<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 26, 1997
REGISTRATION NO. 333-33105
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
N2K INC.
(Exact name of registrant as specified in its charter)
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<S> <C> <C>
DELAWARE 7375 06-1455771
(State or other jurisdiction (Primary Standard (I.R.S. Employer
of incorporation or organization) Industrial Classification Code Identification No.)
Number)
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N2K INC.
55 BROAD STREET, 26TH FLOOR
NEW YORK, NEW YORK 10004
(212) 378-5555
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
JONATHAN V. DIAMOND
VICE CHAIRMAN
N2K INC.
55 BROAD STREET, 26TH FLOOR
NEW YORK, NEW YORK 10004
(212) 378-5555
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
Copies of all communications, including all communications sent to the agent for
service, should be sent to:
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FRANK E. MORGAN II, ESQ. JULIE M. ALLEN, ESQ.
DEWEY BALLANTINE O'SULLIVAN GRAEV & KARABELL, LLP
1301 AVENUE OF THE AMERICAS 30 ROCKEFELLER PLAZA
NEW YORK, NEW YORK 10019 NEW YORK, NEW YORK 10112
(212) 259-8000 (212) 408-2400
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
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,
please check the following box: [ ]
CALCULATION OF REGISTRATION FEE
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PROPOSED
TITLE OF EACH CLASS OF MAXIMUM AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED OFFERING PRICE(1)(2) REGISTRATION FEE
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Common Stock, par value $0.001 per share...... $58,650,000 $17,773(3)
- ----------------------------------------------------------------------------------------------------------------
Warrants to purchase Common Stock............. (4) --
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(1) Includes 450,000 shares which the Underwriters have an option to purchase
from the Company to cover over-allotments, if any.
(2) Estimated solely for purposes of determining the registration fee pursuant
to Rule 457 under the Securities Act of 1933.
(3) Includes $13,152 which was previously paid on August 7, 1997 in accordance
with Rule 457(a).
(4) In connection with the intended purchase of $3,000,000 aggregate value of
the Company's Common Stock by America Online, Inc. ("AOL") as part of this
public offering, the Company expects to grant to AOL a warrant for the
future purchase of up to 219,375 additional shares of Common Stock
(assuming an initial public offering price of $16.00 per share) (the "AOL
Warrant"). The AOL Warrant is also being registered on this Form.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED SEPTEMBER 26, 1997
3,000,000 SHARES
[N2K INC. LOGO]
COMMON STOCK
------------------------
All of the shares of Common Stock offered hereby are being offered by N2K
Inc. ("N2K" or the "Company"). Prior to this offering, there has been no public
market for the Common Stock. It is currently estimated that the initial public
offering price will be between $15.00 and $17.00 per share. See "Underwriting"
for certain factors to be considered in determining the initial public offering
price. The Company has applied for quotation of the Common Stock on the Nasdaq
National Market under the trading symbol "NTKI."
Of the 3,000,000 shares of Common Stock offered hereby, 201,612 shares
(assuming an initial public offering price of $16.00 per share) are being
reserved for sale to America Online, Inc. ("AOL"), which has indicated that it
intends to purchase such shares from the Underwriters at the initial public
offering price less underwriting discounts and commissions. See "Underwriting."
Upon completion of this offering, the Company will also issue a warrant to AOL
for the future purchase of up to 219,375 additional shares of Common Stock
(assuming an initial public offering price of $16.00 per share)(the "AOL
Warrant") at an exercise price equal to the initial public offering price per
share. See "Description of Capital Stock."
THESE SECURITIES INVOLVE A HIGH DEGREE OF RISK. SEE "RISK FACTORS"
BEGINNING ON PAGE 8 OF THIS PROSPECTUS FOR A DISCUSSION OF CERTAIN FACTORS THAT
SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
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Price to Proceeds to
Public Underwriting Company(2)
Discounts and
Commissions(1)
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Per Share......................... $ $ $
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Total............................. $ $ $
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Total Assuming Full Exercise of
Over-Allotment Option(3)........ $ $ $
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(1) The determination of total Underwriting Discounts and Commissions assumes
the purchase by AOL of the shares reserved for it. See "Underwriting."
(2) Before deducting expenses estimated at $1,600,000, which are payable by the
Company.
(3) Assuming exercise in full of the 30-day option granted by the Company to the
Underwriters to purchase up to 450,000 additional shares, on the same terms,
solely to cover over-allotments. See "Underwriting."
------------------------
The shares of Common Stock are offered by the Underwriters, subject to
prior sale, when, as and if delivered to and accepted by the Underwriters, and
subject to their right to reject orders in whole or in part. It is expected that
delivery of the Common Stock will be made in New York City on or about
, 1997.
------------------------
PAINEWEBBER INCORPORATED UNTERBERG HARRIS
------------------------
THE DATE OF THIS PROSPECTUS IS , 1997.
<PAGE> 3
[INSIDE FRONT COVER -- GRAPHIC INCORPORATING THE MUSIC BOULEVARD WEBSITE
ENTRANCE PAGE.]
[INSIDE FRONT COVER GATEFOLD -- GRAPHIC INCORPORATING THE N2K LOGO AND
FEATURING THE MUSIC BOULEVARD WEBSITE AS THE CENTRAL LINK FOR THE FOLLOWING
ELEMENTS: (1) N2K ENCODED MUSIC, (2) THE JAZZ CENTRAL STATION WEBSITE (INCLUDING
PHOTOS REPRESENTING ARTIST AREAS), (3) THE CLASSICAL INSITES WEBSITE (INCLUDING
THE LEONARD BERNSTEIN WEBSITE), (4) THE ROCKTROPOLIS WEBSITE (INCLUDING THE
ALLSTAR MAGAZINE WEBSITE), (5) WEBSITES OF DAVID BOWIE AND THE ROLLING STONES
(INCLUDING ARTIST PHOTOS OR LOGOS) AND (6) THE CONCEPT OF INTERNET ACCESS FOR
USERS OF THE INTERNET.]
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING OVERALLOTMENT, ENTERING STABILIZING BIDS, EFFECTING SYNDICATE COVERING
TRANSACTIONS, AND IMPOSING PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES,
SEE "UNDERWRITING."
<PAGE> 4
PROSPECTUS SUMMARY
Unless otherwise indicated, all information in this Prospectus assumes that
the Underwriters' over-allotment option will not be exercised and gives effect
to (a) the 1-for-4 reverse stock split of each outstanding share of Common Stock
in N2K Inc., a Pennsylvania corporation, to be effected prior to the
reorganization of N2K Inc. as a Delaware corporation, (b) the reorganization of
N2K Inc. as a Delaware corporation immediately prior to the date of this
Prospectus, (c) the automatic conversion of all outstanding shares of the
Company's Preferred Stock, $0.001 par value (the "Preferred Stock"), into an
aggregate of 4,986,778 shares of Common Stock upon the consummation of this
offering (the "Preferred Stock Conversion"), (d) the automatic expiration upon
the consummation of this offering of the put rights associated with 44,790
shares of Common Stock issued in connection with the purchase of the rock
website, Rocktropolis (the "Rocktropolis Put Expiration") and (e) the automatic
conversion of the Management Notes (as defined) into an aggregate of 109,374
shares of Common Stock (assuming an initial public offering price of $16.00 per
share) upon the consummation of this offering (the "Management Note
Conversion"). Fiscal year references are to the respective fiscal year ended
December 31.
THE COMPANY
N2K is one of the leading on-line music entertainment companies using the
Internet as a global platform for promoting, marketing and selling music and
related merchandise. The Company's strategy is to build loyal user communities
around genre-specific websites that provide music content and enable consumers
to purchase compact discs ("CDs"), cassettes and related merchandise. The
Company believes that as its user base continues to grow, it will be able to
increase revenues from sales of music, related merchandise, advertising and
sponsorship programs. The Company estimates, based on internal reports, that the
number of page impressions per month for its music retail website has grown from
approximately 767,000 in July 1996 to approximately 9.4 million in July 1997.
Page impressions for the Company's music retail website are defined as the
number of full computer screens of content served to users of the website.
The Company's music retail website is Music Boulevard (www.musicblvd.com),
around which the Company organizes its genre-specific music websites,
Rocktropolis (www.rocktropolis.com), Jazz Central Station
(www.jazzcentralstation.com) and Classical Insites (www.classicalinsites.com).
In addition to these genre websites, the Company also operates websites for such
artists as David Bowie, The Rolling Stones and Leonard Bernstein. The Company's
websites allow users to view current music news, including news from MTV and
from such magazines as SPIN and JazzTimes, reviews, artist biographies and
discographies, musicians' favorite artist recordings and historical and
educational information, and to hear and view cybercasts and recording and video
samples. Consumers may search, browse and purchase music recordings from a
database of approximately 185,000 CD and cassette titles and related
merchandise, digitally access 30-second music samples from a selection of
approximately 340,000 songs, read from over 60,000 reviews and related articles
and view music video clips. In July 1997, the Company introduced its e _ mod
system, which allows consumers to purchase and digitally download from a
collection of music singles. All product purchases are coordinated through Music
Boulevard, which acts as the Company's on-line retail store. The Company
believes that by providing a wealth of information in a highly personalized,
interactive context, it creates an entertaining environment that attracts
traffic to its websites, fosters brand awareness and encourages purchases of
music and related merchandise.
As part of its growth strategy, the Company seeks to establish strategic
alliances with global on-line, music and media companies to attract additional
users to, and increase brand awareness of, the Company's websites. For example,
the Company recently formed a strategic alliance with America Online, Inc.
("AOL") pursuant to an interactive marketing agreement (the "AOL Contract"),
which provides, among other things, for N2K to be featured as the exclusive
on-line music retailer within AOL's MusicSpace channel, receive an anchor tenant
position on AOL's Shopping channel, participate in a variety of banner
advertising opportunities and be assigned specific keywords within the AOL
service. Similarly, the Company has entered into a sponsorship agreement (the
"Excite Contract") with Excite, Inc. ("Excite"), which provides for N2K to be
the exclusive retail music store sponsor of the www.excite.com website, to
provide certain music-related content to the the www.excite.com website, to
create a co-branded area of Music Boulevard and to participate in joint
promotions to customers of this co-branded area. In addition, the Company has
established an
3
<PAGE> 5
exclusive strategic alliance with MTV Networks (the "MTV/VH1 Alliance"), under
which MTV Networks provides Music Boulevard with content and presents Music
Boulevard, both on-air and on-line, as the exclusive partner for retail sales of
CDs, cassettes and related merchandise for each of the MTV (www.mtv.com) and VH1
(www.vh1.com) websites. N2K has established strategic agreements as most
prominently featured music content provider and on-line music retailer for WebTV
Networks ("WebTV"), as most prominently featured music content provider and
exclusive music retailing anchor tenant for At Home Corporation's ("@Home")
@Home Shopping Guide, as exclusive on-line product fulfillment source for the
Virgin Records America, Inc. ("Virgin Records") website and, subject to a
memorandum of understanding, to become the advertising music sponsor and
preferred on-line music retailer for the Music Zone channel on the PointCast,
Inc. ("PointCast") College Network.
The Company intends to capitalize on the global nature of the Internet to
build an international user base by creating local language versions of, and
localized content for, the Company's websites. Currently, approximately
one-third of the Company's on-line revenues are generated from sales of CDs,
cassettes and related merchandise outside the U.S. The Company has established a
wholly-owned subsidiary in Japan, the world's second largest market for recorded
music sales, and has launched Japanese versions of Music Boulevard
(www.musicblvd.com/jp) and Jazz Central Station (jp.jazzcentralstation.com). The
Company also offers registration and ordering instructions on Music Boulevard in
English, Japanese, German, French and Spanish.
The Company has also established its own record label, N2K Encoded Music,
which uses the Company's websites, as well as record stores and other
traditional distribution channels, to promote, distribute and sell original and
licensed artist recordings. Since January 1997, the Company has released its
initial 12 recordings on the N2K Encoded Music label under the direction of
Grammy Award-winning producer, Phil Ramone. The Company expects to release one
new title through December 1997, and currently has agreements with 12 artists
for future recordings. The Company expects that many of its N2K Encoded Music
CDs will feature enhanced multimedia capabilities ("Enhanced CDs" or "E-CDs")
and Internet connectivity software. Traditional domestic distribution for the
Company's record label is handled by Sony Music Entertainment, Inc.'s
distribution company, RED Distribution, Inc.
The Company's management team has significant experience in managing music
industry and artist relationships, promoting and marketing recorded music and
developing state-of-the-art music recordings. Larry Rosen and Dave Grusin
founded and, together with Jon Diamond, built GRP Records, Inc. ("GRP") into one
of the largest independent record labels and one of the first to digitally
produce music titles from concept through finished recording in CD format. With
more than 75 Grammy Award nominations and 20 Grammy Awards to its credit, GRP
was purchased by MCA Inc. in 1990. Phil Ramone is a renowned record producer,
having produced records for artists including Billy Joel, Paul Simon, Chicago,
Barbra Streisand, Paul McCartney, Elton John and Frank Sinatra.
The Company's executive offices are located at 55 Broad Street, New York,
New York 10004, its telephone number is 212-378-5555 and its Internet address is
www.n2k.com.
4
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THE OFFERING
Common Stock Offered by the
Company............................. 3,000,000 shares
Common Stock to be Outstanding After
the Offering........................ 11,223,951 shares(1)
Use of Proceeds..................... The net proceeds from this offering
will be used by the Company to fund
payments due to AOL and Excite, to
repay short-term indebtedness, to
expand the Company's technical
infrastructure, for marketing and for
working capital and other general
corporate purposes, including possible
future strategic alliances and
acquisitions. See "Use of Proceeds."
Proposed Nasdaq National Market
Symbol.............................. NTKI
- ---------------
(1) As of September 26, 1997, excludes (i) 1,958,011 shares of Common Stock
issuable upon exercise of outstanding options (including options to be
issued upon the consummation of this offering), (ii) 2,034,063 shares of
Common Stock reserved for future grants under the Company's stock option and
purchase plans, (iii) 452,318 shares of Common Stock reserved for issuance
pursuant to the exercise of outstanding warrants and (iv) 219,375 shares of
Common Stock reserved for issuance pursuant to the exercise of the AOL
Warrant (assuming an initial public offering price of $16.00 per share). The
weighted average exercise price of all outstanding options and warrants is
$8.98 per share (assuming an initial public offering price of $16.00 per
share). See "Management -- Stock Plans," "Certain Transactions,"
"Description of Capital Stock" and Note 8 of Notes to Consolidated Financial
Statements.
RISK FACTORS
In connection with this offering, prospective investors should carefully
consider the factors set forth under "Risk Factors," including historical and
anticipated losses; uncertainty of future results; new business challenges;
competition; dependence upon strategic alliances; dependence on key suppliers
and distributors; Internet-related risks (including dependence on the Internet;
uncertain acceptance of the Internet as a medium for commerce; uncertain
acceptance of the Company's Internet content; uncertain acceptance of the
Internet as a medium for advertising; security risks; government regulation and
legal uncertainties; and liability for information retrieved from the Internet);
management of growth; dependence on key personnel; risks inherent in the record
label industry; potential fluctuations in quarterly results; risk of system
failure or inadequacy; risks of technology trends and evolving industry
standards; risks associated with global expansion; possible need for additional
funds; control by management; anti-takeover provisions; shares eligible for
future sale; registration rights; absence of prior public market; possible
volatility of stock price; immediate and substantial dilution; absence of
dividends; and no specific use of certain proceeds.
5
<PAGE> 7
SUMMARY FINANCIAL INFORMATION
The following summary financial information should be read in conjunction
with the Consolidated Financial Statements of the Company and the notes thereto,
"Selected Consolidated Financial Data" and "Management's Discussion and Analysis
of Financial Condition and Results of Operations" included elsewhere in this
Prospectus.
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YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
-------------------------------------------- ---------------------------
1994 1995 1996 1996 1997
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STATEMENT OF OPERATIONS DATA(1):
Net revenues..................... $ -- $ 96,505 $ 1,655,704 $ 529,579 $ 2,936,895
Cost of revenues................. -- 85,176 1,637,319 511,057 2,477,643
----------- ----------- ------------ ----------- -----------
Gross profit................... -- 11,329 18,385 18,522 459,252
Operating expenses............... 1,327,436 2,983,933 18,257,870 9,136,121 10,243,556
----------- ----------- ------------ ----------- -----------
Operating loss(2)................ (1,327,436) (2,972,604) (18,239,485) (9,117,599) (9,784,304)
Income (loss) from:
Continuing operations.......... (1,302,475) (2,884,471) (17,939,235) (9,043,300) (9,748,983)
Discontinued operations(3)..... 1,444,885 1,289,671 (968,674) 157,271 (415,970)
Net income (loss)................ 142,410 (1,594,800) (18,907,909) (8,886,029) (10,164,953)
Pro forma loss per common share
from(4):
Continuing operations.......... $ (2.55) $ (1.19)
Discontinued operations........ (0.14) (0.05)
------------ -----------
Pro forma net loss per common
share........................ $ (2.69) $ (1.24)
============= ============
Shares used in computing pro
forma net loss per common
share(4)....................... 7,041,955 8,229,371
============= ============
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JUNE 30, 1997
--------------------------------------------------
ACTUAL PRO FORMA(5) AS ADJUSTED(6)
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BALANCE SHEET DATA:
Cash and cash equivalents............................. $ 669,722 $ 8,441,322 $45,459,722
Working capital (deficit)............................. (1,602,286) 947,714 43,187,714
Total assets.......................................... 8,397,980 16,169,580 53,187,980
Senior notes.......................................... -- 5,221,600 --
Stockholders' equity.................................. 2,034,620 5,122,118 47,362,118
</TABLE>
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(1) Telebase Systems, Inc. ("Telebase") was founded in 1984 as a provider of
on-line information services. In 1994, Telebase expanded its on-line
business strategy to include music entertainment and began expending
significant resources to enter this market. In 1995, the Company began
offering on-line sales of music through its Music Boulevard website. On
February 13, 1996, Telebase merged with N2K Inc., a New York corporation
("New York N2K"), and changed its name to N2K Inc. In April 1997, the
Company decided to discontinue its on-line information services business to
focus exclusively on its music entertainment business. See note (3) below.
(2) Included in the 1996 operating loss are aggregate one-time charges totaling
$5.2 million for purchased research and development incurred in connection
with the acquisitions of New York N2K ($4.1 million in February 1996) and
the rock website, Rocktropolis ($1.1 million in June 1996). See Notes 1 and
2 of Notes to Consolidated Financial Statements.
(3) In April 1997, the Company's board of directors (the "Board of Directors")
approved a formal plan of disposal for its on-line information services
business and in August 1997, the Company sold substantially all of the net
assets of this business. Accordingly, the operating results and assets and
liabilities of this business have been accounted for as a discontinued
operation and reflected separately from continuing operations. See Note 3 of
Notes to Consolidated Financial Statements.
(4) See Note 1 of Notes to Consolidated Financial Statements.
(5) Reflects (i) the Rocktropolis Put Expiration, (ii) the issuance of the
Senior Notes (as defined) and the Management Notes, (iii) the Preferred
Stock Conversion and (iv) the Management Note Conversion. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
6
<PAGE> 8
(6) As adjusted to give effect to the sale of the shares of Common Stock offered
hereby assuming an initial public offering price of $16.00 per share and
after deducting estimated underwriting discounts and commissions and
offering expenses and the initial application of the net proceeds therefrom
to repay the outstanding balance of the Senior Notes. In connection with the
repayment of the Senior Notes, the Company will record a charge to its
statement of operations in the fiscal quarter in which this offering is
consummated. This charge will be equal to the unamortized portion of the
discount on the Senior Notes which was approximately $614,000 as of
September 26, 1997. See Note 1 of Notes to Consolidated Financial
Statements. See "Use of Proceeds" and "Capitalization."
------------------------
The preceding summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and Consolidated Financial
Statements of the Company and the notes thereto appearing elsewhere in this
Prospectus. This Prospectus contains forward-looking statements that involve
risks and uncertainties. Discussions containing such forward-looking statements
may be found in the material set forth under "Prospectus Summary," "Risk
Factors," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business." Actual events or results could differ
materially from those discussed herein. Factors that could cause or contribute
to such differences include, but are not limited to, those discussed under "Risk
Factors," as well as those discussed in the sections entitled "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business" and in the other sections of this Prospectus.
------------------------
Music Boulevard(R) (and its related logo) is a registered service mark of
the Company. The Company has also applied for trademark and/or service mark
registrations for Jazz Central Station(TM) (and its related logo), Music
Blvd.(TM), N2K Encoded(TM) and Rocktropolis(TM). In addition, the Company is
using allstar(TM), Classical Insites(TM), e _ mod(TM), N2K(TM), Need To Know(TM)
and RAM(TM) as trademarks and/or service marks. All other trademarks or service
marks appearing in this Prospectus are the property of their respective holders.
7
<PAGE> 9
RISK FACTORS
An investment in the shares of Common Stock offered hereby involves a high
degree of risk. Prospective investors should consider carefully the following
risk factors, in addition to the other information set forth in this Prospectus,
before purchasing any of the shares of Common Stock offered hereby.
HISTORICAL AND ANTICIPATED LOSSES; UNCERTAINTY OF FUTURE RESULTS
The Company has incurred significant losses and expects to continue to
incur significant losses on a quarterly and annual basis for the foreseeable
future. As of June 30, 1997, the Company had an accumulated deficit of $37.4
million. The Company has incurred losses from continuing operations of $17.9
million and $9.7 million for the year ended December 31, 1996 and the six months
ended June 30, 1997, respectively. Since its inception, the Company has incurred
costs to develop and enhance its technology, to create, introduce and enhance
its websites, to establish marketing and distribution relationships and to build
an administrative organization. The Company currently intends to increase
substantially its operating expenses as a result of the Company's strategic
alliances, to fund increased sales and marketing, to enhance existing websites
and to implement strategic relationships important to the success of the
Company. To the extent that such expenses precede or are not subsequently
followed by increased revenues, the Company's business, results of operations
and financial condition will be materially adversely affected. There can be no
assurance that the Company will be able to generate sufficient revenues from the
sale of music recordings, related merchandise, advertising and sponsorships to
achieve or maintain profitability on a quarterly or annual basis in the future.
The Company expects negative cash flow from operations to continue for the
foreseeable future as it continues to develop and market its business. See
"Selected Consolidated Financial Data" and "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
NEW BUSINESS CHALLENGES
Although the Company was founded in 1984 and has been conducting an on-line
information services business for more than ten years, it began development of
its central website, Music Boulevard, in 1994. To date, the Company has only a
limited operating history in its music entertainment business upon which an
evaluation of N2K and its prospects can be based. The Company's prospects must
be considered in light of the risks, expenses and difficulties frequently
encountered by companies in new, unproven and rapidly evolving markets. To
address these risks, the Company must, among other things, expand its customer
base, respond to competitive developments, continue to attract, retain and
motivate qualified employees and continue to upgrade its technologies. There can
be no assurance that the Company will be successful in addressing such risks. If
the Company is not successful in developing and expanding its music
entertainment business, including its N2K Encoded Music label, sales of
advertising on its websites and development of related business opportunities,
the Company's ability to achieve profitability will be materially adversely
affected. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
COMPETITION
The market for Internet content providers is highly competitive and rapidly
changing. Since the Internet's commercialization in the early 1990's, the number
of websites on the Internet competing for consumers' attention and spending has
proliferated. With no substantial barriers to entry, the Company expects that
competition will continue to intensify. With respect to competition for
consumers' attention, in addition to intense competition from Internet content
providers, the Company also faces competition from traditional media such as
radio, television and print. N2K Encoded Music competes with the major, and
other independent, record labels. See "-- Risks Inherent in the Record Label
Industry." With respect to recorded music sales, the Company competes with
numerous Internet retailers, including traditional music retail chains, record
labels and independents with websites on the Internet. In addition, the Company
competes with traditional retail stores, including chains and megastores, mass
merchandisers, consumer electronics stores and music clubs. The Company believes
that the primary competitive factors in providing music entertainment products
and services via the Internet are name recognition, variety of value-added
services, ease of use, price, quality of service, availability of customer
support, reliability, technical expertise and experience. The
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Company's success will depend heavily upon its ability to provide high quality,
entertaining content, along with cutting-edge technology and value-added
Internet services. Other factors that will affect the Company's success include
the Company's continued ability to attract experienced marketing, sales and
management talent. The Company's failure to compete successfully in the music
entertainment business would have a material adverse effect on the Company's
business, results of operations and financial condition. In addition, the
competition for advertising revenues, both on Internet websites and in more
traditional media, is intense. To the extent the Company is not able to attract
significant sources of revenues from paid advertisements and sponsorships on its
websites, the Company's business, results of operations and financial condition
will be materially adversely affected.
Many of the Company's current and potential competitors in the Internet and
music entertainment businesses have longer operating histories, significantly
greater financial, technical and marketing resources, greater name recognition
and larger existing customer bases than the Company. 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 the Company. There can be
no assurance that the Company will be able to compete successfully. See
"Business -- Competition."
DEPENDENCE UPON STRATEGIC ALLIANCES
The Company relies on certain strategic alliances to attract users to its
websites to purchase recorded music and related merchandise, as well as to
attract paid advertising to its websites. The Company has entered into such
alliances with AOL, Excite, MTV Networks, WebTV, @Home, Virgin Records and
PointCast, which provide for music sales transactions and, in some cases,
co-marketing and website content. The Company believes that such alliances will
result in increased traffic to its websites. Although the Company has only
recently entered into such strategic alliances, the Company's ability to
generate revenues from Internet commerce may depend on the increased traffic,
purchases, advertising and sponsorships that the Company expects to generate
through such strategic alliances. There can be no assurance that the Company's
infrastructure will be sufficient to handle the expected increased traffic from
such alliances. There can also be no assurance that these relationships will be
maintained beyond their initial terms or that additional third-party alliances
will be available to the Company on acceptable commercial terms or at all. The
inability to enter into new, and to maintain any one or more of its existing,
strategic alliances could have a material adverse effect on the Company's
business, results of operations and financial condition.
DEPENDENCE ON KEY SUPPLIERS AND DISTRIBUTORS
The Company currently has a contract with Valley Record Distributors
("Valley"), which is currently the Company's primary provider of order
fulfillment for direct-to-consumer recorded music products. The Company has no
fulfillment operation or facility of its own and, accordingly, is dependent upon
maintaining its existing relationship with Valley or establishing a new
fulfillment relationship with one of the few other fulfillment operations. There
can be no assurance that the Company will maintain its relationship with Valley
beyond the term of its existing agreement, which was entered into in May 1995
for a three-year period, or that it will be able to find an alternative,
comparable supplier capable of providing fulfillment services on terms
satisfactory to the Company should its relationship with Valley terminate. An
unanticipated termination of the Company's relationship with Valley,
particularly during the fourth quarter of the calendar year in which a high
percentage of recorded music sales are made, could materially adversely affect
the Company's results of operations for the quarter in which such termination
occurred even if the Company was able to establish a relationship with an
alternative fulfillment house. This contract expires in May 1998. The Company is
currently negotiating a new contract with Valley which, if executed, would
extend the term of the agreement. Valley may terminate its existing agreement
with the Company upon 90 days' written notice, in the event that Valley decides
to discontinue providing fulfillment services to all of Valley's on-line service
customers. To date, Valley has satisfied the Company's requirements on a timely
basis. However, to the extent that Valley does not have sufficient capacity and
is unable to satisfy on a timely basis increasing requirements of the
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Company, such capacity constraint would have a material adverse effect on the
Company's business, results of operations and financial condition.
The Company currently has an exclusive agreement with RED Distribution,
Inc., a subsidiary of Sony Music Entertainment, Inc. ("Sony's RED
Distribution"), which provides for Sony's RED Distribution to act as exclusive
distribution agent in the United States for the N2K Encoded Music label. The
Company does not have a distribution operation of its own and, accordingly, is
dependent upon maintaining its existing relationship with Sony's RED
Distribution or establishing a new distribution relationship with a comparable
distributor. There can be no assurance that the Company will maintain its
relationship with Sony's RED Distribution beyond the term of its existing
agreement, which was entered into in October 1996 for a three-year period. The
termination of such relationship would, absent establishing a substitute
relationship with another distributor, have a material adverse effect on the
Company's business, results of operations and financial condition. The Company
believes that alternative distributors would be available on terms satisfactory
to the Company should its relationship with Sony's RED Distribution terminate.
See "Business -- N2K Encoded Music" and "Business -- Ordering, Fulfillment and
Customer Service."
INTERNET-RELATED RISKS
Dependence on the Internet; Uncertain Acceptance of the Internet as a Medium
for Commerce
Use of the Internet by consumers is at an early stage of development, and
market acceptance of the Internet as a medium for commerce is subject to a high
level of uncertainty. The Company's future success will depend on its ability to
significantly increase revenues, which will require the development and
widespread acceptance of the Internet as a medium for commerce. There can be no
assurance that the Internet will be a successful retailing channel. The Internet
may not prove to be a viable commercial marketplace because of inadequate
development of the necessary infrastructure, such as reliable network backbones,
or complementary services, such as high speed modems and security procedures for
financial transactions. The viability of the Internet may prove uncertain due to
delays in the development and adoption of new standards and protocols (for
example, the next generation Internet Protocol) to handle increased levels of
Internet activity or due to increased government regulation. If use of the
Internet does not continue to grow, or if the necessary Internet infrastructure
or complementary services are not developed to effectively support growth that
may occur, the Company's business, results of operations and financial condition
could be materially adversely affected. See "Business -- On-line Music
Industry."
Uncertain Acceptance of the Company's Internet Content
The Company's future success will be significantly dependent upon its
ability to create, license and deliver entertaining and compelling Internet
music-related content in order to attract users to its websites to purchase
recorded music and related merchandise and to attract advertisers to its
websites. The Company launched its first music website, Music Boulevard, in
August 1995 and has limited experience in the on-line music entertainment
business. There can be no assurance that the Company's content will be
attractive to a sufficient number of users to generate significant revenues.
There can also be no assurance that the Company will be able to anticipate,
monitor and successfully respond to rapidly changing consumer tastes and
preferences so as to continually attract a sufficient number of users to its
websites. If the Company is unable to develop Internet content that allows it to
attract, retain and expand a loyal user base, its business, results of
operations and financial condition will be materially adversely affected.
Uncertain Acceptance of the Internet as a Medium for Advertising
In order for the Company to generate advertising revenues, advertisers and
advertising agencies must direct a portion of their budgets to the Internet and,
specifically, to the Company's Internet websites. To date, sales of Internet
advertising represent only a small percentage of total advertising sales. The
Company has begun to sell advertising on its websites but has not recognized
material advertising revenues to date. There can be no assurance that
advertisers and advertising agencies will accept the Internet as a medium. If
Internet advertising is not widely accepted by, or if the Company is not
successful in generating significant advertising
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revenues from, advertisers and advertising agencies, the Company's business,
results of operations and financial condition could be materially adversely
affected. See "Business -- On-line Music Industry."
Security Risks
Despite the implementation of network security measures by the Company, its
infrastructure is potentially vulnerable to computer break-ins and similar
disruptive problems caused by its customers or others. Consumer concern over
Internet security has been, and could continue to be, a barrier to commercial
activities requiring consumers to send their credit card information over the
Internet. Computer viruses, break-ins or other security problems could lead to
misappropriation of proprietary information and interruptions, delays or
cessation in service to the Company's customers. Moreover, until more
comprehensive security technologies are developed, the security and privacy
concerns of existing and potential customers may inhibit the growth of the
Internet as a merchandising medium.
Government Regulation and Legal Uncertainties
The Company is subject, both directly and indirectly, to various laws and
governmental regulations relating to its business. The Company believes it is
currently in compliance with such laws and that they do not have a material
impact on its operations. Moreover, there are currently few laws or regulations
directly applicable to access to or commerce on the Internet. However, due to
the increasing popularity and use of the Internet, it is possible that a number
of laws and regulations may be adopted with respect to the Internet. Such laws
and regulations may cover issues such as user privacy, pricing and
characteristics and quality of products and services. The enactment of any such
laws or regulations in the future may slow the growth of the Internet, which
could in turn decrease the demand for the Company's services and increase the
Company's cost of doing business or otherwise have an adverse effect on the
Company's business, results of operations and financial condition. Moreover, the
applicability to the Internet of existing laws governing issues such as property
ownership, libel and personal privacy is uncertain and could expose the Company
to substantial liability for which the Company might not be indemnified by
content providers. See "-- Liability for Information Retrieved from the
Internet." The Company believes that its use of material on its websites is
protected under current provisions of copyright law. However, legal rights to
certain aspects of Internet content and commerce are not clearly settled. There
can be no assurance that the Company will be able to continue to maintain rights
to information, including downloadable music samples and artist, record and
other information. The failure to be able to offer such information would have a
material adverse effect on the Company's business, results of operations and
financial condition.
Liability for Information Retrieved from the Internet
Due to the fact that material may be downloaded from websites and may be
subsequently distributed to others, there is a potential that claims will be
made against the Company for defamation, negligence, copyright or trademark
infringement or other theories based on the nature and content of such material.
Such claims have been brought, and sometimes successfully pressed, against
on-line services in the past. In addition, the Company could be exposed to
liability with respect to the material that may be accessible through the
Company's branded products and websites. For example, claims could be made
against the Company if material deemed inappropriate for viewing by children
could be accessed through the Company's websites. Although the Company carries
general liability insurance, the Company's insurance may not cover potential
claims of this type or may not be adequate to cover all costs incurred in
defense of potential claims or to indemnify the Company for all liability that
may be imposed. Any costs or imposition of liability that is not covered by
insurance or in excess of insurance coverage could have a material adverse
effect on the Company's business, results of operations and financial condition.
The Company is currently not aware of any such claims.
MANAGEMENT OF GROWTH
The Company has recently experienced a period of rapid and significant
growth, including a substantial increase in the number of its employees. Such
growth has placed, and may continue to place, significant demands on the
Company's management, operations and systems. To the extent that the Company
continues
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to grow internally, through strategic alliances or through acquisitions, the
Company will be faced with risks, including risks associated with the
assimilation of new operations, websites and personnel, the diversion of
resources from the Company's existing business and the inability of management
to integrate any acquired businesses. The Company's ability to compete
effectively will depend, in part, upon its ability to overcome these risks and
to revise, improve and effectively use its operational, management, marketing
and financial systems, both domestically and on an international basis, as
necessitated by changes in the Company's business. There can be no assurance
that the Company will be able to effectively manage such growth and changes. Any
failure of the Company to effectively manage its growth and to respond to
changes in its business would have a material adverse effect on the Company's
business, results of operations and financial condition.
DEPENDENCE ON KEY PERSONNEL
The Company's success depends to a significant extent on the continued
contributions of its senior management team, and technical and marketing
personnel. In particular, the Company's business is highly dependent upon the
services and music industry expertise of Larry Rosen, Dave Grusin, Jon Diamond
and Phil Ramone. The Company does not maintain "key man" life insurance for any
of its employees. The Company does have employment agreements with Messrs.
Rosen, Diamond and Grusin and certain other members of senior management.
However, such employment agreements do not assure the services of such
employees. Despite employment agreements and non-competition arrangements with
certain members of management, the Company's employees may voluntarily terminate
their employment with the Company at any time. The Company's success also
depends on its ability to attract and retain additional qualified employees.
Competition for qualified personnel is intense and there are a limited number of
persons with knowledge of and experience in the Internet and music entertainment
industries. There can be no assurance that the Company will be able to attract
and retain key personnel. The loss of one or more key employees could have a
material adverse effect on the Company. See "Business -- Employees" and
"Management."
RISKS INHERENT IN THE RECORD LABEL INDUSTRY
The record label industry, like other creative industries, involves a
substantial degree of risk. Each recording is an individual artistic work, and
its commercial success is primarily determined by consumer taste, which is
unpredictable and constantly changing. Accordingly, there can be no assurance as
to the financial success of any particular release, the timing of any such
success or the popularity of any particular artist, or the Company's ability to
attract and sign artists to the N2K Encoded Music label. Furthermore, the
Company believes that it is standard practice for record companies to pay
substantial advances to artists. The Company may incur significant expenses in
connection with paying its artists such advances, which could materially
adversely affect the Company's results of operations. In circumstances when the
Company does not pay such advances, it will be competing for artistic talent at
a disadvantage to other record labels that do pay such advances. There can be no
assurance that the Company will be able to generate sufficient revenues from
successful releases to cover the costs of unsuccessful releases. The record
label industry is dominated by a small number of large record companies that
have significantly greater experience and financial, marketing and distribution
resources than the Company. There can be no assurance of the Company's ability
to compete effectively in that market. The failure of the Company to grow N2K
Encoded Music would have a material adverse effect on the Company's growth,
financial condition and results of operations. See "Business -- N2K Encoded
Music."
POTENTIAL FLUCTUATIONS IN QUARTERLY RESULTS
The Company expects to experience significant fluctuations in future
quarterly operating results that may be caused by a variety of factors, many of
which are outside the Company's control. Factors that may affect the Company's
quarterly operating results include, without limitation, (i) the Company's
ability to retain existing customers, attract new customers at a steady rate and
maintain customer satisfaction, (ii) the announcement or introduction of new or
enhanced websites, products and strategic alliances by the Company and its
competitors, (iii) the mix of products sold by the Company, (iv) seasonality of
the recorded music
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industry, (v) seasonality of advertising sales, (vi) Company promotions and
sales programs, (vii) price competition or higher recorded music prices in the
industry, (viii) the level of use of the Internet and increasing consumer
acceptance of the Internet for the purchase of consumer products such as those
offered by the Company, (ix) the Company's ability to upgrade and develop its
systems and infrastructure in a timely and effective manner, (x) the level of
traffic on the Company's websites, (xi) technical difficulties, system downtime
or Internet brownouts, (xii) the amount and timing of operating costs and
capital expenditures relating to expansion of the Company's business, operations
and infrastructure and the implementation of marketing programs, key agreements
and strategic alliances, (xiii) the number of recorded music releases introduced
during the period, (xiv) the level of merchandise returns experienced by the
Company and (xv) general economic conditions and economic conditions specific to
the Internet, on-line commerce and the recorded music industry. While the
Company has a limited operating history in the music entertainment business, it
anticipates that revenues will eventually track traditional music purchase and
advertising sales patterns. As a result, the Company believes that
period-to-period comparisons of its results of operations are not and will not
necessarily be meaningful and should not be relied upon as an indication of
future performance. Due to all of the foregoing factors, it is possible that in
some future quarter or quarters the Company's operating results will be below
the expectations of securities analysts and investors. In such event, the price
of the Common Stock would likely be materially adversely affected. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
RISK OF SYSTEM FAILURE OR INADEQUACY
The Company's operations are dependent on its ability to maintain its
computer and telecommunications equipment in effective working order and to
protect its systems against damage from fire, natural disaster, power loss,
telecommunications failure or similar events. In addition, the growth of the
Company's customer base may strain or exceed the capacity of its computer and
telecommunications systems and lead to degradations in performance or systems
failure. From time to time, the Company has experienced capacity constraints and
failure of its information systems which have resulted in decreased levels of
service delivery or interruptions in service to its customers. While the Company
continually reviews and seeks to upgrade its technical infrastructure and
provides for certain system redundancies and backup power to limit the
likelihood of systems overload or failure, any damage, failure or delay that
causes interruptions in the Company's operations could have a material adverse
effect on the Company's business, results of operations and financial condition.
In addition, substantially all of the Company's computer and telecommunications
operations, including its processing operations, are located at its facility in
Wayne, Pennsylvania. In the event of a catastrophic loss at the Wayne,
Pennsylvania facility resulting in the destruction of the Company's computer and
telecommunications operations, the Company would experience a significant
interruption of its business. Although the Company maintains insurance, such
insurance may not be adequate to compensate the Company for all property damage
and business interruption losses that may occur.
RISKS OF TECHNOLOGY TRENDS AND EVOLVING INDUSTRY STANDARDS
The Company's success will depend upon its ability to develop and provide
new services that meet customers' changing requirements. The music entertainment
industry has been characterized by significant technological changes, such as
the introduction of CDs which have had a significant impact on the industry and
industry participants, and further technological changes are expected to occur.
The Internet is characterized by rapidly changing technology, evolving industry
standards, changes in customer needs and frequent new service and product
introductions. The Company's future success will depend, in part, on its ability
to effectively use leading technologies, to continue to develop its
technological expertise, to enhance its current services, to develop new
services that meet changing customer needs and to influence and respond to
emerging industry standards and other technological changes on a timely and
cost-effective basis. See "Business -- Technology."
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RISKS ASSOCIATED WITH GLOBAL EXPANSION
An important component of the Company's growth strategy is its planned
expansion into global markets. The Company has established a wholly-owned
subsidiary in Japan. There can be no assurance that the Company will be able to
successfully market, sell and distribute its products in global markets due to
legal, contractual and practical considerations. The Company does not currently
have any overseas fulfillment or distribution facility or arrangement and there
can be no assurance that the Company will be able to expand its global presence.
In addition, there are certain risks inherent in doing business on a global
level, such as unexpected changes in regulatory requirements, export
restrictions, tariffs and other trade barriers, difficulties in staffing and
managing foreign operations, difficulties in protecting intellectual property
rights, longer payment cycles, problems in collecting accounts receivable,
political instability, fluctuations in currency exchange rates and potentially
adverse tax consequences, which could adversely impact the success of the
Company's global operations. There can be no assurance that one or more of such
factors will not have a material adverse effect on the Company's future global
operations, and consequently, on the Company's business, results of operations
and financial condition.
POSSIBLE NEED FOR ADDITIONAL FUNDS
Based on current levels of operations and planned growth, the Company
anticipates that its existing capital resources, together with the proceeds of
this offering, will enable it to maintain its operations for at least twelve
months from the date of this Prospectus. The Company may require additional
funds to sustain and expand its sales and marketing and research and development
activities and its strategic alliances, particularly if a well-financed
competitor emerges or if there is a shift in the type of Internet services that
are developed and ultimately receive customer acceptance. Adequate funds for
these and other purposes on terms acceptable to the Company, whether through
additional equity financing, debt financing or other sources, may not be
available when needed or may result in significant dilution to existing
stockholders. The inability to obtain sufficient funds from operations and
external sources would have a material adverse effect on the Company's business,
results of operations and financial condition. See "Use of Proceeds" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
CONTROL BY MANAGEMENT
Upon completion of this offering, the Company's executive officers and
directors and their respective affiliates will beneficially own an aggregate of
32.7% of the Company's outstanding shares of Common Stock (31.4% if the
Underwriters' over-allotment option is exercised in full). Such stockholders, if
voting together, may, as a practical matter, have sufficient voting power to
elect the Board of Directors, exercise significant control over the business,
policies and affairs of the Company and, in general, determine the outcome of
any corporate transaction or other matters submitted to the stockholders for
approval, such as any amendment to the certificate of incorporation of the
Company (the "Certificate of Incorporation"), any merger, consolidation, sale of
all or substantially all of the Company's assets or "going private" transactions
and prevent or cause a change in control of the Company, all of which may
adversely affect the market price of the Common Stock. See "Principal
Stockholders."
ANTI-TAKEOVER PROVISIONS
Certain provisions of the Delaware General Corporation Law (the "Delaware
GCL") may delay, discourage or prevent a change in control of the Company. Such
provisions may discourage bids for the Common Stock at a premium over the market
price of the Common Stock and may adversely affect the market price and the
voting and other rights of the holders of Common Stock. In addition, the Board
of Directors has the authority without action by the Company's stockholders to
fix the rights, privileges and preferences of, and to issue shares of, the
Preferred Stock, which may have the effect of delaying, deterring or preventing
a change in control of the Company. See "Description of Capital
Stock -- Preferred Stock" and "-- Anti-Takeover Effects of Delaware Law."
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SHARES ELIGIBLE FOR FUTURE SALE; REGISTRATION RIGHTS
After the completion of this offering, 11,223,951 shares of Common Stock
will be outstanding. Of such shares, the 3,000,000 shares sold pursuant to this
offering will be tradeable without restriction by persons other than
"affiliates" of the Company. The remaining 8,223,951 shares of Common Stock to
be outstanding after this offering are "restricted securities" within the
meaning of Rule 144 under the Securities Act of 1933, as amended (the
"Securities Act"), and may not be publicly resold, except in compliance with the
registration requirements of the Securities Act or pursuant to an exemption from
registration, including that provided by Rule 144 promulgated under the
Securities Act. 1,981,455 shares of Common Stock will be available for immediate
resale upon the consummation of this offering without restriction pursuant to
the exemption provided by Rule 144(k). The directors and executive officers of
the Company and other stockholders of the Company, who collectively hold
7,369,000 shares, or 89.6%, of the outstanding shares of Common Stock prior to
this offering, have agreed not to offer to sell, sell, contract to sell, grant
any option to sell, encumber, pledge or otherwise dispose of, or exercise any
demand rights with respect to, any Common Stock or securities convertible into
or exercisable or exchangeable for Common Stock for a period of 180 days after
the date of this Prospectus without the prior written consent of PaineWebber
Incorporated. Upon expiration of the 180-day period, 3,990,866 shares of Common
Stock will be eligible for immediate resale under the Securities Act, subject,
in certain cases, to certain volume, manner of sale and other requirements of
Rule 144 promulgated under the Securities Act. The Company intends to file one
or more Registration Statements on Form S-8 immediately following this offering,
registering under the Securities Act an aggregate of 3,900,142 shares of Common
Stock covered by the Company's stock option and purchase plans. In addition,
certain stockholders of the Company are entitled to both demand and incidental
registration rights with respect to 4,853,199 shares of Common Stock. In
addition, the holder of the AOL Warrant will have the right to require the
Company to register one-half of the shares of Common Stock for which the AOL
Warrant is exercisable beginning one year from the date of this Prospectus and
the remaining half of the shares of Common Stock for which the AOL Warrant is
exercisable beginning two years from the date of this Prospectus. The exercise
of such rights could result in a large number of shares being sold in the public
market and could have an adverse effect on the market price for the Common
Stock. No prediction can be made as to the effect, if any, that future sales of
shares, or the availability of shares for future sale, will have on the market
price of the Common Stock prevailing from time to time. Sales of substantial
amounts of Common Stock, or the perception that such sales could occur, could
adversely affect the prevailing market price of the Common Stock. See
"Description of Capital Stock -- Registration Rights," "Shares Eligible for
Future Sale" and "Underwriting."
