<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 27, 2000
REGISTRATION NO. 333-87547
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 2
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.
KOUROSH VOSSOUGHI, ESQ. O'MELVENY & MYERS LLP
BROBECK, PHLEGER & HARRISON LLP 1999 AVENUE OF THE STARS, SUITE 700
38 TECHNOLOGY DRIVE LOS ANGELES, CALIFORNIA 90067
IRVINE, CALIFORNIA 92618 (310) 553-6700
(949) 790-6300
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this Registration Statement becomes effective.
------------------------
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434
under the Securities Act, please check the following box. [ ]
------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF SECURITIES AMOUNT TO OFFERING PRICE PER AGGREGATE OFFERING AMOUNT OF
TO BE REGISTERED BE REGISTERED SHARE(1) PRICE REGISTRATION FEE(2)
<S> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------------------
Common Stock, $0.01 par value.............. 5,750,000 $11.00 $63,250,000 $16,698
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Estimated solely for the purpose of computing the amount of registration fee
pursuant to Rule 457(a) under the Securities Act of 1933.
(2) Previously paid by the registrant in connection with the filing of the
Registration Statement on September 22, 1999.
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 January 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 8.
-------------------------
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
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................. 3
Risk Factors........................ 8
Special Note Regarding
Forward-Looking Statements........ 24
Use of Proceeds..................... 25
Dividend Policy..................... 25
Capitalization...................... 26
Dilution............................ 28
Unaudited Pro Forma Consolidated
Financial Data.................... 29
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.......... 74
Principal Stockholders.............. 81
Description of Capital Stock........ 85
Rescission Offer.................... 88
Shares Eligible For Future Sale..... 89
Underwriters........................ 91
Legal Matters....................... 93
Experts............................. 93
Where You Can Find Information...... 94
Index to Consolidated Financial
Statements........................ F-1
</TABLE>
You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell, and seeking offers to
buy, shares of common stock only in jurisdictions where offers and sales are
permitted. The information contained in this prospectus is accurate only as of
the date of this prospectus, regardless of the time of delivery of this
prospectus or of any sale of the common stock.
In this prospectus, "ARTISTdirect," "we," "us" and "our" refer to
ARTISTdirect, Inc., our subsidiaries and our predecessor ARTISTdirect, LLC.
Unless otherwise indicated, all information in this prospectus:
- reflects the merger of ARTISTdirect, LLC into ARTISTdirect, Inc.
effective as of October 6, 1999;
- reflects the one-for-four reverse split of our common stock to be
effected before the closing of this offering;
- includes the issuance of an aggregate of 7,000,291 shares of Series C
preferred stock in December 1999 and January 2000 to several outside
investors;
- gives effect to the conversion of all outstanding shares of preferred
stock into shares of common stock effective upon the closing of this
offering;
- assumes no exercise of the underwriters' over-allotment option;
- excludes shares of our common stock issuable pursuant to options and
warrants outstanding as of December 31, 1999; and
- excludes approximately 263,000 shares of common stock issued or to be
issued as accrued but unpaid dividends on preferred stock subsequent to
September 30, 1999.
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.
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.
2
<PAGE> 4
PROSPECTUS SUMMARY
You should read the following summary together with the more detailed
information regarding our company and the common stock being sold in this
offering and our financial statements and the notes to those financial
statements appearing elsewhere in this prospectus. The conversion of all of our
convertible preferred stock outstanding as of January 21, 2000 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 a leading 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 November 1999,
users visited more than 60 million pages in our ARTISTdirect Network.
Our ARTISTdirect Network is an integrated network of Web sites consisting
of:
- ARTISTchannels -- customized, artist-owned Web sites that provide one
destination for artist-specific music, merchandise and content. We build,
operate and maintain these sites on behalf of our artists. Artists
control the programming and products offered on their ARTISTchannels and
share in the revenue that they generate. As of December 31, 1999,
ARTISTdirect featured 79 unique, artist-owned ARTISTchannels, and had
signed agreements to launch channels with an additional 26 artists. A
selection of artists with ARTISTchannels includes:
<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 85,000 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 40,000 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, Donald Muller, President of ARTISTdirect
Agency and Kneeling Elephant Records, Stephen Rennie, President of the UBL, and
Nick Turner, Vice President, ARTISTchannels, have collectively worked in the
music industry for over 60 years. We believe that their extensive understanding
of the music industry provides us with a distinct advantage in addressing the
opportunities arising from the convergence of music and the Internet.
3
<PAGE> 5
Music is one of the most popular forms of entertainment worldwide and a
multi-billion dollar industry. In 1998, worldwide sales of recorded music were
$38.7 billion, according to the International Federation of the Phonographic
Industry. Sales of concert tickets, advertising and merchandise related to music
events and individual artists also generate substantial revenue. The Internet is
emerging as an important new medium for music, 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.
We generate revenue from sales of music and related merchandise, online
advertising and sponsorships, royalties on record sales and talent agency
commissions. Our revenue was $4.6 million for 1998 and $6.4 million for the nine
months ended September 30, 1999. Although traffic to our sites and our revenue
have increased, we incurred a net loss for the nine months ended September 30,
1999 of approximately $34.2 million, and our accumulated deficit as of September
30, 1999 was approximately $41.0 million. While we believe that we can increase
our revenues 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.
RECENT DEVELOPMENTS
In November and December 1999, we entered into separate 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. We believe that we are the only online music company
with investments from 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.
ARTISTdirect, Inc. was incorporated in Delaware in July 1999. ARTISTdirect,
LLC, our predecessor, was organized as a California limited liability company in
August 1996. Our principal executive offices are located at 17835 Ventura
Boulevard, Suite 310, Encino, California 91316, and our telephone number is
(818) 758-8700. Our World Wide Web address is www.artistdirect.com. The
information on our Web site is not a part of this prospectus.
4
<PAGE> 6
THE OFFERING
Common stock offered................ 5,000,000 shares
Common stock to be outstanding after
the offering(1)..................... 37,083,481 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 25 for more information on our
use of the proceeds from this offering.
Proposed Nasdaq National Market
symbol.............................. ARTD
- -------------------------
(1) Number reflects:
- outstanding shares as of September 30, 1999;
- the issuance of 7,000,291 shares of Series C preferred stock in December
1999 and January 2000. These shares of Series C preferred stock will be
automatically converted 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 which will be issued upon
the conversion of the Series C preferred stock may be adjusted based upon the
actual initial offering price; and
- the issuance of 176,666 shares pursuant to the exercise of stock options
from October 1, 1999 through December 31, 1999.
5
<PAGE> 7
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
The following pro forma basic and diluted net loss per share and the
weighted average shares outstanding used in computing pro forma basic and
diluted net loss per share give effect to the 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 75;
- the merger of ARTISTdirect, LLC into ARTISTdirect, Inc. effective as of
October 6, 1999;
- the one-for-four reverse split of our common stock to be effected before
the closing of the offering;
- the conversion of all outstanding shares of preferred stock into shares
of common stock upon the closing of this offering.
<TABLE>
<CAPTION>
PERIOD FROM NINE MONTHS ENDED
AUGUST 8, 1996 YEAR ENDED DECEMBER 31, SEPTEMBER 30,
(INCEPTION) TO ------------------------- -------------------------
DECEMBER 31, 1996 1997 1998 1998 1999
----------------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Net revenue.................. $ -- $ 1,888 $ 4,582 $ 3,348 $ 6,434
Gross profit................. -- 1,280 2,067 2,074 778
Operating expense............ 28 1,737 8,416 5,346 35,184
Loss from operations......... (28) (457) (6,349) (3,272) (34,406)
Net loss..................... (28) (460) (6,318) (3,288) (34,206)
Pro forma basic and diluted
net loss per share......... $ (.44) $ (1.83)
Weighted average shares
outstanding used in
computing pro forma basic
and diluted net loss per
share...................... 14,514,508 18,665,230
</TABLE>
The "pro forma as adjusted" column below reflects our capitalization as of
September 30, 1999 with adjustments to give effect to:
- the events listed above related to the pro forma basic and diluted net
loss per share; and
- the issuance of an aggregate of 7,000,291 shares of Series C preferred
stock in December 1999 and January 2000; the shares of Series C preferred
stock are convertible at a ratio of 1 share of preferred for 1.5827
shares of common stock, based on an assumed initial public offering price
of $11.00 per share;
- the issuance of shares of common stock from October 1, 1999 to December
31, 1999 in connection with the exercise of options; 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 25.
6
<PAGE> 8
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1999
-------------------------
PRO FORMA
ACTUAL AS ADJUSTED
----------- -----------
(UNAUDITED)
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 4,316 $151,882
Working capital............................................. 1,314 148,880
Goodwill and intangibles, net............................... 14,192 14,192
Total assets................................................ 25,350 172,916
Total redeemable securities................................. 26,244 7,035
Total members' and stockholders' equity (deficit)........... (6,772) 160,003
</TABLE>
7
<PAGE> 9
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
an accumulated deficit of approximately $41.0 million as of September 30, 1999.
For the nine months ended September 30, 1999, we incurred a net loss of
approximately $34.2 million, which represented approximately 530% of our revenue
for that period. We expect our operating losses and negative cash flow to
continue for the
8
<PAGE> 10
foreseeable 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. Factors that may cause our operating results to fluctuate
significantly include the following:
- fluctuations in the demand for, and pricing of, online advertising;
- the timing and uncertainty of advertising sales cycles and seasonal
declines in advertising sales;
- fluctuations in the levels of user visits to our Web sites and the amount
of time that users spend on our Web sites;
- fluctuations in the levels of consumer purchasing activity through the
ARTISTdirect Network;
- general economic conditions, as well as economic conditions specific to
online advertising, electronic commerce and the music industry; and
- seasonality and fluctuations in the demand for products associated with
music and other entertainment events, especially with respect to
holiday-based commerce and concert tours.
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:
- 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;
9
<PAGE> 11
- 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.
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. In addition, 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. 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. 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
10
<PAGE> 12
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 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 over the next 12 months 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;
11
<PAGE> 13
- larger existing customer bases; and
- more popular content or artists.
These competitors may be able to respond more quickly to new or emerging
technologies and changes in customer requirements and devote greater resources
to develop, promote and sell their products or services than we can. Web sites
maintained by our existing and potential competitors may be perceived by
consumers, artists, talent management companies and other music-related vendors
or advertisers as being superior to ours. In addition, increased competition
could result in reduced advertising rates and margins and loss of market share,
any of which could harm our business. For additional information regarding
competition, see "Business -- Competition" on page 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. Failure to deliver
products to our customers in a timely and accurate manner would harm our
reputation, our relationship with customers, the ARTISTdirect and UBL brands and
our results of operations.
12
<PAGE> 14
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, Level 3 Communications 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, 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,
13
<PAGE> 15
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 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.
If we are presented with appropriate opportunities, we intend to invest in
or acquire complementary companies, products or technologies. We may not,
however, realize the anticipated benefits of any acquisition or investment. If
we buy a company, we could have difficulty in assimilating that company's
personnel, technology, operations or products into our operations. In addition,
the key personnel of the acquired company may decide not to work for us. These
difficulties could disrupt our ongoing business, distract our management and
employees and increase our expenses. 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. 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.
14
<PAGE> 16
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,
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
15
<PAGE> 17
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.
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
16
<PAGE> 18
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 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 the requirements of Rule 701 under the Securities
Act, or any other available exemptions from the registration requirements of
Section 5 of the Securities Act, and may not have qualified for any exemption
from qualification under California securities laws either. Beginning
approximately 180 days after the date of this prospectus, we intend to make a
rescission offer to all these persons pursuant to a registration statement filed
under the Securities Act and pursuant to California securities law. In the
rescission offer, we will offer to repurchase from these persons all shares
issued directly to these persons or pursuant to option exercises by these
persons before the expiration of the rescission offer registration statement, at
the purchase or exercise price paid for these shares, plus interest at the rate
of 10% per year from the date of issuance until the rescission offer expires. To
comply with California securities law, we will also offer to repurchase all
unexercised options issued to such persons at 20% of the option exercise price
multiplied by the number of shares subject to such options, plus interest at the
rate of 10% per year from the date of issuance until the rescission offer
expires. The rescission offer will expire approximately 30 days after the
effectiveness of the rescission offer registration statement. We could be
required to pay up to approximately $11.1 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
17
<PAGE> 19
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 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.
18
<PAGE> 20
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. "Filter" software programs may also limit or prevent
advertising from being delivered to an Internet user's computer, which could
adversely affect the commercial viability of Internet advertising.
WE MAY NEED TO CHANGE THE MANNER IN WHICH WE CONDUCT OUR BUSINESS IF
GOVERNMENT REGULATION INCREASES.
There are currently few laws or regulations that specifically regulate
communications or commerce on the Internet. Laws and regulations may be adopted
in the future, however, that address issues such as user privacy, pricing,
taxation, content, copyrights, distribution, security, and the quality of
products and services. For example, the Telecommunications Act sought to
prohibit transmitting certain types of information and content over the Web.
Several telecommunications companies have petitioned the Federal Communications
Commission to regulate Internet service providers and online services providers
in a manner similar to long distance telephone carriers and to impose access
fees on these companies. Any imposition of access fees could increase the cost
of transmitting data over the Internet. In addition, the growth and development
of the market for online commerce may lead to more stringent consumer protection
laws, both in the United States and abroad, that may impose additional burdens
on us. The United States Congress recently enacted Internet laws regarding
children's privacy, copyrights, taxation and the transmission of sexually
explicit material. The law of the Internet, however, remains largely unsettled,
even in areas where there has been some legislative action. Moreover, it may
take years to determine the extent to which existing laws relating to issues
such as property ownership, libel and personal privacy are applicable to the
Web. Any new, or modifications to existing, laws or regulations relating to the
Web could adversely affect our business.
Prohibition and restriction of Internet content and commerce could reduce
or slow Internet use, decrease the acceptance of the Internet as a
communications and commercial medium and expose us to liability. Any of these
outcomes could have a material adverse effect on our business, results of
operations and financial condition. The growth and development of the market for
Internet commerce may prompt calls for more stringent consumer protection laws,
both in the United States and abroad, that may impose additional burdens on
companies conducting business over the Internet.
THE INTERNET IS SUBJECT TO RAPID CHANGES, WHICH COULD RESULT IN SIGNIFICANT
ADDITIONAL COSTS.
The market for Internet products and services is characterized by rapid
change, evolving industry standards and frequent introductions of new
technological developments. These new standards and developments could make our
existing or future products or services obsolete. Keeping pace with the
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.
19
<PAGE> 21
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.
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.
20
<PAGE> 22
RISKS RELATED TO THE OFFERING
AFTER THIS OFFERING, OUR EXECUTIVE OFFICERS, DIRECTORS AND MAJOR
STOCKHOLDERS WILL BENEFICIALLY OWN APPROXIMATELY 74.6% OF OUR OUTSTANDING
COMMON STOCK AND CONSEQUENTLY WILL BE ABLE TO EXERCISE SIGNIFICANT CONTROL
OVER ARTISTDIRECT.
After this offering, executive officers, directors and holders of 5% or
more of the outstanding ARTISTdirect common stock together will beneficially own
approximately 74.6% of our outstanding common stock. These stockholders would be
able to significantly influence all matters requiring approval by our
stockholders, including the election of directors and the approval of
significant corporate transactions. This concentration of ownership may also
have the effect of delaying, deterring or preventing a change in control of
ARTISTdirect and may make some transactions more difficult or impossible to
complete without the support of these stockholders.
IT MAY BE DIFFICULT FOR A THIRD PARTY TO ACQUIRE OUR COMPANY, AND THIS
COULD PREVENT CHANGES IN OUR MANAGEMENT.
Upon the closing of this offering, we will be subject to the Delaware
anti-takeover laws regulating corporate takeovers. These anti-takeover laws
prevent a Delaware corporation from engaging in a business combination involving
a merger or sale of more than 10% of its assets with any stockholder, including
all affiliates and associates of the stockholder, who owns 15% or more of the
corporation's 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.
21
<PAGE> 23
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 stock in this offering, you will
experience immediate dilution of approximately $7.07 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 $3.70 per
share. Please see "Dilution" on page 28 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 combined with the
net proceeds from this offering will be sufficient to meet our anticipated needs
for working capital and capital expenditures for at least twelve months
following the date of this prospectus. If we are unable to generate sufficient
cash flows from operations to meet our anticipated needs for working capital and
capital expenditures, we will need to raise additional funds to continue our
operations, promote our brands, develop new or enhanced services, respond to
competitive pressures or make acquisitions. We may be unable to obtain any
required additional financing on terms favorable to us, if at all. If adequate
funds are not available on acceptable terms, we may be unable to fund our
expansion, successfully promote our brands, develop or enhance services, respond
to competitive pressures or take advantage of acquisition opportunities, any of
which could have a material adverse effect on our business. If we raise
additional funds through the issuance of equity securities, our stockholders may
experience dilution of their ownership interest, and the newly-issued securities
may have rights superior to those of the common stock. If we raise additional
funds by issuing debt, we may be subject to limitations on our operations,
including limitations on the payment of dividends.
SUBSTANTIAL SALES OF OUR COMMON STOCK COULD CAUSE OUR STOCK PRICE TO FALL.
If our stockholders sell substantial amounts of our common stock, including
shares issued upon the exercise of outstanding options and warrants, in the
public market following this offering, the market price of our common stock
could fall. Such sales also might make it more difficult for us to sell equity
or equity-related securities in the future at a time and price that we deem
appropriate. Upon completion of this offering, we will have outstanding
37,083,481 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 32,083,481
22
<PAGE> 24
remaining shares, none of which will be eligible for sale in the public market
until after October 6, 2000. Please see "Shares Eligible For Future Sale" on
page 89 for more information on the additional shares of our common stock which
may become eligible for sale in the public market after this offering.
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 6,891,800 shares of our common stock and had reserved a
total of an additional 3,181,534 shares for future grants under our three option
plans. The exercise of stock options will reduce your percentage ownership in
ARTISTdirect.
23
<PAGE> 25
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.
24
<PAGE> 26
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 77 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 $11.1 million plus interest.
See "Rescission Offer" on page 88 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 are not
currently a party to any contract or letters of intent with respect to any
acquisitions, and our expansion plans may not be realized or, if realized, may
not prove profitable for us. We intend to invest the net proceeds in short-term
interest-bearing, investment grade securities until we use them.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our capital stock. Our
predecessor, ARTISTdirect, LLC, made cash distributions to its members,
principally to pay taxes. We currently intend to retain all available funds and
any future earnings for use in the operation and expansion of our business, and
we do not expect to pay any cash dividends in the foreseeable future.
25
<PAGE> 27
CAPITALIZATION
The following table sets forth our capitalization as of September 30, 1999:
- on an actual basis;
- on pro forma basis to reflect:
- the merger of ARTISTdirect, LLC into ARTISTdirect, Inc. effected
October 6, 1999, including distributions in the form of notes payable
that were issued in connection with the merger;
- the issuance of an aggregate of 7,000,291 shares of Series C preferred
stock in December 1999 and January 2000; the shares of Series C
preferred stock are convertible at a ratio of 1 share of preferred for
1.5827 shares of common, based on an assumed initial public offering
price of $11.00 per share;
- the filing of an amended and restated certificate of incorporation to
provide for authorized capital stock of 150 million shares of common
stock and five million shares of undesignated preferred stock;
- a one-for-four reverse stock split of our common stock and preferred
stock to be effected before the closing of this offering;
- the automatic conversion of all shares of outstanding preferred stock
into shares of common stock upon the closing of this offering;
- the issuance of 176,666 shares of common stock from October 1, 1999 to
December 31, 1999 in connection with the exercise of options;
- 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 25.
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 10,500,000 shares reserved for issuance under our stock option plans,
of which 6,891,800 shares were subject to outstanding options as of
December 31, 1999, with a weighted average exercise price of $3.67 per
share; and
- approximately 263,000 shares of common stock issued or to be issued as
accrued but unpaid dividends on preferred stock subsequent to September
30, 1999.
26
<PAGE> 28
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 SEPTEMBER 30, 1999
------------------------------------
(UNAUDITED)
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash and cash equivalents(1)................................ -- $ 97,412 $146,895
Notes payable............................................... -- 741 --
Redeemable securities:
Series A redeemable preferred securities -- issued and
outstanding:
3,207,815 shares actual; none pro forma and pro forma as
adjusted................................................ $ 5,030 -- --
Series B redeemable preferred securities -- issued and
outstanding:
3,750,000 shares actual; none pro forma and pro forma as
adjusted................................................ 15,550 -- --
Series C redeemable preferred securities -- issued
7,000,291 shares; none outstanding actual, pro forma and
pro forma as adjusted(1)................................
Redeemable common securities -- issued and outstanding:
170,443 shares actual; 170,443 pro forma and pro forma
as adjusted(2).......................................... 5,664 7,035 7,035
-------- -------- --------
Total redeemable securities............................. 26,244 7,035 7,035
-------- -------- --------
Members' and stockholders' equity:
Preferred stock, $0.01 par value, no shares authorized or
issued on actual basis; 5,000,000 shares authorized,
no shares issued on a pro forma and pro forma as
adjusted basis;....................................... -- -- --
Common stock, $.01 par value, no shares authorized or
issued on actual basis; 150,000,000 shares authorized;
32,083,481 shares issued on a pro forma basis(1); and
37,083,481 shares issued on a pro forma as adjusted
basis................................................. -- 321 371
Additional paid in capital................................ -- 121,886 171,319
Members' interest......................................... 45,927 -- --
Unearned compensation....................................... (11,687) (11,687) (11,687)
Accumulated deficit......................................... (41,012) -- --
-------- -------- --------
Total members' and stockholders' equity (deficit)....... (6,772) 110,520 160,003
-------- -------- --------
Total capitalization............................... $ 19,472 $118,296 $167,038
======== ======== ========
</TABLE>
- ------------------------
(1) Pro forma cash and cash equivalents and shares of common stock reflect the
issuance of an aggregate of 7,000,291 shares of Series C preferred stock in
December 1999 and January 2000 for an aggregate of $97.5 million, and the
conversion of such preferred securities into 11,079,550 common securities
upon the consummation of this offering, based on an initial public offering
price of $11.00 per share. Pro forma shares of common stock also reflects
the issuance of 176,666 shares of common stock pursuant to the exercise of
options for the period from October 1, 1999 through December 31, 1999.
(2) The redeemable common securities are 170,443 common securities that are
subject to a put option granted to the holder exercisable through 2002 in
connection with our acquisition of iMusic. If the holder does not exercise
this option, he will retain ownership of these securities, which will no
longer be subject to the option. In addition redeemable common securities
includes options and securities subject to a rescission offer.
27
<PAGE> 29
DILUTION
Our pro forma net tangible book value as of September 30, 1999 was
approximately $96.3 million or $3.00 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 merger of ARTISTdirect, LLC into ARTISTdirect, Inc. effective as of
October 6, 1999;
- the issuance of 7,000,291 shares of Series C preferred stock in December
1999 and January 2000; these shares of Series C preferred stock will be
automatically converted into 11,079,551 shares of common stock upon the
closing of this offering, based on an assumed initial offering price of
$11.00 per share.
- the issuance of common stock pursuant to exercise of options from October
1, 1999 to December 31, 1999;
- the one-for-four reverse stock split to be effected before the closing of
this offering; and
- the automatic conversion of all shares of outstanding preferred stock
into shares of common stock upon the closing of this offering.
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 September 30, 1999 would
have been approximately $145.8 million or $3.93 per share of common stock. This
represents an immediate increase in pro forma net tangible book value of $0.93
per share to existing stockholders and an immediate dilution of $7.07 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 September
30, 1999.................................................... $3.00
Increase in pro forma net tangible book value per share
attributable to new investors.......................... 0.93
-----
Pro forma net tangible book value per share after the
offering.................................................. 3.93
------
Dilution per share to new investors......................... $ 7.07
======
</TABLE>
The following table summarizes on a pro forma basis, after giving effect to
the December 1999 and January 2000 Series C preferred stock issuances, as of
September 30, 1999, the number of shares of common stock purchased from us by
existing stockholders and new investors, the total consideration paid to us and
the average price per share paid after giving effect to the offering. The
calculation is based on an assumed initial public offering price of $11.00 per
share, before deducting estimated underwriting discounts, commissions and
offering expenses. If the initial public offering price equals or exceeds $17.41
per share, there will be fewer shares of common stock issued upon the conversion
of Series C preferred stock, and therefore, there will be less dilution to new
investors.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
------------------------- -------------------------- PRICE PER
NUMBER PERCENTAGE AMOUNT PERCENTAGE SHARE
----------- ---------- ------------ ---------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders..... 32,083,481 86.5% $118,833,000 68.4% $ 3.70
New investors............. 5,000,000 13.5 55,000,000 31.6 11.00
----------- ----- ------------ -----
Total........... 37,083,481 100.0% $173,833,000 100.0%
=========== ===== ============ =====
</TABLE>
The foregoing table excludes 10,073,334 shares of common stock reserved for
issuance under our stock option plans, of which 6,891,800 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 $5.567 per share.
28
<PAGE> 30
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA
The following unaudited pro forma consolidated financial data has been
derived by applying pro forma adjustments to the historical financial statements
of ARTISTdirect and iMusic for the periods indicated. The adjustments are
described in accompanying notes.
The unaudited pro forma consolidated statements of operations for the year
ended December 31, 1998 and the nine months ended September 30, 1999 give effect
to:
- our acquisition of the 80% interest of iMusic we did not own;
- our acquisition of the interests in The Ultimate Band List, LLC we did
not own; and
- the merger of ARTISTdirect, LLC into ARTISTdirect, Inc. which was
effected on October 6, 1999
as if each occurred at the beginning of the period.
The unaudited pro forma consolidated statements of operations are not
necessarily indicative of the operating results that would have been achieved
had the transactions been in effect as of the beginning of the periods presented
and should not be construed as being representative of future operating results.
The historical financial statements of ARTISTdirect and iMusic, Inc. are
included elsewhere in this prospectus and the unaudited pro forma consolidated
financial data presented herein should be read in conjunction with those
financial statements and related notes.
29
<PAGE> 31
ARTISTDIRECT, LLC AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998
------------------------------------------------------------
ARTISTDIRECT
AND SUBSIDIARIES
ACTUAL(A) IMUSIC, INC. ADJUSTMENTS PRO FORMA
---------------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
Net revenue
Online product sales.............. $ 1,548 $ -- $ -- $ 1,548
Advertising and other........... 552 260 -- 812
Agency commissions.............. 1,917 -- -- 1,917
Record label.................... 565 -- -- 565
------------ ---- ------- -----------
Total net revenue......... 4,582 260 -- 4,842
------------ ---- ------- -----------
Cost of revenue................... 2,515 115 -- 2,630
------------ ---- ------- -----------
Gross profit.............. 2,067 145 -- 2,212
Operating expense:
Product development............. 589 -- -- 589
Sales and marketing............. 1,395 33 -- 1,428
General and administrative...... 2,545 56 -- 2,601
Amortization of stock-based
compensation.................. 3,828 -- -- 3,828
Depreciation and amortization... 59 1 3,074(c) 3,134
------------ ---- ------- -----------
Income (loss) from
operations.............. (6,349) 55 (3,074) (9,368)
Income from equity investment..... 2 -- -- 2
Interest income, net.............. 29 (2) -- 27
------------ ---- ------- -----------
Loss before provision for income
tax............................. (6,318) 53 (3,074) (9,339)
Provision for income tax(b)....... -- -- -- --
------------ ---- ------- -----------
Net income (loss)......... $ (6,318) $ 53 $(3,074) $ (9,339)
============ ==== ======= ===========
Pro forma basic and diluted net
loss per share.................. $ (.44) $ (.64)
===========
Weighted average shares
outstanding used in computing
pro forma basic and diluted net
loss per share 14,514,508 14,684,951(d)
============
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1999
---------------------------------------------
ARTISTDIRECT
AND SUBSIDIARIES
ACTUAL(A) ADJUSTMENTS PRO FORMA
---------------- ----------- -----------
<S> <C> <C> <C>
Net revenue
Online product sales.............. $ 3,501 $ -- $ 3,501
Advertising and other........... 1,666 63(e) 1,729
Agency commissions.............. 662 -- 662
Record label.................... 605 -- 605
------------ ------- -----------
Total net revenue......... 6,434 63(e) 6,497
------------ ------- -----------
Cost of revenue................... 5,656 20(e) 5,676
------------ ------- -----------
Gross profit.............. 778 43 821
Operating expense:
Product development............. 1,028 -- 1,028
Sales and marketing............. 5,438 2(e) 5,440
General and administrative...... 5,622 52(e) 5,674
Amortization of stock-based
compensation.................. 21,542 -- 21,542
Depreciation and amortization... 1,554 1,160(c) 2,714
------------ ------- -----------
Income (loss) from
operations.............. (34,406) (1,171) (35,577)
Income from equity investment..... 33 -- 33
Interest income, net.............. 167 -- 167
------------ ------- -----------
Loss before provision for income
tax............................. (34,206) (1,171) (35,377)
Provision for income tax(b)....... -- -- --
------------ ------- -----------
Net income (loss)......... $ (34,206) $(1,171) $ (35,377)
============ ======= ===========
Pro forma basic and diluted net
loss per share.................. $ (1.83) $ (1.89)
===========
Weighted average shares
outstanding used in computing
pro forma basic and diluted net
loss per share 18,665,230 18,693,637(f)
============
</TABLE>
30
<PAGE> 32
NOTES TO UNAUDITED PRO FORMA STATEMENTS OF OPERATIONS
(a) Includes the operations of ARTISTdirect, Inc., ARTISTdirect, LLC, its
predecessor entity, 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.
Before that time, 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 statements of operations since we have incurred
operating losses to date, and we have recorded a full valuation allowance
for the deferred tax asset. The valuation allowance is based on management's
consideration of historical and projected future taxable income.
(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 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) Reflects the pro forma weighted average common stock and common stock
equivalent shares outstanding in basic and diluted net loss per share giving
effect to:
- increase in outstanding shares resulting from inclusion of shares issued
in connection with the acquisition of iMusic assuming conversion to
common stock and the acquisition of the UBL minority interest as if such
shares were outstanding from January 1, 1998;
- automatic conversion of our redeemable preferred securities into common
stock in connection with this offering;
- the one-for-four reverse stock split to be effected before the closing of
this offering as though it had occurred on January 1, 1998; and
- the issuance of common stock as accrued dividends on redeemable preferred
securities.
(e) The adjustments reflect the inclusion of the operations of iMusic, Inc. from
January 1, 1999 through the date of the acquisition.
31
<PAGE> 33
(f) Reflects the pro forma weighted average common stock and common stock
equivalent shares outstanding and resulting in basic and diluted net loss
per share giving effect to:
- increase in outstanding shares resulting from inclusion of shares issued
in connection with the iMusic acquisition assuming conversion to common
stock and the acquisition of the UBL minority interest acquisition as if
such shares were outstanding from January 1, 1999;
- automatic conversion of our redeemable preferred securities into common
stock in connection with this offering;
- the one-for-four reverse stock split to be effected before the closing of
this offering as though it had occurred on January 1, 1999; and
- the issuance of common stock as accrued dividends on redeemable preferred
securities.
32
<PAGE> 34
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data presented below for the period
from August 8, 1996 (inception) to December 31, 1996, for the years ended
December 31, 1997, and December 31, 1998 and as of December 31, 1996, 1997, and
1998 are derived from our audited financial statements. The selected
consolidated financial data for the nine months ended September 30, 1998 and
September 30, 1999 and as of September 30, 1999 are derived from our unaudited
financial statements.
You should read the financial data presented below together with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our financial statements and the related notes included in this
prospectus.
<TABLE>
<CAPTION>
PERIOD FROM YEAR ENDED NINE MONTHS ENDED
AUGUST 8, 1996 DECEMBER 31, SEPTEMBER 30,
(INCEPTION) TO ------------------------- --------------------------
DECEMBER 31, 1996 1997 1998 1998 1999
----------------- ----------- ----------- ----------- ------------
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Net revenue:
Online product sales........ $ -- $ 269 $ 1,548 $ 804 $ 3,501
Advertising and other....... -- 95 552 334 1,666
Agency commissions.......... -- 974 1,917 1,782 662
Record label................ -- 550 565 428 605
----------- ----------- ----------- ----------- -----------
Total net revenue........ -- 1,888 4,582 3,348 6,434
Cost of revenue............... -- 608 2,515 1,274 5,656
----------- ----------- ----------- ----------- -----------
Gross profit............. -- 1,280 2,067 2,074 778
Operating expense:
Product development......... -- 78 589 336 1,028
Sales and marketing......... 10 196 1,395 792 5,438
General and
administrative........... 13 1,442 2,545 1,798 5,622
Amortization of stock-based
compensation............. -- -- 3,828 2,378 21,542
Depreciation and
amortization............. 5 21 59 42 1,554
----------- ----------- ----------- ----------- -----------
Loss from operations..... (28) (457) (6,349) (3,272) 34,406
Income from equity
investment.................. -- -- 2 -- 33
Interest income (expense),
net......................... -- (3) 29 (16) 167
----------- ----------- ----------- ----------- -----------
Net loss................. $ (28) $ (460) $ (6,318) $ (3,288) $ (34,206)
=========== =========== =========== =========== ===========
Pro forma basic and diluted
net loss per share.......... $ (.44) $ (1.83)
=========== ===========
Weighted average shares used
in computing pro forma basic
and diluted net loss per
share(1).................... 14,514,508 18,665,230
=========== ===========
</TABLE>
<TABLE>
<CAPTION>
AS OF
DECEMBER 31, AS OF
--------------------------------------- SEPTEMBER 30,
1996 1997 1998 1999
----------- ----------- ----------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents........................ $ 80 $ 167 $ 1,940 $ 4,316
Working capital.................................. (20) (526) 1,079 1,314
Goodwill and intangibles, net.................... -- 16 45 14,192
Total assets..................................... 173 314 3,187 25,350
Total redeemable securities...................... -- -- 5,135 26,244
Total members' equity (deficit).................. 72 (412) (3,436) (6,772)
</TABLE>
- -------------------------
(1) 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> 35
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our
consolidated financial statements and the notes to those financial statements
included elsewhere in this prospectus. The following discussion contains
forward-looking statements that involve risks and uncertainties. The statements
are based on current expectations and actual results could differ materially
from those discussed herein. Factors that could cause or contribute to the
differences are discussed in "Risk Factors" and elsewhere in this prospectus.
OVERVIEW
We are a leading online music company that connects artists directly with
their fans worldwide. We provide music entertainment through our ARTISTdirect
Network, an integrated network of Web sites offering multi-media content, music
news and information, community around shared music interests, and music-related
commerce. 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 leading music
search engine on the Web, iMusic, a popular online community where fans exchange
music interests and commentary and DOWNLOADSdirect, a feature that allows users
to download music and upload music and other information to the ARTISTdirect
Network. We also operate a music talent agency, the ARTISTdirect Agency, and
manage a traditional record label, Kneeling Elephant Records.
ARTISTdirect was organized as a California limited liability company in
August 1996 and conducts operations through a group of affiliated limited
liability companies. From inception through December 1996, our primary
activities consisted of developing our business model, recruiting and training
employees and developing our infrastructure. During 1997, our operations
consisted primarily of the ARTISTdirect Agency and the Kneeling Elephant Records
label. In July 1997, we formed a joint venture to own a controlling interest in
UBL, LLC.
In September 1997, we launched our first ARTISTchannel. In June 1998, we
expanded content offerings on the UBL and added an online retail store now known
as the ARTISTdirect Superstore. Also in June 1998, we launched our second
ARTISTchannel and, by the end of 1998, we had nine ARTISTchannels in operation.
In February 1999, ARTISTdirect acquired all of the outstanding capital
stock of iMusic, Inc. The purchase consideration for iMusic was approximately
$2.5 million, including $110,000 in cash, a redeemable put option valued at
approximately $2.2 million and the assumption of approximately $180,000 in
liabilities. The acquisition was accounted for as a purchase. The purchase price
has been largely allocated to goodwill, which will be amortized over five years.
In May 1999, we engaged in an exchange transaction in which all membership
interests in UBL, LLC that we did not own were exchanged for membership
interests in ARTISTdirect, LLC. The value of the consideration given was
approximately $13.9 million and the transaction was accounted for as a purchase.
The purchase price has been largely allocated to goodwill, which will be
amortized over five years.
In July 1999, we officially launched the ARTISTdirect Network, integrating
the UBL and iMusic Web sites with our ARTISTchannels. Since 1997, our revenue
mix has shifted from primarily agency commissions and record label revenue to
electronic commerce revenue and online advertising, and we expect this trend to
continue.
ARTISTdirect has incurred cumulative net losses of $41.0 million from
inception to September 30, 1999. We expect our net losses to increase and to
continue for the foreseeable future. We plan to expend
34
<PAGE> 36
significant resources developing our ARTISTdirect Network, building our brands,
increasing our traffic, expanding our operations, enhancing and acquiring
content, and improving our technology infrastructure. We have a limited
operating history on which to base an evaluation of our business and prospects.
Our prospects must be considered in light of the risks, expenses, and
difficulties encountered by companies in their early stage of development,
particularly companies in new and rapidly evolving markets, such as electronic
commerce. See "Risk Factors" beginning on page 8 for a more complete description
of the many risks we face. Our business is evolving rapidly, and therefore we
believe that period-to-period comparisons of our operating results are not
meaningful and should not be relied upon as an indication of future performance.
On October 6, 1999, ARTISTdirect, LLC merged into ARTISTdirect, Inc. Before
that time, we operated as a group of limited liability companies and did not
incur federal and state income taxes, other than iMusic, which is a Washington
corporation that we acquired in February 1999. Federal and state income taxes
attributable to income during such periods were incurred and paid directly by
the members. Accordingly, no discussion of income taxes is included in "Results
of Operations" beginning on page 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 nine months
ended September 30, 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 merchandise
and shipping revenue upon shipment of the item and record appropriate
reserves for product returns.
- Advertising revenue consists primarily of sales of banner advertisements
and sponsorships. In sales of banner advertisements, we principally earn
revenue based on the number of impressions or times an advertisement
appears on pages viewed within our Web sites. Our banner advertising
commitments generally range from one to three months. Banner advertising
revenue is recognized ratably over the period in which the advertising is
displayed, provided no significant obligations remain and collection of
the receivable is probable. We typically guarantee a minimum number of
impressions to the advertiser. To the extent that minimum guaranteed page
deliveries are not met, we defer recognition of the corresponding revenue
until the guaranteed impressions are delivered. We also sell to
advertisers sponsorship of a Web page or event for a specified period of
time. We recognize sponsorship revenue over the period in which the
sponsored page or event is displayed. To the extent that committed
obligations under sponsorship agreements are not met, revenue recognition
is deferred until the obligations are met.
Revenue from the ARTISTdirect Agency consists primarily of commissions
generated on tour and event bookings of artists represented by the agency.
Agency commission revenue is recognized at the time of the event. Agency
commission revenue fluctuates depending on touring schedules of major artists
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.
35
<PAGE> 37
COST OF REVENUE
Cost of revenue consists primarily of the product cost of music and
music-related merchandise, credit card fees, fulfillment and shipping costs,
artist royalties, Web site maintenance expenses, content acquisition costs,
payroll and related expenses for staff involved in Web site maintenance,
procurement, merchandising, logistics 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 connectivity charges, and networking costs.
In connection with the amortization of vendor warrants and ARTISTchannel
stock options granted through September 30, 1999, we recorded non-cash
compensation expense of approximately $380,000 for the nine months ended
September 30, 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, 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 $25.4
million of stock-based compensation expense for the period from inception
through September 30, 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 $21.5 million during the
nine months ended September 30, 1999, and we expect to record substantial
additional stock-based compensation in the fourth quarter of 1999. We also
anticipate granting additional equity securities in the future to employees,
directors and artists.
Depreciation and Amortization. Depreciation and amortization expense
consists of the depreciation of fixed assets and the amortization of acquired
intangible assets. The acquisitions of iMusic and the minority interest of the
UBL were accounted for using the purchase method of accounting and, accordingly,
the purchase prices have been allocated to the tangible and intangible assets
acquired and liabilities assumed on the basis of their fair values on the
acquisition dates. Substantially all of the purchase price of these transactions
is attributable to the acquired intangible assets. As a result, the 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.
36
<PAGE> 38
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.
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER
30, 1998
NET REVENUE
Net revenue increased to $6.4 million in the nine months ended September
30, 1999 from $3.3 million in the same period of 1998. The increase was
primarily due to an increase in online product sales revenue to $3.5 million
from $804,000, reflecting additional ARTISTchannels plus contributions from the
ARTISTdirect Superstore. Advertising and other revenue also increased to $1.7
million from $334,000, 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 $1.8 million to $662,000,
due primarily to a decrease in the touring activity of the agency's artists.
COST OF REVENUE
Cost of revenue increased to $5.7 million in the nine months ended
September 30, 1999 from $1.3 million for the same period of 1998. This $4.4
million increase corresponded with the increase in online product sales revenue
and was primarily attributable to higher direct costs of merchandise sold and
higher transaction costs. Web site maintenance costs also increased due to an
expansion in our technology staff plus the increased number of ARTISTchannels in
operation. Our gross profit margin decreased to 12% of net revenue for the nine
months ended September 30, 1999 from 62% of net revenue for the nine months
ended September 30, 1998. This margin decline was primarily due to a higher
proportion of online product sales revenue, which has lower gross margin than
our other sources of revenue.
In the nine months ended September 30, 1999, we recorded non-cash
compensation charges of approximately $5.9 million in connection with warrants
issued to vendors and options issued to artists and their advisors related to
our rights to operate ARTISTchannels. Such amount will be amortized to expense
over the life of the contract periods associated with the warrants and options,
resulting in $381,000 of amortization for the nine months ended September 30,
1999, which has been included in cost of revenue.
OPERATING EXPENSE
Product Development. Product development expense increased to $1.0 million
for the nine months ended September 30, 1999 from $336,000 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 $5.4 million
for the nine months ended September 30, 1999 from $792,000 for the same period
in 1998. The increase was primarily attributable to a significant increase in
online and offline advertising, promotion and sponsorship. In addition,
personnel and related expenses increased as we added to our advertising sales
and marketing
37
<PAGE> 39
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
$5.6 million for the nine months ended September 30, 1999 from $1.8 million for
the nine months ended September 30, 1998. This increase was primarily
attributable to an increase in personnel and related expenses and greater use of
outside professional services. We expect general and administrative expense to
increase as we expand our staff to support our growth strategy and incur the
higher costs of operating as a public company.
Amortization of Stock-based Compensation. We recorded a total of $21.5
million of stock-based compensation expense for the nine months ended September
30, 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 $2.4 million, primarily in connection with stock issuances to
employees, directors and professional firms.
Depreciation and Amortization. Depreciation and amortization expense
increased to $1.6 million for the nine months ended September 30, 1999 from
approximately $42,000 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 $34.2 million in the nine months ended September 30,
1999 compared to $3.3 million in the nine months ended September 30, 1998. The
increase in the net loss can be attributed to a $19.1 million increase in the
amortization of stock-based compensation, lower overall margins due to a shift
in revenue mix, and increased expenditures for product development, sales and
marketing, and general and administrative expenses compared with the prior year.
FISCAL YEARS ENDED DECEMBER 31, 1998 AND 1997
NET REVENUE
Net revenue increased to $4.6 million for the fiscal year ended December
31, 1998 from $1.9 million for the fiscal year ended December 31, 1997. The
increase was primarily attributable to a $1.3 million increase in online product
sales revenue and a $943,000 increase in ARTISTdirect Agency commission revenue.
The increase in online product sales revenue resulted primarily from the June
1998 introduction of the ARTISTdirect Superstore and the addition of ten
ARTISTchannels during 1998. The increase in ARTISTdirect Agency commission
revenue reflects a significant increase in touring activity by major artists
represented by the agency.
COST OF REVENUE
Cost of revenue increased to $2.5 million for the fiscal year ended
December 31, 1998 from $608,000 for the fiscal year ended December 31, 1997.
This increase corresponded with the increase in online product sales revenue and
was primarily attributable to higher direct costs of merchandise sold,
additional Web site maintenance expenses and an increase in personnel and
related expenses. Our gross profit margin decreased to 45% of net revenue for
the fiscal year ended December 31, 1998 from 68% of net revenue for the fiscal
year ended December 31, 1997. The margin decline primarily reflects an increase
in online product sales revenue, which has a lower gross margin than other
sources of revenues.
38
<PAGE> 40
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 increased expenditures for
product development, sales and marketing, and general and administrative
expenses compared with the prior year.
SEGMENT OPERATIONS
ARTISTdirect provides music entertainment products and services through the
following three reportable segments:
- ARTISTdirect Network -- music-related Web site operations;
- Talent Agency -- artist booking operations; and
- Record Label -- record label operations.
The factors for determining reportable segments were based on service and
products. Each segment is responsible for executing a segment-specific business
strategy. The accounting policies of the segments are the same as those
described in the summary of significant accounting policies. ARTISTdirect
evaluates performance based on profit or loss from operations before income
taxes. The following table summarizes the net revenue, cost of revenue, gross
profit, operating expenses, and operating income
39
<PAGE> 41
(loss) by segment for the years ended December 31, 1998 and 1997 and the nine
months ended September 30, 1999 and 1998.
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
------------------ -------------------
1997 1998 1998 1999
------- ------- ------- --------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C>
ARTISTDIRECT NETWORK
Net revenue:
Online product sales..................... $ 269 $ 1,548 $ 804 $ 3,501
Advertising and other.................... 95 552 334 1,666
------- ------- ------- --------
Total net revenue...................... 364 2,100 1,138 5,167
Cost of revenue:
Direct cost of product sales............. 262 1,505 726 3,114
Other cost of revenues................... 172 735 360 2,015
------- ------- ------- --------
Total cost of revenue.................. 434 2,240 1,086 5,129
------- ------- ------- --------
Gross profit (loss)......................... (70) (140) 52 38
Operating expense........................... 670 5,116 2,764 30,383
------- ------- ------- --------
Loss from operations........................ (740) (5,256) (2,712) (30,345)
------- ------- ------- --------
TALENT AGENCY
Net revenue................................. $ 974 $ 1,917 $ 1,782 $ 662
Cost of revenue............................. 174 259 172 334
------- ------- ------- --------
Gross profit................................ 800 1,658 1,610 328
Operating expense........................... 603 2,287 1,833 2,472
------- ------- ------- --------
Income (loss) from operations............... 197 (629) (223) (2,144)
------- ------- ------- --------
RECORD LABEL
Net revenue................................. $ 550 $ 565 $ 428 $ 605
Cost of revenue............................. -- 16 16 193
------- ------- ------- --------
Gross profit................................ 550 549 412 412
Operating expense........................... 464 1,013 749 2,329
------- ------- ------- --------
Income (loss) from operations............... 86 (464) (337) (1,917)
------- ------- ------- --------
TOTAL LOSS FROM OPERATIONS.................... $ (457) $(6,349) $(3,272) $(34,406)
======= ======= ======= ========
</TABLE>
Segment income (loss) from operations excludes interest income, interest
expense, and provision for income tax.
40
<PAGE> 42
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth unaudited quarterly results of operations
for the six most recent quarters ended September 30, 1999. This unaudited
quarterly information has been derived from our unaudited financial statements
and, in our opinion, includes all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of the information for
the periods covered. The quarterly data should be read in conjunction with our
financial statements and related notes. The operating results for any quarter
are not necessarily indicative of the operating results for any future period.
<TABLE>
<CAPTION>
QUARTER ENDED
------------------------------------------------------------------------------
JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 30, JUNE 30, SEPTEMBER 30,
1998 1998 1998 1999 1999 1999
-------- ------------- ------------ --------- -------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Net revenue:
Online product sales.............. $ 226 $ 444 $ 744 $ 1,016 $ 1,154 $ 1,331
Advertising and other........... 73 128 218 381 508 777
Agency commissions.............. 372 1,338 135 130 161 371
Record label.................... 152 138 137 171 161 273
------- ------- ------- ------- ------- --------
Total net revenue........ 823 2,048 1,234 1,698 1,984 2,752
Cost of revenue................... 367 677 1,241 1,296 1,653 2,707
------- ------- ------- ------- ------- --------
Gross profit (loss)...... 456 1,371 (7) 402 331 45
Operating expense:
Product development............. 111 99 253 191 440 397
Sales and marketing............. 260 419 603 777 1,760 2,901
General and administration...... 735 590 747 1,308 1,929 2,385
Amortization of stock-based
compensation.................. 845 1,090 1,450 802 1,115 19,625
Depreciation and amortization... 13 17 17 88 625 841
------- ------- ------- ------- ------- --------
Loss from operations..... (1,508) (844) (3,077) (2,764) (5,538) (26,104)
Income from equity investment..... -- -- 2 33 -- --
Interest income (expense), net.... (13) (1) 45 12 65 90
------- ------- ------- ------- ------- --------
Net loss................. $(1,521) $ (845) $(3,030) $(2,719) $(5,473) $(26,014)
======= ======= ======= ======= ======= ========
</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 $10.0 million for the nine months
ended September 30, 1999, and $2.3 million for the fiscal year ended December
31, 1998. Net cash used in operating activities for each of these periods
primarily consisted of net losses, partially offset by increases in accounts
payable and accrued expenses. Net cash provided by operating activities was
$328,000 for the fiscal year ended December 31, 1997.
Net cash used in investing activities was $2.6 million for the nine months
ended September 30, 1999, and $547,000 and $117,000 for the fiscal years ended
December 31, 1998 and 1997, respectively.
41
<PAGE> 43
Net cash used in investing activities for each of these periods consisted of
purchases of fixed assets, primarily computer equipment and systems, totaling
$2.3 million for the nine months ended September 30, 1999 and $141,000 for the
year ended December 31, 1998.
Net cash provided by financing activities was $14.9 million for the nine
months ended September 30, 1999, and $4.6 million for the fiscal year ended
December 31, 1998. Net cash provided by financing activities during each of
these periods primarily consisted of cash proceeds from the following issuances
of preferred securities:
- Between July 1998 and December 1998, we issued 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 and January 2000, we issued an aggregate of 7,000,291
shares of Series C preferred securities for a total purchase price of $97.5
million. These 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 . If the initial offering price is greater than or equal to
$17.41 per share, then these shares will automatically convert into 7,000,291
shares of common stock.
As of September 30, 1999, we had $4.3 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 the net proceeds from this offering, together
with our current cash, cash equivalents, short-term investments and credit
facilities, will be sufficient to meet our anticipated cash needs for working
capital and capital expenditures for at least the next 18 months. Although we do
not currently have any specific material capital commitments beyond such
18-month period, if we are unsuccessful in generating sufficient cash flow from
operations, we may need to raise additional funds in future periods through
public or private financings, or other arrangements to fund our operations and
potential acquisitions. Any additional financings, if needed, might not be
available on reasonable terms or at all. Failure to raise capital when needed
could seriously harm our business and operating results. If additional funds are
raised through the issuance of equity securities, the percentage of ownership of
our stockholders would be reduced. Furthermore, these equity securities might
have rights, preferences or privileges senior to our common stock.
YEAR 2000
Many existing computer programs use only two digits to identify a year.
These programs were designed and developed without addressing the impact of the
recent change in the century. If not 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
42
<PAGE> 44
parties to process our customers' credit card payments, host our servers,
maintain our network, deliver orders to customers, and provide fulfillment and
accounting services.
We have completed the process of reviewing the Year 2000 compliance of our
internal software and performing any necessary remediation. This review included
testing to determine how our systems will function at and beyond the Year 2000
and updating our software where required for Year 2000 compliance. Substantially
all of the systems for the operation of our Web site have been developed within
the last three years. These systems include the software used to provide our Web
sites' search, customer interaction, and transaction processing and distribution
functions, as well as monitoring and back-up capabilities. Based upon our work
to date, the fact that most of our systems were recently developed, and the fact
that we have not experienced any Year 2000 issues to date, we believe that our
internal software is Year 2000 compliant. We have not, and do not, expect to
incur any material remediation expenses to update our internal systems.
We have completed our assessment of the Year 2000 readiness of our
third-party supplied software, computer technology and other services, which
include software for use in our accounting, database and security systems. This
assessment included an audit of their software as well as performing necessary
remediation. The failure of such software or systems to be Year 2000 compliant
could have a material adverse impact on our corporate accounting functions and
the operation of our Web site. As part of the assessment of the Year 2000
compliance of these systems, we sought assurances from these vendors that their
software, computer technology and other services are year 2000 compliant. We
have received written assurances from our software vendors regarding the Year
2000 compliance of their software. We have also received written assurances from
most of our third party service providers, stating that they planned to become
Year 2000 compliant before December 31, 1999. To date, our expenses associated
with this assessment have not been material and we do not expect to incur any
material remediation expenses in connection with our third-party supplied
software and computer systems. The failure of our software and computer systems
and of our third-party suppliers to be Year 2000 complaint would have a material
adverse effect on us.
The Year 2000 readiness of the general infrastructure necessary to support
our operations is more difficult to assess. For instance, we depend on the
integrity and stability of the Internet to provide our services. We also depend
on the Year 2000 compliance of the computer systems and financial services used
by consumers. Thus, the infrastructure necessary to support our operations
consists of a network of computers and telecommunications systems located
throughout the world and operated by numerous unrelated entities and
individuals, none of which has the ability to control or manage the potential
Year 2000 issues that may impact the entire infrastructure. Our ability to
assess the reliability of this infrastructure is limited and relies solely on
generally available news reports, surveys and comparable industry data. Based on
these sources, we believe most entities and individuals that rely significantly
on the Internet are carefully reviewing and attempting to remediate issues
relating to Year 2000 compliance, but it is not possible to predict whether
these efforts will be successful in reducing or eliminating the potential
negative impact of Year 2000 issues. A significant disruption in the ability of
consumers to reliably access the Internet or portions of it or to use their
credit cards would have an adverse effect on demand for our services and would
have a material adverse effect on us.
To date, we have not experienced any Year 2000 issues. We do not have, and
do not plan to develop, a contingency plan to address situations that may result
if we or our vendors are unable to achieve Year 2000 compliance. The cost of
developing and implementing such a plan, if necessary, could be material. Any
failure of our material systems, our vendors' material systems or the Internet
to be Year 2000 compliant could have material adverse consequences for us. Such
consequences could include difficulties in operating our Web site effectively,
taking product orders, making product deliveries or conducting other fundamental
parts of our business.
43
<PAGE> 45
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> 46
BUSINESS
OVERVIEW
We are a leading online music company that connects artists directly with
their fans worldwide. We provide music entertainment through our ARTISTdirect
Network, an integrated network of Web sites offering multi-media content, music
news and information, community around shared music interests, and music-related
commerce. 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 leading 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 November 1999, users viewed more than 60 million pages in our
ARTISTdirect Network.
- ARTISTchannels -- customized Web sites that we build, operate and
maintain on behalf of each of our artists, directly linking artists and
fans. These sites provide artists with a unique opportunity to control
the programming, promotion and distribution of a broad range of their
products and services. Artists share in revenue generated by their
ARTISTchannel. These sites also provide consumers with a single
destination to access a large selection of artist-specific music,
merchandise and content. A selection of artists with ARTISTchannels
includes:
<TABLE>
<S> <C> <C>
Aerosmith Chris Cornell Metallica
Backstreet Boys Cypress Hill Ozzy Osbourne
Beastie Boys Def Leppard Tom Petty
Beck Kenny G Red Hot Chili Peppers
Clint Black Korn Robbie Williams
Cher Limp Bizkit The Who
</TABLE>
- The Ultimate Band List -- a comprehensive online music search engine and
resource for music information. The UBL provides information on more than
85,000 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. We believe that our management team's extensive
music industry experience, which collectively includes over 60 years as talent
agents, record
45
<PAGE> 47
label executives and concert promoters, 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. We believe that
we are the only online music company with investments from 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 amount of content
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 amount of marketing support 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 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.
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 recordings and front
album cover artwork owned by Sony. Sony will consider reasonable requests from
us regarding promotions involving Sony artists that have an
46
<PAGE> 48
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 non-exclusive licenses to transmit their
sound recordings and display associated album cover art. We will pay a
transmission fee for each transmission. The video license agreements provide us
with non-exclusive licenses 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 these strategic relationships.
CISNEROS TELEVISION GROUP
We have agreed to establish a 50/50 joint venture with affiliates of
Cisneros Television Group to develop an Internet music portal featuring content
and e-commerce opportunities targeted to Spanish and Portuguese speaking
audiences in Latin America and the United States. We will provide technical
expertise and content and an affiliate of Cisneros Television Group will provide
content and advertising and promotional support. In particular, we are obligated
to contribute licenses to our proprietary software, provide technical
assistance, sign a specified number of artists to operate their Web sites for
the joint venture and to contribute or obtain content with respect to a
specified number of artists. An affiliate of Cisneros Television Group is
required to provide access to its media distribution channels, advertising, and
licenses to some of its programming. The initial term of the venture is for
fifty years and may be extended for additional ten-year periods. Both of us may
also be required to make capital contributions from time to time on a pro-rata
basis. An affiliate of Cisneros Television Group will receive a fee for
providing management and back-office services for the first two years of the
agreement. Data generated by the joint venture will be licensed to both us and
an affiliate of Cisneros Television Group for a fee and content created or
acquired by the joint venture will be licensed to both us and an affiliate of
Cisneros Television Group on a royalty-free basis. After the thirtieth month of
the agreement, an affiliate of Cisneros Television Group will have the right to
cause a roll-up of the joint venture so that the affiliate's equity interests in
the joint venture are exchanged for our common stock on a fair market value
basis. The shares of our common stock that Cisneros Television Group's affiliate
receives in the roll-up will be subject to the registration rights agreement
discussed on page 78. An affiliate of Cisneros Television Group invested $20.0
million in ARTISTdirect in connection with this strategic relationship.
YAHOO!
We have a two-year advertising and promotion agreement with Yahoo!,
pursuant to which we will purchase media placement on Yahoo! and be one of the
two premier music merchants featured on certain pages in Yahoo!'s music site.
Yahoo! is required to deliver a minimum number of impressions, or page views,
throughout its music and other selected sites, and will deliver a minimum number
of targeted e-mail messages to its users containing our promotional offers. In
exchange for these services, we will pay Yahoo! a slotting fee, a portion of
which will be paid in the form of in-kind co-marketing opportunities. In
addition, we entered into a two-year agreement to participate in Yahoo!'s Remote
Merchant Integration Program. This agreement allows us to market our music and
merchandise offerings through
47
<PAGE> 49
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 88 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 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.
48
<PAGE> 50
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.
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
49
<PAGE> 51
marketing and electronic commerce. Our technology enables us to quickly launch
customized Web sites for our artists. Artists actively collaborate on the
design, content and other features of their ARTISTchannels. With continuing
advances in broadband technology and standards for digital music distribution,
we believe the ARTISTchannels will emerge as the artists' preferred platform for
the full range of their content, commerce and community activities on the
Internet.
Closer Relationships with Fans. The ARTISTchannels promote greater fan
affinity and loyalty by directly linking artists and fans. Artists can use the
ARTISTchannels to provide content and products to fans, including artist news,
concert information, music and video programming, exclusive chats, ticket
giveaways and fan club activities. Artists can also solicit the views of fans on
new music, live performances and music videos. A better understanding of their
fans enables artists to develop relevant content for their ARTISTchannels,
promote their music more effectively and create new revenue opportunities.
Access to Traffic from the ARTISTdirect Network. We attract, aggregate and
retain consumers within the ARTISTdirect Network through our compelling content
and commerce offerings, thereby providing our artists the opportunity to tap
into an active community of millions of music fans. The ARTISTchannels can be
accessed directly or through the ARTISTdirect Network, allowing artists the
opportunity not only to reach their existing audience, but to broaden their fan
base as well. As one of the most heavily trafficked music destinations on the
Internet, we aggregate global consumer traffic, collect targeted fan information
and generate incremental revenue from electronic commerce and advertising for
the shared benefit of the artist and ARTISTdirect.
New Revenue Opportunities. We provide artists with a number of incremental
revenue opportunities, including from music and related merchandise sales and
auctions, advertising and direct marketing. Our sites significantly increase
consumers' access to artist merchandise previously available only at concert
venues or selected retail locations. We also assist artists in developing
original merchandise items for sale through their sites. We believe that our
revenue-sharing with artists provides incentives for them to actively promote
their ARTISTchannels and the ARTISTdirect Network.
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 through the DOWNLOADSdirect area of the
ARTISTdirect Network. 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
50
<PAGE> 52
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 85,000 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.
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 $3.6 million
through September 30, 1999. We intend to increase our marketing expenditures
through a television, radio, print and online advertising campaign that features
a number of our high-profile artists promoting and endorsing the ARTISTdirect
Network. We will continue to encourage our artists to use their album releases,
concert tours and personal appearances to promote their
51
<PAGE> 53
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;
- 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.
52
<PAGE> 54
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> 55
Our current roster of ARTISTchannels includes:
<TABLE>
<S> <C> <C>
Aerosmith Everclear Mighty Mighty Bosstones
www.aerosmithdirect.com www.evercleardirect.com www.bosstonesdirect.com
Tori Amos Fastball Monster Magnet
www.toriamosdirect.com www.fastballdirect.com www.monstermagnetdirect.com
Backstreet Boys Bryan Ferry Mandy Moore
www.bsbdirect.com www.bryanferrydirect.com www.mandymooredirect.com
Beastie Boys Filter Mike Ness
www.grandroyaldirect.com www.filterdirect.net www.mikenessdirect.com
Beck Foo Fighters Stevie Nicks
www.beckdirect.com www.foofightersdirect.com www.stevienicksdirect.com
George Benson Vince Gill No Doubt
www.georgebensondirect.com www.vincegilldirect.com www.nodoubtdirect.com
Bjork Godsmack The Offspring
www.bjorkdirect.com www.godsmackdirect.net www.offspringdirect.com
Black Sabbath Incubus Ozzy Osbourne
www.blacksabbathdirect.com www.incubusdirect.com www.ozzydirect.com
Clint Black Indigo Girls Pantera
www.clintblackdirect.com www.indigogirlsdirect.com www.panteradirect.com
Black Crowes Chris Isaak Pearl Jam
www.blackcrowesdirect.com www.chrisisaakdirect.com www.pearljamdirect.com
blink-182 Kenny G Tom Petty
www.loserkids.com www.kennygdirect.com www.tompettydirect.com
Cher BB King Powerman 5000
www.cherdirect.com www.bbkingdirect.com www.pm5kdirect.com
Coal Chamber Korn Primus
www.coalchamberdirect.com www.korndirect.com www.clubbastardo.com
Chris Cornell Limp Bizkit Rage Against The
www.chriscornelldirect.com www.limpbizkitdirect.com Machine
Counting Crows Kenny Loggins www.ratmdirect.com
www.countingcrowsdirect.com www.kennylogginsdirect.com Rancid
David Crosby Aimee Mann www.ranciddirect.com
www.crosbycprdirect.com www.aimeemanndirect.com Red Hot Chili Peppers
CSNY Marilyn Manson www.chilipeppersdirect.com
www.csnydirect.com www.marilynmansondirect.com Brian Setzer
Cypress Hill Matchbox 20 www.briansetzerdirect.com
www.cypresshilldirect.com www.matchbox20direct.com Sevendust
Def Leppard Megadeth www.sevendustdirect.com
www.deflepparddirect.com www.megadethdirect.com Slayer
Eminem Metallica www.slayerdirect.com
www.eminemdirect.com www.metallicadirect.com Soul Coughing
Eve 6 www.soulcoughingdirect.com
www.eve6direct.com
</TABLE>
54
<PAGE> 56
<TABLE>
<S> <C> <C>
Static X Matthew Sweet The Who
www.staticxdirect.com www.matthewsweetdirect.com www.thewhodirect.com
Stone Temple Pilots System of a Down Robbie Williams
www.stpdirect.com www.soaddirect.com www.robbiewilliamsdirect.com
Sugar Ray Toto Dwight Yoakam
www.sugarraydirect.com www.toto99direct.com www.dwightyoakam.net
Sublime/Long Beach Tina Turner Rob Zombie
Dub All Stars www.tinaturnerdirect.com www.robzombiedirect.com
www.sublimedirect.com ZZ Top
www.zztopdirect.com
</TABLE>
In addition to the ARTISTchannels already launched, we have agreements in
place for the launch of additional ARTISTchannels for artists such as:
<TABLE>
<S> <C> <C>
B-52's Galactic Sonic Youth
Jeff Beck Tony Iommi Stabbing Westward
Frank Black Janet Jackson Steps
Bone Thugs 'N' Harmony Lenny Kravitz James Taylor
Danielle Brisebois Patty Loveless Pam Tillis
Collective Soul Madonna Too Short
Sheryl Crow Remy Zero Wallflowers
DJ Shadow Diana Ross Neil Young
Perry Farrell Silverchair
</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 leading 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 85,000 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.
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> 57
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. Artists pay the ARTISTdirect Agency commissions based upon a
negotiated percentage of the revenues they generate from agency-provided
services. For the nine months ended September 30, 1999, we derived 10% of our
revenue from commissions generated by the ARTISTdirect Agency. Currently, the
ARTISTdirect Agency roster includes over 70 acts, including:
<TABLE>
<S> <C> <C>
Alice in Chains Crystal Method Primus
Beastie Boys Everclear Rage Against the Machine
Beck Foo Fighters Red Hot Chili Peppers
Ben Folds Five Hovercraft Elliott Smith
Frank Black Ben Lee Sonic Youth
Blues Traveler The London Suede Sunny Day Real Estate
Catherine Wheel Marcy Playground The The
Chris Cornell Pearl Jam Paul Westerberg
</TABLE>
KNEELING ELEPHANT RECORDS
Kneeling Elephant Records is an independent record label managed by
ARTISTdirect pursuant to a label agreement with RCA Records. RCA provides all
funding for the label and owns the rights to all sound recordings made under
artist agreements during the initial three year term of the label agreement. The
initial term was recently extended to March 21, 2000. During the initial term,
RCA provides overhead advances, funding for artist advances and recording costs
and marketing resources for a minimum of three artists per year. Kneeling
Elephant finds new talent and negotiates contracts, including royalties,
advances and artist development, and works with RCA's marketing, promotion,
publicity and sales force to develop a marketing strategy for each album.
Manufacturing, packaging and distribution are handled by RCA's affiliated
worldwide distribution network. Kneeling Elephant participates on a royalty
basis in the proceeds of the albums recorded during the initial term. At the end
of the initial term, unless terminated by RCA, this royalty arrangement will
convert to a three-year 50/50 joint venture with respect to all product created
after the initial term. Each party will continue to be responsible generally for
the same functions under the joint venture arrangement, including RCA continuing
to be responsible for funding. If RCA terminates the label agreement at the end
of the initial term the artists signed to the label will remain with RCA. If we
desire to continue with the record label business, we will be responsible for
funding the label's future operations unless we can enter into an arrangement
with another record company.
Kneeling Elephant has signed nine bands to date: Fly/Longslide, Gloritone,
Snakefarm, The Innocence Mission, Lea Krueger, Zen Mafia, Wan Santo Condo, Adam
Elk and Sunset Valley. We have begun to use the ARTISTdirect Network to market
some Kneeling Elephant artists directly to electronic consumers.
For the nine months ended September 30, 1999, we derived 9% of our revenues
from our Kneeling Elephant Records label.
56
<PAGE> 58
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, at Level 3 Communications in Los Angeles,
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. In
addition to fulfilling compact discs ordered by our customers, 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 the inventory of Alliance. Similarly,
almost all of the music-related merchandise available for sale is the inventory
of the artist. We take physical title to the product at the time of shipment and
have ultimate credit and collection risk.
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
57
<PAGE> 59
merchandise 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 September 30, 1999, we employed ten 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 the first nine months of 1999, advertising represented
11% and 23% of revenue, respectively. In these periods, no single advertiser
represented more than 7% of advertising revenue. As of September 30, 1999, we
employed a direct sales force of ten people in Los Angeles and New York and
intend to expand this staff.
Advertisers on the ARTISTdirect Network during 1999 included the following:
<TABLE>
<S> <C> <C>
Atlantic Records Dreamworks Microsoft
Butterfinger Epic Records Milky Way
Coca Cola Gateway OnNow.com
Columbia Records Honda Second Spin
Discover Card Island Records Talk City
</TABLE>
MARKETING AND PROMOTION
We use a number of methods to create awareness of the ARTISTdirect Network
and drive traffic to our Web sites. We have focused much of our online
advertising on specific artists, contests, promotions and other events designed
to attract interest to our sites. We have also used print and radio advertising
to create brand awareness for ARTISTdirect and to promote special events taking
place on the ARTISTdirect Network. In addition, we participate in the
sponsorship of live music and other industry
58
<PAGE> 60
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.
We have launched a new marketing program using print, radio and television
mediums. The purpose of this campaign is to increase awareness of the
ARTISTdirect Network and its association with high profile music artists. As of
the date of this prospectus, 13 of the 79 artists for whom we operate
ARTISTchannels have agreed to participate in this advertising campaign. This
campaign commenced in late 1999.
COMPETITION
The market for the online promotion and distribution of music and
music-related products and services is new, highly competitive and rapidly
changing. The number of Web sites competing for the attention and spending of
consumers and advertisers has increased, and we expect it to continue to
increase, because there are few barriers to entry to Internet commerce. In
addition, the competition for advertising revenue, both on Web sites and in more
traditional media, is intense. We believe that there are more than 150 music
retailing Web sites. We compete as follows:
- for music consumers, advertisers and, to a lesser extent, artist
relationships, with providers of music information, community and content
such as MTVi, Launch Media, mp3.com, EMusic, CheckOut.com and various
other companies;
- with major online music retailers such as Amazon.com and CDnow in selling
music and merchandise;
- for music consumers and advertisers with online "portals" which have
music-oriented sites, including America Online and Yahoo!;
- for music consumers and artist relationships with traditional music
industry companies, including BMG Entertainment, a unit of Bertelsmann
AG, EMI Music, a unit of EMI Group, Sony Music Entertainment, a unit of
Sony Corporation, Warner Music Group, a unit of Time Warner Inc., and
Universal Music Group, a unit of the Seagram Company. Some of these
companies have recently established online presences to promote and
distribute the music and tours of their respective artists;
- for music consumers and advertisers with publishers and distributors of
traditional media, such as television, radio and print, including MTV,
CMT, Rolling Stone and Spin and their Internet affiliates; and
- with traditional retailers targeting music consumers, including Tower
Records and Virgin Megastore and their Internet affiliates, in selling
music and merchandise.
Some of our competitors have agreed to work together to offer music over
the Internet, and we may face increased competitive pressures as a result. For
example, Columbia House, a unit of Time Warner and Sony, announced that they
have agreed to merge with CDnow. In addition, Universal Music Group and BMG
Entertainment recently formed a joint venture to operate an online music store.
59
<PAGE> 61
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
60
<PAGE> 62
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 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 copyrights and trademarks through federal registration,
61
<PAGE> 63
but these actions may be inadequate. Where consultants develop copyrighted
content for us, our general policy is to use written agreements prior to content
creation to obtain ownership of that content. In addition, we principally rely
upon trademark, copyright, trade secret and contract law to protect our
proprietary rights. We generally enter into confidentiality agreements,
"work-made-for-hire" contracts and intellectual property licenses with our
employees, consultants and corporate partners, respectively, as part of our
efforts to control access to and distribution of our technologies, content and
other proprietary information. Despite our efforts to protect our proprietary
rights from unauthorized use or disclosure, parties may attempt to disclose or
use our customer lists, Web site content, service marks, domain names or
confidential commercial data. The steps that we have taken may not prevent
misappropriation of our proprietary rights, particularly in foreign countries
where laws or law enforcement practices may not protect our proprietary rights
at all, or as fully as in the United States. If third parties were to use or
otherwise misappropriate our copyrighted materials, trademarks or other
proprietary rights without our consent or approval, our competitive position
could be harmed, or we could become involved in costly and distracting
litigation to enforce our rights.
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 an MP3 format. 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 a full-length download of a
song in an MP3 format, performance and reproduction rights to the "sound
recording" are generally obtained from the owner of the copyright by means of a
written agreement. With respect to the reproduction of "musical compositions" by
means of an MP3 or other sound file format download, the law is presently
unsettled as to whether a separate mechanical license is required for such form
of reproduction. We believe that no such license is required and do not
presently obtain a separate "reproduction and distribution" mechanical license
from the Harry Fox Agency or any other administrator of music publishing rights;
however, there can be no assurance whatsoever that our view of copyright law
will eventually be vindicated. If we are wrong, we may be forced to obtain such
licenses or may be prevented from third party content use, and may further be
liable to pay actual or statutory damages, profits attributable to any alleged
infringement, as well as attorneys' fees.
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 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
62
<PAGE> 64
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. While we have not designated an agent for notification of infringement
with the Copyright Office, we intend to do so shortly. Doing so may provide us
with limited safe-harbor protection under the recently-enacted Digital
Millennium Copyright Act against liability for infringing material of which we
do not have knowledge.
EMPLOYEES
As of September 30, 1999, we had 143 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 an eight month sublease 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> 65
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
Allan G. Kass............................ 46 Vice President, Sales
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
Stephen M. Krupa......................... 35 Director
Allen D. Lenard.......................... 57 Director
Rick Rubin............................... 36 Director
</TABLE>
- ---------------
(1) Appointed in January 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> 66
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 a 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.
Stephen M. Krupa has served as a director since May 1999. Mr. Krupa is a
founding member and Managing Director of Psilos Group Managers, LLC, a private
venture capital fund focused on the digital media, information technology and
health care sectors. Mr. Krupa serves on the board as a representative of Chase
Capital Partners. Mr. Krupa is currently a director of several private Internet
companies. From February 1995 to July 1998, Mr. Krupa 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
65
<PAGE> 67
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.
Allan G. Kass has served as our Vice President, Sales since April 1999.
From January 1995 to April 1999, Mr. Kass was Vice President of Sales at Turner
Broadcasting. From September 1991 to January 1995, Mr. Kass was Director of
Sports Marketing at Tribune Broadcasting KTLA-TV. From 1986 to 1988, Mr. Kass
was National Sales Manager at WTAF-TV in Philadelphia. Mr. Kass received his
B.A. in Speech from Brooklyn College and his M.S. in Television from Indiana
State University.
Robert A. Morse has served as our Vice President, Business Administration
and Treasurer since May 1999. Mr. Morse served as our Chief Financial Officer
from March 1998 to May 1999. From October 1994 to March 1998, Mr. Morse was Vice
President and Chief Financial Officer of Pacific Bell Interactive Media. From
1989 to 1994, Mr. Morse served in a variety of corporate financial and strategic
roles for the Times Mirror Company. From 1985 to 1989, Mr. Morse was a certified
public accountant with Arthur Andersen. Mr. Morse received his B.A. in Economics
from the University of California at Los Angeles and his M.B.A. from the
University of Southern California.
66
<PAGE> 68
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
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. Krupa and Lenard.
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.
67
<PAGE> 69
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, 1998 for the two individuals who served as
our Co-Chief Executive Officers for that year and for one other executive
officer whose compensation, as defined by the Securities and Exchange
Commission, exceeded $100,000. These people are referred to as the "named
executive officers." The information in the table includes salaries, bonuses
granted and other miscellaneous compensation. ARTISTdirect has not granted stock
appreciation rights or restricted stock awards and has no long-term compensation
benefits other than stock options. No other executive officers received total
compensation in excess of $100,000 during 1998.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
ANNUAL COMPENSATION ------------
------------------------------------ SECURITIES
OTHER ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION OPTIONS COMPENSATION
--------------------------- ---- --------- -------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Marc P. Geiger................ 1998 $ 175,192 $ 50,000 -- -- --
Chairman and 1997 50,000 -- -- -- --
Chief Executive Officer
Donald P. Muller.............. 1998 176,431 50,000 -- -- --
President, ARTISTdirect 1997 71,500 -- -- -- --
Agency and
Kneeling Elephant Records
Keith K. Yokomoto............. 1998 130,769 25,000(1) -- -- --
President, Chief Operating 1997 96,153 -- -- -- --
Officer and Director
</TABLE>
- -------------------------
(1) Does not include deferred compensation of up to $200,000. The actual amount
of such deferred compensation is not determinable as of the date of this
prospectus. For more information on the deferred compensation arrangement,
please see "Related Party Transactions -- Deferred Compensation Agreement on
page 77.
In addition to the named executive officers as of December 31, 1998,
ARTISTdirect currently employs other executive officers who it anticipates will
qualify as named executive officers in future years. Those executives include:
Stephen P. Rennie, President, UBL (annual salary of $150,000); James B. Carroll,
Executive Vice President and Chief Financial Officer (annual salary of
$150,000); Pascal O. Desmarets, Vice President, Information Technology and
Operations (annual salary of $150,000); and Nicholas J. Turner, Vice President
(annual salary of $150,000).
68
<PAGE> 70
BENEFIT PLANS
STOCK OPTION PLANS.
Introduction. We maintain the following three separate stock option plans:
- The 1999 Employee Stock Option Plan under which we have reserved
5,250,000 shares of our common stock for issuance to our employees,
non-employee members of our board of directors and consultants. This
share reserve will automatically increase on the first trading day in
January each calendar year, beginning 2001, by an amount equal to two
percent (2%) of the total number of shares of our common stock
outstanding on the last trading day of December in the prior calendar
year, but in no event will this annual increase exceed 875,000 shares. As
of December 31, 1999, options for 3,747,030 shares of our common stock
were outstanding under this plan, 58,750 options had been exercised, and
1,444,220 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
2,146,145 shares of our common stock were outstanding under this plan,
117,916 options had been exercised, and 1,735,939 shares remained
available for future option grant; and
- The 1999 Artist and Artist Advisor Stock Option Plan under which we have
reserved 1,250,000 shares of our common stock for issuance to artists for
whom we maintain ARTISTchannels and their agents, business managers,
attorneys and other advisors. This share reserve will automatically
increase on the first trading day in January each calendar year,
beginning 2001, by an amount equal to one percent (1%) of the total
number of shares of our common stock outstanding on the last trading day
of December in the prior calendar year, but in no event will this annual
increase exceed 375,000 shares. As of December 31, 1999, options for
998,625 shares of our common stock were outstanding under this plan, no
options had been exercised, and 251,375 shares remained available for
future option grant.
Administration. Each plan is administered by our compensation committee.
This committee will determine which eligible persons are to receive option
grants under the plan, the time or times when the grants are to be made, the
number of shares subject to each grant, the exercise price in effect for each
option, the status of any granted option as either an incentive stock option or
a nonstatutory stock option under the federal tax laws, the vesting schedule to
be in effect for the option grant and the maximum term for which any granted
option is to remain outstanding. No option may have a term in excess of 10
years.
Plan Features. The terms and provisions governing the option grants made
under each of our three plans are substantially the same and may be summarized
as follows:
- The exercise price for any options granted under the plans may be paid in
cash or in shares of our common stock valued at fair market value on the
exercise date. The option may also be exercised through a same-day sale
program pursuant to which the purchased shares are immediately sold
through a designated broker and a portion of the sale proceeds delivered
to us in payment of the option exercise price;
- The compensation committee will have the authority to cancel outstanding
options under the plans in return for the grant of new options for the
same or different number of option shares with
69
<PAGE> 71
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 October 2001. The next offering period
will start on the first business day in November 2001, and subsequent offering
periods will be set by our compensation committee.
70
<PAGE> 72
Eligible Employees. Individuals scheduled to work more than 20 hours per
week for more than 5 calendar months per year may join an offering period on the
start date or any semi-annual entry date within that period. Semi-annual entry
dates will occur on the first business day of May and November each year.
Individuals who become eligible employees after the start date of an offering
period may join the plan on any subsequent semi-annual entry date within that
offering period.
Payroll Deductions. A participant may contribute up to 15% of his or her
total cash earnings through payroll deductions, and the accumulated deductions
will be applied to the purchase of shares on each semi-annual purchase date. The
purchase price per share will be equal to 85% of the fair market value per share
on the participant's entry date into the offering period or, if lower, 85% of
the fair market value per share on the semi-annual purchase date. Semi-annual
purchase dates will occur on the last business day of April and October each
year. However, a participant may not purchase more than 750 shares on any
purchase date, and not more than 500,000 shares may be purchased in total by all
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:
In July 1998, we entered into an employment agreement with Marc Geiger, our
Chairman and Chief Executive Officer, pursuant to which Mr. Geiger is paid an
annual salary of $150,000 and a guaranteed annual bonus of $100,000. The initial
term of employment expires July 27, 2001, with automatic extensions for
successive one-year periods. In addition, the employment agreement provides for
the payment of salary and a guaranteed bonus for twelve months after the date of
termination if the termination was other than (1) due to a disability, (2) for
"cause," such as the commission of a felony, material dishonesty against
ARTISTdirect, or gross negligence in the performance of duties, (3) due to Mr.
Geiger's death, or (4) if he terminates his employment for "good reason," such
as an adverse change of duties, a reassignment of location, or a material breach
of our obligations to him. If Mr. Geiger's employment is terminated for cause or
disability, or he resigns for other than good reasons, he is prohibited, for a
period of the later of one year after the early termination of his employment,
or the expiration of the term of his employment agreement, from competing with
ARTISTdirect or attempting to hire any ARTISTdirect employee.
In July 1998, we entered into an employment agreement with Donald Muller,
the President of ARTISTdirect Agency and Kneeling Elephant Records, and one of
our directors, pursuant to which Mr. Muller is paid an annual salary of $150,000
and a guaranteed annual bonus of $100,000. The initial term of employment
expires July 27, 2001, with automatic extensions for successive one-year
periods. In addition, the employment agreement provides for the payment of
salary and a guaranteed bonus for 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
71
<PAGE> 73
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.
In January 1998, we entered into an employment agreement with Keith
Yokomoto, our President and Chief Operating Officer, pursuant to which Mr.
Yokomoto is paid an annual salary of $100,000 for the first five months of the
agreement and $150,000 thereafter, with a guaranteed bonus of $50,000 the second
year and $100,000 for each year thereafter. The initial term of employment
expires December 31, 2000, and ARTISTdirect has an option to extend the term for
two additional one-year periods. In addition, the employment agreement provides
for the payment of his salary and a guaranteed bonus for the lesser of (1)
twelve months after the date of termination, or (2) until the end of the
agreement, if he is terminated other than due to a disability, for "cause," 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
signed a separate agreement concurrently with his employment agreement which
prohibits him from competing with ARTISTdirect or attempting to hire any
ARTISTdirect employee for the later of one year after termination of employment,
or the expiration of the then-current period of the term of the agreement.
INDEMNIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS AND LIMITATION OF LIABILITY
Section 145 of the Delaware General Corporation Law authorizes a court to
award, or a corporation's board of directors to grant, indemnity to directors
and officers in terms sufficiently broad to permit 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.
72
<PAGE> 74
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.
73
<PAGE> 75
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.
74
<PAGE> 76
ISSUANCES OF ARTISTDIRECT, LLC SERIES A PREFERRED UNITS
Between July 1998 and December 1998, ARTISTdirect, LLC sold a total of
9,458,340 of its Series A preferred units at a purchase price of approximately
$0.31 per unit to the following purchasers:
<TABLE>
<CAPTION>
AGGREGATE
SERIES A PREFERRED PURCHASE
PURCHASER UNITS PRICE
--------- -------------------- ----------
<S> <C> <C>
Constellation Venture Capital, L.P........................ 5,850,520 $1,800,000
Psilos Group Partners, L.P................................ 1,950,172 600,000
DreamMedia Internet Ventures, LLC......................... 1,462,632 450,000
Carl Kawabe............................................... 195,016 60,000
</TABLE>
In January 1999, ARTISTdirect, LLC redeemed 780,068 of its Series A
preferred units from Psilos Group Partners, L.P. for a purchase price of
$240,080 and re-issued those units to CCP/Psilos ARTISTdirect, LLC for the same
price. Mr. Friedman, one of our directors, is the General Partner of
Constellation Venture Capital, L.P. and Mr. Krupa, one of our directors, is the
Managing Director of Psilos Group Managers, L.P.
ISSUANCES OF UBL, LLC UNITS
Between July 1998 and December 1998, UBL, LLC, sold an aggregate of
1,940,000 of its Series A preferred units, and 1,940,000 of its Series B
preferred units, at a purchase price of $1.00 per unit to the following
purchasers:
<TABLE>
<CAPTION>
AGGREGATE
SERIES A PREFERRED SERIES B PREFERRED PURCHASE
PURCHASER UNITS UNITS PRICE
--------- -------------------- -------------------- ----------
<S> <C> <C> <C>
Constellation Venture Capital,
L.P................................ 1,200,000 -- $1,200,000
Psilos Group Partners, L.P........... 400,000 -- 400,000
DreamMedia Internet Ventures, LLC.... 300,000 -- 300,000
Carl Kawabe.......................... 40,000 -- 40,000
ADNM................................. -- 1,940,000 1,940,000
</TABLE>
In January 1999, UBL, LLC redeemed 160,000 of its Series A preferred units
from Psilos Group Partners, L.P. for a purchase price of $160,000 and re-issued
those units to CCP/Psilos UBL, LLC for the same price.
In February 1999, UBL, LLC issued 392,134 of its common units to Scott
Blum, President of iMusic and our Vice President, Research and Development, in
consideration of his contribution of 540,000 shares of common stock of iMusic,
Inc. All information with respect to units of UBL, LLC in this section gives
effect to a 1,000-for-1 unit split that occurred in April 1999.
EXCHANGE TRANSACTION AND ISSUANCE OF ARTISTDIRECT, LLC SERIES B PREFERRED
UNITS
In May 1999, we completed an exchange transaction in which the holders of
common and/or Series A preferred units of UBL, LLC, other than ADNM exchanged a
total of 8,042,134 UBL, LLC common units and 1,940,000 UBL, LLC preferred units
for a total of 13,982,207 common units and 3,372,920 Series A preferred units of
ARTISTdirect, LLC. At the same time, ADNM distributed units in UBL, LLC to
ARTISTdirect, LLC and to ARTISTdirect Holdings LLC, so that after giving effect
to the exchange and distribution transactions, UBL, LLC was 99% owned by
ARTISTdirect, LLC and 1% owned by ARTISTdirect Holdings LLC. In connection with
this transaction, Messrs. Geiger and Muller contributed 491,467 and 995,819
common units, respectively, to the capital of ARTISTdirect, LLC. These units
were then reissued to Mr. Rubin.
75
<PAGE> 77
In May 1999, ARTISTdirect, LLC also sold an aggregate of 15,000,000 of its
Series B preferred units at a purchase price of $1.00 per unit to the following
purchasers:
<TABLE>
<CAPTION>
SERIES B AGGREGATE
PREFERRED PURCHASE
PURCHASER UNITS PRICE
--------- --------------- ----------
<S> <C> <C>
Chase Capital Partners...................................... 4,800,000 $4,800,000
CCP/Psilos ARTISTdirect, LLC................................ 922,509 922,509
Flatiron Fund............................................... 200,000 200,000
Bowman Capital Management LLC............................... 4,000,000 4,000,000
Constellation Venture Capital, L.P.......................... 2,500,000 2,500,000
Psilos Group Partners, L.P.................................. 1,383,764 1,383,764
Cassandra/ARTISTdirect Partners, LLC........................ 1,000,000 1,000,000
Toronto Dominion Investments, Inc........................... 193,727 193,727
</TABLE>
In connection with this financing, the holders of Series A preferred units
in ARTISTdirect, LLC received 354,526 common units in ARTISTdirect, LLC and
$96,000 in exchange for accrued and unpaid preferred returns.
The preferred and common units of ARTISTdirect, LLC were exchanged for
preferred and common stock in connection with the merger of ARTISTdirect, LLC
into ARTISTdirect, Inc. on October 6, 1999. All shares of preferred stock will
convert into shares of common stock on a one-for-one basis upon the closing of
this offering. In addition, approximately 50,000 shares of common stock will be
issued as accrued but unpaid dividends on the preferred stock. See the notes to
the beneficial ownership table in "Principal Stockholders" on page 81 for
information relating to the beneficial ownership of such shares.
ISSUANCES OF ARTISTDIRECT, INC. SERIES C PREFERRED STOCK
Between December 1999 and January 2000, ARTISTdirect, Inc. sold an
aggregate of 7,000,291 of its Series C preferred stock at a purchase price of
$13.928 per share to the following purchasers:
<TABLE>
<CAPTION>
SHARES OF
SERIES C AGGREGATE
PREFERRED PURCHASE
PURCHASER STOCK PRICE
--------- --------------- -----------
<S> <C> <C>
Universal Music Group, Inc.................................. 2,153,935 $30,000,000
Cisneros Television Group(1)................................ 1,435,957 20,000,000
Sony Music, a Group of Sony Music Entertainment Inc......... 1,076,968 15,000,000
BMG Music d/b/a BMG Entertainment........................... 1,076,968 15,000,000
Time Warner Inc.(2)......................................... 1,005,170 14,000,000
Other purchasers............................................ 251,293 3,500,000
</TABLE>
- -------------------------
(1) Shares are actually held by Meadowlane Enterprises Ltd., an affiliate of
Cisneros Television Group.
(2) Shares are actually held by Art-Dir Holdings Inc., an affiliate of Time
Warner Inc.
Mr. Cisneros, one of our directors, is the Chairman and Chief Executive
Officer of the Cisneros Television Group. Universal Music Group, Inc. has the
right to appoint a director pursuant to the stockholders agreement described on
page 78. In addition, each of the Series C preferred stock investors entered
into strategic agreements with us in connection with their purchase of Series C
preferred stock. See "Business -- Strategic Relationships" on page 46 for more
information on these agreements. The actual number of shares of common stock to
be issued upon conversion of Series C preferred stock may be adjusted based upon
the initial public offering price. If the initial public offering price is less
than
76
<PAGE> 78
$17.41 per share, then each share of Series C preferred stock will convert into
a greater number of shares of our common stock. Assuming an initial offering
price of $11.00 per share, each share of Series C preferred stock will convert
into approximately 1.5827 shares of our common stock.
OPTIONS AND STOCK ISSUED TO JAMES CARROLL
In May 1999, the board granted James Carroll, our Chief Financial Officer,
two options to purchase a total of 459,184 shares of common stock at an exercise
price of $3.60 per share. One-fourth of the 344,388 shares subject to the first
option became exercisable immediately, and the remaining option shares become
exercisable in three equal annual installments from the date of the grant. All
of these remaining option shares become immediately exercisable if a change of
control occurs.
One-half of the 114,796 shares underlying Mr. Carroll's second option
become exercisable upon the completion of this offering. The remaining shares
underlying this option become exercisable if the closing price of our common
stock on any two or more trading days exceeds 150% of the initial offering price
during the one month period following the closing of this offering. The
remaining shares will 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 equals or exceeds $300 million.
On September 23, 1999, James Carroll purchased 83,333 shares of common
stock from Don Muller and 27,778 shares of common stock from Keith Yokomoto for
$300,000 and $100,000, respectively.
DEBT TO EXECUTIVE OFFICERS AND DIRECTOR
In satisfaction of our obligations to make distributions triggered by the
merger of ARTISTdirect, LLC into ARTISTdirect, Inc., we issued a note in the
principal amount of $275,000 to each of Messrs. Geiger and Muller and a note in
the principal amount of $190,714 to Mr. Rubin. Each of these notes bears
interest at a rate of 5.98% per annum and will become due and payable upon the
closing of this offering.
DEFERRED COMPENSATION AGREEMENT
In April 1998, we entered into a deferred compensation agreement with Keith
Yokomoto, our President and Chief Operating Officer. The agreement grants Mr.
