<S> <C> <C> <C>
Per Share............................................ $ $ $
Total................................................ $ $ $
</TABLE>
The Securities and Exchange Commission and state securities regulators have not
approved or disapproved these securities, or determined if this prospectus is
truthful or complete. Any representation to the contrary is a criminal offense.
ARTISTdirect has granted the underwriters the right to purchase up to an
additional 750,000 shares of common stock to cover over-allotments. Morgan
Stanley & Co. Incorporated expects to deliver the shares to purchasers on
, 2000.
-------------------------
MORGAN STANLEY DEAN WITTER
BEAR, STEARNS & CO. INC.
DEUTSCHE BANC ALEX. BROWN
, 2000
<PAGE> 3
INSIDE FRONT COVER
THE OUTSIDE GATEFOLD PAGE INCLUDES:
A four-by-four grid with a total of 16 rectangles, each depicting a picture of
an artist or band. The bottom row of rectangles have the ARTISTdirect logo
superimposed across them.
TWO PAGE INSIDE GATEFOLD INCLUDES:
The ARTISTdirect network logo across the top center.
In the upper left corner is a screen shot of the ARTISTdirect.com home page
with the following four lines of text immediately below the screen shot:
Overview of the ARTISTdirect Network
ARTISTdirect Network Navigator
Featured Programs
Search Capabilities
Immediately above the screen shot is the text: ARTISTDIRECT.COM
In the lower left corner is a screen shot of the iMusic.com home page with the
following five lines of text immediately below the screen shot:
Music Community Hub
Message Boards
Chat Sessions
Classifieds
Local Music Connection
Immediately above the screen shot is the text: IMUSIC.COM
In the upper right corner is a screen shot of the Downloads Direct home page
with the following four lines of text immediately below the screen shot:
Digital Downloads
High Profile Artists
Downloads by Genec
Music from Unsigned Artists
Immediately above the screen shot is the text: DOWNLOADS DIRECT
In the lower right corner is a screen shot of the ARTISTdirect Superstore home
page with the following five lines of text along the lower left side of the
screen shot:
200,000 CD Titles
Featured Artists
Weekly Specials
Artist Merchandise
Music by Genre
Immediately above the screen shot is the text: ARTISTDIRECT SUPERSTORE
In the left center are screen shots of the home pages of five ARTISTdirect
channels with the following four lines of text immediately below the screen
shots:
Official Artist Stores
Exclusive Merchandise
Exclusive Content
Contests and Ticket Giveaways
Immediately above the screen shot is the text: ARTIST CHANNELS.
In the right center is a screen shot of the UBL.com home page with the
following four lines of text immediately below the screen shot:
Comprehensive Music Resource
Search 95,000 Artists
Music News
Concert Information
Featured Artists
All the screen shots and text are superimposed on a backdrop that depicts the
names of artists.
<PAGE> 4
INSIDE BACK COVER
The following text is superimposed on a backdrop of a four-by-four grid
consisting of sixteen rectangles, each depicting the picture of an artist or
band:
Across the top center the following text appears: REPRESENTATIVE ARTIST CHANNELS
There are three columns of text. The left column consists of the following
artist names:
Aerosmith Black Crowes CSNY
Tori Amos blink-182 Cypress Hill
B-52s Bone Thugs 'N' Harmony Def Leppard
Backstreet Boys Cher Eminem
Beastie Boys Coal Chamber Eve 6
Beck Collective Soul Everclear
George Benson Chris Cornell Fastball
Bjork Counting Crows Bryan Ferry
Black Sabbath David Crosby Filter
Clint Black
The center column consists of the following artist names:
Foo Fighters Kenny Loggins Mike Ness
Vince Gill Aimee Mann Stevie Nicks
Godsmack Marilyn Manson No Doubt
Incubus Matchbox 20 The Offspring
Indigo Girls Megadeth Ozzy Osbourne
Chris Isaak Metallica Pantera
Kenny G Mighty Mighty Bosstones Patty Loveless
BB King Monster Magnet Pearl Jam
Korn Mandy Moore Tom Petty
Limp Bizkit
The right column consists of the following artist names:
Powerman 5000 Stabbing Westward System of a Down
Primus Static X Pam Tillis
Rage Against The Machine Steps Toto
Rancid Stone Temple Pilots Tina Turner
Red Hot Chili Peppers Sugar Ray The Who
Brian Setzer Sublime/Long Beach Dub Robbie Williams
Severdust All Stars Dwight Yoakam
Slaye Matthew Sweet Rob Zombie
Soul Coughing ZZ Top
<PAGE> 5
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................. 4
Risk Factors........................ 9
Special Note Regarding
Forward-Looking Statements........ 25
Use of Proceeds..................... 26
Dividend Policy..................... 26
Capitalization...................... 27
Dilution............................ 29
Unaudited Pro Forma Consolidated
Financial Data.................... 30
Selected Consolidated Financial
Data.............................. 33
Management's Discussion and Analysis
of Financial Condition and Results
of Operations..................... 34
</TABLE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Business............................ 45
Management.......................... 64
Related Party Transactions.......... 76
Principal Stockholders.............. 84
Description of Capital Stock........ 88
Rescission Offer.................... 91
Shares Eligible For Future Sale..... 92
Underwriters........................ 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.
3
<PAGE> 6
PROSPECTUS SUMMARY
You should read the following summary together with the more detailed
information regarding our company and the common stock being sold in this
offering and our financial statements and the notes to those financial
statements appearing elsewhere in this prospectus. The conversion of all of our
convertible preferred stock outstanding as of the date of this prospectus is
based on an assumed offering price of $11.00 per share. The actual number of
shares issued upon conversion of the preferred stock may be adjusted based upon
the initial public offering price.
ARTISTDIRECT
We are an online music company that connects artists directly with their
fans worldwide. Through our online ARTISTdirect Network, we provide music
entertainment by offering multi-media content, community around shared music
interests and sales of music and related merchandise. During January 2000, users
visited more than 60 million pages in our ARTISTdirect Network.
Our ARTISTdirect Network is an integrated network of Web sites consisting
of:
- ARTISTchannels -- customized, artist-owned Web sites that provide one
destination for artist-specific music, merchandise and content. We build,
operate and maintain these sites on behalf of our artists. Artists
control the programming and products offered on their ARTISTchannels and
share in the revenue that they generate. As of December 31, 1999,
ARTISTdirect featured 79 unique, artist-owned ARTISTchannels, and had
signed agreements to launch channels with an additional 26 artists. A
selection of artists with ARTISTchannels includes:
<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 or the UBL -- a comprehensive online music search
engine with information on more than 95,000 artists across numerous
musical genres and links to thousands of music Web sites. The UBL
features news, concert information, biographies, album reviews, contests,
promotions, music samples and downloads;
- iMusic -- a popular online music community with chats, message boards and
fan clubs. Through hosted chats and fan conferences on iMusic, fans can
interact directly with their favorite artists;
- The ARTISTdirect Superstore -- a retail site offering over 200,000 music
titles and merchandise from over 220 artists; and
- DOWNLOADSdirect -- a feature which enables users to download music from
the ARTISTdirect Network and to upload their music and other information.
We also operate a music talent agency, the ARTISTdirect Agency, and manage
a traditional record label, Kneeling Elephant Records. Consequently, we are able
to provide artists with a full range of traditional and online services. Marc
Geiger, our Chief Executive Officer, Don Muller, our President of the
ARTISTdirect Agency and Kneeling Elephant Records, Steve Rennie, our President
of the UBL and Nick Turner, our Vice President, ARTISTchannels, have 18, 14, 20
and 20 years of experience, respectively, in the music industry.
4
<PAGE> 7
Music is one of the most popular forms of entertainment worldwide and a
multi-billion dollar industry. In 1998, worldwide sales of recorded music were
$38.7 billion, according to the International Federation of the Phonographic
Industry. Sales of concert tickets, advertising and merchandise related to music
events and individual artists also generate substantial revenue. The Internet is
emerging as an important new medium for music, in part because it enables fans
to communicate with their favorite artists and purchase music and related
merchandise directly from them. Jupiter Communications projects that online
sales of recorded music in the United States will grow from $327 million in 1999
to approximately $2.6 billion in 2003.
To take advantage of these opportunities, we have entered into strategic
relationships with six leading music and media companies, including Universal
Music Group, BMG Entertainment, Sony Music Entertainment, Time Warner Inc., an
affiliate of Cisneros Television Group, and Yahoo!. These companies invested an
aggregate of $97.5 million cash in ARTISTdirect in connection with these
strategic relationships and include four of the five major music companies, who
together accounted for 74.6% of U.S. music albums shipped in the year ended
December 31, 1999.
We have generated substantially all of our revenue from online sales of
compact discs and other artist-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. Our principal executive offices are located at 17835 Ventura
Boulevard, Suite 310, Encino, California 91316, and our telephone number is
(818) 758-8700. Our World Wide Web address is www.artistdirect.com. The
information on our Web site is not a part of this prospectus.
We use the following registered service marks and domain names of
ARTISTdirect in this prospectus: ARTISTdirect(SM), UBL(SM), iMusic(SM),
www.artistdirect.com, www.ubl.com, www.imusic.com and www.downloadsdirect.com.
All other trade names and trademarks appearing in this prospectus are the
property of their respective holders.
5
<PAGE> 8
THE OFFERING
Common stock offered................ 5,000,000 shares
Common stock to be outstanding after
the offering........................ 37,296,483 shares
Over-allotment option............... 750,000 shares
Use of proceeds..................... We intend to use approximately $30
million of the proceeds for advertising
and promotion of our brands,
approximately $10 million for content
production and Web site development,
approximately $741,000 to repay
existing indebtedness, and the
remainder for other general corporate
purposes, including for working capital
and potential obligations to fund a
rescission offer. See "Use of Proceeds"
on page 26 for more information on our
use of the proceeds from this offering.
Proposed Nasdaq National Market
symbol.............................. ARTD
- -------------------------
Unless otherwise indicated, all information in this prospectus:
- reflects the one-for-four reverse split of our common stock effected on
March 21, 2000;
- reflects outstanding shares as of December 31, 1999, after giving effect
to the issuance of 1,094,917 shares of Series C preferred stock in
January 2000;
- gives effect to the conversion of all outstanding shares of preferred
stock into shares of common stock effective upon the closing of this
offering; all outstanding shares of Series C preferred stock, including
the 1,094,917 shares issued in January 2000, will convert into 11,079,550
shares of common stock upon the consummation of this offering, based on
an assumed initial offering price of $11.00. The actual number of shares
of common stock that will be issued upon the conversion of the Series C
preferred stock may be adjusted based upon the actual initial offering
price;
- assumes no exercise of the underwriters' over-allotment option;
- excludes shares of our common stock issuable pursuant to options and
warrants outstanding as of December 31, 1999;
- excludes up to 900,000 shares of common stock to be issued to acquire
Mjuice.com, Inc.;
- excludes approximately 100,000 shares of common stock to be issued as
accrued but unpaid dividends on preferred stock after December 31, 1999;
and
- excludes 62,500 shares of common stock issuable pursuant to a warrant
issued in March 2000.
6
<PAGE> 9
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
The following pro forma basic and diluted net loss per share and the
weighted average shares outstanding used in computing pro forma basic and
diluted net loss per share give effect to the following events as if such events
occurred on January 1, 1998 or at original issuance date, if later:
- the exchange transaction and issuance of ARTISTdirect, LLC Series B
preferred units as more fully discussed on page 77;
- the one-for-four reverse split of our common stock effected on March 21,
2000; 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.
<TABLE>
<CAPTION>
PERIOD FROM
AUGUST 8, 1996 YEAR ENDED DECEMBER 31,
(INCEPTION) TO ----------------------------
DECEMBER 31, 1996 1997 1998 1999
----------------- ------ ------ ----------
<S> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Net revenue................................ $ -- $1,888 $4,582 $ 10,274
Gross profit............................... -- 1,280 2,067 34
Operating expense.......................... 28 1,737 8,416 58,169
Loss from operations....................... 28 457 6,349 58,135
Net loss................................... 28 460 6,318 57,804
Pro forma basic and diluted net loss per
share.................................... $ (2.96)
Weighted average shares outstanding used in
computing pro forma basic and diluted net
loss per share........................... 19,502,437
</TABLE>
The "pro forma as adjusted" column below reflects our capitalization as of
December 31, 1999 with adjustments to give effect to:
- the events listed above related to the pro forma basic and diluted net
loss per share;
- the issuance of 1,094,917 shares of Series C preferred stock in January
2000;
- the termination of the put option described in a "Related Party
Transactions -- Transaction with Scott Blum" on page 80, which will occur
upon the closing of this offering; and
- the issuance and sale of 5,000,000 shares of our common stock at an
assumed initial public offering price of $11.00 per share and the
application of the net proceeds from the offering, after deducting the
underwriting discounts, commissions and estimated offering expenses, as
set forth under "Use of Proceeds" on page 26.
7
<PAGE> 10
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1999
-------------------------
PRO FORMA
ACTUAL AS ADJUSTED
----------- -----------
(UNAUDITED)
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 69,119 $133,826
Working capital............................................. 67,730 132,437
Goodwill and intangibles, net............................... 13,415 13,415
Total assets................................................ 98,600 163,307
Total redeemable securities................................. 111,707 6,854
Total members' and stockholders' equity (deficit)........... (23,745) 145,815
</TABLE>
8
<PAGE> 11
RISK FACTORS
You should carefully consider the risks described below, together with all
of the other information included in this prospectus before making an investment
decision. If any of the following risks actually occurs, our business, financial
condition or operating results could be materially and adversely affected. In
such case, the trading price of our common stock could decline, and you may lose
part or all of your investment.
RISKS RELATED TO OUR BUSINESS
IT IS DIFFICULT TO EVALUATE OUR BUSINESS AND PROSPECTS BECAUSE WE HAVE A
LIMITED OPERATING HISTORY.
We were formed in August 1996. We acquired the UBL in July 1997, launched
our first ARTISTchannel in September 1997 and acquired iMusic in February 1999.
We have been operating all of these sites as an integrated network since July
1999. Our limited operating history, particularly as an integrated network of
Web sites, makes it difficult to evaluate our current business and prospects or
to accurately predict our future revenue or results of operations. Our revenue
and income potential are unproven, and our business model is constantly
evolving. Because the Internet is constantly changing, we may need to modify our
business model to adapt to these changes. Before investing, you should evaluate
the risks, uncertainties, expenses and difficulties frequently encountered by
companies in early stages of development, particularly companies in new and
rapidly evolving Internet industry segments.
OUR BUSINESS MODEL IS NEW AND UNPROVEN, AND WE MAY NOT BE ABLE TO GENERATE
SUFFICIENT REVENUE TO OPERATE OUR BUSINESS SUCCESSFULLY.
Our model for conducting business and generating revenue is new and
unproven. Our success will depend primarily on our ability to generate revenue
from multiple sources through the ARTISTdirect Network, including:
- online sales of music and related merchandise;
- sales of advertising and sponsorships;
- marketing our database of consumer information and preferences; and
- sales of, or subscription fees for, digitally distributed music.
It is uncertain whether a music-related Web site that relies on attracting
people to learn about, listen to and purchase music and related merchandise can
generate sufficient revenue from electronic commerce, advertising, sales of
database information and sales of, or fees for, digital downloads of music, to
become a viable business. We provide many of our products and services without
charge, and we may not be able to generate sufficient revenue to pay for these
products and services. Accordingly, we are not certain that our business model
will be successful or that we can sustain revenue growth or be profitable. If
our markets develop more slowly than expected or become saturated with
competitors, or our products and services do not achieve or sustain market
acceptance, we may not be able to successfully operate our business.
WE HAVE A HISTORY OF OPERATING LOSSES AND ANTICIPATE LOSSES AND NEGATIVE
CASH FLOW FOR THE FORESEEABLE FUTURE.
To date, we have not been profitable on an annual basis and have incurred
accumulated losses of approximately $64.6 million as of December 31, 1999. For
the year ended December 31, 1999, we incurred a net loss of approximately $57.8
million, which represented approximately 560% of our revenue for that period. We
expect our operating losses and negative cash flow to continue for the
foreseeable
9
<PAGE> 12
future. We anticipate that our operating losses will increase significantly from
current levels because we plan to significantly increase our expenditures for
sales and marketing, content development, and technology and infrastructure
development to enhance the ARTISTdirect Network. We estimate that, for the year
2000, we will increase our sales and marketing expenses by approximately $20
million, increase our content development expenses by approximately $5 million
and increase our technology and infrastructure development expenses by
approximately $5 million. With increased expenses, we will need to generate
significant additional revenue to achieve profitability. Consequently, it is
possible that we may never achieve profitability, and even if we do achieve
profitability, we may not sustain or increase profitability on a quarterly or
annual basis in the future. If we do not achieve or sustain profitability in the
future, then we will be unable to continue our operations.
OUR OPERATING RESULTS MAY PROVE UNPREDICTABLE.
Our operating results are likely to fluctuate significantly in the future
due to a variety of factors, many of which are outside of our control. Because
our operating results are volatile and difficult to predict, in some future
quarters our operating results may fall below the expectations of securities
analysts and investors. In this event, the trading price of our common stock may
fall significantly.
IF WE DO NOT GENERATE INCREASED REVENUE FROM ONLINE PRODUCT SALES, OUR
GROWTH WILL BE LIMITED AND OUR BUSINESS WILL BE ADVERSELY AFFECTED.
If we do not generate increased revenue from sales of online products, our
growth will be limited and our business will be adversely affected. To generate
significant online product revenue, we will have to offer music and related
merchandise that appeal to a large number of online consumers. We also will have
to continue to create online communities that are conducive to electronic
commerce, build or license a sufficiently robust and scalable electronic
commerce platform and increase our order fulfillment capability. Since our
target market includes Internet users below the age of 18, and these users have
limited access to credit cards, our ability to capture online product revenue
from this group may be limited. If we are not successful in meeting these
challenges, our growth will be limited and our business will be adversely
affected.
IF WE DO NOT INCREASE ADVERTISING REVENUE, OUR BUSINESS WILL BE ADVERSELY
AFFECTED.
If we do not increase advertising revenue, our business will be adversely
affected. Increasing our advertising revenue depends upon many factors,
including our ability to:
- respond to and anticipate fluctuations in the demand for, and pricing of,
online advertising;
- conduct successful selling and marketing efforts aimed at advertisers;
- increase the size of our audience and the amount of time that our
audience spends on our Web sites;
- increase our direct advertising sales force and build up our
international marketing team;
- increase the amount of revenue per advertisement;
- aggregate our target demographic group of 12 to 34 year-old active music
consumers;
- offer advertisers the means to effectively target their advertisements to
our audience;
- accurately measure the size and demographic characteristics of our
audience;
- maintain key advertising relationships; and
- compete for advertisers with Internet and traditional media companies.
10
<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
11
<PAGE> 14
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.
12
<PAGE> 15
These competitors may be able to respond more quickly to new or emerging
technologies and changes in customer requirements and devote greater resources
to develop, promote and sell their products or services than we can. Web sites
maintained by our existing and potential competitors may be perceived by
consumers, artists, talent management companies and other music-related vendors
or advertisers as being superior to ours. In addition, increased competition
could result in reduced advertising rates and margins and loss of market share,
any of which could harm our business. For additional information regarding
competition, see "Business -- Competition" on page 59.
WE DEPEND ON A LIMITED NUMBER OF SUPPLIERS FOR MUSIC MERCHANDISE,
FULFILLMENT AND DISTRIBUTION; IF WE CANNOT SECURE ALTERNATE SUPPLIERS, OUR
BUSINESS MAY BE HARMED.
We rely to a large extent on timely distribution by third parties. We
currently rely substantially on one vendor, Alliance Entertainment, to fulfill
and distribute our orders for music and related merchandise. During the year
ended December 31, 1999, approximately 99.2% of the dollar volume of our orders
for music and related merchandise were fulfilled by Alliance. In July 1997,
Alliance filed for protection from its creditors under Chapter 11 of the U.S.
Bankruptcy Code. Alliance has since emerged from Chapter 11 and is under new
ownership. Our agreement with Alliance covers fulfillment services for sales
under the ARTISTdirect Superstore, but does not cover fulfillment services for
our ARTISTchannels. Although Alliance has been fulfilling orders for music and
related merchandise from the ARTISTchannels on the same terms as orders from the
ARTISTdirect Superstore, Alliance may terminate the ARTISTchannel arrangement at
any time.
We purchase almost all of our compact discs from Alliance and a substantial
majority of our other music-related merchandise from two other vendors, Giant
Merchandising and Winterland Concessions Company. During the year ended December
31, 1999, we purchased approximately 96.0% of the dollar volume of our compact
discs from Alliance, and we obtained approximately 26.9% of the dollar volume of
our other music-related merchandise from Giant Merchandising and approximately
17.0% from Winterland Concessions. Our business could be significantly disrupted
if Alliance, Giant or Winterland were to terminate or breach their agreements or
suffer adverse developments that affect their ability to supply products to us.
If, for any reason, Alliance, Giant or Winterland are unable or unwilling to
supply products to us in sufficient quantities and in a timely manner, we may
not be able to secure alternative suppliers, on acceptable terms in a timely
manner, or at all.
WE DEPEND ON THIRD PARTY INVENTORY AND FINANCIAL SYSTEMS AND CARRIER
SERVICES.
Because we rely on third parties to fulfill orders, we depend on their
systems for tracking inventory and financial data. If our distributors' systems
fail or are unable to scale or adapt to changing needs, or if we cannot
integrate our information systems with the systems of any new distributors, we
may not have adequate, accurate or timely inventory or financial information. We
also rely on third-party carriers for shipments to and from distribution
facilities. We are therefore subject to the risks, including employee strikes
and inclement weather, associated with our carriers' ability to provide delivery
services to meet our distribution and shipping needs. In the quarter ended
December 31, 1999, both we and Alliance experienced an unusually high volume of
orders, which resulted in shipping delays to our customers. These delays did not
have a material adverse effect; however, our failure to deliver products to our
customers in a timely and accurate manner in the future could harm our
reputation, our relationship with customers, the ARTISTdirect and UBL brands and
our results of operations.
OUR BUSINESS IS SUBJECT TO SEASONALITY, WHICH COULD ADVERSELY AFFECT OUR
OPERATING RESULTS
We have experienced and expect to continue to experience seasonal
fluctuations in our online sales. These seasonal patterns will cause quarterly
fluctuations in our operating results. In particular, a
13
<PAGE> 16
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,
14
<PAGE> 17
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.
15
<PAGE> 18
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,
16
<PAGE> 19
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.
17
<PAGE> 20
CHANGES IN LAWS OR REGULATIONS MAY ADVERSELY AFFECT OUR ABILITY TO COLLECT
DEMOGRAPHIC AND PERSONAL INFORMATION FROM USERS AND COULD AFFECT OUR
ABILITY TO ATTRACT ADVERTISERS.
Legislatures and government agencies have adopted and are considering
adopting laws and regulations regarding the collection and use of personal
information obtained from individuals when accessing Web sites. For example,
Congress recently enacted the Children's Online Privacy Protection Act, which
restricts the ability of Internet companies to collect information from children
under the age of 13 without their parents' consent. In addition, the Federal
Trade Commission and state and local authorities have been investigating
Internet companies regarding their use of personal information. Our privacy
programs may not conform with laws or regulations that are adopted. In addition,
these legislative and regulatory initiatives may adversely affect our ability to
collect demographic and personal information from users, which could have an
adverse effect on our ability to provide advertisers with demographic
information.
The European Union has adopted a directive that imposes restrictions on the
collection and use of personal data. The directive could impose restrictions
that are more stringent than current Internet privacy standards in the United
States. If this directive were applied to us, it could prevent us from
collecting data from users in European Union member countries or subject us to
liability for use of information in contravention of the directive. Other
countries have adopted or may adopt similar legislation. We could incur
additional expenses if new regulations regarding the use of personal information
are introduced or if government authorities choose to investigate our privacy
practices. See "Business -- Governmental Regulation" on page 60 for more
information on governmental regulation issues applicable to our business.
WE MAY BE ADVERSELY IMPACTED IF THE SOFTWARE, COMPUTER TECHNOLOGY AND OTHER
SYSTEMS WE USE ARE NOT YEAR 2000 COMPLIANT.
The risks posed by Year 2000 issues could adversely affect our business in
a number of ways. Although we believe that our internal systems and technology
are Year 2000 compliant and have not experienced any Year 2000 issues to date,
we currently do not have, and do not plan to develop, a contingency plan to
address any problems caused by Year 2000 issues. Software and hardware from
third parties that have been integrated into our systems may need to be updated
or replaced, which may be time consuming and expensive. We rely on a number of
third parties to support and operate our Web sites. In addition, our
distribution providers and suppliers, including our accounting services
provider, depend on their own information technology systems and on the systems
of their vendors.
Failures or interruptions of our systems or those of third parties because
of Year 2000 problems could seriously damage our business and our relationships
with our content, distribution and technology providers, advertisers and users.
Failures, interruptions or other service problems due to Year 2000 could result
in lost revenue, increased operating costs and loss of significant user traffic.
Governmental agencies, public utilities, Internet service providers and others
that we rely on or that our customers rely on and which we do not control may
not be Year 2000 compliant. This could result in systemic failures beyond our
control, such as a prolonged Internet, telecommunications or electrical failure,
and prevent us from providing our content or reduce user traffic.
WE HAVE A CONTINGENT LIABILITY OF UP TO $27.0 MILLION AS A RESULT OF A
RESCISSION OFFER WE INTEND TO MAKE DUE TO OUR ISSUANCES OF SECURITIES IN
VIOLATION OF SECURITIES LAWS.
As of the date of this prospectus, we have issued shares or options to
purchase shares of our common stock to our employees and to artists and their
managers and advisors. Due to the nature of the persons who received these
shares and options in addition to our employees and the total number of shares
and options issued to them and our employees, the issuance of these shares and
options did not comply with
18
<PAGE> 21
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.
Based on the number of shares and options issued as of December 31, 1999,
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
19
<PAGE> 22
and damages. Our insurance may not adequately protect us against these types of
claims or the costs of their defense or payment of damages.
THE EFFECTIVENESS OF THE INTERNET FOR ADVERTISING IS UNPROVEN, WHICH MAY
DISCOURAGE SOME ADVERTISERS FROM ADVERTISING ON OUR SITES.
Our future depends in part on an increase in the use of the Internet and
other forms of digital media for advertising. The Internet advertising market is
new and rapidly evolving, and we cannot yet gauge the effectiveness of
advertising on the Internet as compared to traditional media. As a result,
demand for Internet advertising is uncertain. Many advertisers have little or no
experience using the Internet for advertising purposes. The adoption of Internet
advertising, particularly by companies that have historically relied upon
traditional media for advertising, requires the acceptance of a new way of
conducting business, exchanging information and advertising products and
services. Such customers may find advertising on the Internet to be undesirable
or less effective than traditional advertising media for promoting their
products and services. If the Internet advertising market fails to fully develop
or develops more slowly than we expect, our business could be adversely
affected. In addition, the market for advertising on other forms of digital
media, such as broadband distribution, is even less developed than Internet
advertising, and if that market does not develop, our growth may be limited.
IF CURRENT STANDARDS TO MEASURE THE EFFECTIVENESS OF ADVERTISING ON THE
INTERNET DO NOT DEVELOP, OUR ABILITY TO ATTRACT AND RETAIN ADVERTISERS
COULD BE ADVERSELY IMPACTED.
There are currently few, well established standards to measure the
effectiveness of advertising on the Internet and other digital media, and the
absence of these standards could adversely impact our ability to attract and
retain advertisers. Currently available software programs that track Internet
usage and other tracking methodologies are rapidly evolving, but such standard
measurements may never develop. In addition, the development of such software or
other methodologies may not keep pace with our information needs, particularly
to support the growing needs of our internal business requirements and
advertising clients.
SOFTWARE PROGRAMS THAT PREVENT OR LIMIT THE DELIVERY OF ADVERTISING MAY
SERIOUSLY DAMAGE OUR ABILITY TO ATTRACT AND RETAIN ADVERTISERS.
A number of "filter" software programs have been developed which limit or
prevent advertising from being delivered to an Internet user's computer. This
software could adversely affect the commercial viability of Internet
advertising. These programs attempt to blank out, or block, banner and other
advertisements. To date, such programs have not had a material adverse impact on
our ability to attract and retain advertisers or caused us to fail to meet the
terms of our advertising agreements. These programs may, however, have these
effects on us in the future. Widespread adoption of this type of software would
seriously damage our ability to attract and retain advertisers.
WE MAY NEED TO CHANGE THE MANNER IN WHICH WE CONDUCT OUR BUSINESS IF
GOVERNMENT REGULATION INCREASES.
There are currently few laws or regulations that specifically regulate
communications or commerce on the Internet. Laws and regulations may be adopted
in the future, however, that address issues such as user privacy, pricing,
taxation, content, copyrights, distribution, security, and the quality of
products and services. For example, the Telecommunications Act sought to
prohibit transmitting certain types of information and content over the Web.
Several telecommunications companies have petitioned the Federal Communications
Commission to regulate Internet service providers and online services providers
in a manner similar to long distance telephone carriers and to impose access
fees on these companies.
20
<PAGE> 23
Any imposition of access fees could increase the cost of transmitting data over
the Internet. In addition, the growth and development of the market for online
commerce may lead to more stringent consumer protection laws, both in the United
States and abroad, that may impose additional burdens on us. The United States
Congress recently enacted Internet laws regarding children's privacy,
copyrights, taxation and the transmission of sexually explicit material. The law
of the Internet, however, remains largely unsettled, even in areas where there
has been some legislative action. Moreover, it may take years to determine the
extent to which existing laws relating to issues such as property ownership,
libel and personal privacy are applicable to the Web. Any new, or modifications
to existing, laws or regulations relating to the Web could adversely affect our
business.
Prohibition and restriction of Internet content and commerce could reduce
or slow Internet use, decrease the acceptance of the Internet as a
communications and commercial medium and expose us to liability. Any of these
outcomes could have a material adverse effect on our business, results of
operations and financial condition. The growth and development of the market for
Internet commerce may prompt calls for more stringent consumer protection laws,
both in the United States and abroad, that may impose additional burdens on
companies conducting business over the Internet.
THE INTERNET IS SUBJECT TO RAPID CHANGES, WHICH COULD RESULT IN SIGNIFICANT
ADDITIONAL COSTS.
The market for Internet products and services is characterized by rapid
change, evolving industry standards and frequent introductions of new
technological developments. These new standards and developments could make our
existing or future products or services obsolete. Keeping pace with the
introduction of new standards and technological developments could result in
significant additional costs or prove difficult or impossible for us. The
failure to keep pace with these changes and to continue to enhance and improve
the responsiveness, functionality and features of our Web sites could harm our
ability to attract and retain users. Among other things, we will need to license
or develop leading technologies, enhance our existing services and develop new
services and technologies that address the varied needs of our users.
OUR NET SALES COULD BE ADVERSELY AFFECTED IF WE BECOME SUBJECT TO SALES AND
OTHER TAXES.
If one or more states or any foreign country successfully asserts that we
should collect sales or other taxes on the sale of our products, our net sales
and results of operations could be harmed. We do not currently collect sales or
other similar taxes for physical shipments of goods into states other than
California and Florida. However, one or more states may seek to impose sales tax
collection obligations on companies, such as ARTISTdirect, which engage in or
facilitate online commerce. A number of proposals have been made at the state
and local level that would impose additional taxes on the sale of goods and
services through the Internet. Such proposals, if adopted, could substantially
impair the growth of electronic commerce and could adversely affect our
opportunity to derive financial benefit from electronic commerce. Moreover, if
any state or foreign country were to successfully assert that we should collect
sales or other taxes on the exchange of merchandise on its system, our results
of operations could be adversely affected. In addition, any new operations in
states outside California could subject our shipments in such states to state
sales taxes under current or future laws.
Legislation limiting the ability of the states to impose taxes on
Internet-based transactions has been enacted by Congress. However, this
legislation, known as the Internet Tax Freedom Act, imposes only a moratorium
ending on October 21, 2001 on state and local taxes on electronic commerce where
such taxes are discriminatory and on Internet access unless such taxes were
generally imposed and actually enforced before October 1, 1998. Failure to renew
this legislation would allow various states to impose taxes on Internet-based
commerce.
21
<PAGE> 24
OUR SUCCESS DEPENDS ON THE CONTINUED DEVELOPMENT AND MAINTENANCE OF THE
INTERNET AND THE AVAILABILITY OF INCREASED BANDWIDTH TO CONSUMERS.
The success of our business will rely on the continued improvement of the
Internet as a convenient means of consumer interaction and commerce, as well as
an efficient medium for the delivery and distribution of music. Our business
will depend on the ability of our artists and consumers to conduct commercial
transactions with us, as well as to continue to upload and download music files,
without significant delays or aggravation that may be associated with decreased
availability of Internet bandwidth and access to our Web site. This will depend
upon the maintenance of a reliable network with the necessary speed, data
capacity and security, as well as timely development of complementary products,
such as high speed modems, for providing reliable Internet access and services.
The failure of the Internet to achieve these goals will reduce our ability to
generate significant revenue.
Our penetration of a broader consumer market will depend, in part, on
continued proliferation of high speed Internet access. The Internet has
experienced, and is likely to continue to experience, significant growth in the
numbers of users and amount of traffic. As the Internet continues to experience
increased numbers of users, increased frequency of use and increased bandwidth
requirements, the Internet infrastructure may be unable to support the demands
placed on it. In addition, increased users or bandwidth requirements may harm
the performance of the Internet.
The Internet has experienced a variety of outages and other delays and it
could face outages and delays in the future. These outages and delays could
reduce the level of Internet usage as well as the level of traffic, and could
result in the Internet becoming an inconvenient or uneconomical source of music
and related products and merchandise which would cause our revenue to decrease.
The infrastructure and complementary products or services necessary to make the
Internet a viable commercial marketplace for the long term may not be developed
successfully or in a timely manner. Even if these products or services are
developed, the Internet may not become a viable commercial marketplace for the
products or services that we offer.
RISKS RELATED TO THE OFFERING
AFTER THIS OFFERING, OUR EXECUTIVE OFFICERS, DIRECTORS AND MAJOR
STOCKHOLDERS WILL BENEFICIALLY OWN APPROXIMATELY 61.5% OF OUR OUTSTANDING
COMMON STOCK AND CONSEQUENTLY WILL BE ABLE TO EXERCISE SIGNIFICANT CONTROL
OVER ARTISTDIRECT.
After this offering, executive officers, directors and holders of 5% or
more of the outstanding ARTISTdirect common stock together will beneficially own
approximately 61.5% of our outstanding common stock. These stockholders would be
able to significantly influence all matters requiring approval by our
stockholders, including the election of directors and the approval of
significant corporate transactions. This concentration of ownership may also
have the effect of delaying, deterring or preventing a change in control of
ARTISTdirect and may make some transactions more difficult or impossible to
complete without the support of these stockholders.
IT MAY BE DIFFICULT FOR A THIRD PARTY TO ACQUIRE OUR COMPANY, AND THIS
COULD PREVENT CHANGES IN OUR MANAGEMENT.
Upon the closing of this offering, we will be subject to the Delaware
anti-takeover laws regulating corporate takeovers. These anti-takeover laws
prevent a Delaware corporation from engaging in a business combination involving
a merger or sale of more than 10% of its assets with any stockholder, including
all affiliates and associates of the stockholder, who owns 15% or more of the
corporation's
22
<PAGE> 25
outstanding voting stock, for three years following the date that the
stockholder acquired 15% or more of the corporation's stock unless:
- the board of directors approved the transaction where the stockholder
acquired 15% or more of the corporation's stock;
- after the transaction where the stockholder acquired 15% or more of the
corporation's stock, the stockholder owned at least 85% of the
corporation's outstanding voting stock, excluding shares owned by
directors, officers and employee stock plans in which employee
participants do not have the right to determine confidentially whether
shares held under the plan will be tendered in a tender or exchange
offer; or
- on or after this date, the merger or sale is approved by the board of
directors and the holders of at least two-thirds of the outstanding
voting stock that is not owned by the stockholder.
A Delaware corporation may opt out of the Delaware anti-takeover laws if
its certificate of incorporation or bylaws so provide. We have not opted out of
the provisions of the anti-takeover laws. As such, these laws prohibit or delay
mergers or other takeovers or changes of control of ARTISTdirect and may
discourage attempts by other companies to acquire us.
Before the consummation of this offering, we intend to amend and restate
our certificate of incorporation and our bylaws to include a number of
provisions that may delay, deter or impede hostile takeovers or changes of
control or management. These provisions include:
- our board is classified into three classes of directors as nearly equal
in size as possible with staggered three year-terms;
- the authority of our board to issue up to five million shares of
preferred stock and to determine the price, rights, preferences and
privileges of these shares, without stockholder approval;
- all stockholder actions must be effected at a duly called meeting of
stockholders and not by written consent;
- special meetings of the stockholders may be called only by the Chairman
of the Board, the Chief Executive Officer or the Board; and
- the elimination of cumulative voting.
Our certificate of incorporation and bylaws provide that we will indemnify
officers and directors against losses that may incur in investigations and legal
proceedings resulting from their services to us, which may include services in
connection with takeover defense measures. These provisions may have the effect
of preventing changes in our management.
OUR COMMON STOCK PRICE MAY BE VOLATILE, WHICH COULD RESULT IN SUBSTANTIAL
LOSSES FOR INDIVIDUAL STOCKHOLDERS.
The market prices of stock for Internet and technology companies,
particularly following an initial public offering, frequently reach levels that
bear no relationship to the past or present operating performance of such
companies. Such market prices may not be sustainable and may be subject to wide
variations. If our common stock trades to such levels following this offering,
it may thereafter experience a material decline.
YOU WILL EXPERIENCE IMMEDIATE AND SUBSTANTIAL DILUTION AND PAY A HIGHER
PRICE THAN EXISTING STOCKHOLDERS.
We expect the initial public offering price to be substantially higher than
the book value per share of the outstanding common stock immediately after this
offering. Accordingly, if you purchase common
23
<PAGE> 26
stock in this offering, you will experience immediate dilution of approximately
$7.45 in the book value per share of the common stock, based on an assumed
initial public offering price of $11.00 per share. In addition, if outstanding
options and warrants to purchase shares of common stock are exercised, investors
in this offering could experience further dilution. Existing stockholders paid
an average price of $3.68 per share. Please see "Dilution" on page 29 for more
information regarding the dilution you will experience.
WE MAY NOT BE ABLE TO SECURE ADDITIONAL FINANCING TO MEET OUR FUTURE
CAPITAL NEEDS.
We currently anticipate that our available cash resources, without the
proceeds from this offering, will be sufficient to meet our anticipated needs
for working capital and capital expenditures for the next twelve months.
However, if our available cash, the proceeds from this offering and cash flows
from operations are insufficient to meet our anticipated needs for working
capital and capital expenditures, we will need to raise additional funds to
continue our operations, promote our brands, develop new or enhanced services,
respond to competitive pressures or make acquisitions. In particular, we intend
to spend approximately $30 million for advertising and promoting our brands and
network of web sites and approximately $10 million for content production and
Web site development. We may be unable to obtain any required additional
financing on terms favorable to us, if at all. If adequate funds are not
available on acceptable terms, we may be unable to fund our expansion,
successfully promote our brands, develop or enhance services, respond to
competitive pressures or take advantage of acquisition opportunities, any of
which could have a material adverse effect on our business. If we raise
additional funds through the issuance of equity securities, our stockholders may
experience dilution of their ownership interest, and the newly-issued securities
may have rights superior to those of the common stock. If we raise additional
funds by issuing debt, we may be subject to limitations on our operations,
including limitations on the payment of dividends.
SUBSTANTIAL SALES OF OUR COMMON STOCK COULD CAUSE OUR STOCK PRICE TO FALL.
If our stockholders sell substantial amounts of our common stock, including
shares issued upon the exercise of outstanding options and warrants, in the
public market following this offering, the market price of our common stock
could fall. Such sales also might make it more difficult for us to sell equity
or equity-related securities in the future at a time and price that we deem
appropriate. Upon completion of this offering, we will have outstanding
37,296,483 shares of common stock, assuming no exercise of the underwriters'
over-allotment option and no exercise of outstanding options after December 31,
1999. Of these shares, the 5,000,000 shares sold in this offering are freely
tradable. This leaves 32,296,483 remaining shares, 21,216,933 of which will be
eligible for sale in the public market 180 days after the date of this
prospectus. Our directors, officers and existing stockholders have entered into
"lock-up" agreements with respect to approximately 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.
24
<PAGE> 27
The following table sets forth the number of shares of common stock
available for sale in the public market based on shares outstanding as of
December 31, 1999:
<TABLE>
<CAPTION>
APPROXIMATE
NUMBER OF
SHARES
ELIGIBLE FOR
DATE FUTURE SALE COMMENT
---- ------------ -------
<S> <C> <C>
Date of this prospectus........ 5,000,000 Shares sold in this offering
181 days after the date of this
prospectus................... 21,216,933 Underwriters' lock-up period
ends. These shares are eligible
for sale under Rule 144 or 701.
271 days after the date of this
prospectus................... 11,079,550 Additional shares eligible for
sale under Rule 144, assuming
that the shares of common stock
issued upon the automatic
conversion of Series C
preferred stock issued in
December 1999 and January 2000
are eligible.
</TABLE>
SALES OF STOCK TO EMPLOYEES, ARTISTS AND KEY INDIVIDUALS WILL REDUCE YOUR
OWNERSHIP PERCENTAGE.
We seek to attract and retain officers, directors, employees, artists and
other key individuals, in part by offering them stock options and other rights
to purchase shares of common stock. As of December 31, 1999, we had outstanding
options to purchase 6,890,549 shares of our common stock and had reserved a
total of an additional 3,432,784 shares for future grants under our three option
plans. The exercise of stock options will reduce your percentage ownership in
ARTISTdirect.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements under "Prospectus Summary," "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Business" and elsewhere in this prospectus constitute
forward-looking statements. These statements involve known and unknown risks,
uncertainties and other factors that may cause our actual results, levels of
activity, performance or achievements to be materially different from any future
results, levels of activity, performance, or achievements expressed or implied
by such forward-looking statements. Such factors include, among other things,
those listed under "Risk Factors" and elsewhere in this prospectus.
In some cases, you can identify forward-looking statements by terminology
such as "may," "will," "should," "could," "expects," "plans," "intends,"
"anticipates," "believes," "estimates," "predicts," "potential" or "continue" or
the negative of such terms or other comparable terminology.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance, or achievements. You should not place undue reliance on
these forward-looking statements.
25
<PAGE> 28
USE OF PROCEEDS
We estimate that our net proceeds from the sale of 5,000,000 shares of
common stock in this offering will be approximately $49.5 million, assuming an
initial public offering price of $11.00 per share, and after deducting estimated
underwriting discounts and commissions and estimated offering expenses. If the
underwriters exercise their over-allotment option in full, we estimate that our
net proceeds will be $57.2 million. We currently anticipate that our available
cash resources combined with the net proceeds from this offering will be
sufficient to meet our anticipated needs for working capital and capital
expenditures for at least twelve months following the date of this prospectus.
We plan to use the net proceeds for the following purposes:
- approximately $30 million for advertising and promoting our brands and
network of Web sites to increase consumer traffic;
- approximately $10 million for content production and Web site
development, in particular to develop and launch additional ARTIST
channels;
- approximately $741,000 to repay notes issued to several stockholders in
satisfaction of our obligation to make distributions triggered by the
merger of ARTISTdirect, LLC into ARTISTdirect, Inc. See "Related Party
Transactions -- Debt to Executive Officers and Director" on page 79 for
more information on these notes; and
- general corporate purposes, including working capital.
The portion available following application to the first three items above
may be used to fund the repurchase of our shares tendered in connection with our
rescission offer with respect to shares of, or options to purchase, our common
stock issued to our employees and our artists and their managers and advisors.
The amount required for the repurchase may be up to $17.5 million plus interest,
based on the number of options and shares issued as of December 31, 1999. See
"Rescission Offer" on page 91 for more information on the rescission offer. A
portion of the net proceeds may also be used for possible acquisitions of
complimentary businesses, technologies, product lines or content. We intend to
invest the net proceeds in short-term interest-bearing, investment grade
securities until we use them.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our capital stock. Our
predecessor, ARTISTdirect, LLC, made cash distributions to its members,
principally to pay taxes. We currently intend to retain all available funds and
any future earnings for use in the operation and expansion of our business, and
we do not expect to pay any cash dividends in the foreseeable future.
26
<PAGE> 29
CAPITALIZATION
The following table sets forth our capitalization as of December 31, 1999:
- on an actual basis;
- on pro forma basis to reflect:
- the issuance of 1,094,917 shares of Series C preferred stock in
January 2000;
- the filing of an amended and restated certificate of incorporation to
provide for authorized capital stock of 150 million shares of common
stock and five million shares of undesignated preferred stock;
- a one-for-four reverse stock split of our common stock effected on
March 21, 2000;
- the termination of the put option described in "Related Party
Transactions -- Transactions with Scott Blum" on page 80, which will
occur upon the closing of this offering; and
- the automatic conversion of all shares of outstanding preferred stock
into shares of common stock upon the closing of this offering at a
ratio of one preferred share for one common share; provided that the
shares of Series C preferred stock are convertible at a ratio of one
preferred share for 1.5827 common shares, based on an assumed initial
public offering price of $11.00 per share;
- on a pro forma as adjusted basis to reflect the pro forma adjustments and
the issuance and sale of 5,000,000 shares of common stock at an assumed
initial public offering price of $11.00 per share and the application of
the net proceeds from the offering, after deducting the underwriting
discounts, commissions and estimated offering expenses, as set forth in
"Use of Proceeds" on page 26.
None of the columns set forth below reflects the following:
- the 1,244,394 shares of common stock issuable upon exercise of warrants,
of which 529,303 were exercisable as of December 31, 1999 with a weighted
average exercise price of $7.18 per share;
- the 6,890,549 shares subject to outstanding options under our stock
option plans as of December 31, 1999, with a weighted average exercise
price of $3.67 per share;
- approximately 100,000 shares of common stock to be issued as accrued but
unpaid dividends on preferred stock subsequent to December 31, 1999;
- the issuance of up to 900,000 shares of common stock to be issued to
acquire Mjuice.com, Inc.;
- the issuance of up to 62,500 shares of common stock issuable upon the
exercise of a warrant issued in March 2000; and
- the effect of any shares or options repurchased in the rescission offer
that we intend to make after the closing of this offering, as described
in more detail on page 91 under "Rescission Offer".
27
<PAGE> 30
The table below should be read in conjunction with our financial statements
and the notes to those financial statements, which are included elsewhere in
this prospectus:
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1999
-----------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------- -------------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash and cash equivalents(1)...................... $ 69,119 $ 84,343 $133,826
======== ======== ========
Notes payable..................................... 741 741 741
Redeemable securities:
Series A redeemable preferred
securities -- issued and outstanding:
3,207,815 shares actual; none pro forma and
pro forma as adjusted........................ $ 4,963 -- --
Series B redeemable preferred
securities -- issued and outstanding:
3,750,000 shares actual; none pro forma and
pro forma as adjusted........................ 15,350 -- --
Series C redeemable preferred
securities -- issued 7,000,291 shares; none
outstanding actual, pro forma and pro forma
as adjusted(1)............................... 82,188
Redeemable common securities -- issued and
outstanding: 170,443 shares actual; 170,443
pro forma and pro forma as adjusted(2)....... 9,206 6,854 6,854
-------- -------- --------
Total redeemable securities.................. 111,707 6,854 6,854
-------- -------- --------
Stockholders' equity:
Preferred stock, $0.01 par value, no shares
authorized or issued on actual basis;
5,000,000 shares authorized, no shares issued
on a pro forma and pro forma as adjusted
basis;....................................... -- -- --
Common stock, $.01 par value, no shares
authorized or issued on actual basis;
150,000,000 shares authorized; 32,296,483
shares issued on a pro forma basis(1); and
37,296,483 shares issued on a pro forma as
adjusted basis............................... 141 323 373
Additional paid in capital...................... 36,688 156,583 206,016
Unearned compensation............................. (36,976) (36,976) (36,976)
Accumulated deficit............................... (23,598) (23,598) (23,598)
-------- -------- --------
Total members' and stockholders' equity
(deficit).................................. (23,745) 96,332 145,815
-------- -------- --------
Total capitalization.................... $ 87,962 $103,186 $152,669
======== ======== ========
</TABLE>
- ------------------------
(1) Reflects the issuance of 1,094,917 shares of Series C preferred stock in
January 2000 for $15.25 million, and the conversion of all outstanding
shares of Series C preferred stock into 11,079,550 shares of common stock
upon the consummation of this offering, based on an initial public offering
price of $11.00 per share.
(2) The redeemable common securities are 170,443 common securities that were
subject to a put option as of December 31, 1999. The put option was granted
to the holder in connection with our acquisition of iMusic. The holder has
informed us that he does not intend to exercise this option. Accordingly, he
will retain ownership of these securities, and the put option will expire on
the closing of this offering. In addition redeemable common securities
includes options and securities subject to a rescission offer.
28
<PAGE> 31
DILUTION
Our pro forma net tangible book value as of December 31, 1999 was
approximately $82.9 million or $2.57 per share. Pro forma net tangible book
value per share is determined by dividing our pro forma tangible net worth
(total tangible assets minus total liabilities) by the pro forma total number of
shares of common stock outstanding; the pro forma adjustments give effect to:
- the issuance of 1,094,917 shares of Series C preferred stock in January
2000;
- the one-for-four reverse stock split effected on March 21, 2000; 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 as of December 31, 1999, of which
6,890,549 were subject to outstanding options as of December 31, 1999 at a
weighted average exercise price of $3.67 per share, shares issued after December
31, 1999 upon exercise of outstanding options, and 1,244,394 shares of common
stock issuable upon exercise of warrants outstanding as of December 31, 1999 at
a weighted average exercise price of $6.71 per share.
29
<PAGE> 32
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA
The following unaudited pro forma consolidated financial data has been
derived by applying pro forma adjustments to the historical financial statements
of ARTISTdirect and its subsidiaries for the period indicated. The historical
financial statements of ARTISTdirect represent the operations of ARTISTdirect,
LLC for the period from January 1, 1999 to October 5, 1999 (which was the period
before the conversion to a C corporation), and ARTISTdirect, Inc. from October
6, 1999 to December 31, 1999 (which was the period after the conversion to a C
corporation). The adjustments are described in accompanying notes.
The unaudited pro forma consolidated statement of operations for the year
ended December 31, 1999 gives effect to:
- our acquisition of the 80% interest of iMusic we did not own; and
- our acquisition of the interests in The Ultimate Band List, LLC we did
not own.
as if each occurred at the beginning of the period.
The unaudited pro forma consolidated statement of operations is not
necessarily indicative of the operating results that would have been achieved
had the transactions been in effect as of the beginning of the period presented
and should not be construed as being representative of future operating results.
The historical financial statements of ARTISTdirect and its subsidiaries,
Inc. are included elsewhere in this prospectus and the unaudited pro forma
consolidated financial data presented herein should be read in conjunction with
those financial statements and related notes.
30
<PAGE> 33
ARTISTDIRECT, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1999
----------------------------------------------
ARTISTDIRECT
AND SUBSIDIARIES
ACTUAL(a) ADJUSTMENTS PRO FORMA
---------------- ----------- -----------
<S> <C> <C> <C>
Net revenue
Online product sales......................... $ 5,282 $ -- $ 5,282
Advertising and other........................ 2,910 63(d) 2,973
Agency commissions........................... 1,304 -- 1,304
Record label................................. 778 -- 778
---------- ------- ----------
Total net revenue.................... 10,274 63(d) 10,337
Cost of revenue................................ 10,240 20(d) 10,260
---------- ------- ----------
Gross profit......................... 34 43 77
Operating expense:
Product development.......................... 1,815 -- 1,815
Sales and marketing.......................... 13,222 2(d) 13,224
General and administrative................... 10,319 52(d) 10,371
Amortization of stock-based compensation..... 30,304 -- 30,304
Depreciation and amortization................ 2,509 1,160(c) 3,669
---------- ------- ----------
Loss from operations................. (58,135) (1,171) (59,306)
Income from equity investment.................. 50 -- 50
Interest income, net................. 281 -- 281
---------- ------- ----------
Loss before provision for income
tax............................... (57,804) (1,171) (58,975)
Provision for income tax(b).................... -- -- --
---------- ------- ----------
Net income (loss).................... $ (57,804) $(1,171) $ (58,975)
========== ======= ==========
Basic and diluted net loss per share for period
from October 6, 1999 to December 31, 1999.... $ (1.66)
Weighted average shares outstanding used in
computing basic and diluted net loss per
share for period from October 6, 1999 to
December 31, 1999............................ 14,177,463
Pro forma basic and diluted net loss per
share........................................ $ (2.96) $ (3.02)
Weighted average shares outstanding used in
computing pro forma basic and diluted net
loss per share............................... 19,502,437 19,523,743(e)
========== ==========
</TABLE>
31
<PAGE> 34
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
(a) Includes the operations of ARTISTdirect, Inc. (for the period from October
6, 1999 through December 31, 1999), ARTISTdirect, LLC, its predecessor
entity (for the period from January 1, 1999 through October 5, 1999) and the
following subsidiaries: ARTISTdirect Agency, LLC, Kneeling Elephant Records,
LLC, The Ultimate Band List, LLC, ARTISTdirect New Media, LLC, and iMusic,
Inc. For The Ultimate Band List, LLC, all of the entity's losses have been
allocated to the majority interest due to its funding of the operations. The
results of iMusic, Inc. are included from the date of acquisition of the
remaining 80% interest that we did not already own.
(b) On October 6, 1999, ARTISTdirect, LLC was merged into ARTISTdirect, Inc. The
transaction was a merger of entities under common control and, accordingly,
it has been accounted for on the historical cost basis. Before the merger,
we operated as a limited liability company and did not incur federal and
state income taxes. Federal and state income taxes attributable to income
during such periods were incurred and paid directly by the members. The
Company is now taxed as a corporation. No impact of the merger is reflected
on the statement of operations since we have incurred operating losses to
date, and we have recorded a full valuation allowance for the deferred tax
asset. The valuation allowance is based on management's consideration of
historical and projected future taxable income.
(c) In February 1999, The Ultimate Band List, LLC acquired the remaining 80% of
iMusic, Inc. that it did not already own. iMusic, Inc. operates a Web site
that provides music-related content. The acquisition was accounted for using
the purchase method of accounting and, accordingly, the purchase price has
been allocated to the tangible and intangible assets acquired and
liabilities assumed on the basis of their respective fair values on the
acquisition date. The total purchase price of $2.5 million consisted of a 2%
redeemable interest in The Ultimate Band List, LLC with an estimated fair
value of $2.2 million, a cash payment of $110,000, and the assumption of
approximately $180,000 in liabilities, resulting in excess purchase price
over net tangible assets acquired of $2.4 million. In May 1999,
ARTISTdirect, LLC acquired the interests of the minority unit holders of The
Ultimate Band List, LLC, which included the redeemable interest issued in
connection with the iMusic acquisition, in exchange for common interests in
ARTISTdirect, LLC. The acquisition of the minority interests was accounted
for using the purchase method of accounting. The fair value of the
consideration given was $13.9 million, which resulted in excess purchase
price over net tangible assets acquired of $13.1 million. The adjustments
reflect the additional amortization expense for total goodwill resulting
from the iMusic acquisition and purchase of the interests of The Ultimate
Band List, LLC that ARTISTdirect, LLC did not own, using a five year
estimated useful life for the applicable period. The acquisitions were
structured as tax free exchanges of securities; therefore, the differences
between the recognized fair values of acquired assets, including intangible
assets, and their historical tax bases are not deductible for tax purposes.
(d) The adjustments reflect the inclusion of the operations of iMusic, Inc. from
January 1, 1999 through the date of the acquisition.
(e) Reflects the pro forma weighted average common stock and common stock
equivalent shares outstanding and resulting in basic and diluted net loss
per share giving effect to:
- increase in outstanding shares resulting from inclusion of redeemable
common shares issued in connection with the iMusic acquisition, assuming
such shares are not redeemed and common shares issued in the acquisition
of the UBL minority interest as if such shares were outstanding from
January 1, 1999;
- automatic conversion of our redeemable preferred stock into common stock
upon the consummation of this offering;
- the one-for-four reverse stock split effected on March 21, 2000 as though
it had occurred on January 1, 1999; and
- the issuance of common stock as accrued dividends on redeemable preferred
stock.
32
<PAGE> 35
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data presented below for the period
from August 8, 1996 (inception) to December 31, 1996, for the years ended
December 31, 1997, 1998, 1999 and as of December 31, 1996, 1997, 1998, and 1999
are derived from our audited financial statements.
You should read the financial data presented below together with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our financial statements and the related notes included in this
prospectus.
<TABLE>
<CAPTION>
PERIOD FROM
AUGUST 8, 1996
(INCEPTION)
TO YEAR ENDED DECEMBER 31,
DECEMBER 31, -----------------------------
1996 1997 1998 1999
-------------- ------ ------- ----------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Net revenue:
Online product sales............................ $ -- $ 269 $ 1,548 $ 5,282
Advertising and other........................... -- 95 552 2,910
Agency commissions.............................. -- 974 1,917 1,304
Record label.................................... -- 550 565 778
---- ------ ------- ----------
Total net revenue............................ -- 1,888 4,582 10,274
Cost of revenue................................... -- 608 2,515 10,240
---- ------ ------- ----------
Gross profit................................. -- 1,280 2,067 34
Operating expense:
Product development............................. -- 78 589 1,815
Sales and marketing............................. 10 196 1,395 13,222
General and administrative...................... 13 1,442 2,545 10,319
Stock-based compensation(1)..................... -- -- 3,828 30,304
Depreciation and amortization................... 5 21 59 2,509
---- ------ ------- ----------
Loss from operations......................... (28) (457) (6,349) (58,135)
Income from equity investment..................... -- -- 2 50
Interest income (expense), net.................... -- (3) 29 281
---- ------ ------- ----------
Net loss..................................... $(28) $ (460) $(6,318) $ (57,804)
==== ====== ======= ==========
Pro forma basic and diluted net loss per share.... $ (2.96)
==========
Weighted average shares used in computing pro
forma basic and diluted net loss per share(2)... 19,502,437
==========
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
---------------------------------------------
1996 1997 1998 1999
------------ ------ ------- ----------
<S> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents......................... $ 80 $ 167 $ 1,940 $ 69,119
Working capital................................... (20) (526) 1,079 67,730
Goodwill and intangibles, net..................... -- 16 45 13,415
Total assets...................................... 173 314 3,412 98,600
Total redeemable securities....................... -- -- 5,135 111,707
Total members' and stockholders' equity
(deficit)....................................... 72 (412) (3,436) (23,745)
</TABLE>
- -------------------------
(1) Stock-based compensation is comprised of sales and marketing expense of $0
and $8,551 in 1998 and 1999, respectively, and general and administrative
expense of $3,828 and $21,753 in 1998 and 1999, respectively.
(2) See Note 3 to notes to consolidated financial statements for an explanation
of the determination of the number of shares and share equivalents used in
computing pro forma per share amounts.
33
<PAGE> 36
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our
consolidated financial statements and the notes to those financial statements
included elsewhere in this prospectus. The following discussion contains
forward-looking statements that involve risks and uncertainties. The statements
are based on current expectations and actual results could differ materially
from those discussed herein. Factors that could cause or contribute to the
differences are discussed in "Risk Factors" and elsewhere in this prospectus.
OVERVIEW
We are an online music company that connects artists directly with their
fans worldwide. We provide music entertainment through our ARTISTdirect Network,
an integrated network of Web sites offering multi-media content, music news and
information, community around shared music interests, and music-related
commerce. As of December 31, 1999, ARTISTdirect featured 79 unique, artist-owned
ARTISTchannels, and had signed agreements to launch channels with an additional
26 artists. The ARTISTdirect Network also features the UBL, a music search
engine on the Web, iMusic, a popular online community where fans exchange music
interests and commentary and DOWNLOADSdirect, a feature that allows users to
download music and upload music and other information to the ARTISTdirect
Network. We also operate a music talent agency, the ARTISTdirect Agency, and
manage a traditional record label, Kneeling Elephant Records.
ARTISTdirect was organized as a California limited liability company in
August 1996 and conducts operations through a group of affiliated limited
liability companies. From inception through December 1996, our primary
activities consisted of developing our business model, recruiting and training
employees and developing our infrastructure. During 1997, our operations
consisted primarily of the ARTISTdirect Agency and the Kneeling Elephant Records
label. In July 1997, we formed a joint venture to own a controlling interest in
UBL, LLC.
In September 1997, we launched our first ARTISTchannel. In June 1998, we
expanded content offerings on the UBL and added an online retail store now known
as the ARTISTdirect Superstore. Also in June 1998, we launched our second
ARTISTchannel and, by the end of 1998, we had nine ARTISTchannels in operation.
In February 1999, ARTISTdirect acquired all of the outstanding capital
stock of iMusic, Inc. The purchase consideration for iMusic was approximately
$2.5 million, including $110,000 in cash, a redeemable put option valued at
approximately $2.2 million and the assumption of approximately $180,000 in
liabilities. The acquisition was accounted for as a purchase. The purchase price
has been largely allocated to goodwill, which will be amortized over five years.
In May 1999, we engaged in an exchange transaction in which all membership
interests in UBL, LLC that we did not own were exchanged for membership
interests in ARTISTdirect, LLC. The value of the consideration given was
approximately $13.9 million and the transaction was accounted for as a purchase.
The purchase price has been largely allocated to goodwill, which will be
amortized over five years.
In July 1999, we officially launched the ARTISTdirect Network, integrating
the UBL and iMusic Web sites with our ARTISTchannels. Since 1997, our revenue
mix has shifted from primarily agency commissions and record label revenue to
electronic commerce revenue and online advertising, and we expect this trend to
continue, particularly with respect to record label revenue, which we expect to
continue decreasing as a percentage of our total revenue in the future.
ARTISTdirect has incurred cumulative net losses of $64.6 million from
inception to December 31, 1999 of which approximately $35.9 million represented
stock-based compensation expense. We expect our net
34
<PAGE> 37
losses to increase and to continue for the foreseeable future. We plan to expend
significant resources developing our ARTISTdirect Network, building our brands,
increasing our traffic, expanding our operations, enhancing and acquiring
content, and improving our technology infrastructure. We have a limited
operating history on which to base an evaluation of our business and prospects.
Our prospects must be considered in light of the risks, expenses, and
difficulties encountered by companies in their early stage of development,
particularly companies in new and rapidly evolving markets, such as electronic
commerce. See "Risk Factors" beginning on page 9 for a more complete description
of the many risks we face. Our business is evolving rapidly, and therefore we
believe that period-to-period comparisons of our operating results are not
meaningful and should not be relied upon as an indication of future performance.
On October 6, 1999, ARTISTdirect, LLC merged into ARTISTdirect, Inc. Before
that time, we operated as a group of limited liability companies and did not
incur federal and state income taxes, other than iMusic, which is a Washington
corporation that we acquired in February 1999. Federal and state income taxes
attributable to income during such periods were incurred and paid directly by
the members. Accordingly, no discussion of income taxes is included in "Results
of Operations" beginning on page 37. Any tax benefit attributable to losses
generated before our conversion will not be available to us. As a Delaware
corporation, we are fully subject to federal and state income taxation.
REVENUE
We generate revenue from three sources: the ARTISTdirect Network, the
ARTISTdirect Agency, and Kneeling Elephant Records. Substantially all of our
revenue is generated in cash. Less than 1% of our revenue for the year ended
December 31, 1999 was barter revenue.
Revenue from the ARTISTdirect Network, including the ARTISTchannels, the
UBL, iMusic, DOWNLOADSdirect and the ARTISTdirect Superstore, consists primarily
of online product sales and advertising revenue as described below:
- Online product sales revenue includes the sale of music and related
merchandise, such as apparel, collectibles and accessories, through our
ARTISTchannels and the ARTISTdirect Superstore. We recognize the gross
amount of product sales and shipping revenue upon shipment of the item
and record appropriate reserves for product returns. We have experienced
seasonality with respect to our online product sales. In particular, our
online product sales in December have, on average, been higher than in
other months. We believe that this trend may continue for the foreseeable
future. For the year ended December 31, 1999, online product sales
revenue constituted approximately 51.4% of our total net revenue for that
period.
- 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. For the year ended December
31, 1999, advertising revenue constituted approximately 28.3% of our
total net revenue for that period.
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
35
<PAGE> 38
time of the event. Agency commission revenue fluctuates depending on touring
schedules of major artists represented by the agency. Touring schedules are
subject to seasonality, with summer typically being a more active period.
Revenue from Kneeling Elephant Records is generated from overhead advances
and from royalties earned on albums sold by artists signed to the label. We
recognize royalties at the time the releases are shipped to the retailer.
Reserves are established for possible returns.
COST OF REVENUE
Cost of revenue consists primarily of the product cost of music and
music-related merchandise, credit card fees, fulfillment and shipping costs,
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
36
<PAGE> 39
purchase price of these transactions is attributable to the acquired intangible
assets. As a result, the aggregate excess purchase price over the net tangible
assets has been estimated to be $15.5 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
37
<PAGE> 40
attributable to a significant increase in online and offline advertising,
promotion and sponsorship. In addition, personnel and related expenses increased
as we added to our advertising sales and marketing staffs. We intend to continue
to pursue an aggressive branding and marketing campaign and, therefore, expect
sales and marketing expenses to increase significantly in future periods.
General and Administrative. General and administrative expense increased to
$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
38
<PAGE> 41
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.
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.
39
<PAGE> 42
The factors for determining reportable segments were based on service and
products. Each segment is responsible for executing a segment-specific business
strategy. The accounting policies of the segments are the same as those
described in the summary of significant accounting policies. ARTISTdirect
evaluates performance based on profit or loss from operations before income
taxes. The following table summarizes the net revenue, cost of revenue, gross
profit, operating expense, and operating income (loss) by segment for the years
ended December 31, 1999, 1998 and 1997.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1997 1998 1999
----- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
ARTISTDIRECT NETWORK
Net revenue:
Online product sales................................. $ 269 $ 1,548 $ 5,282
Advertising and other................................ 95 552 2,910
----- ------- --------
Total net revenue.................................. 364 2,100 8,192
Cost of revenue:
Direct cost of product sales......................... 262 1,505 5,091
Other cost of revenues............................... 172 735 4,488
----- ------- --------
Total cost of revenue.............................. 434 2,240 9,579
----- ------- --------
Gross profit (loss)..................................... (70) (140) (1,387)
Operating expense....................................... 670 5,116 56,513
----- ------- --------
Loss from operations.................................... (740) (5,256) (57,900)
----- ------- --------
TALENT AGENCY
Net revenue............................................. $ 974 $ 1,917 $ 1,304
Cost of revenue......................................... 174 259 432
----- ------- --------
Gross profit............................................ 800 1,658 872
Operating expense....................................... 603 2,287 850
----- ------- --------
Income (loss) from operations........................... 197 (629) 22
----- ------- --------
RECORD LABEL
Net revenue............................................. $ 550 $ 565 $ 778
Cost of revenue......................................... -- 16 229
----- ------- --------
Gross profit............................................ 550 549 549
Operating expense....................................... 464 1,013 806
----- ------- --------
Income (loss) from operations........................... 86 (464) (257)
----- ------- --------
TOTAL LOSS FROM OPERATIONS................................ $(457) $(6,349) $(58,135)
===== ======= ========
</TABLE>
Segment income (loss) from operations excludes interest income, interest
expense, and provision for income tax.
40
<PAGE> 43
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth unaudited quarterly results of operations
for the six most recent quarters ended December 31, 1999. This unaudited
quarterly information has been derived from our unaudited financial statements
and, in our opinion, includes all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of the information for
the periods covered. The quarterly data should be read in conjunction with our
financial statements and related notes. The operating results for any quarter
are not necessarily indicative of the operating results for any future period.
<TABLE>
<CAPTION>
QUARTER ENDED
----------------------------------------------------------------------------------
SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1998 1998 1999 1999 1999 1999
------------- ------------ --------- -------- ------------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Net revenue:
Online product sales........ $ 444 $ 744 $ 1,016 $ 1,154 $ 1,331 $ 1,781
Advertising and other....... 128 218 381 508 777 1,244
Agency commissions.......... 1,338 135 130 161 371 642
Record label................ 138 137 171 161 273 173
------- ------- ------- ------- -------- --------
Total net revenue.... 2,048 1,234 1,698 1,984 2,752 3,840
Cost of revenue............... 677 1,241 1,296 1,653 2,707 4,584
------- ------- ------- ------- -------- --------
Gross profit
(loss)............. 1,371 (7) 402 331 45 (744)
Operating expense:
Product development......... 99 253 191 440 397 787
Sales and marketing......... 419 603 777 1,760 2,901 7,784
General and
administrative............ 590 747 1,308 1,929 2,385 4,697
Amortization of stock-based
compensation.............. 1,090 1,450 802 1,115 19,625 8,762
Depreciation and
amortization.............. 17 17 88 625 841 955
------- ------- ------- ------- -------- --------
Loss from
operations......... (844) (3,077) (2,764) (5,538) (26,104) (23,729)
Income from equity
investment.................. -- 2 33 -- -- 17
Interest income (expense),
net......................... (1) 45 12 65 90 114
------- ------- ------- ------- -------- --------
Net loss............. $ (845) $(3,030) $(2,719) $(5,473) $(26,014) $(23,598)
======= ======= ======= ======= ======== ========
</TABLE>
Our quarterly operating results have fluctuated in the past and may
fluctuate significantly in the future due to a variety of factors, many of which
are outside of our control. We believe that quarter-to-quarter comparisons of
our operating results are not a good indication of our future performance.
LIQUIDITY AND CAPITAL RESOURCES
From our inception in August 1996 through July 1998, we financed our
operations and growth entirely from internally generated cash flow and capital
contributions from founders. Since July 1998, we have raised $117.4 million
through private sales of preferred securities, including the sale of an
aggregate of $97.5 million of Series C preferred stock in December 1999 and
January 2000.
Net cash used in operating activities was $26.0 million for the year ended
December 31, 1999, and $2.3 million for the fiscal year ended December 31, 1998.
Net cash used in operating activities for each of these periods primarily
consisted of net losses, partially offset by increases in accounts payable and
accrued expenses. Net cash provided by operating activities was $312,000 for the
fiscal year ended December 31, 1997.
Net cash used in investing activities was $4.4 million for the year ended
December 31, 1999, and $514,000 and $101,000 for the fiscal years ended December
31, 1998 and 1997, respectively. Net cash
41
<PAGE> 44
used in investing activities for each of these periods consisted of purchases of
fixed assets, primarily computer equipment and systems, totaling $3.5 million
for the year ended December 31, 1999 and $141,000 for the year ended December
31, 1998.
Net cash provided by financing activities was $97.6 million for the year
ended December 31, 1999, and $4.6 million for the fiscal year ended December 31,
1998. Net cash provided by financing activities during each of these periods
primarily consisted of cash proceeds from the following issuances of preferred
securities:
- Between July 1998 and December 1998, we issued 3,207,815 shares of Series
A preferred securities in exchange for an aggregate purchase price of
$4.9 million.
- In May 1999, we issued 3,750,000 shares of Series B preferred securities
in exchange for an aggregate purchase price of $15.0 million.
In December 1999, we issued an aggregate of 5,905,374 shares of Series C
preferred shares for a total purchase price of $82.25 million. In addition, in
January 2000 we issued 1,094,917 shares of Series C preferred stock for $15.25
million. All of the Series C preferred shares will be automatically converted
into 11,079,551 shares of common stock upon the closing of this offering based
upon an initial offering price of $11.00.
As of December 31, 1999, we had $69.1 million of cash and cash equivalents,
excluding cash held for clients. As of that date, our principal commitments
consisted of obligations outstanding under operating leases and employment
contracts. In November 1999, we reinstated two lines of credit totalling $5.0
million with Republic Bank California N.A. Interest on amounts outstanding under
these credit facilities accrues at the bank's base rate plus 1% per annum and is
payable monthly. The amounts outstanding under these credit facilities are
personally guaranteed by several of our officers and directors and are due on
demand. No amounts are currently outstanding under the credit facilities.
Although we have no material commitments for capital expenditures, we
anticipate a substantial increase in our capital expenditures and lease
commitments in connection with anticipated growth in operations and
infrastructure. Furthermore, we will need to spend significant amounts for sales
and marketing, advertising and promoting our brands, content development and
technology and infrastructure development. We will need to expend funds to add
personnel in all areas.
We currently anticipate that our available cash resources, without the
proceeds from this offering, will be sufficient to meet our anticipated cash
needs for working capital and capital expenditures for the next 12 months. In
addition, we currently anticipate that the net proceeds from this offering,
together with our current cash, cash equivalents, short-term investments and
credit facilities, will be sufficient to meet our anticipated cash needs for
working capital and capital expenditures for at least the next 18 months.
Although we do not currently have any specific material capital commitments
beyond such 18-month period, if we are unsuccessful in generating sufficient
cash flow from operations, we may need to raise additional funds in future
periods through public or private financings, or other arrangements to fund our
operations and potential acquisitions. If any additional financing is needed, we
might not be able to raise capital on reasonable terms or at all. Failure to
raise capital when needed could seriously harm our business and operating
results. If additional funds are raised through the issuance of equity
securities, the percentage of ownership of our stockholders would be reduced.
Furthermore, these equity securities might have rights, preferences or
privileges senior to our common stock. We currently do not have any plans for
future equity offerings.
42
<PAGE> 45
YEAR 2000
Many existing computer programs use only two digits to identify a year.
These programs were designed and developed without addressing the impact of the
recent change in the century. If not corrected, many computer software
applications could fail or create erroneous results, at or beyond the Year 2000.
We use software, computer technology and other services internally developed and
provided by third-party vendors that may fail due to the Year 2000 phenomenon.
For example, we depend on third parties to process our customers' credit card
payments, host our servers, maintain our network, deliver orders to customers,
and provide fulfillment and accounting services.
We have completed the process of reviewing the Year 2000 compliance of our
internal software and performing any necessary remediation. This review included
testing to determine how our systems will function at and beyond the Year 2000
and updating our software where required for Year 2000 compliance. Substantially
all of the systems for the operation of our Web site have been developed within
the last three years. These systems include the software used to provide our Web
sites' search, customer interaction, and transaction processing and distribution
functions, as well as monitoring and back-up capabilities. Based upon our work
to date, the fact that most of our systems were recently developed, and the fact
that we have not experienced any Year 2000 issues to date, we believe that our
internal software is Year 2000 compliant. We have not, and do not, expect to
incur any material remediation expenses to update our internal systems.
We have completed our assessment of the Year 2000 readiness of our
third-party supplied software, computer technology and other services, which
include software for use in our accounting, database and security systems. This
assessment included an audit of their software as well as performing necessary
remediation. The failure of such software or systems to be Year 2000 compliant
could have a material adverse impact on our corporate accounting functions and
the operation of our Web site. As part of the assessment of the Year 2000
compliance of these systems, we sought assurances from these vendors that their
software, computer technology and other services are year 2000 compliant. We
have received written assurances from our software vendors regarding the Year
2000 compliance of their software. We have also received written assurances from
most of our third party service providers, stating that they planned to become
Year 2000 compliant before December 31, 1999. To date, our expenses associated
with this assessment have not been material and we do not expect to incur any
material remediation expenses in connection with our third-party supplied
software and computer systems. The failure of our software and computer systems
and of our third-party suppliers to be Year 2000 complaint would have a material
adverse effect on us.
The Year 2000 readiness of the general infrastructure necessary to support
our operations is more difficult to assess. For instance, we depend on the
integrity and stability of the Internet to provide our services. We also depend
on the Year 2000 compliance of the computer systems and financial services used
by consumers. Thus, the infrastructure necessary to support our operations
consists of a network of computers and telecommunications systems located
throughout the world and operated by numerous unrelated entities and
individuals, none of which has the ability to control or manage the potential
Year 2000 issues that may impact the entire infrastructure. Our ability to
assess the reliability of this infrastructure is limited and relies solely on
generally available news reports, surveys and comparable industry data. Based on
these sources, we believe most entities and individuals that rely significantly
on the Internet are carefully reviewing and attempting to remediate issues
relating to Year 2000 compliance, but it is not possible to predict whether
these efforts will be successful in reducing or eliminating the potential
negative impact of Year 2000 issues. A significant disruption in the ability of
consumers to reliably access the Internet or portions of it or to use their
credit cards would have an adverse effect on demand for our services and would
have a material adverse effect on us.
43
<PAGE> 46
To date, we have not experienced any Year 2000 issues. We do not have, and
do not plan to develop, a contingency plan to address situations that may result
if we or our vendors are unable to achieve Year 2000 compliance. The cost of
developing and implementing such a plan, if necessary, could be material. Any
failure of our material systems, our vendors' material systems or the Internet
to be Year 2000 compliant could have material adverse consequences for us. Such
consequences could include difficulties in operating our Web site effectively,
taking product orders, making product deliveries or conducting other fundamental
parts of our business.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board issued SFAS No. 130, "Reporting
Comprehensive Income," in June 1997. SFAS No. 130 establishes standards for
reporting and presentation of comprehensive income and its components in a full
set of financial statements. Comprehensive income includes all changes in
members' equity, except those arising from transactions with members, and
includes net income and net unrealized gains or losses on securities. There is
no impact on our financial statements as a result of the implementation of SFAS
No. 130.
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position No. 98-1, "Software for Internal Use," which
provides guidance on accounting for the cost of computer software developed or
obtained for internal use. SOP No. 98-1 is effective for financial statements
for fiscal years beginning after December 15, 1998. The adoption of SOP 98-1 did
not have a material impact on the financial statements.
In April, 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of
Start-Up Activities." The statement is effective for fiscal years beginning
after December 15, 1998. The statement requires costs of start-up activities and
organization costs to be expensed as incurred. We are required to adopt SOP 98-5
for the year ended December 31, 1999. The adoption of SOP 98-5 is not expected
to have a material impact on our consolidated financial statements.
The Financial Accounting Standards Board recently issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," which is
effective for all fiscal quarters of all fiscal years beginning after June 15,
2000 (as amended by SFAS No. 137, "Accounting for Derivative Instruments and
Hedging Activities -- Deferral of the Effective date of FASB Statement No.
133"). SFAS 133 establishes accounting and reporting standards for derivative
instruments and hedging activities by requiring that all derivative instruments
be reported as assets or liabilities and measured at their fair values. Under
SFAS 133, changes in the fair values of derivative instruments are recognized
immediately in earnings unless those instruments qualify as hedges of the (1)
fair values of existing assets, liabilities, or firm commitments, (2)
variability of cash flows of forecasted transactions, or (3) foreign currency
exposures on net investments in foreign operations. We are required to adopt
SFAS No. 133 for the quarter ended September 30, 2000. The adoption of SFAS No.
133 is not expected to have a material impact on our consolidated financial
statements.
44
<PAGE> 47
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 January 2000, users viewed more than 60 million pages in our
ARTISTdirect Network.
- ARTISTchannels -- customized Web sites that we build, operate and
maintain on behalf of each of our artists, directly linking artists and
fans. These sites provide artists with a unique opportunity to control
the programming, promotion and distribution of a broad range of their
products and services. Artists share in revenue generated by their
ARTISTchannel. These sites also provide consumers with a single
destination to access a large selection of artist-specific music,
merchandise and content. A selection of artists with ARTISTchannels
includes:
<TABLE>
<S> <C> <C>
Aerosmith Chris Cornell Metallica
Backstreet Boys Cypress Hill Ozzy Osbourne
Beastie Boys Def Leppard Tom Petty
Beck Kenny G Red Hot Chili Peppers
Clint Black Korn Robbie Williams
Cher Limp Bizkit The Who
</TABLE>
- The Ultimate Band List -- a comprehensive online music search engine and
resource for music information. The UBL provides information on more than
95,000 artists across numerous musical genres, featuring news, concert
information, artist biographies, album reviews, contests, promotions,
music samples and downloads. The UBL also offers links to thousands of
other Web sites in the online music community;
- iMusic -- a highly trafficked music-oriented online community providing
chats, message boards and fan clubs relating to specific artists and
general music topics. iMusic allows fans to communicate with others
around the world to share interests and commentary about their favorite
music and artists. iMusic also serves as a platform for fans to interact
directly with their favorite artists through hosted chats and fan
conferences that we organize periodically;
- The ARTISTdirect Superstore -- a retail site offering over 200,000 music
titles and a wide selection of artist merchandise. The ARTISTdirect
Superstore complements the ARTISTchannels by offering music and
merchandise from a wider range of artists; and
- DOWNLOADSdirect -- a feature which enables users to download music from
the ARTISTdirect Network. Users can also upload their music and other
information to the ARTISTdirect Network, making such content available to
other users.
We also operate a music talent agency, the ARTISTdirect Agency and manage a
traditional record label, Kneeling Elephant Records, which, when combined with
the ARTISTdirect Network, allow us to provide a full range of traditional and
online services to artists. Marc Geiger, our Chief Executive Officer, Don
Muller, our President of ARTISTdirect Agency and Kneeling Elephant Records,
Steve Rennie, our
45
<PAGE> 48
President of the UBL and Nick Turner, our Vice President, ARTISTchannels, have
18, 14, 20 and 20 years of experience, respectively, in the music industry. We
believe that our management team's extensive music industry experience and its
understanding of the needs of artists and music consumers provide us with a
distinct advantage in pursuing opportunities arising from the convergence of the
music industry and the Internet.
STRATEGIC RELATIONSHIPS
In November and December 1999, we entered into strategic relationships with
four of the five major music companies: Universal Music Group, Inc., BMG
Entertainment, Sony Music, and Time Warner Inc. We also entered into strategic
relationships with an affiliate of Cisneros Television Group, a leading pay
television content provider in Latin America, and Yahoo!, a leading global
Internet company. These companies invested an aggregate of $97.5 million cash in
ARTISTdirect in connection with these strategic relationships and represent four
of the five major music companies, who together accounted for 74.6% of U.S.
music albums shipped in the year ended December 31, 1999.
UNIVERSAL MUSIC GROUP
Our agreement with Universal Music Group has a term of three years and
provides us with the right to use, on a non-exclusive basis, content related to
Universal's artists as this material is generally made available to other
companies. This material may include music and music-related content such as new
releases, music videos, music audio samples, cybercasts, photographs, album
covers, concert film clips, biographical information, promotional merchandise
and similar materials. Universal will also, from time to time, provide to us the
right to license special content such as exclusive or semi-exclusive cybercasts
and chats with Universal's artists. The fee for this content will be negotiated
on a case-by-case basis. We are required to purchase a minimum of $1.0 million
of content each year, and an aggregate of $4.0 million of content over the term
of the agreement from Universal pursuant to the agreement. We will provide
Universal with marketing support, including advertising, marketing services,
data, data analyses and other promotional services on terms to be negotiated.
Universal is required to purchase a minimum of $1.0 million marketing support
each year, and an aggregate of $4.0 million of marketing support over the term
of the agreement from us. Universal also invested $30.0 million in connection
with this strategic relationship.
BMG ENTERTAINMENT
Our agreement with BMG Entertainment has a term of three years and provides
us with the right to use, on a non-exclusive basis, content related to BMG's
artists as this material is generally made available to other online music
companies. This material may include music and music-related content such as new
releases, electronic press kits, music audio samples, cybercasts, photographs,
album covers, concert film clips, biographical information, promotional
merchandise and similar materials. BMG will also make available to us special
content such as exclusive or semi-exclusive cybercasts, chats with BMG artists
and digital downloads. The fee for this content will be negotiated on a
case-by-case basis. BMG will have the right to designate a specified number of
its artists' Web sites to be integrated into the UBL search engine and to
designate a specified number of its artists to be featured on our Web site. We
will also provide BMG with marketing support, including advertising, marketing
services, data, data analyses and other promotional services on terms to be
negotiated. In addition, we will work with BMG to create a series of links
between our Web sites and BMG's Web sites. BMG also invested $15.0 million in
connection with this strategic relationship.
46
<PAGE> 49
SONY MUSIC ENTERTAINMENT
Our agreement with Sony Music Entertainment has a term of two years and
provides us with a limited license to use audio and video excerpts and front
album cover artwork owned by Sony. Sony will consider reasonable requests from
us regarding promotions involving Sony artists that have an ARTISTchannel with
us. We are required to provide, on each of our Web sites that contains a
recording by, or video of, a Sony artist, an active link to the artist's Web
site or to the ARTISTchannel for that particular artist. We are also required to
provide Sony with usage and sales information related to Sony recordings. Sony
also invested $15.0 million in 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 valued at $55.0 million and an affiliate of Cisneros
Television Group will provide content and advertising and promotional support
valued at $55.0 million. 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. Each of us may also be required to make up to an
aggregate of $20.0 million in capital contributions from time to time on a
pro-rata basis. An affiliate of Cisneros Television Group will receive an
aggregate fee of approximately $510,000 for providing management and back-office
services for the first two years of the agreement. Data generated by the joint
venture will be licensed to both us and an affiliate of Cisneros Television
Group for a fee and content created or acquired by the joint venture will be
licensed to both us and an affiliate of Cisneros Television Group on a
royalty-free basis. After the thirtieth month of the agreement, an affiliate of
Cisneros Television Group will have the right to cause a roll-up of the joint
venture so that the affiliate's equity interests in the joint venture are
exchanged for our common stock on a fair market value basis. The shares of our
common stock that Cisneros Television Group's affiliate receives in the roll-up
will be subject to the registration rights agreement discussed on page 80. An
affiliate of Cisneros Television Group invested $20.0 million in ARTISTdirect in
connection with this strategic relationship.
47
<PAGE> 50
YAHOO!
We have a two-year advertising and promotion agreement with Yahoo!,
pursuant to which we will purchase media placement on Yahoo! and be one of the
two premier music merchants featured on certain pages in Yahoo!'s music site.
Yahoo! is required to deliver a minimum number of impressions, or page views,
throughout its music and other selected sites, and will deliver a minimum number
of targeted e-mail messages to its users containing our promotional offers. In
exchange for these services, we will pay Yahoo! a slotting fee of $19.8 million,
$1.0 million of which will be paid in the form of in-kind co-marketing
opportunities. To date, we have paid $7.4 million of the cash portion of the
slotting fee. The remaining $11.4 million of the cash portion of the slotting
fee is due in 6 quarterly payments of $1.9 million, beginning June 15, 2000. In
addition, we entered into a two-year agreement to participate in Yahoo!'s Remote
Merchant Integration Program. This agreement allows us to market our music and
merchandise offerings through Yahoo!'s Shopping pages pursuant to a
revenue-sharing arrangement with Yahoo! We also issued Yahoo! a warrant to
purchase shares of our common stock. See "Description of Capital
Stock -- Warrants" on page 91 for more information on this warrant.
DISTRIBUTION AND CONTENT RELATIONSHIPS
GO NETWORK
In December 1999, we entered into an eighteen-month co-marketing agreement
with ABC News Internet Ventures, an affiliate of The Walt Disney Company. Under
the agreement, we provide distribution on the ARTISTdirect Network of selected
content developed by Wall of Sound, a music-oriented web site owned and operated
by ABC News Internet Ventures, and selected content developed by us is
distributed in the music area of the GO Network (http://wallofsound.go.com).
Each party's selected content may contain links back to its Web site. Over the
term of the agreement, should one party receive traffic from the other party's
site significantly in excess of the traffic it directs to the other party's
site, the agreement provides for the delivery of advertising inventory to
compensate for the shortfall.
CHUMCITY INTERNATIONAL
In November 1999, we entered into a strategic alliance agreement and a
three-year programming license agreement with CHUMcity International Ltd., a
member of the CHUM group. The strategic alliance agreement contemplates that the
parties will collectively produce a series of music events which they will
jointly own and exploit. Under the programming license agreement, we are allowed
access to CHUM's music library for exploitation over the Internet. This license
is not exclusive and is subject to limitations imposed by CHUM's existing
obligations to third parties. We will pay CHUM a fixed license fee over the term
of the programming license agreement.
INDUSTRY BACKGROUND
THE MUSIC INDUSTRY
Music is one of the most popular forms of entertainment worldwide and a
multi-billion dollar consumer industry. According to the International
Federation of the Phonographic Industry, worldwide sales of recorded music were
$38.7 billion in 1998, 34% of which were in the United States. Concert tours
also generate significant revenue for the music industry. Pollstar estimates
that the total gross ticket sales for major concerts in North America were
approximately $1.3 billion in 1998. In addition, the music industry generates
substantial advertising, sponsorship, promotional and merchandise revenue
related to music events and individual artists.
The music industry identifies artists and develops, promotes and
distributes their content. The high cost associated with development, promotion
and distribution has led artists to rely on third parties such as record labels,
merchandisers and tour promoters. Consequently, artists have had limited ability
to
48
<PAGE> 51
control how they are marketed to consumers, to identify and communicate directly
with their fans and to maximize their economic participation in all available
revenue streams.
The experience of the typical music consumer has been fragmented and
inefficient. Music consumers have had to search a variety of media to find music
news and information and have had to purchase compact discs, tickets and
merchandise through different retail channels. Goods, such as apparel and other
artist merchandise, have been difficult to find and frequently available only at
concerts or selected retail outlets. For music fans, opportunities to interact
with their favorite artists and fellow enthusiasts have been limited.
THE INTERNET OPPORTUNITY
The Internet has emerged as a platform that allows millions of people
worldwide to deliver and receive information rapidly, create virtual communities
around shared interests and engage in electronic commerce. This has made the
Internet an important new medium for music, dramatically altering the way
consumers search for, discover, listen to and purchase music. The Internet
offers:
- efficient reach to a worldwide audience;
- convenient access to a vast offering of musical content and services;
- ongoing flexibility to tailor products and services to consumer interests
and market dynamics;
- digital distribution of music;
- consumer personalization of the music experience; and
- timely collection of customer preferences and demographics for targeted
advertising and promotion.
Artists have begun to view the Internet as a platform to gain greater
control over the programming, promotion and distribution of their music and
related merchandise and to communicate directly with their fans. Consumers have
adopted the Internet to locate music information, share interests and discover
and buy music. According to Jupiter Communications, online sales of recorded
music in the United States are projected to grow from $327 million in 1999,
representing 2.3% of online music sales, to approximately $2.6 billion in 2003,
representing 14.0% of online music sales. Forrester Research estimates that
approximately 50 million individuals will be capable of downloading and playing
digital music by the end of 1999, and by 2003, downloading will add $1.1 billion
to the U.S. music industry. Forrester also estimates that 56% of consumers want
to communicate with artists directly, and 31% would pay for non-music products
from their favorite artists.
According to the United States Census Bureau, this group of consumers, aged
10 through 34, comprised approximately 95 million individuals in the United
States, and according to the Recording Industry Association of America,
purchased 60% of the music sold in the United States in 1998. Not surprisingly,
the music industry has historically focused its promotional and marketing
efforts on this group. According to International Data Corporation,
approximately 58% of the 35 million home Internet users at the end of 1998 were
from essentially the same demographic group, aged 12 through 34. According to
the Internet Advertising Bureau, advertisers on the Internet spent $2.3 billion
during the 12 months ended March 30, 1999.
We believe that the features of the Internet and the common demographics of
music consumers and Internet users present an opportunity to reshape the music
industry. Artists now have the opportunity to exert greater control over the
programming, promotion and distribution of their music and consumers can now
search for, discover and purchase music and related merchandise and content at a
single destination.
49
<PAGE> 52
OUR SOLUTION
BENEFITS TO ARTISTS
By providing artists with a platform to develop their presence on the Web,
we enable artists to assume more creative control over their image, promote
their music in innovative ways, interact with their fans, extend their reach and
participate in incremental revenue streams. Our benefits to artists include:
Artist-controlled Online Media Channel. We offer artists an online media
presence, the ARTISTchannels, to create, present, promote and distribute their
content. The ARTISTchannels include auto-publishing tools, content management
features, and capabilities for advertising and direct marketing and electronic
commerce. Our technology enables us to quickly launch customized Web sites for
our artists. Artists actively collaborate on the design, content and other
features of their ARTISTchannels. With continuing advances in broadband
technology and standards for digital music distribution, we believe the
ARTISTchannels will emerge as the artists' preferred platform for the full range
of their content, commerce and community activities on the Internet.
Closer Relationships with Fans. The ARTISTchannels promote greater fan
affinity and loyalty by directly linking artists and fans. Artists can use the
ARTISTchannels to provide content and products to fans, including artist news,
concert information, music and video programming, exclusive chats, ticket
giveaways and fan club activities. Artists can also solicit the views of fans on
new music, live performances and music videos. A better understanding of their
fans enables artists to develop relevant content for their ARTISTchannels,
promote their music more effectively and create new revenue opportunities.
Access to Traffic from the ARTISTdirect Network. We attract, aggregate and
retain consumers within the ARTISTdirect Network through our compelling content
and commerce offerings, thereby providing our artists the opportunity to tap
into an active community of millions of music fans. The ARTISTchannels can be
accessed directly or through the ARTISTdirect Network, allowing artists the
opportunity not only to reach their existing audience, but to broaden their fan
base as well. As a heavily trafficked music destination on the Internet, we
aggregate global consumer traffic, collect targeted fan information and generate
incremental revenue from electronic commerce and advertising for the shared
benefit of the artist and ARTISTdirect.
New Revenue Opportunities. We provide artists with a number of incremental
revenue opportunities, including from music and related merchandise sales and
auctions, advertising and direct marketing. Our sites significantly increase
consumers' access to artist merchandise previously available only at concert
venues or selected retail locations. We also assist artists in developing
original merchandise items for sale through their sites. We believe that our
revenue-sharing with artists provides incentives for them to actively promote
their ARTISTchannels and the ARTISTdirect Network.
Direct Marketing Opportunities. We encourage fans to provide identifying
information that allows the artists to develop consumer databases through their
ARTISTchannels. Artists use this database information to communicate important
news, upcoming music releases, live appearances or online events that are
targeted to a particular fan base. Data may be also used to develop
artist-approved targeted advertising and marketing opportunities. Artists have
access to detailed information about how many people visited their sites,
listened to or downloaded their music and purchased compact discs. We maintain
each artist database and share any revenue generated through its use with the
artist.
New Platform for Digital Distribution. The Internet represents an important
new platform for digital music distribution. As the music industry develops
standards for secure digital distribution, we are implementing the
infrastructure and systems for digital distribution through the ARTISTdirect
Network. We currently allow free digital downloads of promotional music and a
variety of streaming audio services
50
<PAGE> 53
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.
51
<PAGE> 54
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;
52
<PAGE> 55
- 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.
53
<PAGE> 56
Our current roster of ARTISTchannels includes:
Aerosmith
www.aerosmithdirect.com
Tori Amos
www.toriamosdirect.com
B-52s
www.theb52sdirect.com
Backstreet Boys
www.bsbdirect.com
Beastie Boys
www.grandroyaldirect.com
Beck
www.beckdirect.com
George Benson
www.georgebensondirect.com
Bjork
www.bjorkdirect.com
Black Sabbath
www.blacksabbathdirect.com
Clint Black
www.clintblackdirect.com
Black Crowes
www.blackcrowesdirect.com
blink-182
www.loserkids.com
Bone Thugs 'N' Harmony
www.bonethugsdirect.com
Cher
www.cherdirect.com
Coal Chamber
www.coalchamberdirect.com
Collective Soul
www.collectivesouldirect.com
Chris Cornell
www.chriscornelldirect.com
Counting Crows
www.countingcrowsdirect.com
David Crosby
www.crosbycprdirect.com
CSNY
www.csnydirect.com
Cypress Hill
www.cypresshilldirect.com
Def Leppard
www.deflepparddirect.com
Eminem
www.eminemdirect.com
Eve 6
www.eve6direct.com
Everclear
www.evercleardirect.com
Fastball
www.fastballdirect.com
Bryan Ferry
www.bryanferrydirect.com
Filter
www.filterdirect.net
Foo Fighters
www.foofightersdirect.com
Vince Gill
www.vincegilldirect.com
Godsmack
www.godsmackdirect.net
Incubus
www.incubusdirect.com
Indigo Girls
www.indigogirlsdirect.com
Chris Isaak
www.chrisisaakdirect.com
Kenny G
www.kennygdirect.com
BB King
www.bbkingdirect.com
Korn
www.korndirect.com
Limp Bizkit
www.limpbizkitdirect.com
Kenny Loggins
www.kennylogginsdirect.com
Aimee Mann
www.aimeemanndirect.com
Marilyn Manson
www.marilynmansondirect.com
Matchbox 20
www.matchbox20direct.com
Megadeth
www.megadethdirect.com
Metallica
www.metallicadirect.com
Mighty Mighty Bosstones
www.bosstonesdirect.com
Monster Magnet
www.monstermagnetdirect.com
Mandy Moore
www.mandymooredirect.com
Mike Ness
www.mikenessdirect.com
Stevie Nicks
www.stevienicksdirect.com
No Doubt
www.nodoubtdirect.com
The Offspring
www.offspringdirect.com
Ozzy Osbourne
www.ozzydirect.com
Pantera
www.panteradirect.com
Patty Loveless
www.pattylovelessdirect.com
Pearl Jam
www.pearljamdirect.com
Tom Petty
www.tompettydirect.com
Powerman 5000
www.pm5kdirect.com
Primus
www.clubbastardo.com
Rage Against The Machine
www.ratmdirect.com
Rancid
www.ranciddirect.com
Red Hot Chili Peppers
www.chilipeppersdirect.com
Brian Setzer
www.briansetzerdirect.com
Sevendust
www.sevendustdirect.com
Slayer
www.slayerdirect.com
Soul Coughing
www.soulcoughingdirect.com
Stabbing Westward
www.stabbingwestwarddirect.com
54
<PAGE> 57
Static X
www.staticxdirect.com
Steps
www.stepsofficial.com
Stone Temple Pilots
www.stpdirect.com
Sugar Ray
www.sugarraydirect.com
Sublime/Long Beach
Dub All Stars
www.sublimedirect.com
Matthew Sweet
www.matthewsweetdirect.com
System of a Down
www.soaddirect.com
Pam Tillis
www.pamtillisdirect.com
Toto
www.toto99direct.com
Tina Turner
www.tinaturnerdirect.com
The Who
www.thewhodirect.com
Robbie Williams
www.robbiewilliamsdirect.com
Dwight Yoakam
www.dwightyoakam.net
Rob Zombie
www.robzombiedirect.com
ZZ Top
www.zztopdirect.com
In addition to the ARTISTchannels already launched, we have agreements in
place for the launch of additional ARTISTchannels for artists such as:
<TABLE>
<S> <C> <C>
Jeff Beck eVe Diana Ross
Frank Black Perry Farrell Silverchair
Danielle Brisebois Galactic Sonic Youth
Sheryl Crow Tony Iommi James Taylor
DJ Shadow Janet Jackson Too $hort
DMX Lenny Kravitz Wallflowers
Dr. Dre Madonna Neil Young
Remy Zero
</TABLE>
Based on our recent experience, we generally launch new ARTIST channels
within 2 to 3 months after an agreement has been signed.