ABSENCE OF PRIOR PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE
Prior to this offering, there has been no public market for the Common
Stock. The Company has applied for listing of the Common Stock on the Nasdaq
National Market under the trading symbol "NTKI." There can be no assurance,
however, that an active public market will develop for the Common Stock. The
initial public offering price will be determined through negotiations among the
Company and the Representatives of the Underwriters, and may not be indicative
of the market price for the Common Stock after the completion of this offering.
Among the factors to be considered in determining the initial public offering
price will be the Company's record of operations, its current financial
condition, its future prospects, the market for its products, the experience of
its management, the economic conditions of the Company's industry in general,
the general condition of the equity securities market, the demand for similar
securities of companies considered comparable to the Company and other relevant
factors. See "Underwriting."
Moreover, the trading price of the Common Stock could be subject to
fluctuations in response to quarterly variations in results of operations,
announcements of technological innovations or new services or products by the
Company or its competitors, changes in financial estimates by securities
analysts and other events or factors. See "-- Potential Fluctuations in
Quarterly Results." Recent history relating to the market prices of other newly
public companies indicates that the market price of the Common Stock following
this offering may be highly volatile. In addition, the stock market has
experienced significant price and volume fluctuations that have particularly
affected the market prices of equity securities of many high technology
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companies, particularly Internet-related companies, and that often have been
unrelated to the operating performance of such companies. These broad market
fluctuations may adversely effect the market price of the Common Stock.
IMMEDIATE AND SUBSTANTIAL DILUTION
Purchasers of the Common Stock offered hereby will experience immediate and
substantial dilution in the pro forma net tangible book value per share of
$11.81 at an assumed initial public offering price of $16.00 per share and after
deducting estimated underwriting discounts and commissions and offering
expenses. In addition, as of September 26, 1997, the Company had issued warrants
(including the AOL Warrant) to purchase 671,693 shares of Common Stock, and
options to purchase 1,958,011 shares of Common Stock (including options to be
issued upon the consummation of this offering). If such warrants and options are
exercised in full (assuming an initial public offering price of $16.00 per
share), purchasers of the Common Stock offered hereby would experience an
immediate and substantial dilution in the net tangible book value per share of
$10.90. See "Dilution."
In the event that the initial public offering price of the Common Stock is
less than $14.00 per share, holders of certain series of the Preferred Stock
will be entitled to an adjustment of their respective conversion prices,
resulting in the issuance of additional shares of Common Stock to such holders
in connection with the Preferred Stock Conversion. Furthermore, pursuant to the
stock purchase agreement for the Series G Preferred Stock, if the Company
consummates an initial public offering of the Common Stock in 1997 at a price
per share that is less than $14.00, the Company is required to pay each of the
purchasers of the Series G Preferred Stock, either in cash or in additional
shares of Common Stock, the difference between the initial public offering price
and $14.00 (the "Series G Purchase Price Adjustment"). See "Dilution" and
"Certain Transactions -- Preferred Stock Conversion."
ABSENCE OF DIVIDENDS
The Company has never declared or paid any dividends on the Common Stock
and does not anticipate paying any cash dividends on the Common Stock in the
foreseeable future. See "Dividend Policy."
NO SPECIFIC USE OF CERTAIN PROCEEDS
The Company has designated $30.8 million of the net proceeds of this
offering for specific uses including payments to AOL and Excite, repayment of
short-term indebtedness, expansion of the Company's technical infrastructure and
marketing. The balance of the net proceeds, approximately $12.2 million
(approximately $18.9 million if the Underwriters' overallotment option is
exercised in full), will be used for working capital and other general corporate
purposes, including possible future strategic alliances and acquisitions.
Accordingly, management will have significant flexibility in applying such
balance of the net proceeds of this offering.
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USE OF PROCEEDS
The net proceeds to the Company from the sale of the Common Stock offered
hereby, at an assumed initial public offering price of $16.00 per share and
after deducting estimated underwriting discounts and commissions and offering
expenses, are estimated to be approximately $43.0 million (approximately $49.7
million if the Underwriters' overallotment option is exercised in full). The net
proceeds from this offering will be used by the Company as follows: to fund the
$10.5 million payment due to AOL under the AOL Contract upon the consummation of
this offering; to fund the $3.8 million due to Excite under the Excite Contract
in the next 12 months; approximately $6.0 million to repay short-term
indebtedness; approximately $5.5 million in the next 12 months to expand the
Company's infrastructure, which may include the acquisition of servers, disk
storage capacity and other computer hardware to enable the Company to handle
higher customer traffic; approximately $5.0 million for marketing; and the
balance for working capital and other general corporate purposes, including
possible future strategic alliances and acquisitions. See "Risk Factors -- No
Specific Use of Certain Proceeds."
The short-term indebtedness to be repaid is comprised of approximately $6
million aggregate principal amount of promissory notes (the "Senior Notes")
issued by the Company in August 1997. The Senior Notes bear interest at 14% per
annum and are due on the earliest of (i) consummation of this offering, (ii) a
"change of control of the Company," as that term is defined in the Senior Notes,
and (iii) March 31, 1998. In connection with the repayment of the Senior Notes,
the Company will record a charge to its statement of operations in the fiscal
quarter in which this offering is consummated. This charge will be equal to the
unamortized portion of the discount on the Senior Notes which was approximately
$614,000 as of September 26, 1997. See Note 1 of Notes to Consolidated Financial
Statements. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources."
From time to time, in the ordinary course of business, the Company
evaluates possible acquisitions of, or investments in, businesses, products and
technologies that are complementary to those of the Company. A portion of the
net proceeds may therefore be used to fund acquisitions or investments. The
Company currently has no arrangements, agreements or understandings, and is not
engaged in active negotiations, with respect to any such acquisition or
investment.
Pending the application of the net proceeds from this offering, the Company
intends to invest the net proceeds in short-term, investment-grade,
interest-bearing instruments or money market funds. To the extent necessary to
avoid being subject to the registration requirements of the Investment Company
Act of 1940, as amended, the Company would invest the balance in U.S. Treasury
obligations. Returns on such investments may be less than those that might
otherwise result if the Company were able to use such funds immediately in its
operations.
DIVIDEND POLICY
The Company has never declared or paid any dividends on its Common Stock.
The Company does not anticipate paying any dividends on the Common Stock in the
foreseeable future and intends to retain all available funds for use in the
operation and development of its business. The Board of Directors intends to
review the Company's dividend policy from time to time. Any payment of dividends
in the future will be at the discretion of the Board of Directors and will be
dependent on the earnings and financial requirements of the Company and other
factors, including restrictions imposed by the Delaware GCL on the payment of
dividends, covenants restricting the payment of dividends in future loan
agreements and such other factors as the Board of Directors deems relevant.
17
<PAGE> 19
DILUTION
The pro forma net tangible book value of the Company at June 30, 1997 was
$4.8 million or $0.59 per share. Pro forma net tangible book value per share is
determined by dividing the net tangible book value of the Company (total
tangible assets less total liabilities) by the number of shares of Common Stock
outstanding on a pro forma basis, after giving effect to (i) the Preferred Stock
Conversion, (ii) the Rocktropolis Put Expiration, (iii) the issuance of the
Senior Notes and the Management Notes and (iv) the Management Note Conversion.
Giving effect to the sale of the Common Stock offered hereby at an assumed
public offering price of $16.00 per share and after deducting estimated
underwriting discounts and commissions and offering expenses and the initial
application of the net proceeds therefrom to repay the outstanding balance of
the Senior Notes, the Company's adjusted pro forma net tangible book value as of
June 30, 1997 would have been $47.1 million or $4.19 per share representing an
immediate increase in net tangible book value of $3.60 per share to the existing
stockholders and an immediate dilution to new investors of $11.81 per share. The
following table illustrates the dilution to new investors:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share....................... $16.00
Pro forma net tangible book value per share before this offering.... $0.59
Net increase in pro forma net tangible book value per share
attributable to this offering.................................... 3.60
-----
Pro forma net tangible book value per share after this offering....... 4.19
------
Dilution per share to new investors in this offering(1)............... $11.81
======
</TABLE>
- ---------------
(1) Based on the assumptions set forth above, the dilution to new investors
would be $10.90 per share if all outstanding warrants and options to
purchase shares of Common Stock were exercised in full (assuming an initial
public offering price of $16.00 per share).
In the event that the initial public offering price of the Common Stock is
less than $14.00 per share, holders of certain series of the Preferred Stock
will be entitled to an adjustment of their respective conversion prices,
resulting in the issuance of additional shares of Common Stock to such holders
in connection with the Preferred Stock Conversion. Furthermore, pursuant to the
stock purchase agreement for the Series G Preferred Stock, if the Company
consummates an initial public offering of the Common Stock in 1997 at a price
per share that is less than $14.00, the Company is required to pay each of the
purchasers of the Series G Preferred Stock, either in cash or in additional
shares of Common Stock, the Series G Purchase Price Adjustment. See "Certain
Transactions -- Preferred Stock Conversion."
The following table summarizes, on a pro forma basis (as described above),
as of June 30, 1997, the number of shares of Common Stock purchased from the
Company, the total consideration paid to the Company and the average price per
share paid by the existing stockholders and by the new investors purchasing
shares of Common Stock in this offering, at an assumed initial public offering
price of $16.00 per share and before deducting estimated underwriting discounts
and commissions and offering expenses:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
--------------------- ---------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders............ 8,223,951 73.3% $40,670,656 45.9% $ 4.95
New investors.................... 3,000,000 26.7 48,000,000 54.1 16.00
---------- ------- ----------- -------
Total.................. 11,223,951 100.0% $88,670,656 100.0%
========= ===== ========== =====
</TABLE>
The above table, as of September 26, 1997, excludes (i) 1,958,011 shares of
Common Stock issuable upon exercise of outstanding stock options (including
options to be issued upon the consummation of this offering), (ii) 2,034,063
shares of Common Stock reserved for future grants under the Company's stock
option and purchase plans, (iii) 452,318 shares of Common Stock reserved for
issuance pursuant to the exercise of outstanding warrants and (iv) 219,375
shares of Common Stock reserved for issuance pursuant to the exercise of the AOL
Warrant (assuming an initial public offering price of $16.00 per share). The
weighted average exercise price of all outstanding options and warrants is $8.98
per share (assuming an initial public offering price of $16.00 per share). See
"Management -- Stock Plans," "Certain Transactions," "Description of Capital
Stock" and Note 8 of Notes to Consolidated Financial Statements.
18
<PAGE> 20
CAPITALIZATION
The following table sets forth (i) the capitalization of the Company as of
June 30, 1997, (ii) the pro forma capitalization of the Company as of such date
giving effect to (a) the Preferred Stock Conversion, (b) the Rocktropolis Put
Expiration, (c) the issuance of the Senior Notes and the Management Notes and
(d) the Management Note Conversion and (iii) the capitalization of the Company
as adjusted to give effect to the sale of the Common Stock offered hereby at an
assumed initial public offering price of $16.00 per share and after deducting
estimated underwriting discounts and commissions and offering expenses and the
initial application of the net proceeds therefrom to repay the outstanding
balance of the Senior Notes. This table should be read in conjunction with the
Consolidated Financial Statements of the Company and notes thereto included
elsewhere in this Prospectus. See "Description of Capital Stock."
<TABLE>
<CAPTION>
JUNE 30, 1997
-------------------------------------------
ACTUAL PRO FORMA AS ADJUSTED
----------- ------------ ------------
<S> <C> <C> <C>
Senior notes........................................ $ -- $ 5,221,600(1) $ --
----------- ------------ ------------
Management notes.................................... $ -- $ -- $ --
----------- ------------ ------------
Common stock subject to put rights.................. $ 537,498 $ -- $ --
----------- ------------ ------------
Stockholders' equity:
Preferred stock, $0.001 par value; 40,000,000
shares authorized, 17,757,417 shares issued and
outstanding, actual; none issued and
outstanding, pro forma and as adjusted......... $ 17,757 $ -- $ --
Common stock, $0.001 par value; 100,000,000 shares
authorized; 3,083,009 shares issued and
outstanding, actual; 8,223,951 shares issued
and outstanding, pro forma; and 11,223,951
shares issued and outstanding, as
adjusted(2).................................... 3,083 8,224 11,224
Additional paid-in capital.......................... 39,424,472 42,674,586 85,711,586
Accumulated deficit................................. (37,410,692) (37,560,692) (38,360,692)
----------- ------------ ------------
Total stockholders' equity..................... 2,034,620 5,122,118 47,362,118
----------- ------------ ------------
Total capitalization...................... $ 2,572,118 $ 10,343,718 $ 47,362,118
========== =========== ===========
</TABLE>
- ---------------
(1) In connection with issuance of the Senior Notes in August 1997, the Company
issued warrants to purchase 250,655 shares of Common Stock at an exercise
price of $12.00 per share. The Senior Notes have been recorded net of the
estimated value ($800,000) associated with these warrants.
(2) As of September 26, 1997, excludes (i) 1,958,011 shares of Common Stock
issuable upon exercise of outstanding stock options (including options to be
issued upon the consummation of this offering), (ii) 2,034,063 shares of
Common Stock reserved for future grants under the Company's stock option and
purchase plans, (iii) 452,318 shares of Common Stock reserved for issuance
pursuant to the exercise of outstanding warrants and (iv) 219,375 shares of
Common Stock reserved for issuance pursuant to the exercise of the AOL
Warrant (assuming an initial public offering price of $16.00 per share). The
weighted average exercise price of all outstanding options and warrants is
$8.98 per share (assuming an initial public offering price of $16.00 per
share). See "Management -- Stock Plans," "Certain Transactions,"
"Description of Capital Stock" and Note 8 of Notes to Consolidated Financial
Statements.
19
<PAGE> 21
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data set forth below as of and for the
years ended December 31, 1992, 1993, 1994, 1995 and 1996 have been derived from
the Company's financial statements, which have been audited by Arthur Andersen
LLP, independent public accountants. The consolidated financial statements of
the Company for each of the three years in the period ended December 31, 1996
and the related balance sheets at December 31, 1995 and 1996, which have been
audited by Arthur Andersen LLP, have been included elsewhere in this Prospectus.
The selected balance sheet data as of June 30, 1997 and the selected statement
of operations data for the six months ended June 30, 1996 and 1997 have been
derived from unaudited financial statements of the Company that, in the opinion
of management, include all adjustments (consisting only of normal recurring
adjustments) necessary for a fair presentation of the financial condition and
results of operations for these interim periods. The results of operations for
the six months ended June 30, 1996 and 1997 are not necessarily indicative of
the results that may be expected for any other interim period or for the entire
year. The selected consolidated financial data set forth below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Consolidated Financial Statements of the
Company and the notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------------------------------------------- --------------------------
1992 1993 1994 1995 1996 1996 1997
----------- ---------- ----------- ----------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA(1):
Net revenues.................... $ -- $ -- $ -- $ 96,505 $ 1,655,704 $ 529,579 $ 2,936,895
Cost of revenues................ -- -- -- 85,176 1,637,319 511,057 2,477,643
----------- ---------- ----------- ----------- ------------ ----------- ------------
Gross profit.................. -- -- -- 11,329 18,385 18,522 459,252
Operating expenses:
Operating and
development(2).............. -- -- 257,826 1,034,617 7,811,061 2,152,401 4,610,615
Sales and marketing........... -- -- 173,415 1,077,649 2,726,291 743,365 3,814,133
General and administrative.... 666,043 541,241 896,195 871,667 2,477,995 997,832 1,818,808
Charge for purchased research
and development(3).......... -- -- -- -- 5,242,523 5,242,523 --
----------- ---------- ----------- ----------- ------------ ----------- ------------
Operating loss................ (666,043) (541,241) (1,327,436) (2,972,604) (18,239,485) (9,117,599) (9,784,304)
Interest income................. 65,658 43,761 73,359 106,370 352,531 105,201 85,421
Interest expense................ (105,658) (82,890) (48,398) (18,237) (52,281) (30,902) (50,100)
----------- ---------- ----------- ----------- ------------ ----------- ------------
Loss from continuing
operations.................... (706,043) (580,370) (1,302,475) (2,884,471) (17,939,235) (9,043,300) (9,748,983)
Income (loss) from discontinued
operations(4)................. (526,555) 1,085,256 1,444,885 1,289,671 (968,674) 157,271 (415,970)
----------- ---------- ----------- ----------- ------------ ----------- ------------
Net income (loss)............... $(1,232,598) $ 504,886 $ 142,410 $(1,594,800) $(18,907,909) $(8,886,029) $(10,164,953)
========== ========= ========== ========== =========== ========== ===========
Pro forma loss per common
share(5):
Continuing operations......... $ (2.55) $ (1.19)
Discontinued operations....... (0.14) (0.05)
------------ ------------
Pro forma net loss per common
share....................... $ (2.69) $ (1.24)
=========== ===========
Shares used in computing pro
forma net loss per common
share(5)...................... 7,041,955 8,229,371
=========== ===========
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1997
DECEMBER 31, ------------------------
-------------------------------------------------------------- PRO
1992 1993 1994 1995 1996 ACTUAL FORMA(6)
---------- ---------- ---------- ---------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............. $ 466,606 $ 858,272 $1,469,764 $ 547,624 $4,483,450 $ 669,722 $8,441,322
Working capital (deficit)............. 62,708 543,947 1,756,815 3,960 2,054,665 (1,602,286) 947,714
Total assets.......................... 1,304,440 1,645,275 2,685,317 1,973,332 9,386,470 8,397,980 16,169,580
Senior notes.......................... -- -- -- -- -- -- 5,221,600
Long-term debt, excluding current
portion............................. 75,000 -- -- -- -- -- --
Stockholders' equity.................. 37,244 542,130 2,243,704 648,984 4,908,379 2,034,620 5,122,118
</TABLE>
20
<PAGE> 22
- ---------------
(1) Telebase was founded in 1984 as a provider of on-line information services.
In 1994, Telebase expanded its on-line business strategy to include music
entertainment and began expending significant resources to enter this
market. In 1995, the Company began offering on-line sales of music through
its Music Boulevard website. In 1992 and 1993, the Company's costs consisted
primarily of corporate expenses, i.e., the salaries of the Company's
officers and other general overhead expenses. On February 13, 1996, Telebase
merged with New York N2K, and changed its name to N2K Inc. In April 1997,
the Company decided to discontinue its on-line information services business
to focus exclusively on its music entertainment business. See note (4)
below.
(2) For the years ended December 31, 1995, 1996 and the six months ended June
30, 1996 and 1997, the Company incurred costs of $0.7 million, $3.1 million,
$1.0 million and $1.9 million, respectively, relating to research and
development. These amounts are included in operating and development
expenses. Research and development costs in 1994 were immaterial.
(3) In 1996, aggregate one-time charges of $5.2 million for purchased research
and development were incurred in connection with the acquisitions of New
York N2K ($4.1 million in February 1996) and the rock website, Rocktropolis
($1.1 million in June 1996). See Notes 1 and 2 of Notes to Consolidated
Financial Statements.
(4) In April 1997, the Board of Directors approved a formal plan of disposal for
its on-line information services business and in August 1997, the Company
sold substantially all of the net assets of this business. Accordingly, the
operating results and assets and liabilities of this business have been
accounted for as a discontinued operation and reflected separately from
continuing operations. See Note 3 of Notes to Consolidated Financial
Statements.
(5) See Note 1 of Notes to Consolidated Financial Statements.
(6) Reflects (i) the Rocktropolis Put Expiration, (ii) the issuance of the
Senior Notes and the Management Notes, (iii) the Preferred Stock Conversion
and (iv) the Management Note Conversion. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
21
<PAGE> 23
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
N2K is a music entertainment company using the Internet as a global
platform for promoting, marketing and selling music and related merchandise. The
Company's strategy is to build loyal user communities around genre-specific
websites that provide music content and enable consumers to purchase CDs,
cassettes and related merchandise. The Company has also established its own
record label, N2K Encoded Music, which uses the Company's websites, as well as
record stores and other traditional distribution channels, to promote,
distribute and sell original and licensed artist recordings.
The Company was founded as Telebase in 1984 as a provider of on-line
information services. In 1994, recognizing increasing opportunities in the
consumer entertainment market, Telebase expanded its on-line business strategy
to include music entertainment and began expending significant resources to
enter this market. Telebase launched its Music Boulevard website and began
selling recorded music and related merchandise in 1995. In February 1996,
Telebase merged with New York N2K, a New York corporation founded in 1995 as a
developer of on-line music entertainment content, and the merged entity changed
its name to N2K Inc. (the "Merger"). The Company recently decided to focus
exclusively on its music entertainment business, and, as such, has elected to
discontinue its on-line information services business. In April 1997, the Board
of Directors approved a formal plan of disposal for its on-line information
services business. In August 1997, the Company sold substantially all of the net
assets of this business. See "--Discontinued Operations."
The Company launched its first Internet website, Music Boulevard, in August
1995, and introduced its first music genre website, Jazz Central Station, in
January 1996. Since January 1997, the Company has released its initial 12
recordings on the N2K Encoded Music label. Revenues have grown from $85,000 for
the three months ended December 31, 1995 to $1.8 million for the three months
ended June 30, 1997 while the Company incurred net losses for 1995 and 1996 and
the first half of 1997 as it built its business. Gross profit since its
inception has been approximately $489,000. The Company is currently generating
revenues from the sale of CDs and cassettes produced by others, N2K Encoded
Music CDs, the sale of advertising on its websites and the sale of related
merchandise. The Company believes that increased sales of N2K Encoded Music CDs
and advertising on its websites will contribute to higher margins in the future.
The margins from the sale of CDs and cassettes produced by others are affected
by product costs, shipping and handling fees, content royalties, credit card
fees and promotional discounts, such as discounted selling prices and free
shipping and handling. The Company believes that frequent promotional discounts
will be necessary to build repeat customer traffic to its websites, which will
reduce its gross margins. The Company believes that its future financial
performance will be determined by its success in improving margins on the sale
of CDs and cassettes produced by others, introducing new products and services,
selling advertising and sponsorship programs on its websites and by selling
recorded music under its N2K Encoded Music label. Management has increased the
resources within the Company to support these functions. As a result, revenues
from advertising sold on the Company's websites have increased from $17,000 for
the six months ended June 30, 1996 to $251,000 for the six months ended June 30,
1997, and revenues from the sale of CDs produced by the Company, which began in
1997, totaled $793,000 for the six months ended June 30, 1997.
The Company's strategy to develop products and services for the music
entertainment business was primarily responsible for the decline in net income
and increase in net loss for the years ended December 31, 1994, December 31,
1995 and December 31, 1996. See "Risk Factors--Historical and Anticipated
Losses; Uncertainty of Future Results," "--New Business Challenges" and
"--Management of Growth." To date, the Company has only a limited operating
history in its continuing operations upon which an evaluation of N2K and its
prospects can be based. Accordingly, N2K believes that the results of its
operations for the past five years, during which time the Company had minimal
revenues, are not meaningful indications of future performance. The Company
incurred a net loss of $1.6 million for the year ended December 31, 1995 and a
net loss of $18.9 million for the year ended December 31, 1996, of which $5.2
million represents aggregate one-time charges in connection with the write-off
of purchased research and development.
22
<PAGE> 24
The Company currently intends to increase substantially its operating
expenses as a result of the Company's strategic alliances, to fund increased
sales and marketing, to enhance existing websites and to complete strategic
relationships important to the success of the Company. To the extent that such
expenses precede or are not subsequently followed by increased revenues, the
Company's business, results of operations and financial condition will be
materially adversely affected. There can be no assurance that the Company will
be able to generate sufficient revenues from the sale of music recordings,
related merchandise, advertising and sponsorship programs to achieve or maintain
profitability on a quarterly or annual basis in the future. The Company expects
negative cash flow from operations to continue for the foreseeable future as it
continues to develop and market its business.
Pursuant to the Merger, the shareholders of New York N2K received 1,347,857
shares of Common Stock valued at $3,073,118 and 1,347,860 shares of Series E
Preferred Stock valued at $1,078,286. The Series E Preferred Stock is
convertible into 336,962 shares of Common Stock. The Merger was accounted for as
a purchase transaction with a total purchase price, including transaction costs,
of approximately $4.4 million. In connection with the Merger, $4.1 million was
charged to expense as of the date of the transaction as it represented purchased
research and development. The Company allocated the remainder of the purchase
price ($280,000) to acquired technology costs which is being amortized over five
years on a straight-line basis. The results of the acquired business and the
shares issued in connection with the transaction have been included in the
Company's financial statements since February 13, 1996.
On June 21, 1996, the Company acquired the rock website, Rocktropolis, from
Rocktropolis Enterprises, LLC, for $633,000 in cash and 44,790 shares of Common
Stock. The acquisition has been accounted for as a purchase. The Company
incurred a one-time charge of $1.1 million for purchased research and
development. The Company also recorded an intangible asset (tradename) of
$100,000 that is being amortized over five years on a straight-line basis. The
Common Stock issued in connection with the acquisition of the Rocktropolis
website may be put back to the Company at a price of $12 per share at any time
beginning 366 days after the issuance date if there is not at that time a public
market for shares of the Common Stock. Accordingly, the value of these shares
($537,498) is not included in stockholders' equity in the Company's consolidated
balance sheets at June 30, 1997. The put right will expire upon the consummation
of this offering.
RESULTS OF OPERATIONS
Quarterly Results
The following table sets forth certain financial information for each of
the last seven quarters. This unaudited quarterly information has been prepared
on the same basis as the audited financial statements included elsewhere in this
Prospectus and, in the opinion of the Company's management, reflects all
adjustments (consisting only of normal, recurring adjustments) necessary for a
fair presentation of the information for the periods covered. The table should
be read in conjunction with the Consolidated Financial Statements of the Company
and the notes thereto included elsewhere in this Prospectus. The operating
results for any quarter are not necessarily indicative of results for any future
period.
23
<PAGE> 25
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------------------------------------------------------------------------------------
DECEMBER SEPTEMBER DECEMBER
31, MARCH 31, JUNE 30, 30, 31, MARCH 31, JUNE 30,
1995 1996 1996 1996 1996 1997 1997
----------- ----------- ----------- ------------ ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Net revenues............ $ 84,903 $ 216,800 $ 312,779 $ 446,889 $ 679,236 $ 1,115,897 $ 1,820,998
Cost of revenues........ 73,989 213,003 298,054 431,552 694,710 969,884 1,507,759
----------- ----------- ----------- ------------ ----------- ----------- -----------
Gross profit............ 10,914 3,797 14,725 15,337 (15,474) 146,013 313,239
Operating expenses:
Operating and
development......... 253,957 735,666 1,416,735 1,940,018 3,718,642 2,212,046 2,398,569
Sales and marketing... 350,936 254,223 489,142 825,506 1,157,420 1,484,059 2,330,074
General and
administrative...... 200,517 433,500 564,332 596,275 883,888 837,246 981,562
Charge for purchased
research and
development......... -- 4,133,281 1,109,242 -- -- -- --
----------- ----------- ----------- ------------ ----------- ----------- -----------
Operating loss.......... (794,496) (5,552,873) (3,564,726) (3,346,462) (5,775,424) (4,387,338) (5,396,966)
Interest income (net of
interest expense)..... 13,949 8,352 65,947 144,281 81,670 28,948 6,373
----------- ----------- ----------- ------------ ----------- ----------- -----------
Loss from continuing
operations............ (780,547) (5,544,521) (3,498,779) (3,202,181) (5,693,754) (4,358,390) (5,390,593)
Income (loss) from
discontinued
operations............ 47,397 160,309 (3,038) (363,455) (762,490) (159,943) (256,027)
----------- ----------- ----------- ------------ ----------- ----------- -----------
Net loss................ $(733,150) $(5,384,212) $(3,501,817) $(3,565,636) $(6,456,244) $(4,518,333) $(5,646,620)
=========== ========== ========== ============ =========== ========== ==========
</TABLE>
In August 1995, the Company launched its first Internet website, Music
Boulevard, and in January 1996, introduced Jazz Central Station, its first music
genre website. The Company released its initial recordings on the N2K Encoded
Music label during the first quarter of 1997.
The Company expects to experience significant fluctuations in future
quarterly operating results that may be caused by a variety of factors,
including, without limitation, (i) the Company's ability to retain existing
customers, attract new customers at a steady rate and maintain customer
satisfaction, (ii) the announcement or introduction of new or enhanced websites,
products and strategic alliances by the Company and its competitors, (iii) the
mix of products sold by the Company, (iv) seasonality of the recorded music
industry, (v) seasonality of advertising sales, (vi) Company promotions and
sales programs, (vii) price competition or higher recorded music prices in the
industry, (viii) the level of use of the Internet and increasing consumer
acceptance of the Internet for the purchase of consumer products such as those
offered by the Company, (ix) the Company's ability to upgrade and develop its
systems and infrastructure in a timely and effective manner, (x) the level of
traffic on the Company's websites, (xi) technical difficulties, system downtime
or Internet brownouts, (xii) the amount and timing of operating costs and
capital expenditures relating to expansion of the Company's business, operations
and infrastructure and the implementation of marketing programs, key agreements
and strategic alliances, (xiii) the number of recorded music releases introduced
during the period, (xiv) the level of merchandise returns experienced by the
Company and (xv) general economic conditions and economic conditions specific to
the Internet, on-line commerce and the recorded music industry. While the
Company has a limited operating history in the music entertainment business, it
anticipates that revenues will eventually track traditional music purchase and
advertising sales patterns. As a result, the Company believes that
period-to-period comparisons of its results of operations are not and will not
necessarily be meaningful and should not be relied upon as an indication of
future performance. See "Risk Factors--Potential Fluctuations in Quarterly
Results."
Six Months Ended June 30, 1997 Compared with Six Months Ended June 30, 1996
Revenues. Revenues for the six months ended June 30, 1997 totaled $2.9
million compared to $530,000 for the six months ended June 30, 1996. Revenues
for the six months ended June 30, 1997 consisted primarily of sales of CDs and
cassettes produced by others, which increased to $1.9 million from $507,000 for
the six months ended June 30, 1996; sales of advertising on the Company's
websites, which increased to $251,000 from $17,000 for the six months ended June
30, 1996; and sales of CDs produced by the Company, which began in 1997, which
totaled $793,000.
24
<PAGE> 26
Cost of Revenues. Cost of revenues totaled $2.5 million for the six months
ended June 30, 1997 compared to $511,000 for the six months ended June 30, 1996.
Cost of revenues consists of payments to third parties for distribution of CDs
and cassettes, fulfillment of customer orders, manufacturing expenses,
royalties, copyrights, telecommunications charges, credit card processing
charges, database usage fees, profit participations payable to strategic
alliance partners and content costs. The Company expects revenues from the sale
of advertising and related merchandise to increase in future periods, which the
Company believes will contribute to higher margins and reduce the cost of
revenues as a percentage of revenues.
Operating and Development Expenses. Operating and development expenses
increased from $2.2 million for the six months ended June 30, 1996 to $4.6
million for the six months ended June 30, 1997, due to increased staffing as the
Company expanded its operations. Operating and development personnel totaled 104
full-time employees as of June 30, 1997 compared to 62 full-time employees as of
June 30, 1996. Operating and development expenses consist primarily of software
engineering, multimedia production, graphic design, artist relations, inventory
management and computer operations which support the Company's music
entertainment business. This infrastructure is sufficient to support higher
revenues and, accordingly, the Company expects that, as revenues increase,
operating and development expenses will decrease as a percentage of revenues.
Sales and Marketing Expenses. Sales and marketing expenses increased from
$743,000 for the six months ended June 30, 1996 to $3.8 million for the six
months ended June 30, 1997. The increase in sales and marketing expenses was
primarily attributable to expansion of the Company's on-line and print
advertising, public relations and other promotional expenditures, as well as to
increased personnel and related expenses required to implement the Company's
marketing strategy. Sales and marketing personnel totaled 43 full-time employees
as of June 30, 1997 compared to 11 full-time employees as of June 30, 1996.
Sales and marketing expenses consist primarily of external advertising,
promotion, trade show, advertising sales and personnel expenses associated with
marketing of the Company's websites and N2K Encoded Music CDs. The Company
expects that levels of sales and marketing expenditures will increase in future
periods due to the execution of new advertising programs to promote the
Company's websites and N2K Encoded Music releases, but total sales and marketing
expenses will decline as a percentage of revenue.
General and Administrative Expenses. General and administrative expenses
increased from $1.0 million for the six months ended June 30, 1996 to $1.8
million for the six months ended June 30, 1997, primarily due to increased
staffing and facilities expenses. General and administrative personnel totaled
25 full-time employees as of June 30, 1997 compared to 14 full-time employees as
of June 30, 1996. General and administrative expenses consist of executive
management, accounting and human resources personnel, and expenditures for
applicable facilities costs and overhead. The Company expects general and
administrative expenses to increase in absolute dollars as the Company expands
its staff and incurs additional costs related to the growth of its business and
being a public company.
Interest Income and Expense. Interest income and expense consists of
interest income on short-term liquid investments of the Company's excess cash
and interest expense incurred as a result of the financing of equipment through
capital leases and the use of the Company's revolving credit line. Interest
income for the six months ended June 30, 1996 related to the Company investing
the proceeds of equity financings received in the second quarter of 1996.
Fiscal 1996 Compared with Fiscal 1995
Revenues. Revenues for 1996 totaled $1.7 million compared to $97,000 for
1995. Revenues in 1996 and 1995 consisted primarily of sales of CDs and
cassettes produced by others and a limited amount of advertising revenues. The
Company did not have any revenues from continuing operations prior to August
1995 when the Company launched Music Boulevard.
Cost of Revenues. Cost of revenues totaled $1.6 million for 1996 compared
to $85,000 for 1995. Cost of revenues consists of payments to a third-party
fulfillment operation for the shipment to the Company's customers of music CDs
and cassettes produced by others, telecommunications charges, credit card
processing charges, database usage fees, profit participations payable to
strategic alliance partners and content costs.
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Operating and Development Expenses. Operating and development expenses
increased from $1.0 million for 1995 to $7.8 million for 1996 due to increased
staffing resulting from the Merger and an increased development effort for the
Company's music websites. Operating and development personnel increased from 26
as of December 31, 1995 to 102 as of December 31, 1996. The Company believes
that costs associated with the development and maintenance of its websites will
continue to increase in absolute dollars.
Sales and Marketing Expenses. Sales and marketing expenses increased from
$1.1 million for 1995 to $2.7 million for 1996 due to increased staffing and
supporting higher levels of sales. Sales and marketing personnel increased from
two as of December 31, 1995 to 24 as of December 31, 1996. Advertising and
promotional costs increased from $389,000 for the year ended December 31, 1995
to $1.8 million for the year ended December 31, 1996.
General and Administrative Expenses. General and administrative expenses
increased from $872,000 for 1995 to $2.5 million for 1996 due to the addition of
personnel as a result of the Merger. General and administrative personnel
increased from 11 as of December 31, 1995 to 18 as of December 31, 1996.
Interest Income and Expense. Interest income increased from $106,000 for
1995 to $353,000 for 1996 due to the Company investing the proceeds of equity
financings received in 1996. Interest expense increased from $18,000 for 1995 to
$52,000 for 1996 due to the addition of capital leases from the Merger and the
use of the Company's revolving credit line in 1996 to fund working capital.
Fiscal 1995 Compared with Fiscal 1994
Revenues. Revenues for 1995 totaled $97,000, reflecting the Company's
launch of Music Boulevard in August 1995. The Company had no revenues from
continuing operations prior to 1995.
Cost of Revenues. Cost of revenues totaled $85,000 in 1995, primarily
reflecting payments to a third-party fulfillment operation for the shipment to
the Company's customers of music CDs and cassettes produced by others and
telecommunications and credit card processing charges.
Operating and Development Expenses. Operating and development expenses
increased from $258,000 in 1994 to $1.0 million in 1995. The increase reflects
the expansion of the Company's engineering staff to develop and launch Music
Boulevard. Operating and development personnel increased from 18 as of December
31, 1994 to 26 as of December 31, 1995.
Sales and Marketing Expenses. Sales and marketing expenses increased from
$173,000 in 1994 to $1.1 million in 1995. The increase in sales and marketing
expenses primarily reflects costs associated with the launch of Music Boulevard.
General and Administrative Expenses. General and administrative expenses
declined from $896,000 in 1994 to $872,000 in 1995.
Interest Income and Expense. Interest income increased from $73,000 for
1994 to $106,000 in 1995 due to the Company investing proceeds of equity
financings received in the second half of 1994. Interest expense decreased from
$48,000 in 1994 to $18,000 in 1995 due to repayments on the Company's revolving
line of credit.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations and capital expenditures primarily
from equity financings, cash generated from operations, lease financings, a
revolving bank credit line and short-term loans described herein. At June 30,
1997, the Company had a cash balance of $670,000. From July 1, 1997 to date, the
Company has received an aggregate of $10.8 million from the issuance of the
Senior Notes, the Management Notes and the sale of the information services
business. The Company believes that the proceeds of this offering, together with
the current cash balance, will be sufficient to finance the Company's planned
operations and capital expenditures for at least the next twelve months. The
Company expects negative cash flow from operations to continue for the
foreseeable future, as it continues to develop and market its operations.
Inflation has not had
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any material impact on the Company's operations. See "Risk Factors -- Historical
and Anticipated Losses; Uncertainty of Future Results," "-- Possible Need for
Additional Funds" and "Use of Proceeds."
Net cash of $96,000, $874,000, $10.7 million and $10.5 million was used for
operating activities for the years ended December 31, 1994, 1995, 1996 and the
six months ended June 30, 1997, respectively. The Company financed these
activities through the private placement of Series D Preferred Stock, which
yielded net proceeds of $1.6 million in 1994, and Series E Preferred Stock and
Series F Preferred Stock, which yielded net proceeds of $19.0 million in 1996.
The Company also borrowed $400,000 under its revolving line of credit in 1995 to
fund operating activities, which was repaid in 1996 with the proceeds of the
sale of Preferred Stock. The Company borrowed $850,000 under its revolving
credit line in the first half of 1997 to fund operating activities.
Purchases of property and equipment totaled $256,000, $339,000, $2.9
million and $1.3 million for the years ended December 31, 1994, 1995, 1996 and
the six months ended June 30, 1997, respectively. The Company projects that
total purchases of property and equipment will be approximately $3.5 million for
1997, primarily to support the expansion of facilities and operating systems for
its websites, as well as computer-related equipment to support increased
personnel levels. The Company also invested cash of $672,000 to acquire the rock
website, Rocktropolis, in June 1996.
In April 1997, the Company sold an aggregate of 2,480,329 shares of Series
G Preferred Stock to a class of accredited investors at a price of $3.00 per
share. Pursuant to the stock purchase agreement for the Series G Preferred
Stock, if the Company consummates an initial public offering of stock in 1997 at
a price per share that is less than $14.00, the Company is required to pay each
of the purchasers of the Series G Preferred Stock, either in cash or in
additional shares of Common Stock, the Series G Purchase Price Adjustment. In
connection with the issuance of the Series G Preferred Stock in April 1997, the
Company issued warrants to purchase 48,555 shares of Common Stock at an exercise
price of $12.00 per share as a placement fee. See "Dilution" and "Certain
Transactions -- Preferred Stock Conversion."
In July 1997, the Company issued $1.75 million aggregate principal amount
of promissory notes to Lawrence L. Rosen, Jonathan V. Diamond and Robert David
Grusin (the "Management Notes"), each of whom loaned the Company $583,333. The
Management Notes bear interest at 14% per annum and are due on the earlier of
(i) a "change of control of the Company," as that term is defined in the
Management Notes, and (ii) March 31, 1998; provided, however, that if the
Management Notes are outstanding at the time of this offering, the Management
Notes will convert upon consummation of this offering into 109,374 shares of
Common Stock (assuming an initial public offering price of $16.00 per share). In
consideration for these loans, the Company issued an aggregate of 48,609
warrants to purchase 48,609 shares of Common Stock, representing 16,203 warrants
to each of Messrs. Rosen, Diamond and Grusin. The warrants are exercisable at a
price of $12.00 per share and expire in July 2004. See "Dilution."
In August 1997, the Company issued $6,021,600 aggregate principal amount of
Senior Notes to a group of five institutional investors affiliated with an
insurance company and one existing stockholder of the Company in return for
loans in that amount to the Company. The Senior Notes bear interest at 14% per
annum and are due on the earliest of (i) consummation of this offering, (ii) a
"change of control of the Company," as that term is defined in the Senior Notes,
and (iii) March 31, 1998. In consideration for these loans, the Company issued
an aggregate of 167,266 warrants to purchase 167,266 shares of Common Stock. The
warrants are exercisable at a price of $12.00 per share and expire in August
2004. In connection with the issuance of the Senior Notes in August 1997, the
Company issued warrants to purchase 83,389 shares of Common Stock at an exercise
price of $12.00 per share as a placement fee. A portion of the proceeds of this
offering will be used to repay the Senior Notes. The Senior Notes have been
recorded net of the estimated value ($800,000) associated with these warrants.
This discount is being amortized over the term of the debt through March 31,
1998. In connection with the repayment of the Senior Notes, the Company will
record a charge to its statement of operations in the fiscal quarter in which
this offering is consummated. This charge will be equal to the unamortized
portion of the discount on the Senior Notes which was approximately $614,000 as
of September 26, 1997. See Note 1 of Notes to Consolidated Financial Statements.
See "Use of Proceeds."
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In August 1997, the Company sold substantially all of the net assets of its
discontinued operations and received $3.0 million which was paid in cash at
closing. See Note 3 of Notes to Consolidated Financial Statement.
N2K and AOL formed a strategic alliance as of September 1, 1997 pursuant to
the AOL Contract, which provides for N2K to be featured as the exclusive on-line
music retailer within the MusicSpace channel of AOL's on-line service. In
addition, pursuant to the terms of the AOL Contract, an N2K banner will
continuously appear in a prominent place on the main screen of the MusicSpace
channel and will link to a customized MusicBoulevard website. N2K will also
receive an anchor tenant position in the music retailing department of AOL's
Shopping channel. Although a limited number of other music retailers may appear
in the Shopping channel, none will be featured or promoted more prominently than
N2K. The AOL Contract also provides for an integrated package of placements,
promotions and links through AOL.com, linking to the customized MusicBoulevard
website. N2K will also be promoted on the results pages for certain
music-related searches conducted through the AOL NetFind search engine on
AOL.com. N2K and AOL have also agreed to cooperate in the sale of advertising on
the websites governed by the terms of the AOL Contract. Each party shall have
the first right to sell any advertising or promotional spaces which reside on
their servers. In consideration of the marketing, promotion, advertising and
other services AOL will provide under the AOL Contract, N2K has agreed to pay
AOL a total of $18 million over a three-year contract term, of which $12 million
will be paid between contract execution and the earlier of consummation of this
offering and December 1, 1997, with additional payments of $3 million to be made
on each of November 1, 1998 and November 1, 1999. The Company expects to
amortize the costs associated with the AOL Contract over the initial contract
term of three years. After the initial three year term, the AOL Contract may be
renewed at the option of AOL for additional one-year terms. In connection with
the intended purchase of $3 million in aggregate value of the Company's Common
Stock by AOL as part of this offering, the Company expects to grant the AOL
Warrant for the future purchase of up to 219,375 additional shares of Common
Stock (assuming an initial public offering price of $16.00 per share). The fair
value of the AOL Warrant will be amortized over the initial term of the AOL
Contract.
N2K entered into a sponsorship agreement with Excite on September 23, 1997,
pursuant to which N2K will be the exclusive retail music store sponsor of the
www.excite.com website, provide certain music-related content to the
www.excite.com website, create a co-branded area of Music Boulevard and
participate in joint promotions to customers of this co-branded area. The Excite
Contract provides for the Company to pay Excite an initiation fee, an annual
exclusivity fee, as well as an annual sponsorship fee for on-going programming,
links, placements, advertisements and promotions. Under the terms of the Excite
Contract, the Company will also pay Excite a specified share of gross margins
realized by the Company on transactions, advertising, sponsorship, promotions
and other revenues generated during the term of the Excite Contract on Music
Boulevard as a result of users referred from the www.excite.com website. In
consideration of the sponsorship opportunity afforded to the Company under the
Excite Contract, N2K has agreed to pay Excite a guaranteed minimum total of $9.8
million over a two-year contract term, of which $2.8 million will be paid
between contract execution and December 31, 1997, with additional payments of
$2.9 million during 1998 and $4.1 million during 1999. The Company expects to
amortize the costs associated with the Excite Contract over the initial contract
term which expires on the second anniversary of the commencement date, which is
anticipated to be on or about October 15, 1997. Pursuant to the terms of the
Excite Contract, Excite is obligated to offer the Company the right of first
refusal to negotiate with Excite for renewal of the Excite Contract.
The Company has a commitment for a $2.0 million revolving line of credit
with CoreStates Bank, N.A. (the "CoreStates Facility"), which will expire on
December 31, 1997. The CoreStates Facility bears interest at the bank's prime
rate and is secured by a security interest in substantially all of the Company's
assets. Maximum borrowings under the CoreStates Facility are limited to certain
percentages of eligible accounts receivable. The CoreStates Facility is subject
to an unused commitment fee in the amount of 0.5% of the unused portion of the
facility on a quarterly basis. As of June 30, 1997, the Company had total
borrowings of $850,000 under the CoreStates Facility. The borrowings as of
September 26, 1997 under the CoreStates Facility were $650,000.
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From time to time, in the ordinary course of business, the Company
evaluates possible acquisitions of, or investments in, businesses, products and
technologies that are complementary to those of the Company. A portion of the
Company's cash resources may therefore be used to fund acquisitions or
investments. The Company currently has no arrangements, agreements or
understandings, and is not engaged in active negotiations, with respect to any
such acquisition or investment. See "Risk Factors -- Management of Growth."