Yokomoto deferred compensation of up to $200,000, depending on the value of our
company as of the payment date. The compensation is due on the earlier to occur
of:
- Mr. Yokomoto's sale of all of his shares of our common stock;
- the occurrence of specific capital events, including the sale of
substantially all of our assets and receipt of insurance proceeds from
the occurrence of an extraordinary event; or
- April 1, 2005.
Messrs. Geiger and Muller are obligated to contribute to ARTISTdirect the
amounts necessary to fund this obligation. We have recorded the $200,000
obligation as an expense for 1998.
TRANSACTIONS WITH SCOTT BLUM
In connection with UBL, LLC's acquisition of iMusic, we granted Scott Blum,
President of iMusic, and our Vice President, Research and Development, an option
to have all of his shares of our common stock redeemed for a redemption price of
up to $2.8 million. The redemption option is triggered by the occurrence of
specified events, including this offering. In addition, if Mr. Blum exercises
his option we are required to pay a total of $200,000 in bonuses to employees of
iMusic designated by Mr. Blum. If Mr. Blum decides not to exercise his option,
it will terminate on the closing of this offering.
77
<PAGE> 79
In addition, UBL, LLC entered into a contingent loan agreement with Scott
Blum to make loans to pay federal and state tax liabilities that he may incur as
a result of (a) the liquidation of iMusic or a taxable disposition or other
transfer of iMusic common stock or (b) a distribution of property by UBL, LLC to
Mr. Blum not involving sufficient cash or marketable securities for him to pay
the resulting tax liability, in either case. Any advances to Mr. Blum under the
contingent loan agreement will bear interest at the then lowest permissible rate
under the Internal Revenue Code and be secured by a pledge of a portion of Mr.
Blum's shares of our common stock.
Between 1996 and 1998, Mr. Blum periodically advanced iMusic funds for
various expenses. The largest amount outstanding at any one time during this
period was $66,000. During this period, iMusic leased its principal executive
office from Mr. Blum, for which Mr. Blum received annual rental payments of
$13,500.
REGISTRATION RIGHTS AGREEMENT
We have entered into a registration rights agreement with Rick Rubin, one
of our directors, Marc Geiger, our Chairman of the Board and Chief Executive
Officer, Donald Muller, President of ARTISTdirect Agency and Kneeling Elephant
Records and one of our directors, and the holders of our Series A, Series B and
Series C preferred stock. The registration rights agreement provides these
stockholders with rights to require us to register their stock with the
Securities and Exchange Commission. The holders of these rights have waived them
as to this offering. The other registration rights will survive this offering
and will terminate no later than ten years after the closing date of this
offering.
STOCKHOLDERS AGREEMENT
We have entered into a stockholders agreement with a number of our
stockholders with respect to their rights, restrictions and obligations as
stockholders. These stockholders include several of our officers and directors
and their affiliates, including Marc Geiger, Donald Muller, Keith Yokomoto, L&G
Associates One, Steve Rennie, James Carroll, Robert Morse, Constellation Venture
Capital, L.P., Psilos Group Partners, L.P., Rick Rubin, Scott Blum, Chase
Venture Capital Associates, L.P., Universal Music Group, Inc., Meadowlane
Enterprises, Ltd., Sony Music, Art-Dir Holdings Inc., Maverick Recording
Company, BMG Music and Yahoo!. Although most of the provisions of this agreement
will terminate upon the consummation of this offering, the following provisions
will remain in effect:
- Private Transfer. If Messrs. Geiger or Muller, or any of their
transferees, proposes to transfer five percent or more of our outstanding
capital stock in a single private transaction or series of private transactions,
each of the parties to the stockholders agreement will be allowed to participate
in the transaction;
- Mandatory redemption of Elson's Common Stock. William Elson has notified
us that he intends to exercise the option he received in connection with the
settlement agreement described in "-- Settlement Agreement" on page 80. 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.
78
<PAGE> 80
PERSONAL GUARANTEES BY EXECUTIVE OFFICERS AND DIRECTORS
In February 1999, Marc Geiger, our Chairman of the Board and Chief
Executive Officer, and Donald Muller, President of ARTISTdirect Agency and
Kneeling Elephant Records and one of our directors, personally guaranteed
obligations by us under our $750,000 credit facility with Republic Bank
California, N.A., and obligations by UBL under the $1,250,000 credit facility
with Republic Bank. In November 1999, the $1,250,000 credit facility was
increased to $4,250,000 and James Carroll, our Chief Financial Officer, was
added as one of the personal guarantors on both this facility and the $750,000
facility. Rick Rubin, one of our directors, also personally guaranteed the
obligations by UBL under the $4,250,000 credit facility. As of the date of this
prospectus, no amounts were outstanding under the credit facilities.
In connection with the personal guarantees by Messrs. Geiger and Muller for
the $750,000 line of credit, ARTISTdirect, LLC, ARTISTdirect Holdings, L.L.C.,
ARTISTdirect Agency, LLC, ARTISTdirect New Media, LLC, Kneeling Elephant
Records, Keith Yokomoto, our President, Chief Operating Officer and one of our
directors, L&G Associates One, Stephen P. Rennie, President of The Ultimate Band
List, Robert A. Morse, our Vice President of Business Administration and
Treasurer, Constellation Venture Capital, L.P., Constellation Ventures (BVI),
Inc., Psilos Group Partners, L.P., DreamMedia Internet Ventures, LLC, Carl
Kawabe and CCP/Psilos ARTISTdirect, LLC, each agreed to reimburse Messrs. Geiger
and Muller on demand for any payment they make pursuant to the guarantees.
Additionally, Messrs. Geiger and Muller each agreed to pay the other's
proportionate share of their obligation if either one of them does not receive
the full amount of reimbursement described above.
In connection with the personal guarantees by Messrs. Geiger, Muller,
Carroll and Rubin for the $4,250,000 line of credit, ARTISTdirect, LLC,
ARTISTdirect Holdings, L.L.C., ARTISTdirect Agency, LLC, ARTISTdirect New Media,
LLC, Kneeling Elephant Records, American Recordings, Inc., Constellation Venture
Capital, L.P., Constellation Ventures (BVI), Inc., Psilos Group Partners, L.P.
DreamMedia Internet Ventures, LLC, Carl Kawabe and CCP/Psilos ARTISTdirect, LLC,
each agreed to reimburse Messrs. Geiger, Muller, Carroll and Rubin on demand for
any payment they make pursuant to the guarantees. Additionally, Messrs. Geiger,
Muller, Carroll and Rubin each agreed to pay each other's proportionate share of
their obligation if any one of them does not receive the full amount of
reimbursement described above. Rick Rubin, one of our directors, is President of
American Recordings, Inc.
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, we paid Lenard & Gonzalez LLP $350,184 for legal services provided
to us. Allen Lenard, one of our directors, is Managing Partner of Lenard &
Gonzalez LLP.
OTHER EMPLOYMENT AGREEMENTS
In May 1999, we entered into an employment agreement with James Carroll,
our Chief Financial Officer, pursuant to which Mr. Carroll is paid an annual
salary of $150,000 and a guaranteed annual bonus of $50,000. The initial term of
employment expires May 23, 2001, and ARTISTdirect has an option to extend the
term for one additional year. In addition, the employment agreement provides
that if 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
79
<PAGE> 81
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 agreement expires, or (2) the actual date of termination. In
addition, please see "-- Options and Stock Issued to James Carroll" on page 77
for information on stock and options issued to Mr. Carroll in connection with
his employment.
In April 1998, UBL, LLC entered into an employment agreement with Steve
Rennie, President of the Ultimate Band List, pursuant to which Mr. Rennie is
paid an annual salary of $100,000 for the first year and $150,000 for the second
and third years, with a guaranteed bonus of $50,000 the second year and $100,000
the third year. The initial term of employment expires March 31, 2001. In
addition, 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
entered into a separate agreement which prohibits him from competing with UBL,
LLC until March 31, 2001, or, in the event Mr. Rennie is terminated other than
for cause, the date of Mr. Rennie's termination. The agreement also prohibits
him from soliciting any customer of ARTISTdirect or attempting to hire any
ARTISTdirect employee until March 31, 2002.
For information on our employment agreement with our named executive
officers, please see "Management -- Employment Agreements" on page 71.
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.
80
<PAGE> 82
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
SHARES BENEFICIALLY
NUMBER OF OWNED
SHARES -----------------------
BENEFICIALLY BEFORE AFTER
NAME AND ADDRESS OF BENEFICIAL OWNER OWNED(1) OFFERING OFFERING(2)
------------------------------------ ------------ -------- -----------
<S> <C> <C> <C>
Entities affiliated with Constellation Venture
Capital, L.P.(3)...................................... 2,728,907 8.5% 7.4%
575 Lexington Avenue
New York, New York 10022
Entities affiliated with Chase Capital Partners(4).... 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 10.6 9.2
10 Universal City Plaza
Universal City, California 91608
Entity affiliated with Cisneros Television Group,
Inc.(6)............................................. 2,272,727 7.1 6.1
404 Washington Avenue
Miami Beach, Florida 33139
BMG Music d/b/a BMG Entertainment(7).................. 1,704,547 5.3 4.6
Sony Music, a Group of Sony Music Entertainment(7).... 1,704,547 5.3 4.6
Marc P. Geiger(8)(9).................................. 3,335,820 10.4 9.0
Donald P. Muller(8)(9)................................ 3,252,486 10.1 8.8
Keith K. Yokomoto(8)(10).............................. 1,955,324 6.1 5.3
Rick Rubin............................................ 3,620,219 11.3 9.8
c/o Alan S. Halfon & Company
9595 Wilshire Boulevard, Suite 505
Beverly Hills, CA 90212
Clifford H. Friedman(3)............................... 2,728,907 8.5 7.4
Carlos E. Cisneros(6)................................. 2,272,727 7.1 6.1
Stephen Krupa(11)..................................... 1,288,577 4.0 3.5
Allen D. Lenard(8)(12)................................ 378,264 1.2 1.0
1900 Avenue of the Stars
Twenty-Fifth Floor
Los Angeles, California 90067
All directors and executive officers as a group (10
persons)(13)........................................ 19,591,282 61.1 52.8
</TABLE>
- -------------------------
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and includes voting or investment power
with respect to the securities. Common stock subject to options or warrants
that are currently exercisable or exercisable within 60 days of 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
81
<PAGE> 83
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 32,083,481 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 37,083,481 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. 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.
(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 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.
82
<PAGE> 84
(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>
Marc P. Geiger........................ 3,335,820 31,376 3,367,196
Donald P. Muller...................... 3,252,486 30,592 3,283,078
Keith K. Yokomoto..................... 1,955,324 (5,431) 1,949,893
James B. Carroll...................... 111,111 508 111,619
Stephen P. Rennie..................... 504,352 (42,636) 461,716
Robert A. Morse....................... 126,088 (10,659) 115,429
L&G Associates One.................... 378,264 (3,750) 374,514
</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 consummation. The number of shares set forth under
"Total Shares Upon Distribution" above have been calculated based upon an
assumed closing bid price equal to the assumed initial offering price of
$11.00.
(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 80 for more information on
this transaction.
(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) 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.
(12) Represents all of the shares held by L&G Associates One. Mr. Lenard is
Managing Partner of L&G Associates One, and as such is deemed to exercise
voting and investment power over such shares. He disclaims beneficial
ownership of the shares held by this entity except to the extent of his
proportionate interest therein.
83
<PAGE> 85
(13) Includes 86,097 shares subject to options held by James Carroll that are
currently exercisable and 57,398 shares subject to options held by Mr.
Carroll that will become exercisable upon the completion of this offering.
Does not include 57,398 shares subject to options held by Mr. Carroll that
will become exercisable if the price of our common stock exceeds 150% of
the initial offering price on any two or more trading days during the one
month period following the closing of this offering.
84
<PAGE> 86
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 32,083,481 outstanding shares
of common stock, outstanding options to purchase 6,891,800 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 32,083,481 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
37,083,481 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.
85
<PAGE> 87
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.
86
<PAGE> 88
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.
87
<PAGE> 89
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
78 for more information on these rights.
WARRANTS
As of December 31, 1999, Giant Merchandising and Winterland Concessions
held outstanding warrants to purchase 905,140 shares of our common stock at a
price of $4.00 per share, and Yahoo! held a warrant to purchase 169,627 shares
of our common stock at a price of $13.928 per share, and 169,627 shares of our
common stock at a price of $11.00 per share.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for our common stock will be ChaseMellon
Shareholder Services.
LISTING
Application has been made for listing the common stock on the Nasdaq
National Market under the trading symbol "ARTD."
RESCISSION OFFER
As of the date of this prospectus, we have issued shares or options to
purchase shares of our common stock to our employees and to artists and their
managers and advisors. Due to the nature of the persons who received these
shares and options in addition to our employees and the total number of shares
and options issued to them and our employees, the issuance of these shares and
options did not comply with the requirements of Rule 701 under the Securities
Act, or any other available exemptions from the registration requirements of
Section 5 of the Securities Act, and may not have qualified for any exemption
from qualification under California securities laws either. Beginning
approximately 180 days after the date of this prospectus, we intend to make a
rescission offer to all these persons pursuant to a registration statement filed
under the Securities Act and pursuant to California securities law. In the
rescission offer, we will offer to repurchase from these persons all shares
issued directly to these persons or pursuant to option exercises by these
persons before the expiration of the rescission offer registration statement, at
the purchase or exercise price paid for these shares, plus interest at the rate
of 10% per year from the date of issuance until the rescission offer expires. To
comply with California securities law, we will also offer to repurchase all
unexercised options issued to such persons at 20% of the option exercise price
multiplied by the number of shares subject to such options, plus interest at the
rate of 10% per year from the date of issuance until the rescission offer
expires. The rescission offer will expire approximately 30 days after the
effectiveness of the rescission offer registration statement. We could be
required to pay up to approximately $11.1 million plus the total amount of
interest on that amount as described above based on the number of shares which
have been already issued or which may be issued pursuant to vested unexercised
options before the rescission offer period expires and the number of outstanding
options which will not be exercisable throughout the rescission offer period. We
currently expect to use a portion of the net proceeds of this offering to fund
any requested repayment. In addition, we will keep the rescission offer
registration statement, or another form of registration statement available to
us, in effect to cover the issuance of all shares issuable upon exercise of the
options until the last expiration date of all of the options or until all of the
options have been exercised, whichever occurs first. Offerees who do not accept
the rescission offer and persons who exercise such options while the
registration statement is in effect, will, for purposes of applicable federal
and state securities laws, be deemed to hold registered shares, and those shares
will be freely tradeable on the public market as of the effective date of each
registration statement covering such shares. Some of these shares are subject to
contractual vesting restrictions, to which the holders have previously agreed.
The Securities Act does not expressly provide
88
<PAGE> 90
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 37,083,481
shares of common stock and 37,833,481 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 September 30, 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...................... 0 Lock-up released. No shares are
eligible for sale under Rule
144, 144(k) or 701.
</TABLE>
LOCK-UP AGREEMENTS
A total of approximately shares held by our directors, executive
officers and our existing stockholders are subject to "lock-up" agreements
generally providing that, these stockholders will not (1) offer, pledge, sell,
contract to sell, sell any option or contract to purchase, purchase any option
or contract to sell, grant any option, right or warrant to purchase, lend, file
a registration statement, or otherwise transfer or dispose of, directly or
indirectly, any shares of common stock or any securities convertible into or
exercisable or exchangeable for common stock or (2) enter into any swap or other
arrangement that transfers to another, in whole or in part, any of the economic
consequences of ownership of the common stock or such other securities, in cash
or otherwise, for a period of 180 days following the date of the final
prospectus for this offering without the prior written consent of Morgan Stanley
& Co. Incorporated. The restrictions described in this paragraph do not apply
to:
- the sale of shares to the underwriters;
- the issuance by us of shares of common stock upon the exercise of an
option or a warrant or the conversion of a security outstanding on the
date of this prospectus of which the underwriters have been advising in
writing;
89
<PAGE> 91
- 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 372,965 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
7,318,466 shares. Such registration statement will automatically become
effective upon filing. Accordingly, subject to the exercise of such options,
shares registered under such registration statement will be available for sale
in the open market immediately after the 180-day lock-up period expires.
REGISTRATION RIGHTS
In addition, some of our stockholders have registration rights with respect
to approximately 23,098,856 shares of common stock. Registration of these
securities under the Securities Act would result in those shares becoming freely
tradeable without restriction under the Securities Act. See "Related Party
Transactions -- Registration Rights Agreement" on page 78 for more information
on these rights.
90
<PAGE> 92
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.
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.
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.
91
<PAGE> 93
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.
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
92
<PAGE> 94
underwriters. Among the factors to be considered in determining the initial
public offering price will be the future prospects of ARTISTdirect and its
industry in general, sales, earnings and 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 for which
Morgan Stanley may receive additional fees in the future.
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 7,500 shares of
our common stock. Certain legal matters in connection with this offering will be
passed upon for the underwriters by O'Melveny & Myers LLP, Los Angeles,
California.
EXPERTS
The financial statements of ARTISTdirect, LLC and subsidiaries as of
December 31, 1997 and 1998, and for the period from August 8, 1996 (inception)
through December 31, 1996 and the years ended December 31, 1997 and 1998, and
the financial statements of iMusic, Inc., as of December 31, 1997 and 1998 and
years ended December 31, 1997 and 1998, have been included herein and in the
registration statement in reliance upon the report of KPMG LLP, independent
certified public accountants, appearing elsewhere herein, and upon the authority
of said firm as experts in accounting and auditing.
93
<PAGE> 95
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.
94
<PAGE> 96
ARTISTDIRECT, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ARTISTdirect, LLC and Subsidiaries Consolidated Financial
Statements
Independent Auditors' Report.............................. F-2
Consolidated Balance Sheets............................... F-3
Consolidated Statements of Operations..................... F-4
Consolidated Statements of Changes in Members' and
Stockholders' Equity (Deficit)......................... F-5
Consolidated Statements of Cash Flows..................... F-6
Notes to Consolidated Financial Statements................ F-7
iMusic, Inc. Financial Statements
Independent Auditors' Report.............................. F-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> 97
The Reverse Stock Split as described in Note 2 to the consolidated
financial statements has not been consummated at December 31, 1999. When this
event has been consummated, we will be in a position to render the following
report.
/s/ KPMG LLP
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
ARTISTdirect, Inc.
We have audited the accompanying consolidated balance sheets of
ARTISTdirect, LLC and subsidiaries (the Company) as of December 31, 1997 and
1998 and the related consolidated statements of operations, changes in members'
and stockholders' equity (deficit) and cash flows for the period from August 8,
1996 (inception) through December 31, 1996 and the years ended December 31, 1997
and 1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these combined
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of ARTISTdirect, LLC and
subsidiaries as of December 31, 1997 and 1998 and the results of its operations
and its cash flows for the period from August 8, 1996 (inception) through
December 31, 1996 and the years ended December 31, 1997 and 1998, in conformity
with generally accepted accounting principles.
Los Angeles, CA
September 3, 1999, except as to note 2
which is as of , 1999
F-2
<PAGE> 98
ARTISTDIRECT, LLC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA
REDEEMABLE
SECURITIES AND
STOCKHOLDERS'
DECEMBER 31, EQUITY AT
--------------- SEPTEMBER 30, SEPTEMBER 30,
1997 1998 1999 1999
----- ------- ------------- --------------
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents..................... $ 167 $ 1,940 $ 4,316
Cash held for clients......................... 19 -- 327
Accounts receivable, net...................... 13 460 1,286
Prepaid expenses and other current assets..... 1 167 1,263
----- ------- --------
Total current assets....................... 200 2,567 7,192
Property and equipment, net..................... 87 175 2,297
Investments..................................... -- 373 303
Goodwill and intangibles, net................... 16 45 14,192
Other assets, net............................... 11 27 1,366
----- ------- --------
$ 314 $ 3,187 $ 25,350
===== ======= ========
LIABILITIES, REDEEMABLE SECURITIES AND MEMBERS'
AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Cash held for clients......................... $ 19 $ -- $ 327
Accounts payable.............................. 104 507 3,342
Accrued expenses.............................. 228 536 1,628
Due to employees.............................. 175 288 306
Deferred revenue.............................. 200 157 275
----- ------- --------
Total current liabilities.................. 726 1,488 5,878
Redeemable securities:
Series A redeemable preferred securities...... -- 5,021 5,030 --
Series B redeemable preferred securities...... -- -- 15,550 --
Redeemable common securities.................. -- 114 5,664 6,364
----- ------- -------- ---------
Total redeemable securities................ -- 5,135 26,244 6,364
----- ------- -------- ---------
Members' and stockholders' equity:
Common stock ($.01 par value)................. 208
Additional paid-in-capital.................... 24,587
Members' interest............................. 76 3,872 45,927
Unearned compensation......................... -- (502) (11,687) (11,687)
Accumulated earnings (deficit)................ (488) (6,806) (41,012) --
----- ------- -------- ---------
Total members' and stockholders' equity
(deficit)................................ (412) (3,436) (6,772) 13,108
----- ------- -------- =========
$ 314 $ 3,187 $ 25,350
===== ======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 99
ARTISTDIRECT, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT FOR SHARE DATA)
<TABLE>
<CAPTION>
PERIOD FROM NINE MONTHS ENDED
AUGUST 8, 1996 YEAR ENDED DECEMBER 31, SEPTEMBER 30,
(INCEPTION) TO --------------------------- -------------------------
DECEMBER 31, 1996 1997 1998 1998 1999
----------------- ------------ ------------ ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenue:
Online product sales........... $ -- $ 269 $ 1,548 $ 804 $ 3,501
Advertising and other.......... -- 95 552 334 1,666
Agency commissions............. -- 974 1,917 1,782 662
Record label................... -- 550 565 428 605
---- ------ ----------- ------- -----------
Total net revenue............ -- 1,888 4,582 3,348 6,434
Cost of revenue:
Direct cost of product sales... -- 262 1,505 726 3,114
Other cost of revenues......... -- 346 1,010 548 2,542
---- ------ ----------- ------- -----------
Total cost of revenue........ -- 608 2,515 1,274 5,656
Gross profit................. -- 1,280 2,067 2,074 778
Operating expense:
Product development............ -- 78 589 336 1,028
Sales and marketing............ 10 196 1,395 792 5,438
General and administrative..... 13 1,442 2,545 1,798 5,622
Amortization of stock-based
compensation................. -- -- 3,828 2,378 21,542
Depreciation and
amortization................. 5 21 59 42 1,554
---- ------ ----------- ------- -----------
Loss from operations......... (28) (457) (6,349) (3,272) (34,406)
Income from equity
investment................... -- -- 2 -- 33
Interest income (expense),
net.......................... -- (3) 29 (16) 167
---- ------ ----------- ------- -----------
Net loss..................... $(28) $ (460) $ (6,318) $(3,288) $ (34,206)
==== ====== =========== ======= ===========
Pro forma net loss per share:.... $ (.44) $ (1.83)
=========== ===========
Pro forma weighted average
shares basic and diluted..... 14,514,508 18,665,230
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 100
ARTISTDIRECT, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN MEMBERS' AND STOCKHOLDERS' EQUITY
(DEFICIT)
(IN THOUSANDS)
<TABLE>
<CAPTION>
MEMBERS' UNEARNED ACCUMULATED TOTAL
INTEREST COMPENSATION DEFICIT EQUITY
-------- ------------ ----------- --------
<S> <C> <C> <C> <C>
Balance at August 8, 1996 (inception)........ $ -- $ -- $ -- $ --
Contribution of members' interest.......... 100 -- -- 100
Net loss................................... -- -- (28) (28)
------- -------- -------- --------
Balance at December 31, 1996................. 100 -- (28) 72
Distribution of members' interest.......... (24) -- -- (24)
Net loss................................... -- -- (460) (460)
------- -------- -------- --------
Balance at December 31, 1997................. 76 -- (488) (412)
Distribution of members' interest.......... (249) -- -- (249)
Profit interests........................... 4,330 (4,330) -- --
Amortization of unearned compensation...... -- 3,828 -- 3,828
Accrual of dividends to preferred
members................................. (171) -- -- (171)
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 (unaudited)......... 13,859 -- -- 13,859
Issuance of options/warrants (unaudited)... 15,773 (15,773) -- --
Profit interests (unaudited)............... 16,460 (16,460) -- --
Amortization of unearned compensation
(unaudited)............................. -- 21,048 -- 21,048
Payment of preferred dividend
(unaudited)............................. (96) -- -- (96)
Conversion of preferred return to common
securities (unaudited).................. 355 -- -- 355
Accrual of dividends to preferred members
(unaudited)............................. (914) -- -- (914)
Accretion of redeemable stock
(unaudited)............................. (132) (132)
Securities subject to rescission........... (3,250) (3,250)
Net loss (unaudited)....................... -- -- (34,206) (34,206)
------- -------- -------- --------
Balance at September 30, 1999 (unaudited).... $45,927 $(11,687) $(41,012) $ (6,772)
======= ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 101
ARTISTDIRECT, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM
AUGUST 8, 1996 YEAR ENDED NINE MONTHS ENDED
(INCEPTION) TO DECEMBER 31, SEPTEMBER 30,
DECEMBER 31, --------------------------- ---------------------------
1996 1997 1998 1998 1999
-------------- ------------ ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss................................ $ (28) $(460) $(6,318) $(3,288) $(34,206)
Adjustments to reconcile net loss to net
cash (used in) provided by operating
activities:
Depreciation and amortization......... 5 21 59 42 1,554
Income from equity investment......... -- -- (2) (2) (33)
Allowance for doubtful accounts and
sales returns....................... -- 5 89 13 51
Amortization of unearned
compensation........................ -- -- 3,828 2,378 21,923
Changes in assets and liabilities:
Accounts receivable................. -- (18) (536) (354) (878)
Prepaid expenses and other current
assets........................... -- (2) (166) (167) (1,096)
Other assets........................ (86) 75 (16) (110) (1,339)
Accounts payable and accrued
expenses......................... -- 507 824 707 3,936
Deferred revenue.................... -- 200 (43) 38 118
----- ----- ------- ------- --------
Net cash (used in) provided by
operating activities........... (109) 328 (2,281) (743) (9,970)
----- ----- ------- ------- --------
Cash flows from investing activities:
Purchases of property and equipment..... (11) (101) (141) (141) (2,287)
Cash paid for acquisitions.............. -- -- -- -- (237)
Investments............................. -- -- (373) (146) (30)
Distribution of earnings from equity
investment............................ -- -- -- -- 33
Investment in trademarks................ -- (16) (33) (33) (37)
----- ----- ------- ------- --------
Net cash used in investing
activities..................... (11) (117) (547) (320) (2,558)
----- ----- ------- ------- --------
Cash flows from financing activities:
Payment of borrowings................... -- (100) -- -- --
Payment of preferred dividend........... -- -- -- -- (96)
Contribution of members' interest....... 100 -- -- -- --
Distribution of members' interest....... -- (24) (249) (249) --
Proceeds from borrowings................ 100 -- -- 477 --
Proceeds from issuance of preferred
securities............................ -- -- 4,850 4,000 15,000
----- ----- ------- ------- --------
Net cash provided by (used in)
financing activities........... 200 (124) 4,601 4,228 14,904
----- ----- ------- ------- --------
Net increase in cash and cash
equivalents.................... 80 87 1,773 3,165 2,376
Cash and cash equivalents at beginning of
period.................................. -- 80 167 167 1,940
----- ----- ------- ------- --------
Cash and cash equivalents at end of
period.................................. $ 80 $ 167 $ 1,940 $ 3,332 $ 4,316
===== ===== ======= ======= ========
Supplemental disclosure of cash flow
information -- cash paid during the
period for interest..................... $ -- $ 4 $ 50 $ 50 $ 4
===== ===== ======= ======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 102
ARTISTDIRECT, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF SEPTEMBER 30, 1999 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1998 AND 1999 IS UNAUDITED.)
1. BASIS OF PRESENTATION
ORGANIZATION
ARTISTdirect, LLC (the "Company") was organized as a California limited
liability company and commenced operations on August 8, 1996. The ARTISTdirect,
LLC controlling members were majority owners of the companies, except the
Ultimate Band List, LLC ("UBL, LLC"), described below. At the formation of the
joint venture in July 1997, the Company had effective control and fully funded
the operations of UBL, LLC. On May 18, 1999, ARTISTdirect, LLC entered into an
agreement with the owners of UBL, LLC in which common and preferred units in
ARTISTdirect, LLC were exchanged for all ownership interests in UBL, LLC that
ARTISTdirect, LLC did not own ("Exchange Transaction").
The accompanying consolidated financial statements for ARTISTdirect, LLC
include the operations of the following companies:
<TABLE>
<CAPTION>
CONSOLIDATED COMPANIES/AFFILIATES DESCRIPTION
--------------------------------- -----------
<S> <C>
ARTISTdirect, LLC, a California limited Engaged in providing various administrative
liability company services in support of the related
companies.
ARTISTdirect Agency, LLC, a California Engaged in booking music events for music
limited liability company artists.
Kneeling Elephant Records, LLC, a Engaged in the development of artists and
California limited liability company production and distribution of recorded
music.
The Ultimate Band List, LLC, a California Engaged in providing music-related Internet
limited liability company content and selling music-related
merchandise over the Internet.
ARTISTdirect New Media, LLC, a California Engaged in providing music-related Internet
limited liability company content and selling music-related
merchandise over the Internet.
iMusic, Inc., a Washington corporation Engaged in providing music-related Internet
content.
</TABLE>
PRINCIPLES OF CONSOLIDATION
The accompanying financial statements include the consolidated accounts of
the Company and its subsidiaries. All significant intercompany accounts and
transactions have been eliminated for all periods presented. UBL, LLC generated
losses on its operations for all periods prior to the Company's purchase of the
minority interest in UBL, LLC. Due to the full funding of those losses by the
Company and its members, none of the losses have been allocated to the minority
holders.
UNAUDITED INTERIM FINANCIAL STATEMENTS
The accompanying unaudited financial statements of the Company as of
September 30, 1999, and for the nine months ended September 30, 1998 and 1999
have been prepared on substantially the same basis as the audited financial
statements, and in the opinion of management reflect all adjustments necessary
(consisting of those of a normal recurring nature) for a fair presentation of
such financial statements in accordance with generally accepted accounting
principles. The results of operations for interim periods are not necessarily
indicative of results for a full year.
F-7
<PAGE> 103
ARTISTDIRECT, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1999 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1998 AND 1999 IS UNAUDITED.)
LIQUIDITY
The Company has relied on various equity financings to fund its operations
in the past. The Company believes that its available cash resources combined
with the net proceeds from its planned initial public offering will be
sufficient to meet its short term capital requirements and to fund its expanded
operations. The Company also has considered several potential sources to provide
additional working capital whether through the issuance of additional equity or
bank financings or otherwise. There are, however, no assurances that the planned
initial public offering will be completed or that such other financing will be
obtained. In the event that additional working capital is not obtained or not
obtained in sufficient amounts, the Company's operations may be significantly
curtailed.
2. CAPITAL REORGANIZATION AND REVERSE STOCK SPLIT
On October 6, 1999, the Company was merged into ARTISTdirect, Inc. (the
"Capital Reorganization"). The common units and redeemable preferred units
outstanding immediately prior to the Capital Reorganization were converted into
common stock and redeemable preferred stock of the C corporation. Each common
and preferred unit converted into one share of common and preferred stock,
respectively.
On , 2000, the Company declared a 1 for 4 reverse stock
split (the "Reverse Stock Split"). The outstanding common securities, redeemable
securities, options and warrants have been retroactively adjusted to reflect the
Reverse Stock Split. All discussion of equity amounts in the following footnotes
reflect the effect of the Capital Reorganization and Reverse Stock Split.
3. SIGNIFICANT ACCOUNTING POLICIES
CASH HELD FOR CLIENTS
Cash held for clients consists of funds held on behalf of the Company's
clients for musical performances. The cash is restricted for payment to the
clients, and there is a corresponding amount due to clients.
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 revenue from recorded
music and merchandise sold via the Internet, includes shipping and handling
charges and is recognized when the products are shipped. Online product sales
are shared with the respective artists based on their contracts. The Company
records the artists' share of revenue in cost of revenue.
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
F-8
<PAGE> 104
ARTISTDIRECT, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1999 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1998 AND 1999 IS UNAUDITED.)
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 and September 30, 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
Online cost of sales consists primarily of the direct cost of merchandise,
online commerce transaction costs, Web site hosting and maintenance costs, and
payroll and related expenses for staff involved in Web site maintenance,
procurement, merchandising and logistics and non-cash stock-based compensation
charges in connection with warrants issued to vendors and options issued to
artists and their advisors for the right to operate their stores. Advertising
costs represent the costs of serving online advertising on the Company's Web
site. Agency commission costs consist primarily of payroll and related costs of
agents. Record label costs consist primarily of royalties payable to artists.
Direct merchandise and transaction costs are recognized upon shipment. Web
site-related costs are recognized immediately when incurred. Payroll and related
expenses are recognized 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 are stated at the lower of average cost or
market. Cost is determined using the first-in, first-out method.
INCOME TAXES
The Company is treated as a limited liability company for federal and state
income tax reporting purposes whereby income (or losses) of the Company is
reported in the individual income tax returns of the Company's members, except
for iMusic, Inc., which accounts for income taxes under Statement of Financial
Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes." Under the
asset and liability method of SFAS No. 109, deferred tax assets and liabilities
are recognized for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax assets and liabilities
are measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. Under SFAS No. 109, the effect on deferred tax assets and liabilities
of a change in tax rates is recognized in income in the period that includes the
enactment date.
F-9
<PAGE> 105
ARTISTDIRECT, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1999 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1998 AND 1999 IS UNAUDITED.)
The Capital Reorganization will not have an impact on the deferred tax assets or
liabilities of the Company. The provision for income taxes for iMusic, Inc. is
immaterial to the accompanying financial statements.
PRODUCT DEVELOPMENT 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 and $461,000
during the years ended December 31, 1997 and 1998, and $287,000 and $3,060,000
during the nine months ended September 30, 1998 and 1999, respectively.
INVESTMENTS
Investments in affiliates in which the Company's voting interest is 20% to
50% are accounted for under the equity method of accounting, except in instances
where the Company is unable to exert significant influence. Under this method,
the investment, originally recorded at cost, is adjusted to recognize the
Company's share of the net earnings or losses of the affiliates as they occur
rather than as dividends or other distributions. The Company's share of losses
is generally limited to the extent of the Company's investment in, advances to
and commitments for the investee.
In instances where the Company owns less than 20% of the investee, or is
unable to exert significant influence in the management of the investee, the
Company accounts for the investment under the cost method. Under this method,
the investment is recorded at original cost and is adjusted for additional
investments or distributions.
INTANGIBLE ASSETS
Goodwill and other intangible assets resulting from the acquisitions of
minority interests in The Ultimate Band List, LLC and iMusic, Inc. are amortized
on a straight-line basis over five years, the estimated period of benefit.
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-10
<PAGE> 106
ARTISTDIRECT, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1999 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1998 AND 1999 IS UNAUDITED.)
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 (UNAUDITED)
The pro forma net loss per share (unaudited) for the year ended December
31, 1998 and nine months ended September 30, 1999 is computed using the weighted
average number of common shares outstanding giving pro forma effect to the
Exchange Transaction, Capital Reorganization and Reverse Stock Split of 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, 1998, or at original issuance date, if later. In
addition, the pro forma net loss does not include an adjustment for the change
in tax status due to the Capital Reorganization. There was no pro forma effect
on income tax expense. Pro forma diluted loss per share excludes 356,718 and 3.7
million of securities (after giving effect to the
F-11
<PAGE> 107
ARTISTDIRECT, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1999 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1998 AND 1999 IS UNAUDITED.)
Exchange Transaction, Capital Reorganization and Reverse Stock Split) as of
December 31, 1998 and September 30, 1999, respectively, since their impact would
be anti-dilutive.
The following table is a reconciliation of the shares and net loss amounts
used in the pro forma net loss per share calculation.
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
1998 1999
------------ -----------------
<S> <C> <C>
Actual shares at beginning of the period.................... 13,260,023 16,568,192
Pro forma weighted average shares issued during the
period...................................................... 1,254,485 2,097,038
----------- -----------
Pro forma basic and diluted weighted average shares at the
end of the period......................................... 14,514,508 18,665,230
=========== ===========
Actual basic and diluted net loss (in thousands)............ $ (6,318) $ (34,206)
=========== ===========
</TABLE>
PRO FORMA REDEEMABLE STOCK AND STOCKHOLDERS' EQUITY (UNAUDITED)
Effective upon the closing of this offering, the outstanding shares of
Series A and Series B Redeemable Preferred Stock will automatically convert into
3.2 million and 3.8 million shares, respectively, of common stock (after giving
effect to the Capital Reorganization and Reverse Stock Split). The pro forma
effects of these transactions are unaudited and have been reflected in the
accompanying Pro Forma Stockholders' Equity at September 30, 1999.
STOCK-BASED COMPENSATION
The Company accounts for stock-based employee compensation in accordance
with the provisions of Accounting Principles Board ("APB") Opinion No. 25, and
complies with the disclosure requirements of SFAS No. 123, "Accounting for
Stock-Based Compensation." Under APB No. 25, compensation expense is recorded
based on the difference, if any, between the fair value of the Company's stock
and the exercise price on the measurement date. The Company accounts for stock
issued to non-employees in accordance with SFAS No. 123, which requires entities
to recognize as expense over the service period the fair value of all
stock-based awards on the date of grant.
ESTIMATES
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities and the disclosures
of contingent assets and liabilities at the date of the financial statements and
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board issued SFAS No. 130, "Reporting
Comprehensive Income," in June 1997. SFAS No. 130 establishes standards for
reporting and presentation of 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
F-12
<PAGE> 108
ARTISTDIRECT, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1999 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1998 AND 1999 IS UNAUDITED.)
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 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.
F-13
<PAGE> 109
ARTISTDIRECT, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1999 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1998 AND 1999 IS UNAUDITED.)
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 NINE MONTHS
DECEMBER 31, ENDED SEPTEMBER 30,
-------------------- --------------------
1997 1998 1998 1999
-------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Cash paid for acquisitions:
Fair value of net assets acquired.......... $ -- $ -- $ -- $ 2,463
Net liabilities assumed.................. -- -- -- (185)
Common units issued...................... -- -- -- (2,168)
-------- -------- -------- --------
Cash paid for acquisitions.......... $ -- $ -- $ -- $ 110
======== ======== ======== ========
Issuance of common securities for minority
interests in affiliated companies:
Issuance of common securities............ $ -- $ -- $ -- $ 13,922
Acquisition costs -- cash paid........... 127
Net assets acquired...................... -- -- -- (938)
-------- -------- -------- --------
Goodwill............................ $ -- $ -- $ -- $ 13,111
======== ======== ======== ========
Accrual of dividends on redeemable
preferred securities..................... $ -- $ 171 $ 34 $ 914
Securities subject to potential rescission
offer.................................... $ -- $ 114 $ 111 $ 3,250
Accretion on redeemable stock.............. $ -- $ -- $ -- $ 132
Issuance/exercise of options/warrants...... $ -- $ -- $ -- $ 15,773
Appreciation of profit interests........... $ -- $ -- $ -- $ 16,460
Conversion of preferred return to common
securities............................... $ -- $ -- $ -- $ 355
Issuance of shares to officer.............. $ -- $ -- $ -- $ 875
</TABLE>
5. PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost and consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------ SEPTEMBER 30,
1997 1998 1999
---- ---- --------------
(IN THOUSANDS)
<S> <C> <C> <C>
Computer equipment and software.................... $ 83 $220 $2,393
Furniture and fixtures............................. 28 33 154
---- ---- ------
111 253 2,547
Less accumulated depreciation...................... (24) (78) (250)
---- ---- ------
Property and equipment, net........................ $ 87 $175 $2,297
==== ==== ======
</TABLE>
F-14
<PAGE> 110
ARTISTDIRECT, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1999 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1998 AND 1999 IS UNAUDITED.)
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>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
------------ --------------
1997 1998 1998 1999
---- ---- ----- -----
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Balance, beginning of period..................... $ 0 $ 0 $ 0 $ 81
Provision for doubtful accounts.................. 0 115 31 223
Amounts charged off.............................. 0 (34) (22) (217)
---- ---- ---- ----
Balance, end of period........................... $ 0 $ 81 $ 9 $ 87
==== ==== ==== ====
</TABLE>
A summary of the activity of the reserve for sales returns for the periods
indicated is reflected in the following table:
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
------------ -------------
1997 1998 1998 1999
---- ---- ---- -----
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Balance, beginning of period...................... $ 0 $ 5 $ 5 $ 13
Provision for sales returns....................... 5 16 8 155
Amounts charged off............................... 0 (8) (4) (110)
--- --- --- -----
Balance, end of period............................ $ 5 $13 $ 9 $ 58
=== === === =====
</TABLE>
7. ACCRUED EXPENSES
Accrued expenses are comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------ SEPTEMBER 30,
1997 1998 1999
---- ---- --------------
(IN THOUSANDS)
<S> <C> <C> <C>
Accrued professional fees.......................... $153 $143 $ 389
Accrued payroll and related........................ 39 105 448
Accrued cost of sales.............................. -- 134 198
Accrued license fees............................... -- -- 230
Accrued advertising costs.......................... -- 88 246
Other accrued expenses............................. 36 66 117
---- ---- ------
Total accrued expenses........................ $228 $536 $1,628
==== ==== ======
</TABLE>
F-15
<PAGE> 111
ARTISTDIRECT, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1999 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1998 AND 1999 IS UNAUDITED.)
8. INVESTMENTS
Investments are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1998 1999
------------ --------------
(IN THOUSANDS)
<S> <C> <C>
American Digital Network.................... $250 $250
iMusic, Inc................................. 100 --
SnoCore, LLC................................ 23 53
---- ----
Total investments......................... $373 $303
==== ====
</TABLE>
The Company acquired a 1.7% ownership in American Digital Networks ("ADN").
The Company has accounted for this investment under the cost method due to its
lack of board representation, its 1.7% voting interest and lack of influence on
management policies. Subsequent to September 30, 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.
As of December 31, 1998 and September 30, 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 $33,000 for
this investment for the year ended December 31, 1998 and nine months ended
September 30, 1999, respectively. The income for the nine months ended September
30, 1999 was distributed to the Company.
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, and to $2.0 million
in February 1999. The line of credit is guaranteed by certain officers and
members of the Company, and is due in November 1999. The credit line bears
interest, which is payable monthly, at a base rate as defined in the lending
agreement plus 1%. There was no balance outstanding on the line of credit as of
December 31, 1997 and 1998; the line of credit was terminated at the Company's
option in September 1999 and reinstated in October 1999.
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 The Ultimate Band List, LLC equal
to 2% of its membership interests and the assumption of approximately $180,000
of liabilities. The value of the redeemable common units given was approximately
$2.2 million. The acquisition has been accounted for as a purchase and the
operations of iMusic, Inc. have been included from the date of acquisition. The
Company recorded goodwill of approximately $2.4 million as a result of this
acquisition, which is being amortized over a five year period.
F-16
<PAGE> 112
ARTISTDIRECT, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1999 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1998 AND 1999 IS UNAUDITED.)
In May 1999 the Company acquired the 40.29% minority interest in The
Ultimate Band List, LLC in exchange for common interests in ARTISTdirect, LLC.
The value of the consideration given was approximately $13.9 million, 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. 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 each of the respective periods are as follows:
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
1998 1999
------------ --------------
(IN THOUSANDS)
<S> <C> <C>
Revenues.................................... $4,842 $ 6,497
------ --------
Net loss.................................... $9,339 $ 35,377
------ --------
</TABLE>
11. SIGNIFICANT CONTRACTS
The Company entered into a settlement agreement with an employee in
connection with the termination of his employment in October 1997. Pursuant to
this agreement, the employee received a severance payment of $175,000, to be
paid out in eight quarterly installments. The amount due under this severance
arrangement was $175,000, $88,000 and $22,000 as of December 31, 1997 and 1998
and September 30, 1999, respectively. Additionally, this individual loaned the
Company $100,000 in 1996, the entire amount of which was repaid in 1997. As part
of the settlement agreement, the individual received an option to purchase the
lesser of 100,000 securities or 2.5% of the shares offered to the public upon an
initial public offering at an exercise price that will be set at the completion
of the initial public offering pursuant to the provision defined in the
settlement agreement. The excess of the fair value of the shares at the date of
grant over the consideration paid will be recorded as compensation expense.
In 1998 the Company entered into an employment agreement with an officer of
the Company under which deferred compensation of up to $200,000 was granted. The
value of the deferred compensation was determined based on the value of the
Company as of the payment date. The Company has accrued $200,000 in deferred
compensation.
The Company has an investment in American Digital Network (ADN), and also
entered into a software development agreement with ADN in 1997. The Company paid
ADN $250,000 for development of the software, and received a payment of $250,000
from ADN for the license to use the software. These transactions have been
netted together in the financial statements.
For the year ended December 31, 1998 and the nine months ended September
30, 1998 and 1999, the Company incurred legal expenses of approximately
$450,000, $386,000 and $621,000, 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
F-17
<PAGE> 113
ARTISTDIRECT, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1999 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1998 AND 1999 IS UNAUDITED.)
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 and 1998 and September 30, 1999 are $1,000, $4,000, and
$70,000, respectively.
In April 1999, the Company entered into an agreement with a merchandiser
for a term of four years. In exchange for merchandise fulfillment services, the
Company granted the merchandiser warrants to purchase 131,250 shares of common
stock (after giving effect to the Capital Reorganization and Reverse Stock
Split) upon the signing of the agreement. Additional warrants to purchase common
stock may be earned by the merchandiser based on the achievement of various
sales levels.
In June 1999, the Company entered into an agreement with a merchandiser for
a three-year term. In exchange for merchandise fulfillment services over the
term of the agreement, the Company paid a deposit of $1.0 million which is being
amortized over the term of the agreement, and granted the merchandiser warrants
to purchase 228,426 shares of common stock (after giving effect to the Capital
Reorganization and Reverse Stock Split) upon the signing of the agreement.
Additional warrants to purchase common stock may be earned by the merchandiser
based on the achievement of various sales levels.
12. REDEEMABLE SECURITIES
From July through December 1998, the Company issued redeemable preferred
units for proceeds of $4.9 million. These preferred units were converted into
12.8 million Series A ARTISTdirect, LLC redeemable preferred securities pursuant
to the Exchange Transaction, and were converted into 3,207,815 shares of Series
A Redeemable Preferred Stock (Series A Preferred) pursuant to the Capital
Reorganization and Reverse Stock Split. The Series A Preferred shares carry a
10% cumulative annual dividend, and may be converted into common shares at any
time by the holder. Upon conversion, the shareholders shall receive a cash
payment of 25% of the accrued unpaid dividends through the date of the Capital
Reorganization. The number of common shares into which the preferred shares may
be converted is calculated as the initial capital contribution divided by the
current conversion price. The current conversion price is $1.51 per preferred
share (after giving effect to the Capital Reorganization and Reverse Stock
Split). The conversion price shall be updated periodically based on the fair
value of the Company. All Series A Preferred shares shall be automatically
converted to common shares upon an initial public offering or the conversion of
95% of the shares initially issued. The shareholders have the right to redeem
the Series A Preferred shares upon a management vacancy by one of the founders
of the Company prior to July 28, 2003, or at any time after July 28, 2003. The
Series A Preferred shares have liquidation preference over all other classes of
shares except for the Series B Preferred shares. The redemption value of the
Series A Preferred shares was $5.0 million as of December 31, 1998 and September
30, 1999.
F-18
<PAGE> 114
ARTISTDIRECT, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1999 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1998 AND 1999 IS UNAUDITED.)
On February 17, 1999, the Company issued 170,443 redeemable common shares
(Redeemable Stock) (after giving effect to the Capital Reorganization and the
Reverse Stock Split) for the purchase of the remaining 80% of iMusic, Inc. The
holder of the Redeemable Stock shall have the right to redeem the Redeemable
Stock upon the earlier of an initial public offering or February 17, 2002. The
redemption value shall be $2.8 million. Upon redemption, the Company is also
required to pay a total of $200,000 in bonuses to employees of iMusic, Inc. as
designated by the holder. The Redeemable Stock was initially recorded at its
fair value which shall be accreted to the redemption value through February
2002. The Redeemable Stock has liquidation preference over the common shares.
The accreted value of the Redeemable Stock was $2.3 million as of September 30,
1999.
On May 18, 1999, the Company issued 3,750,000 Series B redeemable preferred
shares (Series B Preferred) (after giving effect to the Capital Reorganization
and Reverse Stock Split) for proceeds of $15 million. The Series B Preferred
shares have the same redemption terms as the Series A Preferred shares, and have
a current conversion price of $4.00 per share. The Series B Preferred shares
have liquidation preference over all other classes of shares. The redemption
value of the Series B Preferred shares was $15.6 million as of September 30,
1999.
Included in Redeemable Common Securities are amounts related to options and
securities subject to a potential rescission offer. Such amounts aggregated
$114,000 and $3,364,000 at December 31, 1998 and September 30, 1999,
respectively.
13. MEMBERS' EQUITY
MEMBER DISTRIBUTIONS
The Company made distributions to members of $24,000 and $249,000 in 1997
and 1998, respectively.
COMMON UNIT INTERESTS
During 1998, the Company issued common units to certain executive employees
and its outside legal counsel in connection with services rendered and to be
rendered. In January 1998, Keith Yokomoto and L&G Associates One, an affiliate
of Lenard & Gonzalez LLP, one of the Company's outside legal counsel, received
interests of 10.1% and 3.03%, respectively. In June 1998, Steve Rennie and
Robert Morse received interests of 4.04% and 1.01%, respectively. The units
provide for the holder to share in the profits and losses of the entity
consistent with the rights and limitations of the other equity holders. The
units represent a common unit but limit the holder to share in the capital of
the Company only to the extent of increases in the fair value of the Company
subsequent to the issuance of the units. The value of the common units at the
time of their issuance, which represents existing capital, will remain the
property of the founders. The common units issued to employees under these
agreements have been accounted for as stock appreciation rights. 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, $2.4 million and $16.0 million for the year ended December 31, 1998 and
the nine months ended September 30, 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.
F-19
<PAGE> 115
ARTISTDIRECT, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1999 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1998 AND 1999 IS UNAUDITED.)
MERCHANDISER WARRANTS
In May and June 1999, the Company issued 359,676 warrants to purchase
common stock (after giving effect to the Capital Reorganization and Reverse
Stock Split). The value of the warrants is $864,000, of which $102,000 has been
recognized as expense for the nine months ended September 30, 1999. The value of
the warrants has been recorded as unearned compensation in the statement of
changes in members' equity, and will be amortized 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.
PREFERRED DIVIDENDS
On May 18, 1999, the Company paid to the Series A redeemable preferred
securities holders the accrued dividends to that date of $355,000 in the form of
88,632 common shares (after giving effect to the Capital Reorganization and
Reverse Stock Split), as well as a cash payment of $96,000.
PURCHASE OF SHARES BY OFFICER
In 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.
14. 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 Capital Reorganization and
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. Each option must have an exercise price not less than 85% of the
fair market value of the common stock on the grant date, and no option may have
a term in excess of 10 years. The options issued during 1998 and the nine months
ended September 30, 1999 vest within three years. As of September 30, 1999,
3,510,487 shares remained available for future option grant.
The Company accounts for its stock option plan in accordance with the
provisions of Accounting Principles Board (APB) Opinion No. 25, "Accounting for
Stock Issued to Employees," and related interpretations. As such, compensation
expense would be recorded on the date of grant only if the current market price
of the underlying stock exceeded the exercise price.
F-20
<PAGE> 116
ARTISTDIRECT, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1999 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1998 AND 1999 IS UNAUDITED.)
Summary stock option activity for 1999 Stock Option Plan during the year
ended December 31, 1998 and nine months ended September 30, 1999 is as follows
(after giving effect to the Capital Reorganization and Reverse Stock Split):
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
----------------------------
WEIGHTED
AVERAGE
NUMBER OF EXERCISE
SHARES PRICE
--------- ----------------
<S> <C> <C>
Outstanding options at December 31, 1997........ -- $ --
Granted....................................... 356,718 1.52
Exercised..................................... -- --
Canceled...................................... -- --
--------- -----
Outstanding options at December 31, 1998........ 356,718 1.52
Granted....................................... 1,382,795 3.60
Exercised..................................... -- --
Canceled...................................... -- --
--------- -----
Outstanding options at September 30, 1999....... 1,739,513 $3.16
========= =====
</TABLE>
If the Company had elected to recognize compensation cost based on the fair
value at the date of grant, consistent with the method as prescribed by SFAS No.
123, net loss for the year ended December 31, 1998 and the nine months ended
September 30, 1999 would have changed to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
1998 1999
------------ -------------
(IN THOUSANDS)
<S> <C> <C>
Net loss:
As reported.................................. $6,318 $34,206
Pro forma.................................... 6,334 34,384
====== =======
</TABLE>
The fair value of options granted during 1998 and 1999 was determined using
a minimum value pricing model with the following assumptions: risk-free interest
rate of 5.6% and an expected life of five years. The fair values of the options
on the date of grant were $.32 per share and $.84 per share for the options
granted in 1998 and during the nine months ended September 30, 1999,
respectively.
F-21
<PAGE> 117
ARTISTDIRECT, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1999 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1998 AND 1999 IS UNAUDITED.)
The following table summarizes information regarding options outstanding
and options exerciseable at September 30, 1999 (after giving effect to the
Capital Reorganization and Reverse Stock Split):
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------- -----------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICE OF SHARES LIFE PRICE OF SHARES PRICE
- ----------- --------- ----------- -------- ------------ --------
<C> <C> <S> <C> <C> <C>
$ 1.24 261,746 8.84 years $1.24 152,001 $1.24
2.30 94,972 8.84 2.30 55,853 2.30
3.60 1,382,795 9.64 3.60 150,052 3.60
- ----------- --------- ---------- ----- --------- -----
$1.24-$3.60 1,739,513 9.48 years $3.16 357,906 $2.40
=========== ========= ========== ===== ========= =====
</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 Capital Reorganization and
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 2 in the prior calendar year, but in no
event will this annual increase exceed 375,000 shares. Each option must have an
exercise price not less than 85% of the fair market value of the common stock on
the grant date. As of September 30, 1999, 767,875 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.
Summary stock option activity for the Advisor Plan options during the nine
months ended September 30, 1999 is as follows (after giving effect to the
Capital Reorganization and Reverse Stock Split):
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
-----------------------
WEIGHTED
AVERAGE
NUMBER OF EXERCISE
SHARES PRICE
---------- ---------
<S> <C> <C>
Outstanding Options at
December 31, 1998.................................... -- --
Granted........................................... 482,125 $3.97
Exercised......................................... 37,500 3.60
Canceled.......................................... -- --
------- -----
Outstanding Options at
September 30, 1999................................... 444,625 $4.00
======= =====
</TABLE>
The weighted average fair value of options granted under the Advisor Plan
was $8.20 per option, resulting in a total value for options granted of $4.0
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 nine
F-22
<PAGE> 118
ARTISTDIRECT, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1999 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1998 AND 1999 IS UNAUDITED.)
months ended September 30, 1999 was $2.1 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 nine months ended September 30, 1999 is 6.9 years, and there are
198,209 options exercisable as of September 30, 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 Capital Reorganization and 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. Each option must have an
exercise price not less than 85% of the fair market value of the common stock on
the grant date. As of September 30, 1999, 2,637,314 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 nine
months ended September 30, 1999 is as follows (after giving effect to the
Capital Reorganization and Reverse Stock Split):
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
-----------------------
WEIGHTED
AVERAGE
NUMBER OF EXERCISE
SHARES PRICE
---------- ---------
<S> <C> <C>
Outstanding Options at
December 31, 1998................................... -- --
Granted.......................................... 1,362,686 $3.94
Exercised........................................ 212,500 3.60
Canceled......................................... -- --
--------- -----
Outstanding Options at
September 30, 1999.................................. 1,150,186 $4.00
========= =====
</TABLE>
The weighted average fair value of the options granted under the Artist
Option Plan was $6.73 per option, resulting in a total value for options granted
of $9.2 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 nine months ended September 30, 1999 was $2.8 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 nine months ended September 30, 1999 is 6.9 years, and
417,479 of these options were exerciseable as of September 30, 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.
F-23
<PAGE> 119
ARTISTDIRECT, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1999 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1998 AND 1999 IS UNAUDITED.)
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.
In October and November 1999, the Company's Board of Directors approved the
grant of 2,066,267, 554,000 and 1,113,875 options under the applicable plan to
employees, advisors, and artists respectively. The exercise price for 2,043,767
of the employee options and 189,375 of the advisor options is $3.60 per share.
The exercise price for 22,500 of the employee options, 364,625 of the advisor
options and all of the artist options have exercise prices of $4.00 per share.
15. COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS
Future minimum lease payments under operating leases for facilities and
certain equipment, including leases entered into subsequent to December 31,
1998, are as follows as of the years ended December 31:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
1999................................................ $346
2000................................................ 270
2001................................................ 165
2002................................................ 94
2003................................................ 14
Thereafter.......................................... 4
----
Total............................................. $893
====
</TABLE>
Rent expense under operating leases for the period from August 8, 1996
(inception) through December 31, 1996 and the years ended December 31, 1997 and
1998 and the nine months ended September 30, 1998 and 1999 for the Company was
$0, $58,000, $109,000, $69,000, and $229,000, respectively.
EMPLOYMENT CONTRACTS
Future payments under employment contracts entered into through September
30, 1999 are as follows for the years ended December 31:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
1999................................................ $1,596
2000................................................ 1,371
2001................................................ 821
2002................................................ 120
------
Total............................................. $3,908
======
</TABLE>
F-24
<PAGE> 120
ARTISTDIRECT, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1999 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1998 AND 1999 IS UNAUDITED.)
ADVERTISING COMMITMENTS
In February 1999 the Company entered into an agreement, cancelable by
either party within 90 days of written notice, with an advertising agency. Under
the agreement, the Company shall engage the advertising agency for an aggregate
of $5 million in advertising and promotion services through February 2000. The
advertising amount will be expensed as incurred. The Company has incurred no
expense under the agreement through September 30, 1999.
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.
16. 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 and 1998 and the nine months ended September 30, 1998
and 1999.
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
----------------- -------------------
1997 1998 1998 1999
------ ------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Net Revenue:
ARTISTdirect Network................. $ 364 $ 2,100 $ 1,138 $ 5,167
Talent Agency........................ 974 1,917 1,782 662
Record Label......................... 550 565 428 605
------ ------- ------- --------
1,888 4,582 3,348 6,434
</TABLE>
F-25
<PAGE> 121
ARTISTDIRECT, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1999 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1998 AND 1999 IS UNAUDITED.)
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
----------------- -------------------
1997 1998 1998 1999
------ ------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Income (Loss) from Operations:
ARTISTdirect Network................. (740) (5,256) (2,712) (30,345)
Talent Agency........................ 197 (629) (223) (2,144)
Record Label......................... 86 (464) (337) (1,917)
------ ------- ------- --------
(457) (6,349) (3,272) (34,406)
------ ------- ------- --------
Interest income (expense), net......... (3) 29 (16) 167
Income from equity investment.......... -- 2 -- 33
------ ------- ------- --------
Net Loss............................... $ (460) $(6,318) $(3,288) $(34,206)
====== ======= ======= ========
Depreciation and amortization:
ARTISTdirect Network................. $ 4 $ 38 $ 24 $ 1,535
Talent Agency........................ 11 18 15 11
Record Label......................... 6 3 3 8
------ ------- ------- --------
$ 21 $ 59 $ 42 $ 1,554
====== ======= ======= ========
</TABLE>
The following tables summarize the capital expenditures for the years ended
December 31, 1997 and 1998, and assets as of December 31, 1997 and 1998 and
September 30, 1998 and 1999.
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
----------------- -------------------
1997 1998 1998 1999
------ ------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Capital expenditures:
ARTISTdirect Network................. $ 23 $ 123 $ 123 $ 2,163
Talent Agency........................ 57 15 15 65
Record Label......................... 21 3 3 59
------ ------- ------- --------
$ 101 $ 141 $ 141 $ 2,287
====== ======= ======= ========
</TABLE>
<TABLE>
DECEMBER 31, SEPTEMBER 30,
----------------- -------------------
1997 1998 1998 1999
------ ------- ------- --------
<S> <C> <C> <C> <C>
Assets:
ARTISTdirect Network................. $ 63 $ 2,707 $ 1,880 $ 18,987
Talent Agency........................ 47 68 661 528
Record Label......................... 83 9 91 109
Corporate............................ 121 403 2,124 5,726
------ ------- ------- --------
$ 314 $ 3,187 $ 4,756 $ 25,350
====== ======= ======= ========
</TABLE>
Assets by segment are those assets used in the Company operations in each
segment. Corporate assets are principally made up of cash and cash equivalents,
prepaid expenses, and computer equipment.
F-26
<PAGE> 122
ARTISTDIRECT, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1999 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1998 AND 1999 IS UNAUDITED.)
17. SUBSEQUENT EVENTS
In November and December 1999, the Company entered into separate strategic
relationships with six 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.
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. In
connection the Company issued to Yahoo! a warrant to purchase 339,254 shares of
our common stock.
F-27
<PAGE> 123
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> 124
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> 125
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> 126
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> 127
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> 128
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> 129
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> 130
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> 131
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> 132
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> 133
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> 134
Section 145 of the GCL further provides that to the extent a director or
officer of a corporation has been successful in the defense of any action, suit
or proceeding referred to in subsections (a) and (b) or in the defense of any
claim, issue or matter therein, he or she shall be indemnified against expenses
(including attorneys' fees) actually and reasonably incurred by him or her in
connection therewith; that indemnification provided for by Section 145 shall not
be deemed exclusive of any other rights to which the indemnified party may be
entitled; and that the corporation shall have power to purchase and maintain
insurance on behalf of a director or officer of the corporation against any
liability asserted against him or her or incurred by him or her in any such
capacity or arising out of his or her status as such whether or not the
corporation would have the power to indemnify him or her against such
liabilities under Section 145.
Reference is made to the Form of Underwriting Agreement (to be filed as
Exhibit 1.1 to this Registration Statement) which provides for indemnification
by the Underwriters under certain circumstances of the directors and officers of
the Company signing the Registration Statement and certain controlling persons
of the Company against certain liabilities, including those arising under the
Securities Act.
The Company carries directors' and officers' liability insurance covering
its directors and officers.
Insofar as indemnification for liabilities under the Securities Act may be
permitted to directors, officers or persons controlling the Company pursuant to
the foregoing provisions, the Company has been informed that, in the opinion of
the Commission, such indemnification is against public policy as expressed in
the Securities Act and is therefore unenforceable.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
The following is a summary of the transactions by ARTISTdirect LLC,
predecessor to the Company since it was organized in August 1996, involving
sales of the Company's securities that were not registered under the Securities
Act. All of the numbers reflect the 35-for-1 forward unit split that occurred in
May 1999 with respect to common and preferred securities of ARTISTdirect, LLC,
but do not reflect the one-for-four reverse stock split of ARTISTdirect, Inc.
that will occur prior to the closing of this offering.
(a) In September 1996, ARTISTdirect, LLC issued 17,461,365 common
securities to two of the three founders of the Company, Marc Geiger and
Don Muller, in connection with services rendered and to be rendered.
(b) In January 1998, ARTISTdirect, LLC issued 4,014,107 common securities
to the other founder of the Company, Keith Yokomoto, and 1,204,232
common securities to L&G Associates One, in connection with services
rendered and to be rendered. L&G Associates One is affiliated with
Allen Lenard, one of the Company's directors.
(c) In June 1998, ARTISTdirect, LLC issued 1,605,643 common securities to
Steve Rennie and 401,411 common securities to Robert Morse in
connection with services rendered and to be rendered. Mr. Rennie is an
executive officer of the Company.
(d) Throughout 1998, ARTISTdirect, LLC periodically issued additional
common securities, for no additional consideration, to Messrs.
Yokomoto, Rennie and Morse and L&G Associates One. In connection with
each of these issuances, Messrs. Geiger and Muller contributed the same
number of common securities to ARTISTdirect, LLC, for no consideration.
(e) In July 1998, we issued 200,705 shares of common securities to each of
Messrs. Geiger and Muller in exchange for their interests in
ARTISTdirect Holdings, L.L.C.
(f) Between July 1998 and December 1998, ARTISTdirect, LLC issued a total
of 9,458,340 Series A preferred securities for an aggregate purchase
price of $2,910,000 to several outside investors,
II-2
<PAGE> 135
including affiliates of Constellation Venture Capital, L.P., Chase
Capital Partners, Psilos Group Partners, DreamMedia Internet Ventures
and Carl Kawabe.
(g) In May 1999, ARTISTdirect, LLC issued a total of 13,982,207 common
securities and 3,372,920 Series A preferred securities to the members
of UBL, LLC in exchange for the 8,042,134 common securities and
1,940,000 preferred securities of UBL held by such members.
(h) In May 1999, ARTISTdirect, LLC issued a total of 15,000,000 Series B
preferred securities for an aggregate purchase price of $15,000,000 to
several outside investors, including affiliates of Constellation
Venture Capital, L.P. Psilos Group Partners, L.P., Chase Venture
Capital Associates, L.P., Flatiron Fund 1998/99, LLC, Spinnaker
Technology Fund, LP, and Toronto Dominion Investments, Inc. In
connection with this transaction, holders of ARTISTdirect, LLC's Series
A preferred securities received an aggregate of 354,526 common
securities of ARTISTdirect, LLC and $96,000 in exchange for accrued and
unpaid preferred returns on their Series A preferred securities.
(i) In December 1999 and January 2000, we issued a total of 7,000,291
shares of Series C preferred stock for an aggregate purchase price of
$97.5 million to several outside investors, including affiliates of
Universal Music Group, Inc., Cisneros Television Group, Sony Music, BMG
Music, Time Warner Inc., Maverick Recording Company and Yahoo!.
(j) In December 1999, we issued Yahoo! a warrant to purchase an aggregate
of 339,254 shares of common stock at an exercise price of $13.928 per
share with respect to half of the shares and an exercise price of
$11.00 per share with respect to the remaining half of the shares.
None of the foregoing transactions involved any public offering, and the
Company believes that at the time of each transaction, the transaction was
exempt from the registration requirements of the Securities Act by virtue of
Section 4(2) thereof. The recipients in each such transaction represented their
intention to acquire the securities for investment only and not with a view to
or for sale in connection with any distribution thereof, and appropriate legends
were affixed to the share certificates and instruments, as applicable, issued in
such transactions. All recipients had adequate access, through their
relationships with the Company, to information about the Company.
From August 1, 1998 to December 31, 1999, we granted options to purchase an
aggregate of 7,318,466 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, 3,562,187 shares at an exercise price of $3.60 per share and
2,977,895 shares at an exercise price of $4.00 per share were outstanding. At
the time these options were issued under the Company's various stock option
plans, the Company believed that each of the issuances were exempt from the
registration requirements of the Securities Act either by virtue of (i) the
exemption provided by Rule 701 for securities offered under compensatory benefit
plans and contracts or (ii) a "no-sale" theory under Section 5 of the Securities
Act of 1933, since none of the optionees provided any consideration for the
grants (the sale of the underlying option shares occurs only when the option is
exercised and the purchase price for the shares is paid to the Company).
Rule 701 was amended in April 1999 to revise, among other things, the
category of persons who will qualify as consultants for purposes of securities
issued pursuant to such rule. As a result, the Company believes that a number of
artists and other non-employees who were granted options under the Company's
plans may no longer qualify as consultants under amended Rule 701 and that the
Rule 701 exemption may no longer be available for the options granted to those
individuals. In addition, the Company believes that the aggregate dollar amount
of the offering represented by the options granted under the Company's stock
option plans may have exceeded the applicable limits set forth in Rule 701.
Because the Company does not wish to rely solely on a "no-sale" theory for these
option grants, the
II-3
<PAGE> 136
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.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) EXHIBITS
The following Exhibits are attached hereto and incorporated herein by
reference.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
-------- -----------
<S> <C>
1.1* Form of Underwriting Agreement.
3.1 Amended and Restated Certificate of Incorporation of the
Registrant.
3.2 Amended and Restated Bylaws of the Registrant.
5.1 Opinion of Brobeck, Phleger & Harrison LLP.
10.1+** Agreement dated as of November 15, 1996, between the RCA
Records Label and the Registrant.
10.2 Digex Services and Products Agreement, dated August 8, 1999,
between Digex, Inc. and the Registrant.
10.3+** BMI Music Performance Agreement for the UBL, dated October
9, 1998.
10.4+** AT&T Dedicated Hosting Service Agreement, dated April 16,
1999, between AT&T and the Registrant.
10.5** Settlement Agreement and Mutual General Release, dated as of
October 23, 1997, between William Elson, on the one hand,
and the Registrant, MGE, LLC, Marc Geiger and Donald Muller,
on the other hand.
10.6+ Database, On-Line Internet Retail Store and Consumer Direct
Fulfillment Services Agreement, dated as of August 15, 1998,
between AEC One Stop Group, Inc. and the UBL, as amended.
10.7** Securities Purchase Agreement, dated July 28, 1998, among
the Registrant, the UBL, Constellation Venture Capital, L.P
and Constellation Ventures (BVI), Inc.
10.8 Third Amended and Restated Registration Rights Agreement,
dated as of November 12, 1999, among the Registrant and the
other parties who are signatories thereto, as amended.
10.9** UBL Exchange, Contribution and Distribution Agreement, dated
May 18, 1999.
10.10** Exchange Agreement, dated February 17, 1999, by and among
the UBL, Scott Blum and Eric Benjamin.
10.11** Contingent Loan Agreement, dated February 17, 1999, by and
between the UBL and Scott Blum.
10.12** Letter Agreement, dated February 17, 1999, between the UBL
and Scott Blum regarding bonuses to cover interest
obligations under the Contingent Loan Agreement.
10.13** Issuance, Noncompetition and Nonsolicitation Agreement,
dated as of January 1, 1996, between the Registrant and
Keith Yokomoto.
10.14** Issuance Agreement, dated as of January 1, 1998, between the
Registrant, Marc Geiger, Donald Muller, and L&G Associates
One.
10.15** Issuance, Noncompetition and Nonsolicitation Agreement,
dated as of June 30, 1998, between the Registrant and Steve
Rennie.
10.16** Deferred Compensation Agreement, dated as of April 1, 1998,
by and between Keith Yokomoto and the Registrant dated July
1, 1998.
</TABLE>
II-4
<PAGE> 137
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
-------- -----------
<S> <C>
10.17** Employment Agreement, dated as of January 1, 1998, between
Keith Yokomoto and the Registrant.
10.18** Employment Agreement, dated as of April 1, 1998, between
Steve Rennie and the UBL.
10.19** Employment Agreement, dated as of July 28, 1998, between
Marc Geiger and the Registrant.
10.20** Employment Agreement, dated as of July 28, 1998, between Don
Muller and the Registrant.
10.21 1999 Employee Stock Purchase Plan.
10.22 1999 Employee Stock Option Plan.
10.23 1999 Artist and Artist Advisor Stock Option Plan.
10.24 1999 Artist Stock Option Plan.
10.25+** Agreement to license Pandesic E-business Solution Service
between Pandesic LLC, AD and UBL.
10.26+** ADNM Merchandiser Agreement, dated as of April 1, 1999,
between Giant Merchandising and ARTISTdirect New Media, LLC.
10.27+** ADNM Merchandiser Agreement, dated as of June 7, 1999,
between Winterland Concessions Company and ARTISTdirect New
Media, LLC.
10.28+** UBL Merchandiser Agreement, dated as of April 1, 1999,
between Giant Merchandising and ARTISTdirect New Media, LLC.
10.29 Form of Directors Indemnification Agreement
10.30 Form of Officers Indemnification Agreement
10.31 Audio Sample License Agreement dated as of December 20, 1999
between the Company and Maverick Recording Company.
10.32+ Internet Video License Agreement dated as of December 20,
1999 between the Company and Maverick Recording Company.
10.33+ Webcasting Transmission License Agreement dated as of
December 20, 1999 between the Company and Maverick Recording
Company.
10.34+ Strategic Marketing Agreement dated as of December 20, 1999
between the Company and Maverick Recording Company.
10.35+ Audio Sample License Agreement dated as of December 20, 1999
between the Company and Warner Music Group Inc.
10.36+ Internet Video License Agreement dated as of December 20,
1999 between the Company and Warner Music Group Inc.
10.37+ Webcasting Transmission License Agreement dated as of
December 20, 1999 between the Company and Warner Music Group
Inc.
10.38+ Strategic Marketing Agreement dated as of December 20, 1999
between the Company and Warner Music Group Inc.
10.39+ Strategic Marketing Agreement dated as of December 6, 1999
between the Company and Universal Music Group, Inc.
10.40+ ARTISTdirect -- Cisneros Television Group Memorandum of
Understanding dated as of November 15, 1999 between the
Company and Lakeport Overseas Ltd.
10.41+ Strategic Licensing Agreement dated as of December 6, 1999
between the Company and Sony Music.
10.42+ Strategic Marketing Agreement dated as of December 20, 1999
between the Company and BMG Music.
10.43+ Advertising and Promotion Agreement dated as of December 24,
1999 between the Company and Yahoo! Inc.
10.44+ Yahoo! Remote Merchant Integration (RMI) Program Agreement
dated as of December 24, 1999 between the Company and Yahoo!
Inc.
</TABLE>
II-5
<PAGE> 138
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
-------- -----------
<S> <C>
10.45 Form of Series C Preferred Stock Purchase Agreement.
10.46+ Warrant dated December 24, 1999, issued to Yahoo!
21.1 Subsidiaries of ARTISTdirect, Inc.
23.1 Consent of Brobeck, Phleger & Harrison LLP (included in
Exhibit 5.1).
23.2** Consent of KPMG LLP with respect to ARTISTdirect, LLC and
subsidiaries.
23.3** Consent of KPMG LLP with respect to iMusic, Inc.
24.1** Powers of Attorney (See page II-6).
27.1** Financial Data Schedule.
</TABLE>
- -------------------------
* To be filed by amendment.
** Previously filed by the Registrant with the Commission.
+ Confidential treatment is requested for certain confidential portions of this
exhibit pursuant to Rule 406 under the Securities Act. In accordance with Rule
406, these confidential portions will be omitted from this exhibit and filed
separately with the Commission.
ITEM 17. UNDERTAKINGS
1. The undersigned Registrant hereby undertakes to provide to the
underwriter, at the closing specified in the underwriting agreements,
certificates in such denominations and registered in such names as required by
the underwriter to permit prompt delivery to each purchaser.
2. Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
3. The undersigned Registrant hereby undertakes that:
(a) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in the
form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(b) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-6
<PAGE> 139
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Amendment No. 2 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 January 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. 2 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 January 27, 2000
- ----------------------------------------------------- Chairman of the Board
Marc P. Geiger (Principal Executive
Officer)
DONALD P. MULLER * President, ARTISTdirect January 27, 2000
- ----------------------------------------------------- Agency and Kneeling Elephant
Donald P. Muller Records and Director
KEITH YOKOMOTO * Chief Operating Officer, January 27, 2000
- ----------------------------------------------------- President and Director
Keith Yokomoto
/s/ JAMES B. CARROLL Executive Vice President and January 27, 2000
- ----------------------------------------------------- Chief Financial Officer
James B. Carroll (Principal Financial and
Accounting Officer)
ALLEN D. LENARD * Director January 27, 2000
- -----------------------------------------------------
Allen D. Lenard
CLIFFORD H. FRIEDMAN * Director January 27, 2000
- -----------------------------------------------------
Clifford H. Friedman
STEPHEN KRUPA * Director January 27, 2000
- -----------------------------------------------------
Stephen Krupa
RICK RUBIN * Director January 27, 2000
- -----------------------------------------------------
Rick Rubin
* Power of attorney
By: /s/ JAMES B. CARROLL
- -----------------------------------------------------
James B. Carroll
Attorney-in-Fact
</TABLE>
II-7
<PAGE> 140
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
-------- ----------- ------------
<S> <C> <C>
1.1* Form of Underwriting Agreement..............................
3.1 Amended and Restated Certificate of Incorporation of the
Registrant..................................................
3.2 Amended and Restated Bylaws of the Registrant...............
5.1 Opinion of Brobeck, Phleger & Harrison LLP..................
10.1+** Agreement dated as of November 15, 1996, between the RCA
Records Label and the Registrant............................
10.2 Digex Services and Products Agreement, dated August 8, 1999,
between Digex, Inc. and the Registrant......................
10.3+** BMI Music Performance Agreement for the UBL, dated October
9, 1998.....................................................
10.4+** AT&T Dedicated Hosting Service Agreement, dated April 16,
1999, between AT&T and the Registrant.......................
10.5** Settlement Agreement and Mutual General Release, dated as of
October 23, 1997, between William Elson, on the one hand,
and the Registrant, MGE, LLC, Marc Geiger and Donald Muller,
on the other hand...........................................
10.6+ Database, On-Line Internet Retail Store and Consumer Direct
Fulfillment Services Agreement, dated as of August 15, 1998,
between AEC One Stop Group, Inc. and the UBL, as amended....
10.7** Securities Purchase Agreement, dated July 28, 1998, among
the Registrant, the UBL, Constellation Venture Capital, L.P
and Constellation Ventures (BVI), Inc.......................
10.8 Third Amended and Restated Registration Rights Agreement,
dated as of November 12, 1999, among the Registrant and the
other parties who are signatories thereto, as amended.......
10.9** UBL Exchange, Contribution and Distribution Agreement, dated
May 18, 1999................................................
10.10** Exchange Agreement, dated February 17, 1999, by and among
the UBL, Scott Blum and Eric Benjamin.......................
10.11** Contingent Loan Agreement, dated February 17, 1999, by and
between the UBL and Scott Blum..............................
10.12** Letter Agreement, dated February 17, 1999, between the UBL
and Scott Blum regarding bonuses to cover interest
obligations under the Contingent Loan Agreement.............
10.13** Issuance, Noncompetition and Nonsolicitation Agreement,
dated as of September 1, 1996, between the Registrant and
Keith Yokomoto..............................................
10.14** Issuance Agreement, dated as of January 1, 1998, between the
Registrant, Marc Geiger, Donald Muller, and L&G Associates
One.........................................................
10.15** Issuance, Noncompetition and Nonsolicitation Agreement,
dated as of June 30, 1998, between the Registrant and Steve
Rennie......................................................
10.16** Deferred Compensation Agreement, dated as of July 1, 1998
between Keith Yokomoto and the Registrant dated July 1,
1998........................................................
10.17** Employment Agreement, dated as of January 1, 1998, between
Keith Yokomoto and the Registrant...........................
</TABLE>
<PAGE> 141
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
-------- ----------- ------------
<S> <C> <C>
10.18** Employment Agreement, dated as of April 1, 1998, between
Steve Rennie and the UBL....................................
10.19** Employment Agreement, dated as of July 28, 1998, between
Marc Geiger and the Registrant..............................
10.20** Employment Agreement, dated as of July 28, 1998, between Don
Muller and the Registrant...................................
10.21 1999 Employee Stock Purchase Plan...........................
10.22 1999 Employee Stock Option Plan.............................
10.23 1999 Artist and Artist Advisor Stock Option Plan............
10.24 1999 Artist Stock Option Plan...............................
10.25+** Agreement to license Pandesic E-business Solution Service
between Pandesic LLC, AD and UBL............................
10.26+** ADNM Merchandiser Agreement, dated as of April 1, 1999,
between Giant Merchandising and ARTISTdirect New Media,
LLC.........................................................
10.27+** ADNM Merchandiser Agreement, dated as of June 7, 1999,
between Winterland Concessions Company and ARTISTdirect New
Media, LLC..................................................
10.28+** UBL Merchandiser Agreement, dated as of April 1, 1999,
between Giant Merchandising and ARTISTdirect New Media,
LLC.........................................................
10.29 Form of Directors Indemnification Agreement.................
10.30 Form of Officers Indemnification Agreement..................
10.31 Audio Sample License Agreement dated as of December 20, 1999
between the Company and Maverick Recording Company..........
10.32+ Internet Video License Agreement dated as of December 20,
1999 between the Company and Maverick Recording Company.....
10.33+ Webcasting Transmission License Agreement dated as of
December 20, 1999 between the Company and Maverick Recording
Company.....................................................
10.34+ Strategic Marketing Agreement dated as of December 20, 1999
between the Company and Maverick Recording Company..........
10.35+ Audio Sample License Agreement dated as of December 20, 1999
between the Company and Warner Music Group Inc..............
10.36+ Internet Video License Agreement dated as of December 20,
1999 between the Company and Warner Music Group Inc.........
10.37+ Webcasting Transmission License Agreement dated as of
December 20, 1999 between the Company and Warner Music Group
Inc.........................................................
10.38+ Strategic Marketing Agreement dated as of December 20, 1999
between the Company and Warner Music Group Inc..............
10.39+ Strategic Marketing Agreement dated as of December 6, 1999
between the Company and Universal Music Group, Inc..........
10.40+ ARTISTdirect -- Cisneros Television Group Memorandum of
Understanding dated as of November 15, 1999 between the
Company and Lakeport Overseas Ltd...........................
10.41+ Strategic Licensing Agreement dated as of December 6, 1999
between the Company and Sony Music..........................
10.42+ Strategic Marketing Agreement dated as of December 20, 1999
between the Company and BMG Music...........................
10.43+ Advertising and Promotion Agreement dated as of December 24,
1999 between the Company and Yahoo! Inc.....................
</TABLE>
<PAGE> 142
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
-------- ----------- ------------
<S> <C> <C>
10.44+ Yahoo! Remote Merchant Integration (RMI) Program Agreement
dated as of December 24, 1999 between the Company and Yahoo!
Inc.........................................................
10.45 Form of Series C Preferred Stock Purchase Agreement.........
10.46+ Warrant dated December 24, 1999, issued to Yahoo!...........
21.1 Subsidiaries of ARTISTdirect, Inc...........................
23.1 Consent of Brobeck, Phleger & Harrison LLP (included in
Exhibit 5.1)................................................
23.2** Consent of KPMG LLP with respect to ARTISTdirect, LLC and
subsidiaries................................................
23.3** Consent of KPMG LLP with respect to iMusic, Inc.............
24.1** Powers of Attorney (See page II-6)..........................
27.1** Financial Data Schedule.....................................
</TABLE>
- -------------------------
* To be filed by amendment.
** Previously filed by the Registrant with the Commission.
+ Confidential treatment is requested for certain confidential portions of this
exhibit pursuant to Rule 406 under the Securities Act. In accordance with
Rule 406, these confidential portions will be omitted from this exhibit and
filed separately with the Commission.
<PAGE> 1
EXHIBIT 3.1
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
ARTISTDIRECT, INC.
The undersigned Marc P. Geiger and James B. Carroll, hereby
certify that:
ONE: They are the duly elected and acting Chief Executive Officer
and Secretary, respectively, of said corporation.
TWO: The original Certificate of Incorporation of the Corporation
was filed with the Secretary of State of Delaware on July 14, 1999.
THREE: An Amended and Restated Certificate of Incorporation of
said corporation was filed with the Secretary of State of Delaware on October 6,
1999.
FOUR: The Amended and Restated Certificate of Incorporation of
said corporation shall be amended and restated to read in full as follows:
ARTICLE I
The name of this corporation is ARTISTdirect, Inc. (the
"Corporation").
ARTICLE II
The address of the Corporation's registered office in the State
of Delaware is Corporation Trust Center, 1209 Orange Street, in the City of
Wilmington, County of New Castle, Delaware 19801. The name of the Corporation's
registered agent at such address is The Corporation Trust Company.
ARTICLE III
The nature of the business or purposes to be conducted or
promoted is to engage in any lawful act or activity for which corporations may
be organized under the General Corporation Law of the State of Delaware (the
"GCL").
ARTICLE IV
The Corporation is authorized to issue two classes of stock to be
designated, respectively, "Common Stock" and "Preferred Stock." The total number
of shares that the Corporation is authorized to issue is One Hundred Fifty Five
Million (155,000,000). One Hundred Fifty Million (150,000,000) shares shall be
Common Stock, par value $0.01 per share, and Five Million (5,000,000) shares
shall be Preferred Stock, par value $0.01 per share.
<PAGE> 2
The Preferred Stock may be issued from time to time in one or
more series, without further stockholder approval. The Board of Directors of the
Corporation is hereby authorized to fix or alter the rights, preferences,
privileges and restrictions granted to or imposed upon each series of Preferred
Stock, and the number of shares constituting any such series and the designation
thereof, or of any of them. The rights, privileges, preferences and restrictions
of any such additional series may be subordinated to, pari passu with
(including, without limitation, inclusion in provisions with respect to
liquidation and acquisition preferences, redemption and/or approval of matters
by vote), or senior to any of those of any present or future class or series of
Preferred Stock or Common Stock. The Board of Directors is also authorized to
increase or decrease the number of shares of any series prior or subsequent to
the issue of that series, but not below the number of shares of such series then
outstanding. In case the number of shares of any series shall be so decreased,
the shares constituting such decrease shall resume the status which they had
prior to the adoption of the resolution originally fixing the number of shares
of such series.
ARTICLE V
In furtherance and not in limitation of the powers conferred by
statute, the Board of Directors is expressly authorized to make, repeal, alter,
amend and rescind any or all of the Bylaws of the Corporation. In addition, the
Bylaws may be amended by the affirmative vote of holders of at least sixty-six
and two-thirds percent (66 2/3%) of the outstanding shares of voting stock of
the Corporation entitled to vote at an election of directors.
ARTICLE VI
The number of directors of the Corporation shall be determined by
resolution of the Board of Directors.
Elections of directors need not be by written ballot unless the
Bylaws of the Corporation shall so provide. Advance notice of stockholder
nominations for the election of directors and of any other business to be
brought before any meeting of the stockholders shall be given in the manner
provided in the Bylaws of this Corporation.
At each annual meeting of stockholders, directors of the
Corporation shall be elected to hold office until the expiration of the term for
which they are elected, or until their successors have been duly elected and
qualified; except that if any such election shall not be so held, such election
shall take place at a stockholders' meeting called and held in accordance with
the GCL.
The directors of the Corporation shall be divided into three (3)
classes as nearly equal in size as is practicable, hereby designated Class I,
Class II and Class III. For the purposes hereof, the initial Class I, Class II
and Class III directors shall be those directors so designated by a resolution
of the Board of Directors. At the annual meeting of stockholders held in 2000,
the term of office of the Class I directors shall expire and Class I directors
shall be elected for a full term of three (3) years. At the annual meeting of
stockholders held in 2001, the term of office of the Class II directors shall
expire and Class II directors shall be elected for a full term of three (3)
years. At the annual meeting of stockholders held in 2002, the term of office of
the Class III
2
<PAGE> 3
directors shall expire and Class III directors shall be elected for a full term
of three (3) years. At each succeeding annual meeting of stockholders, directors
shall be elected for a full term of three (3) years to succeed the directors of
the class whose terms expire at such annual meeting. If the number of directors
is hereafter changed, each director then serving as such shall nevertheless
continue as a director of the class of which he is a member until the expiration
of his current term and any newly created directorships or decrease in
directorships shall be so apportioned among the classes as to make all classes
as nearly equal in number as is practicable.
Vacancies occurring on the Board of Directors for any reason may
be filled only by vote of a majority of the remaining members of the Board of
Directors, even if less than a quorum, at any meeting of the Board of Directors.
A person so elected by the Board of Directors to fill a vacancy shall hold
office for the remainder of the full term of the director for which the vacancy
was created or occurred and until such director's successor shall have been duly
elected and qualified. A director may be removed from office by the affirmative
vote of the holders of 66 2/3% of the outstanding shares of voting stock of the
Corporation entitled to vote at an election of directors, provided that such
removal is for cause.
ARTICLE VII
Any action required or permitted to be taken by the stockholders
of the Corporation must be effected at a duly called annual or special meeting
of the stockholders of the Corporation and may not be effected by any consent in
writing of such stockholders. At any annual or special meeting of stockholders
of the Corporation, only such business will be conducted or considered as has
been brought before such meeting in the manner provided in the Bylaws of the
Corporation. Special meetings of the stockholders, for any purpose or purposes,
may only be called by the Chairman of the Board of Directors of the Corporation
or by a majority of the members of the Board of Directors of the Corporation.
The books of the Corporation may be kept (subject to any provision contained in
the statutes) outside the State of Delaware at such place or places as may be
designated from time to time by the Board of Directors or in the Bylaws of the
Corporation. Meetings of stockholders may be held within or without the State of
Delaware, as the Bylaws may provide.
ARTICLE VIII
To the fullest extent permitted by applicable law, this
Corporation is authorized to provide indemnification of (and advancement of
expenses to) directors, officers, employees and agents (and any other persons to
which Delaware law permits this Corporation to provide indemnification) through
Bylaw provisions, agreements with such agents or other persons, vote of
stockholders or disinterested directors or otherwise, in excess of the
indemnification and advancement otherwise permitted by Section 145 of the GCL,
subject only to limits created by applicable Delaware law (statutory or
non-statutory), with respect to action for breach of duty to the Corporation,
its stockholders, and others.
No director of the Corporation shall be personally liable to the
Corporation or any stockholder for monetary damages for breach of fiduciary duty
as a director, except for any matter in respect of which such director shall be
liable under Section 174 of the GCL or any amendment thereto or shall be liable
by reason that, in addition to any and all other requirements
3
<PAGE> 4
for such liability, such director (1) shall have breached the director's duty or
loyalty to the Corporation or its stockholders, (2) shall have acted in manner
not in good faith or involving intentional misconduct or a knowing violation of
law or, in failing to act, shall have acted in a manner involving intentional
misconduct or a knowing violation of law, or (3) shall have derived an improper
personal benefit. If the GCL is hereafter amended to authorize the further
elimination or limitation of the liability of a director, the liability of a
director of the Corporation shall be eliminated or limited to the fullest extent
permitted by the GCL, as so amended.
Each person who was or is made a party or is threatened to be
made a party to or is in any way involved in any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative (hereinafter a "proceeding"), including any appeal therefrom, by
reason of the fact that he or she, or a person of whom he or she is the legal
representative, is or was a director or officer of the Corporation or a direct
or indirect subsidiary of the Corporation, or is or was serving at the request
of the Corporation as a director or officer of another entity or enterprise, or
was a director or officer of a foreign or domestic corporation which was
predecessor corporation of the Corporation or of another entity or enterprise at
the request of such predecessor corporation, shall be indemnified and held
harmless by the Corporation, and the Corporation shall advance all expenses
incurred by any such person in defense of any such proceeding prior to its final
determination, to the fullest extent authorized by the GCL. In any proceeding
against the Corporation to enforce these rights, such person shall be presumed
to be entitled to indemnification and the Corporation shall have the burden of
proving that such person has not met the standards of conduct for permissible
indemnification set forth in the GCL. The rights to indemnification and
advancement of expenses conferred by this Article VIII shall be presumed to have
been relied upon by the directors and officers of the Corporation in serving or
continuing to serve the Corporation and shall be enforceable as contract rights.
Said rights shall not be exclusive of any other rights to which those seeking
indemnification may otherwise be entitled. The Corporation may, upon written
demand presented by a director or officer of the Corporation or of a direct or
indirect subsidiary of the Corporation, or by a person serving at the request of
the Corporation as a director or officer of another entity or enterprise, enter
into contracts to provide such persons with specified rights to indemnification,
which contracts may confer rights and protections to the maximum extent
permitted by the GCL, as amended and in effect from time to time.