The UBL. The UBL is a music-specific Internet search engine. The UBL serves
as a comprehensive resource for music information relating to specific artists,
various genres and a wide range of events. The UBL combines content generated by
our staff with third-party content either licensed for use on our Web site or
accessible using edited links to other Web sites. Users have ready access to
artist profiles, music downloads, tour information, contests, Internet radio,
Webcasts and other content. The UBL allows users to add or update their own
information about their favorite artists. We believe that this process, together
with links to other music content sites, has made the UBL one of the most
comprehensive databases of bands available on the Web. The UBL currently
contains information regarding more than 95,000 artists and contains links to
thousands of other music-related sites.
iMusic. We believe iMusic is one of the most active music-specific
community sites on the Internet. iMusic offers message boards, text chats, video
chats, fan conferences and other opportunities for fans to interact with each
other and with artists. We plan to introduce e-mail and personal home page
services through iMusic in the near future. We also plan to host a regular
series of artist chats and conferences, providing users with the opportunity to
interact and communicate with their favorite artists.
DOWNLOADSdirect. In October 1999, we added an area within the ARTISTdirect
Network devoted to music downloads. We provide users with a selection of free
downloads chosen by the editorial staff of the UBL. Some of these downloads are
made available to us on an exclusive basis from artists. In addition, we enable
users to upload their music, biography and picture, and then we make this
content available to other users. We plan to expand this area to include a
larger number of downloads and to allow for downloads on a pay or subscription
basis. We have entered into a definitive agreement to acquire Mjuice, a Web site
offering secure mp3 downloads, some of which are available free and some on a
pay basis.
ARTISTdirect Superstore. The ARTISTdirect Superstore is a retail center for
leading brands and artists, offering recorded music and related merchandise. The
ARTISTdirect Superstore offers more than 200,000 music titles and merchandise
for a broad range of artists, including those with an ARTISTchannel who want to
reach a broader audience of music consumers.
55
<PAGE> 58
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 Everclear Rage Against the Machine
Beastie Boys Foo Fighters Red Hot Chili Peppers
Beck Hovercraft Elliott Smith
Ben Folds Five Ben Lee Sonic Youth
Frank Black The London Suede Sunny Day Real Estate
Blues Traveler Marcy Playground The The
Catherine Wheel Pearl Jam Paul Westerberg
Chris Cornell Primus
</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 revenue from our
Kneeling Elephant Records label. We do not expect that revenue from our Kneeling
Elephant Records label will be material in the future and expect that revenue
from this operation will continue to decrease as a percentage of our total
revenue.
56
<PAGE> 59
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.
57
<PAGE> 60
Giant and Winterland. We entered into a four-year agreement with Giant
Merchandising in April 1999 and a three-year agreement with Winterland
Concessions Company in June 1999 to supply merchandise on a wholesale basis for
both our ARTISTchannels and the ARTISTdirect Superstore. Together, Giant and
Winterland represent more than 115 artists, including 35 of those with whom we
have agreements for ARTISTchannels. We believe that our inventory management and
distribution strategy allows us to offer extensive selection while avoiding the
high fixed costs and capital requirements associated with owning and warehousing
product inventory as well as the operational effort integral to shipping and
delivery.
We depend on Alliance, Giant and Winterland for timely shipment of products
purchased through our Web sites. Alliance currently provides fulfillment
services for our ARTISTchannels pursuant to an oral agreement that Alliance may
terminate at any time. If we are unable to renew our agreements with these
suppliers when they expire, on favorable terms or at all, or if Alliance ceases
to provide fulfillment services for our ARTISTchannels, our business could be
adversely affected.
CUSTOMER SERVICE
We have established an in-house customer service operation currently
operating five days per week from 6 a.m. to 11 p.m. Pacific time to respond to
customer inquiries, orders and other requests made by phone, fax, e-mail and
regular mail. As of December 31, 1999, we employed 25 full-time employees in
customer service operations.
SALES AND MARKETING
ADVERTISING SALES
We sell advertising and sponsorships to a variety of advertisers seeking to
reach one or more of the distinct demographic audiences viewing content in the
ARTISTdirect Network. This advertising may take the form of banner ads or
sponsorship of specific content areas. Because the ARTISTdirect Network is
comprised of a large number of distinct Web sites, advertisers may choose a
broad run-of-network campaign or one that is highly targeted based upon the
demographics of a particular section within a single site or a grouping of
sites. Placement and pricing are negotiated based upon the size of the target
audience and the duration and intensity of the campaign desired by the
advertiser. Our strategy is to expand the number of advertisers using the
ARTISTdirect Network and increase the number of product and service categories
represented by these advertisers.
We derive a significant portion of our revenue from the sale of
advertising. In 1998 and 1999, advertising represented 11% and 26% of revenue,
respectively. In 1999, Intel Corporation accounted for 25% of the Company's
advertising revenues but no other single advertiser represented more than 5% in
1999 or 1998. As of December 31, 1999, we employed a direct sales force of 12
people in Los Angeles and New York and intend to expand this staff.
Following is a sample of advertisers on the ARTISTdirect Network during
1999. This list provides a cross-section of different industries represented by
our advertisers:
<TABLE>
<S> <C> <C>
Atlantic Records Dreamworks Microsoft
Butterfinger Epic Records Milky Way
Coca Cola Gateway OnNow.com
Columbia Records Honda Second Spin
Discover Card Intel Talk City
</TABLE>
The above advertisers purchased between $10,000 and $106,000 of advertising
in 1999, other than Intel, which purchased $637,500 of advertising.
58
<PAGE> 61
MARKETING AND PROMOTION
We use a number of methods to create awareness of the ARTISTdirect Network
and drive traffic to our Web sites. We have focused much of our online
advertising on specific artists, contests, promotions and other events designed
to attract interest to our sites. We have also used print and radio advertising
to create brand awareness for ARTISTdirect and to promote special events taking
place on the ARTISTdirect Network. In addition, we participate in the
sponsorship of live music and other industry events that provide prominent
visibility for either ARTISTdirect or the UBL and maintain an aggressive public
relations program generating press coverage and speaking engagements for our
senior executives.
We also use e-mail direct marketing to communicate with registered users of
the ARTISTdirect Network. Campaigns have included direct notification of special
merchandise offers, live artist chats, music downloads and non-scheduled live
performances. As we continue to build our user databases, we expect to expand
the use of e-mail direct marketing to facilitate user retention and create
loyalty and affinity programs.
COMPETITION
The market for the online promotion and distribution of music and
music-related products and services is new, highly competitive and rapidly
changing. The number of Web sites competing for the attention and spending of
consumers and advertisers has increased, and we expect it to continue to
increase, because there are few barriers to entry to Internet commerce. In
addition, the competition for advertising revenue, both on Web sites and in more
traditional media, is intense. We believe that there are more than 150 music
retailing Web sites. We compete as follows:
- for music consumers, advertisers and, to a lesser extent, artist
relationships, with providers of music information, community and content
such as MTVi, Launch Media, mp3.com, EMusic, CheckOut.com and various
other companies;
- with major online music retailers such as Amazon.com and CDnow in selling
music and merchandise;
- for music consumers and advertisers with online "portals" which have
music-oriented sites, including America Online and Yahoo!;
- for music consumers and artist relationships with traditional music
industry companies, including BMG Entertainment, a unit of Bertelsmann
AG, EMI Music, a unit of EMI Group, Sony Music Entertainment, a unit of
Sony Corporation, Warner Music Group, a unit of Time Warner Inc., and
Universal Music Group, a unit of the Seagram Company. Some of these
companies have recently established online presences to promote and
distribute the music and tours of their respective artists;
- for music consumers and advertisers with publishers and distributors of
traditional media, such as television, radio and print, including MTV,
CMT, Rolling Stone and Spin and their Internet affiliates; and
- with traditional retailers targeting music consumers, including Tower
Records and Virgin Megastore and their Internet affiliates, in selling
music and merchandise.
Some of our competitors have agreed to work together to offer music over
the Internet, and we may face increased competitive pressures as a result. For
example, Universal Music Group and BMG Entertainment recently formed a joint
venture to operate an online music store.
59
<PAGE> 62
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
60
<PAGE> 63
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
61
<PAGE> 64
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
62
<PAGE> 65
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.
63
<PAGE> 66
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.
64
<PAGE> 67
in Communications from the University of Iowa. In 1990, Mr. Muller co-founded
the Lollapalooza concert tour.
Keith K. Yokomoto is a co-founder of ARTISTdirect and has served as our
President since July 1999, as our Chief Operating Officer since January 1997,
and as a director since July 1998. From September 1985 to January 1997, Mr.
Yokomoto was a manager of new ventures and business development and a project
engineer at Hughes Electronics. Mr. Yokomoto received his B.S. in Mechanical
Engineering from the University of California at San Diego and his M.B.A. from
the University of Southern California.
Stephen P. Rennie has served as the President of the Ultimate Band List
since April 1998. From October 1994 to April 1998, Mr. Rennie was Senior Vice
President and General Manager, West Coast at Epic Records. From 1990 to 1994,
Mr. Rennie was in artist management. From 1984 to 1990, Mr. Rennie was a Senior
Vice President for Avalon Attractions.
James B. Carroll has served as our Executive Vice President and Chief
Financial Officer since May 1999. Mr. Carroll has served as our Secretary since
July 1999. From November 1994 to May 1999, Mr. Carroll was a Managing Director
in the Media & Entertainment Group at Bear, Stearns & Co. Inc., where he served
as an investment banker to companies primarily in broadcasting and new media.
From January 1989 to August 1994, Mr. Carroll was a Managing Director at Smith
Barney Inc., where he co-founded the Media & Communications Group and served on
the Investment Banking Management Committee. Mr. Carroll received his B.A. in
Psychology from Claremont McKenna College and his M.B.A. from Harvard Business
School.
Carlos E. Cisneros has served as a director since January 2000. In October
1996, Mr. Cisneros founded and became Chief Executive Officer of the Cisneros
Television Group, a member of Ibero-American Media Partners, II, Ltd. In January
1998, Mr. Cisneros was named Vice-Chairman of Ibero-American Media Partners, II,
Ltd., an investment fund jointly owned by the Cisneros Group of Companies and
Hicks, Muse, Tate & Furst Incorporated. From June 1993 to October 1996, Mr.
Cisneros was Vice-President of New Business Development at Venevision
International. Mr. Cisneros serves on the board as a representative of
Meadowlane Enterprises, Ltd., an affiliate of Cisneros Television Group. Mr.
Cisneros also serves on the boards of El Sitio, Inc., OneSoft Corporation and
Playboy TV International, LLC. Mr. Cisneros received his B.A. in Political
Science from American University in Washington, D.C.
Clifford H. Friedman has served as a director since July 1998. Mr. Friedman
is a Senior Managing Director at Bear, Stearns & Co. Inc. where he manages
venture capital funds, including Constellation Venture Capital, L.P. Mr.
Friedman serves on the board as a representative of Constellation. From January
1996 to August 1997, Mr. Friedman served as a Senior Vice President of Universal
Studios. From January 1995 to January 1996 Mr. Friedman was a Vice President of
Corporate Development at NBC. Mr. Friedman received his B.S. in Electrical
Engineering and Computer Science and his M.S. in Electrophysics from Polytechnic
University. Mr. Friedman received his M.B.A. from Adelphi University.
Dara Khosrowshahi has served as a director since March 2000. Since October
1999, Mr. Khosrowshahi has been President of USANetworks Interactive, a division
of USAi. From February 1998 to October 1999, Mr. Khosrowshahi was the Vice
President of Strategic Planning for USAi and USANi LLC. From 1991 to 1998, he
was at Allen & Company Incorporated, an investment bank, where he was a Vice
President from 1995 to 1996 and a director from 1996 to 1998. Mr. Khosrowshahi
also serves as a director of Ticketmaster Online-CitySearch, Inc., HRN and
several private companies. Mr. Khosrowshahi received his B.S. in Bioelectrical
Engineering from Brown University.
Stephen M. Krupa has served as a director since May 1999. Mr. Krupa is a
founding member and Managing Director of Psilos Group Managers, LLC, a private
venture capital fund focused on the digital media, information technology and
health care sectors. Mr. Krupa serves on the board as a representative
65
<PAGE> 68
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
66
<PAGE> 69
with Arthur Andersen. Mr. Morse received his B.A. in Economics from the
University of California at Los Angeles and his M.B.A. from the University of
Southern California.
Jeffrey P. Rea has served as our Vice President of Marketing since October
1999. From October 1998 to July 1999, Mr. Rea consulted as acting head of
marketing for Avanti Corporation. From March 1997 to October 1998, he was Vice
President of Sales and Marketing for Aramark Corporation's publishing
distribution operation. Between 1992 and 1996, Mr. Rea served in international
marketing and product development roles with Whirlpool Corporation. From 1989 to
1993, Mr. Rea served as Brand Director, Miller Lite and Director, New Business
Development for Miller Brewing Company. From 1983 to 1989, Mr. Rea served in a
variety of marketing and business analysis roles at Frito-Lay, Inc. Mr. Rea
received his B.A. in Business Administration from Washington State University
and his Master of Management from Northwestern University.
Nicholas J. Turner has served as our Vice President, ARTISTchannels, since
March 1999. From June 1996 to February 1999, Mr. Turner was Vice President, West
Coast for N2K's Music Boulevard, and from June 1994 to June 1996, Mr. Turner
founded and operated Rocktropolis. Music Boulevard and Rocktropolis are online
music entertainment companies. Before founding Rocktropolis, Mr. Turner was an
associate of artist manager Miles Copeland, working in various capacities with
recording artists.
BOARD COMPOSITION
Each of our directors was appointed to the Board of Directors pursuant to
the stockholders agreement described on page 80. Although the provisions of the
stockholders agreement regarding appointment of directors will terminate upon
the closing of the offering, our existing directors, officers and 5%
stockholders will hold approximately 74.6% of our outstanding voting stock
immediately after the offering. As a result, they will be able to re-elect these
directors. Carlos Cisneros is affiliated with Cisneros Television Group, Inc.,
which will beneficially own approximately 6.1% of our common stock after this
offering and Clifford Friedman is affiliated with Constellation Venture Capital,
L.P., which will beneficially own approximately 7.4% of our common stock after
this offering.
Upon the closing of this offering, our Board of Directors will be divided
into three classes designated as Class I, Class II and Class III, and our
directors will be assigned to each class by the Board of Directors. The Class I
directors will be Keith Yokomoto, Carlos Cisneros and Rick Rubin; the Class II
directors will be Donald Muller, Allen Lenard and Stephen Krupa; and the Class
III directors will be Marc Geiger and Clifford Friedman. At the first annual
meeting of stockholders following the closing of this offering, the term of
office of the Class I directors will expire, and Class I directors will be
elected for a full term of three years. At the second annual meeting of
stockholders following the closing of this offering, the term of office of the
Class II directors will expire, and Class II directors will be elected for a
full term of three years. At the third annual meeting of stockholders following
the closing of this offering, the term of office of the Class III directors will
expire, and Class III directors will be elected for a full term of three years.
At each succeeding annual meeting of stockholders, directors will be elected for
a full term of three years to succeed the directors of the class whose terms
expire at such annual meeting.
BOARD COMMITTEES
The Board of Directors has established a Compensation Committee and an
Audit Committee. The Compensation Committee reviews and recommends to the Board
of Directors the compensation and benefits of all our officers and establishes
and reviews general policies relating to compensation and benefits of our
employees. The members of the Compensation Committee are Messrs. Friedman, Krupa
and Lenard. The Audit Committee reviews our internal accounting procedures and
consults with and reviews the services provided by our independent accountants.
The members of our Audit Committee are Messrs. Friedman, Khosrowshahi and Krupa.
67
<PAGE> 70
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The members of our Compensation Committee of the Board of Directors are
currently Messrs. Friedman, Krupa and Lenard, none of whom has ever been an
officer or employee of ARTISTdirect. Before establishing the Compensation
Committee in September 1999, the Board of Directors as a whole performed the
functions delegated to the Compensation Committee. None of our executive
officers serves as a member of the board of directors or compensation committee
of any entity that has one or more executive officers who serve on our board or
compensation committee.
DIRECTOR COMPENSATION
Our directors do not currently receive any cash compensation from us for
their service as members of the Board of Directors, although they are reimbursed
for travel and lodging expenses in connection with attendance at Board and
Committee meetings. Our directors are eligible to participate in the 1999
Employee Stock Option Plan.
EXECUTIVE COMPENSATION
The following table sets forth information concerning compensation earned
in the fiscal year ended December 31, 1999 for our Chief Executive Officer for
that year and for our four other most highly compensated executive officers
whose compensation, as defined by the Securities and Exchange Commission,
exceeded $100,000. These people are referred to as the "named executive
officers." The information in the table includes salaries, bonuses granted and
other miscellaneous compensation.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
ACCRUAL (EARNED) BASIS ------------
----------------------------------- SECURITIES
OTHER ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION OPTIONS COMPENSATION
--------------------------- ---- -------- -------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Marc P. Geiger................. 1999 $150,000 $100,000 4,715 -- --
Chairman and Chief Executive
Officer
Donald P. Muller............... 1999 150,000 100,000 4,508 -- --
President, ARTISTdirect
Agency
and
Kneeling Elephant Records
Keith K. Yokomoto.............. 1999 150,000 50,000 6,011 -- --
President, Chief Operating
Officer and Director
Stephen P. Rennie.............. 1999 137,500 37,500 -- -- --
President, UBL
James B. Carroll............... 1999 81,250 29,167 -- -- --
Vice President and Chief
Financial Officer
</TABLE>
68
<PAGE> 71
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth information with respect to stock options
granted to James Carroll, our chief financial officer, in 1999, including the
potential realizable value over the seven year term of the options, based on
assumed rates of stock appreciation of 5% and 10%, compounded annually. These
assumed rates of appreciation comply with the rules of the Commission and do not
represent our estimate of future stock price. Actual gains, if any, on stock
option exercises will be dependent on the future performance of our common
stock. No other options were granted to any of our other named executive
officers in 1999.
<TABLE>
<CAPTION>
OPTIONS GRANTS IN 1999
-------------------------------------------------- POTENTIAL REALIZABLE
PERCENT OF VALUE AT ASSUMED ANNUAL
NUMBER OF TOTAL RATES OF STOCK PRICE
SECURITIES OPTIONS EXERCISE APPRECIATION FOR
UNDERLYING GRANTED TO PRICE OPTION TERM($)
OPTIONS EMPLOYEES IN PER-SHARE EXPIRATION ------------------------
NAME GRANTED(#) 1999(%) ($) DATE 5% 10%
- ---- ---------- ------------ --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
James B. Carroll..... 459,184 13.3% $3.60 5/25/06 $5,454,234 $8,189,954
</TABLE>
The potential realizable value is calculated based on the seven year term
of the option at its time of grant. It is calculated based on the assumption
that the assumed initial public offering price of $11.00 per share appreciates
at the indicated annual rate compounded annually for the entire term of the
option and that the option is exercised and sold on the last day of its term for
the appreciated stock price. Actual gains, if any, on stock option exercises are
dependent on the future performance of the common stock and overall stock market
conditions. The amounts reflected in the table may not necessarily be achieved.
In addition, in March 2000, we granted Mr. Carroll an option to purchase 226,084
shares of our common stock at an exercise price equal to the initial offering
price of the common stock offered in this offering. Upon the closing of this
offering, we will also grant Keith Yokomoto and Steve Rennie options to purchase
our common stock. Please see "Related Party Transactions -- Options and Stock
Issued to James Carroll" on page 79 and "Related Party
Transactions -- Equity-Related Transactions Between Officers and Directors" on
page 82 for more information on the option grants to Messrs. Carroll, Yokomoto
and Rennie.
YEAR-END OPTION VALUES
The following table sets forth the number of shares of common stock
underlying the unexercised options held by James Carroll, our chief financial
officer, at the end of 1999. No other named executive officer held options at
the end of 1999. No options were exercised during 1999.
<TABLE>
<CAPTION>
NUMBER OF VALUE OF UNEXERCISED
SECURITIES UNDERLYING IN-THE-MONEY
UNEXERCISED OPTIONS AT OPTIONS AT
DECEMBER 31, 1999 DECEMBER 31, 1999
---------------------------- ----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
James B. Carroll...................... 86,097 373,087 $637,118 $2,760,844
</TABLE>
There was no public trading market for our common stock as of December 31,
1999. Accordingly, these values have been calculated on the basis of the assumed
initial public offering price of $11.00 per share, less the applicable exercise
price per share, multiplied by the number of shares underlying such options.
69
<PAGE> 72
BENEFIT PLANS
STOCK OPTION PLANS.
Introduction. We maintain the following three separate stock option plans:
- The 1999 Employee Stock Option Plan under which we have reserved
6,500,000 shares of our common stock for issuance to our employees,
non-employee members of our board of directors and consultants. This
share reserve includes an increase of 1,250,000 shares which was approved
by our board and our stockholders in March 2000. This share reserve will
also automatically increase on the first trading day in January each
calendar year, beginning 2001, by an amount equal to two percent (2%) of
the total number of shares of our common stock outstanding on the last
trading day of December in the prior calendar year, but in no event will
this annual increase exceed 875,000 shares. As of December 31, 1999,
options for 3,745,780 shares of our common stock were outstanding under
this plan, 58,750 options had been exercised, and 1,445,470 shares
remained available for future option grant;
- The 1999 Artist Stock Option Plan under which we have reserved an
additional 4,000,000 shares of our common stock for issuance to artists
for whom we maintain ARTISTchannels. This share reserve will
automatically increase on the first trading day in January each calendar
year, beginning 2001, by an amount equal to two percent (2%) of the total
number of shares of our common stock outstanding on the last trading day
of December in the prior calendar year, but in no event will this annual
increase exceed 875,000 shares. As of December 31, 1999, options for
2,146,144 shares of our common stock were outstanding under this plan,
117,916 options had been exercised, and 1,735,939 shares remained
available for future option grant; and
- The 1999 Artist and Artist Advisor Stock Option Plan under which we have
reserved 1,550,000 shares of our common stock for issuance to artists for
whom we maintain ARTISTchannels and their agents, business managers,
attorneys and other advisors. This share reserve includes an increase of
300,000 shares which was approved by our board and our stockholders in
March 2000. This share reserve will also automatically increase on the
first trading day in January each calendar year, beginning 2001, by an
amount equal to one percent (1%) of the total number of shares of our
common stock outstanding on the last trading day of December in the prior
calendar year, but in no event will this annual increase exceed 375,000
shares. As of December 31, 1999, options for 998,625 shares of our common
stock were outstanding under this plan, no options had been exercised,
and 251,375 shares remained available for future option grant.
Administration. Each plan is administered by our compensation committee.
This committee will determine which eligible persons are to receive option
grants under the plan, the time or times when the grants are to be made, the
number of shares subject to each grant, the exercise price in effect for each
option, the status of any granted option as either an incentive stock option or
a nonstatutory stock option under the federal tax laws, the vesting schedule to
be in effect for the option grant and the maximum term for which any granted
option is to remain outstanding. No option may have a term in excess of 10
years.
Plan Features. The terms and provisions governing the option grants made
under each of our three plans are substantially the same and may be summarized
as follows:
- The exercise price for any options granted under the plans may be paid in
cash or in shares of our common stock valued at fair market value on the
exercise date. The option may also be exercised through a same-day sale
program pursuant to which the purchased shares are immediately sold
through a designated broker and a portion of the sale proceeds delivered
to us in payment of the option exercise price;
70
<PAGE> 73
- The compensation committee will have the authority to cancel outstanding
options under the plans in return for the grant of new options for the
same or different number of option shares with an exercise price per
share based upon the fair market value of our common stock on the new
grant date;
- Each optionee will have a limited period of time following the
termination of service with us in which to exercise his or her
outstanding options for any shares for which those options are
exercisable at the time of such termination; and
- The compensation committee may structure one or more option grants so
that those options may be assigned during the optionee's lifetime to one
or more family members or to a trust established for such family members.
Upon the optionee's death while holding one or more options under the
plans, those options will be transferred in accordance with the
optionee's will or the laws of inheritance.
Change in Control. Effective upon the execution of the underwriting
agreement for this offering, each of the plans will be amended to include the
following change in control provisions that may result in the accelerated
vesting of outstanding option grants:
- If we are acquired by merger, sale of more than 50% or more of our
outstanding voting securities or sale of substantially all of our assets,
each option grant that is not to be assumed by the successor corporation
or otherwise continued in effect will immediately vest and become
exercisable for all the option shares;
- The compensation committee will have complete discretion to grant one or
more options that will vest and become exercisable for all the option
shares if those options are assumed in the acquisition or otherwise
continued in effect, but the optionee's service with us or the acquiring
entity is subsequently terminated within a designated period (not to
exceed 18 months) following such acquisition; and
- Options currently outstanding under all three of our option plans
immediately vest if we are acquired by merger or asset sale and the
options are not assumed by the acquiring entity.
Additional Provisions. The board may amend or modify any or all of the
three plans at any time, subject to any required stockholder approval. Each of
the plans will terminate no later than October 13, 2009.
1999 EMPLOYEE STOCK PURCHASE PLAN.
Introduction. Our 1999 Employee Stock Purchase Plan was adopted by the
board on October 13, 1999 and approved by the stockholders in October 1999. The
plan will become effective immediately upon the signing of the underwriting
agreement for this offering. The plan is designed to allow our eligible
employees and the eligible employees of our participating subsidiaries to
purchase shares of common stock at semi-annual intervals with accumulated
payroll deductions.
Share Reserve. 500,000 shares of our common stock will initially be
reserved for issuance. The reserve will automatically increase on the first
trading day in January each calendar year, beginning 2000, by an amount equal to
one percent (1%) of the total number of outstanding shares of our common stock
on the last trading day in December in the prior calendar year. In no event will
any such annual increase exceed 1,000,000 shares.
Offering Periods. The plan will have a series of successive offering
periods, each with a maximum duration of 24 months. The initial offering period
will start on the date the underwriting agreement for this offering is signed
and will end on the last business day in April 2002. The next offering period
will start on the first business day in May 2002, and subsequent offering
periods will be set by our compensation committee.
71
<PAGE> 74
Eligible Employees. Individuals scheduled to work more than 20 hours per
week for more than 5 calendar months per year may join an offering period on the
start date or any semi-annual entry date within that period. Semi-annual entry
dates will occur on the first business day of May and November each year.
Individuals who become eligible employees after the start date of an offering
period may join the plan on any subsequent semi-annual entry date within that
offering period.
Payroll Deductions. A participant may contribute up to 15% of his or her
total cash earnings through payroll deductions, and the accumulated deductions
will be applied to the purchase of shares on each semi-annual purchase date. The
purchase price per share will be equal to 85% of the fair market value per share
on the participant's entry date into the offering period or, if lower, 85% of
the fair market value per share on the semi-annual purchase date. Semi-annual
purchase dates will occur on the last business day of April and October each
year. However, a participant may not purchase more than 750 shares on any
purchase date, and not more than 250,000 shares may be purchased in total by all
participants on any purchase date. Our compensation committee will have the
authority to change these limitations for any subsequent offering period.
Change in Control. Should we be acquired by merger or sale of substantially
all of our assets or more than fifty percent of our voting securities, then all
outstanding purchase rights will automatically be exercised immediately before
the effective date of the acquisition. The purchase price will be equal to 85%
of the market value per share on the participant's entry date into the offering
period in which an acquisition occurs or, if lower, 85% of the fair market value
per share immediately before the acquisition.
Plan Provisions. The following provisions will also be in effect under the
plans:
- The plan will terminate no later than the last business day of October
2009.
- The board may at any time amend, suspend or discontinue the plan.
However, amendments may require stockholder approval.
EMPLOYMENT AGREEMENTS
We have entered into employment agreements with our named executive
officers. The compensation and dates of employment under the employment
agreements are as follows:
Marc Geiger
In July 1998, we entered into an employment agreement with Marc Geiger, our
Chairman and Chief Executive Officer which provides for the following:
- Mr. Geiger is paid an annual salary of $150,000 and a guaranteed annual
bonus of $100,000.
- The initial term of his employment expires July 27, 2001, with automatic
extensions for successive one-year periods.
- The agreement provides for the payment of salary and a guaranteed bonus
for twelve months after the date of termination if the termination was
other than:
(1) due to a disability,
(2) for "cause," such as the commission of a felony, material dishonesty
against ARTISTdirect, or gross negligence in the performance of
duties,
(3) due to Mr. Geiger's death, or
(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.
72
<PAGE> 75
- If Mr. Geiger's employment is terminated for cause or disability, or he
resigns for other than good reasons, he is prohibited, for a period of
the later of one year after the early termination of his employment, or
the expiration of the term of his employment agreement, from competing
with ARTISTdirect or attempting to hire any ARTISTdirect employee.
Donald Muller
In July 1998, we entered into an employment agreement with Donald Muller,
the President of ARTISTdirect Agency and Kneeling Elephant Records, and one of
our directors, which provides for the following:
- Mr. Muller is paid an annual salary of $150,000 and a guaranteed annual
bonus of $100,000.
- The initial term of the agreement expires July 27, 2001, with automatic
extensions for successive one-year periods.
- The agreement provides for the payment of salary and a guaranteed bonus
for twelve months after the date of termination if the termination was
other than:
(1) due to a disability,
(2) for "cause," such as the commission of a felony, material
dishonesty against ARTISTdirect, or gross negligence in the performance of
duties,
(3) due to Mr. Muller's death, or
(4) if he terminates his employment for "good reason," such as an
adverse change of duties, a reassignment of location, or a material breach
of our obligations to him.
- If Mr. Muller's employment is terminated for cause or disability or
resigns for other than good reasons, he is prohibited, for a period of
the later of one year after the early termination of his employment, or
the expiration of the term of his employment agreement, from competing
with ARTISTdirect or attempting to hire any ARTISTdirect employee.
Keith Yokomoto
In January 1998, we entered into an employment agreement with Keith
Yokomoto, our President and Chief Operating Officer, which provides for the
following:
- Mr. Yokomoto was paid an annual salary of $100,000 for the first five
months of the agreement and $150,000 thereafter, with a guaranteed bonus
of $50,000 the second year and $100,000 for each year thereafter.
- The initial term of the agreement expires December 31, 2000, and
ARTISTdirect has an option to extend the term for two additional one-year
periods.
- The agreement provides for the payment of his salary and a guaranteed
bonus for the lesser of:
(1) twelve months after the date of termination, or
(2) until the end of the agreement, if he is terminated other than due
to a disability, for "cause," such as the commission of a felony,
material dishonesty against ARTISTdirect, or gross negligence in the
performance of duties, or upon his death.
Mr. Yokomoto also signed a separate agreement concurrently with his
employment agreement which prohibits him from competing with ARTISTdirect or
attempting to hire any ARTISTdirect 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.
73
<PAGE> 76
James Carroll
In May 1999, we entered into an employment agreement with James Carroll,
our Chief Financial Officer, which provides for the following:
- Mr. Carroll is paid an annual salary of $150,000 and a guaranteed annual
bonus of $50,000.
- The initial term of the agreement expires May 23, 2001, and ARTISTdirect
has an option to extend the term for one additional year.
- The employment agreement provides that if Mr. Carroll's employment is
terminated other than due to a disability, death or for "cause," such as
the commission of a felony, material dishonesty against ARTISTdirect, or
gross negligence in the performance of duties, he will be paid his base
salary for the lesser of:
(1) six months after the date of termination, or
(2) the remainder of the agreement.
- If Mr. Carroll is terminated for cause, he is prohibited from competing
with ARTISTdirect until the date the agreement would otherwise have
expired. Mr. Carroll is also prohibited from attempting to hire any
ARTISTdirect employee for one year following the later of:
(1) the date the agreement expires, or
(2) the actual date of termination.
In addition, please see "-- Options and Stock Issued to James Carroll" on
page 79 for information on stock and options issued to Mr. Carroll in connection
with his employment.
Steve Rennie
In April 1998, UBL, LLC entered into an employment agreement with Steve
Rennie, President of the Ultimate Band List, which provides for the following:
- Mr. Rennie is paid an annual salary of $100,000 for the first year and
$150,000 for the second and third years, with a guaranteed bonus of
$50,000 the second year and $100,000 the third year.
- The initial term of the agreement expires March 31, 2001.
- If Mr. Rennie's employment is terminated other than due to disability,
death, or for cause, such as the commission of a felony, material
dishonesty against ARTISTdirect, or gross negligence in the performance
of duties, Mr. Rennie's employment agreement provides for the payment of
his salary and a guaranteed bonus for the lesser of:
(1) twelve months after the date of termination, or
(2) the remaining period of the term.
In June 1998, Mr. Rennie also entered into a separate agreement which
prohibits him from competing with UBL, LLC until March 31, 2001, or, in the
event Mr. Rennie is terminated other than for cause, the date of Mr. Rennie's
termination. The agreement also prohibits him from soliciting any customer of
ARTISTdirect or attempting to hire any ARTISTdirect employee until March 31,
2002.
74
<PAGE> 77
INDEMNIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS AND LIMITATION OF LIABILITY
Section 145 of the Delaware General Corporation Law authorizes a court to
award, or a corporation's board of directors to grant, indemnity to directors
and officers in terms sufficiently broad to permit indemnification for
liabilities, including reimbursement for expenses incurred, arising under the
Securities Act. This indemnification may, however, be unenforceable as against
public policy.
As permitted by Delaware law, our amended and restated certificate of
incorporation, which will become effective upon the closing of this offering,
includes a provision that eliminates the personal liability of its directors for
monetary damages for breach of fiduciary duty as a director, except for
liability:
- for any breach of the director's duty of loyalty to us or our
stockholders;
- for acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law;
- under Section 174 of the Delaware law regarding unlawful dividends and
stock purchases; or
- for any transaction from which the director derived an improper personal
benefit.
As permitted by Delaware law, our amended and restated certificate of
incorporation and our amended and restated bylaws, which will become effective
upon the closing of this offering, provide that:
- we are required to indemnify our directors and officers to the fullest
extent permitted by Delaware law, so long as such person acted in good
faith and in a manner the person reasonably believed to be in or not
opposed to the best interests of ARTISTdirect, and with respect to any
criminal action or proceeding, had no reasonable cause to believe the
person's conduct was unlawful;
- we are permitted to indemnify our other employees to the extent that we
indemnify our officers and directors, unless otherwise required by law,
our amended and restated certificate of incorporation, our amended and
restated bylaws or other agreements;
- we are required to advance expenses to our directors and officers
incurred in connection with a legal proceeding to the fullest extent
permitted by Delaware law, subject to very limited exceptions; and
- the rights conferred in our amended and restated bylaws are not
exclusive.
Before the closing of this offering, we intend to enter into indemnity
agreements with each of our current directors and officers to give such
directors and officers additional contractual assurances regarding the scope of
the indemnification set forth in our amended and restated certificate of
incorporation and our amended and restated bylaws and to provide additional
procedural protections. At present, there is no pending litigation or proceeding
involving any of our directors, officers or employees regarding which
indemnification is sought, nor are we aware of any threatened litigation that
may result in claims for indemnification.
We have obtained directors' and officers' liability insurance.
75
<PAGE> 78
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.
76
<PAGE> 79
ISSUANCES OF ARTISTDIRECT, LLC SERIES A PREFERRED UNITS
Between July 1998 and December 1998, ARTISTdirect, LLC sold a total of
9,458,340 of its Series A preferred units at a purchase price of approximately
$0.31 per unit to the following purchasers:
<TABLE>
<CAPTION>
AGGREGATE VALUE OF
SERIES A PURCHASE UNDERLYING
PURCHASER PREFERRED UNITS PRICE COMMON STOCK(1)
--------- --------------- ---------- ---------------
<S> <C> <C> <C>
Constellation Venture Capital, L.P............. 5,850,520 $1,800,000 $16,088,930
Psilos Group Partners, L.P..................... 1,950,172 600,000 5,362,973
DreamMedia Internet Ventures, LLC.............. 1,462,632 450,000 4,022,238
Carl Kawabe.................................... 195,016 60,000 536,294
</TABLE>
- -------------------------
(1) Based on an assumed initial offering price of $11.00 per share.
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 VALUE OF
SERIES A SERIES B PURCHASE UNDERLYING
PURCHASER PREFERRED UNITS PREFERRED UNITS PRICE COMMON STOCK
--------- --------------- --------------- ---------- ------------
<S> <C> <C> <C> <C>
Constellation Venture Capital,
L.P............................... 1,200,000 -- $1,200,000 $5,737,441
Psilos Group Partners, L.P.......... 400,000 -- 400,000 1,912,480
DreamMedia Internet Ventures, LLC... 300,000 -- 300,000 1,434,360
Carl Kawabe......................... 40,000 -- 40,000 191,248
ADNM................................ -- 1,940,000 1,940,000 5,335,000
</TABLE>
- -------------------------
(1) Based on an assumed initial offering price of $11.00 per share.
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
77
<PAGE> 80
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.
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 VALUE OF
PREFERRED PURCHASE UNDERLYING
PURCHASER UNITS PRICE COMMON STOCK(1)
--------- --------- ---------- ---------------
<S> <C> <C> <C>
Chase Capital Partners............................ 4,800,000 $4,800,000 $13,200,000
CCP/Psilos ARTISTdirect, LLC...................... 922,509 922,509 2,536,900
Flatiron Fund..................................... 200,000 200,000 550,000
Bowman Capital Management LLC..................... 4,000,000 4,000,000 11,000,000
Constellation Venture Capital, L.P................ 2,500,000 2,500,000 6,875,000
Psilos Group Partners, L.P........................ 1,383,764 1,383,764 3,805,351
Cassandra/ARTISTdirect Partners, LLC.............. 1,000,000 1,000,000 2,750,000
Toronto Dominion Investments, Inc................. 193,727 193,727 532,749
</TABLE>
- -------------------------
(1) Based on an assumed initial offering price of $11.00 per share.
In connection with this financing, the holders of Series A preferred units
in ARTISTdirect, LLC received 354,526 common units in ARTISTdirect, LLC and
$85,000 in exchange for accrued and unpaid preferred returns.
The preferred and common units of ARTISTdirect, LLC were exchanged for
preferred and common stock in connection with the merger of ARTISTdirect, LLC
into ARTISTdirect, Inc. on October 6, 1999. All shares of preferred stock will
convert into shares of common stock on a one-for-one basis upon the closing of
this offering. In addition, approximately 50,000 shares of common stock will be
issued as accrued but unpaid dividends on the preferred stock. See the notes to
the beneficial ownership table in "Principal Stockholders" on page 84 for
information relating to the beneficial ownership of such shares.
ISSUANCES OF ARTISTDIRECT, INC. SERIES C PREFERRED STOCK
Between December 1999 and January 2000, ARTISTdirect, Inc. sold an
aggregate of 7,000,291 of its Series C preferred stock at a purchase price of
$13.928 per share to the following purchasers:
<TABLE>
<CAPTION>
SHARES OF
SERIES C AGGREGATE VALUE OF
PREFERRED PURCHASE UNDERLYING
PURCHASER STOCK PRICE COMMON STOCK(1)
--------- --------- ----------- ---------------
<S> <C> <C> <C>
Universal Music Group, Inc....................... 2,153,935 $30,000,000 $37,500,000
Cisneros Television Group(2)..................... 1,435,957 20,000,000 25,000,000
Sony Music, a Group of Sony Music Entertainment
Inc............................................ 1,076,968 15,000,000 18,750,000
BMG Music d/b/a BMG Entertainment................ 1,076,968 15,000,000 18,750,000
Time Warner Inc.(3).............................. 1,005,170 14,000,000 17,500,000
Yahoo! Inc....................................... 179,495 2,500,000 3,125,000
Maverick Recording Company....................... 71,798 1,000,000 1,250,000
</TABLE>
- -------------------------
(1) Based on an assumed initial offering price of $11.00 per share.
(2) Shares are actually held by Meadowlane Enterprises Ltd., an affiliate of
Cisneros Television Group.
(3) Shares are actually held by Art-Dir Holdings Inc., an affiliate of Time
Warner Inc.
78
<PAGE> 81
Mr. Cisneros, one of our directors, is the Chairman and Chief Executive
Officer of the Cisneros Television Group. Universal Music Group, Inc. has the
right to appoint a director pursuant to the stockholders agreement described on
page 80. 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 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.
STRATEGIC AGREEMENTS WITH SERIES C PREFERRED STOCK INVESTORS
Each of our Series C preferred stock investors entered into strategic
agreements with us in connection with their purchase of Series C preferred
stock. See "Business -- Strategic Relationships" on page 46 for more information
on these agreements. Of these investors, Universal Music Group, Inc. and
Cisneros Television Group will each continue to beneficially own more than 5% of
our common stock after this offering, based on an assumed initial offering price
of $11.00 per share.
OPTIONS AND STOCK ISSUED TO JAMES CARROLL
In May 1999, the board granted James Carroll, our Chief Financial Officer,
two options to purchase a total of 459,184 shares of common stock at an exercise
price of $3.60 per share. One-fourth of the 344,388 shares subject to the first
option became exercisable immediately, and the remaining option shares become
exercisable in three equal annual installments from the date of the grant. All
of these remaining option shares become immediately exercisable if a change of
control occurs.
At the time Mr. Carroll's second option was granted, the option was
initially not exercisable and became exercisable as follows:
- One-half of the 114,796 shares underlying Mr. Carroll's second option
would become exercisable upon the completion of an offering.
- The remaining shares underlying this option would become exercisable if
the closing price of our common stock on any two or more trading days
exceeds 150% of the initial offering price during the one month period
following the closing of this offering. The remaining shares would also
become exercisable immediately upon a change of control which occurs
before May 24, 2002, provided that the valuation of ARTISTdirect at the
change of control equaled or exceeded $300 million. In February 2000, we
accelerated the exercisability of this option so that it immediately
became exercisable for all 114,796 of the shares subject to the option.
On September 23, 1999, James Carroll purchased 83,333 shares of common
stock from Don Muller and 27,778 shares of common stock from Keith Yokomoto for
$300,000 and $100,000, respectively.
On March 6, 2000, the board approved an option grant to Mr. Carroll which
will become effective at the time the initial public offering price for this
offering is determined. The option grant will be for 226,084 shares, will have
an exercise price equal to the initial public offering price and will become
exercisable with respect to one-third of the option shares on each anniversary
of the effectiveness of the option grant.
DEBT TO EXECUTIVE OFFICERS AND DIRECTOR
In satisfaction of our obligations to make distributions triggered by the
merger of ARTISTdirect, LLC into ARTISTdirect, Inc., we issued a note in the
principal amount of $275,000 to each of Messrs. Geiger and Muller and a note in
the principal amount of $190,714 to Mr. Rubin. Each of these notes bears
interest at a rate of 5.98% per annum and will become due and payable upon the
closing of this offering.
79
<PAGE> 82
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.
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
80
<PAGE> 83
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
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
81
<PAGE> 84
reimburse Messrs. Geiger, Muller, Carroll and Rubin on demand for any payment
they make pursuant to the guarantees. Additionally, Messrs. Geiger, Muller,
Carroll and Rubin each agreed to pay each other's proportionate share of their
obligation if any one of them does not receive the full amount of reimbursement
described above. Rick Rubin, one of our directors, is President of American
Recordings, Inc.
EQUITY-RELATED TRANSACTIONS BETWEEN OFFICERS AND DIRECTORS
In March 2000, Marc Geiger, Donald Muller and Rick Rubin agreed to enter
into a series of transactions which will effectively transfer to Keith Yokomoto,
Steve Rennie and L&G Associates One the economic benefit of the increase in
value over $13.928 per share with respect to an aggregate of 1,234,386 shares of
our common stock, referred to below as the "Transferred Shares". The purpose of
these transactions was to provide additional equity-based incentives to Messrs.
Yokomoto and Rennie and to provide both equity-based incentives and compensation
for past services to L&G Associates One.
To effect these transactions, Rick Rubin contributed 411,462 shares of his
common stock to ARTISTdirect Investors, LLC in exchange for membership interests
in that entity. ARTISTdirect Investors, LLC is the entity through which Messrs.
Geiger, Muller, Yokomoto, Rennie, and L&G Associates One currently hold their
shares. ARTISTdirect Investors, LLC then granted additional membership interests
to Messrs. Yokomoto and Rennie and L&G Associates One in a transaction that only
diluted the membership interests of Messrs. Geiger, Muller and Rubin. These
additional membership interests, which we refer to as the "Additional
Interests", do not entitle Messrs. Yokomoto or Rennie or L&G Associates One to
any share of the current capital value of ARTISTdirect Investors, LLC. Instead,
the Additional Interests entitle Messrs. Yokomoto and Rennie and L&G Associates
One to any increase in the value of 696,831, 238,913 and 298,642 shares,
respectively, of our common stock held by ARTISTdirect Investors, LLC over
$13.928 per share. Any increase in value will be determined based upon the
closing price of our common stock on the third day of trading, which we refer to
below as the "Closing Price".
Upon closing of this offering, ARTISTdirect Investors, LLC will distribute
the shares of common stock it holds to its members and then dissolve. The number
of shares distributed to each member will be determined based upon the Closing
Price. If the Closing Price does not exceed $13.928, Messrs. Yokomoto and Rennie
and L&G Associates One will not receive any additional shares of common stock
from ARTISTdirect Investors, LLC as a result of its issuance of the Additional
Interests.
In addition to any shares of common stock that they receive from
ARTISTdirect Investors, LLC, upon the closing of this offering, the Company will
issue each of Messrs. Yokomoto and Rennie and L&G Associates One an option to
purchase shares of the Company's common stock. These options will have an
exercise price equal to the Closing Price. The options of Messrs. Yokomoto and
Rennie and L&G Associate One will entitle them to purchase a number of shares
equal to the difference between 696,831, 238,913 and 298,642 and the number of
shares, if any, that ARTISTdirect Investors, LLC distributes to them in respect
of the additional interests. These options have seven year terms. The options to
be granted to Messrs. Yokomoto and Rennie will be granted under our 1999
Employee Stock Plan and will be exercisable at any time following the one year
anniversary of their grant, unless the applicable optionee 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.
82
<PAGE> 85
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.
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.
83
<PAGE> 86
PRINCIPAL STOCKHOLDERS
Except as indicated in footnote (1), the following table sets forth
information with respect to beneficial ownership of our common stock as of
December 31, 1999 and as adjusted to reflect the sale of common stock in this
offering for:
- each person or entity known by us to beneficially own more than 5% of our
outstanding shares of common stock;
- each of our directors;
- each of the named executive officers; and
- all of our directors and executive officers as a group.
<TABLE>
<CAPTION>
PERCENTAGE OF
NUMBER OF SHARES SHARES BENEFICIALLY
BENEFICIALLY OWNED(1) OWNED
------------------------ ----------------------
BEFORE AFTER BEFORE AFTER
NAME AND ADDRESS OF BENEFICIAL OWNER OFFERING OFFERING(2) OFFERING OFFERING(2)
------------------------------------ ---------- ----------- -------- -----------
<S> <C> <C> <C> <C>
Entities affiliated with Constellation Venture
Capital, L.P.(3)................................. 2,728,907 2,728,907 8.4% 7.3%
575 Lexington Avenue
New York, New York 10022
Entities affiliated with Chase Capital
Partners(4)...................................... 1,512,238 1,512,238 4.7 4.1
380 Madison Avenue, 12th Floor
New York, New York 10017
Universal Music Group, Inc.(5)..................... 3,409,091 3,409,091 10.6 9.1
10 Universal City Plaza
Universal City, California 91608
Entity affiliated with Cisneros Television Group,
Inc.(6).......................................... 2,272,727 2,272,727 7.0 6.1
404 Washington Avenue
Miami Beach, Florida 33139
BMG Music d/b/a BMG Entertainment(7)............... 1,704,547 1,704,547 5.3 4.6
1540 Broadway
New York, New York 10036
Sony Music, a Group of Sony Music
Entertainment(7)................................. 1,704,547 1,704,547 5.3 4.6
550 Madison Avenue
New York, New York 10022
Marc P. Geiger(8)(9)............................... 3,335,820 3,393,581 10.3 9.1
Donald P. Muller(8)(9)............................. 3,252,486 3,308,800 10.0 8.9
Keith K. Yokomoto(8)(10)........................... 1,955,324 1,923,837 6.1 5.2
Stephen P. Rennie(8)............................... 504,352 448,714 1.6 1.2
James B. Carroll(8)(11)............................ 312,004 312,456 1.0 0.8
Rick Rubin(8)...................................... 3,620,219 3,620,219 11.2 9.7
c/o Alan S. Halfon & Company
9595 Wilshire Boulevard, Suite 505
Beverly Hills, CA 90212
Clifford H. Friedman(3)............................ 2,728,907 2,728,907 8.4 7.3
Carlos E. Cisneros(6).............................. 2,272,727 2,272,727 7.0 6.1
Dara Khosrowshahi.................................. -- -- -- --
Stephen Krupa(12).................................. 1,288,577 1,288,577 4.0 3.5
Allen D. Lenard(8)(13)............................. 378,264 364,769 1.2 1.0
1900 Avenue of the Stars
Twenty-Fifth Floor
Los Angeles, California 90067
All directors and executive officers as a group (11
persons)(14)..................................... 19,648,680 19,662,587 60.8 52.7
</TABLE>
84
<PAGE> 87
- -------------------------
(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
85
<PAGE> 88
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
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.
86
<PAGE> 89
(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 Partner of
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.
87
<PAGE> 90
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.
88
<PAGE> 91
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.
89
<PAGE> 92
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.
90
<PAGE> 93
REGISTRATION RIGHTS
We have provided purchasers of our Series A, Series B and Series C
preferred stock and Rick Rubin, one of our directors, with rights to require us
to register their securities under the Securities Act of 1933, as amended.
Please see "Related Party Transactions -- Registration Rights Agreement" on page
80 for more information on these rights.
WARRANTS
As of December 31, 1999, Giant Merchandising and Winterland Concessions
held outstanding warrants to purchase 562,500 and 342,640 shares of our common
stock, respectively, at a price of $4.00 per share, and Yahoo! held a warrant to
purchase 169,627 shares of our common stock at a price of $13.928 per share, and
169,627 shares of our common stock at a price of $11.00 per share.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for our common stock will be ChaseMellon
Shareholder Services.
LISTING
Application has been made for listing the common stock on the Nasdaq
National Market under the trading symbol "ARTD."
RESCISSION OFFER
As of the date of this prospectus, we have issued shares or options to
purchase shares of our common stock to our employees and to artists and their
managers and advisors. Due to the nature of the persons who received these
shares and options in addition to our employees and the total number of shares
and options issued to them and our employees, the issuance of these shares and
options did not comply with the requirements of Rule 701 under the Securities
Act, or any other available exemptions from the registration requirements of
Section 5 of the Securities Act, and may not have qualified for any exemption
from qualification under California securities laws either. Beginning
approximately 180 days after the date of this prospectus, we intend to make a
rescission offer to all these persons pursuant to a registration statement filed
under the Securities Act and pursuant to California securities law.
In the rescission offer, we will offer to repurchase from these persons all
shares issued directly to these persons or pursuant to option exercises by these
persons before the expiration of the rescission offer registration statement, at
the purchase or exercise price paid for these shares, plus interest at the rate
of 10% per year from the date of issuance until the rescission offer expires. To
comply with California securities law, we will also offer to repurchase all
unexercised options issued to such persons at 20% of the option exercise price
multiplied by the number of shares subject to such options, plus interest at the
rate of 10% per year from the date of issuance until the rescission offer
expires. The rescission offer will expire approximately 30 days after the
effectiveness of the rescission offer registration statement.
Based on the number of shares and options issued as of December 31, 1999,
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
91
<PAGE> 94
registration statement covering such shares. Some of these shares are subject to
contractual vesting restrictions, to which the holders have previously agreed.
The Securities Act does not expressly provide that a rescission offer will
terminate a purchaser's right to rescind a sale of stock, which was not
registered under the Securities Act as required. Accordingly, should any
offerees reject the rescission offer, we may continue to be contingently liable
under the Securities Act for the purchase price of 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................... 21,216,933 Underwriters' lock-up period
ends. These shares are eligible
for sale under Rule 144 or 701.
271 days after the date of this
prospectus................... 11,079,550 Additional shares eligible for
sale under Rule 144, assuming
that the shares of common stock
issued upon the automatic
conversion of Series C
preferred stock issued in
December 1999 and January 2000
are eligible.
</TABLE>
LOCK-UP AGREEMENTS
A total of approximately 27,640,201 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
92
<PAGE> 95
arrangement that transfers to another, in whole or in part, any of the economic
consequences of ownership of the common stock or such other securities, in cash
or otherwise, for a period of 180 days following the date of the final
prospectus for this offering without the prior written consent of Morgan Stanley
& Co. Incorporated. The restrictions described in this paragraph do not apply
to:
- the sale of shares to the underwriters;
- the issuance by us of shares of common stock upon the exercise of an
option or a warrant or the conversion of a security outstanding on the
date of this prospectus of which the underwriters have been advising in
writing;
- transactions by any person other than us relating to shares of common
stock or other securities acquired in open market transactions after the
completion of the offering of the shares; or
- transfers by gift or distributions by a partnership to its partners, so
long as, in any such instance, such transferee executes a lock-up
agreement with terms identical to those described in this paragraph.
RULE 144
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this prospectus, a person or persons whose shares are aggregated,
who has beneficially owned restricted shares for at least one year, including
the holding period of any prior owner except an affiliate, would be entitled to
sell within any three-month period a number of shares that does not exceed the
greater of:
- 1% of the number of shares of common stock then outstanding, which will
equal approximately 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,
93
<PAGE> 96
shares registered under such registration statement will be available for sale
in the open market immediately after the 180-day lock-up period expires.
REGISTRATION RIGHTS
In addition, some of our stockholders have registration rights with respect
to approximately 23,098,856 shares of common stock. Registration of these
securities under the Securities Act would result in those shares becoming freely
tradeable without restriction under the Securities Act. See "Related Party
Transactions -- Registration Rights Agreement" on page 80 for more information
on these rights.
94
<PAGE> 97
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.
95
<PAGE> 98
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.
96
<PAGE> 99
PRICING OF THE OFFERING
Prior to this offering, there has been no public market for the common
stock. The initial public offering price will be determined by negotiations
between ARTISTdirect and the representatives of the underwriters. The principal
factors to be considered in determining the initial public offering price will
be the future prospects of ARTISTdirect and its industry in general, sales,
earnings and other financial and operating information of ARTISTdirect in recent
periods, and the price-earnings ratios, price-sales ratios, market prices of
securities and other financial and operating information of companies engaged in
activities similar to those of ARTISTdirect. The estimated initial public
offering price range set forth on the cover page of this preliminary prospectus
is subject to change as a result of market conditions and other factors.
Morgan Stanley & Co. Incorporated and Bear, Stearns & Co. Inc. also acted
as placement agents in connection with our private offering of Series C
preferred stock in December 1999 and January 2000, for which they will receive
customary fees for performing such services. In addition, Morgan Stanley & Co.
Incorporated has provided other financial advisory services to us in connection
with our acquisition of Mjuice.com, Inc. for which Morgan Stanley & Co.
Incorporated will receive $500,000 in shares of our common stock at the initial
offering price, or 45,457 shares, based on an initial public offering price of
$11.00 per share. These securities have been deemed underwriting compensation by
the National Association of Securities Dealers, Inc. and shall not be sold,
transferred, assigned, pledged or hypothecated for one year from the effective
date of this offering.
LEGAL MATTERS
The validity of the common stock offered hereby will be passed upon for
ARTISTdirect by Brobeck, Phleger & Harrison LLP, Irvine, California. As of
December 31, 1999, Brobeck, Phleger & Harrison LLP and a number of individuals
affiliated with Brobeck, Phleger & Harrison LLP beneficially own a total of
7,500 shares of our common stock. Certain legal matters in connection with this
offering will be passed upon for the underwriters by O'Melveny & Myers LLP, Los
Angeles, California.
EXPERTS
The financial statements of ARTISTdirect, Inc. (and its predecessor company
ARTISTdirect, LLC) and subsidiaries as of December 31, 1998 and 1999, and for
each of the years in the three year period ended December 31, 1999, and the
financial statements of iMusic, Inc., as of December 31, 1997 and 1998 and the
years ended December 31, 1997 and 1998, have been included herein and in the
registration statement in reliance upon the reports of KPMG LLP, independent
certified public accountants, appearing elsewhere herein, and upon the authority
of said firm as experts in accounting and auditing.
97
<PAGE> 100
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.
98
<PAGE> 101
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> 102
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 March 21, 2000
F-2
<PAGE> 103
ARTISTDIRECT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA
REDEEMABLE
SECURITIES AND
STOCKHOLDERS'
DECEMBER 31, EQUITY AT
------------------ DECEMBER 31,
1998 1999 1999
------- -------- --------------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 1,940 $ 69,119
Cash held for clients..................................... -- 770
Accounts receivable, net.................................. 460 1,001
Prepaid expenses and other current assets................. 392 6,795
------- --------
Total current assets.................................... 2,792 77,685
Property and equipment, net................................. 175 3,343
Investments................................................. 373 70
Goodwill and intangibles, net............................... 45 13,415
Other assets, net........................................... 27 4,087
------- --------
$ 3,412 $ 98,600
======= ========
LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS'
EQUITY (DEFICIT)
Current liabilities:
Cash held for clients..................................... $ -- $ 770
Accounts payable.......................................... 507 3,709
Accrued expenses.......................................... 761 4,698
Due to employees.......................................... 288 --
Notes payable............................................. -- 741
Deferred revenue.......................................... 157 37
------- --------
Total current liabilities............................... 1,713 9,955
Long term liabilities..................................... -- 683
------- -------- ---------
Total liabilities....................................... 1,713 10,638
Redeemable securities:
Series A redeemable preferred stock, $.01 par value.
Authorized, issued and outstanding 3,207,815 shares in
1998 and 1999. Liquidation preference and redemption
value of $5,021 and $4,963 in 1998 and 1999,
respectively............................................ 5,021 4,963 --
Series B redeemable preferred stock, $.01 par value.
Authorized 3,750,000 shares, issued and outstanding
3,750,000 shares in 1999. Liquidation preference and
redemption value of $15,350 in 1999..................... -- 15,350 --
Series C redeemable preferred stock, $.01 par value.
Authorized 8,550,000, issued and outstanding 5,905,374
shares in 1999. Liquidation preference and redemption
value of $82,250 in 1999................................ -- 82,188 --
Redeemable common securities, $.01 par value. Authorized
10,800,000 shares. Liquidation preference and redemption
value of $114 and $9,206 in 1998 and 1999,
respectively............................................ 114 9,206 9,854
------- -------- ---------
Total redeemable securities............................. 5,135 111,707 9,854
------- -------- ---------
Member's and stockholders' equity:
Common stock, $.01 par value. Authorized 50,000,000
shares; issued and outstanding 14,088,674 shares in
1999.................................................... -- 141 271
Additional paid-in-capital................................ -- 36,688 138,411
Members' interest......................................... 3,872 -- --
Unearned compensation..................................... (502) (36,976) (36,976)
Accumulated (deficit)..................................... (6,806) (23,598) (23,598)
------- -------- ---------
Total members' and stockholders' equity
(deficit)............................................ (3,436) (23,745) $ 78,108
------- -------- =========
$ 3,412 $ 98,600
======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 104
ARTISTDIRECT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT FOR SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1997 1998 1999
------ ------- ----------
<S> <C> <C> <C>
Net revenue:
Online product sales................................... $ 269 $ 1,548 $ 5,282
Advertising and other.................................. 95 552 2,910
Agency commissions..................................... 974 1,917 1,304
Record label........................................... 550 565 778
------ ------- ----------
Total net revenue................................... 1,888 4,582 10,274
Cost of revenue:
Direct cost of product sales........................... 262 1,505 5,091
Other cost of revenues................................. 346 1,010 3,380
Stock-based compensation............................... -- -- 1,769
------ ------- ----------
Total cost of revenue............................... 608 2,515 10,240
Gross profit........................................ 1,280 2,067 34
Operating expense:
Product development.................................... 78 589 1,815
Sales and marketing.................................... 196 1,395 13,222
General and administrative............................. 1,442 2,545 10,319
Stock-based compensation(1)............................ -- 3,828 30,304
Depreciation and amortization.......................... 21 59 2,509
------ ------- ----------
Loss from operations................................ (457) (6,349) (58,135)
Income from equity investment.......................... -- 2 50
Interest income (expense), net......................... (3) 29 281
------ ------- ----------
Net loss............................................ $ (460) $(6,318) $ (57,804)
====== ======= ==========
Basic and diluted net loss per share for period from
October 6, 1999 to December 31, 1999................... $ (1.66)
Weighted average shares outstanding used in calculating
net loss per share basic and diluted net loss per share
for period from October 6, 1999 to December 31, 1999... 14,177,463
Pro forma basic and diluted net loss per share:.......... $ (2.96)
====== ==========
Pro forma weighted average shares basic and diluted.... 19,502,437
</TABLE>
- ---------------
(1) Stock-based compensation is comprised of sales and marketing expense of $0
and $8,551, in 1998 and 1999, respectively and general and administrative
expense of $3,828 and $21,753 in 1998 and 1999, respectively.
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 105
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> 106
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> 107
ARTISTDIRECT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
ORGANIZATION
ARTISTdirect, Inc. (the "Company") was formed on October 6, 1999 upon its
merger with ARTISTdirect, LLC (the "Capital Reorganization"). The Capital
Reorganization was only a change in the form of ownership of the Company.
ARTISTdirect, LLC was organized as a California limited liability company and
commenced operations on August 8, 1996. ARTISTdirect, LLC had a 99% ownership
interest in ARTISTdirect Agency LLC, Kneeling Elephant Records, LLC and
ARTISTdirect NewMedia, LLC ("affiliated companies") and has consolidated their
results since inception. In February 1999, Ultimate Band List, LLC ("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 UBL and the affiliated companies whereby units in ARTISTdirect,
LLC were exchanged for the membership interests of UBL and the affiliated
companies. The acquisition of the minority interests in UBL was accounted for
under purchase accounting.
PRINCIPLES OF CONSOLIDATION
The accompanying financial statements include the consolidated accounts of
the Company and its subsidiaries in which it has controlling interests in the
form of voting and operating control. All significant intercompany accounts and
transactions have been eliminated for all periods presented. UBL generated
losses on its operations for all periods prior to the Company's purchase of the
minority interest in UBL. Due to the full funding of those losses by the Company
and its members, none of the losses generated by UBL during the periods
presented have been allocated to the minority holders.
LIQUIDITY
The Company has relied on various equity financings to fund its operations
in the past. The Company believes that its available cash resources, without the
proceeds from this offering, will be sufficient to meet its anticipated cash
needs for working capital and capital expenditures for the next 12 months.
2. CAPITAL REORGANIZATION AND REVERSE STOCK SPLIT
The common units and redeemable preferred units outstanding immediately
prior to the Capital Reorganization were converted into common stock and
redeemable preferred stock of the C corporation. Each common and preferred unit
converted into one share of common and preferred stock, respectively.
On March 21, 2000, the Company effected 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> 108
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> 109
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> 110
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> 111
ARTISTDIRECT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table is a reconciliation of the shares and net loss amounts
used in the pro forma net loss per share calculation:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1999
------------
<S> <C>
Actual shares at beginning of the period.................... 16,568,192
Pro forma weighted average shares issued during the
period.................................................... 2,934,245
-----------
Pro forma basic and diluted weighted average shares at the
end of the period......................................... 19,502,437
===========
</TABLE>
PRO FORMA REDEEMABLE STOCK AND STOCKHOLDERS' EQUITY
Effective upon the closing of this offering, the outstanding shares of
Series A, Series B and Series C Redeemable Preferred Stock will automatically
convert into approximately 3,207,815, 3,750,000 and 5,905,374 shares,
respectively, of common stock (after giving effect to the Reverse Stock Split).
The pro forma effects of these transactions have been reflected in the
accompanying Pro Forma Stockholders' Equity at December 31, 1999.
STOCK-BASED COMPENSATION
The Company accounts for stock-based employee compensation in accordance
with the provisions of Accounting Principles Board ("APB") Opinion No. 25, and
complies with the disclosure requirements of SFAS No. 123, "Accounting for
Stock-Based Compensation." Under APB No. 25, compensation expense is recorded
based on the difference, if any, between the fair value of the Company's stock
and the exercise price on the measurement date. The Company accounts for stock
issued to non-employees in accordance with SFAS No. 123, which requires entities
to recognize as expense over the service period the fair value of all
stock-based awards on the date of grant.
ESTIMATES
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities and the disclosures
of contingent assets and liabilities at the date of the financial statements and
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board issued SFAS No. 130, "Reporting
Comprehensive Income," in June 1997. SFAS No. 130 establishes standards for
reporting and presentation of comprehensive income and its components in a full
set of financial statements. Comprehensive income includes all changes in
members' equity (except those arising from transactions with members) and
includes net income and net unrealized gains (losses) on securities. There is no
impact on the Company's financial statements as a result of the implementation
of SFAS No. 130.
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position ("SOP") No. 98-1, "Software for Internal Use,"
which provides guidance on accounting for the cost of computer software
developed or obtained for internal use. SOP No. 98-1 is effective for financial
statements for fiscal years beginning after December 15, 1998. The adoption of
SOP 98-1 did not have a material impact on the financial statements.
In April, 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of
Start-Up Activities." The statement is effective for fiscal years beginning
after December 15, 1998. The statement requires costs of start-up activities and
organization costs to be expensed as incurred. The Company is required to adopt
F-11
<PAGE> 112
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> 113
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> 114
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> 115
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>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1999
---------------
(IN THOUSANDS)
<S> <C>
Revenues.................................................. $10,337
-------
Net loss.................................................. $58,975
-------
</TABLE>
F-15
<PAGE> 116
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> 117
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> 118
ARTISTDIRECT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Stock Split) upon the signing of the agreement. Additional warrants to purchase
common stock may be earned by the merchandiser based on the achievement of
various sales levels.
In November 1999, the Company entered into three year programming license
agreement with CHUMcity International. The Company is amortizing the license
cost over the contractual license period.
In December 1999, the Company entered into an eighteen month marketing
agreement with ABC News Internet Ventures. The agreement provides for the
exchange and distribution of content by both parties. As the values of the
content and services being provided by both parties is not readily determinable,
the content and services provided and received by the Company will be recorded
at their cost basis to the Company, which is zero.
In connection with the issuance of Series C Preferred shares, the Company
entered into strategic relationships with four record labels. Under the terms of
these agreements, the Company has the right to purchase certain content related
to each of the respective companies' artists on terms generally made available
to other online music companies. The cost associated with the acquisition of
such content will be expensed as it is acquired and broadcast online.
In December 1999, the Company entered into a two-year advertising and
promotion agreement with Yahoo! pursuant to which the Company will purchase
media placement on Yahoo! in return for certain promotional considerations. The
Company will record the expense related to the amounts paid to Yahoo! for
advertising and promotion services over the term of the agreement as services or
promotions are received. Also in connection with the agreement, the Company
issued Yahoo! warrants to purchase 339,254 shares of common stock (after giving
effect to the Reverse Stock Split). The exercise price for 169,627 of the
warrants is $13.93, and the exercise price for the remaining warrants shall be
the IPO price. The expense related to the warrants will also be amortized over
the term of the agreement.
13. REDEEMABLE SECURITIES
From July through December 1998, the Company issued redeemable preferred
units for proceeds of $4.9 million. These preferred units were converted into
12.8 million Series A ARTISTdirect, LLC redeemable preferred securities pursuant
to the Exchange Transaction, and were converted into 3,207,815 shares of Series
A Redeemable Preferred Stock (Series A Preferred) pursuant to the Capital
Reorganization and Reverse Stock Split. The Series A Preferred shares carry a
10% cumulative annual dividend, and may be converted into common shares at any
time by the holder. Upon conversion, the shareholders shall receive a cash
payment of 25% of the accrued unpaid dividends through the date of the Capital
Reorganization. The number of common shares into which the preferred shares may
be converted is calculated as the initial capital contribution divided by the
current conversion price. The current conversion price is $1.51 per preferred
share (after giving effect to the Capital Reorganization and Reverse Stock
Split). The conversion price shall be updated periodically based on the fair
value of the Company. All Series A Preferred shares shall be automatically
converted to common shares upon an initial public offering or the conversion of
95% of the shares initially issued. The shareholders have the right to redeem
the Series A Preferred shares upon a management vacancy by one of the founders
of the Company prior to July 28, 2003, or at any time after July 28, 2003. The
Series A Preferred shares have liquidation preference over all other classes of
shares except for the Series B Preferred shares. The liquidation preference and
redemption value of the Series A Preferred shares was approximately $5.0 million
as of December 31, 1998 and 1999.
F-18
<PAGE> 119
ARTISTDIRECT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
On February 17, 1999, the Company issued 170,443 redeemable common shares
(Redeemable Stock) (after giving effect to the Reverse Stock Split) for the
purchase of the remaining 80% of iMusic, Inc. The holder of the Redeemable Stock
shall have the right to redeem the Redeemable Stock upon the earlier of an
initial public offering or February 17, 2002. The redemption value shall be $2.8
million. Upon redemption, the Company is also required to pay a total of
$200,000 in bonuses to employees of iMusic, Inc. as designated by the holder.
The holder has communicated to the Company that he will not exercise the
redemption right and will retain the common shares. The Redeemable Stock was
initially recorded at its fair value which shall be accreted to the redemption
value through February 2002. The Redeemable Stock has liquidation preference
over the common shares. The accreted value, which is also the liquidation
preference and redemption value, of the Redeemable Stock was approximately $2.4
million as of December 31, 1999.
On May 18, 1999, the Company issued 3,750,000 Series B redeemable preferred
shares (Series B Preferred) (after giving effect to the Reverse Stock Split) for
proceeds of $15 million. The Series B Preferred shares have the same redemption
terms as the Series A Preferred shares, and have a current conversion price of
$4.00 per share. The Series B Preferred shares have liquidation preference over
all other classes of shares. The liquidation preference and redemption value of
the Series B Preferred shares was $15.4 million as of December 31, 1999.
In December 1999, the Company issued 5,905,374 Series C redeemable
preferred shares (Series C Preferred) (after giving effect to the Reverse Stock
Split) for proceeds of $82.2 million and in January 2000, the Company issued an
additional 1,094,917 Series C Preferred shares for proceeds of $15.2 million.
The total sum of $97.5 million was raised through the sale of shares to six
music and media companies which included Universal Music Group, BMG
Entertainment, Sony Music Entertainment, Time Warner Inc, an affiliate of
Cisneros Television Group and Yahoo! The Series C Preferred shares have the same
redemption terms as the Series A and Series B Preferred shares and have a
conversion price of $13.928 per share. The liquidation preference and redemption
value as of December 31, 1999 was $82.3 million.
Included in Redeemable Common Securities are amounts related to options and
securities subject to a potential rescission offer. The rescission offer will
include an offer to repurchase shares issued directly to certain individuals or
purchased pursuant to option exercises at the exercise price, plus interest at
an annual rate of 10% from the date of issuance. To comply with California
Securities law, the Company will also offer to repurchase all unexercised
options issued to such persons at 20% of the option exercise price multiplied by
the number of shares subject to such options, plus interest at an annual rate of
10% per year from the date of issuance. The amounts due under the potential
rescission offer aggregated $114,000 and $6.9 million as of December 31, 1998
and 1999, respectively, including interest. Under the terms of the rescission
offer, the Company could be required to repurchase all underlying shares and
options that may be exercisable within 180 days of the date of the prospectus
for the initial public offering. The potential rescission offer based on the
repurchase of all shares underlying options outstanding as of December 31, 1999
that may be exercisable within 180 days of the date of the prospectus for the
initial public offering is approximately $17.5 million plus interest. The
potential rescission offer based on the repurchase of all shares underlying
options outstanding as of December 31, 1999 is approximately $27.0 million plus
interest.
F-19
<PAGE> 120
ARTISTDIRECT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. MEMBERS' EQUITY
MEMBER DISTRIBUTIONS
The Company made distributions to members of $24,000, $249,000 and $741,000
in 1997, 1998 and 1999, respectively.
COMMON UNIT INTERESTS
During 1998, the Company issued common units to certain executive employees
and its outside legal counsel in connection with services rendered and to be
rendered. In January 1998, Keith Yokomoto and L&G Associates One, an affiliate
of Lenard & Gonzalez LLP, one of the Company's outside legal counsel, received
interests of 10.1% and 3.03%, respectively. In June 1998, Steve Rennie and
Robert Morse received interests of 4.04% and 1.01%, respectively. The units
provide for the holder to share in the profits and losses of the entity
consistent with the rights and limitations of the other equity holders. The
units represent a common unit but limit the holder to share in the capital of
the Company only to the extent of increases in the fair value of the Company
subsequent to the issuance of the units. The value of the common units at the
time of their issuance, which represents existing capital, will remain the
property of the founders. The common units issued to employees under these
agreements have been accounted for as stock appreciation rights. The common
units issued to outside legal counsel were valued at estimated fair value as
determined by the Company. Accordingly the value of these rights are adjusted
upon changes in the fair value of the Company. The Company has estimated the
fair value of the Company for the periods presented based primarily on third
party equity financing. The Company has recorded compensation expense of $3.8
million and $16.3 million for the years ended December 31, 1998 and 1999,
respectively, related to the employee and legal counsel common units. There is
no provision for the Company to settle common units in cash or by issuance of
additional equity securities.
WARRANTS
In May and June 1999, the Company issued 359,676 warrants to purchase
common stock (after giving effect to the Reverse Stock Split) to two vendors
from whom it purchases merchandise ("merchandisers"). The value of the warrants
is $864,000, of which $168,000 has been recognized as expense for the year ended
December 31, 1999. The value of the warrants has been recorded as unearned
compensation in the statement of changes in members' and stockholders' equity,
and will be amortized as cost of revenues over the term of the related
merchandising agreements. Additionally, the merchandisers may earn up to 545,464
of additional warrants based on certain performance levels as specified in the
merchandising agreements.
In December 1999, the Company issued 339,254 warrants to purchase common
stock in connection with an advertising and promotion agreement. The value of
the warrants is $2.0 million, of which $19,000 has been recorded as expense for
the year ended December 31, 1999. The value of the warrants will be amortized
over the term of the related agreement.
PREFERRED DIVIDENDS
On May 18, 1999, the Company paid to the Series A redeemable preferred
securities holders the accrued dividends to that date of $355,000 in the form of
88,632 common shares (after giving effect to the Reverse Stock Split), as well
as a cash payment of $85,000.
F-20
<PAGE> 121
ARTISTDIRECT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
On October 6, 1999, the Company paid to the Series A and B redeemable
preferred stockholders the accrued dividends to that date of $767,000 in the
form of 213,002 shares of common stock (after giving effect to the Reverse Stock
Split), as well as a cash payment of $191,000.
PURCHASE OF SHARES BY OFFICER
In September 1999, the Company's Chief Financial Officer purchased 111,111
shares of common securities from certain officer stockholders at a purchase
price of $3.60 per share. The difference between the purchase price and the fair
value of the securities as of the date of the transaction has been reflected as
stock-based compensation. The amount of stock-based compensation aggregated
$875,000. The Company determined the fair value of the securities based on the
continued growth of the Company's operations and recent equity transactions with
third parties.
15. OPTIONS
In July 1998, the Company implemented the 1998 Unit Option Plan (which was
subsequently amended and replaced by the 1999 Employee Stock Option Plan), which
reserved 5,250,000 shares (after giving effect to the Reverse Stock Split) of
our common stock for issuance to employees, non-employee members of our board of
directors and consultants. This share reserve will automatically increase on the
first trading day in January each calendar year, beginning 2001, by an amount
equal to two percent (2%) of the total number of shares of our common stock
outstanding on the last trading day of December in the prior calendar year, but
in no event will this annual increase exceed 875,000 shares. No option may have
a term in excess of 10 years. The options issued during 1998 and 1999 vest
within three years. As of December 31, 1999, 1,445,470 shares remained available
for future option grant.
The Company accounts for its employee stock option plan in accordance with
the provisions of Accounting Principles Board (APB) Opinion No. 25, "Accounting
for Stock Issued to Employees," and related interpretations. As such,
compensation expense would be recorded on the date of grant only if the current
market price of the underlying stock exceeded the exercise price.
Summary stock option activity for 1999 Stock Option Plan during the years
ended December 31, 1998 and 1999 is as follows (after giving effect to the
Reverse Stock Split):
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
----------------------------
WEIGHTED
AVERAGE
NUMBER OF EXERCISE
SHARES PRICE
--------- ----------------
<S> <C> <C>
Outstanding options at December 31, 1997........ -- $ --
Granted....................................... 356,718 1.52
Exercised..................................... -- --
Canceled...................................... -- --
--------- -----
Outstanding options at December 31, 1998........ 356,718 1.52
Granted....................................... 3,449,062 3.60
Exercised..................................... (58,750) 3.40
Canceled...................................... (1,250) 3.60
--------- -----
Outstanding options at December 31, 1999........ 3,745,780 $3.41
========= =====
</TABLE>
F-21
<PAGE> 122
ARTISTDIRECT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
During the year ended December 31, 1999 the Company issued 7,500 options to
consultants, resulting in a weighted average fair value per option of $10.21,
and a total value of $77,000. The Company recorded this amount as stock based
compensation for the year ended December 31, 1999.
If the Company had elected to recognize compensation cost based on the fair
value at the date of grant, consistent with the method as prescribed by SFAS No.
123, net loss for the years ended December 31, 1998 and 1999 would have changed
to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1998 1999
------------ -------------
(IN THOUSANDS)
<S> <C> <C>
Net loss:
As reported................................ $6,318 $57,804
Pro forma.................................. 6,334 $58,254
====== =======
</TABLE>
The fair value of options granted during 1998 and 1999 was determined using
a minimum value pricing model with the following assumptions: risk-free interest
rate of 6.0% and an expected life of five years. The weighted average fair
values of the options on the date of grant were $.32 per share and $5.56 per
share for the options granted in 1998 and 1999, respectively.
The following table summarizes information regarding options outstanding
and options exerciseable at December 31, 1999 (after giving effect to the
Reverse Stock Split):
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------- -----------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICE OF SHARES LIFE PRICE OF SHARES PRICE
- ----------- --------- ----------- -------- ------------ --------
<C> <C> <S> <C> <C> <C>
$ 1.24 256,746 8.60 years $1.24 158,497 $1.24
2.30 94,972 8.60 2.32 58,534 2.32
3.60 3,394,062 9.62 3.60 204,683 3.60
- ----------- --------- ---------- ----- --------- -----
$1.24-$3.60 3,745,780 9.52 years $3.41 421,713 $2.54
=========== ========= ========== ===== ========= =====
</TABLE>
In June 1999 and as amended in October 1999, the Company adopted the 1999
Artist and Artist Advisor Stock Option Plan (the Advisor Plan). The Plan has
reserved 1,250,000 shares (after giving effect to the Reverse Stock Split) of
common stock for issuance to artists for whom the Company maintains
ARTISTchannels and their agents, business managers, attorneys and other
advisors. This share reserve will automatically increase on the first trading
day in January each calendar year, beginning 2001, by an amount equal to one
percent (1%) of the total number of shares of our common stock outstanding on
the last trading day of December in the prior calendar year, but in no event
will this annual increase exceed 375,000 shares. As of December 31, 1999,
251,375 shares remained available for future option grants. The options expire
seven years from the date of grant. Vesting generally varies between one to
three years, as specifically stated in each advisor's option agreement.
F-22
<PAGE> 123
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> 124
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> 125
ARTISTDIRECT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
EMPLOYMENT CONTRACTS
Future payments under employment contracts entered into through December
31, 1999 are as follows for the years ended December 31:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
2000.............................................. $2,396
2001.............................................. 1,334
2002.............................................. 25
------
Total........................................... $3,755
======
</TABLE>
LITIGATION
The Company is subject to various pending and threatened legal actions,
which arise in the normal course of business. The Company's management believes
that the impact of such litigation will not have a material adverse impact on
its financial position or results of operations.
17. REPORTABLE SEGMENTS
The Company provides integrated music entertainment products and services
through three reportable segments. The three reportable segments are
music-related Web site operations ("ARTISTdirect Network"), musical artist
booking operations ("Talent Agency") and record label operations ("Record
Label"). ARTISTdirect Network generates revenue primarily from the sale of
recorded music and music-related merchandise and from the sale of advertising on
our Web sites. The Talent Agency generates revenue from commissions based on the
income received by agency clients for live performances. The Record Label
generates revenue from advances under an agreement with RCA and from royalties
on sales of recorded music. The factors for determining reportable segments were
based on service and products. Each segment is responsible for executing a
unique marketing and business strategy. The accounting policies of the segments
are the same as those described in the summary of significant accounting
policies. The Company evaluates performance based on profit or loss from
operations before income taxes. The following table summarizes the revenue,
operating income and depreciation and amortization by segment for the years
ended December 31, 1997, 1998 and 1999.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1997 1998 1999
------ ------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Net Revenue:
ARTISTdirect Network............................ $ 364 $ 2,100 $ 8,192
Talent Agency................................... 974 1,917 1,304
Record Label.................................... 550 565 778
------ ------- --------
1,888 4,582 10,274
Income (Loss) from Operations:
ARTISTdirect Network............................ (740) (5,256) (57,900)
Talent Agency................................... 197 (629) 22
Record Label.................................... 86 (464) (257)
------ ------- --------
(457) (6,349) (58,135)
------ ------- --------
Interest income (expense), net.................... (3) 29 281
Income from equity investment..................... -- 2 50
------ ------- --------
Net Loss.......................................... $ (460) $(6,318) $(57,804)
====== ======= ========
</TABLE>
F-25
<PAGE> 126
ARTISTDIRECT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1997 1998 1999
------ ------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Depreciation and amortization:
ARTISTdirect Network............................ $ 4 $ 38 $ 2,504
Talent Agency................................... 11 18 5
Record Label.................................... 6 3 --
------ ------- --------
$ 21 $ 59 $ 2,509
====== ======= ========
</TABLE>
The following tables summarize the capital expenditures for the years ended
December 31, 1997, 1998, and 1999 and assets as of December 31, 1998 and 1999.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1997 1998 1999
----- ------ -------
(IN THOUSANDS)
<S> <C> <C> <C>
Capital expenditures:
ARTISTdirect Network............................... $ 23 $ 123 $ 3,498
Talent Agency...................................... 57 15 9
Record Label....................................... 21 3 6
----- ------ -------
$ 101 $ 141 $ 3,513
===== ====== =======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1998 1999
------ -------
<S> <C> <C>
Assets:
Corporate................................................ $ 403 $78,406
ARTISTdirect Network..................................... 2,932 17,571
Talent Agency............................................ 68 2,547
Record Label............................................. 9 76
------ -------
$3,412 $98,600
====== =======
</TABLE>
Assets by segment are those assets used in the Company operations in each
segment. Corporate assets are principally made up of cash and cash equivalents,
prepaid expenses, computer equipment and other assets.
18. SUBSEQUENT EVENTS
In January 2000, the Company signed a definitive merger agreement with
Mjuice.com, Inc., a company involved in the development and distribution of the
secure digital distribution of MP3-formatted music. The Company plans to issue
up to $15.0 million of its shares in exchange for all of the outstanding equity
of Mjuice.com, Inc. The acquisition is to be accounted for as a purchase, with
substantially all of the purchase price being attributed to goodwill that will
be amortized over a five-year period. The acquisition is expected to close
shortly following the Company's initial public offering.
In March 2000, Marc Geiger, Donald Muller and Rick Rubin agreed to enter
into a series of transactions which will effectively transfer to Keith Yokomoto,
Steve Rennie and L&G Associates One the economic benefit ("Appreciation Rights")
of the difference between the closing price on the third day of trading after
the initial public offering and $13.93 per share, for the number of shares as
specified in the terms of the related agreement. Such increase in value shall be
transferred in the form of shares of common stock of the Company. Additionally,
the Company will issue to these parties options to purchase
F-26
<PAGE> 127
ARTISTDIRECT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
common stock at an exercise price equal to the closing price on the third day of
trading after the initial public offering. The Company will record as expense
the appreciation in the price per share of the common stock over $13.93 for
Messrs. Yokomoto and Rennie. As the options granted to Messrs. Yokomoto and
Rennie will have an exercise price equal to the fair value on the date of grant,
the Company will not record compensation for the options granted to these
individuals. The Company will record as expense the fair value of the
appreciation rights and stock options granted to L&G Associates One as
determined on the respective grant dates.
F-27
<PAGE> 128
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> 129
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> 130
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> 131
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> 132
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> 133
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> 134
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> 135
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> 136
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> 137
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> 138
[ARTISTDIRECT LOGO]
<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 the Company and
ARTISTdirect LLC, predecessor to the Company, since August 1996, involving sales
of the Company's securities that were not registered under the Securities Act.
All of the numbers reflect the 35-for-1 forward unit split that occurred in May
1999 with respect to common and preferred securities of ARTISTdirect, LLC, but
do not reflect the one-for-four reverse stock split of ARTISTdirect, Inc. that
will occur prior to the closing of this offering.
(a) In September 1996, ARTISTdirect, LLC issued 17,461,365 common
securities to two of the three founders of the Company, Marc Geiger and
Don Muller, in connection with services rendered and to be rendered.
(b) In January 1998, ARTISTdirect, LLC issued 4,014,107 common securities
to the other founder of the Company, Keith Yokomoto, and 1,204,232
common securities to L&G Associates One, in connection with services
rendered and to be rendered. L&G Associates One is affiliated with
Allen Lenard, one of the Company's directors.
(c) In June 1998, ARTISTdirect, LLC issued 1,605,643 common securities to
Steve Rennie and 401,411 common securities to Robert Morse in
connection with services rendered and to be rendered. Mr. Rennie is an
executive officer of the Company.
(d) Throughout 1998, ARTISTdirect, LLC periodically issued additional
common securities, for no additional consideration, to Messrs.
Yokomoto, Rennie and Morse and L&G Associates One. In connection with
each of these issuances, Messrs. Geiger and Muller contributed the same
number of common securities to ARTISTdirect, LLC, for no consideration.
(e) In July 1998, we issued 200,705 shares of common securities to each of
Messrs. Geiger and Muller in exchange for their interests in
ARTISTdirect Holdings, L.L.C.
(f) Between July 1998 and December 1998, ARTISTdirect, LLC issued a total
of 9,458,340 Series A preferred securities for an aggregate purchase
price of $2,910,000 to several outside investors, including affiliates
of Constellation Venture Capital, L.P., Chase Capital Partners, Psilos
Group Partners, DreamMedia Internet Ventures and Carl Kawabe.
II-2
<PAGE> 141
(g) In May 1999, ARTISTdirect, LLC issued a total of 13,982,207 common
securities and 3,372,920 Series A preferred securities to the members
of UBL, LLC in exchange for the 8,042,134 common securities and
1,940,000 preferred securities of UBL held by such members.
(h) In May 1999, ARTISTdirect, LLC issued a total of 15,000,000 Series B
preferred securities for an aggregate purchase price of $15,000,000 to
several outside investors, including affiliates of Constellation
Venture Capital, L.P. Psilos Group Partners, L.P., Chase Venture
Capital Associates, L.P., Flatiron Fund 1998/99, LLC, Spinnaker
Technology Fund, LP, and Toronto Dominion Investments, Inc. In
connection with this transaction, holders of ARTISTdirect, LLC's Series
A preferred securities received an aggregate of 354,526 common
securities of ARTISTdirect, LLC and $96,000 in exchange for accrued and
unpaid preferred returns on their Series A preferred securities.
(i) In June 1999, ARTISTdirect, LLC issued Winterland Concessions a warrant
to purchase 342,640 shares of our common stock at a price of $4.00 per
share. ARTISTdirect, LLC also issued Giant Merchandising warrants to
purchase a total of 562,500 shares of our common stock at a price of
$4.00 per share.
(j) In December 1999 and January 2000, we issued a total of 7,000,291
shares of Series C preferred stock for an aggregate purchase price of
$97.5 million to several outside investors, including affiliates of
Universal Music Group, Inc., Cisneros Television Group, Sony Music, BMG
Music, Time Warner Inc., Maverick Recording Company and Yahoo!.
(k) In December 1999, we issued Yahoo! a warrant to purchase an aggregate
of 339,254 shares of common stock at an exercise price of $13.928 per
share with respect to half of the shares and an exercise price of
$11.00 per share with respect to the remaining half of the shares.
(l) In March 2000, we issued 5670 Wilshire, L.P. a warrant to purchase
62,500 shares of our common stock at a price of $13.92 per share.
None of the foregoing transactions involved any public offering, and the
Company believes that at the time of each transaction, the transaction was
exempt from the registration requirements of the Securities Act by virtue of
Section 4(2) thereof. The recipients in each such transaction represented their
intention to acquire the securities for investment only and not with a view to
or for sale in connection with any distribution thereof, and appropriate legends
were affixed to the share certificates and instruments, as applicable, issued in
such transactions. All recipients had adequate access, through their
relationships with the Company, to information about the Company.
From August 1, 1998 to December 31, 1999, we granted options to purchase an
aggregate of 7,317,216 shares of common stock to our directors, executive
officers, employees, artists and consultants at a weighted average exercise
price of $3.67. As of December 31, 1999, options to purchase 261,746 shares at
an exercise price of $1.24 per share, 89,972 shares at an exercise price of
$2.32 per share, 3,560,937 shares at an exercise price of $3.60 per share and
2,977,895 shares at an exercise price of $4.00 per share were outstanding. At
the time these options were issued under the Company's various stock option
plans, the Company believed that each of the issuances were exempt from the
registration requirements of the Securities Act either by virtue of (i) the
exemption provided by Rule 701 for securities offered under compensatory benefit
plans and contracts or (ii) a "no-sale" theory under Section 5 of the Securities
Act of 1933, since none of the optionees provided any consideration for the
grants (the sale of the underlying option shares occurs only when the option is
exercised and the purchase price for the shares is paid to the Company).
Rule 701 was amended in April 1999 to revise, among other things, the
category of persons who will qualify as consultants for purposes of securities
issued pursuant to such rule. As a result, the Company believes that a number of
artists and other non-employees who were granted options under the Company's
plans may no longer qualify as consultants under amended Rule 701 and that the
Rule 701 exemption may no longer be available for the options granted to those
individuals. In addition, the
II-3
<PAGE> 142
Company believes that the aggregate dollar amount of the offering represented by
the options granted under the Company's stock option plans may have exceeded the
applicable limits set forth in Rule 701. Because the Company does not wish to
rely solely on a "no-sale" theory for these option grants, the Company intends
to make a rescission offer with respect to the unexercised options and shares of
its common stock issued pursuant to the exercise of options. The details of this
rescissions offer are summarized on page 87 of the prospectus contained in this
registration statement.
As set forth on page 87 of the prospectus contained in this registration
statement, the Company intends to make a rescission offer with respect to
certain shares of its common stock issued pursuant to option exercises.
In February 2000, we agreed to acquire Mjuice.com, Inc. for $15.0 million
of our stock. We intend to rely on Section 3(a)(10) of the Securities Act for an
exemption from the registration requirements of the Security Act when these
securities are issued.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) EXHIBITS
The following Exhibits are attached hereto and incorporated herein by
reference.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
-------- -----------
<S> <C>
1.1** Form of Underwriting Agreement.
3.1** Amended and Restated Certificate of Incorporation of the
Registrant.
3.2** Amended and Restated Bylaws of the Registrant.
4.1** See Exhibits 3.1 and 3.2 for provisions of the Registrant's
Certificate of Incorporation and Bylaws determining the
rights of holders of the Registrant's common stock. See
Exhibit 10.8 for the rights of holders of registration
rights.
4.2 Specimen common stock certificate.
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.
</TABLE>
II-4
<PAGE> 143
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
-------- -----------
<S> <C>
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.
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.
</TABLE>
II-5
<PAGE> 144
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
-------- -----------
<S> <C>
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.
10.44 Yahoo! Remote Merchant Integration (RMI) Program Agreement
dated as of December 24, 1999 between the Company and Yahoo!
Inc.
10.45** Form of Series C Preferred Stock Purchase Agreement.
10.46** Warrant dated December 24, 1999, issued to Yahoo!
10.47** 5670 Wilshire Boulevard Office Lease, as amended
21.1** Subsidiaries of ARTISTdirect, Inc.
23.1** Consent of Brobeck, Phleger & Harrison LLP (included in
Exhibit 5.1).
23.2 Consent of KPMG LLP with respect to ARTISTdirect, LLC and
subsidiaries.
23.3** Consent of KPMG LLP with respect to iMusic, Inc.
24.1** Powers of Attorney.
27.1** Financial Data Schedule.
</TABLE>
- -------------------------
** Previously filed by the Registrant with the Commission.
+ Confidential treatment is requested for certain confidential portions of this
exhibit pursuant to Rule 406 under the Securities Act. In accordance with Rule
406, these confidential portions will be omitted from this exhibit and filed
separately with the Commission.
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
II-6
<PAGE> 145
(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-7
<PAGE> 146
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Amendment No. 6 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 27th day of March 2000.
ARTISTDIRECT, INC.
By: /s/ MARC P. GEIGER
------------------------------------
Marc P. Geiger
Chief Executive Officer and
Chairman of the Board
Pursuant to the requirements of the Securities Act, this Amendment No. 6 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 27, 2000
- ----------------------------------------------------- Chairman of the Board
Marc P. Geiger (Principal Executive Officer)
DONALD P. MULLER * President, ARTISTdirect March 27, 2000
- ----------------------------------------------------- Agency and Kneeling Elephant
Donald P. Muller Records and Director
KEITH YOKOMOTO * Chief Operating Officer, March 27, 2000
- ----------------------------------------------------- President and Director
Keith Yokomoto
/s/ JAMES B. CARROLL Executive Vice President and March 27, 2000
- ----------------------------------------------------- Chief Financial Officer
James B. Carroll (Principal Financial and
Accounting Officer)
ALLEN D. LENARD * Director March 27, 2000
- -----------------------------------------------------
Allen D. Lenard
CLIFFORD H. FRIEDMAN * Director March 27, 2000
- -----------------------------------------------------
Clifford H. Friedman
</TABLE>
II-8
<PAGE> 147
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
STEPHEN KRUPA * Director March 27, 2000
- -----------------------------------------------------
Stephen Krupa
RICK RUBIN * Director March 27, 2000
- -----------------------------------------------------
Rick Rubin
CARLOS E. CISNEROS * Director March 27, 2000
- -----------------------------------------------------
Carlos E. Cisneros
DARA KHOSROWSHAHI * Director March 27, 2000
- -----------------------------------------------------
Dara Khosrowshahi
* Power of attorney
By: /s/ JAMES B. CARROLL
- -----------------------------------------------------
James B. Carroll
Attorney-in-Fact
</TABLE>
II-9
<PAGE> 148
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...............
4.1** See Exhibits 3.1 and 3.2 for provisions of the Registrant's
Certificate of Incorporation and Bylaws determining the
rights of holders of the Registrant's common stock. See
Exhibit 10.8 for the rights of holders of the Registrant's
common stock. See Exhibit 10.8 for the rights of holders of
registration rights.........................................
4.2 Specimen common stock certificate...........................
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.........................................................
</TABLE>
<PAGE> 149
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
-------- ----------- ------------
<S> <C> <C>
10.15** Issuance, Noncompetition and Nonsolicitation Agreement,
dated as of June 30, 1998, between the Registrant and Steve
Rennie......................................................
10.16** Deferred Compensation Agreement, dated as of July 1, 1998
between Keith Yokomoto and the Registrant dated July 1,
1998........................................................
10.17** Employment Agreement, dated as of January 1, 1998, between
Keith Yokomoto and the Registrant...........................