DISCONTINUED OPERATIONS
Since 1984, the Company has operated an on-line information services
business. In 1994, the Company expanded its business strategy to include music
entertainment. In April 1997, the Company decided to focus exclusively on its
music entertainment business, and, as such, has elected to discontinue its
on-line information services business. At that time, the Board of Directors
approved a formal plan of disposal for its on-line information services
business. In August 1997, the Company sold substantially all of the net assets
of this business.
The on-line information services business has been accounted for as a
discontinued operation. Accordingly, the operating results and assets and
liabilities of this business have been reflected separately from continuing
operations. The sale of the on-line information services business in August 1997
resulted in a gain which the Company presently estimates will be approximately
$1.5 million, and which will be recorded in the period ended September 30, 1997.
See Note 3 of Notes to Consolidated Financial Statements.
For the years ended December 31, 1994, 1995, 1996 and the six months ended
June 30, 1996 and 1997, the discontinued operations generated revenues of $11.4
million, $11.0 million, $7.9 million, $4.6 million and $2.4 million,
respectively. The discontinued operations generated net income of $1.4 million,
$1.3 million and $157,000 in 1994, 1995 and the six months ended June 30, 1996,
respectively, and a net loss of $969,000 in 1996 and $416,000 for the six months
ended June 30, 1997.
RECENT ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share". SFAS
No. 128 requires dual presentation of basic and diluted earnings per share for
complex capital structures on the face of the statements of operations.
According to SFAS No. 128, basic earnings per share, which replaces primary
earnings per share, is calculated by dividing net income available to common
stockholders by the weighted average number of common shares outstanding for the
period. Diluted earnings per share, which replaces fully diluted earnings per
share, reflects the potential dilution from the exercise or conversion of
securities into common stock, such as stock options. SFAS No. 128 is required to
be adopted for the Company's 1997 year-end financial statements; earlier
application is not permitted. The adoption of this pronouncement is expected to
have no significant impact on the Company's financial position or results of
operations.
Additionally, in June 1997, the Financial Accounting Standards Board issued
SFAS No. 130, "Reporting Comprehensive Income" and SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information." SFAS No. 130
establishes standards for reporting and display of comprehensive income and its
components (revenues, expenses, gains and losses) in a full set of
general-purpose financial statements and requires that all items that are
required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. SFAS No. 130 is required to
be adopted for the Company's fiscal year ending December 31, 1998. The adoption
of this pronouncement is expected to have no impact on the Company's financial
position or results of operations. SFAS No. 131 establishes standards for the
way that public business enterprises report information about operating segments
in annual financial statements and requires that those enterprises report
selected information about operating segments in interim financial reports
issued to stockholders. It also establishes standards for related disclosures
about products and services, geographic areas, and major customers. SFAS No. 131
is required to be adopted for the Company's 1998 year-end financial statements.
The Company is currently evaluating the impact, if any, of the adoption of this
pronouncement on the Company's existing disclosures.
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BUSINESS
N2K is one of the leading on-line music entertainment companies using the
Internet as a global platform for promoting, marketing and selling music and
related merchandise. The Company's strategy is to build loyal user communities
around genre-specific websites that provide music content and enable consumers
to purchase CDs, cassettes and related merchandise. The Company believes that as
its user base continues to grow, it will be able to increase revenues from sales
of music, related merchandise, advertising and sponsorship programs. The Company
estimates, based on internal reports, that the number of page impressions per
month for its music retail website has grown from approximately 767,000 in July
1996 to approximately 9.4 million in July 1997. Page impressions for this
website are defined as the number of full computer screens of content served to
users of the Company's music retail website.
The Company's music retail website is Music Boulevard (www.musicblvd.com),
around which the Company organizes its genre-specific music websites,
Rocktropolis (www.rocktropolis.com), Jazz Central Station
(www.jazzcentralstation.com) and Classical Insites (www.classicalinsites.com).
In addition to these genre websites, the Company also operates websites for such
artists as David Bowie, The Rolling Stones and Leonard Bernstein. The Company's
websites allow users to view current music news, including news from MTV and
from such magazines as SPIN and JazzTimes, reviews, artist biographies and
discographies, musicians' favorite artist recordings and historical and
educational information, and to hear and view cybercasts and recording and video
samples. Consumers may search, browse and purchase music recordings from a
database of approximately 185,000 CD and cassette titles and related
merchandise, digitally access 30-second music samples from a selection of
approximately 340,000 songs, read from over 60,000 reviews and related articles
and view music video clips. In July 1997, the Company introduced its e _ mod
system, which allows consumers to purchase and digitally download from a
collection of music singles. All product purchases are coordinated through Music
Boulevard, which acts as the Company's on-line retail store. The Company
believes that by providing a wealth of information in a highly personalized,
interactive context, it creates an entertaining environment that attracts
traffic to its websites, fosters brand awareness and encourages purchases of
music and related merchandise.
As part of its growth strategy, the Company seeks to establish strategic
alliances with global on-line, music and media companies to attract additional
users to, and increase brand awareness of, the Company's websites. For example,
the Company recently formed a strategic alliance with AOL pursuant to an
interactive marketing agreement, which provides, among other things, for N2K to
be featured as the exclusive on-line music retailer within AOL's MusicSpace
channel, receive an anchor tenant position on AOL's Shopping channel,
participate in a variety of banner advertising opportunities and be assigned
specific keywords within the AOL service. Similarly, the Company has entered
into the Excite Contract, which provides for N2K to be the exclusive retail
music store sponsor of the www.excite.com website, to provide certain
music-related content to the www.excite.com website, to create a co-branded area
of Music Boulevard and to participate in joint promotions to customers of this
co-branded area. In addition, the Company has established the MTV/ VH1 Alliance,
under which MTV Networks provides Music Boulevard with content and presents
Music Boulevard, both on-air and on-line, as the exclusive partner for retail
sales of CDs, cassettes and related merchandise for each of the MTV
(www.mtv.com) and VH1 (www.vh1.com) websites. N2K has established strategic
agreements as most prominently featured music content provider and on-line music
retailer for WebTV, as most prominently featured music content provider and
exclusive music retailing anchor tenant for @Home, as exclusive on-line product
fulfillment source for the Virgin Records website and, subject to a memorandum
of understanding, to become the advertising music sponsor and preferred on-line
music retailer for the Music Zone channel on the PointCast College Network.
The Company intends to capitalize on the global nature of the Internet to
build an international user base by creating local language versions of, and
localized content for, the Company's websites. Currently, approximately
one-third of the Company's on-line revenues are generated from sales of CDs,
cassettes and related merchandise outside the U.S. The Company has established a
wholly-owned subsidiary in Japan, the world's second largest market for recorded
music sales, and has launched Japanese versions of Music Boulevard
(www.musicblvd.com/jp) and Jazz Central Station (jp.jazzcentralstation.com). The
Company also offers registration and ordering instructions on Music Boulevard in
English, Japanese, German, French and Spanish.
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The Company has also established its own record label, N2K Encoded Music,
which uses the Company's websites, as well as record stores and other
traditional distribution channels, to promote, distribute and sell original and
licensed artist recordings. Since January 1997, the Company has released its
initial 12 recordings on the N2K Encoded Music label under the direction of
Grammy Award-winning producer, Phil Ramone. The Company expects to release one
new title through December 1997, and currently has agreements with 12 artists
for future recordings. The Company expects that many of its N2K Encoded Music
CDs will feature enhanced multimedia capabilities and Internet connectivity
software. Traditional domestic distribution for the Company's record label is
handled by Sony's RED Distribution.
ON-LINE MUSIC INDUSTRY
The Company believes that substantial growth opportunities exist in the
on-line music industry. According to Jupiter Communications ("Jupiter"), total
on-line music revenues, which include prerecorded music sales, music related
merchandising, advertising and concert ticketing, are expected to grow to $2.8
billion by the year 2002, up from an estimated $22.5 million in 1996 and $71.0
million in 1997. Jupiter estimates that the number of on-line households making
purchases is expected to grow from an estimated 15.2 million households in 1996
to 57.0 million households, representing over 50% of U.S. households, by the
year 2002. During the same time period, Jupiter estimates that the percentage of
on-line households making on-line purchases annually is expected to grow from
approximately 20% to 70%.
The Company believes that the multimedia features available through the
Internet, including audio, video and graphics, make it an ideal medium for
promoting, marketing and selling music and related merchandise. Potential
purchasers of music recordings can preview their purchases by listening to
high-quality sound samples, viewing text and video clips (including cover art,
artists' discographies, music videos and reviews) and searching from an
extensive catalog of available titles. The Internet and current technologies
also allow users to digitally download music in a compressed format to a
personal computer ("PC") and store it on a CD using a read/write CD-ROM drive.
Internet users can also search for music by genre or artist, access a wealth of
information and events, including music history and news, artists' biographies,
cybercast concerts and radio broadcasts, and participate in live interviews with
artists. Because the Internet is a highly interactive medium and user responses
can be tracked, the Company believes that advertisers will become increasingly
attracted to opportunities to focus their marketing efforts on specific user
groups and individuals.
The Company believes that Internet-based retailers have certain advantages
over traditional retail channels. Traditional retail stores limit the amount of
inventory they carry and tend to focus on carrying a greater percentage of hit
releases. The Company estimates that a traditional retail store stocks an
average of 10,000 stock keeping units ("SKUs") and megastores stock an average
of approximately 39,000 SKUs out of a total of more than 185,000 SKUs generally
available in the U.S. and offered by the Company. According to SoundScan, Inc.
("SoundScan"), a retail audio sales data collection company, the number of new
releases in 1995 alone was more than 28,000 titles. According to Jupiter, 80% of
unit sales at traditional retail stores come from only 20% of available titles.
The Company believes that traditional retail stores do not have the same
capability to track individual customer purchases and demographic data for use
in direct marketing programs and in developing a one-to-one relationship with
the consumer. Internet-based stores can operate 24-hours a day, seven days a
week, and are not limited by geographic boundaries.
An individual electronic commerce website can maximize its awareness and
traffic through the use of strategic alliances with other websites having high
user traffic. Through the use of embedded hyperlinks, higher traffic websites
can refer potential customers to electronic commerce websites for potential
purchases of goods or services. These agreements generally involve economic
arrangements including upfront payments or commissions on the dollar volume of
goods sold. These payments are analagous to rent paid by traditional "brick and
mortar" retail locations, and can be critical to an electronic commerce
website's ability to expand.
The Company believes that the demographic profile of consumers of recorded
music has aged along with the population. According to the Recording Industry
Association of America ("RIAA"), domestic purchases of recorded music by those
30 and over have increased from approximately 34% of U.S. sales in 1986 to
approximately 47% of sales, or approximately $5.9 billion, in 1996. The Company
believes that the Internet
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represents an attractive retail and promotion medium for customers in this age
group as they are less "hits-driven" than younger age groups, typically can
afford to buy more titles at one time, often own PCs and generally have credit
cards, which are generally used to make electronic payments.
Historically, the music industry has benefited from innovations in
technology, such as the introduction of the CD in 1983. Over the last ten years,
much of the industry's growth resulted from consumers replacing existing music
collections with the CD format. According to the RIAA, domestic music sales grew
from $5.6 billion in 1987 to $12.5 billion in 1996. In recent years, however,
music sales growth has slowed due to a number of factors, including a shortage
of major releases by new artists and a slowdown in the rate of growth of CD
sales, as consumers have replaced most of their music collections. Nevertheless,
the number of retailers distributing music during this time period has
increased, resulting in greater competition and the closure of a number of
traditional record stores. For example, according to the RIAA, traditional
record stores' market share of music sales dropped from a peak of 72% in 1989 to
50% in 1996. During the same time period, stores such as mass merchandisers,
discount chains and consumer electronics stores have increased their market
share from 16% to 32% and music clubs have increased their market share from 8%
to 14%.
BUSINESS STRATEGY
The Company's strategy includes the following key elements:
Create Strong Brand Awareness. The Company believes that building brand
awareness of the N2K websites is critical to attracting and expanding its global
Internet user base. N2K promotes its brand identities through on-line and
traditional media, event sponsorships and other marketing activities. The
Company enhances brand awareness of its individual websites by providing
original and proprietary content, providing consumers the ability to purchase
music and related merchandise and establishing strategic and bounty
relationships whereby other websites engage Music Boulevard as their on-line
music retailer and content provider.
Develop Key Industry and Website Alliances. The Company seeks to establish
strategic alliances with global music and media companies to attract additional
users to, and increase brand awareness of, the Company's websites. Current
strategic alliances include those with AOL, Excite, MTV/VH1, WebTV, @Home,
Virgin Records and PointCast, pursuant to which N2K is the exclusive or a
preferred on-line music retailer or fulfillment source for each of these
companies' respective websites. The Company views these agreements as a
significant competitive advantage. In addition, N2K has recently established its
Remote Access Music ("RAM") program, whereby third-party websites may register
with N2K and establish hyperlinks to Music Boulevard for on-line music
retailing.
Offer Largest Selection of Music and Related Merchandise. The Company's
merchandising strategy centers around offering users one of the largest
collections of music and related items (including over 185,000 music titles and
related merchandise) in a multimedia, interactive and personalized environment.
Through the Company's e
- -mod system, users can also digitally download a select number of singles. The
Company believes that its extensive music catalog, combined with specific artist
features, music reviews, sound samples and music videos, draws users into areas
of personal interest and generates incremental sales by exposing consumers to
music for which their knowledge or access may be limited or which may be
unavailable in traditional retail environments.
Build User Communities and Attract Advertising. The Company's strategy is
to build global on-line communities around specific genres of music, all of
which link to the Company's retail website, Music Boulevard. The Company
believes that organizing its websites by music genres such as rock, jazz and
classical music parallels traditional radio and other media formats as well as
consumer buying patterns. By organizing its websites by music genre, the Company
is able to aggregate targeted demographic user groups, thereby offering
advertisers and sponsors access to highly defined audiences. These targeted user
groups enable advertisers and sponsors to customize their messages through
banner advertisements, event and program sponsorships and music recording
promotions. The Company provides its advertisers and sponsors with quantitative
feedback on the effectiveness of their website advertising and sponsorship
programs.
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Leverage Infrastructure Through Multiple Websites. The Company intends to
utilize its current infrastructure to enhance existing, and add new, genre and
artist websites. Retailing components in each genre website are dynamically
driven from Music Boulevard databases, and are presented within the interface
and design of the genre website. The Company believes that both users and
advertisers prefer websites designed for specific audiences and that a multiple
website approach enhances the Company's ability to promote content within each
website, encourages more users to bookmark the Company's websites and attracts
greater numbers of third-party hyperlinks to the Company's websites.
Expand International Presence. Approximately one-third of the Company's
on-line revenues are currently generated from sales of CDs, cassettes and
related merchandise outside the U.S. The Company intends to capitalize on this
trend and the global nature of the Internet to build an international user base
by creating local language versions of, and culture-specific content for, the
Company's websites. The Company has established a wholly-owned subsidiary in
Japan, the world's second largest market for recorded music sales, and has
launched Japanese versions of Music Boulevard and Jazz Central Station. The
Company also offers registration and ordering instructions on Music Boulevard in
English, Japanese, German, French and Spanish.
Build and Leverage N2K Encoded Music Label. The Company has established its
own record label, N2K Encoded Music, which uses the Company's websites, as well
as record stores and other traditional distribution channels, to promote,
distribute and sell original and licensed artist recordings. Since January 1997,
the Company has released its initial 12 recordings on the N2K Encoded Music
label under the direction of Grammy Award-winning producer, Phil Ramone. The
Company expects to release one new title through December 1997, and currently
has agreements with twelve artists for future recordings. The Company believes
that it can leverage its Internet platform by promoting and selling its own
proprietary titles produced by N2K Encoded Music. The artists and products of
N2K Encoded Music also provide an additional source of engaging content for the
Company's genre websites.
N2K WEBSITES
The Company's music retail website is Music Boulevard (www.musicblvd.com),
around which the Company organizes its genre-specific music websites,
Rocktropolis (www.rocktropolis.com), Jazz Central Station
(www.jazzcentralstation.com) and Classical Insites (www.classicalinsites.com).
In addition to these genre websites, the Company also hosts websites for such
artists as David Bowie (www.davidbowie.com), The Rolling Stones
(www.stonesworld.com) and Leonard Bernstein (www.leonardbernstein.com). As part
of its multiple website strategy, the Company assigns, whenever possible, a
separate universal resource locator or "URL" to each of its genre and artist
websites, and continually reviews and revises these websites. The Company
believes that both users and advertisers prefer websites with distinct URLs
designed for specific audiences.
Music Retail and Genre Websites. The Company believes that by providing a
wealth of information in a highly personalized, interactive context, it creates
an entertaining environment that attracts traffic to its websites, fosters brand
awareness and encourages purchases of music and related merchandise. The
Company's existing music retail and genre websites include the following:
www.musicblvd.com
Music Boulevard is the Company's flagship website, featuring a rich
graphical and musical environment containing over 75,000 graphic images and
offering over 185,000 CD and cassette titles and related merchandise. The Music
Boulevard URL address leads to an entrance page containing a front door to the
retail store, in addition to direct links to Music Boulevard departments
(including the MTV and VH1 boutique areas). By clicking on the front door, users
enter the retail store where a main page displays featured areas and
departments. This page also serves as a familiar home base to which users may
return to find key destinations within the store. Users may choose desired
locations by clicking on a navigation bar or hyperlinked text allowing them to
begin (i) searching for artists, titles and songs; (ii) accessing the Music
Boulevard Newsstand, Billboard charts, Help, e-mail and on sale items; (iii)
ordering and browsing; (iv) linking to genre departments, including MTV's CD
Lounge, VH1's Sound Shop, Popular, Jazz, Classical,
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Country and Other Music; (v) ordering not-yet-released titles; (vi) linking
directly to MTV and VH1 News; (vii) joining the Frequent Buyers Club; and (viii)
listening to sound samples in MPEG, RealAudio or Liquid Audio formats. The Music
Boulevard Newsstand features over 60,000 reviews and features from MTV News, VH1
News, Jazz Track (news from Jazz Central Station) and CI Classical Review (news
from Classical Insites), and provides links to articles from SPIN, JazzTimes,
Puncture, Fanfare, Dirty Linen, Relix, Blues Access and IAJE Jazz Educators
Journal magazines.
A personal shopping cart allows the user to select merchandise for purchase
while navigating through Music Boulevard. Items can be added to or subtracted
from a shopping cart at any time. As a user completes a search, similar or
complementary artists and titles are suggested. By pressing the "buy" button,
the customer completes the ordering process. See "-- Ordering, Fulfillment and
Customer Service." Music Boulevard customers can join a Frequent Buyers Club and
receive a free CD after purchasing a certain quantity of CDs. To join the
Frequent Buyers Club, customers complete a brief survey which provides valuable
demographic data. The Company currently utilizes the Frequent Buyers Club data
to analyze customer shopping trends and demographics, and is evaluating ways in
which it may utilize this data to customize marketing programs. Each Music
Boulevard department contains new releases, on sale items and a listening post
from which users may choose selected sound samples by title. Virtual end caps
are displayed in each department, featuring specially-priced titles and icons
for sound sampling.
In March 1997, Yahoo Internet Life named Music Boulevard the Best On-line
Music Store. In Summer 1997, Music Boulevard was one of Internet Shopper's
Choice winners for Internet Shopper Best Website.
www.rocktropolis.com
The Rocktropolis website is an in-depth, multimedia entertainment and
information resource for the global rock and pop music communities. Rocktropolis
offers a comprehensive guide to the world of rock and pop music, enabling users
to listen to live performances, discuss their favorite artists and access music
reviews on-line. Rocktropolis' new design transports the user to a futuristic
city. Each section of Rocktropolis has a unique design and content matching its
neighborhood theme, and utilizes advanced multimedia elements to enhance the
visual experience of being in a city. Rocktropolis' primary areas include: RT1
(featuring cybercasts with superstar artists and classic interview shows);
Groove Lounge (featuring cybercasts and live chats with premier electronica
artists); and Buzz (featuring special-event chats, regularly-scheduled weekly
chat shows and 24-hour chat rooms and bulletin boards). Hunt, the Rocktropolis
search engine, gives users the ability to retrieve news stories, gossip items,
album reviews and other information about their favorite artists. Hunt also
features links to the Company's artist websites, including the David Bowie and
Rolling Stones websites. Rocktropolis Radio features four separate streaming
audio stations covering Rock, Dance, Punk and Ambient. Rocktropolis Radio has
featured such artists as David Bowie, Sting, Beck, Sex Pistols, Porno for Pyros,
Bush, The Tragically Hip, Chemical Brothers, Motley Crue, Los Lobos and Sheryl
Crow. In October 1996, Rocktropolis was the recipient of a Yahoo Internet Life
Five-Star Award.
Rocktropolis is the home of the award-winning allstar on-line music
magazine, which provides daily music news and gossip. allstar features album and
live reviews, as well as in-depth interviews with some of rock music's most
important musicians. In July 1997, at the 3rd Annual Music Journalism Awards,
allstar was the winner of a Music Journalism Award for its up-to-the-minute news
coverage.
In September 1997, the Company expects to launch a revised version of the
Rocktropolis website which will include time-based programming with regularly
scheduled events, additional content and enhanced multimedia features.
www.jazzcentralstation.com
Jazz Central Station is an in-depth jazz, multimedia music entertainment
and information resource for the global jazz community. Jazz Central Station
provides a dynamic graphical user interface through which visitors are able to
explore the contemporary and historical world of jazz through text, graphic and
multimedia elements, organized in a virtual train station theme. Featured areas
include: Featured Artists (comprehensive
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overviews of artists' careers); The Listening Car (providing Recommended
Listening, CD Reviews, New Artist Profiles, Film and Video Reviews and a
complete listing of jazz box sets); Record Company Cargo Area (providing
information on jazz record labels and their artist releases); Musician's Express
(featuring master classes by acclaimed jazz artists, as well as the official
website for the International Association of Jazz Educators); artist websites
(including featured areas for Chick Corea, Joshua Redman and Gerry Mulligan and
a planned website for Miles Davis in 1998); Jazz Destinations (highlighting jazz
events and venues worldwide); Jazz Cafe (featuring regularly scheduled chats as
well as the very popular Bulletin Boards); and The Newsstand (including
JazzTimes Magazine, Jazz Educators Journal, The History of Jazz, BRAVO Cable
Jazz listings, Hennessey Jazz Notes and Jazz Central Station's own daily Jazz
Track). Other features include artist interviews, cover art, videos, photos,
liner notes, reviews, biographies, concert calendars and educational listings.
Jazz Central Station is the official website for JazzTimes Magazine, the
International Association of Jazz Educators, The Monterey Jazz Festival, George
Wein's Festival Productions (producer of the JVC Jazz Festival), Playboy Jazz
Festival, North Sea Jazz Festival and a 24-hour a day, seven-day a week on-line
simulcast of WBGO 88.3 FM, a leading straight-ahead jazz radio station. In 1996,
Jazz Central Station inaugurated the first annual JCS Global Jazz Poll, in which
its on-line users voted for their favorite artists. The winners were chosen and
selected winning tracks were compiled for one of the Company's initial releases
under the N2K Encoded Music label in the first quarter of 1997.
Jazz Central Station has an acclaimed Board of Advisors, including Chick
Corea, Quincy Jones, Ramsey Lewis, Bruce Lundvall, Dan Morgenstern and George
Wein. The Board of Advisors is composed of industry leaders, each of whom the
Company believes possesses distinct knowledge of various aspects of the jazz
community.
Jazz Central Station has received numerous awards for its design and
content, including the 1996 America On-line Music Award for the Best Jazz
Cybersite and recognition by Excite as the Best Entertainment Site of 1996 and
The Best (4-Star Rating) from Yahoo Internet Life in August 1997.
www.classicalinsites.com
Classical Insites is an in-depth, multimedia music entertainment and
information resource for the global classical music community. Classical Insites
offers a comprehensive guide to the world of classical music, enabling users to
explore the history and personalities of classical music, listen to performances
and discussions by legendary artists, seek out worldwide classical music events
and purchase music and related merchandise on-line. In addition to text,
features are enhanced by graphic and multimedia elements. Classical Insites'
primary areas include: The Hall of Fame, a gallery of great classical composers
and performers (including recent inductees Luciano Pavarotti, Leontyne Price,
Yo-Yo Ma, and Pierre Boulez); and The Performance Center, including a concert
hall (featuring broadcasts, performances and other events), a spotlight area
(introducing the work of important lesser-known composers and performers), an
information booth (providing links to performing organizations around the world)
and a screening room (featuring exciting new films and great film scores). Other
highlights of Classical Insites include the official website of Leonard
Bernstein (www.leonardbernstein.com).
Classical Insites also hosts the official website of WQXR (96.3 FM), one of
the country's leading classical music radio stations, offering music listings,
program information and a live audio stream to allow users worldwide to hear
WQXR's classical programming. Classical Insites' users can enjoy on-line
editions of Fanfare Magazine (a leading classical music publication) and CI
Classical Review (an in-house publication of CD reviews and feature articles).
Among its plans for 1997, Classical Insites intends to launch the official
website of Cecilia Bartoli, one of the world's renowned mezzo-sopranos, and to
induct Maria Callas, Mstislav Rostropovich, Serge Koussevitsky and Sir Georg
Solti into the Classical Insites Hall of Fame. Classical Insites will also
announce the winners of its first Global Classical Music Poll, in which users
voted for their favorite artists. The Lifetime Achievement category of this
award is being voted on by Classical Insite's distinguished Board of Advisors,
which includes Betty Allen, Marilyn Bergman, Nina Bernstein, John Corigliano,
Peter Gelb, Charles Hamlen, Omus Hirschbein, Bobby McFerrin, Arnold Steinhardt,
Michael
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Tilson Thomas and Charles Webb. The Board of Advisors is composed of artists and
industry leaders that as a whole represent the various aspects of the diverse
classical music community.
Classical Insites has received numerous awards since its launch, including
a Best of The Web (4-Star Rating) from NetGuide Live and The Best (4-Star
Rating) from Yahoo Internet Life during 1997.
Artist Websites. The Company's artist websites include interviews,
discographies, sound and video samples, artists' best recordings, artists'
recommended listening and touring and biographical information. These artist
websites each have a separate URL.
www.davidbowie.com
This official David Bowie website contains many features on the artist,
including an exploration of his latest album releases, Outside and Earthling.
The website also takes visitors inside the murder-mystery world explored in
Bowie's short story, "The Diaries of Nathan Adler." The website features sound
samples, band biographies, concert clips and information, interviews, cover art,
the full text of "The Diaries of Nathan Adler" and information on Bowie's latest
releases and tours (including coverage of his 50th Birthday Concert at Madison
Square Garden). David Bowie's Telling Lies was one of the first singles to be
released exclusively on the Internet. The single has been digitally downloaded
over 300,000 times by website visitors. In addition, the website contains a
special section featuring the artist's selected websites and samples of his
digital art. Bowie fans can communicate with each other and with the artist via
the website's Message Board.
www.stonesworld.com
Stones World is a Rolling Stones website that features an extensive
overview of the band. The website features a comprehensive catalog of the
Rolling Stones' music, comprised of five separate sections: Discography, Down on
the Corner, Mile Stones and Index and a welcome message from Mick Jagger and
Keith Richards. This website incorporates sound samples, live concert clips,
band and concert information, interviews, archival photos, full lyrics and an
interactive poker game. Stones fans can communicate with each other via the
website's Message Board.
www.leonardbernstein.com
The Leonard Bernstein website is the official website celebrating Leonard
Bernstein's life and legacy, developed in conjunction with the Bernstein family
and estate. Drawing primarily on the vast archive of Bernstein materials left to
the Library of Congress, this website presents a multifaceted portrait of
Leonard Bernstein through an extensive collection of rare documents,
photographs, interview excerpts, audio samples and video material. Visitors to
the Leonard Bernstein website enter a virtual rendition of Bernstein's actual
studio and can explore "themes" that offer unique insight into this great
American musician's creative mind. The website offers users the opportunity to
read from a selection of Leonard Bernstein's private letters and peruse his
manuscript scores, working notes, rare photographs, programs and more. Among
some of the website's recent offerings were exhibits featuring West Side Story
(including documentation of its long and complicated genesis), The Young
People's Concerts with the New York Philharmonic (including letters from devoted
fans of all ages whose lives were changed by these ground-breaking educational
programs) and Bernstein's 1943 debut with the New York Philharmonic. Many of the
elements featured on the website have never before been available to the public.
Special Leonard Bernstein recordings and related merchandise are available
exclusively through Music Boulevard.
International Websites. The Company intends to capitalize on the global
nature of the Internet to build an international user base by creating local
language versions of, and localized content for, the Company's websites.
Currently, approximately one-third of the Company's on-line revenues are
generated from sales of CDs, cassettes and related merchandise outside the U.S.
The Company has established a wholly-owned subsidiary in Japan, the world's
largest market for recorded music sales, and has launched Japanese versions of
Music Boulevard (www.musicblvd.com/jp) and Jazz Central Station
(jp.jazzcentralstation.com).
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The Company also offers registration and ordering instructions on Music
Boulevard in English, Japanese, German, French and Spanish.
N2K ENCODED MUSIC
In January 1997, the Company launched its own record label, N2K Encoded
Music, to create, produce, license, acquire and market high-quality recorded
music, which is distributed through the Company's websites as well as through
record stores and other traditional retail and distribution channels. N2K
Encoded Music intends to produce recordings across several music genres,
including rock, pop, jazz, classical and blues. In building and expanding the
N2K Encoded Music record label, the Company will license master recordings from
other record labels, acquire master recordings and publishing catalogs and sign
artists to the record label. Through its websites, the Company intends to
feature and promote individual artists who are signed to the N2K Encoded Music
label. The Company anticipates that in the short-term the majority of N2K
Encoded Music's new recordings will be sold in traditional record stores. The
Company expects that many of its releases will be in the Enhanced CD format,
which utilizes advanced recording techniques while incorporating multimedia
information, including QuickTime video clips, interviews, text and an integrated
link to the Company's on-line websites. The Company believes that the E-CD
format will create more visibility for N2K Encoded Music's recording artists as
well as increased traffic to the Company's websites. The Company prices its
E-CDs on a comparable basis with other music CDs.
Phil Ramone, a noted independent record producer, is the President of N2K
Encoded Music. In such capacity, Mr. Ramone is responsible for managing,
conducting and developing the business of N2K Encoded Music, including signing
recording artists to perform for the N2K Encoded Music label and serving as
Producer or Executive Producer for one or more of its albums. Mr. Ramone has
produced albums for a variety of well-known recording artists, including Billy
Joel, Paul Simon, Chicago, Barbra Streisand, Paul McCartney, Elton John and
Frank Sinatra, among many others. He has also produced soundtracks or albums for
the following films: A Star is Born, Flashdance, Ghostbusters, On Her Majesty's
Secret Service, Midnight Cowboy, Reds, Shampoo, Stand By Me, White Nights and
Yentl, as well as sixteen Broadway plays including Chicago, A Funny Thing
Happened on the Way to the Forum, Hair, Passion, The Wiz, Starlight Express and
Promises, Promises. In addition to numerous platinum and gold albums and
singles, Mr. Ramone has received eight Grammy Awards and many other music
awards. See "Management -- Employment Agreements."
N2K Encoded Music's 12 initial releases feature three compilation
recordings of outstanding jazz musicians, one classical recording from a new
pianist, five jazz recordings and the label's initial two rock/pop recordings.
As part of the Company's strategy to establish the N2K brand name, many of N2K
Encoded Music's releases are currently planned to include comprehensive media
campaigns tied to promotional events and may be promoted on-line, in magazines
and on radio, with corresponding related merchandise offerings. Recent releases
include Dave Grusin's West Side Story, featuring Gloria Estefan and Jon Secada,
and T.S. Monk's Monk on Monk, which was named the Gavin Jazz chart-topper for
the week ending September 19, 1997.
On October 16, 1996, the Company and Sony's RED Distribution entered into a
letter agreement providing that Sony's RED Distribution will be the exclusive
distribution agent in the United States for the N2K Encoded Music label. The
agreement has a three-year term which expires on October 15, 1999 and provides
for payment to Sony's RED Distribution of a distribution fee equal to a
graduated percentage of net sales. The agreement also provides that the Company
will deliver at least 12 previously unreleased, newly compiled or recorded
studio albums during each year of the term of the agreement.
N2K Encoded Music promotes its image as a multimedia, Internet-oriented
label. The Company uses its websites to promote the N2K Encoded Music label and
intends to create a website or featured artist area within an existing N2K
website for each of its recording artists. N2K Encoded Music makes use of E-CDs,
which include multimedia content describing the featured artists and their
recordings. Each E-CD will contain a linking mechanism to one or more of N2K's
websites, allowing for on-line connections that can enhance a user's experience
of the label's recordings.
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For each artist recording, N2K Encoded Music creates a tailored marketing
plan. In conjunction with an artist's release, N2K Encoded Music employs
traditional marketing efforts, including the coordination of radio
advertisements, distribution of CDs to radio syndicates to encourage air-time
play, distribution of point-of-purchase displays to retail locations and
organization of live performances and appearances for the artist. The Company
also uses its websites to promote artists' releases. Users are directed to an
artist's website or featured area for editorial content, sound and video
samples, digital downloading of singles and samples and artist cybercasts. The
Company also creates banner ads on its websites announcing an artist's release
and intends to utilize its strategic partners (including MTV and VH1) for
comarketing. The Company believes that these promotional tactics differentiate
N2K Encoded Music from other labels.
STRATEGIC ALLIANCES
The Company recently formed a strategic alliance with AOL pursuant to an
interactive marketing agreement, which provides, among other things, for N2K to
be featured as the exclusive on-line music retailer within AOL's MusicSpace
channel, receive an anchor tenant position on AOL's Shopping channel,
participate in a variety of banner advertising opportunities and be assigned
specific keywords within the AOL service. Similarly, the Company has entered
into the Excite Contract, which provides for N2K to be the exclusive retail
music store sponsor of the www.excite.com website, to provide certain
music-related content to the www.excite.com website, to create a co-branded area
of Music Boulevard and to participate in joint promotions to customers of this
co-branded area. In addition, the Company has established the MTV/VH1 Alliance,
an exclusive strategic alliance under which MTV Networks provides Music
Boulevard with content and presents Music Boulevard as the exclusive partner for
retail sales of CDs, cassettes and related merchandise for each of the MTV
(www.mtv.com) and VH1 (www.vh1.com) websites, both on-air and on-line. N2K has
established strategic agreements as most prominently featured music content
provider and on-line music retailer for WebTV, as most prominently featured
music content provider and exclusive music retailing anchor tenant for @Home, as
exclusive on-line product fulfillment source for the Virgin Records website and,
subject to a memorandum of understanding, to become the advertising music
sponsor and preferred on-line music retailer for the Music Zone channel on the
PointCast College Network.
Some of the key aspects of the Company's strategic alliances include the
following:
- Pursuant to the AOL Contract, N2K and AOL have agreed to cooperate in the
sale of advertising on designated websites. The AOL Contract has an
initial term of three years, expiring on August 31, 2000, and is
renewable at the option of AOL for additional one-year terms. See
"Management's Discussion and Analysis of Financial Condition and Results
of Operations."
- The Excite Contract provides for the Company to pay Excite an initiation
fee, an annual exclusivity fee, as well as an annual sponsorship fee for
on-going programming, links, placements, advertisements and promotions.
Under the terms of the Excite Contract, the Company will also pay Excite
a specified share of gross margins realized by the Company on
transactions, advertising, sponsorship, promotions and other revenues
generated during the term of the agreement on Music Boulevard as a result
of users referred from the www.excite.com website. The Excite Contract
has an initial term which expires on the second anniversary of the
commencement date, which is anticipated to be on or about October 15,
1997. Pursuant to the terms of the agreement, Excite is obligated to
offer the Company the right of first refusal to negotiate with Excite for
renewal of the Excite Contract. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
- Under the terms of the MTV/VH1 Alliance, the Company and MTV Networks
will share revenues from MTV/VH1 advertising on certain Music Boulevard
pages and will share in net profits on any sales to customers coming from
links to the MTV/VH1 section of Music Boulevard. The Company is committed
to purchase a fixed sum of advertising on-line in the first year of the
contract, and the parties will negotiate in good faith for an advertising
commitment in successive years. The MTV/VH1 Alliance has a two-year term
ending in March 1999.
- The Company's agreement with WebTV involves the sharing of revenue
generated as a result of traffic on the Company's pages within the WebTV
Network, including net revenues and royalties from advertising, premium
services (including, but not limited to, periodic pay-per-view or
pay-per-play programs) and transactions (including, but not limited to,
revenues from merchandising prod-
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ucts/services, other promotions and follow-on transactions). The WebTV
agreement expires in September 1998.
- The agreement between the Company and @Home requires the Company to share
net revenues with @Home from the sale of both music products and
non-music products such as clothing, videotapes and computer accessories.
Any net fees or net advertising revenues generated from any of the five
exclusive events to be created annually by the Company for @Home
customers only will be shared. The agreement with @Home is for an initial
term of one year, expiring June 6, 1998, and provides for an automatic
renewal for an additional one-year term.
- The Company's agreement with Virgin Records involves the payment by the
Company to Virgin Records of a royalty on sales of all products sold by
the Company to customers who have linked from the Virgin Records website
prior to making a purchase. The agreement with Virgin Records has an
initial term of one year, expiring on October 27, 1997, and is
automatically renewable for an indefinite period thereafter.
- Under the terms of the Company's memorandum of understanding with
PointCast, the Company would pay an annual sponsorship fee to PointCast
and would also pay PointCast a royalty on the sales of all products sold
by the Company to designated PointCast users.
- Under the terms of the Company's website development agreement with WBGO,
the Company will receive an administration fee based on a percent of
gross advertising revenues, and will share net advertising revenues with
WBGO. The Company is required to incur certain non-material development
and maintenance expenses for the related website during the contract
term. The agreement expires in September 1999, with automatic one-year
renewals.
- Pursuant to the Company's website development agreement with Interstate
Broadcasting Company, Inc., the licensee of WQXR, the Company is required
to pay for all design and production costs related to the development and
maintenance of the WQXR website. The WQXR agreement provides for an
initial contract term which extends one year from the website's launch
date of November 14, 1996, with one automatic one-year renewal.
SALES AND MARKETING
The Company's overall sales and marketing strategy is designed to
effectively merchandise music and related products sold through Music Boulevard
by building brand awareness, attracting repeat users and driving traffic to
N2K's websites. The Company utilizes a combination of external advertising and
promotion, internal promotion and product merchandising and on-line partnering
programs, including the RAM program, to accomplish these objectives. The Company
currently employs approximately 46 people in its sales and marketing department.
Website Promotion
The Company utilizes strategic alliances to increase brand awareness and
drive traffic to Music Boulevard. In addition, the RAM program enables
independent websites to offer their users the ability to purchase CDs, cassettes
and music-related merchandise through a link to Music Boulevard, earning a
commission on items sold through their website.
The Company also employs a combination of on-line and off-line advertising
and promotion campaigns to stimulate traffic to its websites. The Company
purchases advertisements on high-traffic websites such as Netscape and MSN, on
search engines and directories such as Infoseek, Lycos, Excite and Yahoo!, and
on selected destination websites such as CNET, PointCast and E!Online, which
have targeted demographics similar to those of N2K's users. Generally, these
advertisements are in the form of interactive banners. The Company leases
appropriate "keywords" on search engines. The Company establishes hyperlinks
between N2K websites and artist and fan club websites, posts in music-related
newsgroups and secures reviews and event notices in appropriate directory
websites. The Company also promotes its websites through traditional
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off-line media, including radio, print and television. The Company has a
proactive public relations program and participates in trade shows, conferences
and speaking engagements.
The Company also promotes its Music Boulevard website through hyperlinks
from record label websites and through its relationship with SoundScan. The
Company believes that hyperlinks between Music Boulevard and record label
websites are attractive to record companies who do not sell to consumers
directly on their own websites because of conflicts with retailers. In its
relationship with SoundScan, the Company reports its weekly recorded music
transactions taking place on its Music Boulevard website. SoundScan uses this
information, along with data from the vast majority of music retail locations
nationwide, to tally U.S. music sales. This data is the exclusive criteria for
compiling the Billboard charts, and qualifies the N2K network of websites as a
potential advertising medium for record labels.
Merchandising and Customer Programs
A key part of the Company's merchandising and customer acquisition and
retention strategies is its ability to link its music genre, artist and
title-specific content, such as record reviews, artist profiles and special
promotions, to the music ordering section of Music Boulevard and stimulate and
facilitate consumer purchases of CDs, cassettes and related merchandise.
Pricing. The Company adjusts pricing strategies and tactics as necessary to
maintain competitiveness. The Company's strategy is to price aggressively all
recent releases and popular titles. The Company seeks to encourage the purchase
of multiple titles by capping shipping costs and guaranteeing two-day delivery
within the U.S. for purchases of five titles or more.
In-Store Merchandising. The Company utilizes numerous merchandising
features to encourage and enhance a consumer's buying experience. The Company
believes that the user's ability to listen to audio samples from a selection of
approximately 340,000 songs is a significant incentive to purchase. Prior to
making a purchase on Music Boulevard, a consumer can also access a variety of
information about an artist, music group, album or music genre.
The Company regularly creates artist and sales programs on its music
websites to maximize visibility and sellthrough. The Company contracts with
Billboard to display the top selling music charts on the Music Boulevard
website, which, the Company believes, provides the consumer with an effective
resource for locating samples and sale pricing. The Company has recently enabled
its customers to purchase upcoming popular album releases not yet appearing in
conventional retail stores. These titles are delivered to Music Boulevard
customers on their respective titles' release dates. The Company promotes these
sales events via ad banners both on N2K websites and others' websites.
Exclusive Product Distribution. Through its relationships with music
artists and their business representatives, N2K has made arrangements with
several well known artists to sell selected recordings exclusively through the
Music Boulevard distribution channel. In addition to generating a higher profit
margin, these exclusive releases are not available through any other music
retailers, giving Music Boulevard a significant competitive advantage. The
Company currently has exclusive artist distribution relationships with The
Tragically Hip and Mayfield, featuring Curt Smith.
Push Marketing. The Company has created virtual listening posts, which
consist of CD covers prominently displayed with audio samples in multiple
formats, competitive sale pricing and "Order Now" buttons on the high-traffic
front door to Music Boulevard and in the individual music genre department
storefronts. The Company believes that record labels find the virtual listening
posts attractive for promoting new CD releases.
Customer Acquisition and Conversion. The Company collects user information
through a variety of programs which require registration on both Music Boulevard
and the genre websites and enable the Company to collect demographic data which
can be used to market directly to the Company's customer base. Such programs
include sweepstakes, contests, coupon giveaways, free shipping and other sales
promotions to generate new business.
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Customer Retention. The Company has implemented a Frequent Buyers Club
membership program, allowing members to receive a free CD after a certain number
of purchases. The Company believes that a major benefit of this club is the
ability to collect user demographics and attempt to capture all or a greater
portion of a member's on-line music purchases. The Company uses an existing
technology, known as "cookies", to keep track of basic user actions and sessions
on the Music Boulevard website. The Music Boulevard cookie is able to restore a
customer's shopping basket and on-line session, even if the customer leaves the
website and returns later. The Company believes the use of this technology
facilitates and encourages customers to spontaneously visit N2K's websites.
One-To-One Marketing. The Company believes that database marketing enhances
its ability to know its customers' music and lifestyle preferences which
provides its customers with a more personal and enhanced experience. After
collecting consumer data, the Company uses e-mail to send customers compelling
messages of discount coupons, new releases and special sales, among other
things, depending on the customer's previous purchasing and browsing behavior.
ADVERTISING SALES AND SPONSORSHIPS
The Company has positioned its websites as an interconnected on-line music
network, offering advertisers and marketers the ability to reach highly targeted
communities of music fans worldwide. Advertisers on the Company's websites have
included MCA Records, Microsoft Corp. and Sony Online Ventures, among others.
Advertisers are offered a variety of advertising options which can be combined
in different percentages to reach the desired advertising mix. The Company has
implemented NetGravity's software package for advertising space management,
tracking of page impressions and reporting to advertisers. The Company also
tracks website traffic and activity through NetCount, a third-party website
traffic management firm. In order to foster advertiser confidence in reported
audience measurements, the Company has recently retained a third-party auditor,
BPA International, to provide independent verification of the traffic on its
websites.
The Company utilizes various advertising models to allow for a high degree
of flexibility in responding to individual advertisers' needs. The Company has
implemented a graduated cost per thousand ("CPM") rate structure, charging a
higher CPM for its more highly targeted audiences. The Company intends to
reserve a portion of its available advertising inventory in order to promote the
sale of merchandise and to feature content and events on its websites.
The forms of advertising currently offered on the Company's websites
include banners, virtual endcaps, featured content presentations and integrated
page icons. Advertisements are displayed on home pages, store departments,
search results, artist discographies and on sale and new release listings, among
other high traffic Music Boulevard locations. These advertising spaces can be
dynamically served through the use of NetGravity software to rotate, change or
target existing messages or increase the number of advertisements delivered in a
given space.
The Company also offers advertisers and marketers alternative forms of
website advertising. The Company's advertising model includes sponsorship
packages to encourage users to associate specific content with an identified
sponsor. Sponsorship fees are fixed according to time-based arrangements.
The Company utilizes a combination of internal direct sales personnel and
external agencies to solicit and service advertisers on the Company's websites.
In order to maximize revenue from its available banner inventory, the Company
has also allocated a percentage of banner inventory in Music Boulevard to the
SOFTBANK Network, which conducts advertising sales for a group of Internet
websites.
ORDERING, FULFILLMENT AND CUSTOMER SERVICE
The Company has designed its ordering system to be easy-to-use and simple
to understand. In order to maintain high customer satisfaction and price
competitiveness, the Company places an emphasis on reliable product fulfillment.