If a claim under this Article VIII is not paid in full by the
Corporation within sixty (60) days after a written claim has been received by
the Corporation, the claimant may at any time thereafter bring suit against the
Corporation to recover the unpaid amount of the claim and, if successful in
whole or in part, the claimant shall be entitled to be paid also the expenses of
prosecuting such claim. It shall be a defense to any such action (other than an
action brought to enforce the right to be advanced expenses incurred in
defending any proceeding prior to its final disposition where the required
undertaking, if any, has been tendered to the Corporation ) that the claimant
has not met the standards of conduct which make it permissible under the GCL for
the Corporation to indemnify the claimant for the amount claimed, but the
claimant shall be presumed to be entitled to indemnification and the Corporation
shall have the burden of proving that the claimant has not met the standards of
conduct for permissible indemnification set forth in the GCL.
4
<PAGE> 5
If the GCL is hereafter amended to permit the Corporation to
provide broader indemnification rights than said law permitted the Corporation
to provide prior to such amendment, the indemnification rights conferred by this
Article VIII shall be broadened to the fullest extent permitted by the GCL, as
so amended.
ARTICLE IX
The Corporation reserves the right to amend, alter, change or
repeal any provision contained in this Amended and Restated Certificate of
Incorporation, in the manner now or hereafter prescribed by statute, and all
rights conferred upon stockholders herein are granted subject to this
reservation. Notwithstanding the foregoing, the provisions set forth in Articles
IV, V, VI, VII, VIII and this Article IX of this Amended and Restated
Certificate of Incorporation may not be repealed or amended in any respect
without the affirmative vote of holders at least 66-2/3% of the outstanding
voting stock of the Corporation entitled to vote at an election of directors.
FIFTH: The foregoing amendment and restatement has been duly
adopted by the Corporation's Board of Directors in accordance with the
applicable provisions of Sections 242 and 245 of the General Corporation Law of
the State of Delaware.
SIXTH: The foregoing amendment and restatement was approved by
the holders of the requisite number of shares of the Corporation in accordance
with Section 228 of the General Corporation Law of the State of Delaware.
IN WITNESS WHEREOF, the undersigned have executed this
certificate on ____________, 1999.
______________________________________
Marc P. Geiger
Chief Executive Officer
______________________________________
James B. Carroll
Secretary
5
<PAGE> 1
EXHIBIT 3.2
AMENDED & RESTATED BYLAWS
OF
ARTISTDIRECT, INC.
ARTICLE I
OFFICES
Section 1. The registered office shall be at the office of
Corporation Trust Center, 1209 Orange Street, in the City of Wilmington, County
of New Castle, State of Delaware.
Section 2. The corporation may also have offices at such other
places both within and without the State of Delaware as the Board of Directors
may from time to time determine or the business of the corporation may require.
ARTICLE II
MEETINGS OF STOCKHOLDERS
Section 1. All meetings of the stockholders for the election of
directors shall be held at such place as may be fixed from time to time by the
Board of Directors, or at such other place either within or without the State of
Delaware as shall be designated from time to time by the Board of Directors and
stated in the notice of the meeting. Meetings of stockholders for any other
purpose may be held at such time and place, within or without the State of
Delaware, as shall be stated in the notice of the meeting or in a duly executed
waiver of notice thereof.
Section 2. Annual meetings of stockholders shall be held at such
date and time as shall be designated from time to time by the Board of Directors
and stated in the notice of the meeting. At each annual meeting, the
stockholders shall elect directors to succeed those directors whose terms expire
in that year and shall transact such other business as may properly be brought
before the meeting.
Section 3. Written notice of the annual meeting stating the
place, date and hour of the meeting shall be given to each stockholder entitled
to vote at such meeting not less than ten (10) nor more than sixty (60) days
before the date of the meeting.
Section 4. The officer who has charge of the stock ledger of the
corporation shall prepare and make available, at least ten days before every
meeting of stockholders, a complete list of the stockholders entitled to vote at
the meeting, arranged in alphabetical order, and showing the address of each
stockholder and the number of shares registered in the name of each stockholder.
Such list shall be open to the examination of any stockholder, for any purpose
germane to the meeting, during ordinary business hours, for a period of at least
ten days prior to the meeting, either at a place within the city where the
meeting is to be held, which place shall be specified in the notice of the
meeting, or, if not so specified, at the place where the meeting is to
<PAGE> 2
be held. The list shall also be produced and kept at the time and place of the
meeting during the whole time thereof, and may be inspected by any stockholder
who is present.
Section 5. Special meetings of the stockholders, for any purpose
or purposes, may only be called by the Chairman of the Board or by a majority of
the numbers of the Board.
Section 6. Written notice of a special meeting stating the place,
date and hour of the meeting and the purpose or purposes for which the meeting
is called, shall be given not fewer than ten (10) nor more than sixty (60) days
before the date of the meeting, to each stockholder entitled to vote at such
meeting.
Section 7. Business transacted at any special meeting of
stockholders shall be limited to the purposes stated in the notice.
Section 8. The holders of a majority of the stock issued and
outstanding and entitled to vote thereat, present in person or represented by
proxy, shall constitute a quorum at all meetings of the stockholders for the
transaction of business except as otherwise provided by statute or by the
certificate of incorporation. If, however, such quorum shall not be present or
represented at any meeting of the stockholders, either the Chairman of the
Board, or the stockholders entitled to vote thereat, present in person or
represented by proxy, shall have power to adjourn the meeting from time to time,
without notice other than announcement at the meeting, until a quorum shall be
present or represented. At such adjourned meeting at which a quorum shall be
present or represented any business may be transacted that might have been
transacted at the meeting as originally notified. If the adjournment is for more
than thirty (30) days, or if after the adjournment a new record date is fixed
for the adjourned meeting, a notice of the adjourned meeting shall be given to
each stockholder of record entitled to vote at the meeting.
Section 9. When a quorum is present at any meeting, the vote of
the holders of a majority of the stock having voting power present in person or
represented by proxy shall decide any question brought before such meeting,
unless the question is one upon which by express provision of applicable statute
or of the certificate of incorporation, a different vote is required, in which
case such express provision shall govern and control the decision of such
question.
Section 10. Unless otherwise provided in the certificate of
incorporation each stockholder shall at every meeting of the stockholders be
entitled to one vote in person or by proxy for each share of the capital stock
having voting power held by such stockholder, but no proxy shall be voted on
after three (3) years from its date, unless the proxy provides for a longer
period.
Section 11. Nominations for election to the Board of Directors
must be made by the Board of Directors or by a committee appointed by the Board
of Directors for such purpose or by any stockholder of any outstanding class of
capital stock of the corporation entitled to vote for the election of directors.
Nominations by stockholders must be preceded by notification in writing received
by the secretary of the corporation not less than one-hundred twenty (120) days
prior to any meeting of stockholders called for the election of directors. Such
notification shall contain the written consent of each proposed nominee to serve
as a director if so elected and the
2
<PAGE> 3
following information as to each proposed nominee and as to each person, acting
alone or in conjunction with one or more other persons as a partnership, limited
partnership, syndicate or other group, who participates or is expected to
participate in making such nomination or in organizing, directing or financing
such nomination or solicitation of proxies to vote for the nominee:
(a) the name, age, residence, address, and business
address of each proposed nominee and of each such person;
(b) the principal occupation or employment, the name, type
of business and address of the corporation or other organization in which such
employment is carried on of each proposed nominee and of each such person;
(c) the amount of stock of the corporation owned
beneficially, either directly or indirectly, by each proposed nominee and each
such person; and
(d) a description of any arrangement or understanding of
each proposed nominee and of each such person with each other or any other
person regarding future employment or any future transaction to which the
corporation will or may be a party.
The presiding officer of the meeting shall have the authority to
determine and declare to the meeting that a nomination not preceded by
notification made in accordance with the foregoing procedure shall be
disregarded.
Section 12. At any meeting of the stockholders, only such
business shall be conducted as shall have been brought before the meeting (a)
pursuant to the corporation's notice of meeting, (b) by or at the direction of
the Board of Directors or (c) by any stockholder of the corporation who is a
stockholder of record at the time of giving of the notice provided for in this
Bylaw, who shall be entitled to vote at such meeting and who complies with the
notice procedures set forth in this Bylaw.
For business to be properly brought before any meeting by a
stockholder pursuant to clause (c) above of this Section 12, the stockholder
must have given timely notice thereof in writing to the secretary of the
corporation. To be timely, a stockholder's notice must be delivered to or mailed
and received at the principal executive offices of the corporation not less than
one hundred twenty (120) days prior to the date of the meeting. A stockholder's
notice to the secretary shall set forth as to each matter the stockholder
proposes to bring before the meeting (a) a brief description of the business
desired to be brought before the meeting and the reasons for conducting such
business at the meeting, (b) the name and address, as they appear on the
corporation's books, of the stockholder proposing such business, and the name
and address of the beneficial owner, if any, on whose behalf the proposal is
made, (c) the class and number of shares of the corporation which are owned
beneficially and of record by such stockholder of record and by the beneficial
owner, if any, on whose behalf of the proposal is made and (d) any material
interest of such stockholder of record and the beneficial owner, if any, on
whose behalf the proposal is made in such business.
3
<PAGE> 4
Notwithstanding anything in these Bylaws to the contrary, no
business shall be conducted at a meeting except in accordance with the
procedures set forth in this Section 12. The presiding officer of the meeting
shall, if the facts warrant, determine and declare to the meeting that business
was not properly brought before the meeting and in accordance with the
procedures prescribed by this Section 12, and if such person should so
determine, such person shall so declare to the meeting and any such business not
properly brought before the meeting shall not be transacted. Notwithstanding the
foregoing provisions of this Section 12, a stockholder shall also comply with
all applicable requirements of the Securities Exchange Act of 1934, as amended,
and the rules and regulations thereunder with respect to the matters set forth
in this Section 12.
ARTICLE III
DIRECTORS
Section 1. The number of directors of this corporation that shall
constitute the whole Board of Directors shall be determined by resolution of the
Board of Directors; provided, however, that no decrease in the number of
directors shall have the effect of shortening the term of an incumbent director.
The Board of Directors shall be classified with respect to the time for which
they severally hold office, into three classes, as nearly equal in number as
possible as determined by the Board of Directors, one class to hold office
initially for a term expiring at the annual meeting to be held in 2001, another
class to hold office initially for a term expiring at the annual meeting of
stockholders held in 2002 and another class to hold office initially for a term
expiring at the annual meeting of stockholders to be held in 2002, with the
members of each class to hold office until their successors are elected and
qualified. At each annual meeting of stockholders, the successors of the class
of directors whose term expires at that meeting shall be elected to hold office
for a term expiring at the annual meeting of stockholders held in the third year
following the year of their election.
Section 2. Vacancies and newly created directorships resulting
from any increase in the authorized number of directors may be filled by a
majority of the directors then in office, even if less than a quorum, or by a
sole remaining director, and the directors so chosen shall hold office until the
next election of the class for which such directors were chosen and until their
successors are duly elected and qualified or until earlier resignation or
removal. If there are no directors in office, then an election of directors may
be held in the manner provided by statute.
Section 3. The business of the corporation shall be managed by or
under the direction of its Board of Directors which may exercise all such powers
of the corporation and do all such lawful acts and things as are not by statute
or by the certificate of incorporation or by these Bylaws directed or required
to be exercised or done by the stockholders.
MEETINGS OF THE BOARD OF DIRECTORS
Section 4. The Board of Directors of the corporation may hold
meetings, both regular and special, either within or without the State of
Delaware.
4
<PAGE> 5
Section 5. The first meeting of each newly elected Board of
Directors shall be held at such time and place as shall be fixed by the vote of
the stockholders at the annual meeting and no notice of such meeting shall be
necessary to the newly elected directors in order legally to constitute the
meeting, provided a quorum shall be present. In the event of the failure of the
stockholders to fix the time or place of such first meeting of the newly elected
Board of Directors, or in the event such meeting is not held at the time and
place so fixed by the stockholders, the meeting may be held at such time and
place as shall be specified in a notice given as hereinafter provided for
special meetings of the Board of Directors, or as shall be specified in a
written waiver signed by all of the directors.
Section 6. Regular meetings of the Board of Directors may be held
without notice at such time and at such place as shall from time to time be
determined by the board.
Section 7. Special meetings of the Board of Directors may be
called by the Chairman of the Board or the chief executive on two (2) hours'
notice to each director by phone, fax or electronic mail; special meetings shall
be called by the Chairman of the Board, the chief executive officer or secretary
in like manner and on like notice on the written request of a majority of the
Board unless the Board consists of only one director, in which case special
meetings shall be called by the Chairman of the Board, the chief executive
officer or secretary in like manner and on like notice on the written request of
the sole director.
Section 8. At all meetings of the Board of Directors a majority
of the directors shall constitute a quorum for the transaction of business and
the act of a majority of the directors present at any meeting at which there is
a quorum shall be the act of the Board of Directors, except as may be otherwise
specifically provided by statute or by the certificate of incorporation. If a
quorum shall not be present at any meeting of the Board of Directors, the
directors present thereat may adjourn the meeting from time to time, without
notice other than announcement at the meeting, until a quorum shall be present.
Section 9. Unless otherwise restricted by the certificate of
incorporation or these Bylaws, any action required or permitted to be taken at
any meeting of the Board of Directors or of any committee thereof may be taken
without a meeting, if all members of the Board of Directors or committee, as the
case may be, consent thereto in writing, and the writing or writings are filed
with the minutes of proceedings of the Board of Directors or committee.
Section 10. Unless otherwise restricted by the certificate of
incorporation or these Bylaws, members of the Board of Directors, or any
committee designated by the Board of Directors, may participate in a meeting of
the Board of Directors, or any committee, by means of conference telephone or
similar communications equipment by means of which all persons participating in
the meeting can hear each other, and such participation in a meeting shall
constitute presence in person at the meeting.
COMMITTEES OF DIRECTORS
Section 11. The Board of Directors may, by resolution passed by a
majority of the whole Board, designate one (1) or more committees, each
committee to consist of one (1) or more of the directors of the corporation. The
Board of Directors may designate one (1) or more
5
<PAGE> 6
directors as alternate members of any committee, who may replace any absent or
disqualified member at any meeting of the committee.
In the absence of disqualification of a member of a committee,
the member or members thereof present at any meeting and not disqualified from
voting, whether or not he or they constitute a quorum, may unanimously appoint
another member of the Board of Directors to act at the meeting in the place of
any such absent or disqualified member.
Any such committee, to the extent provided in the resolution of
the Board of Directors, shall have and may exercise all the powers and authority
of the Board of Directors in the management of the business and affairs of the
corporation, and may authorize the seal of the corporation to be affixed to all
papers that may require it; but no such committee shall have the power or
authority in reference to amending the certificate of incorporation, adopting an
agreement of merger or consolidation, recommending to the stockholders the sale,
lease or exchange of all or substantially all of the corporation's property and
assets, recommending to the stockholders a dissolution of the corporation or a
revocation of a dissolution, or amending the Bylaws of the corporation; and,
unless the resolution or the certificate of incorporation expressly so provide,
no such committee shall have the power or authority to declare a dividend or to
authorize the issuance of stock. Such committee or committees shall have such
name or names as may be determined from time to time by resolution adopted by
the Board of Directors.
Section 12. Each committee shall keep regular minutes of its
meetings and report the same to the Board of Directors when required.
COMPENSATION OF DIRECTORS
Section 13. Unless otherwise restricted by the certificate of
incorporation or these Bylaws, the Board of Directors shall have the authority
to fix the compensation of directors. The directors may be paid their expenses,
if any, of attendance at each meeting of the Board of Directors, may be paid a
fixed sum for attendance at each meeting of the Board of Directors or a stated
salary as director and may receive stock grants from the corporation. No such
payment shall preclude any director from serving the corporation in any other
capacity and receiving compensation therefor. Members of special or standing
committees may be allowed like compensation for attending committee meetings.
ARTICLE IV
NOTICES
Section 1. Whenever, under the provisions of the statutes or of
the certificate of incorporation or of these Bylaws, notice is required to be
given to any director or stockholder, it shall not be construed to mean personal
notice (except as provided in Section 7 of Article III of these Bylaws), but
such notice may be given in writing, by mail, addressed to such director or
stockholder, at his address as it appears on the records of the corporation,
with postage thereon prepaid, and such notice shall be deemed to be given at the
time when the same shall be
6
<PAGE> 7
deposited in the United States mail. Notice to directors may also be given by
telephone, telegram or facsimile.
Section 2. Whenever any notice is required to be given under the
provisions of the statutes or of the certificate of incorporation or of these
Bylaws, a waiver thereof in writing, signed by the person or persons entitled to
said notice, whether before or after the time stated therein, shall be deemed
equivalent thereto.
ARTICLE V
OFFICERS
Section 1. The officers of the corporation shall be chosen by the
Board of Directors and shall, at a minimum, include a chief executive officer, a
president, a chief financial officer and a secretary. The Board of Directors may
elect from among its members a Chairman of the Board. The Board of Directors may
also choose one or more vice-presidents, assistant secretaries and assistant
treasurers. Any number of offices may be held by the same person, unless the
certificate of incorporation or these Bylaws otherwise provide.
Section 2. The Board of Directors at its first meeting after each
annual meeting of stockholders shall choose a chief executive officer, a
president, a chief financial officer, and a secretary and may choose vice
presidents.
Section 3. The Board of Directors may appoint such other officers
and agents as it shall deem necessary who shall hold their offices for such
terms and shall exercise such powers and perform such duties as shall be
determined from time to time by the board.
Section 4. The salaries of all officers of the corporation shall
be fixed by the Board of Directors or any committee established by the Board of
Directors for such purpose. The salaries of agents of the corporation shall,
unless fixed by the Board of Directors, be fixed by the chief executive officer,
the president or any vice-president of the corporation.
Section 5. The officers of the corporation shall hold office
until their successors are chosen and qualify. Any officer elected or appointed
by the Board of Directors may be removed at any time by the affirmative vote of
a majority of the Board of Directors. Any vacancy occurring in any office of the
corporation shall be filled by the Board of Directors.
THE CHAIRMAN OF THE BOARD
Section 6. The Chairman of the Board, if any, shall preside at
all meetings of the Board of Directors and of the stockholders at which he/she
shall be present. He/she shall have and may exercise such powers as are, from
time to time, assigned to him/her by the Board and as may be provided by law.
Section 7. In the absence of the Chairman of the Board, the chief
executive officer shall preside at all meetings of the Board of Directors and of
the stockholders at which he
7
<PAGE> 8
shall be present. He shall have and may exercise such powers as are, from time
to time, assigned to him by the Board and as may be provided by law.
THE CHIEF EXECUTIVE OFFICER, PRESIDENT AND SENIOR VICE-PRESIDENTS
Section 8. The chief executive officer of the corporation shall
have general and active management of the business of the corporation and shall
see that all orders and resolutions of the Board of Directors are carried into
effect. In the absence of the Chairman of the Board, the chief executive officer
shall preside at all meetings of the stockholders and the Board of Directors.
Section 9. The chief executive officer, president or any senior
vice president shall execute bonds, mortgages and other contracts requiring a
seal, under the seal of the corporation, except where required or permitted by
law to be otherwise signed and executed and except where the signing and
execution thereof shall be expressly delegated by the Board of Directors to some
other officer or agent of the corporation.
Section 10. In the absence of the chief executive officer or in
the event of his inability or refusal to act, the president, if any, shall
perform the duties of the chief executive officer, and when so acting, shall
have all the powers of and be subject to all the restrictions upon the chief
executive officer. The president shall perform such other duties and have such
other powers as the Board of Directors may from time to time prescribe.
Section 11. In the absence of the chief executive officer and
president or in the event of their inability or refusal to act, a senior
vice-president, if any, (in the event there be more than one senior
vice-president, a senior the vice-president in the order designated by the
directors shall perform the duties of the chief executive officer, and when so
acting, shall have all the powers of and be subject to all the restrictions upon
the chief executive officer. The vice-presidents shall perform such other duties
and have such other powers as the Board of Directors may from time to time
prescribe.
THE SECRETARY AND ASSISTANT SECRETARY
Section 12. The secretary shall attend all meetings of the Board
of Directors and all meetings of the stockholders and record all the proceedings
of the meetings of the corporation and of the Board of Directors in a book to be
kept for that purpose and shall perform like duties for the standing committees
when required. He/she shall give, or cause to be given, notice of all meetings
of the stockholders and special meetings of the Board of Directors, and shall
perform such other duties as may be prescribed by the Board of Directors or
chief executive officer, under whose supervision he/she shall be. He/she shall
have custody of the corporate seal of the corporation and he/she, or an
assistant secretary, shall have authority to affix the same to any instrument
requiring it and when so affixed, it may be attested by his signature or by the
signature of such assistant secretary. The Board of Directors may give general
authority to any other officer to affix the seal of the corporation and to
attest the affixing by his signature.
Section 13. The assistant secretary, or if there be more than
one, the assistant secretaries in the order determined by the Board of Directors
(or if there be no such
8
<PAGE> 9
determination, then in the order of their election) shall, in the absence of the
secretary or in the event of his inability or refusal to act, perform the duties
and exercise the powers of the secretary and shall perform such other duties and
have such other powers as the board of directors may from time to time
prescribe.
THE CHIEF FINANCIAL OFFICER
Section 14. The chief financial officer shall be the chief
financial officer of the corporation, shall have the custody of the corporate
funds and securities and shall keep full and accurate accounts of receipts and
disbursements in books belonging to the corporation and shall deposit all moneys
and other valuable effects in the name and to the credit of the corporation in
such depositories as may be designated by the Board of Directors.
Section 15. He/she shall disburse the funds of the corporation as
may be ordered by the Board of Directors, taking proper vouchers for such
disbursements, and shall render to the chief executive officer and the Board of
Directors, at its regular meetings, or when the Board of Directors so requires,
an account of all his transactions as Chief Financial Officer and of the
financial condition of the corporation.
Section 16. If required by the Board of Directors, he/she shall
give the corporation a bond (which shall be renewed every six years) in such sum
and with such surety or sureties as shall be satisfactory to the Board of
Directors for the faithful performance of the duties of his/her office and for
the restoration to the corporation, in case of his/her death, resignation,
retirement or removal from office, of all books, papers, vouchers, money and
other property of whatever kind in his possession or under his/her control
belonging to the corporation.
Section 17. The treasurer or an assistant treasurer, in the order
determined by the Board of Directors (or if there be no such determination, then
in the order of their election) shall, in the absence of the chief financial
officer or in the event of his inability or refusal to act, perform the duties
and exercise the powers of the chief financial officer and shall perform such
other duties and have such other powers as the Board of Directors may from time
to time prescribe.
ARTICLE VI
CERTIFICATE OF STOCK
Section 1. Every holder of stock in the corporation shall be
entitled to have a certificate, signed by, or in the name of the corporation by,
the Chairman of the Board of Directors, or the chief executive officer or the
president and the the secretary or an assistant secretary of the corporation,
certifying the number of shares owned by him/her in the corporation.
Certificates may be issued for partly paid shares and in such
case upon the face or back of the certificates issued to represent any such
partly paid shares, the total amount of the consideration to be paid therefor,
and the amount paid thereon shall be specified.
9
<PAGE> 10
If the corporation shall be authorized to issue more than one
class of stock or more than one series of any class, the powers, designations,
preferences and relative, participating, optional or other special rights of
each class of stock or series thereof and the qualification, limitations or
restrictions of such preferences and/or rights shall be set forth in full or
summarized on the face or back of the certificate that the corporation shall
issue to represent such class or series of stock, provided that, except as
otherwise provided in section 202 of the General Corporation Law of Delaware, in
lieu of the foregoing requirements, there may be set forth on the face or back
of the certificate that the corporation shall issue to represent such class or
series of stock, a statement that 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.
Any of or all the signatures on the certificate may be facsimile.
In case any officer, transfer agent or registrar who has signed or whose
facsimile signature has been placed upon a certificate shall have ceased to be
such officer, transfer agent or registrar before such certificate is issued, it
may be issued by the corporation with the same effect as if he/she were such
officer, transfer agent or registrar at the date of issue.
LOST CERTIFICATES
Section 2. The Board of Directors may direct a new certificate or
certificates to be issued in place of any certificate or certificates
theretofore issued by the corporation alleged to have been lost, stolen or
destroyed, upon the making of an affidavit of that fact by the person claiming
the certificate of stock to be lost, stolen or destroyed. When authorizing such
issue of a new certificate or certificates, the Board of Directors may, in its
discretion and as a condition precedent to the issuance thereof, require the
owner of such lost, stolen or destroyed certificate or certificates, or his/her
legal representative, to advertise the same in such manner as it shall require
and/or to give the corporation a bond in such sum as it may direct as indemnity
against any claim that may be made against the corporation with respect to the
certificate alleged to have been lost, stolen or destroyed.
TRANSFER OF STOCK
Section 3. Upon surrender to the corporation or the transfer
agent of the corporation of a certificate for shares duly endorsed or
accompanied by proper evidence of succession, assignation or authority to
transfer, it shall be the duty of the corporation to issue a new certificate to
the person entitled thereto, cancel the old certificate and record the
transaction upon its books.
FIXING RECORD DATE
Section 4. In order that the corporation may determine the
stockholders entitled to notice of or to vote at any meeting of stockholders or
any adjournment thereof, or to express consent to corporate action in writing
without a meeting, or entitled to receive payment of any dividend or other
distribution or allotment of any rights, or entitled to exercise any rights in
respect of any change, conversion or exchange of stock or for the purpose of any
other lawful
10
<PAGE> 11
action, the Board of Directors may fix, in advance, a record date, which shall
not be more than sixty (60) nor less than ten (10) days before the date of such
meeting, nor more than sixty (60) days prior to any other action. A
determination of stockholders of record entitled to notice of or to vote at a
meeting of stockholders shall apply to any adjournment of the meeting; provided,
however, that the Board of Directors may fix a new record date for the adjourned
meeting.
REGISTERED STOCKHOLDERS
Section 5. The corporation shall be entitled to recognize the
exclusive right of a person registered on its books as the owner of shares to
receive dividends, and to vote as such owner, and to hold liable for calls and
assessments a person registered on its books as the owner of shares and shall
not be bound to recognize any equitable or other claim to or interest in such
share or shares on the part of any other person, whether or not it shall have
express or other notice thereof, except as otherwise provided by the laws of
Delaware.
ARTICLE VII
GENERAL PROVISIONS
DIVIDENDS
Section 1. Dividends upon the capital stock of the corporation,
subject to the provisions of the certificate of incorporation, if any, may be
declared by the Board of Directors at any regular or special meeting, pursuant
to law. Dividends may be paid in cash, in property, or in shares of the capital
stock, subject to the provisions of the certificate of incorporation.
Section 2. Before payment of any dividend, there may be set aside
out of any funds of the corporation available for dividends such sum or sums as
the directors from time to time, in their absolute discretion, think proper as a
reserve or reserves to meet contingencies, or for equalizing dividends, or for
repairing or maintaining any property of the corporation, or for such other
purposes as the directors shall think conducive to the interest of the
corporation, and the directors may modify or abolish any such reserve in the
manner in which it was created.
CHECKS
Section 3. All checks or demands for money and notes of the
corporation shall be signed by such officer or officers or such other person or
persons as the Board of Directors may from time to time designate.
FISCAL YEAR
Section 4. The fiscal year of the corporation shall be fixed by
resolution of the Board of Directors.
SEAL
Section 5. The Board of Directors may adopt a corporate seal
having inscribed thereon the name of the corporation, the year of its
organization and the words "Corporate Seal,
11
<PAGE> 12
Delaware." The seal may be used by causing it or a facsimile thereof to be
impressed or affixed or reproduced or otherwise.
INDEMNIFICATION
Section 6. The corporation shall, to the fullest extent
authorized under the laws of the State of Delaware, as those laws may be amended
and supplemented from time to time, indemnify any director made, or threatened
to be made, a party to an action or proceeding, whether criminal, civil,
administrative or investigative, by reason of being a director of the
corporation or a predecessor corporation or, at the corporation's request, a
director or officer of another corporation, provided, however, that the
corporation shall indemnify any such agent in connection with a proceeding
initiated by such agent only if such proceeding was authorized by the Board of
Directors of the corporation. The indemnification provided for in this Section 6
shall: (i) not be deemed exclusive of any other rights to which those
indemnified may be entitled under any bylaw, agreement or vote of stockholders
or disinterested directors or otherwise, both as to action in their official
capacities and as to action in another capacity while holding such office, (ii)
continue as to a person who has ceased to be a director, and (iii) inure to the
benefit of the heirs, executors and administrators of such a person. The
corporation's obligation to provide indemnification under this Section 6 shall
be offset to the extent of any other source of indemnification or any otherwise
applicable insurance coverage under a policy maintained by the corporation or
any other person.
Expenses incurred by a director of the corporation in defending a
civil or criminal action, suit or proceeding by reason of the fact that he is or
was a director of the corporation (or was serving at the corporation's request
as a director or officer of another corporation) shall be paid by the
corporation in advance of the final disposition of such action, suit or
proceeding upon receipt of an undertaking by or on behalf of such director to
repay such amount if it shall ultimately be determined that he is not entitled
to be indemnified by the corporation as authorized by relevant sections of the
General Corporation Law of Delaware. Notwithstanding the foregoing, the
corporation shall not be required to advance such expenses to an agent who is a
party to an action, suit or proceeding brought by the corporation and approved
by a majority of the Board of Directors of the corporation which alleges willful
misappropriation of corporate assets by such agent, disclosure of confidential
information in violation of such agent's fiduciary or contractual obligations to
the corporation or any other willful and deliberate breach in bad faith of such
agent's duty to the corporation or its stockholders.
The foregoing provisions of this Section 6 shall be deemed to be
a contract between the corporation and each director who serves in such capacity
at any time while this bylaw is in effect, and any repeal or modification
thereof shall not affect any rights or obligations then existing with respect to
any state of facts then or theretofore existing or any action, suit or
proceeding theretofore or thereafter brought based in whole or in part upon any
such state of facts.
The Board of Directors in its discretion shall have power on
behalf of the corporation to indemnify any person, other than a director, made a
party to any action, suit or proceeding by reason of the fact that he, his
testator or intestate, is or was an officer or employee of the corporation.
12
<PAGE> 13
To assure indemnification under this Section 6 of all directors,
officers and employees who are determined by the corporation or otherwise to be
or to have been "fiduciaries" of any employee benefit plan of the corporation
which may exist from time to time, Section 145 of the General Corporation Law of
Delaware shall, for the purposes of this Section 6, be interpreted as follows:
an "other enterprise" shall be deemed to include such an employee benefit plan,
including without limitation, any plan of the corporation which is governed by
the Act of Congress entitled "Employee Retirement Income Security Act of 1974,"
as amended from time to time; the corporation shall be deemed to have requested
a person to serve an employee benefit plan where the performance by such person
of his duties to the corporation also imposes duties on, or otherwise involves
services by, such person to the plan or participants or beneficiaries of the
plan; excise taxes assessed on a person with respect to an employee benefit plan
pursuant to such Act of Congress shall be deemed "fines."
ARTICLE VIII
AMENDMENTS
Section 1. These Bylaws may be altered, amended or repealed or
new Bylaws may be adopted by the affirmative vote of holders of at least 66-2/3%
vote of the outstanding voting stock of the corporation. These Bylaws may also
be altered, amended or repealed or new Bylaws may be adopted by the Board of
Directors, when such power is conferred upon the Board of Directors by the
certificate of incorporation. The foregoing may occur at any regular meeting of
the stockholders or of the Board of Directors or at any special meeting of the
stockholders or of the Board of Directors if notice of such alteration,
amendment, repeal or adoption of new Bylaws be contained in the notice of such
special meeting. If the power to adopt, amend or repeal Bylaws is conferred upon
the Board of Directors by the certificate of incorporation it shall not divest
or limit the power of the stockholders to adopt, amend or repeal Bylaws.
13
<PAGE> 14
CERTIFICATE OF ADOPTION BY THE
SECRETARY OF
ARTISTDIRECT, INC.
The undersigned,______________ , hereby certifies that he is the
duly elected and acting Secretary of ARTISTdirect, Inc., a Delaware corporation
(the "Corporation"), and that the Bylaws attached hereto constitute the Bylaws
of said Corporation as duly adopted by the Board of Directors on October __,
1999 and the Stockholders on _______, 1999.
IN WITNESS WHEREOF, the undersigned has hereunto subscribed his
name this _____ day of ______________, 1999.
---------------------------------------
James B. Carroll
Secretary
14
<PAGE> 1
EXHIBIT 5.1
[BROBECK, PHLEGER & HARRISON LLP LETTERHEAD]
FORM OF OPINION
_____________, 1999
ARTISTdirect, Inc.
17835 Ventura Boulevard
Encino, CA 91316
Re: ARTISTdirect, Inc. Registration Statement on Form S-1
for up to ____ Shares of Common Stock
Ladies and Gentlemen:
We have acted as counsel to ARTISTdirect, Inc., a Delaware
corporation (the "Company"), in connection with the proposed issuance and sale
by the Company of up to ________ shares of the Company's Common Stock (the
"Shares") pursuant to the Company's Registration Statement on Form S-1 (the
"Registration Statement") filed with the Securities and Exchange Commission
under the Securities Act of 1933, as amended (the "Act").
This opinion is being furnished in accordance with the
requirements of Item 16(a) of Form S-1 and Item 601(b)(5)(i) of Regulation S-K.
We have reviewed the Company's charter documents and the
corporate proceedings taken by the Company in connection with the issuance and
sale of the Shares. Based on such review, we are of the opinion that the Shares
have been duly authorized, and if, as and when issued in accordance with the
Registration Statement and the related prospectus (as amended and supplemented
through the date of issuance) will be legally issued, fully paid and
nonassessable.
We consent to the filing of this opinion letter as Exhibit 5.1
to the Registration Statement and to the reference to this firm under the
caption "Legal Matters" in the prospectus which is part of the Registration
Statement. In giving this consent, we do not thereby admit that we are within
the category of persons whose consent is required under Section 7 of the Act,
the rules and regulations of the Securities and Exchange Commission promulgated
thereunder, or Item 509 of Regulation S-K.
<PAGE> 2
ARTISTdirect, Inc.
Page 2
This opinion letter is rendered as of the date first written
above and we disclaim any obligation to advise you of facts, circumstances,
events or developments which hereafter may be brought to our attention and which
may alter, affect or modify the opinion expressed herein. Our opinion is
expressly limited to the matters set forth above and we render no opinion,
whether by implication or otherwise, as to any other matters relating to the
Company or the Shares.
Very truly yours,
BROBECK, PHLEGER & HARRISON LLP
<PAGE> 1
EXHIBIT 10.2
ARTIST DIRECT TERMS AND CONDITIONS
The following terms and conditions (these "Terms") govern the provision by
DIGEX, Inc. ("Company") of the services and/or products (referred collectively
herein as "Services and Products") described on the Server Order Form and
Contract attached hereto ("Order Form") and defined in Company's product
support listing, to the customer ("Customer") identified on the Order Form. The
Order Form, these Terms and the attachments hereto, which are identified on the
Order Form, executed with respect to the Services and Products are referred to
herein, collectively, as this "Agreement."
1. OBLIGATIONS OF COMPANY. Company shall install within ten business days
after execution by Company of the Order Form, unless otherwise specified
in the Order Form, and maintain the Services and Products which are
designated in the Order Form (as such may be supplemented pursuant to
Section 5, below). Company will use its best efforts to assure that
Customer's Internet server will be available 24 hours a day, seven days a
week. If the Customer's Internet server is 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, below, fees for that week will be
waived and the applicable monthly invoice will be adjusted accordingly.
For the purposes of this Agreement, a week shall be considered to run from
Sunday to Saturday. Customer's Internet server shall be deemed to be not
available for purposes of this Section 1 if Company's standard hardware,
software, or operating system is functioning in a manner that prevents
http, ftp, or mail access to the Internet server ("Unavailability"). For
purposes of this Section 1, Unavailability shall not be deemed to occur
hereunder as a result of Customer action or inaction, including, but not
limited to, Customer utilization of Customer owned, non-standard, or
unsupported hardware and/or software installed by the Customer or Company
at the Customer's request.
2. OBLIGATIONS OF THE CUSTOMER. Customer shall comply with all of the terms
of this Agreement, including, but not limited to, the Acceptable Use
Policy attached hereto as Attachment A (the "Use Policy"), as the Use
Policy may be modified from time to time. Upon notice from Company,
Customer promptly shall eliminate any hazard, interference or service
obstruction that any hardware or software used by the Customer, whether
or not provided by Company ("Customer Materials"), is causing, or is
likely to cause. If Customer requests Company to assist it in removing
any hazards, interference or service obstruction that Customer Materials
are causing or are likely to cause, Company may, but is not required to,
assist in such removal. The charges for Company's services in connection
with such assistance shall be at rates determined by Company at the time
such services are requested and payment with respect thereto shall be
made in accordance with Section 3, below. In the event that the primary
function(s) of Customer's web site is impaired during non-business hours
or holidays, and Company has been unable to successfully locate and/or
contact an authorized representative of Customer, Company make take
reasonable steps to restore the functionality of Customer's web site
without prior Customer approval. ANY NECESSARY WORK THAT IS PERFORMED BY
COMPANY TO RESTORE FUNCTIONALITY THAT WAS IMPAIRED BY CUSTOMER DESIGN
FLAWS OR ERRORS ARE BILLABLE TO CUSTOMER. CUSTOMER UNDERSTANDS THAT
CUSTOMER SHALL PAY TO COMPANY A BILLABLE RATE FOR TIME AND MATERIALS, AS
INDICATED ON THE ORDER FORM UNDER TIME AND EXPENSE ORDER. THESE CHARGES
ARE IN EXCESS OF THE MONTHLY RECURRING CHARGE.
3. PAYMENT.
3.1 Generally. Charges for the Services and Products (including the
charges described in the balance of this Section 3.1, the
"Charges") are set forth on the Order Form. Charges shall commence
to accrue on the date that Company provides access codes to
Customer ("Operational Date"). All payments for Charges shall be
made in U.S. Dollars. Customer may pre-pay the Charges for the
entire term of this Agreement or may pay the Charges on a monthly
basis. Charges shall be invoiced to Customer in advance at the
beginning of the month. Any additional charges, including, but not
limited to, any early cancellation charges, accrued interest, late
fees and any usage-based charge, including, but not limited to,
charges for network access to the Internet, shall be invoiced in
arrears and shall appear on the monthly invoices for Services and
Products or separate invoices. In all cases, payments for Charges
are due upon receipt by Customer of the invoices for such Charges.
In addition to any other remedies that may be available to Company
under this Agreement (including, but not limited to, in connection
with the termination of this Agreement pursuant to Section 6 below)
or applicable law, Charges that are not paid in full thirty (30)
days after receipt by Customer of the invoice therefore (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.
Customer shall be liable for all amounts owed to Company pursuant
to this Agreement, irrespective of the termination of this
Agreement. Customer also shall pay to Company all expenses incurred
by Company 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 Company.
3.2 Taxes. Customer shall be liable for, and shall reimburse Company
and indemnify and hold Company 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 Company, arising out
of, or relating to this Agreement or the sale of the Services and
Products hereunder.
3.3 Pass Through Items and Other Expenses. Company will have the right
at any time during any term of this Agreement to pass through and
invoice to Customer any new or increased fees, assessments, taxes
or other charges imposed on or required to be collected by Company
by any governmental agency or any new or increased charges by any
carrier that affect Company's costs in providing Services and
Products to Customer. Customer also will be responsible for paying
any sales, license and use taxes, fees, or assessments levied by
any local, state or federal government or governmental agency with
respect to the provision of Services and Products under this
Agreement. Customer will pay and be solely responsible for all
taxes, fees and charges levied directly upon it.
4. MAINTENANCE. Company designates time periods ("Scheduled Maintenance
Windows") during which it may limit or suspend the availability of the
hardware and/or software involved in providing its Services and Products
(an "Outage") to perform necessary maintenance or upgrades. Scheduled
Maintenance Windows currently are each Tuesday and Friday between the
hours of 4 am and 8 am and the third Saturday of each month between the
hours of 4 am and 12 noon, Eastern Standard Time and Pacific Standard
Time. If planned maintenance has the possibility of making the server or
servers, as the case may be, utilized by Customer inaccessible to the
Internet during a Scheduled Maintenance Window Company will provide not
less than twenty-four (24) hours prior electronic mail or other notice to
Customer of the Scheduled Maintenance
1
<PAGE> 2
Window during which the Outage is planned. In addition, Company reserves
the right to perform any required maintenance work outside of the Scheduled
Maintenance Window with prior WRITTEN notice to Customer.
5. ADDITIONAL PRODUCTS OR SERVICES. With Company's concurrence, Customer may
orally request service or products ("Additional Item") then offered by
Company in addition to the Services and Products (an "Oral Request"). An
Oral Request may only be made by the individual(s) listed as the authorized
customer upgrade contact on the Order Form. Customer will have five (5)
business days after making the Oral Request to cancel the Additional Item
in writing. As soon as practicable after receiving the Oral Request,
Company will begin the installation process with respect to the Additional
Item. Customer will be charged Company's then current list price for the
Additional Item. If Customer cancels the Oral Request, Customer shall pay
all applicable charges of Company with respect to the installation of the
Additional Item. An Additional Item shall be subject to this Agreement.
6. TERM AND TERMINATION. The initial term of this Agreement shall commence on
the Operational Date and upon expiration shall automatically renew for
successive ninety (90) day terms at the Charges in effect at the
commencement of such terms (which Charges shall have been communicated to
Customer in writing forty-five (45) days prior to the end of the preceding
term) or until written notice of non-renewal by either party is delivered
to the other party at least thirty (30) days prior to the end of the then
current term.
6.1 Termination by Company. In addition to any other rights it may have
under this Agreement or applicable law, Company may, at its option,
immediately terminate this Agreement, upon (i) a Payment Default which
breach is not cured by Customer within ten (10) business days of
Customer's receipt of written notice of such breach, (ii) Customer's
failure to comply with any other obligation of Customer under this
Agreement which breach is not cured by Customer within ten (10)
business days of Customer's receipt of written notice of such breach
(iii) Customer's failure to comply with any of the terms of the Use
Policy which breach is not cured by Customer within two (2) business
days of Customer's receipt of written notice of such breach, (iv)
Customer 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 within 90 calendar days or making an assignment for the
benefit of its creditors or (v) any attempt by Customer to derive any
source code from the Services or Products.
6.2 Termination by Customer. Customer may terminate this Agreement with
respect to all, and not less than all of the Services and Products in
the event of (a) a material breach by Company of its obligations under
this Agreement which breach is not cured within ten (10) business days
after written notice thereof is received by Company, or (b) otherwise
in the first sixty (60) days of the initial term hereof (collectively,
a "Permissible Termination"). In the event of a Permissible
Termination, Customer shall pay (i) installation Charges, (ii) a
pro-rated Charge based on the number of days Company provided Services
and Products prior to the date of termination of this Agreement by
Customer under this Section 6.2, and (iii) if the Services and
Products include software for which Company does not then provide
general customer support, Customer shall pay to Company an amount
equal to Company's cost of such software for the entire term. If
Customer terminates this Agreement other than in a Permissible
Termination, Customer shall pay to Company an amount equal to all
unpaid Charges for the remainder of the then current term of this
Agreement.
6.3 Rights and Obligations on Termination. Upon termination of this
Agreement, Company and Customer shall have no obligations to each
other except as provided in this Agreement. Upon termination of this
Agreement, Customer shall (i) pay all amounts due and owing to
Company, (ii) remove from Company's premises all property owned by
Customer and (iii) return to Company all software, access keys and any
other property provided to Customer by Company under this Agreement.
Customer may retrieve any Customer-provided property or materials upon
reasonable prior written notice to Company. Any property of Customer
not removed from Company's premises within a short, reasonable time
after such termination shall become the property of Company, which
may, among other things, dispose of such property without the payment
of any compensation to Customer. The rights and obligations of both
parties, which by their nature would continue beyond the termination
of this Agreement (including, without limitation, those relating to
confidentiality, payment of Charges, limitations of liability and
indemnification), shall survive such termination.
7. PROPERTY RIGHTS. Company hereby grants Customer a non-exclusive,
non-transferable license to use the Services and Products provided
hereunder during the term of this Agreement. All rights with respect to the
Services and Products, including, but not limited to, intellectual property
or similar rights with respect therefore belong exclusively to Company,
whether or not they are embedded in any Service or Product. Notwithstanding
the foregoing, Customer shall not be obligated to make any royalty or other
payments with respect to the Services and Products other than as provided
in this Agreement.
8. PROPRIETARY RIGHTS INDEMNIFICATION.
8.1 By Customer. Customer agrees to indemnify and hold harmless Company,
all individuals or entities controlling, controlled by or under common
control with Company (each, a "Company Affiliate"), and the officers,
directors, attorneys and employees of Company and each Company
Affiliate (a "Section 8 Indemnified Party") against any losses,
claims, damages, liabilities, penalties, actions, proceedings or
judgments (collectively, "Losses") to which a Section 8 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 utilized by Customer in connection
with any of the Services or Products and will reimburse a Section 8
Indemnified Party for all legal and other expenses, including
reasonable attorneys' fees incurred by such Section 8 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.
8.2 By Company. Company agrees to indemnify and hold harmless the Customer
against any Losses to which the Customer may become subject related to
or arising out of infringement or misappropriation of any United
States copyright, trade secret or other proprietary right related to
the equipment and software provided by the Company to the Customer,
and will reimburse the Customer for all legal and other expenses,
including reasonable attorney's fees incurred in connection with
investigating, defending, or settling any such loss, claim,
2
<PAGE> 3
damage, liability, action or proceeding whether or not in connection
with pending or threatened litigation in which the Customer is a
party. This indemnification does not relate to the Customer's content
or matters that arise from Customer's content or conduct. The
provisions of this Agreement relating to indemnification shall survive
termination of Customer's account. If any such Products and Services,
or any part thereof, is an infringement or a misappropriation, then
Company will, at no additional charge to the Customer, use
commercially reasonable efforts to either: (i) procure for Customer
the right to continue using such Products and Services or part
thereof; or (ii) replace such Products and Services with
non-infringing Products and Services; or (iii) modify the same so as
to make it non-infringing; or (iv) the Agreement as to the infringing
Products and Services will terminate, and Company shall refund to
Customer any and all of the unused portion of the fees paid for such
Products and Services.
9. INDEMNIFICATION. In addition to other indemnification provided herein,
Customer agrees to indemnify and hold harmless Company, each Company
Affiliate and the officers, directors, employees and agents of Company and
each Company Affiliate (each an "Indemnified Party") against any losses,
claims, damages, liabilities, penalties, actions, proceedings or judgments
(collectively, "Losses") to which an Indemnified Party may become subject
and which Losses arise out of, or relate to this Agreement or Customer's
use of the Services and Products, 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.
10. LIMITATION ON COMPANY LIABILITY. The parties acknowledge that the
limitations set forth in this Section 10 are integral to the amount of
fees levied in connection with this Agreement, and that, were Company to
assume any further liability other than as set forth herein, such fees
would of necessity be set substantially higher. Company does not monitor or
exercise control over the content of the information transmitted through
its facilities. Use of the Services and Products or any information that
may be obtained therefrom is at Customer's own risk. Company shall have no
responsibility or liability for the accuracy or quality of information
obtained through its Services and Products. Company shall not be deemed to
be in default of any provision of this Agreement or be liable for any
delay, failure of performance or interruption of the provision of Services
and Products to Customer 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, or (iv) other force or
occurrence beyond its control. The exclusive remedy against Company for
any damages whatsoever to Customer arising out of or related to this
Agreement shall be the refund of the fees paid by Customer to Company with
respect to the then current term of this Agreement. NEITHER PARTY SHALL BE
LIABLE FOR ANY INDIRECT, INCIDENTAL, SPECIAL OR CONSEQUENTIAL DAMAGES, OR
FOR ANY LOSS OF PROFITS OR LOSS OF REVENUE RESULTING FROM THE USE OF THE
COMPANY'S SERVICES AND PRODUCTS BY CUSTOMER OR ANY THIRD PARTIES EVEN IF
COMPANY HAS BEEN ADVISED OF THE POSSIBILITY THEREOF. COMPANY SHALL NOT BE
LIABLE FOR ANY LOSS OF DATA RESULTING FROM DELAYS, NONDELIVERIES,
MISDELIVERIES OR SERVICE INTERRUPTIONS. COMPANY PROVIDES THE SERVICES AND
PRODUCTS AS IS, WITHOUT WARRANTY OF ANY KIND, WHETHER EXPRESS OR IMPLIED.
COMPANY DISCLAIMS ALL IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO,
THE IMPLIED WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR
PURPOSE. CUSTOMER SHALL BE SOLELY RESPONSIBLE FOR THE SELECTION, USE AND
SUITABILITY OF THE SERVICES AND PRODUCTS AND COMPANY SHALL HAVE NO
LIABILITY THEREFORE. The limitations of liability provided in Section 10
of this Agreement shall inure to the benefit of Company and all Company
Affiliates and to all of the respective officers, directors, attorneys,
employees and agents of Company and such other entities ("Limited
Liability Parties"). The limitations of liability afforded Company 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.
11. OTHER CUSTOMER ASSURANCES. During any time period when Customer is
provided access to any facilities, hardware or other property owned or
leased by, or otherwise under the control of Company (collectively
"Company Property") pursuant to this Agreement, Customer shall (i)
maintain insurance, with Company as a named payee, covering any damage or
destruction to Company Property (collectively "Damage") and (ii) reimburse
Company for all expenses incurred by Company in replacing or repairing, as
the case may be, any Damage caused by Customer.
11.1 Limited Company Liability. Neither Company nor any of its officers,
directors, employees, and agents shall be liable for any damage or
destruction of equipment or other materials belonging to, leased by,
or otherwise under the control of Customer, whether or not any such
equipment or materials are at any time located in facilities owned or
operated by Company, except where such damage or destruction is a
direct result of the gross negligence, recklessness or willful
misconduct of Company or any of its officers, directors, employees,
and agents.
12. CONFIDENTIALITY.
12.1 CONFIDENTIALITY. The parties recognize that they will have access to
confidential proprietary information and/or trade secrets of the
other party. Customer specifically acknowledges that the Services and
Products constitute valuable trade secrets of Company. Accordingly,
the parties agree that (i) the provisions of this Agreement, (ii) any
information whatsoever with respect to the Services and Products,
(iii) the course of dealing between Company and Customer hereunder
and (iv) all other non-public information relating to the foregoing,
including but not limited to user information submitted through
Customer's web forms, and the number of such web forms submitted
(collectively, the "Confidential Information") shall be treated by
parties on a confidential basis and shall not be reproduced, reduced
to writing, or disclosed to any employees of the parties (except on a
need to know basis and then only if the employee is subject to an
obligation of confidentiality) or any other person or entity without
the prior written consent of the disclosing party. Upon termination
of this Agreement, any documentation or data reflecting any
Confidential Information shall be promptly returned to the disclosing
party. Disclosure of information pursuant to applicable statutes or
regulations (collectively, "Laws") shall be excepted from this
provision; provided, however, that prior to any disclosure pursuant
to any Laws, the recipient will assert the confidential nature of the
Confidential Information and will cooperate fully with the disclosing
party, at disclosing party's expense, in protecting against such
disclosure.
3
<PAGE> 4
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.
12.2 Tampering. The parties agree that they will not attempt to copy
or in any way, alter, re-engineer or otherwise tamper with any
of the Confidential Information.
12.3 Injunctive Relief. The parties acknowledge that violation of the
provisions of Sections 12.1 or 12.2, above, could cause
irreparable harm to the disclosing party not adequately
compensable by monetary damages. In addition to other relief, it
is agreed that injunctive relief shall be available to the
disclosing party in the event of such violations without
necessity of posting bond to prevent any actual or threatened
violations of such sections.
13. TRANSFER AND ASSIGNMENT. Neither party may sell, assign or transfer any
of its rights or obligations under this Agreement without the prior
written consent of the other party.
14. USE OF CUSTOMER'S OR COMPANY'S NAME. Company shall be permitted to use
Customer's name in connection with proposals to prospective customers
and otherwise in print or 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 Company or its business. Customer may use the
name "DIGEX" in connection with the Services and Products or otherwise
only with Company's prior written consent.
15. NO THIRD PARTY BENEFICIARIES. Except as otherwise specifically provided
herein, this Agreement inures to the benefit of Company and Customer
only and no third party shall enjoy the benefits of this Agreement or
shall have any rights hereunder.
16. NOTICES. 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, internationally, recognized overnight courier, registered
or certified mail (postage prepaid with return receipt requested), to
the address or facsimile number of Customer as set forth in the Order
Form or Company as set forth below. 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 (or, if
international, on the second business day) after being sent by an
internationally recognized overnight air courier or (iv) five days
after being sent, if sent by first class registered mail, return
receipt requested.
DIGEX, Inc., One DIGEX Plaza, Beltsville, Maryland, 20705, Attention: Vice
President, Client Services, Facsimile Number: (301) 847-5056
17. SURVIVAL OF CLAIMS Any claims arising out of or related to this
Agreement must be brought no later than one year after it has accrued.
18. INDEPENDENT CONTRACTOR STATUS. Nothing in this Agreement or in the
course of dealing between Company and Customer pursuant hereto shall be
deemed to create between Company and Customer (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.
19. GOVERNING LAW. 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.
20. DISPUTE RESOLUTION.
20.1 [INTENTIONALLY LEFT BLANK -- DELETION]
20.2 Arbitration. If a dispute or difference of any kind whatsoever
(a "Dispute") shall arise between Company and Customer 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 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
aforementioned thirty-day period, which arbitrators shall then
jointly appoint a third arbitrator within thirty (30) days after
the appointment of the second arbitrator, 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. All mediation and arbitration proceedings
pursuant to this Agreement shall take place in Prince George's
County, Maryland.
21. HEADINGS. The section and subsection headings have been used in this
Agreement as a matter of convenience only and shall not be used in the
interpretation of any provisions of this Agreement.
22. NON-WAIVER, WAIVER AND AMENDMENT. Failure by either Company or
Customer to enforce any of the provisions of this Agreement or any
rights with respect hereto or the failure to exercise any option
provided hereunder shall in no way be considered to be waiver of such
provisions, rights or options, or to in any way affect the validity of
this Agreement. No waiver of any rights under this Agreement, nor any
modification or amendment of this Agreement shall be effective or
enforceable unless in writing and signed by both parties, except by
Section 5, above.
23. SEVERABILITY. If one or more of the provisions contained in this
Agreement are found to be invalid, illegal or unenforceable in any
respect, the
4
<PAGE> 5
validity, legality and enforceability of the remaining provisions shall not
be affected.
24. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement of the
parties and supersedes all oral negotiations and prior writings with
respect thereto. When used in this Agreement, the terms "hereof," "herein"
and "hereunder" refer to this Agreement in its entirety, including any
attachments to this Agreement and not to any particular provisions of this
Agreement, unless otherwise indicated.
25. COUNTERPARTS. 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.
USE OF COMPANY SERVICES AND PRODUCTS CONSTITUTES ACCEPTANCE
OF THESE TERMS AND CONDITIONS
AGREED BY CUSTOMER: ARTIST DIRECT AGREED BY COMPANY: DIGEX, INC.
BY: BY:
------------------------------------ ------------------------------------
NAME: NAME:
---------------------------------- ----------------------------------
TITLE: TITLE:
--------------------------------- ---------------------------------
DATE: DATE:
---------------------------------- ----------------------------------
5
<PAGE> 6
ATTACHMENT A - ACCEPTABLE USE POLICY
Sections 3.6, 3.7 and 3.8 apply only to Web Site Management Group.
1. INTRODUCTION.
This document sets forth the principles, guidelines and requirements of
the Acceptable Use Policy of Intermedia Communications Inc. and its direct and
indirect wholly-owned subsidiaries, including, but to limited to, Digex,
Incorporated and Shared Technologies Fairchild Telecom, Inc. (collectively and
individually, the "Company") governing the use by the customer ("Customer") of
the Company's services and products ("Services and Products"). The Acceptable
Use Policy has been created to promote the integrity, security, reliability and
privacy of Company's Web Site Management Facility, network, and Customer data
contained within. Company retains the right to modify the Acceptable Use Policy
at any time and any such modification shall be automatically effective as to
all customers when adopted by the Company.
Questions or comments regarding the Acceptable Use Policy should be
forwarded to the Company via:
E-mail: [email protected]
Telephone: 301-847-6200, 1-800-=581-8711
2. COMPLIANCE WITH LAW.
Customer shall not post, transmit, re-transmit or store material on or
through any of Services or Products which, in the sole judgment of the Company
(i) is in violation of any local, state, federal, or non-United States law or
regulation, (ii) threatening, obscene, indecent, defamatory or that otherwise
could adversely affect any individual, group or entity (collectively,
"Persons") or (iii) violates the rights of any person, including rights
protected by copyright, trade secret, patent or other intellectual property or
similar laws or regulations including, but not limited to, the installation or
distribution of "pirated" or other software products that are not appropriately
licensed for use by Customer. Customer shall be responsible for determining
what laws or regulations are applicable to its use of the Services and Products.
3. PROHIBITED USES OF SERVICES AND PRODUCTS.
In addition to the other requirements of this Acceptable Use Policy, the
Customer may only use the Services and Products in a manner that, in the
Company's sole judgment, is consistent with the purposes of such Services and
Products. If the Customer is unsure of whether any contemplated use or action
is permitted, please contact the Company as provided above. By way of example,
and not limitation, uses described below of the Services and Products are
expressly prohibited.
3.1 General.
3.1.1. Resale of Services and Products, without the prior written
consent of the Company.
3.1.2. Deceptive on-line marketing practices.
3.1.3. Violations of the rights of any Person protected by
copyright, trade secret, patent or other intellectual
property or similar laws or regulations, including, but not
limited to, the installation or distribution of "pirated"
or other software products that are not appropriately
licensed for use by Customer.
3.1.4. Actions that restrict or inhibit any Person, whether a
customer of the Company or otherwise, in its use or
enjoyment of any of the Company's Services or Products.
3.2. System and Network.
3.2.1. Introduction of malicious programs into the network or
server (e.g., viruses and worms).
3.2.2. Effecting security breaches or disruptions of Internet
communication. Security breaches include, but are not
limited to, accessing data of which the Customer is not an
intended recipient or logging into a server or account that
the Customer is not expressly authorized to access. For
purposes of this Section 3.2.2., "disruption" includes, but
is not limited to, port scans, flood pings, packet spoofing
and forged routing information.
3.2.3. Executing any form of network monitoring which will
intercept data not intended for the Customer's server.
3.2.4. Circumventing user authentication or security of any host,
network or account.
3.2.5. Interfering with or denying service to any user other than
the Customer's host (for example, denial of service attack).
3.2.6. Using any program/script/command, or sending messages of
any kind, designed to interfere with
<PAGE> 7
or to disable, a user's terminal session, via any means, locally
or via the Internet.
3.2.7. Creating an "active" full time connection on a Company-provided
dial-up account for Internet access by using artificial means
involving software, programming or any other method.
3.2.8. Utilizing a Company-provided dial-up account for purposes for
Internet access other than facilitating connectivity to the
Services and Products provided by the Company. This includes
copying or creating files utilizing more than 5MB of disk space
on the dial-up account servers.
3.2.9. Failing to comply with the Company's procedure relating to the
activities of customers on the Company's premises.
3.3. Billing.
3.3.1. Furnishing false or incorrect data on the order from, contract or
online application, including fraudulent use of credit card
numbers.
3.3.2. Attempting to circumvent or alter the processes or procedures to
measure time, bandwidth utilization, or other methods to document
"use" of the Company's Services and Products.
3.4. Mail.
3.4.1. Sending unsolicited mail messages, including the sending of "junk
mail" or other advertising material to individuals who did not
specifically request such material, who were not previous
customers of the Customer or with whom the Customer does not have
an existing business relationship ("E-mail spam").
3.4.2. Harassment, whether through language, frequency or size of
messages.
3.4.3. Unauthorized use, or forging, of mail header information.
3.4.4. Solicitations of mail for any other E-mail address other than
that of the poster's account or service with the intent to harass
or to collect replies.
3.4.5. Creating or forwarding "chain letters" or other "pyramid schemes"
of any type.
3.4.6. Use of unsolicited E-mail originating from within the Company's
network or networks of other Internet Service Providers on behalf
of, or to advertise, any service hosted by the Company, or
connected via the Company's network.
3.5. Usenet Newsgroups.
3.5.1. Posting the same or similar messages to large numbers of Usenet
newsgroup ("Newsgroup spams").
3.5.2. Posting chain letters of any type.
3.5.3. Posting encoded binary files to newsgroups not specifically named
for that purpose.
3.5.4. Cancellation or superseding of posts other than your own.
3.5.5. Forging of header information.
3.5.6. Solicitations of mail for any other E-mail address other than
that of the poster's account or service, with intent to harass or
to collect replies.
3.5.7. Use of unsolicited E-mail originating from within the Company's
network or networks of other Internet Service Providers on behalf
of, or to advertise, any service hosted by the Company, or
connected via the Company's network.
Please note that the following only apply if the Customer uses the relevant
platform and has purchased web site hosting services and/or products.
3.6. Roles Regarding UNIX Managed Server.
3.6.1. Customer may not create/update/delete accounts created and
maintained by the Company. Specifically, the Company account may
not be altered in any manner nor may any account with a UID of
less than 1000 be altered.
3.6.2. Customer may not change the participating or mount points of any
drive.
3.6.3. Customer may not create/update/delete any file in the/usr
directory tree.
3.6.4. Customer may not install Microsoft(C) FrontPage Extensions unless
updated on the/usr directory tree.
3.6.5. Customer may not create .rhosts or/etc/.host.equiv files.
3.6.6. Customer may not implement any procedure or process that would
allow one to login as root
-2-
<PAGE> 8
without using the root password. Customer may not create
suid scripts or programs.
3.6.7. Customer may not alter the system kernel.
3.6.8. Customer may not alter the /sys or /etc/system directory
trees or any files contained therein.
3.6.9. Customer may not apply operating system and application
patches to software not installed and solely maintained
by the Customer, unless notification is given to the
Company.
3.6.10. Customer may not change the root shell.
3.6.11. Customer may not alter the contents of /.k5login.
3.6.12. Customer may not alter /etc/fstab or /etc/vfstab.
3.6.13. Customer may not share or export file systems. This
includes modifying /etc/exportfs, /etc/dfs/sharetab, and
/etc/netgroup.
3.6.14. Customer may not modify the decode or root alias in the
/etc/aliases file.
3.6.15. Customer may not change the "identify" of the system.
This includes modifying /etc/hosts, /etc/hostname.*,
/etc/defaultrouter, /etc/networks and /etc/ethers.
3.6.16. Customer may not modify the system in any manner that
restricts or alters access to the system by the
Company's employees.
3.6.17. Customer may acquire root privileges after successful
login of a valid non-root userid and using su to gain
access as root.
3.6.18. Customer may create/update/delete all aspects of
Customer created user accounts. This may include
modifying home directory permissions, user passwords,
etc.
3.6.19. Customer may use FTP to create/update/delete files and
directories.
3.6.20. Customer may add to, but may not modify, existing data
in the following configuration files: /etc/aliases,
/etc/group, /etc/rc.local, /etc/sendmail.cf file and
root crontab.
3.6.21. Customer may install software on the server provided the
installation meets all of the criteria detailed above,
and the Company is notified of such installation.
3.7. Roles Regarding Windows NT Managed Server.
3.7.1. Customer may not create/update/delete accounts created
and maintained by the Company. Specifically, Company
account may not be altered in any manner.
3.7.2. Customer may not install software that does not
execute as a service.
3.7.3. Customer may not install software that does not have a
remote administration capability.
3.7.4. Customer may not install applications that do not run
within a logon account different from that of the
installing user.
3.7.5. Customer may not install applications which must be
restarted when one user logs off and another user logs
on.
3.7.6. Customer may not install applications that do not
execute when an individual is not logged on to the
server.
3.7.7. Customer may not modify the network and system settings
of the server.
3.7.8. Customer may not apply operating system and application
patches to software not installed and solely maintained
by the Customer, unless notification is given to the
Company.
3.7.9. Customer may use FTP to create/update/delete files and
directories.
3.7.10. Customer may create/update/delete all aspects of
Customer created user accounts. This includes modifying
home directory permissions, user passwords, etc.
3.7.11. Customer may start and stop all Windows NT 4.0
Services, including the WWW and FTP services.
3.7.12. Customer may install software on the server provided
the installation meets all of the criteria detailed
above, and the Company is notified of such installation.
3.8. Abuse of bandwidth during a Web Site Management Beta Period will
result in termination of applicable network discounts and
commencement of billing based upon normal network recurring
charges.
4. ENFORCEMENT.
Company may immediately suspend and/or terminate the Customer's service
for violation of any provision of the Acceptable Use Policy upon verbal or
written notice, which notice may be provided by voicemail or E-mail. However,
the Company attempts to work with the Customer to cure violations of the
Acceptable Use Policy and to ensure that there is no re-occurrence of violations
prior to suspension and/or termination.
-3-
<PAGE> 9
GLOSSARY
- - ACCEPTABLE USE POLICY: Guidelines for services and products for Web
Hosting and Internet Connectivity.
- - ADDRESS/IP SPOOFING: Inserting forged routing information into network
packet(s) such that the origin of the packet is misreported, which causes
return packets to be misrouted.
- - BINARY FILES: A file containing bits or bytes that do not necessarily
represent printable text. The term binary file usually denotes any file
that is not a text file, such as executable machine language code. Special
software is required to print a binary file or view it on the screen.
- - BULK E-MAIL: Any group of messages sent via E-mail, with substantially
identical content, to a large number of addresses at once. Many ISPs
specify a threshold for bulk E-mail (e.g., 25 or more recipients within a
24-hour period). Taken by itself, bulk E-mail is not necessarily abuse of
the electronic mail system. For example, there are legitimate mailing
lists, some with hundreds or thousands of willing recipients.
- - COMMERCIAL E-MAIL: Any E-mail message sent for the purposes of distributing
information about a for-profit institution, soliciting purchase of products
or services, or soliciting any transfer of funds. It also includes
commercial activities by not-for-profit institutions.
- - CRACKS: Distribution of registration codes for software in violation of the
software license, or distribution of any software intended to defeat copy
protection.
- - DECEPTIVE ON-LINE MARKETING PRACTICES: Marketing practices that present a
false image of the advertised product (or of the advertiser). One example
of a deceptive on-line marketing practice would be an E-mail that purports
to originate from the recipient's ISP or from a well-known company. Other
examples include fraud, multi-level marketing, or any commercial or
non-commercial activity that is conducted for the purpose of confusing,
misleading or misinforming the E-mail and/or Internet users.
- - ELECTRONIC MAIL (E-MAIL) SPAM: Unsolicited E-mail from which a recipient
cannot unsubscribe, or unsolicited E-mail to a recipient who does not have
a previous business or other relationship with the sender.
- - FORGED ROUTING INFORMATION: Routing information which is misleading or
incorrect or which would tend to disguise the origin of the routed
material. Usually refers to information that is not generated by any
routing device (such as a mail server), but is inserted by a party using
software which is designed to produce false routing information (headers in
the case of E-mail).
- - FTP: File Transfer Protocol. A standard way of transferring files from one
computer to another on the Internet and on other TCP/IP networks. FTP is
also the name of any of various computer programs that implement the file
transfer protocol. Customers can also retrieve files by FTP using a web
browser.
- - MMF: Make Money Fast Schemes: Messages that "guarantee immediate,
incredible profits!," including such schemes as chain letters.
- - MAILBOMB: Delivery of enough E-mail to an electronic mailbox to overload
the mailbox or potentially overload the system that the mailbox is hosted
on.
- - NEWSGROUP SPAMS: A public forum or discussion area on a computer network.
All users of the network can post messages, and every user can read all
messages distributed worldwide by the Usenet system, covering thousands of
topics.
- - PACKET SPOOFING: Emitting a network packet with a source address you do not
have permission from the owner
-4-
<PAGE> 10
to use.
o PING FLOOD: Intentionally flooding a system's pipeline with ICMP
EchoRequests. This can reduce the bandwidth available for legitimate use
and, if severe enough, can bring a pipe down.
o PIRATED: Any copywritten material, commercial or noncommercial, that is
used, transmitted and/or stored without authorization.
o PYRAMID SCHEMES. A get-rich scheme in which you receive a message
containing a list of names. Recipients are expected to send money to the
first person on the list, cross the first name off, add their name at the
bottom and distribute copies of the message.
o SMURF/FRAGGLE: http://users.quadrunner.com/chuegen/smurf.txt
The "smurf" attack, named after its exploit program, is one of the
most recent types of network-level attacks against hosts. A perpetrator
sends a large amount of ICMP echo (ping) traffic at IP broadcast
addresses, all of which have a spoofed source address of a victim. If the
routing device delivering traffic to those broadcast addresses performs
the IP broadcast to layer-2 broadcast function, most hosts on that IP
network will take the ICMP echo request and reply to it with an echo reply
each, multiplying the traffic by the number of hosts responding. On a
multi-access broadcast network, there could potentially be hundreds of
machines to reply to each packet.
The "smurf" attack's cousin is called "fraggle," which uses UDP echo
packets in the same fashion as the ICMP echo packets. A "fraggle" is a
simple re-write of "smurf."
o SYSTEM KERNEL: The central part of an operating system. In most operating
systems, only the kernel can access hardware directly. (Also spelled
"kernal.")
o UNSOLICITED E-MAIL: Unsolicited E-mail is any E-mail message received
where the recipient did not specifically ask to receive it. Taken by
itself, unsolicited E-mail does not constitute abuse, and not all
unsolicited E-mail is undesired E-mail. For example, receiving
"unsolicited" E-mail from a long-lost friend or relative is certainly not
abuse.
o Unsolicited Bulk E-Mail (UBE): E-mail with substantially identical
content sent to many recipients who did not ask to receive it.
o Unsolicited Commercial E-mail (UCE): E-mail containing commercial
information that has been sent to a recipient who did not ask to
receive it.
o WORMS: An automated computer program that probes, breaks into, interferes
with or disrupts service for one or more computers, networks or services.
Similar to a virus, Trojan horse or other disabled device.
-5-
<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. [***] .
- --------------------------
[***] 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> 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 [***].
1.3 Store Transition:
1.3.1 The parties agree that a transition of the hosting and maintenance of the
Store from AEC to Company (the "Transition") shall be made on or about February
28, 1999 (or such alternative time as the parties hereto may mutually agree).
1.3.2 AEC shall provide technical support for the Store, including timely
maintenance and repair on any of the development completed on the Store features
developed by AEC, for three (3) months following the Transition. In the event
Company continues to require AEC technical support for the Store after such
three (3) month period, Company and AEC shall negotiate a reasonable monthly fee
payable by Company to AEC for such support services.
1.3.3 Company agrees to reimburse AEC for all reasonable ISP costs incurred by
AEC in connection with the Transition.
2. ORDER FULFILLMENT. Subject to the terms of this Section 2, AEC shall supply
to customers all Records and Consignment Product (collectively, "Product")
ordered by the customers of the Store (the "Customers"). In connection
therewith, AEC shall perform the fulfillment, technical and professional
services described below.
2.1 Fulfillment Services:
2.1.1 AEC shall process orders received from Store and arrange to have the
ordered Product shipped to the Customer. All orders will be quality controlled
through advanced sorting and UPC verification methods. However, AEC will have no
obligation to ship "Commercially Unavailable Product," which shall mean any
Record or other item of Product which, at the time the order for such item is
ordered by a Customer or during the process of such order being fulfilled, is
not in the inventory of AEC and, with respect to Records only: (a) is no longer
manufactured; (b) is not reasonably available to AEC from the company that
releases such product; or (c) has been deleted from the catalog of the company
that releases such items.
2.1.2 The Store shall provide advanced on-line connectivity in order to query or
commit Product orders for Customers in real time fulfillment.
2.1.3 AEC shall host a "Remote Order Entry" application that will permit Company
to manually enter Customer orders, cancel or delete orders, query order status
and process authorization for product returns, directly from the AEC fulfillment
computer system. This application will permit Company to access Customer orders.
2.1.4 AEC shall be an invisible fulfillment arm. AEC will produce custom Company
invoices with Company's logo and store policies, shipping labels and packaging
consistent with AEC technologies and capabilities that will accompany an order
to identify the product/order as from
- --------------------------
[***] Confidential treatment has been requested for the bracketed portion. The
confidential redacted portion has been omitted and filed separately with the
Securities and Exchange Commission.
Annex A - Page 2
<PAGE> 5
Company. AEC will affix stickers and any other identification labels as Company
may request from time to time in respect of all orders of Product, [***]. In
addition, AEC will, [***], insert promotional materials (e.g., stickers bearing
Company's logo, coupons, etc.) on behalf of Company with each shipment, [***]
shall bear the costs of invoices and shipping labels, provided [***] accepts
[***] invoice and shipping label formats (samples of which are attached hereto
as Exhibit 3). Special handling considerations not otherwise addressed herein
shall be reviewed during formal operations meetings and it is understood that
AEC and Company shall negotiate in good faith as to the cost, if any, which will
be charged for such special handling.
2.1.5 AEC will make available account representatives who will be responsible
for using reasonable efforts to meet all Company's customer service, product
sales, and technological needs for Company to manage the Store on an on-going
basis.
2.2 Shipping and Return Procedures:
2.2.1 Other than with respect to Commercially Unavailable Product, AEC
represents that (i) all Product for which a Verified Order has been received by
AEC prior to 3:00 PM Eastern Time shall be shipped on a same-day basis, and (ii)
no less than 95% of all units of Product shall be shipped from an AEC facility
within 24 hours of AEC's receipt of a Verified Order therefor. No Product shall
be shipped or otherwise released by AEC to any third party other than pursuant
to a Verified Order. As used herein, the term "Verified Order" means an order
that provides all of the relevant Customer information, including valid account,
address, credit card information and Product related information and for which
transaction authorization has been received by Company's (or AEC's, if
applicable) credit card contractor or payment from the Customer has otherwise
been received by Company.
2.2.2 Current methods of shipment include: United States Postal Service: and
United Parcel Service. AEC shall offer to Company the full range of shipping
options to Customers of Company at no additional cost above fees charged by the
shipping carriers. [***].
2.2.3 Company shall designate the return policies of the Store (which current
policies are set forth on Exhibit 4 attached hereto and shall not be subject to
significant changes in respect of Records without AEC's consent). AEC shall not
issue a refund or other credit to any Consumer for returned Product without
first verifying that Company has issued an appropriate return authorization for
the Product concerned. Company shall assume and pay for all shipping and other
costs incurred in respect of returned, exchanged, refused and undeliverable
Product, including all shipping and other costs incurred with respect to the
processing of an order if the Customer provides incorrect information to AEC, or
if Company causes incorrect order information (i.e., other than as provided by
the Customer) to be provided to AEC. Notwithstanding the foregoing, AEC shall be
responsible for all Product either incorrectly shipped to a Customer or damaged
while in transit to the Customer, but only if such Product was shipped via an
insured and traceable carrier. In such cases, AEC shall assume and pay for all
shipping and other costs incurred in the return or exchange of Product and will
ensure that Company incurs no product cost for the involved transaction. With
respect to all unopened
- --------------------------
[***] Confidential treatment has been requested for the bracketed
portion. The confidential redacted portion has been omitted and filed separately
with the Securities and Exchange Commission.
Annex A - Page 3
<PAGE> 6
Records returned by a Customer in accordance with the return policies of the
Store other than defective, damaged or incorrectly shipped Records, [***].
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
[***]. 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. [***].
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,
[***].
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. [***].
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, [***], under Company's credit card merchant clearing agreement. If AEC
should nevertheless receive
- --------------------------
[***] 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 5
<PAGE> 8
any monies from a Customer in respect of Product sold on the Store, it will
promptly pay over 100% of such monies to Company.
4. DATABASES.
4.1 AMG Database:
4.1.1 AEC hereby irrevocably grants to Company the non-exclusive license
(without the right of sub-license, whether to Company's affiliates or
otherwise), throughout the universe, to use, copy, display and otherwise exploit
the AMG Database, and any portions thereof, and the AMG Marks (as defined in
Section 5 below), solely in and as part of the Store and/or UBL.COM.
4.1.2 Subject to paragraph 4.3.7 below, the period of the license granted to
Company pursuant to this paragraph 4.1 shall commence on June 1, 1998 and end on
the date five (5) years after the expiration or termination of the term of this
Agreement (the "AMG License Period").
4.1.3 The rights licensed to Company hereby in respect of the AMG Database shall
include all future revisions, enhancements and updates thereto. In this regard,
AEC shall deliver to Company an updated copy of the most recent version of the
AMG Database no later than upon the fifth day of each month of the AMG License
Period (unless otherwise agreed upon by both parties) in a format to be mutually
agreed upon. Delivery shall be by FTP pickup, at a designated site for Company's
site, unless otherwise agreed by the parties. Any expenses for any other method
of delivery shall be borne by Company.
4.1.4 With respect to musical recordings sold on the Store during the term of
this Agreement via a digital transferring process when the AMG Database is used
to help promote and feature such sales, AEC shall receive [***] of the revenues
derived from such sales and actually received by Company [***].
4.1.5 If Company continues to use the AMG Database on the Store and/or UBL.COM
during the portion of the AMG License Period occurring after the expiration or
termination of the term of this Agreement, then, in consideration of the license
granted to Company under this paragraph 4.1, Company agrees to pay AEC a royalty
equal to [***] of the Net Monthly Sales generated after the expiration or
termination of the term of this Agreement, but only for as long as Company
continues to use the AMG Database. As used herein, the term "Net Monthly Sales"
shall mean amount of revenues [***].
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 [***].
5. AMG TRADEMARKS.
5.1 Company agrees to include the "All Music Guide" trademark, service mark
and/or associated design or logo (individually and collectively, the "AMG
Marks") with all presentations of AMG Database information on the Store and
UBL.COM (e.g., page view, discography listing, biography, album review, album
track listing), so as to inform the viewer that the data viewed has been
provided by the All Music Guide. The placement of the AMG Marks shall be
designated by AEC, subject to Company's approval, not to be unreasonably
withheld or delayed. Placement of the AMG Marks in accordance with the
illustrations attached hereto as Exhibit 9 attached hereto shall be deemed
pre-approved by AEC and Company. Without limiting the generality of the
foregoing, displays of the following AMG Database information will be marked
with the corresponding AMG logo and branding as set forth below: Artist
Biographies, Essays, and Album Reviews will be marked "AMG Biography," "AMG
Essay," and "AMG Review," respectively. After each biography and album review,
the name of the author, and the term "AMG" will be listed. Ratings will be
marked "AMG Ratings," and relational elements such as the following will be
marked as: "AMG Roots & Influences," "AMG Similar/Related Artists," "AMG Music
Maps," "AMG Track Listings" and "AMG Similar Albums."
5.2 During the AMG License Period, Company agrees to cause the AMG Marks to
appear prominently in all promotional materials prepared by Company in respect
of the Store, provided that any inadvertent failure to comply with this
paragraph 5.2 shall not be deemed a breach of this Agreement.
6. CONSIGNMENT PRODUCT.
6.1 With respect to all items of Consignment Product, as between AEC and
Company, Company shall be solely responsible for: (i) shipping the items to AEC
[***], (iii) assisting AEC in insuring that each item has a viable UPC code,
(iv) ensuring that each item is legal for sale and that Company has the legal
rights to request AEC to fill orders thereof.
6.2 The parties hereto anticipate that inventory of Consignment Product held by
AEC in its warehouses will be in such quantities and held for such periods of
time so as to allow an average
- -------------
[***] 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, [***] 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.
- -------------
[***] 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 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, [***].
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 [***]. 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
- ------------
[***] 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 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. [***].
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
- -------------
[***] 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 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
[***], in the case of a breach in any payment obligation hereunder, or [***], in
the case of a breach in any other kind of obligation hereunder, after the non
breaching party provides notice to the breaching party describing the breach(es)
in reasonable detail.
12.1.2 The failure by AEC to fulfill on a timely basis, in accordance with the
requirements set forth in paragraph 2.2.1 above, at least [***] of all orders
for units of Product received during any particular [***] period (except with
respect to Commercially Unavailable Product, cutouts and imports); provided,
however, that the preceding [***] figure shall instead be [***] with respect to
any thirty (30) day period, the majority of which occurs during a Surge Month.
As used herein, the term "Surge Month" shall mean any calendar month in which
the [***].
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
- --------------------------
[***] 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 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.
[***] 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 2 - Page 3
<PAGE> 28
d) A confirmation number will be assigned after the order is completed.
HELP
1. The Help Section. The help section of the Store will contain the following
topics. Many items will need continual updating to keep the information
presented up-to-date and accurate. Both AEC and Company will work closely
together on defining and maintaining this section of the Store.
a) Customer service
b) Database Search
c) Store Policies
d) Returns Processing
e) Back Orders
f) Special Orders
g) Shipping Rates
h) Frequently Asked Questions
Alliance Entertainment Corp.
Exhibit 2 - Page 4
<PAGE> 29
EXHIBIT 3
SAMPLE INVOICES
Alliance Entertainment Corp.
Exhibit 3
<PAGE> 30
EXHIBIT 4
RETURNS POLICY
Your satisfaction guaranteed!
If you have received damaged, defective, or incorrectly shipped merchandise
please notify Customer Service within 30 days and follow the instructions below.
We will gladly replace the merchandise without additional charge, or provide you
with a full refund.
If you are unsatisfied with your UBL purchase and the merchandise is unopened we
will be happy to exchange it for you. Original shipping and handling charges
cannot be refunded, and you will be responsible for all costs associated with
return shipment. No COD returns will be accepted.
A return must be approved by Customer Service. Once validated a Return
Authorization Number (RA#) is issued. At that time, Customer Service will
generate a new order and replace the item(s). All returns must display the
Return Authorization number on the outside of each box, along with the
customer's return address. Returns received at our facility without an
authorization will be refused on delivery.
Important Information
- Special order and open product are non-returnable.
- Prior to returning product, contents must be well packaged to
assure safe arrival. Product must be unopened, and in re-salable
condition. We recommend using the original packaging for
shipment.
- Shipments must be received pre-paid at our returns facility. Any
COD shipments will not be accepted.
RETURNS PROCEDURE
Please follow these simple steps to ensure your fast returns and appropriate new
shipment or credit.
1. CONTACT CUSTOMER SERVICE
You must contact Customer Service to obtain a RETURN AUTHORIZATION NUMBER (RA#).
Returns cannot be accepted without this number. You may contact Customer Service
in any of the following three ways:
- E-mail: [email protected]
- Phone: 1-800-538-3465, Monday to Friday, 9am to 6pm, Eastern
Standard Time
Alliance Entertainment Corp.
Exhibit 4
<PAGE> 31
- Fax: (954) 255-4837
2. INFORMATION NEEDED
Please have the following information ready before you call or as part of your
e-mail or fax.
1. Order confirmation number
2. Your name
3. Your e-mail address
4. Your phone number
5. Product #
6. Product Name
7. Reason for return
3. PACK AND SEND
1. Fill out the return label (provided on the back of your invoice),
including your RA#. RETURNS CANNOT BE ACCEPTED WITHOUT AN RA#.
2. Enclose merchandise and this completed form in a sturdy package (the
original package is preferred).
3. Enclose the original packing slip/invoice in the package.
4. Affix the return label to the outside of the package and send to the
following address:
Ultimate Band List Store
Attn: Returns Department
4250 Coral Ridge Drive
Coral Springs, FL 33065
Alliance Entertainment Corp.
Exhibit 4
<PAGE> 32
EXHIBIT 5
INTERNET FULFILLMENT PRICE LIST
a. I. Major Label and Independent Price List
(i) Compact Disc
(ii) Suggested List UBL Price
[***] [***]
[***] [***]
[***] [***]
[***] [***]
[***] [***]
[***] [***]
[***] [***]
[***] [***]
[***] [***]
[***] [***]
I = INDEPENDENT LABEL PRICE M = MAJOR LABEL PRICE
Cassette
(III) Suggested List UBL Price
[***] [***]
[***] [***]
[***] [***]
[***] [***]
[***] [***]
II. MONTHLY DISCOUNTS
Within thirty (30) days before the beginning of each calendar month,
Company and AEC shall use good faith efforts to agree upon [***].
- --------------------------
[***] Confidential treatment has been requested for the bracketed
portion. The confidential redacted portion has been omitted and filed separately
with the Securities and Exchange Commission.
Alliance Entertainment Corp.
Exhibit 5
<PAGE> 33
EXHIBIT 6
CONSIGNMENT PRODUCT FULFILLMENT FEES
-----------------------------------------------------------
Product Item Retail Price Fulfillment Fee
-----------------------------------------------------------
[***] [***]
[***] [***]
[***] [***]
[***] [***]
-----------------------------------------------------------
- --------------------------
[***] Confidential treatment has been requested for the bracketed
portion. The confidential redacted portion has been omitted and filed separately
with the Securities and Exchange Commission.
Alliance Entertainment Corp.
Exhibit 6
<PAGE> 34
EXHIBIT 7
SHIPPING RATES
[***]
- --------------------------
[***] Confidential treatment has been requested for the bracketed portion. The
confidential redacted portion has been omitted and filed separately with the
Securities and Exchange Commission.
Alliance Entertainment Corp.
Exhibit 7
<PAGE> 35
EXHIBIT 8
PACKAGING MATERIAL COSTS
-----------------------------------------------------------
Box Size Packaging Cost
-----------------------------------------------------------
[***] [***]
[***] [***]
[***] [***]
-----------------------------------------------------------
- --------------------------
[***] Confidential treatment has been requested for the bracketed portion. The
confidential redacted portion has been omitted and filed separately with the
Securities and Exchange Commission.
Alliance Entertainment Corp.
Exhibit 8
<PAGE> 36
EXHIBIT 9
AMG MARK PLACEMENT
Alliance Entertainment Corp.
<PAGE> 37
Amendment
This amendment ("Amendment") effective as of the ___ day of May 1999, amends and
supplements that certain Database, On-Line Internet Store And Consumer Direct
Fulfillment Services Agreement ("Agreement") dated as of August 15, 1998, by and
between AEC One Stop Group Inc., ("AEC") and THE ULTIMATE BAND LIST, LLC
("UBL"), (together the "Parties") as follows (all capitalized terms used in this
Amendment that are otherwise defined shall have the meanings given to such terms
in the Agreement).
WHEREAS UBL and its affiliates (signatories to the Agreement) ARTISTdirect New
Media, LLC and ARTISTdirect, LLC ("AD") (together the "Companies") have been
operating an e-commerce solution pursuant to the Agreement for some time, and
WHEREAS, UBL'S affiliate, Pollstar Inc., ("Pollstar") currently hosts an artist
and music information (i.e.: concert tour schedules, ticket sales results and
various industry directories) website (the "Pollstar Website"), and
WHEREAS, the Companies have reached an understanding with Pollstar to design a
custom e-commerce solution for Pollstar (the "Pollstar Store"), whereby AD will
develop, build, host, maintain, and manage the entire e-commerce effort tied-in
to the Pollstar Website, and
WHEREAS, the Companies desire to create the Pollstar Store by amending the
Agreement, to which AEC has agreed as amended herein.
NOW THEREFORE, in consideration for the terms and conditions herein contained,
the Parties have agreed to amend the Agreement to include the Pollstar Store
concept as follows:
1. Companies shall be permitted to serve to the Pollstar Store the services
specified below, which they currently receive from AEC under the Agreement.
In the absence of a relationship between AEC and Pollstar, the Companies
shall herein be responsible, liable and accountable for any actions, misuse
or unauthorized use of AEC property other than that permitted herein, by
Pollstar or third parties in contravention of the Agreement and this
Amendment.
2. Companies' Warranties and Obligations.
a) The Companies and Pollstar shall be solely responsible for the
development of the Pollstar Store. There shall be no responsibility
from AEC for any part of the development of the UBL/Pollstar Store.
b) The Companies may re-purpose a portion of the UBL store front-end
(using AEC and UBL technology and proprietary data) to create the
Pollstar Store, while maintaining the Pollstar Website appearance. The
Companies herein represent that the Pollstar's databases shall not
misrepresent the relationship established herein, or imply that a
relationship exists between AEC and Pollstar and the Pollstar Store.
c) AEC data, and the actual e-commerce transactions conducted, shall
reside and be processed on UBL servers.
d) UBL shall insure the AMG data served to the Pollstar site adheres to
AEC branding pursuant to the Agreement. Changes to provisions in the
Agreement, if any, shall be as follows: _________________.
e) The Companies shall all times protect and preserve AEC's rights under
the Agreement and this Amendment.
f) The Companies shall not transfer or issue any AEC technology ,
including AMG content and property to Pollstar for use on Pollstar's
own servers, and at no time shall Pollstar exercise any control over
any AEC technology and AMG content or property.
g) The creation of the Pollstar Store shall not, under this amendment,
create any right or a sublicense of AEC property to Pollstar or create
any relationship whatsoever between AEC and Pollstar.
h) Pollstar shall not be considered an agent of AEC.
i) As Pollstar may be deemed an affiliate of Companies, AEC may publicly
announce that Pollstar is AEC's chosen fulfillment source.
j) The Companies shall make certain that Pollstar indicate publicly that
AEC is Pollstar's Consumer Direct Fulfillment source for CD/Cassette
product sold through its Pollstar Store site.
k) UBL shall manage and support the Pollstar Store, including
merchandising, marketing, promotion and visuals.
l) UBL shall make AEC the product fulfillment partner for the entire
period in which the Companies support Pollstar's e-commerce solution
and UBL shall make AEC Pollstar's supplier of first resort for all
product orders supportive of AEC inventory.
1
<PAGE> 38
m) UBL shall provide AEC all pertinent consumer ordering information
regarding shipment of Pollstar Store generated product orders
compatible to AEC order processing requirements.
n) UBL shall be responsible for all customer product orders for AEC
inventory placed through Pollstar.
o) Pollstar Store consumer orders shall transmitted to AEC through UBL's
e-commerce servers , with Pollstar specific data (identifying the data
as a Pollstar order) clearly marked so not to be confused with a UBL
order.
p) UBL shall be responsible for payment to AEC of all Pollstar Store
generated product orders, as well as any other payments that would be
due under the Agreement (i.e.: customer support provided by AEC to
Pollstar's end-consumers).
q) UBL shall set up a separate billing account for Pollstar Store orders
with terms acceptable to AEC.
r) UBL shall, as soon as possible, inform AEC of any formal relationship
and/or agreement reached with Pollstar, and thereafter, of any changes
thereof.
3. AEC's Obligations:
a) AEC shall process the Pollstar Store product orders under Pollstar
identity, with any custom consumer packing and shipping instructions
pursuant to the Agreement. Changes to provisions in the Agreement, if
any, shall be as follows: __________________________________________.
b) AEC shall conduct end-consumer support on behalf of Pollstar,
consistent with the AEC End-User Call center definition. Changes to
provisions in the agreement, if any, shall be as follows: ___________.
c) AEC shall invoice UBL according to the Agreement. Changes to
provisions in the Agreement, if any, shall be as follows:
______________________________________________.
d) AEC shall provide UBL with daily order status files reflecting all
Pollstar Store order sales information. Changes to provisions in the
Agreement, if any, shall be as follows: __________________________
4. Conflicts. Any conflicts between the Agreement and the Addendum shall be
resolved in favor of the Addendum as they pertain to the Pollstar Store.
5. Except as specifically amended herein, all other provisions set forth in
the Agreement are hereby ratified and confirmed and remain be in force and
effect for the duration of the Term.
IN WITNESS WHEREOF, the parties have caused this Amendment to be executed by
their duly authorized representatives as of the date first written above.
COMPANY: AEC ONE STOP GROUP, INC.