10.18** Employment Agreement, dated as of April 1, 1998, between
Steve Rennie and the UBL....................................
10.19** Employment Agreement, dated as of July 28, 1998, between
Marc Geiger and the Registrant..............................
10.20** Employment Agreement, dated as of July 28, 1998, between Don
Muller and the Registrant...................................
10.21** 1999 Employee Stock Purchase Plan...........................
10.22** 1999 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...........................
</TABLE>
<PAGE> 150
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
-------- ----------- ------------
<S> <C> <C>
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.....................
10.44 Yahoo! Remote Merchant Integration (RMI) Program Agreement
dated as of December 24, 1999 between the Company and Yahoo!
Inc.........................................................
10.45** Form of Series C Preferred Stock Purchase Agreement.........
10.46** Warrant dated December 24, 1999, issued to Yahoo!...........
10.47** 5670 Wilshire Boulevard Office Lease, as amended............
21.1** Subsidiaries of ARTISTdirect, Inc...........................
23.1** Consent of Brobeck, Phleger & Harrison LLP (included in
Exhibit 5.1)................................................
23.2 Consent of KPMG LLP with respect to ARTISTdirect, LLC and
subsidiaries................................................
23.3** Consent of KPMG LLP with respect to iMusic, Inc.............
24.1** Powers of Attorney..........................................
27.1** Financial Data Schedule.....................................
</TABLE>
- -------------------------
** Previously filed by the Registrant with the Commission.
+ Confidential treatment is requested for certain confidential portions of this
exhibit pursuant to Rule 406 under the Securities Act. In accordance with
Rule 406, these confidential portions will be omitted from this exhibit and
filed separately with the Commission.
<PAGE> 1
EXHIBIT 4.2
COMMON STOCK [ARTISTdirect LOGO] ARTISTdirect COMMON STOCK
AD
INCORPORATED UNDER THE LAWS OF SEE REVERSE FOR CERTAIN DEFINITIONS
THE STATE OF DELAWARE
This Certifies that
is the record holder of
FULLY PAID AND NON-ASSESSABLE SHARES OF COMMON STOCK, $.01 PAR VALUE, OF
ARTISTdirect, Inc.
transferable on the books of the Corporation by the holder hereof in person or
by duly authorized attorney upon surrender of this Certificate properly
endorsed. This certificate is not valid until countersigned and registered by
the Transfer Agent and Registrar.
IN WITNESS WHEREOF the Corporation has caused this certificate to be signed in
facsimile by its duly authorized officers and a facsimile of its corporate seal.
Dated:
/s/ James B. Carroll /s/ Marc P. Geiger
SECRETARY CHAIRMAN
COUNTERSIGNED AND REGISTERED:
CHASEMELLON SHAREHOLDER SERVICES, L.L.C.
TRANSFER AGENT AND REGISTRAR
AUTHORIZED SIGNATURE
<PAGE> 2
The Corporation will furnish without charge to each stockholder who so requests
the powers, designations, preferences and relative, participating, optional, or
other special rights of each class of stock or series thereof and the
qualifications, limitations or restrictions of such preferences and/or rights.
Such requests shall be made to the Corporation's Secretary at the principal
office of the Corporation.
KEEP THIS CERTIFICATE IN A SAFE PLACE. IF IT IS LOST, STOLEN, OR DESTROYED THE
CORPORATION WILL REQUIRE A BOND OF INDEMNITY AS A CONDITION TO THE ISSUANCE OF A
REPLACEMENT CERTIFICATE.
The following abbreviations, when used in the inscription on the face of this
certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM -- as tenants in common TEN ENT -- as tenants by the entireties
JT TEN -- as joint tenants with right of
of survivorship and not as tenants
in common
UNIF GIFT MIN ACT --..........................Custodian
(Cust)
.............................
(Minor)
under Uniform Gifts to Minors
Act........................
(State)
UNIF TRF MIN ACT --.....................Custodian (until age.........)
(Cust)
.............................under Uniform Transfers
(Minor)
to Minors Act.......................................
(State)
Additional abbreviations may also be used though not in the above list.
FOR VALUE RECEIVED,.......................hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
Shares
of the common stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
Attorney
to transfer the said stock on the books of the within named Corporation with
full power of substitution in the premises.
Dated..............................
X............................................
X............................................
NOTICE: THE SIGNATURE(S) TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME(S) AS
WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR, WITHOUT
ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER.
Signature(s) Guaranteed
By..........................................
THE SIGNATURE(S) MUST BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION (BANKS,
STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH MEMBERSHIP IN
AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM), PURSUANT TO S.E.C. RULE
17Ad-15.
2
<PAGE> 1
REDACTED
EXHIBIT 10.1
The following shall constitute the agreement, between THE RCA RECORDS
LABEL, a unit of BMG ENTERTAINMENT ("RCA") and ARTIST DIRECT LLC ("AD"), dated
as of November 15, 1996, with respect to creation of a record label ("Label") to
be managed by AD and funded by RCA as set forth below. The parties hereto agree
to negotiate reasonably, in good faith a more formal agreement consistent with
the terms of this Agreement (the "Formal Agreement"), provided that until the
Formal Agreement is fully executed, this Agreement shall be deemed binding and
fully effective and shall constitute the entire agreement between the parties.
RCA's good faith reasonableness in negotiating the Formal Agreement shall be
judged by reference to RCA's customary business practices relating to comparable
deals.
I. PURPOSE:
A. The Label will identify, secure, and develop recording artists
("Artists").
B. Initially, AD's participation in the proceeds from the
exploitation of master recordings by the Artists will be on a
royalty basis as set forth in paragraph V below (the "Label
Deal"). However, if the provisions of paragraph III.C are
applicable, AD's participation in the proceeds from the
exploitation of master recordings by the Artists shall be
converted into a profit participation (the "Profit Deal").
C. In either event, the Artists' records will be released under the
AD label throughout the world. In the United States, the
Artists' records will be distributed through BMG Distribution,
it being understood and agreed that RCA will not release the
Artists' records in the United States through "independent"
distribution channels without AD's consent. The release of
records through "independent" distribution channels outside of
the United States shall be governed by subparagraph VI.B.2
below.
D. An affiliate of AD ("NT Affiliate") will have the right to
purchase Artist's records from BMG pursuant to its standard
"price card" to customers in the United States. RCA represents
and warrants that the "price card" attached hereto as Exhibit
"A" is in effect as of the date hereof. The NT Affiliate shall
have the benefit of all appropriate discounts on a
product-by-product basis offered by BMG to any of its customers
[for example, discounts based on the purchase of catalog albums
(i.e., records which have been released for more than one (1)
year and are not currently on the sales charts, and discounts to
induce the sale of records by new artists. At such times during
the term of this Agreement that BMG changes its "price cards" to
its regular customers in the United States, the prices set forth
in said Exhibit "A" shall be automatically increased or
decreased accordingly. Subject to paragraph I.E.3 hereof, the NT
Affiliate shall have the right to sell such records through
non-traditional developing distribution channels throughout the
world (e.g., sales over the Internet and other similar networks
and sales at tour locations) (collectively, "Non-Traditional
Channels").
1
<PAGE> 2
E. RCA acknowledges that the NT Affiliate will also be in the
business of entering into agreements with recording artists
specifically for the purpose of distributing product through
Non-Traditional Channels ("NT Product"). In this regard, RCA
recognizes that it is the intention of the NT Affiliate that
these agreements will pay the artist small or no advances and a
substantial share of profits and possibly give the artist
reversion rights in the NT Product.
1. If the NT Affiliate acquires the right to distribute the
NT Product through traditional channels of distribution,
it shall first offer such rights to RCA in writing. If,
within fifteen (15) business days after RCA's receipt of
such offer, RCA does not make a written offer to the NT
Affiliate for such rights, then the NT Affiliate shall
have the right to license to any third party such
rights. Alternatively, if RCA makes an offer to the NT
Affiliate as aforesaid, but the parties are unable to
consummate a deal, then the NT Affiliate shall have the
right to license to any third party such rights,
provided the economic terms offered by such third party
for comparable rights are no less favorable to AD than
the economic terms last offered by AD to RCA. If the
economic terms of the third party's offer for comparable
rights are less favorable to AD than the economic terms
contained in AD's last offer to RCA with respect to such
rights, then the NT Affiliate shall notify RCA of such
terms, and RCA shall have the right to match the third
party's offer within ten (10) business days after such
notice.
2. If the NT Affiliate at any time during the Term (as
defined below) desires to enter into an agreement
("Financing Agreement") with a "strategic partner" or
other person or entity to acquire financing for the NT
Affiliate, the NT Affiliate shall first negotiate with
RCA. If the parties are unable to consummate a Financing
Agreement within thirty (30) days, then the NT Affiliate
will have the right to enter into a Financing Agreement
with a third party. RCA will have the right to match the
terms of that agreement if they are equal to or less
favorable to the NT Affiliate than the terms of AD's
last offer. Notwithstanding the foregoing, if the
distribution of audio-only records through
Non-Traditional Channels at the time is a meaningful
alternative to distribution through traditional
distribution channels, RCA shall have the right to match
any third-party offer.
3. Prior to entering into any agreement with any other
manufacturer or distributor, the NT Affiliate shall
negotiate in good faith with BMG, an agreement for BMG
to manufacture and/or fulfill orders for finished goods
of the NT Product for Non-Traditional Distribution in
audio-only configurations ("Fulfillment Agreement").
(The parties understand and agree that such finished
goods may include product by recording artists in
addition to the Artists signed to the Label.) If the
parties are unable to consummate a Fulfillment Agreement
within thirty (30) days, then the NT Affiliate will have
the right to enter into a Fulfillment Agreement with a
third party. BMG will have the right to match the terms
of that agreement if they are equal to or less favorable
to the NT Affiliate than the terms of AD's last offer.
If AD enters into a Fulfillment Agreement with a third
party, RCA's rights under this paragraph I.E.3. shall be
reinstated upon the expiration of such agreement.
II. TERRITORY: The world.
III. TERM AND PROFIT SHARING CONVERSION:
A. Subject to paragraph III.C below, the term of the Agreement will
be three (3) years commencing upon January 1, 1997. However, if
as set forth in paragraph III.C below, the Label Deal is
converted to the Profit Deal (the "Conversion"), then the term
of Profit Deal shall be equal to six (6) years minus the term of
the Label Deal. All references herein to the "Term" shall mean
the term of the Label Deal and, if applicable, the term of the
Profit Deal.
B. Subject to paragraph III.C below, RCA will have the option to
terminate the Term as of the end of the third year of the Term
("Early Termination Right"). In which event:
1. If the Label has had (i) less than $20,000,000 in net
billings during the term of the Label Deal, or (ii) less
than $5,000,000 in net billings in the 3rd year of the
Label Deal, the assets of the Label will not be divided
between RCA and AD.
2. If the Label has had (i) more than $25,000,000 in net
billings during the Label Term, and (ii) more than
$8,000,000 in net billings during the 3rd year of the
term of the Label Deal, the assets of the Label will be
divided between RCA and AD, with AD having the first
pick of the Artists.
3. If the terms of paragraph III.B.1 and III.B.2 are not
applicable, the assets of the Label will be divided
between RCA and AD, with RCA having the first pick of
the Artists.
2
<PAGE> 3
4. The party who has the first pick can elect to transfer
such first pick to other party. The party who has the
second pick pursuant to either paragraphs III.B.2 or
III.B.3 above will pick the next 2 Artists; thereafter,
the parties will alternate by picking 1 Artist until all
of the Artists have been divided.
5. Rights and Royalty Overrides After the Exercise of the
Early Termination Right:
(a) RCA shall retain the ownership to all product
("Pre-Conversion Product") released by RCA prior
to the date (the "Termination Date") of RCA's
exercise of the Early Termination Right.
(b) With respect to all Artists kept by RCA under
any of the above scenarios ("RCA Retained
Artists"), RCA shall have the unilateral right
to exercise all creative decisions thereafter,
subject to good faith consultation with Marc or
Don provided either of them are available. Prior
to the execution of the Formal Agreement, the
parties agree to negotiate in good faith a
procedure which would allow either party to
pick-up an Artist after the Label Term (without
a royalty override or other participation) if
the other party should decide thereafter not to
exercise an option under an Artist Agreement.
(c) RCA shall continue to advance the Artist
advances and recording funds with respect to
records to be recorded by the Artist after the
Termination Date.
(d) RCA will continue to account to AD on a royalty
basis (the "AD Royalty Participation") for all
records subject to an Artist Agreement in
perpetuity. With respect to product recorded by
a RCA Retained Artist prior to the Termination
Date and all product recorded by a RCA Retained
Artist as of the date a RCA Retained Artist
delivers under the applicable Artist Agreement
the second album recorded after the Termination
Date, the AD Royalty Participation shall be the
amount (the "Label Royalty Spread") by which the
royalty payable to AD pursuant to paragraph V
hereof exceeds the "all-in "royalties payable to
the applicable RCA Retained Artist (including
producer royalties) ("Artist Royalties"). With
respect to product recorded after the delivery
of such second album, the AD Royalty
Participation shall be the Label Royalty Spread
less 50% of any increases in the Artist
Royalties agreed to by RCA after the Termination
Date. Notwithstanding the foregoing, in no event
shall the Ad
3
<PAGE> 4
Royalty Participation be less than [***] of the
SRLP with respect to 100% (less free goods and
discounts) of top-line net sales of albums
through normal retail channels in the United
States ("USNRC Album Sales"). The AD Royalty
Participation shall be calculated, reduced and
paid in accordance with the terms of the Formal
Agreement with respect to USNRC Album Sales and
with respect to all other exploitations of the
applicable master recordings. The payment of the
AD Royalty Participation shall continue to be
subject to the recoupment provisions contained
in paragraph IV.G hereof.
(e) Notwithstanding RCA's exercise of the Early
Termination Right, AD will continue to own the
name of the Label; it being understood and
agreed, however, that all prior and future
product under an Artist Agreement shall be
released under the Label's name.
(f) With respect to each Artist that is picked by
AD, RCA shall be entitled to an override royalty
("RCA Override"). With respect to 100% (less
free goods and discounts) of USNRC Album Sales
sold by AD on a "p&d" and/or profit sharing
basis, the RCA Override shall be the lesser of
(i) [***] of the SRLP, or (ii) the amount by
which [***]* exceeds the royalty rate payable to
the Artist, the applicable record producers and
all other third party royalty participants. In
such event, the RCA Override with respect to
USNRC Album Sales and with respect to all other
exploitations of the applicable master
recordings shall be calculated, reduced and paid
in accordance with the applicable Artist
Agreement. With respect to sales of records
through a third party distribution agreement
where AD is paid a royalty and does not pay or
is charged with the manufacturing costs of the
records, the RCA Override shall be equal to
[***] of the difference between the royalty
rates payable to AD under such agreement and the
"all-in" royalties payable to the Artists,
producers and other third party royalty
participants. The RCA Override shall only be
payable to RCA with respect to master recordings
recorded by each Artist prior to the release of
the second newly-recorded album after the
exercise of the Early Termination Right
(including those master recordings contained on
such second album), but shall not be payable
with respect to product distributed by RCA or
any affiliate controlled by RCA. The RCA
Override shall be payable in respect of each
- --------
[***] Confidential treatment has been requested for the bracketed
portion. The confidential redacted portion has been omitted and filed separately
with the Securities and Exchange Commission.
4
<PAGE> 5
applicable LP prospectively after recoupment of
the recording costs and artist advances paid in
connection with the LP concerned. Such
recoupment will be calculated at a royalty rate
of [***] of the SRLP with respect to USNRC Album
Sales, whether AD is paid on a royalty basis or
a profit sharing (or "p&d") basis.
C. The Label Deal will automatically convert to a Profit Deal at
the end of the first 3 years, unless RCA exercises the Early
Termination Right. However, if prior to the end of the first 3
years, the aggregate net billings of the Label exceed either (i)
[***] in Qualified Sales, or (ii) [***] in Aggregate Sales, the
Label Deal will automatically convert to the Profit Deal at the
end of the first semi-annual accounting period during which such
sales are achieved ("Conversion Date"). For purposes of the
above calculation, as used herein:
1. the term "Qualified Sales" shall mean all net sales
other than (A) net billings over [***] from the
master recordings contained on any album by an Artist
signed to a exclusive term recording agreement, and (B)
aggregate net billings from the master recordings
contained on any one-off albums (e.g., soundtrack
albums, albums developed by the NT Affiliate, etc.) in
excess of [***];
2. the term "Aggregate Sales" shall mean all net billings
other than aggregate net billings from the master
recordings contained on all one-off albums in excess of
[***]; and
3. the term "net billings" for purposes of determining
Qualified Sales and Aggregate Sales shall mean:
(a) in the United States, (A) the gross wholesale
receipts to BMG from its customers on all
records shipped less actual returns and a
reasonable reserve for future returns, but
without any other deduction (e.g., any
distribution fees or charges or manufacturing
costs), (B) RCA's receipts the licensing of
master recordings by the Artists, and (C) monies
paid to BMG Distribution by the NT Affiliate;
and
(b) on sales outside of the United States, 100% of
the all-in inter-company "matrix" (as defined
in BMG's Inter-Company License Agreement, such
definition being attached hereto as Exhibit
"B") (the "Matrix") paid or credited to RCA by
its foreign affiliates and all monies paid or
credited by its non-affiliated licensees.
In determining the amount of foreign
income under this subparagraph II.C.3.b. RCA
shall include its good-faith estimate of
so-called "pipeline" royalties in the EEC,
Australia, and Japan.
IV. LABEL FUNDING AND RECOUPMENT UNDER THE LABEL DEAL:
A. Signing Payment: [***], payable on January 2, 1997.
B. Overhead Advances: [***] per year, [***] of which will be
payable at the commencement of each quarter-annual period
(the first installment shall be payable on January 1, 1997).
C. Sales Bonus Overhead Payments: Promptly after the following
events, RCA will pay AD:
1. a sales bonus of [***] for the first album which sells
more than [***] USNRC units, of which [***] shall be
non-recoupable;
2. a sales bonus of [***] for the first album which sells
more than [***] USNRC units, of which [***] shall be
non-recoupable;
3. a sales bonus of [***] for the first album which sells
more than [***] USNRC units, of which [***] shall be
non-recoupable, and
- --------
[***] 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. a sales bonus of [***] for the first album which sells
more than [***] USNRC units, of which [***] shall be
non-recoupable.
For the avoidance of doubt, each bonus payment will be a
one-time only payment, which shall be paid in respect of the
first album to achieve the applicable threshold during the Label
Term.
D. A&R:
1. AD shall sign at least 3 Artists during each year of the
Label Term. If at the end of any year of the Label Term,
AD has signed less than 3 Artists in such year, RCA
shall have the right, by written notice to AD, to
suspend its obligations to AD (other than the payment of
Artist and producer advances and royalties) and the term
of the Term until such artists are signed. If any such
suspension continues for 12 months, RCA shall have the
right, within 30 days thereafter, to terminate the Term,
and the assets of the Label will not be divided between
RCA and AD.
2. If at the end of the second year of the Term, less than
[***] albums have been delivered by the Artists, RCA
shall have the right, by written notice to AD, to
suspend its obligations to AD (other than the payment of
Artist and producer advances and royalties) and the Term
until such albums are delivered. Further, if at the end
of the third year of the Term and each year thereafter,
less than [***] albums have been delivered by the
Artists in such year, RCA shall have the right, by
written notice to AD, to suspend its obligations to AD
(other than the payment of Artist and producer advances
and royalties) and the Term. If any such suspension
continues for 6 months, RCA shall have the right within
30 days thereafter to terminate the Term, and the assets
of the Label will not be divided between RCA and AD.
3. Initial Product Commitment: Subject to paragraph IV.D.3
hereof, RCA will make available to AD [***] ("Maximum
A&R Funding") in each year of the Label Deal to be spent
on Artist advances and recording costs (including
producer advances) for the initial product commitment
for each Artist. As used herein, the "initial product
commitment" means all product intended to be recorded
under an Artist Agreement prior to the exercise of an
option under the applicable Artist Agreement. The Artist
advances and recording funds for the initial product
commitment will be subject to the mutual approval of AD
and RCA, provided that if RCA does not
- --------
[***] Confidential treatment has been requested for the bracketed
portion. The confidential redacted portion has been omitted and filed separately
with the Securities and Exchange Commission.
6
<PAGE> 7
consent to the Artist advances and/or recording funds
for an initial product commitment, neither RCA nor any
company controlled by RCA shall sign the Artist directly
(unless RCA has knowledge of such Artist independently
from AD), and AD may elect to either take the Artist
(each a "Rejected Artist") to another record company
(subject to subparagraph 3(d) below) or, notwithstanding
RCA's non-consent, AD may enter into the Artist
Agreement with the applicable Artists ("AD Selected
Artists") so long as:
(a) the Artist advances and recording fund for a 1
album firm deal do not exceed [***] for the
first album, and the Artist advances and
recording funds for a 2 album firm deal do not
exceed an aggregate of [***] for the first 2
albums:
(b) the aggregate of all Artist advances and
recording funds for the initial product
commitment for all of the AD Selected Artists in
any 1 year of the Term ("Annual A&R Commitment")
do not exceed [***];
(c) with respect to AD Selected Artists after the
first one in each of the second and third years
of the Label Term, the signing of an AD Selected
Artist in the second or third year of the Label
Term would not cause AD to exceed the "Aggregate
Maximum." The Aggregate Maximum would occur in
the second or subsequent year of the Label Term
whenever the "Outstanding Amount" equals or is
more than [***] in the applicable year of the
Term. As used herein, the term "Outstanding
Amount" shall mean the amount, if any, by which
(i) the aggregate of unrecouped and expensed (in
accordance with GAAP) Artist advances and
recording costs for all AD Selected Artists
previously signed to the Label (but excluding
any other charges recoupable from AD or the
Selected Artists) exceeds (ii) all royalties
therefore credited to accounts of all of the AD
Selected Artists previously signed to the Label
and all royalties credited to AD's account with
respect to AD Selected Artists previously
signed to the Label. For purposes of this
calculation; (i) AD may require RCA, up to a
maximum of two (2) times in any calendar year of
the Term, to include in its calculation of
royalties a good-faith estimate of so-called
"pipeline" royalties in the EEC, Australia, and
Japan; and (ii) all royalties credited to AD's
account with respect to the AD Selected Artists
shall first be applied to recoup such artists'
advances and recording costs, prior to the
recoupment of other recoupable charges; and
(d) Notwithstanding anything to the contrary set
forth herein, AD shall not have the right to
sign more than [***] Rejected Artists to another
record company during any Contract Year of the
Term; provided, however, that AD shall not sign
any Artist to another record company on terms
less favorable than the terms last offered to
RCA by AD unless AD first offers to enter into
an agreement on the same terms.
4. Unused A&R Funds: If AD spends less than the Maximum A&R
Funding for initial product commitment in any one year,
then AD can use the lesser of [***] of the difference or
[***] to increase the Maximum A&R Funding for the
next year of the Label Deal.
5. Optional Product: RCA will advance all Artist advances
and recording funds payable with respect to all product
after the initial product commitment, provided that the
Label will not exercise an option under an Artist
Agreement without RCA's consent, not to be
- --------
[***] 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.
7
<PAGE> 8
unreasonably withheld. Prior to the execution of the
Formal Agreement, the parties agree to negotiate in good
faith a procedure which would allow AD to pick-up an
Artist (without a royalty override or other
participation to RCA) if RCA should decide not to
exercise an option under an Artist Agreement.
6. Creative Control: AD will meaningfully and fully consult
with RCA on all creative matters. With respect to each
album, AD will regularly furnish copies of recordings
made during the recording process so that RCA may take
advantage of its consultation right, and so that RCA can
begin to make plans regarding the marketing of the album
concerned.
E. RCA's Marketing and Promotion: RCA will commit to spend at least
[***] to market each album released in the United States. Those
amounts will be spent in accordance with RCA's marketing plan.
RCA will fully consult with AD regarding each marketing plan.
F. AD's Marketing and Promotion:
1. In addition to RCA's committed marketing expenditures,
RCA will spend at least [***] as directed by AD for each
album released in the United States. AD will allocate
these amounts for traditional record marketing purposes
(e.g., independent promotion and marketing, tour
support, etc.) in the United States. AD will have the
right to use the lesser of [***] of any unused portion
of this $100,000 marketing fund or [***] per album
for the marketing and promotion of other albums in full
consultation with RCA.
2. In addition, during the Label Term, RCA will make
available to AD a minimum of [***] in the aggregate for
use in non-traditional marketing in full consultation
with RCA.
G. Recoupment:
1. Artist Advances. Artist advances including [***] of
recording costs, [***] of video costs up to [***] in
video costs for a single video and [***] of video costs
for a single video in excess of [***] , [***] of
independent promotion marketing costs, and [***] of tour
support will be recoupable by RCA from [***] of the
royalties set forth in paragraph V below with respect to
the applicable Artist. There will be no
cross-collateralization between Artists' accounts.
2. Signing Advance, Overhead Advances, and Sales Bonus
Overhead Payments. [***] of the Signing Advance and the
Overhead Advances and the recoupable portion of the
Sales Bonus Overhead Payments (as set forth in paragraph
IV.C hereof) shall be
- --------
[***] 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.
8
<PAGE> 9
recoupable from the aggregate of [***] of the royalties
set forth in paragraph V below from all Artists from the
first record sold.
V. ALL-IN ROYALTY RATES UNDER THE LABEL DEAL:
A. RCA will pay AD a royalty of [***] (the "Base Rate") of the SRLP
with respect to [***] of USNRC Album Sales. The Base Rate will
escalate prospectively to [***] with respect to any album by an
Artist which sells more than [***] USNRC units. If any album by
an Artist sells more than [***] USNRC units, the Base Rate for
all subsequently released albums by that Artist will be [***].
RCA will pay AD a royalty of [***] of the SRLP with respect to
[***] of top-line singles sold through normal retail channels in
the United States.
B. The royalty for compact discs will be [***] of the otherwise
applicable royalty rate. However, if an album in all
configurations has USNRC Album Sales in excess of [***], then
the royalty rate for units of that album sold through USNRC in
excess of [***] will be [***] of the otherwise applicable rate,
and the rate for all compact discs of an album by the applicable
Artist released thereafter shall be [***] of the otherwise
applicable rate.
C. If an Artist's record is released on another type of audiophile
record, then, until such time as particular type of audiophile
record equals [***] of the aggregate of industry-wide sales of
all other configurations, the royalty rate for that record and
all other records by that Artist released in that particular
audiophile configuration during such period will be [***] of the
otherwise applicable royalty rate. Thereafter, the parties will
negotiate a royalty rate for the applicable audiophile record.
D. The foregoing royalty rates assume a standard free goods
allowance of [***] for albums sold in the United States in the
cassette configuration, [***] for albums sold in the United
States in the compact disc configuration and [***] for singles,
and standard packaging deductions of [***] for vinyl, [***] for
analog tape, and [***] for compact discs.
E. On sales through normal trade channels outside the United
States, RCA will pay AD a royalty calculated as a percentage of
the otherwise applicable rate as follows: Canada - [***]; the UK
(including Eire) and Japan - [***]; the rest of the EEC
Countries, Switzerland, Australia and New Zealand - [***]; and
R.O.W. - [***].
F. The other royalty terms will be subject to negotiation prior to
execution of the Formal Agreement.
- --------
[***] Confidential treatment has been requested for the bracketed
portion. The confidential redacted portion has been omitted and filed separately
with the Securities and Exchange Commission.
9
<PAGE> 10
VI. VARIOUS PROVISIONS APPLICABLE TO BOTH THE LABEL DEAL AND THE PROFIT
DEAL:
A. Artist Agreements: The terms of the Artist Agreements will be
mutually approved as to total product, royalty rates, etc.
However, RCA will pre-approve certain terms so that AD will not
have to obtain RCA's approval as to the pre-approved terms. With
regard to mechanicals, AD will use its best efforts to secure a
[***] controlled composition rate in its Artist Agreements with
a [***] times cap on albums ([***] times cap on CDs) and subject
to an allowance for [***] covers per album at the full minimum
statutory rate.
B. Release Commitment:
1. RCA will be obligated to release each album delivered by
an Artist in satisfaction of its recording commitment in
the United States.
2. Each time an Artist delivers an album, AD shall provide
a pre-release copy of the album to BMG. BMG shall notify
AD within 60 days thereafter whether it will release
such album. If BMG notifies AD that it will release the
album, BMG will release the album in Canada, the EEC,
Japan, and Australia ( the "Release Territories") within
120 days after the initial release of such album in the
United States. Notwithstanding the foregoing, if the
album concerned is submitted to BMG less than 60 days
prior to its initial release date in the United States,
such 120-day period will be extended by the number of
days by which 60 days exceeds the number of days the
album is submitted prior to the initial release date in
the United States. If BMG does not release the album in
any Release Territory within such time period, AD shall
have the right to enter into a licensing agreement in
such Territory, provided that, without the approval of
RCA, (i) the foreign licensee shall not have the right
to release more than the applicable album (such licensee
shall also have the right to release singles derived
from such album), and (ii) the foreign licensee shall
not be affiliated with [***] (or any company affiliated
with [***] or [***]. If BMG notifies AD that it will not
release the album, AD shall have the right to cause a
licensing agreement to be entered into with respect to
territories outside of the United States on the terms
and conditions set forth above, provided that the
parties will negotiate at the time whether such license
will be granted by BMG or directly by AD. Under the
Label Deal, each foreign licensee not controlled by RCA
shall pay [***] of
- --------
[***] Confidential treatment has been requested for the bracketed
portion. The confidential redacted portion has been omitted and filed separately
with the Securities and Exchange Commission.
10
<PAGE> 11
all monies to RCA. After paying the applicable Artist
royalty, RCA will take [***] of the proceeds for its own
account and will apply the remaining [***] of the
proceeds to AD's account. Notwithstanding the foregoing,
at AD's election, up to [***] of such proceeds may be
used for international tour support. During the Profit
Deal, the revenues from AD's foreign licensees shall be
deemed income in computing net profits.
C. Finished Goods Purchases: AD and the NT affiliate will be
entitled to purchase finished goods from BMG (at prices to be
mutually agreed upon prior to the execution of the Label Deal)
for the NT Affiliate's exploitation and distribution over the
internet or other networks, at tour locations and other
non-traditional distribution channels.
D. Record Clubs: No record will be sold through a record club in
the United States earlier than 9 months after its initial
release.
VII. DON'S AND MARC'S ENGAGEMENT:
A. Exclusivity: During the Term, neither Don, nor Marc, nor AD nor
any other company owned by either or both of them will have the
right to enter into any agreement with any other company which
involves the sale of records through traditional record
distribution channels. (If RCA becomes a "strategic partner" in
the NT Affiliate, then the exclusivity shall include all
exploitations of master recordings.) Don and Marc will be free
to pursue any other business, including, without limitation, a
talent agency, music publishing, internet website, and the
production, acquisition and/or exploitation of goods and
services, including audio and audiovisual product, over the
internet or other networks and at tour locations, and
merchandising; provided such activities do not interfere with
their material obligations hereunder.
B. Talent Agents: Neither Don nor Marc shall be required under the
Label Deal or the Profit Deal to breach their fiduciary or other
legal obligations to any of their talent agency clients.
VIII. PROFIT DEAL:
A. Management: Promptly after the Conversion Date, AD and RCA shall
negotiate in good faith an operating agreement, which shall
govern the operation of the New Entity. This agreement will
provide, among other matters, that the business of the New
Entity shall be generally run by a Board of Managers comprised
of Don, Marc, and 2 people designated by RCA, one of whom shall
always be a senior executive of RCA. However, the day-to-day
management decisions of the New Entity shall be made by Don and
Marc. In other words, AD shall have sole and absolute discretion
to run the day-to-day operation of the business of the New
Entity through Marc and Don, subject to the New Entity's
business plan which shall be reasonably agreed upon annually by
the Board of Managers.
B. Ownership and Net Profits: AD and RCA will each own 50% of the
New Entity. AD will be entitled to 50% of the net profits under
the Profit Deal, which will be paid within 90 days after each
year of the Profit Deal. Except for possible minimum annual
distributions to cover each party's tax
- --------
[***] Confidential treatment has been requested for the bracketed
portion. The confidential redacted portion has been omitted and filed separately
with the Securities and Exchange Commission.
11
<PAGE> 12
obligations with respect to income subject to the Profit Deal,
no net profits will be distributed until RCA has been reimbursed
for all Chargeable Expenses. Net Profits would mean all revenues
to the Label calculated in accordance with GAAP, as consistently
applied to the financial statements of BMG less Chargeable
Expenses. Revenues from sales of records outside the United
States would mean the Matrix paid or credited to RCA by its
foreign affiliates and all monies paid or credited by its
non-affiliated licensees. As used herein, "Chargeable Expenses"
means the Working Capital Advance described below, all third
party, out-of-pocket manufacturing, marketing, promotional and
exploitation costs incurred by RCA in connection with records
initially released after the Conversion Date and certain
pre-Conversion Date costs as set forth in paragraph VIII.E.2
below.
C. Conversion Payment: If the Label Deal converts to a Profit Deal
as a result of AD achieving the automatic conversion target set
forth in paragraph III.C above (the "Automatic Conversion"), RCA
will pay, upon the Conversion Date, a [***] profit advance to
AD. If the Label Deal converts to a Profit Deal as a result of
RCA exercising its option to extend the Term beyond the initial
3 years (the "Optional Conversion"), RCA will pay, upon the
Conversion Date, a [***] profit advance to AD.
D. Working Capital Advance: Operating funds would be made available
by RCA pursuant to mutually approved annual plans on a
non-interest bearing basis. If AD and RCA are unable to agree
upon an annual business plan for any year, the working capital
advance provided for such non-plan year will be an amount equal
to the following amounts based on the assumption that the New
Entity will sign 5 new Artist during such year: (i) A&R funding
equal to [***] for the initial product commitment; (ii) a
minimum of [***] per album release in marketing and promotion
funds, and (iii) overhead payments equal to [***] in the event
of an Automatic Conversion or [***] in the event of an Optional
Conversion. RCA agrees that all or any portion of the overhead
payments may, at AD's election, be paid to Don and Marc as
salary, perquisites and benefits other distributions.
E. Transition Issues:
1. With respect to all sales and other exploitations of
Pre-Conversion Product prior to the Conversation Date,
RCA will account to AD on a royalty basis.
- --------
[***] Confidential treatment has been requested for the bracketed
portion. The confidential redacted portion has been omitted and filed separately
with the Securities and Exchange Commission.
12
<PAGE> 13
2. All sales and other exploitations after the Conversions
Date will be subject to the Profit Deal; subject to the
following:
(a) RCA shall license to the New Entity all rights
to exploit and otherwise use the Pre-Conversion
Product throughout the world during the term of
the Profit Deal (i.e., such license shall end at
the end of the Term). In consideration for such
license, the New Entity shall pay RCA a royalty.
Such royalty shall be at the rate of [***] of
the SRLP with respect to [***] (less free goods
and discounts) of USNRC Album Sales. Such
royalty shall be calculated, reduced and paid in
accordance with the terms of the Formal
Agreement with respect to USNRC Album Sales and
with respect to all other exploitations of the
applicable master recordings.
(b) The New Entity shall pay RCA all artist
royalties payable for all sales and
exploitations of the Pre-Conversion Product by
the New Entity until such time as all advances
and other recoupable charges incurred by RCA
prior to the Conversion Date have been recouped.
Thereafter and during the rest of the Term, the
Label shall account to the applicable Artists
with respect to such artist royalties. The New
Entity will also pay RCA for: (i) all
Pre-Conversion inventory; and (ii) all
Pre-Conversion marketing expenses incurred in
connection with product to be initially released
after the Conversion Date.
3. Except as set forth in paragraph VIII.E.2 above, no
other expenditures by RCA under the Label Deal will be
deemed Chargeable Expenses in computing net profits or
will be used to reduce the Working Capital Advance.
F. Domestic Distribution: Net profits shall be calculated [***].
RCA agrees that, prior to the execution of this Agreement, it
has supplied AD with a true and correct written statement of
calculation of such [***].
G. Domestic Manufacturing: Net profits shall be calculated using
the applicable manufacturing and packaging prices paid by RCA
for its own product as set forth in Exhibit "C" hereof.
H. Foreign Revenues: The revenue from foreign sales by an affiliate
of RCA will be calculated using the Matrix paid to RCA by its
foreign affiliates for
- --------
[***] 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.
13
<PAGE> 14
RCA's other product and all monies paid by licensees of RCA and
of the New Entity.
I. Additional Services: RCA shall provide the New Entity with
promotion, marketing, creative services, including video, art,
artist relations, publicity, promotional merchandise, sales,
distribution, general financial, royalty accounting and
administrative services with respect to the New Entity's
product. In consideration of the foregoing services, RCA shall
be entitled to the following fees: (i) [***] of RCA's wholesale
receipts in the United States paid or credited to the New Entity
in the applicable year until such fees equal [***], (ii) [***]
of such receipts between of in the applicable year until such
fees equal [***], and (iii) [***] of such receipts until such
fees equal [***] in the applicable year. Notwithstanding the
foregoing, the fees payable in any one(1) year shall not be in
excess of [***]. Further, if RCA does not perform all of the
foregoing services, the parties shall negotiate in good faith a
reduction in the maximum fees payable in each year, provided
that RCA shall continue to be paid the fees as set forth herein
during the period of such negotiations.
J. Buy-Out:
1. If RCA does not exercise its Early Termination Right, AD
shall have the right, at any time after the date 6
months prior to the end of the 6th year of the Term, to
offer ("Buy-Out Offer") to sell AD's interest in the New
Entity to RCA as of the last day of the Term for a
purchase price equal to the Buy-Out Offer price. If AD
has not made a Buy-Out Offer as of the end of the Term,
RCA shall have the right thereafter to require AD to
make a Buy-Out Offer by notifying AD to such effect. If
AD does not make a Buy-Out Offer within 60 days after
such notice, then RCA shall have the right to suspend
its obligation to make any further payments to AD until
AD makes a Buy-Out Offer.
2. RCA shall either accept the Buy-Out Offer or offer to
sell its interest in the New Entity to AD for the
Buy-Out Offer price, within 30 days after RCA's receipt
of the Buy-Out Offer.
3. If, on the one hand, RCA accepts the Buy-Out Offer, then
RCA shall promptly purchase AD's interest in the New
Entity for the Buy-Out Offer price. If, on the other
hand, RCA offers to sell its interest in the New Entity
to AD, then AD shall notify RCA, within 30 days
thereafter, whether AD is electing to purchase RCA's
interest in the New Entity at the Buy-Out Offer or is
rejecting RCA's offer to sell.
- --------
[***] 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.
14
<PAGE> 15
4. In the event AD rejects RCA's offer to sell RCA's
interest in the New Entity, AD shall be deemed to have
offered to sell to RCA AD's interest in the New Entity
for [***] of the original Buy-Out Offer price. RCA shall
either accept the [***] Buy-Out Offer or offer to sell
its interest in the New Entity to AD for the [***]
Buy-Out Offer or offer to sell its interest in the New
Entity to AD for the [***] Buy-Out Offer price, within
30 days after such notice. If, on the one hand, RCA
accepts the [***] Buy-Out Offer, then RCA shall promptly
purchase AD's interest in the New Entity for the [***]
Buy-Out Offer price. If, on the other hand, RCA offers
to sell its interest in the New Entity to AD, then AD
shall notify RCA, within 30 days thereafter, whether AD
is electing to purchase RCA's interest in the New Entity
at the [***] Buy-Out Offer or is rejecting RCA's offer
to sell.
5. The foregoing procedure will continue with reductions
equal to [***] of the initial Buy-Out Offer price at
each level until one of the parties agrees to purchase
the other party's interest in the New Entity.
6. For the avoidance of doubt, the Pre-Conversion Product
shall not be deemed assets of the New Entity and,
accordingly, shall not be subject to the foregoing
provisions of this paragraph VIII.J.
7. It is understood and agreed that if AD purchases RCA's
interest in the New Entity, [***] of the New Entity's
net losses shall be added to AD's purchase price.
K. Consultants: If RCA purchases AD's interest in the New Entity,
Marc and Don, at RCA's election at the time of RCA's purchase
(provided that RCA will not be able to engage one without the
other), will act as consultants to the Label for one (1) year.
During this period, Marc and Don will not be involved in the
record industry (insofar as traditional record distribution is
concerned) with anyone other than RCA. The salary paid to Marc
and Don during this consultancy will be the same amount as the
salary paid to them during the last year of the Profit Deal. The
other terms related to this consultancy shall be negotiated by
the parties in good faith prior to the execution of the Formal
Agreement.
IX. ANCILLARY RIGHTS: In the event that AD or the Label (or any other entity
owned or controlled, directly or indirectly, by the Marc and Don)
obtains music publishing or merchandising rights with respect to any
artist, RCA or its affiliates will be given the first opportunity to
exploit such rights on reasonable business terms. "Reasonableness" in
the preceding sentence will be judged by references
- --------
[***] Confidential treatment has been requested for the bracketed
portion. The confidential redacted portion has been omitted and filed separately
with the Securities and Exchange Commission.
15
<PAGE> 16
to ordinary course, arms-length negotiations conducted in good faith. If
the parties are unable to reach agreement with respect to ancillary
rights in any case, AD and its affiliates will not do a deal with any
third party on terms less favorable than the terms offered to RCA or its
affiliate without first offering such terms to RCA or its affiliate.
X. KEY MAN: During the Term, both Don and Marc will be deemed to be "key
men." Accordingly, if either of them cease to perform or becomes unable
to perform their respective obligations during the Term, RCA will have
the option to terminate the Term.
XI. LEGAL FEES: RCA will not be responsible for any legal or consultancy
fees incurred in connection with the negotiation of this transaction.
XII. WARRANTIES: Each of the parties hereto represents and warrants that: (i)
it has the full right and authority to enter into and fully perform this
agreement; (ii) entering into this agreement will not violate or
infringe upon the rights of any third party: and (iii) it is under no
disability, restriction, or prohibition with respect to its rights to
enter into, and fulfill, all of its obligations under this agreement.
XIII. MISCELLANEOUS: All reference to "this Agreement," "hereof," "herein,"
"hereunder," and words of similar connotation include all exhibits
attached hereto, unless specified otherwise. This Agreement cannot be
canceled, modified, amended or waived, in part or in full, in any manner
except by an instrument in writing signed by the party to be charged. No
waiver by any party to this Agreement, whether expressed or implied, of
any provision of this Agreement or default hereunder shall affect such
party's right to thereafter enforce such provision or to exercise the
right or remedy set forth in this Agreement in the event of any other
default, whether or not similar. Whenever examples are used in this
Agreement with the words "including," "for example," "e.g.," "such as,"
"etc." or any derivation thereof, such examples are intended to be
illustrative and not in limitation thereof.
RCA RECORDS, INC. ARTIST DIRECT, LLC
By: /s/ Jeff Walker By: /s/ Marc Geiger
------------------------------- -------------------------------
Jeff Walker Marc Geiger
Senior Vice President
Business & Legal Affairs
By: /s/ Marc Geiger
-------------------------------
Marc Geiger
16
<PAGE> 1
AT&T Dedicated Hosting Service Level 2
REDACTED EXHIBIT 10.4
- --------------------------------------------------------------------------------
Customer Name Service Period
Artist Direct Twelve (12) months
- --------------------------------------------------------------------------------
1. INITIAL CONTRACT TERM, SERVICE PERIOD, AND BILLING
The Initial Contract Term begins on the Effective Date and, if applicable, ends
on the anniversary of the Implementation Date (as defined below) unless
terminated earlier in accordance with the provisions hereof. Charges for
customer's early cancellation of service are set forth on the Price Sheet. After
the Initial Contract Term, this Attachment shall continue in effect until
terminated as set forth in the AT&T Web Site Services Attachment to which this
Attachment is appended; provided, however, that in the case of Collocated Web
Services (as defined below), this Attachment shall expire no later than the date
on which the Lease (as defined below) expires or is terminated unless the same
has been replaced with another Lease, and provided further that it is understood
that AT&T shall have no obligation to renew, extend, keep in effect or replace
the Lease. Billing, with respect to each site, begins as of the date of physical
completion of server deployment and connection of the server to AT&T's network
("Implementation Date"), regardless of when or whether the customer's content
has been deployed. The Service Period begins on the Implementation Date.
2. ABSENCE OF SUPPORT FOR AUTHORING TOOLS OR CONTENT
Customer is solely responsible for creating, updating and maintaining the
Content. AT&T will not provide support for use of content authoring tools or
other support in connection with the Content of Customer's Web Site.
3. COLLOCATION SPACE
The services covered by this Attachment may involve the provision to Customer of
collated web services ("Collocated Web Services"), which include a AT&T- or
customer-owned server or other equipment that is to be collocated on AT&T's
premises and which may include use of third party software, hardware or other
third party services. The collocation space (the "Space"), which is in premises
that may be leased by AT&T, is described on Exhibit A. If Customer has elected
to do so, AT&T agrees to allow Customer to place certain equipment (the
"Equipment") as defined in Exhibit A, subject and subordinate to the terms and
provisions of the applicable lease or leases (the "Lease") between AT&T or its
affiliates and the landlord or landlords of the Space. The Equipment shall be
approved by AT&T prior to installation in the Space and shall not exceed the
standard dimensions identified in the Price Sheet. Customer hereby accepts the
Space in its as is condition and acknowledges that AT&T has no obligation to
make alterations, improvements, additions, decorations or changes within the
leased premises, Space or any part thereof. In connection with the provision of
the Space, AT&T shall provide to Customer the installation services, remote hand
services and other space services set forth on Exhibit A hereto. In the event of
any taking by eminent domain or damage by fire or other casualty to the leased
premises or the Space, Customer shall acquiesce and be bound by any action taken
by or agreement entered into between AT&T or its Affiliates and the landlord or
landlords with respect thereto.
4. EQUIPMENT
All right, title and interest in all facilities and associated equipment
provided by either party shall at all times remain exclusively with such party.
Neither party shall create any liens or encumbrances with respect to such
facilities or equipment of the other party. Upon termination of Collocated Web
Services, Customer shall as promptly as possible and in any event within 60 days
of termination, release to AT&T all IP addresses provided by AT&T in connection
with the Collocated Web Services. Upon termination of this Attachment, Customer
shall leave the Space in as good condition (except for normal wear and tear) as
it was at the commencement of this Attachment, and shall remove its Equipment
and other property from the Space. Upon sixty (60) days' prior written notice
or, in the event of an emergency, with as much notice as may be feasible, AT&T
may require Customer at Customers expense to relocate the Equipment within the
leased premises, provided, however, that the site of relocation shall afford
comparable environmental conditions for the Equipment and comparable
accessibility to the Equipment. AT&T shall use reasonable efforts to maintain
the Collocated Web Services in accordance with applicable performance standards
therefor and to obtain and keep in effect all rights of way required to provide
the Collocated Web Services. AT&T shall have no responsibility for the hardware
maintenance and repair of, or any liability of any kind with respect to,
facilities and equipment which it does not furnish, and may assess Customer its
standard charge for any false call outs.
5. INDEMNIFICATION
Without limitation of any other provision of the Agreement, Customer hereby
agrees to indemnify and hold harmless AT&T against any and all liabilities,
costs, expenses and claims relating to (i) Customers unlawful or improper use of
the Collocated Web Services, the Space or lease premises or the AT&T network,
(ii) Customers failure to comply with the terms and provisions of the Agreement,
including without limitation this Attachment, or (iii) property damage or
personal injury claims caused by Customer's acts or omissions or arising from
its operation of its Equipment or its use of the Space or the leased premises.
6. ACCESS
As part of the covered services, Customer is granted access into AT&T's Space.
Customer shall at all times use care when working in and around AT&T's or other
Customer's equipment. AT&T, at its sole discretion, may grant Customer use of an
access card. In the event such a card is lost or stolen, Customer shall so
report to AT&T as soon as its loss is discovered. A lost or stolen access card
is replaceable upon payment of a replacement fee to AT&T.
7. INTERNET SERVER AVAILABILITY
Under the AT&T Internet Server Availability Guarantee Program, AT&T Level 2
Dedicated Hosting Service Customers have the confidence that their Web Site will
be accessible by end users of the global Internet, subject to the program rules
and regulations set forth below.
If an AT&T-hosted Customer reports that an end user has been unable to access
their Web Site due to the unavailability of the AT&T content hosting production
web server, the Customer will be eligible to receive a credit against his/her
hosting Monthly Service Fee incurred during the affected month as specified
below, subject to the program rules and regulations set forth below.
Interruptions of 24 hours or less
------------------------------------ --------------
Interruption Length Credit
------------------------------------ --------------
less than 4 hours none
------------------------------------ --------------
4 hours-7 hours 59 minutes 1/3 day
------------------------------------ --------------
8 hours-11 hours 59 minutes 1/2 day
------------------------------------ --------------
12 hours-15 hours 59 minutes 2/3 day
------------------------------------ --------------
16 hours-24 hours one day
------------------------------------ --------------
Interruptions of over 24 hours -- Interruptions over 24 hours will be credited
1/6 day for each 4-hour period or periods or fraction thereof. No more than one
full day's credit will be allowed for any period of 24 hours.
Program rules and regulations:
1. Claims may be made only by participating AT&T Hosting Service Customers.
2. An outage under this limited guarantee is defined as unscheduled
unavailability of an AT&T Hosting Server and does not include outages for
scheduled periods of maintenance and upgrades. Notice of a scheduled outage
may be given by posting of the notice on the applicable customer care
website for the service.
3. Web server availability only applies to content hosting servers used for
hosting Customer's Web Site. It does not apply to servers used to provide
services other than this Hosting Service, including without limitation
transaction service servers or AT&T Internet mail servers.
<PAGE> 2
AT&T MA Reference No.______
AT&T Dedicated Hosting Service Level 2
4. AT&T must be notified in writing of a claim by a Customer within 10 days of
an occurrence of a possible Service outage. Customer claims must be sent to
the e-mail address [email protected] or as otherwise specified in the web
site provided by AT&T for customer support. All submitted claims must
include the date and time of the Service outage.
5. All claims are subject to review and verification by AT&T.
6. AT&T will be the sole party to verify and determine that an AT&T Hosting
Server experienced an outage.
7. A Customer may only receive credits equal to up to one (1) month's AT&T
Hosting Service Fee during any calendar quarter. A Customer will not receive
a credit for AT&T Web Hosting Nonrecurring Charges, other recurring monthly
charges, or charges related to storage space and data download by users.
8. AT&T reserves the right to change or modify the program rules and
regulations or discontinue this limited guarantee program at any time
without notice.
9. Credits are exclusive of any applicable taxes charged to Customer of
collected by AT&T.
This limited guarantee is subject to the applicable AT&T Hosting Service terms
and conditions set forth in the AT&T Web Site Services Attachment to which the
Attachment is appended.
<PAGE> 3
AT&T MA Reference No.______
AT&T Dedicated Hosting Service Level 2
EXHIBIT A
REMOTE HANDS - TERMS OF SERVICE
1. Remote Hands Services.
Customer has, pursuant to this Attachment, located certain equipment on AT&T
premises (the "Premises"), and may from time to time request that AT&T perform
certain basic services with respect to such equipment. Such services (herein
referred to as "Remote Hands Services") offer an opportunity for the Customer to
avoid dispatching field services personnel for certain basic on-site activity.
2. Levels of Service.
Remote Hands Services include 3 levels of service, as follows:
Remote Hands Class A, provided at no additional cost, involves the most basic
activities of an on-site technician, performed with "eyes," "ears" and
"fingers," but without involvement of tools, equipment, physical labor, keyboard
or other data input. Examples of Class A service would include:
- pushing a button
- switching a toggle
- setting a dip switch
- power cycling (turning off and on) equipment
- securing cabling to connections
- observing, describing or reporting on indicator lights or display
information on machines or consoles
- basic observation and reporting on local environment in AT&T premises
Remote Hands Class B, provided in accordance with the fee(s) set forth in the
Price Schedule, involves all the services of Class A, plus some configuration or
running of certain basic operations pursuant to real-time instructions of
Customer. This level of service does not involve opening or moving equipment or
any direct hardware or software interaction. Examples of Class B services would
include:
- running single, built-in diagnostic equipment
- typing commands on a keyboard console
- changing of pre-labeled tapes
- cable organization, ties or labeling
- modifying basic cable layout, such as Ethernet or FDDI connections
- re-labeling equipment
Remote Hands Class C, provided in accordance with the fee(s) set forth in the
Price Schedule, involves all the services of Class B, plus direct contact with
equipment configuration, including hardware and software interaction, provided
Customer provides accurate, understandable real-time instructions. Examples of
Class C services would include:
- installation of previously received equipment in existing track space
- replacing hardware components with spares of upgrades
- adding memory
- upgrading drive capacity by installation of new or additional disk
drives
AT&T shall, in its own reasonable discretion, determine the appropriate Level of
Remote Hands to which each service request applies.
Remote Hands Services may be purchased on a per hour basis as needed, or on a
monthly basis under contract. Customer will be billed for services rendered
along with Customer's monthly service invoice.
3. Request Procedure.
Customer shall initiate a Remote Hands Service request by following the
procedure set forth in the Configuration Review Form (CRF) provided to Customer,
as such procedure may be modified by notice to Customer by AT&T from time to
time. Each service request requires a separate initiation by the Customer, by
fax, e-mail or other writing if possible. Each request from a Customer which has
not elected a contract option shall require an original signed request from a
previously authorized Customer representative. In cases of emergency, a signed
facsimile transmission service request followed by a signed original is
acceptable. AT&T's technicians will use reasonable efforts to respond to a
Customer request for Remote Hands Service by telephone or electronic
communication within 30 minutes of receipt of the initial Customer's request.
AT&T's technician will assign a Trouble Ticket and will use reasonable efforts
to commence the rendering of the service within the time window specified below
from the point of assignment of the Trouble Ticket.
----------------------- --------------------------
AT&T PREMISE SERVICE INITIATION
WITHIN:
----------------------- --------------------------
San Diego, 9850 1 hr.
Scranton Road
----------------------- --------------------------
New York, 67 Broad 1 hr.
Street
----------------------- --------------------------
4. No Warranty/Limitation on Damages.
Customer acknowledges that AT&T will provide Remote Hands Services under
Customer's specific direction. AT&T DOES NOT OFFER OR PROVIDE (AND HEREBY
DISCLAIMS) ANY WARRANTY WITH RESPECT TO REMOTE HANDS SERVICES. NOTWITHSTANDING
ANYTHING CONTAINED IN THE AGREEMENT TO THE CONTRARY, THE REMOTE HANDS SERVICES
ARE PROVIDED ON AN "AS IS" BASIS. AT&T SHALL NOT BE LIABLE IN ANY WAY WHATSOEVER
FOR ANY DIRECT OR INDIRECT LOSS, COST OR DAMAGE CUSTOMER MAY INCUR IN CONNECTION
WITH AT&T PROVIDING OR FAILING TO PROVIDE THE REMOTE HANDS SERVICES TO CUSTOMER.
5. Indemnity.
Customer will at all times defend, indemnify and hold harmless AT&T from and
against any and all damages, liabilities, losses, penalties, interest and other
expenses (including, without limitation, reasonable attorney's fees), whether or
not arising out of or relating to any third party claims, and regardless of the
form of action, whether in contract, tort, strict liability or otherwise,
concerning AT&T's provision of the Remote Hands Services to Customer.
<PAGE> 4
AT&T MA Reference No.______
AT&T Dedicated Hosting Service Level 2
EXHIBIT B
SERVICE COMPONENTS AND PRICING
Exhibit B specifies the AT&T Dedicated Hosting Service hardware and hardware
components, along with one-time service set-up fees, recurring service fees, and
standard charges for other services which may be requested from time to time
under the terms of this Attachment.
SECTION 1: Standard Service Fees
Standard fees include recurring and non-recurring charges. Non-recurring charges
are for site set-up, which includes hardware and software installation,
configuration and testing, and Remote Hands Service, which may be requested by
Customer as needed during the term of this Attachment.
Table 1. Non-Recurring Charges.
- ------------------------------------------ ------------
Basic Site Registration/Set-up Charge(1) $3,000
- ------------------------------------------ ------------
On-demand Remote Hands Service(2)
Class A No Charge
Class B $190/hr
Class C $250/hr
- ------------------------------------------ ------------
Table 2. Recurring Charges (per
month).(3)(4)(5)
- ------------------------------------------ ------------
Bandwidth(6)
0.5 Mbps [***]
1 Mbps additional bandwidth up to a [***]
total of 3.5 Mbps
- ------------------------------------------ ------------
Maintenance, Monitoring, Power and [***]
Standard Rack Space (per server)
- --------------------- --------- ---------- ------------
Contracted Remote Hours Class B Class C
Hands Service per
month
--------- ---------- ------------
[***] [***] [***]
[***] [***] [***]
[***] [***] [***]
- --------------------- --------- ---------- ------------
SECTION 2: Quoted Service Fees
Service fees are quoted for each contract for the following components:
Lease: Rental of equipment and software provided by AT&T.
Rack Space: Non-standard rack space.
Additional Installation and Set-up fees: Installation and set-up of more than
one server system and of software.(7)
Bandwidth Options: Bandwidth values other than those described in SECTION 1:
Standard Service Fees, rate shaping and bursting options.
Detailed information about quoted charges, including descriptions and itemized
pricing, is specified below in SECTION 3: Services and Fees.
[***] Confidential treatment has been requested for the bracketed portion. The
confidential redacted portion has been omitted and filed separately with the
Securities and Exchange Commission.
<PAGE> 5
AT&T MA Reference No.______
AT&T Dedicated Hosting Service Level 2
SECTION 3: Services and Fees
Table 3. Detailed Charges for Hardware. Detailed description of hardware to be
provided with charges for installation and monthly rental (if applicable).
- -------------------------------------------------------
Description: [***];
- -------------------------------------------------------
[***];
[***]
[***]
[***]
[***]
[***]
- -------------------------------------------------------
Amount Comments/Additional
Information
- ---------------- ------------- ------------------------
Installation/Set-up [***] [***]
Monthly Fee [***]
- ---------------- ------------- ------------------------
Table 4. Detailed Charges for Software. Detailed description of software to be
provided with charges for installation and monthly rental (if applicable).
- -------------------------------------------------------
Description: N/A
- -------------------------------------------------------
Amount Comments/Additional
Information
- ---------------- ------------- ------------------------
Installation/Set-up [***] N/A
Monthly Fee [***] N/A
- ---------------- ------------- ------------------------
Table 5. Detailed Charges for Additional Features and Services. Detailed
description of any additional features or services with charges for installation
and any monthly charge.
- -------------------------------------------------------
Description: N/A
- -------------------------------------------------------
Amount Comments/Additional
Information
- ---------------- ------------- ------------------------
Installation/Set-up [***] N/A
Monthly Fee [***] N/A
- ---------------- ------------- ------------------------
SECTION 4: Summary of Charges
This detailed itemization will constitute the Customer ordered and agreed to
equipment, software components and configurations.
AT&T Dedicated Hosting Service Level 2 includes four key elements plus an
installation fee. These elements are combined as required to build the
Customer's customized server configurations:
B: Ethernet connection unit to a cluster of maximum three (3) servers.
L: Lease of certified Sun or Compaq computers (optional) plus software.
M: OS maintenance, performance monitoring, per server.
R: Rack space (required for servers exceeding the standard four (4) inch
height).
Table 6. Service Elements Ordered. Summary of total charges by Element, plus
Total Installation charge.
- ---------- --------- ----------------------------------
Element Amount Description/Comments and
Additional Information
- ---------- --------- ----------------------------------
B $ [***] [***].
- ---------- --------- ----------------------------------
L [***]
- ---------- --------- ----------------------------------
M $ [***] [***]
- ---------- --------- ----------------------------------
R $ [***] [***]
- ---------- --------- ----------------------------------
Install $ [***] [***].
- ---------- --------- ----------------------------------
- -------------------------------------------------------
TOTAL INSTALLATION FEE [***] Customer is
responsible
for
installation
and content
management.
- ---------------------------- ---------- ---------------
TOTAL MONTHLY SERVICE FEE [***]
- ---------------------------- ---------- ---------------
Prices shown are for U.S. only and are subject to change on sixty days notice.
Every effort has been made to ensure that the information is complete and
accurate; however, AT&T is not responsible for typographic errors or omissions.
As prices change, the most current prices will be reflected in on-line HELP.
AT&T and AT&T and the Globe Design are registered trademarks and service marks
of AT&T Corp. Any other marks may be proprietary marks of one or more third
parties. (C) 1998 AT&T. All Rights Reserved. Printed in the U.S.A.
- --------
(1) Includes vanity domain name registration (2 years) and set-up, installation
and testing of hardware and standard software for a single server system.
(2) Refer to Exhibit A for a Remote Hands Services.
(3) Minimum term commitment of 1 year. Except as specified below, in the event
of early cancellation of service, the Customer is responsible for payment of the
remaining portion of the term commitment in full and is not eligible for a
refund of any fees. In the event of a notice of price increase of the monthly
Base Rate of [***] or more, the Customer may cancel Service with no cancellation
penalty by providing written notice of cancellation within 60 days following the
date of notice of such price increase. In the event of a notice of price
increase of any of the software options noted above of [***] or more, the
Customer may cancel the affected optional feature with no cancellation penalty
by providing written notice of cancellation of such feature with no cancellation
penalty by providing written notice of cancellation of such feature within 60
days following the date of notice of such price increase.
(4) Billed one month in advance, pro-ratable for partial months. Registration
and monthly charges accrue upon physical completion of server deployment and
connection of the server to AT&T's network regardless of when or whether the
Customer" content has been deployed. Customer is responsible for content
installation and management.
(5) The AT&T Dedicated Hosting Service Level 2 does not include inbound e-mail
or Internet access capabilities, which are the responsibility of the Customer to
obtain.
(6) Standard bandwidth must be ordered with no more than three (3) 1 Mbps
increments for each 0.5 Mbps. Charges for non-standard bandwidth and bursting,
if applicable, will be specified in Section 3 of this Exhibit B.
(7) See Note 1 above. Additional charges apply when more than one server is
ordered, and for any software which AT&T deems not to be a part of its standard
configuration.
[***] Confidential treatment has been requested for the bracketed portion. The
confidential redacted portion has been omitted and filed separately with the
Securities and Exchange Commission.
<PAGE> 6
AT&T MA Reference No.______
AT&T Dedicated Hosting Service Level 2
ADDENDUM TO DEDICATED HOSTING SERVICE LEVEL 2 AGREEMENT
This Addendum, effective as of the date of the last signature herein to the AT&T
Dedicated Hosting Service Level 2 Agreement ("Agreement") between Artist Direct
("Customer") and AT&T Corporation ("Provider") dated on or about April 16, 1999,
is hereby incorporated with reference to the following:
WITNESSETH:
Whereas, Customer agrees to amend the define certain obligations of the parties
hereto pursuant to the Agreements.
Whereas, Provider agrees to amend and define certain obligations of the parties
hereto pursuant to the Agreements.
Whereas, Customer and Provider agree to amend certain obligations and
incorporate this Amendment as expressed and set forth.
NOW THEREFORE, in consideration of the mutual promises and covenants contained
herein the parties agree as follows:
The Agreement is amended as follows:
1. Add into Section (4) under EQUIPMENT: the language "False Call Out services
are determined when contracted client asks AT&T to provide services and then
realizes that the request for services were not required at all. Therefore
AT&T will bill contracted client for False Call Out services as Remote Hands
Class B services. The prices for Remote Hands Class B services are noted in
Exhibit B "Service Components and Pricing" of the AT&T Dedicated Hosting
Service Level 2 agreement."
2. Delete from Section (5) under INDEMNIFICATION (ii): the language "Customers
failure to comply with the terms and provisions of the Agreement, including
without limitation this Attachment, or" and insert in its place, "Customer's
failure to comply with the material terms and provisions of the Agreement,
including without limitation this Attachment."
3. Add into Section (5) under INDEMNIFICATION: the language "In the event that
the Service fails to perform as otherwise warranted hereunder, solely as a
result of the calendar change from year 1999 to the 2000, or solely as a
result of a calculation made through use of such service which involve dates
after December 31, 1999, and not as a result of use of the Service with
services, products, data or systems that themselves fail to function
properly because of such date change or calculation, then AT&T will take
reasonable steps to correct any such failure of the Service, at no
additional charge to Customer, as Customer's exclusive remedy."
4. Delete from Section (6) under ACCESS the fifth sentence: the language "A
lost or stolen access card is replaceable upon payment of a replacement fee
to AT&T." and insert in its place, "A lost or stolen access card is
replaceable upon payment of a reasonable replacement fee to AT&T.".
5. Add into Section (7) under INTERNET SERVER AVAILABILITY: the language
"AT&T/CERFnet Dedicated Hosting Services' national availability percentage
is 99.45 percent, which equates to 4 hours of downtime per month. This
includes scheduled downtime.
The following is AT&T/CERFnet's standard Service Level Agreement based on
server availability:
- All measurements are based on a thirty (30) day measurement period.
- Server availability of 99.45%, which equates to four (4) hours per month
of down-time. This downtime will include scheduled and unscheduled
maintenance windows.
- Mean time to respond - 15 minutes. This means any customer calls that
are not answered directly will receive a call back within 15 minutes of
the time their message is recorded.
- Mean time to restore - 2 hours. This mean that any server outage will be
resolved and the service will be brought back on-line within two hours.
- Mean time to repair - 4 hours. This means that the cause of the server
outage will be corrected within 4 hours.
Scheduled Maintenance and Notification Procedure.
AT&T/CERFnet will use commercially reasonable efforts to provide advance
notice to Customer."
AT&T PROPRIETARY
<PAGE> 7
AT&T MA Reference No.______
AT&T Dedicated Hosting Service Level 2
6. Delete from Footnote (3) in the third sentence: the language "In the event
of a notice of price increase of the Monthly Base Rate of 10% or more, the
Customer may cancel Service with no cancellation penalty by providing
written notice of cancellation within 60 days following the date of notice
of such price increase."
All other Terms and Conditions pursuant to the Agreement shall remain in full
force and effect.
The parties have caused this Amendment to be executed by duly authorized
representatives as indicated hereinbelow.
AT&T CORPORATION ARTIST DIRECT
Name: Name: Marc Geiger
------------------------------- ----------------------------------
Title: Title: Co. CEO
------------------------------ ---------------------------------
Signature: Signature: /s/ MARC GEIGER
-------------------------- -----------------------------
Marc Geiger
Date: Date: 4/17/99
------------------------------- ----------------------------------
Addendum to AT&T Dedicated Hosting Serviced Level 2 Agreement, Dated April 15,
1999
<PAGE> 1
EXHIBIT 10.6
AEC ONE STOP GROUP, INC.
DATABASE, ON-LINE INTERNET RETAIL STORE
AND CONSUMER DIRECT FULFILLMENT SERVICES AGREEMENT
Dated as of August 15, 1998
1. SERVICES: AEC One Stop Group, Inc. (hereafter referred to as "AEC") is in the
business of wholesaling and fulfilling orders for pre-recorded audio and video
products, maintaining certain associated databases, and designing and developing
certain technologies that help its retail customers increase sales of products
found in such databases. Company wishes to engage AEC to provide, by itself and
through its affiliated entities, the following services and licenses to The
Ultimate Band List, LLC (hereafter referred to as "Company"):
- To develop, design and create a generic internet music retail storefront
for Company (the "Store") tentatively called "The UBL Store," to be
linked with Company's Internet Web Site called "The Ultimate Band List"
located under the domain name www.ubl.com ("UBL.COM");
- To operate and maintain the Store on behalf of Company, until such time
as Company and AEC mutually agree to transition the continued operation
and maintenance of the Store from AEC to Company;
- To handle all customer orders placed through the Store, including by
processing all credit card transactions and providing necessary customer
support services in accordance with [Exhibit 1 - Customer Service]
hereto, until such time as Company and AEC mutually agree to transition
the continued customer order handling from AEC to Company;
- To perform as Company's preferred product distributor and fulfillment
service provider with respect to pre-recorded audio-only product in all
formats ("Records) sold through the Store; and
- To receive, warehouse and manage Company's inventory of all such other
products ("Consignment Product") as may be offered for sale on the Store
from time to time (e.g., apparel, concert tickets, posters, tour
memorabilia, collectible items and other merchandise), and fulfill all
orders thereof on Company's behalf.
- To license to Company, for use on the Store as well as on UBL.COM, the
electronic database versions of the general interest music and movie
guides published under the trade names "All-Music Guide" and "All-Movie
Guide" (individually and collectively, the "AMG Database"), which
databases are compiled by AEC;
2. EXCLUSIVITY: During the term of this Agreement, Company agrees (subject
to the terms and conditions of this Agreement): (i) to use AEC as the
exclusive distributor and fulfillment service provider for the Store in
the United States and Canada with respect to those Records found in
AEC's product availability file, as well as Records that AEC can secure
on behalf of Company as a special order, but specifically excluding
Commercially Unavailable Product; and (ii) not to use on the Store a
third party database service similar and competitive to the "All-Music
Guide" database.
1
<PAGE> 2
3. TERM: Subject to the respective termination rights of the parties set forth
in Annex A hereto, this Agreement shall have a term of five (5) years commencing
on June 1, 1998, and shall automatically renew for additional one (1) year terms
unless either party notifies the other of termination at least 90 days prior to
the expiration of the then current term.
4. GENERAL TERMS AND CONDITIONS: All of the above terms are subject to the
General Terms and Conditions attached hereto as Annex A and incorporated herein
by reference. Additionally, shipping and return policies and procedures,
electronic interfacing protocols, representations and warranties, choice of law
provisions, etc., are all as contained in said Annex A, and such terms and
conditions are an integral part of this Agreement.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first written above.
THE ULTIMATE BAND LIST, LLC AEC ONE STOP GROUP, INC.
By: ARTISTdirect New Media, LLC By: [Illegible]
Its: Manager --------------------------------
Its:
-------------------------------
By: ARTISTdirect, LLC
Its: Member
By: /s/ Marc Geiger
----------------------
Marc Geiger
Its: Member
By: /s/ Donald Muller
----------------------
Donald Muller
Its: Member
2
<PAGE> 3
ANNEX A - GENERAL TERMS AND CONDITIONS
TO AEC ONE STOP GROUP, INC.
DATABASE, ON-LINE INTERNET RETAIL STORE
AND CONSUMER DIRECT FULFILLMENT SERVICES AGREEMENT
In consideration of the mutual agreements and covenants contained herein, the
parties hereto agree as follows:
1. STORE DEVELOPMENT AND OPERATION.
1.1 Store Development:
1.1.1 AEC will, at its sole expense, design, create and develop the Store on
behalf of, and in cooperation with, Company, pursuant to the specifications set
forth in Exhibit 2 attached hereto.
1.1.2 AEC shall provide software repairs to the Store for the development effort
completed by AEC and as defined in said Exhibit 2. It is understood by both
parties that on-going enhancements of the Store shall be regularly required to
keep the Store compelling and competitive in the marketplace. Therefore, Company
and AEC agree that a transition period is required after AEC completes its
initial service role in the development of the Store and to shift the on-going
development effort required on the Store to the Company for its control and
continued improvement.
1.1.3 AEC shall use its best commercially reasonable efforts to make available
to Company the required information to facilitate the Transition (as defined
below) in a manner that minimizes interruptions to each party. AEC shall deliver
to Company the latest version of the source code for the Store as and when it is
updated, but in any event no less frequently than twice per month. Upon
Company's request, but in no event later than upon the commencement of the
Transition, AEC shall deliver to Company complete documentation for the source
code.
1.1.4 Company shall cooperate with AEC to develop the technical linkages between
the Store, UBL.COM and the AMG Database. AEC will not intentionally design or
develop the Store in a manner that would prevent Company from adapting the Store
to accommodate the inventory availability databases used by other fulfillment
providers if AEC is no longer fulfilling Product for the Store.
1.2 Store Hosting:
1.2.1 Prior to the Transition, AEC shall host and maintain the Store. In this
regard, Company shall provide AEC with one or more servers (which shall remain
the property of Company and be returned to Company as part of the Transition) to
be used for workload balancing and redundancy for the Store. AEC shall use its
current, recently upgraded T1 line to support the Store.
Annex A - Page 1
<PAGE> 4
1.2.2 Company agrees to reimburse AEC for the following costs reasonably
incurred by AEC and directly associated with hosting and maintaining the Store:
(i) $1,500 per month for AEC's T1 line, (ii) all reasonable Internet Service
Provider ("ISP") costs, and (iii) any hardware maintenance expenses approved by
Company (which approval is not to be unreasonably withheld).
1.3 Store Transition:
1.3.1 The parties agree that a transition of the hosting and maintenance of the
Store from AEC to Company (the "Transition") shall be made on or about February
28, 1999 (or such alternative time as the parties hereto may mutually agree).
1.3.2 AEC shall provide technical support for the Store, including timely
maintenance and repair on any of the development completed on the Store features
developed by AEC, for three (3) months following the Transition. In the event
Company continues to require AEC technical support for the Store after such
three (3) month period, Company and AEC shall negotiate a reasonable monthly fee
payable by Company to AEC for such support services.
1.3.3 Company agrees to reimburse AEC for all reasonable ISP costs incurred by
AEC in connection with the Transition.
2. ORDER FULFILLMENT. Subject to the terms of this Section 2, AEC shall supply
to customers all Records and Consignment Product (collectively, "Product")
ordered by the customers of the Store (the "Customers"). In connection
therewith, AEC shall perform the fulfillment, technical and professional
services described below.
2.1 Fulfillment Services:
2.1.1 AEC shall process orders received from Store and arrange to have the
ordered Product shipped to the Customer. All orders will be quality controlled
through advanced sorting and UPC verification methods. However, AEC will have no
obligation to ship "Commercially Unavailable Product," which shall mean any
Record or other item of Product which, at the time the order for such item is
ordered by a Customer or during the process of such order being fulfilled, is
not in the inventory of AEC and, with respect to Records only: (a) is no longer
manufactured; (b) is not reasonably available to AEC from the company that
releases such product; or (c) has been deleted from the catalog of the company
that releases such items.
2.1.2 The Store shall provide advanced on-line connectivity in order to query or
commit Product orders for Customers in real time fulfillment.
2.1.3 AEC shall host a "Remote Order Entry" application that will permit Company
to manually enter Customer orders, cancel or delete orders, query order status
and process authorization for product returns, directly from the AEC fulfillment
computer system. This application will permit Company to access Customer orders.
2.1.4 AEC shall be an invisible fulfillment arm. AEC will produce custom Company
invoices with Company's logo and store policies, shipping labels and packaging
consistent with AEC technologies and capabilities that will accompany an order
to identify the product/order as from
Annex A - Page 2
<PAGE> 5
Company. AEC will affix stickers and any other identification labels as Company
may request from time to time in respect of all orders of Product, for no
additional charge to Company so long as there is no more than one label per unit
of Product and it is compatible with AEC's material and handling technology. In
addition, AEC will, at no charge, insert promotional materials (e.g., stickers
bearing Company's logo, coupons, etc.) on behalf of Company with each shipment,
subject to the understanding that all costs reasonably incurred by AEC and
associated with the inserts in excess of the first insert per package, shall be
borne by Company. AEC shall bear the costs of invoices and shipping labels,
provided Company accepts AEC's invoice and shipping label formats (samples of
which are attached hereto as Exhibit 3). Special handling considerations not
otherwise addressed herein shall be reviewed during formal operations meetings
and it is understood that AEC and Company shall negotiate in good faith as to
the cost, if any, which will be charged for such special handling.
2.1.5 AEC will make available account representatives who will be responsible
for using reasonable efforts to meet all Company's customer service, product
sales, and technological needs for Company to manage the Store on an on-going
basis.
2.2 Shipping and Return Procedures:
2.2.1 Other than with respect to Commercially Unavailable Product, AEC
represents that (i) all Product for which a Verified Order has been received by
AEC prior to 3:00 PM Eastern Time shall be shipped on a same-day basis, and (ii)
no less than 95% of all units of Product shall be shipped from an AEC facility
within 24 hours of AEC's receipt of a Verified Order therefor. No Product shall
be shipped or otherwise released by AEC to any third party other than pursuant
to a Verified Order. As used herein, the term "Verified Order" means an order
that provides all of the relevant Customer information, including valid account,
address, credit card information and Product related information and for which
transaction authorization has been received by Company's (or AEC's, if
applicable) credit card contractor or payment from the Customer has otherwise
been received by Company.
2.2.2 Current methods of shipment include: United States Postal Service: and
United Parcel Service. AEC shall offer to Company the full range of shipping
options to Customers of Company at no additional cost above fees charged by the
shipping carriers. AEC represents and warrants, and Company acknowledges, that
the shipping rates charged to AEC by its shipping carrier represent [***].
Company agrees that such shipping rates constitute Confidential Information of
AEC under this Agreement, subject to the provisions of Section 9 hereof.
2.2.3 Company shall designate the return policies of the Store (which current
policies are set forth on Exhibit 4 attached hereto and shall not be subject to
significant changes in respect of Records without AEC's consent). AEC shall not
issue a refund or other credit to any Consumer for returned Product without
first verifying that Company has issued an appropriate return authorization for
the Product concerned. Company shall assume and pay for all shipping and other
costs incurred in respect of returned, exchanged, refused and undeliverable
Product, including all shipping and other costs incurred with respect to the
processing of an order if the Customer provides incorrect information to AEC, or
if Company causes incorrect order information (i.e., other than as provided by
the Customer) to be provided to AEC. Notwithstanding the foregoing, AEC shall be
responsible for all Product either incorrectly shipped to a Customer or damaged
while in transit to the Customer, but only if such Product was shipped via an
insured and traceable carrier. In such cases, AEC shall assume and pay for all
shipping and other costs incurred in the return or exchange of Product and will
ensure that Company incurs no product cost for the involved transaction. With
respect to all unopened
- --------------------------
[***] Confidential treatment has been requested for the bracketed
portion. The confidential redacted portion has been omitted and filed separately
with the Securities and Exchange Commission.
Annex A - Page 3
<PAGE> 6
Records returned by a Customer in accordance with the return policies of the
Store other than defective, damaged or incorrectly shipped Records, Company
shall receive full credit therefor less a return handling fee of [***] per
Record; provided AEC returns such Record to its inventory for resale or is able
to return it to the distributor for a credit.
2.2.4 Company shall also be able to receive electronic updates on orders
shipped, including shipping methods, tracking numbers, fill, invoice totals, and
all pertinent data reasonably requested by Company.
2.3 Prices; Costs; Fees:
2.3.1 Company shall designate the price of all Product offered for sale on the
Store, as well as all other amounts to be charged to the Customers (e.g.,
shipping and handling charges).
2.3.2 Company shall purchase from AEC each Record fulfilled by AEC hereunder at
competitive prices (currently for a purchase price equal to that set forth on
Exhibit 5 attached hereto). The parties acknowledge that such prices may be
subject to such increases or decreases (e.g., if the manufacturers of Records
adjust their prices to AEC) as mutually agreed by the parties from time to time.
Such prices are inclusive of the Consumer Direct Fulfillment services normally
charged for such activities as pick, pack and handling of individual customer
orders.
2.3.3 Notwithstanding the foregoing, in order effectively to promote and attract
Customers to the Store, the parties acknowledge the value of Company offering
for sale on the Store selected Records at special marked-down prices for limited
periods of time (a "Limited Special"). Company shall advise AEC of the
applicable SKU's and time periods for which Company wishes to conduct a Limited
Special at least thirty (30) days prior to the scheduled commencement thereof,
and AEC agrees to use its best commercially reasonable efforts to offer such
SKU's to Company at a discounted price, provided that AEC shall not be obligated
to so discount more than [***] SKU's as part of any particular Limited Special
or during any particular month.
2.3.4 Company shall pay AEC a fulfillment fee for each item of Consignment
Product fulfilled by AEC hereunder equal to that set forth on Exhibit 6 attached
hereto.
2.3.5 Subject to paragraph 2.2.2 above, Company shall reimburse AEC for its
actual shipping expenses to ship ordered Product to the Customers. The shipping
rates of AEC's shippers and carriers that shall be charged to Company are set
forth on Exhibit 7 attached hereto. Subject to paragraph 2.2.2 above, shipping
rates are subject to changes generally noticed to trade and Company by AEC.
2.3.6 Company shall be responsible for the cost of actual packaging materials
(e.g., shipping boxes) required for secure shipment of Consignment Product (as
opposed to shipment of Records, for which the costs of packaging materials are
included in the prices charged to Company hereunder) to Customers. Such costs
are set forth on Exhibit 8 attached hereto.
2.3.7 Company shall pay AEC a [***] service charge per Customer inquiry handled
by AEC pursuant to Section 3 below, including per manual order processed by AEC
(i.e., orders received by AEC other than via the interactive Store electronic
order processing, such as via fax, phone or email). The parties agree to
negotiate a reasonable increase or decrease of such service charge if the volume
of Customer inquiries and/or AEC's associated costs prove significantly
different than expected by the parties as of the execution hereof.
- --------------------------
[***] Confidential treatment has been requested for the bracketed
portion. The confidential redacted portion has been omitted and filed separately
with the Securities and Exchange Commission.
Annex A - Page 4
<PAGE> 7
2.3.8 Except as otherwise expressly provided herein, AEC shall impose no
additional incremental charges to Company for handling Records and Consignment
Product to be shipped to Company's customers hereunder.
2.4 Foreign Fulfillment: It is the intention of the parties that AEC shall
initially fulfill orders of Product hereunder throughout the world. However,
if, during the term of this Agreement, Company desires to fulfill orders of
Records hereunder for distribution in one (1) or more foreign territories
through a fulfillment operation located outside the United States and Canada,
it shall notify AEC of the major terms and conditions upon which Company wishes
to obtain fulfillment in the territory(ies) concerned (the "Offer"). So long as
AEC has, at the time of the Offer, directly or through an affiliate, a
fulfillment operation in place capable of satisfactorily servicing the
applicable territory(ies), the following shall apply: (i) AEC shall have the
right, exercisable within ten (10) business days of the date of the Offer, to
notify Company that it wishes to negotiate with Company in respect of the
fulfillment of Records for the Store in such territory(ies); (ii) if AEC
exercises such right within said ten (10) business day period, Company shall
not enter into an agreement with any third party in respect of the fulfillment
of Records for the Store in such territory(ies) for a period of thirty (30)
days after the date of the Offer; and (iii) after such thirty (30) day period,
Company and AEC have not reached an agreement, Company shall have the right to
enter into an agreement with any third party for the fulfillment of Records in
such territory(ies), but only if the terms of such agreement are not less
favorable to Company than those set forth in AEC's last offer to Company and
provided that such agreement is consummated within one hundred eighty (180)
days after the date of the Offer (failing which, the rights of AEC under this
paragraph 2.4 will be revived).
3. CUSTOMER SERVICE.
3.1 Subject to paragraph 2.3.7 above, AEC shall initially provide, on behalf of
Company, customer support for those orders placed by Customers through the
Store. It is contemplated that AEC shall provide such services during the
initial nine (9) months of the term of this Agreement. The period during which
AEC provides such services is sometimes referred to herein as the "AEC Service
Period." These services shall include retaining and supervising customer support
personnel who will respond to Customer inquiries about products ordered via the
telephone, fax, and on-line. AEC shall also provide office space and equipment
for that personnel. It is further contemplated that, after said nine (9) month
period, Company shall assume this Customer support function, subject to Company
notifying AEC of its intention to do so at least 60 days in advance. The parties
understand that when AEC provides Customer support, it will be provided so the
Customer perceives that such support is being provided by Company. AEC (or
Company, as applicable) shall respond promptly and professionally to Customers'
questions regarding the procedure for ordering Products and any other questions
regarding their orders. In communicating with Customers in connection with
Customers' inquiries, AEC and Company shall use e-mail or other online
connectivity to Customers whenever reasonably possible.
3.2 AEC will provide Company's customers with a toll-free (800 phone number)
call center and AEC will establish and maintain an e-mail customer service
address. AEC will maintain Company's consumer call center at its Florida
headquarters. Consumer Call Center operates Monday through Friday (excluding
holidays), 9:00 AM to 6:00 PM, Eastern Time. Incoming phone calls received after
normal coverage hours are handled via e-mail and AEC will respond to all its
customer email messages the following working day. The services to be provided
by AEC under this Section 3 are further outlined on Exhibit 1 attached hereto.
3.3 The Store will contain a prominently featured hyperlink, with the AMG logo,
to www.allmusic.com. In the event Company receives corrections, additions,
errors, and other comments about the AMG Database from the Store's users,
Company shall forward those comments to the AEC staff. Additionally, both
Company and AEC will review, use and evaluate statistical information collected
via the Store that indicates Customer preferences, purchasing patterns and
similar buying behaviors.
3.4 During the AEC Service Period, all credit card transactions shall be handled
by AEC, at no additional charge, under Company's credit card merchant clearing
agreement. If AEC should nevertheless receive
Annex A - Page 5
<PAGE> 8
any monies from a Customer in respect of Product sold on the Store, it will
promptly pay over 100% of such monies to Company.
4. DATABASES.
4.1 AMG Database:
4.1.1 AEC hereby irrevocably grants to Company the non-exclusive license
(without the right of sub-license, whether to Company's affiliates or
otherwise), throughout the universe, to use, copy, display and otherwise exploit
the AMG Database, and any portions thereof, and the AMG Marks (as defined in
Section 5 below), solely in and as part of the Store and/or UBL.COM.
4.1.2 Subject to paragraph 4.3.7 below, the period of the license granted to
Company pursuant to this paragraph 4.1 shall commence on June 1, 1998 and end on
the date five (5) years after the expiration or termination of the term of this
Agreement (the "AMG License Period").
4.1.3 The rights licensed to Company hereby in respect of the AMG Database shall
include all future revisions, enhancements and updates thereto. In this regard,
AEC shall deliver to Company an updated copy of the most recent version of the
AMG Database no later than upon the fifth day of each month of the AMG License
Period (unless otherwise agreed upon by both parties) in a format to be mutually
agreed upon. Delivery shall be by FTP pickup, at a designated site for Company's
site, unless otherwise agreed by the parties. Any expenses for any other method
of delivery shall be borne by Company.
4.1.4 With respect to musical recordings sold on the Store during the term of
this Agreement via a digital transferring process when the AMG Database is used
to help promote and feature such sales, AEC shall receive [***] of the revenues
derived from such sales and actually received by Company (net of sales tax and
credit card charges).
4.1.5 If Company continues to use the AMG Database on the Store and/or UBL.COM
during the portion of the AMG License Period occurring after the expiration or
termination of the term of this Agreement, then, in consideration of the license
granted to Company under this paragraph 4.1, Company agrees to pay AEC a royalty
equal to [***] of the Net Monthly Sales generated after the expiration or
termination of the term of this Agreement, but only for as long as Company
continues to use the AMG Database. As used herein, the term "Net Monthly Sales"
shall mean amount of revenues generated by the Store (and UBL.COM, to the
extent the AMG Database is used to help promote and feature the applicable
sales), less any applicable shipping costs, handling charges, returns and
allowances, sales tax and various credit card charges.
4.1.6 For purposes of Section 365(n) of the United States Bankruptcy Code, the
licenses granted to Company under this paragraph 4.1 shall be considered
licenses of rights to "intellectual property" as defined thereunder.
Notwithstanding any provision contained herein to the contrary, if the party
that grants such license is under any proceeding under the United States
Bankruptcy Code and the trustee in bankruptcy of such party, or such party, as a
debtor in possession, rightfully elects to reject this Agreement, Company may,
pursuant to 11 U.S.C.
- ---------------
[***] Confidential treatment has been requested for the bracketed portion. The
confidential redacted portion has been omitted and filed separately with the
Securities and Exchange Commission.
Annex A - Page 6
<PAGE> 9
Section 365(n)(1) and (2), retain any and all rights licensed to Company under
this paragraph 4.1, to the maximum extent permitted by law, subject to Company
making any payments to AEC required under paragraph 4.1.5 above.
4.1.7 If, at any time during the AMG License Period, AEC (or any affiliate of
AEC) is approached by a third party or otherwise commences communications with a
third party with respect to a proposed sale or other transfer of ownership or
control in respect of the AMG Database, AEC (or such affiliate) shall promptly
notify Company to such effect so as to accord Company a reasonable opportunity
to negotiate with AEC (or such affiliate) in order to obtain the rights proposed
to be so sold or transferred.
4.2 AEC Availability File: AEC currently compiles and maintains, and shall
continue at all times during the term of this Agreement to compile and maintain,
a separate inventory database which provides AEC's retail customers with
information regarding the availability and pricing of AEC's available SKU's (the
"AEC Availability File"). Subject to paragraph 4.3.7 below, AEC hereby
irrevocably grants to Company, during the term of this Agreement, the
non-exclusive license (without the right of sub-license, whether to Company's
affiliates or otherwise), throughout the universe, to use, copy, display and
otherwise exploit the AEC Availability File, and any portions thereof, solely in
and as part of the Store and in the manner contemplated hereby.
4.3 Other Terms Concerning Databases:
4.3.1 The AMG Database and the AEC Availability File are sometimes referred to
herein individually as a "Database" or collectively as the "Databases."
4.3.2 Except as set forth in paragraph 4.1.5 above, the rights licensed to
Company hereby in respect of the Databases shall not involve the payment of
royalties or any other consideration whatsoever to AEC, its affiliates, or any
other person or entity.
4.3.3 AEC shall incorporate the Databases into the Store to be used as the
Customers' shopping catalog, and shall provide regular updating and general
editorial and database maintenance service at all times so as to make the
information contained in the Databases current and complete to the same extent
as the versions of the Databases which are current at the time this Agreement is
executed, which versions have been reviewed by Company. AEC represents and
warrants that the AMG Database shall be updated no less frequently than monthly,
and that the AEC Availability File shall be updated no less frequently than
weekly, or at such other intervals as mutually agreed by AEC and Company, but in
no event less frequently than AEC or any of its affiliates provide updates to
any of their other licensees. Both parties recognize the importance of offering
the Customers complete details on the up and coming new album releases.
4.3.4 At Company's request, AEC shall adapt the Databases so as to allow them to
be linked to third party audio sample databases (subject to AEC's reasonable
approval), provided such third party databases contain accurate UPC bar codes
for all applicable audio formats and configurations (e.g., videocassette, laser
discs, etc.) and Company causes such third party databases to be delivered to
AEC. If Company requires additional linking beyond the UPC bar code, this can be
arranged for a fee to be agreed upon by Company and AEC.
Annex A - Page 7
<PAGE> 10
4.3.5 AEC shall provide reasonable maintenance and support for the Databases to
Company personnel at all times during the license period set forth herein
applicable to the Database concerned.
4.3.6 The parties acknowledge that additional product data will have to be
incorporated into the Databases for use in the Store in order to support the
sale of Consignment Product; the parties hereto shall mutually determine the
best means (operationally and from an expense position) to accomplish such task.
4.3.7 If Company transfers (through a sale, merger, consolidation, entrance into
a joint venture, or other similar transaction) any of the Databases to an "AEC
Competitor," AEC shall have the right to immediately terminate by notice to
Company, the license granted to Company pursuant to this Section 4 with respect
to the Database concerned. As used herein, the term "AEC Competitor" shall mean
[***].
5. AMG TRADEMARKS.
5.1 Company agrees to include the "All Music Guide" trademark, service mark
and/or associated design or logo (individually and collectively, the "AMG
Marks") with all presentations of AMG Database information on the Store and
UBL.COM (e.g., page view, discography listing, biography, album review, album
track listing), so as to inform the viewer that the data viewed has been
provided by the All Music Guide. The placement of the AMG Marks shall be
designated by AEC, subject to Company's approval, not to be unreasonably
withheld or delayed. Placement of the AMG Marks in accordance with the
illustrations attached hereto as Exhibit 9 attached hereto shall be deemed
pre-approved by AEC and Company. Without limiting the generality of the
foregoing, displays of the following AMG Database information will be marked
with the corresponding AMG logo and branding as set forth below: Artist
Biographies, Essays, and Album Reviews will be marked "AMG Biography," "AMG
Essay," and "AMG Review," respectively. After each biography and album review,
the name of the author, and the term "AMG" will be listed. Ratings will be
marked "AMG Ratings," and relational elements such as the following will be
marked as: "AMG Roots & Influences," "AMG Similar/Related Artists," "AMG Music
Maps," "AMG Track Listings" and "AMG Similar Albums."
5.2 During the AMG License Period, Company agrees to cause the AMG Marks to
appear prominently in all promotional materials prepared by Company in respect
of the Store, provided that any inadvertent failure to comply with this
paragraph 5.2 shall not be deemed a breach of this Agreement.
6. CONSIGNMENT PRODUCT.
6.1 With respect to all items of Consignment Product, as between AEC and
Company, Company shall be solely responsible for: (i) shipping the items to AEC
(and all shipping and insurance costs related thereto, (ii) the cost of insuring
such items (including while in AEC's possession), (iii) assisting AEC in
insuring that each item has a viable UPC code, (iv) ensuring that each item is
legal for sale and that Company has the legal rights to request AEC to fill
orders thereof.
6.2 The parties hereto anticipate that inventory of Consignment Product held by
AEC in its warehouses will be in such quantities and held for such periods of
time so as to allow an average
- -------------
[***] Confidential treatment has been requested for the bracketed portion. The
confidential redacted portion has been omitted and filed separately with the
Securities and Exchange Commission.
Annex A - Page 8
<PAGE> 11
of no less than [***] turnovers per year of such inventory. In the event, after
the initial three (3) months the Store has been in operation, the parties
determine that the average turnover rate for all such inventory is less than so
anticipated, then AEC shall be entitled to charge Company a warehouse rental fee
equal to [***] per month thereafter during which the turnover rate is lower than
an average of [***] per year for each required warehouse bin/storage location.
6.3 AEC shall receive, unpack, count and add UPC codes (to the extent required)
to all shipments of Consignment Product and promptly incorporate such units into
the AEC Availability File and/or otherwise provide Company with up-to-date
inventory levels in a manner reasonably satisfactory to Company. AEC shall
promptly notify Company if there is a discrepancy between the actual number of
units received in any shipment and the corresponding number reflected on the
packing slip. Company shall advise AEC at least seven (7) days in advance of
forthcoming deliveries.
6.4 As between AEC and Company, all Consignment Product inventory shall remain
the property of Company at all times. AEC agrees that it shall safeguard such
inventory in the same manner that it safeguards items in its own inventory in
its warehouse, and that it shall be responsible for all inventory shrinkage.
6.5 All inventory of Consignment Product shall be held in separate locations in
AEC's warehouse so as to physically segregate all Consignment Product inventory
from AEC's inventory of other products, which locations shall be clearly marked
by posted signs or placards identifying all inventory in the applicable storage
area as belonging to a third party. Company shall have the right to approve all
such signs and placards as to language, size and placement. AEC agrees from time
to time to execute and deliver all further instruments and documents, and take
all further actions, that may be necessary or desirable, or that Company may
reasonably request, in order to protect Company's and the Company Clients'
rights in the Consignment Product inventory. Without limiting the generality of
the foregoing AEC hereby irrevocably grants to each of Company and the Company
Clients a power-of-attorney to sign and file one or more financing or
continuation statements, and amendments thereto, under the Uniform Commercial
Code relative to all or any part of the Consignment Product inventory without
the signature of AEC where permitted by law.
7. PAYMENTS, REPORTS AND AUDIT RIGHTS.
7.1 Payment Terms: Company shall make all payments due AEC hereunder within
[***] days of its receipt of appropriate invoices therefor from AEC.
Notwithstanding the foregoing, invoices for payments due pursuant to paragraphs
1.2.2, 1.3.3 and 2.3.7 hereof shall be payable within fifteen (15) days of
Company's receipt thereof.
- ------------
[***] Confidential treatment has been requested for the bracketed portion. The
confidential redacted portion has been omitted and filed separately with the
Securities and Exchange Commission.
Annex A - Page 9
<PAGE> 12
7.2 Sales Reports:
7.2.1 During the AEC Service Period, AEC shall electronically transmit to
Company, on a daily basis, data reflecting all sales and returns of Product for
the preceding day. Further, within thirty (30) days after each calendar month of
the AEC Service Period, AEC shall send Company a comprehensive report detailing
all sales and returns of Product during the calendar month concerned.
7.2.2 Within thirty (30) days after each calendar month of the term of this
Agreement subsequent to the AEC Service Period, Company shall send AEC a summary
sales report detailing the Net Monthly Sales during the calendar month
concerned.
7.2.3 To the extent Company uses the AMG Database after the term of this
Agreement, Company shall compute, pursuant to paragraph 4.1.5 above, AEC's share
of the Net Monthly Sales received by Company during each calendar month and send
AEC, within thirty (30) days after the calendar month concerned, a summary sales
report detailing such Net Monthly Sales, along with payment of any amounts due.
7.2.4 In the event Company sells musical recordings on the Store via a digital
transferring process and the AMG Database is used to help promote and feature
such sales, then Company shall send AEC, within thirty (30) days after each
calendar month of the AMG License Period, a summary sales report detailing all
revenues generated thereby, as well as all associated sales tax and credit card
charges, together with payment to AEC computed in accordance with paragraph
4.1.4 above in respect of any such revenues earned during the term of this
Agreement, it being understood that any such revenues earned after the term of
this Agreement shall be included as "Net Monthly Sales" under paragraph 4.1.5
above. Company shall not be obligated to render statements under this paragraph
7.2.4 for months during which there are no such sales.