At any time during a visit to Music Boulevard, a customer can click on the
"order now" button to place an item in his or her personal shopping basket. The
customer can continue to shop the website, adding chosen items. When the
customer is ready to submit an order, he or she simply returns to the order
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page, chooses a shipping method (U.S. Mail, 2-Day Federal Express or Federal
Express Overnight to customers from the U.S. and air mail and DHL Express to
non-U.S. customers) and a payment method. If not previously registered with
Music Boulevard, a customer is prompted to register at the time of purchase and
to enter his or her name, address and password. The customer then has the option
of securely submitting credit card information on-line or calling or faxing the
information to the Music Boulevard Customer Service Department. Music Boulevard
also provides the option of payment by check or money order. By assigning a
password to every buyer, the Music Boulevard ordering process facilitates repeat
purchases by eliminating the need to re-submit credit card and shipping
information for subsequent orders. The Company keeps customers informed
regarding the status of their orders by sending e-mail messages, including
notification of the receipt and shipment of each order and whether an item is
back-ordered.
The Company primarily uses Valley, a third-party fulfillment operation, to
ship CDs and cassettes. All inventory is owned and stored by Valley. Twice
daily, the Company batches customer orders and electronically transmits them to
Valley. The Company uses a secure network through which it transmits data to
Valley, thereby helping to ensure customer security as well as data integrity.
Valley picks, packs and ships customer orders in Music Boulevard boxes, and
charges the Company negotiated rates for merchandise, shipping and handling.
Customer billing is performed by the Company, which utilizes a third-party
credit card processor, First USA, Inc. If a customer's selection is not in
stock, Music Boulevard sends an e-mail to notify the customer of the backlogged
items, which are then delivered at a nominal additional charge. To date, the
Company has experienced a return rate of approximately 1% of all CDs and
cassettes sold.
The Company believes that high levels of customer service and support are
critical to the value of its services and to retaining and expanding its user
base. Music Boulevard Customer Service representatives are available from 10:00
AM to 10:00 PM EST on weekdays, and 10:00 AM to 6:00 PM EST on weekends for
customer service via e-mail, fax and a toll free telephone number,
1-800-99MUSIC. Customer service is assisted by automated e-mail notifications
which greatly assist in keeping customers up-to-date on the status of their
orders. Company representatives handle general questions about the service as
well as register customers' credit card information over the phone. The Company
believes that these representatives are a valuable source of feedback regarding
user satisfaction, which the Company uses to improve its services. Customers of
the Company are not charged for service and support.
TECHNOLOGY
Over the past twelve years, the Company has developed sophisticated
information services delivery and user tracking systems by integrating
third-party systems, when available, and by developing proprietary tools. The
Company's integrated systems and tools provide functionality in seven primary
areas: (i) multimedia asset management, (ii) website development, (iii) audio
encoding and on-line delivery, (iv) fault tolerance, (v) security, (vi)
scalability and (vii) advanced technologies. At the same time, the systems and
tools provide scalability to maintain performance as the number of users of the
system and the amount of data processed increases and to add new functionality
as new needs and technologies emerge.
Multimedia Asset Management. Central to the Company's system is a database
management system necessary to index, retrieve and manipulate the Company's
continuously growing multimedia content. The database management system allows
for rapid searching, sorting, viewing and distribution of, among other things,
audio samples, video clips, cover art and photos. The Company has chosen Oracle
7.3 as its database management system. Based on the quality and creativity of
the Company's interfaces, Oracle Corporation selected the Company as one of its
featured developers for Oracle Open World, its infomercial and international
product roadshow which was introduced in 1996.
Website Development. The catalog of CDs and cassettes, stored in an Oracle
database, forms the core of the music entertainment content collection and
contains links to related content (e.g., audio samples, images, editorial
content and charts). Each individual page of the Company's Music Boulevard
website is built dynamically from these elements using a proprietary web page
template technology. This template technology results in the separation of the
page look and feel from the individual data elements, which eliminates software
updates for page layout changes and greatly reduces the programming required to
maintain a growing amount
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of content. Templates also enable websites with different formats to seamlessly
integrate Music Boulevard store elements such as "search" and "discography"
pages. The Company has developed software specifically to enable its editorial
and creative staff to develop content tightly linked into this environment. As a
result, the Company can efficiently import editorial content from third-party
sources such as magazines. For high-volume, non-secure Web transactions the
Company uses the Apache web server, a modular, high-performance server.
Audio Encoding and Delivery. The Company uses a variety of audio
compression technologies for its audio samples and downloads, tailoring them to
specific applications. In light of current user patterns, the Company uses the
popular Progressive Networks' RealAudio format for delivering realtime streaming
30-second audio previews and feature-length web broadcasts. The Liquid Audio
streaming format, which employs high quality DOLBY Digital compression, is also
used for realtime preview samples, and primarily for those tracks which are
available for digital distribution. Thirty-second downloadable preview samples
are also available in the industry standard MPEG format.
Each of the Company's audio formats has certain minimum system requirements
for hardware and software in order for a user to listen to the audio samples on
Music Boulevard. A user must have a multimedia-equipped personal computer and
must download software in each format. For example, the minimum system PC
requirements for a user desiring to play an audio sample in the MPEG audio
format are an MPEG Audio Player and a 386/40mhz CPU on a Windows 3.1 operating
system with eight megabytes of random access memory.
The Company is also actively pursuing new and emerging audio compression
technologies for the digital distribution of music. Full-length downloadable
master recordings, available via the Company's e _ mod system, are available as
DOLBY Digital downloads suitable for transfer to standard audio CDs. e _ mod is
the Company's delivery system developed using Music Boulevard's secure
transaction engine and music database in tandem with Liquid Audio's encoding and
digital distribution systems. The e _ mod system makes it possible to deliver
high quality audio on-line to consumers.
Fault Tolerance. The Company has operated a 24-hour a day, seven-day a week
computing facility in the on-line information industry for over ten years.
Drawing on this experience, the Company's website architecture uses redundant
servers and RAID (redundant array of independent drives) storage systems so that
downtime due to system outages or maintenance needs is minimized. The Company is
deploying an architecture in which all components of the on-line systems are
redundant, allowing continuous operation even in the event of occasional
component failures. The Company runs its Oracle database on the Sun Enterprise
3000 server because of its fault tolerant characteristics including redundant,
hotswappable components.
Security. The Company employs a combination of proprietary and commercially
available firewalls to keep its Internet connections secure. The Company uses
the Apache SSL Server for secure electronic transactions over the Internet. It
uses proprietary EDI (electronic data interchange) interfaces and private
networks to ensure the security of customer credit card transactions and other
order information shared with the Company's fulfillment partner and third party
billing company. The Company plans to implement standardized electronic
transaction mechanisms (such as Secure Electronic Transaction technology, the
standard being developed by major credit card companies) as they become
commercially available.
Scalability. The structure of the Company's hardware and software is built
upon a distributed transaction processing model which allows software to be
distributed among multiple parallel servers. This architecture allows the
Company to scale by either adding new servers or increasing the capacity of
existing servers. The current system is designed to easily scale from 2,000
simultaneous users currently to at least 10,000 users, while maintaining both
user performance and cost per transaction. In the rapidly changing Internet
environment, the ability to update the application system to stay current with
new technologies is important. The system's template technology and modular
database design allow the addition or replacement of server-based applications
such as multimedia formats and delivery systems, additional EDI-based
fulfillment partners and search and retrieval engines. This architecture also
enables low-cost, rapid deployment of additional websites that integrate with
the shopping and genre websites.
Advanced Technologies. The Company continually evaluates emerging
technologies, new developments in web technologies and CD/DVD (digital video
disk) multimedia authoring. Technologies with which the
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Company is currently working include Sun's Java language, electronic payment and
transaction systems in the service of an international multiple fulfillment
distribution system, Real Time Streaming Protocol (RTSP) for the orderly
delivery of multimedia content over the Internet and a collaborative filtering
engine to provide automated intelligent recommendation services.
COMPETITION
The market for Internet content providers is highly competitive and rapidly
changing. Since the Internet's commercialization in the early 1990's, the number
of websites on the Internet competing for consumers' attention and spending has
proliferated. With no substantial barriers to entry, the Company expects that
competition will continue to intensify. Currently, there are more than one
hundred music retailing websites on the Internet. With respect to competing for
consumers' attention, in addition to intense competition from Internet content
providers, the Company also faces competition from traditional media such as
radio, television and print. N2K Encoded Music competes with the major, and
other independent, record labels. With respect to recorded music sales, the
Company competes with numerous Internet retailers, including traditional music
retail chains, record labels and independents with websites on the Internet. In
addition, the Company competes with traditional retail stores, including chains
and megastores, mass merchandisers, consumer electronics stores and music clubs.
The Company believes that the primary competitive factors in providing
music entertainment products and services via the Internet are name recognition,
variety of value-added services, ease of use, price, quality of service,
availability of customer support, reliability, technical expertise and
experience. The Company's success in this market will depend heavily upon its
ability to provide high quality, entertaining content, along with cutting-edge
technology and value-added Internet services. Other factors that will affect the
Company's success include the Company's continued ability to attract experienced
marketing, sales and management talent. In addition, the competition for
advertising revenues, both on Internet websites and in more traditional media,
is intense. The Company believes that its high-quality music-related content,
offered free of charge, is an important differentiator from other music-related
and music-merchandising websites.
Many of the Company's current and potential competitors in the Internet and
music entertainment businesses have longer operating histories, significantly
greater financial, technical and marketing resources, greater name recognition
and larger existing customer bases than the Company. 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 the Company. There can be
no assurance that the Company will be able to compete successfully against
current or future competitors.
DISCONTINUED OPERATIONS
The Company began offering on-line information services in 1984. The
Company's principal service in this area was EasyNet, a premium-priced reference
service licensed to on-line content distributors, primarily CompuServe (under
the brand name IQUEST) and NIFTY (under the brand name INFOCUE). This service
offered business credit data, research reports, company fact sheets and
newsletters, as well as general reference information such as newspapers and
magazines, from more than 1,000 sources. Historically, the Company generated
information services revenues through transactional charges to its distributors
for their customers' use of the services.
The on-line information services business has become more competitive and
price sensitive as general reference content, such as newspapers and magazines,
has become available over the Internet at minimal or no cost to the user.
Recognizing this trend, in 1994, the Company expanded its business strategy to
include music entertainment and began to develop Music Boulevard, which was
launched in 1995, in order to diversify its business and customer base. The
Company also merged New York N2K, active in Internet design, into the Company in
February 1996 in order to further strengthen its efforts in the music
entertainment business.
Although the Company's on-line information services business accounted for
approximately 99.1% of its revenues in 1995, and 82.6% of its revenue in 1996,
the Company experienced a decline in information services revenues in seven of
the last eight fiscal quarters. Recognizing the changing competitive
environment, in April 1997, the Board of Directors approved a formal plan of
disposal for its on-line information services
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business and in August 1997, the Company sold substantially all of the net
assets of this business. In connection with the sale, the Company entered into a
services agreement under which it will provide certain services and support
personnel to the purchaser through September 1999 for a fixed monthly fee.
The on-line information services business has been accounted for as a
discontinued operation. Accordingly, the operating results and assets and
liabilities of this business have been reflected separately from continuing
operations. The sale of the on-line information services business in August 1997
resulted in a gain which the Company presently estimates will be approximately
$1.5 million, and which will be recorded in the period ended September 30, 1997.
See Note 3 of Notes to Consolidated Financial Statements.
EMPLOYEES
As of September 15, 1997, the Company had 173 full-time employees,
including 102 in operations and development, 46 in sales and marketing and 25 in
general and administrative. As of September 15, 1997, the Company also had 19
part-time employees, primarily focused on customer service and five consultants,
primarily focused on the Company's music entertainment business. The Company's
future success depends, in significant part, upon the continued service of its
key technical, editorial, sales, product development and senior management
personnel and on its ability to attract and retain highly qualified employees.
There is no assurance that the Company will continue to attract and retain
high-caliber employees, as competition for such personnel is intense. The
Company's employees are not represented by any collective bargaining
organization. The Company has never experienced a work stoppage and considers
relations with its employees to be good.
TRADEMARKS AND PATENTS
Music Boulevard(R) (and its related logo) is a registered service mark of
the Company. The Company has also applied for trademark and/or service mark
registrations for Jazz Central Station(TM) (and its related logo), Music
Blvd.(TM) , N2K Encoded(TM) and Rocktropolis(TM). In addition, the Company is
using allstar(TM), Classical Insites(TM), e_mod(TM), N2K(TM), Need To Know(TM)
and RAM(TM) as trademarks and/or service marks.
FACILITIES
The Company's corporate headquarters are located in the New York
Information Technology Center in New York, New York. The Company leases its
facilities and certain other equipment under operating and capital lease
agreements. The Company leases approximately 40,000 square feet of office space
at these facilities. The term of the lease expires on May 31, 2001. These
facilities offer advanced technology amenities including state-of-the-art voice,
video and data transmission and advanced telecom and data security. The Company
leases an additional 21,400 square foot facility in Wayne, Pennsylvania which
houses the Company's main computer operations. The term of the lease expires on
August 31, 2001. There can be no assurance that a system failure at this
location would not adversely affect the performance of the Company's services.
The Company leases approximately 2,000 square feet of office space in Los
Angeles, California. The Company believes that its existing facilities are
adequate for its current requirements and that additional space can be obtained
to meet its requirements for the foreseeable future.
LITIGATION
The Company and 17 other entities have been named as defendants in a civil
action captioned Interactive Gift Express v. CompuServe, Inc. et al., which is
pending in the U.S. District Court, Southern District of New York, Docket 95 CV
6871 (BSJ). The plaintiff in this action alleges infringement of certain
intellectual property rights, and seeks treble damages and costs in an
unspecified amount, as well as other declaratory and injunctive relief. The
Company believes that the claims against it are without merit and intends to
vigorously defend against them. The Company believes that this lawsuit, even if
adversely determined, will not have a material adverse effect on the Company's
business, financial condition or results of operations.
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MANAGEMENT
OFFICERS AND DIRECTORS
The following table sets forth the names, ages and positions of the
Company's executive officers and members of the Board of Directors as of the
date of this Prospectus:
<TABLE>
<CAPTION>
NAME AGE POSITION WITH COMPANY
- ------------------------------ --- -----------------------------------------------
<S> <C> <C>
Lawrence L. Rosen(1).......... 57 Chairman of the Board of Directors and Chief
Executive Officer
Jonathan V. Diamond........... 38 Vice Chairman and Director
Robert David Grusin........... 63 Vice Chairman and Director
James E. Coane................ 57 President, Chief Operating Officer and Director
Philip Ramone................. 58 President, N2K Encoded Music
Bruce Johnson................. 47 Vice President, Secretary, Treasurer, Chief
Financial Officer and Director
Jerold Rosen.................. 29 Senior Vice President and General Manager --
On-line Entertainment
Robert C. Harris, Jr.(1)(2)... 51 Director
Susanne Harrison(1)(2)........ 52 Director
</TABLE>
- ---------------
(1) A member of the Compensation Committee.
(2) A member of the Audit Committee.
Prior to the Merger, certain of the individuals listed below served as
executive officers and directors of New York N2K, while others served as
executive officers and directors of Telebase.
LAWRENCE L. ROSEN has served as Chairman of the Board of Directors since
the Merger. Mr. Rosen has also served as Chief Executive Officer of the Company
since the Merger. From June 1995 until the Merger, Mr. Rosen was Co-Chairman of
New York N2K. Previously, Mr. Rosen and Mr. Grusin formed Grusin/Rosen
Productions in 1976 to produce artists' recordings for major record labels.
Between 1978 and 1982, Mr. Rosen served as producer, recording engineer and as
President of Arista/GRP Records under a global label distribution agreement with
Arista Records. In 1982, Mr. Rosen co-founded GRP as an independent label with
Mr. Grusin, and it became one of the first record labels to digitally produce
music titles from concept through finished recording in CD format, with Mr.
Rosen as its Co-President. In 1990, GRP was acquired by MCA Inc. and Mr. Rosen
served as President and Chief Executive Officer of GRP, which was operated as a
division of the MCA Music Entertainment Group, until 1995. Mr. Rosen has served
as a member of the Board of Governors of the New York Chapter of the National
Association of Recording Arts and Sciences, is a member of the Grammy Screening
Committee and serves on the Board of the National Foundation for the Advancement
of the Arts. Mr. Rosen attended the Manhattan School of Music. In 1997, Mr.
Rosen was named Entrepreneur of the Year by Ernst & Young LLP in the
Entertainment and New Media category.
JONATHAN V. DIAMOND has served as Vice Chairman and a director of the
Company since the Merger. From June 1995 to the Merger, Mr. Diamond served as
Co-Chairman of New York N2K. Mr. Diamond was an investor in and director of
Telebase from September 1994 to the Merger. Mr. Diamond founded and was
Chairman, from 1991 to 1995, of the J. Diamond Group, a holding company which
acquired and launched six media and entertainment companies in the U.S. and the
U.K., including Vermilion Films, which produced the feature film, Let Him Have
It. From 1984 to 1990, Mr. Diamond served as a director and Executive Vice
President of GRP, where he was responsible for its business and financial
strategy. Prior to his association with GRP, Mr. Diamond founded Diamond
Investments, his own investment firm, which acquired or launched companies in
the media, entertainment and broadcasting areas. Mr. Diamond currently serves on
the Board of
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Directors of The Alliance for Downtown New York and The Lower Manhattan Cultural
Council, and is a member of the Corporate Council of the Whitney Museum and
co-founder of the Whitney Museum's New Media Committee. Mr. Diamond serves as
the Chairman of Opus 118, an inner city music education program in Harlem. Mr.
Diamond holds a B.A. in Economics and Music from the Honors College of the
University of Michigan and a M.B.A. from Columbia University's Graduate School
of Business.
ROBERT DAVID GRUSIN has served as Vice Chairman and a director of the
Company since the Merger. From June 1995 to the Merger, Mr. Grusin served as a
director of New York N2K. In 1976, Mr. Grusin and Mr. Rosen formed Grusin/Rosen
Productions to produce artist recordings for major record labels, which led to a
production agreement with Arista in 1978. In 1982, Mr. Grusin and Mr. Rosen
founded GRP as an independent record company with Mr. Grusin as Co-President. In
1990, GRP was acquired by MCA Inc. and Mr. Grusin served as Executive Vice
President of GRP, which became a division of the MCA Music Entertainment Group,
until 1995. Mr. Grusin, a composer, producer and musician, is the recipient of
ten Grammy Awards and one Academy Award. Mr. Grusin serves on the College of
Music Advisory Board at the University of Colorado, and has received honorary
doctorates from both Berkelee College of Music and the University of Colorado.
JAMES E. COANE has served as President, Chief Operating Officer and a
director of the Company since the Merger. From April 1987 to the Merger, Mr.
Coane served as President and Chief Executive Officer of the Company and as
Chairman of the Board of Directors from 1993 until the Merger. Previously, from
1984 to 1987, Mr. Coane served as President and Chief Operating Officer of
Morris Decision Systems, Inc., a marketer and supplier of microcomputers and
related peripherals. Mr. Coane serves on the Board of Directors of the
Information Industry Association, the Ben Franklin Technology Council and The
Council of Growing Companies. Mr. Coane is a Phi Beta Kappa graduate of Duke
University with an A.B. in Economics and Business Administration.
PHILIP RAMONE has served as President, N2K Encoded Music, since October
1996. From 1973 to 1996, Mr. Ramone was President of Phil Ramone, Inc., a
company he formed to produce artist recordings for major record labels. Mr.
Ramone has received eight grammy awards and produced numerous platinum and gold
albums and singles. Mr. Ramone attended the Julliard School of Music and has
received an honorary doctorate from Berkelee College of Music.
BRUCE JOHNSON has served as Secretary, Treasurer, Vice President and Chief
Financial Officer of the Company since 1988. Mr. Johnson has served as a
director since January 1997. Mr. Johnson has sixteen years of previous
experience in public accounting and financial management with positions at
Arthur Andersen & Co., Marriott Corp. and SEI Corp. Mr. Johnson holds a degree
in Accounting from St. Joseph's University and a M.B.A. in Finance from Drexel
University and is a Certified Public Accountant.
JEROLD ROSEN has served as Senior Vice President and General
Manager--On-line Entertainment since the Merger. From June 1995 to the Merger,
Mr. Rosen served as President of New York N2K. From 1988 to 1992, Mr. Rosen
served in various capacities at GRP, including serving as head of its music
licensing department. Mr. Rosen holds a B.A. in Political Economics from Tulane
University and a M.B.A. in Finance from Rutgers University. Jerold Rosen is the
son of Lawrence L. Rosen.
ROBERT C. HARRIS, JR. has served as a director of the Company since
February 1996. Mr. Harris is a co-founder and currently serves as a Managing
Director of Unterberg Harris. From 1984 to 1989, he was a General Partner,
Managing Director and Director of Alex. Brown & Sons Incorporated. From 1979 to
1984, he was a Partner of Robertson Stephens & Company. Mr. Harris is a Director
of Mobile Data Solutions Inc. and a number of private companies. Mr. Harris is a
graduate of the University of California at Berkeley, where he received B.S. and
M.B.A. degrees.
SUSANNE HARRISON has served as a director of the Company since 1993. Ms.
Harrison has been General Partner of the high technology venture capital funds,
Poly Ventures, Limited Partnership and Poly Ventures II, Limited Partnership,
since 1989 and 1991, respectively. Prior to joining Poly Ventures, Ms. Harrison
was Vice President for Technology Investment Banking at Steinberg and Lyman Inc.
from 1983 to 1987. From 1977 to 1982, she held various management positions at
Symbol Technologies, Inc., a supplier of bar-code
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laser scanners and portable terminals. Ms. Harrison serves as a director of
several privately held high technology portfolio companies, as well as a
Director of the Long Island Venture Group. Ms. Harrison holds a B.A. from Hunter
College, a M.A. from the State University of New York and a M.B.A. from Adelphi
University.
Lawrence L. Rosen, Jonathan V. Diamond, Robert David Grusin, James E.
Coane, Robert C. Harris, Jr. and Susanne Harrison were elected to the Board of
Directors pursuant to a stockholders agreement (the "Stockholders' Agreement")
dated as of February 13, 1996, among Lawrence L. Rosen, Jonathan V. Diamond,
Robert David Grusin, James E. Coane, Charles C. Wilson III, Poly Ventures II,
Limited Partnership, AT&T Corporation, Gary Lauder and Unterberg Harris
Interactive Media Limited Partnership, C.V., in which each party agreed to vote
its shares of capital stock to elect six directors as specified therein.
Simultaneously with the closing of this offering, the Stockholders' Agreement
will terminate in accordance with its terms. See "Certain
Transactions -- Stockholders' Agreement."
Each director holds office until the next annual meeting of stockholders or
until a successor has been duly elected and qualifies, or until his or her
earlier death, resignation or removal. The Company's executive officers are
appointed annually by the Board of Directors and serve at the discretion of the
Board of Directors.
LIMITATIONS ON DIRECTORS' LIABILITY
Liability Limitation. The Company's Certificate of Incorporation provides
that a director of the Company shall not be personally liable to it or its
stockholders for monetary damages to the fullest extent permitted by the
Delaware GCL. Section 102(b)(7) of the Delaware GCL currently provides that a
director's liability for breach of fiduciary duty to a corporation may be
eliminated except for liability (i) for any breach of the director's duty of
loyalty to the corporation or its stockholders, (ii) for acts or omissions not
in good faith or which involve intentional misconduct or a knowing violation of
law, (iii) under Section 174 of the Delaware GCL, for unlawful dividends or
unlawful stock repurchases or redemptions, and (iv) for any transaction from
which the director derives an improper personal benefit. The Delaware GCL does
afford persons who serve on the board of directors of a Delaware corporation
protection against awards of monetary damages for negligence in the performance
of their duties as directors. The Delaware GCL does not affect the availability
of equitable remedies such as an injunction or rescission based upon a
director's breach of his duty of care. Any amendment to these provisions of the
Delaware GCL will automatically be incorporated by reference into the Company's
Certificate of Incorporation, without any vote on the part of its stockholders,
unless otherwise required.
Indemnification Agreements. Simultaneously with the completion of this
offering, the Company and each of its directors will enter into indemnification
agreements. The indemnification agreements will provide that the Company will
indemnify the directors against certain liabilities (including settlements) and
expenses actually and reasonably incurred by them in connection with any
threatened, pending or completed legal action, proceeding or investigation
(other than actions brought by or in the right of the Company) to which any of
them was, is or is threatened to be made a party by reason of his or her status
as a director, officer or agent of the Company or his or her serving at the
request of the Company in any other capacity for or on behalf of the Company,
provided that (i) such director acted in good faith and in a manner at least not
opposed to the best interests of the Company, (ii) with respect to any criminal
proceedings, such director had no reasonable cause to believe his or her conduct
was unlawful, (iii) such director is not finally adjudged to be liable for
negligence or misconduct in the performance of his or her duty to the Company,
unless the court views in light of the circumstances that the director is
nevertheless entitled to indemnification, and (iv) the indemnification does not
relate to any liability arising under Section 16(b) of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), or the rules or regulations
promulgated thereunder. With respect to any action brought by or in the right of
the Company, directors may also be indemnified, to the extent not prohibited by
applicable laws or as determined by a court of competent jurisdiction, against
reasonable costs and expenses incurred by them in connection with such action if
they acted in good faith and in a manner they reasonably believed to be in or
not opposed to the best interests of the Company.
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<PAGE> 50
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors has standing Audit and Compensation Committees. The
Audit Committee consists of Mr. Harris and Ms. Harrison. Among other functions,
the Audit Committee makes recommendations to the Board of Directors regarding
the selection of independent auditors, reviews the results and scope of the
audit and other services provided by the Company's independent auditors, reviews
the Company's financial statements and reviews and evaluates the Company's
internal control functions. The Compensation Committee consists of Messrs.
Harris and Rosen and Ms. Harrison. The Compensation Committee administers the
Company's stock option and stock purchase plans, determines executive
compensation and makes recommendations to the Board of Directors concerning
salaries and incentive compensation for employees and consultants of the
Company.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Mr. Harris, Ms. Harrison and Mr. Rosen served as members of the Company's
Compensation Committee during fiscal year 1996. Other than Mr. Rosen, who served
as the Company's Chairman and Chief Executive Officer during 1996, no committee
member is or has been an officer or employee of the Company. Mr. Rosen serves
only as a non-voting member of the Compensation Committee.
COMPENSATION OF DIRECTORS
Non-employee directors currently receive a fee of $250 per meeting for
their service on the Board of Directors or any committee thereof. Directors are
eligible to receive options under the Company's 1996 Stock Option Plan.
EXECUTIVE COMPENSATION
The following table sets forth a summary of certain information regarding
compensation paid or accrued by the Company during 1996 to each of the Company's
and New York N2K's chief executive officer and each of the other executive
officers of the Company and New York N2K whose total annual salary and bonus
exceeded $100,000 during such period (collectively, the "Named Executives"). The
current positions of the Named Executives are also included in the table.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
-----------------------------
ANNUAL COMPENSATION SECURITIES
-------------------- UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS OPTIONS/SARS COMPENSATION
- ------------------------------------------ -------- ------- ------------ ------------
<S> <C> <C> <C> <C>
Lawrence L. Rosen(1)...................... $175,000 $50,000 220,274 $ 10,062(3)
Chairman of the Board of Directors and
Chief Executive Officer
Jonathan V. Diamond (2)................... 175,000 50,000 220,274 11,031(4)
Vice Chairman
James E. Coane............................ 171,695 -- 31,250 12,100(5)
President and Chief Operating Officer
Daniel E. Meyer........................... 120,000 -- -- 2,077(6)
Senior Vice President and General
Manager -- On-line information(7)
Bruce Johnson............................. 114,375 -- 12,500 2,059(6)
Vice President and Chief Financial
Officer
</TABLE>
- ---------------
(1) On February 13, 1996, Mr. Rosen entered into an employment agreement with
the Company which provides for an annual base salary of $200,000 and a
guaranteed bonus of $50,000 for fiscal year 1996. See "-- Employment
Agreements."
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<PAGE> 51
(2) On February 13, 1996, Mr. Diamond entered into an employment agreement with
the Company which provides for an annual base salary of $200,000 and a
guaranteed bonus of $50,000 for fiscal year 1996. See "--Employment
Agreements."
(3) Represents a car allowance of $8,400 and Company matching contributions
under its 401(k) Matched Savings Plan of $1,662.
(4) Represents a car allowance of $8,400 and Company matching contributions
under its 401(k) Matched Savings Plan of $2,631.
(5) Represents a car lease valued at $9,250 and Company matching contributions
under its 401(k) Matched Savings Plan of $2,850.
(6) Represents Company matching contributions under its 401(k) Matched Savings
Plan.
(7) Mr. Meyer's employment with the Company terminated on August 26, 1997.
As of July 1, 1997, each of Messrs. Rosen, Diamond and Grusin agreed not to
receive compensation from the Company (in the form of either salary or bonus) at
least through the end of fiscal year 1997.
OPTION GRANTS IN LAST FISCAL YEAR
The following table summarizes certain information with respect to Company
stock options granted to the Named Executives during the fiscal year ended
December 31, 1996.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS(1)
---------------------------------------------------------
PERCENT OF POTENTIAL REALIZABLE
TOTAL VALUE AT ASSUMED
NUMBER OF OPTIONS ANNUAL RATES OF STOCK
SECURITIES GRANTED TO EXERCISE PRICE APPRECIATION FOR
UNDERLYING EMPLOYEES PRICE OPTION TERM
OPTIONS IN FISCAL PER ----------------------
NAME GRANTED YEAR 1996 SHARE EXPIRATION DATE 5% 10%
- ------------------------------ ---------- ---------- -------- ----------------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Lawrence L. Rosen............. 125,000 12.3% $ 3.52 February 13, 2006 276,713 701,246
95,274 9.4% 3.20 191,734 485,893
Jonathan V. Diamond........... 125,000 12.3% 3.52 February 13, 2006 276,713 701,246
95,274 9.4% 3.20 191,734 485,893
James E. Coane................ 31,250 3.1% 3.20 February 13, 2006 62,889 159,374
Daniel E. Meyer............... -- -- -- -- -- --
Bruce Johnson................. 12,500 1.2% 3.20 February 13, 2006 25,156 63,750
</TABLE>
- ---------------
(1) All stock options reported in this table were granted pursuant to the 1996
Employee Stock Option Plan at exercise prices equal to at least the fair
market value of the Common Stock at the time of grant. This fair market
value determination was based upon transactions relating to the purchase of
the Company's Preferred Stock by third parties on or near the grant date.
The options vest ratably over a four-year period on each anniversary of the
date of grant and have a ten-year term.
(2) This column shows the hypothetical gains on the options granted based on
assumed annual compound stock appreciation rates of 5% and 10% over the full
ten-year term of the options. The assumed rates of appreciation are mandated
by the rules of the Securities and Exchange Commission (the "Commission")
and do not represent the Company's estimate or projection of future Common
Stock prices.
50
<PAGE> 52
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
The following table shows the number of shares covered by both exercisable
and unexercisable stock options as of fiscal year-end, and the values for
exercisable and unexercisable options. No Named Executive exercised any Company
stock options during 1996.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS
DECEMBER 31, 1996 AT DECEMBER 31, 1996(1)
---------------------------- ----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
------------------------------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Lawrence L. Rosen.................... -- 220,274 $ -- $ 1,898,411
Jonathan V. Diamond.................. 1,250 220,274 11,750 1,898,411
James E. Coane....................... 128,049 52,813 1,114,736 484,752
Daniel E. Meyer...................... 12,500 37,500 110,000 330,000
Bruce Johnson........................ 48,090 28,750 427,489 256,750
</TABLE>
- ---------------
(1) Based on the difference between $12.00, the fair market value of the Common
Stock on December 31, 1996, and the option exercise price for each
above-stated option. The above valuation may not reflect the actual value of
unexercised options as the value of unexercised options will fluctuate with
market activity.
The Company has granted, effective upon the consummation of this offering,
options covering 309,999 shares having an exercise price equal to the initial
public offering price of $16.00 per share to executive officers and employees of
the Company, including 58,333, 58,333, 50,000 and 37,500 to Messrs. Rosen,
Diamond, Coane and Johnson, respectively. Such options vest ratably over a
four-year period and have a ten-year term.
On July 30, 1997, options covering an aggregate of 324,999 shares having an
exercise price of $12.00 per share were granted to Lawrence L. Rosen, Jonathan
V. Diamond and Robert David Grusin. Such options vest ratably over a four-year
period and have a ten-year term. Assuming an initial public offering price of
$16.00 per share and that these options are fully vested, the value of these
options to each individual would be $433,332, $433,332 and $433,332,
respectively, and the total aggregated value of these options would be
$1,299,996.
EMPLOYMENT AGREEMENTS
On February 13, 1996, the Company entered into employment agreements with
Lawrence L. Rosen, Jonathan V. Diamond and Robert David Grusin (the "Rosen
Employment Agreement," the "Diamond Employment Agreement" and the "Grusin
Employment Agreement", respectively) to provide for service in the capacities of
Chairman and Chief Executive Officer, Vice Chairman and Vice Chairman,
respectively, and base salaries of $200,000, $200,000 and $100,000,
respectively, which salaries may be increased as determined by the Compensation
Committee of the Board of Directors. Each of the Rosen Employment Agreement and
the Diamond Employment Agreement provides for payment of an annual bonus of not
less than $50,000, until such time as such executive's base salary is at least
$250,000. The Grusin Employment Agreement provides for an annual bonus in an
amount to be determined by the Board of Directors.
Notwithstanding the terms of their employment agreements, as of July 1,
1997, each of Messrs. Rosen, Diamond and Grusin agreed not to receive
compensation from the Company (in the form of either salary or bonus) at least
through the end of fiscal year 1997.
In connection with the Rosen Employment Agreement, Diamond Employment
Agreement and Grusin Employment Agreement, the Company also agreed to grant
incentive stock options to each of the executives to purchase 125,000 shares of
Common Stock and additional non-qualified options to purchase 95,274 shares of
Common Stock at an exercise price of $3.20 per share (or such higher exercise
price as may be required under Section 422 of the Internal Revenue Code), which
vest ratably over a four-year period.
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<PAGE> 53
Each of the Rosen Employment Agreement, Diamond Employment Agreement and
Grusin Employment Agreement is for a two-year term, but absent notice of
termination by either the Company or the executive, shall be automatically
renewed for consecutive one-year periods. If the Company terminates any of such
executive's employment other than for "cause" or due to "disability" or there
occurs a "change in control" (each as defined in the Rosen Employment Agreement,
the Diamond Employment Agreement and the Grusin Employment Agreement), such
executive will generally be entitled to (i) eighteen months severance plus an
amount equal to his average annual bonus over the prior three years (or such
lesser number of years if employed for less than three years) multiplied by 1.5,
and paid out, at the election of such executive, in a lump sum or in equal
installments over the 18 months following termination, and (ii) the immediate
vesting of any unexercised stock options. If the employment of any of Lawrence
L. Rosen, Jonathan V. Diamond or Robert David Grusin was terminated subsequent
to a "change in control" as of the date of this Prospectus, each executive would
be entitled to payment by the Company of approximately the amount set forth
immediately following his name: Lawrence L. Rosen ($375,000); Jonathan V.
Diamond ($375,000); and Robert David Grusin ($150,000). In accordance with the
Rosen Employment Agreement, Diamond Employment Agreement and Grusin Employment
Agreement, each executive has agreed not to disclose any of the Company's
confidential information and not to compete with the Company for an
eighteen-month period following termination of his employment with the Company.
On May 1, 1987, the Company entered into an employment agreement with Mr.
Coane (as amended, the "Coane Employment Agreement") that provides for a base
salary of $115,000 until September 30, 1987, and a base salary of $125,000
thereafter, subject to salary increases or other compensation at the discretion
of the Board of Directors. The Company also agreed to grant an option to Mr.
Coane to purchase 100,000 shares of Common Stock of the Company at an exercise
price of $3.20 per share, exercisable until May 14, 1997. Mr. Coane exercised
this option in full in May 1997. Pursuant to the terms of the Coane Employment
Agreement, Mr. Coane agreed to serve as President and Chief Executive Officer,
pursuant to election or appointment to those positions, and to perform such
other duties as shall be assigned to him during the continuance of such
agreement. The Coane Employment Agreement was for an initial term of three
years, but absent notice of termination by either the Company or Mr. Coane, the
agreement shall be automatically renewed for consecutive one-year periods. If
the Company terminates Mr. Coane's employment other than for "cause" or due to
"disability" or there occurs a "change in control" (each as defined in the Coane
Employment Agreement), Mr. Coane shall be entitled to severance for eighteen
months. If Mr. Coane's employment was terminated subsequent to a "change of
control" as of the date of this Prospectus, Mr. Coane would be entitled to
payment by the Company of approximately $262,500 over an eighteen-month period.
In accordance with the Coane Employment Agreement, Mr. Coane has agreed not to
compete with the Company during the term of his employment or for any period
during which he receives severance pay or acts, pursuant to the agreement, as a
consultant to the Company.
On February 8, 1988, the Company entered into an employment agreement with
Bruce Johnson (the "Johnson Employment Agreement") that provides for a base
salary of $75,000, participation in a bonus plan and salary increases or other
compensation at the discretion of the Board of Directors. The Company also
agreed to grant an option to Mr. Johnson to purchase 31,250 shares of Common
Stock of the Company at an exercise price of $3.20 per share, exercisable until
February 8, 1998. Mr. Johnson exercised this option in full in May 1997.
Pursuant to the terms of the Johnson Employment Agreement, Mr. Johnson agreed to
serve as Vice President and Chief Financial Officer, pursuant to election or
appointment to those positions, and to perform such other duties as shall be
assigned to him during the continuance of such agreement. The Johnson Employment
Agreement was for an initial term of three years, but absent notice of
termination by either the Company or Mr. Johnson, the agreement shall be
automatically renewed for consecutive one-year periods. If the Company
terminates Mr. Johnson's employment other than for "cause" or due to
"disability," or there occurs a "change in control" (each as defined in the
Johnson Employment Agreement), Mr. Johnson shall be entitled to severance for
twelve months. If Mr. Johnson's employment was terminated subsequent to a
"change of control" as of the date of this Prospectus, Mr. Johnson would be
entitled to payment by the Company of approximately $135,000 over a twelve-month
period. In accordance with the terms of the Johnson Employment Agreement, Mr.
Johnson has agreed not to compete with the Company during the term
52
<PAGE> 54
of his employment or for any period during which he receives severance pay or
acts, pursuant to the agreement, as a consultant to the Company.
The Company entered into an employment agreement with Phil Ramone (the
"Ramone Employment Agreement") to provide for his service as President of N2K
Encoded Music effective as of October 15, 1996. The initial term of the Ramone
Employment Agreement is three years (the "Initial Term"), with an option for an
additional two-year period at the Company's discretion (the "Option Period").
The Ramone Employment Agreement provides for a base salary of $450,000 for the
first year, increasing to $550,000 for the remainder of the Initial Term. If Mr.
Ramone's employment continues after the Initial Term, he will receive $650,000
for the first year of the Option Period, with the salary for the second year to
be negotiated in good faith upon commencement of the Option Period.
Notwithstanding the foregoing, in the event that the Company and Mr. Ramone are
unable to agree on the amount of Mr. Ramone's annual salary during the Option
Period after 30 days' good faith negotiations, then the Company's option will be
treated as if it had not been exercised. The Ramone Employment Agreement also
provides for (a) a one-time $100,000 bonus payable on October 1, 1997 in the
form of a promissory note whose principal and the interest thereon will be
forgiven (assuming no termination for cause) over a 12 month period beginning on
October 1, 1998 and (b) an annual performance bonus in the amount of (i) $50,000
if the gross revenues of N2K Encoded Music are at least $8 million but not in
excess of $10 million during such fiscal year or (ii) $100,000 if such gross
revenues exceed $10 million during such fiscal year. The Ramone Employment
Agreement also provides that Mr. Ramone is entitled to 10% of the after-tax net
profit attributable to N2K Encoded Music's operations in any fiscal year,
including participation in the proceeds of a sale of N2K Encoded Music as if he
were a 5% (during the Initial Term) or a 7.5% (during the Option Period) equity
owner of N2K Encoded Music. Mr. Ramone was granted non-qualified options under
the terms of the Ramone Employment Agreement to purchase 73,677 shares of Common
Stock at $12.00 per share. Such options expire on October 15, 2002, but not
later than one year from the date Mr. Ramone's employment with the Company
terminates. One quarter of Mr. Ramone's options vested at the beginning of his
employment on October 15, 1996, with the balance to vest ratably over a
three-year period. Should Mr. Ramone's employment with the Company be
terminated, the Company at its option may repurchase any or all shares of Common
Stock issued to Mr. Ramone upon his exercise of any of his options held by him
on the date of such termination at fair market value (or, if such termination is
for cause, at the price paid by Mr. Ramone for such shares). The Company may
elect to pay for these shares in three equal annual installments by delivery of
a promissory note with an interest rate of 8% per annum.
The Company loaned Mr. Ramone $100,000 at the signing of the Ramone
Employment Agreement on September 26, 1997. The promissory note related to this
loan (the "Ramone Note") is due on October 1, 2000 and is interest-free unless
an event of default (as defined therein) occurs, in which case the interest rate
shall become 15% until such default is cured. The terms of the Ramone Note give
the Company the right to deduct and withhold certain compensation owed by the
Company to Mr. Ramone under either of the Ramone Employment Agreement or the
Producer's Agreement (as defined below).
Simultaneously with the execution of the Ramone Employment Agreement, the
Company also entered into a Music Producer's Agreement (the "Producer's
Agreement") with Mr. Ramone (through a personal corporation) providing for the
recording and production of master recordings of one or more of the Company's
recording artists. The term of the Producer's Agreement is coextensive with the
term of the Ramone Employment Agreement. Pursuant to the terms of the Producer's
Agreement, Mr. Ramone will receive a percentage of royalties based on agreed
upon formulas. No payments under the Producer's Agreement shall be made to Mr.
Ramone until such time that the Ramone Note has been repaid.
STOCK PLANS
The Company has historically utilized stock options as an integral
component of its compensation program for directors, officers and key employees
of the Company. The Company believes that stock options provide long-term
incentives to such persons and encourage the ownership of the Common Stock.
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<PAGE> 55
1987 Employee Incentive Stock Option Plan. The Company's 1987 Employee
Incentive Stock Option Plan (the "1987 Option Plan") provided for the grant of
stock options to certain officers and key executive employees of the Company.
The options granted under the 1987 Option Plan were intended to qualify as
incentive stock options under Section 422 of the Internal Revenue Code. As of
September 26, 1997, a total of 250,142 options for Common Stock were outstanding
under the 1987 Option Plan. Generally, options granted under the 1987 Option
Plan vest ratably over a four-year period on each anniversary of the date of
grant and have a ten-year term. No further stock options will be granted under
the 1987 Option Plan.
Under the 1987 Option Plan, options are not assignable or transferable
except by will or under the laws of descent and distribution. In the event of an
offer to acquire all or substantially all of the assets or stock of the Company,
all options granted under the 1987 Option Plan shall automatically become
immediately exercisable in full without regard to the provisions relating to
installment exercises or vesting periods.
1996 Stock Option Plan. The 1996 Option Plan was adopted in February 1996.
In June 1996, the Board of Directors of the Company adopted, and in July 1996
the stockholders of the Company approved, the Company's Amended and Restated
1996 Stock Option Plan (the "1996 Option Plan"). The 1987 Option Plan, the 1996
Option Plan and the Directors' Plan (as hereinafter defined) are collectively
referred to as the "Stock Option Plans." Under the 1996 Option Plan, stock
options may be granted to directors, executives and other key employees of the
Company and its subsidiaries. All options granted under the 1996 Option Plan are
not assignable or transferable except by will or under the laws of descent and
distribution. As of September 26, 1997, a total of 1,280,938 options for Common
Stock were outstanding under the 1996 Option Plan. In addition, the Board of
Directors has approved the issuance of options to purchase 309,999 shares of
Common Stock which will be granted at the time of this offering.
The 1996 Option Plan is administered by the Compensation Committee of the
Board of Directors or such other committee as may be appointed by the Board.
Subject to the limitations set forth in the 1996 Option Plan, the Compensation
Committee has the sole and complete authority to select participants, grant
options to participants, impose restrictions and conditions upon each option,
modify or amend the terms of each outstanding option, reduce the exercise price
per share of unexercised options, accelerate or defer the exercise price per
share of any outstanding option and make all other determinations and take all
other actions necessary for the administration of the plan. The Compensation
Committee may amend or modify the terms of any option agreement in any manner to
the extent that it would have had the authority initially to grant an option
with such amended terms; provided, that no such amendment or modification shall
impair the rights of any participant under any outstanding option without the
consent of such participant.
Options granted under the 1996 Option Plan may be either incentive stock
options which are intended to satisfy the requirements of Section 422 of the
Internal Revenue Code, or options that do not qualify as incentive stock
options. Generally, options granted under the 1996 Option Plan vest ratably over
a four-year period on each anniversary of the date of grant. At the Compensation
Committee's discretion, however, options may be made exercisable at any other
time or upon the occurrence of certain events or the achievement of certain
conditions or performance goals. Options granted under the 1996 Option Plan are
exercisable for a period not to exceed ten years from the date of grant, except
that upon a participant's termination of employment for any reason, all vested
options shall expire 90 days following such termination date and any nonvested
options shall be immediately forfeited. Pursuant to the terms of the 1996 Option
Plan, the exercise price of all incentive stock options and nonqualified stock
options granted under the Plan shall not be less than the fair market value of
the Common Stock at the time of grant. In the event of a "change of control" of
the Company (as defined in the 1996 Option Plan) or the termination of a
participant's employment other than for cause, death, disability or voluntary
departure, the Compensation Committee may provide that unvested stock options
previously granted shall be immediately exercisable and that such options, if
not exercised by a prescribed date, shall terminate.