-------------------------------- ------------------------
NAME:
---------------------------------- ----------------------------------
Individual signing (Please print) Individual signing (Please print)
SIGNATURE:
------------------------------ -----------------------------------
TITLE:
----------------------------------- -----------------------------------
2
<PAGE> 1
EXHIBIT 10.8
EXECUTION COPY
THIRD AMENDED AND RESTATED
REGISTRATION RIGHTS AGREEMENT
Dated as of November 12, 1999
Among
ARTISTDIRECT, INC.
and
CHASE VENTURE CAPITAL ASSOCIATES, L.P.
and
CASSANDRA/ARTISTDIRECT PARTNERS, LLC
and
CCP/PSILOS ARTISTDIRECT, LLC
and
CCP/PSILOS UBL, LLC
and
FLATIRON FUND 1998/99, LLC
and
FLATIRON ASSOCIATES, LLC
and
SPINNAKER TECHNOLOGY FUND, L.P.
and
SPINNAKER FOUNDERS FUND, L.P.
and
SPINNAKER CLIPPER FUND, L.P.
and
PSILOS GROUP PARTNERS L.P.
and
TORONTO DOMINION INVESTMENTS, INC.
and
CONSTELLATION VENTURE CAPITAL, L.P.
and
CONSTELLATION VENTURES (BVI), INC.
and
RICK RUBIN
and
MARK DI DIA
and
BRUCE E. VAN DALSEM
and
HENRY D. GRADSTEIN
and
MEADOWLANE ENTERPRISES LTD.
and
UNIVERSAL MUSIC GROUP, INC.
<PAGE> 2
This THIRD AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT is made
and entered into as of November 12, 1999, by and among ARTISTDIRECT, INC, a
Delaware corporation ("AD"), CHASE VENTURE CAPITAL ASSOCIATES, a California
limited partnership, CASSANDRA/ARTISTDIRECT PARTNERS, LLC, a Delaware limited
liability company, CCP/PSILOS ARTISTDIRECT, LLC, a Delaware limited liability
company, CCP/PSILOS UBL, LLC, a Delaware limited liability company, FLATIRON
FUND 1998/99 LLC, a Delaware limited liability company, FLATIRON ASSOCIATES,
LLC, a Delaware limited liability company, SPINNAKER TECHNOLOGY FUND, L.P., a
Delaware limited partnership, SPINNAKER FOUNDERS FUND, L.P., a Delaware limited
partnership, SPINNAKER CLIPPER FUND, L.P., a Delaware limited partnership,
PSILOS GROUP PARTNERS L.P., a Delaware limited partnership, TORONTO DOMINION
INVESTMENTS, INC., a Delaware corporation, CONSTELLATION VENTURE CAPITAL, L.P.,
a Delaware limited partnership, CONSTELLATION VENTURES (BVI), INC., a British
Virgin Islands corporation, MEADOWLANE ENTERPRISES LTD. ("Meadowlane") and
UNIVERSAL MUSIC GROUP, INC., a California corporation ("Universal") (the
foregoing entities, collectively and with the exception of AD, the "Investor
Securityholders"), MARK DI DIA, an individual ("Di Dia"), BRUCE E. VAN DALSEM,
an individual ("Van Dalsem"), HENRY D. GRADSTEIN, an individual ("Gradstein"),
and RICK RUBIN an individual ("Rubin"; each of the Investor Securityholders, Di
Dia, Van Dalsem, Gradstein and Rubin, a "Securityholder" and collectively, the
"Securityholders"), MARC P. GEIGER, an individual residing at 3378 Alginet
Drive, Encino, California 91436 ("Geiger"), and DONALD MULLER, an individual
residing a 20324 Howard Court, Woodland Hills, California 91364 ("Muller").
The Securityholders are the purchasers and holders, as the case may be,
of certain Registrable Securities (as defined below) issued by the Company. The
Company and the Securityholders deem it to be in their respective best interests
to set forth the rights of the Securityholders in connection with public
offerings and sales of the Registrable Securities.
Capitalized terms used herein and not otherwise defined shall have the
meanings ascribed them in the Stockholders Agreement.
NOW, THEREFORE, in consideration of the premises and mutual covenants
and obligations hereinafter set forth, the Company and each of the parties
hereto, intending legally to be bound, hereby agree as follows.
2
<PAGE> 3
SECTION 1. DEFINITIONS. As used in this Agreement, the following terms
shall have the following meanings:
"Affiliate" of any Person means any other Person who either directly or
indirectly is in Control of, is Controlled by, or is under common Control with
such Person; provided, that for purposes of this definition, an investment
entity shall be deemed to be Controlled by its investing manager, investment
advisor or general partner or by reason of contract or otherwise.
"Business Day" shall mean any Monday, Tuesday, Wednesday, Thursday or
Friday that is not a day on which banking institutions in the City of New York
are authorized by law, regulation or executive order to close.
"Capital Stock" shall mean any and all shares, interests, participation
rights or other equivalents (however designated) of capital stock of the
Company, and any and all rights, warrants and options to purchase any of the
foregoing.
"Company" shall mean AD and any successor to AD by way of merger,
consolidation, share exchange, or other reorganization or recombination.
"Consent Letter" shall mean that certain letter dated the date hereof,
among the Company and the Series C Preferred Stockholders, regarding the Series
C Preferred Stockholders' consent to the issuance of additional shares of Series
C Preferred Stock.
"Control" shall mean the power to direct the affairs of an entity by
reason of ownership of equity securities, by contract, or otherwise.
"Current Registration Statement" shall mean the Company's Registration
Statement on Form S-1 initially filed with the Securities and Exchange
Commission on September 22, 1999 (file number 333-87547), as amended from time
to time.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended (or any similar successor federal statute), and the rules and
regulations thereunder, as the same are in effect from time to time.
"First Issue AD Securities" shall mean the common stock issued or
issuable upon conversion of the 5,850,519 shares of Series A Preferred Stock
issued to Constellation Venture Capital, L.P. and Constellation Ventures (BVI),
Inc. pursuant to the Merger Agreement. The amount of First Issue AD Securities
shall not be adjusted to include any securities issued or issuable in connection
with any Preferred Return thereon.
"Founders" shall mean Geiger and Muller.
"Holder" shall mean any Person that owns Registrable Securities, and
including such successors and assigns as acquire Registrable Securities,
directly or indirectly, from such Person; provided, however, that for purposes
of Sections 3, 4 and 10, the term "Holder" shall not include the Founders,
including such successors and assigns as acquire Registrable Securities,
3
<PAGE> 4
directly or indirectly, from the Founders. For purposes of this Agreement, the
Company may deem the registered holder of a Registrable Security as the Holder
thereof.
"Investor Securityholders" has the meaning set forth in the preamble.
"Meadowlane Requisite Share Number" shall mean a number of Registrable
Securities representing (on an as converted basis) not less than the lesser of
(A) 25% of the aggregate shares of the Registrable Securities held by Meadowlane
as of the date of any such determination (calculated on a fully diluted basis)
or (B) $5 million in fair market value of Registrable Securities, as reasonably
determined by the Board of Directors of the Company.
"Merger Agreement" shall mean that certain Merger Agreement dated as of
October 6, 1999 by and between the Company and ARTISTdirect, LLC.
"Person" shall mean any individual, sole proprietorship, partnership,
limited liability company, joint venture, trust, unincorporated organization,
association, corporation, institution, public benefit corporation, entity or
government (whether federal, state, county, city, municipal or otherwise,
including, any instrumentality, division, agency, body or department thereof).
"Prospectus" shall mean the prospectus included in any Registration
Statement, as amended or supplemented by a prospectus supplement with respect to
the terms of the offering of any portion of the Registrable Securities covered
by such Registration Statement and by all other amendments and supplements to
the prospectus, including post-effective amendments and all material
incorporated by reference in such prospectus.
"Registrable Class" shall mean the class of Capital Stock which includes
the Registrable Securities.
"Registrable Securities" shall mean (i) the common stock issuable upon
conversion of the Company's Series A Preferred Stock, Series B Preferred Stock
and Series C Preferred Stock, (ii) the shares of common stock issued pursuant to
the Merger Agreement (including any such shares which were transferred to Di
Dia, Van Dalsem and Gradstein prior to the date hereof), (iii) any shares of
common stock acquired from time to time (A) from the Company pursuant to Section
2.1 of the Stockholders Agreement or (B) pursuant to Section 5.5 of the
Stockholders Agreement, (iv) any shares of Common Stock acquired from the
Company in connection with a Roll-up Transaction (as defined in that certain
Memorandum of Understanding dated as of the date hereof between the Company and
Universal and/or its Affiliates), (v) any common stock of the Company issued as
(or issuable upon the conversion or exercise of any warrant, right or other
security which is issued as) a dividend, split or reverse split, combination,
recapitalization, reclassification, merger or consolidation, exchange, or other
distribution with respect to, or in exchange for or in replacement of, the
shares referenced in (i), (ii), (iii) and (iv) above, excluding in all cases,
however, any Registrable Securities sold by a Holder in a transaction in which
such Holder's rights under this Agreement are not assigned. Notwithstanding the
foregoing, common stock or other securities shall only be treated as Registrable
Securities if and so long as they have not been (A) sold to or through a broker
or
4
<PAGE> 5
dealer or underwriter in a registered public distribution, or (B) sold in a
transaction exempt from the registration and prospectus delivery requirements of
the Securities Act under Section 4(1) thereof (including Rule 144 promulgated
thereunder) so that all transfer restrictions, and restrictive legends with
respect thereto, if any, are removed upon the consummation of such sale.
"Registration Expenses" shall have the definition set forth in Section 7
hereof.
"Registration Statement" shall mean any registration statement which
covers any of the Registrable Securities pursuant to the provisions of this
Agreement, including the Prospectus included therein, all amendments and
supplements to such Registration Statement, including post-effective amendments,
all exhibits and all material incorporated by reference in such Registration
Statement.
"Requisite Share Number" shall mean (i) in the case of a demand made for
an initial public offering of the Company, a number of Registrable Securities
representing (on an as converted basis) not less than either the lesser of (A)
5% of the aggregate shares of the Registrable Class outstanding as of the date
of any such determination (calculated on a fully diluted basis) or (B) $5
million in fair market value of Registrable Securities, as reasonably determined
by the Board of Directors of the Company, or (ii) in the case of a demand made
for an offering after an initial public offering of the Company a number of
Registrable Securities (A) described in clause (i)(B) above or (B) such lesser
number of Registrable Securities as constitutes, in the aggregate, not less than
2% of the total number of shares of the Registrable Class then outstanding
(calculated on a fully diluted basis), provided, that such number includes all
Registrable Securities then owned by the Securityholders (or issued in
connection with any dividend, split or reverse split, combination,
recapitalization, reclassification, merger or consolidation, exchange or
distribution in respect of the interests issued thereunder).
"Rescission Offer Registration" shall mean (i) any registration
statement of the type contemplated under the caption "Rescission Offer" in the
current version of the Company's Registration Statement or Form S-1 (a copy of
which is attached as Exhibit A hereto) and (ii) any other registration
statement, in each case of (i) and (ii), solely covering shares issued or
issuable to employees, artists and their managers and advisors.
"Rule 144" shall mean Rule 144 promulgated under the Securities Act, as
amended from time to time, or any similar successor rule thereto that may be
promulgated by the SEC.
"Rule 144A" shall mean Rule 144A promulgated under the Securities Act,
as amended from time to time, or any similar successor rule thereto that may be
promulgated by the SEC.
"Rule 415" shall mean Rule 415 promulgated under the Securities Act, as
amended from time to time, or any similar successor rule thereto that may be
promulgated by the SEC.
"SEC" shall mean the Securities and Exchange Commission, or any other
federal
5
<PAGE> 6
agency at the time administering the Securities Act.
"Securities Act" shall mean the Securities Act of 1933, as amended (or
any similar successor federal statute), and the rules and regulations
thereunder, as the same are in effect from time to time.
"Series C Preferred Stockholder" shall mean Meadowlane and Universal and
any of their permitted transferees pursuant to Section 5.5 of the Stockholders
Agreement and to whom such transferees are assigned rights hereunder pursuant to
Section 15 hereunder.
"Series C Requisite Share Number" shall mean a number of Registrable
Securities representing (on an as converted basis) not less than the lesser of
(A) 10% of the aggregate shares of the Registrable Securities held by the Series
C Preferred Stockholders as of the date of any such determination (calculated on
a fully diluted basis) or (B) $5 million in fair market value of Registrable
Securities, as reasonably determined by the Board of Directors of the Company.
"Shelf Registration" shall mean the registration of Registrable
Securities for sale on a continuous or delayed basis pursuant to Rule 415.
"Shelf Registration Statement" shall mean a Registration Statement filed
in connection with a Shelf Registration.
"Stockholders Agreement" shall mean that certain Amended and Restated
Stockholders Agreement dated as of the date hereof, among the Company and
certain of its stockholders.
"Underwritten Offering" shall mean a registered offering in which
securities of the Company are sold to an underwriter for resale to the general
public.
SECTION 2. SECURITIES SUBJECT TO THIS AGREEMENT. The securities entitled
to the benefits of this Agreement are the Registrable Securities. This Agreement
will terminate with respect to any Holder after the earlier of (i) ten years
following the consummation of an initial public offering of the Registrable
Class of the Company or (ii) such time as Rule 144 or another similar exemption
under the Securities Act is available for the sale of all of such Holder's
Registrable Securities without restriction as to volume.
SECTION 3. DEMAND REGISTRATION.
(a) Demand Registrations.
(i) Securityholders' Demand. Upon the written request of a
Securityholder or Securityholders (other than a Series C Preferred Stockholder,
which shall not be entitled to initiate a registration effected pursuant this
Section 3(a)(i)) of a majority of the Registrable Securities (the "Initiating
Holders"), requesting that the Company effect the registration under the
Securities Act, at any time after the earlier of (A) May 18, 2004 or (B) the
expiration or earlier termination of any lockup period required by the managing
underwriter or
6
<PAGE> 7
underwriters of the initial public offering of the securities of the Company
(which such period shall not exceed 180 days), of Registrable Securities and
securities of the same class as the Registrable Securities (which shall be
treated as Registrable Securities pursuant to this Agreement in connection with
such offering) constituting not less than the Requisite Share Number; provided,
however, that to the extent the Initiating Holders hold Registrable Securities
constituting less than the Requisite Share Number, the Initiating Holders shall
offer to the Founders the first opportunity to include a "pro rata portion" (as
defined below) of their respective securities of the same class as the
Registrable Securities in any demand registration effected pursuant to this
Section 3(a)(i) in order to meet the Requisite Share Numbers, and specifying the
intended method of disposition thereof (which may, if the Company is eligible to
register common stock on Form S-3 or any similar form, include a continuous or
delayed offering pursuant to a Shelf Registration Statement), the Company will
use its best efforts to effect, as expeditiously as possible, the registration
under the Securities Act of such Registrable Securities; provided, however, that
the Company shall not be obligated to (X) effect more than an aggregate of four
demand registrations pursuant to this Section 3(a)(i) or (Y) register any
Registrable Securities pursuant to this Section 3(a)(i) for a period of 6 months
following the date on which a Registration Statement filed in respect of any
previous demand registration under Section 3(a), if any, was declared effective;
provided further, that the Company's delay right set forth in the foregoing
proviso shall not apply to any registration request pursuant to this Section
3(a)(i) delivered to the Company within 60 days of the expiration of the
applicable lock-up period described in clauses (i)(A) and (i)(B) above.
For the purposes of this Section 3(a)(i) the term "pro rata portion"
shall mean Donald Muller's or Marc Geiger's pro rata portion of the difference
between (i) the number of shares of Registrable Securities with respect to which
(based on their respective share ownership) the Initiating Holders made their
demand and (ii) the Requisite Share Number.
Upon receipt of any request for registration pursuant to this Section
3(a)(i) from any Holders of Registrable Securities, the Company shall promptly
give written notice of such request to all other Holders (including the Series C
Preferred Stockholders). The Company shall include in the requested registration
all Registrable Securities requested to be included by such of the other Holders
who shall make such request by written notice to the Company delivered within 10
Business Days of their receipt of the Company's notice. If the Company shall
receive a request for inclusion in the registration of the Registrable
Securities of additional Holders, it shall promptly so inform the Initiating
Holders.
The Initiating Holders holding a majority of the Registrable Securities
requested to be registered pursuant to this Section 3(a)(i) may, at any time
prior to the effective date of the Registration Statement relating to such
registration, revoke such request by providing a written notice to the Company
revoking such request; provided, however, that the Registration Expenses with
respect to (i) the first such revoked request shall be borne by the Company,
(ii) the second such revoked request shall be borne by the Initiating Holders
and any other holder that indicated it would be including its securities in such
demand registration and (iii) the third such revoked request and any request
made thereafter shall be borne by the Initiating Holders or at the election of
the Initiating Holders, shall be borne by the Company; provided, however, that
upon making any such election to cause the Company to bear such Registration
Expenses, the amount of
7
<PAGE> 8
demand registrations that the Company shall be obligated to effect pursuant to
this Section 3(a)(i) shall be reduced by one.
(ii) Series C Preferred Demand. Upon the written request of one or
more Series C Preferred Stockholders requesting that the Company effect the
registration under the Securities Act, at any time after the earlier of (A) May
18, 2004 or (B) the one-year anniversary of the consummation of the initial
public offering of the securities of the Company, of Registrable Securities
constituting the Series C Requisite Share Number, and specifying the intended
method of disposition thereof (which may, if the Company is eligible to register
common stock on Form S-3 or any similar form, include a continuous or delayed
offering pursuant to a Shelf Registration Statement), the Company will use its
best efforts to effect, as expeditiously as possible, the registration under the
Securities Act of such Registrable Securities; provided, however, that the
Company shall not be obligated (X) to effect more than three demand
registrations pursuant to this Section 3(a)(ii) or (Y) register any Registrable
Securities pursuant to this Section 3(a)(ii) for a period of 6 months following
the date on which a Registration Statement filed in respect of any previous
demand registration under Section 3(a), if any, was declared effective; provided
further, that the Company's delay right set forth in the foregoing proviso shall
not apply to any registration request pursuant to this Section 3(a)(ii)
delivered to the Company within 60 days of the expiration of the applicable
lock-up period described in clauses (ii)(A) and (ii)(B) above; and provided
further, that the number of demand registrations set forth in the first proviso
shall be increased by up to two additional demand registration rights, if any,
pursuant to the Consent Letter.
Upon receipt of any request for registration pursuant to this Section
3(a)(ii) from any Holders of Registrable Securities, the Company shall promptly
give written notice of such request to all other Holders. The Company shall
include in the requested registration all Registrable Securities requested to be
included by such of the other Holders who shall make such request by written
notice to the Company delivered within 10 Business Days of their receipt of the
Company's notice. If the Company shall receive a request for inclusion in the
registration of the Registrable Securities of additional Holders, it shall
promptly so inform the Holders requesting registration under this Section
3(a)(ii).
The Holders of a majority of the Registrable Securities requested to be
registered by the Series C Preferred Stockholders pursuant to this Section
3(a)(ii) may, at any time prior to the effective date of the Registration
Statement relating to such registration, revoke such request by providing a
written notice to the Company revoking such request; provided, however, that the
Registration Expenses with respect to (i) the first such revoked request shall
be borne by the Company, (ii) the second such revoked request shall be borne by
such Holders and any other holder that indicated it would be including its
securities in such demand registration and (iii) the third such revoked request
and any request made thereafter shall be borne by such Holders or at the
election of such Holders, shall be borne by the Company; provided, however, that
upon making any such election to cause the Company to bear such Registration
Expenses, the amount of demand registrations that the Company shall be obligated
to effect pursuant to this Section 3(a)(ii) shall be reduced by one.
(iii) Meadowlane Demand. Upon the written request of Meadowlane
8
<PAGE> 9
requesting that the Company effect the registration under the Securities Act, at
any time after the consummation of the Roll-Up Transaction (if at all), of
Registrable Securities constituting at least the Meadowlane Requisite Share
Number, and specifying the intended method of disposition thereof (which may, if
the Company is eligible to register common stock on Form S-3 or any similar
form, include a continuous or delayed offering pursuant to a Shelf Registration
Statement), the Company will use its best efforts to effect, as expeditiously as
possible, the registration under the Securities Act of such Registrable
Securities; provided, however, that the Company shall not be obligated to (A)
effect more than one (or two, if the fair market value of the shares of the
Company's stock received by Meadowlane in connection with, and at the time of,
the Roll-Up Transaction is equal to or greater than $100,000,000) demand
registration(s) pursuant to this Section 3(a)(iii) or (B) register any
Registrable Securities pursuant to this Section 3(a)(iii) for a period of 6
months following the date on which a Registration Statement filed in respect of
any previous demand registration under Section 3(a), if any, was declared
effective; provided further, that the Company's delay right set forth in the
foregoing proviso shall not apply to any registration request pursuant to this
Section 3(a)(iii) delivered to the Company within 60 days of the consummation of
the Roll-Up Transaction.
Upon receipt of any request for registration pursuant to this Section
3(a)(iii) from any Holders of Registrable Securities, the Company shall promptly
give written notice of such request to all other Holders. The Company shall
include in the requested registration all Registrable Securities requested to be
included by such of the other Holders who shall make such request by written
notice to the Company delivered within 10 Business Days of their receipt of the
Company's notice. If the Company shall receive a request for inclusion in the
registration of the Registrable Securities of additional Holders, it shall
promptly so inform Meadowlane.
Meadowlane may, at any time prior to the effective date of the
Registration Statement relating to a registration under this Section 3(a)(iii),
revoke such request by providing a written notice to the Company revoking such
request; provided, however, that the Registration Expenses with respect to (i)
the first such revoked request shall be borne by the Company, (ii) the second
such revoked request shall be borne by Meadowlane and any other holder that
indicated it would be including its securities in such demand registration and
(iii) the third such revoked request and any request made thereafter shall be
borne by Meadowlane or at the election of Meadowlane, shall be borne by the
Company; provided, however, that upon making any such election to cause the
Company to bear such Registration Expenses, the amount of demand registrations
that the Company shall be obligated to effect pursuant to this Section 3(a)(iii)
shall be reduced by one.
(b) Effectiveness of Registration Statement. The Company agrees to use
its best efforts to (i) cause the Registration Statement relating to any demand
registration pursuant to this Section 3 to become effective as promptly as
practicable; (ii) thereafter keep such Registration Statement effective
continuously for the period specified in the next succeeding paragraph; and
(iii) prevent the occurrence of any event of the kinds described in clauses (4),
(5) and (6) of Section 5(a)(ii).
A demand registration requested pursuant to this Section 3 will not be
deemed to
9
<PAGE> 10
have been effected unless the Registration Statement relating thereto has become
effective under the Securities Act and remained continuously effective (except
as otherwise permitted under this Agreement) for a period ending on the earlier
of (i) the date which is six months after the effective date of such
Registration Statement (or as to a Shelf Registration Statement the date on
which all Registrable Securities covered thereby are eligible for sale without
limitation as to volume pursuant to Rule 144), subject to extension as provided
in the final paragraph of Section 5(a) and (ii) the date on which all
Registrable Securities covered by such Registration Statement have been sold and
the distribution contemplated thereby has been completed; provided, however,
that if, after such Registration Statement has become effective, the offering of
the Registrable Securities pursuant to such registration is interfered with by
any stop order, injunction or similar order of the SEC or other governmental
agency or court (other than by reason of any untrue statement of a material fact
or any omission of a material fact required to be stated in the Registration
Statement or necessary to make the statements therein not misleading, to the
extent, but only to the extent, that such untrue statement or omission is
contained in any information furnished in writing by a Holder to the Company
specifically for inclusion therein), such registration will be deemed not to
have been effected. The Company undertakes to use its best efforts to cause such
interference to be removed or terminated.
(c) Inclusion of Other Securities. The Company, and any other holder of
the Company's securities who has registration rights (an "additional requesting
holder"), may include its securities in any demand registration effected
pursuant to this Agreement; provided, however, that if the managing underwriter
or underwriters of a proposed Underwritten Offering contemplated thereby advise
the Holder or Holders in writing (i) that the total amount or kind of securities
which the Company or any such additional requesting holder intends to include in
such proposed public offering is sufficiently large or of a type to materially
adversely affect the success of the proposed public offering requested by the
Holder or Holders, then the amount of securities to be offered for the account
of the Company or any such additional requesting holder, except a
Securityholder, shall first be reduced pro rata and, (ii) thereafter, if the
amount of securities of the Company and all additional requesting holders (other
than Holders) has been reduced to zero pursuant to Section 3(c)(i) and the
amount of securities the Holders intend to include in such proposed public
offering is greater than the number which can be offered without materially and
adversely affecting the success of such proposed public offering, the amount of
securities to be offered for the accounts of such requesting Holders shall be
reduced pro rata (except as provided below) to the extent necessary to reduce
the total amount of securities to be included in such proposed public offering
to the amount recommended by such managing underwriter or underwriters;
provided, however, that any First Issue AD Securities intended to be included in
any registration effected pursuant to this Section 3 shall in no event be
subject to reduction pursuant to this Section 3(c) in the case of a registration
initiated pursuant to Section 3(a)(i). For purposes of this Section 3(c), the
term "pro rata" shall mean the pro rata portion of Registrable Securities,
excluding any First Issue AD Securities.
(d) Delay of Registration. Notwithstanding the terms of this Section 3,
if the Company shall furnish to Initiating Holders (or the Series C Preferred
Stockholders, in the case of a registration pursuant to Section 3(a)(ii); or
Meadowlane, in the case of a registration pursuant to Section 3(a)(iii)), a
certificate signed by the President of the Company stating that in the good
faith judgment of the Board of Directors of the Company, it would be seriously
10
<PAGE> 11
detrimental to the Company and its stockholders for such registration statement
to be filed and it is therefore essential to defer the filing of such
registration statement, the Company shall have the right to defer such filing
for a period of not more than 90 days after receipt of the request of the
Initiating Holders (or Meadowlane or the Series C Preferred Stockholders, as the
case may be); provided, however, that the Company may not utilize this right (i)
more than twice in any 12 month period with respect to registration requests
made pursuant to Section 3(a)(i), more than twice in any 12 month period with
respect to registration requests made pursuant to Section 3(a)(ii), and more
than twice with respect to registration requests made pursuant to Section
3(a)(iii) in any 12 month period or (ii) during the 60 days following the
expiration or earlier termination of any lockup period required by the managing
underwriter or underwriters of the initial public offering of the securities of
the Company unless all Holders were given the opportunity to participate in such
initial public offering and the amount of securities offered for the accounts of
all such Holders was not reduced; and, provided, further, that the aggregate of
the period of any such deferral and the period in which dispositions of
Registrable Securities are restricted pursuant to Section 3(a) and Section 10(c)
shall not exceed 180 days in any 12 month period (other than the 12 month period
in which the initial public offering of the Company occurs, in which case such
aggregate shall not exceed 270 days), measured separately for each of (A) the
Initiating Holders, with respect to registration requests pursuant to Section
3(a)(i), (B) the Series C Preferred Stockholders, with respect to registration
requests pursuant to Section 3(a)(ii), and (C) Meadowlane, with respect to
registration requests pursuant to Section 3(a)(iii).
SECTION 4. PIGGYBACK REGISTRATION. If the Company at any time proposes
to file a registration statement with respect to any class of equity securities,
whether for its own account (other than the Current Registration Statement or in
connection with any registration statement contemplated by Section 3 or a
registration statement on Form S-4 or S-8 (or any successor or substantially
similar form), any Rescission Offer Registration, or a registration statement
filed in connection with an exchange offer or offering or securities solely to
the Company's existing securityholders), or for the account of a holder of
securities of the Company (a "Requesting Securityholder"), then the Company
shall in each case give written notice of such proposed filing to the Founders
and all Holders of Registrable Securities at least 15 Business Days before the
anticipated filing date of any such registration statement by the Company, and
such notice shall offer to the Founders and all Holders the opportunity to have
any or all of the Registrable Securities held by the Founders and such Holders
included in such registration statement. Each of the Founders and each Holder of
Registrable Securities desiring to have its Registrable Securities registered
under this Section 4 shall so advise the Company in writing within 15 days after
the date of receipt of such notice (which request shall set forth the amount of
Registrable Securities for which registration is requested), and the Company
shall include in such Registration Statement all such Registrable Securities so
requested to be included therein. Notwithstanding the foregoing, if the managing
underwriter or underwriters of any such proposed public offering advises the
Company in writing that the total amount or kind of securities which the
Founders and the Holders of Registrable Securities, the Company and any other
persons or entities intended to be included in such proposed public offering is
sufficiently large to materially adversely affect the success of such proposed
public offering, then (A) the amount or kind of securities to be offered for the
accounts of the Company and holders of securities of the Company (except for the
Founders and Securityholders), to the extent that the Company did not initiate
such registration for its own account or such holders of securities are
11
<PAGE> 12
not Requesting Securityholders, shall first be reduced pro rata, and (B) if the
amount of securities to be offered for such accounts is reduced to zero, to the
extent further reduction is necessary, the amount or kind of securities to be
offered for the accounts of the Founders shall next be reduced pro rata and, (C)
if the amount of securities to be offered for the accounts of the Founders is
reduced to zero, to the extent further reduction is necessary, the amount or
kind of securities to be offered for the accounts of the Securityholders of
Registrable Securities shall then be reduced pro rata to the extent necessary to
reduce the total amount or kind of securities to be included in such proposed
public offering to the amount or kind recommended by such managing underwriter
or underwriters before the securities offered by the Company, to the extent the
Company has initiated the registration for its own account, or any Requesting
Securityholder, are so reduced.
Notwithstanding the foregoing, the Company may withdraw any registration
statement that is subject to this Section 4 at any time prior to the time it
became effective.
SECTION 5. REGISTRATION PROCEDURES.
(a) General. In connection with the Company's registration obligations
hereunder, the Company will:
(i) prepare and file with the SEC a new Registration Statement
or such amendments and post-effective amendments to an existing
Registration Statement as may be necessary to keep such Registration
Statement effective for the time periods set forth in Section 3(c),
provided that no Registration Statement shall be required to remain in
effect after all Registrable Securities covered by such Registration
Statement have been sold and distributed as contemplated by such
Registration Statement, and, provided, further, that as soon as
practicable, but in no event later than three Business Days before
filing such Registration Statement, any related Prospectus or any
amendment or supplement thereto, other than any amendment or supplement
which is automatically and solely made as a result of incorporation by
reference of documents filed with the SEC subsequent to the filing of
such Registration Statement, the Company shall furnish to the Holders of
the Registrable Securities covered by such Registration Statement and
the underwriters, if any, copies of all such documents proposed to be
filed, which documents shall be subject to the review of such Holders
and underwriters; not file any Registration Statement or amendment
thereto or any Prospectus or any supplement thereto (other than any
amendment or supplement which is automatically and solely made as a
result of incorporation by reference of documents filed with the SEC
subsequent to the filing of such Registration Statement) to which the
managing underwriters of the applicable offering, if any, or the Holders
of a majority of the Registrable Securities on a Registrable Class
stock-equivalent basis covered by such Registration Statement (or, in
the case of a registration pursuant to Section 3(a)(ii), the Holders of
a majority of the Registrable Securities requested to be included by the
Series C Preferred Stockholders; or, in the case of a registration
pursuant to Section 3(a)(iii), Meadowlane) shall have reasonably
objected in writing to the effect that such Registration Statement or
amendment thereto or Prospectus or supplement thereto does not comply in
all material respects with the requirements of the Securities Act
(provided that the foregoing shall not limit the right of any Holder
whose Registrable Securities are covered by a Registration Statement to
12
<PAGE> 13
reasonably object, within two Business Days after receipt of such
documents, to any particular information that is to be contained in such
Registration Statement, amendment, Prospectus or supplement that relates
specifically to such Holder, including, without limitation, any
information describing the manner in which such Holder acquired such
Registrable Securities and the intended method or methods of
distribution of such Registrable Securities), and if the Company is
unable to file any such document due to the objections of such
underwriters or such Holders, the Company shall use its best efforts to
cooperate with such underwriters and Holders to prepare, as soon as
practicable, a document that is responsive in all material respects to
the reasonable objections of such underwriters and Holders; cause the
Prospectus to be supplemented by any required Prospectus supplement, and
as so supplemented to be filed pursuant to Rule 424 under the Securities
Act; and comply with the provisions of the Securities Act applicable to
the Company with respect to the disposition of all securities covered by
such Registration Statement during the applicable period in accordance
with the intended method or methods of distribution by the sellers
thereof set forth in such Registration Statement or supplement to the
Prospectus;
(ii) notify the selling Holders of Registrable Securities
and the managing underwriters, if any, promptly (1) when a new
Registration Statement, Prospectus or any Prospectus supplement or
post-effective amendment has been filed, and, with respect to any new
Registration Statement or post-effective amendment, when it has become
effective, (2) of any request by the SEC for amendments or supplements
to any Registration Statement or Prospectus or for additional
information, (3) of the issuance by the SEC of any comments with respect
to any filing, (4) of any stop order suspending the effectiveness of any
Registration Statement or the initiation of any proceedings for that
purpose, (5) in the case of an Underwritten Offering, if at any time the
representations and warranties of the Company contemplated by paragraph
(xi) below cease to be true and correct as of any time they are required
to be true and correct, (6) of any suspension of the qualification of
the Registrable Securities for sale in any jurisdiction or the
initiation or threatening of any proceeding for such purpose and (7) of
the happening of any event which makes any statement of a material fact
made in any Registration Statement, Prospectus or any document
incorporated therein by reference untrue or which requires the making of
any changes in any Registration Statement, Prospectus or any document
incorporated therein by reference in order to make the statements
therein (in the case of any Prospectus, in the light of the
circumstances under which they were made) not misleading; and make every
reasonable effort to obtain as promptly as practicable the withdrawal of
any order or other action suspending the effectiveness of any
Registration Statement or suspending the qualification or registration
(or exemption therefrom) of the Registrable Securities for sale in any
jurisdiction;
(iii) if reasonably requested by the managing underwriter
or underwriters or a Holder of Registrable Securities being sold in
connection with an Underwritten Offering, promptly incorporate in a
Prospectus supplement or post-effective amendment such information as
the managing underwriters and the Holders of a majority of the
Registrable Securities (on a Registrable Class equivalent basis) being
sold in such Underwritten Offering (or, in the case of a registration
pursuant to Section 3(a)(ii), the
13
<PAGE> 14
Holders of a majority of the Registrable Securities requested to be
included by the Series C Preferred Stockholders; or, in the case of a
registration pursuant to Section 3(a)(iii), Meadowlane) agree should be
included therein relating to the sale of the Registrable Securities,
including, without limitation, information with respect to the aggregate
number of shares of Registrable Securities being sold to such
underwriters, the purchase price being paid therefor by such
underwriters and with respect to any other terms of the Underwritten
Offering of the Registrable Securities to be sold in such offering; and
promptly make all required filings of such Prospectus supplement or
post-effective amendment;
(iv) promptly after the filing of any document which is to
be incorporated by reference into a Registration Statement or
Prospectus, provide copies of such document to the selling Holders of
the Registrable Securities covered thereby and the underwriters, if any;
(v) furnish to each selling Holder of Registrable
Securities and each managing underwriter, without charge, the number of
manually signed copies and as many conformed copies as may reasonably be
requested, of the then effective Registration Statement and any
post-effective amendments thereto, including financial statements and
schedules, all documents incorporated therein by reference and all
exhibits (including those incorporated by reference);
(vi) deliver to each selling Holder of Registrable
Securities and the underwriters, if any, without charge, as many copies
of the then effective Prospectus (including each prospectus subject to
completion) and any amendments or supplements thereto as such Persons
may reasonably request;
(vii) use reasonable best efforts to register or qualify
or cooperate with the selling Holders of Registrable Securities, the
underwriters, if any, and their respective counsel in connection with
the registration or qualification of such Registrable Securities for
offer and sale under the securities or blue sky laws of such
jurisdictions as any selling Holder of Registrable Securities or
underwriter reasonably requests in writing and do any and all other acts
or things reasonably necessary or advisable to enable the disposition in
such jurisdictions of the Registrable Securities covered by the then
effective Registration Statement; provided, however, that the Company
will not be required to (1) qualify to do business in any jurisdiction
where it would not otherwise be required to qualify, but for this
paragraph (vii) or (2) subject itself to general taxation in any such
jurisdiction where it would not otherwise be subject to such taxation.
(viii) cooperate with the selling Holders of Registrable
Securities and the managing underwriters, if any, to facilitate the
timely preparation and delivery of certificates representing Registrable
Securities to be sold and not bearing any restrictive legends; and
enable such Registrable Securities to be in such denominations and
registered in such names as the managing underwriters may request at
least two Business Days prior to any sale of Registrable Securities to
the underwriters or any other person;
14
<PAGE> 15
(ix) upon the occurrence of any event contemplated by
clause (7) of paragraph (ii) above, promptly prepare and furnish to the
selling Holders a reasonable number of copies of a supplement or
post-effective amendment to the Registration Statement or the related
Prospectus or any document incorporated therein by reference or file any
other required document so that, as thereafter delivered to the
purchasers of the Registrable Securities, the Prospectus will not
contain an untrue statement of a material fact or omit to state any
material fact necessary to make the statements therein, in the light of
the circumstances in which they were made, not misleading;
(x) cause all Registrable Securities covered by the
Registration Statement to be listed on each securities exchange (or
quotation system operated by a national securities association) on which
securities of the same class issued by the Company are then listed, if
any, and enter into customary agreements including, if necessary, a
listing application and indemnification agreement in customary form, and
provide a transfer agent for such Registrable Securities no later than
the effective date of such Registration Statement;
(xi) in the case of an Underwritten Offering, enter into
an underwriting agreement and take all such other actions in connection
therewith in order to expedite and facilitate the disposition of such
Registrable Securities, in each case as is reasonable and customary, and
in connection therewith, (1) make such representations and warranties to
the Holders of such Registrable Securities and the underwriters in form,
substance and scope as are customarily made by issuers to underwriters
in secondary underwritten offerings; (2) obtain opinions of counsel to
the Company and updates thereof (which counsel and opinions (in form,
scope and substance) shall be reasonably satisfactory to the
underwriters and the selling Holders of such Registrable Securities and
shall cover the matters customarily covered in opinions requested in
secondary underwritten offerings and such other matters as may be
reasonably requested by such Holders and underwriters); (3) obtain "cold
comfort" letters and updates thereof from the independent certified
public accountants of the Company addressed to the selling Holders of
such Registrable Securities and the underwriters, such letters to be in
customary form and covering matters of the type customarily covered in
"cold comfort" letters in connection with secondary underwritten
offerings; (4) provide such indemnification and contribution
undertakings pursuant to such underwriting agreement as are customarily
included in such agreements or reasonably required by such underwriters;
and (5) deliver such documents and certificates as may be reasonably
requested by the selling Holders of such Registrable Securities and the
managing underwriters to evidence compliance with clause (1) above and
with any customary conditions contained in the underwriting agreement or
other agreement entered into by the Company in respect of the relevant
offering. The above shall be done at each closing under such
underwriting or similar agreement;
(xii) provide a CUSIP number for the Registrable
Securities no later than the effective date of such registration
statement;
(xiii) in the case of any nonunderwritten offering: (1)
obtain customary and reasonable opinions of counsel to the Company at
the time of effectiveness of such
15
<PAGE> 16
Registration Statement covering such offering and updates thereof of
customary frequency, addressed to each Holder of any Registrable
Securities participating in such offering; (2) obtain "cold comfort"
letters from the independent certified public accountants of the Company
at the time of effectiveness of such Registration Statement and, upon
the request of the Holders of a majority of the Registrable Securities
(on a Registrable Class equivalent basis) covered by such registration
statement, updates thereof of customary frequency, in each case
addressed to each Holder of Registrable Securities participating in such
offering and covering matters that are no more extensive in scope than
would be customarily covered in "cold comfort" letters and updates
obtained in secondary underwritten offerings by issuers with similar
market capitalization and reporting and financial histories; provided
that any letter or update described in this clause (2) shall only be
required to the extent such letters are being issued in respect of
nonunderwritten secondary offerings under then prevailing accounting
practices; and (3) deliver a certificate of a senior executive officer
of the Company at the time of effectiveness of such Registration
Statement and, upon the request of the Holders of a majority of the
Registrable Securities (on a Registrable Class equivalent basis) covered
by such Registration Statement, updates thereof of customary frequency,
such certificates to cover matters no more extensive in scope than those
matters customarily covered in officer's certificates delivered in
connection with underwritten offerings by issuers with similar market
capitalization and reporting and financial histories;
(xiv) otherwise use its best efforts to comply with all
applicable rules and regulations of the SEC and the federal and state
securities laws relating to such registration and the distribution of
the securities being offered and make generally available to its
securities holders earnings statements satisfying the provisions of
Section 11(a) of the Securities Act, no later than 60 days after the end
of any 12-month period (or 120 days, if such period is a fiscal year)
commencing at the end of any fiscal quarter in which the Registrable
Securities are sold to underwriters in a firm commitment or best efforts
offering, or, if not sold to underwriters in such an offering, beginning
with the first month of the first fiscal quarter commencing after the
effective date of such Registration Statement, which earning statements
shall cover such 12-month periods;
(xv) cooperate and assist in any filings required to be
made with the National Association of Securities Dealers, Inc.;
(xvi) make available for inspection by a representative of
the Holders of the Registrable Securities covered by such Registration
Statement, any underwriter participating in any disposition pursuant to
such registration, and any attorney or accountant retained by the
sellers or underwriter, all financial and other records, pertinent
corporate documents and properties of the Company and cause the
Company's officers, directors and employees to supply all information
reasonably requested by, and to cooperate fully with, any such
representative, underwriter, attorney or accountant in connection with
such registration, and otherwise to cooperate fully in connection with
any due diligence investigation; provided that such representatives,
underwriters, or accountants enter into a confidentiality agreement, in
form and substance reasonably satisfactory to the Company, prior to the
release or disclosure to them of any such
16
<PAGE> 17
information, records or documents;
(xvii) subject to the proviso in paragraph (vii) above,
cause the Registrable Securities covered by the Registration Statement
to be registered with or approved by such other governmental agencies or
authorities as may be necessary to enable the seller or sellers thereof
or the underwriters, if any, to consummate the disposition of such
Registrable Securities (other than as may be required by the
governmental agencies or authorities of any foreign jurisdiction and
other than as may be required by a law applicable to a selling Holder by
reason of its own activities or business other than the sale of
Registrable Securities); and
(xviii)use its best efforts to take all action necessary
or advisable to effect such registration in the manner contemplated by
this Agreement and the applicable registration statement.
The Company may require each seller of Registrable Securities as to
which any registration is being effected to furnish to the Company such
information regarding such seller and the distribution of such securities as the
Company may from time to time reasonably request in writing.
(b) Holders' Obligations and Restrictions. In connection with any
Registration Statement in which a Holder of Registrable Securities is
participating, each such Holder will furnish to the Company in writing such
information as the Company reasonably requests for use in connection with any
such Registration Statement or related prospectus. Each Holder of Registrable
Securities agrees by acquisition of such Registrable Securities that, upon
receipt of any notice from the Company of the happening of any event of the kind
described in Section 5(a)(ii), such Holder will forthwith discontinue
disposition of Registrable Securities pursuant to the then current Prospectus
until (1) such Holder is advised in writing by the Company that a new
Registration Statement covering the offer of Registrable Securities has become
effective under the Securities Act or (2) such Holder receives copies of a
supplemented or amended Prospectus contemplated by Section 5(a)(ix), or until
such Holder is advised in writing by the Company that the use of the Prospectus
may be resumed. If the Company shall have given any such notice during a period
when a demand registration is in effect or if any action is taken by the Company
that results in Holders of the Registrable Securities covered thereby not being
able to dispose of such Registrable Securities during the applicable period,
without limiting any other remedy available to the Holders, the Company shall
extend the period during which such registration statement shall be maintained
effective pursuant to this Agreement by the number of days during which any such
disposition of Registrable Securities is discontinued pursuant to this paragraph
or as a result of such action. The Company shall use its best efforts to limit
the duration of any discontinuance with respect to the disposition of
Registrable Securities pursuant to this paragraph. The Company shall use its
reasonable best efforts to keep the affected Holders informed from time to time
of the status of such discontinuance.
(c) Additional Procedures for Shelf Registration. If the Holders become
entitled, pursuant to an event described in clause (ii) of the definition of
Registrable Securities, to
17
<PAGE> 18
receive any securities in respect of Registrable Securities that were already
included in a Shelf Registration Statement, subsequent to the date such Shelf
Registration Statement is declared effective, and the Company is unable under
the securities laws to add such securities to the then-effective Shelf
Registration Statement, the Company, as promptly as reasonably practicable,
shall file, in accordance with the procedures more particularly set forth in
Section 5(a), an additional Shelf Registration Statement with respect to any
such new Registrable Securities. The Company shall use its best efforts to have
any such additional Registration Statement declared effective as promptly as
reasonably practicable after such filing and to keep such additional Shelf
Registration Statement continuously effective during the period specified in the
second paragraph of Section 3(b). A request to file an additional Shelf
Registration Statement pursuant to this paragraph shall not constitute a demand
under Section 3(a).
SECTION 6. HOLDBACK AGREEMENT. In the case of any underwritten offering
of Registrable Securities pursuant to Section 3, including under any Shelf
Registration Statement, each of the Company and each of the Founders agrees, if
and to the extent requested in writing by the managing underwriter or
underwriters administering such offering, as promptly as reasonably practicable
prior to the commencement of the 15-day period referred to below, not to effect
any public sale or distribution (other than sales pursuant to the same
Registration Statement, as permitted under this Agreement, or the Current
Registration Statement, or any registration on Form S-8 or S-4 (or any successor
or substantially similar form or a registration statement filed in connection
with an exchange offer or offering or securities solely to the Company's
existing securityholders) or a Rescission Offer Registration), of any equity
securities of the Company during the period beginning 15 days prior to the
closing date of each underwritten offering of Registrable Securities and during
the period ending on the earlier of (i) 90 days after such closing date
(provided, that if such underwritten offering is an initial public offering, the
period referred to in this clause (i) shall be 180 days after such closing date)
and (ii) the date such sale or distribution is permitted by such managing
underwriter or underwriters. Any agreement entered into after the date of this
Agreement pursuant to which the Company issues or agrees to issue any privately
placed securities similar to any issue of the Registrable Securities shall
contain a provision under which holders of such securities agree not to effect
any public sale or distribution of any such securities during such period.
SECTION 7. REGISTRATION EXPENSES. All expenses incident to the Company's
performance of or compliance with this Agreement, including without limitation
all registration and filing fees, fees and expenses of compliance with
securities or blue sky laws (including reasonable fees and disbursements of
counsel in connection with blue sky qualifications or registrations (or the
obtaining of exemptions therefrom) of the Registrable Securities), printing
expenses (including expenses of printing Prospectuses), messenger and delivery
expenses, internal expenses (including, without limitation, all salaries and
expenses of its officers and employees performing legal or accounting duties),
fees and disbursements of its counsel and its independent certified public
accountants (including the expenses of any special audit or "comfort" letters
required by or incident to such performance or compliance), securities acts
liability insurance (if the Company elects to obtain such insurance), fees and
expenses of any special experts retained by the Company in connection with any
registration hereunder, fees and expenses of other Persons retained by the
Company, fees and expenses of one counsel for the Holders selected by the
Holders of a majority of the Registrable Securities being sold pursuant
18
<PAGE> 19
to any registration (or, in the case of a registration pursuant to Section
3(a)(ii), the Holders of a majority of the Registrable Securities requested to
be included by the Series C Preferred Stockholders; or, in the case of a
registration pursuant to Section 3(a)(iii), Meadowlane), incurred in connection
with each registration hereunder, and reasonable out-of-pocket expenses incurred
by the Holders (all such expenses being referred to as "Registration Expenses"),
shall be borne by the Company, whether or not any registration statement becomes
effective; provided, that Registration Expenses shall not include any
underwriting discounts, commissions or fees attributable to the sale of the
Registrable Securities (other than sales of securities for the account of the
Company).
SECTION 8. INDEMNIFICATION.
(a) Indemnification by the Company. The Company hereby agrees to
indemnify and hold harmless, to the full extent permitted by law, but without
duplication, each Holder of Registrable Securities, its officers, directors,
employees, partners, principals, equity holders, managed or advised accounts,
advisors and agents, and each Person who controls such Holder (within the
meaning of the Securities Act), against all losses, claims, damages, liabilities
and expenses (including reasonable costs of investigation and reasonable legal
fees and expenses) resulting from (1) any untrue statement of a material fact
in, or any omission of a material fact required to be stated in, any
Registration Statement or Prospectus or necessary to make the statements therein
(in the case of a Prospectus in light of the circumstances under which they were
made) not misleading, except insofar as the same are caused by or contained in
any information furnished in writing to the Company by any Holder or any
underwriters expressly for use therein, (2) any violation or alleged violation
by the Company of any federal, state or common law rule or regulation applicable
to the Company in connection with any registration, qualification or compliance
effected by the Company pursuant to its obligations hereunder, or (3) any
failure to register or qualify Registrable Securities in any state where the
Company or its agents have affirmatively undertaken or agreed to undertake such
registration or qualification on behalf of Holders in connection with the
Company's obligations hereunder; provided, however, that the indemnification
provided for in this Section 8(a) shall not inure to the benefit of any Holder
with respect to any sale or disposition of Registrable Securities by such Holder
in violation of the provisions of Section 5(b) hereof. If so requested, the
Company will also indemnify underwriters participating in the distribution,
their officers, directors, employees, partners and agents, and each Person who
controls such underwriters (within the meaning of the Securities Act), to the
same extent as provided above with respect to the indemnification of the Holders
of Registrable Securities, if so requested.
(b) Indemnification by Holders of Registrable Securities. In connection
with any Registration Statement in which a Holder of Registrable Securities is
participating, each such Holder hereby agrees to indemnify and hold harmless, to
the full extent permitted by law, but without duplication, the Company, its
officers, directors, shareholders, employees, advisors and agents, and each
Person who controls the Company (within the meaning of the Securities Act)
against any losses, claims, damages, liabilities and expenses resulting from any
untrue statement of material fact in, or any omission of a material fact
required to be stated in, the Registration Statement or Prospectus or necessary
to make the statements therein (in the case of a Prospectus in light of the
circumstances under which they were made) not misleading, to the extent, but
only
19
<PAGE> 20
to the extent, that such untrue statement or omission is contained in any
information so furnished in writing by such Holder to the Company specifically
for inclusion therein. If so requested, each Selling Holder also agrees to
indemnify and hold harmless Underwriters of the Registrable Securities, their
officers and directors and each Person who controls such Underwriters on
substantially the same basis as that of the indemnification of the Company
provided in this Section 8(b). In no event shall the liability of any selling
Holder of Registrable Securities hereunder be greater in amount than the dollar
amount of the net proceeds received by such Holder upon the sale of the
Registrable Securities giving rise to such indemnification obligation. The
Company and the other persons described above shall be entitled to request
indemnities from underwriters participating in the distribution, to the same
extent as provided above with respect to information so furnished in writing by
such Persons specifically for inclusion in any Prospectus or Registration
Statement.
(c) Conduct of Indemnification Proceedings. Any Person entitled to
indemnification hereunder will (i) give prompt notice to the indemnifying party
of any claim with respect to which it seeks indemnification and (ii) permit such
indemnifying party to assume the defense of such claim with counsel reasonably
satisfactory to the indemnified party; provided, however, that any Person
entitled to indemnification hereunder shall have the right to employ separate
counsel and to participate in the defense of such claim, but the fees and
expenses of such counsel shall be at the expense of such indemnified Person
unless (A) the indemnifying party has agreed to pay such fees or expenses, (B)
the indemnifying party shall have failed to assume the defense of such claim and
employ counsel reasonably satisfactory to the indemnified party in a timely
manner or (C) in the reasonable judgment of any such Person, based upon advice
of its counsel, a conflict of interest may exist between such person and the
indemnifying party with respect to such claims (in which case, if the Person
notifies the indemnifying party in writing that such Person elects to employ
separate counsel at the expense of the indemnifying party, the indemnifying
party shall not have the right to assume the defense of such claim on behalf of
such person). The indemnifying party will not be subject to any liability for
any settlement made without its consent (but such consent will not be
unreasonably withheld). No indemnified party will be required to consent to
entry of any judgment or enter into any settlement which does not include as an
unconditional term thereof the giving by the claimant or plaintiff to such
indemnified party of a release from all liability in respect of such claim or
litigation. An indemnifying party who is not entitled to, or elects not to,
assume the defense of the claim will not be obligated to pay the fees and
expenses of more than one counsel for all parties indemnified by such
indemnifying party with respect to such claim, as well as one local counsel in
each relevant jurisdiction.
(d) Contribution. If for any reason the indemnification provided for in
Section 8(a) or Section 8(b) is unavailable to an indemnified party or
insufficient to hold it harmless as contemplated by Section 8(a) and Section
8(b), then the indemnifying party shall contribute to the amount paid or payable
by the indemnified party as a result of such loss, claim, damage or liability in
such proportion as is appropriate to reflect the relative fault of the
indemnifying party and the indemnified party, determined by reference to whether
the untrue statement of a material fact or alleged untrue statement of a
material fact or the omission or alleged omission to state a material fact
relates to information supplied by the Company, on the one hand, or the Holder
of Registrable Securities, on the other, and the parties' relative intent,
20
<PAGE> 21
knowledge, access to information and opportunity to correct or prevent such
statement or omission, provided, that no indemnifying Holder shall be required
to contribute an amount greater than the dollar amount of the net proceeds
received by such indemnifying Holder with respect to the sale of the Registrable
Securities giving rise to such indemnification obligation less any amounts
otherwise paid or payable by such indemnifying Holder as damages, penalties or
otherwise in connection with such matter. No Person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
shall be entitled to contribution from any Person who was not guilty of such
fraudulent misrepresentations.
SECTION 9. RULES 144 AND 144A. After the Company completes its initial
public offering of securities, the Company shall use its reasonable best efforts
to make publicly available and available to the Holders, pursuant to Rule 144,
such information as is necessary to enable the Holders to make sales of
Registrable Securities pursuant to that Rule. The Company shall use its
reasonable best efforts to file timely with the SEC all documents and reports
required of the Company under the Exchange Act. After the Company completes its
initial public offering of securities, the Company shall furnish to any Holder,
upon request, a written statement executed on behalf of the Company as to
compliance with the current public information requirements of Rule 144. In
addition, the Company will provide to any Holder of a Registrable Security, or
any potential purchaser of a Registrable Security, upon any such Person's
reasonable request, the information required by paragraph (d)(4) of Rule 144A.
SECTION 10. PARTICIPATION IN UNDERWRITTEN REGISTRATIONS.
(a) If any of the Registrable Securities covered by a demand
registration hereunder are to be sold in an Underwritten Offering, the
investment banker or investment bankers and manager or managers that will
administer the offering will be selected by the Holders of a majority of the
Registrable Securities included in such offering (or, in the case of a
registration initiated pursuant Section 3(a)(ii), by the holders of a majority
of the Registrable Securities requested to be included by the Series C Preferred
Stockholders; or, in the case of a registration statement initiated pursuant to
Section 3(a)(iii), Meadowlane); provided further that such investment bankers
and managers must be reasonably satisfactory to the Company, acting in good
faith, based on identified business reasons specific to such bankers or
managers.
(b) No Person may participate in any Underwritten Offering hereunder
unless such Person (i) agrees to sell such Person's Registrable Securities on
the basis provided in any underwriting arrangements approved by the Persons
entitled hereunder to approve such arrangements and (ii) completes and executes
all questionnaires, powers of attorney, indemnities, underwriting agreements and
other documents required under the terms of such underwriting arrangements.
Nothing in this Section 10 shall be construed to create any additional rights
regarding the registration of Registrable Securities in any Person otherwise
than as set forth herein.
(c) Each Holder hereby agrees that, during the period of duration (up
to, but not exceeding, 15 days prior to the closing date of the Underwritten
Offering and 90 days thereafter or, as to an initial public offering of the
securities of the Company, 15 days prior to the closing date of the Underwritten
Offering and 180 days thereafter) specified by an underwriter of
21
<PAGE> 22
a Registrable Class or other securities of the Company of the same class as
Registrable Securities, following the effective date of a registration statement
of the Company filed under the Securities Act, it shall not, to the extent
requested by such underwriter, directly or indirectly sell, offer to sell,
contract to sell (including, without limitation, any short sale), grant any
option to purchase or otherwise transfer or dispose of (other than to donees,
Affiliates of the Securityholders or the partners of the Securityholders (and
the equityholders of any successor entities thereto) and their Affiliates that
agree to be similarly bound) any Registrable Securities of the Company of the
same class as those offered pursuant to such registration statement held by it
at any time during such period except Registrable Securities included in such
registration; provided, however, that;
(i) such agreement shall be applicable only during the three-year
period following the date of the final prospectus distributed pursuant to the
initial public offering of the Company's securities;
(ii) all officers and directors of the Company, all holders of in
excess of one percent of any class of securities of the Company, and all other
persons with registration rights (whether or not pursuant to this Agreement)
enter into agreements which are no less restrictive;
(iii) the aggregate of the period in which dispositions of
Registrable Securities are restricted pursuant to this Section 10(c) and any
period during which the filing of a registration statement is deferred pursuant
to Section 3(a) and Section 3(d) shall not exceed 180 days in any 12 month
period other than the 12 month period in which the effectiveness of the
registration statement for the initial public offering of the securities of the
Company occurs in which such aggregate shall not exceed 270 days;
(iv) such restriction shall not prevent sales pursuant to Rule 144
or private placement sales to purchasers, Affiliates of the Securityholders or
the partners of the Securityholders (and the equityholders of any successor
entities thereto) and their Affiliates that agree to similar restrictions (which
agreements shall not be required for sales made pursuant to Rule 144); and
(v) this Section 10(c) shall not apply to any Holder that holds less
than 2% of any class of securities of the Company.
In order to enforce the foregoing covenant, the Company may impose
stop-transfer instructions with respect to the Registrable Securities of each
Holder (and the shares or securities of every other person subject to the
foregoing restriction) until the end of such period, and each Holder agrees
that, if so requested, such Holder will execute an agreement in the form
provided by the underwriter containing terms which are consistent with the
provisions of this Section.
SECTION 11. NO INCONSISTENT AGREEMENTS. The Company has not previously
and shall not in the future enter into any agreement, arrangement or
understanding with respect to its securities which is inconsistent with the
rights granted to the Holders of Registrable Securities in
22
<PAGE> 23
this Agreement or otherwise conflicts with the provisions hereof.
SECTION 12. AMENDMENTS AND WAIVERS. The provisions of this Agreement,
including the provisions of this Section 12, may not be amended, modified or
supplemented, and waivers or consents to departures from the provisions hereof
may not be given unless the Company has obtained the written consent of Holders
of a majority of the Registrable Securities then outstanding and each
Securityholder who is adversely affected.
SECTION 13. REMEDIES. Any Person having rights under any provision of
this Agreement shall be entitled to enforce such rights specifically or to
recover damages or to exercise any other remedy available to it at law or in
equity. The foregoing rights and remedies shall be cumulative and the exercise
of any right or remedy provided herein shall not preclude any Person from
exercising any other right or remedy provided herein. The Company agrees that
monetary damages would not be adequate compensation for any loss incurred by
reason of a breach by it of any of the provisions of this Agreement and hereby
agrees to waive the defense in any action for specific performance that a remedy
at law would be adequate.
SECTION 14. NOTICES. All notices and other communications provided for
or permitted hereunder shall be made in writing by hand-delivery, registered
first-class mail, telecopier, or air-courier guaranteeing overnight delivery:
(a) If to a Holder of Registrable Securities, at the current
address for such Holder on the transfer records of the Company, which
address initially is, with respect to each Holder:
For Constellation Venture Capital, L.P. and
Constellation Ventures
(BVI), Inc.:
Constellation Ventures Management, LLC
575 Lexington Avenue
New York, New York 10022
Attention: Clifford H. Friedman
Telecopy Number: (212) 272-7060
For Chase:
Chase Venture Capital Associates, L.P.
380 Madison Avenue, 12th Floor
New York, NY 10017
Attention: I. Robert Greene
Telecopy Number: (212) 622-3101
with copies to:
Kramer Levin Naftalis & Frankel LLP
919 Third Avenue
23
<PAGE> 24
New York, NY 10022
Attention: Howard A. Rothman, Esq.
Telecopy Number: (212) 715-8000
and
O'Sullivan, Graev & Karabell, LLP
30 Rockefeller Plaza, 24th Floor
New York, NY 10112
Attention: Harvey M. Eisenberg, Esq.
Telecopy Number: (212) 408-2420
For Cassandra/ARTISTdirect Partners, LLC:
561 Broadway, Suite 8C
New York, NY 10012
Attention: I. Robert Greene
Telecopy Number: (212) 622-3101
with copies to:
Kramer Levin Naftalis & Frankel LLP
919 Third Avenue
New York, NY 10022
Attention: Howard A. Rothman, Esq.
Telecopy Number: (212) 715-8000
and
O'Sullivan, Graev & Karabell, LLP
30 Rockefeller Plaza, 24th Floor
New York, NY 10112
Attention: Harvey M. Eisenberg, Esq.
Telecopy Number: (212) 408-2420
For Flatiron Fund 1998/99, LLC and Flatiron
Associates, LLC:
Flatiron Partners
257 Park Avenue South, 12th Floor
New York, NY 10010
Attention: Michael F. Connor
Telecopy Number: (212) 228-0552
with copies to:
Kramer Levin Naftalis & Frankel LLP
24
<PAGE> 25
919 Third Avenue
New York, NY 10022
Attention: Howard A. Rothman, Esq.
Telecopy Number: (212) 715-8000
and
O'Sullivan, Graev & Karabell, LLP
30 Rockefeller Plaza, 24th Floor
New York, NY 10112
Attention: Harvey M. Eisenberg, Esq.
Telecopy Number: (212) 408-2420
For Spinnaker Founders Fund, L.P., Spinnaker
Technology Fund, L.P., Spinnaker Clipper Fund,
L.P.:
Bowman Capital Management, L.L.C.
1875 South Grant Street, Suite 600
San Mateo, CA 94402
Attn: Matthew Cowan
Telecopy Number (650) 572-1844
with copies to:
Shartsis, Friese & Ginsburg
One Maritime Plaza
Suite 1800
San Francisco, CA 94111
Telecopy Number: (415) 421-2922
Attn: Eric M. Sippel, Esq.
For Psilos Group Partners, L.P., CCP/Psilos
ARTISTdirect, LLC and CCP/Psilos UBL, LLC:
Psilos Group Partners, L.P.
CCP/Psilos ARTISTdirect, LLC
152 West 57th Street
33rd Floor
New York, NY 10019
Telecopy Number: (212) 957-2013
Attn: Albert S. Waxman, Ph.D.
For Toronto Dominion Investments, Inc.:
Toronto Dominion Investments, Inc.
909 Fannin Street, Suite 1700
25
<PAGE> 26
Houston, TX 77010
Attention: Martha Gariepy
Telecopy Number: (713) 652-2647
with copies to:
Kramer Levin Naftalis & Frankel LLP
919 Third Avenue
New York, NY 10022
Attention: Howard A. Rothman, Esq.
Telecopy Number: (212) 715-8000
For Meadowlane Enterprises Ltd.:
c/o Cisneros Television Group
404 Washington Avenue
Miami Beach, FL 33139
with copies to:
Wachtell, Lipton, Rosen & Katz
51 West 52nd Street
New York, New York 10019
Attention: Andrew J. Nussbaum, Esq.
Fax: (212) 403-2331
For Universal Music Group, Inc.:
70 Universal City Plaza
Universal City, California 91608
with copies to:
Munger, Tolles & Olson LLP
355 S. Grand Ave., Floor 35
Los Angeles, California 90071-1560
Attention: Ruth E. Fisher, Esq.
Fax: (213) 687-3702
(b) If to Rubin, at the current address for Rubin on the transfer
records of the Company, which address initially is:
Alan S. Halfon & Company
9595 Wilshire Boulevard
Suite 505
Beverly Hills, CA 90212
Attention: Alan S. Halfon
26
<PAGE> 27
Telecopy Number: (310) 385-1345
with copies to:
Paul, Hastings, Janofsky & Walker LLP
555 South Flower Street
23rd Floor
Los Angeles, CA 90071-2371
Attention: Anna M. Graves, Esq.
Telecopy Number: (213) 627-0705
(c) If to Di Dia, at the current address for Di Dia on the transfer
records of the Company, which address initially is:
Mark Di Dia
2121 Kress Street
Los Angeles, CA 90046
(d) If to Van Dalsem, at the current address for Van Dalsem on the
transfer records of the Company, which address initially is:
Bruce E. Van Dalsem, Esq.
c/o Gradstein, Luskin & Van Dalsem, PC
12100 Wilshire Boulevard, Suite 350
Los Angeles, CA 90025
(e) If to Gradstein, at the current address for Gradstein on the
transfer records of the Company, which address initially is:
Henry D. Gradstein, Esq.
c/o Gradstein, Luskin & Van Dalsem, PC
12100 Wilshire Boulevard, Suite 350
Los Angeles, CA 90025
27
<PAGE> 28
(f) If to the Company or to the Founders, initially to:
ARTISTdirect, Inc.
17835 Ventura Boulevard
Suite 310
Encino, California 91316
Telecopy Number: (818) 758-8722
with a copy to:
Allen D. Lenard, Esq.
Lenard & Gonzalez, LLP
1900 Avenue of The Stars
Los Angeles, California 90067
Telecopy Number: (310) 552-0740
and thereafter at such other address as may be designated from time to time by
notice given in accordance with the provisions of this Section 14.
(b) All such notices and other communications shall be deemed to
have been delivered and received (i) in the case of personal delivery,
telecopier or telegram, on the date of such delivery (assuming delivery
is confirmed), (ii) in the case of overnight guaranteed delivery air
courier, on the Business Day after the date when sent and (iii) in the
case of mailing, on the third Business Day following such mailing.
SECTION 15. SUCCESSORS AND ASSIGNS. Subject to compliance with Article V
of the Stockholders Agreement, any right, remedy, obligation or liability
arising hereunder or by reason hereof shall be assignable by any Holder in
connection with the transfer of its Registrable Securities without the prior
written consent of the Company; provided (a) the Company is, within a reasonable
time after such transfer or assignment, furnished with written notice of the
name and address of such transferee or assignee and the securities with respect
to which such registration rights are being transferred or assigned; (b) such
transferee or assignee agrees in writing to be bound by and subject to the terms
and conditions of this Agreement, including without limitation the provisions of
Section 6 (if applicable to the transferor); and (c) such transferee or assignee
(i) agrees to act through a single representative with the transferring Holder
for the purpose of exercising rights, receiving notices and taking action
hereunder, or (ii) acquires all of the shares of Registrable Securities held by
such transferring Holder or at least one million (1,000,000) shares of such
Registrable Securities (subject to appropriate adjustment for stock splits,
stock dividends, combinations and other recapitalizations). Any such transferee
or assignee shall be subject to all rights and obligations hereunder and, if
requested by the Company, shall agree in writing to be bound by the terms of
this Agreement. Subject to the foregoing, this Agreement shall inure to the
benefit of and be binding upon the successors and assigns of each of the parties
hereto, including without limitation and without the need for an express
assignment, subsequent Holders of the Registrable Securities.
28
<PAGE> 29
SECTION 16. COUNTERPARTS. This Agreement may be executed in any number
of counterparts and by the parties hereto in separate counterparts, each of
which when so executed shall be deemed to be an original and all of which taken
together shall constitute one and the same agreement.
SECTION 17. HEADINGS. The headings in this Agreement are for convenience
of reference only and shall not limit or otherwise affect the meaning hereof.
SECTION 18. GOVERNING LAW; FORUM. This Agreement shall be governed by,
construed and enforced in accordance with, the laws of the State of Delaware
without regard to the principles thereof relating to conflict of laws. Each of
the parties hereby submits to personal jurisdiction and waives any objection as
to venue in the County of Los Angeles, State of California. Service of process
on the parties in any action arising out of or relating to this Agreement shall
be effective if mailed to the parties in accordance with Section 14 hereof. The
parties hereto waive all right to trial by jury in any action or proceeding to
enforce or defend any rights under this Agreement.
SECTION 19. SEVERABILITY. In the event that any one or more of the
provisions contained herein, or the application thereof in any circumstance, is
held invalid, illegal or unenforceable, the validity, legality and
enforceability of any such provision in every other respect and of the remaining
provisions contained herein shall not be affected or impaired thereby.
SECTION 20. 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 contained herein. This Agreement supersedes all
prior agreements and understandings between the parties with respect to such
subject matter, including but not limited to, that certain Second Amended and
Restated Registration Rights Agreement dated as of May 18, 1999, among
ARTISTdirect, LLC, a California limited liability company (the Company's
predecessor) and certain of the Company's stockholders, as amended by that
certain First Amendment to Second Amended and Restated Registration Rights
Agreement dated as of October 6, 1999.
SECTION 21. ATTORNEYS' FEES. In any proceeding brought to enforce any
provision of this Agreement, the successful party shall be entitled to recover
reasonable attorneys' fees in addition to its costs and expenses and any other
available remedy.
[Remainder of Page Intentionally Left Blank]
29
<PAGE> 30
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first written above.
ARTISTDIRECT, INC.
By:
-----------------------------------
Name:
Title:
CHASE VENTURE CAPITAL ASSOCIATES, L.P.
By: Chase Capital Partners,
L.P.,
its General Partner
By:
-----------------------------------
Name:
Title:
CASSANDRA/ARTISTDIRECT PARTNERS, LLC
By: Chase Venture Capital
Associates, L.P.,
its Managing Member
By: Chase Capital Partners, L.P.,
its General Partner
By:
-----------------------------------
Name:
Title:
CCP/PSILOS ARTISTDIRECT, LLC
By: Psilos Group Investors, LLC,
its Managing Member
By:
-----------------------------------
Name: Albert S. Waxman, Ph.D.
Title: Senior Managing
Director
30
<PAGE> 31
CCP/PSILOS UBL, LLC
By: Psilos Group Investors, LLC,
its Managing Member
By:
-----------------------------------
Name: Albert S. Waxman, Ph.D.
Title: Senior Managing
Director
FLATIRON FUND 1998/99, LLC
By:
-----------------------------------
Fred Wilson
Managing Member
FLATIRON ASSOCIATES, LLC
By:
-----------------------------------
Fred Wilson
Managing Member
SPINNAKER TECHNOLOGY FUND, L.P.
By: Bowman Capital Management,
L.L.C., its General Partner
By:
-----------------------------------
Name: Eric Moore
Title: Controller
SPINNAKER FOUNDERS FUND, L.P.
By: Bowman Capital Management,
L.L.C., its General Partner
By:
-----------------------------------
Name: Eric Moore
Title: Controller
31
<PAGE> 32
SPINNAKER CLIPPER FUND, L.P.
By: Bowman Capital Management,
L.L.C., its General Partner
By:
-----------------------------------
Name: Eric Moore
Title: Controller
PSILOS GROUP PARTNERS L.P.
By: Psilos Group Investors, LLC,
its General Partner
By:
-----------------------------------
Name: Albert S. Waxman, Ph.D.
Title: Senior Managing
Director
TORONTO DOMINION INVESTMENTS, INC.
By:
-----------------------------------
Name: Carole Clause
Title: President
CONSTELLATION VENTURE CAPITAL, L.P.
By: Constellation Ventures
Management LLC, its General
Partner
By:
-----------------------------------
Clifford H. Friedman
Member
32
<PAGE> 33
CONSTELLATION VENTURES (BVI), INC.
By:
-----------------------------------
Clifford H. Friedman
President and Chief Executive
Officer
MEADOWLANE ENTERPRISES, LTD.
By:
-----------------------------------
--------------------------------------
--------------------------------------
UNIVERSAL MUSIC GROUP, INC.
By:
-----------------------------------
--------------------------------------
--------------------------------------
--------------------------------------
Rick Rubin
--------------------------------------
Mark Di Dia
--------------------------------------
Bruce E. Van Dalsem
--------------------------------------
Henry D. Gradstein
--------------------------------------
Marc P. Geiger
--------------------------------------
Donald P. Muller
33
<PAGE> 34
AMENDMENT NO. 1
TO THIRD AMENDED AND
RESTATED REGISTRATION RIGHTS AGREEMENT
This AMENDMENT NO. 1 TO THIRD AMENDED AND RESTATED
REGISTRATION RIGHTS AGREEMENT (this "Amendment") is made and entered into as of
December 20, 1999, by and among ARTISTDIRECT, INC, a Delaware corporation
("AD"), CHASE VENTURE CAPITAL ASSOCIATES, a California limited partnership,
CASSANDRA/ARTISTDIRECT PARTNERS, LLC, a Delaware limited liability company,
CCP/PSILOS ARTISTDIRECT, LLC, a Delaware limited liability company, CCP/PSILOS
UBL, LLC, a Delaware limited liability company, FLATIRON FUND 1998/99 LLC, a
Delaware limited liability company, FLATIRON ASSOCIATES, LLC, a Delaware limited
liability company, SPINNAKER TECHNOLOGY FUND, L.P., a Delaware limited
partnership, SPINNAKER FOUNDERS FUND, L.P., a Delaware limited partnership,
SPINNAKER CLIPPER FUND, L.P., a Delaware limited partnership, PSILOS GROUP
PARTNERS L.P., a Delaware limited partnership, TORONTO DOMINION INVESTMENTS,
INC., a Delaware corporation, CONSTELLATION VENTURE CAPITAL, L.P., a Delaware
limited partnership, CONSTELLATION VENTURES (BVI), INC., a British Virgin
Islands corporation, MEADOWLANE ENTERPRISES LTD., a British Virgin Islands
limited company ("Meadowlane"), UNIVERSAL MUSIC GROUP, INC., a California
corporation ("Universal"), BMG MUSIC d/b/a BMG ENTERTAINMENT, a New York general
partnership ("BMG"), YAHOO! INC, a Delaware corporation ("Yahoo!"), SONY MUSIC,
a Group of SONY MUSIC ENTERTAINMENT INC., a Delaware corporation ("Sony"),
ART-DIR HOLDINGS INC., a Delaware corporation ("Art-Dir Holdings") and MAVERICK
RECORDING COMPANY, a California general partnership ("Maverick") (the foregoing
entities, collectively and with the exception of AD, the "Investor
Securityholders"), MARK DI DIA, an individual ("Di Dia"), BRUCE E. VAN DALSEM,
an individual ("Van Dalsem"), HENRY D. GRADSTEIN, an individual ("Gradstein"),
and RICK RUBIN an individual ("Rubin"; each of the Investor Securityholders, Di
Dia, Van Dalsem, Gradstein and Rubin, a "Securityholder" and collectively, the
"Securityholders"), MARC P. GEIGER, an individual residing at 3378 Alginet
Drive, Encino, California 91436 ("Geiger"), and DONALD MULLER, an individual
residing a 20324 Howard Court, Woodland Hills, California 91364 ("Muller").
The Company and Securityholders (other than BMG, Yahoo! Inc.,
Sony, Art-Dir Holdings and Maverick) are parties to that certain third Amended
and Restated Registration Rights Agreement dated as of November 12, 1999 (the
"Existing Registration Rights Agreement").
Capitalized terms used herein and not otherwise defined shall
have the meanings ascribed them in the Existing Registration Rights Agreement.
NOW, THEREFORE, in consideration of the premises and mutual
covenants and obligations hereinafter set forth, the Company and each of the
parties hereto, intending legally to be bound, hereby agree as follows.
1
<PAGE> 35
SECTION 1. AMENDMENTS TO EXISTING REGISTRATION RIGHTS
AGREEMENT. The Existing Registration Rights Agreement is hereby amended
as follows:
(a) BMG, Yahoo!, Sony, Art-Dir Holdings and Maverick shall
each be added as parties to the Existing Registration Rights Agreement.
(b) The definition of "Consent Letter" in Section 1 of the
Existing Registration Rights Agreement is hereby deleted in its entirety.
(c) Sub-section (iii) of the first sentence of the definition
of "Registrable Securities" in Section 1 of the Existing Registration Rights
Agreement is hereby amended and restated in its entirety as follows:
"(iii) any shares of common stock acquired from time to time
(A) from the Company pursuant to Section 2.1 of the
Stockholders Agreement, (B) pursuant to Section 5.5 of the
Stockholders Agreement, or (C) upon exercise of the warrant
issued to Yahoo! in connection with that certain Letter of
Understanding dated as of December 1, 1999, between the
Company and Yahoo!,"
(d) The definition of "Series C Preferred Stockholder" in
Section 1 of the Existing Registration Rights Agreement is hereby amended and
restated in its entirety as follows:
""Series C Preferred Stockholder" shall mean Meadowlane,
Universal, BMG, Yahoo!, Sony, Art-Dir Holdings, Maverick and
any of their permitted transferees pursuant to Section 5.5 of
the Stockholders Agreement and to whom such transferees are
assigned rights hereunder pursuant to Section 15 hereunder."
(e) The first paragraph of Section 3(a)(ii) of the Existing
Registration Rights Agreement is hereby amended and restated in its entirety as
follows:
"Series C Preferred Demand. Upon the written request of one or
more Series C Preferred Stockholders requesting that the
Company effect the registration under the Securities Act, at
any time after the earlier of (A) May 18, 2004 or (B) the
one-year anniversary of the consummation of the initial public
offering of the securities of the Company, of Registrable
Securities constituting the Series C Requisite Share Number,
and specifying the intended method of disposition thereof
(which may, if the Company is eligible to register common
stock on Form S-3 or any similar form, include a continuous or
delayed offering pursuant to a Shelf Registration Statement),
the Company will use its best efforts to effect, as
expeditiously as possible, the registration under the
Securities Act of such Registrable Securities; provided,
however, that the Company shall not be obligated (X) to effect
more than five demand registrations pursuant to this Section
3(a)(ii) or (Y) register any Registrable Securities pursuant
to this Section 3(a)(ii) for a period of 6 months following
the date on which a Registration Statement
2
<PAGE> 36
filed in respect of any previous demand registration
under Section 3(a), if any, was declared effective; provided
further, that the Company's delay right set forth in the
foregoing proviso shall not apply to any registration
request pursuant to this Section 3(a)(ii) delivered to the
Company within 60 days of the expiration of the applicable
lock-up period described in clauses (ii)(A) and (ii)(B)
above."
(f) Section 14(a) of the Existing Registration Rights
Agreement is hereby amended by adding the following addresses:
For BMG Music d/b/a BMG Entertainment
1540 Broadway
New York, NY 10036-4098
Attention: Vice President, Corporate
Development
with copies to:
Levin & Srinivasen
1776 Broadway, 19th Floor
New York, NY 10019
Attention: Greg Srinivasan, Esq.
Telecopy Number: (212) 957-4565
For Yahoo! Inc.
3420 Central Expressway
Santa Clara, California 95051
Attention: Senior Vice President,
Corporate Development
Telecopy Number: (408) 731-3400
with copies to:
Yahoo! Inc.
3420 Central Expressway
Santa Clara, California 95051
Attention: General Counsel
Telecopy Number: (408) 731-3400
For Sony Music, a Group of Sony Music
Entertainment Inc.
550 Madison Avenue
New York, New York 10022
3
<PAGE> 37
Attention: Senior Vice President, Business
Affairs and Administration
Telecopy Number: (212) 833-7844
with copies to:
550 Madison Avenue
New York, New York 10022
Attention: Senior Vice President and General
Counsel
Telecopy Number: (212) 833-8083
and
Rosenman & Colin LLP
575 Madison Avenue
New York, New York 10022
Attention: Lisa Weiss, Esq.
Telecopy Number: (212) 940-8776
For Art-Dir Holdings Inc.
c/o Time Warner Inc.
75 Rockefeller Plaza
New York, New York 10019
Attention: General Counsel
with copies to:
Cravath, Swaine & Moore
Worldwide Plaza
825 Eighth Avenue
New York, New York 10019
Attention: Faiza J. Saeed, Esq.
For Maverick Recording Company
c/o Maverick Records LLC
9348 Civic Center Drive
Beverly Hills, CA 90210
Attn: Ms. Ronnie Dashev
Facsimile: (310) 385-9087
and:
SR/MDM Venture, Inc.
4
<PAGE> 38
c/o Warner Bros. Records Inc.
3300 Warner Boulevard
Burbank, CA 91505-4694
Attn: Vice Chairman
Facsimile: (818) 840-2382
with copies to:
Grubman, Indursky & Schindler, P.C.
152 West 57th Street
New York, NY 10019
Attn: Donald R. Friedman, Esq.
or Alan Grubman, Esq.
Facsimile: (212) 554-0444
Kramer Levin Naftalis & Frankel LLP
919 Third Avenue
New York, NY 10022
Attn: Howard J. Rothman, Esq.
Facsimile: (212) 715-8000
Legal Department
Warner Music Group Inc.
4000 Warner Boulevard
Burbank, CA 91522
Attn: General Counsel
Facsimile: (818) 954-5274
Cravath, Swaine & Moore
Worldwide Plaza
825 Eighth Avenue
New York, NY 10019
Attn: Faiza J. Saeed, Esq.
Facsimile: (212) 474-3700
SECTION 2. NO OTHER CHANGES. Except as expressly provided
for in Section 1 above, all of the provisions of the Existing Registration
Rights Agreement shall continue in full force and effect.
[Remainder of Page Intentionally Left Blank]
5
<PAGE> 39
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the date first written above.
ARTISTDIRECT, INC.
By:
-------------------------------------
Name:
Title:
CHASE VENTURE CAPITAL ASSOCIATES, L.P.
By: Chase Capital Partners, L.P.,
its General Partner
By:
--------------------------------------
Name:
Title:
CASSANDRA/ARTISTDIRECT PARTNERS, LLC
By: Chase Venture Capital Associates, L.P.,
its Managing Member
By: Chase Capital Partners, L.P.,
its General Partner
By:
--------------------------------------
Name:
Title:
CCP/PSILOS ARTISTDIRECT, LLC
By: Psilos Group Investors, LLC,
its Managing Member
By:
---------------------------------------
Name: Albert S. Waxman, Ph.D.
Title: Senior Managing Director
6
<PAGE> 40
CCP/PSILOS UBL, LLC
By: Psilos Group Investors, LLC,
its Managing Member
By:
--------------------------------------
Name: Albert S. Waxman, Ph.D.
Title: Senior Managing Director
FLATIRON FUND 1998/99, LLC
By:
---------------------------------------
Fred Wilson
Managing Member
FLATIRON ASSOCIATES, LLC
By:
---------------------------------------
Fred Wilson
Managing Member
SPINNAKER TECHNOLOGY FUND, L.P.
By: Bowman Capital Management, L.L.C., its
General Partner
By:
---------------------------------------
Name: Eric Moore
Title: Controller
SPINNAKER FOUNDERS FUND, L.P.
By: Bowman Capital Management, L.L.C., its
General Partner
By:
---------------------------------------
Name: Eric Moore
Title: Controller
7
<PAGE> 41
SPINNAKER CLIPPER FUND, L.P.
By: Bowman Capital Management, L.L.C., its
General Partner
By:
---------------------------------------
Name: Eric Moore
Title: Controller
PSILOS GROUP PARTNERS L.P.
By: Psilos Group Investors, LLC,
its General Partner
By:
---------------------------------------
Name: Albert S. Waxman, Ph.D.
Title: Senior Managing Director
TORONTO DOMINION INVESTMENTS, INC.
By:
---------------------------------------
Name: Carole Clause
Title: President
CONSTELLATION VENTURE CAPITAL, L.P.
By: Constellation Ventures Management LLC,
its General Partner
By:
--------------------------------------
Clifford H. Friedman
Member
8
<PAGE> 42
CONSTELLATION VENTURES (BVI), INC.
By:
--------------------------------------
Clifford H. Friedman
President and Chief Executive Officer
MEADOWLANE ENTERPRISES, LTD.
By:
---------------------------------------
-------------------------------------------
-------------------------------------------
UNIVERSAL MUSIC GROUP, INC.
By:
---------------------------------------
-------------------------------------------
-------------------------------------------
9
<PAGE> 43
------------------------------------------
Rick Rubin
------------------------------------------
Mark Di Dia
-------------------------------------------
Bruce E. Van Dalsem
-------------------------------------------
Henry D. Gradstein
-------------------------------------------
Marc P. Geiger
-------------------------------------------
Donald P. Muller
10
<PAGE> 44
BMG MUSIC d/b/a BMG ENTERTAIMENT
By:
---------------------------------------
-------------------------------------------
-------------------------------------------
11
<PAGE> 45
YAHOO! INC.
By:
---------------------------------------
-------------------------------------------
-------------------------------------------
12
<PAGE> 46
SONY MUSIC, a group of SONY MUSIC
ENTERTAINMENT INC.
By:
---------------------------------------
-------------------------------------------
-------------------------------------------
13
<PAGE> 47
ART-DIR HOLDINGS, INC.
By:
---------------------------------------
-------------------------------------------
-------------------------------------------
14
<PAGE> 48
MAVERICK RECORDING COMPANY
By:
--------------------------------------
Name: Guy Oseary
Its: Co-Chief Executive Officer
15
<PAGE> 1
EXHIBIT 10.21
ARTISTdirect, INC.
1999 EMPLOYEE STOCK PURCHASE PLAN
I. PURPOSE OF THE PLAN
This Employee Stock Purchase Plan is intended to promote the
interests of ARTISTdirect Inc., a Delaware corporation, by providing eligible
employees with the opportunity to acquire a proprietary interest in the
Corporation through participation in a payroll deduction based employee stock
purchase plan designed to qualify under Section 423 of the Code.
Capitalized terms herein shall have the meanings assigned to such
terms in the attached Appendix.
II. ADMINISTRATION OF THE PLAN
The Plan Administrator shall have full authority to interpret
and construe any provision of the Plan and to adopt such rules and regulations
for administering the Plan as it may deem necessary in order to comply with the
requirements of Code Section 423. Decisions of the Plan Administrator shall be
final and binding on all parties having an interest in the Plan.
III. STOCK SUBJECT TO PLAN
A. The stock purchasable under the Plan shall be shares of
authorized but unissued or reacquired Common Stock, including shares of Common
Stock purchased on the open market. The number of shares of Common Stock
initially reserved for issuance over the term of the Plan shall be limited to
Two Million (2,000,000) shares.
B. The number of shares of Common Stock available for issuance
under the Plan shall automatically increase on the first trading day of January
each calendar year during the term of the Plan, beginning with calendar year
2001, by an amount equal to one percent (1%) of the total number of shares of
Common Stock outstanding on the last trading day in December of the immediately
preceding calendar year, but in no event shall any such annual increase exceed
Four Million (4,000,000) shares.
C. Should any change be made to the Common Stock by reason of
any stock split, stock dividend, recapitalization, combination of shares,
exchange of shares or other change affecting the outstanding Common Stock as a
class without the Corporation's receipt of consideration, appropriate
adjustments shall be made to (i) the maximum number and class of securities
issuable under the Plan, (ii) the maximum number and class of securities
purchasable per Participant on any one Purchase Date, (iii) the maximum number
and class of securities purchasable in total by all Participants on any one
Purchase Date, (iv) the maximum number and/or class of securities by which the
share reserve is to increase automatically each
<PAGE> 2
calendar year pursuant to the provisions of Section III.B of this Article One
and (v) the number and class of securities and the price per share in effect
under each outstanding purchase right in order to prevent the dilution or
enlargement of benefits thereunder.
IV. OFFERING PERIODS
A. Shares of Common Stock shall be offered for purchase under
the Plan through a series of successive offering periods until such time as (i)
the maximum number of shares of Common Stock available for issuance under the
Plan shall have been purchased or (ii) the Plan shall have been sooner
terminated.
B. Each offering period shall be of such duration (not to exceed
twenty-four (24) months) as determined by the Plan Administrator prior to the
start date of such offering period. However, the initial offering period shall
commence at the Effective Time and terminate on the last business day in October
2001. The next offering period shall commence on the first business day in
November 2001, and subsequent offering periods shall commence as designated by
the Plan Administrator.
C. Each offering period shall be comprised of a series of one or
more successive Purchase Intervals. Purchase Intervals shall run from the first
business day in May to the last business day in October each year and from the
first business day in November each year to the last business day in April in
the following year. However, the first Purchase Interval in effect under the
initial offering period shall commence at the Effective Time and terminate on
the last business day in April 2000.
V. ELIGIBILITY
A. Each individual who is an Eligible Employee on the start date
of any offering period under the Plan may enter that offering period on such
start date or on any subsequent Semi-Annual Entry Date within that offering
period, provided he or she remains an Eligible Employee.
B. Each individual who first becomes an Eligible Employee after
the start date of an offering period may enter that offering period on any
subsequent Semi-Annual Entry Date within that offering period on which he or she
is an Eligible Employee.
C. The date an individual enters an offering period shall be
designated his or her Entry Date for purposes of that offering period.
D. To participate in the Plan for a particular offering period,
the Eligible Employee must complete the enrollment forms prescribed by the Plan
Administrator (including a stock purchase agreement and a payroll deduction
authorization) and file such forms with the Plan Administrator (or its
designate) on or before his or her scheduled Entry Date.
2.
<PAGE> 3
VI. PAYROLL DEDUCTIONS
A. The payroll deduction authorized by the Participant for
purposes of acquiring shares of Common Stock during an offering period may be
any multiple of one percent (1%) of the Cash Earnings paid to the Participant
during each Purchase Interval within that offering period, up to a maximum of
fifteen percent (15%). The deduction rate so authorized shall continue in effect
throughout the offering period, except to the extent such rate is changed in
accordance with the following guidelines:
(i) The Participant may, at any time during the offering
period, reduce his or her rate of payroll deduction to become effective
as soon as possible after filing the appropriate form with the Plan
Administrator. The Participant may not, however, effect more than one
(1) such reduction per Purchase Interval.
(ii) The Participant may, prior to the commencement of
any new Purchase Interval within the offering period, increase the rate
of his or her payroll deduction by filing the appropriate form with the
Plan Administrator. The new rate (which may not exceed the fifteen
percent (15%) maximum) shall become effective on the start date of the
first Purchase Interval following the filing of such form.
B. Payroll deductions shall begin on the first pay day
administratively feasible following the Participant's Entry Date into the
offering period and shall (unless sooner terminated by the Participant) continue
through the pay day ending with or immediately prior to the last day of that
offering period. The amounts so collected shall be credited to the Participant's
book account under the Plan, but no interest shall be paid on the balance from
time to time outstanding in such account. The amounts collected from the
Participant shall not be required to be held in any segregated account or trust
fund and may be commingled with the general assets of the Corporation and used
for general corporate purposes.
C. Payroll deductions shall automatically cease upon the
termination of the Participant's purchase right in accordance with the
provisions of the Plan.
D. The Participant's acquisition of Common Stock under the Plan
on any Purchase Date shall neither limit nor require the Participant's
acquisition of Common Stock on any subsequent Purchase Date, whether within the
same or a different offering period.
VII. PURCHASE RIGHTS
A. GRANT OF PURCHASE RIGHTS. A Participant shall be granted a
separate purchase right for each offering period in which he or she
participates. The purchase right shall be granted on the Participant's Entry
Date into the offering period and shall provide the Participant with the right
to purchase shares of Common Stock, in a series of successive
3.
<PAGE> 4
installments over the remainder of such offering period, upon the terms set
forth below. The Participant shall execute a stock purchase agreement embodying
such terms and such other provisions (not inconsistent with the Plan) as the
Plan Administrator may deem advisable.
Under no circumstances shall purchase rights be granted under
the Plan to any Eligible Employee if such individual would, immediately after
the grant, own (within the meaning of Code Section 424(d)) or hold outstanding
options or other rights to purchase, stock possessing five percent (5%) or more
of the total combined voting power or value of all classes of stock of the
Corporation or any Corporate Affiliate.