7.3 Inventory Reports: Without limiting the generality of paragraph 6.3 above,
within thirty (30) days after each calendar month of the term of this Agreement,
AEC shall send Company detailed inventory reports for all Consignment Product
reflecting shipments received, units sold and returned, and then-current
inventory levels as of the end of the calendar month concerned. Company shall
have reasonable access to AEC's warehouse in order to perform physical inventory
counts from time to time.
7.4 Books and Records: Each party shall have the right, at its sole cost and
expense and upon reasonable notice to the other party, to inspect and audit the
books and records of such other party insofar as said books and records pertain
to the calculation of monies payable hereunder. Such examination shall take
place during normal business hours at the place of business where such books and
records are kept, and not more than once per calendar year. Any such inspection
must be undertaken within two (2) years after the end of the calendar year being
inspected.
- -------------
Annex A - Page 10
<PAGE> 13
8. OWNERSHIP.
8.1 Store: Subject to AEC's rights in the Developed Technology (as defined
below) pursuant to paragraph 8.1 below, AEC recognizes and agrees that Company
is the sole owner of all right, title and interest in all rights associated with
the Store, and that all goodwill associated with the Store shall inure
exclusively to the benefit of Company.
8.2 Developed Technology: All rights (including all intellectual property
rights, whether recognized currently or in the future) in and to the works
developed by AEC for the Store in connection with this Agreement ("Developed
Technology"), including the source and object code, end-user interface,
navigational structure, appearance, commerce technology, HTML formatting code,
scripts, software, text, graphics, audio, video, artwork and designs, will be
owned jointly by Company and AEC. Notwithstanding the joint ownership of the
Developed Technology, except to prevent a violation of the terms of this
Agreement, neither party shall have any right to restrict or approve of the
other party's use of such Developed Technology or any portion thereof, and
neither party shall be obligated to share any of the results and proceeds of
its use of the Developed Technology or any portion thereof with such other
party. Notwithstanding the foregoing, without the prior written consent of the
other party, neither party may grant any exclusive license to the Developed
Technology, and, without the prior written consent of AEC, Company may not
license or otherwise transfer the Developed Technology to (a) any AEC
Competitor or (b) any person or entity other than an AEC Competitor (a "Non AEC
Competitor") except in connection with a transfer of the Store to such Non AEC
Competitor. For the avoidance of doubt, nothing in this Agreement shall
preclude Company, without the prior written consent of AEC, from engaging in
any merger, reorganization, consolidation or direct or indirect sale or
purchase of outstanding equity that results in the transfer of less than 50% of
the outstanding voting power of Company. Each party agrees to execute any such
documents as may be requested by the other party and reasonably required in
order to effectuate the foregoing. All copyright filings made in connection
with the Developed Technology shall be made jointly in the names of AEC and
Company.
8.3 Independent Technology: Notwithstanding anything to the contrary contained
in this Agreement, Company will acquire no ownership interest in any technology
developed by AEC prior to or independently of this Agreement ("AEC Technology")
and AEC will acquire no ownership interest in any technology developed by
Company prior to or independently of this Agreement (the "Company Technology").
AEC hereby grants to Company a royalty-free, nonexclusive, irrevocable,
perpetual license, throughout the universe, to exploit the AEC Technology (but
specifically excluding the Databases) solely to the extent reasonably required
to facilitate Company's continued use, modification, maintenance and promotion
of the Store and the Developed Technology. For purposes of Section 365(n) of the
United States Bankruptcy Code, said license shall be considered a license of
rights to "intellectual property" as defined thereunder. Notwithstanding any
provision contained herein to the contrary, if AEC is under any proceeding under
the United States Bankruptcy Code and the trustee in bankruptcy of AEC, or AEC,
as a debtor in possession, rightfully elects to reject this Agreement, then
Company may, pursuant to 11 U.S.C. Section 365(n)(1) and (2), retain any and all
of its rights under such license, to the maximum extent permitted by law.
8.4 Databases:
8.4.1 Company acknowledges and agrees that the Databases and all revisions,
modifications and enhancements thereof provided by AEC to Company under this
Agreement are the exclusive and proprietary information of AEC. Title and full
ownership rights thereto, including copyright, trade secret, trademark, trade
name and other intellectual and proprietary rights, are reserved to, and shall
remain with and be the valuable property of, AEC. Company acknowledges the
valuable, proprietary nature of the Databases, including all revisions,
modifications and enhancements thereof, and agrees that irreparable injury will
result from any use, disclosure, reproduction or distribution of the Databases
that is not authorized by this Agreement and agrees not to contest in any way
whatsoever the proprietary status of the Databases or AEC's subsisting
copyrights therein. Company will not remove any proprietary or confidential
legends or markings which AEC has placed upon or within the Databases. Transfer
of certain Store
Annex A - Page 11
<PAGE> 14
technology, as provided herein, shall not, under any circumstances, transfer any
right , title or interest in or to the Databases from AEC to Company.
8.4.2 Company acknowledges that AEC may, at any time or times during the license
period set forth herein applicable to the Database concerned, substitute a new
version of the Database for the version of such Database originally provided
hereunder; in which case the license granted to Company by this Agreement shall
cease with respect to the replaced version of such Database, and Company shall
purge all copies of the replaced version from Company's computer system and from
any other computer storage device or medium as to which Company has or should
have control consistent with this license.
8.5 AMG Marks: Company acknowledges that AEC is the sole owner of all right,
title and interest in the AMG Marks. Nothing contained in this Agreement shall
be construed as an assignment or grant to Company of any right, title or
interest in or to the AMG Marks. All rights relating thereto are expressly being
reserved by AEC, except for the limited licenses granted to Company herein, and
all goodwill associated with the AMG Marks inures to the benefit of AEC.
8.6 UBL Properties: AEC acknowledges and agrees that all information obtained by
AEC from UBL.COM (including any information contained in the various databases
published by Company through UBL.COM, such as artist information and links to
third party Web Sites) or supplied to AEC, in connection with linking UBL.COM
with the Store and the AMG Database or otherwise, as well as all related
copyright, trade secret, trademark, trade name and other intellectual and
proprietary rights (collectively, "UBL Properties") are reserved to, and shall
remain with and be the valuable property of, Company. AEC acknowledges the
valuable, proprietary nature of the UBL Properties, including all revisions,
modifications and enhancements thereof, and agrees that irreparable injury will
result from any use, disclosure, reproduction or distribution of the UBL
Properties that is not authorized by this Agreement and agrees not to contest in
any way whatsoever the proprietary status of the UBL Properties or Company's
subsisting copyrights therein. Notwithstanding the foregoing, AEC shall have
the limited right to extract only artist names and associated music genre
information from the databases published through UBL.COM for incorporation into
the AMG Database. The use by AEC of certain UBL Properties as provided herein
shall not, under any circumstances, transfer any right, title or interest in or
to the UBL Properties from Company to AEC.
9. CONFIDENTIALITY.
9.1 During and following the term hereof, each party to this Agreement expressly
undertakes to retain in confidence, and to require and cause its subsidiaries
and affiliates and its and their respective employees, contractors and agents to
retain in confidence, all information and know how transmitted to such party
(the "Receiving Party") (i) which the disclosing party hereunder (the
"Disclosing Party") has identified in writing as being proprietary and/or
confidential or (ii) which the Receiving Party reasonably should know, based
upon the nature of the information being disclosed, ought to be treated as
confidential (collectively "Confidential Information"). The Receiving Party will
make no use of such Confidential Information except as expressly authorized
under this Agreement. Either party may, however, disclose Confidential
Information if required by law or legal process, provided such party shall
undertake to give the other
Annex A - Page 12
<PAGE> 15
reasonable notice prior to such disclosure and shall comply with any applicable
protective order or equivalent. Under no circumstances shall a Disclosing Party
be entitled to terminate this Agreement for an alleged unauthorized use or
disclosure by the Receiving Party of Confidential Information which was not
marked as "confidential" or "proprietary" unless such disclosure was made in bad
faith (in which case the Disclosing Party may terminate this Agreement to the
extent permitted under Section 12 below).
9.2 Without limiting the generality of paragraph 9.1 above, the parties agree
that the following information disclosed by one party to the other shall be
deemed Confidential Information: the capabilities, technical descriptions and
source code relating to either party's released or unreleased software or
hardware products or services; the marketing or promotion plans of any product
or service of either party; either party's business policies or practices; and
information received from others that either party is obligated to treat as
confidential.
9.3 Without limiting the foregoing:
9.3.1 Company agrees that the Databases and all information contained therein
and/or provided by AEC hereunder, including database layouts, schema, algorithms
and linking and other program features, are and shall be treated as Confidential
Information. Company agrees not to copy, disclose or otherwise make available
the Databases, in any form, to any person for any purpose other than as
necessary to permit Company's use of the Databases as authorized herein. Company
shall include in copies or reproductions of the AMG Database the "AMG" logo and
any other patent, copyright, trademark or proprietary notices contained in the
original or as reasonably required by AEC. Company shall take all reasonable
steps to safeguard the Databases against unauthorized disclosure. Company also
agrees not to use the Databases except as authorized under this Agreement and,
in particular, without limiting the foregoing, not to use such information to
develop a product that would be competitive with the Databases.
9.3.2 AEC agrees that the UBL Properties and all information contained therein
and/or provided by Company hereunder, including database layouts, schema,
algorithms and linking and other program features, are and shall be treated as
Confidential Information. AEC agrees not to copy, disclose or otherwise make
available any UBL Properties, in any form, to any person for any purpose. AEC
shall take all reasonable steps to safeguard the UBL Properties against
unauthorized disclosure. AEC also agrees not to use the UBL Properties except
for purposes of performing its services hereunder in connection with the Store
and, in particular, without limiting the foregoing, not to use such information
to develop a product that would be competitive with UBL.COM.
9.4 Both parties acknowledge that unauthorized disclosure or use of Confidential
Information could cause irreparable harm and significant injury which may be
difficult to ascertain. Accordingly, both parties agree that the aggrieved party
will have the right to seek and obtain injunctive relief from breaches of this
Section 9, in addition to any other rights and remedies it may have. Both
parties agree that each has and shall retain ownership rights to its own
Confidential Information, and that upon expiration or termination of this
Agreement each party shall return and shall not retain the Confidential
Information of the other party.
9.5 Notwithstanding anything in this Section 9 to the contrary, Confidential
Information shall not be construed to mean any information which the Receiving
Party can show: (i) is, or subsequently becomes, publicly available other than
as a result of the Receiving Party's breach of
Annex A - Page 13
<PAGE> 16
any obligation owed to the Disclosing Party or a third party; (ii) became known
to the Receiving Party prior to the Disclosing Party's disclosure of such
information to the Receiving Party, (iii) became known to the Receiving Party
from a source other than the Disclosing Party other than as a result of such
source's breach of an obligation of confidentiality owed to the Disclosing
Party, (iv) is independently developed by the Receiving Party, or (v) has been
authorized for disclosure by the Disclosing Party.
9.6 The provisions of this Section 9 shall survive termination or expiration of
the term of this Agreement.
10. WARRANTIES AND REPRESENTATIONS.
10.1 By AEC.
10.1.1 AEC warrants and represents for the benefit of Company as follows: (i)
the services to be performed by AEC hereunder will be rendered in accordance
with all requirements identified in this Agreement, (ii) AEC has all rights,
licenses and authorizations required to enter into and perform this Agreement,
and the performance of AEC's obligations pursuant to this Agreement will not
violate any United States federal, state or municipal laws, rules, regulations
or ordinances or the provisions of any agreement to which AEC is a party or by
which AEC is bound; (iii) no Developed Technology or the exploitation or use
thereof shall violate or infringe upon any common law or statutory rights of any
party, including contractual rights, copyrights, and rights of privacy or
publicity or shall defame any person or entity; and (iv) any invoices, reports
and documentation to be delivered to Company hereunder will be complete and
accurate to the best of AEC's knowledge.
10.1.2 AEC represents and warrants that AEC (and its affiliates) is the rightful
owner and/or licenser of the Databases, including the copyrights, trademarks,
trade names or other property rights contained therein and being licensed herein
by AEC. The foregoing notwithstanding, AEC does not warrant that it owns any
right to the album artwork or artist images or likenesses that have been
electronically scanned and linked to the Databases. The scanning process and
delivery of the images has been done as a service to Company.
10.2 By Company. Company warrants and represents for the benefit of AEC as
follows: (i) Company's responsibilities and promises herein will be rendered in
accordance with all requirements identified in this Agreement; (ii) Company has
all rights, licenses and authorizations required to enter into and perform this
Agreement, and the performance by Company of its obligations pursuant to this
Agreement will not violate any United States federal, state or municipal laws,
rules, regulations or ordinances or the provisions of any agreement to which
Company is a party or by which Company is bound; and (iii) to the best of
Company's knowledge, all orders for Products conveyed to AEC shall be accurately
conveyed to AEC including, as to each order, all information in the form
provided by any Customer. AEC acknowledges that Company is making no
representations and warranties concerning anticipated success of the Store
and/or the amount of consideration payable to AEC hereunder. AEC agrees that it
shall not make any claim and no liability shall be imposed upon Company based
upon any claim that more sales could have been made or better business could
have been done in connection with the Store.
Annex A - Page 14
<PAGE> 17
10.3 Survival. The representations and warranties contained in this Section 10
are continuous in nature and shall be deemed first given upon the execution of
the Agreement and shall survive termination or expiration of this Agreement.
11. INDEMNIFICATION.
11.1 BY AEC. AEC shall indemnify, hold harmless and defend Company and all of
Company's members, employees, officers, directors and agents from and against
any and all claims, damages, losses, liabilities, suits, actions, demands,
proceedings (whether legal or administrative) and expenses (including reasonable
attorneys' fees incurred, with or without suit, in arbitration or mediation, on
appeal or in a bankruptcy or similar proceeding) (collectively, "Claims")
threatened, asserted or filed by a third party against any of the aforesaid
persons or entities to the extent that such third party Claims arise out of or
relate to (i) the breach of any material warranty, representation or agreement
made by AEC in this Agreement; or (ii) any grossly negligent or tortuous act,
willful misconduct or willful omission by AEC; provided, however, that AEC shall
not be liable for any errors, omissions or inaccuracies in the Databases, or the
updates thereof unless caused by AEC's gross negligence or willful neglect.
Furthermore, AEC shall not be liable for any delays or interruptions in the
delivery, transmission or distribution of the Databases or the updates by reason
of unavoidable equipment failure, communication circuit failure, power failure,
Acts of God, government intervention, fire, flood, or other Acts beyond AEC's
reasonable control. Claims arising from modifications by Company of the
Databases or as a result of a failure by Company to implement any enhancements,
improvements, or updates to the Databases as supplied by AEC, shall be deemed
excluded from the indemnity under this paragraph 11.1.
11.2 By Company. Company shall indemnify, hold harmless and defend AEC and all
employees, officers, directors and agents of AEC from and against any and all
Claims threatened, asserted or filed by a third party against any of the
aforesaid persons or entities to the extent that such third party Claims arise
out of or relate to: (i) the breach of any material warranty, representation or
agreement made by Company in this Agreement; or (ii) any grossly negligent or
tortuous act, willful misconduct or willful omission by Company (iii) the use of
the digitized album and portrait pictures used in the Store.
11.3 Manner of Exercise. Any person or entity that is entitled to be indemnified
pursuant to this Section 11 (the "Indemnified Party") must give prompt notice to
the indemnifying party (the "Indemnifying Party") of the occurrence of the Claim
for which indemnity is requested and, at the option of the Indemnifying Party,
the Indemnifying Party may assume the handling, settlement and defense of such
Claim, in which event the Indemnified Party will cooperate in all reasonable
respects with the Indemnifying Party at the Indemnifying Party's expense. The
failure by the Indemnified Party to give such prompt notice shall not relieve
the Indemnifying Party from any liability under this Section 11 unless, and only
to the extent that, such failure results in prejudice to or forfeiture of,
substantive rights or defenses of the Indemnifying Party. The Indemnifying Party
shall reimburse the Indemnified Party on demand for any payment made by the
Indemnified Party in respect of any Claim to which the foregoing indemnity
relates which either (i) has resulted in an adverse judgment against the
Indemnified Party or (ii) has been settled with the written consent of the
Indemnifying Party, which it may withhold for any reason.
12. DEFAULT AND TERMINATION RIGHTS.
Annex A - Page 15
<PAGE> 18
12.1 Default. In the event of a default (a "Default"), the non defaulting party
shall have the right, without limiting any other right or remedy provided in
this Agreement or that it may have under law or equity (subject, however, to
Section 13 below), to terminate this Agreement by giving notice to the other
party under this Agreement and of its election to terminate this Agreement,
after the non defaulting party becomes aware of such Default. Each of the
following is a Default
12.1.1 The failure of either party to materially perform any of such party's
obligations contained in this Agreement, which failure has not been cured within
ten (10) days, in the case of a breach in any payment obligation hereunder, or
thirty (30) days, in the case of a breach in any other kind of obligation
hereunder, after the non breaching party provides notice to the breaching party
describing the breach(es) in reasonable detail.
12.1.2 The failure by AEC to fulfill on a timely basis, in accordance with the
requirements set forth in paragraph 2.2.1 above, at least [***] of all orders
for units of Product received during any particular [***] period (except with
respect to Commercially Unavailable Product, cutouts and imports); provided,
however, that the preceding [***] figure shall instead be [***] with respect to
any thirty (30) day period, the majority of which occurs during a Surge Month.
As used herein, the term "Surge Month" shall mean any calendar month in which
the average daily order volume (measured by the number of discrete orders
placed, not the total number of Product items ordered) exceeds the average daily
order volumes for the previous two (2) calendar months by at least [***].
12.1.3 The occurrence of any of the following: (a) any party admits in writing
its inability to pay its debts generally or makes a general assignment for the
benefit of creditors; (b) any affirmative act of insolvency by any party filing
by any party of any petition or action under any bankruptcy, reorganization,
insolvency, arrangement, liquidation, dissolution or moratorium law, or any
other similar law or laws for the benefit of, or relating to, debtors; (c) the
filing, by any third party, against any party of any petition or action of the
type described in clause (b) above, which has not been either controverted by
such party within fifteen (15) days after its receipt of the service of process
dating to such filing, or stayed or dismissed within thirty (30) days after the
time of such receipt; (d) the subjection of a material part of any party's
property to any levy, seizure, assignment or sale for or by any creditor, third
party or governmental agency, provided that such levy, seizure, assignment or
sale has not been stayed, discharged or reversed within thirty (30) days after
the date of issuance of the order or decree which authorized the same; or (e)
the issuance of an injunction enjoining either party from performing any of its
material obligations hereunder, which injunction has not been stayed, discharged
or reversed within thirty (30) days after the date of issuance of the order or
decree which authorized the same.
13. LIMITATION OF LIABILITY. NEITHER OF THE PARTIES HERETO SHALL HAVE ANY
LIABILITY TO THE OTHER PARTY HERETO OR TO ANY THIRD PARTY FOR ANY INDIRECT,
SPECIAL, CONSEQUENTIAL, EXEMPLARY OR INCIDENTAL DAMAGES ARISING UNDER THE TERMS
OF THIS AGREEMENT, EVEN IF ADVISED IN ADVANCE OF THE POSSIBILITY OF SUCH
DAMAGES. The foregoing shall not be interpreted to limit any party's right to be
fully indemnified to the extent provided under Section
- -------------
[***] Confidential treatment has been requested for the bracketed portion. The
confidential redacted portion has been omitted and filed separately with the
Securities and Exchange Commission.
Annex A - Page 16
<PAGE> 19
11 above for damages claimed by a third party. Company acknowledges that nothing
in this Agreement shall be deemed to establish a contractual or other legally
recognizable relationship between AEC and a Customer, it being agreed that the
services provided hereunder are for Company's benefit and as agent for Company.
14. FORCE MAJEURE. Except for obligations under Section 9 above and obligations
of payment, the executory obligations of the parties hereunder shall be excused
to the extent, but only to the extent, delayed or prevented by Acts of God,
including earthquake, storm, flood, fire, explosion, power failure, civil
insurrection, or any other cause beyond the reasonable control of the affected
party hereto and which such party could not by reasonable diligence have avoided
(collectively, "Force Majeure"), provided that notice of such Force Majeure is
given by the affected party to the other within twenty (20) days of such party's
becoming affected by the Force Majeure. Furthermore, in the event such notice is
timely given, no failure or delay by either party in the performance of any of
its obligations (other than under Section 9 above) as a result of a Force
Majeure shall give rise to any liability to the other party for any loss,
injury, delay, or other casualty suffered or incurred by such other party due to
such Force Majeure. The party directly affected by a Force Majeure shall use all
reasonable efforts to minimize the effects of the same. At the election of the
party not directly affected by a Force Majeure, a period of time equal to the
duration of any suspension of performance by the other party as a result of a
Force Majeure shall be added to the end of the then current term of this
Agreement, and such term shall be accordingly extended.
15. GENERAL.
15.1 Entire Agreement/Amendment: All references to "this Agreement," "hereof,"
"herein" and words of similar connotation include the agreement to which this
Annex A is attached, as well as all exhibits attached hereto, unless specified
otherwise. Each party acknowledges that it has read this Agreement, understands
it, and agrees to be bound by its terms. This Agreement represents the entire
understanding of the parties with respect to the subject matter hereof and
supersedes all prior agreements, negotiations, understandings, representations,
statements and writings among the parties relating thereto with regard to the
subject matter hereof. No modification, alteration, waiver or change in any of
the terms of this Agreement shall be valid or binding upon the parties hereto
unless made in writing and duly executed by both of the parties hereto.
15.2 Governing Law: This Agreement shall be governed by and interpreted in
accordance with the laws of the State of Florida and the United States of
America, without regard to the principles of conflicts of law. The parties
hereby consent to and submit to the sole jurisdiction of a competent court
located in the State of Florida. Such court shall be the sole and exclusive
venue for resolution of any disputes or disagreements between the parties
relating to this Agreement or the transactions contemplated hereby or otherwise
arising hereunder or with respect to any breach of the terms and provisions
hereof.
15.3 Severability: Should any part of this Agreement be held unenforceable or in
conflict with the applicable laws or regulations of any jurisdiction, the
invalid or unenforceable part or provision shall be replaced with a provision
which accomplishes, to the extent possible, the original business purpose of
such part or provision in a valid and enforceable manner, and the remainder of
this Agreement shall remain binding upon the parties.
Annex A - Page 17
<PAGE> 20
15.4 Successors and Assigns: This Agreement and all obligations and rights
herein shall be binding upon and inure to the benefit of the parties hereto and
their respective successors and assigns.
15.5 Relationship between the Parties: This Agreement is not intended to create
any relationship other than AEC as an independent contractor performing services
covered by this Agreement, and Company as the party contacting with AEC for
those services. No party is a partner or a legal representative of the other for
any purpose whatsoever. No party is authorized to make any contract, agreement
or warranty on behalf of any other party. Under no circumstance shall one
party's employees be construed to be employees of any other party.
15.6 Notices: All notices given to the parties hereunder and all statements and
payments hereunder shall be addressed to the parties at the address set forth
below or at such other address as shall be designated by the parties in writing
from time to time:
If to Company: with a copy to:
The Ultimate Band List, LLC Lenard & Gonzalez LLP
17835 Ventura Blvd., Suite 310 1900 Avenue of the Stars, 25th Floor
Encino, CA 91316 Los Angeles, CA 90067
Attn.: Marc Geiger Attn.: Allen D. Lenard, Esq.
If to AEC: with a copy to:
AEC One Stop Group, Inc. Alliance Entertainment Corp.
4250 Coral Ridge Drive 4250 Coral Ridge Drive
Coral Springs, Florida 33065 Coral Springs, Florida 33065
Attn.: Eric Weisman Attn.: General Counsel
All notices shall be in writing and shall be personally delivered, or served by
certified mail, return receipt requested, or by overnight mail service such as
Federal Express, all charges prepaid. Except as otherwise provided herein, such
notices shall be deemed given three days after mailing or delivery to an
overnight mail service, all charges prepaid, except that notices of change of
address shall be effective only after actual receipt thereof. The failure of the
recipient to accept or receive notice given by certified mail, return receipt
requested, postage prepaid, does not affect the validity of the notice.
15.7 Survival: The terms and provisions of this Agreement by their sense and
context are intended to survive the performance of such term or provision or of
this Agreement shall so survive the completion of performance and termination of
this Agreement, including the provisions of Sections 9, 10 and 11 hereof.
15.8 Waiver of Default or Breach: Waiver by either party of a default or breach
or a succession of defaults or breaches, or any failure by either party to
enforce any rights hereunder, shall not be deemed to constitute a waiver of any
subsequent default or breach with respect to the same or any other provision
hereof, and shall not deprive such party of any right to terminate this
Agreement arising by reason of any subsequent default or breach.
15.9 Captions; Examples: The captions used in this Agreement are for convenience
of reference only and are not to affect the construction hereof or be taken into
consideration in the
Annex A - Page 18
<PAGE> 21
interpretation hereof. Whenever examples are used in this Agreement with the
words "including," "for example," "e.g.," "such as," "etc." or any derivation
thereof, such examples are intended to be illustrative and not in limitation
thereof.
15.10 Drafting Party: Notwithstanding that this Agreement may have been drafted
by one or another of the parties hereto, neither this Agreement nor any
uncertainty or ambiguity herein shall be construed or resolved against either
party, whether under any rule of construction or otherwise. On the contrary,
this Agreement has been reviewed by all parties hereto and shall be construed
and interpreted according to the fair meaning of the words used so as to
accomplish the purposes and intentions of the parties hereto.
15.11 Counterparts: This Agreement may be executed in one or more counterparts
each of which shall be deemed an original but all of which taken together shall
be deemed one and the same instrument.
End of General Terms & Conditions
Annex A - Page 19
<PAGE> 22
EXHIBIT 1
CUSTOMER SERVICE
AEC shall provide on behalf of Company customer support for those
orders placed by Customers through the Store. This Exhibit shall define the
service level and performance requirements mandated to govern such activities.
DEFINITION OF SERVICE LEVEL
1. Contact Numbers. AEC Customer Support Service Department will provide
Company with an (800) phone number, Voice-Mail Messaging system, a (800) fax
phone number, and an e-mail address. The contact numbers will be presented
to the Customers from within the Store and on the printed hardcopy invoice.
The contact numbers will be provided to Company prior to Store launch.
Company shall designate and provide to AEC a contact person (including their
phone number, fax number and email address) to resolve out of policy store
issues that may arise from Store Customers.
2. Customer Support Hours. AEC Customer Support Service Department will operate
Monday through Friday (excluding holidays), between the hours of 9:00 AM and
6:00 PM Eastern Time.
3. Customer Support Activities. AEC Customer Support Services Department will
assist customers with all customer inquiries concerning orders and product
information as defined below:
a) Order Status Information. Customer Service will provide research
and/or updates on orders, as required by the consumer (i.e., is the
order shipping today, did my order ship, when should I expect the
order, etc.)
b) Back Orders & Special Orders. Customer Service will provide support,
answer, update information from the consumer on items placed on back
order or on special order. (e.g., Has the product been received? Do
you know when product will become available? How long does this
usually take?) Additionally, Customer Service will update the
consumer on discontinued items, release product as these become
available, and cancel back orders.
c) Shipping Status. Customer Service will answer questions on items
already shipped or currently in AEC's warehouse ready to ship. This
may also involve tracking the shipment through UPS and providing an
estimate on date of arrival to consumer.
d) Tracking and Locating Product. Customer Service will initiate tracers
with UPS on shipments that have not arrived as promised, and file
claims for service failures.
e) Order Changes, Cancellations, and/or Deletions. Customer Service will
make changes for orders that have not been processed or already
billed. Once orders are processed, changes cannot be made. (e.g.,
adding or deleting product, cancel orders, change shipping address,
etc.)
f) Refused/Undeliverable Shipment. Customer Service will contact
customer when product has been refused on delivery. This will involve
determining if the item(s) should be reshipped, address may need
correction or simply issuing credit to the consumer. If product is
returned "undeliverable" Customer Service will contact the customer
to validate address and arrange for re-shipment of product.
g) Claims Research. Customer Service will research all claims for
product that has already been billed and shipped. (e.g., billing
information, overcharges, credits, product ordered, total amount
billed to credit card, tracking number, ship via method, invoice
itemization, returns etc.)
h) Defective-Product received defective. Customer Service will validate
the defect, issue a return authorization number, retrieve the
defective product and generate a replacement order.
Alliance Entertainment Corp.
Exhibit 1 - Page 1
<PAGE> 23
i) Damaged-Product arrived damaged. Customer Service will validate the
damage, file a claim for the loss with UPS issue a return
authorization number, retrieve the damaged product and generate a
replacement order.
j) Lost-Product lost in transit. Customer Service will validate the
damage, file a claim for the loss with shipping agent, issue a return
authorization, retrieve the damaged product and generate a
replacement order.
k) Incorrect Product. Customer Service will validate the claim for
incorrect item received and will issue a return authorization number,
retrieve product and generate a replacement order.
l) Billing Inquiries. Customer Service will answer and support general
billing questions from consumer, as well as provide detailed
itemization of billing charges.
m) Copy of Invoices. Upon request, Customer Service will generate an
additional copy of the invoice and mail a copy to the consumer.
n) Credit Card Reconciliation. Customer Service will research charges
and credits on behalf of the consumer. (i.e. product returned and
credit has not yet been applied to the credit card, researching
overcharges and credits )
o) Product Inquiries. Customer Service will provide information on
product availability, song titles and artist information to the
consumer. (i.e., Is this available ?, Who is this artist)
4. Non-Store Sales Orders. AEC Customer Service shall provide sales support for
those orders not placed directly through the Store. The following are two
order entry methods available to the Customer.
Phone Sales (order Entry). Customer Service will support orders
submitted via the telephone. All telephone orders will be answered in
the order these are received in Customer Service. If the call is not
answered by a Customer Service Representative, the consumer may leave a
voice mail message and have their call returned.
Fax Sales (order entry). Customer Service will enter orders received via
fax on behalf of the consumer. All fax orders will be answered in the
order these are received in Customer Service.
5. Product Returns. AEC Customer Service will process Customer returns and
conduct the authorization and processing required based on Company's
predetermined returns policy.
Returns. Customers may return product for received damaged, incorrect
item(s) or defective. Customer Service will validate the customer's
claim and issue a return authorization number. Customer Service will
perform this function in accordance with the Store's procedures and
policy.
CUSTOMER SERVICE PERFORMANCE REQUIREMENTS
6. Performance Requirements. The following are AEC's Customer Service
performance representations.
Daily Phone Call Volume. In order to meet the level of Customer Service
as defined herein, a daily incoming Customer Service call volume of (30)
thirty Customer Service related calls (excluding order placement calls)
shall be processed while meeting the below performance standards. Should
demand exceed Daily Call Volume by 15% or more in any month, AEC will
notify Company of the increased Call
Alliance Entertainment Corp.
Exhibit 1 - Page 2
<PAGE> 24
Volume (as provided in Customer Service Regular Customer Service
Reports), and the parties shall negotiate a reasonable monthly fee
payable by Company to AEC by virtue of such increase.
Voice Mail Support. The goal of customer service is to be able to answer
each inbound call immediately by anyone of our several Customer Service
Representatives. However, in the event that the customer's call cannot
be answered in the order it is received, the customer may leave a voice
mail message. Voice mail inquiries received Monday through Friday before
12:00 noon Eastern Time will be acknowledged on the same day. Voice mail
inquiries received after 12:00 noon Eastern Time will be answered the
next day. Voice mail inquiries received over the weekend or on
non-working holidays will be answered on the next regularly scheduled
working day.
Faxed Sales Orders. Orders faxed for manual order entry received by
12:00 noon (Monday-Friday) Eastern Time will be processed and prepared
for shipment the same day. Fax orders received after 12:00 noon Eastern
Time will be processed the following working day and shipped that same
day. Fax orders received over the weekend or on non-working holidays
will be answered on the next regularly scheduled working day.
Phone Sales Orders. All telephone sales orders received for manual order
entry and processing before 12:00 noon (Monday-Friday) Eastern Time will
be processed and prepared for shipment the same day. Voice mail messages
received after 12:00 noon (Monday-Friday) Eastern Time will be
acknowledged, processed and prepared for shipment the next regularly
scheduled working day.
E-mail Inquiries. Email inquiries received before 12:00 noon Eastern
Time (Monday through Friday) will be acknowledged on the same day. Email
received after 12:00 noon Eastern Time (Monday through Friday) will be
answered the next day. Email received over the weekend or on non-working
holidays will be responded to on the next regularly scheduled working
day.
Customer Service Claims Report. A Customer Service Claims Report,
provided by AEC to Company will be generated and distributed to Company
on a BI-weekly basis. The report will display Company with information
pertaining to all open, pending and resolved inquiries received by the
AEC Customer Service Department. This report is primarily used by
Customer Service to monitor service issues. Customer Service will
provide via an Excel file an electronic e-mail copy of this report to
Company. This report will provide detail of customer inquiries by date,
inquiry reason and resolution. This report is currently used to measure
the performance and responsiveness of Customer Service.
Alliance Entertainment Corp.
Exhibit 1 - Page 3
<PAGE> 25
EXHIBIT 2
STORE DEFINITION SUMMARY
AEC as service to the Company, shall design, develop and host the Store as
defined below. This Exhibit shall define the general features and functionality
of the Store. Additionally, the attached ("Storyboard") shall display a visual
depiction of the general flow of the user navigation, and the data elements that
will be displayed on the various particular page views.
STORE LOCATION
1. URL Address. The Store will be reached via the Ultimate Band List Internet
Web Page (UBL.COM). This site is located at http://www.ubl.com. The actual
Store itself will be hosted on AEC'S web servers located in Coral Springs,
Florida.
DATABASE SEARCHES
1. Searches. The Store will allow for the following database search and
retrieval capabilities.
a) The artist search and alpha-key board type search by artist will be
performed by UBL.
b) The album and song title search will be performed by AEC.
c) AEC searches may accept one or more full or partial keywords.
d) A direct match for an artist search will result in the corresponding
artist card being displayed.
e) A direct match for an album or song title search will result in the
corresponding album page being displayed.
f) If a direct match is not found for the artist search, the artist
search results list will be displayed
g) If a direct match is not found for the album or song title search,
the album search results list will be displayed
ALBUM FEATURES - SPOTLIGHTS
1. Features. The Store will provided browsers with several different (i.e.,
genre specific) featured albums depending on area in the Store the browser
is in. Albums selected for featuring will normally contain complete
descriptive details (e.g., artist name, album title, tracks, cover art,
sound bytes (if available), fulfillment status, etc,.). The feature album
list(s) will be updated automatically by AEC and AMG on a weekly basis. AEC
and AMG staff will determine the albums that will be featured on a weekly
basis. The feature album list will be uploaded into the Store database via
an automated application process.
a) Up to three (3) albums will be featured upon entering each main
section of the Store. These album features could be of any musical
genre.
Alliance Entertainment Corp.
Exhibit 2 - Page 1
<PAGE> 26
b) Up to three (3) genre specific features will be displayed in
corresponding genre areas of the Store (e.g., search performed on New
Release by Genre will produce (3) featured albums from the specific
genre searched upon) to the type of genre being displayed.
c) All features will normally contain complete details and/or
descriptive album content (i.e., covers, track listings, sound
bytes.)
NEW RELEASE LISTS
1. New Releases. The program will allow for the easy display of all new
releases contain in the AEC Availability File. Release information is
updated in the Store on weekly basis.
a) Upon selecting the New Release option, user will be displayed (3)
non-genre specific featured albums and will then need to select from
a the list of genres available and/or a date range (e.g., last two
weeks, etc.).
b) New releases will be displayed alphabetically by artist.
c) A release is considered new for the prior 30 days of release or the
following 7 days of the date selected.
d) The album images (if available at the time of release) will be
displayed along with artist name, album title, price and any
suggestive sales data such as sound bytes, etc.
TOP SELLERS
1. Top Sellers. This list will provide the browser with an update-to-date
(weekly) listing of those albums that captured the lions-share of individual
total units sold both to traditional retail and/internet sales on product
sold and filled by AEC. The top sellers are AEC'S top sellers.
a) Up to the top 25 sellers will be displayed by genre.
b) Top sellers are determined weekly based on AEC sales.
c) Top sellers will be AMG content rich.
d) Featured Albums will be presented within each list.
UPCOMING RELEASES
1. Upcoming Releases. These releases are albums that are targeted for release
to general public but are not available for immediate shipment. Accuracy of
releases dates will always be suspect for review. The Store will allow for
and process the pre-booking of upcoming releases. These orders if not in AEC
inventory upon order and/or availability will be treated as a back-order or
a special order.
a) A release is defined as upcoming if it is to be released in the next
7 or more days.
b) Upcoming releases will be displayed by genre and/or release date.
Alliance Entertainment Corp.
Exhibit 2 - Page 2
<PAGE> 27
c) New releases will be featured in this section.
SHOP BY GENRE
1. Shop by Genre. This area of the Store will help the music consumer better
explore areas of music they may not be familiar with. The view is provided
with detailed information about a particular genre of their choice and is
presented with a convenient and quick list of artists and/or albums of
recognized acclaim within this specific genre.
a) A genre is chosen upon entering this section.
b) A style or decade may then be entered.
c) If style is chosen, a description of the style is displayed along
with a listing of the most notable artists of this style.
d) If decade is chosen, the best artists and the best albums for the
decade will be displayed.
e) New releases will be featured in this section.
RECOMMENDATIONS
1. Album and Artist Recommendations. This section of the Store will provide a
quick and specific list of either a list of artists or albums that the music
consumer may want to explore based on their entry of a "liked" artist or
"album". It is not based on "case-based reasoning" or the likes of other
music consumers.
a) User enters their favorite Artist or Album title.
b) The Store returns a list of similar recommendations.
c) While viewing recommendations list, the suggested sell and the most
recent release will be featured automatically.
SHOPPING CART
1. Shopping Cart Features.
a) Cybercash will be used to process credit cards.
b) Gift wrapping options and selection of the gift wrap style (e.g.,
Xmas, birth-day, etc.) will be available to the viewer via images. If
one or more items are ordered, each item in that order will be gift
wrapped individually.
c) Inventory will be checked real time and reserved after placing the
entire order.
Alliance Entertainment Corp.
Exhibit 2 - Page 3
<PAGE> 28
d) A confirmation number will be assigned after the order is completed.
HELP
1. The Help Section. The help section of the Store will contain the following
topics. Many items will need continual updating to keep the information
presented up-to-date and accurate. Both AEC and Company will work closely
together on defining and maintaining this section of the Store.
a) Customer service
b) Database Search
c) Store Policies
d) Returns Processing
e) Back Orders
f) Special Orders
g) Shipping Rates
h) Frequently Asked Questions
Alliance Entertainment Corp.
Exhibit 2 - Page 4
<PAGE> 29
EXHIBIT 3
SAMPLE INVOICES
Alliance Entertainment Corp.
Exhibit 3
[Illegible]
<PAGE> 30
EXHIBIT 4
RETURNS POLICY
Your satisfaction guaranteed!
If you have received damaged, defective, or incorrectly shipped merchandise
please notify Customer Service within 30 days and follow the instructions below.
We will gladly replace the merchandise without additional charge, or provide you
with a full refund.
If you are unsatisfied with your UBL purchase and the merchandise is unopened we
will be happy to exchange it for you. Original shipping and handling charges
cannot be refunded, and you will be responsible for all costs associated with
return shipment. No COD returns will be accepted.
A return must be approved by Customer Service. Once validated a Return
Authorization Number (RA#) is issued. At that time, Customer Service will
generate a new order and replace the item(s). All returns must display the
Return Authorization number on the outside of each box, along with the
customer's return address. Returns received at our facility without an
authorization will be refused on delivery.
Important Information
- Special order and open product are non-returnable.
- Prior to returning product, contents must be well packaged to
assure safe arrival. Product must be unopened, and in re-salable
condition. We recommend using the original packaging for
shipment.
- Shipments must be received pre-paid at our returns facility. Any
COD shipments will not be accepted.
RETURNS PROCEDURE
Please follow these simple steps to ensure your fast returns and appropriate new
shipment or credit.
1. CONTACT CUSTOMER SERVICE
You must contact Customer Service to obtain a RETURN AUTHORIZATION NUMBER (RA#).
Returns cannot be accepted without this number. You may contact Customer Service
in any of the following three ways:
- E-mail: [email protected]
- Phone: 1-800-538-3465, Monday to Friday, 9am to 6pm, Eastern
Standard Time
Alliance Entertainment Corp.
Exhibit 4
<PAGE> 31
- Fax: (954) 255-4837
2. INFORMATION NEEDED
Please have the following information ready before you call or as part of your
e-mail or fax.
1. Order confirmation number
2. Your name
3. Your e-mail address
4. Your phone number
5. Product #
6. Product Name
7. Reason for return
3. PACK AND SEND
1. Fill out the return label (provided on the back of your invoice),
including your RA#. RETURNS CANNOT BE ACCEPTED WITHOUT AN RA#.
2. Enclose merchandise and this completed form in a sturdy package (the
original package is preferred).
3. Enclose the original packing slip/invoice in the package.
4. Affix the return label to the outside of the package and send to the
following address:
Ultimate Band List Store
Attn: Returns Department
4250 Coral Ridge Drive
Coral Springs, FL 33065
Alliance Entertainment Corp.
Exhibit 4
<PAGE> 32
EXHIBIT 5
INTERNET FULFILLMENT PRICE LIST
a. I. Major Label and Independent Price List
(i) Compact Disc
(ii) Suggested List UBL Price
[***] [***]
[***] [***]
[***] [***]
[***] [***]
[***] [***]
[***] [***]
[***] [***]
[***] [***]
[***] [***]
[***] [***]
I = INDEPENDENT LABEL PRICE M = MAJOR LABEL PRICE
Cassette
(III) Suggested List UBL Price
[***] [***]
[***] [***]
[***] [***]
[***] [***]
[***] [***]
II. MONTHLY DISCOUNTS
Within thirty (30) days before the beginning of each calendar month,
Company and AEC shall use good faith efforts to agree upon [***] titles for
which Company will receive a discount from the then current internet fulfillment
price during such month. The amount of each month's discount shall be
determined jointly by the parties through good faith negotiations.
- --------------------------
[***] Confidential treatment has been requested for the bracketed
portion. The confidential redacted portion has been omitted and filed separately
with the Securities and Exchange Commission.
Alliance Entertainment Corp.
Exhibit 5
<PAGE> 33
EXHIBIT 6
CONSIGNMENT PRODUCT FULFILLMENT FEES
-----------------------------------------------------------
Product Item Retail Price Fulfillment Fee
-----------------------------------------------------------
[***] [***]
[***] [***]
[***] [***]
[***] [***]
-----------------------------------------------------------
- --------------------------
[***] Confidential treatment has been requested for the bracketed
portion. The confidential redacted portion has been omitted and filed separately
with the Securities and Exchange Commission.
Alliance Entertainment Corp.
Exhibit 6
<PAGE> 34
EXHIBIT 7
SHIPPING RATES
[***]
Alliance Entertainment Corp.
Exhibit 7
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Domestic Shipping
- ------------------ ---------------- ---------------- --------------- ---------------- ---------------- ---------------
ILLEGIBLE
- ------------------ ---------------- ---------------- --------------- ---------------- ---------------- ---------------
[***}
- ------------------ ---------------- ---------------- --------------- ---------------- ---------------- ---------------
- ------------------ ---------------- ---------------- --------------- ---------------- ---------------- ---------------
- ------------------ ---------------- ---------------- --------------- ---------------- ---------------- ---------------
- ------------------ ---------------- ---------------- --------------- ---------------- ---------------- ---------------
- ------------------ ---------------- ---------------- --------------- ---------------- ---------------- ---------------
- ------------------ ---------------- ---------------- --------------- ---------------- ---------------- ---------------
- ------------------ ---------------- ---------------- --------------- ---------------- ---------------- ---------------
- ------------------ ---------------- ---------------- --------------- ---------------- ---------------- ---------------
- ------------------ ---------------- ---------------- --------------- ---------------- ---------------- ---------------
- ------------------ ---------------- ---------------- --------------- ---------------- ---------------- ---------------
- ------------------ ---------------- ---------------- --------------- ---------------- ---------------- ---------------
A. Canada/Mexico
- ------------------------- ---------------------- ----------------------- ---------------------- ----------------------
ILLEGIBLE
- ------------------------- ---------------------- ----------------------- ---------------------- ----------------------
[***]
- ------------------------- ---------------------- ----------------------- ---------------------- ----------------------
- ------------------------- ---------------------- ----------------------- ---------------------- ----------------------
- ------------------------- ---------------------- ----------------------- ---------------------- ----------------------
- ------------------------- ---------------------- ----------------------- ---------------------- ----------------------
- ------------------------- ---------------------- ----------------------- ---------------------- ----------------------
- ------------------------- ---------------------- ----------------------- ---------------------- ----------------------
- ------------------------- ---------------------- ----------------------- ---------------------- ----------------------
- ------------------------- ---------------------- ----------------------- ---------------------- ----------------------
- ------------------------- ---------------------- ----------------------- ---------------------- ----------------------
- ------------------------- ---------------------- ----------------------- ---------------------- ----------------------
B. UPS International
- ------------------- -------------- ------------- -------------- ------------- -------------- -------------- -------------
ILLEGIBLE
- ------------------- -------------- ------------- -------------- ------------- -------------- -------------- -------------
[***]
- ------------------- -------------- ------------- -------------- ------------- -------------- -------------- -------------
- ------------------- -------------- ------------- -------------- ------------- -------------- -------------- -------------
- ------------------- -------------- ------------- -------------- ------------- -------------- -------------- -------------
- ------------------- -------------- ------------- -------------- ------------- -------------- -------------- -------------
- ------------------- -------------- ------------- -------------- ------------- -------------- -------------- -------------
- ------------------- -------------- ------------- -------------- ------------- -------------- -------------- -------------
- ------------------- -------------- ------------- -------------- ------------- -------------- -------------- -------------
- ------------------- -------------- ------------- -------------- ------------- -------------- -------------- -------------
- ------------------- -------------- ------------- -------------- ------------- -------------- -------------- -------------
- ------------------- -------------- ------------- -------------- ------------- -------------- -------------- -------------
</TABLE>
Confidential - Distributed Under NDA (C)AEC One Stop Group, Inc. 1998.
All Rights Reserved.
- --------------------------
[***] Confidential treatment has been requested for the bracketed portion. The
confidential redacted portion has been omitted and filed separately with the
Securities and Exchange Commission.
<PAGE> 35
International Country/Zone Matrix
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Country Express Expd Cook Islands 907 Honduras 900
Albania 907 Costa Rica 900 Hong Kong 901 602
Algeria 907 Croatia 907 Hungary 907
American Samoa 907 Curacao 900 Iceland 903
Anderra 907 603 Cyprus 905 India 905
Anguilla 900 Czech Republic 907 Indonesia 904 604
Antigus & Barbuda 900 Denmark 903 603 Israel 905
Argentina 900 Djibouti 908 Italy 901 601
Aruba 900 Dominica 900 Ivory Coast 908
Australia 904 604 Dominican Republic 900 Jamaica 900
Austria 903 603 Ecuador 900 Japan 901 602
Azores 903 Egypt 905 Jordan 905
Bahamas 900 El Salvador 900 Kazakhram 907
Bahrain 905 England 901 601 Kenya 908
Bangladesh 905 Equatorial Guinea 908 Kiribati 907
Barbados 900 Eritrea 908 Korea 907
Belarus 907 Estonia 907 Kuwait 905
Belgium 901 601 Ethiopia 908 Kyrgyzstan 907
Belize 900 Faeroe Islands 903 Lacs 907
Benin 908 Federated States of 907 Latvia 907
Bermuda 900 Micronesia Lebanon 905
Bolivia 900 Fiji 907 Lesotho 908
Bonaire 900 Finland 903 603 Liberia 908
Botswana 908 France 901 601 Liechtenstein 903 603
Brazil 900 French Guiana 900 Lithuania 907
British Virgin Islands 900 French Polynesia 907 Luxembourg 901 601
Brunei 905 Gabon 908 Macra 901
Bulgaria 907 Gambia 908 Macedonia 907
Burkina Faso 908 Georgia 907 Madagascar 908
Burundi 908 Germany 901 601 Madeira 903
Cambodia 907 Ghana 908 Malawi 908
Cameroon 908 Gibraltar 907 Malaysia 904 604
Canary Islands 903 Greece 903 Maldives 907
Cape Verde 908 Greenland 903 Mali 908
Cayman Islands 900 Grenada 900 Malta 907
Central African Republic 908 Guadeloupe 900 Marshall Islands 907
Chad 908 Guam 904 Martinique 900
Channel Islands 903 603 Guatemala 900 Mauritania 908
Chile 900 Guinea 908 Mauritius 908
Colombia 900 Guinea-Bissau 908 Moldova 907
Congo 908 Guyana 900 Monaco 901 603
Haiti 900 601 Mantserrat 900
Holland 901 Morocco 907
</TABLE>
- --------------------------------------------------------------------------------
Confidential - Distributed Under NDA (C)AEC One Stop Group, Inc. 1998.
All Rights Reserved.
<PAGE> 36
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mozambique 903 Saba 900 Tanzania 908
Myanmar 907 Saipan 907 Thailand 904 604
Namibia 908 Saudi Arabia 905 Tinian 907
Nepal 905 Scotland 901 601 Togo 908
Netherlands 901 601 Senegal 908 Tonga 907
Netherlands Antilles 900 Seychelles 908 Tortola 900
New Caledonia 907 Sierra Leone 908 Trinidad & Tobago 900
New Zealand 904 Singapore 901 602 Truk 907
Nicaragua 900 Slovakia 907 Tunisia 907
Niger 908 Slovenia 907 Turkey 905
Nigeria 908 Solomon Islands 907 Turks & Caicos 900
Norfolk Island 907 South Africa 908 Islands
Northern Ireland 901 603 South Korea 904 604 Tuvalu 907
Northern Mariana Islands 907 Spain 903 603 Uganda 908
Norway 903 603 Sri Lanka 905 Ukraine 907
Oman 905 St. Barthelemy 900 Union Island 900
Pakistan 905 St. Christopher 900 United Arab Emirates 905
Palau 907 St. Croix 900 United Kingdom 901 601
Panama 900 St. Eustartius 900 Uruguay 900
Papua New Guinea 907 St. John 900 US Virgin Islands 900
Paraguay 900 St. Kirts & Nevis 900 Uzbekistan 907
Peoples Republic of China 904 St. Lucia 900 Vanuaru 907
Peru 900 St. Maarten 900 Venezuela 900
Philippines 904 604 St. Martin 900 Vietnam 904
Poland 907 St. Thomas 900 Virgin Gorda 900
Ponape 907 St. Vincent and the 900 Waka Island 907
Portugal 903 603 Grenadines Wales 901 601
Qatar 905 Sudan 908 Wallis & Fumma 907
Republic of Ireland 901 603 Suriname 900 Islands
Republic of Yemen 905 Swaziland 908 Western Samos 907
Reunion 908 Sweden 903 603 Yap 907
Romania 907 Switzerland 903 603 Zaire 908
Rota 907 Syria 905 Zambia 908
Russia 907 Tahiti 907 Zimbabwe 908
Rwanda 908 Taiwan 901 602
Tajidstan 907
</TABLE>
Disclaimers
o Consumers are responsible for all duties and taxes imposed by
country of delivery.
o Consumers shall not receive refunds if products ordered are
banned by their respective countries. Such banned products
will be destroyed in lieu of return to the UBL.
- --------------------------------------------------------------------------------
Confidential - Distributed Under NDA (C)AEC One Stop Group, Inc. 1998.
All Rights Reserved.
<PAGE> 37
EXHIBIT 8
PACKAGING MATERIAL COSTS
-----------------------------------------------------------
Box Size Packaging Cost
-----------------------------------------------------------
[***] [***]
[***] [***]
[***] [***]
-----------------------------------------------------------
- --------------------------
[***] Confidential treatment has been requested for the bracketed portion. The
confidential redacted portion has been omitted and filed separately with the
Securities and Exchange Commission.
Alliance Entertainment Corp.
Exhibit 8
<PAGE> 38
EXHIBIT 9
AMG MARK PLACEMENT
Alliance Entertainment Corp.
[AMG LOGO] MUSIC TRADEMARK
SPECIFICATION SHEET
COPY
LOGO
PRECEDES
COPY.
[AMG LOGO]
[CHART]
Note: To be used when All-Music Guide is the only data listed on the page.
[AMG LOGO] Content provided by All-Movie Guide. (C) 1998 Matrix Software, Inc.
All-Music Guide is a registered trademark of Matrix Software, Inc.
Note: To be used when All-Music Guide data is listed with other sources of data
on the page.
[AMG LOGO] Portions of content provided by All-Music Guide. (C) 1998 Matrix
Software, Inc.
All-Music Guide is a registered trademark of Matrix Software, Inc.
Where To Place:
At Bottom of home page, proportionately sized in relation to the piece.
When To Use:
Use legal legend whenever an authorized trademark word and/or logo design is
used.
<PAGE> 39
[AMG LOGO] MUSIC TRADEMARK
SPECIFICATION SHEET
LISTINGS
LOGO
FOLLOWS
TITLES.
[AMG LOGO]
[CHART]
COPY
LOGO
PRECEDES
COPY.
[AMG LOGO]
[CHART]
<PAGE> 40
[AMG LOGO] MUSIC TRADEMARK
SPECIFICATION SHEET
LISTINGS
LOGO
FOLLOWS
TITLES.
[AMG LOGO]
[CHART]
COPY
LOGO
PRECEDES
COPY.
[AMG LOGO]
[CHART]
<PAGE> 1
EXHIBIT 10.25
PANDESIC AGREEMENT
ORDER FORM
<TABLE>
<CAPTION>
CONTRACT DATE: April 15, 1999 CONTRACT NUMBER:
----------------------- ---------------------------
MERCHANT INFORMATION
- -------------------------------------------------------------------------------------------
<S> <C>
COMPANY NAME: ARTISTdirect, LLC CONTACT NAME: PASCAL DESMARETS
----------------------- -----------------------------
BILLING ADDRESS: 17835 VENTURA BLVD. PHONE: 818-758-8700
-------------------- ------------------------------------
SUITE 310 FAX: 818-758-8722
- ------------------------------------- --------------------------------------
ENCINO, CA 91316 E-MAIL: [email protected]
- ------------------------------------- -----------------------------------
BILLING CONTACT: BOB MORSE TECHNICAL CONTACT: MORGAN PORTER
--------------------- -------------------------
PHONE: 818-758-8700 PHONE: 818-758-8700
------------------------------ ------------------------------------
FAX: 818-758-8722 FAX: 818-758-8722
-------------------------------- ------------------------------------
E-MAIL: [email protected] E-MAIL: [email protected]
----------------------------- ------------------------------------
</TABLE>
Merchant hereby orders the Pandesic E-Business Solution Service from PANDESIC
LLC ("PANDESIC"). This Order Form and Exhibit A to this Order Form Additional
Services is subject to the Terms and Conditions and the Pandesic reference
documents referred to herein (collectively, the "Agreement"). This Agreement is
valid when accepted by an authorized representative of PANDESIC.
The Pandesic E-Business Solution Service consists of (i) the installation,
implementation, hosting and administration of Merchant's e-commerce web site
(the "Hosting Services") on computers and system software (the "Pandesic
Equipment") operated by PANDESIC or its hosting partner (the "Hosting Partner"),
and (ii) licenses of associated Pandesic and third party ("Supplier")
application software (the "Software") for such purposes.
Other services provided hereunder include (i) training on the operation of the
Pandesic E-Business Solution Service, and (ii) maintenance and support services
(the "Maintenance Services"), all as described from time to time in PANDESIC
reference documents. The Pandesic E-Business Solution Service and the other
services are referred to collectively as the "Services."
MERCHANT HAS READ AND AGREES TO BE BOUND BY THE TERMS AND CONDITIONS OF THIS
AGREEMENT. MERCHANT AND PANDESIC AGREE THAT THE TERMS AND CONDITIONS OF THIS
AGREEMENT REPLACE AND SUPERSEDE ALL PROPOSALS, WRITTEN OR ORAL, AS WELL AS OTHER
COMMUNICATIONS BETWEEN MERCHANT AND PANDESIC RELATING TO THIS AGREEMENT.
<TABLE>
<CAPTION>
ACCEPTANCE
- -------------------------------------------------------------------------------------------
<S> <C>
ACCEPTED BY MERCHANT: ACCEPTED BY PANDESIC LLC:
SIGNATURE: /s/ Marc P. Geiger SIGNATURE: /s/ Peter Wolcott
--------------------------- --------------------------------
PRINT NAME: Marc P. Geiger PRINT NAME: Peter Wolcott
-------------------------- -------------------------------
TITLE: CHIEF EXECUTIVE OFFICER TITLE: President
------------------------------ -----------------------------------
DATE: April 15, 1999 DATE: 5/2/99
------------------------------ -----------------------------------
</TABLE>
Page 1
<PAGE> 2
PANDESIC AGREEMENT
RATE SHEET
INITIAL SET-UP CHARGE
- - Merchant shall pay an initial set-up charge of [***], payable within
[***] days of acceptance of this Agreement.
MONTHLY TRANSACTION FEES
- - The Monthly Base Fee shall be [***].
- - Monthly Transaction Fees will be calculated using the Monthly Base
Fee plus a percentage of monthly revenue (defined as [***] generated
by the sale or other distribution of products
- - Monthly Transaction Fees commence upon the Technical Installation
(the date that the Pandesic software is loaded on the servers and the
servers are ready to accept Merchant's configuration and functional
installation of its products), at the site of Pandesic's Hosting
Partner ("Digex").
FEE SCHEDULE
Monthly Transaction Fee shall be determined in accordance with the following
table:
<TABLE>
<CAPTION>
<S> <C> <C>
MERCHANT MONTHLY SALES MONTHLY TRANSACTION FEE
From To Base Fee Incremental Transaction %
- --------------------- ------------------------ -------------------------
[***] [***] [***] [***]
[***] [***] [***] [***]
</TABLE>
For example, a merchant that transacts [***] of monthly gross sales and [***] of
freight revenue would be responsible for a Monthly Transaction Fee of [***].
Monthly Base Fee for [***] in Monthly Sales [***]
[***] [***]
Total owed to Pandesic [***]
- --------------------------
[***] Confidential treatment has been requested for the bracketed portion. The
confidential redacted portion has been omitted and filed separately with the
Securities and Exchange Commission.
Page 1
<PAGE> 3
Pandesic Agreement
Rate Sheet
ACCEPTANCE
ACCEPTED BY MERCHANT: ACCEPTED BY PANDESIC LLC:
SIGNATURE: /s/ Marc P. Geiger SIGNATURE: /s/ Peter Wolcott
------------------------------ ---------------------------
PRINT NAME: Marc P. Geiger PRINT NAME: Peter Wolcott
----------------------------- --------------------------
TITLE: CHIEF EXECUTIVE OFFICER TITLE: President
--------------------------------- ------------------------------
DATE: April 15, 1999 DATE: 5/2/99
--------------------------------- ------------------------------
Page 2
<PAGE> 4
PANDESIC AGREEMENT
TERMS AND CONDITIONS
The following terms and conditions (these "Terms") govern the provisions by
Pandesic LLC ("Pandesic") of the Services described on the Pandesic E-Business
Solution Service Order Form ("Order Form") to the company ("Merchant")
identified on the Order Form.
1. OBLIGATIONS OF PANDESIC
1.1 Pandesic will provide, deploy, support and maintain the
Pandesic E-Business Solution Service.
1.2 Pandesic hereby grants to Merchant a non-exclusive and
non-assignable license to use the Software in the United
States for the purpose of conducting business over the
Internet throughout the world.
2. OBLIGATIONS OF MERCHANT
2.1 Merchant shall comply with all of the terms of this Agreement,
including but not limited to, the Acceptable Use Policy (the
"Use Policy"), as the Use Policy may be modified from time to
time during the term of this Agreement
2.2 Merchant may use the Services for the purpose of conducting
electronic commerce activities, as well as processing third
party data, solely in connection with products and services
offered via Merchant's website. Subject to the foregoing
Merchant shall not offer, for a fee or free of charge,
services consisting of the processing of data through the use
of the Services for, or for the benefit of, any person other
than Merchant.
3. PAYMENT
3.1 Merchant shall pay the fees set out in the Rate Sheet,
attached hereto.
3.2 All payments shall be made in U.S. Dollars. In all cases,
payments are due upon receipt by Merchant of the applicable
monthly invoices.
3.3 Payments and any additional charges, including, but not
limited to, any early cancellation charges, accrued interest
and late fees shall be invoiced in arrears and shall appear on
the monthly invoices for Services or separate invoices, as
determined by Pandesic in its sole discretion.
3.4 In addition to any other remedies that may be available to
Pandesic under this Agreement (including, but not limited to,
those in connection with the termination of this Agreement
pursuant to Section 13 below) or applicable law, invoices that
are not paid in full thirty (30) days after receipt by
Merchant (a "Payment Default") will be subject to interest
charges of the lesser of one and one-half percent (1.5%) per
month or portion thereof and the highest amount permitted by
law, which interest shall accrue daily.
3.5 Subject to Section 13.3 of this Agreement, Merchant shall be
liable for all amounts owed to Pandesic pursuant to this
Agreement, irrespective of the termination of this Agreement
Merchant also shall pay to Pandesic all expenses incurred by
Pandesic in exercising any of its rights under this Agreement
or applicable law with respect to the collection of a Payment
Default, including, but not limited to, reasonable attorneys'
fees and the fees of any collection agency retained by
Pandesic.
3.6 Merchant shall be liable for, and shall reimburse Pandesic and
indemnify and hold Pandesic harmless from all local, state,
federal and non-United States taxes or similar assessments or
charges (including any interest and penalties imposed
thereon), other than taxes based on the net income of
Pandesic, arising out of or relating to this Agreement or the
provision of the Services hereunder.
Page 1
<PAGE> 5
PANDESIC AGREEMENT
TERMS AND CONDITIONS
4. MAINTENANCE
4.1 Pandesic designates time periods ("Scheduled Maintenance
Windows") during which it may limit or suspend the
availability of the Pandesic Equipment and/or Software
involved in providing its Services (an "Outage") to perform
necessary maintenance or updates. Scheduled Maintenance
Windows currently are each Tuesday and Friday between the
hours of 4:00 a.m. and 8:00 a.m. and the third Saturday of
each month between the hours of 4:00 a.m. and 12 noon Pacific
Standard Time.
4.2 If planned maintenance has the possibility of making the
Pandesic Equipment used by Merchant inaccessible to the
Internet during a Scheduled Maintenance Window, Pandesic will
provide not less than twenty-four (24) hours prior electronic
mail or other notice to Merchant of the Scheduled Maintenance
Window during which the Outage is planned.
4.3 In addition, Pandesic reserves the right to perform any
required maintenance work or updates outside of the Scheduled
Maintenance Window with a minimum of seven (7) days prior
notice to Merchant. Pandesic also may perform at any time any
maintenance or updates it believes is necessary to preserve
the integrity of Pandesic's network and services offered
regardless of whether it has provided any notice to Merchant
thereof. Pandesic shall perform any upgrades to the Software
at times mutually acceptable to both parties.
4.4 Merchant agrees that Pandesic, its Hosting Partner and its
third party service providers shall have access to its
internet commerce system and web site for the purposes
contemplated in this Agreement.
5. CONFIDENTIALITY
5.1 In the course of business dealing, both parties will be
releasing valuable trade secrets and other confidential
information to the other including, in Pandesic's case,
information about the Services and Software provided by
Pandesic, Hosting Partner and Suppliers, and in Merchant's
case, its customer business data. Each party recognizes that
such information constitutes valuable trade secrets of the
other.
5.2 Accordingly, each party agrees that (i) the provisions of this
Agreement (ii) any information whatsoever with respect to the
Services and the Software, (iii) the course of dealing between
Pandesic and Merchant hereunder, (iv) Merchant's data, and (v)
all other non-public information (whether technical or
otherwise) made available or disclosed to such party (the
"recipient") by the other (the "disclosing party")
(collectively, the "Confidential Information") shall be
treated by recipient on a confidential basis and shall not be
reproduced, reduced to writing, or disclosed to any employee
or contractor except as necessary to provide or use the
Services, or to any other person or entity without the prior
written consent of disclosing party.
5.3 Upon termination of this Agreement, any documentation
reflecting any Confidential Information of the other party
shall be returned promptly to such party. Disclosure of
information pursuant to applicable statutes or regulations
(collectively, 'Laws') shall be excepted from the provisions
of this Section 5; provided, however, that prior to any
disclosure by the recipient pursuant to any Laws, recipient
will assert the confidential nature of the Confidential
Information and will cooperate fully with the disclosing
party, at the disclosing party's expense, in protecting
against any such disclosure including, but not limited to,
obtaining a protective order or similar order narrowing the
scope of such disclosure of the Confidential Information. In
the event such protection is not obtained, the recipient shall
disclose the Confidential Information only to the extent
necessary to comply with the Laws.
6. PROPRIETARY RIGHTS INDEMNIFICATION
6.1 Merchant agrees to indemnify and hold harmless Pandesic, all
individuals or entities controlling, controlled by or under
common control with Pandesic (each, a "Pandesic Affiliate"),
Hosting Partner, and the officers, directors and employees of
Pandesic, Pandesic Affiliates and Hosting Partner (an
"Indemnified Party") against any losses, claims, damages,
liabilities, penalties, actions,
Page 2
<PAGE> 6
PANDESIC AGREEMENT
TERMS AND CONDITIONS
proceedings or judgments (collectively "Losses") to which an
Indemnified Party may become subject related to or arising out
of any infringement or misappropriation or alleged
infringement or misappropriation of any United States
copyright, trade secret or other proprietary right related to
any hardware or software (other than the Pandesic Equipment
and the Software) utilized by Merchant in connection with any
of the Services or to any Merchant data distributed via the
Pandesic E-Business Solution Service and will reimburse such
Indemnified Party for all legal and other direct expenses,
including reasonable attorneys' fees incurred by such
Indemnified Party in connection with investigating, defending
or settling any Loss, whether or not in connection with
pending or threatened litigation in which such Indemnified
Party is a party.
6.2 Pandesic agrees to indemnify and hold harmless Merchant
against any Losses to which Merchant may become subject,
related to or arising out of any infringement or
misappropriation or alleged infringement or misappropriation
of any United States patent, copyright, trade secret or other
proprietary right related to the Pandesic Equipment or the
Software and will reimburse Merchant for all legal and other
direct expenses, including reasonable attorneys' fees incurred
by Merchant in connection with investigating, defending or
settling any Loss, whether or not in connection with pending
or threatened litigation in which Merchant is a party. This
indemnification does not relate to the Merchant data or
matters that arise from Merchant data or conduct. The
provisions of this Agreement relating to indemnification shall
survive termination of this Agreement.
6.3 In the event of any claim of infringement or misappropriation
under paragraph 6.2 above, Pandesic shall use its best
efforts, at its option and expense to either (i) procure for
Merchant the right to continue using the Pandesic Equipment or
the Software, (ii) replace such Pandesic Equipment or Software
with non-infringing equipment or software, or (iii) modify the
same so as to make it non-infringing, and thereafter, (iv)
terminate the Agreement as to the infringing Pandesic
Equipment or Software and refund to Merchant any of the unused
portion of the fees paid for Services prior to such
termination.
7. INDEMNIFICATION
7.1 In addition to other indemnification provided herein,
including without limitation Indemnification provided in
Section 8.3 of this Agreement from the date of any such breach
of warranty, notwithstanding any cure period, and except as to
matters covered by paragraph 6.2 above, Merchant agrees to
indemnify and hold harmless Pandesic, Pandesic Affiliates,
Hosting Partner, and the officers, directors and employees of
Pandesic, Pandesic Affiliates, and Hosting Partner (each an
"Indemnified Party") against any Losses to which an
Indemnified Party may become subject and which Losses arise
out of, or relate to Merchants breach of this Agreement in
connection with Its use of the Services under or related to
this Agreement, and will reimburse an Indemnified Party for
all legal and other expenses, including reasonable attorneys'
fees Incurred by such Indemnified Party in connection with
investigating, defending or settling any Loss whether or not
in connection with pending or threatened litigation in which
such Indemnified Party is a party.
8. OTHER MERCHANT ASSURANCES
8.1 During any time period when Merchant is provided access to any
facilities, hardware or other property owned or leased by, or
otherwise under the control of Pandesic or Hosting Partner
(collectively "Pandesic Property") pursuant to this Agreement
Merchant shall (i)maintain insurance, with Pandesic and
Hosting Partner as a named payee, covering any damage or
destruction to Pandesic Property (collectively "'Damage"); (i)
reimburse Pandesic for all expenses incurred by Pandesic in
replacing or repairing, as the case may be, any Damage caused
by Merchant, other than normal wear and tear on Pandesic
Property.
8.2 Merchant shall not attempt to copy, modify, alter,
disassemble, decompile, translate or convert Into human
readable form, or reverse engineer, all or any part of the
Software and shall not use the Software to develop any
derivative works or any functionally compatible or competitive
software, except to the extent permitted under applicable law.
However, Merchant may create interfaces to the Software or
modify the provided interfaces to permit interfacing with
Merchant's legacy database systems solely for Merchant's use
in connection with the Services provided pursuant to this
Agreement. Merchant shall not. separate the Software into its
component parts, nor
Page 3
<PAGE> 7
PANDESIC AGREEMENT
TERMS AND CONDITIONS
incorporate any component files into any product, nor shall it
remove any proprietary, trademark or copyright markings or
confidentiality legends within the Software.
8.3 Merchant shall not use the Services in any manner which
violates any law or regulation, is for a fraudulent purpose,
contravenes public policy, or may cause Pandesic or its
Suppliers to be subject to prosecution or legal action.
Merchant shall only use the Services to process sales
transactions which, to the best of its knowledge, are genuine
and do not arise out of fraudulent or illegal activities in
the sale of goods, information or services. Merchant agrees,
represents and warrants that Merchant's web site shall not
contain any content or materials that infringe on the rights
of any other party or violate any applicable law or regulation
or any proprietary, contract, moral, privacy or other third
party right, or which would expose Pandesic, its Hosting
Partner or its Suppliers to any civil or criminal liability or
otherwise would affect Pandesic's or its Hosting Partner's
business; provided however, that in the event of any such
Infringement, Merchant shall have a period of fifteen (15)
business days from any such infringement to take any steps
required to cure any such breach of the warranty provided
herein with respect to such content or materials. Merchant
shall indemnify and save Pandesic, Pandesic Affiliates,
Hosting Partner, and the officers, directors and employees of
Pandesic harmless (each an "Indemnified Party") against any
claim, liabilities and costs by which an Indemnified Party may
become subject to and which arise out of, or relate to any
content contained on Merchants web site or which result from
the use of the Services in contravention of this section.
Merchant shall (a) acquire all authorizations necessary in
respect of any hyperlinks by its commerce web site, and upon
reasonable request by Pandesic, (b) provide Pandesic and its
Hosting Partner with accurate information concerning
descriptive claims, warranties, guarantees, nature of its
business and the addresses where its business is conducted.
8.4 Merchant appoints Pandesic as its agent to accept customer
relationships with certain of its Suppliers (such as
Cybercash) as more fully described In the reference documents.
9. USE OF MERCHANT'S NAME
9.1 Pandesic shall be permitted to use Merchant's name in a manner
mutually agreed to by the parties and in compliance with any
trademark usage guidelines provided by Merchant to Pandesic,
in connection with proposals to prospective merchants and
otherwise in print and in electronic form for marketing or
other purposes, including, but not limited to, use in
connection with (i) compliance with applicable laws or
regulations; and (ii) the protection of any rights relating to
Pandesic or its business.
10. USE OF PANDESIC'S NAME
10.1 Merchant may use the name "PANDESIC" in connection with the
Services or otherwise only with the prior written consent of
Pandesic. Pandesic shall be permitted to place an image of its
logo on Merchant's web site in order to identify Pandesic as
the e-business solution provider to Merchant. The parties
shall jointly agree the size and location of such logo.
10.2 Except as set forth herein, neither party shall have the right
to use or display the trademarks of the other party (including
with respect to consent of Pandesic, Pandesic's Hosting
Partner and Suppliers) in connection with the Services or
otherwise without prior written consent of the other party.
11. USE OF PANDESIC'S NAME
11.1 Subject to Section 4, Pandesic will use its reasonable
commercial best efforts to assure that the Services will be
available twenty-four (24) hours a day, seven (7) days a week.
If the Services are unavailable for more than a total of 4
hours in any week, other than as a result of the maintenance
activities described in Section 4, Merchant's sole and
exclusive remedy shall be that, in the event the Fees are
below the Monthly Base Fee in the month of availability, the
fees shall be waived on a pro rata basis for the period of
unavailability.
Page 4
<PAGE> 8
PANDESIC AGREEMENT
TERMS AND CONDITIONS
11.2 For purposes of this Agreement, a week shall be considered to
run from Sunday to Saturday and the Services shall be deemed
to be unavailable if (i) the system network is incapable of
transmitting data (subject to Section 15 below); or (ii)
Pandesic's standard hardware; software, or operating system is
functioning in a manner that prevents http, ftp, or mail
access to the Internet server or the software is unable to
process standard functions of the Pandesic E-Business Solution
Service ("Unavailability").
11.3 Notwithstanding the foregoing, Pandesic shall not be in breach
of this warranty for any period of unavailability which
results from Merchant' s action or inaction, including, but
not limited to, Merchants use of Merchant owned, non-standard,
or unsupported hardware and/or software installed by the
Merchant (or by Pandesic at the Merchant's request).
11.4 Pandesic warrants that the Maintenance Services will be
performed in accordance with generally accepted industry
standards for comparable services. Merchant's sole and
exclusive remedy for any breach of the foregoing warranty
shall be to provide Pandesic with notice of such nonconformity
within thirty (30) days of the defective performance and
Pandesic shall re-perform such Maintenance Services.
11.5 YEAR 2000 COMPLIANCE
11.5.1 The Pandesic-owned portion of the Software shall be
Year 2000 Compliant as of September 30, 1999.
11.5.2 In this regard, "Year 2000 Compliant" shall mean that
the software shall continue to function before, during
and after January 1, 2000 without error related to, or
the product of, date data which represents or
references different centuries, and, more specifically,
(a) correctly manages and manipulates data involving
dates, including single-century formulae and
multi-century formulae, (b) correctly identifies the
year 2000 as a leap year, (c) does not include any
information other than a specific date, and (d) uses
four digits to indicate the year in storage, use and
communication of all date data date-related functions.
11.5.3 The Software also includes third party Software. In
some cases, the Year 2000 capabilities of such third
party Software are unwarranted by the Suppliers of such
Software. Pandesic shall test the third party Software
for Year 2000 Compliance and shall use its reasonable
commercial best efforts to cause such Software to be
made Year 2000 Compliant by their Suppliers.
11.5.4 Provided that Pandesic takes reasonable steps to test
the third party Software as provided in Section 11.5.3
of this Agreement, Pandesic is not responsible for
errors resulting from third-party systems or devices,
which directly access the database and overwrite the
database date fields or from the improper integration
of non-Year 2000 Compliant systems by Merchant.
11.6 EXCEPT AS SET FORTH HEREIN, PANDESIC, HOSTING PARTNER AND
SUPPLIERS DISCLAIM ALL OTHER WARRANTIES, EXPRESS, IMPLIED OR
STATUTORY, INCLUDING BUT NOT LIMITED TO THE IMPLIED WARRANTIES
OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE.
11.7 PANDESIC DOES NOT WARRANT THE ACCURACY OF THE TAX DATA AND
OTHER TAX CALCULATIONS MADE BY THE SOFTWARE. MERCHANT BEARS
FULL RESPONSIBILITY FOR THE DETERMINATION OF THE ACCURACY AND
APPLICABILITY OF THE OUTPUT FROM THE SOFTWARE AND ACKNOWLEDGES
AND UNDERSTANDS THAT TAX CALCULATIONS OFTEN INVOLVE
INTERPRETATIONS AND THAT THE DATA OF MANY JURISDICTIONS CAN
CHANGE RAPIDLY. MERCHANT UNDERSTANDS THAT PANDESIC IS
Page 5
<PAGE> 9
PANDESIC AGREEMENT
TERMS AND CONDITIONS
NOT PROVIDING SPECIFIC TAX, LEGAL, ACCOUNTING OR OTHER EXPERT ADVICE AND
MERCHANT SHOULD OBTAIN THE ADVICE OF QUALIFIED PROFESSIONALS IN THE AREA.
12. LIMITATION OF LIABILITY
12.1 NEITHER MERCHANT NOR PANDESIC, HOSTING PARTNER AND SUPPLIERS
SHALL BE LIABLE FOR (i) ANY INDIRECT, INCIDENTAL, SPECIAL,
CONSEQUENTIAL OR EXEMPLARY DAMAGES, OR FOR ANY LOSS OF
PROFITS, LOSS OF REVENUE OR BUSINESS INTERRUPTION OR LOSS OF
BUSINESS INFORMATION RESULTING FROM THE SERVICES, THE PANDESIC
EQUIPMENT OR THE SOFTWARE EVEN IF PANDESIC OR MERCHANT HAS
BEEN ADVISED OF THE POSSIBILITY THEREOF OR (II) ANY LOSS OF
DATA RESULTING FROM DELAYS, NON-DELIVERIES, MIS-DELIVERIES OR
SERVICE INTERRUPTIONS CAUSED BY PANDESIC OR MERCHANT. In no
event shall Merchant or Pandesic's aggregate cumulative
liability for any damages whatsoever to Merchant or Pandesic,
their employees, officers, directors, agents or contractors
arising out of or related to this Agreement exceed the amount
paid by Merchant or Pandesic, during the term, with respect to
the Services.
12.2 Neither Pandesic nor any of its officers, directors,
employees, contractors or agents shall be liable for any
damage or destruction of equipment or other materials
belonging to, leased by, or otherwise under the control of
Merchant, whether or not any such equipment or Materials are
at any time located in facilities owned or operated by
Pandesic, except where such damage or destruction is a direct
result of the gross negligence, recklessness or willful
misconduct of Pandesic or any of its officers, directors,
employees, contractors and agents.
12.3 The limitations of liability provided in this section shall
inure to the benefit of Merchant and Pandesic, Pandesic
Affiliates, Hosting Partner, Suppliers and to all of the
respective officers, directors, employees and agents of
Merchant and Pandesic and such other entities ("Limited
Liability Parties").
12.4 The limitations of liability in this Agreement shall apply
whether (i) the action in which recovery is sought is based in
contract, tort (including, but not limited to, negligence or
strict liability), statute or otherwise; or (ii) a Limited
Liability Party is alleged to be liable jointly with one or
more parties or otherwise.
13. TERM AND TERMINATION
13.1 The initial term of this Agreement shall commence on the
Contract Date and shall continue for twenty-four (24) months
from the date that the Pandesic software is loaded on the
servers and the servers are ready to accept Merchant's
configuration and functional installation of its products,
("Technical Installation"), following which it shall
automatically renew for successive twenty-four (24)-month
terms at the charges in effect at the commencement of each
such terms, unless written notice of non-renewal by either
party is delivered to the other party at least ninety (90)
days prior to the end of the then-current term.
13.2 TERMINATION BY PANDESIC
13.2.1 In addition to any other rights it may have under this
Agreement or applicable law, Pandesic may, at its
option, immediately terminate this Agreement, upon (i)
a Payment Default, which is not cured within fifteen
(15) business days of notice of such default (ii)
Merchants failure to comply with any other material
obligation of Merchant under this Agreement including,
but not limited to, its failure to comply with any of
the terms of the Use Policy, which is not cured within
fifteen (15) business days of notice of such default
(iii) Merchant ceasing to do business in the normal
course, becoming or being declared insolvent or
bankrupt, being the subject of any proceeding relating
to liquidation or insolvency which is not dismissed
ninety (90) calendar days or making an assignment for
the benefit of its creditors, (iv) any attempt that is
prohibited under this Agreement by Merchant to derive
any source code from the Software, (v) breach of
Page 6
<PAGE> 10
PANDESIC AGREEMENT
TERMS AND CONDITIONS
Merchant's obligations under Section 5 hereto, or (vi)
Pandesic, Hosting Partner or any Supplier becomes the
subject of an investigation by a law enforcement agency
not withdrawn within ninety (90) days or threatened
with prosecution as a result of Merchant's use of the
Services.
13.2.2 Pandesic may, at its option, terminate this Agreement
and retain the initial set-up charge paid by Merchant
in the event that Merchant does not complete its
pre-work obligations to permit deployment of the
Pandesic E-Business Solution Service by Pandesic within
six (6) months of the Contract Date.
13.3 TERMINATION BY MERCHANT
13.3.1 Merchant may terminate this Agreement in the event of a
material breach by Pandesic of its obligations under
this Agreement which breach is not cured within fifteen
(15) business days after written notice thereof is
received by Pandesic (a "Permissible Termination")
other than breaches that have defined remedies
associated therewith. In the event of a Permissible
Termination, Merchant shall pay a pro-rated Monthly
Transaction Fee based on the number of days Pandesic
provided Services prior to the date of termination of
this Agreement by Merchant under this Section 13.3, if
the level of Fees for such month would fall within the
Monthly Base Fee.
13.3.2 If Merchant terminates this Agreement other than in a
Permissible Termination, Merchant agrees that it would
be impractical and/or extremely difficult to fix or
establish the actual damage sustained by Pandesic as a
result of such termination and agrees that Merchant
shall pay to Pandesic as liquidated damages an amount
equal to [***].
13.3.3 Merchant may also terminate this Agreement in the event
that Pandesic (i) becomes insolvent, or files or has
filed against it any proceeding in bankruptcy or for
reorganization under any federal bankruptcy law or
similar state law, or has any receiver appointed for
all or a substantial part of Pandesic's assets or
business, or makes any assignment for the benefit of
its creditors, or enters into any other proceeding for
debt relief and such proceeding is not dismissed within
ninety (90) days after it has begun; or (ii) ceases to
do business or institutes any proceedings for the
liquidation or winding up of its business or for the
termination of its corporate charter. Within thirty
(30) days of termination by Merchant pursuant to (i) or
(ii) above, Pandesic shall provide the Source Code and
the compiled executables to Merchant. For purposes of
this Section 13.3.3 only, Source Code shall be defined
as one copy of the source code and related documents
which pertain to the Pandesic-owned portion of the
Software only, without updates. In the event that the
Source Code is released to Merchant pursuant to (i) or
(ii) above, Pandesic hereby grants Merchant the
royalty-free right to use such Source Code solely for
the purpose of maintaining its object code version of
the Pandesic-owned portion of the Software as of the
date this Agreement terminates in accordance with this
Section 13 of this Agreement and for no other reason
whatsoever.
13.4 Upon termination of this Agreement, Pandesic and Merchant
shall have no obligations to each other except as provided in
this Agreement. Upon termination of this Agreement, Merchant
shall (i) pay all amounts due and owing to Pandesic, (ii)
remove from Pandesic's and Hosting Partner's premises all
property owned by Merchant in respect of the Services
provided, and (iii) return to Pandesic all equipment,
documentation, software, access keys and any other property
provided to Merchant by Pandesic under this Agreement. Any
property of Merchant not removed from Pandesic's and Hosting
Partner's premises. Within ten (10) days after such
termination shall become the property of Pandesic, which may,
among other things, dispose of such property without the
payment of any compensation to Merchant. Pandesic shall return
to Merchant all of its data residing on the Pandesic Equipment
provided, however, that in the event that Merchant gives
Pandesic written notice that Merchant can not immediately
provide for the receipt of Merchants data residing on the
Pandesic Equipment, this Agreement will continue in effect
until such data is
- --------------------------
[***] Confidential treatment has been requested for the bracketed portion. The
confidential redacted portion has been omitted and filed separately with the
Securities and Exchange Commission.
Page 7
<PAGE> 11
PANDESIC AGREEMENT
TERMS AND CONDITIONS
returned, Pandesic agrees to continue to host such data for up
to sixty (60) days from the date of such notice, and Merchant
agrees to continue to pay Pandesic and provided for in this
Agreement The rights and obligations of the parties hereto
which by their nature would continue beyond the termination or
cancellation of this Agreement (Including, without limitation,
those relating to confidentiality, payment of charges,
limitations of liability and indemnification) shall survive
any such termination or cancellation.
14. DISPUTE RESOLUTION
14.1 If a dispute or difference of any kind whatsoever (a
"Dispute") shall arise between Pandesic and Merchant in
connection with, relating to or arising out of this Agreement,
including the interpretation, performance, non-performance, or
termination hereof, the parties shall attempt to settle such
Dispute in the first instance by mutual discussions. If such
Dispute has not been resolved within thirty (30) days by
mutual discussions, the parties shall endeavor to settle the
Dispute by mediation under the Mediation Rules of the American
Arbitration Association prior to any recourse to arbitration
pursuant to Section 14.2 below.
14.2 If such Dispute cannot be settled within thirty (30) days
after submission to mediation pursuant to Section 14.1 above
(the "Mediation Period"), such Dispute shall be settled by an
arbitral tribunal (the "Tribunal") under the Arbitration Rules
of the American Arbitration Association (the "Arbitration
Rules"). Each party shall appoint an arbitrator within thirty
(30) days after the expiration of the Mediation Period, which
arbitrators shall then jointly appoint a third arbitrator
within thirty (30) days after the appointment of the first two
arbitrators, to act as president of the Tribunal. Arbitrators
not so appointed shall be appointed pursuant to the
Arbitration Rules. The costs of the arbitration shall be borne
by the parties as determined by the Tribunal. The award
rendered in any arbitration commenced hereunder shall be final
and conclusive and judgment thereon may be entered in any
court having jurisdiction for its enforcement. Neither party
shall (i) appeal to any court from the decision of the
Tribunal; or (ii) have any right to commence or maintain any
suit or legal proceeding concerning a Dispute until such
Dispute has been determined in accordance with the arbitration
procedure provided for herein, and then only for enforcement
of the award rendered in such arbitration.
14.3 Notwithstanding the foregoing, nothing in Sections 14.1 or
14.2 shall be deemed as preventing either party from seeking
injunctive relief from the courts pursuant to Section 14.4
below. All mediation and arbitration proceedings -pursuant to
this Agreement shall take place in Santa Clara County,
California.
14.4 Notwithstanding the foregoing, each party acknowledges that
violation of Section 5.2 will cause irreparable harm to the
other not adequately compensable by monetary damages. In
addition to other relief, each party agrees that injunctive
relief shall be available to the other in the event of such
violations without necessity of posting bond to prevent any
actual or threatened violation of such section.
15. GENERAL
15.1 Neither Merchant nor Pandesic shall be deemed to be in default
of any provision of this Agreement or be liable for any delay,
failure of performance of obligations or interruption of the
provision of Services under this Agreement resulting, directly
or indirectly, from any (i) weather conditions, natural
disasters or other acts of God, (ii) action of any
governmental or military authority, (iii) failure caused by
telecommunication or other Internet provider (but not
including Hosting Partner), or (iv) any other force or
occurrence beyond its control, including any termination of
the agreement between Pandesic and the Hosting Partner.
15.2 Hosting Partner and Suppliers are third-party beneficiaries to
this Agreement to the extent that this Agreement contains
provisions which relate to Merchants use of Hosting Partner's
services or the Supplier Software. Such provisions are made
for the benefit of such third parties and are enforceable by
them in addition to Pandesic.
Page 8
<PAGE> 12
PANDESIC AGREEMENT
TERMS AND CONDITIONS
15.3 Unless otherwise specified herein, any notices or other
communications required or permitted hereunder shall be
sufficiently given if in writing and delivered personally or
sent by facsimile transmission, email, internationally
recognized overnight courier, registered or certified mail
(postage prepaid with return receipt requested), to the
address or facsimile number of Merchant as set forth in the
Order Form or Pandesic as set forth below. In addition to the
obligations set forth herein, in the event that Pandesic sends
to Merchant any notice or other communication of Merchants
material breach of this Agreement, Pandesic shall provide any
such notice to Michelle Katz, Esq., Lenard and Gonzales, 1900
Avenue of the Stars, 25th Floor, Los Angeles, CA 90067. Such
notices or other communications shall be deemed received (i)
on the date delivered, if delivered personally, (ii) on the
date that return confirmation is received, if sent by
facsimile; (iii) on the business day after being sent by an
internationally recognized overnight air courier, or (iv) five
(5) days after being sent, if sent by first class registered
mail, return receipt requested.
Pandesic LLC
990 Almanor Avenue
Sunnyvale, California 94086
Attention: Director of Law & Corporate Affairs
Facsimile Number (408) 616-1920
15.4 Any claims arising out of or related to this Agreement must be
brought no later than one year after it has accrued.
15.5 Nothing in this Agreement or in the course of dealing between
Pandesic and Merchant pursuant hereto shall be deemed to
create between Pandesic and Merchant (including their
respective directors, officers, employees and agents) a
partnership, joint venture, association, employment
relationship or any other relationship other than that of
independent contractors with respect to each other.
15.6 This Agreement shall be governed by and construed in
accordance with the laws of the State of California without
regard to choice of law provisions that would cause the
application of the law of another jurisdiction.
15.7 Failure by either Pandesic or Merchant to enforce any of the
provisions of this Agreement or any rights with respect hereto
shall not be considered to be waiver of such provisions or
rights, or to in any way affect the validity of this
Agreement.
15.8 If one or more of the provisions contained in this Agreement
are found to be invalid, illegal or unenforceable in any
respect the validity, legality and enforceability of the
remaining provisions shall not be affected.
15.9 This Agreement may be executed in any number of counterparts,
each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
15.10 Pandesic may change its Hosting Partner at any time in its
sole discretion.
15.11 Upon reasonable notice and in a manner which does not unduly
interfere with Merchants operations, Pandesic shall have the
right to audit and inspect Merchant's use of the Pandesic
E-Business Solution Service and the sales records associated
therewith in order to verify compliance with the terms of this
Agreement In the event there is a discrepancy of [***], or
more in the accounts, Merchant shall be responsible for and
shall pay the reasonable costs of such audit to Pandesic.
15.12 Pandesic, as part of its E-Business Solutions Services
provides certain equipment to Merchant for use in connection
with the said Services. Merchant holds such equipment subject
and subordinate to the rights of Pandesic. Merchant will keep
such equipment free from any liens or encumbrances whatsoever
and will indemnify and hold Pandesic harmless from it failure
to do so. Merchant will
- --------------------------
[***] Confidential treatment has been requested for the bracketed portion. The
confidential redacted portion has been omitted and filed separately with the
Securities and Exchange Commission.
Page 9
<PAGE> 13
PANDESIC AGREEMENT
TERMS AND CONDITIONS
use commercially reasonable efforts to maintain such equipment
in good operating order, protect such from deterioration other
than normal wear and tear and will not use such for any
purposes other than contemplated herein.
15.13 This Agreement constitutes the entire agreement of the parties
and supersedes all oral negotiations and prior writings with
respect thereto. Except as set forth in Section 13 above, this
Agreement may not be amended, modified or terminated unless it
is in writing signed by both parties hereto.
Page 10
<PAGE> 14
PANDESIC AGREEMENT
TERMS AND CONDITIONS
ACCEPTANCE
ACCEPTED BY MERCHANT: ACCEPTED BY PANDESIC LLC:
SIGNATURE: /s/ Marc P. Geiger SIGNATURE: /s/ Peter Wolcott
------------------------------ ------------------------------
PRINT NAME: Marc P. Geiger PRINT NAME: Peter Wolcott
------------------------------ ------------------------------
TITLE: CHIEF EXECUTIVE OFFICER TITLE: President
------------------------------ ------------------------------
DATE: April 15, 1999 DATE: 5/2/99
------------------------------ ------------------------------
Page 11
<PAGE> 15
EXHIBIT A
ADDITIONAL SERVICES
Artist Direct/Ultimate Band List (UBL.com)
Per discussions between Pascal Desmarets and Harold Hughes and Rob
Vickery held on April 14, 1999 at Artist Direct headquarters on behalf
of Merchant and Pandesic, respectively, Merchant and Pandesic agree to
the following:
1. Pandesic agrees to make a standalone FI/CO instance and such services as
the parties mutually agree available to Merchant for the duration of the
agreement. Merchant agrees to make an expert (or any equivalent
consultant services) in the FI/CO modules of SAP R/3 available to
Pandesic for the term of the FI/CO installation project.
2. Pandesic will operate Artist Direct and UBL stores on the same
installation of Pandesic 3.0.
3. Pandesic will use its best efforts to deploy initial Artist Direct
stores within 6 weeks of the date of technical install. Pandesic will
make best efforts to condense this effort to 4 weeks but makes no
commitments that any such deployment will be made in less than 6 weeks
from the date of technical install.
4. Pandesic will commit to Cybersource fraud detection and payment
integration for Romeo. Transaction fees associated with all Cybersource
services will be the complete responsibility of Merchant.
5. Pandesic will deliver procurement functionality as part of the Romeo
release. Until the Romeo release, Merchant will utilize the procurement
processes utilized by DVD Express.
6. Fulfillment with Alliance Entertainment is completely the responsibility
of Merchant. Should Pandesic be required to provide any personnel for
implementation and/or testing, these personnel will be billable at
[***]. Pandesic will ensure that the fulfillment API functions as
documented.
7. Wholesale Orders - Pandesic will provide a "work around" to handle
multiple shipments/line item. Pandesic will use its best efforts to
provide the functionality within R/3 for Romeo to handle multiple
shipments/line item.
8. Pandesic will allow Merchant to use the I/Pro Agent on Pandesic servers
provided that any such use does not negatively impact Pandesic services.
- --------------------------
[***] Confidential treatment has been requested for the bracketed portion.
The confidential redacted portion has been omitted and filed separately with the
Securities and Exchange Commission.
<PAGE> 1
EXHIBIT 10.26
ADNM MERCHANDISER AGREEMENT
THIS AGREEMENT, dated as of April 1, 1999, between Giant Merchandising
("Merchandiser"), 5655 Union Pacific Avenue, Commerce, CA 90022, and
ARTISTdirect New Media, LLC ("ADNM"), 17835 Ventura Blvd., Suite 310, Encino, CA
91316, is being entered into in light of the following:
A. Merchandiser is in the business of acquiring the right to use the
names, photographs and other likenesses, biographical material and other
personal identification (collectively, "Personal Identification") of musical
artists in connection with the manufacture and sale of merchandise and the
licensing of such rights to third parties.
B. ADNM is in the business of developing and operating Internet retail
storefronts for musical artists ("Artist Stores") that, among other things, sell
merchandise containing the Personal Identification of the applicable artist.
C. Merchandiser and ADNM are entering into this Agreement in order to
set forth the terms and conditions upon which Merchandiser has agreed to
accommodate ADNM in respect of developing and opening new Artist Stores
featuring Merchandiser Artists (as defined below) and in the operation thereof.
NOW, THEREFORE, in consideration of the foregoing and the mutual
benefits contained herein, the parties hereto agree as follows:
1. Term: The term of this Agreement (the "Term") shall be four (4) years
commencing on the date of this Agreement.
2. Signing Procedures:
(a) As used herein, "Merchandiser Artist" shall mean, individually
and collectively, each and every musical recording artist in respect of which
Merchandiser from time to time has the exclusive right to manufacture
merchandise utilizing such artist's Personal Identification and to sell such
merchandise for distribution through retail channels, including to retailers who
solely or primarily sell merchandise via the Internet (collectively, the
"Rights"). Merchandiser represents and warrants that attached hereto as Exhibit
A is a true and complete list of Merchandiser Artists as of the execution of
this Agreement, as well as the territory of the Rights in respect of each such
Merchandiser Artist.
(b) During the Term, Merchandiser agrees that, promptly upon
Merchandiser entering into an agreement to obtain Rights in respect of a
Merchandiser Artist, Merchandiser shall notify ADNM of the applicable artist
name(s) as well as the territory of the Rights. Upon Merchandiser's entering
into such agreement, the applicable Merchandiser Artist shall be deemed added to
said Exhibit A.
(c) Merchandiser agrees to promptly notify ADNM if any of the
information on said Exhibit A should change during the Term, or if the Rights in
respect of a particular Merchandiser Artist shall have terminated and/or the
"sell-off" provisions
1
<PAGE> 2
of Merchandiser's agreement with the applicable Merchandiser Artist have
become operative (after which such artist shall be deemed deleted from said
Exhibit A.)
(d) Said Exhibit A indicates with an asterisk (*) those Merchandiser
Artists in respect of which ADNM desires to enter into a Store Agreement as of
the execution of this Agreement. ADNM shall have the right from time to time
during the Term to notify Merchandiser that it desires to enter into a Store
Agreement with any other Merchandiser Artists. Each such Merchandiser Artist
shall be referred to herein as an "Accepted Artist." ADNM and Merchandiser shall
use their collective commercially reasonable efforts to cause the applicable
Merchandiser Artist to enter into an agreement with ADNM (each such agreement,
along with any extensions or renewals thereof, is sometimes referred to herein
as a "Store Agreement") substantially in the form attached hereto as Exhibit B.
ADNM agrees to provide Merchandiser with copies of each such Store Agreement
promptly after the complete execution thereof during the Term.