The Company has authorized and reserved 1,650,000 shares of Common Stock
for issuance under the 1996 Option Plan. The shares may be unissued shares or
treasury shares. If any options that are the subject of an award are not
exercised prior to their expiration or are cancelled, terminated or forfeited
without the issuance of Common Stock thereunder, such shares will no longer be
charged against such maximum share
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<PAGE> 56
limitation and may again be made subject to award under the 1996 Option Plan. In
the event of certain corporate reorganizations, recapitalizations or other
specified corporate transactions affecting the Common Stock of the Company,
proportionate adjustments may be made to the number of shares available for
grant and to the number of shares and price of outstanding awards made before
the event. The 1996 Option Plan has a term of ten years, subject to earlier
termination or amendment by the Board of Directors. All awards granted under the
1996 Option Plan prior to its termination remain outstanding until exercised,
paid or terminated in accordance with their terms. The Board of Directors may
amend the 1996 Option Plan at any time, except that stockholder approval is
required for certain amendments to the extent it is required by law, agreement
or the rules of any exchange upon which the Common Stock is listed.
The grant of a stock option under the 1996 Option Plan will not generally
result in taxable income for the participant, nor in a deductible compensation
expense for the Company, at the time of grant. The participant will have no
taxable income upon exercising an incentive stock option (except that the
alternative minimum tax may apply), and the Company will receive no deduction
when an incentive stock option is exercised. Upon exercising a nonqualified
stock option, the participant will recognize ordinary income in the amount by
which the fair market value of the Common Stock on the date of exercise exceeds
the exercise price, and the Company will generally be entitled to a
corresponding deduction. The treatment of a participant's disposition of shares
of Common Stock acquired upon the exercise of an option is dependent upon the
length of time the shares have been held and on whether such shares were
acquired by exercising an incentive stock option or a nonqualified stock option.
Generally, there will be no tax consequence to the Company in connection with
the disposition of shares acquired under an option except that the Company may
be entitled to a deduction in the case of a disposition of shares acquired upon
exercise of an incentive stock option before the applicable incentive stock
option holding period has been satisfied.
Stock options previously granted under the 1996 Option Plan to the Named
Executives and directors are described above under "-- Executive Compensation."
The number of shares of Common Stock that may be subject to options granted in
the future to executive officers and other officers, key employees and directors
of the Company under the 1996 Option Plan is not determinable at this time.
1996 Employee Stock Purchase Plan. In June 1996, the Board of Directors of
the Company adopted and the stockholders of the Company approved the Company's
1996 Employee Stock Purchase Plan (the "Purchase Plan"), which will be effective
upon the date of this Prospectus. The Purchase Plan is intended to satisfy the
requirements of Section 423 of the Internal Revenue Code. The Purchase Plan is
administered by the Compensation Committee. Any employee of the Company or any
subsidiary designated by the Compensation Committee who customarily works at
least 20 hours per week and more than five months per year is eligible to
participate in the Purchase Plan after having worked for the Company for six
months. Approximately 145 employees currently are eligible to participate in the
Purchase Plan. Non-employee directors of the Company are not eligible to
participate in the Purchase Plan. Each employee eligible to participate in the
Purchase Plan will be granted an option to contribute between one and ten
percent of the employee's compensation towards the purchase of the Common Stock
at a purchase price for each three-month purchase period (a "Purchase Period")
equal to the lower of (x) 85% of the fair market value of a share of the Common
Stock on the first day of the Purchase Period and (y) 85% of the fair market
value of a share of the Common Stock on the last day of the Purchase Period. The
amount to be contributed by a participant will be deducted from each paycheck,
held for the participant during a Purchase Period and applied towards the
purchase of the Common Stock on the last day of the Purchase Period. A
participant may change the percentage of his or her compensation to be
contributed for any given purchase period prior to the beginning of that period
and may elect not to participate with respect to one or more plan periods, but
then must wait until the next calendar year before participating again. The
number of shares available for purchase under the Purchase Plan is 1,500,000.
The Board at any time may amend, suspend or discontinue the Purchase Plan, in
whole or in part.
Directors' Stock Option Plan. In April 1997, the Board of Directors adopted
and the stockholders of the Company approved, the 1997 Directors' Stock Option
Plan (the "Directors' Plan") pursuant to which each member of the Board of
Directors who is not an employee of the Company who is elected or continues as a
member of the Board of Directors is entitled to receive annually options to
purchase 12,500 shares of Common
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<PAGE> 57
Stock at an exercise price equal to fair market value; provided, however, that
no director may receive under the Directors' Plan options to purchase an
aggregate of more than 125,000 shares of Common Stock. The Compensation
Committee of the Board of Directors administers the Directors' Plan; however, it
cannot direct the number, timing or price of options granted to eligible
recipients thereunder.
Each option grant under the Directors' Plan vests after the first
anniversary of the date of grant and expires three years thereafter. The number
of shares of Common Stock related to awards that expire unexercised or are
forfeited, surrendered, terminated or cancelled are available for future awards
under the Directors' Plan. If a director's service on the Board of Directors
terminates for any reason other than death, all vested options may be exercised
by such director until the earlier of his or her death and the expiration date
of the option grant. In the event of a director's death, any options which such
director was entitled to exercise on the date immediately preceding his or her
death may be exercised by a transferee of such director for the six-month period
after the date of the director's death. Pursuant to the Directors' Plan, in the
case of a director who represents an institutional investor, such as a venture
capital fund, option grants may be made directly to the institutional investor
on whose behalf a director serves on the Board of Directors.
The maximum number of shares of Common Stock reserved for issuance under
the Directors' Plan is 500,000 shares (subject to adjustment for certain events
such as stock splits and stock dividends). Pursuant to the terms of the
Directors' Plan, on the effective date in April 1997, a total of 25,000 options
were authorized to be granted to non-employee directors under the Directors'
Plan at an exercise price per share equal to the initial public offering price
of the Common Stock.
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CERTAIN TRANSACTIONS
SERIES D PREFERRED STOCK
In August and September 1994, Lawrence L. Rosen and Jonathan V. Diamond,
directors and executive officers of the Company, and entities affiliated with
Robert C. Harris, Jr. and Susanne Harrison, directors of the Company, purchased
an aggregate of 725,000 shares of Series D Preferred Stock, which will convert
upon consummation of this offering into 557,689 shares of Common Stock. The
purchase price per share of Common Stock on an as-converted basis was $2.60.
Each of these individuals (and/or their affiliated entities) purchased shares of
Series D Preferred Stock that convert into the number of shares of Common Stock
set forth immediately following his or her name: Lawrence L. Rosen (19,230);
Jonathan V. Diamond (38,460); Robert C. Harris, Jr. (384,615); and Susanne
Harrison (115,384).
CONSIDERATION FOR THE MERGER; SERIES E PREFERRED STOCK
In February 1996, as consideration for all of the outstanding shares of
common stock of New York N2K in the Merger, the shareholders of New York N2K
received an aggregate of 1,347,857 shares of Common Stock and 1,347,860 shares
of Series E Preferred Stock of the Company. The shareholders of New York N2K at
the time of the Merger included Lawrence L. Rosen, Jonathan V. Diamond, Robert
David Grusin and Jerold L. Rosen. Each of these individuals received the number
of shares of Common Stock and Series E Preferred Stock that will, upon
conversion of the Series E Preferred Stock, result in the number of shares of
Common Stock set forth immediately following his or her name: Lawrence L. Rosen
(390,879), (97,719); Jonathan V. Diamond (390,879), (97,719); Robert David
Grusin (390,879), (97,719); and Jerold L. Rosen (107,828), (26,957). Also in
February 1996, entities affiliated with Robert C. Harris, Jr. and Susanne
Harrison, directors of the Company, and Messrs. Diamond, Grusin, L. Rosen and J.
Rosen purchased an aggregate of 3,050,000 shares of Series E Preferred Stock at
a purchase price of $.80 per share, which will convert into 762,500 shares of
Common Stock. The purchase price per share of Common Stock on an as-converted
basis was $3.20. Each of these individuals (and/or their affiliated entities)
purchased the number of shares of Series E Preferred Stock that convert into the
number of shares of Common Stock set forth immediately following his or her
name: Robert C. Harris, Jr. (129,687); Susanne Harrison (125,000); Lawrence L.
Rosen (164,063); Jonathan V. Diamond (179,688); Robert David Grusin (156,250);
and Jerold Rosen (7,812). In May 1996, Mr. Harris purchased an additional
125,000 shares of Series E Preferred Stock, which will convert into 31,250
shares of Common Stock. The purchase price per share of Common Stock on an
as-converted basis was $3.20.
SERIES G PREFERRED STOCK
In April 1997, Lawrence L. Rosen, Jonathan V. Diamond and Robert David
Grusin, directors and executive officers of the Company, purchased an aggregate
of 333,333 shares of Series G Preferred Stock, which will convert upon
consummation of this offering into 83,331 shares of Common Stock. The purchase
price per share of Common Stock on an as-converted basis was $12.00. Each of
these individuals purchased shares of Series G Preferred Stock that convert into
the number of shares of Common Stock set forth immediately following his name:
Lawrence L. Rosen (27,777); Jonathan V. Diamond (27,777); and Robert David
Grusin (27,777).
MANAGEMENT NOTES
In July 1997, the Company issued $1.75 million aggregate principal amount
of Management Notes to Lawrence L. Rosen, Jonathan V. Diamond and Robert David
Grusin, each of whom loaned the Company $583,333. The Management Notes bear
interest at 14% per annum and are due on the earlier of (i) a "change of control
of the Company," as that term is defined in the Management Notes, and (ii) March
31, 1998; provided, however, that if the Management Notes are outstanding at the
time of this offering, the Management Notes will convert into 109,374 shares of
Common Stock at the initial public offering price of $16.00 per share upon
consummation of this offering. In consideration for these loans, the Company
issued an aggregate of 48,609 warrants to purchase 48,609 shares of Common
Stock, representing 16,203 warrants to
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each of Messrs. Rosen, Diamond and Grusin. The warrants are exercisable at a
price of $12.00 per share and expire in July 2004. See "Dilution."
OPTION GRANTS TO INSIDERS
The Company has granted options to purchase shares of Common Stock to
certain of its executive officers and directors. See "Management -- Employment
Agreements," "-- Compensation of Directors," and -- Executive Compensation."
PREFERRED STOCK CONVERSION
Upon consummation of this offering, 488,838 shares of the Company's Series
A Preferred Stock, $0.001 par value (the "Series A Stock"), will convert into
171,276 shares of Common Stock; 625,000 shares of Series B Preferred Stock,
$0.001 par value (the "Series B Stock"), will convert into 178,569 shares of
Common Stock; 2,022,857 shares of Series C Preferred Stock, $0.001 par value
(the "Series C Stock"), will convert into 566,399 shares of Common Stock;
800,000 shares of Series D Preferred Stock, $0.001 par value (the "Series D
Stock"), will convert into 615,381 shares of Common Stock; 6,007,060 shares of
Series E Preferred Stock, $0.001 par value (the "Series E Stock"), will convert
into 1,501,755 shares of Common Stock; 5,333,333 shares of Series F Preferred
Stock, $0.001 par value (the "Series F Stock"), will convert into 1,333,321
shares of Common Stock; and 2,480,329 shares of Series G Preferred Stock,
$0.0001 par value (the "Series G Stock"), will convert into 620,077 shares of
Common Stock (the Series A Stock, the Series B Stock, the Series C Stock, the
Series D Stock, the Series E Stock, the Series F Stock and the Series G Stock
are referred to collectively as the "Preferred Stock"). See "Principal
Stockholders" and "Dilution."
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with certain of its
executive officers as described under "Management -- Employment Agreements."
INDEMNIFICATION AGREEMENTS
Simultaneously with the completion of the Merger, the shareholders of New
York N2K, including Lawrence L. Rosen, Jonathan V. Diamond, Robert David Grusin
and Jerold R. Rosen (collectively, the "New York N2K Shareholders"), entered
into an indemnification agreement with the Company (the "Indemnification
Agreement"). The Indemnification Agreement provides for indemnification by the
New York N2K Shareholders and by the Company against certain liabilities,
losses, claims, damages or expenses arising from or in connection with (i) the
breach of any warranty, the misstatement of any representation or the failure to
fulfill any covenant or agreement made by New York N2K in the Merger Agreement
dated as of January 31, 1996 (the "Merger Agreement" ) between Telebase and New
York N2K, or in any document furnished by New York N2K or any representative
thereof in connection with the Merger Agreement or the transactions contemplated
therein; (ii) any and all claims, suits, actions or proceedings for brokerage or
other commissions in connection with the Merger Agreement or the transactions
contemplated thereby; and (iii) any and all actions, suits, proceedings, claims,
demands, assessments, judgments, costs and expenses incident to any of the
foregoing. Pursuant to the Indemnification Agreement, all indemnification by the
New York N2K Shareholders shall be effected solely by return to the Company of
all or a portion of an aggregate of 312,500 escrowed shares of Common Stock at a
value of $3.20 per share and all indemnification by the Company shall be
effected by the issuance by the Company to the applicable New York N2K
Shareholders of up to an aggregate of 312,500 shares of Common Stock at a value
of $3.20 per share, in proportion to each New York N2K Shareholder's ownership
interest in the Company at the time of the Merger. The Indemnification Agreement
will terminate upon the consummation of this offering.
Upon the completion of this offering, the Company will enter into
Indemnification Agreements with each of its directors and executive officers
whereby the Company will agree, subject to certain limitations, to indemnify and
hold harmless each director and executive officer from liabilities incurred as a
result of such
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person's status as a director of the Company. See "Management -- Limitations on
Directors' Liability -- Indemnification Agreements."
STOCKHOLDERS' AGREEMENT
On February 13, 1996, the Stockholders' Agreement was entered into among
James E. Coane, Charles Wilson III, Poly Ventures II, Limited Partnership, AT&T
Corporation, Gary Lauder and Unterberg Harris Interactive Media Limited
Partnership, C.V. (collectively, the "Telebase Group"), Lawrence L. Rosen
("Rosen"), Jonathan V. Diamond ("Diamond"), Robert David Grusin ("Grusin") and
the Company. For the purposes of the Stockholders' Agreement, the Telebase
Group, Rosen, Diamond and Grusin are referred to collectively as the
"Stockholders" and each individually as a "Stockholder." Pursuant to the
Stockholders' Agreement, each party agreed to vote all of its shares of capital
stock to elect members of the Board of Directors as specified therein. The
Stockholders' Agreement provides that, with respect to all actions by the
stockholders of the Company for the election of members of the Board of
Directors, all capital stock held by the Stockholders shall be voted for (i) two
nominees designated by the Telebase Group, (ii) one nominee designated by Rosen,
(iii) one nominee designated by Diamond, (iv) one nominee designated by Grusin
and (v) Robert C. Harris, Jr. ("Harris"). The initial six director nominees
specified in the Stockholders' Agreement are James E. Coane, Susanne Harrison,
Lawrence L. Rosen, Jonathan V. Diamond, Robert David Grusin and Robert C.
Harris, Jr.
Subject to certain additional restrictions, the Stockholder entitled to
nominate and elect a director shall be entitled to remove such director.
Vacancies occurring on the Board of Directors by reason of the death,
disqualification, incapacity, inability to act, resignation or removal of any
director shall be filled only by the Stockholder whose nominee was affected and
by the Telebase Group in the case of a nominee of the Telebase Group; provided,
however, that in the case of Harris, his replacement on the Board of Directors
shall be nominated and elected by a majority of the remaining directors. Under
the terms of the Stockholders' Agreement, each Stockholder agrees not to
transfer shares of capital stock owned by him or it unless the transferee agrees
to join in and be bound by the terms of the Stockholders' Agreement. Any
transferee of stock held by a member of the Telebase Group must also agree to be
a member of such group for the purposes of the Stockholders' Agreement. Pursuant
to the terms of the Stockholders' Agreement, each of Rosen, Diamond and Grusin
shall retain the right to designate a nominee to the Board of Directors as long
as each owns at least 20% of the stock owned by him as of the date of the
Stockholders' Agreement. In addition, no transferee of any of Rosen, Diamond or
Grusin shall have the right to designate a nominee to the Board of Directors
unless Rosen, Diamond or Grusin, respectively, sells any of his stock to such
transferee in a single transaction or series of transactions representing more
than 80% of the stock owned by Rosen, Diamond or Grusin, respectively, as of the
date of the Stockholders' Agreement. In accordance with its terms, the
Stockholders' Agreement will terminate simultaneously with the closing of this
offering.
FUTURE INTERESTED TRANSACTIONS
The Board of Directors has adopted a policy, which will be effective
simultaneously with the completion of this offering, to provide that future
transactions between the Company and its officers, directors and other
affiliates must (i) be approved by a majority of the members of the Board of
Directors and by a majority of the disinterested members of the Board of
Directors, (ii) be on terms no less favorable to the Company than could be
obtained from unaffiliated third parties and (iii) be for bona fide business
purposes only.
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PRINCIPAL STOCKHOLDERS
The table below sets forth, as of September 26, 1997, certain information
regarding beneficial ownership of Common Stock held by (i) each director and
each of the Named Executives who own shares of Common Stock, (ii) all directors
and executive officers of the Company as a group and (iii) each person known by
the Company to own beneficially more than 5% of the Common Stock. Each
individual or entity named has sole investment and voting power with respect to
shares of Common Stock beneficially owned by them, except where otherwise noted.
<TABLE>
<CAPTION>
PERCENTAGE BENEFICIALLY
OWNED(1)
SHARES ------------------------
BENEFICIALLY BEFORE THE AFTER THE
OWNED OFFERING OFFERING
------------ ---------- ---------
<S> <C> <C> <C>
EXECUTIVE OFFICERS AND DIRECTORS:
Jonathan V. Diamond(2)...................................... 796,303 9.7 7.1
Lawrence L. Rosen(3)........................................ 719,146 8.8 6.4
Robert David Grusin(4)...................................... 699,916 8.6 6.3
Susanne Harrison(5)......................................... 585,567 7.2 5.3
Robert C. Harris, Jr.(6).................................... 558,052 6.9 5.0
Jerold Rosen(7)............................................. 146,347 1.8 1.3
James E. Coane(8)........................................... 141,800 1.7 1.3
Bruce Johnson(9)............................................ 55,490 * *
Philip Ramone(10)........................................... 18,419 * *
ALL DIRECTORS AND EXECUTIVE OFFICERS AS A GROUP (9
PERSONS):................................................. 3,721,040 44.5 32.7
OTHER PRINCIPAL STOCKHOLDERS:
Poly Ventures II, Limited Partnership(5).................... 584,317 7.2 5.3
901 Route 110
Farmingdale, NY 11735
Unterberg Harris Interactive Media
Limited Partnership, C.V.(6).............................. 498,677 6.1 4.5
Swiss Bank Tower
10 East 50th Street, 22nd Floor
New York, NY 10022
</TABLE>
- ---------------
* Indicates beneficial ownership of less than 1.0% of the outstanding shares
of Common Stock.
(1) Calculated pursuant to Rule 13d-3(d) of the Exchange Act. Under Rule
13d-3(d), shares not outstanding which are subject to options, warrants,
rights or conversion privileges exercisable within 60 days are deemed
outstanding for the purpose of calculating the number and percentage owned
by such person, but not deemed outstanding for the purpose of calculating
the percentage owned by any other person listed. As of September 26, 1997,
the Company had 8,114,577 shares of Common Stock outstanding.
(2) Represents 739,985 shares of Common Stock and exercisable options to
purchase 56,318 shares of Common Stock.
(3) Represents 476,578 shares of Common Stock and 187,500 shares of Common
Stock held by the Lawrence L. Rosen Family Trust, with respect to which Mr.
Rosen has voting power, and exercisable options to purchase 55,068 shares
of Common Stock.
(4) Represents 644,848 shares of Common Stock and exercisable options to
purchase 55,068 shares of Common Stock.
(5) Represents exercisable options to purchase 1,250 shares of Common Stock and
584,317 shares of Common Stock owned by Poly Ventures II, Limited
Partnership of which Ms. Harrison is a general partner. Ms. Harrison
disclaims beneficial ownership of all shares owned by Poly Ventures II,
Limited Partnership.
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(6) Represents 59,375 shares of Common Stock and 498,677 shares of Common
Stock held by Unterberg Harris Interactive Media Limited Partnership, C.V.
Mr. Harris is a Managing Director of Unterberg Harris. Mr. Harris
disclaims beneficial ownership of all shares owned by Unterberg Harris
Interactive Media Limited Partnership, C.V.
(7) Represents 142,597 shares of Common Stock and exercisable options to
purchase 3,750 shares of Common Stock.
(8) Represents 100,000 shares of Common Stock and exercisable options to
purchase 41,800 shares of Common Stock.
(9) Represents 34,275 shares of Common Stock and an exercisable option to
purchase 21,215 shares of Common Stock.
(10) Represents exercisable options to purchase 18,419 shares of Common Stock.
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DESCRIPTION OF CAPITAL STOCK
The following summarizes the material provisions of the Certificate of
Incorporation and Bylaws. Such summaries do not purport to be complete and are
subject to, and are qualified in their entirety by reference to, all of the
provisions of the Certificate of Incorporation and the Bylaws, copies of which
have been filed as exhibits to the Registration Statement of which this
Prospectus is a part.
GENERAL
Effective upon the closing of this offering, the authorized capital stock
of the Company will be comprised of 100,000,000 shares of Common Stock and
20,000,000 shares of Preferred Stock.
COMMON STOCK
Following this offering, 11,223,951 shares of Common Stock will be
outstanding. All of the issued and outstanding shares of Common Stock are, and
upon the completion of this offering the shares of Common Stock offered hereby
will be, fully paid and non-assessable. Each holder of shares of Common Stock is
entitled to one vote per share on all matters to be voted on by stockholders
generally, including the election of directors. There are no cumulative voting
rights. The holders of Common Stock are entitled to dividends and other
distributions as may be declared from time to time by the Board of Directors out
of funds legally available therefor, if any. See "Dividend Policy." Upon the
liquidation, dissolution or winding up of the Company, the holders of shares of
Common Stock would be entitled to share ratably in the distribution of all of
the Company's assets remaining available for distribution after satisfaction of
all its liabilities and the payment of the liquidation preference of any
outstanding Preferred Stock as described below. The holders of Common Stock have
no preemptive or other subscription rights to purchase shares of stock of the
Company, nor are such holders entitled to the benefits of any redemption or
sinking fund provisions. As of September 26, 1997, there were approximately 285
beneficial owners of Common Stock.
PREFERRED STOCK
The Certificate of Incorporation authorizes the Board of Directors to
create and issue one or more series of Preferred Stock and determine the rights
and preferences of each series, to the extent permitted by the Certificate of
Incorporation and applicable law. Among other rights, the Board of Directors may
determine, without the further vote or action by the Company's stockholders, (i)
the number of shares constituting the series and the distinctive designation of
the series; (b) the dividend rate on the shares of the series, whether dividends
will be cumulative, and if so, from which date or dates, and the relative rights
of priority, if any, of payment of dividends on shares of the series; (iii)
whether the series shall have voting rights, in addition to the voting rights
provided by law and, if so, the terms of such voting rights; (iv) whether the
series shall have conversion privileges, and, if so, the terms and conditions of
such conversion, including provision for adjustment of the conversion rate in
such events as the Board of Directors shall determine; (v) whether or not the
shares of that series shall be redeemable or exchangeable, and, if so, the terms
and conditions of such redemption or exchange, as the case may be, including the
date or dates upon or after which they shall be redeemable or exchangeable, as
the case may be, and the amount per share payable in case of redemption, which
amount may vary under different conditions and at different redemption dates;
(vi) whether the series shall have a sinking fund for the redemption or purchase
of shares of that series and, if so, the terms and amount of such sinking fund;
and (vii) the rights of the shares of the series in the event of voluntary or
involuntary liquidation, dissolution or winding up of the Company and the
relative rights or priority, if any, of payment of shares of the series. Except
for any difference so provided by the Board of Directors, the shares of all
series of Preferred Stock will rank on a parity with respect to the payment of
dividends and to the distribution of assets upon liquidation. Although the
Company has no present plans to issue any shares of Preferred Stock following
the consummation of this offering, the issuance of shares of Preferred Stock, or
the issuance of rights to purchase such shares, may have the effect of delaying,
deterring or preventing a change of control of the Company or an unsolicited
acquisition proposal. See "Risk Factors -- Anti-Takeover Provisions."
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REGISTRATION RIGHTS
The holders of an aggregate of 4,853,199 shares of the Common Stock to be
outstanding upon the consummation of this offering (collectively, the
"Registration Rights Holders") have been granted by the Company certain demand
and incidental registration rights. In general, the Registration Rights Holders
have the right at any time after 180 days from the effective date of the
Registration Statement of which this Prospectus forms a part until the time that
the Company shall have qualified for the use of Form S-2 or S-3, on one
occasion, to cause the Company to register their holdings of Common Stock under
the Securities Act (such right being referred to as a "demand registration
right"). The Registration Rights Holders are also entitled, if the Company
determines to file a registration statement covering any of its securities under
the Securities Act (with the exception of an offering pursuant to a registration
statement on Form S-8 or S-4 and, in the case of Registration Rights Holders
holding the Series F Stock and Series G Stock, an initial public offering by the
Company) to require the Company to use its best efforts to include a requested
amount of their shares of Common Stock in the Company's registered offering
(such right being referred to as an "incidental registration right"), subject to
reduction if the managing underwriter for the offering determines that the
inclusion of such shares would interfere with the successful marketing of the
offering. Furthermore, at such time as the Company shall have qualified for the
use of Form S-2 or S-3, the Registration Rights Holders, and their permitted
transferees, have the right to make one demand registration request annually,
subject to certain marketing restrictions. The AOL Letter Agreement provides
that registration rights comparable to those of the Registration Rights Holders
shall be granted to the holder of the AOL Warrant with respect to the shares of
Common Stock for which the AOL Warrant is exercisable.
The Company is required to bear all registration expenses (other than
underwriting discounts and commissions and fees, and certain fees and
disbursements of counsel of the Registration Rights Holders) and has agreed to
indemnify the Registration Rights Holders against, and provide contribution with
respect to, certain liabilities under the Securities Act in connection with
incidental and demand registrations. The Registration Rights Holders have agreed
not to exercise their demand registration rights for a period of 180 days after
the date of this Prospectus.
WARRANTS
As of September 26, 1997, there were warrants outstanding (including the
AOL Warrant) to purchase an aggregate of 671,693 shares of Common Stock at an
average exercise price of $12.82 per share (in each case, assuming an initial
public offering price of $16.00 per share), expiring at various dates ending in
September 2004, and options to purchase an aggregate of 1,958,011 shares of
Common Stock (including options to be issued upon the consummation of this
offering) at an average exercise price of $7.67 per share, expiring at various
dates ending in July 2007. Upon completion of this offering, the Company will
issue the AOL Warrant for the purchase of 219,375 shares of Common Stock
(assuming an initial public offering price of $16.00 per share) at an exercise
price equal to the initial public offering price per share. The AOL Warrant will
be exercisable as to one-half of the total shares on the first anniversary of
the issuance of the warrant and as to the balance of the shares on the second
anniversary of the issue of the warrant; such warrant will expire seven years
from the date of issuance. The exercise price and number of shares of Common
Stock issuable upon exercise of the aforementioned warrant are subject to
adjustment upon the occurrence of certain events, including stock splits; stock
dividends; reorganizations; recapitalizations; consolidations or mergers; sales;
certain issuances of capital stock, rights, options, warrants or convertible
securities; distributions of the capital stock or evidences of indebtedness; and
extraordinary dividends or distributions. The AOL Warrant is subject to certain
conversion rights, at the election of the holder. The AOL Warrant and shares of
Common Stock issuable upon exercise of the AOL Warrant are subject to certain
registration rights.
ANTI-TAKEOVER EFFECTS OF DELAWARE LAW
Section 203 of the Delaware GCL contains certain provisions that may make
more difficult the acquisition of control of the Company by means of a tender
offer, open-market purchase, a proxy fight or otherwise. These provisions are
designed to encourage persons seeking to acquire control of the Company to
negotiate with the Board of Directors. However, these provisions could have the
effect of discouraging a prospective acquiror from making a tender offer or
otherwise attempting to obtain control of the Company. To
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<PAGE> 65
the extent that these provisions discourage takeover attempts, they could
deprive stockholders of opportunities to realize takeover premiums for their
shares or could depress the market price of the Common Stock.
Set forth below is a description of the relevant provisions of Section 203
of the Delaware GCL. The description is intended as a summary only and is
qualified in its entirety by reference to Section 203 of the Delaware GCL.
Section 203 of the Delaware GCL prohibits certain "business combination"
transactions between a publicly held Delaware corporation, such as the Company
after this offering, and any "interested stockholder" for a period of three
years after the date on which the latter became an interested stockholder,
unless (i) prior to that date either the proposed business combination or the
proposed acquisition of stock resulting in its becoming an interested
stockholder is approved by the board of directors of the corporation, (ii) in
the same transaction in which it becomes an interested stockholder, the
interested stockholder acquires at least 85% of those shares of the voting stock
of the corporation which are not held by the directors, officers or certain
employee stock plans or (iii) the business combination with the interested
stockholder is approved by the Board of Directors and also approved at a
stockholders' meeting by the affirmative vote of the holders of at least
two-thirds of the outstanding shares of the corporation's voting stock other
than shares held by the interested stockholder.
NASDAQ NATIONAL MARKET LISTING
The Company has applied for listing of the Common Stock on the Nasdaq
National Market under the trading symbol "NTKI."
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is American Stock
Transfer & Trust Company.
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SHARES ELIGIBLE FOR FUTURE SALE
Immediately following this offering, there will be 11,223,951 shares of
Common Stock issued and outstanding (assuming the Underwriters' over-allotment
option is not exercised). Of such shares, the 3,000,000 shares of Common Stock
to be sold in this offering will be immediately eligible for sale in the public
market, except for any of such shares owned at any time by an "affiliate" of the
Company within the meaning of Rule 144 under the Securities Act. The remaining
8,223,951 issued and outstanding shares are "restricted securities" within the
meaning of Rule 144 and may not be publicly resold, except in compliance with
the registration requirements of the Securities Act or pursuant to an exemption
from registration, including that provided by Rule 144.
In general, under Rule 144, a person (or persons whose shares are
aggregated) who has beneficially owned "restricted securities" for at least one
year, including a person who may be deemed an affiliate of the Company, is
entitled to sell within any three-month period a number of shares of Common
Stock that does not exceed the greater of 1% of the then-outstanding shares of
Common Stock of the Company, or the average weekly trading volume of Common
Stock on the Nasdaq National Market during the four calendar weeks preceding the
date on which notice of the sale is filed with the Commission. Sales under Rule
144 are subject to certain restrictions relating to manner of sale, notice and
the availability of current public information about the Company. A person who
is not an "affiliate" of the Company at any time during the 90 days preceding a
sale and who has beneficially owned shares for at least two years would be
entitled to sell such shares immediately following this offering under Rule
144(k) without regard to the volume limitations, manner of sale provisions or
notice or other requirements of Rule 144. In addition, any employee, director or
officer of, or consultant to, the Company who purchased his shares pursuant to a
written compensatory plan or contract may be entitled to rely on the resale
provisions of Rule 701, which permits non-affiliates to sell their Rule 701
shares without having to comply with the public information, holding period,
volume limitation or notice provisions of Rule 144, and permits affiliates to
sell their Rule 701 shares without having to comply with Rule 144's holding
period restrictions, in each case commencing 90 days after the date of this
Prospectus.
The directors and executive officers of the Company and certain other
stockholders of the Company, who collectively hold 7,369,000 of the outstanding
shares of Common Stock, have agreed not to offer to sell, sell, contract to
sell, grant any option to sell, encumber, pledge or otherwise dispose of, or
exercise any demand rights with respect to, any Common Stock or securities
convertible into or exercisable or exchangeable for Common Stock for a period of
180 days after the date of this Prospectus without the prior written consent of
PaineWebber Incorporated. Of the remaining 914,145 outstanding shares of Common
Stock, 546,765 shares may be publicly resold without limitation pursuant to Rule
144(k). Certain stockholders of the Company are entitled to both demand and
incidental registration rights with respect to 4,853,199 shares of Common Stock.
After the expiration of the 180-day period, such holders may choose to exercise
their demand registration rights, which could result in a large number of shares
being sold in the public market. In addition, the holder of the AOL Warrant will
have the right to require the Company to register one-half of the shares of
Common Stock for which the AOL Warrant is exercisable beginning one year from
the date of this Prospectus and the remaining half of the shares of Common Stock
for which the AOL Warrant is exercisable beginning two years from the date of
this Prospectus.
The Company intends to file immediately following this offering
registration statements on Form S-8 under the Securities Act to register an
aggregate of 2,400,142 shares of Common Stock reserved for issuance pursuant to
the exercise of stock options granted under the Stock Option Plans and 1,500,000
shares of Common Stock reserved for issuance pursuant to the Purchase Plan. The
stock registered under such registration statements will thereafter be available
for sale in the public market, subject to the resale limitations of Rule 144
applicable to "affiliates" of the Company. See "Management -- Stock Plans."
Prior to the date of this Prospectus, there has been no public market for
the Common Stock. Trading of the Common Stock on the Nasdaq National Market is
expected to commence on the date of this Prospectus. No prediction can be made
as to the effect, if any, that future sales of shares, or the availability of
shares for future sale, will have on the market price of the Common Stock
prevailing from time to time. Sales of substantial amounts of Common Stock, or
the perception that such sales could occur, could adversely affect the
prevailing market price of the Common Stock. See "Risk Factors -- Shares
Eligible for Future Sale; Registration Rights."
65
<PAGE> 67
UNDERWRITING
The Underwriters named below, acting through PaineWebber Incorporated and
Unterberg Harris (the "Representatives"), have severally agreed, subject to the
terms and conditions set forth in the Underwriting Agreement by and among the
Company and the Representatives (the "Underwriting Agreement"), to purchase from
the Company, and the Company has agreed to sell to the Underwriters, the number
of shares of Common Stock set forth opposite the names of such Underwriters
below:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
-------------------------------------------------------------------------- ---------
<S> <C>
PaineWebber Incorporated..................................................
Unterberg Harris..........................................................
---------
Total........................................................... 3,000,000
========
</TABLE>
The Underwriting Agreement provides that the obligations of the
Underwriters to purchase all of the shares of Common Stock are subject to
certain conditions. The Underwriters are committed to purchase, and the Company
is obligated to sell, all of the shares of Common Stock offered by this
Prospectus, if any of the shares of Common Stock being sold pursuant to the
Underwriting Agreement are purchased.
Of the 3,000,000 shares of Common Stock offered hereby, 201,612 shares
(assuming an initial public offering price of $16.00 per share) are being
reserved for sale to AOL, which has indicated that it intends to purchase such
shares from the Underwriters at the initial public offering price less
underwriting discounts and commissions. Upon completion of this offering, the
Company will also issue a warrant to AOL for the future purchase of up to
219,375 additional shares of Common Stock (assuming an initial public offering
price of $16.00 per share) at the initial public offering price per share. See
"Description of Capital Stock -- Warrants."
The Company has been advised by the Representatives that the Underwriters
propose to offer the shares of Common Stock to the public initially at the
public offering price set forth on the cover page of this Prospectus, and to
certain securities dealers at such price less a concession not in excess of
$ per share. The Underwriters may allow, and such dealers may reallow,
a discount not in excess of $ per share. After the initial public
offering, the public offering price and the concessions and discounts may be
changed by the Representatives.
The Company has granted an option to the Underwriters, exercisable during
the 30-day period after the date of this Prospectus, to purchase up to 450,000
additional shares of Common Stock at the initial public offering price less the
underwriting discount and commissions set forth on the cover page of this
Prospectus. The Underwriters may exercise such option only to cover
over-allotments in the sale of the shares that the Underwriters have agreed to
purchase. To the extent that the Underwriters exercise such option, each of the
Underwriters will become obligated, subject to certain conditions, to purchase
approximately the same percentage of such additional shares as is approximately
the percentage of shares of Common Stock that it is obligated to purchase of the
total number of the shares under the Underwriting Agreement as shown in the
table set forth above.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act or to contribute
payments that the Underwriters may be required to make in respect thereof.
66
<PAGE> 68
The Company, its directors and executive officers and certain stockholders
have agreed not to offer, sell, contract to sell or grant any option to purchase
or otherwise dispose of any shares of Common Stock owned by them prior to the
expiration of 180 days from the date of this Prospectus, except (i) for shares
of Common Stock offered hereby; (ii) with the prior written consent of
PaineWebber Incorporated; and (iii) in the case of the Company, for the issuance
of shares of Common Stock upon the exercise of options or the grant of options
to purchase shares of Common Stock.
Prior to this offering, there has been no public market for the Common
Stock of the Company. Accordingly, the initial public offering price will be
determined by negotiations among the Company and the Representatives of the
Underwriters. Among the factors to be considered in determining the initial
public offering price will be the Company's record of operations, its current
financial condition, its future prospects, the market for its products, the
experience of its management, the economic conditions of the Company's industry
in general, the general condition of the equity securities market, the demand
for similar securities of companies considered comparable to the Company and
other relevant factors.
Affiliates of Unterberg Harris are stockholders of the Company and Robert
C. Harris, Jr., a co-founder and a Managing Director of Unterberg Harris, is a
director and stockholder of the Company. See "Management," "Certain
Transactions" and "Principal Stockholders." Unterberg Harris acted as financial
advisor to Telebase in connection with the Merger, for which it received a
warrant to purchase 37,500 shares of Common Stock at an exercise price of $3.20
per share as compensation. Accordingly, this offering is being made pursuant to
Rule 2720 of the NASD's Conduct Rules. PaineWebber Incorporated is acting as
qualified independent underwriter and has agreed to assume the responsibilities
of acting as such in pricing this offering and conducting due diligence.
The Underwriters do not intend to confirm sales to any accounts over which
they exercise discretionary authority.
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 overallot in
connection with this offering, creating a short position in the Common Stock for
their own account. In addition, to cover overallotments or to stabilize the
price of the Common Stock, the Underwriters may bid for, and purchase, shares of
the Common Stock in the open market. The Underwriters may also reclaim selling
concessions allowed to an underwriter or a dealer for distributing the Common
Stock in transactions to cover their short positions, in stabilization
transactions or otherwise. Finally, the Underwriters may bid for, and purchase,
shares of the Common Stock in market making transactions and impose penalty
bids. These activities may stabilize or maintain the market price of the Common
Stock above market levels that may otherwise prevail. The Underwriters are not
required to engage in these activities, and may end any of these activities at
any time.
LEGAL MATTERS
Certain legal matters with respect to the validity of the Common Stock
offered hereby will be passed upon for the Company by its counsel, Dewey
Ballantine, 1301 Avenue of the Americas, New York, New York 10019. O'Sullivan
Graev & Karabell, LLP, 30 Rockefeller Plaza, New York, New York 10112 is acting
as counsel for the Underwriters in connection with certain legal matters
relating to the shares of Common Stock offered hereby.
67
<PAGE> 69
EXPERTS
The audited consolidated financial statements of the Company as of December
31, 1995 and 1996, and for each of the years in the three-year period ended
December 31, 1996, included in this Prospectus and elsewhere in the Registration
Statement have been audited by Arthur Andersen LLP, independent public
accountants, as indicated in their report with respect thereto, and are included
herein in reliance upon the authority of said firm as experts in giving said
report.
The financial statements of N2K Inc., a New York corporation, as of
December 31, 1995 appearing in the Registration Statement have been audited by
Richard A. Eisner & Company, LLP, independent auditors, as set forth in their
report thereon appearing elsewhere in the Registration Statement and have been
included in reliance upon such report given upon the authority of such firm as
experts in auditing and accounting.
ADDITIONAL INFORMATION
The Company has filed with the Commission a registration statement on Form
S-1 (the "Registration Statement") under the Securities Act, with respect to the
shares of Common Stock offered hereby. For the purposes hereof, the term
"Registration Statement" means the original Registration Statement and any and
all amendments thereto. This Prospectus does not contain all of the information
set forth in the Registration Statement and the exhibits and schedules thereto.
For further information with respect to the Company and such Common Stock,
reference is hereby made to such Registration Statement, which can be inspected
and copied at the public reference facilities maintained by the Commission at
Judiciary Plaza, Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and
at the Regional Offices of the Commission at Seven World Trade Center, New York,
New York 10048 and Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661. Copies of such material also can be obtained from the
Public Reference Section of the Commission, Washington, D.C. 20549 at prescribed
rates. In addition, the Company is required to file electronic versions of these
documents with the Commission through the Commission's Electronic Data
Gathering, Analysis and Retrieval (EDGAR) system. The Commission maintains a
World Wide Web site at http://www.sec.gov that contains reports, proxy and
information statements and other information regarding registrants that file
electronically with the Commission.
Statements contained in this Prospectus as to the contents of any contract
or other document to which reference is made are summaries of the material terms
of such contracts or documents, and in each instance reference is made to the
copy of such contract or other document filed as an exhibit to the Registration
Statement, each such statement being qualified in all respects by such
reference.
The Company intends to furnish its stockholders with annual reports
containing financial statements audited by independent accountants and with
quarterly reports containing updated summary financial information for each of
the first three quarters of each fiscal year.
68
<PAGE> 70
N2K INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
CONSOLIDATED FINANCIAL STATEMENTS OF N2K INC. AND SUBSIDIARIES
Report of Independent Public Accountants.......................................... F-2
Consolidated Balance Sheets....................................................... F-3
Consolidated Statements of Operations............................................. F-4
Consolidated Statements of Stockholders' Equity................................... F-5
Consolidated Statements of Cash Flows............................................. F-6
Notes to Consolidated Financial Statements........................................ F-7
FINANCIAL STATEMENTS OF NEW YORK N2K
Independent Auditors' Report...................................................... F-26
Balance Sheet..................................................................... F-27
Statement of Operations........................................................... F-28
Statement of Stockholders' Equity................................................. F-29
Statement of Cash Flows........................................................... F-30
Notes to Financial Statements..................................................... F-31
</TABLE>
F-1
<PAGE> 71
After the one-for-four reverse stock split of each outstanding share of
Common stock and the reorganization of the Company as a Delaware corporation, as
discussed in Note 1 of Notes to Consolidated Financial Statements is effected,
we expect to be in a position to render the following audit report.
/s/ ARTHUR ANDERSEN LLP
Philadelphia, Pa.
September 26, 1997
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To N2K Inc.:
We have audited the accompanying consolidated balance sheets of N2K Inc. (a
Delaware corporation) and subsidiaries as of December 31, 1995 and 1996, and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1996. 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 N2K Inc. and subsidiaries as
of December 31, 1995 and 1996 and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1996, in
conformity with generally accepted accounting principles.