B. EXERCISE OF THE PURCHASE RIGHT. Each purchase right shall be
automatically exercised in installments on each successive Purchase Date within
the offering period, and shares of Common Stock shall accordingly be purchased
on behalf of each Participant on each such Purchase Date. The purchase shall be
effected by applying the Participant's payroll deductions for the Purchase
Interval ending on such Purchase Date to the purchase of whole shares of Common
Stock at the purchase price in effect for the Participant for that Purchase
Date.
C. PURCHASE PRICE. The purchase price per share at which Common
Stock will be purchased on the Participant's behalf on each Purchase Date within
the offering period shall be equal to eighty-five percent (85%) of the lower of
(i) the Fair Market Value per share of Common Stock on the Participant's Entry
Date into that offering period or (ii) the Fair Market Value per share of Common
Stock on that Purchase Date. However, for any Participant whose Entry Date
occurs after the start date of the offering period, the clause (i) amount shall
not be less than the Fair Market Value per share of Common Stock on such start
date.
D. NUMBER OF PURCHASABLE SHARES. The number of shares of Common
Stock purchasable by a Participant on each Purchase Date during the offering
period shall be the number of whole shares obtained by dividing the amount
collected from the Participant through payroll deductions during the Purchase
Interval ending with that Purchase Date by the purchase price in effect for the
Participant for that Purchase Date. However, the maximum number of shares of
Common Stock purchasable per Participant on any one Purchase Date shall not
exceed Three Thousand (3,000) shares, subject to periodic adjustments in the
event of certain changes in the Corporation's capitalization. In addition, the
maximum number of shares of Common Stock purchasable in total by all
Participants on any one Purchase Date shall not exceed Two Million (2,000,000)
shares, subject to periodic adjustments in the event of certain changes in the
Corporation's capitalization. However, the Plan Administrator shall have the
discretionary authority, exercisable prior to the start of any offering period
under the Plan, to increase or decrease the limitations to be in effect for the
number of shares purchasable per Participant and in total by all Participants on
each Purchase Date within that offering period.
4.
<PAGE> 5
E. EXCESS PAYROLL DEDUCTIONS. Any payroll deductions not applied
to the purchase of shares of Common Stock on any Purchase Date because they are
not sufficient to purchase a whole share of Common Stock shall be held for the
purchase of Common Stock on the next Purchase Date. However, any payroll
deductions not applied to the purchase of Common Stock by reason of the
limitation on the maximum number of shares purchasable per Participant or in
total by all Participants on the Purchase Date shall be promptly refunded.
F. TERMINATION OF PURCHASE RIGHT. The following provisions shall
govern the termination of outstanding purchase rights:
(i) A Participant may, at any time prior to the next
scheduled Purchase Date in the offering period, terminate his or her
outstanding purchase right by filing the appropriate form with the Plan
Administrator (or its designate), and no further payroll deductions
shall be collected from the Participant with respect to the terminated
purchase right. Any payroll deductions collected during the Purchase
Interval in which such termination occurs shall, at the Participant's
election, be immediately refunded or held for the purchase of shares on
the next Purchase Date. If no such election is made at the time such
purchase right is terminated, then the payroll deductions collected with
respect to the terminated right shall be refunded as soon as possible.
(ii) The termination of such purchase right shall be
irrevocable, and the Participant may not subsequently rejoin the
offering period for which the terminated purchase right was granted. In
order to resume participation in any subsequent offering period, such
individual must re-enroll in the Plan (by making a timely filing of the
prescribed enrollment forms) on or before his or her scheduled Entry
Date into that offering period.
(iii) Should the Participant cease to remain an Eligible
Employee for any reason (including death, disability or change in
status) while his or her purchase right remains outstanding, then that
purchase right shall immediately terminate, and all of the Participant's
payroll deductions for the Purchase Interval in which the purchase right
so terminates shall be immediately refunded. However, should the
Participant cease to remain in active service by reason of an approved
unpaid leave of absence, then the Participant shall have the right,
exercisable up until the last business day of the Purchase Interval in
which such leave commences, to (a) withdraw all the payroll deductions
collected to date on his or her behalf for that Purchase Interval or (b)
have such funds held for the purchase of shares on his or her behalf on
the next scheduled Purchase Date. In no event, however, shall any
further payroll deductions be collected on the Participant's behalf
during such leave. Upon the Participant's return to active service (x)
within ninety (90) days following the commencement of such leave or (y)
prior to the expiration of any longer period for which such
Participant's right to reemployment with the Corporation is guaranteed
by statute or contract, his or her payroll deductions under the Plan
shall automatically resume at the rate in
5.
<PAGE> 6
effect at the time the leave began, unless the Participant withdraws
from the Plan prior to his or her return. An individual who returns to
active employment following a leave of absence which exceeds in duration
the applicable (x) or (y) time period will be treated as a new Employee
for purposes of subsequent participation in the Plan and must
accordingly re-enroll in the Plan (by making a timely filing of the
prescribed enrollment forms) on or before his or her scheduled Entry
Date into the offering period.
G. CHANGE IN CONTROL. Each outstanding purchase right shall
automatically be exercised, immediately prior to the effective date of any
Change in Control, by applying the payroll deductions of each Participant for
the Purchase Interval in which such Change in Control occurs to the purchase of
whole shares of Common Stock at a purchase price per share equal to eighty-five
percent (85%) of the lower of (i) the Fair Market Value per share of Common
Stock on the Participant's Entry Date into the offering period in which such
Change in Control occurs or (ii) the Fair Market Value per share of Common Stock
immediately prior to the effective date of such Change in Control. However, for
any Participant whose Entry Date occurs after the start date of the offering
period, the clause (i) amount shall not be less than the Fair Market Value per
share of Common Stock on such start date. In addition, the applicable limitation
on the number of shares of Common Stock purchasable per Participant shall
continue to apply to any such purchase, but not the limitation applicable to the
maximum number of shares of Common Stock purchasable in total by all
Participants.
The Corporation shall use its best efforts to provide at least
ten (10)-days prior written notice of the occurrence of any Change in Control,
and Participants shall, following the receipt of such notice, have the right to
terminate their outstanding purchase rights prior to the effective date of the
Change in Control.
H. PRORATION OF PURCHASE RIGHTS. Should the total number of
shares of Common Stock to be purchased pursuant to outstanding purchase rights
on any particular date exceed the number of shares then available for issuance
under the Plan, the Plan Administrator shall make a pro-rata allocation of the
available shares on a uniform and nondiscriminatory basis, and the payroll
deductions of each Participant, to the extent in excess of the aggregate
purchase price payable for the Common Stock pro-rated to such individual, shall
be refunded.
I. ASSIGNABILITY. The purchase right shall be exercisable only
by the Participant and shall not be assignable or transferable by the
Participant.
J. STOCKHOLDER RIGHTS. A Participant shall have no stockholder
rights with respect to the shares subject to his or her outstanding purchase
right until the shares are purchased on the Participant's behalf in accordance
with the provisions of the Plan and the Participant has become a holder of
record of the purchased shares.
6.
<PAGE> 7
VIII. ACCRUAL LIMITATIONS
A. No Participant shall be entitled to accrue rights to acquire
Common Stock pursuant to any purchase right outstanding under this Plan if and
to the extent such accrual, when aggregated with (i) rights to purchase Common
Stock accrued under any other purchase right granted under this Plan and (ii)
similar rights accrued under other employee stock purchase plans (within the
meaning of Code Section 423) of the Corporation or any Corporate Affiliate,
would otherwise permit such Participant to purchase more than Twenty-Five
Thousand Dollars ($25,000.00) worth of stock of the Corporation or any Corporate
Affiliate (determined on the basis of the Fair Market Value per share on the
date or dates such rights are granted) for each calendar year such rights are at
any time outstanding.
B. For purposes of applying such accrual limitations to the
purchase rights granted under the Plan, the following provisions shall be in
effect:
(i) The right to acquire Common Stock under each
outstanding purchase right shall accrue in a series of installments on
each successive Purchase Date during the offering period on which such
right remains outstanding.
(ii) No right to acquire Common Stock under any
outstanding purchase right shall accrue to the extent the Participant
has already accrued in the same calendar year the right to acquire
Common Stock under one or more other purchase rights at a rate equal to
Twenty-Five Thousand Dollars ($25,000.00) worth of Common Stock
(determined on the basis of the Fair Market Value per share on the date
or dates of grant) for each calendar year such rights were at any time
outstanding.
C. If by reason of such accrual limitations, any purchase right
of a Participant does not accrue for a particular Purchase Interval, then the
payroll deductions which the Participant made during that Purchase Interval with
respect to such purchase right shall be promptly refunded.
D. In the event there is any conflict between the provisions of
this Article and one or more provisions of the Plan or any instrument issued
thereunder, the provisions of this Article shall be controlling.
IX. EFFECTIVE DATE AND TERM OF THE PLAN
A. The Plan was adopted by the Board on October 13, 1999 and shall
become effective at the Effective Time, provided no purchase rights granted
under the Plan shall be exercised, and no shares of Common Stock shall be issued
hereunder, until (i) the Plan shall have been approved by the stockholders of
the Corporation and (ii) the Corporation shall have complied with all applicable
requirements of the 1933 Act (including the registration of the shares of Common
Stock issuable under the Plan on a Form S-8 registration statement filed with
the Securities and Exchange Commission), all applicable listing requirements of
any stock
7.
<PAGE> 8
exchange (or the Nasdaq National Market, if applicable) on which the Common
Stock is listed for trading and all other applicable requirements established by
law or regulation. In the event such stockholder approval is not obtained, or
such compliance is not effected, within twelve (12) months after the date on
which the Plan is adopted by the Board, the Plan shall terminate and have no
further force or effect, and all sums collected from Participants during the
initial offering period hereunder shall be refunded.
B. Unless sooner terminated by the Board, the Plan shall
terminate upon the earliest of (i) the last business day in October 2009, (ii)
the date on which all shares available for issuance under the Plan shall have
been sold pursuant to purchase rights exercised under the Plan or (iii) the date
on which all purchase rights are exercised in connection with a Change in
Control. No further purchase rights shall be granted or exercised, and no
further payroll deductions shall be collected, under the Plan following such
termination.
X. AMENDMENT OF THE PLAN
A. The Board may alter, amend, suspend or terminate the Plan at
any time to become effective immediately following the close of any Purchase
Interval. However, the Plan may be amended or terminated immediately upon Board
action, if and to the extent necessary to assure that the Corporation will not
recognize, for financial reporting purposes, any compensation expense in
connection with the shares of Common Stock offered for purchase under the Plan,
should the financial accounting rules applicable to the Plan at the Effective
Time be subsequently revised so as to require the Corporation to recognize
compensation expense in the absence of such amendment or termination.
B. In no event may the Board effect any of the following
amendments or revisions to the Plan without the approval of the Corporation's
stockholders: (i) increase the number of shares of Common Stock issuable under
the Plan, except for permissible adjustments in the event of certain changes in
the Corporation's capitalization, (ii) alter the purchase price formula so as to
reduce the purchase price payable for the shares of Common Stock purchasable
under the Plan or (iii) modify the eligibility requirements for participation in
the Plan.
XI. GENERAL PROVISIONS
A. All costs and expenses incurred in the administration of the
Plan shall be paid by the Corporation; however, each Plan Participant shall bear
all costs and expenses incurred by such individual in the sale or other
disposition of any shares purchased under the Plan.
B. Nothing in the Plan shall confer upon the Participant any
right to continue in the employ of the Corporation or any Corporate Affiliate
for any period of specific duration or interfere with or otherwise restrict in
any way the rights of the Corporation (or any Corporate Affiliate employing such
person) or of the Participant, which rights are hereby expressly reserved by
each, to terminate such person's employment at any time for any reason, with or
without cause.
8.
<PAGE> 9
C. The provisions of the Plan shall be governed by the laws of
the State of California without resort to that State's conflict-of-laws rules.
9.
<PAGE> 10
SCHEDULE A
CORPORATIONS PARTICIPATING IN
EMPLOYEE STOCK PURCHASE PLAN
AS OF THE EFFECTIVE TIME
ARTISTdirect, Inc.
<PAGE> 11
APPENDIX
The following definitions shall be in effect under the Plan:
A. BOARD shall mean the Corporation's Board of Directors.
B. CASH EARNINGS shall mean (i) the regular base salary paid to
a Participant by one or more Participating Companies during such individual's
period of participation in one or more offering periods under the Plan and (ii)
any overtime payments, bonuses, commissions, profit-sharing distributions and
other incentive-type payments received during such period. Cash Earnings shall
be calculated before deduction of (A) any income or employment tax withholdings
or (B) any contributions made by the Participant to any Code Section 401(k)
salary deferral plan or Code Section 125 cafeteria benefit program now or
hereafter established by the Corporation or any Corporate Affiliate. Cash
Earnings shall not include any contributions made on the Participant's behalf by
the Corporation or any Corporate Affiliate to any employee benefit or welfare
plan now or hereafter established (other than Code Section 401(k) or Code
Section 125 contributions deducted from such Cash Earnings).
C. CHANGE IN CONTROL shall mean a change in ownership of the
Corporation pursuant to any of the following transactions:
(i) a merger or consolidation in which securities
possessing more than fifty percent (50%) of the total combined voting
power of the Corporation's outstanding securities are transferred to a
person or persons different from the persons holding those securities
immediately prior to such transaction, or
(ii) the sale, transfer or other disposition of all or
substantially all of the assets of the Corporation in complete
liquidation or dissolution of the Corporation, or
(iii) the acquisition, directly or indirectly, by a
person or related group of persons (other than the Corporation or a
person that directly or indirectly controls, is controlled by or is
under common control with the Corporation) of beneficial ownership
(within the meaning of Rule 13d-3 of the 1934 Act) of securities
possessing more than fifty percent (50%) of the total combined voting
power of the Corporation's outstanding securities pursuant to a tender
or exchange offer made directly to the Corporation's stockholders.
C. CODE shall mean the Internal Revenue Code of 1986, as
amended.
D. COMMON STOCK shall mean the Corporation's common stock.
A-1
<PAGE> 12
E. CORPORATE AFFILIATE shall mean any parent or subsidiary
corporation of the Corporation (as determined in accordance with Code Section
424), whether now existing or subsequently established.
F. CORPORATION shall mean ARTISTdirect, Inc., a Delaware
corporation, and any corporate successor to all or substantially all of the
assets or voting stock of ARTISTdirect, Inc. which shall by appropriate action
adopt the Plan.
H. EFFECTIVE TIME shall mean the time at which the Underwriting
Agreement is executed and the Common Stock priced for the initial public
offering of such Common Stock. Any Corporate Affiliate which becomes a
Participating Corporation after such Effective Time shall designate a subsequent
Effective Time with respect to its employee-Participants.
I. ELIGIBLE EMPLOYEE shall mean any person who is employed by a
Participating Corporation on a basis under which he or she is regularly expected
to render more than twenty (20) hours of service per week for more than five (5)
months per calendar year for earnings considered wages under Code Section 3401
(a).
J. ENTRY DATE shall mean the date an Eligible Employee first
commences participation in the offering period in effect under the Plan. The
earliest Entry Date under the Plan shall be the Effective Time.
K. FAIR MARKET VALUE per share of Common Stock on any relevant
date shall be determined in accordance with the following provisions:
(i) If the Common Stock is at the time traded on the
Nasdaq National Market, then the Fair Market Value shall be the closing
selling price per share of Common Stock on the date in question, as such
price is reported by the National Association of Securities Dealers on
the Nasdaq National Market. If there is no closing selling price for the
Common Stock on the date in question, then the Fair Market Value shall
be the closing selling price on the last preceding date for which such
quotation exists.
(ii) If the Common Stock is at the time listed on any
Stock Exchange, then the Fair Market Value shall be the closing selling
price per share of Common Stock on the date in question on the Stock
Exchange determined by the Plan Administrator to be the primary market
for the Common Stock, as such price is officially quoted in the
composite tape of transactions on such exchange. If there is no closing
selling price for the Common Stock on the date in question, then the
Fair Market Value shall be the closing selling price on the last
preceding date for which such quotation exists.
(iii) For purposes of the initial offering period which
begins at the Effective Time, the Fair Market Value shall be deemed to
be equal to the price per share at which the Common Stock is sold in the
initial public offering pursuant to the Underwriting Agreement.
A-2.
<PAGE> 13
L. 1933 ACT shall mean the Securities Act of 1933, as amended.
M. PARTICIPANT shall mean any Eligible Employee of a
Participating Corporation who is actively participating in the Plan.
N. PARTICIPATING CORPORATION shall mean the Corporation and such
Corporate Affiliate or Affiliates as may be authorized from time to time by the
Board to extend the benefits of the Plan to their Eligible Employees. The
Participating Corporations in the Plan are listed in attached Schedule A.
0. PLAN shall mean the Corporation's 1999 Employee Stock
Purchase Plan, as set forth in this document.
P. PLAN ADMINISTRATOR shall mean the committee of two (2) or
more Board members appointed by the Board to administer the Plan.
Q. PURCHASE DATE shall mean the last business day of each
Purchase Interval. The initial Purchase Date shall be April 28, 2000.
R. PURCHASE INTERVAL shall mean each successive six (6)-month
period within the offering period at the end of which there shall be purchased
shares of Common Stock on behalf of each Participant.
S. SEMI-ANNUAL ENTRY DATE shall mean the first business day in
May and November each year on which an Eligible Employee may first enter an
offering period.
T. STOCK EXCHANGE shall mean either the American Stock Exchange
or the New York Stock Exchange.
U. UNDERWRITING AGREEMENT shall mean the agreement between the
Corporation and the underwriter or underwriters managing the initial public
offering of the Common Stock.
A-3.
<PAGE> 1
EXHIBIT 10.22
ARTISTdirect, INC.
1999 EMPLOYEE STOCK OPTION PLAN
Section 1. Description of Plan.
(a) This 1999 Employee Stock Option Plan (the "Plan") of
ARTISTdirect, Inc., a Delaware corporation (the "Company"), is effective as of
October 6, 1999 and is designed to effect the assumption by the Company of the
ARTISTdirect LLC 1998 Unit Option Plan (the "LLC Plan") and all options
thereunder in connection with the incorporation of ARTISTdirect LLC. As part of
such assumption, each outstanding option to acquire Units of ARTISTdirect LLC
under the LLC plan has been converted into an option to acquire the same number
of shares of the Company's common stock (the "Common Stock") under this Plan
at the same exercise price per share. All the other terms and conditions of
each such assumed option shall continue in full force and effect.
(b) Under the Plan, designated employees, non-employee Board
members and consultants in the service of the Company and/or of any directly or
indirectly owned entities of the Company (individually, a "Subsidiary" and
collectively, the "Subsidiaries") may be granted options ("Options") to purchase
shares of Common Stock. It is intended that the Options under this Plan will
either qualify for treatment as incentive stock options under Section 422 of the
Internal Revenue Code of 1986, as amended (the "Code"), and will be designated
"Incentive Stock Options," or such Options will not qualify for such treatment
and will be designated "Nonstatutory Stock Options." Incentive Stock Options
shall be subject to the additional provisions of Section 9.
Section 2. Purpose of Plan. The purpose of the Plan and of granting
Options to specified persons is to further the growth, development and financial
success of the Company and its Subsidiaries by providing additional incentives
to certain key employees, non-employee Board members and consultants. By
assisting such persons in acquiring Common Stock, the Company can ensure that
such persons will themselves benefit directly from the growth, development and
financial success of the Company and its Subsidiaries.
Section 3. Eligibility. The persons who shall be eligible to receive
grants of Options under the Plan shall be limited to those employees,
non-employee Board members and consultants in the service of the Company and/or
its Subsidiaries as determined by the Plan Administrator; provided that bona
fide services shall be rendered to the Company or its Subsidiaries by such
employees, non-employee Board members and consultants of the Company, and such
services shall not have been in connection with the offer and sale of securities
in a capital-raising transaction. A person who holds an Option is herein
referred to as a "Participant," and more than one Option may be granted to any
Participant.
<PAGE> 2
Section 4. Administration.
(a) The Plan shall be administered by the Board or, at the
Board's option, by a committee established by the Board and composed of not less
than three Board members (the "Committee"). Members of the Committee shall be
appointed, both initially and as vacancies occur, by the Board, to serve at the
pleasure of the Board. Upon the first registration of an equity security of the
Company under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), to the extent possible and advisable, the Committee may be constituted so
as to permit this Plan to comply with Rule 16b-3 promulgated under Section 16 of
the Exchange Act and Section 162(m) of the Code. The Committee shall meet at
such times and places as it determines and may meet through a telephone
conference call. A majority of its members shall constitute a quorum, and the
decision of a majority of those present shall constitute the decision of the
Committee. A memorandum signed by all of its members shall constitute the
decision of the Committee without the need, in such event, to hold an actual
meeting. The term "Plan Administrator" as used in this document shall mean the
Board or the Committee acting in its capacity as administrator of the Plan.
(b) The Plan Administrator is authorized and empowered to
administer the Plan and, subject to the express provisions of the Plan,
including but not limited to Section 23, (i) to determine the dates upon which
Options shall be granted and the terms and conditions thereof in a manner
consistent with the Plan, which terms and conditions need not be identical as to
the various Options granted; (ii) to interpret the Plan; (iii) to grant Options;
(iv) to determine the Participants; (v) to specify the terms of the Options;
(vi) to determine the number of shares of Common Stock which may be purchased;
(vii) to accelerate the time during which an Option may be exercised in
accordance with the provisions of Section 18 hereof, and to otherwise accelerate
the time during which an Option may be exercised (but not reduce the time of
exercise for Options which have vested), in each case notwithstanding the
provisions in the Option Agreement (as defined in Section 16 hereof) stating the
time during which it may be exercised; (viii) to prescribe, amend and rescind
rules relating to the Plan; (ix) to authorize any person to execute on behalf of
the Company any instrument required to effectuate the grant of an Option
previously granted by the Plan Administrator; (x) to determine the rights and
obligations of Participants under the Plan; (xi) to determine whether the
granted Option is to be structured as an Incentive Stock Option or Nonstatutory
Stock Option under the federal tax laws and (xii) to make all other
determinations deemed necessary or advisable for the administration of the Plan.
The interpretation and construction by the Plan Administrator of any provision
of the Plan or of any Option granted under it shall be final. No person serving
as Plan Administrator shall be liable for any action or determination made with
respect to the Plan or any Option granted hereunder.
2
<PAGE> 3
Section 5. Common Stock Subject to Plan.
(a) The maximum number of shares of Common Stock which may be
issued under the Plan shall not exceed 21,000,000 shares. Such reserve shall
consist of (i) the number of shares available for issuance under the LLC Plan
immediately after the incorporation of the LLC and the conversion of the Units
issuable thereunder into shares of Common Stock plus (ii) an additional increase
of 9,270,019 shares to be approved by the Company's stockholders.
(b) The number of shares of Common Stock available for issuance
under the Plan shall automatically increase on the first trading day of January
each calendar year during the term of the Plan, beginning with calendar year
2001, by an amount equal to two percent (2%) of the total number of shares of
Common Stock outstanding on the last trading day in December of the immediately
preceding calendar year, but in no event shall any such annual increase exceed
3,500,000 shares.
(c) Shares of Common Stock subject to outstanding Options
(including Options assumed under this Plan) shall be available for subsequent
issuance under the Plan to the extent (i) those Options expire or terminate for
any reason prior to exercise in full or (ii) the Options are cancelled in
accordance with the cancellation-regrant provisions of Section 13. Unvested
shares issued under the Plan and subsequently repurchased by the Company at the
original issue price paid per share, pursuant to the Company's repurchase rights
under the Plan shall be added back to the number of shares of Common Stock
reserved for issuance under the Plan and shall accordingly be available for
reissuance through one or more subsequent Option grants under the Plan. However,
should the exercise price of an Option under the Plan be paid with shares of
Common Stock or should shares of Common Stock otherwise issuable under the Plan
be withheld by the Company in satisfaction of the withholding taxes incurred in
connection with the exercise of an Option or the vesting of a stock issuance
under the Plan, then the number of shares of Common Stock available for issuance
under the Plan shall be reduced by the gross number of shares for which the
Option is exercised or which vest under the stock issuance, and not by the net
number of shares of Common Stock issued to the holder of such Option or stock
issuance.
Section 6. Option Exercise Price.
(a) Except as provided in Sections 15 and 19 hereof, the purchase
price per share (the "Exercise Price") of the shares of Common Stock underlying
each Option shall be as determined by the Plan Administrator in its sole
discretion; provided, that in the case of any person owning greater than 10% of
the total combined voting power of all classes of capital stock of the Company
or its parent or subsidiaries ("10% Stockholder"), the Exercise Price of the
Option granted to such person shall not be less than 110% of the fair market
value of the shares of Common Stock at the time the Option is granted.
3
<PAGE> 4
(b) For purposes of the Plan, the fair market value per share of
Common Stock on any relevant date shall be determined in accordance with the
following procedures:
(i) If the Common Stock is at the time traded on the
Nasdaq National Market, then the fair market value shall be the closing
selling price per share of Common Stock on the date in question, as such
price is reported by the National Association of Securities Dealers on
the Nasdaq National Market. If there is no closing selling price for the
Common Stock on the date in question, then the fair market value shall
be the closing selling price on the last preceding date for which such
quotation exists.
(ii) If the Common Stock is at the time listed on any
national stock exchange, then the fair market value shall be the closing
selling price per share of Common Stock on the date in question on the
stock exchange determined by the Plan Administrator to be the primary
market for the Common Stock, as such price is officially quoted in the
composite tape of transactions on such exchange. If there is no closing
selling price for the Common Stock on the date in question, then the
fair market value shall be the closing selling price on the last
preceding date for which such quotation exists.
(iii) If the Common Stock is at the time neither traded on
the Nasdaq National Market nor listed on any national stock exchange,
then the fair market value shall be determined by the Plan Administrator
on the basis of such factors as the Plan Administrator shall deem
appropriate.
Section 7. Restrictions on Grants; Vesting of Options.
(a) Notwithstanding any other provisions set forth herein or in
any Option Agreement, no Options may be granted under the Plan subsequent to ten
(10) years after the October 6, 1999 effective date of this Plan. Each Option
shall grant the Participant the right to purchase a specified number of shares
of Common Stock at the Exercise Price determined by the Plan Administrator in
accordance with Section 6. The Options shall vest pursuant to a chronological
vesting schedule and/or based on targeted goals or other schedule established by
the Plan Administrator. The Plan Administrator shall determine the vesting
schedule, including, if applicable, the performance criteria and the performance
measurement period(s), applicable to each Option or group of Options in a
schedule, a copy of which shall be
4
<PAGE> 5
filed with the records of the Plan Administrator and attached to each Option
Agreement to which the same applies. The vesting schedule, including, if
applicable, the performance criteria and the performance measurement period(s),
need not be identical for all Options granted hereunder.
(b) Following the conclusion of each applicable performance
measurement period, the Plan Administrator shall determine, in its sole
judgment, the extent, if at all, that each Option subject thereto shall have
become exercisable based upon the applicable performance criteria and the
schedule of exercisability. The Plan Administrator may periodically review the
performance criteria applicable to any Option or Options and, in its sole
judgment, may adjust the same to reflect significant events involving the
Company or any Subsidiary, such as mergers, acquisitions, asset sales, other
extraordinary corporate events and extraordinary losses and gains, significant
changes in the level of capital expenditures, as well as changes in accounting
treatment.
(c) Until the date the Common Stock is first registered under
Section 12 of the Exchange Act (the "Section 12 Registration Date"), the Plan
Administrator may not impose a vesting schedule upon any Option grant or the
shares of Common Stock subject to that Option which is more restrictive than
twenty percent (20%) per year vesting, with the initial vesting to occur not
later than one (1) year after the grant date of such Option. However, such
limitation shall not be applicable to any Options granted to individuals who are
officers of the Company, non-employee Board members or independent consultants.
Section 8. Exercise of Options.
(a) Once vested, and prior to its termination date, an Option may
be exercised by the Participant by giving written notice to the Company
specifying the number of shares of Common Stock to be purchased and accompanied
by payment of the full Exercise Price for those shares in cash or by check
payable to the Company's order. The Plan Administrator may structure one or more
Options so that following the Section 12 Registration Date, the Exercise Price
may also be paid in any of the following forms:
(i) shares of Common Stock held for the requisite period
necessary to avoid a charge to the Company's earnings for financial
reporting purposes and valued at fair market value on the exercise date,
or
(ii) to the extent the Option is exercised for vested
shares, through a special sale and remittance procedure pursuant to
which the Participant shall concurrently provide irrevocable
instructions to (a) a Company-designated brokerage firm to effect the
immediate sale of the purchased shares and remit to the Company, out of
the sale proceeds available on the settlement date, sufficient funds to
cover the aggregate Exercise Price payable for the
5
<PAGE> 6
purchased shares plus all applicable federal, state and local income and
employment taxes required to be withheld by the Company by reason of
such exercise and (b) the Company to deliver the certificates for the
purchased shares directly to such brokerage firm in order to complete
the sale.
Except to the extent such sale and remittance procedure is
utilized, payment of the Exercise Price for the purchased shares must be made on
the date the Option is exercised.
(b) During the lifetime of the Participant, Incentive Stock
Options shall be exercisable only by the Participant and shall not be assignable
or transferable other than by will or by the laws of inheritance following the
Participant's death. However, a Nonstatutory Option may be assigned in whole or
in part during the Participant's lifetime to one or more members of the
Participant's immediate family or to a trust established exclusively for one or
more such family members or may be assigned to the Participant's former spouse
pursuant to a domestic relations order. The assigned portion may only be
exercised by the person or persons who acquire a proprietary interest in the
Option pursuant to the assignment. The terms applicable to the assigned portion
shall be the same as those in effect for the Option immediately prior to such
assignment and shall be set forth in such documents issued to the assignee as
the Plan Administrator may deem appropriate. Notwithstanding the foregoing, the
Participant may also designate one or more persons as the beneficiary or
beneficiaries of his or her outstanding Options, and those Options shall, in
accordance with such designation, automatically be transferred to such
beneficiary or beneficiaries upon the Participant's death while holding those
Options. Such beneficiary or beneficiaries shall take the transferred Options
subject to all the terms and conditions of the applicable agreement evidencing
each such transferred Option, including (without limitation) the limited time
period during which the Option may be exercised following the Participant's
death.
(c) Any permitted transferee under this Section 8 shall be
required prior to any transfer of an Option or shares of Common Stock acquired
under such Option to execute a written undertaking to be bound by the provisions
of the Plan and the applicable Option Agreement.
Section 9. Incentive Stock Options. The terms specified below shall be
applicable to all Incentive Stock Options. Except as modified by the provisions
of this Section 9, all the other provisions of this Plan shall be applicable to
Incentive Stock Options. Options which are specifically designated as
Nonstatutory Options when issued under the Plan shall not be subject to the
terms of this Section 9.
(a) Incentive Stock Options may only be granted to employees of
the Company (or any parent or Subsidiary).
6
<PAGE> 7
(b) The aggregate fair market value of the shares of Common Stock
(determined as of the respective date or dates of grant) for which one or more
Options granted to any employee under the Plan (or any other option plan of the
Company or any parent or Subsidiary) may for the first time become exercisable
as Incentive Stock Options during any one calendar year shall not exceed the sum
of One Hundred Thousand Dollars ($100,000). To the extent the employee holds two
(2) or more such options which become exercisable for the first time in the same
calendar year, the foregoing limitation on the exercisability of such options as
Incentive Stock Options shall be applied on the basis of the order in which such
options are granted.
(c) If any employee to whom an Incentive Stock Option is granted
is a 10% Stockholder, then the Exercise Price per share shall not be less than
one hundred ten percent (110%) of the fair market value per share of Common
Stock on the option grant date, and the option term shall not exceed five (5)
years measured from the option grant date.
Section 10. Cessation of Service.
(a) The following provisions shall govern the exercise of any
Options held by the Participant at the time of cessation of Service or death:
(i) Any Option outstanding at the time of the
Participant's cessation of Service for any reason shall remain
exercisable for such period of time thereafter as shall be determined by
the Plan Administrator and set forth in the documents evidencing the
Option, but no such Option shall be exercisable after the expiration of
the option term.
(ii) Any Option held by the Participant at the time of
death and exercisable in whole or in part at that time may be
subsequently exercised by the personal representative of the
Participant's estate or by the person or persons to whom the Option is
transferred pursuant to the Participant's will or the laws of
inheritance or by the Participant's designated beneficiary or
beneficiaries of that Option.
(iii) During the applicable post-Service exercise period,
the Option may not be exercised in the aggregate for more than the
number of vested shares for which the Option is exercisable on the date
of the Participant's cessation of Service, except to the extent the
Option Agreement provides for a limited period of exercise following
such a termination for Cause. Upon the expiration of the applicable
exercise period or (if earlier) upon the expiration of the option term,
the Option shall terminate and cease to be outstanding for any vested
shares for which the Option has not been exercised. However, the Option
shall, immediately upon the Participant's cessation of' Service,
terminate and cease to be outstanding to the extent the Option is not
otherwise at that time exercisable for vested shares.
7
<PAGE> 8
(b) The Plan Administrator shall have complete discretion,
exercisable either at the time an Option is granted or at any time while the
Option remains outstanding, to:
(i) extend the period of time for which the Option is to
remain exercisable following the Participant's cessation of Service from
the limited exercise period otherwise in effect for that Option to such
greater period of time as the Plan Administrator shall deem appropriate,
but in no event beyond the expiration of the option term, and/or
(ii) permit the Option to be exercised, during the
applicable post-Service exercise period, not only with respect to the
number of vested shares of Common Stock for which such Option is
exercisable at the time of the Participant's cessation of Service but
also with respect to one or more additional installments in which the
Participant would have vested had the Participant continued in Service.
(c) Except to the extent otherwise specifically provided in the
documents evidencing the Option, the Participant shall be deemed, for purposes
of the Plan, to continue in Service for so long as such Participant performs
services for the Company (or any parent or Subsidiary) in the capacity of an
employee, a non-employee member of the board of directors or a consultant or
other independent advisor.
Section 11. Stockholder Rights. The holder of an Option shall have no
stockholder rights with respect to the shares subject to that Option until such
person shall have exercised the Option, paid the Exercise Price and become a
holder of record of the purchased shares.
Section 12. Repurchase Rights. The Plan Administrator shall have the
discretion to grant Options which are exercisable for unvested shares of Common
Stock. Should the Participant cease Service while holding such unvested shares,
the Company shall have the right to repurchase, at the Exercise Price paid per
share, any or all of those unvested shares. The terms upon which such repurchase
right shall be exercisable (including the period and procedure for exercise and
the appropriate vesting schedule for the purchased shares) shall be established
by the Plan Administrator and set forth in the document evidencing such
repurchase right.
Section 13. Option Cancellation and Regrant. The Plan Administrator
shall have the authority to effect, at any time and from time to time, with the
consent of the affected option holders, the cancellation of any or all
outstanding Options under the Plan (including the assumed Options hereunder) and
to grant in substitution new Options covering the same or different number of
shares of Common Stock but with an Exercise Price per share based on the fair
market value per share of Common Stock on the new grant date.
8
<PAGE> 9
Section 14. Issuance of Common Stock. The Company's obligation to issue
its shares of Common Stock upon exercise of an Option is expressly conditioned
upon (A) the compliance by the Company with any registration or other
qualification obligations with respect to such shares of Common Stock under any
state and/or federal law or rulings and regulations of any government regulatory
body, and/or (B) the making of such investment representations or other
representations and undertakings by the Participant (or the Participant's legal
representative, heir, legatee or beneficiary, as the case may be) in order to
comply with the requirements of any exemption from any such registration or
other qualification obligations with respect to such shares of Common Stock
which the Company in its sole discretion shall deem necessary or advisable. Such
required representations and undertakings may include representations and
agreements that such Participant (or the Participant's legal representative,
heir, legatee or beneficiary): (a) is purchasing such shares of Common Stock for
investment and not with any present intention of selling or otherwise disposing
of such shares of Common Stock; and (b) agrees to have a legend placed upon the
face and reverse of any certificates evidencing such shares of Common Stock (or,
if applicable, an appropriate data entry made in the ownership records of the
Company) setting forth (i) any representations and undertakings which such
Participant has given to the Company or a reference thereto, and (ii) that,
prior to effecting any sale or other disposition of any such shares of Common
Stock, the Participant must furnish to the Company an opinion of counsel,
satisfactory to the Company and its counsel, to the effect that such sale or
disposition will not violate the applicable requirements of state and federal
laws and regulatory agencies; provided, however, that any such legend or data
entry shall be removed when no longer applicable. The inability of the Company
to obtain, from any regulatory body having jurisdiction, authority reasonably
deemed by the Company's counsel to be necessary for the lawful issuance and sale
of any shares of Common Stock hereunder shall relieve the Company of any
liability in respect of the non-issuance or sale of such shares of Common Stock
as to which such requisite authority shall not have been obtained. Any shares of
Common Stock issued by the Company upon exercise of an Option granted hereunder
shall be subject to all obligations under this Plan, including without
limitation any right of first offer of the Company and others with respect to
all shares of Common Stock proposed to be transferred by Participant under
Section 16(b) hereof, the dragalong rights described in Section 16(c) hereof,
and certain other restrictions set forth in each particular Option Agreement.
Section 15. Recapitalizations and Changes in Control.
(a) Subject to paragraph (c) of this Section 15, if any change is
made to the Common Stock by reason of any stock split, stock dividend,
recapitalization, combination of shares, exchange of shares or other change
affecting the outstanding Common Stock as a class without the Company's receipt
of consideration, appropriate adjustments shall be made by the Plan
Administrator to (i) the maximum number and/or class of securities issuable
under the Plan, (ii) the number and/or class of securities and the Exercise
Price per share in effect under each outstanding Option under the Plan and (iii)
the maximum number and/or class of securities by which the share reserve is to
increase automatically each calendar year
9
<PAGE> 10
pursuant to the provisions of Section 5. Such adjustments to the outstanding
Options are to be effected in a manner which shall preclude the enlargement or
dilution of rights and benefits under such Options. Any such adjustment in an
outstanding Option, however, shall be made without a change in the total
Exercise Price applicable to the unexercised portion of the Option but with a
corresponding adjustment in the Exercise Price for each share of Common Stock
covered by the Option. In making such adjustments, or in determining that no
such adjustments are necessary, the Plan Administrator may rely upon the advice
of counsel and accountants to the Company, and the determination of the Plan
Administrator shall be binding. No fractional shares of Common Stock shall be
issued or issuable under the Plan on account on any such adjustment.
(b) Each Option granted under this Plan and outstanding at the
time of a Change in Control (as defined below) shall automatically vest in full
so that each such Option shall, immediately prior to the effective date of the
Change in Control, become exercisable for all of the shares of Common Stock at
the time subject to that Option and may be exercised for any or all of those
shares as fully-vested shares of Common Stock. However, an outstanding Option
shall not vest on such an accelerated basis if and to the extent: (i) such
Option is assumed by the successor corporation (or parent thereof) or otherwise
continued in full force and effect pursuant to the terms of the Change in
Control transaction or (ii) such Option is to be replaced with a cash incentive
program which preserves the spread existing on the unvested option shares at the
time of the Change in Control and provides for subsequent payout in accordance
with the same vesting schedule applicable to those unvested option shares or
(iii) the acceleration of such Option is subject to other limitations imposed by
the Plan Administrator at the time of the Option grant. Any Options originally
granted under the LLC Plan and assumed under this Plan which are outstanding at
the time of a Change in Control shall continue to be governed by the change in
control/extraordinary event provisions of the LLC Plan (as such provisions are
set forth in attached Schedules A), except to the extent the Plan Administrator
determines to extend one or more provisions of this Section 15 to those Options.
(c) Immediately following the consummation of the Change in
Control, all outstanding Options shall terminate and cease to be outstanding,
except to the extent assumed by the successor corporation (or parent thereof) or
otherwise continued in full force and effect pursuant to the terms of the Change
in Control transaction.
(d) Each Option which is assumed in connection with a Change in
Control or otherwise continued in effect shall be appropriately adjusted,
immediately after such Change in Control, to apply to the number and class of
securities which would have been issuable to the Participant in consummation of
such Change in Control, had the Option been exercised immediately prior to such
Change in Control. Appropriate adjustments shall also be made to the Exercise
Price payable per share under each outstanding Option, provided the aggregate
Exercise Price payable for such securities shall remain the same. To the extent
the actual holders of the Company's outstanding Common Stock receive cash
consideration for their Common Stock in
10
<PAGE> 11
consummation of the Change in Control, the Company or any successor corporation
may, in connection with the assumption or continuation of the outstanding
Options under this Plan, substitute one or more shares of its own common stock
with a fair market value equivalent to the cash consideration paid per share of
Common Stock in the Change in Control transaction.
(e) The Plan Administrator shall have the discretionary authority
to structure one or more Options so that those Options shall, immediately prior
to the effective date of a Change in Control, become exercisable for all the
shares of Common Stock at the time subject to those Options and may be exercised
for any or all of those shares as fully vested shares of Common Stock, whether
or not those Options are to be assumed in the Change in Control or otherwise
continued in full force and effect. Alternatively, the Plan Administrator shall
have the authority to structure one or more Options so that those Options shall
become exercisable in whole or in part on an accelerated basis in the event the
Optionee's Service is subsequently terminated within a designated period
following the effective date of any Change in Control in which those Options are
assumed or otherwise continued in full force and effect.
(f) For purposes of this Section 15, the term "Change in Control"
shall mean any of the following transactions effecting a change in control or
ownership of the Company:
(i) a stockholder-approved merger or consolidation in
which securities possessing more than fifty percent (50%) of the total
combined voting power of the Company's outstanding securities are
transferred to a person or persons different from the persons holding
those securities immediately prior to such transaction, or
(ii) a stockholder-approved sale, transfer or other
disposition of all or substantially all of the Company's assets in
complete liquidation or dissolution of the Company, or
(iii) the acquisition, directly or indirectly by any
person or related group of persons (other than the Company or a person
that directly or indirectly controls, is controlled by, or is under
common control with, the Company), of beneficial ownership (within the
meaning of Rule 13d-3 of the Exchange Act) of securities possessing more
than fifty percent (50%) of the total combined voting power of the
Company's outstanding securities pursuant to a tender or exchange offer
made directly to the Company's stockholders.
(g) The grant of an Option under the Plan 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 corporate action.
11
<PAGE> 12
Section 16. Option Agreement. Each Option granted under the Plan shall
be evidenced by a written option agreement (an "Option Agreement") executed by
the Company and the Participant which (a) shall contain each of the provisions
and agreements herein specifically required to be contained therein; (b) shall
contain provisions which give the Company and certain others a right of first
offer to purchase any shares of Common Stock issued pursuant to the exercise of
Options granted under the Plan which a Participant proposes to sell; (c) shall
contain "drag-along" rights, that, in the event of the sale of shares of Common
Stock held by Donald Muller and Marc Geiger or their respective permitted
successors or assignees (collectively, the "Founders"), shall enable the
Founders to cause any shares of Common Stock previously issued pursuant to the
exercise of Options granted under the Plan to be included in such sale, and to
cause the Company to terminate the remaining Options upon payment of the
difference between the sale price and the exercise price of such Options; (d)
shall contain repurchase rights in favor of the Company and certain others and
(e) may contain such other terms and conditions as the Plan Administrator deems
desirable and which are not inconsistent with the Plan. The clause (b), (c) and
(d) provisions shall automatically terminate upon the Section 12 Registration
Date.
Section 17. Termination of Options. Each Option granted under the Plan
shall set forth a termination date thereof, which shall be not later than ten
(10) years from the date such Option is granted, subject to earlier termination
as set forth in Section 10 or Section 15 hereof, or as otherwise set forth in
each particular Option Agreement.
Section 18. Acceleration of Options. Notwithstanding the provisions of
Section 7 hereof or any provision to the contrary contained in a particular
Option Agreement, the Plan Administrator, in its sole discretion, may accelerate
the vesting of all or any portion of any Option then outstanding. The decision
by the Plan Administrator to accelerate an Option or to decline to accelerate an
Option shall be final. In the event of the acceleration of the exercisability of
Options as the result of a decision by the Plan Administrator pursuant to this
Section 18, each outstanding Option so accelerated shall be exercisable for a
period from and after the date of such acceleration and upon such other terms
and conditions as the Plan Administrator may determine in its sole discretion,
provided that such terms and conditions (other than terms and conditions
relating solely to the acceleration of exercisability and the related
termination of an Option) may not adversely affect the rights of any Participant
without the consent of the Participant so adversely affected. Any outstanding
Option which has not been exercised by the holder at the end of such period
shall terminate automatically at that time.
Section 19. Substitute Options. If the Company at any time should
succeed to the business of another entity through a merger, consolidation,
corporate reorganization or exchange, or through the acquisition of stock or
assets of such entity or its subsidiaries or otherwise, Options may be granted
under this Plan to option holders of such entity or its subsidiaries, in
substitution for options to purchase interests in such entity held by them at
the time of succession. The Plan Administrator, in its sole and absolute
discretion, shall determine the extent to which such substitute Options
12
<PAGE> 13
shall be granted (if at all), the person or persons to receive such substitute
Options (who need not be all option holders of such entity), the number of
shares of Common Stock to be subject to the Option granted to each such person,
the Exercise Price of such Option and the other terms and conditions of such
substitute Options.
Section 20. Withholding of Taxes.
(a) The Company, or a Subsidiary, as the case may be, may deduct
and withhold from the wages, salary, bonus and other income paid by the Company
(or such Subsidiary) to the Participant the requisite tax upon the amount of
taxable income, if any, recognized by the Participant in connection with the
exercise of any Option, or the sale of shares of Common Stock issued to the
Participant upon the exercise of an Option, as may be required from time to time
under any federal, state, local or foreign tax laws and regulations. This
withholding of tax shall be made from the Company's (or such Subsidiary's)
concurrent or subsequent payments of wages, salary, bonus or other income to the
Participant or by payment to the Company (or such Subsidiary) by the Participant
of the required withholding tax, as the Plan Administrator may determine.
(b) The Plan Administrator may, in its discretion, provide any or
all holders of Nonstatutory Options or unvested shares of Common Stock under the
Plan with the right to use shares of Common Stock in satisfaction of all or part
of the withholding taxes to which such holders may become subject in connection
with the exercise of those Options or the vesting of those shares. Such right
may be provided to any such holder in either or both of the following formats:
(i) Stock Withholding: The election to have the Company
withhold, from the shares of Common Stock otherwise issuable upon the
exercise of such Nonstatutory Option or the vesting of such shares, a
portion of those shares with an aggregate fair market value equal to the
percentage of the withholding taxes (not to exceed one hundred percent
(100%)) designated by the holder.
(ii) Stock Delivery: The election to deliver to the
Company, at the time the Nonstatutory Option is exercised or the shares
vest, one or more shares of Common Stock previously acquired by such
holder (other than in connection with the option exercise or share
vesting triggering the withholding taxes) with an aggregate fair market
value equal to the percentage of the withholding taxes (not to exceed
one hundred percent (100%)) designated by the holder.
Section 21. Effectiveness and Termination of the Plan. This Plan shall
be effective as of October 6, 1999; provided, however, that stockholder approval
of the Plan must be obtained by the Company within 12 months after such date.
The Plan shall terminate, in addition to the other termination events set forth
herein, when all shares of Common Stock which may be issued hereunder have been
issued as fully-vested shares. However, the Board
13
<PAGE> 14
may, in its sole discretion, terminate the Plan at any prior time; provided
further that in any event, unless earlier terminated, the Plan shall
automatically terminate on the tenth anniversary of the adoption of the Plan by
the Board or the tenth anniversary of the approval of the Plan by the
stockholders, whichever is earlier. Subject to Section 17 hereof, no such
termination shall in any way affect any Option then outstanding.
Section 22. Time of Granting Options. The date of grant of an Option
shall, for all purposes, be the date on which the Plan Administrator makes the
determination granting such an Option. Notice of the determination shall be
given to each Participant to whom an Option is so granted within a reasonable
time after the date of such grant.
Section 23. Amendment of Plan and Options. The Plan Administrator may
make such amendments to the Plan and in the terms and conditions of granted
Options as it shall deem advisable, including, without limitation, accelerating
the time at which an Option may be exercised. No amendment shall in any way
adversely affect any Option then outstanding, without the consent of the
Participant so adversely affected.
Section 24. Transfers and Leaves of Absence. For purposes of the Plan,
(a) a transfer of a Participant's employment or consulting relationship, without
an intervening period, between the Company and a Subsidiary (or vice versa) or
between Subsidiaries shall not be deemed a termination of employment or such
relationship and (b) a Participant who is granted in writing a leave of absence
shall be deemed to have remained in the employ of, or in a consulting
relationship with, the Company (or a Subsidiary, whichever is applicable) during
such leave of absence, but such Participant may or may not be allowed, at the
discretion of the Plan Administrator, to vest in his or her outstanding Options
during the period of such leave.
Section 25. No Obligation to Exercise Option. The granting of an Option
shall impose no obligation on the Participant to exercise such Option.
Section 26. Indemnification. In addition to such other rights of
indemnification as they may have as members of the Board of Directors, the
members of the Committee serving as Plan Administrator shall be indemnified by
the Company to the fullest extent permitted by law against the reasonable
expenses, including attorney's fees, actually and necessarily incurred in
connection with the defense of any action, suit or proceeding, or in connection
with any appeal therein, to which they or any of them may be a party by reason
of any action taken or failure to act under or in connection with the Plan or
any Option granted thereunder, and against all amounts paid by them in
satisfaction of a judgment in any such action, suit or proceeding except in
relation to matters as to which it shall be adjudged in such action, suit: or
proceeding that such Board or Committee member is not entitled to
indemnification under applicable law; provided, however, that within sixty (60)
days after institution of any such action, suit or proceeding such Board or
Committee member shall in writing offer the Company the opportunity, at the
Company's expense to handle and defend the same, and such Board or Committee
member shall cooperate with and assist the Company in the defense of
14
<PAGE> 15
any such action, suit or proceeding. The Company shall not be obligated to
indemnify any Board or Committee member with regard to any settlement of any
action, suit or proceeding of which the Company did not consent to in writing
prior to such settlement.
Section 27. Governing Law. The Plan and any Option granted pursuant to
the Plan shall be construed under and governed by the laws of the State of
California without regard to conflict of law provisions thereof.
Section 28. Not an Employment or Consulting Agreement. Nothing contained
in the Plan or in any Option Agreement shall confer, intend to confer or imply
any rights of employment or any rights to a consulting relationship or rights to
continued employment by, or a consulting relationship with, the Company or any
Subsidiary in favor of any Participant or limit the ability of the Company or
any Subsidiary to terminate, with or without cause, in its sole and absolute
discretion, the employment or consulting relationship of any Participant,
subject to the terms of any written employment or consulting agreement to which
a Participant is a party. In addition, nothing contained in the Plan or in any
Option Agreement shall preclude any lawful action by the Company or the Board.
Section 29. Access to Financial Information. Until the Section 12
Registration Date, the Company shall deliver a balance sheet and income
statement at least annually to each person holding an outstanding Option under
the Plan, unless such person is a key employee whose duties in connection with
the Company assure such person of access to equivalent financial information.
15
<PAGE> 16
SCHEDULE A
SPECIAL CHANGE IN CONTROL PROVISIONS
The following change in control provisions shall be in effect for
any Options originally granted under the LLC Plan and assumed under this Plan,
except to the extent the Plan Administrator subsequently determines to extend
one or more provisions of Section 15 of the Plan to those Options:
(a) 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 stockholders (each, a "Stockholder") have the
opportunity to receive cash, securities of another entity and/or other property
in exchange for their shares of Common Stock of the Company, or (iv) any
acquisition by any person or group (as defined in Section 13(d) of the Exchange
Act), of beneficial ownership of more than fifty percent (50%) of the Company's
then outstanding shares of Common Stock (each of the events described in clauses
(i), (ii), (iii), or (iv), is referred to herein as an "Extraordinary Event"),
the Plan and each outstanding Option subject to this Schedule A shall terminate
unless the Company elects to have such Option survive the Extraordinary Event
pursuant to the provisions of paragraph (c) below.
(b) Upon the occurrence of an Extraordinary Event,
notwithstanding any provision of any applicable Option Agreement, each
Participant holding an Option subject to this Schedule A shall have the right
until ten (10) days before the effective date of such Extraordinary Event to
exercise, in whole or in part, such Option, to the extent that Option is then
vested and exercisable pursuant to the provisions of such Option and Section 7
of the Plan.
(c) In its sole discretion, the Company may permit any Option
subject to this Schedule A to survive an Extraordinary Event as the Company
deems appropriate. In addition, in the case of any Extraordinary Event, in its
sole discretion the surviving entity (which may be the Company) may, but shall
not be so obligated, tender to any Participant an option or options to purchase
shares of Common Stock or other equity interests in such surviving entity, and
such continuing new option or options shall contain such terms and provisions as
shall be required to substantially preserve the rights and benefits of the
Option as then outstanding under the Plan with any reasonable changes to take
into account the circumstances of the surviving entity.
<PAGE> 1
EXHIBIT 10.23
ARTISTdirect, INC.
1999 ARTIST AND ARTIST ADVISOR STOCK OPTION PLAN
Section 1. Description of Plan.
(a) This 1999 Artist and Artist Advisor Stock Option Plan (the
"Advisor Plan") of ARTISTdirect, Inc., a Delaware corporation (the "Company"),
is effective as of October 6, 1999 and is designed to effect the assumption by
the Company of the ARTISTdirect LLC 1999 Artist and Artist Advisor Unit Option
Plan (the "LLC Advisor Plan") and all options thereunder in connection with the
incorporation of ARTISTdirect LLC. As part of such assumption, each outstanding
option to acquire Units of ARTISTdirect LLC under the LLC Advisor Plan has been
converted into an option to acquire the same number of shares of the Company's
common stock (the "Common Stock") under this Plan at the same exercise price per
share. All the other terms and conditions of each such assumed option shall
continue in full force and effect.
(b) Under the Advisor Plan, designated artists, attorneys,
personal managers, business managers, agents and other artist advisors who
provide products and/or services to the Company and/or any directly or
indirectly owned entities of the Company (individually, a "Subsidiary" and
collectively, the "Subsidiaries") may be granted options ("Options") to purchase
shares of common stock of the Company ("Common Stock"). It is intended that the
Options under this Advisor Plan will not qualify for treatment as incentive
stock options under Section 422 of the Internal Revenue Code of 1986, as amended
(the "Code"), and will be designated "Nonstatutory Stock Options."
Section 2. Purpose of Plan. The purpose of the Advisor Plan and of
granting Options to specified persons is to further the growth, development and
financial success of the Company and its Subsidiaries by providing additional
incentives to certain artists, attorneys, personal managers, business managers,
agents and other artist advisors who provide products and/or services to the
Company and/or any Subsidiary. By assisting such persons in acquiring Common
Stock, the Company can ensure that such persons will themselves benefit directly
from the growth, development and financial success of the Company and its
Subsidiaries.
Section 3. Eligibility. The persons who shall be eligible to receive
grants of Options under the Advisor Plan shall be limited to those artists,
attorneys, personal managers, business managers, agents or other artist advisors
who provide products and/or services to the Company and/or any Subsidiary and
are designated by the Plan Administrator; provided, that bona fide services
shall be rendered to the Company or its Subsidiaries by such independent
contractors, and such services shall not have been in connection with the offer
and sale of securities in a capital-raising transaction. A person who holds an
Option is herein referred to as a "Participant," and more than one Option may be
granted to any Participant.
Section 4. Administration.
(a) The Advisor Plan shall be administered by the Board or, at
the Board's option, by a committee established by the Board composed of not less
than three Board members (the "Committee"). Members of the Committee shall be
appointed, both initially and as vacancies occur, by the Board, to serve at the
pleasure of the Board. Upon the first registration of an equity security of the
Company under the Securities Exchange Act of 1934, as amended
<PAGE> 2
(the "Exchange Act"), to the extent possible and advisable, the Committee may be
constituted so as to permit this Advisor Plan to comply with Rule 16b-3
promulgated under Section 16 of the Exchange Act and Section 162(m) of the Code.
The Committee shall meet at such times and places as it determines and may meet
through a telephone conference call. A majority of its members shall constitute
a quorum, and the decision of a majority of those present shall constitute the
decision of the Committee. A memorandum signed by all of its members shall
constitute the decision of the Committee without the need, in such event, to
hold an actual meeting. The term "Plan Administrator" as used in this document
shall mean the Board or the Committee acting in its capacity as administrator of
the Advisor Plan.
(b) The Plan Administrator is authorized and empowered to
administer the Advisor Plan and, subject to the express provisions of the
Advisor Plan, including but not limited to Section 23, (i) to determine the
dates upon which Options shall be granted and the terms and conditions thereof
in a manner consistent with the Advisor Plan, which terms and conditions need
not be identical as to the various Options granted; (ii) to interpret the
Advisor Plan; (iii) to grant Options; (iv) to determine the Participants; (v) to
specify the terms of the Options; (vi) to determine the number of shares of
Common Stock which may be purchased; (vii) to accelerate the time during which
an Option may be exercised in accordance with the provisions of Section 18
hereof, and to otherwise accelerate the time during which an Option may be
exercised (but not reduce the time of exercise for Options which have vested),
in each case notwithstanding the provisions in the Option Agreement (as defined
in Section 16 hereof) stating the time during which it may be exercised; (viii)
to prescribe, amend and rescind rules relating to the Advisor Plan; (ix) to
authorize any person to execute on behalf of the Company any instrument required
to effectuate the grant of an Option previously granted by the Plan
Administrator; (x) to determine the rights and obligations of Participants under
the Advisor Plan; and (xi) to make all other determinations deemed necessary or
advisable for the administration of the Advisor Plan. The interpretation and
construction by the Plan Administrator of any provision of the Advisor Plan or
of any Option granted under it shall be final. No person serving as Plan
Administrator shall be liable for any action or determination made with respect
to the Advisor Plan or any Option granted hereunder.
Section 5. Common Stock Subject to Plan.
(a) The maximum number of shares of Common Stock which may be
issued under the Advisor Plan shall not exceed 5,000,000 shares. Such reserve
shall consist of (i) the number of shares available for issuance under the LLC
Advisor Plan immediately after the incorporation of the LLC and the conversion
of the Units issuable thereunder into shares of Common Stock plus (ii) an
additional increase of 3,500,000 shares to be approved by the Company's
shareholders.
(b) The number of shares of Common Stock available for issuance
under the Advisor Plan shall automatically increase on the first trading day of
January each calendar year during the term of the Advisor Plan, beginning with
calendar year 2001, by an amount equal to one percent (1%) of the total number
of shares of Common Stock outstanding on the last trading day in December of the
immediately preceding calendar year, but in no event shall any such annual
increase exceed 1,500,000 shares.
(c) Shares of Common Stock subject to outstanding Options
(including options assumed under this Plan) shall be available for subsequent
issuance under the Advisor Plan to the extent (i) those Options expire or
terminate for any reason prior to exercise in full or (ii) the options are
cancelled in accordance with the cancellation-regrant
2
<PAGE> 3
provisions of Section 13. Unvested shares issued under the Advisor Plan and
subsequently repurchased by the Company at the original issue price paid per
share, pursuant to the Company's repurchase rights under the Advisor Plan shall
be added back to the number of shares of Common Stock reserved for issuance
under the Advisor Plan and shall accordingly be available for reissuance through
one or more subsequent Option grants under the Advisor Plan. However, should the
exercise price of an Option under the Advisor Plan be paid with shares of Common
Stock or should shares of Common Stock otherwise issuable under the Advisor Plan
be withheld by the Company in satisfaction of the withholding taxes incurred in
connection with the exercise of an Option or the vesting of a stock issuance
under the Advisor Plan, then the number of shares of Common Stock available for
issuance under the Advisor Plan shall be reduced by the gross number of shares
for which the option is exercised or which vest under the stock issuance, and
not by the net number of shares of Common Stock issued to the holder of such
Option or stock issuance.
Section 6. Option Exercise Price.
(a) Except as provided in Sections 15 and 19 hereof, the
purchase price per share (the "Exercise Price") of the shares of Common Stock
underlying each Option shall be as determined by the Plan Administrator in its
sole discretion; provided, that in the case of any person owning greater than
10% of the total combined voting power of all classes of capital stock of the
Company (or its parent or subsidiaries), the Exercise Price of the Option
granted to such person shall not be less than 110% of the fair market value of
the shares of Common Stock at the time the Option is granted.
(b) For purposes of the Plan, the fair market value per share of
Common Stock on any relevant date shall be determined in accordance with the
following procedures:
(i) If the Common Stock is at the time traded on the
Nasdaq National Market, then the fair market value shall be the closing
selling price per share of Common Stock on the date in question, as such
price is reported by the National Association of Securities Dealers on
the Nasdaq National Market. If there is no closing selling price for the
Common Stock on the date in question, then the fair market value shall
be the closing selling price on the last preceding date for which such
quotation exists.
(ii) If the Common Stock is at the time listed on any
national stock exchange, then the fair market value shall be the closing
selling price per share of Common Stock on the date in question on the
stock exchange determined by the Plan Administrator to be the primary
market for the Common Stock, as such price is officially quoted in the
composite tape of transactions on such exchange. If there is no closing
selling price for the Common Stock on the date in question, then the
fair market value shall be the closing selling price on the last
preceding date for which such quotation exists.
(iii) If the Common Stock is at the time neither traded
on the Nasdaq National Market nor listed on any national stock exchange,
then the fair market value shall be determined by the Plan Administrator
on the basis of such factors as the Plan Administrator shall deem
appropriate.
3
<PAGE> 4
Section 7. Restrictions on Grants; Vesting of Options. Notwithstanding
any other provisions set forth herein or in any Option Agreement, no Options may
be granted under the Advisor Plan subsequent to ten (10) years after the October
13, 1999 effective date of this Advisor Plan. Each Option shall grant the
Participant the right to purchase a specified number of shares of Common Stock
at a price determined by the Plan Administrator in accordance with Section 6.
The Options shall vest pursuant to a chronological vesting schedule and/or based
on targeted goals or other schedule established by the Plan Administrator. The
Plan Administrator shall determine the vesting schedule, including, if
applicable, the performance criteria and the performance measurement period(s),
applicable to each Option or group of Options in a schedule, a copy of which
shall be filed with the records of the Plan Administrator and attached to each
Option Agreement to which the same applies. The vesting schedule, including, if
applicable, the performance criteria and the performance measurement period(s),
need not be identical for all Options granted hereunder. Following the
conclusion of each applicable performance measurement period, the Plan
Administrator shall determine, in its sole judgment, the extent, if at all, that
each Option subject thereto shall have become exercisable based upon the
applicable performance criteria and the schedule of exercisability. The Plan
Administrator may periodically review the performance criteria applicable to any
Option or Options and, in its sole judgment, may adjust the same to reflect
significant events involving the Company or any Subsidiary, such as mergers,
acquisitions, asset sales, other extraordinary corporate events and
extraordinary losses and gains, significant changes in the level of capital
expenditures, as well as changes in accounting treatment.
Section 8. Exercise of Options.
(a) Once vested, and prior to its termination date, an Option
may be exercised by the Participant by giving written notice to the Company
specifying the number of shares of Common Stock to be purchased and accompanied
by payment of the full Exercise Price for those shares in cash or by check
payable to the Company's order. The Plan Administrator may structure one or more
Options so that following the date the Common Stock is first registered under
Section 12 of the Exchange Act (the "Section 12 Registration Date"), the
Exercise Price may also be paid in any of the following forms:
(i) shares of Common Stock held for the requisite period
necessary to avoid a charge to the Company's earnings for financial
reporting purposes and valued at fair market value on the exercise date,
or
(ii) to the extent the option is exercised for vested
shares, through a special sale and remittance procedure pursuant to
which the Participant shall concurrently provide irrevocable
instructions to (a) a Company-designated brokerage firm to effect the
immediate sale of the purchased shares and remit to the Company, out of
the sale proceeds available on the settlement date, sufficient funds to
cover the aggregate exercise price payable for the purchased shares plus
all applicable federal, state and local income and employment taxes
required to be withheld by the Company by reason of such exercise and
(b) the Company to deliver the certificates for the purchased shares
directly to such brokerage firm in order to complete the sale.
Except to the extent such sale and remittance procedure is
utilized, payment of the Exercise Price for the purchased shares must be made on
the date the Option is exercised.
4
<PAGE> 5
Section 9. Limited Transferability. Any Option held by the Participant
at the time of his or her death shall be assigned or transferred pursuant to
such Participant's will or the laws of inheritance. However, any Option may be
assigned in whole or in part during the Participant's lifetime to one or more
members of the Participant's immediate family or to a trust established
exclusively for one or more such family members or may be assigned to the
Participant's former spouse pursuant to a domestic relations order. The assigned
portion may only be exercised by the person or persons who acquire a proprietary
interest in the Option pursuant to the assignment. The terms applicable to the
assigned portion shall be the same as those in effect for the Option immediately
prior to such assignment and shall be set forth in such documents issued to the
assignee as the Plan Administrator may deem appropriate. Notwithstanding the
foregoing, the Participant may also designate one or more persons as the
beneficiary or beneficiaries of his or her outstanding Options, and those
Options shall, in accordance with such designation, automatically be transferred
to such beneficiary or beneficiaries upon the Participant's death while holding
those options. Such beneficiary or beneficiaries shall take the transferred
options subject to all the terms and conditions of the applicable agreement
evidencing each such transferred option, including (without limitation) the
limited time period during which the option may be exercised following the
Participant's death.
Section 10. Cessation of Service.
(a) The following provisions shall govern the exercise of any
Options held by the Participant at the time of cessation of Service or death:
(i) Any Option outstanding at the time of the
Participant's cessation of Service for any reason shall remain
exercisable for such period of time thereafter as shall be determined by
the Plan Administrator and set forth in the documents evidencing the
option, but no such option shall be exercisable after the expiration of
the option term.
(ii) Any option held by the Participant at the time of
death and exercisable in whole or in part at that time may be
subsequently exercised by the personal representative of the
Participant's estate or by the person or persons to whom the option is
transferred pursuant to the Participant's will or the laws of
inheritance or by the Participant's designated beneficiary or
beneficiaries of that option.
(iii) In the event the Participant's Service is
terminated for Cause, all Options held by that Participant under the
Advisor Plan shall immediately terminate, except to the extent the
Option Agreement provides for a limited period of exercise following
such a termination for Cause. For purposes of this Advisor Plan, "Cause"
shall have the following meaning: (A) termination of any other written
agreement governing the terms of the Participant's contractual
relationship with the Company and/or any Subsidiary prior to the
expiration of the full term thereof either (x) by the Company or such
Subsidiary due to a material breach thereof by Participant and the
failure of the Participant to cure such breach within the cure period,
if any, specified therein or (y) by Participant other than due to a
material breach thereof by the Company or such Subsidiary and the
failure of the Company or such Subsidiary to cure such breach within the
cure period, if any, specified therein; and (B) any other definition
ascribed to it in any other written agreement governing the terms of the
Participant's contractual relationship with the Company and/or any
Subsidiary.
5
<PAGE> 6
(iv) During the applicable post-Service exercise period,
the Option may not be exercised in the aggregate for more than the
number of vested shares for which the Option is exercisable on the date
of the Participant's cessation of Service. Upon the expiration of the
applicable exercise period or (if earlier) upon the expiration of the
option term, the Option shall terminate and cease to be outstanding for
any vested shares for which the Option has not been exercised. However,
the Option shall, immediately upon the Participant's cessation of'
Service, terminate and cease to be outstanding to the extent the Option
is not otherwise at that time exercisable for vested shares.
(b) The Plan Administrator shall have complete discretion,
exercisable either at the time an Option is granted or at any time while the
Option remains outstanding, to:
(i) extend the period of time for which the Option is to
remain exercisable following the Participant's cessation of Service from
the limited exercise period otherwise in effect for that Option to such
greater period of time as the Plan Administrator shall deem appropriate,
but in no event beyond the expiration of the option term, and/or
(ii) permit the Option to be exercised, during the
applicable post-Service exercise period, not only with respect to the
number of vested shares of Common Stock for which such Option is
exercisable at the time of the Participant's cessation of Service but
also with respect to one or more additional installments in which the
Participant would have vested had the Participant continued in Service.
(c) Except to the extent otherwise specifically provided in the
documents evidencing the option grant, the Participant shall be deemed, for
purposes of the Advisor Plan, to continue in Service for so long as such
Participant performs services for the Company (or any parent or Subsidiary) in
the capacity of an employee, a non-employee member of the board of directors or
a consultant or independent advisor.
Section 11. Stockholder Rights. The holder of an Option shall have no
stockholder rights with respect to the shares subject to that Option until such
person shall have exercised the Option, paid the Exercise Price and become a
holder of record of the purchased shares.
Section 12. Repurchase Rights. The Plan Administrator shall have the
discretion to grant Options which are exercisable for unvested shares of Common
Stock. Should the Participant cease Service while holding such unvested shares,
the Company shall have the right to repurchase, at the Exercise Price paid per
share, any or all of those unvested shares. The terms upon which such repurchase
right shall be exercisable (including the period and procedure for exercise and
the appropriate vesting schedule for the purchased shares) shall be established
by the Plan Administrator and set forth in the document evidencing such
repurchase right.
Section 13. Option Cancellation and Regrant. The Plan Administrator
shall have the authority to effect, at any time and from time to time, with the
consent of the affected option holders, the cancellation of any or all
outstanding Options under the Advisor Plan (including the assumed Options
hereunder) and to grant in substitution new Options covering the same or
6
<PAGE> 7
different number of shares of Common Stock but with an Exercise Price per share
based on the fair market value per share of Common Stock on the new grant date.
Section 14. Issuance of Common Stock. The Company's obligation to issue
its shares of Common Stock upon exercise of an Option is expressly conditioned
upon (A) the compliance by the Company with any registration or other
qualification obligations with respect to such shares of Common Stock under any
state and/or federal law or rulings and regulations of any government regulatory
body, and/or (B) the making of such investment representations or other
representations and undertakings by the Participant (or the Participant's legal
representative, heir, legatee or beneficiary, as the case may be) in order to
comply with the requirements of any exemption from any such registration or
other qualification obligations with respect to such shares of Common Stock
which the Company in its sole discretion shall deem necessary or advisable. Such
required representations and undertakings may include representations and
agreements that such Participant (or the Participant's legal representative,
heir, legatee or beneficiary): (a) is purchasing such shares of Common Stock for
investment and not with any present intention of selling or otherwise disposing
of such shares of Common Stock; and (b) agrees to have a legend placed upon the
face and reverse of any certificates evidencing such shares of Common Stock (or,
if applicable, an appropriate data entry made in the ownership records of the
Company) setting forth (i) any representations and undertakings which such
Participant has given to the Company or a reference thereto, and (ii) that,
prior to effecting any sale or other disposition of any such shares of Common
Stock, the Participant must furnish to the Company an opinion of counsel,
satisfactory to the Company and its counsel, to the effect that such sale or
disposition will not violate the applicable requirements of state and federal
laws and regulatory agencies; provided, however, that any such legend or data
entry shall be removed when no longer applicable. The inability of the Company
to obtain, from any regulatory body having jurisdiction, authority reasonably
deemed by the Company's counsel to be necessary for the lawful issuance and sale
of any shares of Common Stock pursuant to the exercise of an Option granted
hereunder shall suspend the Company's obligation to permit the exercise of such
Option or to issue any shares of Common Stock thereupon. Any shares of Common
Stock issued by the Company upon exercise of an Option granted hereunder shall
be subject to all obligations under this Advisor Plan, including without
limitation any right of first offer of the Company and others with respect to
all shares of Common Stock proposed to be transferred by Participant under
Section 16(b) hereof, the drag-along rights described in Section 16(c) hereof,
and certain other restrictions set forth in each particular Option Agreement.
Section 15. Recapitalization; Reorganization; Merger or Consolidation.
(a) Subject to paragraph (c) of this Section 15, if any change
is made to the Common Stock by reason of any stock split, stock dividend,
recapitalization, combination of shares, exchange of shares or other change
affecting the outstanding Common Stock as a class without the Company's receipt
of consideration, appropriate adjustments shall be made by the Plan
Administrator to (i) the maximum number and/or class of securities issuable
under the Advisor Plan, (ii) the number and/or class of securities and the
Exercise Price per share in effect under each outstanding Option under the
Advisor Plan and (iii) the maximum number and/or class of securities by which
the share reserve is to increase automatically each calendar year pursuant to
the provisions of Section 5. Such adjustments to the outstanding Options are to
be effected in a manner which shall preclude the enlargement or dilution of
rights and benefits under such Options. Any such adjustment in an outstanding
Option, however, shall be made without a change in the total Exercise Price
applicable to the unexercised portion of the Option but with a corresponding
adjustment in the Exercise Price for each share of Common Stock
7
<PAGE> 8
covered by the Option. In making such adjustments, or in determining that no
such adjustments are necessary, the Plan Administrator may rely upon the advice
of counsel and accountants to the Company, and the determination of the
Committee shall be binding. No fractional shares of Common Stock shall be issued
or issuable under the Advisor Plan on account on any such adjustment.
(b) Each Option outstanding under the Advisor Plan at the time
of a Change in Control (as defined below) shall automatically vest in full so
that each such Option shall, immediately prior to the effective date of the
Change in Control, become exercisable for all of the shares of Common Stock at
the time subject to that option and may be exercised for any or all of those
shares as fully-vested shares of Common Stock. However, an outstanding Option
shall not vest on such an accelerated basis if and to the extent: (i) such
Option is assumed by the successor corporation (or parent thereof) or otherwise
continued in full force and effect pursuant to the terms of the Change in
Control transaction or (ii) such Option is to be replaced with a cash incentive
program which preserves the spread existing on the unvested option shares at the
time of the Change in Control and provides for subsequent payout in accordance
with the same vesting schedule applicable to those unvested option shares or
(iii) the acceleration of such Option is subject to other limitations imposed by
the Plan Administrator at the time of the Option grant. Any Options originally
granted under the LLC Advisor Plan and assumed under this Plan which are
outstanding at the time of a Change in Control shall continue to be governed by
the change in control/extraordinary event provisions of the LLC Advisor Plan (as
such provisions are set forth in attached Schedule A), except to the extent the
Plan Administrator determines to extend one or more provisions of this Section
15 to those Options.
(c) Immediately following the consummation of the Change in
Control, all outstanding Options shall terminate and cease to be outstanding,
except to the extent assumed by the successor corporation (or parent thereof) or
otherwise continued in full force and effect pursuant to the terms of the Change
in Control transaction.
(d) Each Option which is assumed in connection with a Change in
Control or otherwise continued in effect shall be appropriately adjusted,
immediately after such Change in Control, to apply to the number and class of
securities which would have been issuable to the Participant in consummation of
such Change in Control, had the Option been exercised immediately prior to such
Change in Control. Appropriate adjustments shall also be made to the Exercise
Price payable per share under each outstanding Option, provided the aggregate
Exercise Price payable for such securities shall remain the same. To the extent
the actual holders of the Company's outstanding Common Stock receive cash
consideration for their Common Stock in consummation of the Change in Control,
the Company or any successor corporation may, in connection with the assumption
or continuation of the outstanding Options under this Advisor Plan, substitute
one or more shares of its own common stock with a fair market value equivalent
to the cash consideration paid per share of Common Stock in the Change in
Control transaction.
(e) The Plan Administrator shall have the discretionary
authority to structure one or more Options so that those Options shall,
immediately prior to the effective date of a Change in Control, become
exercisable for all the shares of Common Stock at the time subject to those
Options and may be exercised for any or all of those shares as fully vested
shares of Common Stock, whether or not those Options are to be assumed in the
Change in Control or otherwise continued in full force and effect.
Alternatively, the Plan Administrator shall have the authority to structure one
or more Options so that those Options shall become
8
<PAGE> 9
exercisable in whole or in part on an accelerated basis in the event the
Optionee's Service is subsequently terminated within a designated period
following the effective date of any Change in Control in which those Options are
assumed or otherwise continued in full force and effect.
(f) For purposes of this Section 15, the term "Change in
Control" shall mean any of the following transactions effecting a change in
control or ownership of the Company:
(i) a stockholder-approved merger or consolidation in
which securities possessing more than fifty percent (50%) of the total
combined voting power of the Company's outstanding securities are
transferred to a person or persons different from the persons holding
those securities immediately prior to such transaction, or
(ii) a stockholder-approved sale, transfer or other
disposition of all or substantially all of the Company's assets in
complete liquidation or dissolution of the Company, or
(iii) the acquisition, directly or indirectly by any
person or related group of persons (other than the Company or a person
that directly or indirectly controls, is controlled by, or is under
common control with, the Company), of beneficial ownership (within the
meaning of Rule 13d-3 of the Exchange Act) of securities possessing more
than fifty percent (50%) of the total combined voting power of the
Company's outstanding securities pursuant to a tender or exchange offer
made directly to the Company's stockholders.
(g) The grant of an Option under the Advisor Plan 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 corporate action.
Section 16. Option Agreement. Each Option granted under the Advisor Plan
shall be evidenced by a written option agreement (an "Option Agreement")
executed by the Company and the Participant which (a) shall contain each of the
provisions and agreements herein specifically required to be contained therein;
(b) shall contain provisions which give the Company and certain others a right
of first offer to purchase shares of Common Stock issued pursuant to the
exercise of Options granted under the Advisor Plan which a Participant proposes
to sell; (c) shall contain "drag-along" rights, that, in the event of the sale
of shares of Common Stock held by Donald Muller and Marc Geiger or their
respective permitted successors or assignees (collectively, the "Founders"),
shall enable the Founders to cause any shares of Common Stock previously issued
pursuant to the exercise of Options granted under the Advisor Plan to be
included in such sale, and to cause the Company to terminate the remaining
Options upon payment of the difference between the sale price and the exercise
price of such Options; and (d) may contain such other terms and conditions as
the Plan Administrator deems desirable and which are not inconsistent with the
Advisor Plan. The clause (b) and (c) provisions shall automatically terminate
upon the Section 12 Registration Date.
Section 17. Termination of Options. Each Option granted under the
Advisor Plan shall set forth a termination date thereof, which shall be not
later than ten (10) years from the date
9
<PAGE> 10
such Option is granted (the "Expiration Date"), subject to earlier termination
as set forth in Section 10 or Section 15 hereof, or as otherwise set forth in
each particular Option Agreement.
Section 18. Acceleration of Options. Notwithstanding the provisions of
Section 7 hereof or any provision to the contrary contained in a particular
Option Agreement, the Plan Administrator, in its sole discretion, may accelerate
the vesting of all or any portion of any Option then outstanding. The decision
by the Plan Administrator to accelerate an Option or to decline to accelerate an
Option shall be final. In the event of the acceleration of the exercisability of
Options as the result of a decision by the Plan Administrator pursuant to this
Section 18, each outstanding Option so accelerated shall be exercisable for a
period from and after the date of such acceleration and upon such other terms
and conditions as the Plan Administrator may determine in its sole discretion,
provided that such terms and conditions (other than terms and conditions
relating solely to the acceleration of exercisability and the related
termination of an Option) may not adversely affect the rights of any Participant
without the consent of the Participant so adversely affected. Any outstanding
Option which has not been exercised by the holder at the end of such period
shall terminate automatically at that time.
Section 19. Substitute Options. If the Company at any time should
succeed to the business of another entity through a merger, consolidation,
corporate reorganization or exchange, or through the acquisition of stock or
assets of such entity or its subsidiaries or otherwise, Options may be granted
under the Advisor Plan to option holders of such entity or its subsidiaries, in
substitution for options to purchase interests in such entity held by them at
the time of succession. The Plan Administrator, in its sole and absolute
discretion, shall determine the extent to which such substitute Options shall be
granted (if at all), the person or persons to receive such substitute Options
(who need not be all option holders of such entity), the number of shares of
Common Stock to be subject to the Option granted to each such person, the
Exercise Price of such Option and the other terms and conditions of such
substitute Options.
Section 20. Withholding of Taxes.
(a) The Company, or a Subsidiary, as the case may be, may deduct
and withhold from the wages, salary, bonus and other income paid by the Company
(or such Subsidiary) to the Participant the requisite tax upon the amount of
taxable income, if any, recognized by the Participant in connection with the
exercise in whole or in part of any Option, or the sale of shares of Common
Stock issued to the Participant upon the exercise of an Option, as may be
required from time to time under any federal, state, local or foreign tax laws
and regulations. This withholding of tax shall be made from the Company's (or
such Subsidiary's) concurrent or subsequent payments of wages, salary, bonus or
other income to the Participant or by payment to the Company (or such
Subsidiary) by the Participant of the required withholding tax, as the Plan
Administrator may determine.
(b) The Plan Administrator may, in its discretion, provide any
or all holders of Nonstatutory Options or unvested shares of Common Stock under
the Advisor Plan with the right to use shares of Common Stock in satisfaction of
all or part of the withholding taxes to which such holders may become subject in
connection with the exercise of those Options or the vesting of those shares.
Such right may be provided to any such holder in either or both of the following
formats:
(i) Stock Withholding: The election to have the Company
withhold, from the shares of Common Stock otherwise issuable upon the
exercise of such Nonstatutory Option or the vesting of such shares, a
portion of
10
<PAGE> 11
those shares with an aggregate fair market value equal to the percentage
of the withholding taxes (not to exceed one hundred percent (100%))
designated by the holder.
(ii) Stock Delivery: The election to deliver to the
Company, at the time the Nonstatutory Option is exercised or the shares
vest, one or more shares of Common Stock previously acquired by such
holder (other than in connection with the option exercise or share
vesting triggering the withholding taxes) with an aggregate fair market
value equal to the percentage of the withholding taxes (not to exceed
one hundred percent (100%)) designated by the holder.
Section 21. Effectiveness and Termination of the Advisor Plan. The
Advisor Plan shall be effective as of October 6, 1999 provided, however, that
stockholder approval of the Advisor Plan must be obtained by the Company within
12 months after the date the Advisor Plan is adopted by the Board. The Advisor
Plan shall terminate, in addition to the other termination events set forth
herein, when all shares of Common Stock which may be issued hereunder have been
so issued as fully-vested shares. However, the Board may, in its sole
discretion, terminate the Advisor Plan at any prior time; provided further that
in any event, unless earlier terminated, the Advisor Plan shall automatically
terminate on the tenth anniversary of the adoption of the Advisor Plan by the
Board or the tenth anniversary of the approval of the Advisor Plan by the
stockholders, whichever is earlier. Subject to Section 17 hereof, no such
termination shall in any way affect any Option then outstanding.
Section 22. Time of Granting Options. The date of grant of an Option
shall, for all purposes, be the date on which the Plan Administrator makes the
determination granting such an Option. Notice of the determination shall be
given to each Participant to whom an Option is so granted within a reasonable
time after the date of such grant.
Section 23. Amendment of Plan and Options. The Plan Administrator may
make such amendments to the Advisor Plan and in the terms and conditions of
granted Options as it shall deem advisable, including, without limitation,
accelerating the time at which an Option may be exercised. No amendment shall in
any way adversely affect any Option then outstanding, without the consent of the
Participant so adversely affected.
Section 24. No Obligation to Exercise Option. The granting of an Option
shall impose no obligation on the Participant to exercise such Option.
Section 25. Indemnification. In addition to such other rights of
indemnification as they may have as members of the Board of Directors, the
members of the Committee serving as Plan Administrator shall be indemnified by
the Company to the fullest extent permitted by law against the reasonable
expenses, including attorney's fees, actually and necessarily incurred in
connection with the defense of any action, suit or proceeding, or in connection
with any appeal therein, to which they or any of them may be a party by reason
of any action taken or failure to act under or in connection with the Advisor
Plan or any Option granted thereunder, and against all amounts paid by them in
satisfaction of a judgment in any such action, suit or proceeding except in
relation to matters as to which it shall be adjudged in such action, suit or
proceeding that such Board or Committee member is not entitled to
indemnification under applicable law; provided, however, that within sixty (60)
days after institution of any such action, suit or proceeding such Board or
Committee member shall in writing offer the Company the opportunity, at the
Company's expense to handle and defend the same, and such Board or
11
<PAGE> 12
Committee member shall cooperate with and assist the Company in the defense of
any such action, suit or proceeding. The Company shall not be obligated to
indemnify any Board or Committee member with regard to any settlement of any
action, suit or proceeding of which the Company did not consent to in writing
prior to such settlement.
Section 26. Governing Law. The Advisor Plan and any Option granted
pursuant to the Advisor Plan shall be construed under and governed by the laws
of the State of California without regard to conflict of law provisions thereof.
Section 27. Not an Employment or Consulting Agreement. Nothing contained
in the Advisor Plan or in any Option Agreement shall confer, intend to confer or
imply any rights of employment or any rights to a consulting relationship or
rights to continued employment by, or a consulting relationship with, the
Company or any Subsidiary in favor of any Participant or limit the ability of
the Company or any Subsidiary to terminate, with or without cause, in its sole
and absolute discretion, the employment or consulting relationship of any
Participant, subject to the terms of any written employment or other agreement
to which a Participant is a party. In addition, nothing contained in the Advisor
Plan or in any Option Agreement shall preclude any lawful action by the Company
or the Board.
Section 28. Access to Financial Information. Until the Section 12
Registration Date, the Company shall deliver a balance sheet and income
statement at least annually to each person holding an outstanding Option under
the Plan, unless such person is a key employee whose duties in connection with
the Company assure such person of access to equivalent financial information.
12
<PAGE> 13
SCHEDULE A
SPECIAL CHANGE IN CONTROL PROVISIONS
The following change in control provisions shall be in effect for any
Options originally granted under the LLC Advisor Plan and assumed under this
Advisor Plan, except to the extent the Plan Administrator subsequently
determines to extend one or more provisions of Section 15 of the Advisor Plan to
those Options:
(a) 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 stockholders (each, a "Stockholder") have the
opportunity to receive cash, securities of another entity and/or other property
in exchange for their shares of Common Stock of the Company, or (iv) any
acquisition by any person or group (as defined in Section 13(d) of the Exchange
Act), of beneficial ownership of more than fifty percent (50%) of the Company's
then outstanding shares of Common Stock (each of the events described in clauses
(i), (ii), (iii), or (iv), is referred to herein as an "Extraordinary Event"),
each outstanding Option subject to this Schedule A shall terminate unless the
Company elects to have any Option survive the Extraordinary Event pursuant to
paragraph (c) below.
(b) Upon the occurrence of an Extraordinary Event,
notwithstanding any provision of any applicable Option Agreement, each
Participant holding an Option subject to this Schedule A shall have the right
until ten (10) days before the effective date of such Extraordinary Event to
exercise, in whole or in part, such Option, to the extent that such Option is
then vested and exercisable pursuant to the provisions of such Option and
Section 7 of the Advisor Plan. In this regard, the Company shall notify each
Participant 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.
(c) If, in the case of any Extraordinary Event, the Plan
Administrator does not elect to accelerate an Option subject to this Schedule A,
then, at the election of the Company and/or the surviving entity, either: (i)
the Company shall permit such Option to survive such Extraordinary Event or (ii)
the surviving entity (which may be the Company) shall tender to the Participant
holding such Option an option or options to purchase shares of Common Stock or
other equity interests in such surviving entity, and such continuing new option
or options shall contain such terms and provisions as shall be required to
substantially preserve the rights and benefits of such Option then outstanding
under the Advisor Plan with any reasonable changes to take into account the
circumstances of the surviving entity.
<PAGE> 1
EXHIBIT 10.24
ARTISTdirect, INC.
1999 ARTIST STOCK OPTION PLAN
Section 1. Description of Plan.
(a) This 1999 Artist Stock Option Plan (the "Artist Plan")
of ARTISTdirect, Inc., a Delaware corporation (the "Company"), is effective as
of October 6, 1999 and is designed to effect the assumption by the Company of
the ARTISTdirect LLC 1999 Artist Unit Option Plan (the "LLC Artist Plan") and
all options thereunder in connection with the incorporation of ARTISTdirect LLC.
As part of such assumption, each outstanding option to acquire Units of
ARTISTdirect LLC under the LLC Artist Plan has been converted into an option to
acquire the same number of shares of the Company's common stock (the "Common
Stock") under this Artist Plan at the same exercise price per share. All the
other terms and conditions of each such assumed option shall continue in full
force and effect.
(b) Under the Artist Plan, designated independent
contractors who are artists who provide products and/or services to the Company
and/or any directly or indirectly owned entities of the Company (individually, a
"Subsidiary" and collectively, the "Subsidiaries") may be granted options
("Options") to purchase shares of common stock of the Company ("Common Stock").
It is intended that the Options under this Artist Plan will not qualify for
treatment as incentive stock options under Section 422 of the Internal Revenue
Code of 1986, as amended (the "Code"), and will be designated "Nonstatutory
Stock Options."
Section 2. Purpose of Plan. The purpose of the Artist Plan and of
granting Options to specified persons is to further the growth, development and
financial success of the Company and its Subsidiaries by providing additional
incentives to certain independent contractors who are key artists and who
provide products and/or services to the Company and/or any Subsidiary. By
assisting such persons in acquiring Common Stock, the Company can ensure that
such persons will themselves benefit directly from the growth, development and
financial success of the Company and its Subsidiaries.
Section 3. Eligibility. The persons who shall be eligible to receive
grants of Options under the Artist Plan shall be limited to those independent
contractors who are artists who provide products and/or services to the Company
and/or any Subsidiary designated by the Plan Administrator; provided, that bona
fide services shall be rendered to the Company or its Subsidiaries by such
independent contractors, and such services shall not have been in connection
with the offer and sale of securities in a capital-raising transaction. A person
who holds an Option is herein referred to as a "Participant," and more than one
Option may be granted to any Participant.
Section 4. Administration.
(a) The Artist Plan shall be administered by the Board or,
at the Board's option, by a committee established by the Board and composed of
not less than three Board members (the "Committee"). Members of the Committee
shall be appointed, both initially and as vacancies occur, by the Board, to
serve at the pleasure of the Board. Upon the first registration of an equity
security of the Company under the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), to the extent possible and advisable, the Committee may be
constituted so as to permit this Artist Plan to comply with Rule 16b-3
promulgated under Section
<PAGE> 2
16 of the Exchange Act and Section 162(m) of the Code. The Committee shall meet
at such times and places as it determines and may meet through a telephone
conference call. A majority of its members shall constitute a quorum, and the
decision of a majority of those present shall constitute the decision of the
Committee. A memorandum signed by all of its members shall constitute the
decision of the Committee without the need, in such event, to hold an actual
meeting. The term "Plan Administrator" as used in this document shall mean the
Board or the Committee acting in its capacity as administrator of the Artist
Plan.
(b) The Plan Administrator is authorized and empowered to
administer the Artist Plan and, subject to the express provisions of the Advisor
Plan, including but not limited to Section 23, (i) to determine the dates upon
which Options shall be granted and the terms and conditions thereof in a manner
consistent with the Artist Plan, which terms and conditions need not be
identical as to the various Options granted; (ii) to interpret the Artist Plan;
(iii) to grant Options; (iv) to determine the Participants; (v) to specify the
terms of the Options; (vi) to determine the number of shares of Common Stock
which may be purchased; (vii) to accelerate the time during which an Option may
be exercised in accordance with the provisions of Section 18 hereof, and to
otherwise accelerate the time during which an Option may be exercised (but not
reduce the time of exercise for Options which have vested), in each case
notwithstanding the provisions in the Option Agreement (as defined in Section 16
hereof) stating the time during which it may be exercised; (viii) to prescribe,
amend and rescind rules relating to the Artist Plan; (ix) to authorize any
person to execute on behalf of the Company any instrument required to effectuate
the grant of an Option previously granted by the Plan Administrator; (x) to
determine the rights and obligations of Participants under the Artist Plan; and
(xi) to make all other determinations deemed necessary or advisable for the
administration of the Artist Plan. The interpretation and construction by the
Plan Administrator of any provision of the Artist Plan or of any Option granted
under it shall be final. No person serving as Plan Administrator shall be liable
for any action or determination made with respect to the Artist Plan or any
Option granted hereunder.