(e) Merchandiser acknowledges that, prior to the execution hereof,
ADNM entered into a Store Agreement with respect to the Merchandiser Artist
professionally known as [***] and that all Merchandiser Product sold under said
Store Agreement after the date hereof ("[***] Merchandise") shall be subject to
the terms of this Agreement, except as set forth below in this paragraph 2(e).
ADNM agrees to use best efforts to cause [***] to agree that the License Fee (as
defined in paragraph 6 below) shall be payable to Merchandiser hereunder (rather
than to [***]) in respect of all [***] Merchandise. In the event [***]
nevertheless refuses to so agree, ADNM shall pay Merchandiser the following
product consignment charges in respect of all [***] Merchandise, computed as if
the License Fee had been actually paid to Merchandiser hereunder, as follows:
(i) an amount equal to that portion of the otherwise applicable License Fee that
Merchandiser would have been entitled to retain for its sole account under its
agreement with [***] (e.g., as opposed to any portion thereof that Merchandiser
would be obligated to credit to [***] royalty account), plus (ii) the amount
of the Consignment Charge, if any, that would have been applicable under
paragraph 6(c) below.
3. Product Supply:
(a) As used herein:
(i) "Merchandiser Product" means all merchandise containing the
Personal Identification of a Merchandiser Artist and sold pursuant to a Store
Agreement (whether through the applicable Artist Store or the UBL Store), that
is provided by or on behalf of Merchandiser or a Sublicensee pursuant to the
Merchandiser Terms;
(ii) "Artist Product" means all merchandise and other products or
services sold pursuant to a Store Agreement (whether through the applicable
Artist Store or the UBL Store) other than Merchandiser Product (e.g., records,
concert tickets, advertisement space, and merchandise supplied by a Sublicensee
other than pursuant to the Merchandiser Terms); and
- ----------------
[***] Confidential treatment has been requested for the bracketed portion. The
confidential redacted portion has been omitted and filed separately with the
Securities and Exchange Commission.
2
<PAGE> 3
(iii) "Merchandiser Terms" means that payment for the applicable
merchandise shall not become due until the date [***] after the applicable
merchandise has arrived at ADNM's fulfillment center(s) (the "Center"), it being
understood that ADNM shall have the right to return any such merchandise to
Merchandiser for a full credit within said [***] period (provided the applicable
returned merchandise arrives at Merchandiser's warehouse no later than [***]
after the expiration of said [***] period). For purposes of this paragraph
3(a)(iii), merchandise shall be deemed to have "arrived at the Center" at such
time as the vehicle delivering such merchandise arrives at the Center,
regardless of the date on which such merchandise is unloaded.
(b) During the term of each Store Agreement (but only as long as
Merchandiser has the Rights in respect of the applicable Merchandiser Artist),
Merchandiser agrees to sell merchandise manufactured by or under the control of
Merchandiser to ADNM for resale under the applicable Store Agreement upon the
following terms:
(i) All such sales shall be subject to the Merchandiser Terms.
(ii) All such sales shall be at Merchandiser's standard wholesale
prices (i.e., the prices that Merchandiser generally charges its other wholesale
customers, subject to Merchandiser's customary volume discounts). Merchandiser
represents and warrants that attached hereto as Exhibit C are Merchandiser's
standard wholesale prices as of the execution of this Agreement. Merchandiser
shall notify ADNM of any changes to its standard wholesale prices, which changes
shall only apply to Merchandiser Product ordered by ADNM after its receipt of
such notice from Merchandiser. Notwithstanding the foregoing, the parties agree
and acknowledge that Merchandiser may not have standard wholesale prices for
certain Collectibles (as defined in paragraph 6(b)(v) below), in which case the
wholesale price shall be reasonably determined by Merchandiser.
(iii) ADNM and Merchandiser shall in their good faith business
judgment mutually determine on an item-by-item basis the applicable minimum and
maximum inventory levels to be carried by ADNM, and Merchandiser agrees to use
commercially reasonable efforts to ship merchandise on a timely basis consistent
therewith.
(iv) ADNM shall pay all costs (including all associated freight
and insurance costs) of shipping the products to the Center and returning any
unsold merchandise from the Center to Merchandiser's warehouse.
(c) Merchandiser shall use reasonable efforts to cause each person or
entity who manufactures and distributes merchandise under license from
Merchandiser (a "Sublicensee") to sell merchandise to ADNM hereunder upon the
foregoing terms (e.g., in accordance with the Merchandiser Terms and at no more
than the
- ----------------
[***] 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.
3
<PAGE> 4
Sublicensee's standard wholesale prices). If a Sublicensee is unwilling
to do so, Merchandiser may elect (in its discretion) to purchase the applicable
merchandise from such Sublicensee and sell same to ADNM pursuant to the
Merchandiser Terms.
(d) For the avoidance of doubt, Merchandiser agrees and acknowledges
that Artist Product will be sold on the Artist Stores and the UBL Store
and that no License Fee shall be payable to Merchandiser in respect of any
Artist Product.
(e) After the expiration of the [***] period described in paragraph
3(a)(iii) above, ADNM shall have the right to return (not for credit) to
Merchandiser any unsold merchandise hereunder. Merchandiser agrees to use its
commercially reasonably efforts to promptly sell such returned product at
liquidation prices (subject to Merchandiser's commercially reasonable efforts to
maximize the liquidation proceeds) and to remit to ADNM, within [***] after each
such sale, [***] of the net proceeds thereof. As used in this paragraph 3(e),
the term "net proceeds" shall mean the gross amount payable or credited to
Merchandiser from such sales, less Merchandiser's verifiable direct third party
out-of-pocket costs in connection with such sales.
4. UBL Store: Merchandiser agrees and acknowledges that ADNM may elect
to make available for sale on an Internet on-line store (the "UBL Store")
operated by a company affiliated with ADNM certain items of Merchandiser Product
offered for sale through an Artist Store. ADNM agrees that its books and records
shall clearly distinguish Merchandiser Product sold through an Artist Store from
Merchandiser Product sold through the UBL Store, and ADNM shall, for the
avoidance of doubt, at no time credit a sale that took place through an Artist
Store as a sale through the UBL Store.
5. Grant of Rights: With respect to each Store Agreement (and subject to
the terms and conditions set forth therein), Merchandiser shall be deemed to
have granted to ADNM, in consideration for the License Fee, the following
rights, but only insofar as Merchandiser has such Rights and for the territory
Merchandiser has such Rights, during the term of such Store Agreement (but only
as long as Merchandiser has the Rights in respect of the applicable Merchandiser
Artist): (a) the exclusive right and license to develop and operate the only
"official" Internet store for the applicable Merchandiser Artist, and (b) the
non-exclusive (subject to paragraph 11 below) right and license to utilize such
Merchandiser Artist's Personal Identification in connection with the applicable
Artist Store. Notwithstanding the foregoing, ADNM acknowledges that such uses of
the Merchandiser Artist's Personal Identification may be subject to the approval
of the applicable Merchandiser Artist under Merchandiser's agreement with such
Merchandiser Artist; in this regard, Merchandiser hereby authorizes ADNM to seek
to obtain such approvals directly from the applicable Merchandiser Artist.
6. License Fee:
(a) In consideration for the rights licensed pursuant to paragraph 5
above and Merchandiser's agreement to supply Merchandiser Product to ADNM
- ----------------
[***] Confidential treatment has been requested for the bracketed portion. The
confidential redacted portion has been omitted and filed separately with the
Securities and Exchange Commission.
4
<PAGE> 5
pursuant to the Merchandiser Terms, ADNM agrees to pay Merchandiser a License
Fee with respect to all Merchandiser Product sold at any time (including after
the Term).
(b) As used herein:
(i) "License Fee" shall mean, subject to paragraph 6(c) below,
the amount by which the following amounts exceed the wholesale purchase price
payable by ADNM for all applicable Merchandiser Product, provided that the
License Fee otherwise payable shall be further reduced by any third party
marketing and rights clearance costs incurred by ADNM, with the approval of
Merchandiser (which approval may be withheld by Merchandiser for any reason) and
the applicable Merchandiser Artist, and attributable to Merchandiser Product (it
being understood that any such costs not specifically attributable to
Merchandiser Product shall be allocated reasonably by ADNM between Merchandiser
and the applicable Merchandiser Artist, taking into account whether the
applicable costs related to Merchandiser Product and/or Artist Product:
(A) [***] of the Adjusted Gross Merchandiser Product Revenue with
respect to Merchandiser Product (other than Collectibles) sold through an Artist
Store and with respect to Collectibles sold through the UBL Store (or through
any other source other than an Artist Store);
(B) [***] of the Adjusted Gross Merchandiser Product Revenue with
respect to Merchandiser Product (other than Collectibles) sold through the UBL
Store (or through any other source other than an Artist Store); and
(C) [***] of the Adjusted Gross Merchandiser Product Revenue with
respect to Collectibles sold through an Artist Store.
(ii) "Adjusted Gross Merchandiser Product Revenue" shall mean Gross
Merchandiser Product Revenue less the Deductible Amounts.
(iii) "Gross Merchandiser Product Revenue" shall mean the amount
actually received by ADNM (including shipping and handling revenues) in respect
of Merchandiser Product.
(iv) "Deductible Amounts" shall mean all of the following costs paid
by ADNM and specifically attributable to Merchandiser Product: all amounts paid
under paragraph 3(b)(iv) above; all actual packaging and shipping costs paid to
third parties (not to exceed the associated shipping and handling revenues
referred to in paragraph 6(b)(iii) above); all third party fulfillment fees and
related charges; sales, use and value-added taxes actually paid; credit card
fees; and any credits for returns, rebates, cancellations and exchanges. ADNM
shall not deduct any fulfillment fees or related charges to the extent they
exceed such amounts as Merchandiser has approved; Merchandiser hereby
pre-approves the applicable amounts set forth on Exhibit D attached hereto. To
the extent ADNM is unable to identify a particular item of cost as being
attributable to either Merchandiser Product or Artist Product, only a portion
thereof shall be deemed a "Deductible Amount" hereunder, such portion to be
determined reasonably by ADNM, taking into account the total amount of Gross
Merchandiser Product Revenues as compared to the total amount of other
applicable revenues during the applicable accounting period. Notwithstanding
anything to the contrary contained herein, as between ADNM and Merchandiser,
ADNM shall be solely responsible for all customer bad debts in respect of
Merchandiser Product shipped by ADNM (or its designee), including all associated
Deductible Amounts.
(v) "Collectibles" means any single item of Merchandiser Product
bearing a wholesale price in excess of [***].
(c) Within ten (10) business days after the date ADNM notifies
Merchandiser of each new Accepted Artist pursuant to paragraph 2(d) above (or
within ten (10) business days after the complete execution of this Agreement, in
respect of any
- ----------------
[***] 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
Accepted Artist indicated on Exhibit A as of the execution hereof), Merchandiser
shall have the right to notify ADNM of the percentage of the applicable License
Fees hereunder that Merchandiser is obligated to pay to, or credit to the
account of, the applicable Accepted Artist or its furnishing company (the
"Artist Percentage"), if such Artist Percentage exceeds [***]. In such event,
notwithstanding anything to the contrary contained herein, ADNM shall pay to
Merchandiser a product consignment charge (the "Consignment Charge") equal to
[***] of the Adjusted Gross Merchandiser Product Revenue with respect to such
Accepted Artist for each [***] by which such Artist Percentage exceeds [***].
For purposes of illustration, in the event that Merchandiser has properly
notified ADNM that the Artist Percentage with respect to a particular Accepted
Artist equals [***], then with respect to such Accepted Artist, ADNM shall pay
to Merchandiser a Consignment Charge equal to [***] of the Adjusted Gross
Merchandiser Product Revenue with respect to such Accepted Artist. For the
avoidance of doubt, no Consignment Charge shall be applicable with respect to
any Merchandiser Artist for which Merchandiser does not timely notify ADNM of
the Artist Percentage as provided in this paragraph 6(c).
(d) Attached hereto as Exhibit E are certain example computations of
the License Fee.
7. Artist Store Advertising Revenues. In respect of any amounts received
by ADNM during the Term in consideration of the placement of hyperlinks, banners
and other advertisements contained on an Artist Store ("Artist Store Advertising
Revenues"), ADNM agrees to pay Merchandiser [***] of the amount by which such
Artist Store Advertising Revenues exceed all agent commissions related thereto.
The parties acknowledge that all such hyperlinks, banners and other
advertisements may be subject to the approval of the applicable Accepted Artist.
8. Artist Store Customer Databases. During the Term, subject to the
consent of the applicable Merchandiser Artist, ADNM shall provide Merchandiser
with customer database information from the Artist Stores, [***] , to be used by
Merchandiser solely for purposes of promoting the Artist Stores and
Merchandiser's business in connection with the applicable Merchandiser Artist to
which the database relates. Merchandiser specifically acknowledges and agrees
that it shall have no right to sell, distribute, sublicense or otherwise dispose
of the customer database information provided to Merchandiser hereunder or any
portion thereof.
9. ARTISTdirect Warrant. In further consideration of Merchandiser's
entering into and fully performing its obligations under this Agreement, and in
exchange for the payment by Merchandiser to ARTISTdirect, LLC ("AD") of one
dollar ($1.00), upon the consummation of the transaction that currently is
contemplated to occur whereby AD will become the beneficial owner of one hundred
percent (100%) of the outstanding membership interests of The Ultimate Band
List, LLC (the "Rollup"), ADNM shall cause AD to grant to Merchandiser a warrant
to acquire Common Units of ARTISTdirect, LLC
- ----------------
[***] Confidential treatment has been requested for the bracketed portion. The
confidential redacted portion has been omitted and filed separately with the
Securities and Exchange Commission.
6
<PAGE> 7
representing approximately two percent (2%) of AD's outstanding membership
interests for an aggregate exercise price not to exceed One Million Seven
Hundred Twenty-Four Thousand Dollars ($1,724,000) which warrant shall be subject
to the terms generally set forth in Exhibit F attached hereto; provided,
however, that if the Rollup shall not occur prior to July 31, 1999, then ADNM
shall then cause AD to grant to Merchandiser a warrant substantially in the form
of Exhibit F attached hereto.
10. Accountings:
(a) ADNM shall compute the License Fee, any Consignment Charges and
Merchandiser's applicable share of any Artist Store Advertising Revenues,
payable to Merchandiser and render an accounting statement to Merchandiser
within thirty (30) days after March 31, June 30, September 30 and December 31
for the three-month period preceding March 31, June 30, September 30 or December
31, as the case may be. Each such statement shall include an itemized breakdown
of the sources of the applicable revenue, Deductible Amounts and all other
reductions in computing the License Fee and share of Artist Store Advertising
Revenues, and shall be accompanied by the payment of the amounts, if any, earned
by Merchandiser during the accounting period to which the statement relates.
(b) Merchandiser or a certified public accountant on Merchandiser's
behalf may, at ADNM's offices and at Merchandiser's expense, examine ADNM's
books and records relevant to the calculation of the License Fee solely for the
purposes of verifying the accuracy of statements rendered by ADNM to
Merchandiser. Such books and records may be examined as aforesaid only (i)
during ADNM's normal business hours, (ii) upon reasonable notice to ADNM, and
(iii) within two years after the date a statement is due hereunder. Further,
Merchandiser shall not have the right to examine such books and records more
frequently than once in any twelve month period or more than once with respect
to any particular statement. Each statement shall be deemed final and binding
upon Merchandiser as an account stated and shall not be subject to any claim or
objection by Merchandiser (A) unless Merchandiser notifies ADNM of
Merchandiser's specific written objection to the applicable statement, stating
the basis thereof in reasonable detail within two (2) years after the date such
statement is due hereunder, and (B) unless, within said two (2)-year period,
Merchandiser make proper service of process upon ADNM in a suit instituted in a
court of proper jurisdiction.
11. Exclusivity: Insofar as ADNM is concerned, Merchandiser shall have
the right to sell and authorize others to sell merchandise containing a
Merchandiser Artist's Personal Identification over the Internet. However, during
the Term, Merchandiser shall not, without ADNM's consent, develop or maintain a
web site, or license or otherwise authorize any other web site provider to
develop or maintain a web site, that is identified solely with a single
Merchandiser Artist (e.g., a web site that is the "official" merchandise web
site for a Merchandiser Artist). The foregoing is not intended to prohibit
Merchandiser from operating a web site relating to multiple artists, with
certain pages or sections thereof devoted solely or primarily to a particular
Merchandiser Artist, and to
7
<PAGE> 8
sell merchandise on such web site; provided the appearance of such web site is
not designed so as to give the consumer the impression that the merchandise is
being purchased directly from the Merchandiser Artist, rather than from
Merchandiser (or its licensee). [For the avoidance of doubt, the operation of
any such web site by Merchandiser shall not in any way affect ADNM's rights
hereunder or otherwise to develop and operate the "official" web site of the
applicable Artist (e.g., an Artist Store).]
12. Tour Merchandising and Sublicensing Rights: During the Term and for
a period of one (1) year thereafter, ADNM agrees that it and its affiliates
shall refrain from seeking from any artist (a) tour merchandising rights, or (b)
the right to sublicense merchandising rights to third parties, or (c) the right
to manufacture merchandise containing such artist's Personal Identification.
13. First Opportunity to Manufacture Merchandise for Outside Artists: As
used herein, the term "Outside Artist" shall mean an artist who is not a
Merchandiser Artist, who is then subject to a store agreement with ADNM, and who
is not then subject to an agreement pursuant to which the Rights with respect to
such artist are held by a third party (e.g., another merchandising company).
During the Term, ADNM shall not arrange for the manufacture of merchandise
containing the Personal Identification of an Outside Artist with anyone other
than Merchandiser without first affording Merchandiser the opportunity to
manufacture such merchandise. In such event, ADNM and Merchandiser shall
negotiate in good faith the terms pursuant to which Merchandiser will
manufacture and supply such merchandise to ADNM. If ADNM and Merchandiser are
unable to agree on such terms, then, insofar as Merchandiser is concerned, ADNM
may make an arrangement with anyone else to manufacture and supply such
merchandise. Notwithstanding the foregoing, Merchandiser agrees and
acknowledges that the applicable Outside Artist shall not be bound by the
foregoing and shall, accordingly, have the right, insofar as Merchandiser is
concerned, to cause anyone else to manufacture and supply to ADNM such
merchandise. For the avoidence of doubt, no License Fee shall be payable under
this Agreement with respect to any merchandise containing the Personal
Identification of an Outside Artist.
14. Representations and Warranties; Indemnity:
(a) Each party hereto represents and warrants that: (i) it has the
full right, power and authority to enter into and to perform this Agreement;
(ii) it is not under any restriction or obligation that may or will impair such
party's full performance of this Agreement; and (iii) it shall not at any time
do or authorize any person or entity to do anything inconsistent with, or
anything that might diminish, impair or interfere with any of the other party's
rights hereunder.
(b) Merchandiser agrees to indemnify and hold ADNM and its members,
employees, attorneys, agents, successors, affiliates, assigns and licensees
harmless against any claim, liability, cost and expenses (including attorneys'
and accountants' fees reasonably incurred) in connection with any breach or
alleged breach of this Agreement by Merchandiser. In this regard, ADNM shall not
settle any claim without first notifying Merchandiser of the terms of any
proposed settlement and obtaining Merchandiser's consent thereto.
(c) ADNM agrees to indemnify and hold Merchandiser and its members,
employees, attorneys, agents, successors, affiliates, assigns and licensees
harmless against any claim, liability, cost and expenses (including attorneys'
and accountants' fees reasonably incurred) in connection with any breach or
alleged breach of this Agreement by ADNM and/or in connection with the breach by
ADNM of any Store Agreement. In this regard, Merchandiser shall not settle any
claim without first notifying ADNM of the terms of any proposed settlement and
obtaining ADNM's consent thereto.
(d) Merchandiser acknowledges that ADNM is making no representations
and warranties concerning anticipated success of the Stores, the amount of
compensation payable to Merchandiser hereunder, and/or the current or future
value of ADNM or the warrants described in paragraph 8 above. Likewise, ADNM
8
<PAGE> 9
acknowledges that Merchandiser is making no representations and warranties
concerning anticipated success of the Stores or the amount of compensation
payable to ADNM with respect thereto.
15. Notices; Approvals:
(a) All notices and payments to either party hereto shall be sent to
such party's address first mentioned herein, or such other address as a party
hereto may hereafter designate by notice to the other. All notices sent under
this Agreement must be in writing to be effective, and must be sent by a third
party messenger, by air courier service with a written acknowledgment of
receipt, by registered or certified mail, return receipt requested, or through a
telegraph office. The date of personal delivery, of mailing or faxing, or the
date of delivery to a telegraph office, as the case may be, of any such notice
shall be deemed the date of the giving thereof (except, with respect to notices
of change of address, the date of which will be the date of receipt by the
receiving party). Until ADNM notifies Merchandiser otherwise, a copy of all
notices hereunder to ADNM shall be simultaneously sent as aforesaid to Lenard &
Gonzalez LLP, 1900 Avenue of the Stars, 25th Floor, Los Angeles, CA 90067;
Attention: Allen D. Lenard, Esq. Until Merchandiser notifies ADNM otherwise, a
copy of all notices hereunder to Merchandiser shall be simultaneously sent as
aforesaid to Warner Music Group Inc., 3400 Riverside Drive, 6th Floor, Burbank,
CA 91505; Attention: Legal Department.
(b) No failure by a party hereto to perform any of its obligations
hereunder shall be deemed a breach of this Agreement, unless the party claiming
a breach has given the other party hereto notice of such alleged breach in
reasonable detail and such alleged breach is not cured within fifteen (15)
business days [ten (10) business days for non-payments] after the giving of such
notice, provided this sentence shall not apply to breaches incapable of being
cured (e.g., representations and warranties).
(c) No consent or approval under this Agreement shall be unreasonably
withheld or delayed. With respect to consents and approvals required under this
Agreement, the applicable party may elect to request such consent by notice to
the other. If the party whose consent or approval is required does not respond
to such notice within ten (10) business days thereafter, the party seeking to
obtain such consent or approval may give the other party a second notice making
such request, and the applicable party's consent or approval shall be deemed
granted unless it notifies the other party to the contrary, stating in
reasonable detail the basis thereof, within ten (10) business days after such
second notice.
16. Miscellaneous:
(a) All references to "this Agreement," "hereof," "herein" and words
of similar connotation include all exhibits attached hereto, unless specified
otherwise. This Agreement is intended by the parties hereto as a final
expression of their understanding and agreement with respect to the subject
matter hereof and as a complete and exclusive statement of the terms thereof;
this Agreement supersedes all prior and contemporaneous negotiations,
understandings, and agreements between the parties
9
<PAGE> 10
hereto with respect to the subject matter hereof. The parties acknowledge and
agree that neither party hereto has made any representations or promises in
connection with this Agreement or the subject matter hereof not contained
herein. Nothing in this Agreement shall be construed to require the commission
of any act contrary to law, and wherever there is a conflict between any
provisions of this Agreement and any statute, law, ordinance, order or
regulation contrary to which the parties hereto have no legal right to contract,
such statute, law, ordinance, order or regulation shall prevail; provided that,
in such event, (a) the provision of this Agreement so affected shall be limited
only to the extent necessary to permit the compliance with the minimum legal
requirements, (b) no other provisions of this Agreement shall be affected
thereby, and (c) all such other provisions shall remain in full force and
effect. The parties hereto shall negotiate in good faith to replace any invalid,
illegal or unenforceable provision (the "Invalid Provision") with a valid
provision, the effect of which comes as close as possible to that of the Invalid
Provision. This Agreement cannot be canceled, modified, amended or waived, in
part or in full, in any manner except by an instrument in writing signed by the
party to be charged. No waiver by ADNM, whether expressed or implied, of any
provision of this Agreement or default hereunder shall affect ADNM's right to
thereafter enforce such provision or to exercise the right or remedy set forth
in this Agreement in the event of any other default, whether or not similar.
Words in the singular number shall include the plural, and vice versa. Whenever
examples are used in this Agreement with the words "including," "for example,"
"e.g.," "such as," "etc." or any derivation thereof, such examples are intended
to be illustrative and not in limitation thereof. The paragraph headings herein
are used solely for convenience and shall not be used in the interpretation or
construction of this Agreement.
(b) In entering into this Agreement and providing services pursuant hereto,
Merchandiser and ADNM each have and shall have the status of independent
contractors. Nothing herein contained shall contemplate or constitute either
party being an agent or employee of the other party, and nothing herein shall
constitute a partnership, joint venture or fiduciary relationship between the
parties.
(c) Neither party hereto shall, without the prior written consent of the other
party, assign this Agreement, in whole or in part, to any person or entity other
than a subsidiary, affiliated or controlling entity, or to any person or entity
owning or acquiring a substantial portion of the stock or assets of such party
hereto.
(d) This Agreement shall be deemed to have been entered into in the State of
California and the validity, interpretation and legal affect of this Agreement
shall be governed by the laws of the State of California applicable to contracts
entered into and performed entirely within the State of California. The courts
located in the County of Los Angeles, California (state and federal), only, will
have jurisdiction of any controversy regarding this Agreement; any action or
other proceeding which involves such a controversy will be brought in those
courts, in California and not elsewhere.
ARTISTdirect New Media, LLC GIANT MERCHANDISING
10
<PAGE> 11
By: ______/s/ Marc P. Geiger________ By: ________/s/ [Illegible]_______
(an authorized signatory) (an authorized signatory)
11
<PAGE> 12
EXHIBIT A
MERCHANDISER'S ARTISTS
Artist Agreement Territory
- -----------------------------------------------------------------------------
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
GIANT MERCHANDISING
Music Roster
<S> <C>
Bryan Adams Presidents of the United States
Aerosmith of America
Bad Religion Rage Against the Machine
Bauhaus Rancid
Clint Black Red Hot Chili Peppers
Bush Savage Garden
Candlebox Smashing Pumpkins
The Chieftains Social Distortion
Kurt Cobain Speedealer
C.O.C. (Corrosion of Conformity) Sponge
Crystal Method Testament
Days of the New Third Eye Blind
Def Leppard Tool
Deftones The Vandals
Bryan Ferry Veruca Salt
Flaming Lips The Wallflowers
Fu Manchu Weezer
Goldfinger
Green Day
Don Henley
Lauryn Hill
Hole
Hootie & The Blowfish
Korn
Lenny Kravitz
L7
Limp Bizkit
Love And Rockets
Marcy Playground
Matchbox 20
Megadeth
Metallica
Mudhoney
My Life With The Thrill Kill Kult
Mike Ness
The Offspring
Orgy
Porno For Pyros
</TABLE>
12
<PAGE> 13
EXHIBIT B
ON-LINE STORE AGREEMENT
THIS AGREEMENT, dated as of ____________, 19__, by and between ARTISTdirect New
Media, LLC ("ADNM"), 17835 Ventura Blvd., Suite 310, Encino, CA 91316, and
[Company Name] ("you"), c/o __________________________ is being entered into in
consideration of the mutual benefits and covenants contained in this Agreement.
1. PURPOSE: Subject to your approval rights in this Agreement, ADNM will
develop, maintain and operate an Internet web site for you relating to the
musical group professionally known as "[ArtistName]" ("Artist") and the members
of Artist, to be known as "The Official [ArtistName] Superstore" (the "Store").
The Store will provide Internet and other online access for online and offline
distribution of products and services ("Product"). It is intended that the
Product will include records, digital downloads (subject to the consent of
Artist's record company), merchandise, tickets, tour memorabilia, collectible
items and special or limited edition items not available from any other source,
and special bundled packages including any or all of the foregoing items.
2. TERM: The term of this Agreement (the "Term") shall commence on the date set
forth above and shall extend for an initial contract period ending five (5)
years after the official launch of the Store. After the initial contract period,
the Term shall automatically continue for additional one (1) year contract
periods, subject to the following sentence. At any time between sixty (60) and
thirty (30) days prior to the expiration of any contract period of the Term,
either party may by notice to the other terminate the Term effective as of the
end of the then-current contract period.
3. MERCHANDISER AGREEMENTS.
(a) You are presently party to an agreement (the
"Artist/Merchandiser Agreement") with Winterland Concessions Company
("Merchandiser") pursuant to which you have granted Merchandiser the exclusive
right to manufacture (and license the manufacture of) merchandise bearing the
name, likenesses, biographical material and other personal identification of
Artist (collectively, "Personal Identification") for sale through retail
channels, including the right to sell such merchandise to retailers who solely
or primarily sell merchandise via the Internet (the "Rights").
(b) ADNM represents and warrants that it is party to an agreement
with Merchandiser pursuant to which Merchandiser has (i) granted to ADNM any
consents and licenses that may be required from Merchandiser as a result of the
Artist/Merchandiser Agreement in connection with the sale of Product hereunder,
and (ii) agreed to supply (or cause the supply of) merchandise on a consignment
basis to ADNM for resale on the Store (the "ADNM/Merchandiser Agreement"). You
acknowledge that certain Product items may be manufactured by or under the
control of Merchandiser's sublicensees, and that Merchandiser may or may not be
able to offer such Product items to ADNM on a consignment basis. All Product
supplied to ADNM by Merchandiser (or its sublicensees) on a consignment basis is
sometimes
13
<PAGE> 14
referred to herein as "Merchandiser Product"; all other Product is sometimes
referred to herein as "Artist Product."
(c) If you (or Artist) enter into any agreement during the Term
(of this Agreement) pursuant to which you grant the Rights to any third party,
you shall cause such third party to grant to ADNM any consents and licenses that
may be required from such third party in connection with the sales of Product
hereunder. For the avoidance of doubt, no termination or expiration of the
Artist/Merchandiser Agreement or of the ADNM/Merchandiser Agreement shall affect
the Term (of this Agreement) or the rights granted to ADNM hereunder.
Accordingly, the only effect of either such termination or expiration will be
that the terms of this Agreement relating to Merchandiser Product will no longer
apply, and the terms of this Agreement relating to Artist Product will
thereafter apply to all Product hereunder.
4. DEVELOPMENT; HOSTING; CUSTOMER SERVICE:
(a) ADNM will design and develop the Store, including the source
code, the Product catalog, and the commerce system, and will be solely
responsible for the costs of such design and development. You shall have the
right to approve the design of the Store, including its "look and feel." The
parties hereto agree to use commercially reasonable best efforts (i) to cause
the beta version of the Store to be completed within 60 days after the complete
execution of this Agreement, and (ii) to officially launch the Store within 90
days after such execution.
(b) During the Term, ADNM will host (i.e., provide the server
for) and maintain the Store, including by providing periodic source code
programming updates and improvements in accordance with your reasonable
requests. In this regard, ADNM will use its commercially reasonable best efforts
to correct any material "bug" or defect as soon as reasonably possible after
ADNM becomes aware of such material "bug" or defect.
(c) ADNM shall handle all customer orders and inquiries, provide
all necessary credit card accounting and processing services and develop
payment, delivery and refund policies. To effect the foregoing, ADNM shall also
provide an on-line and toll-free telephone service center that will take orders
and respond to customer inquiries. On-line inquiries will be responded to within
24 hours of receipt and the telephone service will be operational Mondays
through Fridays from 9:00 a.m. to 7:00 p.m. Pacific Time (excluding holidays)
and will enable customers who prefer not to place orders on-line to place orders
by facsimile or telephone.
(d) Unless you and ADNM agree otherwise in writing, ADNM (or its
designee) shall process orders received from the Store and arrange to have the
ordered Product shipped to the customer (subject to Product availability).
5. PRODUCT SUPPLY AND INVENTORY:
(a) You will have the right to approve the Products that are to
be sold through the Store and the retail price of each Product item.
(b) You and ADNM agree to cooperate with each other and use their
commercially reasonable best efforts to make the necessary arrangements with the
manufacturers, distributors and providers of Product ("Suppliers"), on mutually
acceptable terms, to ensure the
14
<PAGE> 15
timely supply of Product in sufficient quantities to fulfill Store customer
orders. You will be responsible for purchasing all Product from the Suppliers
and paying all related costs (including directly associated freight and
insurance costs) ("Product Costs"). If ADNM should nevertheless pay any Product
Costs on your behalf (which ADNM is not obligated to do), all such Product Costs
will be deducted from any and all monies otherwise payable to you hereunder and,
to the extent ADNM is at any time unable to do so, you agree to promptly
reimburse ADNM for the excess upon demand. In order to assist you with regard to
the foregoing, ADNM will provide inventory management services, taking into
account such inventory levels as you and ADNM may have mutually approved.
As between you and ADNM, you shall own and be solely responsible for all
Artist Product inventory. However, ADNM shall maintain (or cause the applicable
fulfillment center to maintain) at all times during the Term insurance to
protect you and ADNM from losses related to Artist Product inventory damaged or
otherwise lost while in the fulfillment center's possession. The coverage terms
of the insurance policy currently in effect are set forth on Exhibit 1 attached
to this Agreement.
(c) Upon the expiration of the Term, all Artist Product inventory
for which you have paid the Product Costs shall be shipped, at your sole cost
and expense, to a location designated or approved by you, which inventory shall
be free and clear of any encumbrances by ADNM or any third party deriving rights
through ADNM.
6. PRODUCT SALES AND STORE REVENUES:
(a) Merchandiser Product: Attached hereto as Exhibit 2 is an extract of
the ADNM/Merchandiser Agreement setting forth the license fee payable by ADNM to
Merchandiser in respect of Merchandiser Product sold hereunder. Company
acknowledges and agrees that it shall look solely to Merchandiser, and not to
ADNM, with respect to all monies due Company and/or Artist in respect of
Merchandiser Product sold hereunder.
(b) Artist Product:
(i) Upon ADNM's receipt of a verified order for a particular item of
Artist Product, ADNM shall purchase such item of Product from you. Upon such
purchase, title to such Product shall pass to ADNM and, as between you and ADNM,
ADNM will thereafter be responsible for the inventory of such Product item.
(ii) ADNM shall pay you a purchase price equal to [***] of the "Gross
Artist Product Revenue," which means the amount actually received by ADNM in
respect of Artist Product sold through the Store, less all related Deductible
Amounts. The term "Deductible Amounts" means all shipping and handling charges;
third party fulfillment fees and related charges; sales, use and value-added
taxes; credit card and other third party service fees; and any credits for
returns, rebates, cancellations and exchanges. A schedule setting forth the
fulfillment fees charged by the fulfillment center as of the date hereof is set
forth on Exhibit 1 attached hereto.
(iii) Notwithstanding anything to the contrary contained herein, as
between ADNM and you, [***] shall be solely responsible for all Product Costs
and Deductible Amounts
- ----------------
[***] Confidential treatment has been requested for the bracketed portion. The
confidential redacted portion has been omitted and filed separately with the
Securities and Exchange Commission.
15
<PAGE> 16
associated with customer bad debts in respect of Product hereunder shipped by
ADNM (or its designee).
(c) Records: Notwithstanding paragraphs 5(c) and 6(b) above,
phonorecords that are supplied by ADNM's designated fulfillment center for sale
through the Store ("Records") shall be purchased by ADNM directly from such
fulfillment center, and ADNM (or the fulfillment center) shall be solely
responsible for all related Product Costs (subject to the next sentence) and
inventory. ADNM shall pay you [***] of the "Net Record Revenue, which means all
Gross Record Revenue less all Product Costs incurred for Records. The term
"Gross Record Revenue" means the amount actually received by ADNM in respect of
Records sold through the Store, less all related Deductible Amounts.
(d) UBL Store: ADNM may elect to make certain items of Product available
for sale on an Internet on-line store (the "UBL Store") operated by a company
affiliated with ADNM (the "UBL Affiliate"). To the extent any merchandise
offered for sale on the UBL Store is readily available in the Store inventory,
ADNM agrees to cause the UBL Affiliate to utilize such inventory to fulfill
orders for such merchandise placed on the UBL Store, rather than order such
merchandise from any third party source. However, for the avoidance of doubt, no
merchandise or other products (e.g. Records) that are obtained by the UBL
Affiliate from third party sources (i.e., other than from the Store's inventory)
and sold on the Store shall be deemed to constitute Product subject to this
Agreement. ADNM shall account to you pursuant to the terms of this Agreement
with respect to all Artist Product sold through the UBL Store, except that ADNM
(or the UBL Affiliate) shall purchase such Product for a price equal to [***] of
the applicable Gross Artist Product Revenue shall be computed "at the source"
(i.e., based upon the amount actually received by the UBL Affiliate, rather than
the amount actually received by ADNM), and shall be deemed received by ADNM for
purposes of paragraph 6(g) below within 30 days after it is received by the UBL
Affiliate.
(e) Database: As between ADNM and you, you will own the customer
database as specifically identified with the Store (the "Database"). However,
ADNM will have the exclusive right during the Term, subject to your consent in
each instance, to administer and license any third party uses of the Database,
and to collect all monies relating thereto accrued during the Term, regardless
of when payable, ADNM shall pay you [***] of the "Gross Database Revenue," which
means the amount actually received by ADNM in respect of sales and other
exploitations of the Database, less all related Deductible Amounts.
(f) Other Revenues: The term "Gross Exploitation Revenue" means the
amount actually received by ADNM in respect of activities contemplated in this
Agreement and not set forth above in this paragraph 6 including, for example,
income in respect of advertising contained on the Store (e.g., hyperlinks to,
and banners and other advertisements for, other Internet web sites), less all
agent commissions and other related Deductible Amounts. You shall have the right
to approve all such advertising and other activities. ADNM shall pay
Merchandiser [***] of the Gross Exploitation Revenue received by ADNM during the
term of the Artist/Merchandiser Agreement (and you agree to look solely to
Merchandiser, and not to ADNM, with respect to all monies, due you and/or Artist
in respect of such Gross Exploitation Revenue) and shall pay you [***] of the
Gross Exploitation Revenue received by ADNM after the expiration of the term or
the Artist/Merchandiser Agreement.
(g) Accounting: The term "Gross Income" means, individually and
collectively, Gross Artist Product, Revenue Gross Record Revenue, Gross Database
Revenue and Gross Exploitation Revenue. ADNM shall compute your share of Gross
Income and render statements thereof to you within 60 days after March 31, June
30, September 30 and December 31 for the preceding three-
- ----------------
[***] Confidential treatment has been requested for the bracketed portion. The
confidential redacted portion has been omitted and filed separately with the
Securities and Exchange Commission.
16
<PAGE> 17
month period. ADNM shall deduct from your share of Gross Income all chargeable
amounts under this Agreement. Each such statement shall include an itemized
breakdown of the sources of the applicable revenue and shall be accompanied by
the payment of the amount of monies, if any, earned by you during the accounting
period to which the statement relates. ADNM shall be entitled from time to time
to withhold from payments otherwise due reserves against anticipated returns,
rebates, credits, cancellations and exchanges, provided that such reserves shall
be liquidated within two accounting periods following their establishment. You
or a certified public accountant on your behalf may, at ADNM's offices and at
your expense, examine ADNM's books and records relevant to the calculation of
your share of Gross Income solely for the purposes of verifying the accuracy of
statements rendered by ADNM to you. Such books and records may be examined as
aforesaid only (i) during ADNM's normal business hours, (ii) upon reasonable
notice to ADNM, and (iii) within two years after the date a statement is due
hereunder. Further, you shall not have the right to examine such books and
records more frequently than once in any twelve month period or more than once
with respect to any particular statement. Each statement shall be deemed final
and binding upon you as an account stated and shall not be subject to any claim
or objection by you (A) unless you notify ADNM of your specific written
objection to the applicable statement, stating the basis thereof in reasonable
detail within two years after the date such statement is due hereunder, and (B)
unless, within said two year period, you make proper service of process upon
ADNM in a suit instituted in a court of proper jurisdiction.
7. MARKETING.
(a) During the Term, ADNM shall cause the Ultimate Band List Internet
web site, located at www.ubl.com (the "UBL"), to contain a featured hyperlink
to, and prominently placed advertising for, the Store. Also, ADNM may include on
the Store a featured hyperlink to, and prominently placed advertising for the
UBL at no charge to the UBL Affiliate or ADNM. Other marketing activities in
respect of the Store shall be subject to your approval, and may involve the
development of strategic relationships with, for example, other Internet web
sites and/or Artist's record you to create Store hyperlinks. Any third party
marketing costs incurred with your approval shall be deducted from any monies
otherwise payable to you hereunder (except to the extent deducted from monies
otherwise payable by ADNM to Merchandiser, it being understood that all
marketing costs shall be subject to allocation by ADNM, in ADNM's reasonable
business judgment, between you and Merchandiser taking into account whether the
applicable costs related to Merchandiser Product and/or Artist Product).
(b) You agree to use your commercially reasonable best efforts to:
(i) Keep ADNM apprised of Artist's professional activities (e.g.,
touring and recording) and provide ADNM reasonable access to
Artist's professional relationships (e.g., with tour promoters
and record labels);
17
<PAGE> 18
(i) Cause the URL of the Store to be included on all
advertisements for Artist records released during the Term or for concerts to be
performed during the Term, and on the liner notes of Artist's records and
concert programs;
(ii) Cause on-line events and/or sites featuring Artist or any
member of Artist (e.g., the official Internet web site of Artist's fan club, any
official Internet web site relating to any member of Artist, any on-line "chats"
featuring Artist or any member(s) of Artist, cybercasts of Artist's live
performances, interviews or other audiovisal programs featuring Artist or any
member(s) of Artist) to prominently feature, on both the front and main event
page(s), a hyperlink to, and banner advertising for, the Store; and
(iii) Subject to Artist's other professional commitments, cause
Artist to be reasonably available during the Term for on-line "chats" hosted by
the Store.
8. Ownership; Grant of Rights; Post-Term Rights:
(a) Artist Content: As between you and ADNM, any and all artwork,
trademarks, logos, graphics, video, sound recordings, musical compositions,
text, data and other materials supplied by you to ADNM in connection with this
Agreement, as well as the URL and the domain name or names assigned to the Store
and/or the Artist Site (collectively, the "Artist Content"), shall remain your
sole and exclusive property. You hereby grant to ADNM during the Term and
throughout the universe (the "Territory") a non-exclusive, royalty-free license
to use, copy, modify (with your prior consent), distribute, publicly perform and
display and otherwise exploit the Artist Content in connection with the
development, maintenance and operation of the Store and/or the Artist Site and
the advertising and promotion of the Store and/or the Artist Site and of ADNM in
connection with the Store and/or the Artist Site.
(b) Developed Content: As between you and ADNM, any and all text,
graphics, audio, video, artwork and designs created by ADNM or its employees or
agents during the Term for use solely on the Store and/or the Artist Site,
including any additions to or modifications of Artist Content made by ADNM or
its employees or agents, (collectively, the "Developed Content"), shall be your
sole and exclusive property. All Developed Content shall be deemed included in
the license granted by you under paragraph 8(a) above.
(c) ADNM Content: As between you and ADNM, any and all commerce
technology, HTML formatting code, source and object code, programming code and
software, as well as all text, graphics, audio, video, artwork and designs
provided by ADNM in connection with this Agreement which does not constitute
Developed Content (collectively, the "ADNM Content") shall be ADNM's sole and
exclusive property. Notwithstanding the foregoing, upon the expiration of the
Term and provided you are not in breach of this Agreement, ADNM shall grant to
you a perpetual non-exclusive license throughout the Territory to use, modify,
publicly perform and display all ADNM Content used in the Store and owned and
controlled by ADNM, solely in connection with operating and maintaining the
Store. In consideration of such license, if you elect to so utilize any such
ADNM Content in connection with the Store after the Term,
18
<PAGE> 19
you agree to pay, or cause your licensee to pay, ADNM a royalty equal to [***]
of the gross revenues earned in connection with the Store after the expiration
of the Term, but only for as long as you continue to use any such ADNM Content.
In this regard, you shall account in the same fashion and within the same time
periods, and ADNM shall be accorded the same examination rights and be subject
to the same limitations and restrictions, as apply with respect to your
accountings under paragraph 6(g) above. Nothing contained in this Agreement
shall impose upon ADNM any obligation whatsoever to provide you with updates,
hosting, maintenance or support with respect to the Store or such ADNM Content
after the expiration of the Term. You shall not be entitled to use any name,
trademark or service mark of ADNM or its affiliates in any manner whatsoever
without obtaining the prior written consent of ADNM or the applicable affiliate
of ADNM.
(c) Artist Identification: You hereby grant to ADNM the non-exclusive
right during the Term throughout the Territory to use the names of Artist and
Artist's tours, and the names and approved photographs and other approved
likenesses of the members of Artist, on the Store and in advertisements and
promotions of the Store and of ADNM in connection with the Store. In this
regard, at no cost to ADNM, you agree to provide ADNM with all photographs,
graphics, logos and similar items reasonably required by ADNM to create the
Store and readily available to you promptly following ADNM's request.
(d) Inducement Terms and Guarantee: You shall cause the members of
Artist to execute the Inducement Terms and Guarantee attached to this Agreement
as Exhibit 3 concurrently with the execution of this Agreement.
9. THIRD PARTY CLEARANCES: You shall obtain all necessary third-party
clearances in connection with all Artist Content and Product (including the
payment of any associated fees, royalties and other costs). Without limiting the
generality of the foregoing, with respect to all uses of musical compositions,
sound recordings and audiovisual productions in connection with the Store, you
agree to grant or cause Artist and/or any applicable third parties (e.g., music
publishers, record companies and performing rights societies) to grant to ADNM
any and all required rights. However, ADNM shall not use any particular sound
recording, musical composition or audiovisual production on the Store, or
provide access to any feature or service on the Store which entails the public
performance of music (e.g., live audio streaming), except at your request or
with your approval. If ADNM nevertheless shall pay, with your approval, any
third party clearance cost relating to the Store (which ADNM is not obligated to
do), all such amounts shall be deducted from any and all monies otherwise
payable to you under this Agreement (except to the extent deducted from monies
otherwise payable by ADNM to Merchandiser, it being understood that such costs
shall be subject to allocation by ADNM, in ADNM's reasonable business judgment,
between you and Merchandiser taking into account whether the applicable costs
related to Merchandiser Product and/or Artist Product).
10. REPRESENTATIONS AND WARRANTIES: INDEMNITY:
- ----------------
[***] Confidential treatment has been requested for the bracketed portion. The
confidential redacted portion has been omitted and filed separately with the
Securities and Exchange Commission.
19
<PAGE> 20
(a) You represent and warrant as follows:
(i) You have the full right, power and authority to enter into and to
perform this Agreement and to grant to ADNM all rights and licenses set forth in
this Agreement. Neither you nor Artist are under any restriction or obligation
which may or will impair your full performance of this Agreement. No Artist
Content or the exploitation or use thereof or the sale of any Product shall
violate or infringe upon any common law or statutory rights of any party,
including contractual rights, copyrights, and rights of privacy or publicity or
shall defame any person or entity; and
(ii) ADNM shall have the exclusive right during the Term throughout the
Territory to develop and operate the only "official" Artist on-line store (i.e.,
the only Internet web site authorized by Artist with respect to products
relating primarily to Artist and/or any members of Artist. Accordingly, during
the Term, neither you, Artist nor any member of Artist shall grant any other
person or entity the right to develop and/or operate a web site that (A)
pertains primarily to Artist and/or one or more members of Artist and (B) sells
products using the mane of Artist and/or the names and likenesses of members of
Artist.
(b) You agree to indemnify and hold ADNM and its members, employees,
attorneys, agents, successors, assigns and licensees harmless against any claim,
liability, cost and expenses (including attorneys' and accountants' fees
reasonably incurred) in connection with any breach or alleged breach of this
Agreement by you. In this regard, ADNM shall not settle any claim without first
notifying you of the terms of any proposed settlement and obtaining your consent
thereto, provided you post within ten days after such notice, a bond,
satisfactory to ADNM in its reasonable discretion, to assure ADNM of
reimbursement for all damages, liabilities, costs and expenses (including legal
expenses and counsel fees reasonably incurred) that ADNM, in its reasonable
business judgment, incur as a result of such a claim. If you fail to post such a
bond, you shall be deemed to have consented to ADNM's settlement. You shall,
upon demand, pay the person or entity being indemnified hereunder for any
payment made or required to be made by such person or entity at any time
(including after the Term) in respect of any liability, damage, or expense to
which the foregoing indemnity relates. Without waiving any right or remedy
available to ADNM, if any such claim is made, ADNM shall have the right to
withhold monies otherwise payable to you under this Agreement in an amount
reasonably related to such claim and to deduct therefrom payments required under
this paragraph. ADNM shall not withhold monies otherwise payable to you after
you post a bond meeting the above-described conditions.
(c) You acknowledge that ADNM is making no representations and
warranties concerning anticipated success of the Store and/or the amount of
compensation payable to you hereunder. You warrant, represent and agree that
neither you nor Artist nor any third party shall make any claim, nor shall any
liability be imposed upon ADNM based upon any claim, that more sales could have
been made or better business could have been done in connection with the Store
than was actually made or done. You agree that ADNM shall not be liable for any
special, consequential, incidental or indirect damages in connection with or
arising out of this Agreement, however caused, under any theory of liability.
11. NOTICES; APPROVALS:
20
<PAGE> 21
(a) All notices, accounting statements and payments to either party
shall be sent to such party's address first mentioned in this Agreement, or such
other address as a party to this Agreement may hereafter designate by notice to
the other. All notices sent under this Agreement must be in writing to be
effective, and, except for statements and payments, must be sent by a third
party messenger, by air courier service with a written acknowledgment of
receipt, by registered or certified mail, return receipt requested, or through a
telegraph office. The date of personal delivery, of mailing or faxing, or the
date of delivery to a telegraph office, as the case may be, of any such notice
shall be deemed the date of the giving thereof (except, with respect to notices
of change of address, the date of which will be the date of receipt by the
receiving party). Until ADNM notifies you otherwise, a copy of all notices
hereunder to ADNM shall be simultaneously sent as aforesaid to Lenard & Gonzalez
LLP, 1900 Avenue of the Stars, 25th Floor, Los Angeles, CA 90067; Attention:
Allen D. Lenard, Esq.
(b) No failure by any party to this Agreement to perform any of its
obligations hereunder shall be deemed a breach of this Agreement, unless the
other party has given notice of such alleged breach in reasonable detail and
such alleged breach is not cured within 30 days after the giving of such notice.
(c) No consent or approval under this Agreement shall be unreasonably
withheld or delayed. ADNM may elect to request a consent or approval by notice
to you, or may send you a notice reflecting the availability of a test site of
the Store embodying the materials for which approval is sought. In each
instance, your consent or approval shall be deemed granted unless you notify
ADNM to the contrary within five (5) business days after ADNM sends the
aforesaid notice to you. No inadvertent failure by ADNM to obtain your consent
or approval shall be deemed a breach by ADNM of this Agreement, provided ADNM
shall use reasonable efforts to rectify such failure on a prospective basis
following receipt of notice from you specifying such failure. Notwithstanding
the provisions of paragraph 11(a) above, any notice described in this paragraph
11(c) may be sent by telecopier or electronic mail.
12. MISCELLANEOUS:
(a) This Agreement is intended by the parties hereto as a final
expression of their understanding and agreement with respect to the subject
matter hereof and as a complete and exclusive statement of the terms thereof;
this Agreement supersedes all prior and contemporaneous negotiations,
understandings, and agreements between the parties hereto with respect to the
subject matter hereof. The parties acknowledge and agree that neither party
hereto has made any representations or promises in connection with this
Agreement or the subject matter hereof not contained herein. The parties hereto
shall negotiate in good faith to replace any invalid, illegal or unenforceable
provision (the "Invalid Provision") with a valid provision, the effect of which
comes as close as possible to that of the Invalid Provision. This Agreement
cannot be canceled, modified, amended or waived, in part or in full, in any
manner except by an instrument in writing signed by the party to be charged. No
waiver by either party hereto, whether expressed or implied, of any provision of
this Agreement or default hereunder shall affect such party's right to
thereafter enforce such provision or to exercise the right or remedy set forth
in this Agreement in the event of any other default, whether or not similar.
Words in the singular number shall include the plural, and vice versa. Whenever
examples are used in this Agreement with the words "including," "for example,"
"e.g.," "such as," "etc." or any derivation thereof, such
21
<PAGE> 22
examples are intended to be illustrative and not in limitation thereof. The
paragraph headings herein are used solely for convenience and shall not be used
in the interpretation or construction of this Agreement. All exhibits attached
hereto are incorporated into this Agreement by reference.
(b) In entering into this Agreement and providing services pursuant
hereto, you and ADNM each have and shall have the status of independent
contractors. Nothing herein contained shall contemplate or constitute either
party being an agent or employee of the other party, and nothing herein shall
constitute a partnership, joint venture or fiduciary relationship between the
parties.
(c) This Agreement shall be deemed to have been entered into in the
State of California and the validity, interpretation and legal affect of this
Agreement shall be governed by the laws of the State of California applicable to
contracts entered into and performed entirely within the State of California.
The courts located in California (state and federal), only, will have
jurisdiction of any controversy regarding this Agreement; any action or other
proceeding which involves such a controversy will be brought in those courts, in
California and not elsewhere.
ARTISTDIRECT NEW MEDIA, LLC COMPANY NAME
A CALIFORNIA LIMITED LIABILITY COMPANY A CORPORATION
--------------
By : ARTISTdirect, LLC
Its: Member
By : /s/ Marc Geiger By:
------------------------------ -----------------------
Marc Geiger Its:
Its: Co-Chief Executive Officer -----------------------
By :
------------------------------
Don Muller
Its: Co-Chief Executive Officer
22
<PAGE> 23
EXHIBIT 1
SCHEDULE OF FULFILLMENT FEES
<TABLE>
<CAPTION>
Item Retail Price Fulfillment Fee
----------------- ---------------
<S> <C> <C>
[***] [***]
[***] [***]
[***] [***]
[***] [***]
In addition, the following packaging costs are applicable:
Box Size Packaging Cost
-------- --------------
[***] [***]
[***] [***]
[***] [***]
</TABLE>
SCHEDULE OF INSURANCE COVERAGE
ADNM currently carries property insurance with respect to all
inventory at the fulfillment center, covering up to $1,000,000 in damages
(subject to adjustments from time to time in accordance with then-current
inventory value), with a $5,000 deductible (except with respect to wind damage,
for which the deductible is $100,000). ADNM shall cause you to be named an
additional insured under said policy and provide you with a certificate of
insurance to such effect.
- ----------------
[***] Confidential treatment has been requested for the bracketed portion. The
confidential redacted portion has been omitted and filed separately with the
Securities and Exchange Commission.
12
<PAGE> 24
EXHIBIT 2
[ADNM/MERCHANDISE AGREEMENT - LICENSE FEE]
6. License Fee:
(a) In consideration for the rights licensed pursuant to paragraph 5
above and Merchandiser's agreement to supply Merchandiser Product to ADNM
pursuant to the Merchandiser Terms, ADNM agrees to pay Merchandiser a License
Fee with respect to all Merchandiser Product sold at any time (including after
the Term).
(b) As used herein:
(i) "License Fee" shall mean, subject to paragraph 6(c) below,
the amount by which the following amounts exceed the wholesale purchase price
payable by ADNM for all applicable Merchandiser Product, provided that the
License Fee otherwise payable shall be further reduced by any third party
marketing and rights clearance costs incurred by ADNM, with the approval of
Merchandiser (which approval may be withheld by Merchandiser for any reason) and
the applicable Merchandiser Artist, and attributable to Merchandiser Product (it
being understood that any such costs not specifically attributable to
Merchandiser Product shall be allocated reasonably by ADNM between Merchandiser
and the applicable Merchandiser Artist, taking into account whether the
applicable costs related to Merchandiser Product and/or Artist Product):
(A) [***] of the Adjusted Gross Merchandiser Product Revenue with
respect to Merchandiser Product (other than Collectibles) sold through an Artist
Store and with respect to Collectibles sold through the UBL Store (or through
any other source other than an Artist Store);
(B) [***] of the Adjusted Gross Merchandiser Product Revenue with
respect to Merchandiser Product (other than Collectibles) sold through the UBL
Store (or through any other source other than an Artist Store); and
(C) [***] of the Adjusted Gross Merchandiser Product Revenue with
respect to Collectibles sold through an Artist Store.
(ii) "Adjusted Gross Merchandiser Product Revenue" shall mean Gross
Merchandiser Product Revenue less the Deductible Amounts.
(iii) "Gross Merchandiser Product Revenue" shall mean the amount
actually received by ADNM (including shipping and handling revenues) in respect
of Merchandiser Product.
(iv) "Deductible Amounts" shall mean all of the following costs paid
by ADNM and specifically attributable to Merchandiser Product: all amounts paid
under paragraph 3(b)(iv) above; all actual packaging and shipping costs paid to
third parties (not to exceed the associated shipping and handling revenues
referred to in paragraph 6(b)(iii) above); all third party fulfillment fees and
related charges; sales, use and value-added taxes actually paid; credit card
fees; and any credits for returns, rebates, cancellations and exchanges. ADNM
shall not deduct any fulfillment fees or related charges to the extent they
exceed such amounts as Merchandiser has approved; Merchandiser hereby
pre-approves the applicable amounts set forth on Exhibit D attached hereto. To
the extent ADNM is unable to identify a particular item of cost as being
attributable to either Merchandiser Product or Artist Product, only a portion
thereof shall be deemed a "Deductible Amount" hereunder, such portion to be
determined reasonably by ADNM, taking into account the total amount of Gross
Merchandiser Product Revenues as compared to the total amount of other
applicable revenues during the applicable accounting period. Notwithstanding
anything to the contrary contained herein, as between ADNM and Merchandiser,
[***] shall be solely responsible for all customer bad debts in respect of
Merchandiser Product shipped by ADNM (or its designee), including all associated
Deductible Amounts.
(v) "Collectibles" means any single item of Merchandiser Product
bearing a wholesale price in excess of [***].
(c) Within ten (10) business days after the date ADNM notifies
Merchandiser of each new Accepted Artist pursuant to paragraph 2(d) above (or
within ten (10) business days after the complete execution of this Agreement, in
respect of any Accepted Artist indicated on Exhibit A as of the execution
hereof), Merchandiser shall have the right to notify ADNM of the percentage of
the applicable License Fees hereunder that Merchandiser is obligated to pay to,
or credit to the account of, the applicable Accepted Artist or its furnishing
company (the "Artist Percentage"), if such Artist Percentage exceeds [***]. In
such event, notwithstanding anything to the contrary contained herein, ADNM
shall pay to Merchandiser a product consignment charge (the "Consignment
Charge") equal to [***] of the Adjusted Gross Merchandiser Product Revenue with
respect to such Accepted Artist for each [***] by which such Artist Percentage
exceeds [***]. For purposes of illustration, in the event that Merchandiser has
properly notified ADNM that the Artist Percentage with respect to a particular
Accepted Artist equals [***], then with respect to such Accepted Artist, ADNM
shall pay to Merchandiser a Consignment Charge equal to [***] of the Adjusted
Gross Merchandiser Product Revenue with respect to such Accepted Artist. For the
avoidance of doubt, no Consignment Charge shall be applicable with respect to
any Merchandiser Artist for which Merchandiser does not timely notify ADNM of
the Artist Percentage as provided in this paragraph 6(c).
(d) Attached hereto as Exhibit E are certain example computations of
the License Fee.
----------------
[***] 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.
13
<PAGE> 25
EXHIBIT 3
INDUCEMENT TERMS AND GUARANTEE
The undersigned hereby acknowledge that they have read and
understand all of the terms and conditions set forth in the agreement dated as
of ______ ___, 19__ (the "Agreement") by and between ARTISTdirect New Media, LLC
("ADNM") and CompanyName ("Company") to which these inducement Terms and
Guarantee are attached.
In consideration of Company's execution and delivery of the
Agreement, the benefit of which runs to the undersigned, undersigned hereby
represent, warrant and agree, jointly and severally that:
1. Company has the rights, insofar as the undersigned are
concerned, to enter into the Agreement and to assume all of the obligations,
warranties and undertakings to Company on the part of the undersigned contained
therein, and Company shall continue to have those rights until all of those
obligations, warranties and undertakings shall have been fully performed and
discharged.
2. All of the representations, warranties and agreements on the
part of Company contained in the Agreement that concern Company and/or the
undersigned are and shall remain true and correct.
3. The undersigned shall fully and to the best of their abilities
perform and discharge all of the obligations, warranties and undertakings
contained in the Agreement insofar as the same are required of the undersigned
and to the extent Company has undertaken to cause the performance and discharge
by the undersigned of those obligations and undertakings, and the undersigned
further guarantee the full and faithful performance of all other obligations of
Company under the Agreement, it being agreed and acknowledged that such
guarantee shall be applicable regardless of whether, for any reason whatsoever,
notwithstanding the provisions of paragraph 1 above, Company shall cease to have
the right to perform the obligations, warranties and undertakings to ADNM on the
part of Company contained in the Agreement.
4. The undersigned agree to look solely to Company (and not to
ADNM) with respect to all monies payable to the undersigned in connection with
the Agreement.
5. ADNM may, in its own name, institute any action or proceeding
against the undersigned to enforce its rights under the Agreement and/or this
agreement, and ADNM shall be entitled to equitable relief, including injunctive
relief, to enforce the provisions of said agreements, without the necessity of
first resorting to or exhausting any rights or remedies against Company.
Dated as of ______ ____, 19__
- -------------------------------- ---------------------------
1
<PAGE> 26
EXHIBIT C
MERCHANDISER'S STANDARD WHOLESALE PRICE LIST
Giant Merchandising
Wholesale Price List
April 1, 1999
Music
<TABLE>
<CAPTION>
Description Color Unit Price
- --------------------------------------------------------------
<S> <C> <C>
Basic 1-Sided White [***]
Basic 1-Sided Lights [***]
Basic 1-Sided Darks [***]
Basic 1-Sided Black [***]
Basic 2-Sided White [***]
Basic 2-Sided Lights [***]
Basic 2-Sided Darks [***]
Basic 2-Sided Black [***]
High Roy 1-Sided White [***]
High Roy 1-Sided Lights [***]
High Roy 1-Sided Darks [***]
High Roy 1-Sided Black [***]
High Roy 2-Sided White [***]
High Roy 2-Sided Lights [***]
High Roy 2-Sided Darks [***]
High Roy 2-Sided Black [***]
</TABLE>
- ----------------
[***] Confidential treatment has been requested for the bracketed portion. The
confidential redacted portion has been omitted and filed separately with the
Securities and Exchange Commission.
1
<PAGE> 27
EXHIBIT D
FULFILLMENT FEE
<TABLE>
<CAPTION>
Item Retail Price Fulfillment Fee
----------------- ---------------
<S> <C> <C>
[***] [***]
[***] [***]
[***] [***]
[***] [***]
b. In addition, the following packaging costs are applicable:
Box Size Packaging Cost
[***] [***]
[***] [***]
[***] [***]
</TABLE>
- ----------------
[***] Confidential treatment has been requested for the bracketed portion. The
confidential redacted portion has been omitted and filed separately with the
Securities and Exchange Commission.
1
<PAGE> 28
EXHIBIT E
<TABLE>
<CAPTION>
<S> <C>
Example I - T-shirt L/XL U.S. Priority Mail
Retail Price (sales tax excluded) [***]
Shipping/handling charge [***]
-------------
Gross Merchandiser Product Revenue [***]
-------------
Shipping cost [***]
Fulfillment fee/Packaging Cost [***]
Credit card fee [***] [***]
-------------
Deductible Amounts [***]
-------------
-------------
Adjusted GMPR [***]
-------------
License Fee Base [***] [***]
Wholesale price [***]
-------------
License Fee [***]
=============
Example II - Pocket Logo Mesh V Neck: 2nd Day Air
Retail Price (sales tax excluded) [***]
Shipping/handling charge [***]
-------------
Gross Merchandiser Product Revenue [***]
-------------
Shipping cost [***]
Fulfillment fee/Packaging Cost [***]
Credit card fee [***] [***]
-------------
Deductible Amounts [***]
-------------
-------------
Adjusted GMPR [***]
-------------
License Fee Base [***] [***]
Wholesale price [***]
-------------
License Fee [***]
=============
</TABLE>
- ----------------
[***] Confidential treatment has been requested for the bracketed portion. The
confidential redacted portion has been omitted and filed separately with the
Securities and Exchange Commission.
1
<PAGE> 29
EXHIBIT F
ARTISTDIRECT, LLC
WARRANT TO PURCHASE 50,000 COMMON UNITS
WARRANT NO. 1999-1
THIS WARRANT HAS BEEN ACQUIRED FOR INVESTMENT AND HAS NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAWS. THIS
WARRANT MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF
SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER SAID ACT AND ANY APPLICABLE
STATE SECURITIES LAWS. THIS WARRANT IS FURTHER SUBJECT TO CERTAIN RESTRICTIONS
ON TRANSFER CONTAINED HEREIN AND IN THAT CERTAIN AMENDED AND RESTATED OPERATING
AGREEMENT OF ARTISTDIRECT, LLC, A CALIFORNIA LIMITED LIABILITY COMPANY, DATED
JULY 28, 1998, AS AMENDED.
WARRANT TO PURCHASE
LIMITED LIABILITY COMPANY COMMON UNITS
This certifies that Giant Merchandising ("Merchandiser") is
entitled, on or after April 1 1999, to become a Member in ARTISTdirect, LLC, a
California limited liability company (the "Company"), on and subject to the
terms and conditions contained herein and in the "Operating Agreement" (as
defined below), with the number of Common Units in the Company set forth in
Section 1 below, in return for a capital contribution by Merchandiser to the
Company of cash consideration in an amount equal to Thirty-Four and 48/100
Dollars ($34.48) per Common Unit (subject to adjustment as hereinafter provided,
the "Warrant Price").
Except as otherwise specifically provided herein, terms used but
not otherwise defined herein shall have those meanings as set forth in that
certain Amended and Restated Operating Agreement of ARTISTdirect, LLC, dated
July 28, 1998, as amended (the "Operating Agreement"). A true and correct copy
of the Operating Agreement is attached hereto.
This Warrant is subject to the following terms and conditions:
1. Common Units Subject to Warrant Vesting.
(a) Definitions.
(i) "ADNM" means ARTISTdirect New Media, LLC, a Subsidiary of the
Company;
2
<PAGE> 30
(ii) "Determination Date" means April 30, 2003;
(iii) "Merchandiser Agreement" means that certain Merchandiser
Agreement dated as of April 1, 1999 between ADNM and
Merchandiser;
(iv) "Artist Store," "Merchandiser Artist," "Merchandiser
Product," "Merchandiser Terms," "Personal Identification,"
"Rights," "Store Agreement," and "Sublicensee" each have
the meaning ascribed thereto in the Merchandiser
Agreement;
(v) "Qualifying Revenue" means the "Adjusted Gross
Merchandiser Product Revenue" (as defined in the
Merchandiser Agreement); provided, however, that, for
purposes of this Warrant:
(a) Qualifying Revenue shall not include any amounts
received in respect of any merchandise sold through the
UBL Store.
(b) if Merchandiser's Rights to a particular Merchandiser
Artist terminate during the term of the Merchandiser
Agreement, then Qualifying Revenue shall nonetheless be
computed by deeming Merchandiser Product to include all
merchandise containing the Personal Identification of that
Merchandiser Artist and sold after such termination
through the applicable Artist Store, regardless of whether
such merchandise is provided by or on behalf of
Merchandiser or a Sublicensee, and regardless of whether
such merchandise is provided pursuant to the Merchandiser
Terms.
(vi) "Highest Sales" means the greatest Qualifying Revenue
during any period of twelve (12) consecutive calendar
months during the term of the Merchandiser Agreement
(i.e., between April 1, 1999 and March 31, 2003).
(b) This Warrant may be exercised with respect to:
(i) 5,000 Common Units at any time on or before March 31,
2004; and
(ii) an additional 5,000 Common Units for each full Five
Hundred Thousand Dollars ($500,000) in Highest Sales in
excess of Five Hundred Thousand Dollars ($500,000);
provided that the number of additional Common Units that
may be acquired pursuant to this Section 1(b)(ii) shall be
subject to a maximum of 45,000 (i.e., for Highest Sales of
Five Million Dollars ($5,000,000 or more).
On or before the Determination Date, the Company shall notify Merchandiser of
the Highest Sales.
3
<PAGE> 31
2. Term. Except for the rights conferred upon the Company pursuant to
Section 8 below, this Warrant, and Merchandiser's right to exercise this
Warrant, shall terminate immediately upon the first to occur of the
following:
(a) the close of business (i.e., 5:00 p.m., Los Angeles time) on
April 30, 2008;
(b) the termination of the Merchandiser Agreement prior to the
expiration of the full term thereof either i) by ADNM due to a
material breach thereof by Merchandiser, which breach remains
uncured for the period specified in Section 15(b) of the
Merchandiser Agreement, or (ii) by Merchandiser other than due to
a material breach thereof by ADNM, which breach remains uncured
for the period specified in Section 15(b) of the Merchandiser
Agreement; or
(c) the breach by Merchandiser of any material provision of this
Warrant.
3. Method of Exercise; Payment; Issuance of New Warrant; Transfer and
Exchange. This Warrant may be exercised by Merchandiser, in whole or in
part, by the surrender of this Warrant, properly endorsed, at the
principal office of the Company at 17835 Ventura Blvd., Suite 310,
Encino, CA 91316 (or at such other location within the State of
California or the State of New York as the Company may advise
Merchandiser in writing), and by (a) payment to the Company in cash or
immediately available funds of the Warrant Price of the Common Units
being purchased, and (b) delivery to the Company of a customary
investment letter executed by Merchandiser, representing and warranting
that the Common Units are being acquired for Merchandiser's own account,
for investment purposes only, and not with a view to the distribution,
resale or other distribution thereof in violation of applicable
securities laws, and acknowledging the issuance and transfer of the
Common Units are subject to the requirements of federal and state
securities laws. Merchandiser, in lieu of exercising this Warrant for a
specified number of Common Units (the "Exercised Units") and paying the
aggregate exercise price therefor (the "Exercise Price"), may elect to
receive a number of Common Units equal to the number of Exercised Units,
minus a number of Common Units having an aggregate "Fair Market Value"
(as defined below) equal to the Exercise Price. After any such election,
the number of Common Units covered by this Warrant shall be deemed
automatically reduced by the number of Exercised Shares. For purposes of
this Warrant, "Fair Market Value" means (a) if the Common Units are then
publicly traded, the closing sale price of the Common Units on its
principal stock exchange or market system (or the average of the closing
bid and asked prices, if closing sales prices are not reported) for the
ten (10) consecutive trading days immediately prior to the date of any
such "net exercise," or (b) in all other cases, as determined by the
Managers in their sole, good faith discretion. In the event of any
exercise, or any such "net exercise," of less than all of the rights
represented by this Warrant, the Company shall issue to Merchandiser a
new warrant evidencing the ability of Merchandiser to purchase the
balance of the number of Common Units from the Company, and shall
deliver such warrant to Merchandiser promptly following such partial
exercise. The Company agrees that the Common Units issuable to
Merchandiser upon exercise of this Warrant shall be issued to
Merchandiser as of the close of business on the date on which all of the
above-described conditions to exercise have be satisfied. Merchandiser
hereby covenants and agrees that, upon
4
<PAGE> 32
Merchandiser's exercise of all or a portion of this Warrant and
Merchandiser's making the applicable payment to the Company in respect
thereof, Merchandiser and the Common Units issued to Merchandiser with
respect to such exercise shall become subject to the terms and
conditions of the Operating Agreement, including without limitation, the
obligation to sell Common Units and the restrictions on transfer of
Common Units contained therein. In this regard, Merchandiser
acknowledges that it shall only become a Member and be entitled to the
rights as a Member once Merchandiser validly exercises this Warrant in
accordance with the terms hereof and executes a signature page to the
Operating Agreement whereby it agrees to be bound by all of the terms
thereof, excluding the non-competition covenant contained in Section
3.10 thereof, from which Merchandiser shall be exempted.
4. Due Authorization and Issuance. The Company covenants and agrees that
any and all of the Common Units issued to Merchandiser in accordance
with the terms hereof will, upon such issuance, be duly authorized,
validly issued and free from all preemptive rights of any holder of
Common Units in the Company, free and clear of all taxes, liens and
charges with respect to such issuance. The Company further covenants and
agrees that, during the period within which this Warrant may be
exercised, the Company will take no action that would prohibit the
issuance of Common Units required to be issued in accordance with the
terms and conditions hereof on such exercise.
5. Fractional Common Units. No fractional Common Units shall be issued in
connection with any exercise hereunder but in lieu of such fractional
Common Units, the Company shall make a cash payment therefor upon the
basis of the fair market value of the Common Units, as determined by the
Managers in their sole, good faith discretion.
6. Certain Adjustments.
(a) If the outstanding Common Units are changed into or exchanged
for a different number or kind of securities of the Company or a
successor entity (including a "C-corporation" that becomes the
successor or parent of the Company in connection with a roll-up
or similar exchange transaction in connection with an initial
public offering) through a capital reorganization or
reclassification, or if the number of outstanding Common Units
is changed through a split of Common Units, reverse split of
Common Units or issuance of a Common Unit dividend, then a
reasonable and appropriate adjustment shall be made by the
Company in (i) the number or kind of Common Units that may be
purchased pursuant to the exercise of this Warrant, and (ii) the
number, exercise price, or kind of securities subject to this
Warrant. Any such adjustment in this Warrant, however, shall be
made without a change in the total price applicable to the
unexercised portion of this Warrant but with a corresponding
adjustment in the price for each Common Unit covered by this
Warrant. In making such adjustments, or in determining that no
such adjustments are necessary, the Company may rely upon the
advice of counsel and accountants to the Company, and the
reasonable determination of the Company shall be binding.
5
<PAGE> 33
(b) Upon (i) the dissolution, liquidation, or sale of all or
substantially all of the business, properties and assets of the
Company, (ii) any reorganization, merger, consolidation, sale or
exchange of securities in which the Company does not survive,
(iii) any reorganization, merger, consolidation, sale or
exchange of securities in which the Company does survive and any
of the Company's members have the opportunity to receive cash,
securities of another entity and/or other property in exchange
for their Common Units (other than a "roll-up" or similar
exchange transaction in connection with an initial public
offering), or (iv) any acquisition by any person or group (as
defined in Section 13(d) of the Securities Exchange Act of 1934,
as amended), of beneficial ownership of more than fifty percent
(50%) of the Company's then outstanding Common Units (each of
the events described in clauses (i), (ii), (iii), or (iv) is
referred to herein as an "Extraordinary Event"), this Warrant
shall terminate unless it survives the Extraordinary Event
pursuant to Section 6(d) below.
(c) Merchandiser shall have the right until ten (10) days before the
effective date of any Extraordinary, Event to exercise, in whole
or in part, this Warrant, but only to the extent to which it is
exercisable pursuant to the provisions hereof. In this regard,
the Company shall notify Merchandiser in writing of the
Company's intent to engage in any Extraordinary Event on or
before the date (the "Notice Date") that is no less than thirty
(30) days before the effective date of such Extraordinary Event.
In addition, notwithstanding anything to the contrary contained
herein, if an Extraordinary Event shall occur during the term of
the Merchandiser Agreement, then, solely for purposes of
determining the extent to which this Warrant is exercisable in
accordance with this Section 6(c), Highest Sales shall be
determined either (i) with reference to each period of twelve
(12) consecutive calendar months of the term of the Merchandiser
Agreement prior to the Notice Date; or (ii) if fewer than twelve
(12) months have elapsed since the commencement of the term of
the Merchandiser Agreement, on an annualized basis.
(d) If an Extraordinary Event occurs during the term of the
Merchandiser Agreement, then the Company shall be obligated to
either, in its sole discretion: (i) cause this Warrant to
survive such Extraordinary Event or (ii) cause the surviving
entity (which may be the Company), or any other entity that,
after giving effect to the Extraordinary Event, owns, directly
or indirectly, fifty percent (50%) or more of the Company's then
outstanding Common Units, to tender to Merchandiser a substitute
warrant to purchase units or other equity interests in such
entity containing terms and provisions substantially preserving,
in the reasonable, good faith discretion of the Company, the
rights and benefits of this Warrant to the extent then
outstanding (a "Substitute Warrant"). If an Extraordinary Event
occurs after the term of the Merchandiser Agreement, in its sole
and absolute discretion, the Company may permit this Warrant to
survive such Extraordinary Event. In addition, if an
Extraordinary Event occurs after the term of the Merchandiser
Agreement, in its sole and absolute discretion, the surviving
entity (which may be the Company), or another entity, may, but
shall not be so obligated, tender to Merchandiser a Substitute
Warrant.
6
<PAGE> 34
(e) The grant of this Warrant shall not affect in any way the right
or power of the Company to make adjustments, reclassification or
changes in its capital or business structures or to merge,
consolidate, dissolve, or liquidate or to sell or transfer all
or any part of its business or assets or undertake any other
permitted limited liability company action.
(f) Upon the occurrence of each adjustment of this Warrant pursuant
to this Section 6, the Company at its expense shall promptly
compute such adjustment or readjustment in accordance with the
terms hereof and furnish to Merchandiser a certificate setting
forth such adjustment or readjustment and showing in detail the
facts upon which such adjustment or readjustment is based. The
Company shall, upon the written request of Merchandiser, furnish
or cause to be furnished to Merchandiser a like certificate
setting forth: (i) such adjustments and readjustments; (ii) the
applicable Exercise Price at the time in effect; and (iii) the
number of Common Units, if any, and the amount, if any, of other
securities or property that at the time would be received upon
the exercise of this Warrant.
(g) Other Action Affecting Common Units. The Company will not, by
amendment of its Articles of Organization or the Operating
Agreement, or through any reorganization, recapitalization,
transfer of assets, consolidation, merger, dissolution, issue or
sale of securities, dividend or other distribution of cash or
property, or any other voluntary action, avoid or seek to avoid
the rights granted to Merchandiser hereunder or the observance
or performance of any of the terms to be observed or performed
hereunder by the Company, but will at all times in good faith
assist in the carrying out of all the provisions hereof, and in
the taking of all such actions as may be necessary or
appropriate in order to protect the rights of Merchandiser as
set forth herein against impairment.
7. Payment of Taxes. The Company will pay all taxes (other than taxes based
upon income) and other governmental charges that may be imposed with
respect to the issue or delivery of Common Units upon exercise of this
Warrant.
8. Drag-Along Obligation.
(a) Definition of Equity Securities. For purposes of this Warrant,
"Equity Securities" shall mean all (i) Units, all rights,
options or warrants to purchase Units, all securities of any
type, whatsoever that are convertible into or exchangeable for
Units, and all rights, options or warrants to purchase
securities that are convertible into or exchangeable for Units
and (ii) all shares, options, warrants, general or limited
partnership interests, limited liability company membership
interests, participations or other equivalents (regardless of
how designated) of or in a corporation, partnership, limited
liability company or equivalent entity that are issued in
exchange for any of the items described in the preceding clause
(ii).
(b) The Obligation. Notwithstanding anything to the contrary
contained herein, if the Managers find an acquirer for all or
any portion of their interest in the Company (whether such
acquisition is by way of purchase of assets or Common Units,
7
<PAGE> 35
merger, recapitalization or other form of transaction, and
including, without limitation, a roll-up transaction that is for
the purpose of a reorganization among the Company and its
Affiliates), then, at the request of the Managers, Merchandiser
shall sell or otherwise transfer a corresponding portion of any
Common Units (or successor Equity Securities) then held by
Merchandiser to such acquirer on the same terms and conditions
as apply to the sale or other transfer by the Managers. \
Merchandiser further agrees timely to take such other actions as
the Managers may reasonably request in connection with the
approval of the consummation of such sale or other transfer,
including, without limitation, voting in favor of such sale or
other transfer and waiving any dissenters' rights, executing
such agreements, powers of attorney, voting proxies or other
documents and instruments as may be necessary or desirable to
consummate such sale or other transfer, and, in the event that
such sale or other transfer is structured as a recapitalization,
transferring and retaining such portion of Common Units (or
successor Equity Securities) and rights under this Warrant as
may be requested by the Managers.
9. Tag-along Right.
(a) Definition of Excluded Transferee. For purposes of this Warrant,
"Excluded Transferee" shall mean: (i) Marc Geiger; (ii) Donald
Muller; (iii) a spouse, descendant or parent of Marc Geiger or
Donald Muller; (iv) a descendant of any Person listed in clauses
(i), (ii) or (iii) above; (v) a trust for the sole benefit of
any one or more of the Persons listed in clauses (i), (ii),
(iii) or (iv) above; or (vi) any Affiliate of any Person listed
in clauses (i), (ii), (iii), (iv) or (v) above.
(b) The Right. If Marc Geiger, Donald Muller, or any direct or
indirect successor, assignee, heir, devisee, donee, legatee or
transferee of either of them (each a "Transferor'), proposes
alone or with others to Transfer, directly or indirectly, to any
Person that is not an Excluded Transferee, any Equity Securities
(each, a "Subject Interest') that represent a fully-diluted
Percentage of thirty percent (30%) or more, in a single
transaction or series of transactions, and the Common Units (or
substitute Equity Securities) issued to Merchandiser pursuant to
this (or any successor) Warrant (the "Securities") include (at
such time or upon exercise, conversion or exchange) any Equity
Securities of the same class as the Subject Interest (the
"Subject Interest Class"), the would-be Transferor shall provide
Merchandiser with not less than thirty (30) days' prior written
notice of such proposed sale, which notice shall include all of
the material terms and conditions of such proposed sale and
which shall identify such purchaser (the "Sale Notice"), and
Merchandiser shall have the option, exercisable by written
notice to the Transferor within twenty (20) days after the
receipt of the Sale Notice, to participate in such transaction
pro rata with the Transferor at the same time as, and upon the
same terms and conditions as (including all direct or indirect
consideration) the Transferor Transfers his Equity Securities in
the Company. Merchandiser may sell all or any portion of the
Securities held by Merchandiser (or issuable to Merchandiser
upon exercise, conversion or exchange of any of the Securities)
that are of the class of Equity Securities that includes the
Subject
8
<PAGE> 36
Interest Class (the "Merchandiser's Securities") equal to the
product obtained by multiplying (i) the Subject Interest by (ii)
a fraction, the numerator of which is Merchandiser's Securities
and the denominator of which is the total number of Equity
Securities of the Subject Interest Class then owned by the
Transferor, Merchandiser, and any other Person that has
tag-along rights with respect to the proposed Transfer by
Transferor. To the extent Merchandiser, or any other Person that
has tag-along rights with respect to the proposed Transfer by
Transferor, shall exercise its tag-along right, the number of
Equity Securities that the Transferor may Transfer in the
transaction shall be correspondingly reduced.
(c) Expenses. In any transaction in which Merchandiser sells or
otherwise disposes of any of the Merchandiser's Securities
pursuant to this Section 9, Merchandiser shall bear its pro rata
share of the reasonable expenses incurred by the Transferor in
connection with the sale of the Subject Interest.
(d) Exempt Sales. The rights and obligations set forth in this
Section 9 shall not apply to any sale of Equity Securities made
in connection with or following an initial public offering of
common stock of the corporate successor of the Company.
10. Transferability of Warrant.
(a) Except as set forth in Section 10(b) below, this Warrant may not
be sold, conveyed, transferred, alienated, donated, encumbered
or otherwise disposed of by Merchandiser and, accordingly, any
purported such transaction in violation of this Section 10 shall
be void ab initio, of no force or effect.
(b) Notwithstanding Section 10(a) above, but subject to applicable
securities laws, Merchandiser may transfer all, but not less
than all, of this Warrant, to any Affiliate of Merchandiser,
provided that no such transfer shall be effective until the
transferee agrees in writing to be bound by all of the
provisions of this Warrant, including Section 8 above.
11. Investment Representation. Merchandiser represents and warrants to the
Company that Merchandiser is acquiring this Warrant for Merchandiser's
own account for investment and not with a view to, or for resale in
connection with, any distribution thereof. Merchandiser acknowledges
that this Warrant and the Common Units that may be purchased under this
Warrant have not been registered under the Securities Act, by reason of
a specific exemption from the registration provisions of the Securities
Act that depends upon, among other things, the bona fide nature of the
investment intent of Merchandiser as expressed herein.
12. Amendment and Waiver; Successors. This Warrant may only be amended or
supplemented, and any waiver or departure from the provisions hereof may
only be given, with the consent of the Managers and Merchandiser. All of
the covenants and provisions of this Warrant by or for the benefit of
the Company and Merchandiser shall
9
<PAGE> 37
bind and inure to the benefit of them and their respective permitted successors
and assigns hereunder.
13. Notices. All notices required by this Warrant to Merchandiser shall be
sent to Giant Merchandising, 5655 Union Pacific Avenue, Commerce, CA
90022, or such other address as Merchandiser may hereafter designate by
notice to the Company. All notices sent under this Agreement to the
Company or the Managers shall be sent to the address indicated in
Section 3 above. All notices required by this Warrant must be in writing
to be effective, and must be sent by a third party messenger, by air
courier service with a written acknowledgement of receipt, by registered
or certified mail, return receipt requested, or through a telegraph
office. The date of personal delivery, of mailing, or the date of
delivery to a telegraph office, as the case may be, of any such notice
shall be deemed the date of the giving thereof (except, with respect to
notices of change of address, the date of which will be the date of
receipt by the receiving party). Until the Company notifies Merchandiser
otherwise, a copy of all notices hereunder to the Company shall be
simultaneously sent as aforesaid to Lenard & Gonzalez LLP, 1900 Avenue
of the Stars, 25th Floor, Los Angeles, CA 90067; Attention: Allen D.
Lenard, Esq.
14. Descriptive Headings and Governing Law. The descriptive headings of the
several paragraphs of this Warrant are inserted for convenience only and
do not constitute a part of this Warrant. This Warrant shall be
construed and enforced in accordance with, and the rights of the parties
shall be governed by, the laws of the State of California.
15. Lost Warrant. The Managers and the Company represent and warrant to
Merchandiser that upon receipt of evidence reasonably satisfactory to
the Managers and the Company of the loss, theft, destruction, or
mutilation of this Warrant and, in the case of any such loss, theft or
destruction upon receipt of an indemnity reasonably satisfactory to the
Managers and the Company, or in the case of any such mutilation upon
surrender and cancellation of such Warrant, the Managers and the Company
will make and deliver a new Warrant in lieu of the lost, stolen,
destroyed or mutilated Warrant.
IN WITNESS WHEREOF, Merchandiser, the Company and the Managers
have caused this Warrant to be duly executed and issued by their respective
officers thereunto duly authorized as of the 1st day of April, 1999.
"COMPANY" "MERCHANDISER"
ARTISTdirect, LLC Giant Merchandising
By: /s/ Marc Geiger By:
--------------------------------- -----------------------------
Its: Co-Chief Executive Officer (an authorized signatory)
10
<PAGE> 38
"MANAGERS"
By: /s/ Marc Geiger
--------------------------------------
Marc Geiger
By:
--------------------------------------
Donald Muller
11
<PAGE> 1
REDACTED
EXHIBIT 10.27
ADNM MERCHANDISER AGREEMENT
This Agreement, dated as of June 7, 1999, between Winterland
Concessions Company, a California corporation, doing business as "Winterland"
("Merchandiser"), 1951 Fairway Drive, San Leandro, CA 94577, and ARTISTdirect
New Media, LLC ("ADNM"), 17835 Ventura Blvd., Suite 310, Encino, CA 91316, is
being entered into in light of the following:
A. Merchandiser is in the business of acquiring the right to use the
names, photographs and other likenesses, biographical material and other
personal identification (collectively, "Personal Identification") of musical
artists in connection with the manufacture and sale of merchandise and the
licensing of such rights to third parties.
B. ADNM is in the business of developing and operating Internet retail
storefronts for musical artists ("Artist Stores") that, among other things, sell
merchandise containing the Personal Identification of the applicable artist.
C. Merchandiser and ADNM are entering into this Agreement in order to
set forth the terms and conditions upon which Merchandiser has agreed to
accommodate ADNM in respect of developing and opening new Artist Stores
featuring Merchandiser Artists (as defined below) and in the operation thereof.
NOW, THEREFORE, in consideration of the foregoing and the mutual
benefits contained herein, the parties hereto agree as follows:
1. Term: The term of this Agreement (the "Term") shall be three (3)
years commencing on the date of this Agreement.
2. Signing Procedures:
(a) As used herein, "Merchandiser Artist" shall mean,
individually and collectively, each and every artist in respect of which
Merchandiser has the exclusive right (sometimes referred to herein as the
"Rights") to manufacture merchandise utilizing such artist's Personal
Identification (including any entity furnishing the Personal Identification of
such an artist). Merchandiser represents and warrants that (A) attached hereto
as Exhibit A is a true and complete list of Merchandiser Artists as of the
execution of this Agreement; and (B) the territory and duration of the Rights
set forth on said Exhibit A are true and complete.
(b) During the Term, Merchandiser agrees that, within a
reasonable period of time after Merchandiser enters into an agreement with
respect to a new Merchandiser Artist, Merchandiser shall notify ADNM of the
applicable artist name(s), territory and duration of Rights, if any. Upon such
notice, the applicable Merchandiser Artist shall be deemed added to said Exhibit
A.
(c) Merchandiser agrees to promptly notify ADNM if any of the
information on said Exhibit A should change during the Term, as well as soon as
the Rights in respect of an artist end (after which such artist shall be deemed
deleted from said Exhibit A.)
1
<PAGE> 2
(d) Said Exhibit A indicates with an asterisk (*) those
Merchandiser Artists in respect of which ADNM desires to enter into a Store
Agreement as of the execution of this Agreement. ADNM shall have the right from
time to time during the Term to notify Merchandiser that it desires to enter
into a Store Agreement with any other Merchandiser Artists. ADNM and
Merchandiser shall use their collective commercially reasonable efforts to cause
the applicable Merchandiser Artist to enter into an agreement with ADNM
substantially in the form attached hereto as Exhibit B, subject to any
modifications as the parties may mutually agree upon prior to the execution
thereof (a "Store Agreement").
(e) Merchandiser acknowledges that, prior to the execution
hereof, ADNM entered into agreements in respect of the development and operation
of Artist Stores for the artists set forth on Schedule A attached hereto
(individually and collectively, "Excluded Artists"). In respect of each Excluded
Artist, Merchandiser agrees (i) to continue to sell to ADNM (or the applicable
Excluded Artist or its furnishing company), for resale on the applicable Artist
Store and the UBL Store (as defined in paragraph 6 below), merchandise featuring
the Personal Identification of the applicable Excluded Artist on terms no less
favorable to ADNM than [***] terms; (ii) that no License Fee shall be payable
with respect to any such merchandise; (iii) that to the extent any Rights are
needed from Merchandiser to operate the applicable Artist Store, such Rights
shall be deemed granted to ADNM in consideration of ADNM entering into this
Agreement; and (iv) the Excluded Artists shall not be subject to this Agreement.
3. Sale of Merchandise Manufactured By or Under the Control of
Merchandiser: As used herein, the term "Merchandiser Product" means all
merchandise sold pursuant to a Store Agreement (whether through the applicable
Artist Store or the UBL Store) that is provided by or on behalf of Merchandiser
or a Sublicensee, as well as any "limited edition" or "one-of-a-kind" items of
merchandise sold pursuant to a Store Agreement (whether or not actually provided
by or on behalf or Merchandiser or a Sublicensee). During the term of each Store
Agreement (but only as long as Merchandiser has the Rights in respect of the
applicable Merchandiser Artist), Merchandiser agrees to sell to ADNM (or the
applicable Merchandiser Artist), for resale under the applicable Store
Agreement, Merchandiser Product manufactured by or under the control of
Merchandiser that contains the Personal Identification of the applicable
Merchandiser Artist upon the following terms:
(a) Merchandiser agrees to sell all such merchandise to ADNM at
Merchandiser's standard wholesale prices (i.e., the prices that Merchandiser
generally charges its other wholesale customers, it being understood that ADNM
to have the benefit of all quantity discounts customarily afforded by
Merchandiser to its other wholesale customers). Merchandiser represents and
warrants that attached hereto as Exhibit C are Merchandiser's standard wholesale
prices as of the execution of this Agreement. Upon notice from Merchandiser to
ADNM, Merchandiser shall have the right to change its standard wholesale prices
hereunder, provided such changes apply to all of Merchandiser's customers and
that such changes shall only apply to Merchandiser Product ordered by ADNM after
its receipt of such notice from Merchandiser.
- ----------
[***] Confidential treatment has been requested for the bracketed
portion. The confidential redacted portion has been omitted and filed
separately with the Securities and Exchange Commission.
2
<PAGE> 3
Notwithstanding the foregoing, the parties agree and acknowledge that
Merchandiser may not have standard wholesale prices for certain collectibles and
limited edition items, in which case the wholesale price shall be negotiated in
good faith.
(b) Subject to paragraph 4 below, all such sales shall be on a
consignment basis [i.e., the applicable Merchandiser Product shall not be deemed
sold to ADNM until ADNM has received a verified order therefor from a customer
of an Artist Store (or the UBL Store), and ADNM shall have the right to return
to Merchandiser, for a full credit, any Merchandiser Product that is unsold or
has been returned by such a customer in accordance with the return policies of
the Artist Store (or the UBL Store, as applicable)]. Payment to Merchandiser
shall be made within fifteen (15) days after the end of the month during which
ADNM has sold the applicable item of Merchandiser Product.
(c) ADNM and Merchandiser shall in their good faith business
judgment mutually determine on an item-by-item basis the amount of inventory
that Merchandiser will ship to the ADNM's fulfillment center(s) (the "Center").
In this regard, Merchandiser agrees that it will ship on a timely basis an
amount of Merchandiser Product reasonably sufficient to cover the anticipated
orders through the applicable Store. During the Term, ADNM agrees to provide
Merchandiser within five (5) business days after the last day of each month (and
at such other times as Merchandiser reasonably requests, but no more frequently
than twice during any 30-day period of the Term), with a computer run of the
inventory held as of the end of the preceding month at the Center of
Merchandiser Product supplied by Merchandiser. Merchandiser shall have the right
from time to time to require ADNM to return inventory of Merchandiser Product
that exceeds the inventory level deemed likely to be sold within a reasonable
period of time, as mutually agreed among the parties.
(d) ADNM shall pay all third party costs (including all
associated freight and insurance costs) of shipping the Merchandiser Product
supplied by Merchandiser to the Centers and returning any such unsold
Merchandiser Product from the Center to Merchandiser's closest warehouse to the
Center.
4. Sale of Merchandise Manufactured By or Under the Control of a
Sublicensee: As used herein, the term "Sublicensee" means any person or entity
who has obtained prior to the date of this Agreement, or during the Term
obtains, from Merchandiser the right to manufacture and distribute merchandise
bearing the Personal Identification of a Merchandiser Artist.
(a) During the term of each Store Agreement, Merchandiser shall
use its commercially reasonable efforts to cause each Sublicensee to sell on a
timely basis to ADNM (or the applicable Merchandiser Artist), for resale under
the applicable Store Agreement, Merchandiser Product manufactured by such
Sublicensee at no more than the Sublicensee's standard wholesale prices and
otherwise in accordance with the terms of paragraph 2(e) above (e.g., on a
consignment basis). Subject to paragraph 4(b) below, if, despite Merchandiser's
commercially reasonable efforts, a Sublicensee refuses to sell Merchandiser
Product on a consignment basis, Merchandiser shall use its commercially
reasonable efforts to cause such
3
<PAGE> 4
Sublicensee to agree that payment for the applicable Merchandiser Product will
not be due until at least [***] after the applicable Merchandiser Product is
received at the Center from the Sublicensee. Subject to paragraph 4(b) below,
if, despite Merchandiser's commercially reasonable efforts, a Sublicensee
refuses to sell Merchandiser Product on [***] terms, Merchandiser shall use its
commercially reasonable efforts to cause such Sublicensee to agree that payment
for the applicable Merchandiser Product will not be due until at least [***]
after the applicable Merchandiser Product is received at the Center from the
Sublicensee.
(b) If a Sublicensee refuses to sell Merchandiser Product to
ADNM (or the applicable Merchandiser Artist) on terms acceptable to ADNM,
Merchandiser may elect to purchase such Merchandiser Product from the
Sublicensee and sell such Merchandiser Product to ADNM in accordance with the
terms set forth in paragraph 3(b) above. If the Sublicensee or Merchandiser
furnishes a Sublicensee's merchandise to ADNM (or the applicable Merchandiser
Artist) on a consignment basis, then the License Fee with respect to such
Merchandiser Product shall be paid by ADNM to Merchandiser. If such Merchandise
Product is not supplied on a consignment basis (i.e., ADNM and/or the applicable
Merchandiser Artist do not have the right to return such Product against a full
credit), then, notwithstanding anything contained in this Agreement to the
contrary, the License Fee with respect to such Merchandiser Product shall be
paid by ADNM to the applicable Merchandiser Artist under the applicable Store
Agreement.
5. Winterland Store:
(a) During the Term, ADNM will design, develop, maintain and
operate for Merchandiser an Internet retail storefront for the sale of
merchandise containing the Personal Identification of certain Merchandiser
Artists to be mutually selected by ADNM and Merchandiser (the "Winterland
Store"), to be integrated with Merchandiser's web site currently located at
www.winterland.com (the "Winterland Site"). ADNM will design and develop the
Winterland Store pursuant to a mutually approved design concept. ADNM shall be
solely responsible for all costs incurred by ADNM in connection with developing
the Winterland Store; however, Merchandiser agrees to cooperate with ADNM,
including by providing technical assistance and such other resources as may be
reasonably required, to integrate the Winterland Store into the existing
Winterland Site. Merchandiser shall provide ADNM with all photographs, graphics,
logos and similar items reasonably required by ADNM to create the Winterland
Store and readily available to Merchandiser promptly following ADNM's request
and at no cost to ADNM.