F-2
<PAGE> 72
N2K INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30, PRO FORMA
-------------------------- ------------ STOCKHOLDERS'
1995 1996 1997 EQUITY (NOTE 1)
----------- ------------ ------------ ---------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............................ $ 547,624 $ 4,483,450 $ 669,722
Restricted cash...................................... 500,000 -- --
Accounts receivable, net............................. 1,515 63,549 403,261
Prepaid expenses..................................... 79,001 703,657 965,403
Inventory............................................ -- 113,824 56,079
Advances and recoupable costs........................ -- 86,525 1,478,647
----------- ------------ ------------
Total current assets............................... 1,128,140 5,451,005 3,573,112
----------- ------------ ------------
NET ASSETS OF DISCONTINUED OPERATIONS.................. 178,663 14,446 --
----------- ------------ ------------
PROPERTY AND EQUIPMENT:
Computer equipment................................... 772,851 2,289,944 2,684,858
Office furniture and equipment....................... 63,839 491,942 712,367
Leasehold improvements............................... 31,290 486,877 1,077,783
Property and equipment under capital leases.......... 498,802 868,436 1,076,662
----------- ------------ ------------
1,366,782 4,137,199 5,551,670
Less -- Accumulated depreciation and amortization.... (867,253) (1,002,435) (1,481,855)
----------- ------------ ------------
Net property and equipment......................... 499,529 3,134,764 4,069,815
----------- ------------ ------------
OTHER ASSETS:
Intangible assets, net............................... -- 320,162 282,158
Restricted cash...................................... 167,000 167,000 167,000
Other................................................ -- 299,093 305,895
----------- ------------ ------------
Total other assets................................. 167,000 786,255 755,053
----------- ------------ ------------
$ 1,973,332 $ 9,386,470 $ 8,397,980
=========== ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Line of credit....................................... $ 400,000 $ -- $ 850,000
Current portion of capital lease obligations......... 63,504 182,868 225,009
Accounts payable..................................... 236,182 1,088,657 1,873,887
Accrued compensation................................. 81,239 529,063 662,101
Accrued royalties.................................... -- -- 116,271
Other accrued liabilities............................ 343,255 1,595,752 1,448,130
----------- ------------ ------------
Total current liabilities.......................... 1,124,180 3,396,340 5,175,398
----------- ------------ ------------
NET LIABILITIES OF DISCONTINUED
OPERATIONS........................................... -- -- 23,255
----------- ------------ ------------
CAPITAL LEASE OBLIGATIONS.............................. 149,253 235,153 298,938
----------- ------------ ------------
OTHER LONG-TERM LIABILITIES............................ 50,915 309,100 328,271
----------- ------------ ------------
COMMON STOCK SUBJECT TO PUT RIGHTS..................... -- 537,498 537,498 $ --
----------- ------------ ------------ ------------
COMMITMENTS AND CONTINGENCIES (Note 11)
STOCKHOLDERS' EQUITY:
Preferred stock, $.001 par value, 40,000,000 shares
authorized, 4,056,695, 15,397,088 and 17,757,417
shares issued and outstanding; none issued and
outstanding pro forma.............................. 4,057 15,397 17,757 --
Common stock, $.001 par value, 100,000,000 shares
authorized, 1,566,975, 2,923,216 and 3,083,009
shares issued and outstanding; 8,114,577 shares
issued and outstanding pro forma................... 1,567 2,923 3,083 8,115
Additional paid-in capital........................... 8,539,777 31,694,385 39,424,472 39,974,695
Accumulated deficit.................................. (7,896,417) (26,804,326) (37,410,692) (37,410,692)
----------- ------------ ------------ ------------
Total stockholders' equity......................... 648,984 4,908,379 2,034,620 $ 2,572,118
============
----------- ------------ ------------
$ 1,973,332 $ 9,386,470 $ 8,397,980
=========== ============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE> 73
N2K INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
---------------------------------------- --------------------------
1994 1995 1996 1996 1997
----------- ----------- ------------ ----------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
NET REVENUES................ $ -- $ 96,505 $ 1,655,704 $ 529,579 $ 2,936,895
COST OF REVENUES............ -- 85,176 1,637,319 511,057 2,477,643
----------- ----------- ------------ ----------- ------------
Gross profit........... -- 11,329 18,385 18,522 459,252
OPERATING EXPENSES:
Operating and
development............ 257,826 1,034,617 7,811,061 2,152,401 4,610,615
Sales and marketing....... 173,415 1,077,649 2,726,291 743,365 3,814,133
General and
administrative......... 896,195 871,667 2,477,995 997,832 1,818,808
Charge for purchased
research and
development............ -- -- 5,242,523 5,242,523 --
----------- ----------- ------------ ----------- ------------
Operating loss......... (1,327,436) (2,972,604) (18,239,485) (9,117,599) (9,784,304)
INTEREST AND OTHER INCOME... 73,359 106,370 352,531 105,201 85,421
INTEREST EXPENSE............ (48,398) (18,237) (52,281) (30,902) (50,100)
----------- ----------- ------------ ----------- ------------
Loss from continuing
operations........... (1,302,475) (2,884,471) (17,939,235) (9,043,300) (9,748,983)
INCOME (LOSS) FROM
DISCONTINUED OPERATIONS... 1,444,885 1,289,671 (968,674) 157,271 (415,970)
----------- ----------- ------------ ----------- ------------
NET INCOME (LOSS)........... $ 142,410 $(1,594,800) $(18,907,909) $(8,886,029) $(10,164,953)
=========== =========== ============ =========== ============
PRO FORMA LOSS PER COMMON
SHARE (Note 1)
(unaudited):
Loss from continuing
operations............. $ (2.55) $ (1.19)
Discontinued operations... (0.14) (0.05)
------------ ------------
Pro forma net loss per
Common share........... $ (2.69) $ (1.24)
============ ============
SHARES USED IN COMPUTING PRO
FORMA NET LOSS PER COMMON
SHARE (unaudited)......... 7,041,955 8,229,371
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE> 74
N2K INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
ADDITIONAL
PREFERRED COMMON PAID-IN ACCUMULATED
STOCK STOCK CAPITAL DEFICIT TOTAL
--------- ------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1993........... $ 3,257 $ 1,567 $ 6,981,333 $ (6,444,027) $ 542,130
Issuance of Series D Preferred
stock, net...................... 800 -- 1,558,284 -- 1,559,084
Common stock options exercised..... -- -- 80 -- 80
Net income......................... -- -- -- 142,410 142,410
------- ------ ----------- ------------ ------------
BALANCE, DECEMBER 31, 1994........... 4,057 1,567 8,539,697 (6,301,617) 2,243,704
Common stock options exercised..... -- -- 80 -- 80
Net loss........................... -- -- -- (1,594,800) (1,594,800)
------- ------ ----------- ------------ ------------
BALANCE, DECEMBER 31, 1995........... 4,057 1,567 8,539,777 (7,896,417) 648,984
Issuance of Common stock and Series
E Preferred stock in connection
with purchase of New York N2K... 1,348 1,348 4,148,708 -- 4,151,404
Issuance of Series E Preferred
stock........................... 4,659 -- 3,722,701 -- 3,727,360
Issuance of Series F Preferred
stock, net...................... 5,333 -- 15,262,951 -- 15,268,284
Issuance of Common stock for
services rendered............... -- 6 14,244 -- 14,250
Common stock options exercised..... -- 2 6,004 -- 6,006
Net loss........................... -- -- -- (18,907,909) (18,907,909)
------- ------ ----------- ------------ ------------
BALANCE, DECEMBER 31, 1996........... 15,397 2,923 31,694,385 (26,804,326) 4,908,379
Issuance of Series G Preferred stock,
net................................ 2,480 -- 7,213,051 -- 7,215,531
Conversion of Series C Preferred
stock to Common stock.............. (120) 34 86 -- --
Common stock purchase and
retirement......................... -- (37) -- (441,413) (441,450)
Common stock options exercised....... -- 163 516,950 -- 517,113
Net loss............................. -- -- -- (10,164,953) (10,164,953)
------- ------ ----------- ------------ ------------
BALANCE, JUNE 30, 1997 (unaudited)... $ 17,757 $ 3,083 $39,424,472 ($(37,410,692) $ 2,034,620
======= ====== =========== ============ ============
PRO FORMA BALANCE (Note 1)
(unaudited)........................ $ -- $ 8,115 $39,974,695 $(37,410,692) $ 2,572,118
======= ====== =========== ============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE> 75
N2K INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
--------------------------------------- ---------------------------
1994 1995 1996 1996 1997
---------- ----------- ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss)..................................... $ 142,410 $(1,594,800) $(18,907,909) $ (8,886,029) $(10,164,953)
Adjustments to reconcile net income (loss) to net cash
used in operating activities --
Depreciation and amortization....................... 290,653 238,558 767,357 279,718 588,023
Loss on property disposal........................... -- -- -- -- 79,620
Provision for doubtful accounts and returns......... 18,000 -- 18,000 9,000 138,574
Charge for purchased research and development....... -- -- 5,242,523 5,242,523 --
Issuance of Common stock for services rendered...... -- -- 14,250 14,250 --
Decrease (increase) in --
Restricted cash................................... -- -- 500,000 500,000 --
Accounts receivable............................... (202,463) 485,839 461,356 (144,512) (390,826)
Prepaid expenses.................................. (26,343) (30,225) (610,365) (283,305) (284,959)
Inventory......................................... -- -- (113,824) -- 57,745
Advances and recoupable costs..................... -- -- (86,525) -- (1,392,122)
Other assets...................................... 7,367 (229) (49,144) (63,259) (11,598)
Increase (decrease) in --
Accounts payable.................................. 89,793 (30,951) 1,177,839 721,902 1,039,466
Accrued compensation.............................. 43,025 44,335 484,819 103,469 46,291
Accrued royalties................................. -- -- -- -- 116,271
Other accrued liabilities......................... (457,948) 34,121 308,858 (216,245) (373,379)
Other long-term liabilities....................... (47) (20,671) 59,073 39,399 19,171
---------- ----------- ------------ ----------- -----------
Net cash used in operating activities.......... (95,553) (874,023) (10,733,692) (2,683,089) (10,532,676)
---------- ----------- ------------ ----------- -----------
INVESTING ACTIVITIES:
Purchases of and deposits on property and equipment... (255,847) (338,721) (2,933,196) (918,792) (1,319,946)
Acquisition of New York N2K, net of cash acquired..... -- -- (224,077) (224,077) --
Purchase of Rocktropolis website...................... -- -- (671,744) (671,744) --
---------- ----------- ------------ ----------- -----------
Net cash used in investing activities.......... (255,847) (338,721) (3,829,017) (1,814,613) (1,319,946)
---------- ----------- ------------ ----------- -----------
FINANCING ACTIVITIES:
Net borrowings (repayments) under line of credit...... (400,000) 400,000 (400,000) (400,000) 850,000
Payments on capital lease obligations................. (117,959) (109,476) (103,115) (14,468) (102,300)
Payments on subordinated note......................... (75,000) -- -- -- --
Proceeds from issuance of Preferred stock, net........ 1,559,084 -- 18,995,644 18,995,644 7,215,531
Proceeds from exercise of Common stock options........ 80 80 6,006 162 75,663
---------- ----------- ------------ ----------- -----------
Net cash provided by financing activities...... 966,205 290,604 18,498,535 18,581,338 8,038,894
---------- ----------- ------------ ----------- -----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ 614,805 (922,140) 3,935,826 14,083,636 (3,813,728)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.......... 854,959 1,469,764 547,624 547,624 4,483,450
---------- ----------- ------------ ----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD................ $1,469,764 $ 547,624 $ 4,483,450 $ 14,631,260 $ 669,722
========== =========== ============ =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE> 76
N2K INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF JUNE 30, 1997 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1996 AND 1997 IS UNAUDITED)
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
THE COMPANY:
Background
N2K Inc. (the Company or N2K), formerly Telebase Systems, Inc., was formed
as a result of the merger in February 1996, of N2K Inc., a New York corporation
(New York N2K) which was founded in 1995, and Telebase Systems, Inc. (Telebase),
which was founded in 1984 as a provider of on-line information services (see
Note 2). In 1994, recognizing increasing opportunities in the entertainment
market, Telebase expanded its strategy to include music entertainment. In April
1997, the Company discontinued its on-line information services business and in
August 1997, the Company sold substantially all of the net assets of this
business. The operations of the on-line information services business have been
accounted for as discontinued operations (see Note 3).
The Company is an on-line music entertainment company using the Internet as
a global platform for promoting, marketing and selling music and related
merchandise. The Company's strategy is to build loyal user communities around
genre-specific websites that provide music content and enable consumers to
purchase compact discs (CDs), cassettes and related merchandise. The Company
believes that as its user base continues to grow, it will be able to increase
revenues from sales of music, related merchandise, advertising and sponsorship
programs.
The Company has also established its own record label, N2K Encoded Music,
which uses the Company's websites, as well as record stores and other
traditional distribution channels, to promote, distribute and sell original and
licensed artist recordings. Since January 1997, the Company has released its
initial 12 recordings on the N2K Encoded Music label under the direction of
Grammy Award-winning producer, Phil Ramone. The Company expects that many of its
N2K Encoded Music CDs will feature enhanced multimedia capabilities and Internet
connectivity software.
The Company has incurred significant losses and expects to continue to
incur significant losses on a quarterly and annual basis for the foreseeable
future. As of June 30, 1997, the Company had an accumulated deficit of
$37,410,692. The Company has incurred losses from continuing operations of
$17,939,235 and $9,748,983 for the year ended December 31, 1996 and the six
months ended June 30, 1997, respectively. Since its inception, the Company has
incurred costs to develop and enhance its technology, to create, introduce and
enhance its websites, to establish marketing and distribution relationships and
to build an administrative organization. The Company currently intends to
increase substantially its operating expenses as a result of the Company's
strategic alliances, to fund increased sales and marketing, to enhance existing
websites and to implement strategic relationships important to the success of
the Company. To the extent that such expenses precede or are not subsequently
followed by increased revenues, the Company's business, results of operations
and financial condition will be materially adversely affected. There can be no
assurance that the Company will be able to generate sufficient revenues from the
sale of music recordings, related merchandise, advertising and sponsorship to
achieve or maintain profitability on a quarterly or annual basis in the future.
The Company expects negative cash flow from operations to continue for the
foreseeable future as it continues to develop and market its business.
In April 1997, the Company sold 2,480,329 shares of Series G Preferred
stock at $3 per share, including 17,000 shares issued as a finder's fee, and
received gross proceeds of $7,389,987 and net proceeds of $7,215,531.
Additionally, the Company issued warrants to purchase 48,555 shares of Common
stock at an exercise price of $12 per share as a placement fee relating to this
transaction. Pursuant to the stock purchase agreement for the Series G Preferred
stock, if the Company consummates an initial public offering of stock in 1997 at
a price per share that is less than $14, the Company is required to pay each of
the purchasers of the Series G Preferred stock, either in cash or in additional
shares of Common stock, the difference between the initial public offering price
and $14 (see Note 7).
F-7
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N2K INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In July 1997, the Company issued an aggregate principal amount of
$1,750,000 in the form of promissory notes to Lawrence L. Rosen, Jonathan V.
Diamond and Robert David Grusin (the Management Notes), each of whom loaned the
Company $583,333. The Management Notes bear interest at 14% per annum and are
due on the earlier of (i) a change of control of the Company, as defined, and
(ii) March 31, 1998; however, if still outstanding, the Management Notes will
convert into 109,374 shares of Common stock (assuming an initial public offering
price of $16 per share) upon the consummation of the Company's initial public
offering. In consideration for these loans, the Company issued an aggregate of
48,609 warrants to purchase 48,609 shares of Common stock, representing 16,203
warrants to each of Messrs. Rosen, Diamond and Grusin. The warrants are
exercisable at a price of $12 per share and expire in July 2004.
In August 1997, the Company issued an aggregate principal amount of
$6,021,600 in the form of Senior Notes (the Senior Notes) to a group of five
institutional investors affiliated with an insurance company and one existing
stockholder of the Company. The Senior Notes bear interest at 14% per annum and
are due on the earlier of (i) consummation of the Company's initial public
offering, (ii) a change of control of the Company, as defined, and (iii) March
31, 1998. In consideration for these loans, the Company issued an aggregate of
167,266 warrants to purchase 167,266 shares of Common stock. The warrants are
exercisable at a price of $12 per share and expire in August 2004. In addition,
the Company issued warrants to purchase 83,389 shares of Common stock at an
exercise price of $12 per share as a placement fee relating to this transaction.
A portion of the proceeds of the Company's initial public offering will be used
to repay the Senior Notes. The Senior Notes have been recorded net of the
estimated value ($800,000) associated with these warrants. This discount is
being amortized over the term of the debt through March 31, 1998. In connection
with the repayment of the Senior Notes, the Company will record a charge to its
statement of operations in the fiscal quarter in which this offering is
consummated. This charge will be equal to the unamortized portion of the
discount on the Senior Notes which was approximately $614,000 as of September
26, 1997.
In August 1997, the Company sold substantially all of the net assets of its
discontinued operation and received $3,000,000, which was paid in cash at
closing (see Note 3). Based upon the Series G Preferred stock financing, the
issuance of Management and Senior Notes and the cash generated from the sale of
its discontinued operations, the Company believes that adequate resources are
available to fund the Company's operations for the year ending December 31,
1997.
The Company and America Online, Inc. (AOL) formed a strategic alliance as
of September 1, 1997 pursuant to an interactive marketing agreement (AOL
Contract), which provides for N2K to be featured as the exclusive on-line music
retailer within the MusicSpace channel of AOL's on-line service. In addition,
pursuant to the terms of the AOL Contract, an N2K banner will continuously
appear in a prominent place on the main screen of the MusicSpace channel and
will link to a customized MusicBoulevard website. N2K will also receive an
anchor tenant position in the music retailing department of AOL's Shopping
channel. Although a limited number of other music retailers may appear in the
Shopping channel, none will be featured or promoted more prominently than N2K.
The AOL Contract also provides for an integrated package of placements,
promotions and links through AOL.com, linking to the customized MusicBoulevard
website. N2K will also be promoted on the results pages for certain
music-related searches conducted through the AOL NetFind search engine on
AOL.com. N2K and AOL have also agreed to cooperate in the sale of advertising on
the websites governed by the terms of the AOL Contract. Each party shall have
the first right to sell any advertising or promotional spaces which reside on
their servers. In consideration of the marketing, promotion, advertising and
other services AOL will provide under the AOL Contract, N2K has agreed to pay
AOL a total of $18,000,000 over a three-year contract term, of which $12,000,000
will be paid between contract execution and the earlier of consummation of this
offering and December 1, 1997, with additional payments of $3,000,000 to be made
on each of November 1, 1998 and November 1, 1999. The Company expects to
amortize the costs associated with the AOL Contract over the initial contract
term of three years. After the initial three year term, the AOL Contract may be
renewed at the option of AOL for additional one-year terms.
In connection with the AOL Contract, AOL and the Company entered into an
agreement, pursuant to which AOL intends to purchase from the Underwriters at
the initial public offering price per share (less
F-8
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N2K INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
underwriting discounts and commissions) an aggregate amount of $3,000,000. In
addition, the Company expects to grant AOL a warrant for the future purchase of
up to 219,375 additional shares (assuming an initial public offering price of
$16 per share) of Common Stock (the AOL Warrant) at an exercise price equal to
the initial public offering price per share. The AOL Warrant will be exercisable
as to one-half of the total number of shares on the first anniversary of the
date of issuance and as to the balance of the shares on the second anniversary
of the date of issuance. The AOL Warrant expires in September 2004. The fair
value of these warrants will be amortized over the initial term of the AOL
Contract.
On September 23, 1997, the Company entered into a sponsorship agreement
with Excite, Inc. (Excite) (the Excite Contract), pursuant to which N2K will be
the exclusive retail music store sponsor of the www.excite.com website, provide
certain music-related content to the www.excite.com website, create a co-branded
area of Music Boulevard, the Company's website, and participate in joint
promotions to customers of this co-branded area. The Excite Contract provides
for the Company to pay Excite an initiation fee, an annual exclusivity fee, as
well as an annual sponsorship fee for ongoing programming, links, placements,
advertisements and promotions. Under the terms of the Excite Contract, the
Company will also pay Excite a specified share of gross margins realized by the
Company on transactions, advertising, sponsorship, promotions and other revenues
generated during the term of the Excite Contract on Music Boulevard as a result
of users referred from the www.excite.com website. In consideration of the
sponsorship opportunity afforded to the Company under the Excite Contract, N2K
has agreed to pay Excite a guaranteed minimum total of $9,800,000 over a
two-year contract term, of which $2,800,000 will be paid between contract
execution and December 31, 1997, with additional payments of $2,875,000 during
1998 and $4,125,000 during 1999. The Company expects to amortize the costs
associated with the Excite Contract over the initial contract term which expires
on the second anniversary of the commencement date, which is anticipated to be
on or about October 15, 1997. Pursuant to the terms of the agreement, Excite is
obligated to offer the Company the right of first refusal to negotiate with
Excite for renewal of the Excite Contract.
Unaudited Pro Forma Stockholders' Equity
In conjunction with the proposed initial public offering of the Company's
Common stock (the Offering), all of the outstanding shares of the Series A,
Series B, Series C, Series D, Series E, Series F and Series G Preferred stock
will convert into Common stock upon the consummation of the Offering. The
unaudited pro forma Stockholders' equity at June 30, 1997 reflects the assumed
conversion of the Series A, Series B, Series C, Series D, Series E, Series F and
Series G Preferred stock into 171,276, 178,569, 566,399, 615,381, 1,501,755,
1,333,321 and 620,077 shares, respectively, of Common stock. Additionally, the
put rights associated with the 44,790 shares of Common stock issued in
connection with the Rocktropolis transaction valued at $537,498 expire upon
consummation of the Offering. The unaudited pro forma Stockholders' equity at
June 30, 1997 reflects the conversion of the Common stock Subject to Put Rights
into Common stock and Additional paid-in capital (see Note 2).
Stock Split and Reorganization
On , 1997, the Company effected a one-for-four reverse stock
split of each outstanding share of Common stock in N2K Inc., a Pennsylvania
corporation, prior to the reorganization of N2K Inc. as a Delaware corporation,
which will occur immediately prior to the date of this Prospectus. All share,
stock option and warrant data have been restated to reflect the reverse stock
split.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Interim Financial Statements
The consolidated financial statements as of June 30, 1997 and for the six
months ended June 30, 1996 and 1997 are unaudited and, in the opinion of
management, include all adjustments (consisting only of normal recurring
adjustments) necessary for a fair presentation of results for these interim
periods. The results of
F-9
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N2K INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
operations for the six months ended June 30, 1996 and 1997 are not necessarily
indicative of the results to be expected for the entire year.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated.
Management's Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
For purposes of the Consolidated Statements of Cash Flows, the Company
considers investment instruments with an original maturity of three months or
less to be cash equivalents. Cash equivalents are comprised of investments in
various mutual and money market funds, as well as short-term notes.
Supplemental Disclosures of Cash Flow Information
For the years ended December 31, 1994, 1995 and 1996 and the six months
ended June 30, 1996 and 1997, the Company paid interest of $50,809, $18,237,
$52,281, $30,903 and $43,622, respectively. Income taxes paid in 1994, 1995 and
1996 were immaterial. The Company incurred $159,099, $99,454 and $208,226 of
capital lease obligations during 1994, 1995 and the six months ended June 30,
1997, respectively. There were no capital lease obligations incurred during
1996.
F-10
<PAGE> 80
N2K INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table displays the noncash assets and liabilities that were
consolidated as a result of the New York N2K acquisition on February 13, 1996
(see Note 2):
<TABLE>
<S> <C>
Noncash assets (liabilities):
Accounts receivable........................................... $ 78,090
Prepaid expenses.............................................. 3,540
Property and equipment........................................ 557,455
Other assets.................................................. 36,612
Goodwill...................................................... 280,000
Charge for purchased research and development................. 4,133,281
Accounts payable and other accrued liabilities................ (405,118)
Capital lease obligations..................................... (308,379)
-----------
Net noncash assets acquired................................ 4,375,481
Less -- Preferred stock issued............................. (1,078,286)
Common stock issued................................ (3,073,118)
-----------
Cash paid, net of cash acquired............................... $ 224,077
===========
</TABLE>
Additionally, the following table displays the noncash assets that were
acquired as a result of the Rocktropolis website acquisition on June 21, 1996
(see Note 2):
<TABLE>
<S> <C>
Noncash assets:
Charge for purchased research and development.................. $1,109,242
Intangible assets.............................................. 100,000
----------
Net noncash assets acquired................................. 1,209,242
Less -- Common stock issued................................. (537,498)
----------
Cash paid........................................................ $ 671,744
==========
</TABLE>
Advances and Recoupable Costs
In accordance with Statement of Financial Accounting Standards No. 50,
"Financial Reporting in the Record and Music Industry," advances to artists and
producers and other recoupable costs are capitalized as an asset when the
current popularity and past performance of the artist or producer provides a
sound basis for estimating the probable future recoupment of such advances from
earnings otherwise payable to the artist or producer. Any portion of such
advances not deemed to be recoupable from future royalties is reserved at the
balance sheet date. All other significant advances which do not meet the above
criteria are expensed when paid.
Property and Equipment
Property and equipment are stated at cost. Depreciation is calculated on a
straight-line basis over the estimated useful lives of the assets. Computer
equipment is depreciated primarily over an estimated useful life of 4 years and
office furniture and equipment is depreciated over an estimated useful life of 4
to 8 years. Leasehold improvements are amortized over the shorter of the
estimated useful life or the lease term. Improvements and betterments are
capitalized, and maintenance and repair costs are charged to expense as
incurred. Upon retirement or disposition, the applicable property amounts are
relieved from the accounts, and any gain or loss is recorded in the consolidated
statement of operations.
F-11
<PAGE> 81
N2K INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Intangible Assets
Intangible assets consist of acquired technology costs and the Rocktropolis
trade name and are being amortized over 5 years on a straight-line basis.
The Company evaluates the realizability of intangible assets based on
estimates of undiscounted future cash flows over the remaining useful life of
the asset. If the amount of such estimated undiscounted future cash flow is less
than the net book value of the asset, the asset is written down to its net
realizable value. As of June 30, 1997, no such write-down was required.
Revenue Recognition
Revenues from the sale of music CDs and cassettes sold via the Internet,
include shipping and handling charges, and are recognized at the time of
shipment. The Company records the estimated gross profit which will be lost due
to current year's shipments being returned in future periods as a reduction of
revenues and cost of revenues in the period of shipment.
Beginning in January 1997, in connection with the Company's first record
release, revenues began to be derived from the sale of original and licensed
artist recordings. Revenues are recognized at the time of shipment. Provision is
made for the estimated effect of sales returns where right-of-return privileges
exist. Returns of product from customers are accepted in accordance with
standard industry practice. The full amount of the returns allowance (estimated
returns to be received net of distribution, royalty and inventory costs) is
shown, along with the allowance for doubtful accounts, as a reduction of
accounts receivable in the accompanying consolidated financial statements.
The Company has numerous agreements with other companies in the
entertainment business which provide for, among other things, the Company to pay
a percentage of revenues, as defined, derived from customers entering the
Company's website via the websites of these other companies. The Company records
these costs in cost of revenues at the time the related revenues are recorded.
Revenues from barter transactions are recognized as earned. Barter
transactions are recorded at the estimated fair value of the goods or services
received. To date, barter transactions have been insignificant.
Advertising revenues are derived from the sale of advertising on the
Company's websites. Advertising revenues are recognized in the period the
advertisement is displayed, provided that no significant Company obligations
remain and collection of the resulting receivable is probable. Company
obligations typically include guarantees of minimum number of "impressions", or
times that any advertisement is viewed by users on the Company's websites. To
the extent minimum guaranteed impressions are not met, the Company defers
recognition of the corresponding revenues until guaranteed impression levels are
achieved. Revenues from the sale of certain advertising on the Company's
websites are shared with third parties under the terms of certain agreements.
The Company records advertising revenues net of amounts allocable to third
parties under the terms of such agreements. To date, amounts allocable to third
parties have not been significant.
International net revenues were $25,570, $650,258, $194,702 and $1,108,501
for the years ended December 31, 1995 and 1996 and the six months ended June 30,
1996 and 1997, respectively.
Operating and Development Expenses
Operating and development expenses consist of software engineering,
multimedia production, graphic design, artist relations, inventory management
and computer operations which support the Company's products. For the years
ended December 31, 1995 and 1996 and the six months ended June 30, 1996 and
1997, the Company incurred costs of $724,326, $3,051,174, $1,047,364 and
$1,895,064, respectively, relating to research and development. These amounts
are included in operating and development expenses as shown in
F-12
<PAGE> 82
N2K INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the accompanying consolidated statements of operations. Research and development
costs in 1994 were immaterial.
Advertising Expenses
Promotional costs incurred in connection with the N2K Encoded Music label
are capitalized for unreleased projects and expensed when the related product is
released. All other advertising and promotional costs incurred by the Company
are expensed the first time the advertising takes place. Advertising and
promotion expense was $388,748, $1,759,515, $445,625 and $1,356,120 for the
years ended December 31, 1995 and 1996 and the six months ended June 30, 1996
and 1997, respectively, and is included in sales and marketing expenses in the
accompanying consolidated statements of operations. There were no advertising
expenses incurred in 1994.
Charge for Purchased Research and Development
In connection with the acquisition of New York N2K in February 1996 and the
rock website, Rocktropolis, in June 1996 (see Note 2), $5,242,523 of the
aggregate purchase price was allocated to incomplete research and development
projects. Accordingly, these costs were charged to expense as of the acquisition
dates. The development of these projects had not yet reached technological
feasibility and the technology had no alternative future use. The acquired
technology required substantial additional development by the Company.
Pro Forma Net Loss Per Common Share (Unaudited)
Pro forma net loss per Common share was calculated by dividing net loss by
the weighted average number of common shares outstanding for the respective
periods adjusted for the dilutive effect of common stock equivalents, which
consist of stock options using the treasury stock method. Pursuant to the
requirements of the Securities and Exchange Commission, common stock issued by
the Company during the 12 months immediately preceding the initial public
offering, plus the number of common equivalent shares which became issuable
during the same period pursuant to the grant of common stock options and
warrants, have been included in the calculation of the shares used in computing
pro forma net loss per Common share as if they were outstanding for all periods
presented (using the treasury stock method and the initial public offering price
of $16 per Common share). Pursuant to the policy of the staff of the Securities
and Exchange Commission, the calculation of shares used in computing pro forma
net loss per Common share also includes the Series A, Series B, Series C, Series
D, Series E and Series F Preferred stock which will convert into 171,276,
178,569, 566,399, 615,381, 1,501,755 and 1,333,321 shares, respectively, of
Common stock upon the consummation of the Offering contemplated in this
Prospectus as if they were converted to Common stock on their original date of
issuance. The Series G Preferred stock, which will convert into 620,077 shares
of Common stock upon the consummation of the Offering, have been included as
outstanding for all periods presented (using the treasury stock method and the
initial public offering price of $16 per Common share) since they were issued
during the twelve months immediately preceding the initial public offering (see
Note 7).
Major Supplier and Distribution Agreement
The Company currently has a contract with Valley Record Distributors
(Valley), which is currently the Company's primary provider of order fulfillment
for direct-to-consumer recorded music products. The Company has no fulfillment
operation or facility of its own and, accordingly, is dependent upon maintaining
its existing relationship with Valley or establishing a new fulfillment
relationship with one of the few other fulfillment operations. There can be no
assurance that the Company will maintain its relationship with Valley beyond the
term of its existing agreement, which was entered into in May 1995 for a
three-year period, or that
F-13
<PAGE> 83
N2K INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
it will be able to find an alternative, comparable supplier capable of providing
fulfillment services on terms satisfactory to the Company should its
relationship with Valley terminate. An unanticipated termination of the
Company's relationship with Valley, particularly during the fourth quarter of
the calendar year in which a high percentage of recorded music sales are made,
could materially adversely affect the Company's results of operations for the
quarter in which such termination occurred even if the Company was able to
establish a relationship with an alternative fulfillment house. This contract
expires in May 1998. The Company is currently negotiating a new contract with
Valley which, if executed, would extend the term of the agreement. Valley may
terminate its existing agreement with the Company upon 90 days' written notice,
in the event that Valley decides to discontinue providing fulfillment services
to all of Valley's on-line service customers. To date, Valley has satisfied the
Company's requirements on a timely basis. However, to the extent that Valley
does not have sufficient capacity and is unable to satisfy on a timely basis
increasing requirements of the Company, such capacity constraint would have a
material adverse effect on the Company's business, results of operations and
financial condition.
On October 16, 1996, the Company and RED Distribution, Inc. (RED), a
subsidiary of Sony Music Entertainment, Inc., entered into a letter agreement
which provided that RED be the exclusive distribution agent in the United States
for the N2K Encoded Music label. The agreement has a three-year term and
provides for a distribution fee of between 16% to 20% of net revenues (as
defined). The agreement provides that the Company will deliver at least 12
previously unreleased, newly compiled or recorded studio albums during each year
of the term of the agreement and no less than 4 such albums during each six
months of each year of the term of the agreement. The distribution services
rendered by RED include billing and collecting from customers, bearing bad
debts, distributing promotional items, advertising, undertaking retail marketing
and inventory control activities and processing returns. The payment of the
distribution fees owed to RED by the Company is secured by all of the Company's
inventories in RED's possession awaiting distribution. The Company does not have
a distribution operation of its own and, accordingly, is dependent upon
maintaining its existing relationship with RED or establishing a new
distribution relationship with a comparable distributor. There can be no
assurance that the Company will maintain its relationship with RED beyond the
term of its existing agreement. The termination of such relationship would,
absent establishing a substitute relationship with another distributor, have a
material adverse effect on the Company's business, results of operations and
financial condition. The Company believes that alternative distributors would be
available on terms satisfactory to the Company should its relationship with RED
terminate. As the Company's first recording was released in January 1997, there
was no activity under this agreement prior to December 31, 1996. For the six
months ended June 30, 1997, $787,804 in gross product revenues and $617,968 in
net product revenues were generated through RED, respectively. Net amounts due
from RED as of June 30, 1997, were approximately $322,000, which are included in
accounts receivable in the accompanying consolidated balance sheets.
2. ACQUISITIONS:
Acquisition of New York N2K
On February 13, 1996, New York N2K merged with and into Telebase in a
transaction accounted for as a purchase. Telebase issued 1,347,857 shares of
Common stock valued at $3,073,118 and 1,347,860 shares of Series E Preferred
stock valued at $1,078,286 in exchange for all of the outstanding Common stock
of New York N2K. The fair value assigned to the Common stock was determined
based upon an independent appraisal. Telebase is the surviving corporation;
however, the corporate name of the surviving corporation was changed to N2K Inc.
Telebase was the acquirer in this purchase. The results of the acquired business
have been included in the consolidated financial statements from the date of
acquisition. The total purchase price of $4,375,481, including transaction
costs, was allocated to the assets acquired and liabilities assumed based on
their respective fair values. The Company recorded $4,133,281 of the purchase
price as a charge to the consolidated statements of operations on the
acquisition date as it was related to the fair value of incomplete research and
development projects. The remaining balance of the purchase price of $280,000
was allocated to
F-14
<PAGE> 84
N2K INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
acquired technology costs and is being amortized over 5 years on a straight-line
basis. If the acquisition of New York N2K had occurred on January 1, 1995, the
unaudited pro forma information, after giving effect to the pro forma
adjustments described below, would have been as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1995 1996
----------- ------------
<S> <C> <C>
Unaudited pro forma revenues........................... $ 240,131 $ 1,724,331
========== ===========
Unaudited pro forma loss from continuing operations.... $(4,129,250) $(14,189,842)
========== ===========
Unaudited pro forma net loss........................... $(2,839,579) $(15,158,516)
========== ===========
Unaudited pro forma net loss per Common share.......... $(2.15)
===========
</TABLE>
The unaudited pro forma information does not purport to be indicative of
the results that would have been attained if the operations had actually been
combined for the periods presented and is not necessarily indicative of the
operating results to be expected in the future.
The pro forma adjustments consist of compensation charges for certain
executive officers who did not receive any compensation from New York N2K prior
to the merger and the amortization of the acquired technology costs. The amount
of the compensation pro forma adjustment was $500,000 and $75,000 for the years
ended December 31, 1995 and 1996, respectively. The amount of the acquired
technology cost amortization pro forma adjustment was $46,667 and $7,000 for the
years ended December 31, 1995 and 1996, respectively. Additionally, the above
unaudited pro forma information excludes the one-time charge of $4,133,281
associated with the write-off of purchased research and development costs in
connection with the New York N2K acquisition and includes the write-off of
purchased research and development costs associated with the purchase of the
Rocktropolis website for the year ended December 31, 1996. This one-time charge
would have increased the unaudited pro forma net loss per Common share for the
year ended December 31, 1996 by $0.57.
On February 13, 1996, the Company sold 3,750,000 shares of Series E
Preferred stock at $.80 per share and received gross proceeds of $3,000,000 (see
Note 7).
Acquisition of Rocktropolis Website
On June 21, 1996, the Company acquired the assets that relate to the rock
website known as Rocktropolis, from Rocktropolis Enterprises, LLC for $633,000
in cash and 44,790 shares of Common stock valued at $537,498. The total purchase
price of $1,209,242, including transaction costs, was allocated to the assets
acquired based on their respective fair values. The Company recorded $1,109,242
of the purchase price as a charge to the consolidated statements of operations
on the acquisition date as it was related to the fair value of incomplete
research and development projects. The remaining balance of the purchase price
was allocated to the Rocktropolis tradename and is being amortized on a
straight-line basis over 5 years.
The Common stock issued in connection with the acquisition of the
Rocktropolis website may be "put" back to the Company at a price of $12 per
share at any time beginning 366 days after the issuance date if there is not at
that time a public market for shares of the Company's Common stock. Accordingly,
the value of these shares ($537,498) is not included in Stockholders' equity in
the accompanying consolidated balance sheets. The "put" rights expire upon the
consummation of the Offering.
3. DISCONTINUED OPERATIONS:
In April 1997, the Company's Board of Directors approved a formal plan of
disposal for its on-line information services business.
The on-line information services business was accounted for as discontinued
operations with a measurement date of April 4, 1997. The Company expected that
the sale of the on-line information services business would result in a gain on
the disposal of the segment's net assets which would be sufficient to offset the
losses of the segment from the measurement date to the disposal date. As a
result, no amounts were accrued in the
F-15
<PAGE> 85
N2K INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
accompanying financial statements relating to the disposal of the segment. The
net losses from discontinued operations from the measurement date to the
disposal date were recorded as an adjustment to the net assets or liabilities of
the discontinued operations in the accompanying consolidated balance sheets. The
accompanying consolidated financial statements reflect the operating results and
balance sheet items of the discontinued operations separately from continuing
operations.
Effective August 1, 1997, the Company entered into an agreement for the
sale of all of the net assets of the on-line information services business,
except its accounts receivable and accounts payable. The total purchase price of
$6,000,000 consists of $3,000,000 payable in cash at closing, and up to an
additional $3,000,000 pursuant to an earn-out which, if and to the extent
earned, is payable at the purchaser's sole discretion on March 31, 1999 and
September 30, 1999, either in cash or that number of shares of its Common Stock
having a market value equal to the amount to be paid. The earn-out is based upon
the revenues of the business which are generated from July 1, 1997 through
December 31, 1998. If revenues during the above period do not meet the specified
target, the earn-out is reduced. If revenues during the above period exceed the
specified target, the earn-out is increased, up to a maximum of $1,000,000. The
Company will record the earn-out as a gain on the sale of discontinued
operations when realized. At closing, the Company will record a gain on the sale
of discontinued operations which the Company presently estimates will be
approximately $1,500,000. In connection with the sale, the Company entered into
a services agreement under which it will provide certain services and support
personnel to the purchaser through September 1999 for a fixed monthly fee.
Income (loss) from discontinued operations in the accompanying consolidated
statements of operations were:
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE
YEAR ENDED DECEMBER 31, 30,
-------------------------------------- -----------------------
1994 1995 1996 1996 1997
----------- ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Revenues........................... $11,391,780 $10,976,711 $7,855,758 $4,633,940 $2,411,057
=========== =========== ========== ========== ==========
Income (loss) before income
taxes............................ $ 1,454,165 $ 1,289,971 $ (968,674) $ 157,271 $ (415,970)
Income taxes....................... 9,280 300 -- -- --
----------- ----------- ---------- ---------- ----------
Income (loss)...................... $ 1,444,885 $ 1,289,671 $ (968,674) $ 157,271 $ (415,970)
=========== =========== ========== ========== ==========
</TABLE>
The assets and liabilities of the on-line information services business
have been reclassified in the accompanying consolidated balance sheets to
separately identify them as net assets (liabilities) of discontinued operations.
A summary of these net assets (liabilities) of discontinued operations is as
follows:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
------------------------- -----------
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Current assets, excluding accounts
receivable.................................. $ 22,642 $ 11,891 $ 35,104
Accounts receivable........................... 1,497,034 1,033,734 946,274
Property and equipment, net................... 321,615 278,875 247,152
Other assets.................................. 22,700 -- --
Current liabilities........................... (1,503,435) (1,310,054) (1,251,785)
Long-term liabilities......................... (181,893) -- --
---------- ---------- ---------
Net assets (liabilities) of discontinued
operations.................................. $ 178,663 $ 14,446 $ (23,255)
========== ========== =========
</TABLE>
4. MTV AGREEMENT:
On December 18, 1996, the Company entered into a letter of intent creating
a strategic alliance with MTV Networks (MTVN), the entity that controls the MTV
and VH1 cable channels. As part of this alliance, MTVN provides the Company's
internet site, Music Boulevard, with content and presents Music Boulevard, both
on-air and on-line, as the exclusive partner for each of the MTV and VH1
websites. In exchange, the Company promotes MTV/VH1 on-line on Music Boulevard
and has granted to MTVN the right to sell
F-16
<PAGE> 86
N2K INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
advertising on and share profits from MTV/VH1 sales made through Music
Boulevard. In addition, a MTV/VH1 popular and rock section replaced the
Company's offerings for those genres on Music Boulevard. The agreement has a
two-year term which commenced on the launch date, which was in March 1997. As of
June 30, 1997, the effect of this agreement in the accompanying consolidated
financial statements is insignificant.
5. OTHER ACCRUED LIABILITIES:
Other accrued liabilities as of December 31, 1995, 1996 and June 30, 1997
consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
----------------------- ----------
1995 1996 1997
-------- ---------- ----------
<S> <C> <C> <C>
Office close-down............................... $ -- $ 500,722 $ 196,064
Accrued professional fees....................... -- 499,352 371,219
Accrued merchandise costs....................... 33,300 24,740 373,262
Other........................................... 309,955 570,938 507,585
-------- -------- ----------
$343,255 $1,595,752 $1,448,130
======== ======== ==========
</TABLE>
At June 30, 1997, the Company has future obligations relating to the
close-down of an office. The costs accrued include charges for lease payments
(net of sublease receipts) on an office facility which the Company will not
utilize, employee severance and estimated losses on the write-down of certain
non-recoverable assets. Actual results could differ from this estimate.
6. CREDIT AGREEMENTS:
The Company had a line of credit with a bank of $2,000,000 as of June 30,
1997 which originally expired on June 30, 1997. On August 6, 1997, the bank
extended the expiration date to August 31, 1997, at which time the outstanding
principal balance, if any, became payable unless the line of credit was
extended. Additionally, the August 6, 1997 letter agreement waived certain
financial covenants through August 31, 1997 which the Company was required to
maintain and which the Company was not in compliance with at and subsequent to
June 30, 1997. This letter agreement also limited the Company's borrowings to
the outstanding balance as of August 6, 1997, which was $850,000. On September
16, 1997, pursuant to a letter agreement, the line of credit was extended to
December 31, 1997. Additionally, the limit placed on the Company's borrowings
was removed. The Company is obligated to pay a commitment fee equal to 0.5% on
the average daily unused portion of the commitment. The line of credit bears
interest at the bank's "national commercial rate," as defined, and is secured by
a security interest in substantially all corporate assets. Maximum borrowings
are limited to certain percentages of eligible accounts receivable (as defined).
Prior to June 30, 1996, the line of credit was $1,000,000, bore interest at the
bank's "national commercial rate," as defined, for borrowings which did not
exceed $500,000 and at the bank's "national commercial rate," as defined, plus
1% for borrowings which exceeded $500,000 and was secured by a $500,000
certificate of deposit and a security interest in substantially all corporate
assets. The $500,000 was shown as restricted cash in current assets in the
accompanying consolidated balance sheets. Maximum borrowings were limited to
certain percentages of eligible accounts receivable (as defined), plus the
$500,000 certificate of deposit. During 1994, 1995, 1996 and the six months
ended June 30, 1996 and 1997, the maximum amount outstanding was $500,000,
$400,000, $600,000, $600,000 and $850,000, respectively. For the years ended
December 31, 1994, 1995, 1996 and the six months ended June 30, 1996 and 1997,
the weighted average interest rate was 7.5%, 8.7%, 8.7%, 8.7% and 8.4%,
respectively. In addition, the line of credit requires the Company to meet
certain financial covenants. As of June 30, 1997, the Company was not in
compliance with certain of these financial covenants; however, the Company has
obtained a waiver from the bank relating to such noncompliance. Interest expense
for the years
F-17
<PAGE> 87
N2K INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ended December 31, 1994, 1995, 1996 and the six months ended June 30, 1996 and
1997, was $21,236, $7,360, $14,992, $14,992 and $32,031, respectively.
In January 1989, the Company entered into a $300,000 subordinated note
agreement with the Philadelphia Industrial Development Corporation. The note was
unsecured and bore interest at 13%, payable quarterly. The final principal
payment of $75,000 was paid in December 1994. Interest expense was $9,750 in
1994.
7. PREFERRED STOCK:
Preferred stock consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- JUNE 30,
1995 1996 1997
------ -------- --------
<S> <C> <C> <C>
Preferred stock, $.001 par value, 40,000,000 shares
authorized and designated as follows --
Series A, 500,000 shares authorized,
488,838 shares issued and outstanding........... $ 489 $ 489 $ 489
Series B, 625,000 shares authorized, issued and
outstanding..................................... 625 625 625
Series C, 2,857,143 shares authorized,
2,142,857, 2,142,857 and 2,022,857 shares
issued and outstanding.......................... 2,143 2,143 2,023
Series D, 1,000,000 shares authorized,
800,000 shares issued and outstanding........... 800 800 800
Series E, 6,007,060 shares authorized,
issued and outstanding.......................... -- 6,007 6,007
Series F, 5,333,333 shares authorized,
issued and outstanding.......................... -- 5,333 5,333
Series G, 15,000,000 shares authorized,
2,480,329 issued and outstanding................ -- -- 2,480
------ ------- -------
$4,057 $ 15,397 $17,757
====== ======= =======
</TABLE>
In January 1988, the Company issued 488,838 shares of Series A Preferred
stock at $1.25 per share upon the conversion of certain liabilities. The Series
A Preferred shares are convertible into 171,276 shares of Common stock, subject
to adjustment (as defined).
In March 1988, the Company sold 625,000 shares of Series B Preferred stock
for $1,000,000. In August 1988, the Company sold 2,142,857 shares of Series C
Preferred stock for $3,000,000. In 1993, the Series C Preferred stockholder sold
all of its shares to various outside investors, as well as to certain officers
of the Company. In June 1997, certain officers converted 120,000 shares of their
Series C Preferred shares into 33,600 shares of Common stock. The Series B and
Series C Preferred shares are convertible into 178,569 and 566,399 shares of
Common stock, respectively, subject to adjustment (as defined).
In September 1994, the Company sold 800,000 shares of Series D Preferred
stock at $2 per share and received net proceeds of $1,559,084. The Series D
Preferred shares are convertible into 615,381 shares of Common stock, subject to
adjustment (as defined).
On February 13, 1996, the Company issued 1,347,860 shares of Series E
Preferred Stock in connection with the acquisition of New York N2K (see Note 2).
Also, on February 13, 1996, the Company sold 3,750,000 shares of Series E
Preferred stock for $.80 per share and received proceeds of $3,000,000. In April
and May 1996, the Company sold 909,200 shares of Series E Preferred stock at
$.80 per share and received proceeds of $727,360. The number of shares of Series
E Preferred stock sold to certain officers and directors of
F-18
<PAGE> 88
N2K INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the Company at $.80 per share was 3,299,992. The Series E Preferred shares are
convertible into 1,501,755 shares of Common stock, subject to adjustment (as
defined). In May and June 1996, the Company sold 5,333,333 shares of Series F
Preferred stock at $3 per share and received net proceeds of $15,268,284. The
Series F Preferred shares are convertible into 1,333,321 shares of Common stock,
subject to adjustment (as defined).
In April 1997, the Company sold 2,480,329 shares of Series G Preferred
stock at $3 per share, including 17,000 shares issued as a finder's fee, and
received gross proceeds of $7,389,987 and net proceeds of $7,215,531. The Series
G Preferred shares are convertible into 620,077 shares of Common stock, subject
to adjustment (as defined). The number of shares of Series G Preferred stock
sold to certain officers and directors of the Company at $3 per share was
333,333. Additionally, the Company issued warrants to purchase 48,555 shares of
Common stock at an exercise price of $12 per share as a placement fee relating
to this transaction. Pursuant to the stock purchase agreement for the Series G
Preferred stock, if the Company consummates an initial public offering of stock
in 1997 at a price per share that is less than $14, the Company is required to
pay each of the purchasers of the Series G Preferred stock, either in cash or in
additional shares of Common stock, the difference between the initial public
offering price and $14 per share.