Section 5. Common Stock Subject to Plan.
(a) The maximum number of shares of Common Stock which may
be issued under the Artist Plan shall not exceed 16,000,000 shares. Such reserve
shall consist of (i) the number of shares available for issuance under the LLC
Artist Plan immediately after the incorporation of the LLC and the conversion of
the Units issuable thereunder into shares of Common Stock plus (ii) an
additional increase of 6,433,980 shares to be approved by the Company's
stockholders.
(b) The number of shares of Common Stock available for
issuance under the Artist Plan shall automatically increase on the first trading
day of January each calendar year during the term of the Artist Plan, beginning
with calendar year 2001, by an amount equal to two percent (2%) of the total
number of shares of Common Stock outstanding on the last trading day in December
of the immediately preceding calendar year, but in no event shall any such
annual increase exceed 3,500,000 shares.
(c) Shares of Common Stock subject to outstanding Options
(including options assumed under this Plan) shall be available for subsequent
issuance under the Artist Plan to the extent (i) those Options expire or
terminate for any reason prior to exercise in full or (ii) the Options are
cancelled in accordance with the cancellation-regrant provisions of Section 13.
Unvested shares issued under the Artist Plan and subsequently repurchased by the
Company at the original issue price paid per share, pursuant to the Company's
repurchase
2
<PAGE> 3
rights under the Artist Plan shall be added back to the number of shares of
Common Stock reserved for issuance under the Artist Plan and shall accordingly
be available for reissuance through one or more subsequent Option grants under
the Artist Plan. However, should the exercise price of an Option under the
Artist Plan be paid with shares of Common Stock or should shares of Common Stock
otherwise issuable under the Artist Plan be withheld by the Company in
satisfaction of the withholding taxes incurred in connection with the exercise
of an Option or the vesting of a stock issuance under the Artist Plan, then the
number of shares of Common Stock available for issuance under the Artist Plan
shall be reduced by the gross number of shares for which the Option is exercised
or which vest under the stock issuance, and not by the net number of shares of
Common Stock issued to the holder of such Option or stock issuance.
Section 6. Option Exercise Price.
(a) Except as provided in Sections 15 and 19 hereof, the
purchase price per share (the "Exercise Price") of the shares of Common Stock
underlying each Option shall be as determined by the Plan Administrator in its
sole discretion; provided, that in the case of any person owning greater than
10% of the total combined voting power of all classes of capital stock of the
Company (or its parent or subsidiaries), the exercise price of the Option
granted to such person shall not be less than 110% of the fair market value of
the shares of Common Stock at the time the Option is granted.
(b) For purposes of the Artist Plan, the fair market value
per share of Common Stock on any relevant date shall be determined in accordance
with the following procedures:
(i) If the Common Stock is at the time traded on
the Nasdaq National Market, then the fair market value shall be the
closing selling price per share of Common Stock on the date in question,
as such price is reported by the National Association of Securities
Dealers on the Nasdaq National Market. If there is no closing selling
price for the Common Stock on the date in question, then the fair market
value shall be the closing selling price on the last preceding date for
which such quotation exists.
(ii) If the Common Stock is at the time listed on
any national stock exchange, then the fair market value shall be the
closing selling price per share of Common Stock on the date in question
on the stock exchange determined by the Plan Administrator to be the
primary market for the Common Stock, as such price is officially quoted
in the composite tape of transactions on such exchange. If there is no
closing selling price for the Common Stock on the date in question, then
the fair market value shall be the closing selling price on the last
preceding date for which such quotation exists.
(iii) If the Common Stock is at the time neither
traded on the Nasdaq National Market nor listed on any national stock
exchange, then the fair market value shall be determined by the Plan
Administrator on the basis of such factors as the Plan Administrator
shall deem appropriate.
Section 7. Restrictions on Grants; Vesting of Options. Notwithstanding
any other provisions set forth herein or in any Option Agreement, no Options may
be granted under the Artist Plan subsequent to ten (10) years after the October
13, 1999 effective date of this Artist
3
<PAGE> 4
Plan. Each Option shall grant the Participant the right to purchase a specified
number of shares of Common Stock at a price determined by the Plan Administrator
in accordance with Section 6. The Options shall vest pursuant to a chronological
vesting schedule and/or based on targeted goals or other schedule established by
the Plan Administrator. The Plan Administrator shall determine the vesting
schedule, including, if applicable, the performance criteria and the performance
measurement period(s), applicable to each Option or group of Options in a
schedule, a copy of which shall be filed with the records of the Plan
Administrator and attached to each Option Agreement to which the same applies.
The vesting schedule, including, if applicable, the performance criteria and the
performance measurement period(s), need not be identical for all Options granted
hereunder. Following the conclusion of each applicable performance measurement
period, the Plan Administrator shall determine, in its sole judgment, the
extent, if at all, that each Option subject thereto shall have become
exercisable based upon the applicable performance criteria and the schedule of
exercisability. The Plan Administrator may periodically review the performance
criteria applicable to any Option or Options and, in its sole judgment, may
adjust the same to reflect significant events involving the Company or any
Subsidiary, such as mergers, acquisitions, asset sales, other extraordinary
corporate events and extraordinary losses and gains, significant changes in the
level of capital expenditures, as well as changes in accounting treatment.
Section 8. Exercise of Options.
(a) Once vested, and prior to its termination date, an
Option may be exercised by the Participant by giving written notice to the
Company specifying the number of shares of Common Stock to be purchased and
accompanied by payment of the full Exercise Price for those shares in cash or by
check payable to the Company's order. The Plan Administrator may structure one
or more Options so that following the date the Common Stock is first registered
under Section 12 of the Exchange Act (the "Section 12 Registration Date"), the
Exercise Price may also be paid in any of the following forms:
(i) shares of Common Stock held for the requisite
period necessary to avoid a charge to the Company's earnings for
financial reporting purposes and valued at fair market value on the
exercise date, or
(ii) to the extent the Option is exercised for
vested shares, through a special sale and remittance procedure pursuant
to which the Participant shall concurrently provide irrevocable
instructions to (a) a Company-designated brokerage firm to effect the
immediate sale of the purchased shares and remit to the Company, out of
the sale proceeds available on the settlement date, sufficient funds to
cover the aggregate Exercise Price payable for the purchased shares plus
all applicable federal, state and local income and employment taxes
required to be withheld by the Company by reason of such exercise and
(b) the Company to deliver the certificates for the purchased shares
directly to such brokerage firm in order to complete the sale.
Except to the extent such sale and remittance procedure is
utilized, payment of the Exercise Price for the purchased shares must be made on
the date the Option is exercised.
Section 9. Limited Transferability. Any Option held by the Participant
at the time of his or her death shall be assigned or transferred pursuant to
such Participant's will or the laws of inheritance. However, any Option may be
assigned in whole or in part during the Participant's
4
<PAGE> 5
lifetime to one or more members of the Participant's immediate family or to a
trust established exclusively for one or more such family members or may be
assigned to the Participant's former spouse pursuant to a domestic relations
order. The assigned portion may only be exercised by the person or persons who
acquire a proprietary interest in the Option pursuant to the assignment. The
terms applicable to the assigned portion shall be the same as those in effect
for the Option immediately prior to such assignment and shall be set forth in
such documents issued to the assignee as the Plan Administrator may deem
appropriate. Notwithstanding the foregoing, the Participant may also designate
one or more persons as the beneficiary or beneficiaries of his or her
outstanding Options, and those Options shall, in accordance with such
designation, automatically be transferred to such beneficiary or beneficiaries
upon the Participant's death while holding those Options. Such beneficiary or
beneficiaries shall take the transferred Options subject to all the terms and
conditions of the applicable agreement evidencing each such transferred Option,
including (without limitation) the limited time period during which the Option
may be exercised following the Participant's death.
Section 10. Cessation of Service.
(a) The following provisions shall govern the exercise of
any Options held by the Participant at the time of cessation of Service or
death:
(i) Any Option outstanding at the time
of the Participant's cessation of Service for any reason shall remain
exercisable for such period of time thereafter as shall be determined by
the Plan Administrator and set forth in the documents evidencing the
Option, but no such Option shall be exercisable after the expiration of
the option term.
(ii) Any Option held by the Participant at the
time of death and exercisable in whole or in part at that time may be
subsequently exercised by the personal representative of the
Participant's estate or by the person or persons to whom the Option is
transferred pursuant to the Participant's will or the laws of
inheritance or by the Participant's designated beneficiary or
beneficiaries of that Option.
(iii) In the event the Participant's
Service is terminated for Cause, all Options held by that Participant
under the Artist Plan shall immediately terminate, except to the extent
the Option Agreement provides for a limited period of exercise following
such a termination for Cause. For purposes of this Artist Plan, "Cause"
shall have the following meaning: (A) termination of any other written
agreement governing the terms of the Participant's contractual
relationship with the Company and/or any Subsidiary prior to the
expiration of the full term thereof either (x) by the Company or such
Subsidiary due to a material breach thereof by Participant and the
Participant's failure to cure such breach within the cure period, if
any, specified therein or (y) by Participant other than due to a
material breach thereof by the Company or such Subsidiary and the
failure by the Company or such Subsidiary to cure such breach within the
cure period, if any, specified therein; and (B) any other definition
ascribed to it in any other written agreement governing the terms of the
Participant's contractual relationship with the Company and/or any
Subsidiary.
(iv) During the applicable post-Service exercise
period, the Option may not be exercised in the aggregate for more than
the number of
5
<PAGE> 6
vested shares for which the Option is exercisable on the date of the
Participant's cessation of Service. Upon the expiration of the
applicable exercise period or (if earlier) upon the expiration of the
option term, the Option shall terminate and cease to be outstanding for
any vested shares for which the Option has not been exercised. However,
the Option shall, immediately upon the Participant's cessation of'
Service, terminate and cease to be outstanding to the extent the Option
is not otherwise at that time exercisable for vested shares.
(b) The Plan Administrator shall have complete discretion,
exercisable either at the time an Option is granted or at any time while the
Option remains outstanding, to:
(i) extend the period of time for which the Option
is to remain exercisable following the Participant's cessation of
Service from the limited exercise period otherwise in effect for that
Option to such greater period of time as the Plan Administrator shall
deem appropriate, but in no event beyond the expiration of the option
term, and/or
(ii) permit the Option to be exercised, during the
applicable post-Service exercise period, not only with respect to the
number of vested shares of Common Stock for which such Option is
exercisable at the time of the Participant's cessation of Service but
also with respect to one or more additional installments in which the
Participant would have vested had the Participant continued in Service.
(c) Except to the extent otherwise specifically provided
in the documents evidencing the Option, the Participant shall be deemed, for
purposes of the Artist Plan, to continue in Service for so long as such
Participant performs services for the Company (or any parent or Subsidiary) in
the capacity of an employee, a non-employee member of the board of directors or
a consultant or independent advisor, including services rendered pursuant to any
Store Agreement in effect between the Participant and ARTISTdirect New Media,
LLC.
Section 11. Stockholder Rights. The holder of an Option shall have no
stockholder rights with respect to the shares subject to that Option until such
person shall have exercised the Option, paid the Exercise Price and become a
holder of record of the purchased shares.
Section 12. Repurchase Rights. The Plan Administrator shall have the
discretion to grant Options which are exercisable for unvested shares of Common
Stock. Should the Participant cease Service while holding such unvested shares,
the Company shall have the right to repurchase, at the Exercise Price paid per
share, any or all of those unvested shares. The terms upon which such repurchase
right shall be exercisable (including the period and procedure for exercise and
the appropriate vesting schedule for the purchased shares) shall be established
by the Plan Administrator and set forth in the document evidencing such
repurchase right.
Section 13. Option Cancellation and Regrant. The Plan Administrator
shall have the authority to effect, at any time and from time to time, with the
consent of the affected option holders, the cancellation of any or all
outstanding Options under the Artist Plan (including the assumed Options
hereunder) and to grant in substitution new Options covering the same or
different number of shares of Common Stock but with an Exercise Price per share
based on the fair market value per share of Common Stock on the new grant date.
6
<PAGE> 7
Section 14. Issuance of Common Stock. The Company's obligation to issue
its shares of Common Stock upon exercise of an Option is expressly conditioned
upon (A) the compliance by the Company with any registration or other
qualification obligations with respect to such shares of Common Stock under any
state and/or federal law or rulings and regulations of any government regulatory
body, and/or (B) the making of such investment representations or other
representations and undertakings by the Participant (or the Participant's legal
representative, heir, legatee or beneficiary, as the case may be) in order to
comply with the requirements of any exemption from any such registration or
other qualification obligations with respect to such shares of Common Stock
which the Company in its sole discretion shall deem necessary or advisable. Such
required representations and undertakings may include representations and
agreements that such Participant (or the Participant's legal representative,
heir, legatee or beneficiary): (a) is purchasing such shares of Common Stock for
investment and not with any present intention of selling or otherwise disposing
of such shares of Common Stock; and (b) agrees to have a legend placed upon the
face and reverse of any certificates evidencing such shares of Common Stock (or,
if applicable, an appropriate data entry made in the ownership records of the
Company) setting forth (i) any representations and undertakings which such
Participant has given to the Company or a reference thereto, and (ii) that,
prior to effecting any sale or other disposition of any such shares of Common
Stock, the Participant must furnish to the Company an opinion of counsel,
satisfactory to the Company and its counsel, to the effect that such sale or
disposition will not violate the applicable requirements of state and federal
laws and regulatory agencies; provided, however, that any such legend or data
entry shall be removed when no longer applicable. The inability of the Company
to obtain, from any regulatory body having jurisdiction, authority reasonably
deemed by the Company's counsel to be necessary for the lawful issuance and sale
of any shares of Common Stock pursuant to the exercise of an Option granted
hereunder shall suspend the Company's obligation to permit the exercise of such
Option or to issue any shares of Common Stock thereupon. Any shares of Common
Stock issued by the Company upon exercise of an Option granted hereunder shall
be subject to all obligations under this Artist Plan, including without
limitation any right of first offer of the Company and others with respect to
all shares of Common Stock proposed to be transferred by Participant under
Section 16(b) hereof, the drag-along rights described in Section 16(c) hereof,
and certain other restrictions set forth in each particular Option Agreement.
Section 15. Recapitalization; Change in Control.
(a) Subject to paragraph (c) of this Section 15, if any
change is made to the Common Stock by reason of any stock split, stock dividend,
recapitalization, combination of shares, exchange of shares or other change
affecting the outstanding Common Stock as a class without the Company's receipt
of consideration, appropriate adjustments shall be made by the Plan
Administrator to (i) the maximum number and/or class of securities issuable
under the Artist Plan, (ii) the number and/or class of securities and the
Exercise Price per share in effect under each outstanding Option under the
Artist Plan and (iii) the maximum number and/or class of securities by which the
share reserve is to increase automatically each calendar year pursuant to the
provisions of Section 5. Such adjustments to the outstanding Options are to be
effected in a manner which shall preclude the enlargement or dilution of rights
and benefits under such Options. Any such adjustment in an outstanding Option,
however, shall be made without a change in the total Exercise Price applicable
to the unexercised portion of the Option but with a corresponding adjustment in
the Exercise Price for each share of Common Stock covered by the Option. In
making such adjustments, or in determining that no such adjustments are
necessary, the Plan Administrator may rely upon the advice of counsel and
accountants to the Company, and the determination of the Plan Administrator
shall be binding. No fractional
7
<PAGE> 8
shares of Common Stock shall be issued or issuable under the Artist
Plan on account on any such adjustment.
(b) Each Option outstanding under the Artist Plan at the
time of a Change in Control (as defined below) shall automatically vest in full
so that each such Option shall, immediately prior to the effective date of the
Change in Control, become exercisable for all of the shares of Common Stock at
the time subject to that Option and may be exercised for any or all of those
shares as fully-vested shares of Common Stock. However, an outstanding Option
shall not vest on such an accelerated basis if and to the extent: (i) such
Option is assumed by the successor corporation (or parent thereof) or otherwise
continued in full force and effect pursuant to the terms of the Change in
Control transaction or (ii) such Option is to be replaced with a cash incentive
program which preserves the spread existing on the unvested option shares at the
time of the Change in Control and provides for subsequent payout in accordance
with the same vesting schedule applicable to those unvested option shares or
(iii) the acceleration of such Option is subject to other limitations imposed by
the Plan Administrator at the time of the Option grant. Any Options originally
granted under the LLC Artist Plan and assumed under this Plan which are
outstanding at the time of a Change in Control shall continue to be governed by
the change in control/extraordinary event provisions of the LLC Artist Plan (as
such provisions are set forth in attached Schedule A), except to the extent the
Plan Administrator determines to extend one or more provisions of this Section
15 to those Options.
(c) Immediately following the consummation of the Change
in Control, all outstanding Options shall terminate and cease to be outstanding,
except to the extent assumed by the successor corporation (or parent thereof) or
otherwise continued in full force and effect pursuant to the terms of the Change
in Control transaction.
(d) Each Option which is assumed in connection with a
Change in Control or otherwise continued in effect shall be appropriately
adjusted, immediately after such Change in Control, to apply to the number and
class of securities which would have been issuable to the Participant in
consummation of such Change in Control, had the Option been exercised
immediately prior to such Change in Control. Appropriate adjustments shall also
be made to the Exercise Price payable per share under each outstanding Option,
provided the aggregate Exercise Price payable for such securities shall remain
the same. To the extent the actual holders of the Company's outstanding Common
Stock receive cash consideration for their Common Stock in consummation of the
Change in Control, the Company or any successor corporation may, in connection
with the assumption or continuation of the outstanding Options under this Artist
Plan, substitute one or more shares of its own common stock with a fair market
value equivalent to the cash consideration paid per share of Common Stock in the
Change in Control transaction.
(e) The Plan Administrator shall have the discretionary
authority to structure one or more Options so that those Options shall,
immediately prior to the effective date of a Change in Control, become
exercisable for all the shares of Common Stock at the time subject to those
Options and may be exercised for any or all of those shares as fully vested
shares of Common Stock, whether or not those Options are to be assumed in the
Change in Control or otherwise continued in full force and effect.
Alternatively, the Plan Administrator shall have the authority to structure one
or more Options so that those Options shall become exercisable in whole or in
part on an accelerated basis in the event the Optionee's Service is subsequently
terminated within a designated period following the effective date of any Change
in Control in which those Options are assumed or otherwise continued in full
force and effect.
8
<PAGE> 9
(f) For purposes of this Section 15, the term "Change in
Control" shall mean any of the following transactions effecting a change in
control or ownership of the Company:
(i) a stockholder-approved merger or consolidation
in which securities possessing more than fifty percent (50%) of the
total combined voting power of the Company's outstanding securities are
transferred to a person or persons different from the persons holding
those securities immediately prior to such transaction, or
(ii) a stockholder-approved sale, transfer or
other disposition of all or substantially all of the Company's assets in
complete liquidation or dissolution of the Company, or
(iii) the acquisition, directly or indirectly by
any person or related group of persons (other than the Company or a
person that directly or indirectly controls, is controlled by, or is
under common control with, the Company), of beneficial ownership (within
the meaning of Rule 13d-3 of the Exchange Act) of securities possessing
more than fifty percent (50%) of the total combined voting power of the
Company's outstanding securities pursuant to a tender or exchange offer
made directly to the Company's stockholders.
(g) The grant of an Option under the Artist Plan 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 corporate action.
Section 16. Option Agreement. Each Option granted under the Artist Plan
shall be evidenced by a written option agreement (an "Option Agreement")
executed by the Company and the Participant which (a) shall contain each of the
provisions and agreements herein specifically required to be contained therein;
(b) shall contain provisions which give the Company and certain others a right
of first offer to purchase shares of Common Stock issued pursuant to the
exercise of Options granted under the Artist Plan which a Participant proposes
to sell; (c) shall contain "drag-along" rights, that, in the event of the sale
of shares of Common Stock held by Donald Muller and Marc Geiger or their
respective permitted successors or assignees (collectively, the "Founders"),
shall enable the Founders to cause any shares of Common Stock previously issued
pursuant to the exercise of Options granted under the Artist Plan to be included
in such sale, and to cause the Company to terminate the remaining Options upon
payment of the difference between the sale price and the exercise price of such
Options; and (d) may contain such other terms and conditions as the Plan
Administrator deems desirable and which are not inconsistent with the Artist
Plan. The clause (b) and (c) provisions shall automatically terminate upon the
Section 12 Registration Date.
Section 17. Termination of Options. Each Option granted under the Artist
Plan shall set forth a termination date thereof, which shall be not later than
ten (10) years from the date such Option is granted (the "Expiration Date"),
subject to earlier termination as set forth in Section 10 or Section 15 hereof,
or as otherwise set forth in each particular Option Agreement.
Section 18. Acceleration of Options. Notwithstanding the provisions of
Section 7 or any provision to the contrary contained in a particular Option
Agreement, the Plan Administrator, in its sole discretion, may accelerate the
vesting of all or any portion of any Option then
9
<PAGE> 10
outstanding. The decision by the Plan Administrator to accelerate an Option or
to decline to accelerate an Option shall be final. In the event of the
acceleration of the exercisability of Options as the result of a decision by the
Plan Administrator pursuant to this Section 18, each outstanding Option so
accelerated shall be exercisable for a period from and after the date of such
acceleration and upon such other terms and conditions as the Plan Administrator
may determine in its sole discretion, provided that such terms and conditions
(other than terms and conditions relating solely to the acceleration of
exercisability and the related termination of an Option) may not adversely
affect the rights of any Participant without the consent of the Participant so
adversely affected. Any outstanding Option which has not been exercised by the
holder at the end of such period shall terminate automatically at that time.
Section 19. Substitute Options. If the Company at any time should
succeed to the business of another entity through a merger, consolidation,
corporate reorganization or exchange, or through the acquisition of stock or
assets of such entity or its subsidiaries or otherwise, Options may be granted
under the Artist Plan to option holders of such entity or its subsidiaries, in
substitution for options to purchase interests in such entity held by them at
the time of succession. The Plan Administrator, in its sole and absolute
discretion, shall determine the extent to which such substitute Options shall be
granted (if at all), the person or persons to receive such substitute Options
(who need not be all option holders of such entity), the number of shares of
Common Stock to be subject to the Option granted to each such person, the
Exercise Price of such Option and the other terms and conditions of such
substitute Options.
Section 20. Withholding of Taxes.
(a) The Company, or a Subsidiary, as the case may be, may
deduct and withhold from the wages, salary, bonus and other income paid by the
Company (or such Subsidiary) to the Participant the requisite tax upon the
amount of taxable income, if any, recognized by the Participant in connection
with the exercise of any Option, or the sale of shares of Common Stock issued to
the Participant upon the exercise of an Option, as may be required from time to
time under any federal, state, local or foreign tax laws and regulations. This
withholding of tax shall be made from the Company's (or such Subsidiary's)
concurrent or subsequent payments of wages, salary, bonus or other income to the
Participant or by payment to the Company (or such Subsidiary) by the Participant
of the required withholding tax, as the Plan Administrator may determine.
(b) The Plan Administrator may, in its discretion, provide
any or all holders of Nonstatutory Options or unvested shares of Common Stock
under the Artist Plan with the right to use shares of Common Stock in
satisfaction of all or part of the withholding taxes to which such holders may
become subject in connection with the exercise of those Options or the vesting
of those shares. Such right may be provided to any such holder in either or both
of the following formats:
(i) Stock Withholding: The election to have the
Company withhold, from the shares of Common Stock otherwise issuable
upon the exercise of such Nonstatutory Option or the vesting of such
shares, a portion of those shares with an aggregate fair market value
equal to the percentage of the withholding taxes (not to exceed one
hundred percent (100%)) designated by the holder.
(ii) Stock Delivery: The election to deliver to
the Company, at the time the Nonstatutory Option is exercised or the
shares vest,
10
<PAGE> 11
one or more shares of Common Stock previously acquired by such holder
(other than in connection with the option exercise or share vesting
triggering the withholding taxes) with an aggregate fair market value
equal to the percentage of the withholding taxes (not to exceed one
hundred percent (100%)) designated by the holder.
Section 21. Effectiveness and Termination of the Artist Plan. The Artist
Plan shall be effective as of October 6, 1999; provided, however, that
stockholder approval of the Artist Plan must be obtained by the Company within
12 months after the date the Artist Plan is adopted by the Board. The Artist
Plan shall terminate, in addition to the other termination events set forth
herein, when all shares of Common Stock which may be issued hereunder have been
so issued as fully-vested shares. However, the Board may, in its sole
discretion, terminate the Artist Plan at any prior time; provided further that
in any event, unless earlier terminated, the Artist Plan shall automatically
terminate on the tenth anniversary of the adoption of the Artist Plan by the
Board or the tenth anniversary of the approval of the Artist Plan by the
stockholders, whichever is earlier. Subject to Section 17 hereof, no such
termination shall in any way affect any Option then outstanding.
Section 22. Time of Granting Options. The date of grant of an Option
shall, for all purposes, be the date on which the Plan Administrator makes the
determination granting such an Option. Notice of the determination shall be
given to each Participant to whom an Option is so granted within a reasonable
time after the date of such grant.
Section 23. Amendment of Plan and Options. The Plan Administrator may
make such amendments to the Artist Plan and in the terms and conditions of
granted Options as it shall deem advisable, including, without limitation,
accelerating the time at which an Option may be exercised. No amendment shall in
any way adversely affect any Option then outstanding, without the consent of the
Participant so adversely affected.
Section 24. No Obligation to Exercise Option. The granting of an Option
shall impose no obligation on the Participant to exercise such Option.
Section 25. Indemnification. In addition to such other rights of
indemnification as they may have as members of the Board of Directors, the
members of the Committee serving as Plan Administrator shall be indemnified by
the Company to the fullest extent permitted by law against the reasonable
expenses, including attorney's fees, actually and necessarily incurred in
connection with the defense of any action, suit or proceeding, or in connection
with any appeal therein, to which they or any of them may be a party by reason
of any action taken or failure to act under or in connection with the Artist
Plan or any Option granted thereunder, and against all amounts paid by them in
satisfaction of a judgment in any such action, suit or proceeding except in
relation to matters as to which it shall be adjudged in such action, suit or
proceeding that such Board or Committee member is not entitled to
indemnification under applicable law; provided, however, that within sixty (60)
days after institution of any such action, suit or proceeding such Board or
Committee member shall in writing offer the Company the opportunity, at the
Company's expense to handle and defend the same, and such Board or Committee
member shall cooperate with and assist the Company in the defense of any such
action, suit or proceeding. The Company shall not be obligated to indemnify any
Board or Committee member with regard to any settlement of any action, suit or
proceeding of which the Company did not consent to in writing prior to such
settlement.
11
<PAGE> 12
Section 26. Governing Law. The Artist Plan and any Option granted
pursuant to the Artist Plan shall be construed under and governed by the laws of
the State of California without regard to conflict of law provisions thereof.
Section 27. Not an Employment or Consulting Agreement. Nothing contained
in the Artist Plan or in any Option Agreement shall confer, intend to confer or
imply any rights of employment or any rights to a consulting relationship or
rights to continued employment by, or a consulting relationship with, the
Company or any Subsidiary in favor of any Participant or limit the ability of
the Company or any Subsidiary to terminate, with or without cause, in its sole
and absolute discretion, the employment or consulting relationship of any
Participant, subject to the terms of any written employment or other agreement
to which a Participant is a party. In addition, nothing contained in the Artist
Plan or in any Option Agreement shall preclude any lawful action by the Company
or the Board.
Section 28. Access to Financial Information. Until the Section 12
Registration Date, the Company shall deliver a balance sheet and income
statement at least annually to each person holding an outstanding Option under
the Plan, unless such person is a key employee whose duties in connection with
the Company assure such person of access to equivalent financial information.
12
<PAGE> 13
SCHEDULE A
SPECIAL CHANGE IN CONTROL PROVISIONS
The following change in control provisions shall be in effect for any
Options originally granted under the LLC Plan and assumed under this Artist
Plan, except to the extent the Plan Administrator subsequently determines to
extend one or more provisions of Section 15 of the Artist Plan to those options:
(a) 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 stockholders (each, a "Stockholder") have the
opportunity to receive cash, securities of another entity and/or other property
in exchange for their shares of Common Stock of the Company, or (iv) any
acquisition by any person or group (as defined in Section 13(d) of the Exchange
Act), of beneficial ownership of more than fifty percent (50%) of the Company's
then outstanding shares of Common Stock (each of the events described in clauses
(i), (ii), (iii), or (iv), is referred to herein as an "Extraordinary Event"),
each outstanding Option subject to this Schedule A shall terminate unless the
Company elects to have such Option survive the Extraordinary Event pursuant to
paragraph (c) below.
(b) Upon the occurrence of an Extraordinary Event,
notwithstanding any provision of any applicable Option Agreement, each
Participant holding an Option subject to this Schedule A shall have the right
until ten (10) days before the effective date of such Extraordinary Event to
exercise, in whole or in part, such Option, to the extent such Option is then
vested and exercisable pursuant to the provisions of such Option and Section 7
of the Artist Plan. In this regard, the Company shall notify each Participant 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.
(c) If, in the case of any Extraordinary Event, the Plan
Administrator does not elect to accelerate an Option subject to this Schedule A,
then, at the election of the Company and/or the surviving entity, either: (i)
the Company shall permit such Option to survive such Extraordinary Event or (ii)
the surviving entity (which may be the Company) shall tender to the Participant
holding such Option an option or options to purchase shares of Common Stock or
other equity interests in such surviving entity, and such continuing new option
or options shall contain such terms and provisions as shall be required to
substantially preserve the rights and benefits of such Option then outstanding
under the Artist Plan with any reasonable changes to take into account the
circumstances of the surviving entity.
<PAGE> 1
EXHIBIT 10.29
DIRECTOR'S INDEMNIFICATION AGREEMENT
THIS DIRECTOR'S INDEMNIFICATION AGREEMENT ("Agreement") is made and
entered into as of _______, 1999 by and between ARTISTdirect, Inc., a Delaware
corporation (the "Company"), and _______________ ("Director").
R E C I T A L S
A. Director, as the [______________] and a member of the Board of
Directors of the Company, performs a valuable service in such capacity for the
Company;
B. The stockholders of the Company have adopted Bylaws (the
"Bylaws") providing for the indemnification of the officers, directors, agents
and employees of the Company to the maximum extent authorized by Section 145 of
the Delaware General Corporation Law, as amended (the "Delaware Law");
C. The Bylaws and the Delaware Law, by their non-exclusive nature,
permit contracts between the Company, its officers and the members of its Board
of Directors with respect to indemnification of such persons;
D. In accordance with the authorization as provided by the Delaware
Law, the Company has purchased and presently maintains or will shortly hereafter
purchase and thereafter maintain, a policy or policies of directors and officers
liability insurance ("D & O Insurance"), covering certain liabilities which may
be incurred by its directors and officers in the performance as directors of the
Company;
E. As a result of developments affecting the terms, scope and
availability of D & O Insurance, there exists general uncertainty as to the
extent of protection afforded members of the Board of Directors and officers of
the Company by such D & O Insurance and by statutory and Bylaw indemnification
provisions; and
F. In order to induce Director to continue to serve as [an executive
officer and] a member of the Board of Directors of the Company, the Company has
determined and agreed to enter into this contract with Director.
NOW, THEREFORE, in consideration of Director's continued service to
the Company after the date hereof, the parties hereto agree as follows:
1. Indemnity of Director. The Company hereby agrees to hold harmless
and indemnify Director to the fullest extent authorized or permitted by the
provisions of the Delaware Law, as may be amended from time to time, and by the
Bylaws as they exist as of the date hereof.
2. Additional Indemnity. Subject only to the exclusions set forth in
Section 3 hereof, the Company hereby further agrees to hold harmless and
indemnify Director:
<PAGE> 2
(a) against any and all expenses (including reasonable
attorneys' fees), witness fees, judgments, fines and amounts paid in settlement
actually and reasonably incurred by Director in connection with any threatened,
pending or completed action, suit or proceeding, whether civil, criminal,
administrative or investigative (including an action by or in the right of the
Company) to which Director is, was or at any time becomes a party, or is
threatened to be made a party, by reason of the fact that Director is or was an
officer or director of the Company, or is or was serving or at any time serves
at the request of the Company as an officer or director of another corporation,
partnership, joint venture, trust, employee benefit plan or other enterprise;
and
(b) otherwise to the fullest extent as may be provided to
Director by the Company under the non-exclusivity provisions of Section 6 of
Article VII of the Bylaws of the Company.
3. Limitations on Additional Indemnity. No indemnity pursuant to
Section 2 hereof shall be paid by the Company:
(a) except to the extent the aggregate of losses to be
indemnified thereunder exceeds the sum of such losses for which the Director is
indemnified pursuant to Section 1 hereof or pursuant to any directors and
officers liability insurance purchased and maintained by the Company;
(b) in respect to remuneration paid to Director if it shall be
determined by a final judgment or other final adjudication that such
remuneration was in violation of law;
(c) on account of any suit in which judgment is rendered
against Director for an accounting of profits, made from the purchase or sale by
Director of securities of the Company, pursuant to the provisions of Section
16(b) of the Securities Exchange Act of 1934 and amendments thereto or similar
provisions of any federal, state or local statutory law;
(d) on account of Director's conduct which is finally adjudged
to have been knowingly fraudulent or deliberately dishonest, or to constitute
willful misconduct;
(e) on account of Director's conduct which is the subject of
an action, suit or proceeding described in Section 7(c)(ii) hereof;
(f) on account of any action, claim or proceeding (other than
a proceeding referred to in Section 8(b) hereof) initiated by the Director
unless such action, claim or proceeding was authorized in the specific case by
action of the Board of Directors; and
(g) if a final decision by a court having jurisdiction in the
matter shall determine that such indemnification is not lawful (and, in this
respect, both the Company and Director have been advised that the Securities and
Exchange Commission believes that indemnification for liabilities arising under
the federal securities laws is against public policy and
2
<PAGE> 3
is, therefore, unenforceable and that claims for indemnification should be
submitted to appropriate courts for adjudication).
4. Contribution. If the indemnification provided in Sections 1 and 2
hereof is unavailable by reason of a court decision described in Section 3(g)
hereof based on grounds other than any of those set forth in paragraphs (b)
through (f) of Section 3 hereof, then in respect of any threatened, pending or
completed action, suit or proceeding in which the Company is jointly liable with
Director (or would be if joined in such action, suit or proceeding), the Company
shall contribute to the amount of expenses (including reasonable attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred and paid or payable by Director in such proportion as is appropriate to
reflect (i) the relative benefits received by the Company on the one hand and
Director on the other hand from the transaction from which such action, suit or
proceeding arose, and (ii) the relative fault of the Company on the one hand and
of Director on the other in connection with the events which resulted in such
expenses, judgments, fines or settlement amounts, as well as any other relevant
equitable considerations. The relative fault of the Company on the one hand and
of Director on the other shall be determined by reference to, among other
things, the parties' relative intent, knowledge, access to information and
opportunity to correct or prevent the circumstances resulting in such expenses,
judgments, fines or settlement amounts. The Company agrees that it would not be
just and equitable if contribution pursuant to this Section 4 were determined by
pro rata allocation or any other method of allocation which does not take
account of the foregoing equitable considerations.
5. Continuation of Obligations. All agreements and obligations of
the Company contained herein shall continue during the period Director is an
executive officer or director of the Company (or is or was serving at the
request of the Company as an executive officer or director of another
corporation, partnership, joint venture, trust, employee benefit plan or other
enterprise) and shall continue thereafter so long as Director shall be subject
to any possible claim or threatened, pending or completed action, suit or
proceeding, whether civil, criminal or investigative, by reason of the fact that
Director was an executive officer or director of the Company or serving in any
other capacity referred to herein.
6. Notification and Defense of Claim. Not later than thirty (30)
days after receipt by Director of notice of the commencement of any action, suit
or proceeding, Director will, if a claim in respect thereof is to be made
against the Company under this Agreement, notify the Company of the commencement
thereof, but the omission so to notify the Company will not relieve the Company
from any liability which it may have to Director otherwise than under this
Agreement. With respect to any such action, suit or proceeding as to which
Director notifies the Company of the commencement thereof:
(a) the Company will be entitled to participate therein
at its own expense;
(b) except as otherwise provided below, to the extent that it
may wish, the Company jointly with any other indemnifying party similarly
notified will be entitled to assume the defense thereof, with counsel reasonably
satisfactory to Director. After notice from
3
<PAGE> 4
the Company to Director of its election so as to assume the defense thereof, the
Company will not be liable to Director under this Agreement for any legal or
other expenses subsequently incurred by Director in connection with the defense
thereof other than reasonable costs of investigation or as otherwise provided
below. Director shall have the right to employ its counsel in such action, suit
or proceeding, but the fees and expenses of such counsel incurred after notice
from the Company of its assumption of the defense thereof shall be at the
expense of Director unless (i) the employment of counsel by Director has been
authorized by the Company, (ii) Director shall have reasonably concluded, based
on the advice of counsel, that there may be a conflict of interest between the
Company and Director in the conduct of the defense of such action or (iii) the
Company shall not in fact have employed counsel to assume the defense of such
action, in each of which cases the fees and expenses of Director's separate
counsel shall be at the expense of the Company. The Company shall not be
entitled to assume the defense of any action, suit or proceeding brought by or
on behalf of the Company or as to which Director shall have made the conclusion
provided for in (ii) above; and
(c) the Company shall not be liable to indemnify Director
under this Agreement for any amounts paid in settlement of any action or claim
effected without its written consent. Company shall be permitted to settle any
action except that it shall not settle any action or claim in any manner which
would impose any penalty or limitation on Director without Director's written
consent. Neither the Company nor Director will unreasonably withhold its consent
to any proposed settlement.
7. Advancement and Repayment of Expenses.
(a) In the event that Director employs his own counsel
pursuant to Section 6(b)(i) through (iii) above, the Company shall advance to
Director, prior to any final disposition of any threatened or pending action,
suit or proceeding, whether civil, criminal, administrative or investigative,
any and all reasonable expenses (including legal fees and expenses) incurred in
investigating or defending any such action, suit or proceeding within ten (10)
days after receiving copies of invoices presented to Director for such expenses.
(b) Director agrees that Director will reimburse the Company
for all reasonable expenses paid by the Company in defending any civil or
criminal action, suit or proceeding against Director in the event and only to
the extent it shall be ultimately determined by a final judicial decision (from
which there is no right of appeal) that Director is not entitled, under the
provisions of the Delaware Law, the Bylaws, this Agreement or otherwise, to be
indemnified by the Company for such expenses.
(c) Notwithstanding the foregoing, the Company shall not be
required to advance such expenses to Director if Director (i) commences any
action, suit or proceeding as a plaintiff unless such advance is specifically
approved by a majority of the Board of Directors or (ii) is a party to an
action, suit or proceeding brought by the Company and approved by a majority of
the Board which alleges willful misappropriation of corporate assets by
Director, wilfull disclosure of confidential information in bad faith and in
violation of Director's fiduciary or contractual obligations to the Company, or
any other willful and deliberate breach in bad faith
4
<PAGE> 5
of Director's duty to the Company or its stockholders.
5
<PAGE> 6
8. Enforcement.
(a) The Company expressly confirms and agrees that it has
entered into this Agreement and assumed the obligations imposed on the Company
hereby in order to induce Director to continue as a director of the Company, and
acknowledges that Director is relying upon this Agreement in continuing in such
capacity.
(b) In the event Director is required to bring any action to
enforce rights or to collect moneys due under this Agreement and is successful
in such action, the Company shall reimburse Director for all Director's
reasonable fees and expenses in bringing and pursuing such action.
9. Subrogation. In the event of payment under this agreement, the
Company shall be subrogated to the extent of such payment to all of the rights
of recovery of Director, who shall execute all documents required and shall do
all acts that may be necessary to secure such rights and to enable the Company
effectively to bring suit to enforce such rights.
10. Non-Exclusivity of Rights. The rights conferred on Director by
this Agreement shall not be exclusive of any other right which Director may have
or hereafter acquire under any statute, provision of the Company's Certificate
of Incorporation or Bylaws, agreement, vote of stockholders or directors, or
otherwise, both as to action in his official capacity and as to action in
another capacity while holding office.
11. Survival of Rights. The rights conferred on Director by this
Agreement shall continue after Director has ceased to be a director, officer,
employee or other agent of the Company and shall inure to the benefit of
Director's heirs, executors and administrators.
12. Severability. Each of the provisions of this Agreement is a
separate and distinct agreement and independent of the others, so that if any or
all of the provisions hereof shall be held to be invalid or unenforceable for
any reason, such invalidity or unenforceability shall not affect the validity or
enforceability of the other provisions hereof or the obligation of the Company
to indemnify the Director to the full extent provided by the Bylaws or the
Delaware Law.
13. Governing Law; Venue and Jurisdiction. This Agreement shall be
interpreted and enforced in accordance with the laws of the State of Delaware,
without regard to the conflicts of law provisions thereof. The Company and
Director hereby irrevocably and unconditionally (i) agree that any action or
proceeding arising out of or in connection with this Agreement shall be brought
only in the Court of Chancery of the State of Delaware (the "Delaware Court"),
and not in any other State or federal court in the United States of America or
any court in any other country, (ii) consent to submit to the exclusive
jurisdiction of the Delaware Court for purposes of any action or proceeding
arising out of or in connection with this Agreement, (iii) waive any objection
to the laying of venue of any such action or proceeding in the Delaware Court,
and (iv) waive, and agree not to plead or to make, any claim that any such
action or proceeding brought in the Delaware Court has been brought in an
improper or otherwise
6
<PAGE> 7
inconvenient forum.
14. Binding Effect. This Agreement shall be binding upon Director
and upon the Company, its successors and assigns, and shall inure to the benefit
of Director, his heirs, personal representatives and assigns and to the benefit
of the Company, its successors and assigns.
15. Amendment and Termination. No amendment, modification,
termination or cancellation of this Agreement shall be effective unless in
writing signed by both parties hereto.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
on and as of the day and year first above written.
ARTISTdirect, Inc.
a Delaware corporation
----------------------------------------
By: Marc P. Geiger
Its Chief Executive Officer
DIRECTOR
----------------------------------------
Name:
----------------------------------
7
<PAGE> 1
EXHIBIT 10.30
OFFICER'S INDEMNIFICATION AGREEMENT
THIS OFFICER'S INDEMNIFICATION AGREEMENT ("Agreement") is made and
entered into as of __________ by and between ARTISTdirect, Inc., a Delaware
corporation (the "Company"), and __________________ ("Officer").
R E C I T A L S
A. Officer, as the _____________ of the Company, performs a
valuable service in such capacity for the Company;
B. The stockholders of the Company have adopted Bylaws (the
"Bylaws") providing for the indemnification of the officers, directors, agents
and employees of the Company to the maximum extent authorized by Section 145 of
the Delaware General Corporation Law, as amended (the "Delaware Law");
C. The Bylaws and the Delaware Law, by their non-exclusive
nature, permit contracts between the Company, its officers and the members of
its Board of Directors with respect to indemnification of such persons; and
D. In accordance with the authorization as provided by the
Delaware Law, the Company has purchased and presently maintains or will shortly
hereafter purchase and thereafter maintain, a policy or policies of directors
and officers liability insurance ("D & O Insurance"), covering certain
liabilities which may be incurred by its directors and officers in the
performance as directors of the Company;
E. As a result of developments affecting the terms, scope and
availability of D & O Insurance, there exists general uncertainty as to the
extent of protection afforded members of the Board of Directors and officers of
the Company by such D & O Insurance and by statutory and Bylaw indemnification
provisions; and
F. In order to induce Officer to continue to serve as an
executive officer of the Company, the Company has determined and agreed to enter
into this contract with Officer.
NOW, THEREFORE, in consideration of Officer's continued service
to the Company after the date hereof, the parties hereto agree as follows:
1. Indemnity of Officer. The Company hereby agrees to hold
harmless and indemnify Officer to the fullest extent authorized or permitted by
the provisions of the Delaware Law, as may be amended from time to time, and by
the Bylaws as they exist as of the date hereof.
2. Additional Indemnity. Subject only to the exclusions set forth
in Section 3 hereof, the Company hereby further agrees to hold harmless and
indemnify Officer:
1
<PAGE> 2
(a) against any and all expenses (including reasonable
attorneys' fees), witness fees, judgments, fines and amounts paid in settlement
actually and reasonably incurred by Officer in connection with any threatened,
pending or completed action, suit or proceeding, whether civil, criminal,
administrative or investigative (including an action by or in the right of the
Company) to which Officer is, was or at any time becomes a party, or is
threatened to be made a party, by reason of the fact that Officer is or was an
officer of the Company, or is or was serving or at any time serves at the
request of the Company as an officer or director of another corporation,
partnership, joint venture, trust, employee benefit plan or other enterprise;
and
(b) otherwise to the fullest extent as may be provided to
Officer by the Company under the non-exclusivity provisions of Section 6 of
Article VII of the Bylaws of the Company.
3. Limitations on Additional Indemnity. No indemnity pursuant to
Section 2 hereof shall be paid by the Company:
(a) except to the extent the aggregate of losses to be
indemnified thereunder exceeds the sum of such losses for which the Officer is
indemnified pursuant to Section 1 hereof or pursuant to any directors and
officers liability insurance purchased and maintained by the Company;
(b) in respect to remuneration paid to Officer if it shall
be determined by a final judgment or other final adjudication that such
remuneration was in violation of law;
(c) on account of any suit in which judgment is rendered
against Officer for an accounting of profits, made from the purchase or sale by
Officer of securities of the Company, pursuant to the provisions of Section
16(b) of the Securities Exchange Act of 1934 and amendments thereto or similar
provisions of any federal, state or local statutory law;
(d) on account of Officer's conduct which is finally
adjudged to have been knowingly fraudulent or deliberately dishonest, or to
constitute willful misconduct;
(e) on account of Officer's conduct which is the subject
of an action, suit or proceeding described in Section 7(c)(ii) hereof;
(f) on account of any action, claim or proceeding (other
than a proceeding referred to in Section 8(b) hereof) initiated by the Officer
unless such action, claim or proceeding was authorized in the specific case by
action of the Board of Directors; and
(g) if a final decision by a court having jurisdiction in
the matter shall determine that such indemnification is not lawful (and, in this
respect, both the Company and Officer have been advised that the Securities and
Exchange Commission believes that indemnification for liabilities arising under
the federal securities laws is against public policy and is, therefore,
unenforceable and that claims for indemnification should be submitted to
appropriate courts for adjudication).
2
<PAGE> 3
4. Contribution. If the indemnification provided in Sections 1
and 2 hereof is unavailable by reason of a court decision described in Section
3(g) hereof based on grounds other than any of those set forth in paragraphs (b)
through (f) of Section 3 hereof, then in respect of any threatened, pending or
completed action, suit or proceeding in which the Company is jointly liable with
Officer (or would be if joined in such action, suit or proceeding), the Company
shall contribute to the amount of expenses (including reasonable attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred and paid or payable by Officer in such proportion as is appropriate to
reflect (i) the relative benefits received by the Company on the one hand and
Officer on the other hand from the transaction from which such action, suit or
proceeding arose, and (ii) the relative fault of the Company on the one hand and
of Officer on the other in connection with the events which resulted in such
expenses, judgments, fines or settlement amounts, as well as any other relevant
equitable considerations. The relative fault of the Company on the one hand and
of Officer on the other shall be determined by reference to, among other things,
the parties' relative intent, knowledge, access to information and opportunity
to correct or prevent the circumstances resulting in such expenses, judgments,
fines or settlement amounts. The Company agrees that it would not be just and
equitable if contribution pursuant to this Section 4 were determined by pro rata
allocation or any other method of allocation which does not take account of the
foregoing equitable considerations.
5. Continuation of Obligations. All agreements and obligations of
the Company contained herein shall continue during the period Officer is an
executive officer of the Company (or is or was serving at the request of the
Company as an executive officer or director of another corporation, partnership,
joint venture, trust, employee benefit plan or other enterprise) and shall
continue thereafter so long as Officer shall be subject to any possible claim or
threatened, pending or completed action, suit or proceeding, whether civil,
criminal or investigative, by reason of the fact that Officer was an executive
officer of the Company or serving in any other capacity referred to herein.
6. Notification and Defense of Claim. Not later than thirty (30)
days after receipt by Officer of notice of the commencement of any action, suit
or proceeding, Officer will, if a claim in respect thereof is to be made against
the Company under this Agreement, notify the Company of the commencement
thereof, but the omission so to notify the Company will not relieve the Company
from any liability which it may have to Officer otherwise than under this
Agreement. With respect to any such action, suit or proceeding as to which
Officer notifies the Company of the commencement thereof:
(a) the Company will be entitled to participate therein at
its own expense;
(b) except as otherwise provided below, to the extent that
it may wish, the Company jointly with any other indemnifying party similarly
notified will be entitled to assume the defense thereof, with counsel reasonably
satisfactory to Officer. After notice from the Company to Officer of its
election so as to assume the defense thereof, the Company will not be liable to
Officer under this Agreement for any legal or other expenses subsequently
incurred
3
<PAGE> 4
by Officer in connection with the defense thereof other than reasonable costs of
investigation or as otherwise provided below. Officer shall have the right to
employ its counsel in such action, suit or proceeding, but the fees and expenses
of such counsel incurred after notice from the Company of its assumption of the
defense thereof shall be at the expense of Officer unless (i) the employment of
counsel by Officer has been authorized by the Company, (ii) Officer shall have
reasonably concluded, based on the advice of counsel, that there may be a
conflict of interest between the Company and Officer in the conduct of the
defense of such action or (iii) the Company shall not in fact have employed
counsel to assume the defense of such action, in each of which cases the fees
and expenses of Officer's separate counsel shall be at the expense of the
Company. The Company shall not be entitled to assume the defense of any action,
suit or proceeding brought by or on behalf of the Company or as to which Officer
shall have made the conclusion provided for in (ii) above; and
(c) the Company shall not be liable to indemnify Officer
under this Agreement for any amounts paid in settlement of any action or claim
effected without its written consent. Company shall be permitted to settle any
action except that it shall not settle any action or claim in any manner which
would impose any penalty or limitation on Officer without Officer's written
consent. Neither the Company nor Officer will unreasonably withhold its consent
to any proposed settlement.
7. Advancement and Repayment of Expenses.
(a) In the event that Officer employs his own counsel
pursuant to Section 6(b)(i) through (iii) above, the Company shall advance to
Officer, prior to any final disposition of any threatened or pending action,
suit or proceeding, whether civil, criminal, administrative or investigative,
any and all reasonable expenses (including legal fees and expenses) incurred in
investigating or defending any such action, suit or proceeding within ten (10)
days after receiving copies of invoices presented to Officer for such expenses.
(b) Officer agrees that Officer will reimburse the Company
for all reasonable expenses paid by the Company in defending any civil or
criminal action, suit or proceeding against Officer in the event and only to the
extent it shall be ultimately determined by a final judicial decision (from
which there is no right of appeal) that Officer is not entitled, under the
provisions of the Delaware Law, the Bylaws, this Agreement or otherwise, to be
indemnified by the Company for such expenses.
(c) Notwithstanding the foregoing, the Company shall not
be required to advance such expenses to Officer if Officer (i) commences any
action, suit or proceeding as a plaintiff unless such advance is specifically
approved by a majority of the Board of Directors or (ii) is a party to an
action, suit or proceeding brought by the Company and approved by a majority of
the Board which alleges willful misappropriation of corporate assets by Officer,
wilfull disclosure of confidential information in bad faith and in violation of
Officer's fiduciary or contractual obligations to the Company, or any other
willful and deliberate breach in bad faith of Officer's duty to the Company or
its stockholders.
4
<PAGE> 5
8. Enforcement.
(a) The Company expressly confirms and agrees that it has
entered into this Agreement and assumed the obligations imposed on the Company
hereby in order to induce Officer to continue as an officer of the Company, and
acknowledges that Officer is relying upon this Agreement in continuing in such
capacity.
(b) In the event Officer is required to bring any action
to enforce rights or to collect moneys due under this Agreement and is
successful in such action, the Company shall reimburse Officer for all Officer's
reasonable fees and expenses in bringing and pursuing such action.
9. Subrogation. In the event of payment under this agreement, the
Company shall be subrogated to the extent of such payment to all of the rights
of recovery of Officer, who shall execute all documents required and shall do
all acts that may be necessary to secure such rights and to enable the Company
effectively to bring suit to enforce such rights.
10. Non-Exclusivity of Rights. The rights conferred on Officer by
this Agreement shall not be exclusive of any other right which Officer may have
or hereafter acquire under any statute, provision of the Company's Certificate
of Incorporation or Bylaws, agreement, vote of stockholders or directors, or
otherwise, both as to action in his official capacity and as to action in
another capacity while holding office.
11. Survival of Rights. The rights conferred on Officer by this
Agreement shall continue after Officer has ceased to be an officer, employee or
other agent of the Company and shall inure to the benefit of Officer's heirs,
executors and administrators.
12. Severability. Each of the provisions of this Agreement is a
separate and distinct agreement and independent of the others, so that if any or
all of the provisions hereof shall be held to be invalid or unenforceable for
any reason, such invalidity or unenforceability shall not affect the validity or
enforceability of the other provisions hereof or the obligation of the Company
to indemnify the Officer to the full extent provided by the Bylaws or the
Delaware Law.
13. Governing Law; Venue and Jurisdiction. This Agreement shall
be interpreted and enforced in accordance with the laws of the State of
Delaware, without regard to the conflicts of law provisions thereof. The Company
and Officer hereby irrevocably and unconditionally (i) agree that any action or
proceeding arising out of or in connection with this Agreement shall be brought
only in the Court of Chancery of the State of Delaware (the "Delaware Court"),
and not in any other State or federal court in the United States of America or
any court in any other country, (ii) consent to submit to the exclusive
jurisdiction of the Delaware Court for purposes of any action or proceeding
arising out of or in connection with this Agreement, (iii) waive any objection
to the laying of venue of any such action or proceeding in the Delaware Court,
and (iv) waive, and agree not to plead or to make, any claim that any such
action or proceeding brought in the Delaware Court has been brought in an
improper or otherwise
5
<PAGE> 6
inconvenient forum.
14. Binding Effect. This Agreement shall be binding upon Officer
and upon the Company, its successors and assigns, and shall inure to the benefit
of Officer, his heirs, personal representatives and assigns and to the benefit
of the Company, its successors and assigns.
15. Amendment and Termination. No amendment, modification,
termination or cancellation of this Agreement shall be effective unless in
writing signed by both parties hereto.
6
<PAGE> 7
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement on and as of the day and year first above written.
ARTISTdirect, Inc.
a Delaware corporation
By: Marc P. Geiger
Its Chief Executive Officer
OFFICER
Name:
7
<PAGE> 1
EXHIBIT 10.31
12/15/99
AUDIO SAMPLE LICENSE AGREEMENT
MAVERICK RECORDING COMPANY
9348 Civic Center Drive
Beverly Hills, California 90210
Dated: As of December 20, 1999
ARTISTdirect, INC.
17835 Ventura Boulevard
Suite 310
Encino, California 91316
Gentlemen:
This letter, when signed by you, or upon your use of any Sample, shall
constitute your agreement (the "Agreement") with Maverick Recording Company
("Maverick") on behalf of itself and the applicable artist:
1. Maverick grants to you the non-exclusive right to use for promotional
purposes only as described below up to thirty (30) contiguous seconds of any
track of audio material provided to you from time to time by Maverick. Such
audio material is referred to as "Property," and the items of Property selected
by you for use hereunder are referred to as "Samples."
2. You may use Samples only as follows: you may disseminate, display and/or
perform Samples to third-party users of a site (a "Site") on an "online"
database that is accessible to multiple users, such as the Internet or the World
Wide Web (collectively, the "Net"). Your use of Samples is also subject to any
restrictions of which we advise you at any time. You will notify Maverick of the
Internet address of any Site on which you are using Samples.
3. Your use of audio Samples requires the consent of music publishers. You
hereby warrant that you will obtain all necessary consents and indemnify
Maverick from any and all claims (including attorney's fees) by third parties in
connection with your use of Samples.
4. Your right to use any Sample on a Site shall commence as of the date hereof,
and shall terminate on December 31, 2001.
5. Whenever you disseminate, display and/or perform any Sample on a Site, you
shall cause to be displayed on such site (i) the appropriate copyright
information, including, without limitation, the name of the artist's album and
record label, and (ii) the following notice:
"Any reproduction, publication, further distribution or public
exhibition of materials provided at this site, in whole or in part, is
strictly prohibited."
1
<PAGE> 2
6. Except as may technically be required to adapt a Sample for use on the Net,
you may not alter the Property, or any Sample, in any manner whatsoever.
7. This Agreement sets forth the entire agreement of the parties hereto
regarding the matters to which this Agreement relates, and supersedes and
terminates any and all prior agreements and understandings relating thereto.
Maverick shall have the right to equitable relief to enforce this Agreement. You
may not transfer, assign or sub-license this Agreement or the rights granted to
you hereunder. 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.
Please confirm your agreement to the foregoing by signing in the space
provided below. Please note that your use of the Samples shall constitute such
agreement and acceptance.
Very truly yours,
MAVERICK RECORDING COMPANY
By: /s/ GUY OSEARY
---------------------------
Guy Oseary
Co-Chief Executive Officer
Accepted and Agreed:
ARTISTdirect, INC.
By: /s/ KEITH YOKOMOTO
-------------------------------------
Keith Yokomoto
President and Chief Operating Officer
2
<PAGE> 1
EXHIBIT 10.32
12.15.99
INTERNET VIDEO LICENSE AGREEMENT
THIS AGREEMENT is made as of the 20th day of December, 1999 BETWEEN:
1. MAVERICK RECORDING COMPANY ("Maverick") of 9348 Civic Center Drive,
Beverly Hills, California 90210; and
2. ARTISTdirect, INC. ("ADI") of 17835 Ventura Boulevard, Suite 310,
Encino, California 91316.
BACKGROUND
A. WHEREAS, Maverick, in order to promote the sale and distribution of
phonorecords and audio-visual music products throughout the "Territory"
(as hereinafter defined in subparagraph 1.01(o)), licenses the use of
"Maverick Videos" (as hereinafter defined in subparagraph 1.01(q)); and
B. WHEREAS, ADI intends to "Stream" (as hereinafter defined in
subparagraph 1.01(l)) Maverick Videos from "Licensed Music Sites" (as
hereinafter defined in subparagraph 1.01(e)).
C. NOW THEREFORE, the parties hereto have agreed to the terms and
conditions set forth below with respect to the non-exclusive use by ADI
of Maverick Videos on Licensed Music Sites.
THE PARTIES AGREE AS FOLLOWS:
1. DEFINITIONS AND INTERPRETATION
1.01 Definitions Unless defined elsewhere in this Agreement, capitalized
terms shall have the meanings ascribed to them below:
(a) "ENDUSER DEVICE": any device (such as a computer or a Web TV) which is
capable of receiving and playing/displaying the audio-visual output of
a Streamed Video.
(b) "EXCERPT": means a continuous audio-visual portion of a Maverick Video
where no more than 30 seconds thereof may be accessed by the enduser or
viewed by a viewer.
(c) Intentionally deleted.
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 Maverick, which such Music Site on a gratis
basis (A) Streams Videos in a sequence designated by ADI on a
continuous 24-hour, seven-day-a-week basis (i.e., as part of a
"Pre-Programmed Stream") or (B) Streams particular Videos at the demand
of an enduser (i.e., as part of an "On-Demand Stream"). Without
limiting the foregoing, "Licensed Music Site" shall include all of
those "pages" on a Music Site: (w) that constitute "home pages"; (x)
that direct an enduser to a Video; (y) through which an enduser
navigates in order to view a Video; or (z) from which an enduser can
Stream a Video.
(f) "MASTER": a first generation color copy of the fully-edited titled and
assembled electronic master of a Maverick Video (a "Videotape Copy")
or, at Maverick's election, a copy of such electronic master digitized
by Maverick in a format compatible with ADI's technical requirements (a
"Digitized Copy").
(g) "MUSIC SITE": a non-subscription, music audio-visual programming
service which may be advertiser-supported, which: (i) is delivered over
the Internet (which may also include delivery via broadband
technology); (ii) is transmitted from fileservers exclusively located
in the United States using Streaming technologies; (iii) uses English
as the principal language spoken by hosts or used in textual, graphic
or interstitial programming; and (iv) if such service transmitted
digital audio data only, rather than digital audio-visual data (other
than with respect to On-Demand Streams) would be subject to statutory
licensing pursuant to Paragraph 2, Subsection d, Section 114 of title
17, United States Code (the "Digital Millennium Copyright Act").
(h) "ON-DEMAND STREAM FRACTION": a fraction, the numerator of which is that
number of transmissions to an individual enduser of Maverick Videos (in
whole or in part) other than Excerpts on a particular Licensed Music
Site as part of an On-Demand Stream and the denominator of which is
that number of transmissions to an individual enduser of Videos (in
whole or in part),
2
<PAGE> 3
including Maverick Videos, on such particular Licensed Music Site as
part of an On-Demand Stream, as determined in a calendar quarter.
(i) "ON-DEMAND STREAM RECEIPTS": [***]*.
(j) "PRE-PROGRAMMED STREAM FRACTION": a fraction, the numerator of which is
that number of transmissions to an individual enduser of Maverick
Videos (in whole or in part) other than Excerpts on a particular
Licensed Music Site as part of a Pre-Programmed Stream and the
denominator of which is that number of transmissions to an individual
enduser of Videos (in whole or in part), including Maverick Videos, on
such particular Licensed Music Site as part of a Pre-Programmed Stream,
as determined in a calendar quarter.
(k) "PRE-PROGRAMMED STREAM RECEIPTS": [***]*.
(l) "STREAM(s)(ed)(ing)": a public performance of any duration via the
Internet that permits an enduser to view data contemporaneously with
its reception by an Enduser Device in such a manner that the data is
not copied, duplicated or stored in such Enduser Device except by way
of temporary buffering.
(m) "TERM": shall commence on the date of this Agreement and end on
December 31, 2001, unless sooner terminated as set forth herein.
(n) "TERM YEAR": each separate, consecutive 12-month period of the Term.
(o) "TERRITORY": worldwide.
(p) "VIDEO": an audio-visual work embodying the sound recording of a single
musical composition in synchronization with visual images intended
primarily for promotional use.
(q) "MAVERICK VIDEO": any Video with respect to which Maverick has
promotional exhibition rights in the Territory (a "Controlled Video")
that Maverick wishes to license to unaffiliated third parties for
broadcast television exhibition or to unaffiliated third party Music
Sites for Streaming, provided that the soundtrack of such Video is a
duplicate of a sound recording owned or controlled for the Territory by
Maverick. "Maverick Videos" shall not include: (i) any Videos
commercially exhibited prior to the commencement of the Term; or (ii)
any Video which is part of a long-form audio-visual program and is not
distributed or licensed by Maverick separately therefrom. [***]*.
- ----------
* 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, Maverick grants to ADI a non-exclusive license to
digitally encode and duplicate Maverick Videos in their entirety for
duplication on ADI's fileservers for the sole purpose of producing
programming containing Maverick Videos for Streaming on Licensed Music
Sites.
2.02 Streaming Right Subject to the terms and conditions of this Agreement
and any contractual restrictions imposed upon Maverick in connection
with Maverick Videos of which Maverick has advised ADI in writing with
reasonable advance notice, during the Term Maverick grants to ADI a
non-exclusive license: (a) to permit endusers to access via Streaming
Maverick Videos in their entirety as part of a Pre-Programmed Stream on
a Licensed Music Site; and (b) to permit endusers to access via
Streaming Maverick Videos in their entirety as part of an On-Demand
Stream on a Licensed Music Site; provided, however, that endusers shall
not be able to Stream more than one Maverick Video at a time as part of
a continuous transmission (i.e., endusers shall not be able to Stream a
series of Maverick Videos as part of one continuous transmission).
Continuously during the Streaming of any Maverick Video as part of an
On-Demand Stream and in a space that is "above the fold," near or
adjacent to, and on the same page as such Maverick Video, ADI shall, at
ADI's sole cost and expense, provide a button permitting an enduser
"one-click" access to the "home page" for Maverick's official site of
the applicable artist (or, if the artist does not have an official
site, Maverick's site), provided that Maverick delivers to ADI, prior
to or no later than Maverick's delivery of the applicable Maverick
Video, the foregoing "home page" information. If other links are
provided to third-party sites for the same artist, then Maverick's link
shall be the first listed and the most prominent.
2.03 Advertising and Promotion Subject to the terms and conditions of this
Agreement and any contractual restrictions imposed upon Maverick in
connection with Maverick Videos of which Maverick has advised ADI in
writing, during the Term, ADI may utilize Excerpts in any and all media
to
4
<PAGE> 5
advertise, promote and publicize the exhibition of Maverick Videos on
the Licensed Music Sites; provided, however, that, without Maverick's
written consent, no more than one Excerpt per artist may be used for
such purpose.
2.04 Names and Likenesses Subject to the terms and conditions of this
Agreement and any contractual restrictions imposed upon Maverick in
connection with Maverick Videos of which Maverick has advised ADI in
writing with reasonable advance notice, during the Term, ADI may use
the name and Maverick-approved or -supplied likenesses, such approval
not to be unreasonably withheld or delayed, of such artist for the
purposes of advertising, promoting or publicizing the Streaming by ADI
of such Maverick Video on the applicable Licensed Music Site, but not
in a manner which implies an endorsement of any service (including,
without limitation, Licensed Music Sites) or product without Maverick's
prior consent.
2.05 Reservation of Rights
(a) As between Maverick and ADI, Maverick retains all ownership rights in
Masters and Maverick Videos including, without limitation, all
copyrights and trademarks in Masters and Maverick Videos; provided,
however, that Maverick shall not use in any manner any Digitized Copy
of a Maverick Video created by or at the direction of ADI, unless
Maverick has made payment therefor in accordance with paragraph 4.01.
(b) ADI shall not have any rights in Maverick Videos other than as
expressly provided in this Agreement.
2.06 Withdrawal Rights
ADI agrees that ADI's rights to Stream any Maverick Video may be
terminated by Maverick upon one week's prior written notice to ADI if
any of the following conditions are met:
(a) If Maverick, in Maverick's good faith business judgment believes that
such termination is necessary for significant artist relations
purposes; or
(b) If Maverick's rights in the Maverick Video terminate; or
(c) If Maverick is notified or otherwise becomes aware of an apparently
bona fide third-party claim that the transmission of the Maverick Video
infringes rights owned by others.
5
<PAGE> 6
3. PROHIBITIONS ON ADI
ADI shall only have the right to exploit or use Maverick Videos as
specifically authorized in Paragraph 2 of this Agreement, or as
otherwise agreed to by Maverick in writing in its sole discretion, and
may not exploit or use Maverick Videos in any other manner. Without
limiting the foregoing, unless Maverick agrees otherwise in writing,
during the Term, neither ADI nor any party acting on behalf of ADI
shall, directly or indirectly:
(a) copy or duplicate any Maverick Video except as ADI may reasonably
require to exercise ADI's rights under this Agreement;
(b) Stream (or encode to permit the Streaming of) the audio portion of any
Maverick Video at a transmission rate greater than [***]* or the video
portion of any Maverick Video at a transmission rate greater than
[***]*;
(c) Stream the soundtrack of any Maverick Video separately from the visual
portion thereof;
(d) Stream the visual portion of any Maverick Video separately from the
soundtrack thereof, except to the extent that ADI uses only the visual
portion of an Excerpt to exercise ADI's rights under subparagraph 2.03
above without any soundtrack whatsoever;
(e) Stream any Maverick Video other than in conjunction with the sequence
of images originally synchronized with the sound recording included
thereon;
(f) Stream any Maverick Video on a "pay-per-view" or "pay-per-play" basis;
(g) exhibit any advertisement or commercial of any nature during or
associated with the Streaming of any Maverick Video in a manner which
reasonably implies an endorsement by the artist whose performances are
contained on such Maverick Video;
(h) license or authorize a third party (whether or not affiliated with ADI)
to "deep link" to a non-Licensed Music Site for the purpose of
Streaming a Maverick Video; or
(i) except as expressly set forth in Paragraph 5, edit or otherwise alter
any Maverick Video, including, without limitation, the deletion or
erasing of any signal now or hereafter contained therein to facilitate
the automatic identification and/or logging of Maverick Videos so
Streamed and/or to restrict
- ----------
* Confidential treatment has been requested for the bracketed portion. The
confidential redacted portion has been omitted and filed separately with the
Securities and Exchange Commission.
6
<PAGE> 7
the reproduction of Maverick Videos so Streamed (a "Protective
Signal").Should ADI become aware that any party (whether or not acting
on behalf of ADI) is circumventing the provisions of this Paragraph 3
(a "Circumvention Event"), ADI shall promptly notify Maverick in
writing thereof and ADI shall, at ADI's sole cost and expense, use
ADI's commercially reasonable efforts to prevent such circumvention.
4. MAVERICK VIDEOS
4.01 Servicing of Masters In respect of each Maverick Video, Maverick shall
make a Master available to ADI for collection at ADI's expense, no
later than the date Maverick makes the applicable Maverick Video
available for delivery to other unaffiliated third parties. Should
Maverick provide ADI with a Master in Videotape Copy form, ADI shall
provide Maverick, at Maverick's request, with a Digitized Copy of such
Master provided that Maverick pays ADI's actual duplication and
shipping expenses in connection therewith.
4.02 Treatment of Maverick Videos and Masters
ADI shall:
(a) maintain all Masters and all copies of Masters on ADI's premises and
safeguard the same from any loss, damage, theft, unauthorized use,
copying, storage or duplication by others;
(b) be solely responsible for any loss, theft or damage to Masters and
copies of Masters in their possession and any unauthorized use,
copying, storage or duplication by others thereof; and
(c) upon the expiration of the Term or termination of this Agreement, at
Maverick's election, ADI shall either: (i) (A) to the extent that
Maverick made Digitized Copies of any Masters and provided them to ADI
hereunder, return all such Masters and copies of such Masters to
Maverick at ADI's expense; (B) to the extent that ADI made Digitized
Copies of any Masters hereunder, but has not provided Digitized Copies
of such Masters to Maverick pursuant to subparagraph 4.01 above, return
all such Masters and copies of such Masters to Maverick and Maverick
shall pay ADI's actual duplication and shipping expenses; and (C) to
the extent that ADI made Digitized Copies of any Masters hereunder and
has provided Digitized Copies of such Masters to Maverick pursuant to
subparagraph 4.01 above, return all such Masters and copies of such
Masters to Maverick at ADI's expense; or (ii) or destroy all Masters
and all copies of Masters at ADI's sole cost and expense, and provide
Maverick with a written affidavit verifying such destruction.
7
<PAGE> 8
5. ADI'S UNDERTAKINGS
During the Term, ADI shall have the obligation, at ADI's sole cost and
expense:
(a) to exhibit the following information continuously during the Streaming
of each Maverick Video in a space adjacent to the Maverick Video,
provided that Maverick submits such information to ADI in a timely
manner:
(i) the title of the musical composition on the Maverick Video;
(ii) the title of the record or home video that includes the
performance of the musical composition contained in the Maverick
Video;
(iii) the name of the artist performing the musical composition
contained in the Maverick Video;
(iv) the name of the record company and the URL of its "home page";
and
(v) the name of the motion picture, if any, from which the Maverick
Video is derived.
(b) to obtain public performance rights licenses, if necessary, covering
the performance of the musical compositions in Maverick Videos; and
(c) to transmit as part of each Maverick Video Streamed on Licensed Music
Sites any Protective Signal contained in the Maverick Videos; provided,
however, that the transmission of such Protective Signal does not
represent a recurrent and unreasonable cost to ADI and in no way leads
to the deterioration of Streaming quality of Maverick Videos.
6. MAVERICK'S UNDERTAKINGS
Maverick shall deliver to ADI, at Maverick's expense (where available
and reasonably contemporaneously with the delivery of the relevant
Masters) artwork, promotional material, biographical material and other
information in relation to Maverick Videos and the relevant artists, to
be used by ADI solely for promotional purposes on Licensed Music Sites.
7. COMPENSATION
7.01 Royalties ADI shall pay to Maverick royalties equal to: [***]*.
- ----------
* Confidential treatment has been requested for the bracketed portion. The
confidential redacted portion has been omitted and filed separately with the
Securities and Exchange Commission.
8
<PAGE> 9
7.02 Banner Ads
ADI shall make "Banner Ads" (the "Banner Ads") available to Maverick at
[***]*.
8. ACCOUNTING AND PAYMENTS; MARKET RESEARCH
8.01 Accounting Within 30 days following each calendar quarter of the Term,
ADI shall account for and pay to Maverick any royalties payable in
respect of such quarter and shall furnish to Maverick a statement
setting forth:
(a) a listing of all Maverick Videos Streamed on each Licensed Music Site
during such quarter;
(b) the number of Maverick Videos Streamed on each Licensed Music Site as
compared to the total number of Videos Streamed on each such Licensed
Music Site during such quarter;
(c) Pre-Programmed Stream Receipts and On-Demand Stream Receipts for such
quarter and the sources thereof;
(d) the number of times that Maverick Videos were Streamed on each Licensed
Music Site as compared to the total number of times that Videos were
Streamed on each such Licensed Music Site during such quarter;
(e) the number of "pageviews" of the Banner Ads during such quarter and the
number of "clickthroughs" from the Banner Ads to URLs designated by
Maverick during such quarter. ADI shall also furnish Maverick with the
information described in subparagraphs 8.01(a), (b) and (d) on a weekly
basis within 10 days following the end of each week during the Term.
8.02 Audit Rights
(a) ADI shall keep complete and accurate books and records of account
relating to the Streaming of Maverick Videos and Videos maintained to a
standard sufficient to enable an audit trail to be established.
- ----------
* 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) Maverick shall have the right during the Term and during the two-year
period following the termination or expiration of the Term, at
Maverick's sole cost and expense, to have a certified public accountant
inspect ADI's books and records no more than once during any year. This
inspection shall take place at ADI's office, during normal business
hours on not less than 30 days' written notice. The auditor appointed
by Maverick may inspect and take copies of the books and records of ADI
solely for the purpose of verifying the calculation of royalties
accruing to Maverick under this Agreement and verifying ADI's
compliance with Paragraph 7.
(c) Each statement rendered under this Agreement shall be deemed final and
binding upon Maverick as an account stated and shall not be subject to
any claim or objection by Maverick unless Maverick notifies ADI of
Maverick's objection to the applicable statement, stating the basis
thereof in reasonable detail within three (3) years after the date such
statement was rendered to Maverick hereunder.
8.03 Market Research
ADI and Maverick shall cooperate with each other in conducting market
research, at Maverick's sole cost and expense, designed to determine
the effect of the Licensed Music Sites on consumer awareness of artists
featured in Maverick Videos and sales of such artist's records. ADI and
Maverick shall use the results of such research for internal purposes
only. Such market research shall be subject to the approval of any
applicable artists (but only if required by written agreement between
ADI and such artist) and shall be subject to the published privacy
policy of the applicable Licensed Music Site (if any). Nothing
contained herein shall be deemed to require Maverick to conduct any
such market research.
9. WARRANTIES AND INDEMNITY
9.01 ADI's Warranties
ADI represents and warrants that:
(a) ADI has full right and authority to enter into and to fulfill all of
ADI's obligations under this Agreement; and
(b) ADI shall comply with all licenses, laws and regulations relating to
its maintenance and transmission of Licensed Music Sites.
10
<PAGE> 11
9.02 Maverick's Warranties
(a) Maverick represents and warrants that Maverick has the right to enter
into and fulfill all of Maverick's obligations under this Agreement;
and
(b) Maverick makes no representation or warranty whatsoever with respect to
the non-dramatic performing rights in the musical compositions embodied
in the Maverick Videos.
9.03 Indemnity
(a) ADI does hereby indemnify, save and hold harmless Maverick and
Maverick's subsidiaries, affiliates, licensees, assigns, officers and
employees from any and all loss and damage (including, without
limitation, reasonable fees and disbursements of counsel incurred by
Maverick in any action or proceeding between ADI and Maverick or
between Maverick and any third party or otherwise) arising out of or
connected with any claim or act or omission by ADI which is
inconsistent with any of the representations or agreements made by ADI
in this Agreement or any breach of ADI's obligations hereunder or any
unauthorized use by ADI or any party acting on behalf of ADI of Masters
or Maverick Videos in connection with the advertising, promotion or
publicity of each Maverick Video or the name or likeness of any artist
who rendered services in connection with such Maverick Videos. Maverick
shall have the right at all times, in Maverick's sole discretion and at
Maverick's sole cost and expense, to retain or resume control of the
conduct relative to the defense of any claim to which the foregoing
indemnity applies. The foregoing indemnity shall be limited to claims
reduced to judgment or settled with ADI's prior written consent not to
be unreasonably withheld.
(b) Maverick does hereby indemnify, save and hold harmless ADI and ADI's
subsidiaries, affiliates, licensees, assigns, officers and employees
from any and all loss and damage (including, without limitation,
reasonable fees and disbursements of counsel incurred by ADI in any
action or proceeding between ADI and Maverick or between ADI and any
third party or otherwise) arising out of our connected with any claim
or act or omission by Maverick which is inconsistent with any of the
representations or agreements made by Maverick in this Agreement or any
breach of its obligations hereunder or any claim that any Maverick
Video or the content thereof violates the rights of any third party,
including, without limitation, libel, slander, defamation, copyright,
trademark, and rights of privacy and publicity. ADI shall have the
right at all times, in ADI's sole discretion and at ADI's sole cost and
expense, to retain or resume control of the conduct relative to the
defense of any claim to which the foregoing indemnity applies. The
foregoing indemnity shall be limited to
11
<PAGE> 12
claims reduced to judgment or settled with Maverick's prior written
consent not to be unreasonably withheld.
(c) The indemnitor shall give the indemnitee prompt written notice of any
claim to which the foregoing indemnity applies, and the indemnitor
shall have the right to participate in the defense of any such claim
through counsel of the indemnitor's own choice and at the indemnitor's
cost and expense.
10. TERMINATION
10.01 Maverick's Termination RightsMaverick may terminate this Agreement
immediately by written notice to ADI if, at any time during the Term:
(a) ADI goes in liquidation, receivership or administration or becomes
bankrupt, makes any arrangement for the benefit of ADI's creditors or
has a receiver appointed for any of ADI's assets; provided, that if
such proceeding is involuntary, then Maverick shall not have the right
to terminate the Term unless such proceeding is not dismissed within 90
days of the filing thereof;
(b) ADI breaches any material term or provision of this Agreement;
(c) the Licensed Music Sites cease, except for any instance of force
majeure, to be transmitted for a continuous period of 10 days; or
(d) if ADI does not succeed in preventing a Circumvention Event within 60
days following ADI's becoming aware thereof; provided, in the case of
any event set forth in subparagraph (b) above, Maverick shall have
given ADI written notice of such event and ADI shall have failed to
cure same within 30 days after ADI's receipt of such notice (or 10
business days if the event is ADI's failure to pay Maverick a sum
certain).
10.02 ADI's Termination Rights
ADI may terminate this Agreement immediately by written notice to
Maverick if: (a) at any time during the Term, Maverick goes into
liquidation, receivership or administration or becomes bankrupt, makes
any arrangement for the benefit of Maverick's creditors or has a
receiver appointed for any of Maverick's assets; provided, that if such
proceeding is involuntary, then ADI shall not have the right to
terminate the Term unless such proceeding is not dismissed within 90
days of the filing thereof; or (b) if Maverick breaches any material
term or provision of this Agreement and fails to cure such breach
within 30 days after ADI's written notice to Maverick of such breach.
12
<PAGE> 13
11. PROCEDURE UPON TERMINATION. Upon the expiration or termination of this
Agreement:
(a) ADI shall cease the Streaming of Maverick Videos on Licensed Music
Sites;
(b) ADI shall perform in accordance with the provisions of subparagraph
4.02(c); and
(c) should ADI terminate this Agreement pursuant to subparagraph 10.02
above, ADI shall have no further obligations to Maverick and Maverick
shall have no further obligations to ADI.
12. MISCELLANEOUS
12.01 Relationship of the Parties In performing its obligations under this
Agreement, each of the parties hereto shall be deemed an independent
contractor, and nothing in this Agreement shall in any way constitute
either party, or any of such party's officer or directors, an agent or
employee of the other party and this Agreement shall not be deemed to
constitute a partnership, joint venture or contract of employment
between the parties.
12.02 Service of Notices Any notice which either party hereto may desire to
give or which is required under the terms of this Agreement shall be
given in writing by registered or certified mail, return receipt
requested, or by telefax or by personal service (in all cases, all
charges prepaid) to ADI at the address first noted in the preamble to
this Agreement, Attn: Chief Financial Officer, or to such other address
to which ADI notifies Maverick in writing, with copies to Lenard &
Gonzalez, LLP, 1900 Avenue of the Stars, 25th Floor, Los Angeles,
California 90067, Attn: Allen D. Lenard, Esq., and to Maverick to the
address first noted in the preamble to this Agreement, Attn: General
Counsel. In the event any such notice is given by mail, such notice
shall be deemed to be given on the date five business days following
the date of such mailing. In the event any such notice is given by
personal delivery, such notice shall be deemed to be given on the date
personal delivery is made.
12.03 Confidentiality/Press Announcements Neither ADI nor Maverick nor their
respective affiliates may disclose to any third party (other than each
party's employees and professional advisors, in their capacity as such)
any information regarding the terms and conditions of this Agreement
without the prior written consent of the other party except:
(a) to the extent necessary to comply with the law or the legal process of
a court of competent jurisdiction or in administrative proceedings, in
which event the party making such disclosure must use its commercially
reasonable efforts to procure confidential treatment of such
information;
13
<PAGE> 14
(b) as part of its normal reporting or review procedure to its parent
companies, its auditors and its attorneys, provided that ADI and
Maverick inform these parties of the provisions of this subparagraph
12.03;
(c) to the extent necessary to comply with Maverick's contractual
obligations to third parties;
(d) to make press announcements approved in writing by both of the parties;
and
(e) to the extent such terms become public through no breach by either
party of this subparagraph 12.03.
In addition to the foregoing, ADI shall not disclose to any third party
(other than to ADI's employees, in their capacity as such): (i) the
identity of the Maverick Videos Streamed on a Licensed Music Site; (ii)
the number of Maverick Videos Streamed on a Licensed Music Site; or
(iii) the number of times that any Maverick Video was Streamed on a
Licensed Music Site.
12.04 Assignment/Sublicense Maverick may not assign, sublicense or
effectively assign or sublicense Maverick's rights or obligations under
this Agreement except to an affiliated or associated company or to a
person or entity acquiring all or substantially all of the stock or
assets of Maverick and subject to the assignee assuming Maverick's
obligations hereunder. ADI may not assign, sublicense or effectively
assign or sublicense any of ADI's rights or obligations under this
Agreement to any party. For the avoidance of doubt, ADI may not
syndicate ADI's programming containing Maverick Videos.
12.05 No Waiver No failure to exercise or delay in exercising any right,
power or privilege under this Agreement by either party shall operate
as a waiver of that right, power or privilege. Similarly, a single or
partial exercise of any right, power or privilege by either party shall
not preclude any other or further exercise of that right, power or
privilege.
12.06 Remedies Cumulative/Severability The rights and remedies contained in
this Agreement are cumulative and are not exclusive of any rights and
remedies provided by law, in equity or otherwise. If any provision of
this Agreement is prohibited by or contravenes any applicable law, or
is held by any court of competent jurisdiction or any other legally
constituted body having jurisdiction to make this determination to be
void, unlawful or unenforceable then that provision shall be severed
from the Agreement and rendered ineffective, as far as possible,
without modifying the remaining provisions of this Agreement.
14
<PAGE> 15
12.07 Entire Agreement/Amendments/Counterparts This Agreement contains the
entire agreement between the parties with respect to its subject matter
and supersedes any prior agreement or negotiation between the parties
on the subject matter of this Agreement. There are no representations,
agreements or understandings, oral or written, between the parties
relating to the subject matter of this Agreement which are not fully
expressed in this Agreement. No amendment, termination, waiver,
discharge or modification of this Agreement shall be effective unless
it is in writing and is signed by an authorized signatory of both
Maverick and ADI. This Agreement may be executed in one or more
counterparts and by facsimile signature, each of which shall be deemed
an original and all of which together shall be deemed one Agreement.
12.08 Litigation ADI shall notify Maverick if ADI becomes aware of any
unauthorized dealing by any third party in any Maverick Videos or in
Licensed Music Sites, and shall cooperate fully, at Maverick's cost, in
any dispute relating to Maverick's rights in Masters and Maverick
Videos as well as Maverick's rights under this Agreement. Maverick,
after written notice to ADI, may, at Maverick's sole cost and expense,
act in the name of ADI and Maverick to protect Maverick's rights under
this Agreement and ADI appoints Maverick ADI's attorney-in-fact to do
this; provided, however, that Maverick shall not be permitted to
execute any document on behalf of ADI without first affording ADI a
reasonable opportunity to execute such document itself. If Maverick
acts on ADI's behalf as permitted herein, Maverick shall keep ADI
informed on a current basis of such acts and all proceedings relating
thereto.
12.09 Governing Law This agreement has been entered into in the state of New
York, and the validity, interpretation and the laws of the state of New
York shall govern the legal effect of this Agreement. The New York
courts (state and federal), only, shall have jurisdiction of any
controversies regarding this Agreement; any action or other proceeding
which involves such a controversy shall be brought in these courts, in
New York County, and not elsewhere. Any process in any such action or
proceeding may, among other methods, be served upon ADI or Maverick, as
applicable, by delivering it or mailing it, by registered or certified
mail, return receipt requested, directed to the address first above
written. Any such delivery or mail service shall be deemed to have the
same force and effect as personal service within the state of New York.
15
<PAGE> 16
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
as of the date first above written.
ACCEPTED AND AGREED:
MAVERICK RECORDING COMPANY ARTISTdirect, INC.
By: /s/ GUY OSEARY By: /s/ KEITH YOKOMOTO
------------------------------ ---------------------------
Name: Guy Oseary Name: Keith Yokomoto
Title: Co-Chief Executive Officer Title: President and
Chief Operating Officer
16
<PAGE> 1
EXHIBIT 10.33
12.15.99
WEBCASTING TRANSMISSION LICENSE AGREEMENT
This Webcasting Transmission License Agreement ("Agreement"), dated as
of December 20, 1999, is made by and between Maverick Recording Company with its
principal offices at 9348 Civic Center Drive, Beverly Hills, California 90210,
("Licensor"), and ARTISTdirect, Inc., with its principal offices at 17835
Ventura Boulevard, Suite 310, Encino, California 91316 ("Licensee").
WHEREAS, Licensee operates the Web Site that digitally transmits sound
recordings to the public;
WHEREAS, Licensee wishes to obtain a license for certain transmissions
of sound recordings on the Web Site;
WHEREAS, Licensee has agreed to pay a royalty and provide certain
additional consideration for such license, and Licensor and Licensee have agreed
upon such consideration and other terms, which are reflected in this Agreement;
NOW, THEREFORE, and in consideration of the mutual promises contained
in this Agreement and for other good and valuable consideration, including the
consideration provided by Licensee in Section 3, the adequacy and sufficiency of
which are hereby acknowledged, the parties hereby agree as follows:
1. DEFINITIONS
1.1 "Confidential Information" means information submitted to Licensor
pursuant to Section 5.1, 5.2, 5.3 or 5.4.
1.2 "Excerpt" means a "Sample" (as defined in the Audio Sample License
Agreement between Licensor and Licensee of even date herewith) where no
more than 30 seconds thereof may be accessed by the Web Site User.
1.3 "First Transmission Date" means the date on which the Licensee makes the
first Payable Transmission of a sound recording in the Repertory.
1.4 "License Fee Report" means a report required by Section 5.
1
<PAGE> 2
1.5 "Payable Transmission" means each instance in which any portion of a
sound recording of a musical work in the Repertory other than an Excerpt
is delivered to a Web Site User via Web Site Transmissions (e.g., the
delivery of any portion of a single track from a compact disc to one
listener).
1.6 "Payable Transmission Rate" means the following: [***]*.
1.7 "Repertory" consists of all copyrighted sound recordings, including sound
recordings created during the term of this Agreement, in which Licensor
has or will have during the term of this Agreement the right to license
transmissions.
1.8 "Sound recordings" means such term as it is defined in Section 17 U.S.C.
Section 101.
1.9 "Territory" means the United States, its territories, commonwealths and
possessions.
1.10 "Web Site" means any Internet site or Internet sites which are: (a)(i)
majority-owned or wholly-owned or controlled by Licensee; and (ii)
wholly-programmed and operated by Licensee; or (b)(i) operated and
managed by Licensee and (ii) subject to comprehensive written web site
agreements between Licensee and recording artists (or such recording
artist's furnishing companies) ("Artists") of the type which Licensee
typically enters into with recording artists as of the date hereof;
provided, that such Artists are recording artists then-currently signed
to exclusive recording agreements with Licensor.
1.11 "Web Site Transmissions" means all digital audio transmissions to Web
Site Users from or through the Web Site of stations on the Web Site
created by Web Site Users in accordance with the parameters set out in
Exhibit A ("Web Site User Stations"), and does not include digital audio
transmissions made by any other means.
1.12 "Web Site Users" means all those who access the Web Site solely for
personal consumer use.
- --------
* Confidential treatment has been requested for the bracketed portion. The
confidential redacted portion has been omitted and filed separately with the
Securities and Exchange Commission.
2
<PAGE> 3
2. GRANT OF LICENSE
2.1 Licensor hereby grants to Licensee, during the term of this Agreement,
subject to the limitations set forth below, a limited nonexclusive
license to (a) transmit publicly any or all of the sound recordings in
the Repertory, within the Territory, by means of Web Site Transmissions
and (b) exhibit within the Territory album cover art in postage stamp
size adjacent to artist, album title and sound recording title
information with respect to a sound recording being transmitted pursuant
to this Agreement on the Web Site; provided, in each case, that (i)
Licensee complies with Section 17 U.S.C. 114(d)(2)(c)(i) and Section 17
U.S.C. Section 1101 and all of the terms and conditions of this Agreement
and (ii) the Web Site Transmissions comply with all non-financial terms
negotiated or determined by the Copyright Arbitration Royalty Panel
pursuant to Section 17 U.S.C. Section 114(f). [***]*.
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.
- --------
* 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
3. LICENSE FEES AND OTHER CONSIDERATION
3.1 [***]*, Licensee shall pay Licensor, for the license granted in Section
2.1, an amount equal to [***]*.
3.2 Licensee shall pay a finance charge of [***]* per month, or the maximum
rate permitted by law, whichever is less, from the date due, on any
required payment that is not made on or before its due date, without
prejudice to any other rights Licensor may have in connection with such
delinquency.
3.3 During the term of this Agreement, Licensee shall, within a reasonable
time after Licensor's written request setting forth the applicable IP
address, provide direct links, from the location on the Web Site where
artist, album title, and sound recording title information for each sound
recording is provided, (which shall be the same location on such Web Site
where Web Site Users access the transmission of such sound recording), to
one or more Web sites that provide for direct sales of substantially all
the sound recordings transmitted by Licensee on the Web Site, except to
the extent that such sales are conducted directly by Licensee from the
Web Site. In addition, at the option of Licensor, Licensee shall, within
a reasonable time after Licensor's written request setting forth the
applicable IP address, provide reasonably prominent "above the fold"
direct links from the location on the Web Site where information
regarding a particular recording artist is provided, (which shall be the
same location on such Web Site where Web Site Users access the
transmission of sound recordings), to a Web site operated by Licensor
relating to the relevant recording artist.