(b) During the Term, ADNM will host (i.e., provide the server
for) and maintain the Winterland Store, including by providing periodic source
code programming updates and improvements. In this regard, ADNM will use its
commercially reasonable efforts to correct any material "bug" or defect as soon
as reasonably possible after ADNM becomes aware of such material "bug" or
defect.
(c) ADNM and Merchandiser shall mutually approve the merchandise
to be sold over the Winterland Store. Merchandiser shall have the right to
approve the retail price of
- ----------
[***] Confidential treatment has been requested for the bracketed
portion. The confidential redacted portion has been omitted and filed
separately with the Securities and Exchange Commission.
4
<PAGE> 5
merchandise sold over the Winterland Store. ADNM (or its designee) shall process
all orders received from the Winterland Store and arrange to have the ordered
merchandise shipped to the customer (subject to availability).
(d) All merchandise to be offered for sale on the Winterland
Store shall be supplied to ADNM in accordance with the terms of paragraphs 2(e)
and 4 above. In addition, with respect to merchandise supplied by Merchandiser
or a Sublicensee and sold over the Winterland Store, ADNM agrees to account to
Merchandiser in the same manner as ADNM accounts to Merchandiser for
Merchandiser Product sold over an Artist Store (i.e., pursuant to paragraphs
8(b)(i)(A) and 8(b)(i)(C) below, but subject to the last sentence of paragraph
4(b) above). However, any merchandise containing the Personal Identification of
a Merchandiser Artist who is not subject to a Store Agreement that is offered
for sale on the Winterland Store and sold through the UBL Store shall not be
deemed a sale under this Agreement (i.e., shall not be subject to the License
Fee). Rather such sale shall be deemed a sale under the UBL Merchandiser
Agreement between Merchandiser and The Ultimate Band List, LLC being entered
into concurrently herewith (the "UBL Agreement").
(e) During the Term, ADNM shall handle all customer orders and
inquiries in respect of the Winterland Store, provide all necessary credit card
accounting and processing services and develop payment, delivery and refund
policies. To effect the foregoing, ADNM shall also provide an on-line and
toll-free telephone service center that will take orders and respond to customer
inquiries. On-line inquiries will be responded to within 24 hours of receipt and
the telephone service will be operational Mondays through Fridays from 9:00 a.m.
to 7:00 p.m. Pacific Time (excluding holidays) and will enable customers who
prefer not to place orders on-line to place orders by facsimile or telephone.
(f) As between ADNM and Merchandiser, Merchandiser will own the
customer database specifically identified with the Winterland Store (the
"Winterland Database"). However, ADNM will have the exclusive right during the
Term, subject to Merchandiser's consent in each instance, to administer and
license any third party uses of the Winterland Database, and to collect all
monies relating thereto accrued during the Term, regardless of when payable.
ADNM shall pay Merchandiser [***] of the "Gross Database Revenue," which means
the amount actually received by ADNM in respect of sales and other exploitations
of the Winterland Database, less all related Deductible Amounts.
(g) ADNM shall pay Merchandiser [***] of the "Gross Exploitation
Revenue," which means the amount actually received by ADNM in respect of
ancillary income from the Winterland Store, for example, income in respect of
advertising contained on the Winterland Store (e.g., hyperlinks to, and banners
and other advertisements for, other Internet web sites), less all agent
commissions and other related Deductible Amounts. Merchandiser shall have the
right to approve all such ancillary activities.
(h) As between ADNM and Merchandiser, Merchandiser shall be
solely responsible for all costs of marketing the Winterland Store, and ADNM
shall not incur any such
- ----------
[***] 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
costs without Merchandiser's written approval. If ADNM incurs any marketing
costs with Merchandiser's written approval, such costs shall be recoupable out
of all monies payable to Merchandiser under this Agreement, other than (i) the
wholesale purchase price for the Merchandiser Product and merchandise purchased
for sale through the Winterland Store and (ii) the monies payable under
paragraph 3(d) above.
(i) As between Merchandiser and ADNM, any and all artwork,
trademarks, logos, graphics, video, sound recordings, musical compositions,
text, data and other materials supplied by Merchandiser to ADNM in connection
with the Winterland Store, as well as the URL and the domain name or names
assigned to the Winterland Store (collectively, the "Winterland Content"), shall
remain Merchandiser's sole and exclusive property. Merchandiser hereby grants to
ADNM during the Term and throughout the universe a non-exclusive, royalty-free
license to use, copy, modify (with Merchandiser's consent), distribute, publicly
perform and display and otherwise exploit the Winterland Content and the
Personal Identification of each applicable Merchandiser Artist in connection
with the development, maintenance and operation of the Winterland Store and the
advertising and promotion thereof and of ADNM in connection with the Winterland
Store. No Winterland Content or the exploitation or use thereof or the sale of
any Merchandiser Product shall violate or infringe upon any common law or
statutory rights of any party, including contractual rights, copyrights, and
rights of privacy or publicity or shall defame any person or entity.
(j) As between Merchandiser and ADNM, any and all text,
graphics, audio, video, artwork and designs created by ADNM or its employees or
agents during the Term for use solely on the Winterland Store, including any
additions to or modifications of Winterland Content made by ADNM or its
employees or agents, (collectively, the "Developed Content"), shall be
Winterland's sole and exclusive property. All Developed Content shall be deemed
included in the license granted by Merchandiser under paragraph 5(i) above. Upon
Merchandiser's reasonable request and at Merchandiser's sole expense, ADNM shall
assist Merchandiser in the procurement and maintenance of Merchandiser's rights
in the Developed Content (including all intellectual property rights, whether
recognized currently or in the future).
(k) As between Merchandiser and ADNM, any and all commerce
technology, HTML formatting code, source and object code, programming code and
software, as well as all text, graphics, audio, video, artwork and designs
provided by ADNM in connection with this Agreement which does not constitute
Developed Content (collectively, the "ADNM Content") shall be ADNM's sole and
exclusive property. Notwithstanding the foregoing, upon the expiration of the
Term and provided Merchandiser is not in breach of this Agreement, ADNM shall
grant to Merchandiser a perpetual non-exclusive license throughout the universe
to use, modify, publicly perform and display all ADNM Content used in the
Winterland Store and owned and controlled by ADNM, solely in connection with
operating and maintaining the Winterland Store. In consideration of such
license, if Merchandiser elects to so utilize any such ADNM Content in
connection with the Winterland Store after the Term, Merchandiser agrees to pay,
or cause its licensee(s) to pay, ADNM a royalty equal to [***] of the gross
revenues earned in connection with the Winterland Store after the expiration of
the Term, but only for as long as
- ----------
[***] Confidential treatment has been requested for the bracketed
portion. The confidential redacted portion has been omitted and filed
separately with the Securities and Exchange Commission.
6
<PAGE> 7
Merchandiser continue to use any such ADNM Content. In this regard, Merchandiser
shall account in the same fashion and within the same time periods, and ADNM
shall be accorded the same examination rights and be subject to the same
limitations and restrictions, as apply with respect to Merchandiser's
accountings under paragraph 11 below. Nothing contained in this Agreement shall
impose upon ADNM any obligation whatsoever to provide Merchandiser with updates,
hosting, maintenance or support with respect to the Winterland Store or such
ADNM Content after the Term. Merchandiser shall not be entitled to use any name,
trademark or service mark of ADNM or its affiliates in any manner whatsoever
without obtaining the prior written consent of ADNM or the applicable affiliate
of ADNM.
(l) Merchandiser shall obtain all necessary third-party
clearances in connection with all Winterland Content and merchandise offered for
sale on the Winterland Store (including the payment of any associated fees,
royalties and other costs). If ADNM nevertheless shall pay, with Merchandiser's
approval, any third party clearance cost relating to the Winterland Store (which
ADNM is not obligated to do), all such amounts shall be deducted from any and
all monies otherwise payable to Merchandiser under this Agreement.
(m) ADNM represents and warrants that no exploitation or use by
ADNM or Merchandiser of the ADNM Content or Developed Content in accordance with
the terms of this Agreement shall violate or infringe upon any common law or
statutory rights of any party, including contractual rights, copyrights, and
rights of privacy or publicity. ADNM shall indemnify Merchandiser in accordance
with the terms of paragraph 14(c) below in respect of any claim contrary to the
foregoing; other than with respect to any claim subject to the foregoing
indemnity obligation, Merchandiser agrees that ADNM shall not be liable for any
special, consequential, incidental or indirect damages in connection with the
development or operation of the Winterland Store, however caused, under any
theory of liability.
6. UBL Store: Merchandiser agrees and acknowledges that ADNM may elect
to make available for sale on an Internet on-line store (the "UBL Store")
operated by a company affiliated with ADNM certain items of Merchandiser Product
offered for sale through an Artist Store.
7. Grant of Rights: With respect to each Store Agreement (and subject to
the terms and conditions set forth therein), Merchandiser shall be deemed to
have granted to ADNM, in consideration for the License Fee, the irrevocable
right and license, insofar as Merchandiser has such Rights and for the territory
Merchandiser has such Rights, during the term of such Store Agreement (but only
as long as Merchandiser has the Rights in respect of the applicable Merchandiser
Artist), to develop and operate the only "official" Internet store for the
applicable Merchandiser Artist, and the non-exclusive (subject to paragraph 12
below) right and license to utilize such Merchandiser Artist's Personal
Identification in connection with the applicable Artist Store.
8. License Fee:
(a) Unless otherwise provided in the applicable Store Agreement,
in consideration for the rights licensed pursuant to paragraph 7 above, ADNM
agrees to pay Merchandiser a License Fee with respect to all Merchandiser
Product sold at any time (including after the Term) under a Store Agreement,
subject to the last sentence of paragraph 4(b) above.
7
<PAGE> 8
(b) As used herein:
(i) "License Fee" shall mean the amount by which the
following amounts exceed, on an item-by-item basis, the wholesale purchase
price payable by ADNM (or the applicable Merchandiser Artist) for the applicable
Merchandiser Product, provided that the aggregate License Fees otherwise payable
with respect to an accounting period shall be further reduced by all mutually
approved costs for which Merchandiser and/or the Merchandiser Artists are
responsible under the Store Agreements:
(A) [***] of the Adjusted Gross Merchandiser
Product Revenue with respect to Merchandiser Product (other than High-End
Collectibles) sold through an Artist Store and with respect to High-End
Collectibles sold through the UBL Store;
(B) [***] of the Adjusted Gross Merchandiser
Product Revenue with respect to Merchandiser Product (other than High-End
Collectibles) sold through the UBL Store; and
(C) [***] of the Adjusted Gross Merchandiser
Product Revenue with respect to High-End Collectibles sold through an Artist
Store.
(ii) "Adjusted Gross Merchandiser Product Revenue" shall
mean the amount actually received by ADNM in respect of Merchandiser Product
sold by ADNM to customers who place orders through the applicable Store or the
UBL Store (other than shipping and handling revenues) less the Deductible
Amounts.
(iii) "Deductible Amounts" shall mean all amounts paid
by ADNM pursuant to paragraph 3(d) above, third party fulfillment fees, third
party warehouse charges and third party related charges (e.g., box charges and
return processing fees); sales, use and value-added taxes; credit card and other
third party service fees; agent commissions; and any credits for returns,
cancellations and exchanges. Merchandiser shall have the right to approve the
amount of (A) third party fulfillment fees (but only if such fees are in excess
of the fees set forth on Exhibit D attached hereto, (B) the third party service
fees (other than credit card fees), and (C) agent commissions, provided that
once such approval is given with respect to a particular artist, ADNM will not
be obligated to obtain Merchandiser's approval of any other third party
fulfillment fees, third party service fees or agent commissions for such
Merchandiser Artist or any other Merchandiser Artist so long as such fees or
commissions, as the case my be, are not in excess of the fees and commissions
previously approved by Merchandiser. Notwithstanding anything to the contrary
contained herein, as between ADNM and Merchandiser, ADNM shall be solely
responsible for all customer bad debts in respect of Merchandiser Product
shipped by ADNM (or its designee), including all associated Deductible Amounts.
(iv) "High-End Collectibles" means any single item of
Merchandiser Product sold pursuant to a Store Agreement (whether through the
applicable Artist Store or the UBL Store) for a retail price in excess of [***].
(c) For the avoidance of doubt, Merchandiser agrees and
acknowledges that Artist Product will be sold on the Artist Stores and that no
License Fee shall be payable to Merchandiser in respect of any Artist Product.
As used herein, "Artist Product" means all merchandise and other products sold
pursuant to a Store Agreement (whether through the applicable Artist Store or
the UBL Store) other than Merchandiser Product (e.g., records, concert tickets,
etc.). During the period Merchandiser has the Rights to a particular
Merchandiser Artist that is party to a Store Agreement, ADNM shall advise
Merchandiser of ADNM's intention to sell on the applicable Artist Store any
Artist Product (other than records and concert tickets) within a reasonable
period of time prior to the intended sale.
- ----------
[***] Confidential treatment has been requested for the bracketed
portion. The confidential redacted portion has been omitted and filed
separately with the Securities and Exchange Commission.
8
<PAGE> 9
9. ARTISTdirect Warrant: In further consideration for Merchandiser
entering into and fully performing its obligations undertaken by Merchandiser in
this Agreement and under the UBL Agreement, promptly following the execution
hereof, ADNM shall cause ARTISTdirect, LLC to grant to Merchandiser a warrant
substantially in the form of Exhibit E attached hereto in exchange for the
payment by Merchandiser to ARTISTdirect, LLC of one hundred dollars ($100.00).
10. Execution Payment: In consideration of the rights granted and other
covenants and agreements made by Merchandiser in this Agreement and in the UBL
Agreement, ADNM agrees to pay to Merchandiser, upon the complete execution of
both this Agreement and the UBL Agreement, a one-time, non-returnable,
non-recoupable fee of [***].
11. Accountings:
(a) ADNM shall compute the License Fee payable to Merchandiser
and render an accounting statement to Merchandiser within thirty (30) days after
March 31, June 30, September 30 and December 31 for the three-month period
preceding March 31, June 30, September 30 or December 31, as the case may be.
Each such statement shall include an itemized breakdown of the sources of the
applicable revenue, Deductible Amounts and all other reductions in computing the
License Fee and shall be accompanied by the payment of the amount of the License
Fees, if any, earned by Merchandiser during the accounting period to which the
statement relates. With respect to the last two (2) accounting periods before
the end of the Term, ADNM shall be entitled to withhold from payments otherwise
due reasonable reserves against anticipated returns, rebates, credits,
cancellations and exchanges related to the Winterland Store, provided that such
reserves shall consistent with the average amount of actual returns, rebates,
credits, cancellations and exchanges during the accounting period concerned, and
provided further that all such reserves shall be liquidated with the first
accounting period after the Term.
(b) Merchandiser or a certified public accountant on
Merchandiser's behalf may, at ADNM's offices and at Merchandiser's expense,
examine ADNM's books and records relevant to the calculation of the License Fee
solely for the purposes of verifying the accuracy of statements rendered by ADNM
to Merchandiser. Such books and records may be examined as aforesaid only (i)
during ADNM's normal business hours, (ii) upon reasonable notice to ADNM, and
(iii) within two years after the date a statement is due hereunder. Further,
Merchandiser shall not have the right to examine such books and records more
frequently than once in any twelve month period or more than once with respect
to any particular statement. Each statement shall be deemed final and binding
upon Merchandiser as an account stated and shall not be subject to any claim or
objection by Merchandiser (A) unless Merchandiser notifies ADNM of
Merchandiser's specific written objection to the applicable statement, stating
the basis thereof in reasonable detail within two (2) years after the date such
statement is due hereunder, and (B) unless, within said two (2)-year period,
Merchandiser make proper service of process upon ADNM in a suit instituted in a
court of proper jurisdiction.
- ----------
[***] Confidential treatment has been requested for the bracketed
portion. The confidential redacted portion has been omitted and filed
separately with the Securities and Exchange Commission.
9
<PAGE> 10
12. Exclusivity:
(a) Insofar as ADNM is concerned, Merchandiser shall have the
right to sell and authorize others to sell merchandise containing a Merchandiser
Artist's Personal Identification over the Internet. However, during the Term,
Merchandiser shall not, without ADNM's consent, develop or maintain a web site,
or license or otherwise authorize any other web site provider to develop or
maintain a web site, that is identified solely with a single Merchandiser Artist
(e.g., a web site that is the "official" merchandise web site for a Merchandiser
Artist).
(b) Except with respect to collectibles and limited edition
items supplied by the Merchandiser Artist, records, and concert tickets, ADNM
agrees that, so long as Merchandiser has the Rights, ADNM shall not purchase
within the territory of Merchandiser's exclusivity merchandise bearing the
Personal Identification of a Merchandiser Artist from anyone other than
Merchandiser or a Sublicensee; provided that Merchandiser will consider in good
faith each request by ADNM and/or a Merchandiser Artist who is party to a Store
Agreement to manufacture, or cause the manufacture by a Sublicensee, of
merchandise not otherwise manufactured by Merchandiser or a Sublicensee. If
Merchandiser is unable to timely supply sufficient quantities of any item of
merchandise manufactured by or under the control of Merchandiser (it being
understood that merchandise manufactured by a Sublicensee shall not be deemed
manufactured under the control of Merchandiser) for sixty (60) consecutive days
then, without limiting any other right or remedy available to ADNM, ADNM shall
be entitled to make arrangements with another manufacturer for the manufacture
of such merchandise.
13. Tour Merchandising and Sublicensing Rights: During the Term, ADNM
agrees that it and its affiliates shall refrain from seeking from any artist (a)
tour merchandising rights, or (b) the right to sublicense merchandising rights
to third parties, or (c) the right to manufacture merchandise containing such
artist's Personal Identification.
14. Representations and Warranties; Indemnity:
(a) Each party hereto represents and warrants that: (i) it has
the full right, power and authority to enter into and to perform this Agreement;
(ii) it is not under any restriction or obligation that may or will impair such
party's full performance of this Agreement; and (iii) it shall not at any time
do or authorize any person or entity to do anything inconsistent with, or
anything that might diminish, impair or interfere with any of the other party's
rights hereunder.
(b) Merchandiser agrees to indemnify and hold ADNM and its
members, employees, attorneys, agents, successors, affiliates, assigns and
licensees harmless against any claim, liability, cost and expenses (including
attorneys' and accountants' fees reasonably incurred) in connection with any
breach or alleged breach of this Agreement by Merchandiser. In this regard, ADNM
shall not settle any claim without first notifying Merchandiser of the terms of
any proposed settlement and obtaining Merchandiser's consent thereto.
(c) ADNM agrees to indemnify and hold Merchandiser and its
members, employees, attorneys, agents, successors, affiliates, assigns and
licensees harmless against any claim, liability, cost and expenses (including
attorneys' and accountants' fees reasonably incurred) in connection with any
breach or alleged breach of this Agreement by ADNM. In this
10
<PAGE> 11
regard, Merchandiser shall not settle any claim without first notifying ADNM of
the terms of any proposed settlement and obtaining ADNM's consent thereto.
(d) Merchandiser acknowledges that ADNM is making no
representations and warranties concerning anticipated success of the Stores or
the Winterland Store, the amount of compensation payable to Merchandiser
hereunder, and/or the current or future value of ADNM or the warrants described
in paragraph 9 above. Likewise, ADNM acknowledges that Merchandiser is making no
representations and warranties concerning anticipated success of the Stores or
the Winterland Stores or the amount of compensation payable to ADNM with respect
thereto.
15. Office Space: During the Term, ADNM shall supply an executive of
Merchandiser (currently Roxsanna Mobley) with an office and secretarial space at
ADNM's offices. If Merchandiser hires a secretary, assistant or other employee
to work out of ADNM's offices, Merchandiser shall be solely responsible for all
obligations of an employer with respect to such person, including salary,
benefits, worker's compensation insurance, tax withholdings and reportings, etc.
16. Notices; Approvals:
(a) All notices and payments to either party hereto shall be
sent to such party's address first mentioned herein, or such other address as a
party hereto may hereafter designate by notice to the other. All notices sent
under this Agreement must be in writing to be effective, and must be sent by a
third party messenger, by air courier service with a written acknowledgment of
receipt, by registered or certified mail, return receipt requested, or by
facsimile provided receipt is confirmed by telephone call to the recipient. The
date of personal delivery or faxing, or the date of delivery to a telegraph
office, as the case may be, of any such notice shall be deemed the date of the
giving thereof; and the date two (2) days following deposit with any air courier
service, or five (5) days following deposit with the United States Postal
Service, of any such notice shall be deemed the date of the giving thereof
(except, with respect to notices of change of address, the date of which will be
the date of receipt by the receiving party). Until ADNM notifies Merchandiser
otherwise, a copy of all notices hereunder to ADNM shall be simultaneously sent
as aforesaid to Lenard & Gonzalez LLP, 1900 Avenue of the Stars, 25th Floor, Los
Angeles, CA 90067; Attention: Allen D. Lenard, Esq.
(b) No failure by a party hereto to perform any of its
obligations hereunder shall be deemed a breach of this Agreement, unless the
party claiming a breach has given the other party hereto notice of such alleged
breach in reasonable detail and such alleged breach is not cured within fifteen
(15) business days [five (5) business days for non-payments] after the giving of
such notice, provided that if it is not reasonably possible to cure such breach
within such time period, then such failure shall not be deemed a breach if
within such period such party commences the curing of such breach and cures such
breach within a reasonable period of time thereafter. The foregoing provisions
of this paragraph shall not delay or prohibit either party from seeking and
obtaining injunctive and other equitable relief.
(c) No consent or approval under this Agreement shall be
unreasonably withheld or delayed. With respect to consents and approvals of
Merchandiser required under this Agreement, ADNM may elect to request such
consent by notice to Merchandiser. If Merchandiser does not respond to such
notice within ten (10) business days thereafter, ADNM may give Merchandiser a
second notice making such request, and Merchandiser's consent or
11
<PAGE> 12
approval shall be deemed granted unless Merchandiser notifies ADNM to the
contrary, stating in reasonable detail the basis thereof, within five (5)
business days after such second notice.
17. Miscellaneous:
(a) All references to "this Agreement," "hereof," "herein" and
words of similar connotation include all exhibits attached hereto, unless
specified otherwise. This Agreement is intended by the parties hereto as a final
expression of their understanding and agreement with respect to the subject
matter hereof and as a complete and exclusive statement of the terms thereof;
this Agreement supersedes all prior and contemporaneous negotiations,
understandings, and agreements between the parties hereto with respect to the
subject matter hereof. The parties acknowledge and agree that neither party
hereto has made any representations or promises in connection with this
Agreement or the subject matter hereof not contained herein. Nothing in this
Agreement shall be construed to require the commission of any act contrary to
law, and wherever there is a conflict between any provisions of this Agreement
and any statute, law, ordinance, order or regulation contrary to which the
parties hereto have no legal right to contract, such statute, law, ordinance,
order or regulation shall prevail; provided that, in such event, (a) the
provision of this Agreement so affected shall be limited only to the extent
necessary to permit the compliance with the minimum legal requirements, (b) no
other provisions of this Agreement shall be affected thereby, and (c) all such
other provisions shall remain in full force and effect. The parties hereto shall
negotiate in good faith to replace any invalid, illegal or unenforceable
provision (the "Invalid Provision") with a valid provision, the effect of which
comes as close as possible to that of the Invalid Provision. This Agreement
cannot be canceled, modified, amended or waived, in part or in full, in any
manner except by an instrument in writing signed by the party to be charged. No
waiver by either party, whether expressed or implied, of any provision of this
Agreement or default hereunder shall affect such party's right to thereafter
enforce such provision or to exercise the right or remedy set forth in this
Agreement in the event of any other default, whether or not similar. Words in
the singular number shall include the plural, and vice versa. Whenever examples
are used in this Agreement with the words "including," "for example," "e.g.,"
"such as," "etc." or any derivation thereof, such examples are intended to be
illustrative and not in limitation thereof. The paragraph headings herein are
used solely for convenience and shall not be used in the interpretation or
construction of this Agreement.
(b) In entering into this Agreement and providing services
pursuant hereto, Merchandiser and ADNM each have and shall have the status of
independent contractors. Nothing herein contained shall contemplate or
constitute either party being an agent or employee of the other party, and
nothing herein shall constitute a partnership, joint venture or fiduciary
relationship between the parties.
(c) Neither party hereto shall, without the prior written
consent of the other party (not to be unreasonably withheld), assign this
Agreement, in whole or in part, to any person or entity other than a subsidiary,
affiliated or controlling entity, or to any person or entity owning or acquiring
a substantial portion of the stock or assets of such party hereto.
(d) This Agreement shall be deemed to have been entered into in
the State of California and the validity, interpretation and legal affect of
this Agreement shall be governed by the laws of the State of California
applicable to contracts entered into and performed entirely
12
<PAGE> 13
within the State of California. The courts located in the County of Los Angeles,
California (state and federal), only, will have jurisdiction of any controversy
regarding this Agreement; any action or other proceeding which involves such a
controversy will be brought in those courts, in California and not elsewhere.
18. (a) Each party to this Agreement expressly undertakes to retain in
confidence, and to require and cause its subsidiaries and affiliates and its and
their respective employees, contractors and agents to retain in confidence, all
information and know how transmitted to such party (the "Receiving Party") (i)
which the disclosing party hereunder (the "Disclosing Party") has identified in
writing as being proprietary and/or confidential or (ii) which the Receiving
Party reasonably should know, based upon the nature of the information being
disclosed, ought to be treated as confidential (collectively "Confidential
Information"). The Receiving Party will make no use of such Confidential
Information except as expressly authorized under this Agreement. Either party
may, however, disclose Confidential Information if required by law or legal
process, provided such party shall undertake to give the other reasonable notice
prior to such disclosure and shall comply with any applicable protective order
or equivalent.
(b) ADNM hereby specifically acknowledges and agrees that the terms
of the Rights applicable to each Merchandiser Artist constitute Confidential
Information of Merchandiser under this Agreement.
(c) Both parties acknowledge that unauthorized disclosure or use of
Confidential Information could cause irreparable harm and significant injury
which may be difficult to ascertain. Accordingly, both parties agree that the
aggrieved party will have the right to seek and obtain injunctive relief from
breaches of this paragraph 18, in addition to any other rights and remedies it
may have. Both parties agree that each has and shall retain ownership rights to
its own Confidential Information, and that upon expiration or termination of the
Term each party shall return and shall not retain the Confidential Information
of the other party.
(d) Notwithstanding anything in this paragraph 18 to the contrary,
Confidential Information shall not be construed to mean any information which
the Receiving Party can show: (i) is, or subsequently becomes, publicly
available other than as a result of the Receiving Party's breach of any
obligation owed to the Disclosing Party or a third party; (ii) became known to
the Receiving Party prior to the Disclosing Party's disclosure of such
information to the Receiving Party, (iii) became known to the Receiving Party
from a source other than the Disclosing Party other than as a result of such
source's breach of an obligation of confidentiality owed to the Disclosing
Party, (iv) is independently developed by the Receiving Party, or (v) has been
authorized for disclosure by the Disclosing Party.
(e) The provisions of this paragraph 18 shall survive termination
or expiration of the Term.
ARTISTdirect New Media, LLC Winterland Concessions Company,
a California corporation, doing
business as
"Winterland"
By: /s/ Marc P. Geiger
---------------------------------
(an authorized signatory)
13
<PAGE> 14
By: /s/ [Illegible]
---------------------------------
(an authorized signatory)
14
<PAGE> 15
SCHEDULE A
EXCLUDED ARTISTS
Backstreet Boys
Led Zeppelin
Marilyn Manson
Pantera
Primus
Rob Zombie
Slayer
Stabbing Westward
Tom Petty
15
<PAGE> 16
EXHIBIT A
MERCHANDISER'S ARTISTS
<TABLE>
<CAPTION>
Term of
Artist Agreement Territory Merchandiser's Rights
------ --------- --------- ---------------------
<S> <C> <C> <C>
</TABLE>
- ----------
* Artists with whom ARTISTdirect Stores, LLC desires to enter a Store Agreement.
x Artists for whom Winterland does not have the Rights.
16
<PAGE> 17
EXHIBIT B
ONLINE STORE AGREEMENT
THIS AGREEMENT, dated as of ____________, 19__, by and between ARTISTdirect New
Media, LLC ("ADNM"), 17835 Ventura Blvd., Suite 310, Encino, CA 91316, and
[Company Name] ("you"), c/o __________________________ is being entered into in
consideration of the mutual benefits and covenants contained in this Agreement.
1. Purpose: Subject to your approval rights in this Agreement, ADNM will
develop, maintain and operate an Internet web site for you relating to the
musical group professionally known as "[ArtistName]" ("Artist") and the members
of Artist, to be known as "The Official [ArtistName] Superstore" (the "Store").
The Store will provide Internet and other online access for online and offline
distribution of products and services ("Product"). It is intended that the
Product will include records, digital downloads (subject to the consent of
Artist's record company), merchandise, tickets, tour memorabilia, collectible
items and special or limited edition items not available from any other source,
and special bundled packages including any or all of the foregoing items.
2. Term: The term of this Agreement (the "Term") shall commence on the date set
forth above and shall extend for an initial contract period ending three (3)
years after the official launch of the Store. After the initial contract period,
the Term shall automatically continue for additional one (1) year contract
periods, subject to the following sentence. At any time between ninety (90) and
thirty (30) days prior to the expiration of any contract period of the Term,
either party may by notice to the other terminate the Term effective as of the
end of the then-current contract period.
3. Merchandiser Agreements.
(a) You are presently party to an agreement (the "Artist/Merchandiser
Agreement") with Winterland Concessions Company ("Merchandiser") pursuant to
which you have granted Merchandiser the exclusive right to manufacture (and
license the manufacture of) merchandise bearing the name, likenesses,
biographical material and other personal identification of Artist (collectively,
"Personal Identification") for sale through retail channels, including the right
to sell such merchandise to retailers who solely or primarily sell merchandise
via the Internet (the "Rights").
(b) ADNM represents and warrants that it is party to an agreement with
Merchandiser pursuant to which Merchandiser has (i) granted to ADNM any consents
and licenses that may be required from Merchandiser as a result of the
Artist/Merchandiser Agreement in connection with the sale of Product hereunder,
and (ii) agreed to supply (or cause the supply of) merchandise on a consignment
basis to ADNM for resale on the Store (the "ADNM/Merchandiser Agreement"). You
acknowledge that certain Product items may be manufactured by or under the
control of Merchandiser's sublicensees, and that Merchandiser may or may not be
able to offer such Product items to ADNM on a consignment basis. All Product
supplied to ADNM by
1
<PAGE> 18
Merchandiser (or its sublicensees) on a consignment basis is sometimes referred
to herein as "Merchandiser Product"; all other Product is sometimes referred to
herein as "Artist Product."
(c) If you (or Artist) enter into any agreement during the Term (of this
Agreement) pursuant to which you grant the Rights to any third party, you shall
cause such third party to grant to ADNM any consents and licenses that may be
required from such third party in connection with the sales of Product
hereunder. For the avoidance of doubt, no termination or expiration of the
Artist/Merchandiser Agreement or of the ADNM/Merchandiser Agreement shall affect
the Term (of this Agreement) or the rights granted to ADNM hereunder.
Accordingly, the only effect of either such termination or expiration will be
that the terms of this Agreement relating to Merchandiser Product will no longer
apply, and the terms of this Agreement relating to Artist Product will
thereafter apply to all Product hereunder.
4. Development; Hosting; Customer Service:
(a) ADNM will design and develop the Store, including the source code,
the Product catalog, and the commerce system, and will be solely responsible for
the costs of such design and development. You shall have the right to approve
the design of the Store, including its "look and feel." The parties hereto agree
to use commercially reasonable best efforts (i) to cause the beta version of the
Store to be completed within 60 days after the complete execution of this
Agreement, and (ii) to officially launch the Store within 90 days after such
execution.
(b) During the Term, ADNM will host (i.e., provide the server for) and
maintain the Store, including by providing periodic source code programming
updates and improvements in accordance with your reasonable requests. In this
regard, ADNM will use its commercially reasonable best efforts to correct any
material "bug" or defect as soon as reasonably possible after ADNM becomes aware
of such material "bug" or defect.
(c) ADNM shall handle all customer orders and inquiries, provide all
necessary credit card accounting and processing services and develop payment,
delivery and refund policies. To effect the foregoing, ADNM shall also provide
an on-line and toll-free telephone service center that will take orders and
respond to customer inquiries. On-line inquiries will be responded to within 24
hours of receipt and the telephone service will be operational Mondays through
Fridays from 9:00 a.m. to 7:00 p.m. Pacific Time (excluding holidays) and will
enable customers who prefer not to place orders on-line to place orders by
facsimile or telephone.
(d) Unless you and ADNM agree otherwise in writing, ADNM (or its
designee) shall process orders received from the Store and arrange to have the
ordered Product shipped to the customer (subject to Product availability).
(e) Within a reasonable time after your written request during the Term,
ADNM will, without charge or cost to you, design and develop a non-commerce
Internet web site solely related to Artist (the "Artist Site"), including the
source code, or, if the Artist Site already exists, ADNM will redesign and
- ----------
2
<PAGE> 19
redevelop it for you. ADNM will be solely responsible for the costs of such
design and development. You shall have the right to approve the design of the
Artist Site, including its "look and feel." During the Term, ADNM will host and
maintain the Artist Site, including by providing periodic source code
programming updates and improvements in accordance with your reasonable
requests.
5. Product Supply and Inventory:
(a) Product Selection: You will have the right to approve the Products
that are to be sold through the Store and the retail price of each Product item.
(b) Merchandiser Product: ADNM will be responsible for purchasing all
Merchandiser Product from Merchandiser and paying all related costs (including
directly associated freight and insurance costs) ("Product Costs"). As between
you and ADNM, ADNM will be solely responsible for all inventory of Merchandiser
Product.
(c) Artist Product:
(i) You and ADNM agree to cooperate with each other and use
their commercially reasonable best efforts to make the necessary arrangements
with the manufacturers, distributors and providers manufacturers, distributors
and providers of Artist Product ("Suppliers"), on mutually acceptable terms, to
ensure the timely supply of Artist Product in sufficient quantities to fulfill
Store customer orders. You will be responsible for purchasing all Artist Product
from the Suppliers and paying all related Product Costs. If ADNM should
nevertheless pay any Product Costs on your behalf (which ADNM is not obligated
to do), all such Product Costs will be deducted from any and all monies
otherwise payable to you hereunder and, to the extent ADNM is at any time unable
to do so, you agree to promptly reimburse ADNM for the excess upon demand. In
order to assist you with regard to the foregoing, ADNM will provide inventory
management services, taking into account such inventory levels as you and ADNM
may have mutually approved.
(ii) As between you and ADNM, you shall own and be solely
responsible for all Artist Product inventory. However, ADNM shall maintain (or
cause the applicable fulfillment center to maintain) at all times during the
Term insurance to protect you and ADNM from losses related to Artist Product
inventory damaged or otherwise lost while in the fulfillment center's
possession. The coverage terms of the insurance policy currently in effect are
set forth on Exhibit 1 attached to this Agreement.
(d) Upon the expiration of the Term, all Artist Product inventory for
which you have paid the Product Costs shall be shipped, at your sole cost and
expense, to a location designated or approved by you, which inventory shall be
free and clear of any encumbrances by ADNM or any third party deriving rights
through ADNM.
6. Product Sales and Store Revenues:
3
<PAGE> 20
(a) Merchandiser Product: Attached hereto as Exhibit 2 is an extract of
the ADNM/Merchandiser Agreement setting forth the license fee payable by ADNM to
Merchandiser in respect of Merchandiser Product sold hereunder. Company
acknowledges and agrees that it shall look solely to Merchandiser, and not to
ADNM, with respect to all monies due Company and/or Artist in respect of
Merchandiser Product sold hereunder.
(b) Artist Product:
(i) Upon ADNM's receipt of a verified order for a particular
item of Artist Product, ADNM shall purchase such item of Product from you. Upon
such purchase, title to such Product shall pass to ADNM and, as between you and
ADNM, ADNM will thereafter be responsible for the inventory of such Product
item.
(ii) ADNM shall pay you a purchase price equal to [***]of the
"Gross Artist Product Revenue," which means the amount actually received by ADNM
in respect of Artist Product sold through the Store, less all related Deductible
Amounts. The term "Deductible Amounts" means all shipping and handling charges;
third party fulfillment fees and related charges; sales, use and value-added
taxes; credit card and other third party service fees; and any credits for
returns, rebates, cancellations and exchanges. A schedule setting forth the
fulfillment fees charged by the fulfillment center as of the date hereof is set
forth on Exhibit 1 attached hereto.
(iii) Notwithstanding anything to the contrary contained herein,
as between ADNM and you, [***] shall be solely responsible for all Product Costs
and Deductible Amounts associated with customer bad debts in respect of Product
hereunder shipped by ADNM (or its designee).
(c) Records: Notwithstanding paragraphs 5(c) and 6(b) above,
phonorecords that are supplied by ADNM's designated fulfillment center for sale
through the Store ("Records") shall be purchased by ADNM directly from such
fulfillment center, and ADNM (or the fulfillment center) shall be solely
responsible for all related Product Costs (subject to the next sentence) and
inventory. ADNM shall pay you [***] of the "Net Record Revenue," which means
all Gross Record Revenue less all Product Costs incurred for Records. The term
"Gross Record Revenue" means the amount actually received by ADNM in respect of
Records sold through the Store, less all related Deductible Amounts. For the
avoidance of doubt, if you elect to supply phonorecords directly to ADNM for
sale through the Store, such phonorecords shall be subject to paragraphs 5(c)
and 6(b) above rather than this paragraph 6(c).
(d) UBL Store: To the extent any merchandise offered for sale on an
Internet on-line store (the "UBL Store") operated by a company affiliated with
ADNM (the "UBL Affiliate") is readily available in the Store inventory, ADNM
agrees to cause the UBL Affiliate to utilize such inventory to fulfill orders
for such merchandise placed on the UBL Store. ADNM shall account to you pursuant
to the terms of this Agreement with respect to all such Artist Product sold
through the UBL Store, except that ADNM (or the UBL Affiliate) shall purchase
such Artist Product for a price equal to [***] of the applicable Gross Artist
Product Revenue, rather than the price set forth in paragraph 6(b)(ii) above.
Such Artist Product Revenue shall be computed "at the source" (i.e., based upon
the amount actually received by the UBL Affiliate, rather than the amount
actually received by ADNM), and shall be deemed received by ADNM for purposes of
paragraph 6(g) below within 30 days after it is received by the UBL Affiliate.
For the avoidance of doubt, no merchandise or other products (including Records)
that are obtained by the UBL Affiliate from
- ----------
[***] Confidential treatment has been requested for the bracketed
portion. The confidential redacted portion has been omitted and filed
separately with the Securities and Exchange Commission.
4
<PAGE> 21
third party sources (i.e., other than from the Store's inventory) and sold on
the UBL Store shall be deemed to constitute Product subject to this Agreement.
(e) Database: As between ADNM and you, you will own the customer
database as specifically identified with the Store (the "Store Database"). ADNM
will maintain and update the Store Database during the Term, including by
inputting additional names and associated data compiled from contests and
similar activities of the Store. ADNM will also input into the Store Database
any supplemental data about the persons contained in the Store Database (such as
demographic and lifestyle information) that may be included, in other databases
owned, controlled or accessed by ADNM or the UBL Affiliate (collectively, the
"ADNM Database"), and may also seek to obtain such supplemental information
through data sharing arrangements with third parties. ADNM will attempt to
develop revenue sources in respect of the Store Database during the Term,
subject to your consent in each instance, and shall pay you [***] of the
associated "Gross Database Revenue" (i.e., the amount actually received by ADNM
in respect of sales and other exploitations of the Store Database, less all
related Deductible Amounts). ADNM will make the ADNM Database available for
mutually approved Store promotions during the Term, in exchange for which you
agree that ADNM may supplement the ADNM Database with names and associated data
(but specifically excluding any references to you, Artist or the Store) derived
from the Store Database. Neither you nor Artist shall have any interest in and
to the ADNM Database or any revenues that may be generated in respect thereof.
(f) Other Revenues: ADNM shall pay you [***] of the "Gross Exploitation
Revenue," which means the amount actually received by ADNM in respect of
activities contemplated in this Agreement and not set forth above in this
paragraph 6, including, for example, income in respect of advertising contained
on the Store (e.g., hyperlinks to, and banners and other advertisements for,
other Internet web sites), less all agent commissions and other related
Deductible Amounts. You shall have the right to approve all such advertising and
other activities.
(g) Accounting: The term "Gross Income" means, individually and
collectively, Gross Artist Product Revenue, Gross Record Revenue, Gross Database
Revenue and Gross Exploitation Revenue. ADNM shall compute your share of Gross
Income and render statements thereof to you within 60 days after March 31, June
30, September 30 and December 31 for the preceding three-month period. ADNM
shall deduct from your share of Gross Income all chargeable amounts under this
Agreement. Each such statement shall include an itemized breakdown of the
sources of the applicable revenue and shall be accompanied by the payment of the
amount of monies, if any, earned by you during the accounting period to which
the statement relates. ADNM shall be entitled from time to time to withhold from
payments otherwise due reasonable reserves against anticipated returns, rebates,
credits, cancellations and exchanges, provided that such reserves shall be
liquidated within two accounting periods following their establishment. You or a
certified public accountant on your behalf may, at ADNM's offices and at your
expense, examine ADNM's books and records relevant to the calculation of your
share of Gross Income solely for the purposes of verifying the accuracy of
statements rendered by ADNM to you. Such books and records may be examined as
aforesaid only (i) during ADNM's normal business hours, (ii) upon reasonable
notice to ADNM, and (iii) within two years after the date a statement is
rendered hereunder. Further, you shall not have the right to examine such books
and records more frequently than once in any twelve month period or more than
once with respect to any particular statement. Each statement shall be deemed
final and binding upon you as an account stated and shall not be subject to any
claim or objection by you (A) unless you notify ADNM of
- ----------
[***] Confidential treatment has been requested for the bracketed
portion. The confidential redacted portion has been omitted and filed
separately with the Securities and Exchange Commission.
5
<PAGE> 22
your specific written objection to the applicable statement, stating the basis
thereof in reasonable detail within two years after the date such statement is
rendered hereunder, and (B) unless, within said two year period, you make proper
service of process upon ADNM in a suit instituted in a court of proper
jurisdiction.
7. Marketing.
(a) During the Term, ADNM shall cause the Ultimate Band List Internet
web site, located at www.ubl.com (the "UBL"), to contain a featured hyperlink
to, and prominently placed advertising for, the Store. Similarly, you agree that
ADNM may include on the Store a featured hyperlink to, and prominently placed
advertising for the UBL at no charge. Other marketing activities in respect of
the Store shall be subject to your approval, and may involve the development of
strategic relationships with, for example, other Internet web sites and/or
Artist's record company to create Store hyperlinks. Any third party marketing
costs incurred with your approval shall be deducted from any monies otherwise
payable to you hereunder (except to the extent deducted from monies otherwise
payable by ADNM to Merchandiser, it being understood that all marketing costs
shall be subject to allocation by ADNM, in ADNM's reasonable business judgment,
between you and Merchandiser taking into account whether the applicable costs
related to Merchandiser Product and/or Artist Product).
(b) You agree to use your commercially reasonable efforts to:
(i) Keep ADNM apprised of Artist's professional activities
(e.g., touring and recording) and provide ADNM reasonable access to Artist's
professional relationships (e.g., with tour promoters and record labels);
(ii) Cause the URL of the Store to be included on all
advertisements for Artist records released during the Term or for concerts to be
performed during the Term, and on the liner notes of Artist's records and
concert programs;
(iii) Provide ADNM with a minimum of [***] complimentary tickets
to each concert held by Artist during the Term to be given away in connection
with Store promotions;
(iv) Cause a minimum of [***] special or limited edition
Products to be the manufactured and supplied during the course of the Term for
sale exclusively on the Store, and not through any other source;
(v) Cause a minimum of [***] unique and/or collectible items of
Product to be sold through auctions conducted auctioned on the Store;
(vi) Cause Artist to autograph records from time to time for
sale or promotional use on the Store, provided Artist shall not be required to
autograph more than [***] records in the aggregate during the Term;
- ----------
[***] Confidential treatment has been requested for the bracketed
portion. The confidential redacted portion has been omitted and filed
separately with the Securities and Exchange Commission.
6
<PAGE> 23
(vii) Cause on-line events and/or sites featuring Artist or any
member of Artist (e.g., the official Internet web site of Artist's fan club, any
official Internet web site relating to any member of Artist, any on-line "chats"
featuring Artist or any member(s) of Artist, cybercasts of Artist's live
performances, interviews or other audiovisual programs featuring Artist or any
member(s) of Artist) to prominently feature, on both the front and main event
page(s), a hyperlink to, and banner advertising for, the Store;
(viii) Subject to Artist's other professional commitments, cause
Artist to be reasonably available during the Term for on-line "chats" hosted by
the Store.
8. Ownership; Grant of Rights; Post-Term Rights:
(a) Artist Content: As between you and ADNM, any and all artwork,
trademarks, logos, graphics, video, sound recordings, musical compositions,
text, data and other materials supplied by you to ADNM in connection with this
Agreement, as well as the URL and the domain name or names assigned to the Store
and/or the Artist Site (collectively, the "Artist Content"), shall remain your
sole and exclusive property. You hereby grant to ADNM during the Term and
throughout the universe (the "Territory") a non-exclusive, royalty-free license
to use, copy, modify (with your prior consent), distribute, publicly perform and
display and otherwise exploit the Artist Content in connection with the
development, maintenance and operation of the Store and/or the Artist Site and
the advertising and promotion of the Store and/or the Artist Site and of ADNM in
connection with the Store and/or the Artist Site.
(b) Developed Content: As between you and ADNM, any and all text,
graphics, audio, video, artwork and designs created by ADNM or its employees or
agents during the Term for use solely on the Store and/or the Artist Site,
including any additions to or modifications of Artist Content made by ADNM or
its employees or agents, (collectively, the "Developed Content"), shall be your
sole and exclusive property. All Developed Content shall be deemed included in
the license granted by you under paragraph 8(a) above.
(c) ADNM Content: As between you and ADNM, any and all commerce
technology, HTML formatting code, source and object code, programming code and
software, as well as all text, graphics, audio, video, artwork and designs
provided by ADNM in connection with this Agreement which does not constitute
Developed Content (collectively, the "ADNM Content") shall be ADNM's sole and
exclusive property.
(d) Post-Term Rights: Upon expiration of the Term, you shall continue to
have the ownership of or right to use, as applicable, the Artist Content and
Developed Content in accordance with the terms of this paragraph 8 free and
clear of any claim or encumbrance by ADNM or any third party deriving rights
through ADNM. Upon your request after the expiration of the Term, ADNM will
negotiate with you in good faith to: (i) license certain ADNM Content to you;
(ii) assist you in the transition of the Store and the Artist Site from any
third-party vendors or licensors used by ADNM to any entity or entities of your
choice to provide the same functions for you; and (iii) provide you with
updates, hosting, maintenance or support with respect to the Store or the Artist
Site. For the avoidance of doubt, you shall not be entitled to use any name,
trademark or service mark of ADNM or its affiliates in any manner
7
<PAGE> 24
whatsoever without obtaining the prior written consent of ADNM or the applicable
affiliate of ADNM.
(e) Artist Identification: You hereby grant to ADNM the non-exclusive
right during the Term throughout the Territory to use the names of Artist and
Artist's tours, and the names and approved photographs and other approved
likenesses of the members of Artist, and any trademark or service mark owned by
you, Artist or any of your respective Affiliates ("Artist Identification"),
solely on the Store and/or the Artist Site and in advertisements and promotions
of the Store and for the Artist Site, and of ADNM in connection with the Store
and/or the Artist Site. In this regard, at no cost to ADNM, you agree to provide
ADNM with all photographs, graphics, logos and similar items reasonably required
by ADNM to create the Store and/or the Artist Site, and readily available to you
promptly following ADNM's request. For the avoidance of doubt, ADNM shall not
use the Artist Identification in any manner whatsoever after the Term without
obtaining your prior written consent.
(f) Inducement Terms and Guarantee: You shall cause the members of
Artist to execute the Inducement Terms and Guarantee attached to this Agreement
as Exhibit 3 concurrently with the execution of this Agreement.
9. Third Party Clearances: You shall obtain all necessary third-party clearances
in connection with all Artist Content and Product (including the payment of any
associated fees, royalties and other costs). Without limiting the generality of
the foregoing, with respect to all uses of musical compositions, sound
recordings and audiovisual productions in connection with the Store, you agree
to grant or cause Artist and/or any applicable third parties (e.g., music
publishers, record companies and performing rights societies) to grant to ADNM
any and all required rights. However, ADNM shall not use any particular sound
recording, musical composition or audiovisual production on the Store or the
Artist Site, or provide access to any feature or service on the Store or the
Artist Site which entails the public performance of music (e.g., live audio
streaming), except at your request or with your approval. If ADNM nevertheless
shall pay, with your approval, any third party clearance cost relating to the
Store and/or the Artist Site (which ADNM is not obligated to do), all such
amounts shall be deducted from any and all monies otherwise payable to you under
this Agreement (except to the extent deducted from monies otherwise payable by
ADNM to Merchandiser, it being understood that such costs shall be subject to
allocation by ADNM, in ADNM's reasonable business judgment, between you and
Merchandiser taking into account whether the applicable costs related to
Merchandiser Product and/or Artist Product).
10. Representations and Warranties: Indemnity:
(a) You represent and warrant as follows:
(i) You have the full right, power and authority to enter into
and to perform this Agreement and to grant to ADNM all rights and licenses set
forth in this Agreement. Neither you nor Artist are under any restriction or
obligation which may or will impair your full performance of this Agreement. No
Artist Content or the exploitation or use thereof or the sale of any Product
shall violate or infringe upon any common law or statutory rights of any party,
8
<PAGE> 25
including contractual rights, copyrights, and rights of privacy or publicity or
shall defame any person or entity; and
(ii) ADNM shall have the exclusive right during the Term
throughout the Territory to develop and operate the only "official" Artist
on-line store (i.e., the only Internet web site authorized by Artist with
respect to products relating primarily to Artist and/or any member(s) of Artist
(acting in the capacity of Artist members, rather than in connection with any
member's professional endeavors unrelated to Artist). Accordingly, during the
Term, neither you, Artist nor any member of Artist shall grant any other person
or entity the right to develop and/or operate a web site that (A) pertains
primarily to Artist (B) sells products featuring the Artist identification and
(C) is promoted or otherwise officially sanctioned by Artist (e.g., by featuring
a hyperlink to such web site on the Artist Site).
(b) ADNM represents and warrants as follows: It has the full right,
power and authority to enter into and to perform this Agreement and to grant to
you all rights and licenses set forth in this agreement. No ADNM Content or
Developed Content, or the exploitation or use thereof in accordance with the
terms of this Agreement shall violate or infringe upon any common law or
statutory rights of any party, including contractual rights, copyrights, and
rights of privacy or publicity.
(c) You agree to indemnify and hold ADNM and its members, employees,
attorneys, agents, successors, assigns and licensees harmless against any claim,
liability, cost and expenses (including attorneys' and accountants' fees
reasonably incurred) in connection with any breach or alleged breach of this
Agreement by you. In this regard, ADNM shall not settle any claim without first
notifying you of the terms of any proposed settlement and obtaining your consent
thereto, provided you post within ten days after such notice, a bond,
satisfactory to ADNM in its reasonable discretion, to assure ADNM of
reimbursement for all damages, liabilities, costs and expenses (including legal
expenses and counsel fees reasonably incurred) that ADNM, in its reasonable
business judgment, incur as a result of such a claim. If you fail to post such a
bond, you shall be deemed to have consented to ADNM's settlement. You shall,
upon demand, pay the person or entity being indemnified hereunder for any
payment made or required to be made by such person or entity at any time
(including after the Term) in respect of any liability, damage, or expense to
which the foregoing indemnity relates. Without waiving any right or remedy
available to ADNM, if any such claim is made, ADNM shall have the right to
withhold monies otherwise payable to you under this Agreement in an amount
reasonably related to such claim and to deduct therefrom payments required under
this paragraph. ADNM shall not withhold monies otherwise payable to you after
you post a bond meeting the above-described conditions.
(d) (i) You acknowledge that ADNM is making no representations and
warranties concerning the anticipated success of the Store, the Artist Site
and/or the amount of compensation payable to you hereunder. You warrant,
represent and agree that neither you nor Artist nor any third party shall make
any claim, nor shall any liability be imposed upon ADNM based upon any claim,
that more sales could have been made or better business could have been done in
connection with the Store and/or the Artist Site than was actually made or done.
Except as may be specifically set forth herein, ADNM disclaims all other
warranties, whether express, implied or statutory, including the implied
warranties of merchantability and fitness for a
9
<PAGE> 26
particular purpose. ADNM does not warrant that the Store, the Artist Site and/or
services herein will be error-free or without interruption.
(ii) You agree that ADNM shall not be liable for any special,
consequential, incidental or indirect damages in connection with or arising out
of this Agreement, however caused, under any theory of liability, including (i)
any loss of profits or loss of revenue resulting from the use of ADNM's services
and/or ADNM Content even if ADNM has been advised of the possibility thereof,
and/or (ii) any loss of data resulting from delays, non-deliveries,
mis-deliveries or service interruptions caused by either party.
11. Notices; Approvals:
(a) All notices, accounting statements and payments to either party
shall be sent to such party's address first mentioned in this Agreement, or such
other address as a party to this Agreement may hereafter designate by notice to
the other. All notices sent under this Agreement must be in writing to be
effective, and, except for statements and payments, must be sent by a third
party messenger, by air courier service with a written acknowledgment of
receipt, by registered or certified mail, return receipt requested, or through a
telegraph office. The date of personal delivery, of mailing or faxing, or the
date of delivery to a telegraph office, as the case may be, of any such notice
shall be deemed the date of the giving thereof (except, with respect to notices
of change of address, the date of which will be the date of receipt by the
receiving party). Until ADNM notifies you otherwise, a copy of all notices
hereunder to ADNM shall be simultaneously sent as aforesaid to Lenard & Gonzalez
LLP, 1900 Avenue of the Stars, 25th Floor, Los Angeles, CA 90067; Attention:
Allen D. Lenard, Esq.
(b) No failure by any party to this Agreement to perform any of its
obligations hereunder shall be deemed a breach of this Agreement, unless the
other party has given notice of such alleged breach in reasonable detail and
such alleged breach is not cured within 30 days after the giving of such notice.
(c) No consent or approval under this Agreement shall be unreasonably
withheld or delayed. ADNM may elect to request a consent or approval by notice
to you, or may send you a notice reflecting the availability of a test site of
the Store embodying the materials for which approval is sought. In each
instance, your consent or approval shall be deemed granted unless you notify
ADNM to the contrary within five (5) business days after ADNM's sends the
aforesaid notice to you. No inadvertent failure by ADNM to obtain your consent
or approval shall be deemed a breach by ADNM of this Agreement, provided ADNM
shall use reasonable efforts to rectify such failure on a prospective basis
following receipt of notice from you specifying such failure. Notwithstanding
the provisions of paragraph 11(a) above, any notice described in this paragraph
11(c) may be sent by telecopier or electronic mail.
12. Miscellaneous:
(a) This Agreement is intended by the parties hereto as a final
expression of their understanding and agreement with respect to the subject
matter hereof and as a complete and exclusive statement of the terms thereof,
this Agreement supersedes all prior and contemporaneous negotiations,
understandings, and agreements between the parties hereto with
10
<PAGE> 27
respect to the subject matter hereof. The parties acknowledge and agree that
neither party hereto has made any representations or promises in connection with
this Agreement or the subject matter hereof not contained herein. The parties
hereto shall negotiate in good faith to replace any invalid, illegal or
unenforceable provision (the "Invalid Provision") with a valid provision, the
effect of which comes as close as possible to that of the Invalid Provision.
This Agreement cannot be canceled, modified, amended or waived, in part or in
full, in any manner except by an instrument in writing signed by the party to be
charged. No waiver by either party hereto, whether expressed or implied, of any
provision of this Agreement or default hereunder shall affect such party's right
to thereafter enforce such provision or to exercise the right or remedy set
forth in this Agreement in the event of any other default, whether or not
similar. Words in the singular number shall include the plural, and vice versa.
Whenever examples are used in this Agreement with the words "including," `for
example," "e.g.," "such as," "etc." or any derivation thereof, such examples are
intended to be illustrative and not in limitation thereof. The paragraph
headings herein are used solely for convenience and shall not be used in the
interpretation or construction of this Agreement. All exhibits attached hereto
are incorporated into this Agreement by reference.
(b) In entering into this Agreement and providing services pursuant
hereto, you and ADNM each have and shall have the status of independent
contractors. Nothing herein contained shall contemplate or constitute either
party being an agent or employee of the other party, and nothing herein shall
constitute a partnership, joint venture or fiduciary relationship between the
parties.
(c) This Agreement shall be deemed to have been entered into in the
State of California and the validity, interpretation and legal affect of this
Agreement shall be governed by the laws of the State of California applicable to
contracts entered into and performed entirely within the State of California.
The courts located in California (state and federal), only, will have
jurisdiction of any controversy regarding this Agreement; any action or other
proceeding which involves such a controversy will be brought in those courts, in
California and not elsewhere.
ARTISTdirect New Media, LLC
a California limited liability company
By: ARTISTdirect, LLC [Company Name]
Its: Member a __________ Corporation
By: ___________________________
Its: ___________________________
By: ___________________________
Marc Geiger
Its: Co-Chief Executive Officer
11
<PAGE> 28
By: ___________________________
Don Muller
Its: Co-Chief Executive Officer
12
<PAGE> 29
EXHIBIT 1
SCHEDULE OF FULFILLMENT FEES
<TABLE>
<CAPTION>
--------------------------------------- ---------------------------------------
Item Retail Price Fulfillment Fee
--------------------------------------- ---------------------------------------
<S> <C>
[***] [***]
[***] [***]
[***] [***]
[***] [***]
--------------------------------------- ---------------------------------------
</TABLE>
In addition, the following packaging costs are applicable:
<TABLE>
<CAPTION>
--------------------------------------- ---------------------------------------
Box Size Packaging Cost
--------------------------------------- ---------------------------------------
<S> <C>
[***] [***]
[***] [***]
[***] [***]
--------------------------------------- ---------------------------------------
</TABLE>
SCHEDULE OF INSURANCE COVERAGE
ADNM currently carries property insurance with respect to all inventory
at the fulfillment center, covering up to $1,000,000 in damages (subject to
adjustments from time to time in accordance with then-current inventory value),
with a $5,000 deductible (except with respect to wind damage, for which the
deductible is $100,000). ADNM shall cause you to be named an additional insured
under said policy and provide you with a certificate of insurance to such
effect.
- ----------
[***] Confidential treatment has been requested for the bracketed
portion. The confidential redacted portion has been omitted and filed
separately with the Securities and Exchange Commission.
<PAGE> 30
EXHIBIT 2
[ADNM/MERCHANDISE AGREEMENT - LICENSE FEE]
8. License Fee:
(a) Unless otherwise provided in the applicable Store Agreement,
in consideration for the rights licensed pursuant to paragraph 7 above, ADNM
agrees to pay Merchandiser a License Fee with respect to all Merchandiser
Product sold at any time (including after the Term) under a Store Agreement,
subject to the last sentence of paragraph 4(b) above.
(b) As used herein:
(i) "License Fee" shall mean the amount by which the
following amounts exceed, on an item-by-item basis, the wholesale purchase
price payable by ADNM (or the applicable Merchandiser Artist) for the applicable
Merchandiser Product, provided that the aggregate License Fees otherwise payable
with respect to an accounting period shall be further reduced by all mutually
approved costs for which Merchandiser and/or the Merchandiser Artists are
responsible under the Store Agreements:
(A) [***] of the Adjusted Gross Merchandiser
Product Revenue with respect to Merchandiser Product (other than High-End
Collectibles) sold through an Artist Store and with respect to High-End
Collectibles sold through the UBL Store;
(B) [***] of the Adjusted Gross Merchandiser
Product Revenue with respect to Merchandiser Product (other than High-End
Collectibles) sold through the UBL Store; and
(C) [***] of the Adjusted Gross Merchandiser
Product Revenue with respect to High-End Collectibles sold through an Artist
Store.
(ii) "Adjusted Gross Merchandiser Product Revenue" shall
mean the amount actually received by ADNM in respect of Merchandiser Product
sold by ADNM to customers who place orders through the applicable Store or the
UBL Store (other than shipping and handling revenues) less the Deductible
Amounts.
(iii) "Deductible Amounts" shall mean all amounts paid
by ADNM pursuant to paragraph 3(d) above, third party fulfillment fees, third
party warehouse charges and third party related charges (e.g., box charges and
return processing fees); sales, use and value-added taxes; credit card and other
third party service fees; agent commissions; and any credits for returns,
cancellations and exchanges. Merchandiser shall have the right to approve the
amount of (A) third party fulfillment fees (but only if such fees are in excess
of the fees set forth on Exhibit D attached hereto, (B) the third party service
fees (other than credit card fees), and (C) agent commissions, provided that
once such approval is given with respect to a particular artist, ADNM will not
be obligated to obtain Merchandiser's approval of any other third party
fulfillment fees, third party service fees or agent commissions for such
Merchandiser Artist or any other Merchandiser Artist so long as such fees or
commissions, as the case my be, are not in excess of the fees and commissions
previously approved by Merchandiser. Notwithstanding anything to the contrary
contained herein, as between ADNM and Merchandiser, [***] shall be solely
responsible for all customer bad debts in respect of Merchandiser Product
shipped by ADNM (or its designee), including all associated Deductible Amounts.
(iv) "High-End Collectibles" means any single item of
Merchandiser Product sold pursuant to a Store Agreement (whether through the
applicable Artist Store or the UBL Store) for a retail price in excess of [***].
(c) For the avoidance of doubt, Merchandiser agrees and
acknowledges that Artist Product will be sold on the Artist Stores and that no
License Fee shall be payable to Merchandiser in respect of any Artist Product.
As used herein, "Artist Product" means all merchandise and other products sold
pursuant to a Store Agreement (whether through the applicable Artist Store or
the UBL Store) other than Merchandiser Product (e.g., records, concert tickets,
etc.). During the period Merchandiser has the Rights to a particular
Merchandiser Artist that is party to a Store Agreement, ADNM shall advise
Merchandiser of ADNM's intention to sell on the applicable Artist Store any
Artist Product (other than records and concert tickets) within a reasonable
period of time prior to the intended sale.
- ----------
[***] Confidential treatment has been requested for the bracketed
portion. The confidential redacted portion has been omitted and filed
separately with the Securities and Exchange Commission.
<PAGE> 31
EXHIBIT 3
INDUCEMENT TERMS AND GUARANTEE
The undersigned hereby acknowledge that they have read and understand
all of the terms and conditions set forth in the agreement dated as of _________
___, 19___, by and (the "Agreement") by and between ARTISTdirect New Media, LLC
("ADNM") and [CompanyName] ("Company"), to which these Inducement Terms and
Guarantee are attached.
In consideration of Company's execution and delivery of the Agreement,
the benefit of which runs to the undersigned, the undersigned hereby represent,
warrant and agree, jointly and severally that:
1. Company has the right, insofar as the undersigned are concerned, to
enter into the Agreement and to assume all of the obligations, warranties and
undertakings to Company on the part of the undersigned contained therein, and
Company shall continue to have those rights until all of those obligations,
warranties and undertakings shall have been fully performed and discharged.
2. All of the representations, warranties and agreements on the part of
Company contained in the Agreement that concern Company and/or the undersigned
are and shall remain true and correct.
3. The undersigned shall fully and to the best of their abilities
perform and discharge all of the obligations, warranties and undertakings
contained in the Agreement insofar as the same are required of the undersigned
and to the extent Company has undertaken to cause the performance and discharge
by the undersigned of those obligations and undertakings, and the undersigned
further guarantee the full and faithful performance of all other obligations of
Company under the Agreement, it being agreed and acknowledged that such
guarantee shall be applicable regardless of whether, for any reason whatsoever,
notwithstanding the provisions of paragraph 1 above, Company shall cease to have
the right to perform the obligations, warranties and undertakings to ADNM on the
part of Company contained in the Agreement.
4. The undersigned agree to look solely to Company (and not to ADNM)
with respect to all monies payable to the undersigned in connection with the
Agreement.
5. ADNM may, in its own name, institute any action or proceeding against
the undersigned to enforce its rights under the Agreement and/or this agreement,
and ADNM shall be entitled to equitable relief, including injunctive relief, to
enforce the provisions of said agreements, without the necessity of first
resorting to or exhausting any rights or remedies against Company.
Dated as of _______ ___, 19___, by and
______________________
______________________
<PAGE> 32
EXHIBIT C
MERCHANDISER'S STANDARD WHOLESALE PRICE LIST
MERCHANDISER'S STANDARD
WHOLESALE PRICE LIST
(as of June 11, 1999)
<TABLE>
<CAPTION>
--------------------------------- ----------------
ITEM PRICE
--------------------------------- ----------------
<S> <C>
T-shirt (adult) [***]
--------------------------------- ----------------
T-shirt (youth) [***]
--------------------------------- ----------------
Baby T [***]
--------------------------------- ----------------
Tank top (women's) [***]
--------------------------------- ----------------
Long-sleeve shirt [***]
(men's/women's)
--------------------------------- ----------------
Football jersey [***]
--------------------------------- ----------------
Tie-dye shirt [***]
--------------------------------- ----------------
Baseball jersey (men's) [***]
--------------------------------- ----------------
Baseball jersey (women's) [***]
--------------------------------- ----------------
Poly T (women's) [***]
--------------------------------- ----------------
Hats [***]
--------------------------------- ----------------
</TABLE>
- ----------
[***] Confidential treatment has been requested for the bracketed
portion. The confidential redacted portion has been omitted and filed
separately with the Securities and Exchange Commission.
1
<PAGE> 33
EXHIBIT D
PRE-APPROVED FULFILLMENT FEES
<TABLE>
<CAPTION>
--------------------------------------- -----------------------------------
Item Retail Price Fulfillment Fee
--------------------------------------- -----------------------------------
<S> <C>
[***] [***]
[***] [***]
[***] [***]
[***] [***]
--------------------------------------- -----------------------------------
</TABLE>
IN ADDITION, THE FOLLOWING PACKAGING COSTS ARE APPLICABLE:
<TABLE>
<CAPTION>
--------------------------------------- -----------------------------------
Box Size Packaging Cost
--------------------------------------- -----------------------------------
<S> <C>
[***] [***]
[***] [***]
[***] [***]
--------------------------------------- -----------------------------------
</TABLE>
- ----------
[***] Confidential treatment has been requested for the bracketed
portion. The confidential redacted portion has been omitted and filed
separately with the Securities and Exchange Commission.
1
<PAGE> 34
EXHIBIT E
ARTISTDIRECT, LLC
WARRANT TO PURCHASE 1,370,558 COMMON UNITS
WARRANT NO. 1999-3
THIS WARRANT HAS BEEN ACQUIRED FOR INVESTMENT AND HAS NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAWS. THIS
WARRANT MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF
SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER SAID ACT AND ANY APPLICABLE
STATE SECURITIES LAWS. THIS WARRANT IS FURTHER SUBJECT TO CERTAIN RESTRICTIONS
ON TRANSFER CONTAINED HEREIN AND IN THAT CERTAIN SECOND AMENDED AND RESTATED
OPERATING AGREEMENT OF ARTISTDIRECT, LLC, A CALIFORNIA LIMITED LIABILITY
COMPANY, DATED MAY 18, 1999, AS THE SAME MAY BE AMENDED FROM TIME TO TIME.
WARRANT TO PURCHASE
LIMITED LIABILITY COMPANY COMMON UNITS
This certifies that Winterland Concessions Company, a California
corporation, doing business as "Winterland" ("Merchandiser) is entitled, on or
after the date hereof, to become a Member in ARTISTdirect, LLC, a California
limited liability company (the "Company"), on and subject to the terms and
conditions contained herein and in the "Operating Agreement" (as defined below),
with the number of Common, Units in the Company set forth in Section 1 below, in
return for a capital contribution by Merchandiser to the Company of cash
consideration in an amount equal to One Dollar ($1.00) per Common Unit (subject
to adjustment as hereinafter provided, the "Warrant Price").
Except as otherwise specifically provided herein, terms used but not
otherwise defined herein shall have those meanings as set forth in that certain
Second Amended and Restated Operating Agreement of ARTISTdirect, LLC, dated May
18, 1999, as the same may be amended from time to time (the "Operating
Agreement"). A true and correct copy of the Operating Agreement is attached
hereto.
This Warrant is subject to the following terms and conditions:
1. Common Units Subject to Warrant: Vesting.
2
<PAGE> 35
(a) Definitions.
(i) "ADNM" means ARTISTdirect New Media, LLC, a Subsidiary of
the Company;
(ii) "ADNM Merchandiser Agreement" means that certain
Merchandiser Agreement dated June 7, 1999 between ADNM and Merchandiser,
(iii) "ADNM Qualifying Revenue" means the "Adjusted Gross
Merchandiser Product Revenue" (as defined in the ADNM Merchandiser
Agreement), excluding, however, all amounts received in respect of
"Merchandiser Product" (as defined in the ADNM Merchandiser Agreement)
sold in respect of orders placed through the UBL Store.
(iv) "UBL" means The Ultimate Band List, LLC, a Subsidiary of
the Company;
(v) "UBL Merchandiser Agreement" means that certain Merchandiser
Agreement dated June 7, 1999 between UBL and Merchandiser;
(vi)"UBL Store" has the meaning ascribed thereto in the ADNM
Merchandiser Agreement;
(vii) "UBL Qualifying Terms" means on a consignment basis or on
terms requiring payment no earlier than the date ninety (90) days after
the receipt by UBL's fulfillment center(s) of the applicable product
items and UBL's receipt of an invoice from Merchandiser therefor;
(viii) "UBL Merchandiser Product" means merchandise provided to
UBL on UBL Qualifying Terms by either Merchandiser or any "Sublicensee"
(as defined in the UBL Merchandiser Agreement);
(ix) "UBL Gross Merchandiser Product Revenue" means the amount
actually received by UBL in respect of UBL Merchandiser Product sold to
customers who place orders through the UBL Store, including any directly
related shipping and handling revenues collected by UBL from such
customers;
(x) "UBL Deductible Amounts" means all third party costs
(including all associated freight and insurance costs) of shipping the
applicable merchandise to UBL's fulfillment center(s); all third party
fulfillment fees, third party warehouse charges and third party related
charges (e.g., box charges and return processing fees); sales, use and
value-added taxes; credit card and other third party service fees; agent
commissions; and any credits for returns, cancellations and exchanges;
provided, however that, in order for any of the foregoing to constitute
a "UBL Deductible Amount," it must be approved by Merchandiser in
accordance with the provisions of Section 8(b)(iii) of the ADNM
Merchandiser Agreement, if applicable.
3
<PAGE> 36
(xi) "UBL Qualifying Revenue" means UBL Gross Merchandiser
Product Revenue less the UBL Deductible Amounts; and
(xii) "Highest Sales" means the greatest aggregate ADNM
Qualifying Revenue and UBL Qualifying Revenue during any period of
twelve (12) consecutive calendar months of the term of each of the ADNM
Merchandiser Agreement and the UBL Merchandiser Agreement between June
7, 1999 and June 6, 2002);
(b) This Warrant may be exercised with respect to:
(i) Nine Hundred Thirteen Thousand Seven Hundred Five (913,705)
Common Units at any time on or before June 6, 2004; and
(ii) an additional Four Hundred Fifty-Six Thousand Eight Hundred
Fifty-Three (456,853) Common Units if Highest Sales equal or exceed Ten
Million Dollars ($10,000,000). In this regard, the Company shall notify
Merchandiser within sixty (60) days following the date upon which such
level of Highest Sales is achieved, if at all.
2. Term. Except for the rights conferred upon the Company pursuant to Section
7(a) below, this Warrant, and Merchandiser's right to exercise this Warrant,
shall terminate immediately upon the first to occur of the following:
(a) the close of business (i.e., 5:00 p.m., Los Angeles time) on June 6,
2007;
(b) the termination of the ADNM Merchandiser Agreement prior to the
expiration of the full term thereof either (i) by ADNM due to a material breach
thereof by Merchandiser, which breach remains uncured for the period specified
in Section 16(b) of the ADNM Merchandiser Agreement, or (ii) by Merchandiser
other than due to a material breach thereof by ADNM, which breach remains
uncured for the period specified in Section 16(b) of the ADNM Merchandiser
Agreement;
(c) the termination of the UBL Merchandiser Agreement prior to the
expiration of the full term thereof either (i) by UBL due to a material breach
thereof by Merchandiser, which breach remains uncured for the period specified
in Section 4(b) of the UBL Merchandiser Agreement, or (ii) by Merchandiser other
than due to a material breach thereof by UBL, which breach remains uncured for
the period specified in Section 4(b) of the UBL Merchandiser Agreement; or
(d) the breach by Merchandiser of any material provision of this
Warrant.
3. Method of Exercise; Payment; Issuance of New Warrant; Transfer and Exchange.
This Warrant may be exercised by Merchandiser, in whole or in part, by the
surrender of this Warrant, properly endorsed, at the principal office of the
Company at 17835 Ventura Blvd., Suite 310, Encino, CA 91316 (or at such other
location as the Company may advise Merchandiser in writing), and by (a) payment
to the Company in cash or immediately available funds of the Warrant Price of
the Common Units being purchased, and (b) delivery to the Company of a customary
investment letter executed by Merchandiser, representing and warranting that the
Common Units are being acquired for Merchandiser's own account, for investment
purposes only, and not with a view to the distribution, resale or other
distribution thereof, and acknowledging the issuance and transfer of the Common
Units are subject to the requirements of
4
<PAGE> 37
federal and state securities laws. Merchandiser, in lieu of exercising this
Warrant for a specified number of Common Units (the "Exercised Units") and
paying the aggregate exercise price therefor (the "Exercise Price"), may elect
to receive a number of Common Units equal to the number of Exercised Units,
minus a number of Common Units having an aggregate "Fair Market Value" (as
defined below) equal to the Exercise Price. After any such election, the number
of Common Units covered by this Warrant shall be deemed automatically reduced by
the number of Exercised Units. For purposes of this Warrant, "Fair Market Value"
means (a) if the Common Units are then publicly traded, the closing sale price
of the Common Units on its principal stock exchange or market system (or the
average of the closing bid and asked prices, if closing sales prices are not
reported) for the ten (10) consecutive trading days immediately prior to the
date of any such "net exercise," or (b) in all other cases, as determined by the
Managers in their sole, good faith discretion. In the event of any exercise, or
any such "net exercise," of less than all of the rights represented by this
Warrant, the Company shall issue to Merchandiser a new warrant evidencing the
ability of Merchandiser to purchase the balance of the number of Common Units
from the Company, and shall deliver such warrant to Merchandiser promptly
following such partial exercise. The Company agrees that the Common Units
issuable to Merchandiser upon exercise of this Warrant shall be issued to
Merchandiser as of the close of business on the date on which all of the
above-described conditions to exercise have be satisfied. Merchandiser hereby
covenants and agrees that, upon Merchandiser's exercise of all or a portion of
this Warrant and Merchandisers making the applicable payment to the Company in
respect thereof, Merchandiser and the Common Units issued to Merchandiser with
respect to such exercise shall become subject to the terms and conditions of the
Operating Agreement, including without limitation, the obligation to sell Common
Units and the restrictions on transfer of Common Units contained therein. In
this regard, Merchandiser acknowledges that it shall only become a Member and be
entitled to the rights as a Member once Merchandiser validly exercises this
Warrant in accordance with the terms hereof and executes a signature page to the
Operating Agreement whereby it agrees to be bound by all of the terms thereof,
excluding the non-competition covenant contained in Section 3.10 thereof, from
which Merchandiser shall be exempted.
4. Due Authorization and Issuance. The Company covenants and agrees that any and
all of the Common Units issued to Merchandiser in accordance with the terms
hereof will, upon such issuance, be duly authorized, validly issued and free
from all preemptive rights of any holder of Common Units in the Company, free
and clear of all taxes, liens and charges with respect to such issuance. The
Company further covenants and agrees that, during the period within which this
Warrant may be exercised, the Company will take no action that would prohibit
the issuance of Common Units required to be issued in accordance with the terms
and conditions hereof on such exercise. The Company hereby represents and
warrants that, as of May 18, 1999, 1,370,558 Common Units represented a
fully-diluted Percentage equal to one and one-half percent (1.5%).
5. Fractional Common Units. No fractional Common Units shall be issued in
connection with any exercise hereunder but in lieu of such fractional Common
Units, the Company shall make a cash payment therefor upon the basis of the fair
market value of the Common Units, as determined by the Managers in their sole,
good faith discretion.
6. Certain Adjustments.
5
<PAGE> 38
(a) If the outstanding Common Units are changed into or exchanged for a
different number or kind of securities of the Company or a successor entity
(including a `C-corporation" that becomes the successor or parent of the Company
in connection with a roll-up or similar exchange transaction in connection with
an initial public offering) through a capital reorganization or
reclassification, or if the number of outstanding Common Units is changed
through a split of Common Units, reverse split of Common Units or issuance of a
Common Unit dividend, then an appropriate adjustment shall be made by the
Company in (i) the number or kind of Common Units that may be purchased pursuant
to the exercise of this Warrant, and (ii) the number, exercise price, or kind of
securities subject to this Warrant. Any such adjustment in this Warrant,
however, shall be made without a change in the total price applicable to the
unexercised portion of this Warrant but with a corresponding adjustment in the
price for each Common Unit covered by this Warrant. In making such adjustments,
or in determining that no such adjustments are necessary, the Company may rely
upon the advice of counsel and accountants to the Company, and the determination
of the Company shall be binding.
(b) Upon (i) the dissolution, liquidation, or sale of all or
substantially all of the business, properties and assets of the Company, (ii)
any reorganization, merger, consolidation, sale or exchange of securities in
which the Company does not survive, (iii) any reorganization, merger,
consolidation, sale or exchange of securities in which the Company does survive
and any of the Company's members have the opportunity to receive cash,
securities of another entity and/or other property in exchange for their Common
Units (other than a "roll-up" or similar exchange transaction in connection with
an initial public offering), or (iv) any acquisition by any person or group (as
defined in Section 13(d)) of the Securities Exchange Act of 1934, as amended),
of beneficial ownership of more than fifty percent (50%) of the Company's then
outstanding Common Units (each of the events described in clauses (i), (ii),
(iii), or (iv) is referred to herein as an "Extraordinary Event"), this Warrant
shall terminate unless it survives the Extraordinary Event pursuant to Section
6(d) below.
(c) Merchandiser shall have the right until ten (10) days before the
effective date of any Extraordinary Event to exercise, in whole or in part, this
Warrant, but only to the extent to which it is exercisable pursuant to the
provisions hereof. In this regard, the Company shall notify Merchandiser in
writing of the Company's intent to engage in any Extraordinary Event on or
before the date (the "Notice Date") that is no less than twenty (20) days before
the effective date of such Extraordinary Event. In addition, notwithstanding
anything to the contrary contained herein, if an Extraordinary Event shall occur
during the term of the Merchandiser Agreement, then, solely for purposes of
determining the extent to which this Warrant is exercisable in accordance with
this Section 6(c), Highest Sales shall be determined either: (i) with reference
to each period of twelve (12) consecutive calendar months of the term of the
Merchandiser Agreement prior to the Notice Date; or (ii) if fewer than twelve
(12) months have elapsed since the commencement of the term of the Merchandiser
Agreement, on an annualized basis.
(d) If an Extraordinary Event occurs during the term of the Merchandiser
Agreement, then the Company shall be obligated to either, in its sole
discretion: (i) cause this Warrant to survive such Extraordinary Event or (ii)
cause the surviving entity (which may be the Company), or any other entity that,
after giving effect to the Extraordinary Event, owns, directly or indirectly,
fifty percent (50%) or more of the Company's then outstanding Common Units, to
tender to Merchandiser a substitute warrant to purchase units or other equity
interests in such
6
<PAGE> 39
entity containing terms and provisions substantially preserving, in the sole and
absolute, good faith discretion of the Company, the rights and benefits of this
Warrant to the extent then outstanding (a "Substitute Warrant"). If an
Extraordinary Event occurs after the term of the Merchandiser Agreement, in its
sole and absolute discretion, the Company may permit this Warrant to survive
such Extraordinary Event. In addition, if an Extraordinary Event occurs after
the term of the Merchandiser Agreement, in its sole and absolute discretion, the
surviving entity (which may be the Company), or another entity, may, but shall
not be so obligated, tender to Merchandiser a Substitute Warrant.
(e) The grant of this Warrant shall not affect in any way the right or
power of the Company to make adjustments, reclassification or changes in its
capital or business structures or to merge, consolidate, dissolve, or liquidate
or to sell or transfer all or any part of its business or assets or undertake
any other permitted limited liability company action.
(f) Upon the occurrence of each adjustment of this Warrant pursuant to
this Section 6, the Company at its expense shall promptly compute such
adjustment or readjustment in accordance with the terms hereof and furnish to
Merchandiser a certificate setting forth such adjustment or readjustment and
showing in detail the facts upon which such adjustment or readjustment is based.
The Company shall, upon the written request of Merchandiser, furnish or cause to
be furnished to Merchandiser a like certificate setting forth: (i) such
adjustments and readjustments; (ii) the applicable Exercise Price at the time in
effect; and (iii) the number of Common Units, if any, and the amount, if any, of
other securities or property that at the time would be received upon the
exercise of this Warrant.
7. Payment of Taxes. The Company will pay all taxes (other than taxes based upon
income) and other governmental charges that may be imposed with respect to the
issue or delivery of Common Units upon exercise of this Warrant.
(a) Drag-Along Obligation. Notwithstanding anything to the contrary
contained herein, if the Managers find an acquirer for all or any portion of
their interest in the Company (whether such acquisition is by way of purchase of
assets or Common Units or successor equity securities, merger, recapitalization
or other form of transaction, and including, without limitation, a roll-up
transaction that is for the purpose of a reorganization among the Company and
its Affiliates), then, at the request of the Managers, Merchandiser shall sell
or otherwise transfer a corresponding portion of any Common Units (or successor
equity securities) then held by Merchandiser to such acquirer on the same terms
and conditions as apply to the sale or other transfer by the Managers.
Merchandiser further agrees timely to take such other actions as the Managers
may reasonably request in connection with the approval of the consummation of
such sale or other transfer, including, without limitation, voting in favor of
such sale or other transfer and waiving any dissenters' rights, executing such
agreements, powers of attorney, voting proxies or other documents and
instruments as may be necessary or desirable to consummate such sale or other
transfer, and, in the event that such sale or other transfer is structured as a
recapitalization, transferring and retaining such portion of Common Units (or
successor equity securities) and rights under this Warrant as may be requested
by the Managers.
7
<PAGE> 40
8. Transferability of Warrant. This Warrant may not be sold, conveyed,
transferred, alienated, donated, encumbered or otherwise disposed of by
Merchandiser and, accordingly, any purported such transaction shall be void ab
initio, of no force or effect.
9. Investment Representation. Merchandiser represents and warrants to the
Company that Merchandiser is acquiring this Warrant for Merchandiser's own
account for investment and not with a view to, or for resale in connection with
any distribution thereof. Merchandiser acknowledges that this Warrant and the
Common Units that may be purchased under this Warrant have not been registered
under the Securities Act, by reason of a specific exemption from the
registration provisions of the Securities Act that depends upon, among other
things, the bona fide nature of the investment intent of Merchandiser as
expressed herein.
10. Amendment and Waiver; Successors. This Warrant may only be amended or
supplemented, and any waiver or departure from the provisions hereof may only be
given, with the consent of the Managers and Merchandiser. All of the covenants
and provisions of this Warrant by or for the benefit of the Company and
Merchandiser shall bind and inure to the benefit of them and their respective
permitted successors and assigns hereunder.
11. Notices. All notices required by this Warrant to Merchandiser shall be sent
to Winterland Concessions Company, 1951 Fairway Drive, San Leandro, CA 94577, or
such other address as Merchandiser may hereafter designate by notice to the
Company. All notices sent under this Agreement to the Company or the Managers
shall be sent to the address indicated in Section 3 above. All notices required
by this Warrant must be in writing to be effective, and must be sent by a third
party messenger, by air courier service with a written acknowledgment of
receipt, by registered or certified mail, return receipt requested, or through a
telegraph office. The date of personal delivery, of mailing, or the date of
delivery to a telegraph office, as the case may be, of any such notice shall be
deemed the date of the giving thereof (except, with respect to notices of change
of address, the date of which will be the date of receipt by the receiving
party). Until the Company notifies Merchandiser otherwise, a copy of all notices
hereunder to the Company shall be simultaneously sent as aforesaid to Lenard &
Gonzalez LLP, 1900 Avenue of the Stars, 25th Floor, Los Angeles, CA 90067;
Attention: Allen D. Lenard, Esq.
12. Descriptive Headings and Governing Law. The descriptive headings of the
several paragraphs of this Warrant are inserted for convenience only and do not
constitute a part of this Warrant. This Warrant shall be construed and enforced
in accordance with, and the rights of the parties shall be governed by, the laws
of the State of California.
13. Lost Warrant. The Managers and the Company represent and warrant to
Merchandiser that upon receipt of evidence reasonably satisfactory to the
Managers and the Company of the loss, theft, destruction, or mutilation of this
Warrant and, in the case of any such loss, theft or destruction upon receipt of
an indemnity reasonably satisfactory to the Managers and the Company, or in the
case of any such mutilation upon surrender and cancellation of such Warrant, the
Managers and the Company will make and deliver a new Warrant in lieu of the
lost, stolen, destroyed or mutilated Warrant.
8
<PAGE> 41
IN WITNESS WHEREOF, Merchandiser, the Company and the Managers have
caused this Warrant to be duly executed and issued as of June 7, 1999.
"COMPANY" "MERCHANDISER"
ARTISTdirect, LLC Winterland Concessions Company, a
California corporation, doing
business as "Winterland"
By: __________________________
Its: Co-Chief Executive Officer
By: ______________________________
(an authorized signatory)
"MANAGERS"
__________________________________
Marc Geiger
__________________________________
Donald Muller
9
<PAGE> 1
EXHIBIT 10.28
UBL MERCHANDISER AGREEMENT
This Agreement, dated as of April 1, 1999, between Giant Merchandising
("Merchandiser"), 5655 Union Pacific Avenue, Commerce, CA 90022, and The
Ultimate Band List, LLC ("UBL"), 17835 Ventura Blvd., Suite 310, Encino, CA
91316, is being entered into in light of the following:
A. Merchandiser is in the business of manufacturing and selling
merchandise containing the names, photographs and other likenesses, biographical
material and other personal identification (collectively, "Personal
Identification") of artists.
B. UBL is in the business of operating an Internet web site (the "UBL
Store") that, among other things, sells merchandise containing the Personal
Identification of the various artists.
C. Merchandiser and UBL are entering into this Agreement in order to set
forth the terms and conditions upon which Merchandiser has agreed to sell
merchandise to UBL for resale over the UBL Site.
NOW, THEREFORE, in consideration of the foregoing and the mutual
benefits contained herein, the parties hereto agree as follows:
1. Term: The term of this Agreement (the "Term") shall be four (4) years
commencing on the date of this Agreement.
2. Merchandise Sales:
(a) Merchandiser agrees to sell to UBL during the Term, for resale
over the UBL Site upon the terms and conditions set forth below, all merchandise
manufactured by or under the control of Merchandiser, except to the extent
Merchandiser does not have the right to sell such merchandise to web site retail
outlets. Merchandiser agrees to use reasonable efforts to diligently and timely
fulfill UBL's orders of merchandise under this Agreement.
(b) Merchandiser agrees to sell all such merchandise to UBL at
Merchandiser's standard wholesale prices (i.e., the prices that Merchandiser
generally charges its other wholesale customers, subject to Merchandiser's
customary volume discounts). Merchandiser represents and warrants that attached
hereto as Exhibit A are Merchandiser's standard wholesale prices as of the
execution of this Agreement. Merchandiser shall notify UBL of any changes to its
standard wholesale prices, which changes shall only apply to merchandise ordered
by UBL after its receipt of such notice from Merchandiser. Notwithstanding the
foregoing, the parties agree and acknowledge that Merchandiser may not have
standard wholesale prices for certain collectible or limited edition items, in
which case the wholesale price shall be reasonably determined by Merchandiser.
(c) UBL shall remit payment to Merchandiser for all product
purchased from Merchandiser under this Agreement pursuant to invoices therefor
rendered to UBL, it being
1
<PAGE> 2
understood that payment shall not be due earlier than the date [***] after the
arrival at the Center of the applicable product items and UBL's receipt of an
invoice from Merchandiser therefor.
(d) Merchandiser shall use reasonable efforts to cause each person
or entity who manufactures and distributes product under license from
Merchandiser (a "Sublicensee") to sell merchandise to UBL hereunder upon [***]
payment terms and at no more than the Sublicensee's standard wholesale prices.
If a Sublicensee is unwilling to do so, Merchandiser may elect (in its
discretion) to purchase the applicable merchandise from such Sublicensee and
sell same to UBL pursuant to [***] payment terms, provided that the purchase
price charged by Merchandiser to UBL shall not be greater than the lesser of (i)
the price Merchandiser paid for such merchandise, or (ii) the lowest price the
applicable Sublicensee offered the merchandise to UBL.
(e) Merchandiser agrees that UBL may at any time return (not for
credit) to Merchandiser any unsold products sold to UBL by Merchandiser or a
Sublicensee. UBL shall pay all costs (including all associated freight and
insurance costs) of returning any unsold products from the Center to
Merchandiser's warehouse. Merchandiser agrees to use its commercially reasonably
efforts to promptly sell such returned product at liquidation prices (subject to
Merchandiser's commercially reasonable efforts to maximize the liquidation
proceeds) and to remit to UBL, within [***] after each such sale, [***] of the
net proceeds thereof. As used in this paragraph 2(e), the term "net proceeds"
shall mean the gross amount payable or credited to Merchandiser from such sales
less Merchandiser's verifiable direct third party out-of-pocket costs in
connection with such sales.
(f) Notwithstanding anything to the contrary contained herein, any
"Merchandiser Product" sold on the UBL Site pursuant to a particular "Store
Agreement" [as such terms are defined in the agreement between Merchandiser and
ARTISTdirect New Media, LLC, of even date herewith (the "ADMN Agreement")] shall
not be subject to this Agreement, it being the intention of the parties that all
such Merchandiser Product shall be subject to the terms and conditions of the
ADMN Agreement and the applicable Store Agreement.
3. Warrant. In further consideration of Merchandiser's entering into and
fully performing its obligations under this Agreement, and in exchange for the
payment by Merchandiser to ARTISTdirect, LLC ("AD") of one dollar ($1.00), upon
the consummation of the transaction that currently is contemplated to occur
whereby AD will become the beneficial owner of one hundred percent 100% of the
outstanding membership interests of UBL (the "Rollup"), UBL shall cause AD to
grant to Merchandiser a warrant to acquire common units of AD representing
approximately one percent (1%) of AD's outstanding membership interests for an
aggregate exercise price not to exceed One Million Twenty-One Thousand
Forty-Five Dollars ($1,021,045), which warrant shall be subject to the terms
generally set forth in Exhibit B attached hereto; provided, however, that if the
Rollup shall not occur prior to July 31, 1999, then UBL shall then grant to
Merchandiser a warrant substantially in the form of Exhibit B attached hereto.
4. Representations and Warranties; Indemnity:
- --------------------------
[***] Confidential treatment has been requested for the bracketed portion. The
confidential redacted portion has been omitted and filed separately with the
Securities and Exchange Commission.
2
<PAGE> 3
(a) Each party hereto represents and warrants that: (i) it has the
full right, power and authority to enter into and to perform this Agreement;
(ii) it is not under any restriction or obligation that may or will impair such
party's full performance of this Agreement; and (iii) it shall not at any time
do or authorize any person or entity to do anything inconsistent with, or
anything that might diminish, impair or interfere with any of the other party's
rights hereunder.
(b) Each party hereto agrees to indemnify and hold the other and its
members, employees, attorneys, agents, successors, affiliates, assigns and
licensees harmless against any claim, liability, cost and expenses (including
attorneys' and accountants' fees reasonably incurred) in connection with any
breach or alleged breach of this Agreement the indemnifying party. In this
regard, the indemnified party shall not settle any claim without first notifying
the indemnifying party of the terms of any proposed settlement and obtaining its
consent thereto.
(c) Merchandiser acknowledges that UBL is making no representations
and warranties concerning anticipated success of the UBL Store, the amount of
compensation payable to Merchandiser hereunder, and/or the current or future
value of UBL or the warrants described in paragraph 3 above. Likewise, UBL
acknowledges that Merchandiser is making no representations and warranties
concerning anticipated success of the UBL Store or the amount of compensation
payable to UBL with respect thereto.
5. Notices:
(a) All notices and payments to either party hereto shall be sent to
such party's address first mentioned herein, or such other address as a party
hereto may hereafter designate by notice to the other. All notices sent under
this Agreement must be in writing to be effective, and must be sent by a third
party messenger, by air courier service with a written acknowledgment of
receipt, by registered or certified mail, return receipt requested, or through a
telegraph office. The date of personal delivery, of mailing or faxing, or the
date of delivery to a telegraph office, as the case may be, of any such notice
shall be deemed the date of the giving thereof (except, with respect to notices
of change of address, the date of which will be the date of receipt by the
receiving party). Until UBL notifies Merchandiser otherwise, a copy of all
notices hereunder to UBL shall be simultaneously sent as aforesaid to Lenard &
Gonzalez LLP, 1900 Avenue of the Stars, 25th Floor, Los Angeles, CA 90067;
Attention: Allen D. Lenard, Esq. Until Merchandiser notifies UBL otherwise, a
copy of all notices hereunder to Merchandiser shall be simultaneously sent as
aforesaid to Warner Music Group Inc., 3400 Riverside Drive, 6th Floor, Burbank,
CA 91505; Attention: Legal Department.
(b) No failure by a party hereto to perform any of its obligations
hereunder shall be deemed a breach of this Agreement, unless the party claiming
a breach has given the other party hereto notice of such alleged breach in
reasonable detail and such alleged breach is not cured within fifteen (15)
business days [ten (10) business days for non-payments] after the giving of such
notice, provided this sentence shall not apply to breaches incapable of being
cured (e.g., representations and warranties).
3
<PAGE> 4
6. Miscellaneous:
(a) All references to "this Agreement," "hereof," "herein" and words
of similar connotation include all exhibits attached hereto, unless specified
otherwise. This Agreement is intended by the parties hereto as a final
expression of their understanding and agreement with respect to the subject
matter hereof and as a complete and exclusive statement of the terms thereof;
this Agreement supersedes all prior and contemporaneous negotiations,
understandings, and agreements between the parties hereto with respect to the
subject matter hereof. The parties acknowledge and agree that neither party
hereto has made any representations or promises in connection with this
Agreement or the subject matter hereof not contained herein. Nothing in this
Agreement shall be construed to require the commission of any act contrary to
law, and wherever there is a conflict between any provisions of this Agreement
and any statute, law, ordinance, order or regulation contrary to which the
parties hereto have no legal right to contract, such statute, law, ordinance,
order or regulation shall prevail; provided that, in such event, (a) the
provision of this Agreement so affected shall be limited only to the extent
necessary to permit the compliance with the minimum legal requirements, (b) no
other provisions of this Agreement shall be affected thereby, and (c) all such
other provisions shall remain in full force and effect. The parties hereto shall
negotiate in good faith to replace any invalid, illegal or unenforceable
provision (the "Invalid Provision") with a valid provision, the effect of which
comes as close as possible to that of the Invalid Provision. This Agreement
cannot be canceled, modified, amended or waived, in part or in full, in any
manner except by an instrument in writing signed by the party to be charged. No
waiver by UBL, whether expressed or implied, of any provision of this Agreement
or default hereunder shall affect UBL's right to thereafter enforce such
provision or to exercise the right or remedy set forth in this Agreement in the
event of any other default, whether or not similar. Words in the singular number
shall include the plural, and vice versa. Whenever examples are used in this
Agreement with the words "including," "for example," "e.g.," "such as," "etc."
or any derivation thereof, such examples are intended to be illustrative and not
in limitation thereof. The paragraph headings herein are used solely for
convenience and shall not be used in the interpretation or construction of this
Agreement.
(b) In entering into this Agreement and providing services pursuant
hereto, Merchandiser and UBL each have and shall have the status of independent
contractors. Nothing herein contained shall contemplate or constitute either
party being an agent or employee of the other party, and nothing herein shall
constitute a partnership, joint venture or fiduciary relationship between the
parties.
(c) This Agreement shall be deemed to have been entered into in the
State of California and the validity, interpretation and legal affect of this
Agreement shall be governed by the laws of the State of California applicable to
contracts entered into and performed entirely within the State of California.
The courts located in the County of Los Angeles, California (state and federal),
only, will have jurisdiction of any controversy regarding this Agreement; any
action or other proceeding which involves such a controversy will be brought in
those courts, in California and not elsewhere.