The Company has reserved 4,986,778 shares of Common stock for the
conversion of all series of Preferred stock. Each series of Preferred stock has
voting rights equal to the number of shares that would be received if it was
converted into Common stock.
8. STOCKHOLDERS' EQUITY:
Common Stock Options
Under the Company's 1987 Incentive Stock Option Plan, options to purchase
775,000 shares of Common stock could have been granted to certain officers,
directors and employees. The options expire ten years from the date of grant and
vest over four years. Expiration dates range from 1997 to 2005. As of June 30,
1997, there are 283,623 options outstanding and no additional grants will be
made under this plan. Subsequent to June 30, 1997, options to purchase 33,481
shares of Common stock were terminated.
Additionally, the Company has 72,882 nonqualified stock options outstanding
as of June 30, 1997, with expiration dates ranging from May 1998 to January
2004. These options vested immediately upon grant.
In February 1996, the Company established the 1996 Stock Option Plan, which
authorized options to purchase 1,650,000 shares of Common stock, as amended and
restated on June 20, 1996. Under the 1996 Stock Option Plan, options may be
granted to officers, directors and other key employees. The options expire ten
years from the date of grant and vest over four years, unless specifically
agreed to otherwise. The exercise price is fixed at the grant date and equals at
least 100% of the fair market value of the Common stock on the date of grant. As
of June 30, 1997, there are 1,000,866 options outstanding and 649,134 options
available for grant under the 1996 Stock Option Plan. On July 30, 1997, the
Company granted options to purchase 324,999 shares of Common stock. These
options were granted pursuant to the 1996 Stock Option Plan. These options have
an exercise price of $12 per share and vest over four years. Subsequent to July
30, 1997, options to purchase 44,927 shares of Common stock were terminated.
In December 1996, the Company granted 4,050 nonqualified stock options to
individuals who were neither employees or directors of the Company. The options
expire ten years from the date of grant and vested immediately upon grant. The
exercise price is equal to the fair market value of the Common stock on the date
of grant.
F-19
<PAGE> 89
N2K INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Information relative to the 1987 Incentive Stock Option Plan, the
nonqualified stock options and the 1996 Stock Option Plan is as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
EXERCISE PRICE EXERCISE PRICE AGGREGATE
OPTIONS (PER SHARE) (PER SHARE) PROCEEDS
--------- --------------- -------------- ----------
<S> <C> <C> <C> <C>
Balance as of December 31, 1993..... 318,641 $2.50 - $ 5.00 $ 3.75 $1,193,484
Granted........................... 79,750 2.60 - 3.20 2.64 210,200
Exercised......................... (25) 3.20 3.20 (80)
Terminated........................ (1,475) 3.20 3.20 (4,720)
--------- -------------- ----- ----------
Balance as of December 31, 1994..... 396,891 2.50 - 5.00 3.52 1,398,884
Granted........................... 231,375 2.60 - 3.20 2.63 608,325
Exercised......................... (25) 3.20 3.20 (80)
Terminated........................ (5,850) 3.20 3.20 (18,720)
--------- -------------- ----- ----------
Balance as of December 31, 1995..... 622,391 2.50 - 5.00 3.19 1,988,409
Granted........................... 1,020,169 3.20 - 12.00 4.83 4,922,483
Exercised......................... (2,145) 2.60 - 3.20 2.80 (6,006)
Terminated........................ (102,363) 2.50 - 5.00 3.05 (311,994)
--------- -------------- ----- ----------
Balance as of December 31, 1996..... 1,538,052 2.50 - 12.00 4.29 6,592,892
Granted........................... -- -- -- --
Exercised......................... (162,969) 2.60 - 3.20 3.17 (517,113)
Terminated........................ (13,662) 2.60 - 3.20 3.07 (41,963)
--------- -------------- ----- ----------
Balance as of June 30, 1997......... 1,361,421 $2.50 - $12.00 $ 4.43 $6,033,816
========= ============== ===== ==========
Options exercisable as of
June 30, 1997..................... 440,735 $ 3.88
========= =====
</TABLE>
The weighted average remaining contractual life of all options outstanding
at December 31, 1996 is 7.7 years.
The following table summarizes information relating to the 1987 Incentive
Stock Option Plan, the nonqualified stock options and the 1996 Stock Option Plan
at June 30, 1997 based upon each exercise price.
<TABLE>
<CAPTION>
WEIGHTED
WEIGHTED AVERAGE
WEIGHTED AVERAGE EXERCISE
AVERAGE EXERCISE PRICE
RANGE OF OPTIONS REMAINING PRICE OF OPTIONS OF
EXERCISE OUTSTANDING CONTRACTUAL OUTSTANDING EXERCISABLE EXERCISABLE
PRICES AT JUNE LIFE OPTIONS AT JUNE 30, OPTIONS
(PER SHARE) 30,1997 (YEARS) (PER SHARE) 1997 (PER SHARE)
------------ --------- ---------- ------------ -------------- -----------
<S> <C> <C> <C> <C> <C>
$2.50 - $2.60 88,881 7.3 $2.60 47,694 $2.60
$3.20 - $3.52 1,057,820 8.2 $3.32 326,798 $3.30
$5.00 40,500 1.2 $5.00 40,500 $5.00
$12.00 174,220 9.3 $12.00 25,743 $12.00
--------- ----------
1,361,421 440,735
========= ==========
</TABLE>
F-20
<PAGE> 90
N2K INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Under the 1996 Stock Option Plan, the Company's Board of Directors has
approved the authorization of the issuance of options to purchase 309,999 shares
of Common stock. These options will be granted at the time of the Offering and
at an exercise price equal to the initial public offering price for shares sold
in the Offering. Additionally, the Company's Board of Directors has approved the
issuance of options to purchase 15,000 shares of Common stock, which are not
pursuant to any of the Company's option plans, to non-employees of the Company.
These options will be granted at the time of the Offering and at an exercise
price equal to the initial public offering price for shares sold in the
Offering. In accordance with SFAS 123 (as defined), the Company will record a
charge for the fair value of these options.
In April 1997, the Board of Directors adopted and the stockholders of the
Company approved, the 1997 Directors' Stock Option Plan (the Directors' Plan)
pursuant to which each member of the Board of Directors, who is not an employee
of the Company, who is elected or continues as a member of the Board of
Directors is entitled to receive annually, options to purchase 12,500 shares of
Common stock at an exercise price equal to fair market value; provided, however,
that no director may receive under the Directors' Plan, options to purchase an
aggregate of more than 125,000 shares of Common stock. Each option grant under
the Directors' Plan vests after the first anniversary of the date of grant and
expires three years thereafter. The maximum number of shares of Common stock
reserved for issuance under the Directors' Plan is 500,000 shares (subject to
adjustment for certain events such as stock splits and stock dividends). In
April 1997, the Board of Directors authorized the issuance of 25,000 options
under the Directors' Plan at an exercise price per share equal to the initial
public offering price of the Common stock.
The Company accounts for all of its option plans under APB Opinion No. 25,
"Accounting for Stock Issued to Employees," under which no compensation cost has
been recognized. In 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS 123). SFAS 123 establishes a fair value based method of
accounting for stock-based compensation plans. This statement also applies to
transactions in which an entity issues its equity instruments to acquire goods
or services from non-employees. SFAS 123 requires that an employer's financial
statements include certain disclosures about stock-based employee compensation
arrangements regardless of the method used to account for the plan. Had the
Company recognized compensation cost for its stock option plans consistent with
the provisions of SFAS 123, the Company's net loss in 1995 and 1996 and the pro
forma net loss per Common share in 1996 would have been increased to the
following pro forma amounts:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1995 1996
----------- ------------
<S> <C> <C>
Net Loss:
As reported............................................ $(1,594,800) $(18,907,909)
=========== ============
Pro forma.............................................. $(2,218,800) $(21,681,909)
=========== ============
Pro Forma Net Loss per Common share:
As reported (unaudited)................................ $ (2.69)
============
SFAS 123............................................... $ (3.08)
============
</TABLE>
Since the SFAS 123 method of accounting has not been applied to options
granted prior to January 1, 1995, the pro forma compensation cost disclosed
above may not be representative of that to be expected in future years.
The weighted average fair value of the stock options granted during 1995
and 1996 was $9.93 and $8.62, respectively. The fair value of each option grant
is estimated on the date of grant using the Black-Scholes option pricing model
with the following weighted average assumptions:
F-21
<PAGE> 91
N2K INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
1995 1996
-------- --------
<S> <C> <C>
Risk-free interest rate.......................................... 6.5% 5.5%
Expected dividend yield.......................................... 0.0% 0.0%
Expected life.................................................... 6 Years 6 Years
</TABLE>
Common Stock Warrants
In February 1996, the Company issued warrants to purchase 37,500 shares of
Common stock at an exercise price of $3.20 per share. These warrants expire in
February 2001. In May and June 1996, the Company issued warrants to purchase
66,999 shares of Common stock at an exercise price of $12 per share. These
warrants expire in 2003. In April 1997, the Company issued warrants to purchase
48,555 shares of Common stock at an exercise price of $12 per share in
connection with the Series G Preferred stock financing. These warrants expire in
April 2004. Additionally, in July and August 1997, the Company issued warrants
to purchase an aggregate of 299,264 shares of Common stock at an exercise price
of $12 per share in connection with the issuance of the Management Notes and
Senior Notes (see Note 1). In addition, see Note 1 for description of AOL
Warrant.
Employee Stock Purchase Plan
In June 1996, the Company established the 1996 Employee Stock Purchase Plan
(the ESP Plan). The number of shares available to purchase under the ESP Plan is
1,500,000 shares of Common stock. As of June 30, 1997, 1,500,000 shares are
available for purchase under the ESP Plan. The employee's purchase price is the
lower of (a) 85% of the fair market value of a share of the Company's Common
stock on the first day of the Purchase period (as defined) and (b) 85% of the
fair market value of a share of the Company's Common stock on the last day of
the Purchase period (as defined).
9. INCOME TAXES:
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS
109). SFAS 109 requires an asset-and-liability approach in accounting for income
taxes. Under this method, deferred income taxes are computed based on the
differences between financial reporting and income tax reporting of assets and
liabilities using enacted tax rates.
As of December 31, 1996, the Company had net operating loss carryforwards
for federal income tax purposes of approximately $25,100,000, which begin to
expire in 2001. Significant components of deferred income taxes consist of the
following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1995 1996
----------- -----------
<S> <C> <C>
Gross deferred tax assets:
Net operating loss carryforwards........................ $ 2,584,000 $ 8,534,000
Depreciation and amortization........................... 38,000 13,000
Accruals not currently deductible....................... 152,500 413,000
----------- -----------
2,774,500 8,960,000
Gross deferred tax liabilities............................ -- (17,000)
Less -- Valuation allowance............................... (2,774,500) (8,943,000)
----------- -----------
$ -- $ --
=========== ===========
</TABLE>
The Company has recorded a valuation allowance for the net deferred tax
asset as the Company concluded that the net deferred tax asset did not meet the
recognition criteria under SFAS 109. The valuation
F-22
<PAGE> 92
N2K INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
allowance increased $6,168,500 during 1996 due principally to net operating loss
carryforwards. Based on changes in ownership of the Company, utilization of the
net operating loss carryforwards may be subject to annual limitations.
10. OTHER RELATED-PARTY TRANSACTIONS:
For the years ended December 31, 1994, 1995, 1996 and the six months ended
June 30, 1996 and 1997, the Company incurred fees of $30,000, $30,000, $130,000,
$121,000 and $0, respectively, to a law firm in which certain of its partners
are Series A Preferred stockholders.
11. COMMITMENTS AND CONTINGENCIES:
The Company has entered into various operating and capital leases for
office space, computer equipment and office equipment. Assets acquired under
capital leases at a cost of $498,802, $868,436 and $1,076,663 less accumulated
amortization of $290,799, $477,535 and $584,540, are included in property and
equipment in the accompanying consolidated balance sheets as of December 31,
1995, 1996, and June 30, 1997, respectively. Certain capital leases are secured
by certificates of deposit totaling $167,000, which are shown as restricted cash
in other assets in the accompanying consolidated balance sheets. Interest rates
on these capital leases range from 6.0% to 19.0%. Future minimum lease payments
under operating and capital leases as of December 31, 1996, are as follows:
<TABLE>
<CAPTION>
OPERATING
------------------------------------------
DISCONTINUED CONTINUING TOTAL CAPITAL
------------ ---------- ---------- --------
<S> <C> <C> <C> <C>
1997............................... $ 74,501 $ 928,551 $1,003,052 $204,001
1998............................... 94,507 1,233,022 1,327,529 196,987
1999............................... 94,607 1,307,851 1,402,458 63,632
2000............................... 94,607 1,293,241 1,387,848 --
2001............................... 63,071 574,021 637,092 --
-------- ---------- ---------- --------
Total minimum lease payments....... $421,293 $5,336,686 $5,757,979 464,620
======== ========== ==========
Less -- Amount representing
interest......................... (46,599)
--------
Present value of minimum capital
lease payments................... $418,021
========
</TABLE>
Rent expense under the operating leases for continuing operations for the
years ended December 31, 1994, 1995, 1996 and the six months ended June 30, 1996
and 1997 was $43,594, $100,870, $529,186, $210,411 and $467,208, respectively.
The Company has employment agreements with certain officers that provide
for, among other things, salary, bonus, severance and change in control
provisions.
The Company entered into an employment agreement with Phil Ramone (the
"Ramone Employment Agreement") to provide for his service as President of N2K
Encoded Music effective as of October 15, 1996. The initial term of the Ramone
Employment Agreement is three years (the "Initial Term"), with an option for an
additional two-year period at the Company's discretion (the "Option Period").
The Ramone Employment Agreement provides for a base salary of $450,000 for the
first year, increasing to $550,000 for the remainder of the Initial Term. If Mr.
Ramone's employment continues after the Initial Term, he will receive $650,000
for the first year of the Option Period, with the salary for the second year to
be negotiated in good faith upon commencement of the Option Period.
Notwithstanding the foregoing, in the event that the Company and Mr. Ramone are
unable to agree on the amount of Mr. Ramone's annual salary during the Option
Period after 30 days' good faith negotiations, then the Company's option will be
treated as if it had not
F-23
<PAGE> 93
N2K INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
been exercised. The Ramone Employment Agreement also provides for (a) a one-time
$100,000 bonus payable on October 1, 1997 in the form of a promissory note whose
principal and the interest thereon will be forgiven (assuming no termination for
cause) over a 12 month period beginning on October 1, 1998 and (b) an annual
performance bonus in the amount of (i) $50,000 if the gross revenues of N2K
Encoded Music are at least $8 million but not in excess of $10 million during
such fiscal year or (ii) $100,000 if such gross revenues exceed $10 million
during such fiscal year. The Ramone Employment Agreement also provides that Mr.
Ramone is entitled to 10% of the after-tax net profit attributable to N2K
Encoded Music's operations in any fiscal year, including participation in the
proceeds of a sale of N2K Encoded Music as if he were a 5% (during the Initial
Term) or a 7.5% (during the Option Period) equity owner of N2K Encoded Music.
Mr. Ramone was granted non-qualified options under the terms of the Ramone
Employment Agreement to purchase 73,677 shares of Common Stock at $12.00 per
share. Such options expire on October 15, 2002, but not later than one year from
the date Mr. Ramone's employment with the Company terminates. One quarter of Mr.
Ramone's options vested at the beginning of his employment on October 15, 1996,
with the balance to vest ratably over a three-year period. Should Mr. Ramone's
employment with the Company be terminated, the Company at its option may
repurchase any or all shares of Common Stock issued to Mr. Ramone upon his
exercise of any of his options held by him on the date of such termination at
fair market value (or, if such termination is for cause, at the price paid by
Mr. Ramone for such shares). The Company may elect to pay for these shares in
three equal annual installments by delivery of a promissory note with an
interest rate of 8% per annum.
The Company loaned Mr. Ramone $100,000 at the signing of the Ramone
Employment Agreement on September 26, 1997. The promissory note related to this
loan (the "Ramone Note") is due on October 1, 2000 and is interest-free unless
an event of default (as defined therein) occurs, in which case the interest rate
shall become 15% until such default is cured. The terms of the Ramone Note give
the Company the right to deduct and withhold certain compensation owed by the
Company to Mr. Ramone under either of the Ramone Employment Agreement or the
Producer's Agreement (as defined below).
Simultaneously with the execution of the Ramone Employment Agreement, the
Company also entered into a Music Producer's Agreement (the "Producer's
Agreement") with Mr. Ramone (through a personal corporation) providing for the
recording and production of master recordings of one or more of the Company's
recording artists. The term of the Producer's Agreement is coextensive with the
term of the Ramone Employment Agreement. Pursuant to the terms of the Producer's
Agreement, Mr. Ramone will receive a percentage of royalties based on agreed
upon formulas. No payments under the Producer's Agreement shall be made to Mr.
Ramone until such time that the Ramone Note has been repaid.
The Company is party to various claims arising in the ordinary course of
business. Although the ultimate outcome of these matters is presently not
determinable, management believes that the resolution of these matters will not
have a material adverse effect on the Company's financial position or results of
operations.
Due to the fact that materials may be downloaded from websites and may be
subsequently distributed to others, there is potential that claims will be made
against the Company for defamation, negligence, copyright or trademark
infringement or other theories based on the nature and content of such
materials. Although the Company carries general liability insurance, the
Company's insurance may not cover potential claims of this type or may not be
adequate to cover all costs incurred in defense of potential claims or to
indemnify the Company for all liability that may be imposed. Any costs or
imposition of liability that is not covered by insurance or in excess of
insurance coverage could have a material adverse effect on the Company's
business, results of operations and financial condition. The Company is
currently not aware of any such claims.
12. DEFINED CONTRIBUTION PLAN:
The Company maintains a Matched Savings Plan (the Plan) in accordance with
the provisions of Section 401(k) of the Internal Revenue Code. The Plan covers
substantially all full-time employees of the Company.
F-24
<PAGE> 94
N2K INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Participants may contribute up to 15% of their total compensation to the Plan,
with the Company matching 30% of the participant's contribution, limited to 6%
of the participant's total compensation. For the years ended December 31, 1994,
1995, 1996 and the six months ended June 30, 1996 and 1997, the Company
contributed $14,400, $18,200, $53,100, $18,500 and $52,400, respectively, to the
Plan for continuing operations and $18,100, $20,700, $12,000, $6,800 and $7,400,
respectively, for discontinued operations.
F-25
<PAGE> 95
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
N2K Inc.
New York, New York
We have audited the balance sheet of N2K Inc. (a New York corporation) as
of December 31, 1995, and the related statements of operations, stockholders'
equity and cash flows for the period beginning March 7, 1995 (date of inception)
through December 31, 1995. 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 audit.
We conducted our audit 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 audit provides 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 N2K Inc. as of December 31,
1995 and the results of its operations and its cash flows for the period
beginning March 7, 1995 through December 31, 1995 in conformity with generally
accepted accounting principles.
As described in Note F, on February 13, 1996, the Company effected a
business combination in which it merged with a company formerly known as
Telebase Systems, Inc.
New York, New York
January 31, 1996
With respect to Note F
February 13, 1996
/s/ RICHARD A. EISNER & COMPANY, LLP
F-26
<PAGE> 96
N2K INC.
BALANCE SHEET
DECEMBER 31, 1995
<TABLE>
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents................................................... $ 245,423
Accounts receivable......................................................... 57,281
Prepaid expenses............................................................ 2,057
--------
Total current assets................................................... 304,761
Property and equipment, net...................................................... 311,812
Goodwill......................................................................... 4,467
Deposits......................................................................... 101,621
--------
TOTAL.................................................................. $ 722,661
========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of capital lease obligations............................. $ 57,407
Accounts payable and accrued expenses....................................... 207,144
--------
Total current liabilities.............................................. 264,551
Capital lease obligations........................................................ 136,184
Deferred rent payable............................................................ 20,038
--------
Total liabilities...................................................... 420,773
--------
Commitments and contingencies
Stockholders' equity:
Common stock, $.01 par value, 2,000,000 authorized, 1,000,000 shares issued
and outstanding............................................................ 10,000
Additional paid-in capital.................................................. 990,000
Accumulated (deficit)....................................................... (698,112)
--------
Total stockholders' equity............................................. 301,888
--------
TOTAL.................................................................. $ 722,661
========
</TABLE>
The accompanying notes to financial statements are an integral part hereof
F-27
<PAGE> 97
N2K INC.
STATEMENT OF OPERATIONS
FOR THE PERIOD BEGINNING MARCH 7, 1995
(DATE OF INCEPTION) THROUGH DECEMBER 31, 1995
<TABLE>
<S> <C>
Revenues:
Consulting revenue.......................................................... $ 132,626
Network revenue............................................................. 11,000
--------
Total revenue.......................................................... 143,626
--------
Expenses:
Selling, general and administrative expenses................................ 767,628
Purchased research and development.......................................... 56,262
Depreciation and amortization............................................... 16,575
--------
Total expense.......................................................... 840,465
--------
Operating loss................................................................... (696,839)
Interest expense, net of interest income of $185................................. (1,273)
--------
Net loss......................................................................... $(698,112)
========
</TABLE>
The accompanying notes to financial statements are an integral part hereof
F-28
<PAGE> 98
N2K INC.
STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE PERIOD BEGINNING MARCH 7, 1995
(DATE OF INCEPTION) THROUGH DECEMBER 31, 1995
<TABLE>
<CAPTION>
ADDITIONAL
COMMON PAID-IN ACCUMULATED
STOCK CAPITAL DEFICIT TOTAL
------- -------- ---------- ----------
<S> <C> <C> <C> <C>
Sale of common stock.......................... $10,000 $990,000 $1,000,000
Net loss...................................... $ (698,112) (698,112)
------- -------- ---------- --------
Balance -- December 31, 1995.................. $10,000 $990,000 $ (698,112) $ 301,888
======= ======== ========== ========
</TABLE>
The accompanying notes to financial statements are an integral part hereof
F-29
<PAGE> 99
N2K INC.
STATEMENT OF CASH FLOWS
FOR THE PERIOD BEGINNING MARCH 7, 1995
(DATE OF INCEPTION) THROUGH DECEMBER 31, 1995
<TABLE>
<S> <C>
Cash flows from operating activities:
Net loss.................................................................... $(698,112)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization.......................................... 16,575
Changes in assets and liabilities:
Increase in:
Accounts receivable.......................................... (48,543)
Prepaid expenses............................................. (2,057)
Deposits..................................................... (101,621)
Accounts payable and accrued expenses........................ 207,144
Deferred rent payable........................................ 20,038
---------
Net cash used in operating activities................... (606,576)
---------
Cash flows from investing activities:
Assets acquired in purchase transaction..................................... (43,738)
Purchase of property and equipment.......................................... (101,612)
---------
Net cash used in investing activities................... (145,350)
---------
Cash flows from financing activities:
Principal payments on capital lease obligations............................. (2,651)
Sale of common stock........................................................ 1,000,000
---------
Net cash provided by financing activities............... 997,349
---------
Increase in cash and cash equivalents............................................ 245,423
Cash and cash equivalents, beginning of period................................... --
---------
Cash and cash equivalents, end of period......................................... $ 245,423
=========
Supplemental disclosures of cash flow information:
Cash paid during the period for interest.................................... $ 1,458
Noncash investing and financing activity:
The Company entered into capital leases for equipment valued at
$196,242.
</TABLE>
The accompanying notes to financial statements are an integral part hereof
F-30
<PAGE> 100
N2K INC.
NOTES TO FINANCIAL STATEMENTS
NOTE A -- ORGANIZATION AND ACQUISITION:
N2K Multimedia Company, Inc. (the "Company") was incorporated on March 7,
1995 for the purpose of developing interactive on-line web sites and technology,
with 200 shares of authorized common stock of which 100 shares were issued in
exchange for $100,000 paid in cash. On October 10, 1995 the authorized common
stock was increased to 2,000,000 shares of $.01 par value and the outstanding
shares were split 10,000 for 1. All references to shares in these financial
statements give retroactive effect to the stock split. On June 13, 1995 the
Company purchased substantially all the assets of N2K Inc. a company engaged
primarily in computer systems consulting and its name was changed to N2K Inc.
The purchase price was $100,000 which was allocated in accordance with fair
values as follows: Fixed Assets $30,000; Accounts Receivable $8,738; Research
and Development Costs $56,262, and Goodwill $5,000. Because computer systems
consulting is not the focus of the Company, the acquiree is not a predecessor
company.
After the acquisition the Company developed an on-line site called Jazz
Central Station that provides a comprehensive history of Jazz. The site was
launched on the Microsoft Network on August 24, 1995 and is in beta testing on
the World Wide Web.
NOTE B -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
[1] Use of estimates:
These financial statements were prepared by management using generally
accepted accounting principles which require the use of estimates.
[2] Property and equipment:
Property and equipment are stated at cost. Depreciation is calculated on a
straight-line basis over estimated useful lives of the assets, primarily 5
years. Upon retirement or disposition, the applicable property amounts are
relieved from the accounts, and any gain or loss is recorded in the statement of
operations. When assets become fully depreciated, the applicable asset and
accumulated depreciation amounts are relieved.
[3] Goodwill:
Goodwill, which represents the excess purchase price of N2K Inc. over the
fair value of the identifiable assets acquired, is being amortized on a
straight-line basis over five years.
[4] Statement of Cash Flows:
Highly liquid investments with an original maturity of three months or less
are considered cash equivalents for purposes of the statement of cash flows.
[5] Capital Leases:
The Company capitalizes assets acquired under capital leases and records
the related capital lease obligations.
[6] Income Taxes:
The Company is an S corporation for Federal and State income tax purposes.
No provision for these taxes is required.
F-31
<PAGE> 101
N2K INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE C -- PROPERTY AND EQUIPMENT:
Property and equipment consists of the following:
<TABLE>
<S> <C>
Computer equipment........................................................ $249,726
Furniture and fixtures.................................................... 16,796
Leasehold improvements.................................................... 61,332
--------
327,854
Less accumulated depreciation............................................. (16,042)
--------
$311,812
========
</TABLE>
Included in property and equipment is property acquired under capital
leases with an aggregate cost of $196,242 and accumulated depreciation of
$9,569.
NOTE D -- EQUIPMENT LEASE FINANCING:
The Company has a line of credit to finance its acquisition of furniture,
office and computer equipment in the amount of $350,000. Under the terms of the
master agreement, acquired assets are financed pursuant to capital leases with a
three year term and interest rate of 8.75%. At December 31, 1995 $175,424 of the
line of credit was available. The Company is also obligated under two other
capital leases with interest rates of approximately 14% and aggregating $18,167
at December 31, 1995.
NOTE E -- COMMITMENTS, CONTINGENCIES AND RISKS:
The Company is obligated under operating and capital leases for office
space, computers and office equipment. Future annual minimum lease payments
under leases in effect at December 31, 1995 are as follows:
<TABLE>
<CAPTION>
OPERATING CAPITAL
--------- --------
<S> <C> <C>
1996........................................................... $ 120,456 $ 72,233
1997........................................................... 196,088 75,795
1998........................................................... 195,356 68,132
1999........................................................... 219,550 5,522
2000........................................................... 213,155 -0-
-------- --------
221,682
Less amount representing interest.............................. 28,091
--------
Present value of capital lease obligations..................... $193,591
========
</TABLE>
The Company maintains its accounts at one institution insured by the
Federal Deposit Insurance Corporation up to a maximum of $100,000.
The Company is committed to purchase furniture and equipment aggregating
approximately $125,000 which it expects to finance under the equipment lease
financing commitment described in Note D.
Two of the Company's consulting customers individually accounted for 59%
and 27% of the Company's consulting revenues for the period ended December 31,
1995 and 76% and 22% of the accounts receivable at December 31, 1995.
NOTE F -- SUBSEQUENT EVENT:
The Company merged with Telebase Systems, Inc. on February 13, 1996.
Pursuant to the merger the Company's shares were exchanged for common and
preferred shares of Telebase Systems, Inc. which changed its name to N2K Inc.
F-32
<PAGE> 102
[INSIDE BACK COVER -- GRAPHIC INCORPORATING SCREENS FROM EACH OF THE MUSIC
BOULEVARD, ROCKTROPOLIS, JAZZ CENTRAL STATION, CLASSICAL INSITES, DAVID BOWIE
AND ROLLING STONES WEBSITES AND THE COVER ART FOR TWO OF THE N2K ENCODED MUSIC
CD RELEASES.]
<PAGE> 103
======================================================
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION AND
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY
OR THE UNDERWRITERS. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY ANY SECURITIES OTHER THAN THE REGISTERED SECURITIES TO WHICH IT
RELATES. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION
OF AN OFFER TO BUY SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR
SOLICITATION IS UNLAWFUL.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 4
Risk Factors.......................... 8
Use of Proceeds....................... 17
Dividend Policy....................... 17
Dilution.............................. 18
Capitalization........................ 19
Selected Consolidated Financial
Data................................ 20
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 22
Business.............................. 30
Management............................ 46
Certain Transactions.................. 57
Principal Stockholders................ 60
Description of Capital Stock.......... 62
Shares Eligible for Future Sale....... 65
Underwriting.......................... 66
Legal Matters......................... 67
Experts............................... 68
Additional Information................ 68
Index to Consolidated Financial
Statements.......................... F-1
</TABLE>
------------------------
UNTIL , 1997, ALL DEALERS EFFECTING TRANSACTIONS IN THE
REGISTERED SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE
REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF
DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO
THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
======================================================
======================================================
3,000,000 SHARES
[N2K INC. LOGO]
COMMON STOCK
------------------------
PROSPECTUS
------------------------
PAINEWEBBER INCORPORATED
UNTERBERG HARRIS
------------------------
, 1997
======================================================
<PAGE> 104
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following is an itemized statement of the estimated amounts of all
expenses payable by the Registrant in connection with the registration of the
Common Stock offered hereby, other than underwriting discounts and commissions:
<TABLE>
<S> <C>
Securities and Exchange Commission filing fee............................ $ 17,773
Nasdaq National Market listing fee....................................... 50,000
NASD filing fee.......................................................... 4,840
Blue Sky fees and expenses (including attorneys' fees)................... 12,500
Accounting fees and expenses............................................. 300,000
Legal fees and expenses.................................................. 750,000
Printing and engraving expenses.......................................... 350,000
Transfer agent and registrar fees........................................ 15,000
Miscellaneous............................................................ 99,887
----------
Total.......................................................... $1,600,000
=========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
(a) The Certificate of Incorporation of the Registrant provides for, and
the Bylaws of the Registrant require, indemnification of directors, officers,
employees and agents to the full extent permitted by law.
(b) Pursuant to the provisions of Section 145 of the Delaware GCL, every
Delaware corporation has the power to indemnify any person who was or is 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) by reason of the
fact that such person is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by such person in connection with such action, suit or proceeding. The
power to indemnify applies only if such person acted in good faith and in a
manner such person reasonably believed to be in or not opposed to the best
interests of the corporation and, with respect to any criminal action or
proceeding, had no reasonable cause to believe that his or her conduct was
unlawful.
The power to indemnify applies to actions brought by or in the right of the
corporation as well, but only to the extent of defense or settlement expenses
and not to any satisfaction of a judgment or settlement of the claim itself, and
with the further limitation that in such actions no indemnification shall be
made in the event of any adjudication of negligence or misconduct unless the
court, in its discretion, believes that in light of all the circumstances
indemnification should apply. Such indemnification is not exclusive of any other
rights to which those indemnified may be entitled under any by-laws, agreement,
vote of stockholders or otherwise.
(c) Section 102(b)(7) of the Delaware GCL currently provides that a
director's liability for breach of fiduciary duty to a corporation may be
eliminated except for liability (i) for any breach of the director's duty of
loyalty to the corporation or its stockholders, (ii) for acts or omissions not
in good faith or which involve intentional misconduct or a knowing violation of
law, (iii) under Section 174 of the Delaware GCL, for unlawful dividends or
unlawful stock repurchases or redemptions, and (iv) for any transaction from
which the director derives an improper personal benefit.
(d) See the Underwriting Agreement (the form of which is included as
Exhibit 1.1 to this Registration Statement) for provisions regarding the
indemnification under certain circumstances of the Registrant, its directors and
certain of its officers by the Underwriters.
II-1
<PAGE> 105
(e) See the Form of Indemnification Agreement (to be entered into
simultaneously with the completion of this offering between the Registrant and
each of its directors and executive officers and which is included as Exhibit
10.15 to this Registration Statement) for provisions regarding the
indemnification under certain circumstances of the directors and executive
officers of the Registrant.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
The securities issued in the transactions described below were offered and
sold in reliance upon the exemption from registration under Section 4(2) of the
Securities Act, relating to transactions by an issuer not involving any public
offering. The factors that assured the availability of the exemption provided by
Section 4(2) of the Securities Act included the sophistication of the offerees
and the purchasers, their access to material information, the disclosures
actually made to them by the Company and the absence of any general solicitation
or advertising.
In September 1994, the Company issued 800,000 shares of Series D Preferred
Stock to a class of six accredited investors for the aggregate offering price of
$1,600,000 resulting in net proceeds of $1,559,084.
In December 1995, the Company issued 112,500 shares of Common Stock to
Daniel E. Meyer, a former employee and officer of the Company, as consideration
in a pooling-of-interests transaction in which Advanced Research Technologies,
Inc. was merged with and into ART Acquisition Corp., a wholly owned subsidiary
of the Company. Prior to December 31, 1995, ART Acquisition Corp. was merged
into the Company.
In February 1996, the Company issued 1,347,859 shares of Common Stock and
1,347,860 shares of Series E Preferred Stock to the shareholders of New York N2K
(consisting of Lawrence L. Rosen, Jonathan V. Diamond, Robert David Grusin and
Jerold L. Rosen) in exchange for all of the outstanding common stock of New York
N2K. The Company subsequently changed its name to N2K Inc.
In February 1996, the Company issued a warrant to Unterberg Harris to
purchase 37,500 shares of Common Stock at an exercise price of $3.20 per share
as compensation for acting as financial advisor to the Company in connection
with the Merger.
In February, April and May 1996, the Company issued 4,659,200 shares of
Series E Preferred Stock (in addition to the 1,347,860 shares of Series E
Preferred Stock issued in consideration for the shares of N2K Inc.), to a class
of purchasers (consisting of 40 accredited investors and 3 management employees
of the Company) for the aggregate offering price of $3,727,360.
In May and June 1996, the Company issued 5,333,333 shares of Series F
Preferred Stock to a class of 43 accredited investors for the aggregate offering
price of $16,000,000 resulting in net proceeds of $15,268,284.
In May and June 1996, the Company issued warrants to Allen & Company
Incorporated to purchase 64,166 shares of Common Stock at an exercise price of
$12.00 per share, as compensation for acting as placement agent to the Company
in connection with the issuance of the Series F Preferred Stock.
In May 1996, the Company issued 6,250 shares of Common Stock in payment to
the law firm of Pryor, Cashman, Sherman & Flynn for legal services rendered.
In June 1996, the Company issued warrants to purchase 2,833 shares of
Common Stock at an exercise price of $12.00 per share to Stuart Sundlun, an
unaffiliated individual, as a finder's fee in connection with the issuance of
the Series F Preferred Stock.
In April 1997, the Company issued 2,480,329 shares of Series G Preferred
Stock (including 17,000 shares as a finder's fee issued to David Darst, an
unaffiliated individual) to a class of 18 accredited investors for the aggregate
offering price of $7,389,987 resulting in net proceeds of $7,215,531. In
connection with the issuance of the Series G Preferred Stock in April 1997, the
Company issued warrants to Allen & Company Incorporated to purchase 48,555
shares of Common Stock at an exercise price of $12.00 per share as a placement
fee.
In July 1997, the Company issued Management Notes to three members of the
Company's management in the aggregate principal amount of $1,750,000 in exchange
for loans to the Company in the aggregate
II-2
<PAGE> 106
principal amount of $1,750,000, along with warrants to purchase 48,609 shares of
Common Stock at an exercise price of $12.00 per share.
In August 1997, the Company issued Senior Notes to a group of five
affiliated accredited institutional investors in the aggregate principal amount
of $6,021,600 in exchange for loans to the Company in the aggregate principal
amount of $6,021,600, along with warrants to purchase 166,266 shares of Common
Stock at an exercise price of $12.00 per share. In connection with the issuance
of the Senior Notes in August 1997, the Company issued warrants to Allen &
Company Incorporated to purchase 83,389 shares of Common Stock at an exercise
price of $12.00 per share as a placement fee.
Since August 1994, the Company has issued an aggregate of 2,001,542 stock
options at a weighted average exercise price of $7.61 per share.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- -------------------- ------------------------------------------------------------------------
<C> <S>
1.1 -- Form of Underwriting Agreement.*
3.1 -- Form of Certificate of Incorporation of the Registrant, as amended.X
3.2 -- Form of Bylaws of the Registrant, as amended.X
4.1 -- Specimen of Certificate for Common Stock.*
4.2 -- 1987 Employee Incentive Stock Option Plan of the Company.X
4.3 -- Amended and Restated 1996 Stock Option Plan of the Company.X
4.4 -- 1996 Employee Stock Purchase Plan.X
4.5 -- 1997 Directors' Stock Option Plan.
4.6 -- Note Purchase Agreement dated October 30, 1987 between the Company
and Gary M. Lauder.X
4.7 -- Form of Series A Preferred Stock Purchase Agreement.X
4.8 -- Form of Series C Preferred Stock Purchase Agreement.X
4.9 -- Form of Series D Preferred Stock Purchase Agreement.X
4.10 -- Form of Series E Preferred Stock Purchase Agreement.X
4.11 -- Form of Series F Preferred Stock Purchase Agreement.X
4.12 -- Form of Series G Preferred Stock Purchase Agreement.
4.13 -- Registration Rights Agreement dated as of February 13, 1996 among the
Company and the Shareholders of New York N2K.X
4.14 -- Warrant Agreement dated as of February 13, 1996 between the Company
and Unterberg Harris.X
4.15 -- Form of Warrant Certificate of the Company.X
4.16 -- Form of 14% Management Note of the Company.
4.17 -- Form of 14% Senior Note of the Company.
4.18 -- Form of Warrant Certificate of the Company, issued in connection with
the 14% Senior Notes.
4.19 -- Letter Agreement dated September 16, 1997 between the Company and
America Online, Inc.+
5.1 -- Opinion of Dewey Ballantine.*
9.1 -- Stockholders' Agreement dated February 13, 1996, by and among James
E. Coane, Charles Wilson III, Poly Ventures II, Limited Partnership,
AT&T Corporation, Gary Lauder, Unterberg Harris Interactive Media
Limited Partnership, C.V., Lawrence L. Rosen, Jonathan V. Diamond,
Robert David Grusin and the Company.X
10.1 -- Employment Agreement effective as of February 13, 1996 between the
Company and Lawrence L. Rosen.X
</TABLE>
II-3
<PAGE> 107
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- -------------------- ------------------------------------------------------------------------
<C> <S>
10.2 -- Employment Agreement effective as of February 13, 1996 between the
Company and Jonathan V. Diamond.X
10.3 -- Employment Agreement effective as of February 13, 1996 between the
Company and Robert David Grusin.X
10.4 -- Employment Agreement dated as of May 1, 1987 between the Company and
James E. Coane.X
10.5 -- Employment Agreement dated as of February 8, 1988 between the Company
and Bruce Johnson.X
10.6 -- Letter Agreement re: Revolving Line of Credit with CoreStates Bank,
N.A. (f.k.a. Meridian Bank).
10.7 -- Letter Agreement dated June 3, 1996 between the Company and
Rocktropolis Enterprises, LLC.X
10.8 -- Lease Agreement dated April 26, 1991 between the Company and Bebob
Associates, as amended.X
10.9 -- Lease Agreement dated September 7, 1995 between New York N2K and 55
Broad Street Company, as supplemented by the First, Second, Third and
Fourth Additional Space Agreements dated April 1, April 2, April 3
and October 15, 1996 between the Company and 55 Broad Street
Company.X
10.10 -- Small Order Fulfillment Agreement between the Company and Valley
Record Distributors.+X
10.11 -- Indemnification Agreement dated as of February 13, 1996 among the
Company and the shareholders of New York N2K.X
10.12 -- Form of Director Indemnification Agreement.X
10.13 -- Sales Data Agreement dated June 5, 1996 between the Company and
SoundScan, Inc.X
10.14 -- Distribution Agreement dated October 16, 1996 between the Company and
RED Distribution, Inc.+X
10.15 -- Employment Agreement dated as of October 15, 1996 between the Company
and Phil Ramone.
10.16 -- Sponsorship Agreement dated September 23, 1997 between the Company
and Excite, Inc.+
10.17 -- Letter Agreement dated October 28, 1996 between the Company and
Virgin Records America Inc.+X
10.18 -- Web Site Development Agreement dated as of November 1, 1996 between
the Company and Interstate Broadcasting Company, Inc.+X
10.19 -- Omitted.
10.20 -- Content and Services Agreement dated as of May 21, 1997 between WebTV
Networks, Inc. and the Company.+X
10.21 -- Letter of Intent dated December 18, 1996 between the Company and MTV
Networks.+
10.22 -- Web Site Development Agreement dated as of June 18, 1997 between WBGO
and the Company.+X
10.23 -- @Home Shopping Tenant Agreement dated June 5, 1997 between At Home
Corporation and the Company.+X
10.24 -- Interactive Marketing Agreement dated as of September 1, 1997 between
America Online, Inc. and the Company.+
10.25 -- Memorandum of Understanding dated August 4, 1997 between the Company
and PointCast, Inc.+
10.26 -- Music Producer's Agreement dated as of October 15, 1996 between the
Company and Phil Ramone, Inc.
11.1 -- Statement re: Computation of Per Share Earnings.
</TABLE>
II-4
<PAGE> 108
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- -------------------- ------------------------------------------------------------------------
<C> <S>
21.1 -- Subsidiaries of the Registrant.X
23.1 -- Consent of Arthur Andersen LLP.
23.2 -- Consent of Richard A. Eisner & Company, LLP.
23.3 -- Consent of Dewey Ballantine (contained in Exhibit 5.1).*
24.1 -- Power(s) of Attorney.X
27.A -- Financial Data Schedule.
27.B -- Financial Data Schedule.
</TABLE>
- ---------------
* To be filed by amendment.
+ Confidential treatment requested.
X Previously filed.
(b) Financial Statement Schedules
None
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes to provide to the
Underwriters, at the closing specified in the underwriting agreement,
certificates in such denominations and registered in such names as required by
the Underwriters to permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 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 Securities and Exchange Commission
such indemnification is against public policy as expressed in the 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 Act and will be governed by the final adjudication of
such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in
a 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.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-5
<PAGE> 109
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in New York, New York, on September 26,
1997.
N2K INC.
By: /s/ LAWRENCE L. ROSEN
----------------------------------
Lawrence L. Rosen
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities indicated on the 26th day of September, 1997.
<TABLE>
<CAPTION>
SIGNATURE TITLE
- --------------------------------------------- ----------------------------------------------
<C> <S>
/s/ LAWRENCE L. ROSEN Chairman of the Board, Chief Executive Officer
- --------------------------------------------- and Director (Principal Executive Officer)
Lawrence L. Rosen
* Vice Chairman and Director
- ---------------------------------------------
Jonathan V. Diamond
* Vice Chairman and Director
- ---------------------------------------------
Robert David Grusin
/s/ JAMES E. COANE President, Chief Operating Officer and
- --------------------------------------------- Director
James E. Coane
* /s/ BRUCE JOHNSON Vice President, Secretary, Chief Financial
- --------------------------------------------- Officer (Principal Accounting Officer and
Bruce Johnson Principal Financial Officer) and Director
(as attorney in fact)
/s/ ROBERT C. HARRIS, JR. Director
- ---------------------------------------------
Robert C. Harris, Jr.
* Director
- ---------------------------------------------
Susanne Harrison
</TABLE>
II-6
<PAGE> 110
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- -------------------- -------------------------------------------------------------- ------------
<C> <S> <C>
1.1 -- Form of Underwriting Agreement.*
3.1 -- Form of Certificate of Incorporation of the Registrant, as
amended.X
3.2 -- Form of Bylaws of the Registrant, as amended.X
4.1 -- Specimen of Certificate for Common Stock.*
4.2 -- 1987 Employee Incentive Stock Option Plan of the Company.X
4.3 -- Amended and Restated 1996 Stock Option Plan of the
Company.X
4.4 -- 1996 Employee Stock Purchase Plan.X
4.5 -- 1997 Directors' Stock Option Plan.
4.6 -- Note Purchase Agreement dated October 30, 1987 between the
Company and Gary M. Lauder.X
4.7 -- Form of Series A Preferred Stock Purchase Agreement.X
4.8 -- Form of Series C Preferred Stock Purchase Agreement.X
4.9 -- Form of Series D Preferred Stock Purchase Agreement.X
4.10 -- Form of Series E Preferred Stock Purchase Agreement.X
4.11 -- Form of Series F Preferred Stock Purchase Agreement.X
4.12 -- Form of Series G Preferred Stock Purchase Agreement.X
4.13 -- Registration Rights Agreement dated as of February 13, 1996
among the Company and the Shareholders of New York N2K.X
4.14 -- Warrant Agreement dated as of February 13, 1996 between the
Company and Unterberg Harris.X
4.15 -- Form of Warrant Certificate of the Company.X
4.16 -- Form of 14% Management Note of the Company.
4.17 -- Form of 14% Senior Note of the Company.
4.18 -- Form of Warrant Certificate of the Company, issued in
connection with the 14% Senior Notes.