3.4 During the term of this Agreement, Licensee shall post an announcement on
the Web Site, in form and substance satisfactory to Licensor, concerning
the license limitations contained in Sections 2.2, 2.3, and 2.4, and, if
requested by Licensor, include a click wrap agreement in form and
substance satisfactory to Licensor, for acknowledgement by Web Site
Users.
4. TERM
4.1 The term of this Agreement commences on the First Transmission Date and
ends on December 31, 2001, unless earlier terminated pursuant to this
Section 4 or Section 8.
4.2 Either party may terminate this Agreement as to the other party if, at
any time, such other party shall file in any court or agency pursuant to
any statute or regulation of any state or country, a petition in
bankruptcy or insolvency or for reorganization or for an arrangement
- --------
* 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
or for the appointment of a receiver or trustee of the party or of its
assets, or if such other party proposes a written agreement of
composition or extension of its debts, or if such other party shall be
served with an involuntary petition against it, filed in any insolvency
proceeding, and such petition shall not be dismissed within sixty (60)
days after the filing thereof, or if such other party shall propose or be
a party to any dissolution or liquidation, or if such other party shall
make an assignment for the benefit of creditors.
4.3 If technology becomes widely available that permits Web Site Users to
create a separate, complete and usable copy of sound recordings
transmitted by Licensee, then Licensee, upon notice from Licensor or
otherwise obtaining information as to the existence of such technology,
shall make all commercial efforts to prevent the use of such technology
by Web Site Users. Licensee shall also implement technical protection
measures, if available, to prevent the use of such technology by Web Site
Users. In the event that such commercial efforts and technical measures
fail to prevent Web Site Users from using such technology, then the
Payable Transmission Rate shall no longer apply and the parties shall
immediately enter into good faith negotiations to determine an
appropriate increased Payable Transmission Rate.
4.4 Licensor may terminate this Agreement if Licensee transmits sound
recordings using multicast technology and fails to maintain a control
connection or other mechanism with Web Site Users that permits Licensee
to count reliably the number of Payable Transmissions so that Licensor
may reliably audit such count pursuant to Section 6.
5. LICENSE FEE REPORTS
5.1 Licensee shall submit a quarterly License Fee Report to Licensor for each
quarterly period during the term of this Agreement, by the twentieth day
of the following quarter. Licensee and Licensor shall mutually agree upon
a form of License Fee Report within sixty (60) days following the date of
this Agreement. Such License Fee Report shall provide reasonably detailed
information as to the number of Payable Transmissions during such
quarterly period and shall be certified to be accurate by an officer of
Licensee.
5.2 During the term of this Agreement, Licensee shall provide Licensor with
weekly reports, by the tenth day after the end of each week, regarding
the sound recordings accessed by Web Sites Users during the preceding
week. Such reports shall be in a form to be mutually agreed upon by
Licensor and Licensee within sixty (60) days following the date of this
Agreement. Such reports shall include information as to use by title;
artist; album; label; catalogue number; UPC Code (by December 31, 1999);
release date; ISRC code (when available); number of playing dates and
times of transmission; duration of sound recording; and such additional
information as Licensor reasonably requests; provided that such requests
shall not be effective in less than sixty (60) days from the date of the
request. In the event Licensee incurs additional actual out-of-pocket
costs as a result of furnishing such additional information, such
reasonable costs will be deducted from license fees payable for the
relevant period(s).
5
<PAGE> 6
5.3 During the term of this Agreement, Licensee agrees to submit such
additional information as may be required under applicable rules and
regulations of the Copyright Office, including without limitation 37
C.F.R. Section 201.36.
6. VERIFICATION OF LICENSE FEE REPORTS AND OTHER REPORTS
6.1 Licensor shall have the right to examine Licensee's books and records,
and Licensee agrees to obtain for Licensor the right to examine the books
and records of any partner in, or co-publisher of, the Web Site, in order
to verify any report required by this Agreement. Licensor may exercise
this right no more than once per calendar year. Licensor shall give
Licensee thirty (30) days' notice of its intention to conduct an
examination. Licensee agrees to furnish all pertinent books and records,
including electronic records, to Licensor's authorized representatives,
during customary business hours. Such books and records shall be kept by
Licensee in accordance with Generally Accepted Accounting Principles and
shall be retained for at least three (3) years following expiration of
the term of this Agreement. Notwithstanding the foregoing, Licensee shall
not be required to provide Licensor with the access provided in this
Section 6.1 if in the preceding twelve (12) months the Licensee's
independent auditor has completed and signed an audit report for an audit
that addresses all of the information that would have been requested by
and made available to Licensor, in which event Licensee shall provide to
Licensor the audit report, work papers and other information provided to
such auditor.
6.2 Licensee agrees to provide a third-party contractor selected by Licensor
(unless Licensee identifies a conflict of interest or other material fact
that should disqualify the contractor) with such reasonable additional
information and reasonable access to Licensee's premises and equipment,
and to cooperate with such contractor in making any inquiries of Licensee
and third parties who provided products or services to Licensee, as shall
reasonably be required for Licensor to verify the accuracy and
completeness of the Licensee Fee Reports provided under Section 5,
including without limitation Sections 5.1 and 5.2.
6.3 Expenses for any examination conducted by Licensor under Sections 6.1 and
6.2 shall be paid by Licensor unless such examination results in a
determination by the auditor conducting such examination that Licensee's
actual payments for the period examined were more than [***]* below the
payments required under this Agreement, in which case Licensee shall pay
the costs of the audit.
- --------
* Confidential treatment has been requested for the bracketed portion. The
confidential redacted portion has been omitted and filed separately with the
Securities and Exchange Commission.
6
<PAGE> 7
6.4 The exercise by Licensor of any rights under this Section 6 shall not
prejudice any other rights or remedies of Licensor, including any other
rights of Licensor to dispute any amounts owed to Licensor under this
Agreement.
7 CONFIDENTIALITY
7.1 Licensor shall provide access to Confidential Information only to its own
employees, employees of its constituent companies and to an independent
and qualified auditor retained by Licensor with respect to the
verification of license fee payments.
7.2 Licensor shall not disclose or make any use of the Confidential
Information except as permitted in Section 7.1 or as required by law. In
the event Licensor believes it may be obligated by law to disclose any
Confidential Information, it shall advise Licensee and cooperate with
Licensee in seeking to limit the scope of such disclosure and making such
disclosure subject to a protective order or similar device designed to
maintain the confidentiality of the Confidential Information. Licensor
shall implement procedures designed to safeguard all Confidential
Information.
7.3 Except as may be required by any law, statute, or governmental rule or
regulation, neither party shall provide this Agreement, or disclose any
of the terms and rates contained in this Agreement, to any person or
entity without the prior written consent of the other party.
7.4 Neither party shall issue any press release or make any other public
statement regarding this Agreement or the transactions contemplated
herein without the prior written consent of the other party.
8. BREACH OR DEFAULT
If either party fails to perform any of the material terms or conditions
required of it by this Agreement, the non-breaching party may, at its option,
give the breaching party notice to cure such material breach or default. Such
notice shall describe the nature of such breach. If the breaching party does not
cure within ten (10) business days of any such notice, any further notice from
the non-breaching party, and any further transmissions shall be fully subject to
the copyright owners' rights under Section 17 U.S.C. Section 106(6), and the
remedies in Section 17 U.S.C. Section 501 et seq. No waiver by the breaching
party of full performance by the non-breaching party in any one or more
instances shall be a waiver of the right to require full and complete
performance of this Agreement thereafter or of the right to terminate this
Agreement in accordance with this Section 8.
7
<PAGE> 8
9. NOTICES
All notices and other communications between the parties hereto shall be in
writing and deemed received (i) when delivered in person; (ii) upon confirmed
transmission by facsimile device; or (iii) five (5) days after deposited in U.S.
mails, postage prepaid, certified or registered mail, addressed to the other
party at the address set forth below (or such other address as such other party
may supply by written notice):
Licensee: ARTISTdirect, Inc.
17835 Ventura Boulevard
Suite 310
Encino, California 91316
Attn: Chief Financial Officer
with a copy to:
Lenard & Gonzalez LLP
1900 Avenue of the Stars
25th Floor
Los Angeles, California 90067
Attn: Allen D. Lenard, Esq.
Licensor: Maverick Recording Company
9348 Civic Center Drive
Beverly Hills, California 90210
Attn: Vice Chairman and General Counsel
10. MISCELLANEOUS
10.1 This Agreement shall be governed by, and construed in accordance with,
the laws of the State of New York (without giving effect to conflicts of
law principles thereof).
10.2 The remedies provided herein shall be cumulative and shall not preclude
assertion by any party hereto of any other rights or the seeking of any
other remedies against the other party hereto. No failure to exercise and
no delay in exercising any right, power or privilege granted under this
Agreement shall operate as a waiver of such right, power or privilege. No
single or partial exercise of any right, power or privilege granted under
this Agreement shall preclude any other or further exercise thereof or
the exercise of any other right, power or privilege.
8
<PAGE> 9
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.
9
<PAGE> 10
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the
date first above written.
MAVERICK RECORDING COMPANY ARTISTdirect, INC.
By: /s/ GUY OSEARY By: /s/ KEITH YOKOMOTO
------------------------- -----------------------------------------
Title: Co-Chief Executive Officer Title: President and Chief Operating Officer
10
<PAGE> 11
EXHIBIT A
OPERATING RESTRICTIONS
The following parameters shall apply to transmissions licensed pursuant to this
Agreement:
1. The Web Site Transmissions shall be streamed only and shall be streamed
[***]*.
2. Except as may be mutually agreed between Licensor and Licensee in writing,
the Web Site Transmissions shall comport with such parameters so that they would
be subject to statutory licensing pursuant to Paragraph 2, Subsection d, Section
114 of title 17, United States Code (the "Digital Millennium Copyright Act").
END OF EXHIBIT
- --------
* Confidential treatment has been requested for the bracketed portion. The
confidential redacted portion has been omitted and filed separately with the
Securities and Exchange Commission.
11
<PAGE> 1
EXHIBIT 10.34
12.15.99
STRATEGIC MARKETING AGREEMENT
THIS STRATEGIC MARKETING AGREEMENT (this "Agreement"), dated as of
December 20, 1999, is being entered into by and between Maverick Recording
Company, a California joint venture ("Maverick") and ARTISTdirect, Inc., a
Delaware corporation ("Company"), in light of the following:
Whereas, as of the date hereof, Maverick is a significant company in the
music industry;
Whereas, there are synergies between Maverick's business and that of
Company;
Whereas, Maverick has become a significant equity owner in Company, and
Whereas, in connection with the foregoing, Maverick 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 Maverick hereby agree as follows.
1. Certain Definitions. As used in this Agreement, the following terms
shall have the following meanings:
(1) "Affiliate" of an entity shall mean another entity controlled
by, under common control with, or controlling such entity.
(2) "Commencement Date" shall have the meaning set forth in
paragraph 2 below.
(3) "Company Contact Person" shall have the meaning set forth in
paragraph 4(c) below.
(4) "Maverick Artist" is a recording artist who is then subject
to an exclusive recording agreement with Maverick.
(5) "Maverick Contact Person" shall have the meaning set forth in
paragraph 3(b) below.
(6) "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
1
<PAGE> 2
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.
3. Maverick Obligations.
(1) Search Engine. Commencing with Maverick's new web
architecture, currently expected to be launched in mid-2000, Maverick shall make
the UBL.com search engine the preferred non-commerce music search engine on
Maverick's web sites. Such search engine shall be incorporated so as to permit
visitors 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.
(2) Maverick Contact Person. Maverick shall promptly after the
execution hereof appoint (and shall maintain throughout the Term) one person to
be the primary contact person on behalf of Maverick (the "Maverick Contact
Person"), which person may change from time to time as designated by Maverick in
its sole discretion. The Maverick Contact Person shall coordinate with the
Company Contact Person with respect to all operational and similar purposes
under this Agreement.
4. Company Obligations.
(1) Site Links. During the Term, Company agrees that, with
respect to all searches relating to Maverick Artists by means of UBL.com's
search engine, Maverick's websites relating to such artists shall be listed
first and shall otherwise be highlighted for maximum impact on the user.
(2) Certain Elements of Search Design. Company agrees that all
searches initiated from any of Maverick's 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 Maverick and UBL.com's logos; (iii) contain ad
banner(s) which shall be solely controlled by Maverick and all income from which
shall belong to Maverick; and (iv) contain an easily identifiable back path to
Maverick's web page from which such search was initiated. Company hereby
warrants and represents that Maverick 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 [***]*.
(3) 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 Maverick Contact Person with respect to all operational and
similar purposes under this Agreement.
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 Maverick and Company and of
even date herewith. At
- --------
* 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
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 Maverick and in connection with the
specific promotions of Maverick 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.
(1) 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.
(2) 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.
(3) 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.
(4) Amendments. This Agreement may be amended, modified or
supplemented only in a writing executed by each of the parties hereto.
(5) 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).
(6) Relationship of the Parties. Notwithstanding any other
3
<PAGE> 4
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.
(7) 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.
(8) 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. MAVERICK RECORDING COMPANY
By: /s/ KEITH YOKOMOTO By: /s/ GUY OSEARY
------------------------------------- --------------------------
President and Chief Operating Officer Co-Chief Executive Officer
Keith Yokomoto Maverick Recording Company
ARTISTdirect, Inc. 9348 Civic Center Drive
17835 Ventura Boulevard Beverly Hills, California 90210
Suite 310
Encino, CA 91316
Attn: President and Chief
Operating Officer
With a copy to:
Lenard & Gonzalez LLP
1900 Avenue Of the Stars
25th Floor
Los Angeles, CA 90067
Attn: Allen D. Lenard, Esq.
4
<PAGE> 1
EXHIBIT 10.35
12/2/99
AUDIO SAMPLE LICENSE AGREEMENT
WARNER MUSIC GROUP INC.
75 Rockefeller Plaza
New York, New York 10019
Dated: As of December 20, 1999
ARTISTdirect, INC.
17835 Ventura Boulevard
Suite 310
Encino, California 91316
Gentlemen:
This letter, when signed by you, or upon your use of any Sample, shall
constitute your agreement (the "Agreement") with Warner Music Group Inc. ("WMG")
on behalf of its controlled affiliated record Labels (the "Labels") and the
applicable artist:
1. The Labels grant to you the non-exclusive right to use for promotional
purposes only as described below up to thirty (30) contiguous seconds of any
track of audio material provided to you from time to time by the Labels. Such
audio material is referred to as "Property," and the items of Property selected
by you for use hereunder are referred to as "Samples."
2. You may use Samples only as follows: you may disseminate, display and/or
perform Samples to third-party users of a site (a "Site") on an "online"
database that is accessible to multiple users, such as the Internet or the World
Wide Web (collectively, the "Net"). Your use of Samples is also subject to any
restrictions of which we advise you at any time. You will notify WMG of the
Internet address of any Site on which you are using Samples.
3. Your use of audio Samples requires the consent of music publishers. You
hereby warrant that you will obtain all necessary consents and indemnify the
Labels from any and all claims (including attorney's fees) by third parties in
connection with your use of Samples.
4. Your right to use any Sample on a Site shall commence as of the date hereof,
and shall terminate on December 31, 2001. During the term of this Agreement,
you may use Samples on sites as provided herein [***]*.
5. Whenever you disseminate, display and/or perform any Sample on a Site, you
shall cause to be displayed on such site (i) the appropriate copyright
information, including, without limitation, the name of the artist's album and
record label, and (ii) the following notice:
"Any reproduction, publication, further distribution or public
exhibition of materials provided at this site, in whole or in part, is
strictly prohibited."
- --------------
* 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> 2
6. Except as may technically be required to adapt a Sample for use on the Net,
you may not alter the Property, or any Sample, in any manner whatsoever.
7. This Agreement sets forth the entire agreement of the parties hereto
regarding the matters to which this Agreement relates, and supersedes and
terminates any and all prior agreements and understandings relating thereto. WMG
or any of the Labels shall have the right to equitable relief to enforce this
Agreement. You may not transfer, assign or sub-license this Agreement or the
rights granted to you hereunder. 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.
Please confirm your agreement to the foregoing by signing in the space
provided below. Please note that your use of the Samples shall constitute such
agreement and acceptance.
Very truly yours,
WARNER MUSIC GROUP
By: /s/ PAUL VIDICH
---------------------------------
Accepted and Agreed:
ARTISTdirect, INC.
By: /s/ MARC P. GEIGER
- ----------------------------------
2
<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": [***]*.
(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": [***]*.
(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 [***]*.
- --------
* 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
[***]*.
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). [***]*
- --------
* 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 [***]*
3.2 Licensee shall pay a finance charge of [***]* 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
- --------
* 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
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) [***]*
- --------
* 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 10.39
STRATEGIC MARKETING AGREEMENT
THIS STRATEGIC MARKETING AGREEMENT (the "Agreement") is made as of the
first Closing Date under the Stock Purchase Agreement, 1999 by and between
Universal Music Group, Inc., a California corporation ("UMG") and ARTISTdirect,
Inc., a Delaware corporation (the "Company").
Whereas, as of the date hereof, UMG (together with its Affiliates) is a
significant company in the music industry, and
Whereas, there are synergies between UMG's business and that of the
Company, and
Whereas, UMG (or one of its Affiliates) has become a significant equity
owner in the Company, and
Whereas, in connection with the foregoing, UMG and the Company deem it
to be in their respective best interests to set forth certain understandings
between them with respect to strategic marketing and other commitments which
each believes will advantage its business.
NOW, THEREFORE, in consideration of the premises and mutual covenants
and obligations hereinafter set forth, the Company and UMG hereby agree as
follows.
1. DEFINITIONS.
As used in this Agreement, the following terms shall have the
following meanings.
"Affiliate" of an entity shall mean another entity controlled
by, under common control with or controlling such entity.
"Availability Date" shall mean the date on which the UMG
Entity makes the relevant Content available to Company Entities, provided that
the Availability Date for any particular Content shall be no later than the
first date on which such Content is made available on a nonexclusive basis to
third parties. The parties acknowledge and agree that the Availability Date as
to any particular Content shall not occur if such Content is provided (i) only
to then-current Affiliates of UMG (including, without limitation, GetMusic LLC),
and/or (ii) exclusively as to any particular Content only to one or more third
parties prior to being made available generally to third parties (e.g., certain
Content may be provided to a third party providing special support to a
promotion or in connection with a third party specific promotion).
"Commencement Date" shall have the meaning set forth in
Section 2 hereof.
"Company Contact Person" shall have the meaning set forth in
Section 4.E. hereof.
<PAGE> 2
"Company Entities" shall have the meaning set forth in Section
4.A. hereof.
"Company Term Minimum Commitment" shall have the meaning set
forth in Section 4.D. hereof.
"Company Yearly Minimum Commitment" shall have the meaning set
forth in Section 4.D. hereof.
"Complying Party" shall have the meaning set forth in Section
5.B. hereof.
"Content" shall mean music and music related content (i) made
available on a non-exclusive basis for marketing and promotional purposes by
labels to third parties (e.g., materials related to new artists and new
releases, music videos, music audio samples, cybercasts, photographs, album
covers, concert film clips, biographical information, promotional merchandise
and similar materials), or (ii) designated by a UMG Entity, in its sole
discretion, as Content for the purposes of this Agreement.
"Derived Analyses" shall mean analyses based upon or related
to data generated from web sites, if any, which analyses are created by or for a
UMG Entity or a Company Entity during the Term, (i) in the case of a UMG Entity,
primarily through the analysis of Other Data, and (ii) in the case of a Company
Entity, (A) primarily through the analysis of Other Data, or (B) provided by a
Company Entity to any unaffiliated third party, or (C) related solely to UMG
Data. Derived Analyses shall not include any individual level data (i.e. data
which would permit an entity to identify a single consumer by his or her name or
e-mail address).
"Generally Available Content" shall have the meaning set forth
in Section 3.A.i. hereof.
"Marketing Support" shall mean (i) advertising space, (ii)
marketing services, (iii) promotional products or services, (iv) Other Data or
Derived Analyses, and (v) other marketing or promotional products or services.
"Noncomplying Party" shall have the meaning set forth in
Section 5.B. hereof.
"Other Data" shall mean any and all data owned or controlled
by a Company Entity and made available by a Company Entity to any unaffiliated
third party (other than (i) UMG Data, (ii) data owned by an unaffiliated third
party, and (iii) data as to a particular web site made available solely to the
person or entity controlling the rights to substantially all the content on
such web site (e.g., an artist, such artist's label or a branding entity
(e.g. [***]*))). Notwithstanding the foregoing, Other Data shall not include any
data which cannot be provided to UMG without such artists' or branding entity's
consent (unless such consent has been obtained) or consumer consent.
- --------
* 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
"Set-Off Right" shall have the meaning set forth in Section
5.A. hereof.
"Special Content" shall have the meaning set forth in Section
3.A.ii. hereof.
"Term" shall have the meaning set forth in Section 2 hereof.
"Term Minimum Commitment" shall mean the UMG Term Minimum
Commitment or the Company Term Minimum Commitment, as applicable.
"Term Year" shall have the meaning set forth in Section 3.B.
hereof.
"Third Party Payments" shall mean any payments required by
contract or law to a person or entity other than UMG or one of its Affiliates.
For purposes of clarity, a payment made to UMG or one of its Affiliates in its
capacity as an agent of a third party shall be a Third Party Payment (e.g., a
payment made to a UMG Affiliate which is a music publishing company for the
benefit of an artist shall be a Third Party Payment hereunder).
"True Up Payment" shall have the meaning set forth in Section
5.B. hereof.
"UMG Affiliates" shall mean UMG and its Affiliates including,
without limitation, the UMG Entities.
"UMG Artist Site" shall mean any web site (whether or not
located on the World Wide Web) owned or operated by a Company Entity that (i)
uses the name of, or predominantly features one or more artists under contract
to a UMG Entity, and (ii) Company Entity institutes, operates or continues to
operate during the Term at least in material part as the result of the efforts
of one or more UMG Entities, including through an introduction or recommendation
by a UMG Affiliate to such artist (or such artist's management), or other
arrangement entered into between a UMG Affiliate and such artist. For purposes
of clarity, web sites existing or in development pursuant to an agreement
existing as of the Commencement Date shall not be UMG Artist Sites unless and
until the agreement or other arrangement pursuant to which the relevant Company
Entity acquired the rights to institute or operate such web site would have
expired or terminated but for the material contributing efforts of a UMG
Affiliate in causing the relevant artist to continue such site (whether on the
same or different terms). [***]*
"UMG Contact Person" shall have the meaning set forth in
Section 3.D. hereof.
"UMG Data" shall mean any and all data collected by a Company
Entity [***]* Notwithstanding the foregoing, UMG Data shall not include any data
which cannot be provided to UMG without artists' consent (unless such consent
has been obtained) or consumer consent.
- --------
* 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
"UMG Entities" shall have the meaning set forth in Section
3.A. hereof.
"UMG Term Minimum Commitment" shall have the meaning set forth
in Section 3.B. hereof.
"UMG Yearly Minimum Commitment" shall have the meaning set
forth in Section 3.B. hereof.
"Yearly Compliance Notice" shall have the meaning set forth in
Section 5.B. hereof.
"Yearly Minimum Commitment" shall mean the UMG Yearly Minimum
Commitment or the Company Yearly Minimum Commitment, as applicable.
2. TERM.
The "Term" of this Agreement shall commence on the date first
set forth above (the "Commencement Date") and end on the earlier of: (i) the
third anniversary of the Commencement Date and (ii) the termination of the
Agreement pursuant to Section 6.A. hereof.
3. UMG OBLIGATIONS.
A. Availability of Content. During the Term, UMG shall, and
shall cause those entities over which it exercises actual control regularly to
(UMG and such entities, for the period that such actual control exists,
collectively and individually the "UMG Entities"), make Content available to the
Company at the times and on the terms as set forth herein.
i. Generally Available Content. "Generally Available
Content" is Content which the UMG Entities make available to unaffiliated third
parties for use on web sites. The UMG Entities shall regularly provide to the
Company the right to use Generally Available Content, and may provide additional
Content on a non-exclusive basis, all of which may be used by Company solely on
one or more web sites owned by Company Entities and web sites operated by the
Company as part of a joint venture in which the Company owns fifty percent (50%)
or more of the economic interest, and solely for the promotion and marketing of
UMG Entity artists (it being understood and agreed that the Company Entities
acquire no right, title or interest in such Content other than the same rights
to use such Content generally provided by the relevant UMG Entity to other
unaffiliated web sites) and shall be provided by the relevant UMG Entity on the
Availability Date for such Content. [***]*
ii. Special Content. "Special Content" is content
which the UMG Entities make available only to one or more Company Entities, or
only to one or more Company Entities and a limited number of other unaffiliated
third parties. The UMG Entities shall
- --------
* 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
regularly provide to the Company Entities the right to license Special Content
(i) for an exclusive period prior to the Availability Date, or (ii) exclusively,
or (iii) on a limited non-exclusive basis (i.e., such Special Content shall be
available for some period of time only to the Company Entities and a limited
number of other third parties). The parties acknowledge and agree that Special
Content may be made available only on the payment by the Company Entities of a
(x) license or similar fee, or (y) in return for the cost of developing and
creating such Special Content, or (z) on payment of the UMG Entities costs for
such Special Content. All financial terms and other terms and conditions
applicable to any particular Special Content shall be negotiated in good faith
by the parties, [***]* Examples of Special Content might be instances where a
UMG Entity has the right to license or provide: (A) a cybercast, made available
first and exclusively to the Company for a limited period of time or a limited
number of broadcasts, and for which Company would pay a fee and any required
Third Party Payments; (B) an exclusive chat with a UMG artist on terms which may
or may not include a fee; and (C) prizes or promotional items provided at the
UMG Entities' cost. The UMG Entities, collectively, shall in each Term Year
offer sufficient Special Content to the Company Entities so that the Company
Entities could, if they choose to license such Special Content, meet the Company
Yearly Minimum Commitment and assuming the Agreement is not terminated pursuant
to Section 6.A.(ii), the Company Term Minimum Commitment.
iii. For purposes of clarity, the UMG Entities'
obligation hereunder is to make Content available to the Company; subject to
Section 4.D. hereof, the Company shall have no obligation to license, acquire or
use such Content. On each license or purchase by a Company Entity of Content
(i.e., where a Company Entity will be required to pay for such Content), the
parties shall promptly memorialize the financial and all other terms applicable
to such purchase and promptly provide a copy of such memorialization to each of
the Company Contact Person and the UMG Contact Person (it being acknowledged and
agreed that failure so to provide such a copy shall not invalidate or otherwise
affect such license or purchase or the terms applicable thereto).
B. Minimum Purchase Commitment. Subject to the further terms
and provisions of this Agreement, (i) in each twelve month period commencing on
the Commencement Date or the first or second anniversary thereof and ending on
the day immediately preceding the next such anniversary of the Commencement Date
(each such period, a "Term Year"), UMG and its Affiliates shall purchase, in the
aggregate, not less than [***]* of Marketing Support from the Company Entities
(the "UMG Yearly Minimum Commitment"), and (ii) during the Term, the UMG
Affiliates shall purchase not less than [***]* of Marketing Support from the
Company Entities (the "UMG Term Minimum Commitment"). If, as a result of a
termination of the Agreement by UMG pursuant to Section 6.A. hereof the Term of
this Agreement terminates prior to the third anniversary of the Commencement
Date, the obligations under this Section 3.B. shall be pro rated to take into
account such early termination.
- --------
* 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
C. Derived Analyses. Each UMG Entity shall promptly after its
completion make each Derived Analysis available to the Company, at no charge,
provided the Company shall not transfer, assign, sell or disclose such Derived
Analyses to any unaffiliated third party without UMG's consent, provided a
Derived Analysis related to a particular artist or entity controlling the rights
to substantially all the content underlying such Derived Analysis may be made
available (without rights to further assign, sell or disclose) to the applicable
artist or entity. The parties shall hereafter agree on the form and media in
which such Derived Analyses shall be provided to the Company.
D. Contact Person. The UMG Entities, collectively, shall
promptly hereafter appoint (and shall maintain throughout the Term) at least one
person to be the primary contact person (the "UMG Contact Person") who shall
coordinate with the Company Contact Person with respect to all operational and
similar purposes under this Agreement, which person may change from time to time
as designated by UMG in its sole discretion.
4. COMPANY OBLIGATIONS.
A. Availability of Marketing Support. During the Term and
subject to the further provisions of this Section 4, the Company shall, and
shall cause entities over which it exercises actual control to (the Company and
such entities, collectively and individually, the "Company Entities"), make any
Marketing Support the Company Entities make available to third parties available
to the UMG Affiliates, [***].* For purposes of clarity, the Company Entities'
obligation hereunder is to make Marketing Support available to UMG Affiliates;
subject to Section 3.B. hereof, the UMG Affiliates shall have no obligation to
acquire or use any particular Marketing Support product or service. The parties
shall promptly memorialize the financial and all other terms applicable to the
provision of such marketing support and promptly provide a copy of such
memorialization to each of the UMG Contact Person and the Company Contact Person
(it being acknowledged and agreed that the failure so to provide such a copy
shall not invalidate or otherwise affect such transaction or the terms
applicable thereto).
B. Provision of UMG Data. The Company shall, and shall cause
each Company Entity to provide to UMG copies of all UMG Data from time to time
as requested by UMG, but not less frequently than monthly. The parties shall
hereafter agree on the form and media in which such data shall be provided to
UMG, it being understood and agreed that UMG shall be entitled to the UMG Data
in digital format, and that the Company shall reasonably cooperate with UMG in
creating data collection fields for UMG Artist Sites. Notwithstanding the
foregoing, the parties acknowledge and agree that the provision of UMG Data to
UMG may be subject to artist consent.
C. Provision of Other Data, Derived Analyses. During the Term,
the Company shall, and shall cause each Company Entity to, notify UMG promptly
after the date on which such Company Entity makes any Other Data or Derived
Analyses available to any unaffiliated third party, identifying in reasonable
detail: (i) the nature of such Other Data or
- --------
* 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
Derived Analyses, and (ii) the financial and other terms applicable to such
Other Data or Derived Analyses [***.]* Notwithstanding anything contained in
this Agreement to the contrary, no Company Entity shall be obligated under this
Agreement to provide any UMG Entity with any data (x) if the artist has the
right to approve the dissemination of such data to a UMG Entity and has not give
such approval, (y) subject to Section 4.F. hereof, the dissemination of such
data would violate the privacy policy of the applicable Company Entity, or (z)
the dissemination of such data would violate any law, statute or regulation then
in effect including if applicable The Children's Online Privacy Protection Act
and any regulation promulgated by the Federal Trade Commission or any other
governmental entity (whether United States or foreign) and, in the case of (y)
and (z), such data is not being provided to other unaffiliated third parties.
Without the relevant Company Entity's prior written consent, or as permitted by
the terms applicable to such Other Data or Derived Analyses consistent with
clause (ii)(b) of the first sentence of this Section 4.C., UMG shall not be
entitled to transfer, assign, sell or disclose such Other Data or Derived
Analyses other than to UMG Entities, and shall (and shall permit the UMG
Entities to) use such Other Data or Derived Analyses solely for internal
marketing research and analysis. Notwithstanding the immediately preceding
sentence, Other Data or a Derived Analysis related to a particular artist may be
made available (without rights to further assign, sell or disclose) to the
applicable artist.
D. Minimum Purchase Commitment. Subject to the further terms
and provisions of this Agreement, (i) in each Term Year the Company Entities
shall purchase, in the aggregate, not less than [***]* of Content from the UMG
Entities (the "Company Yearly Minimum Commitment"), and (ii) during the Term,
the Company Entities shall purchase not less than [***]* of Content from the UMG
Entities (the "Company Term Minimum Commitment"). If as a result of a
termination of this Agreement by the Company pursuant to Section 6.A. hereof the
Term of this Agreement terminates prior to the third anniversary of the
Commencement Date, the obligations under this Section 4.D. shall be pro rated to
take into account such early termination.
E. Contact Person. The Company Entities, collectively, shall
promptly hereafter appoint (and shall maintain throughout the Term) at least one
person to be the primary contact person (the "Company Contact Person") to
coordinate with the UMG Contact Person with respect to operational and similar
purposes under this Agreement, which person may change from time to time as
designated by the Company in its sole discretion.
F. Efforts to Obtain Consents; Anti-Discrimination. The
Company Entities shall use their commercially reasonable efforts to seek and
obtain each and every consent, waiver, agreement or other action necessary to
afford UMG the rights to data set forth in this Section 4, including, without
limitation, artists' and consumer consents. The Company and UMG shall consult
with one another as to the actions to be taken to obtain necessary consents, and
the Company shall promptly notify UMG if it has been unable to obtain an artist
consent necessary to afford UMG the rights set forth in this Section 4.
- --------
* 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
[***]*
5. SET-OFF AND TERM YEAR PAYMENTS.
A. Set-Off Right. Notwithstanding any other provision of this
Agreement to the contrary, the Company Entities shall be entitled to set-off all
amounts owed by them to any UMG Entity under this Agreement against all amounts
owed to any of them by any UMG Affiliate under this Agreement, and the UMG
Affiliates shall be entitled to set-off all amounts owed by them to any Company
Entity under this Agreement against all amounts owed to any of them by any
Company Entity under this Agreement (the "Set-Off Right"). Not later than 30
days after the end of each Term Year, each of UMG and the Company shall provide
to the other a schedule listing in sufficient detail to identify the
transaction, all purchases made by an entity from the other and for which UMG or
the Company, as the case may be, can and will set-off under this Agreement.
B. True Up Payments. Due to the availability of the Set-Off
Right, the parties acknowledge and agree that no payments shall be due from one
to the other hereunder with respect to any Term Year unless (i) at the end of
such Term Year, only one of UMG or the Company has met its Yearly Minimum
Commitment, and (ii) the entity meeting its Yearly Minimum Commitment (the
"Complying Party") notifies the other, within forty-five days of the end of such
Term Year that the Complying Party has met its Yearly Minimum Commitment, and
that the other party (the "Noncomplying Party") has not, demands that the
Noncomplying Party meet its Yearly Minimum Commitment for such Term Year, and
specifies the amount of the Yearly Minimum Commitment outstanding at the end of
the relevant Term Year (such notice, the "Yearly Compliance Notice"). If the
Noncomplying Party has not, within 60 days of such Yearly Compliance Notice (the
"Extension Period") purchased such amount of Marketing Support or Content, as
applicable, within such Extension Period as would (when aggregated whether with
the purchases made during the applicable Term Year) meet its Yearly Minimum
Commitment, it shall, not later than the 60th day after such Yearly Compliance
Notice pay such amount of the Yearly Minimum Commitment (the "True Up Payment")
which remains unmet as of the end of such 60 day period, in cash, to the
Complying Party. Purchases of Marketing Support or Content, as applicable, made
in the Extension Period after a Yearly Compliance notice and included in
calculating a True Up Payment may not be included for purposes of ascertaining
whether the Noncomplying Party has met its Yearly Minimum Commitment in any
other Term Year but (for purposes of clarity) shall be included in calculating
whether a party has made its Term Minimum Commitment. Notwithstanding the
foregoing, if the UMG Entities have not made Special Content available to the
Company in the first or second Term Year in an amount sufficient for the Company
Entities to actually expend amounts sufficient to meet the Company Yearly
Minimum Commitment during the applicable Term Year (including the Extension
Period), the amount of such shortfall (the "Yearly Shortfall Amount") shall not
be required to be paid in cash by Company at the end of such Term Year, the
Yearly Shortfall Amount shall be deemed paid by the Company for purposes of
calculating whether the Company has met its Term Minimum Commitment, and UMG
shall pay the Company in cash the amount
- --------
* 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
by which (A) the lesser of (i) the aggregate amounts spent by the UMG Entities
in the aggregate for Marketing Support in such Term Year and (ii) [***,]* exceed
(B) the aggregate amounts spent by the Company Entities in such Term Year, for
Content. At the end of the Term, the parties' (and their Affiliates') respective
aggregate purchases of Marketing Support and Content, respectively, during the
entire Term shall be calculated. If, as of the end of the Term, either party has
failed to meet its Term Minimum Commitment, and has not, within 60 days of the
end of the Term, purchased such amount of Marketing Support or Content, as
applicable, within such 60 day period as would (when aggregated with all other
purchases made during the Term) meet its Term Minimum Commitment, such
non-complying party shall, not later than the 60th day after the end of the Term
pay to the other party the difference between the non-complying party's Term
Minimum Commitment and the amount actually spent by it during the Term and such
60 day post-Term period. Notwithstanding the foregoing, if at the end of the
Term the UMG Entities have not made Special Content available to the Company
during the Term in an amount sufficient for the Company Entities to actually
expend amounts sufficient to meet the Company Term Minimum Commitment, the
amount of such shortfall (the "Term Shortfall Amount") shall not be required to
be paid in cash by Company at the end of the Term, and UMG shall pay the Company
in cash the amount by which (A) the lesser of (i) the aggregate amounts spent by
the UMG Entities in the aggregate for Marketing Support during the Term and (ii)
[***,]* exceed (B) the aggregate amounts spent by the Company Entities during
the Term for Content (taking into account the "deemed paid" amounts set forth
above). Notwithstanding any provision of this Agreement to the contrary, the
remedy provided for in this Section 5.B. shall be the sole and exclusive remedy
for any breach or alleged breach of the parties' respective obligations under
Sections 3.B. and 4.D.
C. Limitations on Set Off. Notwithstanding anything in this
Agreement to the contrary, a party which purchases Content or Marketing Support,
as the case may be, (i) in excess of [***]* in any Term Year, or (ii) in excess
of [***]* during the Term shall, for each and every purchase over either such
limit, pay cash for such purchase in accordance with the payment terms otherwise
applicable to such transaction. Unless and until the aggregate of all cash
payments made by a party (and its affiliates) hereunder exceeds (together with
all amounts set-off or eligible for set-off hereunder) [***]* such cash
payments shall be included in any calculation of whether such party has met its
Term Minimum Commitment.
D. Other Purchases. By mutual agreement of the parties, any
purchase made by one party (or its Affiliates) from the other (or its
Affiliates) which does not otherwise fall under the categories described in this
Agreement (e.g., a purchase by the Company of marketing or promotional services
or advertising from a UMG Entity or the provision of music digital downloads by
a UMG Entity to the Company) may be deemed to be "Content" or "Marketing
Support" for the purpose of calculating whether a party has met its Yearly
Minimum Commitment or Term Minimum Commitment hereunder.
6. TERMINATION FOR BREACH.
- --------
* 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
A. Early Termination. Either party may terminate this
Agreement (i) on the material breach of the other party, subject to notice and a
reasonable (not to exceed 30 days) period to cure, or on the occurrence of an
insolvency event with respect to the other party, or (ii) if the UMG Entities
fail to make sufficient Special Content available in the first two Term Years so
that the Company Entities fail to meet the Company Yearly Minimum Commitment
hereunder in each of such years.
7. MISCELLANEOUS.
A. Counterparts; Facsimile Signatures. This Agreement may be
signed in multiple counterparts. Each counterpart will be considered an
original, but all of them in the aggregate shall constitute one agreement. This
Agreement and any amendments hereto, to the extent signed and delivered by means
of a facsimile machine, shall be treated in all manner and respects as an
original agreement or instrument and shall be considered to have the same
binding effect as if it were the original signed version thereof delivered in
person.
B. Successors and Assigns. This Agreement may not be assigned,
in whole or in part, whether voluntarily or by operation of law without the
consent of the other party hereto.
C. Entire Agreement. This Agreement is intended by the parties
as a final expression of their agreement and is intended to be a complete and
exclusive statement of the agreement and understanding of the parties hereto in
respect of the subject matter hereof. This Agreement supersedes all prior
letters of intent, agreements and understandings between the parties with
respect to the subject matter hereof.
D. Amendments. This Agreement may be amended, modified or
supplemented only in a writing executed by each of the parties hereto.
E. Notices. All notices and other communications provided for
or permitted hereunder shall be made in writing by hand-delivery, first class
mail or overnight courier, shall be deemed given on the date received, if
delivered by hand or courier, and four days after deposit into the United States
mail, if mailed, and shall be delivered to the addresses for notice indicated on
the signature pages hereof, or at such other addresses as a party may hereafter
designate by notice delivered pursuant to this Section 7.E.
F. Relationship of the Parties. Notwithstanding any other
relationship between the parties hereto, or between or among them and their
respective Affiliates, nothing herein shall be deemed to constitute the parties
a partnership or joint venture.
G. Governing Law. This Agreement and all matters or issues
related thereto or arising hereunder shall be governed by the laws of the State
of California without regard to the application of principles of conflicts of
laws.
H. Headings and Examples. The headings in this Agreement are
for the convenience of reference only and shall not limit or otherwise affect
the meaning hereof.
10
<PAGE> 11
Whenever examples are used in this Agreement with the words "including," "for
example," "e.g.," "such as," "etc." or any derivation thereof, such examples are
intended to be illustrative and not in limitation thereof.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first written above.
ARTISTdirect, INC. UNIVERSAL MUSIC GROUP, INC.
By: /s/ KEITH YOKOMOTO By: /s/ MICHAEL OSTROFF
------------------------------- --------------------------------
Keith Yokomoto Senior Vice President
ARTISTdirect, Inc. 70 Universal City Plaza
17835 Ventura Boulevard Universal City, CA 91608
Suite 310 Attn: President, Global E-Commerce
Encino, CA 91316 and Advanced Technology
Attn: Chief Executive Officer AND Attn: Senior Vice President,
Business and Legal Affairs
With a copy to: With a copy to:
Lenard & Gonzalez LLP Munger, Tolles & Olson LLP
25th Floor 35th Floor
1900 Ave. Of the Stars 355 S. Grand Ave.
Los Angeles, CA 90067 Los Angeles, CA 90071-1560
Attn: Allen D. Lenard Attn: Ruth E. Fisher
11
<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 [***]*
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:
- ------------
* 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
4.5.1. Cash Management. Maintain one or more bank accounts
(the "Account") in trust for, and for the benefit of the Company, monitor and
collect accounts receivable and monitor and pay the Company's payables from and
out of collections. Within 45 days after the end of each calendar month during
the term of the Agreement, CTSI will provide the Company with a report listing
in detail all receipts into and disbursements from the Company's Account.
4.5.2. Accounting and Financial Reporting. Maintain general
ledger; prepare, on a periodic basis, all financial reports requested by the GM;
compile data required by the Company and its tax accountants for preparation of
the Company's tax returns and similar filings.
4.5.3. Human Resources. Administer payroll and benefits for
the Company's employees.
4.5.4. Facilities Management. Procure and maintain office and
facility space for the Company's administrative and operational functions;
provide janitorial and maintenance services; arrange the procurement,
installation, and maintenance of telephones, computers, telecopiers and other
business equipment required by the Company.
4.5.5. Extension of Term. The CTSI Term may be extended by
mutual agreement of CTSI and the Company. If the CTSI Term is not extended, CTSI
will facilitate the transition to a new management service provider.
4.6. CTSI Compensation. In consideration for the management and
back-office services to be provided by CTSI, the Company will pay to CTSI (i) a
fee at the rate of [***]* per year for the period from the Execution Date
through the first (1st) anniversary of the Commencement Date and (ii) [***]* for
the period from the first (1st) anniversary of the Commencement Date through the
second (2nd) Anniversary of the Commencement Date. To the extent any of the
services set forth in Section 4.5 above are provided by AD, AD will be entitled
to reimbursement on a cost plus basis and such services will be included as a
line item in the Business Plan.
4.7. Financial Reports/Audit Rights.
4.7.1. The General Manager will oversee the preparation of
regular periodic financial statements and annual financial statements to be
prepared in accordance with GAAP. The Company's books and records will be
audited annually by an independent nationally-recognized accounting firm.
4.7.2. The Company, at the request of the GM or AD, will have
the right to audit CTSI's books and records, as such books and records pertain
to the Company, once every twelve
- ------------
* Confidential treatment has been requested for the bracketed portion. The
confidential redacted portion has been omitted and filed separately with the
Securities and Exchange Commission.
5
<PAGE> 6
(12) months. The Company will give reasonable notice of its intent to audit and
the parties will attempt to schedule such audit so as not to unnecessarily
interfere with the operations of CTSI.
5. Business Plan/Annual Fiscal Year Budgets.
5.1. The Management Committee will agree to an initial [***]* 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 [***]* 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.
- ------------
* 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
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
[***]* 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 [***]* 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 [***]*, 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 [***]*.
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.
- ------------
* 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
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 [***]* 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 [***]*, 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, [***]*.
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
- ------------
* 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
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. [***]*.
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 [***]. 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
[***]* 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.
- ------------
* 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
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 [***]* 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
- ------------
* 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
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 [***]*.
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 [***]* 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 [***]*, and any Promotional Support provided by CTG to the
Company with a value greater than [***]* 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 [***]*.
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
[***]* (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%).
- ------------
* 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
(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 [***]* (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 [***]* or [***]*, as the case may be), and the
non-Declining or non-Defaulting Member may elect to purchase the Declining or
Defaulting Member's entire membership interest for a price equal to the Fair
Market Value of such interest, as determined in accordance with the procedures
set forth in Exhibit "B" attached hereto. For the purposes of this Section
10.3.3, a Declining or Defaulting Member's ownership interest will be inclusive
of such Member's Affiliates' ownership interests in the Company.
10.3.4. Capital Accounts. Each Member agrees that a single
capital account (each a "Capital Account") will be established and maintained
for each Member and will be credited, charged and otherwise adjusted in the
manner provided herein, subject to the regulations promulgated under Section
704(b) of the Internal Revenue Code of 1986, as amended. Except as set forth in
this Section, no Member will be entitled to receive any interest on its capital
contributions.
11. Use of the Company's End-User Database and Content.
11.4. Subject to Section 11.1.1 below, each Member will have a
perpetual, non-exclusive, non-transferable, limited license to use, for its own
internal business purposes, data relating to end-users of the Front End Sites
collected by the Company in the course of operating the Front End Sites. At each
Member's request, the Company will provide the requesting Member, via File
Transfer Protocol to an IP address designated by the requesting Member, such
end-user data within thirty (30)
- --------
* 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.
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.
11.4.1. In consideration of the Company's license and delivery
of end-user data to the requesting Member, the requesting Member will pay the
Company a fee for every one thousand unique end-users for which the Company
receives complete data records, which fee will be determined by calculating the
average fee quoted by Yahoo, Lycos, and Excite for comparable use rights for one
thousand unique end-users' data records containing comparable information to the
Company's data records. A complete data record for an end-user will comprise, at
a minimum, the user's name, email address and, to the extent available, mailing
address, telephone number and Social Security number or other established form
of identification used in the country where the user is domiciled as such
information is submitted to the Company by the end-user. No fee will be payable
with respect to any end-user for whom the requesting Member already possesses
the minimum data record, or for any duplicate or update of a data record for
which the requesting Member has already paid a fee.
11.4.2. The Company will not sell, rent or otherwise make
available or allow others to sell, rent or otherwise make available to any third
party any data contained in the Company's end-user database, except as mutually
agreed by the Members.
11.5. The Company grants to AD a perpetual, non-exclusive,
non-transferable, royalty-free license to translate into English all content
produced or acquired by the Company (other than content licensed by AD) for
display on the Front End Sites (collectively, "Company Content") and (b)
distribute such translated Company Content through Web sites in the AD Network
and successor thereof, all subject to the restrictions and limitations
applicable to the Company pursuant to agreements with third party providers of
such Company Content. The Company will use its commercially reasonable efforts
to obtain from third party licensors of the Company Content all rights necessary
in order to grant the foregoing rights. As between the Company and AD, the
Company will own all right, title and interest (except as licensed herein) in
and to the Company Content and all translations and localized versions of the
Company Content created by or on behalf of AD. AD agrees to assign and does
hereby assign to the Company any and all right, title and interest that it may
acquire in the Company Content or any translation or localized version of the
Company Content. Any and all amounts payable by the Company to third party
licensors in connection with the granting of the foregoing license or AD's use
of such licensed content will be reimbursed by AD, subject, however, to AD's
prior approval of such expense.
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.
13.6. During the thirty (30) days prior to the commencement of each of
the first [***]*, the Management Committee will meet and mutually select the
following two (2) groups of recording artists: (i) [***]* 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) [***]* 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 [***]*, AD will (i)
enter into Internet website agreements with at least [***]* 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 [***]* of the Content Selected Artists (with [***]* Content
Selected Artists selected from the [***]* 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 [***]* Content Selected Artists
under Performance Target 2, then during the successive Fiscal Year, CTG has the
right to reduce its Promotional Support by [***]*, (ii) if during a given Fiscal
Year, AD signs [***]* Website Selected Artists under Performance Target 1 and
[***]* Content Selected Artists under Performance Target 2, then during the
successive Fiscal Year, CTG has the right to reduce its Promotional Support by
[***]*.
- ------------
* 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.
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 [***]* 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.
- ------------
* 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.
23
<PAGE> 24
15. Dispute Resolution.
15.9. Subject to the authority of the Independent Directors to resolve
deadlocks pursuant to this Agreement, in the event of any dispute or claim
arising out of or related to this Agreement, the parties agree to use best
efforts to resolve such dispute or claim on a consensual basis before commencing
an arbitration proceeding. Such best efforts will include an in-person meeting
between members of senior management of both parties. If the parties' best
efforts fail, any controversy or claim arising out of or relating to this
Agreement, its enforcement or interpretation, or because of an alleged breach,
default or misrepresentation in connection with any of its provisions, or
arising out of or relating in any way to the relationship between the parties,
will be determined by binding arbitration. The arbitration proceedings will be
held and conducted in accordance with California Code of Civil Procedure
Sections 1282-1284.2, with the power to grant equitable relief, including
injunctions and temporary restraining orders. California Code of Civil Procedure
Section 1283.05, which provides for certain discovery rights, will apply to any
such arbitration, and said code section is hereby incorporated by reference. In
reaching a decision, the arbitrator will have no authority to change, extend,
modify or suspend any of the terms of this Agreement. The arbitration will be
commenced and heard in Los Angeles County, California. The arbitrator will apply
the substantive law (and the law of remedies, if applicable) of California or
federal law, or both, as applicable to the claim(s) asserted. Judgment on the
award may be entered in any court of competent jurisdiction. The parties may
seek, from a court of competent jurisdiction, provisional remedies or injunctive
relief in support of their respective rights and remedies hereunder without
waiving any right to arbitration. However, the merits of any action that
involves such provisional remedies or injunctive relief, including, without
limitation, the terms of any permanent injunction, will be determined by
arbitration under this Section 15.1. If the parties do not agree upon an
arbitrator within ten (10) days after a written demand for arbitration is served
upon one party by the other, the arbitrator will be appointed pursuant to
Section 1281.6 of the California Code of Civil Procedure; provided, however,
that only persons who are retired Superior Court, California Appellate Court or
federal judges or lawyers admitted to the bar for at least twenty (20) years and
classified as "A-v" by the Martindale Hubbell Law Directory will be eligible to
be selected as an arbitrator.
15.10. If any legal action, arbitration or other proceeding is brought
for the enforcement of this Agreement, or because of any alleged dispute,
breach, default or misrepresentation in connection with any of the provisions of
this Agreement, the successful or prevailing party will be entitled to recover
reasonable attorneys' fees and other costs incurred therein, in addition to any
other relief to which it or they may be entitled. The court or arbitrator will
consider, in determining the prevailing party, which party obtains relief which
most nearly reflects the remedy or relief which the parties sought.
24
<PAGE> 25
16. Currency; Payments.
Except where otherwise expressly provided to the contrary in the
Superseding Agreements:
16.11. All amounts due from either party to the other or from the
Company to a Member or Affiliate pursuant to this Agreement will be paid in U.S.
Dollars. If any portion of such payment is calculated on the basis of revenues
received in other currencies, such revenues will be calculated using the
exchange rate published in the Wall Street Journal as of the business day
immediately preceding the date on which the payment initially is due. Such
exchange rate will also apply to any portion of a payment which is permitted to
be deferred, regardless of whether such deferred payment is represented by a
promissory note or other instrument. If laws or currency regulations in the
Territory now or at any time during the term of this Agreement prohibit or
restrict any party ("payer") from paying any sums due to any other party
("payee"), payee may, in its sole and absolute discretion, elect to accept funds
in a currency other than United States dollars. If payee elects to accept funds
in a currency other than United States dollars, payee will notify payer of such
election and payer will deposit sums due payee in a bank or banks in the
Territory approved by payee or promptly pay such sums to such person or persons
in the Territory as the payee may designate in writing. In the event that,
pursuant to the legal requirements imposed upon payer by a duly-organized
governmental taxing authority, payer is required to withhold from the amount
payable to payee hereunder any sales, remittance, value added, turnover and/or
any other tax, levy and/or charge (collectively, "Required Taxes"), the
following shall apply: (i) payer shall only withhold from payment to payee the
minimum amount of such Required Taxes which must be paid to the taxing
authority; (ii) payer shall only withhold from payment to payee the actual
amount of such minimum Required Taxes which have been paid by payer to the
taxing authority; (iii) payer shall provide payee concurrently with, or promptly
after, the payment to payee of the applicable installment of the amount payable
hereunder, any official receipt issued by the taxing authority to the payer
certifying the amount and basis of such Required Taxes and the date upon which
payment of such Required Taxes was received by the taxing authority (or in the
absence of such a receipt, the payer shall furnish the foregoing information to
payee promptly after the payment); (iv) payer shall promptly refund to payee any
amount of the Required Taxes which was deducted or withheld from or offset
against any installment of the amounts payable hereunder which amount was
subsequently refunded or credited to payer; and (v) payer shall promptly refund
to payee any amount of the Required Taxes which was deducted or withheld from or
offset against any installment of the amounts payable to the payee hereunder to
the extent the payer has received or will receive a benefit (either directly or
indirectly) by or from such taxing authority for such amount.
16.12. All payments owing pursuant to this Agreement will be made by
wire transfer of immediately available funds, net of any withholding required by
applicable law. Each party will from time to time designate one or more accounts
into which such payments will be made and may designate one or more Affiliates
to receive such payments.
25
<PAGE> 26
16.13. Any payment hereunder not made when due, after a ten (10) day
grace period, will bear interest from the date due to and including the date of
payment in full at a rate equal to the Effective Rate as in effect on the date
payment was due.
17. HSR Filing.
By no later than November 24, 1999 (the "Filing Deadline"), the Members
will file notifications (with a request for early termination of the waiting
period) under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended, (the "HSR Act") in connection with the transactions contemplated hereby
and will respond as promptly as practicable to any inquiries of the Federal
Trade Commission (the "FTC"), the Antitrust Division of the Department of
Justice (the "DOJ") or any other applicable state or federal agency's request
for additional information or documentation in connection with antitrust matters
related to transactions contemplated by this Agreement. Each Member will bear
its costs and expenses and attorneys' fees relating to the HSR Act filings
(including one-half ( 1/2) of the HSR Act filing fee, if only one filing for the
transactions contemplated by this Agreement is required) and will, to the extent
necessary, provide appropriate information to the other party to coordinate and
permit the filing on or before the Filing Deadline. If, pursuant to the HSR Act,
the FTC or DOJ objects to the transactions contemplated by this Agreement, the
Members will negotiate in good faith with respect to restructuring the
transactions to address such objection. If (i) the Members fail to agree on a
restructuring or (ii) any applicable waiting period under the HSR Act has not
expired or been terminated by one hundred eighty (180) days from the Execution
Date, this Agreement will terminate of its own accord and the Members will not
have any further rights or obligations pursuant hereto.
18. Miscellaneous Provisions.
18.14. Expenses.
18.14.1. All legal and other expenses incurred by the Company
in connection with its formation will be paid by the Company and, to the extent
paid by either Member, will be reimbursed by the Company to such Member.
18.14.2. Subject to Section 18.1.1 above, each Member will be
responsible for legal fees incurred by the Member in connection with the
negotiation and execution of this Agreement and the Superseding Agreements.
18.15. Counterparts. This Agreement may be executed in several
counterparts, each of which will be deemed an original but all of which will
constitute one and the same.
26
<PAGE> 27
18.16. Partial Invalidity. Wherever possible, each provision hereof
will be interpreted in such manner as to be effective and valid under applicable
law, but in case any one or more of the provisions contained herein will, for
any reason, be held to be invalid, illegal or unenforceable in any respect, such
provision will be ineffective to the extent, but only to the extent, of such
invalidity, illegality or unenforceability without invalidating the remainder of
such invalid, illegal or unenforceable provision or provisions or any other
provisions hereof, unless such a construction would be unreasonable.
18.17. Binding Effect. Subject to the provisions of this Agreement
relating to transferability, this Agreement will be binding upon and will inure
to the benefit of the parties, and their respective distributees, heirs,
successors and assigns.
18.18. Further Assurances. In connection with this Agreement and the
transaction contemplated hereby, each Member will execute and deliver any
additional documents and instruments and perform any additional acts that may be
necessary or appropriate to effectuate and perform the provisions of this
Agreement and such transactions.
18.19. Representations and Warranties: Limitation of Liability
18.19.1. Authority. Each Member represents that (i) it has
full power and authority to enter into and perform this Agreement, (ii) the
Agreement is the valid and binding obligation of such Member, enforceable
against it in accordance with its terms, and (iii) the performance by such
Member of its obligations under this Agreement does not violate any law, rule or
regulation binding on such party, including any contractual rights of or
obligations to third parties, or such Member's charter documents.
18.19.2. Intellectual Property; Content. Each Member and its
Affiliates represent and warrant to the other and to the Company that the
intellectual property licensed or provided to the Company pursuant to this
Agreement, including any trademarks, copyrights, patents, software, content or
other confidential or proprietary information, when used pursuant to this
Agreement, does not infringe or violate any intellectual property right of any
third party, or violate any license or other agreement governing such
intellectual property; provided, however, that any and all representations and
warranties made by a Member or its Affiliates to the other with respect to
patent, software or other technology licenses shall be made to the best of such
Member's (or such Affiliate's) knowledge.
18.19.3. Limitation of Liability. Each Member acknowledges and
agrees that the other Member does not guarantee the accuracy, completeness,
timeliness or availability of the content or other proprietary or confidential
information provided to the Company, and that except for the willful misconduct
or gross negligence of a Member regarding any content or other proprietary or
confidential information provided to the Company, neither Member will have any
liability whatsoever for such content, or any reliance thereon. IN NO EVENT WILL
EITHER
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.
18.19.4. No Other Warranties. EXCEPT FOR THE WARRANTIES
EXPRESSLY PROVIDED FOR HEREIN, EACH MEMBER DISCLAIMS TO THE FULLEST EXTENT
ALLOWABLE UNDER APPLICABLE LAW, ALL OTHER WARRANTIES, EXPRESS OR IMPLIED,
INCLUDING WITHOUT LIMITATION THE IMPLIED WARRANTIES OF MERCHANTABILITY AND
FITNESS FOR A PARTICULAR PURPOSE, REGARDING THE INTELLECTUAL PROPERTY, CONTENT,
SOFTWARE, AND OTHER PROPRIETARY OR CONFIDENTIAL INFORMATION PROVIDED TO THE
COMPANY, WHETHER OR NOT ADVISED OR AWARE OF ANY SUCH PURPOSE.
18.20. Assignment; No Third Party Beneficiary. Subject to Section 10.2,
no party hereto will assign its rights or delegate its obligations hereunder
without written consent of the other party except to an Affiliate of such party;
provided that no such assignment will relieve the assignor of its obligations.
The provisions of this Agreement are for the benefit only of the parties, and no
third party may seek to enforce or benefit from these provisions.
18.21. Waivers, Remedies Cumulative, Amendments.
18.21.1. No failure or delay by any of the parties hereto in
exercising any right, power or privilege under this Agreement will operate as a
waiver thereof nor will any single or partial exercise by any of the parties
hereto of any right, power or privilege preclude any further exercise thereof or
the exercise of any other right, power or privilege.
18.21.2. The rights and remedies herein provided are
cumulative and not exclusive of any rights and remedies provided by law.
18.21.3. No provision of this Agreement may be amended,
modified, waived, discharged or terminated, other than by the express written
agreement of the parties hereto nor may any breach of any provision of this
Agreement be waived or discharged except with the express written consent of the
party not in breach.
18.22. Notices. All notices, requests, demands and other communications
required to be given under this Agreement will be in writing and will
conclusively deemed to have been duly given (a) when hand delivered to the other
party, (b) the next business day if sent by a generally recognized overnight
courier services that provides written acknowledgment by the addressee of
receipt, or (c) when received, if sent by facsimile or other generally accepted
means of electronic transmission.
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
18.23. Indemnity.
18.23.1. By AD. Notwithstanding Section 18.6.3, AD will
indemnify and hold harmless CTG and its shareholders, managers, directors,
officers, employees, agents, representatives, Affiliates, successors and assigns
(collectively, the "CTG Indemnified Parties"), from and against all claims,
losses, damages (including loss of profits and consequential damages awarded to
unrelated third parties, if any, but excluding loss of profits and consequential
damages otherwise suffered by the CTG Indemnified Parties), expenses,
judgements, costs and liabilities (including reasonable attorneys' fees and
costs) incurred by the CTG Indemnified Parties arising from AD's breach of any
covenants, agreements, representations or warranties contained in this
Agreement.
18.23.2. By CTG. Notwithstanding Section 18.6.3, CTG will
indemnify and hold harmless AD and its managers, shareholders, directors,
officers, employees, agents, representatives, Affiliates, successors and assigns
(collectively, the "AD Indemnified Parties"), from and against all claims,
losses, damages (including loss of profits and consequential damages awarded to
unrelated third parties, if any, but excluding loss of profits and consequential
damages otherwise suffered by the AD Indemnified Parties), expenses, judgements,
costs and liabilities (including reasonable attorneys' fees and costs) incurred
by the AD Indemnified Parties arising from CTG's breach of any covenants,
agreements, representations or warranties contained in this Agreement.
18.23.3. If a claim by a third party is made against an
indemnified party, the indemnified party will promptly notify the indemnifying
party of such claim. Failure to so notify the indemnifying party will not
relieve the indemnifying party of any liability which the indemnifying party
might have, except to the extent that such failure materially prejudices the
indemnifying party's legal rights. The indemnifying party will have thirty (30)
days after receipt of such notice to undertake, conduct and control through
counsel of its own choosing (subject to the approval of the indemnified party,
such approval not to be unreasonably withheld) and at its expense, the
settlement or defense of such claim, and the indemnified party will cooperate
with the indemnifying party in connection therewith; provided, however, that (i)
the indemnifying party will permit the indemnified party to participate in such
settlement or defense through counsel chosen by the indemnified party, provided
that the fees and expenses of such counsel will be borne by the indemnified
party and (ii) the indemnifying party will reimburse the indemnified party for
the full amount of any loss resulting from such claim and all related expenses
incurred by the indemnified party within the limits of this Section 18.10 as
such are incurred. If the indemnifying party does not notify the indemnified
party within thirty (30) days after actual receipt of the indemnified party's
notice of a claim of indemnity hereunder that it elects to undertake the defense
thereof (which may be with a reservation of rights by such indemnifying party)
or so notifies the indemnified party but fails to undertake or maintain such
defense promptly and in good faith so that a default is threatened, the
indemnified party will promptly notify the indemnifying party whether it desires
to undertake the defense of such claim. If the indemnifying party does not
within ten (10) business days thereafter elect to undertake the defense thereof,
the indemnified party will have the right to contest, settle or compromise the
claim in the exercise of its reasonable judgment and without prejudice to
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.
18.23.4. Indemnification of Agents. The Company will indemnify
any Person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding by reason of the
fact that he or she is or was a Member, Management Committee member, General
Manager, officer, employee or other agent of the Company or that, being or
having been such a Member, Management Committee member, General Manager,
officer, employee or agent, he or she is or was serving at the request of the
Company as a manager, director, officer, employee or other agent of another
limited liability company, corporation, partnership, joint venture, trust or
other enterprise (all such persons being referred to hereinafter as an "agent"),
to the fullest extent permitted by applicable law in effect on the date hereof
and to such greater extent as applicable law may hereafter from time to time
permit.
18.23.5. Insurance. The Company will have the power to
purchase and maintain insurance on behalf of any Person who is or was an agent
of the Company against any liability asserted against such Person and incurred
by such Person in any such capacity, or arising out of such Person's status as
an agent, whether or not the Company would have the power to indemnify such
Person against such liability under the provisions of Section 18.10.4. or under
applicable law.
18.23.6. Notwithstanding anything in this Section 18.10 to the
contrary, neither Member will have any obligation to indemnify or advance
expenses to the other Member, or to the Company, either separately or together,
with respect to any third party claim, action, suit, proceeding, issue or matter
resulting from a breach of this Agreement by the other Member or the Company
including the use or distribution of any of the Company's or Members' Marks,
Content, or other licensed intellectual property other than as provided for
herein.
18.24. Confidentiality. Each Member (the "receiving Member"), its
respective Affiliates and the Company will (i) hold all information of a
confidential or proprietary nature that it receives regarding the customers,
business, finances, assets or affairs of the Company or the other Member or any
of its Affiliates ("Proprietary Information" of the disclosing party) in strict
confidence and will take reasonable precautions to protect Proprietary
Information of the disclosing party (including, without limitation, all
precautions that itself employs with respect to its own confidential materials),
(ii) not divulge any Proprietary Information of the disclosing party or any
information derived therefrom to any third party (except to employees,
contractors and consultants who have a legitimate need to know such information
and who have previously executed a written nondisclosure agreement which is then
in effect restricting the use and disclosure of confidential information that
the receiving Member receives from third parties), (iii) not make any use
whatsoever of Proprietary Information of the disclosing party except to the
extent permitted under this Agreement or to the extent necessary to perform its
obligations under this Agreement. Without granting any right or license, the
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
18.25. This Agreement constitutes the entire agreement between the
parties with respect to the subject matter hereof and supersedes all proposals,
oral or written, all negotiations, conversations, or discussions between the
parties and all past dealing or industry custom.
AGREED AND ACCEPTED:
"CTG" "AD"
Lakeport Overseas Ltd. ARTISTdirect Latin America, LLC
By ARTISTdirect International Holdings,
By: /s/ [ILLEGIBLE] LLC, its Member
--------------------------------
Name:
Title: By ARTISTdirect, Inc., its Member
By: /s/ KEITH YOKOMOTO
------------------------------
Name: Keith Yokomoto
Title: President and COO
As to Section 10.2.3 As to Sections 9.5 and 10.2.3
"CTG Parent" "AD Parent"
Hampstead Management Co. ARTISTdirect, Inc.
By: /s/ [ILLEGIBLE] By: /s/ KEITH YOKOMOTO __
-------------------------------- ----------------------------------
Name: Name: Keith Yokomoto
Title: Title: President and COO
As to Sections 4.5 and 4.6
"CTSI"
Cisneros Television Services, Inc.
By: /s/ [ILLEGIBLE]
--------------------------------
Name:
Title:
33
<PAGE> 34
EXHIBIT "A"
BUSINESS PLAN AND ANNUAL BUDGET
See attached.
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>
[***]*
- ------------
* 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
[***]*
- ------------
* 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.
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) [***]* Sound Clips from [***]* or (ii) [***]* Sound Clip in
respect of [***]*.
(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-
- ----------
* 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
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. [***]*
4. CONSIDERATION
4.01. In consideration of the rights granted to you hereunder, each Web
Site hosted on the ARTISTdirect Network containing Sony Content or any of the
elements described in sections 3A.03(b)(1), (2) or (3) above shall at all times
during the Term contain an active link to a Web Site created, hosted and
maintained by Sony in respect of such Sony Artist (each, a "Sony Artist Site"),
if any. Each such link shall be solely to such locations and/or addresses on the
Sony Artist Site as Sony shall designate in writing in each instance, and shall
be equal in size and prominence as the link from the corresponding Sony Artist
Site to such ARTISTdirect Network Web Site placed by Sony pursuant to paragraph
4A.01 below.
- --------
* Confidential treatment has been requested for the bracketed portion. The
confidential redacted portion has been omitted and filed separately with the
Securities and Exchange Commission.
5
<PAGE> 6
4.02 [***]*
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.
- --------
* 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
5.02. Omitted without implication.
5.03. If you become aware of any unauthorized manufacture, advertising,
distribution, lease or sale by any third party of the Sony Recordings, or any
other Master Recordings the copyrights to which are owned by Sony or its
licensors, you shall promptly notify Sony thereof and shall cooperate with Sony,
at Sony's cost and expense, in the event that Sony commences any action or
proceeding against such third party.
6. Omitted without implication.
7. ADDITIONAL REPRESENTATIONS, WARRANTIES AND INDEMNITIES
7.01. You warrant and represent that:
(a) You have the right and power to enter into and fully
perform this license agreement and to make the commitments you make herein, and
have obtained or will obtain all necessary licenses, permissions and consents.
(b) Sony shall not be subject to any costs, fees or other
charges (including, without limitation, any royalties) in respect of
ARTISTdirect's use of any Sound Clips and/or Artwork files or in respect of the
ARTISTdirect Network.
(c) You are fully-qualified to digitize and create Sound Clip
and Artwork files and to operate the ARTISTdirect Network as described herein.
(d) Subject to clause (i) of the last sentence of paragraph
9.01 below, you own, and will own at all times during the Term, all right, title
and interest in and to the ARTISTdirect Network, and all copyrights and other
rights therein (other than the underlying rights in the content and intellectual
property included therein, to the extent such content and intellectual property
is owned by third parties and licensed to you), throughout the Territory, free
and clear of any and all claims or encumbrances whatsoever. Subject to the
representations and warranties made by Sony hereunder, the operation and use of
ARTISTdirect Network for the purposes described herein, do not, and at no time
shall during the Term, violate any law (including, without limitation, any
federal law or regulation) or infringe upon or violate the rights of any Person.
(e) You have obtained from third parties all licenses and
other rights necessary in order to create and operate the ARTISTdirect Network.
(f) You are a corporation duly organized and in good standing
under the laws of the State of Delaware.
7.02. You will at all times indemnify and hold harmless Sony and any
licensor of Sony from and against any and all claims, damages, liabilities,
costs and expenses (including reasonable legal expenses and counsel fees)
arising out of any breach or
7
<PAGE> 8
alleged breach by you of any representation, warranty or agreement made by you
herein, including, without limitation, your representation and warranty to
secure and pay for all third-party licenses, permissions and consents. You will
reimburse Sony and/or its licensors on demand for any payment made at any time
after the date hereof in respect of any liability or claim in respect of which
Sony or its licensors are entitled to be indemnified.
7.03. Sony will at all times indemnify and hold you harmless from and
against any and all claims, damages, liabilities, costs and expenses (including
reasonable legal expenses and counsel fees) arising out of any breach by Sony of
any representation or warranty made by Sony herein up to, in the aggregate,
[***]*. 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
- --------
* 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
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 [***]* in length (except for Sony Recordings in
the [***]*, which shall be no
- --------
* 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
greater than [***]* 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
- --------
* 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
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 10.42
STRATEGIC MARKETING AGREEMENT
THIS STRATEGIC MARKETING AGREEMENT (this "Agreement"), dated as of
December 20, 1999, is being entered into by and between BMG Music d/b/a BMG
Entertainment, a New York general partnership ("Group") and ARTISTdirect, Inc.,
a Delaware corporation ("Company"):
WHEREAS, as of the date hereof, Group together with its Affiliates (as
defined below) is an active participant in the music industry;
WHEREAS, Group and Company believe there are synergies between Group's
business and Company's business;
WHEREAS, Group (or one of its Affiliates) has become a significant
equity owner in Company; and
WHEREAS, Group and Company desire to set forth certain understandings
between them with respect to strategic marketing and other commitments which
each believes will advantage its business.
NOW, THEREFORE, in consideration of the premises, covenants, agreements
and obligations hereinafter set forth and other good and valuable consideration,
the receipt and adequacy of which are hereby acknowledged, and intending to be
legally bound hereby, Company and Group hereby agree as follows.
1. Certain Definitions. As used in this Agreement, the following terms
shall have the following meanings:
(a) "Action" means any claim, action, suit, arbitration, inquiry,
proceeding, notice of violation, or investigation by or before any Governmental
Authority.
(b) "Affiliate" means, with respect to any specified Person, any other
Person that directly, or indirectly through one or more intermediaries,
controls, is controlled by, or is under common control with, such specified
Person. Affiliates also include, with respect to Company, any other person in
which the Company or one of its Affiliates serves as a general partner or as a
trustee (or similar capacity). For purposes of this definition, "control"
(including "controlled by" and "under common control with") means, with respect
to the relationship between or among two or more Persons, the possession,
directly or indirectly, or as trustee, personal representative, or executor, of
the power to direct or cause the direction of the affairs or management of a
Person, whether through the ownership of voting securities, as trustee, personal
representative, or executor, by contract or otherwise, including, the ownership,
directly or indirectly, of securities having the power to elect a majority of
the board of directors or similar body governing the affairs of such Person.
(c) "Business Days" means any day except a Saturday, Sunday or other
day on which banks are required or authorized by law to be closed in the City of
New York.
(d) "Commencement Date" shall have the meaning set forth in paragraph 2
below.
(e) "Company" shall have the meaning set forth in the preamble.
<PAGE> 2
2
(f) "Company Contact Person" shall have the meaning set forth in
paragraph 4(g) below.
(g) "Content" means music and music related content related to a Group
Artist (i) made available by Group or its Affiliates for marketing and
promotional purposes to non-Affiliated Persons (e.g., materials related to new
artists and new releases, electronic press kits, music audio samples, music
digital downloads, cybercasts, photographs, album covers, concert film clips,
biographical information, promotional merchandise and similar materials), or
(ii) designated by Group, in its sole discretion, as "Content" for the purposes
of this Agreement.
(h) "Controlled Affiliates", means any separately-branded or -imprinted
music label in which Group owns or holds, directly or indirectly, a fifty
percent or greater equity interest; provided, however, that a "50/50" joint
venture music label shall only be deemed a Controlled Affiliate if the
day-to-day management of such Controlled Affiliate is actually controlled,
directly or indirectly, by Group.
(i) "Derived Analyses" means analyses created by or for Company or an
Affiliate thereof during the Term and (A) created primarily through the analysis
of Other Data and provided by Company or an Affiliate thereof to any
non-Affiliated Person (other than a Person who is featured on a web site
operated by Company or an Affiliate thereof and Company or an Affiliate thereof
is contractually prohibited from disclosing such Derived Analysis), or (B)
related solely to Group Data. Derived Analyses shall not include any individual
level data (i.e. data which would permit an entity to identify a single consumer
by his or her name or email address).
(j) "Exclusive Content" means Content related to a Group Artist that
Group or its Affiliates makes available to Company or an Affiliate thereof
during the Term and with respect to which at least one of the following is true:
(i) such Content has not been and is not available (whether for online or
off-line use) and remains unavailable to any Person other than Company and/or
its Affiliates; (ii) such Content has not been and is not available (whether for
online or off-line use) and remains unavailable to any Person other than Company
and/or its Affiliates for a period of time to be agreed on a case-by-case basis
by, on the one hand, Company and/or its Affiliates and, on the other hand, Group
or its Affiliate providing such Content; or (iii) such Content has not been and
is not available and remains unavailable to any Person other than Company and/or
its Affiliates for online use, although it is made available to other Persons
solely for off-line use.
(k) "Generally Available Content" means Content related to a Group
Artist that Group or a Controlled Affiliate thereof makes generally available
during the Term to Online Music Companies for use on web sites.
(l) "Governmental Authority" means any national, federal, state,
municipal, local, or other government, governmental, regulatory, or
administrative authority, agency, or commission, or any court, tribunal, or
judicial or arbitral body.
(m) "Group" shall have the meaning set forth in the preamble.
(n) "Group Artist" means a recording artist who is, as of any date of
determination, subject to (i) an exclusive recording agreement (with customary
industry carve outs) with Group or an Affiliate of Group; (ii) an exclusive
license agreement (with customary
<PAGE> 3
3
industry carve outs) with Group or an Affiliate of Group; or (iii) an
arrangement wherein Group or an Affiliate thereof exclusively distributes
product of such artist.
(o) "Group Artist Site" means any web site (whether or not located on
the World Wide Web) owned or operated by Company or an Affiliate thereof that
(i) uses the name of, or predominantly features, a Group Artist, and (ii) is
owned or operated by Company or an Affiliate thereof as a result of the
substantial efforts during the Term of Group or an Affiliate thereof. For
purposes of clarity, any web site owned or operated by Company or an Affiliate
thereof pursuant to a written agreement or arrangement entered into by Company
or an Affiliate thereof prior to the Commencement Date shall not be a "Group
Artist Site"; provided, however, that if the Group Artist who is featured on
such web site (or an entity furnishing such Group Artist's services) agrees, as
a result of Group's or an Affiliate's thereof substantial efforts during the
Term, to extend such agreement or arrangement beyond the term thereof (as such
term exists as of the Commencement Date), then such web site shall be deemed a
"Group Artist Site" during such extension. Notwithstanding the foregoing, any
"Group Artist Site" shall cease to be a "Group Artist Site" upon the date the
applicable artist is no longer a Group Artist and has executed an exclusive
recording agreement (subject to customary carve outs in the recording industry)
with a Third Party.
(p) "Group Contact Person" shall have the meaning set forth in
paragraph 3(d) below.
(q) "Group Data" means any and all data collected by Company or an
Affiliate thereof (i) with respect to a consumer that registers with Company or
an Affiliate of Company through a Group Artist Site, (ii) with respect to any
transaction by a consumer related to a Group Artist Site or any transaction with
respect to product distributed by Group or an Affiliate thereof, and (iii) with
respect to any transaction by a consumer related to (A) a former Group Artist
Site, and (B) product distributed by the Group or Affiliate thereof.
Notwithstanding the foregoing, Group Data shall not include any data that
Company or an Affiliate thereof is prohibited from providing to Group or an
Affiliate thereof without such artist's consent (unless such consent has been
obtained) or a consumer's consent.
(r) "Indemnitee" shall have the meaning specified in paragraph 9(a).
(s) "Indemnitor" shall have meaning specified in paragraph 9(a).
(t) "Law" means any international, national, federal, state,
provincial, municipal, local, or other statute, law, ordinance, regulation,
rule, code, order, or other requirement or rule of law.
(u) "Licensed Content" shall have the meaning set forth in paragraph
7(a).
(v) `Licensor Marks" shall have the meaning set forth in paragraph
7(c).
(w) "Losses" means, with respect to any specified Person, all debts,
liabilities, obligations, losses, damages, claims, costs, expenses, amounts paid
in settlement, interest, awards, judgments, penalties, or fines of any kind,
nature, or description whatsoever (including all reasonable fees and
disbursements of counsel, accountants, experts, and consultants) suffered,
incurred, or sustained by such Person or to which such Person becomes subject
(including in connection with any Action brought or otherwise initiated by or on
behalf of such
<PAGE> 4
4
Person, whether against an Indemnitor hereunder or any other Person), based
upon, resulting from, arising out of, or relating to any specified facts or
circumstances.
(x) "Marketing Support" shall mean the following: (i) advertising
space, (ii) marketing services, (iii) promotional products or services, (iv)
Other Data, (v) Derived Analyses, and (vi) other marketing or promotional
products or services.
(y) "Online Music Company" means any Person who engages, as more than
an incidental portion of its commercial activities, in the online sale of music
or music/artist-related merchandise or the online publication of music-related
content online.
(z) "Other Data" means any and all data owned or controlled by Company
or an Affiliate thereof and made available by Company or an Affiliate thereof to
any Person, non-Affiliated to Company and shall specifically exclude (i) Group
Data, (ii) data owned by a Person non-Affiliated to Company, and (iii) data as
to a particular web site made available solely to the Person controlling the
rights to substantially all the content on such web site for example, an artist,
such artist's record label or a branding entity (e.g., "Dick Clark Presents").
Further, Other Data shall not include any data that Company or an Affiliate
thereof is prohibited from providing to Group or an Affiliate thereof without
such artist's or branding entity's consent (unless such consent has been
obtained) or a consumer's consent (unless such consent has been obtained).
(aa) "Permitted Web Sites" shall have the meaning set forth in
paragraph 7(a) below.
(bb) "Person" means any individual, partnership, firm, corporation,
limited liability company, joint venture, association, trust, unincorporated
organization, or other entity.
(cc) "Representative" means, with respect to any specified Person, any
Affiliate, manager, director, officer, employee, agent, accountant, or counsel
of, or other Person empowered to act for, such Person.
(dd) "Special Content" means Content related to a Group Artist (other
than Exclusive Content) that Group or its Affiliates makes available during the
Term and with respect to which at least one of the following is true: (i) such
Content has not been and is not available (whether for online or off-line use)
and remains unavailable except that it is made available to (A) Company and/or
its Affiliates and (B) a limited number of Online Music Companies (which may
include Affiliates of Group); (ii) such Content has not been and is not
available (whether for online or off-line use) and remains unavailable except
that it is made available to (A) Company and/or its Affiliates and (B) a limited
number of Online Music Companies (which may include Affiliates of Group) for a
period of time to be agreed on a case-by-case basis by, on the one hand, the
recipient of such Content and, on the other hand, Group or its Affiliate
providing such Content; or (iii) such Content has not been and is not available
and remains unavailable except that it is made available to (A) Company and/or
its Affiliates and (B) a limited number of Online Music Companies (which may
include Affiliates of Group) for online use, although it is made available to
other Persons for off-line use.
(ee) "Term" shall have the meaning set forth in paragraph 2 below.
(ff) "Third Party" shall mean any Person anywhere in the universe who
is not, as of any date of determination, then an Affiliate of Group or Company.
<PAGE> 5
5
(gg) "Third-Party Claims" shall have meaning specified in paragraph
9(b).
(hh) "Third Party Payments" shall mean any payments required by
contract or law to a Person other than Group or one of its Affiliates. For
purposes of clarity, a payment made to Group or one of its Affiliates in its
capacity as an agent of a third party shall be a Third Party Payment (e.g., a
payment made to a Group Affiliate which is a music publishing company for the
benefit of an artist shall be a Third Party Payment hereunder).
2. Term. The term of this Agreement (the "Term") shall commence on the
date of this Agreement (the "Commencement Date") and end on the earlier of (a)
the third anniversary of the Commencement Date and (b) the termination of the
Agreement pursuant to paragraph 8 below.
3. Group Obligations.
(a) Generally Available Content. During the Term, Group shall, and
shall cause its Affiliates to, regularly make available and grant the right to
use, Generally Available Content to Company and its Affiliates in the same
manner that Group or the applicable Group Affiliate allows Online Music
Companies to use the applicable Generally Available Content (it being understood
and agreed that, unless Group or an Affiliate thereof specifically grants such
rights to Company or an Affiliate thereof, Company shall not acquire any rights
in Generally Available Content greater than those rights generally granted by
Group or an Affiliate thereof to other Online Music Companies). [***]*. Group
shall use commercially reasonable efforts to make available, or cause to be made
available, to Company all Generally Available Content of a general promotional
nature no later than such content is generally made available to Online Music
Companies; provided that Group shall have no liability whatsoever for its
failure to comply with the requirements of this sentence. Notwithstanding the
foregoing, Group shall not be deemed to be in breach of this paragraph 3(a) for
any purpose hereunder if such breach is caused by the failure of any Group
Affiliate (other than Controlled Affiliates) to comply with this paragraph 3(a).
(b) Special Content and Exclusive Content. (i) Group shall, and shall
cause its Controlled Affiliates to, from time to time provide the opportunity
for Company and its Affiliates to obtain the right to use Special Content or
Exclusive Content. All terms and conditions applicable to Company's or its
Affiliates' use of any particular Special Content or Exclusive Content shall be
negotiated in good faith by the parties. The parties acknowledge and agree that,
at the discretion of Group and its Controlled Affiliates, Special Content and
Exclusive Content may be made available to Company and its Affiliates only upon
the payment by Company or its Affiliates of mutually agreed consideration [***]*
Examples of Special Content or Exclusive Content may be instances where a Group
or its Controlled Affiliate has the right to license or provide: (1) a
cybercast, made available first and exclusively to Company for a limited period
of time or a limited number of broadcasts, and for which Company would pay a fee
and any required Third Party Payments; (2) an exclusive chat with a Group Artist
on terms that may or may not include a fee; (3) prizes or promotional items
provided by Group or its Controlled Affiliate at no cost to Company or its
Affiliates; and (4) digital music downloads on terms that may or may not include
a fee. Notwithstanding anything to the contrary contained in this Agreement,
this Agreement does not place any restrictions whatsoever on Group and its
Affiliates' provision of Content (of any kind, type or nature) to any Person.
- ----------
* 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
6
(ii) Notwithstanding paragraph 3(b)(i) above, Group shall, and shall
cause its Controlled Affiliates, to grant Company and its Affiliates the right
to use, [***]* of Exclusive Content, in the aggregate, relating to the Group
Artists each calendar quarter.
(c) Use of Content. For purposes of clarity, Company and its Affiliates
shall have no obligation to license, acquire or use any Content. With respect to
each license or purchase by a Company or an Affiliate thereof of Content (i.e.,
where Company or an Affiliate thereof is required to pay for such Content), the
parties shall promptly memorialize the financial and all other terms applicable
to such purchase and promptly provide a copy of such memorialization to each the
of Company Contact Person and the Group Contact Person (it being acknowledged
and agreed that failure so to provide such a copy shall not invalidate or
otherwise affect such license or purchase or the terms applicable thereto).
(d) Group Contact Person. Group shall promptly after the execution of
this Agreement appoint (and shall maintain throughout the Term) one person to be
the primary contact person on behalf of Group and its Affiliates (the "Group
Contact Person"), which person may change from time to time as designated by
Group in its sole discretion. The Group Contact Person shall coordinate with the
Company Contact Person with respect to all operational and similar purposes
under this Agreement.
4. Company Obligations.
(a) Group Artist Web Sites. During the Term, Group shall have the right
to designate, [***]*, up to [***]* Group Artist web sites owned or operated by
Group or any of its Affiliates to be seamlessly integrated into the listings or
directories (or other display of the availability of artist web sites) of artist
web sites accessible by the UBL.com search engine such that a user of such
search engine will not be able to tell which artist web sites are operated by
Company and its Affiliates as opposed to artist web sites operated by Group and
its Affiliates; provided that Group shall not designate any Group Artist web
sites for which there exists, as of the date hereof, a Group Artist Site.
Company shall integrate the Group designated artist web sites as provided above
within 5 Business Days of receipt of Group's designation notice. [***]*. If,
during the Term, Company or its Affiliates provides other listings or
directories of artist web sites (or other display of the availability of artist
web sites) or redesigns of same, Group designated artist web sites shall be
integrated into such listings in the same manner as is contemplated in the
UBL.com search engine.
(b) Designated Group Artists. During the Term, Group shall have the
right to designate, not more than once each calendar quarter, [***]* Group
Artists to be featured prominently on the Company and its Affiliates web sites,
including the UBL.com search engine, for a continuous period of not less than
[***]*; provided that Group shall not designate more than [***]* whose last
album released within [***]* prior thereto was certified "Gold" in the United
States.
(c) Availability of Marketing Support. During the Term and subject to
the further provisions of this paragraph 4, Company shall, and shall cause its
Affiliates to, make available to Group and its Affiliates any Marketing Support
that Company and its Affiliates make available to Third Parties [***]*. For
purposes of clarity, Group and its Affiliates shall have no obligation to
acquire or use any particular Marketing Support. The parties shall promptly
- ----------
* 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
7
memorialize the terms and conditions applicable to the provision of such
Marketing Support and promptly provide a copy of such memorialization to each of
the Group Contact Person and the Company Contact Person (it being acknowledged
and agreed that the failure so to provide such a copy shall not invalidate or
otherwise affect such transaction or the terms applicable thereto).
(d) Provision of Group Data. During the Term, Company shall provide,
and shall cause its Affiliates to provide, to Group copies of all Group Data
from time to time as requested by Group, but not less frequently than monthly.
The parties shall agree on the form and media in which such data shall be
provided to Group, and that Company shall reasonably cooperate with Group in
creating data collection fields for Group Artist Sites and with respect to the
sale of Group product. Notwithstanding the foregoing, the parties acknowledge
and agree that the provision of Group Data to Group may be subject to the
consent of the applicable Group Artist. [***]*.
(e) Provision of Other Data, Derived Analyses. During the Term, Company
shall notify, and shall cause each Company Affiliate to notify, Group promptly
after the date Company or an Affiliate thereof first makes available any Other
Data or Derived Analyses created by Company or an Affiliate thereof, to any
Third Party. Such notice shall identify in reasonable detail: (i) the nature of
such Other Data or Derived Analyses, and (ii) the terms and conditions such
Other Data or Derived Analyses was provided to such Third Party [***]*.
Notwithstanding anything contained in this Agreement to the contrary, Company
and its Affiliates shall not be obligated under this Agreement to provide Group
or any Affiliate thereof with any data (A) if the applicable artist or entity
has the right to approve the dissemination of such data and has not give such
approval, (B) the dissemination of such data would violate the privacy policy of
Company or the applicable Company Affiliate, or (C) the dissemination of such
data would violate any law, statute or regulation then in effect including, if
applicable, The Children's Online Privacy Protection Act and any regulation
promulgated by the Federal Trade Commission or any other governmental entity
(whether United States or foreign). Without Company's prior written consent, or
as permitted by the terms applicable to such Other Data or Derived Analyses
consistent with clause (ii) of the first sentence of this paragraph 4(e), Group
and its Affiliates shall not be entitled to transfer, assign, sell or disclose
any Other Data or Derived Analyses to any Person other than to a Group Affiliate
(and the Group Affiliate shall be so restricted). Notwithstanding the
immediately preceding sentence, Other Data or Derived Analysis related to a
particular Group Artist may be made available by Group and its Affiliates to the
applicable Group Artist (provided such artist agrees that it shall not further
assign, sell or disclose same). [***]*.
(f) [***]*.
- ----------
* 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> 8
8
(g) Company Contact Person. Company shall promptly after the execution
of this Agreement appoint (and shall maintain throughout the Term) one person to
be the primary contact person on behalf of Company and its Affiliates (the
"Company Contact Person"), which person may change from time to time as
designated by Company in its sole discretion. The Company Contact Person shall
coordinate with the Group Contact Person with respect to all operational and
similar purposes under this Agreement.
5. Links. It is the parties intention to mutually agree on a series of
links between web sites owned or operated by the Group and its Affiliates, on
the one hand, and the Company and its Affiliates, on the other hand. In
particular, it is the parties intention to mutually agree on a series of links
between (a) the GetMusic LLC genre web sites and appropriate artist web sites
owned or operated by the Company and its Affiliates; (b) unique programming on
the GetMusic LLC web sites and appropriate web sites (including artist web
sites) owned or operated by the Company and its Affiliates; and (c) web sites
owned or operated by Group and its Affiliates, on the one hand, and the Company
and its Affiliates, on the other hand, relating to the same Group Artists. The
nature, size, type and prominence of such links will be negotiated in good faith
by the parties hereto.
6. Intellectual Property. All of the intellectual property held, used
or provided by each party hereto and its respective Affiliates, including the
Limited Content provided pursuant to paragraph 7 below, is directly or
indirectly owned thereby or held thereby pursuant to valid and subsisting
licenses or sublicenses. The rights of each party hereto and its respective
Affiliates in, to, or under such intellectual property or its use thereof do not
conflict with or infringe on the rights of any other person. Except as expressly
provided in paragraph 8(b) below, paragraph 9 will be the sole and exclusive
remedy of the parties hereto for a breach of this paragraph 6.