4
<PAGE> 5
THE ULTIMATE BAND LIST, LLC GIANT MERCHANDISING
By: /s/ Marc P. Geiger By: /s/ [Illegible]
------------------------- -------------------------
(an authorized signatory) (an authorized signatory)
(i)
5
<PAGE> 6
EXHIBIT A
MERCHANDISER'S STANDARD WHOLESALE PRICE LIST
(AS OF JUNE 11, 1999)
ITEM PRICE
---- -----
T-shirt (adult) [***]*
T-shirt (youth) [***]*
Baby T [***]*
Tank top (women's) [***]*
Long-sleeve shirt
(men's/women's) [***]*
Football jersey [***]*
Tie-dye shirt [***]*
Baseball jersey (men's) [***]*
Baseball jersey
(women's) [***]*
Poly T (women's) [***]*
Hats [***]*
- ---------------
* Confidential treatment has been requested for bracketed portion. The
confidential redacted portion has been omitted and filed separately with the
Securities and Exchange Commission.
1
<PAGE> 7
EXHIBIT B
THE ULTIMATE BAND LIST, LLC
WARRANT TO PURCHASE 385,300 COMMON UNITS
WARRANT NO. 1999-1
THIS WARRANT HAS BEEN ACQUIRED FOR INVESTMENT AND HAS NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAWS. THIS
WARRANT MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF
SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER SAID ACT AND ANY APPLICABLE
STATE SECURITIES LAWS. THIS WARRANT IS FURTHER SUBJECT TO CERTAIN RESTRICTIONS
ON TRANSFER CONTAINED HEREIN AND IN THAT CERTAIN AMENDED AND RESTATED OPERATING
AGREEMENT OF THE ULTIMATE BAND LIST, LLC, A CALIFORNIA LIMITED LIABILITY COMPANY
DATED JULY 28, 1998, AS AMENDED.
WARRANT TO PURCHASE
LIMITED LIABILITY COMPANY COMMON UNITS
This certifies that Giant Merchandising ("Merchandiser") is entitled, on
or after April 1, 1999, to become a Member in The Ultimate Band List, LLC, a
California limited liability company (the "Company"), on and subject to the
terms and conditions contained herein and in the "Operating Agreement" (as
defined below), with the number of Common Units in the Company set forth in
Section 1 below, in return for a capital contribution by Merchandiser to the
Company of cash consideration in an amount equal to Two and 65/100 Dollars
($2.65) per Common Unit (subject to adjustment as hereinafter provided, the
"Warrant Price").
Except as otherwise specifically provided herein, terms used by not
otherwise defined herein shall have those meanings as set forth in that certain
Amended and Restated Operating Agreement of The Ultimate Band List, LLC, a
California limited liability company dated July 28, 1998, as amended (the
"Operating Agreement"). A true and correct copy of the Operating Agreement is
attached hereto.
This Warrant is subject to the following terms and conditions:
1. Common Units Subject to Warrant: Vesting.
(a) Definitions.
(i) "Determination Date" means April 30, 2003;
1
<PAGE> 8
(ii) "Merchandiser Agreement" means that certain Merchandiser
Agreement dated as of April 1, 1999 between the Company and Merchandiser;
(iii) "Qualifying Terms" means on a consignment basis or on terms
requiring payment no earlier than the date ninety (90) days after the receipt by
the "Center" (as defined in the Merchandiser Agreement) of the applicable
product items;
(iv) "Merchandiser Product" means merchandise provided to the
Company on Qualifying Terms by either Merchandiser or any "Sublicensee" (as
defined in the Merchandiser Agreement);
(v) "Gross Merchandiser Product Revenue" shall mean the amount
actually received by the Company in respect of Merchandiser Product sold to
customers who place orders through the "UBL Store" (as defined in the
Merchandiser Agreement), including any directly related shipping and handling
revenues collected by the Company from such customers;
(vi) "Deductible Amounts" shall mean all shipping and handling
costs; third party fulfillment fees, warehouse charges and related charges;
sales, use and value-added taxes; credit card and other third party service
fees; agent commissions; and any credits for returns, rebates, cancellations and
exchanges;
(vii) "Adjusted Gross Merchandiser Product Revenue" shall mean Gross
Merchandiser Product Revenue less the Deductible Amounts; and
(viii) "Highest Sales" means the greatest Adjusted Gross
Merchandiser Product Revenue during any period of twelve (12) consecutive
calendar months of the term of the Merchandiser Agreement (i.e., between April
1, 1999 and March 31, 2003).
(b) This Warrant may be exercised with respect to:
(i) 192,650 Common Units at any time on or before March 31, 2004;
and
(ii) an additional 96,325 Common Units for each full Five Hundred
Thousand Dollars ($500,000) in Highest Sales in excess of One Million Dollars
($1,000,000); provided that the number of additional Common Units that may be
acquired pursuant to this Section 1(b)(ii) shall be subject to a maximum of
192,650 (i.e., for Highest Sales of Two Million Dollars ($2,000,000) or more).
On or before the Determination Date, the Company shall notify Merchandiser of
the Highest Sales.
2. Term. Except for the rights conferred upon the Company pursuant to
Section 8 below, this Warrant, and Merchandiser's right to exercise this
Warrant, shall terminate immediately upon the first to occur of the
following:
2
<PAGE> 9
(a) the close of business (i.e., 5:00 p.m., Los Angeles time) on April
30, 2008;
(b) the termination of the Merchandiser Agreement prior to the
expiration of the full term thereof either (i) by the Company due to a material
breach thereof by Merchandiser, which breach remains uncured for the period
specified in Section 5(b) of the Merchandiser Agreement or (ii) by Merchandiser
other than due to a material breach thereof by the Company, which breach remains
uncured for the period specified in Section 5(b) of the Merchandiser Agreement;
or
(c) the breach by Merchandiser of any material provision of this
Warrant.
3. Method of Exercise; Payment; Issuance of New Warrant: Transfer and
Exchange. This Warrant may be exercised by Merchandiser, in whole or in
part, by the surrender of this Warrant, properly endorsed, at the
principal office of the Company at 17835 Ventura Blvd., Suite 310,
Encino, CA 91316 (or at such other location within the State of
California or the State of New York as the Manager may advise
Merchandiser in writing), and by (a) payment to the Company in cash or
immediately available funds of the Warrant Price of the Common Units
being purchased, and (b) delivery to the Company of a customary
investment letter executed by Merchandiser, representing and warranting
that the Common Units are being acquired for Merchandiser's own account,
for investment purposes only, and not with a view to the distribution,
resale or other distribution thereof in violation of applicable
securities laws, and acknowledging the issuance and transfer of the
Common Units are subject to the requirements of federal and state
securities laws. Merchandiser, in lieu of exercising this Warrant for a
specified number of Common Units (the "Exercised Units") and paying the
aggregate exercise price therefor (the "Exercise Price"), may elect to
receive a number of Common Units equal to the number of Exercised Units,
minus a number of Common Units having an aggregate "Fair Market Value"
(as defined below) equal to the Exercise Price. After any such election,
the number of Common Units covered by this Warrant shall be deemed
automatically reduced by the number of Exercised Shares. For purposes of
this Warrant, "Fair Market Value" means (a) if the Common Units are then
publicly traded, the closing sale price of the Common Units on its
principal stock exchange or market system (or the average of the closing
bid and asked prices, if closing sales prices are not reported) for the
ten (10) consecutive trading days immediately prior to the date of any
such "net exercise," or (b) in all other cases, as determined by the
Manager in its sole, good faith discretion. In the event of any
exercise, or any such "net exercise," of less than all of the rights
represented by this Warrant, the Company shall issue to Merchandiser a
new warrant evidencing the ability of Merchandiser to purchase the
balance of the number of Common Units from the Company, and shall
deliver such warrant to Merchandiser promptly following such partial
exercise. The Company agrees that the Common Units issuable to
Merchandiser upon exercise of this Warrant and Merchandiser's making the
applicable payment to the Company in respect thereof, Merchandiser and
the Common Units issued to Merchandiser with respect to such exercise
shall become subject to the terms and conditions of the Operating
Agreement, including without limitation, the obligation to sell Common
Units and the restrictions on transfer of Common Units contained
therein. In this regard, Merchandiser acknowledges that it shall only
become a Member and be entitled to the rights as a Member once
Merchandiser validly exercises
3
<PAGE> 10
this Warrant in accordance with the terms hereof and executes a
signature page to the Operating Agreement whereby it agrees to be bound
by all of the terms thereof, excluding the non-competition covenant
contained in Section 3.10 thereof, from which Merchandiser shall be
exempted.
4. Due Authorization and Issuance. The Company covenants and agrees that
any and all of the Common Units issued to Merchandiser in accordance
with the terms hereof will, upon such issuance, be duly authorized,
validly issued and free from all preemptive rights of any holder of
Common Units in the Company, free and clear of all taxes, liens and
charges with respect to such issuance. The Company further covenants and
agrees that, during the period within which this Warrant may be
exercised, the Company will take no action that would prohibit the
issuance of Common Units required to be issued in accordance with the
terms and conditions hereof on such exercise.
5. Fractional Common Units. No fractional Common Units shall be issued in
connection with any exercise hereunder but in lieu of such fractional
Common Units, the Company shall make a cash payment therefor upon the
basis of the fair market value of the Common Units, as determined by the
Manager in its sole, good faith discretion.
6. Certain Adjustments.
(a) If the outstanding Common Units are changed into or exchanged for a
different number or kind of securities of the Company or a successor entity
(including a "C-corporation" that becomes the successor or parent of the Company
in connection with a roll-up or similar exchange transaction in connection with
an initial public offering) through a capital reorganization or
reclassification, or if the number of outstanding Common Units is changed
through a split of Common Units, reverse split of Common Units or issuance of a
Common Unit dividend, then a reasonable and appropriate adjustment shall be made
by the Company in (i) the number or kind of Common Units that may be purchased
pursuant to the exercise of this Warrant, and (ii) the number, exercise price,
or kind of securities subject to this Warrant. Any such adjustment in this
Warrant, however, shall be made without a change in the total price applicable
to the unexercised portion of this Warrant but with a corresponding adjustment
in the price for each Common Unit covered by this Warrant. In making such
adjustments, or in determining that no such adjustments are necessary, the
Company may rely upon the advice of counsel and accountants to the Company, and
the reasonable determination of the Company shall be binding.
(b) Upon (i) the dissolution, liquidation, or sale of all or
substantially all of the business, properties and assets of the Company, (ii)
any reorganization, merger, consolidation, sale or exchange of securities in
which the Company does not survive, (iii) any reorganization, merger,
consolidation, sale or exchange of securities in which the Company does survive
and any of the Company's members have the opportunity to receive cash,
securities of another' entity and/or other property in exchange for their Common
Units (other than a "roll-up" or similar exchange transaction in connection with
an initial public offering), or (iv) any acquisition by any person or group (as
defined in Section 13(d) of the Securities Exchange Act of 1934, as amended), of
beneficial ownership of more than fifty percent (50%) of the Company's then
outstanding Common Units (each of the events described in clauses (i), (ii),
(iii), or (iv) is
4
<PAGE> 11
referred to herein as an "Extraordinary Event"), this Warrant shall terminate
unless it survives the Extraordinary Event pursuant to Section 6(d) below.
(c) Merchandiser shall have the right until ten (10) days before the
effective date of any Extraordinary Event to exercise, in whole or in part, this
Warrant, but only to the extent to which it is exercisable pursuant to the
provisions hereof. In this regard, the Company shall notify Merchandiser in
writing of the Company's intent to engage in any Extraordinary Event on or
before the date (the "Notice Date") that is no less than thirty (30) days before
the effective date of such Extraordinary Event. In addition, notwithstanding
anything to the contrary contained herein, if an Extraordinary Event shall occur
during the term of the Merchandiser Agreement, then, solely for purposes of
determining the extent to which this Warrant is exercisable in accordance with
this Section 6(c), Highest Sales shall be determined either: (i) with reference
to each period of twelve (12) consecutive calendar months of the term of the
Merchandiser Agreement prior to the Notice Date; or (ii) if fewer than twelve
(12) months have elapsed since the commencement of the term of the Merchandiser
Agreement, on an annualized basis.
(d) If an Extraordinary Event occurs during the term of the Merchandiser
Agreement, then the Company shall be obligated to either, in its sole
discretion: (i) cause this Warrant to survive such Extraordinary Event or (ii)
cause the surviving entity (which may be the Company), or any other entity that,
after giving effect to the Extraordinary Event, owns, directly or indirectly,
fifty percent (50%) or more of the Company's then outstanding Common Units, to
tender to Merchandiser a substitute warrant to purchase units or other equity
interests in such entity containing terms and provisions substantially
preserving, in the reasonable, good faith discretion of the Company, the rights
and benefits of this Warrant to the extent then outstanding (a "Substitute
Warrant"). If an Extraordinary Event occurs after the term of the Merchandiser
Agreement, in its sole and absolute discretion, the Company may permit this
Warrant to survive such Extraordinary Event. In addition, if an Extraordinary
Event occurs after the term of the Merchandiser Agreement, in its sole and
absolute discretion, the surviving entity (which may be the Company), or another
entity, may, but shall not be so obligated, tender to Merchandiser a Substitute
Warrant.
(e) The grant of this Warrant shall not affect in any way the right or
power of the Company to make adjustments, reclassification or changes in its
capital or business structures or to merge, consolidate, dissolve, or liquidate
or to sell or transfer all or any part of its business or assets or undertake
any other permitted limited liability company action.
(f) Upon the occurrence of each adjustment of this Warrant pursuant to
this Section 6, the Company at its expense shall promptly compute such
adjustment or readjustment in accordance with the terms hereof and furnish to
Merchandiser a certificate setting forth such adjustment or readjustment and
showing in detail the facts upon which such adjustment or readjustment is based.
The Company shall, upon the written request of Merchandiser, furnish or cause to
be furnished to Merchandiser a like certificate setting forth: (i) such
adjustments and readjustments; (ii) the applicable Exercise Price at the time in
effect; and (iii) the number of Common Units, if any, and the amount, if any, of
other securities or property that at the time would be received upon the
exercise of this Warrant.
5
<PAGE> 12
(g) Other Action Affecting Common Units. The Company will not, by
amendment of its Articles of Organization or the Operating Agreement, or through
any reorganization, recapitalization, transfer of assets, consolidation, merger,
dissolution, issue or sale of securities, dividend or other distribution of cash
or property, or any other voluntary action, avoid or seek to,: avoid the rights
granted to Merchandiser hereunder or the observance or performance of any of the
terms to be observed or performed hereunder by the Company, but will at all
times in good faith assist in the carrying out of all the provisions hereof, and
in the taking of all such actions as may be necessary or appropriate in order to
protect the rights of Merchandiser as set forth herein against impairment.
7. Payment of Taxes. The Company will pay all taxes (other than taxes based
upon income) and other governmental charges that may be imposed with
respect to the issue or delivery of Common Units upon exercise of this
Warrant.
8. Drag-Along Obligation.
(a) Definition of Equity Securities. For purposes of this Warrant,
"Equity Securities" shall mean all (i) Units, all rights, options or warrants to
purchase Units, all securities of any type whatsoever that are convertible into
or exchangeable for Units, and all rights, options or warrants to purchase
securities that are convertible into or exchangeable for Units and (ii) all
shares, options, warrants, general or limited partnership interests, limited
liability company membership interests, participations or other equivalents
(regardless of how designated) of or in a corporation, partnership, limited
liability company or equivalent entity that are issued in exchange for any of
the items described in the preceding clause (ii).
(b) The Obligation. Notwithstanding anything to the contrary contained
herein, if the Manager finds an acquirer for all or any portion of its interest
in the Company (whether such acquisition is by way of purchase of assets, Common
Units or successor Equity SECURITIES, merger, recapitalization or other form of
transaction, and including, without limitation, a roll-up transaction that is
for the purpose of a reorganization among the Company and its Affiliates), then,
at the request of the Manager, Merchandiser shall sell or otherwise transfer a
corresponding portion of any Common Units (or successor Equity Securities) then
held by Merchandiser to such acquirer on the same terms and conditions as apply
to the sale or other transfer by the Manager. Merchandiser to such acquirer on
the same terms and conditions as apply to the sale or other transfer by the
Manager. Merchandiser further agrees timely to take such other actions as the
Manager may reasonably request in connection with the approval of the
consummation of such sale or other transfer, including, without limitation,
voting in favor of such sale or other transfer and waiving any dissenters'
rights, executing such agreements, powers of attorney, voting proxies or other
documents and instruments as may. be necessary or desirable to consummate such
sale or other transfer, and, in the event that such sale or other transfer is
structured as a recapitalization, transferring and retaining such portion of
Common Units (or successor Equity Securities) and rights under this Warrant as
may be requested by the Manager.
9. Tag-along Right.
(a) Definition of Excluded Transferee. For purposes of this Warrant,
"Excluded Transferee" shall mean: (i) Marc Geiger; (ii) Donald Muller; (iii) a
spouse, descendant or parent
6
<PAGE> 13
of Marc Geiger or Donald Muller; (iv) a descendant of any Person listed in
clauses (i), (ii) or (iii) above; (v) a trust for the sole benefit of any one or
more of the Persons listed in clauses (i), (ii), (iii) or (iv) above; (vi)
ARTISTdirect New Media, LLC ("ADNM"); or (vii) any Affiliate of any Person
listed in clauses (i), (ii), (iii), (iv), (v) or (vi) above.
(b) The Right. If ADNM, or any direct or indirect successor, assignee or
transferee of ADNM (each a "Transferor"), proposes alone or with others to
Transfer, directly or indirectly, to any Person that is not an Excluded
Transferee, any Equity Securities (each, a "Subject Interest") that represent a
fully-diluted Percentage of twenty percent (20%) or more, in a single
transaction or series of transactions, and the Common Units (or substitute
Equity Securities) issued to Merchandiser) pursuant to this (or any successor)
Warrant (the "Securities") include (at such time or upon exercise, conversion or
exchange) any Equity Securities of the same class as the Subject Interest (the
"Subject Interest Class"), the would-be Transferor shall provide Merchandiser
with not less than thirty (30) days' prior written notice of such proposed sale,
which notice shall include all of the material terms and conditions of such
proposed sale and which shall identify such purchaser (the "Sale Notice"), and
Merchandiser shall have the option, exercisable by written notice to the
Transferor within twenty (20) days after the receipt of the Sale Notice, to
participate in such transaction pro rata with the Transferor at the same time
as, and upon the same terms and conditions as (including all direct or indirect
consideration) the Transferor Transfers his Equity Securities in the Company.
Merchandiser may sell all or any portion of the Securities held by Merchandiser
(or issuable to Merchandiser upon exercise, conversion or exchange of any of the
Securities) that are of the class of Equity Securities that includes the Subject
Interest Class (the "Merchandiser's Securities") equal to the product obtained
by multiplying (i) the Subject Interest by (ii) a fraction, the numerator of
which is Merchandiser's Securities and the denominator of which is the total
number of Equity Securities of the Subject Interest Class then owned by the
Transferor, Merchandiser, and any other Person that has tag-along rights with
respect to the proposed Transfer by Transferor. To the extent that Merchandiser,
or any other Person that has tag-along rights with respect to the proposed
Transfer by Transferor, shall exercise its tag-along right, the number of Equity
Securities that the Transferor may Transfer in the transaction shall be
correspondingly reduced.
(c) Expenses. In any transaction in which Merchandiser sells or
otherwise disposes of any of the Merchandiser's Securities pursuant to this
Section 9, Merchandiser shall bear its pro rata share of the reasonable expenses
incurred by the Transferor in connection with the sale of the Subject Interest.
(d) Exempt Sales. The rights and obligations set forth in this Section 9
shall not apply to any sale of Equity Securities made in connection with or
following an initial public offering of common stock of the corporate successor
of the Company.
10. Transferability of Warrant.
(a) Except as set forth in Section 10(b) below, this Warrant may not be
sold, conveyed, transferred, alienated, donated, encumbered or otherwise
disposed of by Merchandiser and, accordingly, any purported such transaction in
violation of this Section 10 shall be void ab initio, of no force or effect.
7
<PAGE> 14
(b) Notwithstanding Section 10(a) above, but subject to applicable
securities laws, Merchandiser may transfer all, but not less than all, of this
Warrant, to any Affiliate of Merchandiser, provided that no such transfer shall
be effective until the transferee agrees in writing to be bound by all of the
provisions of this Warrant, including Section 8 above.
11. Investment Representation. Merchandiser represents and warrants to the
Company that Merchandiser is acquiring this Warrant for Merchandiser's
own account for investment and not with a view to, or for resale in
connection with, any distribution thereof. Merchandiser acknowledges
that this Warrant and the Common Units that may be purchased under this
Warrant have not been, registered under the Securities Act, by reason of
a specific exemption from the registration provisions of the Securities
Act that depends upon, among other things, the bona fide nature of the
investment intent of Merchandiser as expressed herein.
12. Representation Regarding Exercise Price. The Company hereby represents
and warrants to Merchandiser that the Exercise Price was calculated by
applying a value of the Company that does not exceed the value of the
Company that applied in the Company's most recent issuance of Common
Units to an unrelated third party.
13. Amendment and Waiver; Successors. This Warrant may only be amended or
supplemented, and any waiver or departure from the provisions hereof may
only be given, with the consent of the Manager and Merchandiser. All of
the covenants and provisions of this Warrant by or for the benefit of
the Company and Merchandiser shall bind and inure to the benefit of them
and their respective permitted successors and assigns hereunder.
14. Notices. All notices required by this Warrant to merchandiser shall be
sent to Giant Merchandising, 5655 Union Pacific Avenue, Commerce, CA
90022, or such other address as Merchandiser may hereafter designate by
notice to the Company. All notices sent under this Agreement to the
Company or the Manager shall be sent to the address indicated in Section
3 above. All notices required by this Warrant must be in writing to be
effective, and must be sent by a third party messenger, by air courier
service with a written acknowledgment of receipt, by registered or
certified mail, return receipt requested, or through a telegraph office.
The date of personal delivery, of mailing, or the date of delivery to a
telegraph office. The date of any such notice shall be deemed the date
of the giving thereof (except, with respect to notices of change of
address, the date of which will be the date of receipt by the receiving
party). Until the Company notifies Merchandiser otherwise, a copy of all
notice hereunder to the Company shall be simultaneously sent as
aforesaid to Lenard & Gonzalez LLP, 1900 Avenue of the Stars, 25th
Floor, Los Angeles, CA 90067; Attention: Allen D. Lenard, Esq.
15. Descriptive Headings and Governing Law. The descriptive headings of the
several paragraphs of this Warrant are inserted for convenience only and
do not constitute a part of this Warrant. This Warrant shall be
construed and enforced in accordance with, and the rights of the parties
shall be governed by, the laws of the State of California.
8
<PAGE> 15
16. Lost Warrant. The Manager and the Company represent and warrant to
Merchandiser that upon receipt of evidence reasonably satisfactory to
the Manager and the Company of the loss, theft, destruction or
mutilation of this Warrant and, in the case of any such loss, theft or
destruction upon receipt of an indemnity reasonably satisfactory to the
Manager and the Company, or in the case of any such mutilation upon
surrender and cancellation of such Warrant, the Manager and the Company
will make and deliver a new Warrant in lieu of the lost, stolen,
destroyed or mutilated Warrant.
IN WITNESS WHEREOF, Merchandiser, the Company and the Manager
have caused this Warrant to be duly executed and issued by their respective
officers thereunto duly authorized as of the 1st day of April, 1999.
"COMPANY" "MERCHANDISER"
THE ULTIMATE BAND LIST, LLC Giant Merchandising
By: /s/ Marc P. Geiger By:
------------------------------- ------------------------------
Its: Co-Chief Executive Officer (an authorized signatory)
"MANAGER"
ARTISTdirect New Media, LLC
By: /s/ Marc P. Geiger
-------------------------------
Its: Co-Chief Executive Officer
9
<PAGE> 1
EXHIBIT 10.36
12.10.99
INTERNET VIDEO LICENSE AGREEMENT
THIS AGREEMENT is made as of the 20th day of December, 1999 BETWEEN:
1. WARNER MUSIC GROUP INC. ("Warner") of 75 Rockefeller Plaza, New York,
New York 10019; and
2. ARTISTdirect, INC. ("ADI") of 17835 Ventura Boulevard, Suite 310,
Encino, California 91316.
BACKGROUND
A. WHEREAS, Warner, in order to promote the sale and distribution of
phonorecords and audio-visual music products throughout the "Territory"
(as hereinafter defined in subparagraph 1.01(o)), licenses the use of
"Warner Videos" (as hereinafter defined in subparagraph 1.01(q)); and
B. WHEREAS, ADI intends to "Stream" (as hereinafter defined in
subparagraph 1.01(l)) Warner Videos from "Licensed Music Sites" (as
hereinafter defined in subparagraph 1.01(e)).
C. NOW THEREFORE, the parties hereto have agreed to the terms and
conditions set forth below with respect to the non-exclusive use by ADI
of Warner Videos on Licensed Music Sites.
THE PARTIES AGREE AS FOLLOWS:
1. DEFINITIONS AND INTERPRETATION
1.01 Definitions
Unless defined elsewhere in this Agreement, capitalized terms shall
have the meanings ascribed to them below:
(a) "ENDUSER DEVICE": any device (such as a computer or a Web TV) which is
capable of receiving and playing/displaying the audio-visual output of
a Streamed Video.
(b) "EXCERPT": means a continuous audio-visual portion of a Warner Video
where no more than 30 seconds thereof may be accessed by the enduser or
viewed by a viewer.
(c) Intentionally deleted.
1
<PAGE> 2
(d) "INTERNET": the wide area cooperative network of university, corporate,
government and private computer networks communicating through
Transmission Control Protocol/Internet Protocol which is commonly
referred to as the Internet.
(e) "LICENSED MUSIC SITE": any Music Site which: (i) (A) is either wholly-
or partially-owned by ADI; and (B) is wholly-programmed and operated by
ADI; and (C) is prominently and exclusively branded with the tradename,
trademark or logo of ADI; or (ii) (A) is operated and managed by ADI
and (B) is subject to a comprehensive written web site agreement
between ADI and a recording artist (or such recording artist's
furnishing company) ("Artist") of the type which ADI typically enters
into with recording artists as of the date hereof; provided, that such
Artist is a recording artist then-currently signed to an exclusive
recording agreement with affiliates of Warner, which such Music Site on
a gratis basis (A) Streams Videos in a sequence designated by ADI on a
continuous 24-hour, seven-day-a-week basis (i.e., as part of a
"Pre-Programmed Stream") or (B) Streams particular Videos at the demand
of an enduser (i.e., as part of an "On-Demand Stream"). Without
limiting the foregoing, "Licensed Music Site" shall include all of
those "pages" on a Music Site: (w) that constitute "home pages"; (x)
that direct an enduser to a Video; (y) through which an enduser
navigates in order to view a Video; or (z) from which an enduser can
Stream a Video.
(f) "MASTER": a first generation color copy of the fully-edited titled and
assembled electronic master of a Warner Video (a "Videotape Copy") or,
at Warner's election, a copy of such electronic master digitized by
Warner in a format compatible with ADI's technical requirements (a
"Digitized Copy").
(g) "MUSIC SITE": a non-subscription, music audio-visual programming
service which may be advertiser-supported, which: (i) is delivered over
the Internet (which may also include delivery via broadband
technology); (ii) is transmitted from fileservers exclusively located
in the United States using Streaming technologies; (iii) uses English
as the principal language spoken by hosts or used in textual, graphic
or interstitial programming; and (iv) if such service transmitted
digital audio data only, rather than digital audio-visual data (other
than with respect to On-Demand Streams) would be subject to statutory
licensing pursuant to Paragraph 2, Subsection d, Section 114 of title
17, United States Code (the "Digital Millennium Copyright Act").
(h) "ON-DEMAND STREAM FRACTION": a fraction, the numerator of which is that
number of transmissions to an individual enduser of Warner Videos (in
whole or in part) other than Excerpts on a particular Licensed Music
Site as part of an On-Demand Stream and the denominator of which is
that number of transmissions to an individual enduser of Videos (in
whole or in part), including Warner Videos, on such particular Licensed
Music Site as part of an On-Demand Stream, as determined in a calendar
quarter.
2
<PAGE> 3
(i) "ON-DEMAND STREAM RECEIPTS": gross advertising monies (or the monetary
value of any non-monetary advertising consideration) actually received,
directly or indirectly, by ADI or ADI's affiliates in connection with
the page of a Licensed Music Site that provides an On-Demand Stream of
one or more Warner Videos less any actual advertising agency or media
sales fees directly related thereto.
(j) "PRE-PROGRAMMED STREAM FRACTION": a fraction, the numerator of which is
that number of transmissions to an individual enduser of Warner Videos
(in whole or in part) other than Excerpts on a particular Licensed
Music Site as part of a Pre-Programmed Stream and the denominator of
which is that number of transmissions to an individual enduser of
Videos (in whole or in part), including Warner Videos, on such
particular Licensed Music Site as part of a Pre-Programmed Stream, as
determined in a calendar quarter.
(k) "PRE-PROGRAMMED STREAM RECEIPTS": gross advertising monies (or the
monetary value of any non-monetary advertising consideration) actually
received, directly or indirectly, by ADI or ADI's affiliates in
connection with the page of a Licensed Music Site that provides a
Pre-Programmed Stream of one or more Warner Videos less any actual
advertising agency or media sales fees directly related thereto.
(l) "STREAM(s)(ed)(ing)": a public performance of any duration via the
Internet that permits an enduser to view data contemporaneously with
its reception by an Enduser Device in such a manner that the data is
not copied, duplicated or stored in such Enduser Device except by way
of temporary buffering.
(m) "TERM": shall commence on the date of this Agreement and end on
December 31, 2001, unless sooner terminated as set forth herein.
(n) "TERM YEAR": each separate, consecutive 12-month period of the Term.
(o) "TERRITORY": worldwide.
(p) "VIDEO": an audio-visual work embodying the sound recording of a single
musical composition in synchronization with visual images intended
primarily for promotional use.
(q) "WARNER VIDEO": any Video with respect to which Warner has promotional
exhibition rights in the Territory (a "Controlled Video") that Warner
or any of Warner's wholly-owned US-based record company affiliates (the
"Affiliates") wish to license to unaffiliated third parties for
broadcast television exhibition or to unaffiliated third party Music
Sites for Streaming, provided that the soundtrack of such Video is a
duplicate of a sound recording owned or controlled for the Territory by
Warner. Within sixty (60) days following the date of this Agreement,
Warner shall provide ADI with a list of current Affiliates. "Warner
Videos" shall not include: (i) any Videos commercially exhibited prior
to the commencement of the Term; or (ii) any Video which is part of a
long-form audio-visual program and is not distributed or licensed by
Warner separately therefrom. Warner shall have the right to elect in
Warner's sole discretion that Controlled Videos from up to [***]*
albums released in any Term Year not become Warner Videos for the
purposes of this Agreement until 90 days following the date which is
the earlier of: (A) the date on which the Video is initially Streamed
under Warner's authority by an unaffiliated third party; or (B) the
date on which the Video is initially exhibited under Warner's authority
on television in the US.
- --------
* 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.
3
<PAGE> 4
1.02 Headings
The headings used in this Agreement are for ease of reference only and
shall have no effect on the interpretation or construction of this
Agreement.
1.03 Plural/Singular/References
The plural may include the singular and the singular may include the
plural and this Agreement shall be interpreted in this regard as the
context may require. References to paragraphs and subparagraphs are to
paragraphs and subparagraphs of this Agreement, and references to any
agreement or other instrument shall be deemed to include references to
that agreement or other instrument as varied or replaced from time to
time.
2. GRANT OF RIGHTS
2.01 Duplication Rights
During the Term, subject to the terms and conditions of this Agreement,
Warner grants to ADI a non-exclusive license to digitally encode and
duplicate Warner Videos in their entirety for duplication on ADI's
fileservers for the sole purpose of producing programming containing
Warner Videos for Streaming on Licensed Music Sites.
2.02 Streaming Right
Subject to the terms and conditions of this Agreement and any
contractual restrictions imposed upon Warner in connection with Warner
Videos of which Warner has advised ADI in writing with reasonable
advance notice, during the Term Warner grants to ADI a non-exclusive
license: (a) to permit endusers to access via Streaming Warner Videos
in their entirety as part of a Pre-Programmed Stream on a Licensed
Music Site; and (b) to permit endusers to access via Streaming Warner
Videos in their entirety as part of an On-Demand Stream on a Licensed
Music Site; provided, however, that endusers shall not be able to
Stream more than one Warner Video at a time as part of a continuous
transmission (i.e., endusers shall not be able to Stream a series of
Warner Videos as part of one continuous transmission). Continuously
during the Streaming of any Warner Video as part of an On-Demand Stream
and in a space that is "above the fold," near or adjacent to, and on
the same page as such Warner Video, ADI shall, at ADI's sole cost and
expense, provide a button permitting an enduser "one-click" access to
the "home page" for the applicable Affiliates' official site of the
applicable artist (or, if the artist does not have an official site,
the "home page" for the official site of the applicable Affiliate that
is the artist's record company), provided that Warner delivers to ADI,
prior to or no later than Warner's delivery of the applicable Warner
Video, the foregoing "home
4
<PAGE> 5
page" information. If other links are provided to third-party sites for
the same artist, then the Affiliate's link shall be the first listed
and the most prominent.
2.03 Advertising and Promotion
Subject to the terms and conditions of this Agreement and any
contractual restrictions imposed upon Warner in connection with Warner
Videos of which Warner has advised ADI in writing, during the Term, ADI
may utilize Excerpts in any and all media to advertise, promote and
publicize the exhibition of Warner Videos on the Licensed Music Sites;
provided, however, that, without Warner's written consent, no more than
one Excerpt per artist may be used for such purpose.
2.04 Names and Likenesses
Subject to the terms and conditions of this Agreement and any
contractual restrictions imposed upon Warner in connection with Warner
Videos of which Warner has advised ADI in writing with reasonable
advance notice, during the Term, ADI may use the name and
Warner-approved or -supplied likenesses, such approval not to be
unreasonably withheld or delayed, of such artist for the purposes of
advertising, promoting or publicizing the Streaming by ADI of such
Warner Video on the applicable Licensed Music Site, but not in a manner
which implies an endorsement of any service (including, without
limitation, Licensed Music Sites) or product without Warner's prior
consent.
2.05 Reservation of Rights
(a) As between Warner and ADI, Warner retains all ownership rights in
Masters and Warner Videos including, without limitation, all copyrights
and trademarks in Masters and Warner Videos; provided, however, that
neither Warner nor the Affiliates shall use in any manner any Digitized
Copy of a Warner Video created by or at the direction of ADI, unless
Warner or an Affiliate has made payment therefor in accordance with
paragraph 4.01.
(b) ADI shall not have any rights in Warner Videos other than as expressly
provided in this Agreement.
2.06 Withdrawal Rights
ADI agrees that ADI's rights to Stream any Warner Video may be
terminated by Warner upon one week's prior written notice to ADI if any
of the following conditions are met:
(a) If the respective Affiliate, in the respective Affiliate's good faith
business judgment believes that such termination is necessary for
significant artist relations purposes; or
5
<PAGE> 6
(b) If the respective Affiliate's rights in the Warner Video terminate; or
(c) If the respective Affiliate is notified or otherwise becomes aware of
an apparently bona fide third-party claim that the transmission of the
Warner Video infringes rights owned by others.
3. PROHIBITIONS ON ADI
ADI shall only have the right to exploit or use Warner Videos as
specifically authorized in Paragraph 2 of this Agreement, or as
otherwise agreed to by Warner in writing in its sole discretion, and
may not exploit or use Warner Videos in any other manner. Without
limiting the foregoing, unless Warner agrees otherwise in writing,
during the Term, neither ADI nor any party acting on behalf of ADI
shall, directly or indirectly:
(a) copy or duplicate any Warner Video except as ADI may reasonably require
to exercise ADI's rights under this Agreement;
(b) Stream (or encode to permit the Streaming of) the audio portion of any
Warner Video at a transmission rate greater than [***]* or the video
portion of any Warner Video at a transmission rate greater than [***]*;
(c) Stream the soundtrack of any Warner Video separately from the visual
portion thereof;
(d) Stream the visual portion of any Warner Video separately from the
soundtrack thereof, except to the extent that ADI uses only the visual
portion of an Excerpt to exercise ADI's rights under subparagraph 2.03
above without any soundtrack whatsoever;
(e) Stream any Warner Video other than in conjunction with the sequence of
images originally synchronized with the sound recording included
thereon;
(f) Stream any Warner Video on a "pay-per-view" or "pay-per-play" basis;
(g) exhibit any advertisement or commercial of any nature during or
associated with the Streaming of any Warner Video in a manner which
reasonably implies an endorsement by the artist whose performances are
contained on such Warner Video;
(h) license or authorize a third party (whether or not affiliated with ADI)
to "deep link" to a non-Licensed Music Site for the purpose of
Streaming a Warner Video; or
- --------
* Confidential treatment has been requested for the bracketed portion. The
confidential redacted portion has been omitted and filed separately with the
Securities and Exchange Commission.
6
<PAGE> 7
(i) except as expressly set forth in Paragraph 5, edit or otherwise alter
any Warner Video, including, without limitation, the deletion or
erasing of any signal now or hereafter contained therein to facilitate
the automatic identification and/or logging of Warner Videos so
Streamed and/or to restrict the reproduction of Warner Videos so
Streamed (a "Protective Signal").
Should ADI become aware that any party (whether or not acting on behalf
of ADI) is circumventing the provisions of this Paragraph 3 (a
"Circumvention Event"), ADI shall promptly notify Warner in writing
thereof and ADI shall, at ADI's sole cost and expense, use ADI's
commercially reasonable efforts to prevent such circumvention.
4. WARNER VIDEOS
4.01 Servicing of Masters
In respect of each Warner Video, Warner shall make a Master available
to ADI for collection at ADI's expense, no later than the date Warner
or an Affiliate makes the applicable Warner Video available for
delivery to other unaffiliated third parties. Should Warner provide ADI
with a Master in Videotape Copy form, ADI shall provide Warner, at
Warner's request, with a Digitized Copy of such Master provided that
Warner pays ADI's actual duplication and shipping expenses in
connection therewith.
4.02 Treatment of Warner Videos and Masters
ADI shall:
(a) maintain all Masters and all copies of Masters on ADI's premises and
safeguard the same from any loss, damage, theft, unauthorized use,
copying, storage or duplication by others;
(b) be solely responsible for any loss, theft or damage to Masters and
copies of Masters in their possession and any unauthorized use,
copying, storage or duplication by others thereof; and
(c) upon the expiration of the Term or termination of this Agreement, at
Warner's election, ADI shall either: (i) (A) to the extent that Warner
made Digitized Copies of any Masters and provided them to ADI
hereunder, return all such Masters and copies of such Masters to Warner
at ADI's expense; (B) to the extent that ADI made Digitized Copies of
any Masters hereunder, but has not provided Digitized Copies of such
Masters to Warner pursuant to subparagraph 4.01 above, return all such
Masters and copies of such Masters to Warner and Warner shall pay ADI's
actual duplication and shipping expenses; and (C) to the extent that
ADI made Digitized Copies of any Masters hereunder and has provided
Digitized Copies of such Masters to Warner pursuant to subparagraph
4.01 above, return all such Masters and copies of such Masters to
Warner at
7
<PAGE> 8
ADI's expense; or (ii) or destroy all Masters and all copies of Masters
at ADI's sole cost and expense, and provide Warner with a written
affidavit verifying such destruction.
5. ADI'S UNDERTAKINGS
During the Term, ADI shall have the obligation, at ADI's sole cost and
expense:
(a) to exhibit the following information continuously during the Streaming
of each Warner Video in a space adjacent to the Warner Video, provided
that Warner submits such information to ADI in a timely manner:
(i) the title of the musical composition on the Warner Video;
(ii) the title of the record or home video that includes the
performance of the musical composition contained in the Warner
Video;
(iii) the name of the artist performing the musical composition
contained in the Warner Video;
(iv) the name of the record company and the URL of its "home page";
and
(v) the name of the motion picture, if any, from which the Warner
Video is derived.
(b) to obtain public performance rights licenses, if necessary, covering
the performance of the musical compositions in Warner Videos; and
(c) to transmit as part of each Warner Video Streamed on Licensed Music
Sites any Protective Signal contained in the Warner Videos; provided,
however, that the transmission of such Protective Signal does not
represent a recurrent and unreasonable cost to ADI and in no way leads
to the deterioration of Streaming quality of Warner Videos.
6. WARNER'S UNDERTAKINGS
Warner shall deliver to ADI, at Warner's expense (where available and
reasonably contemporaneously with the delivery of the relevant Masters)
artwork, promotional material, biographical material and other
information in relation to Warner Videos and the relevant artists, to
be used by ADI solely for promotional purposes on Licensed Music Sites.
7. COMPENSATION
8
<PAGE> 9
7.01 Royalties
ADI shall pay to Warner royalties equal to: [***]*.
7.02 Banner Ads
ADI shall make "Banner Ads" (the "Banner Ads") available to Warner at
ADI's standard rate card cost therefor, or at such other rate as the
parties shall mutually agree.
8. ACCOUNTING AND PAYMENTS; MARKET RESEARCH
8.01 Accounting
Within 30 days following each calendar quarter of the Term, ADI shall
account for and pay to Warner any royalties payable in respect of such
quarter and shall furnish to Warner a statement setting forth:
(a) a listing of all Warner Videos Streamed on each Licensed Music Site
during such quarter;
(b) the number of Warner Videos Streamed on each Licensed Music Site as
compared to the total number of Videos Streamed on each such Licensed
Music Site during such quarter;
(c) Pre-Programmed Stream Receipts and On-Demand Stream Receipts for such
quarter and the sources thereof;
(d) the number of times that Warner Videos were Streamed on each Licensed
Music Site as compared to the total number of times that Videos were
Streamed on each such Licensed Music Site during such quarter;
(e) the number of "pageviews" of the Banner Ads during such quarter and the
number of "clickthroughs" from the Banner Ads to URLs designated by
Warner during such quarter.
ADI shall also furnish Warner with the information described in
subparagraphs 8.01(a), (b) and (d) on a weekly basis within 10 days
following the end of each week during the Term.
8.02 Audit Rights
(a) ADI shall keep complete and accurate books and records of account
relating to the Streaming of Warner Videos and Videos maintained to a
standard sufficient to enable an audit trail to be established.
- --------
* Confidential treatment has been requested for the bracketed portion. The
confidential redacted portion has been omitted and filed separately with the
Securities and Exchange Commission.
9
<PAGE> 10
(b) Warner shall have the right during the Term and during the two-year
period following the termination or expiration of the Term, at Warner's
sole cost and expense, to have a certified public accountant inspect
ADI's books and records no more than once during any year. This
inspection shall take place at ADI's office, during normal business
hours on not less than 30 days' written notice. The auditor appointed
by Warner may inspect and take copies of the books and records of ADI
solely for the purpose of verifying the calculation of royalties
accruing to Warner under this Agreement and verifying ADI's compliance
with Paragraph 7.
(c) Each statement rendered under this Agreement shall be deemed final and
binding upon Warner as an account stated and shall not be subject to
any claim or objection by Warner unless Warner notifies ADI of Warner's
objection to the applicable statement, stating the basis thereof in
reasonable detail within three (3) years after the date such statement
was rendered to Warner hereunder.
8.03 Market Research
ADI and Warner shall cooperate with each other in conducting market
research, at Warner's sole cost and expense, designed to determine the
effect of the Licensed Music Sites on consumer awareness of artists
featured in Warner Videos and sales of such artist's records. ADI and
Warner shall use the results of such research for internal purposes
only. Such market research shall be subject to the approval of any
applicable artists (but only if required by written agreement between
ADI and such artist) and shall be subject to the published privacy
policy of the applicable Licensed Music Site (if any).
9. WARRANTIES AND INDEMNITY
9.01 ADI's Warranties
ADI represents and warrants that:
(a) ADI has full right and authority to enter into and to fulfill all of
ADI's obligations under this Agreement; and
(b) ADI shall comply with all licenses, laws and regulations relating to
its maintenance and transmission of Licensed Music Sites.
9.02 Warner's Warranties
(a) Warner represents and warrants that Warner has the right to enter into
and fulfill all of Warner's obligations under this Agreement; and
(b) Warner makes no representation or warranty whatsoever with respect to
the non-dramatic performing rights in the musical compositions embodied
in the Warner Videos.
10
<PAGE> 11
9.03 Indemnity
(a) ADI does hereby indemnify, save and hold harmless Warner and Warner's
subsidiaries, affiliates, licensees, assigns, officers and employees
from any and all loss and damage (including, without limitation,
reasonable fees and disbursements of counsel incurred by Warner in any
action or proceeding between ADI and Warner or between Warner and any
third party or otherwise) arising out of or connected with any claim or
act or omission by ADI which is inconsistent with any of the
representations or agreements made by ADI in this Agreement or any
breach of ADI's obligations hereunder or any unauthorized use by ADI or
any party acting on behalf of ADI of Masters or Warner Videos in
connection with the advertising, promotion or publicity of each Warner
Video or the name or likeness of any artist who rendered services in
connection with such Warner Videos. Warner shall have the right at all
times, in Warner's sole discretion and at Warner's sole cost and
expense, to retain or resume control of the conduct relative to the
defense of any claim to which the foregoing indemnity applies. The
foregoing indemnity shall be limited to claims reduced to judgment or
settled with ADI's prior written consent not to be unreasonably
withheld.
(b) Warner does hereby indemnify, save and hold harmless ADI and ADI's
subsidiaries, affiliates, licensees, assigns, officers and employees
from any and all loss and damage (including, without limitation,
reasonable fees and disbursements of counsel incurred by ADI in any
action or proceeding between ADI and Warner or between ADI and any
third party or otherwise) arising out of our connected with any claim
or act or omission by Warner which is inconsistent with any of the
representations or agreements made by Warner in this Agreement or any
breach of its obligations hereunder or any claim that any Warner Video
or the content thereof violates the rights of any third party,
including, without limitation, libel, slander, defamation, copyright,
trademark, and rights of privacy and publicity. ADI shall have the
right at all times, in ADI's sole discretion and at ADI's sole cost and
expense, to retain or resume control of the conduct relative to the
defense of any claim to which the foregoing indemnity applies. The
foregoing indemnity shall be limited to claims reduced to judgment or
settled with Warner's prior written consent not to be unreasonably
withheld.
(c) The indemnitor shall give the indemnitee prompt written notice of any
claim to which the foregoing indemnity applies, and the indemnitor
shall have the right to participate in the defense of any such claim
through counsel of the indemnitor's own choice and at the indemnitor's
cost and expense.
10. TERMINATION
10.01 Warner's Termination Rights
11
<PAGE> 12
Warner may terminate this Agreement immediately by written notice to
ADI if, at any time during the Term:
(a) ADI goes in liquidation, receivership or administration or becomes
bankrupt, makes any arrangement for the benefit of ADI's creditors or
has a receiver appointed for any of ADI's assets; provided, that if
such proceeding is involuntary, then Warner shall not have the right to
terminate the Term unless such proceeding is not dismissed within 90
days of the filing thereof;
(b) ADI breaches any material term or provision of this Agreement;
(c) the Licensed Music Sites cease, except for any instance of force
majeure, to be transmitted for a continuous period of 10 days; or
(d) if ADI does not succeed in preventing a Circumvention Event within 60
days following ADI's becoming aware thereof;
provided, in the case of any event set forth in subparagraph (b) above,
Warner shall have given ADI written notice of such event and ADI shall
have failed to cure same within 30 days after ADI's receipt of such
notice (or 10 business days if the event is ADI's failure to pay Warner
a sum certain).
10.02 ADI's Termination Rights
ADI may terminate this Agreement immediately by written notice to
Warner if: (a) at any time during the Term, Warner goes into
liquidation, receivership or administration or becomes bankrupt, makes
any arrangement for the benefit of Warner's creditors or has a receiver
appointed for any of Warner's assets; provided, that if such proceeding
is involuntary, then ADI shall not have the right to terminate the Term
unless such proceeding is not dismissed within 90 days of the filing
thereof; or (b) if Warner or an Affiliate breaches any material term or
provision of this Agreement and fails to cure such breach within 30
days after ADI's written notice to Warner of such breach.
11. PROCEDURE UPON TERMINATION
Upon the expiration or termination of this Agreement:
(a) ADI shall cease the Streaming of Warner Videos on Licensed Music Sites;
(b) ADI shall perform in accordance with the provisions of subparagraph
4.02(c); and
(c) should ADI terminate this Agreement pursuant to subparagraph 10.02
above, ADI shall have no further obligations to Warner and Warner shall
have no further obligations to ADI.
12
<PAGE> 13
12. MISCELLANEOUS
12.01 Relationship of the Parties
In performing its obligations under this Agreement, each of the parties
hereto shall be deemed an independent contractor, and nothing in this
Agreement shall in any way constitute either party, or any of such
party's officer or directors, an agent or employee of the other party
and this Agreement shall not be deemed to constitute a partnership,
joint venture or contract of employment between the parties.
12.02 Service of Notices
Any notice which either party hereto may desire to give or which is
required under the terms of this Agreement shall be given in writing by
registered or certified mail, return receipt requested, or by telefax
or by personal service (in all cases, all charges prepaid) to ADI at
the address first noted in the preamble to this Agreement, Attn: Chief
Financial Officer, or to such other address to which ADI notifies
Warner in writing, with copies to Lenard & Gonzalez, LLP, 1900 Avenue
of the Stars, 25th Floor, Los Angles, California 90067, Attn: Allen D.
Lenard, Esq., and to Warner to the address first noted in the preamble
to this Agreement, Attn: General Counsel. In the event any such notice
is given by mail, such notice shall be deemed to be given on the date
five business days following the date of such mailing. In the event any
such notice is given by personal delivery, such notice shall be deemed
to be given on the date personal delivery is made.
12.03 Confidentiality/Press Announcements
Neither ADI nor Warner nor their respective affiliates may disclose to
any third party (other than each party's employees and professional
advisors, in their capacity as such) any information regarding the
terms and conditions of this Agreement without the prior written
consent of the other party except:
(a) to the extent necessary to comply with the law or the legal process of
a court of competent jurisdiction or in administrative proceedings, in
which event the party making such disclosure must use its commercially
reasonable efforts to procure confidential treatment of such
information;
(b) as part of its normal reporting or review procedure to its parent
companies, its auditors and its attorneys, provided that ADI and Warner
inform these parties of the provisions of this subparagraph 12.03;
(c) to the extent necessary to comply with Warner's contractual obligations
to third parties;
(d) to make press announcements approved in writing by both of the parties;
and
13
<PAGE> 14
(e) to the extent such terms become public through no breach by either
party of this subparagraph 12.03.
In addition to the foregoing, ADI shall not disclose to any third party
(other than to ADI's employees, in their capacity as such): (i) the
identity of the Warner Videos Streamed on a Licensed Music Site; (ii)
the number of Warner Videos Streamed on a Licensed Music Site; or (iii)
the number of times that any Warner Video was Streamed on a Licensed
Music Site.
12.04 Assignment/Sublicense
Warner may not assign, sublicense or effectively assign or sublicense
Warner's rights or obligations under this Agreement except to an
affiliated or associated company or to a person or entity acquiring all
or substantially all of the stock or assets of Warner and subject to
the assignee assuming Warner's obligations hereunder. ADI may not
assign, sublicense or effectively assign or sublicense any of ADI's
rights or obligations under this Agreement to any party. For the
avoidance of doubt, ADI may not syndicate ADI's programming containing
Warner Videos.
12.05 No Waiver
No failure to exercise or delay in exercising any right, power or
privilege under this Agreement by either party shall operate as a
waiver of that right, power or privilege. Similarly, a single or
partial exercise of any right, power or privilege by either party shall
not preclude any other or further exercise of that right, power or
privilege.
12.06 Remedies Cumulative/Severability
The rights and remedies contained in this Agreement are cumulative and
are not exclusive of any rights and remedies provided by law, in equity
or otherwise. If any provision of this Agreement is prohibited by or
contravenes any applicable law, or is held by any court of competent
jurisdiction or any other legally constituted body having jurisdiction
to make this determination to be void, unlawful or unenforceable then
that provision shall be severed from the Agreement and rendered
ineffective, as far as possible, without modifying the remaining
provisions of this Agreement.
12.07 Entire Agreement/Amendments/Counterparts
This Agreement contains the entire agreement between the parties with
respect to its subject matter and supersedes any prior agreement or
negotiation between the parties on the subject matter of this
Agreement. There are no representations, agreements or understandings,
oral or written, between the parties relating to the subject matter of
this Agreement which are not fully
14
<PAGE> 15
expressed in this Agreement. No amendment, termination, waiver,
discharge or modification of this Agreement shall be effective unless
it is in writing and is signed by an authorized signatory of both
Warner and ADI. This Agreement may be executed in one or more
counterparts and by facsimile signature, each of which shall be deemed
an original and all of which together shall be deemed one Agreement.
12.08 Litigation
ADI shall notify Warner if ADI becomes aware of any unauthorized
dealing by any third party in any Warner Videos or in Licensed Music
Sites, and shall cooperate fully, at Warner's cost, in any dispute
relating to Warner's rights in Masters and Warner Videos as well as
Warner's rights under this Agreement. Warner, after written notice to
ADI, may, at Warner's sole cost and expense, act in the name of ADI and
Warner to protect Warner's rights under this Agreement and ADI appoints
Warner ADI's attorney-in-fact to do this; provided, however, that
Warner shall not be permitted to execute any document on behalf of ADI
without first affording ADI a reasonable opportunity to execute such
document itself. If Warner acts on ADI's behalf as permitted herein,
Warner shall keep ADI informed on a current basis of such acts and all
proceedings relating thereto.
12.09 Governing Law
This agreement has been entered into in the state of New York, and the
validity, interpretation and the laws of the state of New York shall
govern the legal effect of this Agreement. The New York courts (state
and federal), only, shall have jurisdiction of any controversies
regarding this Agreement; any action or other proceeding which involves
such a controversy shall be brought in these courts, in New York
County, and not elsewhere. Any process in any such action or proceeding
may, among other methods, be served upon ADI or Warner, as applicable,
by delivering it or mailing it, by registered or certified mail, return
receipt requested, directed to the address first above written. Any
such delivery or mail service shall be deemed to have the same force
and effect as personal service within the state of New York.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
as of the date first above written.
ACCEPTED AND AGREED:
WARNER MUSIC GROUP INC. ARTISTdirect, INC.
By: /s/ PAUL VIDICH By: /s/ MARC P. GEIGER
------------------------------ ---------------------------
Name: Paul Vidich Name: Marc P. Geiger
Title: Executive Vice President Title: CEO
15
<PAGE> 1
EXHIBIT 10.37
12.2.99
WEBCASTING TRANSMISSION LICENSE AGREEMENT
This Webcasting Transmission License Agreement ("Agreement"), dated as
of December 20, 1999, is made by and between Warner Music Group Inc. with its
principal offices at 75 Rockefeller Plaza, New York, NY 10019, ("Licensor"), and
ARTISTdirect, Inc., with its principal offices at 17835 Ventura Boulevard, Suite
310, Encino, California 91316 ("Licensee").
WHEREAS, Licensee operates the Web Site that digitally transmits sound
recordings to the public;
WHEREAS, Licensee wishes to obtain a license for certain transmissions
of sound recordings on the Web Site;
WHEREAS, Licensee has agreed to pay a royalty and provide certain
additional consideration for such license, and Licensor and Licensee have agreed
upon such consideration and other terms, which are reflected in this Agreement;
NOW, THEREFORE, and in consideration of the mutual promises contained
in this Agreement and for other good and valuable consideration, including the
consideration provided by Licensee in Section 3, the adequacy and sufficiency of
which are hereby acknowledged, the parties hereby agree as follows:
1. DEFINITIONS
1.1 "Confidential Information" means information submitted to Licensor
pursuant to Section 5.1, 5.2, 5.3 or 5.4.
1.2 "Excerpt" means a "Sample" (as defined in the Audio Sample License
Agreement between Licensor and Licensee of even date herewith) where no
more than 30 seconds thereof may be accessed by the Web Site User.
1.3 "First Transmission Date" means the date on which the Licensee makes the
first Payable Transmission of a sound recording in the Repertory.
1.4 "License Fee Report" means a report required by Section 5.
1.5 "Payable Transmission" means each instance in which any portion of a
sound recording of a musical work in the Repertory other than an Excerpt
is delivered to a Web Site User via Web Site Transmissions (e.g., the
delivery of any portion of a single track from a compact disc to one
listener).
1
<PAGE> 2
1.6 "Payable Transmission Rate" means the following: [***]*.
1.7 "Repertory" consists of all copyrighted sound recordings, including sound
recordings created during the term of this Agreement, in which Licensor
has or will have during the term of this Agreement the right to license
transmissions. Within sixty (60) days following the date of this
Agreement, Licensor shall provide Licensee with a list of those entities
that own or control sound recordings which Licensor shall have the right
to license to Licensee for transmissions as provided hereunder. Such list
of entities shall be as updated by Licensor from time to time by written
notice from Licensor to Licensee.
1.8 "Sound recordings" means such term as it is defined in Section 17 U.S.C.
Section 101.
1.9 "Territory" means the United States, its territories, commonwealths and
possessions.
1.10 "Web Site" means any Internet site or Internet sites which are: (a) (i)
majority-owned or wholly-owned or controlled by Licensee; and (ii)
wholly-programmed and operated by Licensee; or (b) (i) operated and
managed by Licensee and (ii) subject to comprehensive written web site
agreements between Licensee and recording artists (or such recording
artist's furnishing companies) ("Artists") of the type which Licensee
typically enters into with recording artists as of the date hereof;
provided, that such Artists are recording artists then-currently signed
to exclusive recording agreements with affiliates of Licensor.
1.11 "Web Site Transmissions" means all digital audio transmissions to Web
Site Users from or through the Web Site of stations on the Web Site
created by Web Site Users in accordance with the parameters set out in
Exhibit A ("Web Site User Stations"), and does not include digital audio
transmissions made by any other means.
1.12 "Web Site Users" means all those who access the Web Site solely for
personal consumer use.
2. GRANT OF LICENSE
2.1 Licensor hereby grants to Licensee, during the term of this
Agreement, subject to the limitations set forth below, a limited
nonexclusive license to (a) transmit publicly any or all of the sound
recordings in the Repertory, within the Territory, by means of Web Site
Transmissions and (b) exhibit within the Territory album cover art in
postage stamp size adjacent to artist, album title and sound recording
title information with respect to a sound recording being transmitted
pursuant to this Agreement on the Web Site; provided, in each case, that
(i) Licensee complies with Section 17 U.S.C. 114(d)(2)(c)(i) and Section
17 U.S.C. Section 1101 and all of the terms and conditions of this
Agreement and (ii) the Web Site Transmissions comply with all
non-financial terms negotiated or determined by the Copyright Arbitration
Royalty Panel pursuant to Section 17 U.S.C. Section 114(f). In the event
that compensation system set by the Librarian of Congress pursuant to
Section 17 U.S.C. Section 114(f) would result in double payment to
Licensor with respect to any Web Site Transmissions, then the parties
shall negotiate in good faith an adjustment that will result in the
Licensor only receiving the compensation provided for under this
Agreement with respect to such Web Site Transmissions.
- --------
* Confidential treatment has been requested for the bracketed portion. The
confidential redacted portion has been omitted and filed separately with the
Securities and Exchange Commission.
2
<PAGE> 3
2.2 Nothing in this Agreement authorizes Licensee to grant to any other
person or entity (including without limitation any Web Site User or any
operator of another Web site), any right to reproduce by any means,
method or process whatsoever, now known or hereafter developed, any of
the sound recordings in the Repertory, including, but not limited to,
transferring or downloading any such sound recordings to a computer hard
drive, or otherwise copying the sound recording onto any other storage
medium.
2.3 Nothing in this Agreement authorizes Licensee to grant to any person or
entity (including without limitation any Web Site User or any operator of
another Web site) any right to transmit publicly, by means of digital
transmission or otherwise, any of the sound recordings in the Repertory.
2.4 The licenses granted in this Agreement extend only to Licensee and the
Web Site. This Agreement grants no rights to Licensee other than those
expressly granted herein. Without limiting the generality of the
foregoing, this Agreement does not grant to Licensee (a) any copyright
interest in any sound recording; (b) any rights outside the Territory;
(c) any trademark rights; or (d) any rights to any endorsement by
Licensor or any other person.
2.5 Licensor represents and warrants to Licensee that it has the rights
necessary to grant the licenses and other rights granted under this
Agreement and will defend, indemnify and hold harmless Licensee its
parent, subsidiaries or affiliates and their directors, officers,
employees and agents from and against any and all claims, actions,
liabilities, losses, damages, costs or expenses (whether direct or
indirect, by contract, in tort, by operation of law or otherwise)
incurred by or asserted or awarded against Licensee arising out of or in
connection with a breach of any representation, warranty or covenant
hereunder or any failure of Licensor to have the rights granted to
Licensee pursuant to this Agreement.
3. LICENSE FEES AND OTHER CONSIDERATION
3.1 For each calendar quarter of the term of this Agreement, Licensee shall
pay Licensor, for the license granted in Section 2.1, an amount equal to
the number of Payable Transmissions during that quarterly period
multiplied by the Payable Transmission Rate.
3.2 Licensee shall pay a finance charge of one and one-half percent (1-1/2%)
per month, or the maximum rate permitted by law, whichever is less, from
the date due, on any required payment that is not made on or before its
due date, without prejudice to any other rights Licensor may have in
connection with such delinquency.
3.3 During the term of this Agreement, Licensee shall, within a reasonable
time after Licensor's written request setting forth the applicable IP
address, provide direct links, from the location on the Web Site where
artist, album title, and sound recording title information for each sound
recording is provided, (which shall be the same location on such Web Site
where Web Site Users access the transmission of such sound recording), to
one or more
3
<PAGE> 4
Web sites that provide for direct sales of substantially all the sound
recordings transmitted by Licensee on the Web Site, except to the extent
that such sales are conducted directly by Licensee from the Web Site. In
addition, at the option of Licensor, Licensee shall, within a reasonable
time after Licensor's written request setting forth the applicable IP
address, provide reasonably prominent "above the fold" direct links from
the location on the Web Site where information regarding a particular
recording artist is provided, (which shall be the same location on such
Web Site where Web Site Users access the transmission of sound
recordings), to a Web site operated by Licensor relating to the relevant
recording artist.
3.4 During the term of this Agreement, Licensee shall post an announcement on
the Web Site, in form and substance satisfactory to Licensor, concerning
the license limitations contained in Sections 2.2, 2.3, and 2.4, and, if
requested by Licensor, include a click wrap agreement in form and
substance satisfactory to Licensor, for acknowledgement by Web Site
Users.
4. TERM
4.1 The term of this Agreement commences on the First Transmission Date and
ends on December 31, 2001, unless earlier terminated pursuant to this
Section 4 or Section 8.
4.2 Either party may terminate this Agreement as to the other party if, at
any time, such other party shall file in any court or agency pursuant to
any statute or regulation of any state or country, a petition in
bankruptcy or insolvency or for reorganization or for an arrangement or
for the appointment of a receiver or trustee of the party or of its
assets, or if such other party proposes a written agreement of
composition or extension of its debts, or if such other party shall be
served with an involuntary petition against it, filed in any insolvency
proceeding, and such petition shall not be dismissed within sixty (60)
days after the filing thereof, or if such other party shall propose or be
a party to any dissolution or liquidation, or if such other party shall
make an assignment for the benefit of creditors.
4.3 If technology becomes widely available that permits Web Site Users to
create a separate, complete and usable copy of sound recordings
transmitted by Licensee, then Licensee, upon notice from Licensor or
otherwise obtaining information as to the existence of such technology,
shall make all commercial efforts to prevent the use of such technology
by Web Site Users. Licensee shall also implement technical protection
measures, if available, to prevent the use of such technology by Web Site
Users. In the event that such commercial efforts and technical measures
fail to prevent Web Site Users from using such technology, then the
Payable Transmission Rate shall no longer apply and the parties shall
immediately enter into good faith negotiations to determine an
appropriate increased Payable Transmission Rate.
4.4 Licensor may terminate this Agreement if Licensee transmits sound
recordings using multicast technology and fails to maintain a control
connection or other mechanism with Web Site Users that permits Licensee
to count reliably the number of Payable Transmissions so that Licensor
may reliably audit such count pursuant to Section 6.
4
<PAGE> 5
5. LICENSE FEE REPORTS
5.1 Licensee shall submit a quarterly License Fee Report to Licensor for each
quarterly period during the term of this Agreement, by the twentieth day
of the following quarter. Licensee and Licensor shall mutually agree upon
a form of License Fee Report within sixty (60) days following the date of
this Agreement. Such License Fee Report shall provide reasonably detailed
information as to the number of Payable Transmissions during such
quarterly period and shall be certified to be accurate by an officer of
Licensee.
5.2 During the term of this Agreement, Licensee shall provide Licensor with
weekly reports, by the tenth day after the end of each week, regarding
the sound recordings accessed by Web Sites Users during the preceding
week. Such reports shall be in a form to be mutually agreed upon by
Licensor and Licensee within sixty (60) days following the date of this
Agreement. Such reports shall include information as to use by title;
artist; album; label; catalogue number; UPC Code (by December 31, 1999);
release date; ISRC code (when available); number of playing dates and
times of transmission; duration of sound recording; and such additional
information as Licensor reasonably requests; provided that such requests
shall not be effective in less than sixty (60) days from the date of the
request. In the event Licensee incurs additional actual out-of-pocket
costs as a result of furnishing such additional information, such
reasonable costs will be deducted from license fees payable for the
relevant period(s).
5.3 During the term of this Agreement, Licensee agrees to submit such
additional information as may be required under applicable rules and
regulations of the Copyright Office, including without limitation 37
C.F.R. Section 201.36.
6. VERIFICATION OF LICENSE FEE REPORTS AND OTHER REPORTS
6.1 Licensor shall have the right to examine Licensee's books and records,
and Licensee agrees to obtain for Licensor the right to examine the books
and records of any partner in, or co-publisher of, the Web Site, in order
to verify any report required by this Agreement. Licensor may exercise
this right no more than once per calendar year. Licensor shall give
Licensee thirty (30) days' notice of its intention to conduct an
examination. Licensee agrees to furnish all pertinent books and records,
including electronic records, to Licensor's authorized representatives,
during customary business hours. Such books and records shall be kept by
Licensee in accordance with Generally Accepted Accounting Principles and
shall be retained for at least three (3) years following expiration of
the term of this Agreement. Notwithstanding the foregoing, Licensee shall
not be required to provide Licensor with the access provided in this
Section 6.1 if in the preceding twelve (12) months the Licensee's
independent auditor has completed and signed an audit report for an audit
that addresses all of the information that would have been requested by
and made available to Licensor, in which event Licensee shall provide to
Licensor the audit report, work papers and other information provided to
such auditor.
6.2 Licensee agrees to provide a third-party Section selected by Licensor
(unless Licensee identifies a conflict of interest or other material fact
that should disqualify the contractor)
5
<PAGE> 6
with such reasonable additional information and reasonable access to
Licensee's premises and equipment, and to cooperate with such contractor
in making any inquiries of Licensee and third parties who provided
products or services to Licensee, as shall reasonably be required for
Licensor to verify the accuracy and completeness of the Licensee Fee
Reports provided under Section 5, including without limitation Sections
5.1 and 5.2.
6.3 Expenses for any examination conducted by Licensor under Sections 6.1 and
6.2 shall be paid by Licensor unless such examination results in a
determination by the auditor conducting such examination that Licensee's
actual payments for the period examined were more than [***]* below the
payments required under this Agreement, in which case Licensee shall pay
the costs of the audit.
6.4 The exercise by Licensor of any rights under this Section 6 shall not
prejudice any other rights or remedies of Licensor, including any other
rights of Licensor to dispute any amounts owed to Licensor under this
Agreement.
7 CONFIDENTIALITY
7.1 Licensor shall provide access to Confidential Information only to its own
employees, employees of its constituent companies and to an independent
and qualified auditor retained by Licensor with respect to the
verification of license fee payments.
7.2 Licensor shall not disclose or make any use of the Confidential
Information except as permitted in Section 7.1 or as required by law. In
the event Licensor believes it may be obligated by law to disclose any
Confidential Information, it shall advise Licensee and cooperate with
Licensee in seeking to limit the scope of such disclosure and making such
disclosure subject to a protective order or similar device designed to
maintain the confidentiality of the Confidential Information. Licensor
shall implement procedures designed to safeguard all Confidential
Information.
7.3 Except as may be required by any law, statute, or governmental rule or
regulation, neither party shall provide this Agreement, or disclose any
of the terms and rates contained in this Agreement, to any person or
entity without the prior written consent of the other party.
7.4 Neither party shall issue any press release or make any other public
statement regarding this Agreement or the transactions contemplated
herein without the prior written consent of the other party.
8. BREACH OR DEFAULT
If either party fails to perform any of the material terms or conditions
required of it by this Agreement, the non-breaching party may, at its option,
give the breaching party notice to cure
- --------
* Confidential treatment has been requested for the bracketed portion. The
confidential redacted portion has been omitted and filed separately with the
Securities and Exchange Commission.
6
<PAGE> 7
such material breach or default. Such notice shall describe the nature of such
breach. If the breaching party does not cure within ten (10) business days of
any such notice, any further notice from the non-breaching party, and any
further transmissions shall be fully subject to the copyright owners' rights
under Section 17 U.S.C. Section 106(6), and the remedies in Section 17 U.S.C.
Section 501 et seq. No waiver by the breaching party of full performance by the
non-breaching party in any one or more instances shall be a waiver of the right
to require full and complete performance of this Agreement thereafter or of the
right to terminate this Agreement in accordance with this Section 8.
9. NOTICES
All notices and other communications between the parties hereto shall be in
writing and deemed received (i) when delivered in person; (ii) upon confirmed
transmission by facsimile device; or (iii) five (5) days after deposited in U.S.
mails, postage prepaid, certified or registered mail, addressed to the other
party at the address set forth below (or such other address as such other party
may supply by written notice):
Licensee: Chief Financial Officer
ARTISTdirect, Inc.
17835 Ventura Boulevard
Suite 310
Encino, California 91316
with a copy to:
Lenard & Gonzalez LLP
1900 Avenue of the Stars
25th Floor
Los Angeles, California 90067
Attn: Allen D. Lenard, Esq.
Licensor: Warner Music Group Inc.
75 Rockefeller Plaza
New York, New York 10019
Attn: General Counsel
10. MISCELLANEOUS
10.1 This Agreement shall be governed by, and construed in accordance with,
the laws of the State of New York (without giving effect to conflicts of
law principles thereof).
10.2 The remedies provided herein shall be cumulative and shall not preclude
assertion by any party hereto of any other rights or the seeking of any
other remedies against the other party
7
<PAGE> 8
hereto. No failure to exercise and no delay in exercising any right,
power or privilege granted under this Agreement shall operate as a waiver
of such right, power or privilege. No single or partial exercise of any
right, power or privilege granted under this Agreement shall preclude any
other or further exercise thereof or the exercise of any other right,
power or privilege.
10.3 Whenever possible, each provision of this Agreement shall be interpreted
in such a manner as to be effective and valid under applicable law, but
if any provision of this Agreement shall be prohibited by or invalid
under applicable law, such provisions shall be ineffective to the extent
of such prohibition or invalidity, without invalidating the remainder of
such provision or the remaining provisions of this Agreement.
10.4 This Agreement may be modified or amended only by a writing signed by
Licensor and Licensee.
10.5 This Agreement expresses the entire understanding of the parties and
supersedes all prior and contemporaneous agreements and undertakings of
the parties with respect to the subject matter hereof.
10.6 Except as otherwise provided in Section 6.3, each party will pay all of
its own expenses, including attorneys' fees incurred in connection with
the negotiation of this Agreement, and the performance of its obligations
hereunder.
10.7 Licensor and Licensee agree that all obligations of clearance, payment or
attribution to third parties, if any, including music publishers to the
extent necessary, union funds and performing rights societies, shall be
solely the responsibility of Licensee, including but not limited to
payment for use of the musical compositions embodied in sound recordings,
if any, and for any liabilities associated with such use.
10.8 This Agreement may be executed in counterparts and by facsimile
signature, each of which shall be deemed to be an original but which
taken together shall constitute one agreement.
10.9 Except as otherwise expressly provided herein, this Agreement and the
rights hereunder shall not be assignable or transferable by either party
without the prior written consent of the other party; provided, however,
that either party hereto may assign its rights to any parent or
subsidiary, or any entity that acquires substantially all of the stock or
assets of such party in which case such assignee shall assume all
obligations and rights of such party under this Agreement.
10.10 This Agreement shall not be construed to create a partnership, joint
venture, agency or other legal relationship between the parties, or to
form any other legal entity.
10.11 The titles used in this Agreement are used for convenience only and are
not to be considered in construing or interpreting this Agreement.
8
<PAGE> 9
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the
date first above written.
WARNER MUSIC GROUP INC. ARTISTdirect, INC.
By: /s/ PAUL VIDICH By: /s/ MARC GEIGER
--------------------------- --------------------------
Title: Executive Vice President Title: CEO
9
<PAGE> 10
EXHIBIT A
OPERATING RESTRICTIONS
The following parameters shall apply to transmissions licensed pursuant to this
Agreement:
1. The Web Site Transmissions shall be streamed only and shall be streamed
[***]*.
2. Except as may be mutually agreed between Licensor and Licensee in writing,
the Web Site Transmissions shall comport with such parameters so that they would
be subject to statutory licensing pursuant to Paragraph 2, Subsection d, Section
114 of title 17, United States Code (the "Digital Millennium Copyright Act").
END OF EXHIBIT
- --------
* Confidential treatment has been requested for the bracketed portion. The
confidential redacted portion has been omitted and filed separately with the
Securities and Exchange Commission.
10
<PAGE> 1
EXHIBIT 10.38
12.10.99
STRATEGIC MARKETING AGREEMENT
THIS STRATEGIC MARKETING AGREEMENT (this "Agreement"), dated as of
December 20, 1999, is being entered into by and between Warner Music Group Inc.,
a Delaware corporation ("Group") and ARTISTdirect, Inc., a Delaware corporation
("Company"), in light of the following:
Whereas, as of the date hereof, Group (together with its Affiliates) is
a significant company in the music industry;
Whereas, there are synergies between Group's business and that of
Company;
Whereas, Time Warner Inc. (of which Group is an Affiliate) has become a
significant equity owner in Company, and
Whereas, in connection with the foregoing, Group and 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, mutual covenants and
obligations hereinafter set forth, Company and Group hereby agree as follows.
1. Certain Definitions. As used in this Agreement, the following terms
shall have the following meanings:
(a) "Affiliate" of an entity shall mean another entity
controlled by, under common control with, or controlling such entity.
(b) "Commencement Date" shall have the meaning set forth in
paragraph 2 below.
(c) "Company Contact Person" shall have the meaning set forth
in paragraph 4(c) below.
(d) "Group Artist" is a recording artist who is then subject
to an exclusive recording agreement with an Affiliate of Group.
(e) "Group Contact Person" shall have the meaning set forth in
paragraph 3(b) below.
(f) "Term" shall have the meaning set forth in paragraph 2
below.
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 (i)
the second anniversary of the Commencement Date and (ii) the termination of the
Agreement pursuant to paragraph 6 below.
<PAGE> 2
3. Group Obligations.
(a) Search Engine. Commencing with Group's new web
architecture, currently expected to be launched in mid-2000, Group shall make,
and cause its US-based Affiliates to make, the UBL.com search engine the
preferred non-commerce music search engine on the web sites of such Affiliates.
Such search engine shall be incorporated so as to permit vistors to such sites
to access the UBL.com's searchable database of bands, record labels, concerts,
tour information, ticket sales and such other information as may be part of such
database, and the search results shall appear on the Company's UBL.com site as
described in paragraph 4(b) below.
(b) Group Contact Person. Group shall promptly after the
execution hereof 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) Site Links. During the Term, Company agrees that, with
respect to all searches relating to Group Artists by means of UBL.com's search
engine, Group and its Affiliates' websites relating to such artists shall be
listed first and shall otherwise be highlighted for maximum impact on the user.
(b) Certain Elements of Search Design. Company agrees that all
searches initiated from any of Group's or its Affiliates' websites shall result
in a new window which shall: (i) contain the search results of UBL.com hosted by
Company; (ii) contain a co-branded logo of either Group or its Affiliates, as
applicable and UBL.com's logos; (iii) contain ad banner(s) which shall be solely
controlled by Group or its Affiliates, as applicable and all income from which
shall belong to Group or its Affiliates, as applicable; and (iv) contain an
easily identifiable back path to Group or its Affiliates' webpage, as
applicable, from which such search was initiated. Company hereby warrants and
represents that Group and its Affiliates, as applicable, shall be able to update
the specific ads to be included among the ad banners referred to in the previous
sentence no less frequently than [***]* and that such banners shall be able to
"rotate" no less frequently than [***]*.
(c) Company Contact Person. Company shall promptly after the
execution hereof 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.
(d) Company Meetings with Group. During each calendar quarter
of the Term, the Company shall, upon the request of the Group Contact Person,
within 10 days of receipt of such request, hold a meeting, in person or by means
of conference telephone or similar communications equipment through which all
persons participating in the meeting can hear each other, between (i) the Group
Contact Person and such other representatives of the Group and its Affiliates as
the Group Contact Person shall designate and (ii) (A) the Chief Executive
Officer of the Company or the Chief Operating Officer of the Company; (B) the
Chief Financial Officer of the Company; and (C) such other representatives of
the Company as the Company shall designate, to discuss such matters relating to
the business and affairs of the Company as the Group Contact Person shall
specify.
- --------
* Confidential treatment has been requested for the bracketed portion. The
confidential redacted portion has been omitted and filed separately with the
Securities and Exchange Commission.
2
<PAGE> 3
5. Other Cross-Marketing and Promotion. References are made to the
Internet Video License Agreement, the Webcasting Transmission License Agreement
and the Audio Sample License Agreement, each between Group and Company and of
even date herewith. At the request of either party hereto, the parties shall
discuss in good faith entering into further arrangements on a case-by-case basis
for the licensing of other material owned or controlled by Group or an Affiliate
thereof and in connection with the specific promotions of Group Artists
conducted by Company or its Affiliates on the web sites operated by Company or
an Affiliate thereof.
6. Termination for Breach. Without waiving any right or remedy
otherwise available to a party hereunder, either party hereto may terminate the
Term due to the material breach of this Agreement by the other party or its
Affiliates, subject to notice and a reasonable period to cure (not to exceed
thirty days), or on the occurrence of an insolvency event with respect to the
other party.
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 be assigned to
any Affiliate of the assigning party or to any person or entity 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
the signature pages hereof, or at such other addresses as a party may hereafter
designate by notice delivered pursuant to this paragraph 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.
3
<PAGE> 4
(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. 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. WARNER MUSIC GROUP INC.
By: /s/ MARC P. GEIGER By: /s/ PAUL VIDICH
------------------------------ ---------------------------
Marc P. Geiger Paul Vidich
ARTISTdirect, Inc. Warner Music Group Inc.
17835 Ventura Boulevard 75 Rockefeller Plaza
Suite 310 30th Floor
Encino, CA 91316 New York, New York 10019
Attn: Chief Executive Officer
With a copy to: With a copy to:
Lenard & Gonzalez LLP Warner Music Group Inc.
25th Floor 75 Rockefeller Plaza
1900 Ave. Of the Stars 30th Floor
Los Angeles, CA 90067 New York, New York 10019
Attn: Allen D. Lenard Attn: EVP & General Counsel
4
<PAGE> 1
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.
2
<PAGE> 3
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.
3
<PAGE> 4
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:
4
<PAGE> 5
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 $250,000 per year for the period from the Execution Date
through the first (1st) anniversary of the Commencement Date and (ii) $262,500
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
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.
6
<PAGE> 7
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.
7
<PAGE> 8
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.
8
<PAGE> 9
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
9
<PAGE> 10
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
10
<PAGE> 11
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.
11
<PAGE> 12
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
12
<PAGE> 13
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.
13
<PAGE> 14
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.
14
<PAGE> 15
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
15
<PAGE> 16
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.
16
<PAGE> 17
(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.
17
<PAGE> 18
(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%).
18
<PAGE> 19
(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.
19
<PAGE> 20
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.
11.1. 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)
20
<PAGE> 21
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.
11.1.1. 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.
11.1.2. 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.
11.2. 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.
21
<PAGE> 22
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).
22
<PAGE> 23
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.
23
<PAGE> 24
15. Dispute Resolution.
15.1. 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.
15.2. 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.
24
<PAGE> 25
16. Currency; Payments.
Except where otherwise expressly provided to the contrary in the
Superseding Agreements:
16.1. 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.
16.2. 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.
25
<PAGE> 26
16.3. 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.
18.1. Expenses.
18.1.1. 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.
18.1.2. 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.
18.2. 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.
26
<PAGE> 27
18.3. 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.
18.4. 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.
18.5. 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.
18.6. Representations and Warranties: Limitation of Liability
18.6.1. 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.
18.6.2. 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.
18.6.3. 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
27
<PAGE> 28
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.
18.6.4. 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.
18.7. 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.
18.8. Waivers, Remedies Cumulative, Amendments.
18.8.1. 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.
18.8.2. The rights and remedies herein provided are
cumulative and not exclusive of any rights and remedies provided by law.
18.8.3. 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.
18.9. 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.
28
<PAGE> 29
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.
29
<PAGE> 30
18.10. Indemnity.
18.10.1. 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.
18.10.2. 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.
18.10.3. 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
30
<PAGE> 31
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.
18.10.4. 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.
18.10.5. 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.
18.10.6. 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.
18.11. 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
31
<PAGE> 32
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.
/ / /
/ / /
/ / /
/ / /
/ / /
/ / /
/ / /
/ / /
/ / /
/ / /
32
<PAGE> 33
18.12. 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:
33
<PAGE> 34
EXHIBIT "A"
BUSINESS PLAN AND ANNUAL BUDGET
See attached.
[***]
- ----------------
[***] Confidential treatment has been requested for bracketed portion. The
confidential redacted portion has been omitted and filed separately with the
Securities and Exchange Commission.
34
<PAGE> 35
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.
35
<PAGE> 36
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>
PROPOSED BREAKDOWN OF $39M (5 YEARS)
<TABLE>
<CAPTION>
PROMO [***]*
ROS AD TIME [***]*
ESTIMATED YEARLY AVERAGES
--------------------------------
<S> <C> <C>
PROMO ROS SPOTS
AMOUNT AMOUNT
CABLE PROPERTIES (per month) [***]*
- ---------------- ----------- ---------
[***] [***]*
[***] [***]*
[***] [***]*
HTV [***] [***]*
INFINITO [***] [***]*
LOCOMOTION [***] [***]*
PLAYBOY TV [***] [***]*
MUCHMUSIC [***] [***]*
I-SAT [***] [***]*
UNISERIES [***] [***]*
SPACE [***] [***]*
</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
<PAGE> 37
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.
1
<PAGE> 2
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-
2
<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
3
<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. ADDITIONAL SONY CONTENT
3A.01. During the Term, upon ARTISTdirect's request, Sony shall
consider in good faith any reasonable request made by ARTISTdirect to license to
ARTISTdirect additional copyrighted materials owned and controlled by Sony not
licensed to ARTISTdirect pursuant to Articles 2 and 3 of this agreement (the
"Additional Sony Content") for use in connection with promotions of Sony Artists
conducted by ARTISTdirect on the ARTISTdirect Network.
3A.02. (a) Reference is hereby made to the ARTISTchannel Site for the
Sony Artist [***]* are individually and collectively referred to herein as the
"Qualifying ARTISTchannel Sites"; [***]* are individually and collectively
referred to herein as the "Qualifying Sony Artists".)
(b) Only in respect of the rights Sony (or its Licensees, as the
case may be) owns or controls, and subject to all of the terms, conditions
limitations and restrictions of this license agreement applicable to Sony
Content, in addition to and not in lieu of the License as it pertains to the use
of Sony Content as permitted elsewhere herein on the Qualifying ARTISTchannel
Sites, Sony (on behalf of itself and its Licensees) grants to you a
non-exclusive, limited license during the Term and throughout the Territory to
include the following on the Qualifying ARTISTchannel Sites for the Qualifying
Sony Artist concerned for the limited purposes prescribed in sections
3A.02(b)(1), (2) or (3) below:
(1)(A) Images of the front album cover art, only, of the
most recent album released by Sony in the United States
consisting entirely of the featured performances of the
Qualifying Sony Artist concerned, to be incorporated into the
"look and feel" (i.e., the basic visual elements and
presentation) of such Qualifying ARTISTchannel Site. To the
extent, if at all, that Sony has the right to grant to you the
right to make a derivative work containing such images as so
incorporated, you shall have the right to make a derivative
work containing such images as so incorporated, provided that
you have requested Sony's permission to do so in writing in
each instance and Sony has agreed to grant the derivative
rights concerned to you in each instance.;
(B) Notwithstanding the first sentence of subsection
3A.02(b)(1)(A) above, solely in connection with the [***]*, such
license shall include all images of the album art for the most
recent such album, whether or not such album art is the front
album cover art, solely to the extent used by you on the [***]*
as of the date hereof, it being understood and agreed that any
future changes in respect thereof shall require Sony's consent
in each instance unless the changes are otherwise in accordance
with the terms prescribed in subsection 3A.02(b)(1)(A) above.;
(2) Excerpts from Videos produced by Sony consisting
entirely of the featured performances of the Qualifying Sony
Artist concerned, subject to the following conditions: (i) such
excepts may be no longer than thirty (30) seconds in running
time, (ii) such excerpts must be for promotional uses only
(i.e., at no-charge), and (iii) such excerpts shall be
- ----------------
* 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
transmitted to end-users solely by so-called "streaming"
technology (i.e., technology which transmits and plays or
displays, as applicable, the Video excerpt concerned to remote
users in real time). Neither you nor any other Person shall
create or facilitate the creation of "downloadable" copies of
any such Video excerpts. Provided that you have used
commercially reasonable efforts to prevent the creation of
"downloadable" copies of any such Video excerpts 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 such Video, you shall not be deemed
to have breached the foregoing provisions of section
3A.02(b)(2). 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 Video, 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-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 Video, 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 Videos 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 Videos concerned from all Web Sites on the ARTISTdirect
Network.; and
(3) The most recently produced Video produced by Sony
consisting entirely of the featured performances of the
Qualifying Sony Artist concerned, subject to the following
conditions: (i) such Video may shown in its entirety, provided
that it may be made available only for a period of two (2)
consecutive weeks, which two (2) week period commences on the
date that is one (1) week after the date the Video concerned is
submitted to MTV in the United States; (ii) such Video shall be
transmitted to end-users solely by so-called "streaming"
technology (i.e., technology which transmits and plays or
displays, as applicable, the Video excerpt concerned to remote
users in real time). Neither you nor any other Person shall
create or facilitate the creation of "downloadable" copies of
any such Video excerpts. Provided that you have used
commercially reasonable efforts to prevent the creation of
"downloadable" copies of any such Video excerpts 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 such Video, you shall not be deemed
to have breached the foregoing provisions of section
3A.02(b)(3). 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 Video, 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-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 Video, 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 Videos 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 Videos concerned from all Web Sites on the ARTISTdirect
Network.
6
<PAGE> 7
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.
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.
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.
7
<PAGE> 8
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 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
8
<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
9
<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
<PAGE> 12
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
13
<PAGE> 14
ARTISTDIRECT, INC.
By: /s/ MARC P. GEIGER
------------------------
Title: CEO
14
<PAGE> 1
EXHIBIT 10.43
ADVERTISING AND PROMOTION AGREEMENT
This Advertising and Promotion Agreement (the "Agreement") is entered into this
24th day of December, 1999 (the "Effective Date") between Yahoo! Inc. ("Yahoo"),
a Delaware corporation with offices at 3420 Central Expressway, Santa Clara, CA
95051, and ARTISTdirect, Inc. ("ARTISTdirect"), a Delaware corporation with
offices at 17835 Ventura Boulevard, Suite 310, Encino, CA 91316.
In consideration of the mutual promises contained in this
Agreement, Yahoo and ARTISTdirect hereby agree as follows:
1. DEFINITIONS.
The following terms are used in this Agreement with the
respective meanings set forth below:
"ARTISTdirect Banner" means an advertising unit that (a) promotes
Music Products, ARTISTdirect Content or music related services available on the
ARTISTdirect Network; (b) has dimensions no larger than 468 pixels wide by 60
pixels high; (c) does not contain more than six seconds of animation; (d) does
not contain "looped" animation; (e) has a file size no larger than 15K; and (f)
permits users to navigate directly to a Page on the ARTISTdirect Network
primarily related to the content in the ARTISTdirect Banner.
"ARTISTdirect Banner Category Pages" means those Pages within the
categories of the Yahoo Directory identified in Exhibit A.
"ARTISTdirect Banner Keywords" means those keywords identified in
Exhibit A, except that Yahoo may substitute a comparable keyword (based on
projected Page Views) for any ARTISTdirect Banner Keyword if it determines, in
its sole discretion, that such substitution is reasonably necessary to avoid
liability for third-party claims relating to alleged infringement or other
improper use of the particular ARTISTdirect Banner Keyword.
"ARTISTdirect Banner Pages" means the ARTISTdirect Banner
Category Pages and the ARTISTdirect Banner Search Results Pages.
"ARTISTdirect Banner Search Results Pages" means those Pages
displayed upon a user's search of the Yahoo Directory for an ARTISTdirect Banner
Keyword.
"ARTISTdirect Brand Features" means all trademarks, service
marks, logos and other distinctive brand features of ARTISTdirect that are used
in or relate to its business.
"ARTISTdirect Best Sellers Module" means an advertising unit
substantially similar in form to the example set forth in Exhibit C that (a)
contains a list of the top 5 best-selling recording artists, as provided by
ARTISTdirect on a weekly basis; (b) contains an ARTISTdirect Branded Link; and
(c) permits users to navigate directly to an ARTISTdirect Biased Buy Page from
each entry of the best-seller list.
EXECUTION COPY
<PAGE> 2
"ARTISTdirect Biased Buy Page" means a Page within Yahoo Shopping
(a) to which users click through directly from the ARTISTdirect Best Sellers
Module, the ARTISTdirect Billboard Module, the ARTISTdirect Buy It Button or the
ARTISTdirect New Releases Module; (b) which permits users to purchase the Music
Products promoted in the particular advertising unit only from the ARTISTdirect
RMI Site; and (c) which is substantially similar in form to the example set
forth in Exhibit D.
"ARTISTdirect Billboard Module" means an advertising unit
substantially similar in form to the example set forth in Exhibit E that (a)
contains a list of the top 10 albums of the Billboard 200 albums and the
corresponding recording artists, as provided by a third party; (b) contains an
ARTISTdirect Branded Link; and (c) permits users to navigate directly to an
ARTISTdirect Biased Buy Page from the first 10 album entries.
"ARTISTdirect Branded Link" means a Link substantially similar in
form to the example set forth in Exhibit F that (a) contains ARTISTdirect Brand
Features; (b) has dimensions no larger than 120 pixels wide by 20 pixels high;
(c) is saved in GIF or JPG format; (d) has a file size no larger than 2K; (e)
does not contain animation; (f) contains the phrase "Buy from" or comparable
purchase reference text; and (g) permits users to navigate directly to the front
Page of the ARTISTdirect RMI Site.
"ARTISTdirect Buy It Button" means an advertising unit
substantially similar in form to the example set forth in Exhibit G that (a) has
dimensions no larger than 88 pixels wide by 31 pixels high; (b) has a file size
no larger than 2K; (c) contains ARTISTdirect Brand Features; (d) contains text
that is provided by Yahoo; and (e) permits users to navigate directly to an
ARTISTdirect Biased Buy Page.
"ARTISTdirect Chat Banner" means an advertising unit
substantially similar in form to the example set forth in Exhibit X and to the
ARTISTdirect Banner, except that the ARTISTdirect Chat Banner (a) has dimensions
no larger than 468 pixels wide by 90 pixels high and (b) permits users to
navigate directly to a Page on the ARTISTdirect Network primarily related to the
content in the ARTISTdirect Chat Banner.
"ARTISTdirect Content" means all materials, data and similar
information relating to music that is collected or owned by ARTISTdirect, which
is a collection of HTML files, digital audio files and certain related scripts.
ARTISTdirect Content may include, but is not limited to (a) certain digital song
tracks and clips from the ARTISTdirect database; (b) certain recording artists
who participate in ARTISTdirect sponsored chat events; (c) certain webcasts of
music concerts or other music related events; and (d) certain auctions of Music
Products.
"ARTISTdirect Destination Page" means any Page on the
ARTISTdirect Network or the ARTISTdirect RMI Site to which users click through
directly from any ARTISTdirect Link. For clarity, ARTISTdirect Destination Page
does not mean any subsequent Page on the ARTISTdirect Network or the
ARTISTdirect RMI Site to which users navigate from the original Destination
Page.
2
<PAGE> 3
"ARTISTdirect DHTML Module" means an advertising unit
substantially similar in form to the example set forth in Exhibit H that will be
presented to the user in 1 of 2 views:
(1) Opening View. The Opening View of this advertising unit (a)
promotes certain Music Products, certain ARTISTdirect Content
or certain music related services available on the
ARTISTdirect Network, as further promoted in the Expanded
View of this advertising unit; (b) has dimensions no larger
than 130 pixels wide by 40 pixels high; (c) does not contain
animation; (d) may contain an image in GIF or JPG format; and
(e) has a file size no greater than 3K.
(2) Expanded View. The Expanded View of this advertising unit (a)
promotes Music Products, ARTISTdirect Content or music
related services available on the ARTISTdirect Network; (b)
has a width no larger than 130 pixels and a variable height
based on the number of characters used in accordance with
subsection (d) below; (c) does not contain animation; and (d)
contains headline text of no more than 18 characters,
including spaces, and body text of no more than 200
characters, including spaces. The body text may contain text
links that permit users to navigate directly to Pages on the
ARTISTdirect Network primarily related to the content in the
Expanded View of this advertising unit, as long as at least
one text link permits users to navigate directly to a Page on
the ARTISTdirect RMI Site dedicated to the on-line purchase
of the Music Products promoted in the Expanded View of this
advertising unit.
"ARTISTdirect E-Mail Message" means an electronic mail message
substantially similar in form to the example set forth in Exhibit I that (a)
presents users with a promotional offer regarding the on-line sale of Music
Products by ARTISTdirect or the provision of ARTISTdirect Content or music
related services by ARTISTdirect at no cost to the user (e.g., 30% discount on
the purchase of compact discs, free music downloads); (b) is targeted to
participating registered Yahoo Mail users who have indicated an interest in
music in their Yahoo profiles based on 1 of the following 5 variables (as
selected by ARTISTdirect and subject to availability), which are provided by
registered Yahoo Mail users upon registration: age, gender, occupation,
interest, zip code; (c) conforms to Yahoo Delivers' then current guidelines; (d)
is a single HTML message that does not exceed 425 pixels in width, which Yahoo
will enclose within a table and place between the required header and footer
information; (e) consists of HTML code that is free of errors and passes the
weblink validation checker; (f) has a total file size, including HTML code and
graphics, no larger than 30K; (g) does not have more than six seconds of
animation; (h) does not contain "looped" animation; (i) does not contain Java,
JavaScript, frames, ActiveX, or dynamic HTML; (j) does not have body background
image or color, except that colored tables may be used to simulate a background
color; (k) addresses users as Yahoo Delivers members (e.g., "An exclusive offer
for Yahoo Delivers members."); (l) has a subject line that contains no more than
35 characters, including spaces, and conforms to the following format: "Yahoo!
Delivers: A Special Offer from ARTISTdirect"; and (m) permits users to navigate
directly to a Page on the ARTISTdirect Network primarily related to the content
in the ARTISTdirect E-Mail Message.
3
<PAGE> 4
"ARTISTdirect Front Page Promotion" means a promotion that (a)
includes the ARTISTdirect Front Page Promotion Banner; (b) runs for at least 2
weeks, unless otherwise mutually agreed by the parties; (c) runs no more
frequently than once per calendar quarter; and (d) complies with Yahoo's then
current guidelines with respect to front Page promotions, currently located at
http://docs.yahoo.com/docs/advertising/csguide/index.html.
"ARTISTdirect Front Page Promotion Banner" means an advertising
unit substantially similar in form to the example set forth in Exhibit J that
(a) presents users with a promotional offer regarding the on-line sale of Music
Products by ARTISTdirect or the provision of ARTISTdirect Content or music
related services by ARTISTdirect at no cost to the user (e.g., 30% discount on
the purchase of compact discs, free music downloads, win tickets to see Sting in
concert); (b) has dimensions no larger than 230 pixels wide by 33 pixels high;
(c) does not contain more than 6 seconds of animation; (d) does not contain
"looped" animation; (e) has a file size no greater than 3K and (f) permits users
to navigate directly to a Page on the ARTISTdirect Network primarily related to
the content in the ARTISTdirect Banner.