7. Content Use License. (a) Content License. Upon the delivery by Group
or any of its Affiliates to Company or any of its Affiliates of any Content
("Licensed Content") pursuant to this Agreement, such Group or Affiliate, as the
case may be (for purposes of this paragraph 7, "Licensor"), shall be deemed to
have granted to Company during the Term a revocable, [***]*, non-exclusive
license (except as provided in paragraph 3(b)) for use on English language only
.com and .net web sites targeted at U.S.-based consumers ("Permitted Web
Sites"): (i) to reproduce the Licensed Content in digital form (alone or in
combination with other works, including text, data, images, photographs,
illustrations, animation, graphics, video and audio segments, and hypertext
links) and (ii) to reproduce, transmit, display, distribute, perform, or
otherwise communicate the Licensed Content through electronic, magnetic,
wireless, cellular, cable telephonic, terrestrial, satellite, radiophonic, or
any other communications technology, whether now known or hereafter developed,
as part of or in conjunction with any Permitted Web Site owned or operated by
Company or any of its Affiliates.
(b) Ownership. Subject to the license granted hereby, as between
Company and its Affiliates on the one hand, and its Group and its Affiliates on
the other hand, the Licensed Content and all right, title, and interest therein
is and shall remain the exclusive property of Licensor.
(c) Trademark License and Usage. (i) Licensor hereby grants to Company
during the Term a revocable, [***]*, non-exclusive license for use on Permitted
Web Sites to use
- ----------
* Confidential treatment has been requested for the bracketed portion. The
confidential redacted portion has been omitted and filed separately with the
Securities and Exchange Commission.
<PAGE> 9
9
the trademarks, trade names, service marks, and logos owned, controlled, or
licensed by Licensor or any of its Affiliates and described in Schedule I
hereto; and upon the delivery by any Licensor to Company of any Licensed Content
pursuant to this Agreement, such Licensor shall be deemed to have granted to
Company during the Term a revocable, non-royalty-bearing, non-exclusive license
for use on Permitted Web Sites to use any trademarks, trade names, service
marks, or logos owned, controlled, or licensed by Licensor or any of its
Affiliates and incorporated in such Licensed Content (collectively, as they now
exist and as they may hereafter be modified, the "Licensor Marks"), solely for
purposes of and in connection with exploiting and otherwise using as permitted
herein the Licensed Content on any Permitted Web Site owned or operated by
Company or any of its Affiliates.
(ii) Company shall: (A) prospectively after notice from Group to
Company thereof, comply with the standards established from time to time by the
applicable Licensor with respect to the form of such its Licensor Marks and
their usage; and (B) maintain good business standards in compliance with all
applicable Laws in all matters relating to the Licensor Marks.
(iii) Company shall not: (A) use the Licensor Marks in any manner not
expressly contemplated by this Agreement; (B) use the Licensor Marks in any
manner which could reasonably be expected to diminish the commercial value of
such Licensor Marks, including in close proximity with any other trademark,
trade name, service mark, logo, name, or image which could reasonably be
expected to create any form of composite mark; (C) permit any unauthorized Third
Party to use the Licensor Marks; or (D) use or permit the use of any trademark,
trade name, service mark, logo, name, or image in a way which could reasonably
be expected to cause confusion with the Licensor Marks.
(iv) As between as Company and its Affiliates, on the one hand, and
Group and its Affiliates on the other hand, the Licensor Marks and all right,
title, and interest therein are and shall remain the exclusive property of
Licensor, Company shall acquire no proprietary rights in, to, or under the
Licensor Marks by virtue of this Agreement or its use of the Licensor Marks
hereunder, and Company's use of the Licensor Marks hereunder shall inure solely
to the benefit of Licensor.
(d) Right to Sublicense. Company shall have the right to sublicense to
any Affiliate thereof which is engaged in a substantially similar business, upon
the terms and subject to the conditions set forth in this paragraph 7, all of
its rights under this paragraph 7 with respect to the Licensed Content and the
Licensed Marks. Company shall have no other rights to sublicense the Licensed
Content and the Licensed Marks.
(e) Revocability of Licenses. Notwithstanding the revocability of the
licenses granted pursuant to clauses (a) and (b) of this paragraph 7, Licensor
agree not to use the revocable nature of the licenses to frustrate the purposes
of this Agreement. Furthermore, Licensor agrees that it will not revoke the
license hereunder with respect to any Licensed Content unless any one of the
following is true: (i) Licensor or Group believes, in good faith, that the
Licensed Content or the use of the Licensed Content is causing, or may
reasonably be expected to cause, an artist relationship or label relationship
issue, (ii) the Licensor's rights in or to the Licensed Content expire, (iii)
the Licensor or any of its Affiliates become aware of any Action or threatened
Action regarding the Licensed Content or the use of the Licensed Content, or
(iv) Licensor or Group believes, in good faith, that the use of the Licensed
Content has, or will have, an adverse effect on Licensor or any its Affiliates
or any of their respective artists.
<PAGE> 10
10
8. Termination. (a) Either party hereto may terminate this Agreement at
any time by delivery of written notice of termination to the other party: (i) if
any representation or warranty of the other party contained herein (other than
with respect to paragraph 6 above) was not true and complete in all material
respects when made, and such other party fails to cure any such breach or
default, if curable, within thirty days of receipt of written notice thereof
from the terminating party; (ii) if the other party fails timely to comply in
all material respects with each covenant or agreement thereof contained in this
Agreement, and such other party fails to cure any such breach or default, if
curable, within thirty days of receipt of written notice thereof from the
terminating party; or (iii) if the other party makes a general assignment for
the benefit of creditors, or any proceeding is instituted by or against the
other party seeking to adjudicate it a bankrupt or insolvent, or seeking
liquidation, winding up or reorganization, arrangement, adjustment, protection,
relief or composition of its debts under any law relating to bankruptcy,
insolvency or reorganization; provided that, in the event of any such proceeding
instituted against the other party, such proceeding has not been stayed or
dismissed for a period of sixty days.
(b) Notwithstanding anything to the contrary contained herein, either
party shall have the right to terminate this Agreement upon 30 days notice to
the other party in the event such party or its Affiliates are subject to an
Action directly related to a breach of Section 6, so long as such breach was not
caused by the party electing to terminate this Agreement. Notwithstanding
anything to the contrary contained herein, Group shall have the right to
terminate this Agreement upon 30 days notice to Company in the event Company or
its Affiliates becomes owned or controlled (as defined in the definition of
Affiliate) by a Competitor (as defined below) or this Agreement is assigned to a
Competitor; provided that Group shall not have such right of termination so long
as two of James Carroll, Marc Geiger, Steve Rennie and Keith Yokomoto remain
executives of the Company during the Term with responsibilities, which include,
the day-to-day management of the Company and its Affiliates. As used herein
"Competitor" means any Person that owns, operates, or manages an Online Music
Company or has significant operations involving the creation (i.e., traditional
"music label" activities) and/or distribution of music in a physical format.
(c) The termination or expiration of this Agreement shall not release
either party hereto from any obligation accruing prior to the date of such
termination or expiration or which, in accordance with the terms hereof,
survives such termination or expiration, nor release a defaulting party from
liability for its default hereunder and for the Losses incurred by the other
party as a result of any such default hereunder.
(d) Neither party will be liable to the other for incidental,
consequential, special, punitive or indirect damages, including, loss of profit,
loss of business or business opportunity.
9. Indemnification. (a) General. Each party hereto (each such party in
its capacity as indemnitor under this paragraph 9, the "Indemnitor") shall
indemnify each other party hereto, each Affiliate of such other party, each
successor and assign of each such Person, and each Representative of each of the
foregoing (each such Person in its capacity as indemnitee under this paragraph
9, an "Indemnitee"), with respect to, and hold each of them harmless from and
against, all Losses based upon, resulting from, arising out of, or relating to
any breach or alleged breach by Indemnitor of any representation, warranty,
covenant, or agreement of such Indemnitor contained in this Agreement. To the
extent that any obligations of Indemnitor set forth in this paragraph 9 may be
invalid, illegal, or unenforceable, Indemnitor shall, to the fullest extent
permitted under applicable Law, contribute to the payment and
<PAGE> 11
11
satisfaction of all Losses incurred by any Indemnitee. Each Indemnitee shall
promptly give Indemnitor notice of any matter which such Indemnitee has
determined has given or could reasonably be expected to give rise to a right of
indemnification hereunder, stating the amount of the Loss, if known, and method
of computation thereof, and describing in reasonable detail the facts and
circumstances upon which such determination is based; provided, however that any
failure to provide such notice shall not release Indemnitor from any of its
obligations under this paragraph 9 except to the extent that the Indemnitor is
materially prejudiced by such failure.
(b) Third-Party Claims. The obligations and liabilities of Indemnitor
under this paragraph 9 with respect to Losses arising from claims of any Third
Party which are subject to the indemnification provided for in this paragraph 9
("Third-Party Claims") shall be governed by and contingent upon the following
additional terms and conditions:
(i) If an Indemnitee receives notice of any Third-Party Claim,
such Indemnitee shall give Indemnitor notice of such Third-Party Claim
within ten Business Days after the receipt by such Indemnitee of such
notice; provided, however, that the failure to provide such notice
shall not release Indemnitor from any of its obligations under this
paragraph 9 except to the extent Indemnitor is materially prejudiced by
such failure and shall not relieve Indemnitor from any other obligation
or liability that it may have to any Indemnitee otherwise than under
this paragraph 9;
(ii) If Indemnitor acknowledges in writing its obligation to
indemnify such Indemnitee under this Agreement against any Losses that
may result from such Third-Party Claim, then Indemnitor shall be
entitled to assume and control the defense of such Third-Party Claim at
its expense and through counsel of its choice (which counsel shall be
reasonably acceptable to such Indemnitee) if it gives notice of its
intention to do so to such Indemnitee within five Business Days after
the receipt of such notice. In the event that Indemnitor exercises the
right to undertake any such defense against any such Third-Party Claim
as provided above, such Indemnitee shall cooperate with Indemnitor in
such defense and make available to Indemnitor all witnesses, pertinent
records, materials, and information in such Indemnitee's possession or
under its control relating thereto as is reasonably required by
Indemnitor. Similarly, in the event that such Indemnitee is conducting
the defense against any such Third-Party Claim, Indemnitor shall
cooperate with such Indemnitee in such defense and make available to
such Indemnitee all such witnesses, records, materials, and information
in Indemnitor's possession or under its control relating thereto as is
reasonably required by such Indemnitee. Indemnitor shall not compromise
or settle any Third-Party Claim without the prior written consent of
the Indemnitee, unless in connection therewith, such Indemnitee is
given a full and complete release with respect to such Third-Party
Claim, in form and substance reasonably satisfactory to such
Indemnitee.
10. Miscellaneous.
(a) Counterparts; Facsimile Signatures. This Agreement may be signed in
multiple counterparts. Each counterpart will be considered an original, but all
of them in the aggregate shall constitute one agreement. This Agreement and any
amendments hereto, to the extent signed and delivered by means of a facsimile
machine, shall be treated in all manner and respects as an original agreement or
instrument and shall be considered to have the same binding effect as if it were
the original signed version thereof delivered in person.
<PAGE> 12
12
(b) Successors and Assigns. Subject to paragraph 8 above, this
Agreement may be assigned to any Affiliate of the assigning party or to any
Person who purchases all of substantially all of the stock or assets of the
assigning party, provided that the assigning party shall remain primarily liable
under this Agreement for its obligations hereunder. In all other respects, this
Agreement shall not be assigned, in whole or in part, whether voluntarily or by
operation of law, without the consent of the other party hereto, and any such
purported assignment shall be deemed null and void and without force or effect.
(c) Entire Agreement. This Agreement is intended by the parties as a
final expression of their agreement and is intended to be a complete and
exclusive statement of the agreement and understanding of the parties hereto in
respect of the subject matter hereof. This Agreement supersedes all prior
letters of intent, agreements and understandings between the parties with
respect to the subject matter hereof.
(d) Amendments. This Agreement may be amended, modified or supplemented
only in a writing executed by each of the parties hereto.
(e) Notices. All notices and other communications provided for or
permitted hereunder shall be made in writing by hand-delivery, first class mail
or overnight courier, shall be deemed given on the date received, if delivered
by hand or courier, and four days after deposit into the United States mail, if
mailed, and shall be delivered to the addresses for notice indicated on Schedule
II attached hereto, or at such other addresses as a party may hereafter
designate by notice delivered pursuant to this paragraph 10.
(f) Relationship of the Parties. Notwithstanding any other relationship
between the parties hereto, or between or among them and their respective
Affiliates, nothing herein shall be deemed to constitute the parties a
partnership or joint venture.
(g) Severability. If any term or other provision hereof is determined
by any court of competent jurisdiction to be invalid, illegal, or unenforceable,
in whole or in part, by reason of any applicable law or public policy now or
hereafter existing, and such determination becomes final and nonappealable, such
term or other provision shall remain in full force and effect to the fullest
extent permitted by law, and all other terms and provisions hereof shall remain
in full force and effect in their entirety.
(h) Governing Law; Jurisdiction; Jury Trial. This Agreement shall be
governed by the laws of the State of New York. Each party hereto hereby
unconditionally and irrevocably submits, for itself and its property, to the
exclusive jurisdiction of any court of the State of New York and any federal
court of the United States of America, in either case, sitting in the City and
County of New York, and any appellate court therefrom, over any action, suit, or
proceeding based upon, resulting from, arising out of, or relating to this
letter agreement or any transaction or agreement contemplated hereby, or for the
recognition or enforcement of any judgment resulting from any such action, suit,
or proceeding. Each party hereto hereby unconditionally and irrevocably waives
all right to trial by jury in any action, suit, or proceeding (whether based on
contract, tort, or otherwise) based upon, resulting from, arising out of, or
relating to this letter agreement or any transaction or agreement contemplated
hereby.
(i) Preparation and Negotiation of This Agreement. Each party hereto
has participated equally in the preparation and negotiation of this Agreement,
including all annexes, appendices, exhibits, and schedules hereto, and each
party hereto hereby unconditionally and irrevocably waives to the fullest extent
permitted by law any rule of interpretation or construction
<PAGE> 13
13
requiring that this Agreement, including any annex, appendix, exhibit, or
schedule hereto, be interpreted or construed against the drafting party.
(j) Survival of Representations and Warranties and Certain Covenants
and Agreements. Each party's representations and warranties contained herein,
and the covenants and agreements contained in paragraphs 9 and 10, shall survive
the termination or expiration hereof.
(k) Headings and Examples. The headings in this Agreement are for the
convenience of reference only and shall not limit or otherwise affect the
meaning hereof. Whenever examples are used in this Agreement with the words
"including," "for example," "e.g.," "such as," "etc." or any derivation thereof,
such examples are intended to be illustrative and not in limitation thereof.
(l) Publicity. Neither party hereto shall, and each party hereto shall
cause its respective Representatives not to, make or cause to be made any press
release or public announcement with respect to this Agreement or the related
equity investment by Group or one of its Affiliates in Company without the
express written consent of the other party hereto (which consent the other party
may give or withhold in its sole discretion).
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
<PAGE> 14
14
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first written above.
ARTISTdirect, INC.
By: /s/ KEITH YOKOMOTO
---------------------------------------
Keith Yokomoto
President and Chief Operating Officer
BMG MUSIC d/b/a BMG ENTERTAINMENT
By: /s/ THOMAS W. MCINTYRE
---------------------------------------
Name: Thomas W. McIntyre
Title: Executive Vice President and
Chief Financial Officer
<PAGE> 15
SCHEDULE I
[***]*
- ----------
* 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> 16
SCHEDULE II
[***]*
- ----------
* 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> 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
[***]* 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 [***]* and (b) the other ARTISTdirect Links on or
before [***]* In any event, ARTISTdirect will deliver to
Yahoo all the text, artwork and design elements of the
ARTISTdirect Banner no later than [***]* and all text,
artwork and design elements of the other ARTISTdirect Links
no later than [***]*
8.2 Yahoo reserves the right, at any time, to redesign or
modify the organization, structure, specifications, "look
and feel," navigation, guidelines and other elements of the
ARTISTdirect Links or any Yahoo Property on which an
ARTISTdirect Link is placed. If such a modification
materially and adversely affects any specific ARTISTdirect
Link, Yahoo will provide ARTISTdirect, as its sole remedy,
with a comparable promotional placement on the Yahoo
Properties.
- --------
* 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,
[***]*. If the parties cannot resolve the matter within 5
business days of Yahoo's notice to ARTISTdirect, Yahoo
reserves the right to [***]*).
8.6 Within [***]* days after the Effective Date of this
Agreement, ARTISTdirect will place a Yahoo graphic link on
all ARTISTdirect Destination Pages. The Yahoo graphic link
must (a) be placed in a manner approved by Yahoo, [***]*;
(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 [***]* of this Agreement, the parties will use
commercially reasonable efforts [***]*, to credit
ARTISTdirect with the traffic and reach statistics
generated from users who view Pages on the ARTISTdirect RMI
Site, as reported by Media Metrix. If the parties cannot
devise a means of officially crediting ARTISTdirect with
these statistics, either by a change in technology or by a
change in Media Metrix's reporting policies, [***]*
9. LIMITED EXCLUSIVITY; RIGHT OF FIRST PRESENTATION.
9.1 Commencing on [***]* and continuing through the Term, Yahoo
will (a) [***]*
9.2 The parties acknowledge and agree that, with respect to the
Music Merchant Modules only, placement of ARTISTdirect's
Music Merchant Modules will [***]*
9.3 ARTISTdirect acknowledges and agrees that, except with
respect to the foregoing limited exclusivity of Sections
9.1 and 9.2 above, Yahoo is not precluded from, among other
things, promoting or placing any advertising units of a
Music Merchant or any other entity in any area of the Yahoo
Properties.
9.4 In the event that Yahoo develops enhancements that
materially improve the size, appearance or placement of (a)
any ARTISTdirect Link or (b) any other advertising unit
made available to Music Merchants generally,
- --------
* 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 [***]*
10. PAGE VIEWS.
10.1 With respect to the ARTISTdirect Links, Yahoo will deliver
a minimum of [***]* Page Views.
10.2 Yahoo will use commercially reasonable efforts to deliver
the aforementioned Page Views according to the allocation
set forth below, but Yahoo's Page View obligation is with
respect to the Music Merchant Program as a whole. Yahoo
will not be in breach of this Agreement for failure to
deliver the specific number of Page Views in any of the
areas set forth below:
(a) [***]*
10.3 [***]* Yahoo and ARTISTdirect will meet to discuss the
performance of this Music Merchant Program as a whole and
agree to consider in good faith ways to optimize elements
of this Music Merchant Program. In the event that Yahoo
fails to deliver the number of Page Views set forth in
Section 10.1 before expiration of the Term, [***]* If Yahoo
does not satisfy its Page View obligation within [***]*
days after the expiration of the Term, then [***]* The
parties acknowledge and agree that the [***]* referenced
above has no other significance in this Agreement other
than [***]*
10.4 On a regular basis and at ARTISTdirect's reasonable
request, Yahoo will provide ARTISTdirect with access to an
electronic database, the accuracy of which is periodically
reviewed and certified by Ernst & Young, LLP or a similarly
reputable and independent entity, that describes in
reasonable detail Yahoo's calculation of the Page Views
delivered under this Agreement. To the extent that Yahoo
elects, in its sole discretion, to conduct research or
analysis on behalf of or at the direction of ARTISTdirect,
Yahoo will share its results with ARTISTdirect at [***]*
11. COMPENSATION.
11.1 Slotting Fee. In consideration of Yahoo's performance and
obligations as set forth herein, ARTISTdirect will pay to
Yahoo [***]* of the first payment set forth in the payment
schedule below will be designated as a
- --------
* Confidential treatment has been requested for the bracketed portion.
The confidential redacted portion has been omitted and filed separately with the
Securities and Exchange Commission.
15
<PAGE> 16
set up fee for the design, consultation, development,
implementation and placement of the ARTISTdirect Links.
Payment Date
------- ----
[***]*
11.2 Payment Information. Except as set forth in Section 10.3,
all payments herein are non-refundable and non-creditable
and will be made by ARTISTdirect via wire transfer into
Yahoo's main account according to the wire transfer
instructions set forth on Exhibit S.
11.3 Late Payments. Any portion of the above payments that has
not been paid to Yahoo within [***]* after the dates set
forth above will bear interest at the lesser of (a) [***]*
percent [***]* per month or (b) the maximum amount allowed
by law. Notwithstanding the foregoing, any failure by
ARTISTdirect to make the payments specified in Section 11.1
on the dates set forth therein constitutes a material
breach of this Agreement.
11.4 Ability to Pay. ARTISTdirect represents and warrants that
it has the ability to pay to Yahoo all fees set forth in
this Agreement.
12. TERM AND TERMINATION.
12.1 Term. This Agreement will commence upon the Effective Date
and, unless terminated as provided herein, will remain in
effect for the Term.
12.2 Termination by Either Party with Cause. This Agreement may
be terminated at any time by either party (a) immediately
upon written notice if the other party (1) becomes
insolvent; (2) files a petition in bankruptcy; or (3) makes
an assignment for the benefit of its creditors; or (b) 30
days after written notice to the other party of such other
party's breach of any of its obligations under this
Agreement in any material respect (20 days in the case of a
failure to pay), which breach is not remedied within such
notice period. In the event that ARTISTdirect does not
remedy a breach of its payment obligation under this
Agreement within 20 days of Yahoo's written notice to
ARTISTdirect, Yahoo will be entitled to suspend its
performance under this Agreement immediately. Any notice of
breach provided in accordance with subsection (b) will
describe any termination of the Warrant that will result
from such breach.
12.3 Survival. The provisions of Sections 1, 10.3, 11, 13
through 17 and this 12.3 will survive expiration or
termination of this Agreement, except that ARTISTdirect's
payment obligations set forth in Section 11.1 will not
- --------
* Confidential treatment has been requested for the bracketed portion.
The confidential redacted portion has been omitted and filed separately with the
Securities and Exchange Commission.
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 [***]* 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.
- --------
* 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.
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:
[***]* 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]
- --------
* 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.
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
[*** ***
*** ***]*
- --------
* 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.
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! [***]* of Revenue received
by Merchant. "Revenue" means the total net retail amount of sales, [***]*.
Merchant will pay such Revenue share amounts quarterly within [***]* 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
- --------
* 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> 6
required more often than [***]* per twelve (12) month period, except that
Yahoo! may audit Merchant within [***]* months of any audit in which a
discrepancy of [***]* 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 [***]* 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 [***]* 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,
- --------
* 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> 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 10.45
FORM OF SERIES C PREFERRED STOCK PURCHASE AGREEMENT
THIS SERIES C PREFERRED STOCK PURCHASE AGREEMENT is made as of the
___th day of December 1999, by and between ARTISTdirect, Inc., a Delaware
corporation (the "Company") and _______________________ ("the "Investor").
THE PARTIES HEREBY AGREE AS FOLLOWS:
1. Purchase and Sale of Stock.
1.1 Restated Certificate. The Company has adopted and filed with the
Secretary of the State of Delaware the Amended and Restated Certificate of
Incorporation in the form attached hereto as Exhibit A (the "Restated
Certificate"). The Company's stockholders have approved the Restated
Certificate.
1.2 Sale and Issuance of Series C Preferred Stock. Subject to the
terms and conditions of this Agreement, the Investor agrees to purchase at the
Closing (as defined below), and the Company agrees to sell and issue to the
Investor at the Closing, _________ shares of the Company's Series C Preferred
Stock (or, if all of the Company's Series C Preferred Stock has been
automatically converted to Common Stock in connection with the Company's initial
public offering, the same number of shares of Common Stock issuable upon
conversion of such Series C Preferred Stock) at a purchase price of $3.482 per
share and an aggregate purchase price of $______________.
1.3 Closing. The purchase and sale of the Series C Preferred Stock
(or Common Stock, if all of the Company's Series C Preferred Stock has been
automatically converted into Common Stock in connection with the Company's
initial public offering) (the "Closing") shall take place at the offices of
Brobeck, Phleger & Harrison LLP ("BPH"), 38 Technology Drive, Irvine,
California, at 10:00 a.m., on ___________________, or at such other time and
place as the Company and the Investor mutually agree upon orally or in writing
(the "Closing Date"). At the Closing, the Company shall deliver to the Investor
a certificate representing shares of fully paid, nonassessable, validly issued
and authorized shares of Series C Preferred Stock (or Common Stock, if
applicable) that the Investor is purchasing at the Closing against payment of
the purchase price therefor by check or wire transfer.
2. Representations and Warranties of the Company. The Company hereby
represents and warrants to the Investor that, except as set forth on a Schedule
of Exceptions (the "Schedule of Exceptions") previously furnished to the
Investor and counsel for the Investor, specifically identifying the relevant
subparagraph hereof, which exceptions shall be deemed to be representations and
warranties as if made hereunder:
2.1 Organization, Good Standing and Qualification. The Company is a
corporation duly organized, validly existing and in good standing under the laws
of the State of Delaware and has all requisite corporate power and authority to
carry on its business as now conducted and as proposed to be conducted. The
Company is duly qualified to transact business and is in good standing in each
jurisdiction in which the failure to so qualify would have a material adverse
effect on the business, properties, assets, liabilities, condition (financial or
1
<PAGE> 2
otherwise) or prospects of the Company and its Subsidiaries (as defined below),
taken as a whole (a "Material Adverse Effect").
2.2 Capitalization and Voting Rights.
(a) The authorized capital of the Company consists, or will
consist immediately prior to the Closing, of:
(1) Preferred Stock. Seventy-Five Million (75,000,000)
shares of Preferred Stock (the "Preferred Stock"), of which (A) Fifteen Million
(15,000,000) shares have been designated Series A Preferred Stock (the "Series A
Preferred Stock"), of which Twelve Million Eight Hundred Thirty-One Thousand Two
Hundred Sixty-One (12,831,261) shares are issued and outstanding; (B) Fifteen
Million (15,000,000) shares have been designated Series B Preferred Stock (the
"Series B Preferred Stock"), of which Fifteen Million (15,000,000) shares are
issued and outstanding; and (C) Thirty-Four Million Two Hundred Thousand
(34,200,000) shares have been designated Series C Preferred Stock (the "Series C
Preferred Stock"), of which no shares are issued and outstanding and of which
____________________________ shares may be issued pursuant to this Agreement.
The rights, privileges, preferences and restrictions of the Series C Preferred
Stock are as stated in the Company's Restated Certificate.
(2) Common Stock. Two Hundred Million (200,000,000) shares
of common stock ("Common Stock"), of which _____________________________ shares
are issued and outstanding as of _____________________.
(b) Stockholders. All of the outstanding shares of Common Stock
and Preferred Stock are owned by the stockholders and in the numbers specified
in Exhibit E hereto.
(c) Valid Issuance. The shares of Common Stock and Preferred
Stock outstanding on the date hereof and as of the Closing are all duly and
validly authorized and issued, fully paid and nonassessable, and were issued in
accordance with the registration or qualification provisions of the Securities
Act of 1933, as amended (the "Act"), and any relevant state securities laws or
pursuant to valid exemptions therefrom.
(d) Except for (i) the conversion privileges of the Series A
Preferred Stock, the Series B Preferred Stock and the Series C Preferred Stock,
(ii) the rights provided in the Stockholders Agreement (as defined in Section
2.4 below), as amended, (iii) an aggregate of twenty-one million (21,000,000)
shares of Common Stock reserved for issuance under the Company's Stock Option
Plan (the "Employee Plan"), of which _______________ shares are subject to
outstanding options as of _____________________, (iv) an aggregate of sixteen
million (16,000,000) shares of Common Stock reserved for issuance under the
Company's Artist Option Plan (the "Artist Plan"), of which __________________
shares are subject to outstanding options as of ___________________, (v) an
aggregate of five million (5,000,000) shares of Common Stock reserved for
issuance under the Company's Artist and Artist Advisors Option Plan (the
"Advisor Plan"), of which ______________ shares are subject to outstanding
options as of __________________, (vi) outstanding warrants to purchase
___________________________________ shares of Common Stock, (vii) dividends on
2
<PAGE> 3
Preferred Stock which, as of __________________________, are payable as
_________________________________________ shares of Common Stock, and (viii)
options granted to William Elson to purchase the lesser of (A) 100,000 shares of
Common Stock and (B) 2.5% of the shares offered in the Company's initial public
offering, there are not outstanding any options, warrants, rights (including
conversion, exchange or preemptive rights) or agreements for the purchase or
acquisition from the Company of any shares of its capital stock. Except for the
Stockholders Agreement (as defined below), the Company is not a party or subject
to any agreement or understanding and, to the Company's knowledge, there is no
agreement or understanding between any persons and/or entities, which affects or
relates to the ownership, transfer, voting or giving of written consents with
respect to any Company security or by a director of the Company.
2.3 Subsidiaries. The Company's wholly-owned subsidiaries
(collectively "Subsidiaries") are listed on Schedule 2.3 of the Schedule of
Exceptions. Each of such subsidiaries is duly incorporated or organized, as the
case may be, validly existing and in good standing under the laws of the state
of its incorporation or organization, as the case may be, and has all requisite
corporate power and authority to carry on its business as now conducted and as
proposed to be conducted. Each Company is duly qualified to transact business
and is in good standing in each jurisdiction in which the failure to so qualify
would have a Material Adverse Effect. Except as set forth in Schedule 2.3, the
Company does not have any direct or indirect ownership or other interest in any
other corporation, limited liability company, partnership or other entity.
2.4 Authorization. All corporate action on the part of the Company,
its board of directors, officers, directors and stockholders necessary for (a)
the authorization, execution and delivery of (i) this Agreement, (ii) Amendment
No. 1 to that certain Amended and Restated Registration Rights Agreement dated
as of November 12, 1999 (the "Registration Rights Agreement"), among the Company
and certain of its stockholders, in the form attached hereto as Exhibit B (the
"Registration Rights Agreement Amendment"), and (iii) Amendment No. 1 to that
certain Amended and Restated Stockholders Agreement dated as of November 12,
1999 (the "Stockholders Agreement") in the form attached hereto as Exhibit D
(the "Stockholders Agreement Amendment") (collectively, the "Transaction
Agreements"), (b) the performance of all obligations of the Company hereunder
and thereunder, and (c) the authorization, issuance, sale and delivery of the
Series C Preferred Stock (or Common Stock, if applicable) being sold hereunder
has been taken and the Transaction Agreements constitute valid and legally
binding obligations of the Company, enforceable in accordance with their
respective terms, except (x) as limited by applicable bankruptcy, insolvency,
reorganization, moratorium, and other laws of general application affecting
enforcement of creditors' rights generally, (y) as limited by laws relating to
the availability of specific performance, injunctive relief, or other equitable
remedies, and (z) to the extent the indemnification provisions contained in the
Amended Registration Rights Agreement may be limited by applicable federal or
state securities laws.
2.5 Valid Issuance of Preferred and Common Stock. The Series C
Preferred Stock (or the Common Stock, if applicable) that is being purchased by
the Investor hereunder, when issued, sold and delivered in accordance with the
terms of this Agreement for the consideration expressed herein, will be duly and
validly issued, fully paid, and nonassessable, and will be free of any
preemptive or similar rights and of restrictions on transfer other than
3
<PAGE> 4
restrictions on transfer under the Transaction Agreements and under applicable
state and federal securities laws. The Common Stock issuable upon conversion of
the Series C Preferred Stock purchased under this Agreement has been duly and
validly reserved for issuance and, upon issuance in accordance with the terms of
the Restated Certificate, will be duly and validly issued, fully paid, and
nonassessable and will be free of any preemptive or similar rights and of
restrictions on transfer other than restrictions on transfer under the
Transaction Agreements and under applicable state and federal securities laws.
2.6 Governmental Consents. No consent, approval, order or
authorization of, or registration, qualification, designation, declaration or
filing with, any federal, state or local or foreign governmental authority on
the part of the Company is required in connection with the consummation of the
transactions contemplated by the Transaction Agreements.
2.7 Offering. Subject in part to the truth and accuracy of the
Investor's representations set forth in Section 3 of this Agreement, the offer,
sale and issuance of the Series C Preferred Stock (or Common Stock, if
applicable) as contemplated by this Agreement and the conversion into Common
Stock in accordance with the Restated Certificate are exempt from the
registration requirements of the Act.
2.8 Compliance with Law. The Company and each of its Subsidiaries
have conducted their respective businesses so as to comply with, and are in
compliance with, all requirements of law applicable to such entity, except where
the failure to be in compliance would not have a Material Adverse Effect. No
notices or warnings from any federal, state, local or foreign governmental
authority with respect to any failure or alleged failure of the Company or any
Subsidiary to comply with any requirements of law have been received by the
Company or any Subsidiary nor, to the Company's knowledge, are any such notices
threatened.
2.9 Litigation. There is no action, suit, proceeding or
investigation pending or, to the Company's knowledge, threatened against the
Company or any of its Subsidiaries that questions the validity of the
Transaction Agreements or the right of the Company to enter into such
agreements, or to consummate the transactions contemplated hereby or thereby, or
that might result, either individually or in the aggregate, in a Material
Adverse Effect. Neither the Company nor any of its Subsidiaries is a party or
subject to the provisions of any order, writ, injunction, judgment or decree of
any court or government agency or instrumentality. There is no action, suit,
proceeding or investigation by the Company or any of its Subsidiaries pending or
that the Company or any of its Subsidiaries intends to initiate.
2.10 Patents and Trademarks. Neither the Company nor any of its
Subsidiaries has any patents or pending patent applications. To the Company's
knowledge, and without having consulted any intellectual property counsel or
performed any technical docket search, the Company and its Subsidiaries own or
have a license or otherwise have the right to use, all patents, trademarks,
trade names, copyrights, know-how and trade secrets which are used in their
respective businesses as currently conducted without violating or conflicting in
any respect with the rights of others. There are no outstanding options,
licenses, or agreements of any kind relating to the foregoing, nor is the
Company or any of its Subsidiaries bound by or a party to any options, licenses
or agreements of any kind with respect to the patents, trademarks, service
marks, trade names, copyrights, trade secrets, licenses, information,
proprietary rights and
4
<PAGE> 5
processes of any other person or entity. Except as disclosed in the Schedule of
Exceptions, and without having consulted any intellectual property counsel or
performed any technical docket search, the Company is not aware of any violation
or infringement by a third party of any of the Company's or its Subsidiaries'
patents, trademarks, service marks, trade names, copyrights, trade secrets,
licenses or other proprietary rights in a manner that could reasonably be
expected to have a Material Adverse Effect. To the Company's knowledge, and
without having consulted any intellectual property counsel or performed any
technical docket search, the Company's and its Subsidiaries businesses as now
conducted and as proposed to be conducted do not and will not infringe or
conflict with the rights of others, including rights under patents, trademarks,
service marks, trademarks, service marks, trade names, copyrights, trade
secrets, licenses and other proprietary rights, in any manner that could
reasonably be expected to have a Material Adverse Effect. Neither the Company
nor any of its Subsidiaries has received any communications alleging that the
Company or any of its Subsidiaries has violated or, by conducting its business
as proposed, would violate any of the patents, trademarks, service marks, trade
names, copyrights or trade secrets or other proprietary rights of any other
person or entity. The Company is not aware that any of its or its Subsidiaries'
employees is obligated under any contract (including licenses, covenants or
commitments of any nature) or other agreement, or subject to any judgment,
decree or order of any court or administrative agency, that would interfere with
the use of his or her best efforts to promote the interests of the Company or
its Subsidiaries or that would conflict with the Company's or its Subsidiaries'
businesses as now conducted and as proposed to be conducted. Neither the
execution nor delivery of the Transaction Agreements nor performance by the
Company of its obligations hereunder, nor the carrying on of the Company's or
its Subsidiaries' businesses by the employees of the Company or its
Subsidiaries, as the case may be, will conflict with or result in a breach of
the terms, conditions or provisions of, or constitute a default under, any
contract, covenant or instrument under which any of such employees is now
obligated, except for such breaches or defaults which would not have a Material
Adverse Effect.
2.11 Compliance with Other Instruments. Neither the Company nor any
of its Subsidiaries is in violation or default of any provision of its charter
documents, or in any material respect of any instrument, judgment, order, writ,
decree, mortgage, indebtedness, indenture, agreement or contract to which it is
a party or by which it or its property is bound, of any material provision of
any material federal or state statute, rule or regulation applicable to the
Company or any of its Subsidiaries, as the case may be. The execution, delivery
and performance of the Transaction Agreements and the consummation of the
transactions contemplated thereby will not result in any such violation or be in
conflict with or constitute, with or without the passage of time and/or giving
of notice or both, either a default under any such provision, instrument,
judgment, order, writ, decree, mortgage, indebtedness, indenture, agreement or
contract or an event that results in the creation of any mortgage, pledge, lien,
charge or encumbrance upon any assets of the Company or any of its Subsidiaries
or the suspension, revocation, impairment, forfeiture, or nonrenewal of any
material permit, license, authorization, or approval applicable to the Company
or its Subsidiaries, or any of their businesses or operations or any of their
assets or properties.
5
<PAGE> 6
2.12 Agreements; Action.
(a) Other than the Transaction Agreements and the Strategic
Licensing Agreement, there are no agreements, instruments, contracts, judgments,
orders, writs or decrees to which the Company or any of its Subsidiaries is a
party or by which any such entity is bound that may involve (i) obligations
(contingent or otherwise) of, or payments to the Company or its Subsidiaries in
excess of, $250,000, or (ii) the license of any material patent, copyright,
trade secret or other proprietary right or intellectual property to or from the
Company or its Subsidiaries. Neither the Company nor any of its Subsidiaries has
received any written notice of an intention to terminate any of its material
contracts or agreements from any of the other parties to such contracts and
agreements.
(b) Neither the Company nor any of its Subsidiaries has (i)
declared or paid any dividends or authorized or made any distribution upon or
with respect to any class or series of its capital stock, (ii) incurred any
indebtedness for money borrowed individually in excess of $100,000 or in the
aggregate in excess of $1,000,000, (iii) made any loans or advances to any
person, other than ordinary advances for travel expenses, or (iv) sold,
exchanged or otherwise disposed of any of its assets or rights in any material
respect.
(c) For the purposes of subsections (a) and (b) above, all
indebtedness, liabilities, agreements, understandings, instruments, contracts
and proposed transactions involving the same person or entity (including persons
or entities the Company has reason to believe are affiliated therewith) shall be
aggregated for the purpose of meeting the individual minimum dollar amounts of
such subsections.
(d) Neither the Company nor any of its Subsidiaries is a party
to or is bound by any contract, agreement or instrument, or subject to any
restriction under charter documents that is reasonably likely to have a Material
Adverse Effect.
2.13 Related-Party Transactions. No employee, officer, or director
of the Company or any of its Subsidiaries, or member of his or her immediate
family is indebted to the Company in an amount greater than $100,000, nor is the
Company or any of its Subsidiaries indebted (or committed to make loans or
extend or guarantee credit) to any of them in an amount greater than $100,000.
Except pursuant to employment agreements in the ordinary course, there are no
contracts or agreements between the Company or any of its Subsidiaries and any
such individual involving an amount greater than $100,000 (in the aggregate,
with respect to any such individual). To the Company's knowledge, no employee or
officer has any direct or indirect ownership interest in any firm or corporation
with which the Company or any Subsidiary thereof is affiliated or with which the
Company or any of its Subsidiaries has a business relationship, or any firm or
corporation that competes with the Company or any of its Subsidiaries, except
that employees and officers of the Company and its Subsidiaries and members of
their immediate families may own stock in publicly traded companies that may
compete with the Company and/or its Subsidiaries.
2.14 Permits. The Company and each of its Subsidiaries have all
franchises, permits, licenses, and any similar authority necessary for the
conduct of its business as now being conducted by them, the lack of which could
have a Material Adverse Effect, and the
6
<PAGE> 7
Company and each of its Subsidiaries believe they can obtain, without undue
burden or expense, any similar authority for the conduct of its business as
planned to be conducted. Neither the Company nor any of its Subsidiaries is in
default in any material respect under any of such franchises, permits, licenses,
or other similar authority.
2.15 Environmental and Safety Laws. Neither the Company nor its
Subsidiaries is in violation of any applicable statute, law or regulation
relating to the environment or occupational health and safety, and to its
knowledge, no material expenditures are or will be required in order to comply
with any such existing statute, law or regulation.
2.16 Registration Rights. Except as provided in the Registration
Rights Agreement (as amended), the Company has not granted or agreed to grant
any registration rights, including piggyback rights, to any person or entity.
2.17 Corporate Documents. The Restated Certificate and Bylaws of the
Company are in the form previously provided to counsel for the Investor.
2.18 Title to Property and Assets. Neither the Company nor any of
its Subsidiaries owns any real property. With respect to the property and assets
it leases, the Company and each of its Subsidiaries are in compliance with such
leases ("Leases") and, to the Company's knowledge, hold a valid leasehold
interest free of any liens, claims or encumbrances. Neither the Company nor any
of its Subsidiaries has committed a breach of, or is in default under, any
Lease, which breach or default would result in a Material Adverse Effect, nor,
to the Company's knowledge, has there occurred any event that with the passage
of time or the giving of notice or both, would result in a Material Adverse
Effect.
2.19 Liabilities. The Company has made available to the Investor its
audited consolidated financial statements (balance sheet, income statement and
statement of cash flows) at and for the 12 months ended December 31, 1998, and
its unaudited consolidated financial statements at and for the nine months ended
September 30, 1999 (collectively, the "Financial Statements"). Such Financial
Statements have been prepared in good faith in accordance with U.S. generally
accepted accounting principles ("GAAP") and with the books and records of the
Company and fairly present the financial position of the Company as of such date
and the financial results of the Company for such period, subject to, in the
case of the September 30, 1999 Financial Statements, normal year end
adjustments. Except as set forth in the Financial Statements, the Company has no
material liabilities, contingent or otherwise, other than liabilities incurred
in the ordinary course of business subsequent to December 31, 1998 which are not
materially adverse to the financial condition or operating results of the
Company.
2.20 Changes. Since December 31, 1998, there has not been:
(a) any change in the assets, liabilities, financial condition
or operating results of the Company from that reflected in the Financial
Statements, except changes in the ordinary course of business, which
individually or in the aggregate, would not constitute a Material Adverse
Effect;
(b) any damage, destruction or loss, whether or not covered by
insurance, which has a Material Adverse Effect;
7
<PAGE> 8
(c) any waiver or forgiveness by the Company of a valuable
right or of a material debt owed to it;
(d) any satisfaction or discharge of any lien, claim or
encumbrance or payment of any obligation by the Company, except in the ordinary
course of business and that would not have a Material Adverse Effect;
(e) any material change in any compensation arrangement or
agreement or equity plan with any employee;
(f) any sale, assignment or transfer of any patents,
trademarks, copyrights, trade secrets or other intangible assets;
(g) any resignation or termination of employment of any key
officer of the Company; and the Company, to its knowledge, does not know of the
impending resignation or termination of employment of any such officer;
(h) any material acquisitions or dispositions or business
combinations;
(i) any material tax election or material change in tax or
accounting methods;
(j) any material suits, actions, claims, tax audits or
settlements thereof;
(k) any termination or amendment of any material contract which
has or would have a Material Adverse Effect;
(l) any agreement or commitment by the Company to do any of the
things described in this Section 2.20; or
(m) to the Company's knowledge, any other event or condition of
any character that is likely to result in a Material Adverse Effect.
2.21 Employee Benefit Plans. Section 2.21 of the Schedule of
Exceptions identifies each employee benefit plan that is intended to be a
"qualified plan" within the meaning of Section 401(a) of the Code ("Qualified
Plans"). The Internal Revenue Service has issued a favorable determination
letter with respect to each Qualified Plan and the related trust that has not
been revoked, and no circumstances exist and no events have occurred that would
adversely affect the qualified status of any Qualified Plan or the related
trust. With respect to each employee benefit plan, the Company and each of its
Subsidiaries has complied, and are now in compliance, in all material respects,
with all provisions of ERISA, the Code and all laws and regulations applicable
to such employee benefit plan, and each employee benefit plan has been
administered in all material respects in accordance with its terms, except where
failure to so comply would not have a Material Adverse Effect.
2.22 Tax Returns, Payments and Elections. The Company and each of
its Subsidiaries have filed all tax returns and reports as required by law.
These returns and reports
8
<PAGE> 9
are true and correct in all material respects. The Company and each of its
Subsidiaries has paid all taxes and other assessments due, except those
contested by it in good faith by appropriate proceedings that are listed in the
Schedule of Exceptions, and have been reserved against in accordance with GAAP.
Neither the Company nor any of its Subsidiaries has elected pursuant to the
Internal Revenue Code of 1986, as amended (the "Code"), to be treated as a
Subchapter S corporation or a collapsible corporation pursuant to Section
1362(a) or Section 341(f) of the Code, respectively, nor has it made any other
elections pursuant to the Code (other than elections that relate solely to
methods of accounting, depreciation or amortization) that would have a Material
Adverse Effect.
2.23 Insurance. The Company and each of its Subsidiaries have in
full force and effect insurance of a type and in amounts customarily covered by
persons conducting business similar to those conducted by the Company.
2.24 Labor Agreements and Actions. Neither the Company nor any of
its Subsidiaries is bound by or subject to (and none of its assets or properties
is bound by or subject to) any written or oral, express or implied, contract,
commitment or arrangement with any labor union, and no labor union has requested
or, to the Company's knowledge, has sought to represent any of the employees,
representatives or agents of the Company or any of its Subsidiaries. There is no
strike or other labor dispute involving the Company or any of its Subsidiaries
pending, or to the Company's knowledge, threatened, that is likely to have a
Material Adverse Effect, nor is the Company aware of any labor organization
activity involving its or any of its Subsidiaries' employees. The Company is not
aware that any officer or key employee, or that any group of key employees,
intends to terminate their employment with the Company or any of its
Subsidiaries, nor does the Company or any of its Subsidiaries have a present
intention to terminate the employment of any of the foregoing. The employment of
each officer and employee of the Company and its Subsidiaries is terminable at
the will of the Company or its Subsidiaries, as the case may be. The Company and
each of its Subsidiaries have complied in all material respects with all
applicable state and federal equal employment opportunity and other laws related
to employment, except where the failure to so comply would not have a Material
Adverse Effect.
2.25 Takeover Laws. The execution of this Agreement and each other
Transaction Agreement, the sales and purchases of the Company's Series C
Preferred Stock or Common Stock, if applicable) contemplated hereby and the
other transactions contemplated hereby and by the other Transaction Agreements
are exempt from or inapplicable under any state takeover law or state law that
purports to limit or restrict business combinations or the ability to acquire or
vote shares, including without limitation Section 203 of the General Corporation
Law of the State of Delaware.
2.26 Disclosure. No representations or warranties made by the
Company in this Agreement contain any untrue statement of material fact or omit
or will omit to state any material fact necessary to make the statements herein,
in light of the circumstances under which they were made, not misleading.
Originals or true and complete copies of all documents or other written
materials underlying items listed in the Schedule of Exceptions have heretofore
been made available to the Investor for inspection on request, in the form in
which each of such documents is in effect.
9
<PAGE> 10
Except with respect to (i) the transactions contemplated by this
Agreement, (ii) and the Transaction Agreements, (iii) the transaction
contemplated by that certain Series C Preferred Stock Purchase Agreement dated
as of November 12, 1999, (the "Prior Series C Agreement"), among the Company and
the investors identified therein, and (iv) the transactions contemplated by the
MOU and the Marketing Agreement referred to in the Prior Series C Agreement, the
most current draft of the Company's Registration Statement on Form S-1
(initially filed with the Securities and Exchange Commission on September 22,
1999) which is provided to the counsel for the Investor and attached hereto as
Exhibit H) does not contain any untrue statement of material fact or omit to
state any material fact necessary to make the statements therein, in light of
the circumstances under which they were made, not misleading, and complies as to
form with the requirements of the Securities Act of 1933, as amended, in all
material respects.
2.27 Year 2000. The internal information systems and business
systems (collectively, the "Systems") of the Company and its Subsidiaries are
Y2K Compliant and if such systems fail to be Y2K Compliant, such failure will
not have a Material Adverse Effect. As used in this Section 2.27:
(a) "Y2K Compliant" shall mean that (i) all Calendar-Related
processing of Date Data or of any System Date will not cause the Systems to
cease to operate substantially in accordance with their specifications, (ii) all
data fields for the Date Data contained in the Systems are four-digit fields
(other than month and date fields which are at least two-digit fields) capable
of indicating century and millennium, and (iii) the Company has verified through
its testing procedures that no change in the System Date (including the change
from the year 1999 to the year 2000) will cause the Systems to cease to operate
substantially in accordance with their specifications;
(b) "Calendar-Related" refers to date values based on the
Gregorian calendar as defined in Encyclopedia Britannica, 15th edition, 1982,
page 602.
(c) "Date Data" means any Calendar-Related data in the
inclusive range January 1, 1985 through December 31, 2035 that the Systems use
in any manner.
(d) "System Date" means any Calendar-Related date value in the
inclusive range from January 1, 1985 through December 31, 2035 (including the
transition between such values) that the Systems will be able to use as their
current date while operating.
Notwithstanding any provision to the contrary set forth in this
Agreement, Company makes no representation or warranty with respect to its
Systems operating in conjunction with any computer software, computer firmware,
computer hardware, or any combination of the foregoing supplied by third
parties. The Company represents and warrants to the Investor that it has made
inquiry to each of its material third party service providers and none of such
providers has notified the Company that it does not believe that it will be Y2K
compliant prior to December 31, 1999.
10
<PAGE> 11
2.28 Books and Records. The books and records of the Company,
including the minutes of director and stockholder meetings, actions and
consents, are accurate, current and complete in all material respects.
3. Representations and Warranties of the Investor. The Investor hereby
represents and warrants that:
3.1 Authorization. The Investor has full power and authority to
enter into the Transaction Agreements, and each such agreement constitutes its
valid and legally binding obligation, enforceable in accordance with its terms.
3.2 Purchase Entirely for Own Account. This Agreement is made with
the Investor in reliance upon the Investor's representation to the Company,
which by the Investor's execution of this Agreement the Investor hereby
confirms, that the Series C Preferred Stock (or Common Stock, if applicable) to
be received by the Investor and the Common Stock issuable upon conversion
thereof (collectively, the "Securities") will be acquired for investment for the
Investor's own account, not as a nominee or agent, and not with a view to the
resale or distribution of any part thereof, and that the Investor has no present
intention of selling, granting any participation in, or otherwise distributing
the same. By executing this Agreement, the Investor further represents that the
Investor does not have any contract, undertaking, agreement or arrangement with
any person to sell, transfer or grant participations to such person or to any
third person, with respect to any of the Securities.
3.3 Disclosure of Information. The Investor represents that it has
had an opportunity to ask questions and receive answers from the Company
regarding the terms and conditions of the offering of the Series C Preferred
Stock (or Common Stock, if applicable) and the business, properties, prospects
and financial condition of the Company.
3.4 Investment Experience. The Investor is an investor in securities
of companies in the development stage and acknowledges that it is able to fend
for itself, can bear the economic risk of its investment, and has such knowledge
and experience in financial or business matters that it is capable of evaluating
the merits and risks of the investment in the Series C Preferred Stock (or
Common Stock, if applicable).
3.5 Accredited Investor. The Investor is an "accredited investor"
within the meaning of Securities and Exchange Commission ("SEC") Rule 501 of
Regulation D, as presently in effect.
3.6 Restricted Securities. The Investor understands that the
Securities it is purchasing are characterized as "restricted securities" under
the federal securities laws inasmuch as they are being acquired from the Company
in a transaction not involving a public offering and that under such laws and
applicable regulations such securities may be resold without registration under
the Securities Act of 1933, as amended, only in certain limited circumstances.
In this connection, the Investor represents that it is familiar with Rule 144
promulgated under the Act, as presently in effect, and understands the resale
limitations imposed thereby and by the Act.
11
<PAGE> 12
3.7 Legends. It is understood that the certificates evidencing the
Securities may bear one or all of the following legends:
(a) Any legend required under the Stockholders Agreement (as
amended); and
(b) Any legend required by the laws of the State of California,
including any legend required by the California Department of Corporations and
Sections 417 and 418 of the California Corporations Code.
4. California Commissioner of Corporations.
4.1 Corporate Securities Law. THE SALE OF THE SECURITIES THAT ARE THE
SUBJECT OF THIS AGREEMENT HAS NOT BEEN QUALIFIED WITH THE COMMISSIONER OF
CORPORATIONS OF THE STATE OF CALIFORNIA AND THE ISSUANCE OF SUCH SECURITIES OR
THE PAYMENT OR RECEIPT OF ANY PART OF THE CONSIDERATION FOR SUCH SECURITIES
PRIOR TO SUCH QUALIFICATION IS UNLAWFUL, UNLESS THE SALE OF SECURITIES IS EXEMPT
FROM QUALIFICATION BY SECTION 25100, 25102 OR 25105 OF THE CALIFORNIA
CORPORATIONS CODE. THE RIGHTS OF ALL PARTIES TO THIS AGREEMENT ARE EXPRESSLY
CONDITIONED UPON SUCH QUALIFICATION BEING OBTAINED, UNLESS THE SALE IS SO
EXEMPT.
5. Covenants.
5.1 The Company will use its reasonable best efforts to (a) obtain
such written consents, approvals, waivers and clearances as are necessary to be
obtained by it to consummate the transactions contemplated by this Agreement,
(b) prepare all documentation, effect all filings, obtain all permits, consents,
approvals and authorizations of all third parties and governmental authorities
necessary to be obtained by it to consummate the transactions contemplated by
this Agreement, and (c) take all such other actions necessary on its part to
cause the transactions contemplated by this Agreement to be consummated by the
Closing Date.
5.2 Each party hereto will give prompt written notice to the other
parties of any material development affecting the ability of such party to
consummate the transactions contemplated hereby. No disclosure by any party
pursuant to this Section 5.2, however, shall be deemed to amend or supplement
any schedule hereto or to prevent or cure any misrepresentation, breach of
warranty or breach of covenant.
5.3 The Company and the Investor hereby agree with each other, that
at any time and from time to time it will promptly execute and deliver or cause
its Affiliates to execute and deliver to the other such further assurances,
instruments and documents as the other party may reasonably request in order to
consummate the transactions contemplated hereby and take such further action as
the other parties may reasonably request in order to carry out the full intent
and purpose of this Agreement and consummate the transactions contemplated
hereby.
5.4 The Company agrees that prior to disclosing the existence of or
the terms of this Agreement or the transactions contemplated hereby in any
filing with the Securities and
12
<PAGE> 13
Exchange Commission, it shall provide a copy of such disclosure to the Investor
and shall use reasonable efforts to take into consideration any comments by the
Investor to such disclosure. In addition, the Company shall from time to time
keep the Investor reasonably informed as to the status of the Company's
registration process currently ongoing.
5.5 The Company agrees that it shall not issue any shares of its
Series C Preferred Stock, including to Sony Music Entertainment Inc.,
Bertelsmann Music Group, Universal Music Group, Inc., Time Warner Inc., Yahoo!
Inc. or any of their respective Affiliates, unless such issuances are on
substantively identical terms; provided, that the terms of any strategic
arrangement entered into between the Company and any of such investors in
connection with such investment shall not be taken into consideration for
purposes of such determination.
6. Conditions of Investor's Obligations at the Closing.
6.1 Closing. The obligation of the Investor to purchase and pay for
the Series C Preferred Stock (or Common Stock, if applicable) which the Investor
has agreed to purchase at the Closing is subject to the fulfillment on or before
the Closing, of each of the following conditions, any of which may be waived in
whole or in part by the Investor:
(a) Representations and Warranties. The representations and
warranties of the Company contained in Section 2 shall be true on and as of the
Closing with the same effect as though such representations and warranties had
been made on and as of the date of the Closing, unless the representations
contained in Section 2 are made as of a specific date, in which case they shall
be true on and as of such date.
(b) Performance. The Company shall have performed and complied
with all agreements, obligations and conditions contained in this Agreement that
are required to be performed or complied with by it on or before the Closing.
(c) Compliance Certificate. The Chief Executive Officer of the
Company shall deliver to the Investor at the Closing a certificate stating that
the conditions specified in Section 6.1(a) and 6.1(b) have been fulfilled and
stating that there shall have been no Material Averse Effect since the date of
the Financial Statements.
(d) Qualifications. All authorizations, approvals, or permits, if
any, of any governmental authority or regulatory body of the United States or of
any state that are required in connection with the lawful issuance and sale of
the Securities pursuant to this Agreement shall be duly obtained and effective
as of the Closing.
(e) Proceedings and Documents. All corporate and other
proceedings in connection with the transactions contemplated at the Closing and
all documents incident thereto shall be reasonably satisfactory in form and
substance to the Investor, and they shall have received all such counterpart
original and certified or other copies of such documents as they may reasonably
request.
(f) Opinion of Company Counsel. The Investor shall have received
from Brobeck, Phleger & Harrison LLP, counsel for the Company, an opinion, dated
as of the Closing, in substantially the form attached hereto as Exhibit C.
13
<PAGE> 14
(g) Transaction Agreements. The Company, the Investor and each of
the other parties necessary to make the Transaction Agreements effective shall
have entered into the Transaction Agreements.
(h) Stock Certificate. The Company shall have delivered to the
Investor a stock certificate representing the shares of Series C Preferred Stock
(or Common Stock, if applicable) that the Investor is purchasing at the Closing.
(i) Strategic Agreement. The Company and each of the other
parties (other than the Investor or any of its Affiliates) necessary to make the
Strategic Agreement (the "Strategic Agreement"), a copy of which is attached
hereto as Exhibit F, effective, shall have entered into the Strategic Agreement.
7. Conditions of the Company's Obligations at the Closing.
7.1 Closing. The obligation of the Company to sell and issue the
Series C Preferred Stock (or Common Stock, if applicable) which the Company has
agreed to issue on the date of the Closing is subject to the fulfillment on or
before the Closing of each of the following conditions, any of which may be
waived in whole or in part by the Company.
(a) Representations and Warranties. The representations and
warranties of the Investor contained in Section 3 shall be true on and as of the
Closing with the same effect as though such representations and warranties had
been made on and as of the Closing, unless the representations contained in
Section 3 are made as of a specific date.
(b) Payment of Purchase Price. The Investor shall have delivered
the purchase price specified in Section 1.2.
(c) Qualifications. All authorizations, approvals, or permits, if
any, of any governmental authority or regulatory body of the United States or of
any state that are required in connection with the lawful issuance and sale of
the Securities pursuant to this Agreement shall be duly obtained and effective
as of the Closing.
(d) Strategic Agreement. Each of the parties (other than the
Company) necessary to make the Strategic Licensing Agreement effective shall
have entered into the Strategic Agreement.
8. Miscellaneous.
8.1 Survival of Warranties. The warranties, representations and
covenants of the Company and the Investor contained in or made pursuant to this
Agreement shall survive the execution and delivery of this Agreement and the
Closing for a period ending thirty days after the Company's audited financial
statements for the fiscal year 2000 have been delivered or made available to the
Investor and shall in no way be affected by any investigation of the subject
matter thereof made by or on behalf of the Investor or the Company.
8.2 Successors and Assigns. Except as otherwise provided herein, the
terms and conditions of this Agreement shall inure to the benefit of and be
binding upon the respective
14
<PAGE> 15
successors and assigns of the parties (including transferees of any Securities).
Nothing in this Agreement, express or implied, is intended to confer upon any
party other than the parties hereto or their respective successors and assigns
any rights, remedies, obligations, or liabilities under or by reason of this
Agreement, except as expressly provided in this Agreement. Notwithstanding
anything to the contrary herein, the Investor shall be entitled to assign its
rights under this Agreement to any of its Affiliates, which shall, on and after
the date of such assignment, be the "Investor" hereunder to the extent of such
assignments. As used in this Section 8.2, an "Affiliate" of a party shall mean
any entity which directly or indirectly wholly-owns the Investor, is
wholly-owned by the Investor, or is under the common ownership of all of the
entity owning, directly or indirectly, at least 80% of the interests of each of
the Investor and such first entity.
8.3 Governing Law. This Agreement shall be governed by and construed
under the laws of the State of California as applied to agreements among
California residents entered into and to be performed entirely within
California.
8.4 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
8.5 Titles and Subtitles. The titles and subtitles used in this
Agreement are used for convenience only and are not to be considered in
construing or interpreting this Agreement.
8.6 Notices. Unless otherwise provided, any notice required or
permitted under this Agreement shall be given in writing and shall be deemed
effectively given upon personal delivery to the party to be notified or upon
deposit with the United States Postal Service, by registered or certified mail,
postage prepaid and addressed to the party to be notified at the address
indicated for such party on the signature page hereof, or at such other address
as such party may designate by ten (10) days' advance written notice to the
other parties.
8.7 Finder's Fee. Each party represents that it neither is nor will
be obligated for any finders' fee or commission in connection with this
transaction. The Investor agrees to indemnify and to hold harmless the Company
from any liability for any commission or compensation in the nature of a
finders' fee (and the costs and expenses of defending against such liability or
asserted liability) for which the Investor or any of its officers, partners,
employees, or representatives is responsible and the Company agrees to indemnify
and hold harmless the Investor from any liability for any commission or
compensation in the nature of a finders' fee (and the costs and expenses of
defending against such liability or asserted liability) for which the Company or
any of its officers, employees or representatives is responsible.
8.8 Expenses. The Company shall pay all costs and expenses that it
incurs with respect to the negotiation, execution, delivery and performance of
this Agreement. In addition, upon the consummation of the Closing, the Company
shall pay the Investor's reasonable legal fees in connection with the review,
negotiation and execution of this Agreement and the Transaction Agreements and
related agreements. If any action at law or in equity is necessary to enforce or
interpret the terms of this Agreement, the prevailing party shall be
15
<PAGE> 16
entitled to reasonable attorney's fees, costs and necessary disbursements in
addition to any other relief to which such party may be entitled.
8.9 Amendments and Waivers. Any term of this Agreement may be amended
and the observance of any term of this Agreement may be waived (either generally
or in a particular instance and either retroactively or prospectively), only
with the written consent of the Company and the Investor. Any amendment or
waiver effected in accordance with this paragraph shall be binding upon each
holder of any securities purchased under this Agreement at the time outstanding
(including securities into which such securities are convertible), each future
holder of all such securities, and the Company.
8.10 Consent to Jurisdiction. In any action or proceeding arising out
of, related to, or in connection with this Agreement, the parties consent to be
subject to the jurisdiction and venue of the Court of Chancery of the State of
Delaware and the United States District Court for the District of Delaware. Each
of the parties consents to the service of process in any action commenced
hereunder by certified or registered mail, return receipt requested, or by any
other method or service acceptable under federal law or the laws of the State of
Delaware. AS TO ANY ACTION OR PROCEEDING ARISING OUT OF, RELATED TO OR IN
CONNECTION WITH THIS AGREEMENT, THE PARTIES HEREBY AGREE TO WAIVE THEIR RIGHTS
TO A TRIAL BY JURY.
8.11 Severability. If one or more provisions of this Agreement are
held to be unenforceable under applicable law, such provision shall be excluded
from this Agreement and the balance of the Agreement shall be interpreted as if
such provision were so excluded and shall be enforceable in accordance with its
terms.
8.12 Aggregation of Stock. All shares of Series C Preferred Stock (or
Common Stock, if applicable) held or acquired by affiliated entities or persons
shall be aggregated together for the purpose of determining the availability of
any rights under this Agreement.
8.13 Entire Agreement. This Agreement and the documents referred to
herein constitute the entire agreement among the parties and no party shall be
liable or bound to any other party in any manner by any warranties,
representations, or covenants except as specifically set forth herein or
therein.
8.14 Termination. In the event the Closing has not occurred within
sixty (60) days of the execution of this Agreement, the Company (provided the
Company is not in breach of this Agreement at such time) may terminate this
Agreement and no party shall have any further obligations or liabilities
hereunder. In the event the Closing has not occurred within sixty (60) days of
the execution of this Agreement, the Investor (provided the Investor is not in
breach of this Agreement at such time) may terminate this Agreement with respect
to the Investor and the Company and such parties shall not have any further
obligations or liabilities with respect to each other.
16
<PAGE> 17
SERIES C PREFERRED STOCK PURCHASE
AGREEMENT SIGNATURE PAGE
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
COMPANY:
ARTISTdirect, Inc.
By:
----------------------------------
Marc P. Geiger,
Chief Executive Officer
Address: 17835 Ventura Boulevard, Suite 310
Encino, California 91316
INVESTOR:
By:
--------------------------------
Name:
--------------------------------
Its:
--------------------------------
Address:
<PAGE> 1
EXHIBIT 10.46
NEITHER THE WARRANT NOR THE SHARES OF STOCK ISSUABLE UPON EXERCISE HEREOF HAVE
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"). NO
SALE, TRANSFER OR OTHER DISPOSITION OF THIS WARRANT OR SAID SHARES MAY BE
EFFECTED WITHOUT (i) AN EFFECTIVE REGISTRATION STATEMENT RELATED THERETO, (ii)
AN OPINION OF COUNSEL FOR THE PURCHASER, REASONABLY SATISFACTORY TO THE COMPANY,
THAT SUCH REGISTRATION IS NOT REQUIRED OR (iii) RECEIPT OF A NO-ACTION LETTER
FROM THE SECURITIES AND EXCHANGE COMMISSION TO THE EFFECT THAT REGISTRATION
UNDER THE ACT IS NOT REQUIRED.
Date of Issuance: December 24, 1999 ("Date of Issuance") Warrant No.: W-4
WARRANT TO PURCHASE UP TO 1,357,016
SHARES OF COMMON STOCK OF ARTISTDIRECT, INC.
THIS CERTIFIES THAT Yahoo! Inc., a Delaware company ("Purchaser"), is
entitled to purchase under this Warrant up to One Million Three Hundred
Fifty-Seven Thousand Sixteen (1,357,016) shares (as may be adjusted pursuant to
provisions hereof, the "Shares") of Common Stock of ARTISTdirect, Inc., a
Delaware corporation (the "Company") at the prices per share set forth in
Section 1.1 and 1.2 below (as applicable, the "Exercise Price"), subject to the
provisions and upon the terms and conditions hereinafter set forth.
1. Exercise Price; Exercisibility and Term.
----------------------------------------
1.1 First Shares. This Warrant shall be exercisable with
respect to Fifty Percent (50%) of the Shares (the "First Shares") at any time
and from time to time during the period commencing on Date of Issuance and,
subject to Section 1.3, ending at 5:00 p.m. California time on the date three
(3) years after the Date of Issuance. The Exercise Price for each of the First
Shares shall be $3.482.
1.2 Second Shares. This Warrant shall be exercisable with
respect to Fifty Percent (50%) of the Shares (the "Second Shares") at any time
and from time to time during the period commencing on the earlier of (a) the
date two (2) years after the Date of Issuance or (b) the effective date of
termination of the Promotion Agreement because of Company's breach pursuant to
Section 12.2(b) of the Promotion Agreement (the "Second Shares Vesting Date")
and, subject to Section 1.3, ending at 5:00 p.m. California time on the date
three (3) years after the Second Shares Vesting Date. The Exercise Price for
each of the Second Shares shall be the initial offering price per share of the
Company's Common Stock in the Company's first public offering of Common Stock
pursuant to a registration statement filed with, and declared effective by, the
Securities and Exchange Commission under the Securities Act (an "IPO") or, if an
IPO has not occurred on or before the Second Shares Vesting Date, then the
Exercise Price for each of the Second Shares shall be fair market value per
share of the Company's Common Stock, as determined by the Company's Board of
Directors in good faith and memorialized by written resolution.
1
<PAGE> 2
1.3 Termination. Notwithstanding anything herein to the
contrary, this Warrant shall immediately terminate (and shall not thereafter be
exercisable) with respect to any unexercised Shares in the event that the
Promotion Agreement is terminated for Purchaser's breach pursuant to Section
12.2 of the Promotion Agreement.
1.4 Capitalization. The Company hereby represents and warrants
to the Purchaser that, as of November 12, 1999, its capitalization consisted of
(i) Seventy-Five Million (75,000,000) shares of Preferred Stock (the "Preferred
Stock"), of which (A) Fifteen Million (15,000,000) shares have been designated
Series A Preferred Stock, of which Twelve Million Eight Hundred Thirty-One
Thousand Two Hundred Sixty-One (12,831,261) shares were issued and outstanding;
and (B) Fifteen Million (15,000,000) shares have been designated Series B
Preferred Stock, of which Fifteen Million (15,000,000) shares were issued and
outstanding; and (ii) Two Hundred Million (200,000,000) shares of common stock
("Common Stock"), of which Fifty-Six Million Four Hundred Twenty-Nine Thousand
Eight Hundred Seven (56,429,807) shares were issued and outstanding. As of
November 12, 1999, except for (i) the conversion privileges of the Series A
Preferred Stock and the Series B Preferred Stock, (ii) the rights provided in
the Company's existing Stockholders Agreement dated as of October 6, 1999, (iii)
an aggregate of Twenty-One Million (21,000,000) shares of Common Stock reserved
for issuance under the Company's Stock Option Plan (the "Employee Plan"), of
which Fifteen Million One Hundred Ninety-Three Thousand One Hundred Twenty
(15,193,120) shares are subject to outstanding options, (iv) an aggregate of
Sixteen Million (16,000,000) shares of Common Stock reserved for issuance under
the Company's Artist Option Plan (the "Artist Plan"), of which Eight Million
Eight Hundred Fifty-Six Thousand Two Hundred Forty-Three (8,856,243) shares are
subject to outstanding options, (v) an aggregate of Five million (5,000,000)
shares of Common Stock reserved for issuance under the Company's Artist and
Artist Advisors Option Plan (the "Advisor Plan"), of which 4,196,251 shares are
subject to outstanding options, (vi) outstanding warrants to purchase Three
Million Six Hundred Twenty Thousand Five Hundred Fifty-Eight (3,620,558) shares
of Common Stock, (vii) accrued dividends on Preferred Stock which were payable
as Fifty-Seven Thousand Seven Hundred Sixty-Two (57,762) shares of Common Stock,
(viii) options granted to William Elson to purchase the lesser of (A) 100,000
shares of Common Stock and (B) 2.5% of the shares offered in the Company's
initial public offering, and (ix) agreements to issue shares of the Company's
Series C Preferred Stock, there were not outstanding any options, warrants,
rights (including conversion, exchange or preemptive rights) or agreements for
the purchase or acquisition from the Company of any shares of its capital stock.
Since November 12, 1999, the Company has not issued any shares
of its capital stock or any options, warrants, rights (including conversion,
exchange or preemptive rights) or entered into agreements for the purchase or
acquisition from the Company of any shares of its capital stock, other than (i)
amending its Certificate of Incorporation to designate Thirty-Four Million Two
Hundred Thousand (34,200,000) shares as Series C Preferred Stock, of which the
Company issued Twenty-One Million Three Hundred Ninety-Five Thousand Seven
Hundred Forty-Nine (21,395,749) shares, each of which is currently issued and
outstanding, (ii) entering into a Series C Preferred Stock Purchase Agreement
dated as of November 12, 1999 with Meadowlane Enterprises Ltd. and Universal
Music Group, Inc., pursuant to which the Company may be obligated to issue up to
an aggregate of Five Million Eight Hundred Eighty-Seven
2
<PAGE> 3
Thousand Four Hundred Twenty-One (5,887,421) additional shares of Series C
Preferred Stock, (iii) entering into a Series C Preferred Stock Purchase
Agreement dated as of December 17, 1999 with the Purchaser to issue Seven
Hundred Seventeen Thousand Nine Hundred Seventy-Eight (717,978) shares of Series
C Preferred Stock, (iv) issuing options to purchase Common Stock under the
Company's existing stock option plans, and (v) additional accrued dividends on
Preferred Stock since November 12, 1999, including the possible obligation of
the Company to issue dividends on its Series C Preferred Stock.
2. Conversion.
-----------
2.1 Method of Exercise; Payment; Issuance of New Warrant. This
Warrant may be exercised by the Purchaser, in whole or in part and from time to
time, by the surrender of this Warrant (with a notice of exercise in the form
attached as Exhibit A and the investment representation certificate in the form
attached as Exhibit B duly executed) at the principal office of the Company and
by the payment to the Company by check or wire transfer, of an amount equal to
the then applicable Exercise Price per share multiplied by the number of Shares
then being purchased (the "Aggregate Exercise Price"). The person or persons in
whose name(s) any certificate(s) representing shares of Common Stock shall be
issuable upon exercise of this Warrant shall be deemed to have become the
Purchaser(s) of record of, and shall be treated for all purposes as the record
Purchaser(s) of the shares represented thereby (and such shares shall be deemed
to have been issued) immediately prior to the close of business on the date or
dates upon which this Warrant is exercised. In the event of any exercise of this
Warrant, certificates for the shares of stock so purchased shall be delivered
promptly (and, if the Company has consummated its initial public offering,
within 10 business days of receipt of notice of exercise) to the Purchaser and,
unless this Warrant has been fully exercised or expired, a new Warrant
representing the portion of the Shares, if any, with respect to which this
Warrant shall not then have been exercised shall also be issued promptly (and,
if the Company has consummated its initial public offering, within 10 business
days of receipt of notice of exercise) to the Purchaser.
2.2 Right to Convert Warrant into Stock; Net Issuance. In
addition to and without limiting the rights of the Purchaser under the terms of
this Warrant, the Purchaser may elect to convert this Warrant or any portion
thereof (the "Conversion Right"), but only to the extent that the Purchaser then
has a right to exercise this Warrant, into shares of Common Stock, as set forth
below. The Conversion Right may be exercised by the Purchaser by surrender of
this Warrant at the principal office of the Company together with notice of the
Purchaser's intention to exercise the Conversion Right, in which event the
Company shall issue to the Purchaser the number of shares of the Company's
Common Stock computed using the following formula:
X = Y(A-B)
------
A
3
<PAGE> 4
Where:
X The number of shares of Common Stock to be issued to the
Purchaser.
Y The number of shares of Common Stock representing the
portion of this Warrant that is being converted.
A The fair market value of one share of the Company's Common Stock.
B The Exercise Price (as adjusted to the date of such calculations).
For purposes of this Section 2.2, the "fair market value" per share of the
Company's Common Stock shall mean, the average daily Market Price (as defined
below) during the period of the most recent 20 days, ending on the last business
day before the effective date of exercise of the Conversion Right, on which the
national securities exchanges were open for trading, except that if no class of
the Common Stock is then listed or admitted to trading on any national
securities exchange or quoted in the over-counter market, the fair market value
shall be the Market Price on the last business day before the effective date of
exercise of the Conversion Right. If the Common Stock is traded on a national
securities exchange or admitted to unlisted trading privileges on such an
exchange, or is listed on the National Market System (the "National Market
System") of the National Association of Securities Dealers Automated Quotations
System (the "NASDAQ"), the Market Price as of a specified day shall be the last
reported sale price of the Common Stock on such exchange or on the National
Market System on such date or if no such sale is made on such day, the mean of
the closing bid and asked prices for such day on such exchange or on the
National Market System. If the Common Stock is not so listed or admitted to
unlisted trading privileges, the Market Price as of a specified day shall be the
mean of the last bid and asked prices reported on such date (x) by the NASDAQ or
(y) if reports are unavailable
4
<PAGE> 5
under clause (x) above by the National Quotation Bureau Incorporated. If the
Common Stock is not so listed or admitted to unlisted trading privileges and bid
and ask prices are not reported, the Market Price as of a specified day shall be
determined in good faith by written resolution of the Board of Directors of the
Company.
2.3 Automatic Exercise. Subject to Section 1.3, in the event
that this Warrant would otherwise expire unexercised with respect to any First
Shares or Second Shares for which this Warrant is then exercisable and the
Conversion Right for such exercisable Shares would entitle Purchaser to the
issuance of shares of Common Stock pursuant to Section 2.2, Purchaser shall be
deemed to have automatically converted this Warrant pursuant to Section 2.2
immediately prior to the time at which it would have otherwise expired.
3. Securities Fully Paid; Reservation of Shares/Stockholder
Rights. All shares of Common Stock that may be issued upon the exercise of the
rights represented by this Warrant, upon issuance, will be fully paid and
nonassessable, and free from all taxes, liens and charges with respect to the
issue thereof. During the period within which the rights represented by the
Warrant may be exercised, the Company will at all times have authorized and
reserved for the purpose of issuance upon exercise of the purchase rights
evidenced by this Warrant, a sufficient number of shares of its Common Stock to
provide for the exercise of the rights represented by this Warrant. Until this
Warrant is exercised by the Purchaser in accordance with the terms and
conditions hereof, Purchaser shall have no rights as a stockholder of the
Company with respect to the Shares issuable upon exercise of this Warrant.
4. Adjustment of Exercise Price and Number of Shares. The number
and kind of securities purchasable upon the exercise of the Warrant and the
Exercise Price shall be subject to adjustment from time to time upon the
occurrence of certain events, as follows:
4.1 Reclassification or Merger. In case of any
reclassification, change or conversion of securities in the class issuable upon
exercise of this Warrant (other than a change in par value, or from par value to
no par value, or from no par value to par value, or as a result of a subdivision
or combination), or in case of any merger of the Company with or into another
corporation (other than a merger with another corporation in which the Company
is a continuing corporation and which does not result in any reclassification or
change of outstanding securities issuable upon exercise of this Warrant), or in
case of any sale of all or substantially all of the assets of the Company,
unless this Warrant shall have been exercised or terminated in accordance with
its terms, the Purchaser of this Warrant shall have the right to exercise this
Warrant and upon such exercise to receive, in lieu of each share of Common Stock
theretofore issuable upon exercise of this Warrant, the kind and amount of
shares of stock, other securities, money and
5
<PAGE> 6
property receivable upon such reclassification, change or merger by a holder of
one share of Common Stock. The provisions of this subparagraph shall similarly
apply to successive reclassifications, changes, mergers and transfers.
4.2 Subdivisions or Combination of Shares. If the Company at
any time while this Warrant remains outstanding and unexpired shall subdivide or
combine its Common Stock, the applicable Exercise Price and the number of Shares
issuable upon exercise hereof shall be proportionately adjusted.
4.3 Stock Dividends. If the Company at any time while this
Warrant is outstanding and unexpired shall pay a dividend payable in shares of
Common Stock (except any distribution specifically provided for in the foregoing
subparagraphs 4.1 and 4.2), then each applicable Exercise Price shall be
adjusted, from and after the date of determination of stockholders entitled to
receive such dividend or distribution, to that price determined by multiplying
such Exercise Price in effect immediately prior to such date of determination by
a fraction (a) the numerator of which shall be the total number of shares of
Common Stock outstanding immediately prior to such dividend or distribution, and
(b) the denominator of which shall be the total number of shares of Common Stock
outstanding immediately after such dividend or distribution and the number of
Shares subject to this Warrant shall be proportionately adjusted.
4.4 Notice of Adjustments. Whenever any applicable Exercise
Price shall be adjusted pursuant to the provisions hereof, the Company shall
within thirty (30) days of such adjustment deliver a certificate signed by its
chief financial officer to Purchaser setting forth, in reasonable detail, the
event requiring the adjustment, the amount of the adjustment, the method by
which such adjustment was calculated, and the applicable Exercise Price after
giving effect to such adjustment.
5. Compliance with Securities Laws and other Restrictions.
5.1 Accredited Investor. This Warrant is conditioned upon, and
by its acceptance hereof Purchaser hereby confirms, that Purchaser is an
"accredited investor" as that term is defined under Regulation D under the
Securities Act of 1933.
5.2 Legend. Upon issuance, the Shares shall be imprinted with
a legend in substantially the following form:
"The securities represented by this certificate have not been
registered under the Securities Act of 1933. The securities may not be
sold or offered for sale in the absence of (a) an effective
registration statement for the securities under such Act, (b) a "no
action" letter of the Securities and Exchange Commission with respect
to such sale or offer or (c) satisfactory assurances to the Company
that registration under such Act is not required with respect to such
sale or offer."
together with any other legend required under applicable federal or state
securities laws.
6
<PAGE> 7
5.3 Restrictions on Transfer. This Warrant and the Shares
issuable upon exercise this Warrant may not be transferred or assigned in whole
or in part without compliance with applicable federal and state securities laws
by the transferor and the transferee. In addition, the Purchaser agrees not to
make any disposition of this Warrant or any Shares issued upon exercise hereof
unless and until the transferee has agreed in writing for the benefit of the
Company to be bound by (a) this Section 5.3, (b) Section 6 of that certain
Registration Rights Agreement dated as of November 12, 1999, as amended, among
the Company and certain of its stockholders, and (c) Article V of that certain
Stockholders Agreement dated as of November 12, 1999, as amended, among the
Company and certain of its stockholders; provided, and to the extent, this
Section and such agreements are then applicable, and:
(a) There is then in effect a registration statement under the
Securities Act covering such proposed disposition and such disposition is made
in accordance with such registration statement; or
(b) Purchaser shall have notified the Company of the proposed
disposition and shall have furnished the Company with a detailed statement of
the circumstances surrounding the proposed disposition, and (ii) if reasonably
requested by the Company, Purchaser shall have furnished the Company with an
opinion of counsel, reasonably satisfactory to the Company that such disposition
will not require registration of such shares under the Securities Act. It is
agreed that the Company will not require opinions of counsel from the Purchaser
for transactions made pursuant to Rule 144 under the Securities Act except in
unusual circumstances and will not require opinions of counsel in transactions
involving the transfer or distribution of Securities by the Purchaser to any
direct or indirect subsidiary, parent or affiliate of the Purchaser.
6. Fractional Shares. No fractional shares of Common Stock will
be issued in connection with any exercise hereunder, but in lieu of such
fractional shares the Company shall make a cash payment therefor upon the basis
of the Exercise Price then in effect.
7. Modification and Waiver. This Warrant and any provision hereof
may be changed, waived, discharged or terminated only by an instrument in
writing signed by the party against which enforcement of the same is sought.
8. Notices.
8.1 Notice of Certain Events. The Company shall provide the
Purchaser with at least thirty (30) business days notice (or such greater amount
of notice as Delaware law requires to be given to stockholders having the right
to vote at a meeting on any Sale Event) prior to (i) a merger of the Company
with and into, the consolidation of the Company with, or the sale by the Company
of all or substantially all of its assets to, another company (other than such a
transaction wherein the stockholders of the Company retain or obtain a majority
of the voting capital stock of the surviving, resulting or purchasing company)(a
"Sale Event"), (ii) any liquidation, dissolution or winding up of the Company or
(iii) the record date for any cash dividend declared on the Company's Common
Stock (each, a "Notice Event"). If the notice is provided pursuant to subsection
(i) or (ii) of the previous sentence, the notice will indicate the expected date
of the Notice Event.
7
<PAGE> 8
8.2 Notice Procedure. Any notice required or permitted
pursuant to this Warrant shall be in writing and shall be deemed sufficient when
either (a) delivered personally, (b) sent by e-mail or fax with confirmation of
receipt or (c) deposited in the U.S. mail, as certified or registered mail, with
postage prepaid, addressed as follows:
IF TO THE PURCHASER:
Yahoo! Inc.
[***]*
IF TO THE COMPANY:
ARTISTdirect, Inc.
17835 Ventura Boulevard, Suite 310
Encino, California 91316
Attention: Chief Financial Officer
Facsimile: (818) 758-8722
with a copy to:
Brobeck, Phleger & Harrison LLP
38 Technology Drive
Irvine, California 92618
Attention: Richard Fink, Esq.
Facsimile: (949) 790-6301
Each of the foregoing parties shall be entitled to specify a different
address by giving five (5) days advance written notice as aforesaid to the other
parties. All such notices and communications shall be deemed to have been
received (i) in the case of personal delivery or delivery be e-mail or fax, on
the date of such delivery (provided there is confirmation of such delivery) and
(ii) in the case of mailing, on the third business day following the date of
such mailing.
- ------------
* 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. Lost Warrants or Stock Certificates. Upon receipt of evidence
reasonably satisfactory to the Company of the loss, theft, destruction, or
mutilation of this Warrant or any stock certificate and, in the case of any such
loss, theft or destruction, upon receipt of an indemnity reasonably satisfactory
to the Company, or in the case of any such mutilation upon surrender and
cancellation of such Warrant or stock certificate, the Company will make and
deliver a new Warrant or stock certificate, or like tenor, in lieu of the lost,
stolen, destroyed or mutilated Warrant or stock certificate.
10. Non-Disclosure. The terms and conditions of this Warrant shall be
considered confidential and shall not be disclosed to any third parties except
to Company's or Purchasers's accountants, attorneys, or except as otherwise
required by law. Neither Company nor Purchaser shall make any public
announcement regarding the existence of this Warrant without the other party's
prior written approval and consent. If Company or Purchaser desires to make a
public announcement regarding the existence of this Warrant, it shall provide
the other with a minimum of three (3) business days notice of the intended
disclosure. If this Agreement or any of its terms must be disclosed by Company
under any law, rule or regulation, Company shall (i) give written notice of the
intended disclosure to Purchaser at least five (5) days in advance of the date
of disclosure, (ii) redact portions of this Agreement to the fullest extent
permitted under any applicable laws, rules and regulations, and (iii) submit a
request, to be agreed upon by Purchaser, that such portions and other provisions
of this Agreement requested by Purchaser receive confidential treatment under
the laws, rules and regulations of the body or tribunal to which disclosure is
being made or otherwise be held in the strictest confidence to the fullest
extent permitted under the laws, rules or regulations of any other applicable
governing body.
11. No Impairment. The Company will not, through any reorganization,
recapitalization, transfer of assets, consolidation, merger, dissolution,
issuance or sale of securities or any other voluntary action, avoid or seek to
avoid the observance or performance of any of the terms to be observed or
performed hereunder by the Company, but will at all times in good faith assist
in the carrying out of all the provisions of this Warrant and in the taking of
all such action as may be necessary or appropriate in order to protect the
rights of the holder of this Warrant against impairment.
12. Governing Law. This Warrant shall be construed and enforced
in accordance with, and the rights of the parties shall be governed by, the laws
of the State of California.
9
<PAGE> 10
IN WITNESS WHEREOF, this Warrant has been executed as of the Date of
Issuance.
ARTISTDIRECT, INC.
By
------------------------------------
Name
----------------------------------
Title
---------------------------------
YAHOO! INC.
By
-------------------------------------
Name
-----------------------------------
Title
----------------------------------
10
<PAGE> 11
EXHIBIT "A"
NOTICE OF EXERCISE FORM
(To be executed only upon partial or full
exercise of the within Warrant)
The undersigned registered Purchaser of the within Warrant hereby
irrevocably exercises the within Warrant for and purchases shares of Common
Stock of ARTISTdirect, Inc. and herewith makes payment therefor in the amount of
$______, all at the price and on the terms and conditions specified in the
within Warrant and requests that a certificate (or _______certificates in
denominations of shares) for the shares of Common Stock of ARTISTdirect, Inc.
hereby purchased be issued in the name of and delivered to (choose one) (a) the
undersigned or (b) [NAME], whose address is____________________________________
and, if such shares of Common Stock shall not include all the shares of Common
Stock issuable as provided in the within Warrant, that a new Warrant of like
tenor for the number of shares of Common Stock of ARTISTdirect, Inc. not being
purchased hereunder be issued in the name of and delivered to (choose one) (a)
the undersigned or (b) [NAME], whose address is ______________________________.
Date: ______________________
By:
-------------------------------------
(Signature of Registered Purchaser)
Title:
------------------------------------
NOTICE: The signature to this Notice of Exercise must correspond with
the name as written upon the face of the within Warrant in
every particular, without alteration or enlargement or any
change whatever.
11
<PAGE> 12
EXHIBIT "B"
INVESTMENT REPRESENTATION CERTIFICATE
Purchaser:
Company: ARTISTdirect, Inc.
Security: Common Stock
Amount:
Date:
In connection with the purchase of the above-listed securities (the
"Securities"), the undersigned (the "Purchaser") represents to the Company as
follows:
The Purchaser is aware of the Company's business affairs and financial
condition, and has acquired sufficient information about the Company to reach an
informed and knowledgeable decision to acquire the Securities. The Purchaser is
purchasing the Securities for its own account for investment purposes only and
not with a view to, or for the resale in connection with, any "distribution"
thereof for purposes of the Securities Act of 1933, as amended (the "Securities
Act");
The Purchaser understands that the Securities have not been registered
under the Securities Act in reliance upon a specific exemption therefor, which
exemption depends upon, among other things, the bona fide nature of the
Purchaser's investment intent as expressed herein. In this connection, the
Purchaser understands that, in the view of the Securities and Exchange
Commission ("SEC"), the statutory basis for such exemption may be unavailable if
the Purchaser's representation was predicated solely upon a present intention to
hold these Securities for the minimum capital gains period specified under tax
statutes, for a deferred sale, for or until an increase or decrease in the
market price of the Securities, or for a period of one year or any other fixed
period in the future. The Purchaser is an "accredited investor" as that term is
defined under Regulation D promulgated by the Securities Exchange Commission
under the Securities Act;
The Purchaser further understands that the Securities must be held
indefinitely unless subsequently registered under the Securities Act or unless
an exemption from registration is otherwise available. Moreover, except as
provided in that certain Third Amended and Restated Registration Rights
Agreement dated as of November 12, 1999, as amended, among the Company and
certain of its stockholders, the Purchaser understands that the Company is under
no obligation to register the Securities. In addition, the Purchaser understands
that the certificate evidencing the Securities will be imprinted with the
legends referred to in this Warrant under which the Securities are being
purchased;
The Purchaser is aware of the provisions of Rule 144, promulgated under
the Securities
12
<PAGE> 13
Act, which, in substance, permit limited public resale of
"restricted securities" acquired, directly or indirectly, from the issuer
thereof (or from an affiliate of such issuer), in a non-public offering subject
to the satisfaction of certain conditions, if applicable, including, among other
things: (i) the availability of certain public information about the Company;
(ii) the resale occurring not less than one (1) year after the party has
purchased and paid for the securities to be sold; (iii) the sale being made
through a broker in an unsolicited "broker's transaction" or in transactions
directly with a market maker (as said term is defined under the Securities
Exchange Act of 1934) and the amount of securities being sold during any
three-month period not exceeding the specified limitations stated therein;
The Purchaser further understands that at the time it wishes to sell
the Securities there may be no public market upon which to make such a sale, and
that, even if such a public market upon which to make such a sale then exists,
the Company may not be satisfying the current public information requirements of
Rule 144, and that, in such event, the Purchaser may be precluded from selling
the Securities under Rule 144 even if the one-year minimum holding period had
been satisfied; and
The Purchaser further understands that in the event all of the
requirements of Rule 144 are not satisfied, registration under the Securities
Act, compliance with Regulation A, or some other registration exemption will be
required; and that, notwithstanding the fact that Rule 144 is not exclusive, the
staff of the SEC has expressed its opinion that persons proposing to sell
private placement securities other than in a registered offering and otherwise
than pursuant to Rule 144 will have a substantial burden of proof in
establishing that an exemption from registration is available for such offers or
sales, and that such persons and their respective brokers who participate in
such transactions do so at their own risk.
Date: ______________________
PURCHASER:
13
<PAGE> 1
EXHIBIT 21.1
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
Name of State of Doing
Subsidiary Organization Business As
---------- ------------ -----------
<S> <C> <C>
Kneeling Elephant Records, LLC California Kneeling Elephant Records
The Ultimate Band List, LLC California The UBL*
ARTISTdirect New Media, LLC California ARTISTdirect New Media
ARTISTdirect Agency, LLC California ARTISTdirect Agency
ARTISTdirect Holdings, LLC California ARTISTdirect Holdings
ARTISTdirect International
Holdings, LLC
ARTISTdirect Latin America, LLC
</TABLE>
* iMusic, Inc. is a wholly owned subsidiary of the Ultimate Band List, LLC.