"ARTISTdirect Keyword Module" means an advertising unit
substantially similar in form to the example set forth in Exhibit K that (a)
promotes the on-line sale of Music Products by ARTISTdirect; (b) has dimensions
no larger than 88 pixels wide by 31 pixels high; (c) does not contain animation;
(d) has a file size no greater than 2K (e) contains ARTISTdirect Brand Features
that permit users to navigate directly to the front Page of the ARTISTdirect RMI
Site; (f) contains 3 text links on 3 lines that do not exceed 16 characters per
line, including spaces; and (g) permits users to navigate directly to Pages on
the ARTISTdirect RMI Site that ARTISTdirect deems appropriate, except that each
Page must present users with a prominent opportunity to purchase on-line the
Music Products promoted in the ARTISTdirect Keyword Module.
"ARTISTdirect Keyword Module Category Pages" means those Pages
within the categories of the Yahoo Directory identified in Exhibit B, as amended
by Yahoo from time to time to account for changes in the organization of the
Yahoo Directory.
"ARTISTdirect Keyword Module Keywords" means those keywords
identified in Exhibit B, except that Yahoo may substitute a comparable keyword
(based on projected Page Views) for any ARTISTdirect Keyword Module Keyword if
it determines, in its sole discretion, that such substitution is reasonably
necessary to avoid liability for third-party claims relating to alleged
infringement or other improper use of the particular ARTISTdirect Keyword Module
Keyword.
"ARTISTdirect Keyword Module Pages" means the ARTISTdirect
Keyword Module Category Pages and the ARTISTdirect Keyword Module Search Results
Pages.
"ARTISTdirect Keyword Module Search Results Pages" means those
Pages displayed upon a user's search of the Yahoo Directory for an ARTISTdirect
Banner Keyword.
"ARTISTdirect Link" means any Link placed by Yahoo under this
Agreement, including but not limited to the ARTISTdirect Banner, the
ARTISTdirect Chat Banner, the ARTISTdirect Shopping Banner, the ARTISTdirect
Front Page Promotion Banner, the ARTISTdirect Best Sellers Module, the
ARTISTdirect Billboard Module, the ARTISTdirect Buy
4
<PAGE> 5
It Button, the ARTISTdirect DHTML Module, the ARTISTdirect Keyword Module, the
ARTISTdirect Message Boards Module, the ARTISTdirect New Releases Module, the
ARTISTdirect Sweepstakes Button, the ARTISTdirect Sweepstakes Text Link, the
Yahoo Mail Welcome Module and the Yahoo Mail Logout Module.
"ARTISTdirect Message Boards Module" means an advertising unit
substantially similar in form to the example set forth in Exhibit L that (a)
promotes Music Products, ARTISTdirect Content or music related services
available on the ARTISTdirect Network, except that the ARTISTdirect Message
Boards Module may not promote message boards on the ARTISTdirect Network; (b)
has dimensions no larger than 125 pixels wide by 125 pixels high; (c) does not
contain more than six seconds of animation; (d) does not contain "looped"
animation; (e) has a file size no greater than 10K; and (f) permits users to
navigate directly to a Page on the ARTISTdirect Network primarily related to the
content in the ARTISTdirect Message Boards Module.
"ARTISTdirect New Releases Module" means an advertising unit
substantially similar in form to the example set forth in Exhibit M that (a)
contains 3 images of album art, where each image has dimensions no larger than
80 pixels wide by 80 pixels high, a file size no greater than 3K and permits
users to navigate directly to an ARTISTdirect Biased Buy Page; (b) contains 3
lines of text, where each line provides either the name of the artist or the
title of the album in the corresponding image and serves as a text link that
permits users to navigate directly to an ARTISTdirect Biased Buy Page; and (c)
contains an ARTISTdirect Branded Link.
"ARTISTdirect Replacement Module" means an advertising unit that
(a) contains at least one link; (b) has dimensions no smaller than the
ARTISTdirect DHTML Module Opening View and no larger than the Expanded View; and
(c) has other specifications as mutually agreed upon by the parties.
"ARTISTdirect RMI Site" means those Pages within the ARTISTdirect
Network as hosted by Yahoo and included in the Yahoo Remote Merchant Integration
Program.
"ARTISTdirect Shopping Banner" means an advertising unit
substantially similar in form to the ARTISTdirect Banner, except that the
ARTISTdirect Shopping Banner permits users to navigate directly to a Page on the
ARTISTdirect RMI Site primarily related to the content in the ARTISTdirect
Shopping Banner.
"ARTISTdirect Network" means the Web properties owned or operated
on behalf of ARTISTdirect, which are dedicated to the on-line promotion and sale
of Music Products and are currently located at http://www.artistdirect.com,
http://www.ubl.com, http://www.imusic.com and http://www.downloadsdirect.com.
"ARTISTdirect Sweepstakes Button" means an advertising unit
substantially similar in form to the example set forth in Exhibit N that (a)
contains a sweepstakes with a minimum retail prize value of [***]* (to be
provided by Yahoo); (b) contains text that is provided by Yahoo in consultation
with ARTISTdirect; (c) permits users to interact with the
- --------
* 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
ARTISTdirect Network as mutually agreed upon by the parties; (d) does not
contain ARTISTdirect Brand Features; (e) is further outlined in a production
scheduled mutually agreed upon by the parties; and (f) permits users to navigate
directly to an ARTISTdirect Sweepstakes Page that will contain ARTISTdirect
Brand Features, and the ARTISTdirect Brand Features permit users to navigate
directly to the front Page of the ARTISTdirect Network, currently located at
http://www.artistdirect.com.
"ARTISTdirect Sweepstakes Page" means a Page substantially
similar in form to the example set forth in Exhibit P that (a) is hosted by
Yahoo; (b) may contain Yahoo Brand Features and will contain ARTISTdirect Brand
Features that permit users to navigate directly to the front Page of the
ARTISTdirect Network, currently located at http://www.artistdirect.com; and (c)
permits user to register for a sweepstakes.
"ARTISTdirect Sweepstakes Text Link" means an advertising unit
substantially similar in form to the example set forth in Exhibit O that (a)
contains a sweepstakes with a minimum retail prize value of [***]* (to be
provided by Yahoo); (b) contains text that is provided by Yahoo in consultation
with ARTISTdirect; (c) permits users to interact with the ARTISTdirect Network
as mutually agreed upon by the parties; (d) does not contain ARTISTdirect Brand
Features; (e) is further outlined in a production scheduled mutually agreed upon
by the parties; and (f) permits users to navigate directly to an ARTISTdirect
Sweepstakes Page that will contain ARTISTdirect Brand Features, and the
ARTISTdirect Brand Features permit users to navigate directly to the front Page
of the ARTISTdirect Network, currently located at http://www.artistdirect.com.
"FTC Order" means that certain "Decision and Consent Order"
issued by the U.S. Federal Trade Commission on February 5, 1999 against
GeoCities, Inc., a California corporation acquired by Yahoo, attached hereto as
Exhibit T and any and all subsequent or related official materials, regulations,
laws judgements or orders.
"Launch Date" means the date on which the ARTISTdirect RMI Site
is made publicly available by Yahoo.
"Link" or "link" means a visible graphic or textual indicator
located within a Page that permits a user to navigate the World Wide Web; when
selected by a user, this indicator directs the user's internet browser
connection onward to a specified Page on the same or any other Web site via a
URL (whether perceptible or not) and establishes a direct connection between the
browser and the new Page.
"Music Merchant" means any company or other third party that
derives at least 50% of its revenue from the on-line sale of Music Products.
"Music Merchant Best Sellers Module" means an advertising unit
that (a) conforms to the specifications of the ARTISTdirect Best Sellers Module
and (b) is placed on the same Pages on which the ARTISTdirect Best Sellers
Module is placed.
- --------
* Confidential treatment has been requested for the bracketed portion.
The confidential redacted portion has been omitted and filed separately with the
Securities and Exchange Commission.
6
<PAGE> 7
"Music Merchant Modules" means (a) the ARTISTdirect Billboard
Module, the ARTISTdirect Buy It Button, the ARTISTdirect DHTML Module, the
ARTISTdirect Keyword Module, the ARTISTdirect New Releases Module, the
ARTISTdirect Sweepstakes Button and the ARTISTdirect Sweepstakes Text Link, and
(b) those advertising units that (1) conform to the specifications of the
aforementioned ARTISTdirect advertising units and (2) are placed within the same
area of the same Pages on which the aforementioned ARTISTdirect advertising
units are placed, either adjacent to the aforementioned ARTISTdirect advertising
units or in rotation with the aforementioned ARTISTdirect advertising units.
"Music Products" means music recordings and other music related
merchandise (i.e., compact discs, cassettes tapes, mp3 files and other audio
formats, music videos and other audio/video formats, music concert memorabilia,
including but not limited to clothing and posters that commemorate the music
concert, and recording artist memorabilia, including but not limited to clothing
and posters that feature the recording artist).
"Music Merchant Program" means Yahoo's program consisting of
certain advertising and promotional activities with Music Merchants as further
described in this Agreement.
"Page" means any World Wide Web page (or, for on-line media other
than Web sites, the equivalent unit of the relevant protocol).
"Page View" mean a user's request for a Page as measured by
Yahoo's advertising reporting system.
"Run of Music Rooms" means banner placements in the south banner
position across the chat rooms within the music category of Yahoo Chat.
"Run of Network" means banner placements in the north banner
position across the Yahoo Properties.
"Run of Yahoo Music" means banner placements in the north banner
position across Yahoo Music.
"Run of Yahoo Shopping" means banner placements in the north
banner position across Yahoo Shopping.
"Term" means the period beginning on the Effective Date and
continuing for twenty-four (24) months from the Launch Date, unless either party
terminates this Agreement on an earlier date in accordance with Section 12.
"Yahoo Brand Features" means all trademarks, service marks, logos
and other distinctive brand features of Yahoo that are used in or relate to its
business.
"Yahoo Chat" means Yahoo's U.S. targeted chat property, currently
located at http://chat.yahoo.com.
7
<PAGE> 8
"Yahoo Delivers" means Yahoo's U.S. targeted direct marketing
program conducted via Yahoo Mail.
"Yahoo Digital" means Yahoo's U.S. targeted digital music
property, currently located at http://digital.yahoo.com.
"Yahoo Directory" means Yahoo's principal U.S. targeted directory
to the World Wide Web, currently located at http://www.yahoo.com.
"Yahoo Mail" means Yahoo's U.S. targeted electronic mail
property, currently located at http://mail.yahoo.com.
"Yahoo Mail Logout Module" means an advertising unit
substantially similar in form to the example set forth in Exhibit R that (a) is
targeted to certain registered Yahoo Mail users based on age, gender, interest
or occupation (e.g., users whose Yahoo profiles reflect an age between 18 and
35); (b) has dimensions no larger than 88 pixels wide by 31 pixels high; (c) has
a file size no greater than 2K; (d) contains no more than 25 characters of text,
including spaces; (e) contains a pull down menu with a file size no greater than
1.35K and with no more than 5 options; (f) does not contain animation; and (g)
permits users to navigate directly to a Page on the ARTISTdirect Network that
(1) is dedicated to the on-line purchase of the Music Products promoted in the
Yahoo Mail Logout Module or (2) presents users with a promotional offer
regarding the on-line sale of Music Products by ARTISTdirect or the provision of
ARTISTdirect Content or music related services by ARTISTdirect at no cost to the
user (e.g., free music downloads, access to ARTISTdirect Content that is not
available to the general public, discounts on the on-line purchase of Music
Products, free shipping and handling on the on-line purchase of Music Products).
"Yahoo Mail Logout Page" means a Page substantially similar in
form to the example set forth in Exhibit R that is the first Page presented to a
user after the user clicks on the "Sign Out" Link in Yahoo Mail.
"Yahoo Mail Welcome Module" means an advertising unit
substantially similar in form to the example set forth in Exhibit Q that (a) is
targeted to certain registered Yahoo Mail users based on age, gender, interest
or occupation (e.g., users whose Yahoo profiles reflect an age between 18 and
35); (b) has dimensions no larger than 88 pixels wide by 31 pixels high; (c) has
a file size no greater than 2K; (d) contains 2 lines of text, not to exceed 25
characters, including spaces, per line; (e) does not contain animation; and (f)
permits users to navigate directly to a Page on the ARTISTdirect Network that
(1) is dedicated to the on-line purchase of the Music Products promoted in the
Yahoo Mail Welcome Module or (2) presents users with a promotional offer
regarding the on-line sale of Music Products by ARTISTdirect or the provision of
ARTISTdirect Content or music related services by ARTISTdirect at no cost to the
user (e.g., free music downloads, access to ARTISTdirect Content that is not
available to the general public, discounts on the on-line purchase of Music
Products, free shipping and handling on the on-line purchase of Music Products).
"Yahoo Mail Welcome Page" means a Page substantially similar in
form to the example set forth in Exhibit Q that (a) is the first Page presented
to a user after the user
8
<PAGE> 9
successfully enters a Yahoo ID and password for a Yahoo Mail account and (b) is
presented to the user each time the user accesses the Yahoo Mail account before
clicking on the "Sign Out" Link in Yahoo Mail or before the Yahoo Mail system
signs out the user (e.g., for a sustained period of inactivity).
"Yahoo Message Boards" means Yahoo's U.S. targeted message board
property, currently located at http://messages.yahoo.com.
"Yahoo Music" means Yahoo's U.S. targeted music property,
currently located at http://music.yahoo.com.
"Yahoo Properties" means any Yahoo branded or co-branded media
properties, including but not limited to Internet guides, that are developed in
whole or in part by Yahoo or its affiliates.
"Yahoo Remote Merchant Integration Program" means that program
through which Yahoo integrates certain Web sites of remote on-line merchants
into Yahoo Shopping.
"Yahoo Remote Merchant Integration Program Agreement" means the
agreement set forth in Exhibit V.
"Yahoo Shopping" means Yahoo's U.S. targeted shopping property,
currently located at http://shopping.yahoo.com.
2. ARTISTDIRECT BANNERS.
2.1 Yahoo will provide the ARTISTdirect Banner, on a rotating
basis until its Page View obligation under Section 10.1 is
met, on ARTISTdirect Banner Pages, through Run of Yahoo
Music and, based on an interest in music (i.e., targeted to
registered Yahoo users who have indicated an interest in
music in their Yahoo profiles), through Run of Network.
2.2 Yahoo will provide the ARTISTdirect Chat Banner, on a
rotating basis until its Page View obligation under Section
10.1 is met, through Run of Music Rooms.
2.3 Yahoo will provide the ARTISTdirect Shopping Banner, on a
rotating basis until its Page View obligation under Section
10.1 is met, through Run of Yahoo Shopping.
2.4 Yahoo will provide the ARTISTdirect Front Page Promotion
Banner on a rotating basis in connection with the
ARTISTdirect Front Page Promotion.
3. ARTISTDIRECT BUTTONS AND MODULES.
3.1 During the Term, Yahoo will provide the ARTISTdirect Best
Sellers Module on Pages within Yahoo Digital, Yahoo Music
and Yahoo Shopping.
9
<PAGE> 10
3.2 Yahoo will provide the ARTISTdirect Billboard Module, on a
rotating basis with the corresponding Music Merchant Module
of the Selected Music Merchant (as defined in Section 9.1)
during the Term, on Pages within Yahoo Shopping.
3.3 Yahoo will provide the ARTISTdirect Buy It Button, on a
rotating basis with the corresponding Music Merchant Module
of the Selected Music Merchant during the Term, on Pages
within Yahoo Music.
3.4 Yahoo will provide the ARTISTdirect DHTML Module, on a
rotating basis with the corresponding Music Merchant Module
of the Selected Music Merchant during the Term, on Pages
within Yahoo Music. In the event that Yahoo cannot provide
the ARTISTdirect DHTML Module, Yahoo will provide the
ARTISTdirect Replacement Module on a rotating basis with
the Selected Music Merchant on Pages within Yahoo Music
during the time that Yahoo is unable to provide the
ARTISTdirect DHTML Module. The continued provision of the
ARTISTdirect Replacement Module will be subject to review
at the quarterly meetings described in Section 10.3.
3.5 Yahoo will provide the ARTISTdirect Keyword Module, on a
rotating basis with and adjacent to the corresponding Music
Merchant Module of the Selected Music Merchant during the
Term, on the ARTISTdirect Keyword Module Pages.
3.6 Yahoo will provide the ARTISTdirect Message Boards Module,
on a rotating basis until its Page View obligation under
Section 10.1 is met, on Pages within the music category of
Yahoo Message Boards.
3.7 Yahoo will provide the ARTISTdirect New Release Module, on
a rotating basis with the corresponding Music Merchant
Module of the Selected Music Merchant during the Term, on
Pages within Yahoo Shopping.
3.8 Yahoo will provide the Yahoo Mail Welcome Module, on a
rotating basis until its Page View obligation under Section
10.1 is met, on the Yahoo Mail Welcome Page.
3.9 Yahoo will provide the Yahoo Mail Logout Module, on a
rotating basis until its Page View obligation under Section
10.1 is met, on the Yahoo Mail Logout Page.
4. ARTISTDIRECT SWEEPSTAKES BUTTON AND SWEEPSTAKES TEXT LINK.
4.1 Yahoo will provide the ARTISTdirect Sweepstakes Button, on
a rotating basis with the corresponding Music Merchant
Module of the Selected Music Merchant until its Page View
obligation under Section 10.1 is met, on Pages within the
music category of Yahoo Shopping.
10
<PAGE> 11
4.2 Yahoo will provide the ARTISTdirect Sweepstakes Text Link,
on a rotating basis with the corresponding Music Merchant
Module of the Selected Music Merchant until its Page View
obligation under Section 10.1 is met, on Pages within Yahoo
Music.
4.3 Yahoo will provide as many as [***]* separate sweepstakes
(the "Sweepstakes") in connection with the ARTISTdirect
Sweepstakes Button and the ARTISTdirect Sweepstakes Text
Link. ARTISTdirect will be responsible for creating the
Sweepstakes, including but not limited to drafting the
official rules that will govern the Sweepstakes and the
acquisition and fulfillment of all prizes in connection
with the Sweepstakes, except that Yahoo will provide
ARTISTdirect with 1 prize of retail value not less than
[***]* for each Sweepstakes that is conducted under this
Agreement. The Sweepstakes will be (a) subject to Yahoo's
approval, which will not be unreasonably withheld, and (b)
conducted in accordance with Yahoo's then current
guidelines with respect to sweepstakes. The parties
acknowledge and agree that Yahoo's approval of the official
rules for the Sweepstakes will not constitute an opinion as
to the legal appropriateness or adequacy of such rules or
their manner of use.
4.4 In connection with the Sweepstakes, Yahoo will present
users who participate in the Sweepstakes with the
opportunity to receive an electronic mail message (the
"Follow-Up E-Mail"). Upon ARTISTdirect's election, Yahoo
will deliver the Follow-Up E-Mail on behalf of ARTISTdirect
to those users who opt to receive the Follow-Up E-Mail.
ARTISTdirect will provide to Yahoo all text of the
Follow-Up E-Mail, and such text will be subject to Yahoo's
approval, which will not be unreasonably withheld.
5. ARTISTDIRECT E-MAIL MESSAGE.
5.1 Yahoo will deliver [***]* ARTISTdirect E-Mail Messages to
those registered Yahoo Mail users who (a) have indicated in
their Yahoo Mail preferences an interest in music and a
willingness to receive promotional offers via Yahoo
Delivers and (b) have provided information in their Yahoo
profiles that matches the value selected by ARTISTdirect
for purposes of targeting the ARTISTdirect E-Mail Message.
Yahoo will deliver the ARTISTdirect E-Mail Message in
accordance with Yahoo's privacy policy.
5.2 ARTISTdirect will provide to Yahoo all text of the
ARTISTdirect E-Mail Message and any other materials
necessary for ARTISTdirect to participate in Yahoo
Delivers. Such materials will be (a) subject to Yahoo's
approval, which will not be unreasonably withheld, and (b)
- --------
* Confidential treatment has been requested for the bracketed portion.
The confidential redacted portion has been omitted and filed separately with the
Securities and Exchange Commission.
11
<PAGE> 12
consistent with Yahoo's policies and guidelines for such
messages and for Yahoo Delivers generally.
6. ARTISTDIRECT FRONT PAGE PROMOTION.
6.1 During the Term, and in connection with the ARTISTdirect
Front Page Promotion Banner, Yahoo will provide the
ARTISTdirect Front Page Promotion no more frequently than
[***]* until its Page View obligation under Section 10.1 is
met.
7. ARTISTDIRECT CONTENT.
7.1 During the Term and in ARTISTdirect's sole discretion,
ARTISTdirect will apprise Yahoo of ARTISTdirect Content
when ARTISTdirect develops or acquires such ARTISTdirect
Content. Yahoo will, in its sole discretion, consider
ARTISTdirect Content for inclusion in appropriate areas of
the Yahoo Properties. Under no circumstances will
ARTISTdirect be under any obligation, express or implied,
to provide ARTISTdirect Content to Yahoo, nor will Yahoo be
under any obligation, express or implied, to include any
ARTISTdirect Content in any Yahoo Property. If Yahoo
chooses to include ARTISTdirect Content in any Yahoo
Property, the terms of such inclusion will be mutually
agreed upon by the parties.
8. IMPLEMENTATION.
8.1 Yahoo will be solely responsible for the user interface and
placement of the ARTISTdirect Links and ARTISTdirect will
be solely responsible for and will provide Yahoo with all
text, artwork and design elements of the ARTISTdirect
Links. The parties will use commercially reasonable efforts
to make available on Yahoo (a) the ARTISTdirect Banners on
or before January 7, 2000 and (b) the other ARTISTdirect
Links on or before January 14, 2000. In any event,
ARTISTdirect will deliver to Yahoo all the text, artwork
and design elements of the ARTISTdirect Banner no later
than January 7, 2000 and all text, artwork and design
elements of the other ARTISTdirect Links no later than
January 14, 2000.
8.2 Yahoo reserves the right, at any time, to redesign or
modify the organization, structure, specifications, "look
and feel," navigation, guidelines and other elements of the
ARTISTdirect Links or any Yahoo Property on which an
ARTISTdirect Link is placed. If such a modification
materially and adversely affects any specific ARTISTdirect
Link, Yahoo will provide ARTISTdirect, as its sole remedy,
with a comparable promotional placement on the Yahoo
Properties.
- --------
* Confidential treatment has been requested for the bracketed portion.
The confidential redacted portion has been omitted and filed separately with the
Securities and Exchange Commission.
12
<PAGE> 13
8.3 ARTISTdirect will provide to Yahoo all URLs, URL formats
(as applicable), content and other materials necessary for
Yahoo to provide the ARTISTdirect Links in accordance with
the specifications set forth in this Agreement and Yahoo's
standard advertising guidelines, currently located at
http://docs.yahoo.com/docs/advertising/ (the "ARTISTdirect
Deliverables") on or before the ARTISTdirect Deliverables
Due Date. All content and material contained in the
ARTISTdirect Links will be subject to Yahoo's approval,
which will not be unreasonably withheld, and must comply
with all applicable federal, state and local laws, rules
and regulations, including but not limited to consumer
protection laws and any rules and regulations governing
product claims, truth in labeling or false advertising.
8.4 During the Term, ARTISTdirect hereby grants to Yahoo a
non-exclusive, non-transferable, non-sublicensable,
worldwide, fully paid license to use, reproduce and display
the ARTISTdirect Brand Features solely (a) to indicate the
location of the ARTISTdirect Links as set forth herein and
(b) in connection with the marketing and promotion of
ARTISTdirect in the Yahoo Properties pursuant to this
Agreement.
8.5 In no event will any ARTISTdirect Destination Page contain
graphic or text links, advertisements or promotions of
[***]* (the "Yahoo Competitors"). Yahoo will be entitled to
update the list of Yahoo Competitors on a quarterly basis.
The foregoing exclusion of Yahoo Competitors does not apply
to any graphic or text link that serves as attribution for,
and appears adjacent to, original content that is presented
on an ARTISTdirect Destination Page, unless Yahoo
determines, in its reasonable discretion, that such link is
promotional in nature. If Yahoo makes such a determination,
or if Yahoo becomes aware of any link, advertisement or
promotion that potentially violates this Section 8.5,
Yahoo will notify ARTISTdirect and may request that
ARTISTdirect (a) remove, revise or replace suck link,
advertisement or promotion; (b) specify a different
Destination Page to which the particular advertising unit
will direct users; or (c) any alternative solution to which
the parties mutually agree. If the parties cannot resolve
the matter within 5 business days of Yahoo's notice to
ARTISTdirect, Yahoo reserves the right to remove or disable
the particular advertising unit and to prorate its Page
View obligation for this Music Merchant Program as a whole
(e.g., based on the Page View allocation set forth in
Section 10.2(d) and a 24 month Term, if Yahoo were to
remove or disable the ARTISTdirect Chat Banner under this
Section 8.5 and the parties did not resolve the matter for
10 days, then Yahoo's Page View obligation for this Music
Merchant Program would be reduced by [***]* Page Views.
8.6 Within 45 days after the Effective Date of this
Agreement, ARTISTdirect will place a Yahoo graphic link on
all ARTISTdirect Destination Pages. The Yahoo graphic link
must (a) be placed in a manner approved by Yahoo, which
approval will not be unreasonably withheld; (b) contain
the Yahoo name and logo as provided by Yahoo; and (c)
directly link the user back to a Page on the Yahoo
Properties designated by Yahoo.
8.7 During the Term, Yahoo hereby grants to ARTISTdirect a
non-exclusive, worldwide, fully paid license to use,
reproduce and display the Yahoo Brand Features as described
in Section 8.6.
- --------
* 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.
13
<PAGE> 14
8.8 ARTISTdirect and Yahoo will execute the Yahoo Remote
Merchant Integration Program Agreement, attached hereto as
Exhibit V, on the Effective Date of this Agreement.
8.9 ARTISTdirect will issue to Yahoo a warrant (the "Warrant")
substantially in the form attached hereto as Exhibit W on
the Effective Date of this Agreement.
8.10 The ARTISTdirect Network will (a) handle [***]*
simultaneous requests; (b) have a minimum [***]* uptime and
maximum [***]* downtime per calendar quarter of the term
(except for planned downtime that may be required for
system enhancements, upgrades or preventative maintenance);
and (c) ensure that data transfers from the ARTISTdirect
Network to the Yahoo Properties initiate within fewer than
[***]* seconds, on average, of request. The parties
acknowledge and agree that a failure of the ARTISTdirect
Network to meet the aforementioned performance standards
for any calendar quarter is a material breach for the
purposes of Section 12.2(b).
8.11 Within 90 days after the Effective Date of this Agreement,
the parties will use commercially reasonable efforts (e.g.,
Yahoo making a written request to Media Metrix), to credit
ARTISTdirect with the traffic and reach statistics
generated from users who view Pages on the ARTISTdirect RMI
Site, as reported by Media Metrix. If the parties cannot
devise a means of officially crediting ARTISTdirect with
these statistics, either by a change in technology or by a
change in Media Metrix's reporting policies, ARTISTdirect's
sole remedy will be to raise the issue during the quarterly
review set forth in Section 10.3.
9. LIMITED EXCLUSIVITY; RIGHT OF FIRST PRESENTATION.
9.1 Commencing on January 1, 2000 and continuing through the
Term, Yahoo will (a) not sell the Music Merchant Best
Sellers Module to any third party; (b) not sell the Music
Merchant Modules to more than 1 Music Merchant (the
"Selected Music Merchant"); and (c) except as set forth in
subsection (b) above, not sell the right to present users
with an explicit offer to purchase Music Products on-line
(e.g., "Click here to buy the new Madonna album.") in the
text of any advertising unit that is place on an
ARTISTdirect Keyword Module Page or a Page within Yahoo
Music on which an ARTISTdirect Best Sellers Module, an
ARTISTdirect Buy It Button, an ARTISTdirect DHTML Module or
an ARTISTdirect Sweepstakes Text Link is placed.
9.2 The parties acknowledge and agree that, with respect to the
Music Merchant Modules only, placement of ARTISTdirect's
Music Merchant Modules will rotate equally with placement
of the Music Merchant Modules of the Selected Music
Merchant.
9.3 ARTISTdirect acknowledges and agrees that, except with
respect to the foregoing limited exclusivity of Sections
9.1 and 9.2 above, Yahoo is not precluded from, among other
things, promoting or placing any advertising units of a
Music Merchant or any other entity in any area of the Yahoo
Properties.
9.4 In the event that Yahoo develops enhancements that
materially improve the size, appearance or placement of (a)
any ARTISTdirect Link or (b) any other advertising unit
made available to Music Merchants generally,
- --------
* 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.
14
<PAGE> 15
Yahoo will provide ARTISTdirect with written notice of such
enhancements prior to their release and will describe
Yahoo's reasonable business requirements for providing such
enhancements to ARTISTdirect.
9.5 In the event that Yahoo, in its sole discretion, elects (a)
to extend this Music Merchant Program beyond the Term or
(b) subject to the limited exclusivity set forth in Section
9.1 above, to develop for any area of the Yahoo Properties
a new merchant advertising program that promotes either the
on-line sale of Music Products or the on-line offering of
music-related content and is projected to generate 500
million or more Page Views, Yahoo will provide written
notice to ARTISTdirect that describes Yahoo's reasonable
business requirements for participation in such program
(the "Presentment Notice"). With respect to an extension of
this Music Merchant Program, Yahoo will provide a
Presentment Notice to ARTISTdirect at least 30 days prior
to the expiration of the Term. The parties will use good
faith efforts to negotiate and execute a written agreement
under reasonable terms and conditions with respect to any
opportunity presented in a Presentment Notice. If
ARTISTdirect declines to commence negotiations with Yahoo
within 5 days after ARTISTdirect receives a Presentment
Notice from Yahoo, or if the parties fail to reach
agreement within 30 days following the commencement of good
faith negotiations, or such later date as is agreed by the
parties, Yahoo may offer the opportunity to any third
party.
10. PAGE VIEWS.
10.1 With respect to the ARTISTdirect Links, Yahoo will deliver
a minimum of [***]* Page Views.
10.2 Yahoo will use commercially reasonable efforts to deliver
the aforementioned Page Views according to the allocation
set forth below, but Yahoo's Page View obligation is with
respect to the Music Merchant Program as a whole. Yahoo
will not be in breach of this Agreement for failure to
deliver the specific number of Page Views in any of the
areas set forth below:
(a) [***]* Page Views of the ARTISTdirect Front Page
Promotion Banner;
(b) [***]* Page Views of the Yahoo Mail Welcome Module and
the Yahoo Mail Logout Module;
(c) [***]* Page Views of the ARTISTdirect Banner as
follows:
(1) [***]* Page Views through Run of Network based on
an interest in music (i.e., targeted to
registered Yahoo users who have indicated an
interest in music in their Yahoo profiles);
(2) [***]* Page Views through Run of Yahoo Music;
(3) [***]* Page Views on ARTISTdirect Banner Category
Pages;
(4) [***]* Page Views on ARTISTdirect Banner Search
Results Pages;
(d) [***]* Page Views of the ARTISTdirect Chat Banner;
(e) [***]* Page Views of the ARTISTdirect Shopping Banner;
(f) [***]* Page Views of the ARTISTdirect Message Boards
Module;
(g) [***]* Page Views of the ARTISTdirect DHTML Modules;
(h) [***]* Page Views of the ARTISTdirect Sweepstakes Text
Link;
(i) [***]* Page Views of the ARTISTdirect Sweepstakes
Button;
(j) [***]* Page Views of the ARTISTdirect Best Sellers
Module;
(k) [***]* Page Views of the ARTISTdirect Billboard
Module;
(l) [***]* Page Views of the ARTISTdirect New Releases
Module;
(m) [***]* Page Views of the ARTISTdirect Keyword Module;
(n) [***]* Page Views of the ARTISTdirect Buy It Button.
10.3 On a quarterly basis, Yahoo and ARTISTdirect will meet to
discuss the performance of this Music Merchant Program as a
whole and agree to consider in good faith ways to optimize
elements of this Music Merchant Program. In the event that
Yahoo fails to deliver the number of Page Views set forth
in Section 10.1 before expiration of the Term, Yahoo will
"make good" the shortfall by extending its obligations
under Sections 2.3 and 4 in the areas of the Yahoo
Properties set forth therein (or similar inventory mutually
agreed upon by the parties) beyond the end of the Term (at
no additional fee to ARTISTdirect beyond those fees set
forth in Section 11) until such Page View obligation is
satisfied. If Yahoo does not satisfy its Page View
obligation within 120 days after the expiration of the
Term, then ARTISTdirect will be entitled to a prorated
refund equal to the amount calculated by multiplying the
CPM [***]* by the undelivered number of Page Views divided
by 1000, payable 20 days after the third party audit of the
most recent applicable quarter. The parties acknowledge and
agree that the CPM referenced above has no other
significance in this Agreement other than to calculate the
prorated refund due to ARTISTdirect. The provisions of this
Section 10.3 set forth the entire liability of Yahoo, and
ARTISTdirect's sole remedy, for Yahoo's failure to meet its
Page View obligation set forth in Section 10.1.
10.4 On a regular basis and at ARTISTdirect's reasonable
request, Yahoo will provide ARTISTdirect with access to an
electronic database, the accuracy of which is periodically
reviewed and certified by Ernst & Young, LLP or a similarly
reputable and independent entity, that describes in
reasonable detail Yahoo's calculation of the Page Views
delivered under this Agreement. To the extent that Yahoo
elects, in its sole discretion, to conduct research or
analysis on behalf of or at the direction of ARTISTdirect,
Yahoo will share its results with ARTISTdirect at no
additional fee to ARTISTdirect beyond those fees set forth
in Section 11.
11. COMPENSATION.
11.1 Slotting Fee. In consideration of Yahoo's performance and
obligations as set forth herein, ARTISTdirect will pay to
Yahoo a non-refundable, non-creditable slotting fee equal
to nineteen million, eight hundred thousand dollars
($19,800,000), of which eighteen million, eight hundred
thousand dollars ($18,800,000) will be paid to Yahoo on or
before the dates set forth in the payment schedule below,
and one million dollars ($1,000,000) will be provided to
Yahoo in the form of in kind co-marketing opportunities,
such co-marketing opportunities to be mutually agreed upon
by the parties within 90 days after the Effective Date. One
million dollars ($1,000,000) of the first payment set forth
in the payment schedule below will be designated as a
- --------
* Confidential treatment has been requested for the bracketed portion.
The confidential redacted portion has been omitted and filed separately with the
Securities and Exchange Commission.
15
<PAGE> 16
set up fee for the design, consultation, development,
implementation and placement of the ARTISTdirect Links.
Payment Date
------- ----
$5,500,000 Due upon execution of Agreement
$1,900,000 On or before March 15, 2000
$1,900,000 On or before June 15, 2000
$1,900,000 On or before September 15, 2000
$1,900,000 On or before December 15, 2000
$1,900,000 On or before March 15, 2001
$1,900,000 On or before June 15, 2001
$1,900,000 On or before September 15, 2001
11.2 Payment Information. Except as set forth in Section 10.3,
all payments herein are non-refundable and non-creditable
and will be made by ARTISTdirect via wire transfer into
Yahoo's main account according to the wire transfer
instructions set forth on Exhibit S.
11.3 Late Payments. Any portion of the above payments that has
not been paid to Yahoo within 5 days after the dates set
forth above will bear interest at the lesser of (a) one
percent (1%) per month or (b) the maximum amount allowed
by law. Notwithstanding the foregoing, any failure by
ARTISTdirect to make the payments specified in Section 11.1
on the dates set forth therein constitutes a material
breach of this Agreement.
11.4 Ability to Pay. ARTISTdirect represents and warrants that
it has the ability to pay to Yahoo all fees set forth in
this Agreement.
12. TERM AND TERMINATION.
12.1 Term. This Agreement will commence upon the Effective Date
and, unless terminated as provided herein, will remain in
effect for the Term.
12.2 Termination by Either Party with Cause. This Agreement may
be terminated at any time by either party (a) immediately
upon written notice if the other party (1) becomes
insolvent; (2) files a petition in bankruptcy; or (3) makes
an assignment for the benefit of its creditors; or (b) 30
days after written notice to the other party of such other
party's breach of any of its obligations under this
Agreement in any material respect (20 days in the case of a
failure to pay), which breach is not remedied within such
notice period. In the event that ARTISTdirect does not
remedy a breach of its payment obligation under this
Agreement within 20 days of Yahoo's written notice to
ARTISTdirect, Yahoo will be entitled to suspend its
performance under this Agreement immediately. Any notice of
breach provided in accordance with subsection (b) will
describe any termination of the Warrant that will result
from such breach.
12.3 Survival. The provisions of Sections 1, 10.3, 11, 13
through 17 and this 12.3 will survive expiration or
termination of this Agreement, except that ARTISTdirect's
payment obligations set forth in Section 11.1 will not
16
<PAGE> 17
survive a proper termination of this Agreement by
ARTISTdirect in accordance with Section 12.2.
13. CONFIDENTIAL INFORMATION AND PUBLICITY.
13.1 Terms and Conditions. The terms and conditions of this
Agreement will be considered confidential and will not be
disclosed to any third parties except to such party's
accountants, attorneys or except as otherwise required by
law. Neither party will make any public announcement
regarding the existence of this Agreement without the other
party's prior written approval and consent. If this
Agreement or any of its terms must be disclosed under any
law, rule or regulation (e.g., as part of a filing with the
United States Securities and Exchange Commission),
excluding an order or other discovery request issued by a
court of competent jurisdiction, the disclosing party will
(a) give written notice of the intended disclosure to the
other party at least 3 days in advance of the date of
disclosure; (b) redact portions of this Agreement to the
fullest extent permitted under any applicable laws, rules
and regulations; and (c) submit a request, to be agreed
upon by the other party, that such portions and other
provisions of this Agreement requested by the other party
receive confidential treatment under the laws, rules and
regulations of the body or tribunal to which disclosure is
being made or otherwise be held in the strictest confidence
to the fullest extent permitted under the laws, rules or
regulations of any other applicable governing body. With
respect to a party's responses to the United States
Securities and Exchange Commission's comments on a
confidential treatment request, the disclosing party will
use best efforts to provide the other party with reasonable
prior notice of the intended disclosure, but a failure to
provide such notice will not be deemed a breach of this
Agreement.
13.2 Publicity. Yahoo and ARTISTdirect will jointly issue a
press release announcing this Agreement. The parties will
use commercially reasonable efforts to issue a joint press
release announcing this Agreement within 10 days after the
Launch Date, but no sooner than January 1, 2000. Any and
all publicity relating to this Agreement and subsequent
transactions between Yahoo and ARTISTdirect and the method
of its release will be approved in advance of the release,
in writing, by both Yahoo and ARTISTdirect.
13.3 Nondisclosure Agreement. Yahoo and ARTISTdirect acknowledge
and agree that the terms of the Mutual Nondisclosure
Agreement attached as Exhibit U will be incorporated by
reference and made a part of this Agreement, and will
govern the use and disclosure of confidential information
and all discussions pertaining to or leading to this
Agreement.
13.4 User Data. All information and data provided to Yahoo by
users of the Yahoo Properties or otherwise collected by
Yahoo relating to user activity
17
<PAGE> 18
on the Yahoo Properties will be retained by and owned
solely by Yahoo. All information and data provided to
ARTISTdirect on the ARTISTdirect Network or otherwise
collected by ARTISTdirect relating to user activity on the
ARTISTdirect Network will be retained by and owned solely
by ARTISTdirect. Notwithstanding the foregoing, [***]* will
own all information and data provided to Yahoo by users who
participate in the Sweepstakes that Yahoo makes available
via the ARTISTdirect Sweepstakes Button and the
ARTISTdirect Sweepstakes Text Link. Each party agrees to
use information and data provided to it by a user only as
authorized by that user and will not disclose, sell,
license or otherwise transfer this information to any third
party or use this information for the transmission of "junk
mail," "spam" or any other unsolicited mass distribution of
information. With respect to information and data provided
by or collected from users in connection with the
ARTISTdirect RMI Site, the Yahoo Remote Merchant
Integration Program Agreement will govern the ownership and
use of such information and data by the parties.
13.5 Privacy of User Information. ARTISTdirect will (a) ensure
that all information provided by users of the ARTISTdirect
Network is maintained, accessed and transmitted in a secure
environment and in compliance with industry standard
security specifications and (b) provide a link to its
privacy policy regarding the protection of user data on
those Pages of the ARTISTdirect Network where the user is
requested to provide personal or financial information.
Further, ARTISTdirect represents and warrants that it has
reviewed the FTC Order and will not engage in any conduct
that it reasonably believes would cause Yahoo to violate
the FTC Order. ARTISTdirect agrees to follow and comply
with all reasonable instructions and directions of Yahoo to
ensure Yahoo's compliance with the FTC Order.
14. INDEMNIFICATION.
14.1 By ARTISTdirect. ARTISTdirect, at its own expense, will
indemnify, defend and hold harmless Yahoo and its
employees, representatives, agents and affiliates against
any claim, demand, action or other proceeding brought by
any third party against Yahoo to the extent that such
claim, demand, action or other proceeding is based on, or
arises out of, a claim that any ARTISTdirect Brand Feature,
ARTISTdirect Content, any material, product or service
produced, distributed, offered or sold by ARTISTdirect, or
any material presented on the ARTISTdirect Network or the
ARTISTdirect RMI Site (excluding any Yahoo graphic links
placed by ARTISTdirect in accordance with Section 8.6)
- --------
* Confidential treatment has been requested for the bracketed portion.
The confidential redacted portion has been omitted and filed separately with the
Securities and Exchange Commission.
18
<PAGE> 19
(a) infringes in any manner any copyright, patent,
trademark, trade secret or any other intellectual
property right of any third party;
(b) is or contains any material or information that is
obscene, defamatory, libelous, slanderous, or that
violates any law or regulation;
(c) violates any rights of any person or entity, including
but not limited to rights of publicity, privacy or
personality;
(d) has resulted in any consumer fraud, product liability,
tort, breach of contract, injury, damage or harm of
any kind to any third party; or
(e) is subject to any fees, royalties, licenses or any
other payments to any third party;
provided, however, that in any such case: (1) Yahoo
provides ARTISTdirect with prompt written notice of any
such claim; (2) Yahoo permits ARTISTdirect to assume and
control the defense of such action or proceeding upon
ARTISTdirect's written notice to Yahoo of its intention to
indemnify; and (3) upon ARTISTdirect's written request, and
at no expense to Yahoo, Yahoo will provide ARTISTdirect
with all available information and assistance reasonably
necessary for ARTISTdirect to defend such claim.
ARTISTdirect will not enter into any settlement or
compromise of any such claim, which settlement or
compromise would result in any liability to Yahoo, without
Yahoo's prior written consent, which will not be
unreasonably withheld. ARTISTdirect will pay any and all
costs, damages and expenses, including but not limited to
reasonable attorneys' fees and costs awarded against or
otherwise incurred by Yahoo in connection with or arising
from any such claim, demand, action or other proceeding. It
is understood and agreed that Yahoo will not be required to
edit or review for accuracy or appropriateness any content
provided by ARTISTdirect.
14.2 By Yahoo. Yahoo, at its own expense, will indemnify, defend
and hold harmless ARTISTdirect and its employees,
representatives, agents and affiliates against any claim,
demand, action or other proceeding brought by any third
party against ARTISTdirect to the extent that such claim,
demand, action or other proceeding is based on, or arises
out of, a claim that any Yahoo Brand Feature
(a) infringes in any manner any copyright, patent,
trademark, trade secret or any other intellectual
property right of any third party;
(b) is or contains any material or information that is
obscene, defamatory, libelous, slanderous, or that
violates any law or regulation;
19
<PAGE> 20
(c) violates any rights of any person or entity, including
but not limited to rights of publicity, privacy or
personality;
(d) has resulted in any consumer fraud, product liability,
tort, breach of contract, injury, damage or harm of
any kind to any third party; or
(e) is subject to any fees, royalties, licenses or any
other payments to any third party;
provided, however, that in any such case: (1) ARTISTdirect
provides Yahoo with prompt written notice of any such
claim; (2) ARTISTdirect permits Yahoo to assume and
control the defense of such action or proceeding upon
Yahoo's written notice to ARTISTdirect of its intention to
indemnify; and (3) upon Yahoo's written request, and at no
expense to ARTISTdirect, ARTISTdirect will provide Yahoo
with all available information and assistance reasonably
necessary for Yahoo to defend such claim. Yahoo will not
enter into any settlement or compromise of any such claim,
which settlement or compromise would result in any
liability to ARTISTdirect, without ARTISTdirect's prior
written consent, which will not be unreasonably withheld.
Yahoo will pay any and all costs, damages and expenses,
including but not limited to reasonable attorneys' fees
and costs awarded against or otherwise incurred by
ARTISTdirect in connection with or arising from any such
claim, demand, action or other proceeding.
15. LIMITATION OF LIABILITY.
EXCEPT AS PROVIDED IN SECTION 14, UNDER NO CIRCUMSTANCES WILL
ARTISTDIRECT, YAHOO OR ANY AFFILIATE OF EITHER PARTY BE LIABLE TO
THE OTHER PARTY FOR INDIRECT, INCIDENTAL, CONSEQUENTIAL, SPECIAL
OR EXEMPLARY DAMAGES ARISING FROM THIS AGREEMENT, EVEN IF THAT
PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES,
INCLUDING BUT NOT LIMITED TO LOSS OF REVENUE OR ANTICIPATED
PROFITS OR LOST BUSINESS.
16. INSURANCE.
ARTISTdirect will maintain insurance during the Term with a
carrier that is reasonably acceptable to Yahoo and with coverage
for commercial general liability and errors and omissions of at
least $1 million per occurrence. ARTISTdirect will name Yahoo as
an additional insured on such insurance and will provide evidence
of such insurance to Yahoo within 10 days of the Effective Date.
Such insurance policy will not be cancelled or modified in a
manner inconsistent with this provision without Yahoo's prior
written consent.
20
<PAGE> 21
17. GENERAL PROVISIONS.
17.1 Independent Contractors. It is the intention of Yahoo and
ARTISTdirect that Yahoo and ARTISTdirect are, and will be
deemed to be, independent contractors with respect to the
subject matter of this Agreement, and nothing contained in
this Agreement will be deemed or construed in any manner
whatsoever as creating any partnership, joint venture,
employment, agency, fiduciary or other similar relationship
between Yahoo and ARTISTdirect.
17.2 Entire Agreement. This Agreement, and all Exhibits attached
hereto, represents the entire agreement between Yahoo and
ARTISTdirect with respect to the subject matter hereof and
thereof and will supersede all prior agreements and
communications of the parties, oral or written, including
but not limited to the Letter of Understanding executed on
or about December 1, 1999 between Yahoo and ARTISTdirect.
17.3 Amendment and Waiver. No amendment to, or waiver of, any
provision of this Agreement will be effective unless in
writing and signed by both parties. The waiver by any party
of any breach or default will not constitute a waiver of
any different or subsequent breach or default.
17.4 Governing Law. This Agreement will be governed by and
interpreted in accordance with the laws of the State of
California without regard to the conflicts of laws
principles thereof.
17.5 Successors and Assigns. Neither party will assign its
rights or obligations under this Agreement without the
prior written consent of the other party, which will not
unreasonably be withheld or delayed. Notwithstanding the
foregoing, either party may assign this Agreement to an
entity that acquires substantially all of the stock or
assets of a party to this Agreement, except that consent
will be required if the non-assigning party reasonably
determines that the assignee will not have sufficient
capital or assets to perform its obligations hereunder, or
that the assignee is a direct competitor of the
non-assigning party. All terms and provisions of this
Agreement will be binding upon and inure to the benefit of
the parties hereto and their respective permitted
transferees, successors and assigns.
17.6 Force Majeure. Neither party will be liable for failure to
perform or delay in performing any obligation (other than
the payment of money) under this Agreement if such failure
or delay is due to fire, flood, earthquake, strike, war
(declared or undeclared), embargo, blockade, legal
prohibition, governmental action, riot, insurrection,
damage, destruction or any other similar cause beyond the
control of such party. If such event continues for more
than 30 days, the other party may terminate this Agreement
without further obligation.
21
<PAGE> 22
17.7 Notices. Any notice, request or other communication called
for by this Agreement will be (a) in writing; (b) sent by
overnight or certified mail return receipt requested; and
(c) deemed delivered to the party to whom such
communication is directed, if by overnight mail, on the
date delivered or, if by certified mail, 2 days following
the date sent. If to Yahoo, such notices will be addressed
to 3420 Central Expressway, Santa Clara, CA 95051, Fax:
(408) 731-3301 Attention: Senior Vice President, Sales,
with a copy to its General Counsel. If to ARTISTdirect,
such notices will be addressed to 17835 Ventura Boulevard,
Suite 310, Encino, CA 91316 Attention: Chief Operating
Officer, with a copy to its counsel, Lenard & Gonzalez LLP,
1900 Avenue of the Stars, 25th Floor, Los Angeles, CA
90067, Attention: Allen D. Lenard, Esq.
17.8 Severability. If any provision of this Agreement is held to
be invalid, illegal or unenforceable for any reason, such
invalidity, illegality or unenforceability will not effect
any other provisions of this Agreement, and this Agreement
will be construed as if such invalid, illegal or
unenforceable provision had never been contained herein.
17.9 Sole Responsibility. ARTISTdirect will remain solely
responsible for the operation of the ARTISTdirect Network,
and Yahoo will remain solely responsible for the operation
of Yahoo's principal U.S. targeted Web site (the "Yahoo
Site"). Each party (a) acknowledges that the ARTISTdirect
Network and the Yahoo Site may be subject to temporary
shutdowns due to causes beyond the operating party's
reasonable control and (b) subject to the terms of this
Agreement, retains sole right and control over the
programming, content and conduct of transactions over its
respective internet-based service.
17.10 Counterparts. This Agreement may be executed in two
counterparts, both of which taken together will constitute
a single instrument. Execution and delivery of this
Agreement may be evidenced by facsimile transmission.
17.11 Authority. Each of Yahoo and ARTISTdirect represents and
warrants that the negotiation and entry of this Agreement
will not violate, conflict with, interfere with, result in
a breach of, or constitute a default under any other
agreement to which they are a party.
17.12 Attorneys Fees. The prevailing party in any action to
enforce this Agreement will be entitled to reimbursement of
its expenses, including reasonable attorneys' fees.
[SIGNATURE PAGE FOLLOWS]
22
<PAGE> 23
This Advertising and Promotion Agreement has been executed by the
duly authorized representatives of the parties, effective as of the Effective
Date.
YAHOO! INC. ARTISTDIRECT, INC.
By: /s/ ANIL SINGH By: /s/ KEITH YOKOMOTO
--------------------------------- ----------------------------------
Name: Anil Singh Name: Keith Yokomoto
-------------------------------- --------------------------------
Title: Senior Vice President Title: President and COO
------------------------------- -------------------------------
Attn: Senior Vice President, Sales Attn: Chief Operating Officer
3420 Central Expressway
Santa Clara, CA 95051
Tel.: (408) 731-3300 Tel: (818) 758-8700
Fax: (408) 731-3301 Fax: (818) 758-8722
e-mail: [email protected] e-mail: [email protected]
23
<PAGE> 24
EXHIBIT T
FTC DECISION AND ORDER
9823015
B251544
UNITED STATES OF AMERICA
FEDERAL TRADE COMMISSION
COMMISSIONERS:
ROBERT PITOFSKY, CHAIRMAN
SHEILA F. ANTHONY
MOZELLE W. THOMPSON
ORSON SWINDLE
IN THE MATTER OF
GEOCITIES, A CORPORATION.
DOCKET NO. C-3850
DECISION AND ORDER
The Federal Trade Commission having initiated an investigation of certain acts
and practices of the respondent named in the caption hereof, and the respondent
having been furnished thereafter with a copy of a draft of complaint which the
Bureau of Consumer Protection proposed to present to the Commission for its
consideration and which, if issued by the Commission, would charge respondent
with violation of the Federal Trade Commission Act; and
The respondent, its attorneys, and counsel for Federal Trade Commission having
thereafter executed an agreement containing a consent order, an admission by the
respondent of all the jurisdictional facts set forth in the aforesaid draft of
complaint, a statement that the signing of said agreement is for settlement
purposes only and does not constitute an admission by respondent that the law
has been violated as alleged in such complaint, or that the facts as alleged in
such complaint, other than jurisdictional facts, are true and waivers and other
provisions as required by the Commission's Rules; and
The Commission having considered the matter and having determined that it had
reason to believe that the respondent has violated the said Act, and that
complaint should issue stating its charges in that respect, and having thereupon
accepted the executed consent agreement and placed such agreement on the public
record for a period of sixty (60) days, and having duly considered the comments
filed thereafter by interested persons pursuant to Section 2.34 of its Rules,
now in further conformity with the procedure prescribed in Section 2.34 of its
Rules, the Commission hereby issues its complaint, makes the following
jurisdictional findings and enters the following order:
1. Respondent GeoCities, is a corporation organized, existing, and doing
business under and by virtue of the laws of the State of California, with
its office or principal place of business located at 1918 Main Street, Suite
300, Santa Monica, California 90405.
2. The Federal Trade Commission has jurisdiction of the subject matter of
this proceeding and of the respondent, and the proceeding is in the
proceeding is in the public interest.
i
<PAGE> 25
ORDER
DEFINITIONS
For purposes of this order, the following definitions shall apply:
1. "Child" or "children" shall mean a person of age twelve (12) or under.
2. "Parents" or "parental" shall mean a legal guardian, including, but not
limited to, a biological or adoptive parent.
3. "Personal identifying information" shall include, but is not limited to,
first and last name, home or other physical address (e.g., school), e-mail
address, telephone number, or any information that identifies a specific
individual, or any information which when tied to the above becomes
identifiable to a specific individual.
4. "Disclosure" or "disclosed to third party(ies)" shall mean (a) the
release of information in personally identifiable form to any other
individual, firm, or organization for any purpose or (b) making publicly
available such information by any means including, but not limited to,
public posting on or through home pages, pen pal services, e-mail services,
message boards, or chat rooms.
5. "Clear(ly) and prominent(ly)" shall mean in a type size and location that
are not obscured by any distracting elements and are sufficiently noticeable
for an ordinary consumer to read and comprehend, and in a typeface that
contrasts with the background against which it appears.
6. "Archived" database shall mean respondent's off-site "back-up" computer
tapes containing member profile information and GeoCities Web site
information.
7. "Electronically verifiable signature" shall mean a digital signature or
other electronic means that ensures a valid consent by requiring: (1)
authentication (guarantee that the message has come from the person who
claims to have sent it); (2) integrity (proof that the message contents have
not been altered, deliberately or accidentally, during transmission); and
(3) non-repudiation (certainty that the sender of the message cannot later
deny sending it).
8. "Express parental consent" shall mean a parent's affirmative agreement
that is obtained by any of the following means: (1) a signed statement
transmitted by postal mail or facsimile; (2) authorizing a charge to a
credit card via a secure server; (3) e-mail accompanied by an electronically
verifiable signature; (4) a procedure that is specifically authorized by
statute, regulation, or guideline issued by the Commission; or (5) such
other procedure that ensures verified parental consent and ensures the
identity of the parent, such as the use of a reliable certifying authority.
9. Unless otherwise specified, "respondent" shall mean GeoCities, its
successors and assigns and its officers, agents, representatives, and
employees.
10. "Commerce" shall mean as defined in Section 4 of the Federal Trade
Commission Act, 15 U.S.C. Section 44.
I.
IT IS ORDERED that respondent, directly or through any corporation, subsidiary,
division, or other device, in connection with any online collection of personal
identifying information from consumers, in or affecting commerce, shall not make
any misrepresentation, in any manner, expressly or by
ii
<PAGE> 26
implication, about its collection or use of such information from or about
consumers, including, but not limited to, what information will be disclosed to
third parties and how the information will be used.
II.
IT IS FURTHER ORDERED that respondent, directly or through any corporation,
subsidiary, division, or other device, in connection with any online collection
of personal identifying information from consumers, in or affecting commerce,
shall not misrepresent, in any manner, expressly or by implication, the identity
of the party collecting any such information or the sponsorship of any activity
on its Web site.
III.
IT IS FURTHER ORDERED that respondent, directly or through any corporation,
subsidiary, division, or other device, in connection with the online collection
of personal identifying information from children, in or affecting commerce,
shall not collect personal identifying information from any child if respondent
has actual knowledge that such child does not have his or her parent's
permission to provide the information to respondent. Respondent shall not be
deemed to have actual knowledge if the child has falsely represented that (s)he
is not a child and respondent does not knowingly possess information that such
representation is false.
IV.
IT IS FURTHER ORDERED that respondent, directly or through any corporation,
subsidiary, division, or other device, in connection with the online collection
of personal identifying information, in or affecting commerce, shall provide
clear and prominent notice to consumers, including the parents of children, with
respect to respondent's practices with regard to its collection and use of
personal identifying information. Such notice shall include, but is not limited
to, disclosure of:
A. what information is being collected (e.g., "name," "home address,"
"e-mail address," "age," "interests");
B. its intended use(s);
C. the third parties to whom it will be disclosed (e.g., "advertisers of
consumer products," mailing list companies," "the general public");
D. the consumer's ability to obtain access to or directly access such
information and the means by which (s)he may do so;
E. the consumer's ability to remove directly or have the information removed
from respondent's databases and the means by which (s)he may do so; and
F. the procedures to delete personal identifying information from
respondent's databases and any limitations related to such deletion.
Such notice shall appear on the home page of respondent's Web site(s) and at
each location on the site(s) at which such information is collected.
Provided that, respondent shall not be required to include the notice at the
locations at which information is collected if such information is limited to
tracking information and the collection of such information is described in the
notice required by this Part.
Provided further that, for purposes of this Part, compliance with all of the
following shall be deemed adequate notice: (a) placement of a clear and
prominent hyperlink or button labeled PRIVACY NOTICE on the home page(s), which
directly links to the privacy notice screen(s); (b) placement of the information
required in this Part clearly and prominently on the privacy notice screen(s),
followed on the same screen(s) with a button that must be clicked on to make it
disappear; and (c) at each
iii
<PAGE> 27
location on the site at which any personal identifying information is collected,
placement of a clear and prominent hyperlink on the initial screen on which the
collection takes place, which links directly to the privacy notice and which is
accompanied by the following statement in bold typeface: NOTICE: WE COLLECT
PERSONAL INFORMATION ON THIS SITE. TO LEARN MORE ABOUT HOW WE USE YOUR
INFORMATION CLICK HERE.
V.
IT IS FURTHER ORDERED that respondent, directly or through any corporation,
subsidiary, division, or other device, in connection with the online collection
of personal identifying information from children, in or affecting commerce,
shall maintain a procedure by which it obtains express parental consent prior to
collecting and using such information.
Provided that, respondent may implement the following screening procedure that
shall be deemed to be in compliance with this Part. Respondent shall collect and
retain certain personal identifying information from a child, including birth
date and the child's and parent's e-mail addresses (hereafter "screening
information"), enabling respondent to identify the site visitor as a child and
to block the child's attempt to register with respondent without express
parental consent. If respondent elects to have the child register with it,
respondent shall: (1) give notice to the child to have his/her parent provide
express parental consent to register; and/or (2) send a notice to the parent's
e-mail address for the purpose of obtaining express parental consent. The notice
to the child or parent shall provide instructions for the parent to: (1) go to a
specific URL on the Web site to receive information on respondent's practices
regarding its collection and use of personal identifying information from
children and (2) provide express parental consent for the collection and use of
such information. Respondent's collection of screening information shall be by a
manner that discourages children from providing personal identifying information
in addition to the screening information. All personal identifying information
collected from a child shall be held by respondent in a secure manner and shall
not be used in any manner other than to effectuate the notice to the child or
parent, or to block the child from further attempts to register or otherwise
provide personal identifying information to respondent without express parental
consent. The personal identifying information collected shall not be disclosed
to any third party prior to the receipt of express parental consent. If express
parental consent is not received by twenty (20) days after respondent's
collection of the information from the child, respondent shall remove all such
personal identifying information from its databases, except such screening
information necessary to block the child from further attempts to register or
otherwise provide personal identifying information to respondent without express
parental consent.
VI.
Nothing in this order shall prohibit respondent from collecting personal
identifying information from children or from using such information, as
specifically permitted in the Children's Online Privacy Protection Act of 1998
(without regard to the effective date of the Act) or as such Act may hereafter
be amended; regulations or guides promulgated by the Commission; or
self-regulatory guidelines approved by the Commission pursuant to the Act.
VII.
IT IS FURTHER ORDERED that respondent GeoCities, and its successors and assigns,
shall provide a reasonable means for consumers, including the parents of
children, to obtain removal of their or their children's personal identifying
information collected and retained by respondent and/or disclosed to third
parties, prior to the date of service of this order, as follows:
A. Respondent shall provide a clear and prominent notice to each consumer over
the age of twelve (12) from whom it collected personal identifying information
and disclosed that information to CMG Information Services, Inc., describing
such consumer's options as stated in Part VI.C and the manner in which (s)he may
exercise them.
iv
<PAGE> 28
B. Respondent shall provide a clear and prominent notice to the parent of each
child from whom it collected personal identifying information prior to May 20,
1998, describing the parent's options as stated in Part VI.C and the manner in
which (s)he may exercise them.
C. Respondent shall provide the notice within thirty (30) days after the date of
service of this order by e-mail, postal mail, or facsimile. Notice to the parent
of a child may be to the e-mail address of the parent and, if not known by
respondent, to the e-mail address of the child. The notice shall include the
following information:
1. the information that was collected (e.g., "name," "home address," "e-mail
address," "age," "interests"); its use(s) and/or intended use(s); and the
third parties to whom it was or will be disclosed (e.g., "advertisers of
consumer products," "mailing list companies," "the general public") and with
respect to children, that the child's personal identifying information may
have been made public through various means, such as by publicly posting on
the child's personal home page or disclosure by the child through the use of
an e-mail account;
2. the consumer's and child's parents' right to obtain access to such
information and the means by which (s)he may do so;
3. the consumer's and child's parents' right to have the information removed
from respondent's or a third party's databases and the means by which (s)he
may do so;
4. a statement that childrens information will not be disclosed to third
parties, including public posting, without express parental consent to the
disclosure or public posting;
5. the means by which express parental consent may be communicated to the
respondent permitting disclosure to third parties of a child's information;
and
6. a statement that the failure of a consumer over the age of twelve (12) to
request removal of the information from respondent's databases will be
deemed as approval to its continued retention and/or disclosure to third
parties by respondent.
D. Respondent shall provide to consumers, including the parents of children, a
reasonable and secure means to request access to or directly access their or
their children's personal identifying information. Such means may include direct
access through password protected personal profile, return e-mail bearing an
electronically verifiable signature, postal mail, or facsimile.
E. Respondent shall provide to consumers, including the parents of children, a
reasonable means to request removal of their or their children's personal
identifying information from respondent's and/or the applicable third party's
databases or an assurance that such information has been removed. Such means may
include e-mail, postal mail, or facsimile.
F. The failure of a consumer over the age of twelve (12) to request the actions
specified above within twenty (20) days after his/her receipt of the notice
required in Part VI.A shall be deemed to be consent to the information's
continued retention and use by respondent and any third party.
G. Respondent shall provide to the parent of a child a reasonable means to
communicate express parental consent to the retention and/or disclosure to third
parties of his/her child's
v
<PAGE> 29
personal identifying information. Respondent shall not use any such information
or disclose it to any third party unless and until it receives express parental
consent.
H. If, in response to the notice required in Part VI.A, respondent has received
a request by a consumer over the age of twelve (12) that respondent should
remove from its databases the consumer's personal identifying information or has
not received the express consent of a parent of a child to the continued
retention and/or disclosure to third parties of a child's personal identifying
information by respondent within twenty (20) days after the parent's receipt of
the notice required in Part VI.B, respondent shall within ten (10) days:
1. Discontinue its retention and/or disclosure to third parties of such
information, including but not limited to (a) removing from its databases
all such information, (b) removing all personal home pages created by the
child, and (c) terminating all e-mail accounts for the child; and
2. Contact all third parties to whom respondent has disclosed the
information, requesting that they discontinue using or disclosing that
information to other third parties, and remove the information from their
databases.
With respect to any consumer over the age of twelve (12) or any parent of a
child who has consented to respondent's continued retention and use of
personal identifying information pursuant to this Part, such consumer's or
parent's continuing right to obtain access to his/her or a child's personal
identifying information or removal of such information from respondent's
databases shall be as specified in the notice required by Part IV of this
order.
I. Within thirty (30) days after the date of service of this order, respondent
shall obtain from a responsible official of each third party to whom it has
disclosed personal identifying information and from each GeoCities Community
Leader a statement stating that (s)he has been advised of the terms of this
order and of respondent's obligations under this Part, and that (s)he agrees,
upon notification from respondent, to discontinue using or disclosing a
consumer's or child's personal identifying information to other third parties
and to remove any such information from its databases.
J. As may be permitted by law, respondent shall cease to do business with any
third party that fails within thirty (30) days of the date of service of this
order to provide the statement set forth in Part VI.I or whom respondent knows
or has reason to know has failed at any time to (a) discontinue using or
disclosing a child's personal identifying information to other third parties, or
(b) remove any such information from their databases. With respect to any
GeoCities Community Leader, the respondent shall cease the Community Leader
status of any person who fails to provide the statement set forth in Part VI.I
or whom respondent knows or has reason to know has failed at any time to (a)
discontinue using or disclosing a child's personal identifying information to
other third parties, or (b) remove any such information from their databases.
For purposes of this Part: "third party(ies)" shall mean each GeoCities
Community Leader, CMG Information Services, Inc., Surplus Software, Inc.
(Surplus Direct/Egghead Computer), Sage Enterprises, Inc. (GeoPlanet/Planetall),
Netopia, Inc. (Netopia), and InfoBeat/Mercury Mail (InfoBeat).
vi
<PAGE> 30
VIII.
IT IS FURTHER ORDERED that for the purposes of this order, respondent shall not
be required to remove personal identifying information from its archived
database if such information is retained solely for the purposes of Web site
system maintenance, computer file back-up, to block a child's attempt to
register with or otherwise provide personal identifying information to
respondent without express parental consent, or to respond to requests for such
information from law enforcement agencies or pursuant to judicial process.
Except as necessary to respond to requests from law enforcement agencies or
pursuant to judicial process, respondent shall not disclose to any third party
any information retained in its archived database. In any notice required by
this order, respondent shall include information, clearly and prominently, about
its policies for retaining information in its archived database.
IX.
IT IS FURTHER ORDERED that for five (5) years after the date of this order,
respondent GeoCities, and its successors and assigns, shall place a clear and
prominent hyperlink within its privacy statement which states as follows in bold
typeface:
NOTICE: CLICK HERE FOR IMPORTANT INFORMATION ABOUT SAFE SURFING FROM THE FEDERAL
TRADE COMMISSION.
The hyperlink shall directly link to a hyperlink/URL to be provided to
respondent by the Commission. The Commission may change the hyperlink/URL upon
thirty (30) days prior written notice to respondent.
X.
IT IS FURTHER ORDERED that respondent GeoCities, and its successors and assigns,
shall maintain and upon request make available to the Federal Trade Commission
for inspection and copying the following:
A. For five (5) years after the last date of dissemination of a notice
required by this order, a print or electronic copy in HTML format of all
documents relating to compliance with Parts IV through VIII of this order,
including, but not limited to, a sample copy of every information collection
form, Web page, screen, or document containing any representation regarding
respondent's information collection and use practices, the notice required
by Parts IV through VI, any communication to third parties required by Part
VI, and every Web page or screen linking to the Federal Trade Commission Web
site. Each Web page copy shall be accompanied by the URL of the Web page
where the material was posted online. Electronic copies shall include all
text and graphics files, audio scripts, and other computer files used in
presenting information on the World Wide Web; and
Provided that, after creation of any Web page or screen in compliance with this
order, respondent shall not be required to retain a print or electronic copy of
any amended Web page or screen to the extent that the amendment does not affect
respondent's compliance obligations under this order.
B. For five (5) years after the last collection of personal identifying
information from a child, all materials evidencing the express parental
consent given to respondent.
XI.
IT IS FURTHER ORDERED that respondent GeoCities, and its successors and assigns,
shall deliver a copy of this order to all current and future principals,
officers, directors, and managers, and to all current and future employees,
agents, and representatives having responsibilities with respect to the subject
matter of this order. Respondent shall deliver this order to current personnel
within thirty (30) days after the date of service of this order, and to future
personnel within thirty (30) days after the person assumes such position or
responsibilities.
vii
<PAGE> 31
XII.
IT IS FURTHER ORDERED that respondent GeoCities, and its successors and assigns,
shall establish an "information practices training program" for any employee or
GeoCities Community Leader engaged in the collection or disclosure to third
parties of consumers' personal identifying information. The program shall
include training about respondent's privacy policies, information security
procedures, and disciplinary procedures for violations of its privacy policies.
Respondent shall provide each such current employee and GeoCities Community
Leader with information practices training materials within thirty (30) days
after the date of service of this order, and each such future employee or
GeoCities Community Leader such materials and training within thirty (30) days
after (s)he assumes his/her position or responsibilities.
XIII.
IT IS FURTHER ORDERED that respondent GeoCities, and its successors and assigns,
shall notify the Commission at least thirty (30) days prior to any change in the
corporation that may affect compliance obligations arising under this order,
including, but not limited to, a dissolution, assignment, sale, merger, or other
action that would result in the emergence of a successor corporation; the
creation or dissolution of a subsidiary, parent, or affiliate that engages in
any acts or practices subject to this order; the proposed filing of a bankruptcy
petition; or a change in the corporate name or address. Provided, however, that,
with respect to any proposed change in the corporation about which respondent
learns less than thirty (30) days prior to the date such action is to take
place, respondent shall notify the Commission as soon as is practicable after
obtaining such knowledge. All notices required by this Part shall be sent by
certified mail to the Associate Director, Division of Enforcement, Bureau of
Consumer Protection, Federal Trade Commission, Washington, D.C. 20580.
XIV.
IT IS FURTHER ORDERED that respondent GeoCities, and its successors and assigns,
shall, within sixty (60) days after service of this order, and at such other
times as the Federal Trade Commission may require, file with the Commission a
report, in writing, setting forth in detail the manner and form in which they
have complied with this order.
XV.
This order will terminate on February 5, 2019, or twenty (20) years from the
most recent date that the United States or the Federal Trade Commission files a
complaint (with or without an accompanying consent decree) in federal court
alleging any violation of the order, whichever comes later; provided, however,
that the filing of such a complaint will not affect the duration of:
A. Any Part in this order that terminates in less than twenty (20) years;
B. This order's application to any respondent that is not named as a
defendant in such complaint; and
C. This order if such complaint is filed after the order has terminated
pursuant to this Part.
Provided, further, that if such complaint is dismissed or a federal court rules
that the respondent did not violate any provision of the order, and the
dismissal or ruling is either not appealed or upheld on appeal, then the order
will terminate according to this Part as though the complaint had never been
filed, except that the order will not terminate between the date such complaint
is filed and the later of the deadline for appealing such dismissal or ruling
and the date such dismissal or ruling is upheld on appeal.
viii
<PAGE> 32
By the Commission.
Donald S. Clark
Secretary
ISSUED: February 5, 1999
SEAL
ix
<PAGE> 33
EXHIBIT U
MUTUAL NONDISCLOSURE AGREEMENT
1. "Confidential Information" is that confidential, proprietary, and trade
secret information being disclosed by the disclosing party pursuant to this
Agreement.
2. Except as set forth in this Section 2, all Confidential Information shall be
in tangible form and shall be marked as Confidential or proprietary
information of the disclosing party. If the Confidential Information is
disclosed orally or visually, it shall be identified as such at the time of
disclosure and confirmed in a writing to the recipient within thirty (30)
days of such disclosure.
3. Each of the parties agrees that it will not make use of, disseminate, or in
any way disclose any Confidential Information of the other party to any
person, firm or business, except to the extent necessary for negotiations,
discussions, and consultations with personnel or authorized representatives
of the other party and any purpose the other party may hereafter authorize
in writing. Each of the parties agrees that it shall disclose Confidential
Information of the other party only to those of its employees, consultants,
advisors and investors who need to know such information and who have
previously agreed, either as a condition to employment or in order to obtain
the Confidential Information, to be bound by terms and conditions
substantially similar to those of this Agreement.
4. There shall be no liability for disclosure or use of Confidential
Information which is (a) in the public domain through no fault of the
receiving party (b) rightfully received from a third party without any
obligation of confidentiality, (c) rightfully known to the receiving party
without any limitation on use or disclosure prior to its receipt from the
disclosing party, (d) independently developed by the receiving party without
use of any Confidential Information and by persons who have not had access
to any Confidential Information (e) generally made available to third
parties without any restriction on disclosure, or (f) communicated in
response to a valid order by a court or other governmental body, as
otherwise required by law, or as necessary to establish the rights of either
party under this Agreement (provided that the party so disclosing has
provided the other party with a reasonable opportunity to seek protective
legal treatment for such Confidential Information).
5. Each of the parties agrees that it shall treat all Confidential Information
of the other party with the same degree of care as it accords to its own
Confidential Information, and each of the parties represents that it
exercises reasonable care to protect its own Confidential Information.
6. Each of the parties agrees that it will not modify, reverse engineer,
decompile, create other works from, or disassemble any software programs
contained in the Confidential Information of the other party unless
otherwise specified in writing by the disclosing party.
7. All materials (including, without limitation, documents, drawings, models,
apparatus, sketches, designs and lists) furnished to one party by the other,
and which are designated in writing to be the property of such party, shall
remain the property of such party and shall be returned to it promptly at
its request, together with any copies thereof.
x
<PAGE> 34
8. This Agreement shall govern all communications between the parties that are
made during the period from the effective date of this Agreement to the date
on which either party receives from the other written notice that subsequent
communications shall not be so governed, provided, however, that each
party's obligations under Sections 2 and 3 with respect to Confidential
Information of the other party which it has previously received shall
continue unless and until such Confidential Information falls within Section
4. Neither party shall communicate any information to the other in violation
of the proprietary rights of any third party. Neither party acquires any
licenses under any intellectual property rights of the other party under
this Agreement.
xi
<PAGE> 1
EXHIBIT 10.44
YAHOO REMOTE MERCHANT INTEGRATION PROGRAM AGREEMENT
<PAGE> 2
YAHOO! REMOTE MERCHANT INTEGRATION (RMI) PROGRAM AGREEMENT
THIS RMI AGREEMENT (the " RMI Agreement") is made as of this 24th day of
December, 1999 (the "Effective Date") between YAHOO! INC. ("Yahoo!"), a Delaware
corporation, and ARTISTdirect, Inc. ("Merchant"), a Delaware corporation. In
consideration of the mutual promises contained herein, the parties agree as
follows:
1. MERCHANT PRODUCT INFORMATION. Merchant will provide to Yahoo!, or will
permit Yahoo! to download, information relating to Merchant products in
accordance with Yahoo!'s technical and formatting specifications. Such
information will include without limitation a Merchant identifier, product
name, product description, product price, URL for the Web page on the
Merchant Network (as defined below) that features the product, URL for the
Web page on the Merchant Network that contains the product image and, if
applicable, any warranty notices or disclaimers, product availability,
return information, sizes, colors, SKU numbers, Web pages and graphic files,
including but not limited to graphical brand features of Merchant
(collectively referred to as "Merchant Product Information"). Merchant
agrees to update all Merchant Product Information in accordance with
Yahoo!'s technical and formatting specifications and in a timely manner that
is mutually agreed upon by the parties. If Merchant provides Merchant
Product Information to Yahoo! on or about the Effective Date of this RMI
Agreement, Yahoo! will host Merchant Product Information on Yahoo! servers
and include Merchant Product Information in Yahoo!'s U.S. based on-line
shopping property (referred to as "Yahoo! Shopping" or the "Service") within
forty-five (45) days after the Effective Date of this RMI Agreement. If
Merchant does not provide Merchant Product Information to Yahoo! on or about
the Effective Date of this RMI Agreement, the parties will use commercially
reasonable efforts to include Merchant Production Information in Yahoo!
Shopping as soon as possible, but no sooner than forty-five (45) days after
the Effective Date of this RMI Agreement. Yahoo! is solely responsible for
the design, layout, posting and maintenance of Yahoo! Shopping.
2. MERCHANT PAGES. Merchant will permit Yahoo! to download and display, via a
"Proxy Server" or other means, Web pages from the Web sites that comprise
the network operated by or for Merchant (the "Merchant Network"), currently
located at http://www.artistdirect.com. The parties will use commercially
reasonable efforts to isolate and include in the Service only those Web
sites on the Merchant Network that sell products on-line, including but not
limited to the Web site currently located at
http://www.ubl.com/fp.asp?layout=front_page and any Web site that sells
products on-line relating to a particular recording artist (e.g.,
www.beckdirect.com). Web pages from the Merchant Network, as displayed by
Yahoo! in accordance with this RMI Agreement, are referred to as "Merchant
Pages." Within forty-five (45) days after the Effective Date of this RMI
Agreement, Yahoo! will host Merchant Pages on Yahoo! servers and include
Merchant Pages in Yahoo! Shopping.
3. RESPONSIBILITIES AND RIGHTS WITH RESPECT TO MERCHANT PRODUCT INFORMATION AND
MERCHANT PAGES. In the event that Yahoo! becomes aware of a potential
violation of law or a conflict with Yahoo!'s advertising guidelines arising
from any hypertext links or third party advertising included in the Merchant
Pages, Yahoo! will notify Merchant and may request that Merchant remove or
replace such hypertext links or third party advertising on Merchant Pages.
If the parties cannot resolve the matter within three (3) business days of
Yahoo!'s notice to Merchant, Yahoo! reserves the right to remove or disable
such hypertext links or third party advertising on Merchant Pages. The
foregoing only applies to Merchant Pages and does not affect operation of
1
<PAGE> 3
or any material on the Merchant Network.
4. CUSTOMER ORDER INFORMATION.
(a) ORDER PLACEMENT AND FULFILLMENT. Users of Yahoo! Shopping may search
for and navigate to Merchant Product Information and Merchant Pages via
Yahoo! Shopping pages designed and hosted by Yahoo!. Users of Yahoo!
Shopping will order items to be purchased from Merchant via Merchant
Pages. Check-out for orders also will be conducted on Merchant Pages
(the "Check-out Pages"). Information relating to the purchase of
Merchant products via the Service, including product name, product
quantity, amount paid, user's proper name, shipping address, billing
address, email address and credit card information ("Customer Order
Information") will be transmitted to Merchant. Merchant will notify
each user via email within twenty-four (24) hours after Merchant
receives the Customer Order Information whether the order can or cannot
be fulfilled. Merchant will be solely responsible for all products
offered by Merchant on Yahoo! Shopping and all activities related to
such products, including without limitation billing, shipping and
fulfillment of goods, returns and customer service and for any acts or
omissions that occur in connection with such product offerings. During
the Term (as defined below), if Merchant intends to modify the
Check-out Pages or otherwise redesign the Merchant Network, Merchant
will provide Yahoo! with (i) at least three (3) business days written
notice prior to implementing such modification or redesign, unless such
modification or redesign is necessary to avoid liability for third
party claims, and (ii) reasonable technical assistance, as Yahoo! may
reasonably request, to ensure that the Service will be uninterrupted.
Merchant acknowledges that Merchant's failure to provide Yahoo! with at
least three (3) business days notice prior to implementing such
modification or redesign may adversely affect operation of Merchant
Pages, including but not limited to Check-out Pages, and users' ability
to search for and navigate to Merchant Production Information and
Merchant Pages.
(b) PRIVACY AND CONSUMER PROTECTION. Merchant agrees to implement adequate
security protections to ensure the privacy of Customer Order
Information. Merchant further agrees (i) to post a privacy policy on
the Merchant Network that, at a minimum, discloses any and all uses of
personal information collected from users by Merchant, including but
not limited to any uses of personal information collected during a
transaction that is cancelled or otherwise not completed by the user;
(ii) to place a prominent notice on any Check-out Pages on which
Merchant collects personal information from users that such information
is being collected; (iii) to provide a hypertext link on all Check-out
Pages to Merchant's privacy policy; and (iv) to use Customer Order
Information only as expressly permitted by Merchant's privacy policy.
If a user requests, or if Yahoo! conveys such request on behalf of the
user, that Merchant remove personal information relating to any user
from Merchant's database and other records, Merchant agrees to remove
such information promptly from its database or other records.
5. INFORMATION MAINTAINED BY YAHOO! AND RELEVANT TO THE TRANSACTION. In the
event that a registered Yahoo! user places an order for a Merchant product
via the Service, Yahoo! already may maintain information about the user in
Yahoo!'s proprietary databases that is relevant to the transaction,
including but not limited to that user's proper name, shipping address,
billing address, email address and credit card information. Merchant
acknowledges that Yahoo! may give registered Yahoo! users the option to have
certain input fields on Check-out Pages that
2
<PAGE> 4
request Customer Order Information "populated" with applicable information
about that registered Yahoo! user from Yahoo!'s proprietary databases. For
clarity, the parties understand that such "population" by Yahoo! will not
affect Merchant's ownership of Customer Order Information, as set forth in
Section 7(c), and will not transfer, impair or otherwise limit Yahoo!'s
rights in the "populated" information.
6. REGISTRATION OF UNREGISTERED YAHOO! USERS WHO PURCHASE FROM MERCHANT VIA THE
SERVICE. Merchant agrees that users who are not registered with Yahoo! may
be given the opportunity to register with Yahoo! before completing a
discrete transaction with Merchant via the Service; provided, however, that
(a) such opportunity to register may be presented during the check-out
process for the underlying transaction only to the extent that Yahoo! places
a hypertext link to its registration page in the Yahoo! branded toolbar on
Merchant Pages, unless otherwise mutually agreed upon by the parties, and
(b) there will be no obligation to register. The Yahoo! branded toolbar will
be substantially similar in form to the example set forth in Exhibit 1 and
will include other hypertext links that provide access to additional
features of the Service only.
7. MERCHANT LICENSES TO YAHOO!.
(a) MERCHANT PRODUCT INFORMATION. Subject to the limitations set forth in
this Section 7(a), Merchant hereby grants to Yahoo! a worldwide,
non-transferable, non-sublicensable, non-exclusive license to use,
display, modify, make derivative works from, reproduce and distribute
Merchant Product Information and any portions thereof and any
derivative works therefrom during the Term solely for the purpose of
providing features of the Service, including without limitation the
right to incorporate Merchant Product Information into a database and
the right to display in any manner the results of search queries and
comparisons conducted by users of the Service. Yahoo! may modify and
create derivative works from Merchant Product Information only to the
extent reasonably necessary to fit the format of the Service or to
provide features of the Service. Merchant also grants to Yahoo! (i) the
right to maintain such Merchant Product Information on Yahoo! servers
during the Term; (ii) the right to authorize the downloading and
printing of Merchant Product Information, or any portion thereof, by
users; and (iii) subject to Merchant's prior approval, which will not
be unreasonably withheld, the right to use Merchant Product Information
for purposes of promoting Merchant products, Yahoo! Shopping or Yahoo!
generally.
(b) MERCHANT PAGES. Subject to the limitations set forth in this Section
7(b), Merchant grants to Yahoo! a worldwide, non-transferable,
non-sublicensable, non-exclusive license to use, display, modify,
reproduce and distribute Merchant Pages during the Term solely for the
purpose of responding to particular queries by users of the Service.
Notwithstanding the foregoing, Yahoo! may modify Merchant Pages only
pursuant to Section 3 above and to the extent necessary to format
Merchant Pages for the Service or to provide features of the Service by
placing a Yahoo! branded toolbar on Merchant Pages in a manner
substantially similar to the example set forth in Exhibit 1; provided,
however, that no modification will affect the substance or accuracy of
the underlying content on Merchant Pages. Merchant also grants to
Yahoo! (i) the right to designate and display a Yahoo! URL for all
Merchant Pages and (ii) subject to Merchant's prior approval, the right
to redirect certain hypertext links on Merchant Pages to certain pages
of the Service.
(c) CUSTOMER ORDER INFORMATION. Merchant owns Customer Order Information
and grants to
3
<PAGE> 5
Yahoo! a perpetual, worldwide, sublicensable, non-exclusive license to
use Customer Order Information in aggregate form, such that Customer
Order Information is not individually attributable to Merchant or to
individual users as customers of Merchant specifically, for research,
marketing or other promotional purposes. Yahoo!'s use of Customer Order
Information under this Section 7(c) will comply with the privacy
principles of TRUSTe, currently located at
http://www.truste.org/webpublishers/pub_principles.html.
8. YAHOO! LICENSES TO MERCHANT. Yahoo! may provide Merchant with access to
certain software owned by Yahoo! (the "Software") in order to, among other
things, facilitate the transmission of Customer Order Information to
Merchant. In the event that Yahoo! provides Merchant with access to
Software, the terms that govern such access to, and use of, said Software
will be mutually agreed upon by the parties.
9. CONFIDENTIALITY. Each party acknowledges that Confidential Information may
be disclosed to the other party during the Term of this RMI Agreement.
"Confidential Information" means any confidential, proprietary or trade
secret information relating to this RMI Agreement or disclosed by one party
to the other party during the Term of this RMI Agreement, including but not
limited to material terms of this RMI Agreement, information about users
(e.g. Customer Order Information), guidelines and specifications, technical
processes, source codes, product designs, sales, cost and other unpublished
financial information, product and business plans, projections and marketing
data that is not (a) generally known to the public; (b) disclosed in public
materials or otherwise in the public domain through no fault of the
receiving party; (c) lawfully known to or independently developed by the
receiving party prior to disclosure by the disclosing party; (d) lawfully
obtained from a third party; or (e) required or reasonably advised to be
disclosed by law. Except as otherwise expressly provided in this RMI
Agreement, each party agrees that (i) it will treat all Confidential
Information of the other party with the same degree of care as it accords to
its own Confidential Information and (ii) it will disclose Confidential
Information of the other party only to those of its agents or employees who
need to know such Confidential Information and who have agreed previously,
either as a condition of employment or in order to obtain the Confidential
Information, to be bound by terms substantially similar to those of this
Section 10. Merchant acknowledges and agrees that Yahoo! may access
information related to Merchant on Yahoo! servers during the Term as
necessary to identify or resolve technical problems or respond to complaints
about the Service.
10. PAYMENTS TO YAHOO!. Merchant will pay to Yahoo! one percent (1%) of Revenue
received by Merchant. "Revenue" means the total net retail amount of sales,
excluding shipping, handling, taxes, credit card processing fees,
fulfillment fees charged by third party suppliers (which will not exceed
$3.00 per item without Yahoo!'s prior written consent, which will not be
unreasonably withheld), refunds and rebates paid, and any chargebacks for
returned or canceled products, from all purchases of Merchant products that
are conducted on the Service. Merchant will pay such Revenue share amounts
quarterly within fifteen (15) days of the end of each quarter and will
accompany each payment with a written report certified by an officer of
Merchant that includes (a) the total retail dollar amount of sales made via
the Service and (b) the calculation of Revenue share due to Yahoo!. Merchant
will maintain complete and accurate records in accordance with generally
accepted methods of accounting for all such transactions and will allow
Yahoo!, at its own expense, to direct an independent certified public
accounting firm to inspect and audit such records during normal business
hours with written notice to Merchant. Such audits will not be
4
<PAGE> 6
required more often than one (1) time per twelve (12) month period, except
that Yahoo! may audit Merchant within three (3) months of any audit in which
a discrepancy of ten percent (10%) or greater is discovered. If such a
discrepancy is discovered, Merchant will pay the amount of the error to
Yahoo! within ten (10) days of such error's discovery. Yahoo! will pay the
cost of any audit conducted in accordance with this Section 10, except that
Merchant will pay such audit's cost, as long as such cost is computed on an
hourly and not contingent basis, if a discrepancy of ten percent (10%) or
greater was discovered in the immediately preceding audit. All fees are
payable in U.S. dollars. Late payments will bear interest at the rate of one
percent (1%) per month (or the highest rate permitted by law, if less). In
the event of any failure by Merchant to make payment, Merchant will be
responsible for all reasonable expenses (including attorneys' fees) incurred
by Yahoo! in collecting such amounts.
11. TERM, TERMINATION AND MODIFICATION. This RMI Agreement will become effective
as of the Effective Date and will, unless sooner terminated as provided
herein or as otherwise agreed, remain effective for at least twenty-four
(24) months from the date on which Merchant Pages become publicly available
via the Service and continue on a month to month basis thereafter until
terminated by either party with no less than thirty (30) days written notice
(the "Term"). No amendment to any provision of this RMI Agreement will be
effective unless in writing and signed by both parties. Upon termination,
Yahoo! will delete from its servers any and all information related to
Merchant, including but not limited to Merchant Product Information, but
excluding Customer Order Information retained in accordance with Section
7(c). Sections 4(b), 7(c), 9, 10 (to the extent that Yahoo! is owed fees
that arose during the Term and to the extent that Yahoo!'s audit right will
survive for one year after termination), 11 and 13 through 15 will survive
termination or expiration of this RMI Agreement.
12. REPRESENTATIONS AND WARRANTIES.
(a) BY MERCHANT. Merchant represents and warrants that it (i) has full
power and authority under all relevant laws and regulations to offer,
sell and distribute the products offered by it, including but not
limited to holding all necessary licenses from all necessary
jurisdictions to engage in the advertising and sale of such products,
and (ii) will not engage in any activities: (A) that constitute or
encourage a violation of any applicable law or regulation, including
but not limited to the sale of illegal goods or the violation of export
control or obscenity laws and (B) that are in any way connected with
the transmission of the unsolicited distribution of email or with any
unethical marketing practices.
(b) BY YAHOO!. Yahoo! represents and warrants that it (i) has full power
and authority under all relevant laws and regulations to offer the
Service and (ii) will not engage in any activities that are in any way
connected with the transmission of the unsolicited distribution of
email or with any unethical marketing practices.
13. INDEMNITY.
(a) BY MERCHANT. Merchant, at its own expense, will indemnify, defend and
hold harmless Yahoo! and its employees, representatives, agents and
affiliates against any claim, demand,
5
<PAGE> 7
action or other proceeding brought by any third party against Yahoo! to
the extent that such claim, demand, action or other proceeding is based
on, or arises out of, (i) any products offered, distributed or sold by
Merchant in connection with the Service; (ii) any mistake, error or
omission made by Merchant, including but not limited to data corruption
and/or wrongful disclosure of Customer Order Information; or (iii) any
infringement of the United States copyright, trademark or other
proprietary right of a third party established under United States law
that results from Merchant's use of any content, trademarks, service
marks, trade names, copyrighted or patented material, or other
intellectual property used by Merchant; provided, however, that in any
such case: (A) Yahoo! provides Merchant with prompt written notice of
any such claim; (B) Yahoo! permits Merchant to assume and control the
defense of such action or proceeding upon Merchant's written notice to
Yahoo! of its intention to indemnify; and (C) upon Merchant's written
request, and at no expense to Yahoo!, Yahoo! will provide Merchant with
all available information and assistance reasonably necessary for
Merchant to defend such claim. Merchant will not enter into any
settlement or compromise of any such claim, which settlement or
compromise would result in any liability to Yahoo!, without Yahoo!'s
prior written consent, which will not be unreasonably withheld.
Merchant will pay any and all costs, damages and expenses, including
but not limited to reasonable attorneys' fees and costs awarded against
or otherwise incurred by Yahoo! in connection with or arising from any
such claim, demand, action or other proceeding. It is understood and
agreed that Yahoo! will not be required to edit or review for accuracy
or appropriateness any content provided by Merchant.
(b) BY YAHOO!. Yahoo!, at its own expense, will indemnify, defend and hold
harmless Merchant and its employees, representatives, agents and
affiliates against any claim, demand, action or other proceeding
brought by any third party against Merchant to the extent that such
claim, demand, action or other proceeding is based on, or arises out
of, (i) any corruption of Merchant Product Information by Yahoo! that
prevents the successful completion of any transaction between Merchant
and a potential customer of Merchant; (ii) any wrongful disclosure of
Customer Order Information by Yahoo!; or (iii) any infringement of the
United States copyright, trademark or other proprietary right of a
third party established under United States law that results from
Yahoo!'s use of Yahoo! trademarks, service marks, logos or other
distinctive Yahoo! brand features; provided, however, that in any such
case: (A) Merchant provides Yahoo! with prompt written notice of any
such claim; (B) Merchant permits Yahoo! to assume and control the
defense of such action or proceeding upon Yahoo!'s written notice to
Merchant of its intention to indemnify; and (C) upon Yahoo!'s written
request, and at no expense to Merchant, Merchant will provide Yahoo!
with all available information and assistance reasonably necessary for
Yahoo! to defend such claim. Yahoo! will not enter into any settlement
or compromise of any such claim, which settlement or compromise would
result in any liability to Merchant, without Merchant's prior written
consent, which will not be unreasonably withheld. Yahoo! will pay any
and all costs, damages and expenses, including but not limited to
reasonable attorneys' fees and costs awarded against or otherwise
incurred by Merchant in connection with or arising from any such claim,
demand, action or other proceeding.
14. DISCLAIMER OF WARRANTIES AND LIMITATIONS OF LIABILITY AND DAMAGES. THE
SERVICE IS PROVIDED ON AN "AS IS" AND "AS AVAILABLE" BASIS WITHOUT
WARRANTIES OF ANY KIND, EITHER EXPRESS OR IMPLIED,
6
<PAGE> 8
INCLUDING BUT NOT LIMITED TO WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A
PARTICULAR PURPOSE. NEITHER THIS RMI AGREEMENT NOR ANY DOCUMENTATION
FURNISHED UNDER IT IS INTENDED TO EXPRESS OR IMPLY ANY WARRANTY THAT THE
SERVICES WILL BE UNINTERRUPTED, TIMELY OR ERROR-FREE.
EXCEPT FOR OBLIGATIONS UNDER SECTION 13, NEITHER PARTY NOR ITS PARENTS,
SUBSIDIARIES, AFFILIATES, OFFICERS, DIRECTORS, SHAREHOLDERS, EMPLOYEES AND
AGENTS WILL BE LIABLE, UNDER ANY CIRCUMSTANCES OR LEGAL THEORIES WHATSOEVER,
FOR ANY LOSS OF BUSINESS, PROFITS OR GOODWILL, LOSS OF USE OR DATA,
INTERRUPTION OF BUSINESS OR FOR ANY INDIRECT, SPECIAL, INCIDENTAL OR
CONSEQUENTIAL DAMAGES OF ANY CHARACTER, EVEN IF THAT PARTY IS AWARE OF THE
RISK OF SUCH DAMAGES. IN ADDITION, AND EXCEPT FOR OBLIGATIONS UNDER SECTION
13, NEITHER PARTY WILL BE LIABLE UNDER ANY CIRCUMSTANCES OR LEGAL THEORIES
FOR ANY DAMAGES THAT RESULT IN ANY WAY FROM MERCHANT'S USE OR INABILITY TO
USE THE SERVICE, OR THAT RESULT FROM ERRORS, DEFECTS, OMISSIONS, DELAYS IN
OPERATION OR TRANSMISSION, OR ANY OTHER FAILURE OF PERFORMANCE OF THE
SERVICE.
15. MISCELLANEOUS. Any and all press releases and other public announcements
relating to this RMI Agreement and/or the underlying transactions between
Yahoo! and Merchant and the method and timing of such announcements must be
approved in advance by the parties in writing. Any notice or communication
will be (a) in writing; (b) sent by overnight or certified mail return
receipt requested; and (c) deemed delivered to the party to whom such
communication is directed, if by overnight mail, on the date delivered or,
if by certified mail, two (2) days following the date sent. If to Yahoo!,
such notices will be addressed to 3420 Central Expressway, Santa Clara, CA
95051. If to Merchant, such notices will be addressed to 17835 Ventura
Boulevard, Suite 310, Encino CA 91316, Attention 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. The section headings
in this RMI Agreement are for convenience only and may not be relied upon to
construe or otherwise interpret this RMI Agreement. This RMI Agreement
constitutes the final, complete and exclusive statement of the agreement
between the parties with respect to its subject matter and supersede all
previous proposals. This RMI Agreement and the relationship between Merchant
and Yahoo! will be governed by the laws of the state of California without
regard to its conflict of law provisions. If any provision of this RMI
Agreement is found invalid or unenforceable, that provision will be enforced
to the maximum extent permissible, and the other provisions of this RMI
Agreement will remain in full force. Neither party's failure to exercise or
enforce any right or provision of this RMI Agreement will constitute a
waiver of such right or provision. Both parties agree that, regardless of
any statute or law to the contrary, any claim or cause of action arising out
of or related to use of the Service or this RMI Agreement must be filed
within two (2) years after such claim or cause of action arose, or be
forever barred.
[SIGNATURE PAGE FOLLOWS]
7
<PAGE> 9
IN WITNESS WHEREOF, the parties have caused this RMI Agreement to be executed by
their duly authorized representatives as of the date first written above.
YAHOO! INC.
By: /s/ ANIL SINGH By: /s/ KEITH YOKOMOTO
----------------------------- -----------------------------
Title: Senior Vice President Title: President and COO
-------------------------- --------------------------
Address: 3420 Central Expressway Address:
------------------------ ------------------------
Santa Clara, CA 95051
------------------------ ------------------------
Telecopy: Telecopy:
----------------------- -----------------------
E-mail: E-mail:
------------------------- -------------------------
8
<PAGE> 1
EXHIBIT 23.2
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 March 21, 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.