4.19 -- Letter Agreement dated September 16, 1997 between the
Company and America Online, Inc.+
5.1 -- Opinion of Dewey Ballantine.*
9.1 -- Stockholders' Agreement dated February 13, 1996, by and
among James E. Coane, Charles Wilson III, Poly Ventures II,
Limited Partnership, AT&T Corporation, Gary Lauder,
Unterberg Harris Interactive Media Limited Partnership,
C.V., Lawrence L. Rosen, Jonathan V. Diamond, Robert David
Grusin and the Company.X
10.1 -- Employment Agreement effective as of February 13, 1996
between the Company and Lawrence L. Rosen.X
10.2 -- Employment Agreement effective as of February 13, 1996
between the Company and Jonathan V. Diamond.X
10.3 -- Employment Agreement effective as of February 13, 1996
between the Company and Robert David Grusin.X
10.4 -- Employment Agreement dated as of May 1, 1987 between the
Company and James E. Coane.X
10.5 -- Employment Agreement dated as of February 8, 1988 between
the Company and Bruce Johnson.X
10.6 -- Letter Agreement re: Revolving Line of Credit with
CoreStates Bank, N.A. (f.k.a. Meridian Bank).
10.7 -- Letter Agreement dated June 3, 1996 between the Company and
Rocktropolis Enterprises, LLC.X
10.8 -- Lease Agreement dated April 26, 1991 between the Company
and Bebob Associates, as amended.X
</TABLE>
<PAGE> 111
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- -------------------- -------------------------------------------------------------- ------------
<C> <S> <C>
10.9 -- Lease Agreement dated September 7, 1995 between New York
N2K and 55 Broad Street Company, as supplemented by the
First, Second, Third and Fourth Additional Space Agreements
dated April 1, April 2, April 3 and October 15, 1996
between the Company and 55 Broad Street Company.X
10.10 -- Small Order Fulfillment Agreement between the Company and
Valley Record Distributors.+X
10.11 -- Indemnification Agreement dated as of February 13, 1996
among the Company and the shareholders of New York N2K.X
10.12 -- Form of Director Indemnification Agreement.X
10.13 -- Sales Data Agreement dated June 5, 1996 between the Company
and SoundScan, Inc.X
10.14 -- Distribution Agreement dated October 16, 1996 between the
Company and RED Distribution, Inc.+X
10.15 -- Employment Agreement dated as of October 15, 1996 between
the Company and Phil Ramone.
10.16 -- Sponsorship Agreement dated September 23, 1997 between the
Company and Excite, Inc.+
10.17 -- Letter Agreement dated October 28, 1996 between the Company
and Virgin Records America Inc.+X
10.18 -- Web Site Development Agreement dated as of November 1, 1996
between the Company and Interstate Broadcasting Company,
Inc.+X
10.19 -- Omitted.
10.20 -- Content and Services Agreement dated as of May 21, 1997
between WebTV Networks, Inc. and the Company.+X
10.21 -- Letter of Intent dated December 18, 1996 between the
Company and MTV Networks.+
10.22 -- Web Site Development Agreement dated as of June 18, 1997
between WBGO and the Company.+X
10.23 -- @Home Shopping Tenant Agreement dated June 5, 1997 between
At Home Corporation and the Company.+X
10.24 -- Interactive Marketing Agreement dated as of September 1,
1997 between America Online, Inc. and the Company.+
10.25 -- Memorandum of Understanding dated August 4, 1997 between
the Company and PointCast, Inc.
10.26 -- Music Producer's Agreement dated as of October 15, 1996
between the Company and Phil Ramone, Inc.
11.1 -- Statement re: Computation of Per Share Earnings.
21.1 -- Subsidiaries of the Registrant.X
23.1 -- Consent of Arthur Andersen LLP.
23.2 -- Consent of Richard A. Eisner & Company, LLP.
23.3 -- Consent of Dewey Ballantine (contained in Exhibit 5.1).*
24.1 -- Power(s) of Attorney.X
27.A -- Financial Data Schedule.
27.B -- Financial Data Schedule.
</TABLE>
- ---------------
* To be filed by amendment.
+ Confidential treatment requested.
X Previously filed.
<PAGE> 1
Exhibit 4.5
N2K INC.
1997 DIRECTORS' STOCK OPTION PLAN
1. Purpose. The 1997 Directors' Stock Option Plan (the "Plan") of N2K
Inc. (the "Company"), is intended to advance the best interests of the Company
by providing the nonemployee members of the Board of Directors of the Company
(the "Board") an opportunity to purchase shares of common stock of the Company
(the "Shares"). This Plan is effective as of April 15, 1997 (the "Effective
Date") and is not intended to qualify as an incentive stock option plan under
section 422 of the Internal Revenue Code of 1986, as amended (the "Code").
2. Administration. The authority to manage and control the operation
and administration of the Plan shall be vested in a Committee (the "Committee")
consisting of two or more members of the Board, who shall be appointed by, and
may be removed by, the Board; provided that the Committee shall have no
authority, power, or discretion to determine the number, timing or price of
options granted pursuant to paragraph 3 or to alter the terms and conditions of
options as set forth herein. In the absence of any such appointment or removal,
the Board shall act as the Committee under the Plan. Any interpretation of the
Plan by the Committee and any decision made by the Committee on any other matter
within its discretion is final and binding on all persons.
3. Participation. Each member of the Board who is not an employee of
the Company shall be a participant in the Plan. On the Effective Date and as of
the date of each annual meeting of the Company's stockholders after the
Effective Date, each Director who is elected or continues as a member of the
Board shall be awarded an option to purchase 12,500 Shares. Notwithstanding the
foregoing, in the case of a Director who serves on the Board on behalf of an
institutional investor of the Company (an "Investor") under the terms of an
arrangement pursuant to which the Investor is entitled to the compensation paid
by the Company for the Director's service on the Board, the options to be
awarded hereunder shall not be awarded to the Director but shall instead be
awarded directly to the Investor. The Director or Investor to whom the option is
awarded, as applicable, shall be referred to hereunder as the "Optionee." The
maximum number of shares that may be awarded under the Plan to any Optionee
shall be 125,000 shares (considering for this purpose any Director and Investor
that he represents as a single Optionee).
<PAGE> 2
4. Shares Subject to the Plan. The aggregate number of Shares with
respect to which options may be issued under the Plan is 500,000. The number of
shares related to awards that expire unexercised or are forfeited, surrendered,
terminated or cancelled shall again be available for additional awards under the
Plan unless the Plan shall have terminated. Any Shares issued under the Plan may
be treasury shares or authorized but unissued shares.
5. Option Price. The option price with respect to each Share shall be
the Fair Market Value of a Share on the date the award is made. The "Fair Market
Value" of a Share as of any date shall be equal to the closing sale price of a
Share as reported on the exchange on which it is traded or as reported by an
applicable automated quotation system on the applicable date or, if no sales of
Shares are reported on such date, the closing sale price of a Share on the date
the Shares were last reported on the exchange or automated quotation system. If
the Shares are not listed or admitted to trading on any exchange or quotation
system, Fair Market Value shall be determined in good faith by the Committee.
The purchase price may be subject to adjustment in the event there is any change
in the capitalization of the Company as provided in paragraph 12.
6. Option Expiration Date. The "Expiration Date" with respect to an
option or any portion thereof granted to an Optionee under the Plan means the
date which is three years after the date on which the option is granted. Subject
to paragraph 8, all rights to purchase Shares pursuant to an option shall cease
no later than the option's Expiration Date.
7. Exercise of Options. Each option shall be exercisable, either in
whole or in part, at any time after the first anniversary of the grant date and
before the option's Expiration Date. An Optionee may exercise an option by
giving written notice thereof prior to the option's Expiration Date to the Chief
Executive Officer of the Company at the Company's corporate headquarters setting
out the number of Shares with respect to which the option is to be exercised.
Contemporaneously with the delivery of such notice, the full purchase price of
the Shares purchased pursuant to the exercise of a stock option shall be paid in
the form of: (a) cash, certified check, bank draft, or postal or express money
order payable to the order of the Company or (b) Shares at the fair market value
on the date of exercise, and specifying the address to which the certificates
for the Shares are to be mailed. As promptly as practicable after receipt of
written notification and payment, the Company shall deliver to the Optionee
certificates in the Optionee's name for the number of Shares with respect to
which the option has been exercised.
2
<PAGE> 3
Delivery shall be deemed effected when a stock transfer agent of the Company
shall have deposited the certificates in the United States mail, addressed to
the Optionee, at the address specified under this paragraph.
8. Termination of Service. If the Director terminates service on the
Board for any reason before the first anniversary of the date that an option is
granted, such option shall expire upon the Director's termination of service and
shall not be exercisable by any person. If the Director's service on the Board
terminates for any reason other than death, any options which are not cancelled
in accordance with the preceding sentence shall by exercisable by the Optionee
until the option's Expiration Date. In the event of the death of a Director, any
options which an Optionee was entitled to exercise on the date immediately
preceding the date of death shall be exercisable for a period of six months
after the date of death, but no later than the option's Expiration Date, by the
person or persons to whom an option held by a Director passes by will or by the
laws of descent and distribution or, in the case of an option held by an
Investor, by such Investor.
9. Compliance with Applicable Laws. Notwithstanding any other provision
in the Plan, the Company shall have no liability to issue any Shares under the
Plan unless such issuance would comply with all applicable laws and applicable
requirements of any securities exchange or similar entity. Prior to the issuance
of any Shares under the Plan, the Company may require a written statement that
the recipient is acquiring the Shares for investment and not for the intention
of distributing the Shares. Certificates representing such Shares may bear a
legend referring to such restrictions.
10. Transferability. Options under the Plan are not transferable
except, in the case of options granted to a Director, by will or by the laws of
descent and distribution. Options granted to a Director may be exercised during
the lifetime of the Director only by the Director, and after the death of the
Director, only as provided in paragraph 8. Options granted to an Investor may be
exercised only by such Investor.
11. Stockholder Status. The grant of an option under the Plan shall not
confer upon the Optionee any right as a stockholder of the Company. No Optionee
entitled to exercise any option granted under the Plan shall have any of the
rights or privileges of a stockholder of record with respect to any Shares
issuable upon exercise of such option until certificates representing such
Shares have been issued and delivered.
3
<PAGE> 4
12. Adjustments to Number of Shares Subject to the Plan and to Option
Terms. Subject to the following provisions of this paragraph 12, in the event of
any change in the outstanding Shares by reason of any stock dividend, stock
split, recapitalization, merger, consolidation, combination, exchange of shares
or other similar corporate change, an appropriate and proportionate adjustment
shall be made in the number and kind of Shares subject to options outstanding or
to be granted under the Plan. Any such adjustment in any outstanding option
shall be made without change in the aggregate purchase price applicable to the
unexercised portion of such option but with a corresponding adjustment in the
price for each Share covered by such option as well as the adjustment in the
number and kind of Shares mentioned above. In no event shall the purchase price
for a Share be adjusted below the par value of such Share, nor shall any
fraction of a Share be issued upon the exercise of an option.
13. Agreement with Company. At the time of a grant of an option, the
Committee may require an Optionee to enter into an agreement with the Company in
a form specified by the Committee agreeing to the terms and conditions of the
Plan.
14. Amendment and Termination of Plan. Subject to any approval of the
stockholders of the Company which may be required by law or the rules of any
stock exchange or market on which the Shares are traded, the Board may at any
time amend, suspend or terminate the Plan; provided, however, no amendment,
suspension or termination of the Plan shall alter or impair any option
previously granted under the Plan without the consent of the affected Optionee.
4
<PAGE> 1
EXHIBIT 4.16
SENIOR NOTE
$__________ _____________, 1997
FOR VALUE RECEIVED, N2K Inc. ("Maker"), a Pennsylvania
corporation, hereby promises to pay to the order of
_______________________________________________ (together with his successors
and assigns, the "Holder"), the principal sum of ________________ Dollars
($______________), in legal and lawful money of the United States of America,
together with accrued interest thereon as set forth in Section 1 hereof, which
interest shall accrue on the outstanding unpaid principal from and including the
date hereof, but excluding the date on which the principal and all accrued
interest are paid in full or the Note is converted pursuant to Section 3 hereof.
The principal of this Note, together with all accrued interest thereon, shall be
due and payable (unless the Note has been converted pursuant to Section hereof)
on the date (the "Maturity Date") on which the first of the following events
occurs: (i) Change in Control (as hereinafter defined), or (ii) March 31, 1998.
For purposes hereof "Change in Control" means (a) a merger or consolidation of
Maker in which holders of the common stock of Maker receive cash, securities or
other property from one or more third parties or (b) a sale by Maker of all or
substantially all of the assets of Maker. This Note is issued to fund critical
working capital needs of N2K Inc.
Section 1. Interest. This Note shall accrue interest on the
unpaid principal amount hereof at the rate of 14% per annum, compounded
quarterly. Interest shall be computed on the basis of a 360-day year of 12
thirty-day months and shall be payable on the Maturity Date.
Section 2. Prepayments. Maker may, at its option, prepay the
principal amount of this Note, and all accrued interest thereon, at any time and
from time to time, in whole or in part and without penalty.
Section 3. Automatic Conversion of Note. Upon consummation of
an initial public offering of shares of common stock of the Maker registered
pursuant to the Securities Act of 1933, as amended ("IPO"), the principal amount
of this Note plus all accrued but unpaid interest thereon (the "Conversion
Amount") shall, without any action on the part of the Holder, be deemed
automatically converted into such whole number of fully paid and non-assessable
shares of Common Stock as are obtained by dividing the Conversion Amount by the
per share initial offering price of the Maker's Common Stock in the IPO. Any
fractional shares that result from such calculation will be paid in cash rather
than fractional shares.
<PAGE> 2
Section 4. Events of Default and Remedies. Any of the
following events shall be an "Event of Default":
(a) Maker shall fail to pay the amount due under this Note on
or preceding the Maturity Date;
(b) Maker shall fail to perform, observe and comply with any
covenant, agreement, or condition (other than the covenant to pay amounts of
principal or interest thereon due under this Note) contained in this Note and
such failure continues for a period of ten (10) days following written notice to
Maker from Holder of the continuation of such failure; or
(c) Maker (i) shall generally not, or be unable to, or shall
admit in writing its inability to, pay its debts as such debts become due; (ii)
shall make an assignment for the benefit of creditors, petition or apply to any
tribunal for the appointment of a custodian, receiver or trustee for itself or a
substantial part of its assets; (iii) shall commence any proceeding under any
bankruptcy, reorganization, arrangement or readjustment of debt law or statute
of any jurisdiction, whether now or hereafter in effect; (iv) shall have had any
such petition or application filed or any such proceeding shall have been
commenced, against it, in which an adjudication or appointment is made or order
for relief is entered, or which petition, application or proceeding remains
undismissed or unstayed for a period of thirty (30) days or more; (v) or shall
be the subject of any proceeding under which its assets may be subject to
seizure, forfeiture or divestiture; (vi) by any act or omission shall indicate
its consent to, approval of or acquiescence in any such petition, application or
proceeding or order for relief or the appointment of a custodian, receiver or
trustee for all or any substantial part of its property; or (vii) shall suffer
any such custodianship, receivership or trusteeship to continue undischarged for
a period of thirty (30) days or more.
(d) Any warranty, representation or other statement by or on
behalf of Maker contained in any instrument furnished in compliance with or in
reference thereto shall have been false or misleading in any material respect
when made.
(e) Maker shall have defaulted with respect to any payment
obligation in respect of any indebtedness of Maker (other than trade payables)
or under any agreement securing or relating to such indebtedness, or any event
shall occur and be continuing or any condition shall exist in respect of any
indebtedness (other than trade payables), or under any agreement securing or
relating to such indebtedness, that causes such indebtedness, or a portion
thereof, to become due prior to its stated maturity or prior to its regularly
scheduled date or dates of payment (and the holder of such indebtedness has
caused such to become due).
Upon the occurrence of an Event of Default described in
paragraph (c) of Section 4 hereof, the outstanding principal amount of this Note
shall automatically become immediately due and payable. Upon the existence of an
Event of Default (other than pursuant to paragraph (c) of Section 4 hereof),
Holder may declare the outstanding principal amount of the Note, to be forthwith
due and payable. Upon the outstanding principal amount of this Note becoming due
and payable under this Section 4, whether automatically or by declaration, the
outstanding
2
<PAGE> 3
principal amount of the Note, all interest thereon, and all other amounts due
under this Note shall become and be forthwith due and payable, without
presentment, demand, protest, or further notice of any kind, all of which are
hereby expressly waived by Maker; and in addition thereto, Holder may exercise
any rights and remedies provided by law.
Section 5. Covenants of Maker. At all times prior to the
Maturity Date and so long as any amount remains outstanding under this Note:
(a) Financial Reporting: Business Information. Maker shall
deliver to Holder:
(i) Monthly Financial Statements -- prior to the date (the
"IPO Date") Maker first offers for sale its common stock pursuant to an
effective registration statement filed under the Securities Act of
1933, as amended, as soon as practicable after the end of each monthly
fiscal period in each fiscal year of Maker, and in any event within 30
days thereafter:
(A) a consolidated balance sheet as at the
end of such month;
(B) a consolidated income statement for such
month and for the portion of such fiscal year ending with such month;
and
(C) consolidated statements of changes in
stockholders' equity and cash flows for such months and for the portion
of such fiscal year ending with such month;
for Maker, setting forth in each case in comparative form the figures
for the corresponding month in the previous fiscal year of Maker, all
in reasonable detail, and certified by a senior financial officer of
Maker as fairly presenting, in all material respects, the financial
position of Maker and its results of operations and cash flows (subject
to changes resulting from year-end adjustments);
(ii) Post Initial Public Offering Information --
from and after the IPO Date, promptly upon their becoming available, a
copy of each financial statement, report, notice or proxy statement
sent by Maker to stockholders generally, and of each regular or
periodic report (including, without limitation, each Form 10-Q and Form
10-K) and any registration statement, prospectus or written
communication (other than transmittal letters), and each amendment
thereto, in respect thereof filed by Maker with, or received by Maker
in connection therewith from, the National Association of Securities
Dealers, any securities exchange or the Securities and Exchange
Commission or any successor agency; and
(iii) Annual Financial Statements -- in the event that the IPO
Date does not occur before March 31, 1998, as soon as practicable after
the end of each fiscal year of the Maker, and in any event within one
hundred twenty (120) days thereafter,
(i) consolidated balance sheets as at the
end of such year, and
3
<PAGE> 4
(ii) consolidated statements of
income, changes in shareholders' equity and cash flows for
such year, for the Maker and its consolidated subsidiaries,
setting forth in comparative form the financial statements for
the previous fiscal year, all in reasonable detail and
accompanied by an audit report thereon of independent
certified public accountants of recognized national standing,
which report shall state without qualification (including,
without limitation, qualifications related to the scope of the
audit, the compliance of the audit with generally accepted
auditing standards, or the ability of the Maker or a material
subsidiary thereof to continue as a going concern), that such
financial statements have been prepared and are in conformity
with GAAP.
(iv) Requested Information -- with reasonable
promptness, such other data and information as from time to time may be
reasonably requested by Holder;
(b) Inspection. Maker will permit officers and designated
representatives of Holder, at the expense of Maker at any time when an Event of
Default exists, and otherwise at the expense of Holder, to visit and inspect any
of its properties, and to examine its books of account and to make copies and
extracts therefrom, and discuss its affairs, finances and accounts with, and be
advised as to the same by, its officers and its independent accountants (and by
this provision Maker authorized said accountants to discuss the finances and
affairs of Maker), all upon reasonable notice and at such reasonable times and
intervals and to such reasonable extent as Holder may reasonably request.
(c) Negative Pledge. Maker will not grant in the future (upon
the happening of a contingency or otherwise), any of its property, whether now
owned or hereafter acquired, at any time to be subject to a lien securing
indebtedness of Maker except for renewals or extensions of a loan agreement with
CoreStates Bank in an amount up to $2 million.
(d) Distributions. Maker will not:
(i) make or declare, or incur any liability to
make or declare, any dividends or other distributions on the capital stock of
Maker; and
(ii) make any optional or mandatory redemption,
retirement, purchase or other acquisition, direct or indirect, of any shares of
capital stock of Maker, or of any warrants, rights, or options to acquire any
shares of such capital stock of Maker other than the "put" of Rocktropolis, LLC
as described in Maker's S-1 Registration Statement.
(e) Line of Business. Maker will not engage, directly or
indirectly, in any line of business other than the music entertainment business.
Section 6. Costs and Expenses. Maker shall pay when billed the
reasonable out-
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<PAGE> 5
of-pocket costs and expenses (including reasonable attorney's fees) incurred by
Holder in connection with the consideration, negotiation, preparation or
execution of any amendments, waivers, consents, standstill agreements or other
similar agreements with respect to this Note (whether or not any such
amendments, waivers, consents, standstill agreements or other similar agreements
are executed). At any time when Maker and Holder are conducting restructuring or
workout negotiations in respect hereof, or an Event of Default exists, Maker
shall pay when billed the reasonable out-of-pocket costs and expenses (including
reasonable attorneys' fees and the fees of professional advisors) incurred by
Holder in connection with the assessment, analysis or enforcement of any rights
or remedies that are or may be available to Holder and in connection with
inspections made pursuant to Section 5(b) (provided that at all other times
inspections will be at the expense of Holder). If Maker shall fail to pay when
due any principal of, or interest on, this Note, Maker shall pay to Holder, to
the extent permitted by law, such amounts as shall be sufficient to cover the
out-of-pocket costs and expenses, including but not limited to reasonable
attorneys' fees, incurred by Holder in collecting any sums due on this Note.
Section 7. Payments on this Note. Maker shall pay all amounts
payable with respect to this Note (without any presentment of this Note and
without any notation of such payment being made thereon) by crediting, by
federal funds bank wire transfer, the account Holder may hereafter direct in
writing. Any payment to be made to the Holder hereunder shall be deemed to have
been made on the business day such payment actually becomes available at the
Holder's bank prior to the close of business of such bank, provided that
interest for one day shall be due on the amount of any such payment that
actually becomes available to such bank after 1:00 p.m. (local time of such
bank).
SECTION 8. GOVERNING LAW. THIS NOTE SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK (WITHOUT GIVING
EFFECT TO ITS CONFLICT OF LAW PRINCIPLES).
Section 9. Waiver and Amendment. Maker hereby waives
presentment, demand for payments, notice of dishonor, protest and notice of
protest and any and all other notices or demands in connection with this Note.
No delay or omission on the part of Holder in exercising any right hereunder
shall operate as a waiver of such right or of any other right under this Note. A
waiver on one occasion shall not be construed as a bar to or waiver of any such
right and/or remedy on any future occasion. Any provision of this Note may be
amended upon the express written agreement thereto of Maker, Holder and the
holder of the Note at the time of such amendment.
Section 10 Headings; Construction. The headings of the
sections of this Note are inserted for convenience only and shall not be deemed
to constitute a part hereof; words used herein of any gender shall be construed
to include any other gender where appropriate, and words used herein that are
either singular or plural shall be construed to include the other where
appropriate.
Section 11. Lost Note. Upon receipt by Maker of evidence
satisfactory to it of the loss, theft, destruction or mutilation of this Note,
and (in case of loss, theft or destruction) of indemnity satisfactory to it
(provided that if Holder is an institutional investor or a nominee of an
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<PAGE> 6
institutional investor, such institutional investor's own unsecured agreement of
indemnity shall be deemed to be satisfactory for such purpose), and upon
reimbursement to Maker of all reasonable expenses incidental thereto, and upon
surrender and cancellation of such Note, if mutilated, Maker will deliver in
lieu of such Note a new note for the unpaid principal amount thereof and
carrying the same rights to interest on the unpaid principal.
IN WITNESS WHEREOF, the undersigned has executed this Note on
the date first above written.
N2K Inc.
By: ____________________________
Bruce Johnson
Vice President, Secretary and Treasurer
6
<PAGE> 1
EXHIBIT 4.17
SENIOR NOTE
$_______________ ___________, 1997
PPN: ___________
FOR VALUE RECEIVED, N2K Inc. ("Maker"), hereby a Pennsylvania
corporation, promises to pay to the order of ______________, a _______________,
with its principal place of business at ______________,
______________________________________________________ (together with its
successors and assigns, the "Holder"), the principal sum of ___________________
Dollars ($_______________) in legal and lawful money of the United States of
America, together with accrued interest thereon as set forth in Section 1
hereof, which interest shall accrue on the outstanding unpaid principal from
and including the date hereof, but excluding the date on which the principal
and all accrued interest are paid in full. The principal of this Note,
together with all accrued interest thereon, shall be due and payable on the
date (the "Maturity Date") on which the first of the following events occurs:
(i) consummation of an initial public offering of the common stock of
N2K Inc., (ii) Change in Control (as hereinafter defined), or (iii) March 31,
1998. For purposes hereof "Change in Control" means (a) a merger or
consolidation of Maker in which holders of the common stock of Maker receive
cash, securities or other proper property from one or more third parties, (b) a
sale by Maker of all or substantially all of the assets of Maker (c) at any
time, the failure of Lawrence L. Rosen, Robert David Grusin or Jonathan V.
Diamond (the "Management Stockholders") to collectively own, directly or
indirectly, beneficially and of record, at least 20% (by number of votes) of the
voting stock of Maker outstanding at such time, or (d) the transfer of other
disposition of the voting stock of the Maker by any one or more of the
Management Stockholders such that immediately after such transfer or other
disposition the Management Stockholders fail to collectively own, directly or
indirectly, beneficially and of record at least 25% (by number of votes) of the
voting stock of the Maker outstanding at such time.
This Note is issued to fund critical working capital needs of
N2K Inc. and is being issued in connection with a certain letter agreement by
and between Maker as Holder of even date herewith (the "Letter Agreement").
Section 1. Interest. This Note shall accrue interest on the
unpaid principal amount hereof at the rate of 14% per annum, compounded
quarterly. Interest shall be computed on the basis of a 360-day year of 12
thirty-day months and shall be payable on the Maturity Date.
Section 2. Prepayments. Maker may, at its option, prepay the
principal amount of this Note, and all accrued interest thereon, at any time and
from time to time, in whole or in
<PAGE> 2
part and without penalty.
Section 3. Events of Default and Remedies. Any of the
following events shall be an "Event of Default":
(a) Maker shall fail to pay the amount due under this Note on
or preceding the Maturity Date;
(b) Maker shall fail to perform, observe and comply with any
covenant, agreement, or condition (other than the covenant to pay amounts of
principal or interest thereon due under this Note) contained in this Note and
such failure continues for a period of ten (10) days following written notice to
Maker from Holder of the continuation of such failure; or
(c) Maker (i) shall generally not, or be unable to, or shall
admit in writing its inability to, pay its debts as such debts become due; (ii)
shall make an assignment for the benefit of creditors, petition or apply to any
tribunal for the appointment of a custodian, receiver or trustee for itself or a
substantial part of its assets; (iii) shall commence any proceeding under any
bankruptcy, reorganization, arrangement or readjustment of debt law or statute
of any jurisdiction, whether now or hereafter in effect; (iv) shall have had any
such petition or application filed or any such proceeding shall have been
commenced, against it, in which an adjudication or appointment is made or order
for relief is entered, or which petition, application or proceeding remains
undismissed or unstayed for a period of thirty (30) days or more; (v) or shall
be the subject of any proceeding under which its assets may be subject to
seizure, forfeiture or divestiture; (vi) by any act or omission shall indicate
its consent to, approval of or acquiescence in any such petition, application or
proceeding or order for relief or the appointment of a custodian, receiver or
trustee for all or any substantial part of its property; or (vii) shall suffer
any such custodianship, receivership or trusteeship to continue undischarged for
a period of thirty (30) days or more.
(d) Any warranty, representation or other statement by or on
behalf of Maker contained in the Letter Agreement or in any instrument furnished
in compliance with or in reference thereto shall have been false or misleading
in any material respect when made.
(e) Maker shall have defaulted with respect to any payment
obligation in respect of any indebtedness of Maker (other than trade payables)
or under any agreement securing or relating to such indebtedness, or any event
shall occur and be continuing or any condition shall exist in respect of any
indebtedness (other than trade payables), or under any agreement securing or
relating to such indebtedness, that causes such indebtedness, or a portion
thereof, to become due prior to its stated maturity or prior to its regularly
scheduled date or dates of payment (and the holder of such indebtedness has
caused such to become due).
Upon the occurrence of an Event of Default described in
paragraph (c) of Section 3 hereof, the outstanding principal amount of this Note
shall automatically become immediately due and payable. Upon the existence of an
Event of Default (other than pursuant to paragraph (c) of Section 3 hereof),
Holder may declare the outstanding principal amount of the Note, to be forthwith
due and payable. Upon the outstanding principal amount of this Note becoming due
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<PAGE> 3
and payable under this Section 3, whether automatically or by declaration, the
outstanding principal amount of the Note, all interest thereon, and all other
amounts due under this Note shall become and be forthwith due and payable,
without presentment, demand, protest, or further notice of any kind, all of
which are hereby expressly waived by Maker; and in addition thereto, Holder may
exercise any rights and remedies provided by law.
Section 4. Covenants of Maker. At all times prior to the
Maturity Date and so long as any amount remains outstanding under this Note:
(a) Financial Reporting: Business Information. Maker shall
deliver to Holder:
(i) Monthly Financial Statements -- prior to the date
(the "IPO Date") Maker first offers for sale its common stock pursuant to an
effective registration statement filed under the Securities Act of 1933, as
amended, as soon as practicable after the end of each monthly fiscal period in
each fiscal year of Maker, and in any event within 30 days thereafter:
(A) a consolidated balance sheet as at the
end of such month;
(B) a consolidated income statement for such
month and for the portion of such fiscal year ending with such month;
and
(C) consolidated statements of changes
in stockholders' equity and cash flows for such months and for the
portion of such fiscal year ending with such month;
for Maker, setting forth in each case in comparative form the
figures for the corresponding month in the previous fiscal year of Maker, all in
reasonable detail, and certified by a senior financial officer of Maker as
fairly presenting, in all material respects, the financial position of Maker and
its results of operations and cash flows (subject to changes resulting from
year-end adjustments);
(ii) Post Initial Public Offering Information --
from and after the IPO Date, promptly upon their becoming available, a copy of
each financial statement, report, notice or proxy statement sent by Maker to
stockholders generally, and of each regular or periodic report (including,
without limitation, each Form 10-Q and Form 10-K) and any registration
statement, prospectus or written communication (other than transmittal letters),
and each amendment thereto, in respect thereof filed by Maker with, or received
by Maker in connection therewith from, the National Association of Securities
Dealers, any securities exchange or the Securities and Exchange Commission or
any successor agency; and
(iii) Annual Financial Statements -- in the event
that the IPO Date does not occur before March 31, 1998, as soon as practicable
after the end of each fiscal year of the Maker, and in any event within one
hundred twenty (120) days thereafter,
(i) consolidated balance sheets as at the
end of such year, and
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<PAGE> 4
(ii) consolidated statements of income,
changes in shareholders' equity and cash flows for such year, for the Maker and
its consolidated subsidiaries, setting forth in comparative form the financial
statements for the previous fiscal year, all in reasonable detail and
accompanied by an audit report thereon of independent certified public
accountants of recognized national standing, which report shall state without
qualification (including, without limitation, qualifications related to the
scope of the audit, the compliance of the audit with generally accepted auditing
standards, or the ability of the Maker or a material subsidiary thereof to
continue as a going concern), that such financial statements have been prepared
and are in conformity with GAAP.
(iv) Requested Information -- with reasonable
promptness, such other data and information as from time to time may be
reasonably requested by Holder;
(b) Inspection. Maker will permit officers and designated
representatives of Holder, at the expense of Maker at any time when an Event of
Default exists, and otherwise at the expense of Holder, to visit and inspect any
of its properties, and to examine its books of account and to make copies and
extracts therefrom, and discuss its affairs, finances and accounts with, and be
advised as to the same by, its officers and its independent accountants (and by
this provision Maker authorized said accountants to discuss the finances and
affairs of Maker), all upon reasonable notice and at such reasonable times and
intervals and to such reasonable extent as Holder may reasonably request.
(c) Negative Pledge. Maker will not grant in the future (upon
the happening of a contingency or otherwise), any of its property, whether now
owned or hereafter acquired, at any time to be subject to a lien securing
indebtedness of Maker except for renewals or extensions of a loan agreement with
CoreStates Bank in an amount up to $2 million.
(d) Distributions. Maker will not:
(i) make or declare, or incur any liability to make
or declare, any dividends or other distributions on the
capital stock of Maker; and
(ii) make any optional or mandatory redemption,
retirement, purchase or other acquisition, direct or indirect,
of any shares of capital stock of Maker, or of any warrants,
rights, or options to acquire any shares of such capital stock
of Maker other than the "put" of Rocktropolis, LLC as
described in Maker's S-1 Registration Statement.
(e) Line of Business. Maker will not engage, directly or
indirectly, in any line of business other than the music entertainment business.
Section 5. Costs and Expenses. Maker shall pay when billed the
reasonable out-of-pocket costs and expenses (including reasonable attorney's
fees) incurred by Holder in connection with the consideration, negotiation,
preparation or execution of any amendments,
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<PAGE> 5
waivers, consents, standstill agreements or other similar agreements with
respect to this Note (whether or not any such amendments, waivers, consents,
standstill agreements or other similar agreements are executed). At any time
when Maker and Holder are conducting restructuring or workout negotiations in
respect hereof, or an Event of Default exists, Maker shall pay when billed the
reasonable out-of-pocket costs and expenses (including reasonable attorneys'
fees and the fees of professional advisors) incurred by Holder in connection
with the assessment, analysis or enforcement of any rights or remedies that are
or may be available to Holder and in connection with inspections made pursuant
to Section 4(b) (provided that at all other times inspections will be at the
expense of Holder). If Maker shall fail to pay when due any principal of, or
interest on, this Note, Maker shall pay to Holder, to the extent permitted by
law, such amounts as shall be sufficient to cover the out-of-pocket costs and
expenses, including but not limited to reasonable attorneys' fees, incurred by
Holder in collecting any sums due on this Note.
Section 6. Payments on this Note. Maker shall pay all amounts
payable with respect to this Note (without any presentment of this Note and
without any notation of such payment being made thereon) by crediting, by
federal funds bank wire transfer, the account of Holder designated on Annex 1
hereto or as the Holder may hereafter direct in writing. Any payment to be made
to the Holder hereunder shall be deemed to have been made on the business day
such payment actually becomes available at the Holder's bank prior to the close
of business of such bank, provided that interest for one day shall be due on the
amount of any such payment that actually becomes available to such bank after
1:00pm (local time of such bank).
SECTION 7. GOVERNING LAW. THIS NOTE SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK (WITHOUT GIVING
EFFECT TO ITS CONFLICT OF LAW PRINCIPLES).
Section 8. Waiver and Amendment. Maker hereby waives
presentment, demand for payments, notice of dishonor, protest and notice of
protest and any and all other notices or demands in connection with this Note.
No delay or omission on the part of Holder in exercising any right hereunder
shall operate as a waiver of such right or of any other right under this Note. A
waiver on one occasion shall not be construed as a bar to or waiver of any such
right and/or remedy on any future occasion. Any provision of this Note may be
amended upon the express written agreement thereto of Maker, Holder and the
holder of the Note at the time of such amendment.
Section 9. Headings; Construction. The headings of the
sections of this Note are inserted for convenience only and shall not be deemed
to constitute a part hereof; words used herein of any gender shall be construed
to include any other gender where appropriate, and words used herein that are
either singular or plural shall be construed to include the other where
appropriate.
Section 10. Lost Note. Upon receipt by Maker of evidence
satisfactory to it of the loss, theft, destruction or mutilation of this Note,
and (in case of loss, theft or destruction) of indemnity satisfactory to it
(provided that if Holder is an institutional investor or a nominee of an
institutional investor, such institutional investor's own unsecured agreement of
indemnity shall be deemed to be satisfactory for such purpose), and upon
reimbursement to Maker of all reasonable
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<PAGE> 6
expenses incidental thereto, and upon surrender and cancellation of such Note,
if mutilated, Maker will deliver in lieu of such Note a new note for the unpaid
principal amount thereof and carrying the same rights to interest on the unpaid
principal.
IN WITNESS WHEREOF, the undersigned has executed this Note on
the date first above written.
N2K Inc.
By: ____________________________
Bruce Johnson
Vice President, Secretary and Treasurer
6
<PAGE> 1
Exhibit 4.18
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933 OR THE LAWS OF ANY STATE. THEY MAY NOT BE SOLD OR OTHERWISE
TRANSFERRED UNLESS THEY ARE REGISTERED UNDER SUCH ACT AND APPLICABLE
STATE SECURITIES LAWS OR AN EXEMPTION FROM REGISTRATION IS AVAILABLE.
_______ Warrants
(Subject to Adjustment as
Provided Herein)
PPN: ______________
N2K INC.
WARRANT CERTIFICATE
This warrant certificate ("Warrant Certificate") certifies
that for value received _________________________________________ or his/its
registered assigns (the "Holder") is the owner of the number of warrants
("Warrants") specified above, each of which entitles the Holder thereof to
purchase, at any time on or before the Expiration Date (hereinafter defined),
one fully paid and non-assessable share of Common Stock, $.001 par value
("Common Stock"), of N2K Inc. a Pennsylvania corporation (the "Company"), at a
purchase price of $3.00 per share of Common Stock in lawful money of the United
States of America in cash or by certified or cashier's check or a combination of
cash and certified or cashier's check (subject to adjustment as hereinafter
provided).
1. Warrant; Purchase Price
Each Warrant shall entitle the Holder initially to purchase
one share of Common Stock of the Company and the purchase price payable upon
exercise of the Warrants (the "Purchase Price") shall initially be $3.00 per
share of Common Stock. The Purchase Price and number of shares of Common Stock
issuable upon exercise of each Warrant are subject to adjustment as provided in
Article 6. The shares of Common Stock issuable upon exercise of the Warrants
(and/or other shares of Common Stock so issuable by reason of any adjustments
pursuant to Article 6) are sometimes referred to herein as the "Warrant Shares."
This Warrant is issued in connection with that certain letter agreement (the
"Agreement") and the Company's 14% Senior Note (the "Note") of even date
herewith.
<PAGE> 2
2. Exercise; Expiration Date
2.1 The Warrants are exercisable, at the option of the Holder,
in whole or in part at any time and from time to time after issuance and on or
before the Expiration Date, upon surrender of this Warrant Certificate to the
Company together with a duly completed Notice of Exercise, in the form attached
hereto as Exhibit A, and payment of an amount equal to the Purchase Price times
the number of Warrants to be exercised. In the case of exercise of less than all
the Warrants represented by this Warrant Certificate, the Company shall cancel
the Warrant Certificate upon the surrender thereof and shall execute and deliver
a new Warrant Certificate for the balance of such Warrants.
2.2 The term "Expiration Date" shall mean 5:00 p.m. New York
time on July 31, 2004 or if such day shall in the State of New York be a holiday
or a day on which banks are authorized to close, then 5:00 p.m. New York time
the next following day which in the State of New York is not a holiday or a day
on which banks are authorized to close.
3. Registration and Transfer on Company Books
3.1 The Company shall maintain books for the registration and
transfer of the Warrants and the registration and transfer of the Warrant
Shares.
3.2 Prior to due presentment for registration of transfer of
this Warrant Certificate, or the Warrant Shares, the Company may deem and treat
the registered Holder as the absolute owner thereof.
4. Reservation of Shares
The Company covenants that it will at all times reserve and
keep available out of its authorized capital stock, solely for the purpose of
issue upon exercise of the Warrants, such number of shares of capital stock as
shall then be issuable upon the exercise of all outstanding Warrants. The
Company covenants that all shares of capital stock which shall be issuable upon
exercise of the Warrants shall be duly and validly issued and fully paid and
non-assessable and free from all taxes, liens and charges with respect to the
issue thereof, and that upon issuance such shares shall be listed on each
national securities exchange, if any, on which the other shares of such
outstanding capital stock of the Company are then listed.
5. Loss or Mutilation
Upon receipt by the Company of reasonable evidence of the
ownership of and the loss, theft, destruction or mutilation of any Warrant
Certificate and, in the case of loss, theft or destruction, of indemnity
reasonably satisfactory to the Company (provided that if Holder is an
institutional investor or a nominee of an institutional investor, such
institutional investor's own unsecured agreement of indemnity shall be deemed to
be satisfactory for such purpose), or, in the case of mutilation, upon surrender
and cancellation of the mutilated Warrant Certificate, the Company shall execute
and deliver
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<PAGE> 3
in lieu thereof a new Warrant Certificate representing an equal number of
Warrants.
6. Adjustment of Purchase Price and Number of Shares
Deliverable
6.1 The number of Warrant Shares purchasable upon the exercise
of each Warrant and the Purchase Price with respect to the Warrant Shares shall
be subject to adjustment as follows:
(a) In case the Company shall (i) declare a dividend or make a
distribution on its Common Stock payable in shares of its capital
stock, (ii) subdivide its outstanding shares of Common Stock through
stock split or otherwise, (iii) combine its outstanding shares of
Common Stock into a smaller number of shares of Common Stock, or (iv)
issue by reclassification of its Common Stock (including any
reclassification in connection with a consolidation or merger in which
the Company is the continuing corporation) other securities of the
Company, the number and/or nature of Warrant Shares purchasable upon
exercise of each Warrant immediately prior thereto shall be adjusted so
that the Holder shall be entitled to receive the kind and number of
Warrant Shares or other securities of the Company which it would have
owned or have been entitled to receive after the happening of any of
the events described above, had such Warrant been exercised immediately
prior to the happening of such event or any record date with respect
thereto. Any adjustment made pursuant to this paragraph (a) shall
become effective retroactively as of the record date of such event.
(b) In case the Company shall issue rights, options or
warrants or securities convertible into Common Stock to the holders of
its shares of Common Stock generally, entitling them to subscribe for
or purchase shares of Common Stock at a price per share which (together
with the value of the consideration, if any, payable for such rights,
options, warrants or convertible securities) is lower on the record
date referred to below than the then Market Price Per Share of such
Common Stock (as determined pursuant to Section 9.2) the number of
Warrant Shares thereafter purchasable upon the exercise of each Warrant
shall be determined by multiplying the number of Warrant Shares
immediately theretofore purchasable upon exercise of each Warrant by a
fraction, of which the numerator shall be the number of shares of
Common Stock outstanding on such record date plus the number of
additional shares of Common Stock offered for subscription or purchase,
and of which the denominator shall be the number of shares of Common
Stock outstanding on such record date plus the number of shares which
the aggregate offering price of the total number of shares of Common
Stock so offered would purchase at the then Market Price Per Share of
such Common Stock. Such adjustment shall be made whenever such rights,
options, warrants or convertible securities are issued, and shall
become effective retroactively as of the record date for the
determination of shareholders entitled to receive such rights, options,
warrants or convertible securities. In the case such subscription price
may be paid in consideration, part of which or all of which is in a
form other than cash, the value of such consideration shall be
determined in good faith by the Board of Directors of the Company.
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<PAGE> 4
(c) In case the Company shall distribute to all holders of its
shares of Common Stock, or all holders of Common Stock shall otherwise
become entitled to receive, shares of capital stock of the Company
(other than dividends or distributions on its Common Stock referred to
in paragraph (a) above), evidences of its indebtedness or rights,
options, warrants or convertible securities providing the right to
subscribe for or purchase any shares of the Company's capital stock or
evidences of its indebtedness (other than any rights, options, warrants
or convertible securities referred to in paragraph (b) above), then in
each case the number of Warrant Shares thereafter purchasable upon the
exercise of each Warrant shall be determined by multiplying the number
of Warrant Shares theretofore purchasable upon the exercise of each
Warrant, by a fraction, of which the numerator shall be the then Market
Price Per Share of the Warrant Shares (as determined pursuant to
Section 9.2) on the record date mentioned below in this paragraph (c),
and of which the denominator shall be the then Market Price Per Share
of the Warrant Shares on such record date, less the then fair value (as
determined by the Board of Directors of the Company, in good faith) of
the portion of the shares of the Company's capital stock other than
Common Stock, evidences of indebtedness, or of such rights, options,
warrants or convertible securities, distributable with respect to each
Warrant Share. Such adjustment shall be made whenever any such
distribution is made, and shall become effective retroactively as of
the record date for the determination of shareholders entitled to
receive such distribution.
(d) In the event of any capital reorganization or any
reclassification of the capital stock of the Company or in case of the
consolidation or merger of the Company with another corporation (other
than a consolidation or merger in which the outstanding shares of the
Company's Common Stock are not converted into or exchanged for other
rights or interests), or in the case of any sale, transfer or other
disposition to another corporation of all or substantially all the
properties and assets of the Company, the Holder of each Warrant shall
thereafter be entitled to purchase (and it shall be a condition to the
consummation of any such reorganization, reclassification,
consolidation, merger, sale, transfer or other disposition that
appropriate provisions shall be made so that such Holder shall
thereafter be entitled to purchase) the kind and amount of shares of
stock and other securities and property (including cash) which the
Holder would have been entitled to receive had such Warrants been
exercised immediately prior to the effective date of such
reorganization, reclassification, consolidation, merger, sale, transfer
or other disposition; and in any such case appropriate adjustments
shall be made in the application of the provisions of this Article 6
with respect to rights and interest thereafter of the Holder of the
Warrants to the end that the provisions of this Article 6 shall
thereafter be applicable, as near as reasonably may be, in relation to
any shares or other property thereafter purchasable upon the exercise
of the Warrants. The provisions of this Section 6.1(d) shall similarly
apply to successive reorganizations, reclassifications, consolidations,
mergers, sales, transfers or other dispositions.
(e) Whenever the number of Warrant Shares purchasable upon the
exercise of each Warrant is adjusted, as provided in this Section 6.1,
the Purchase
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<PAGE> 5
Price with respect to the Warrant Shares shall be accordingly adjusted
in order to reflect the number of Warrant Shares then and thereafter
issuable.
6.2 In the event the Company shall declare a dividend, or make
a distribution to the holders of its Common Stock generally, whether in cash,
property or assets of any kind, including any dividend payable in stock or
securities of any other issuer owned by the Company (excluding any dividend or
distribution referred to in Section 6.1(a) or (c) above), the Purchase Price of
each Warrant shall be reduced, without any further action by the parties hereto,
by the Per Share Value (as hereinafter defined) of the dividend. For purposes of
this Section 6.2, the "Per Share Value" of a cash dividend or other distribution
shall be the dollar amount of the distribution on each share of Common Stock and
the "Per Share Value" of any dividend or distribution other than cash shall be
equal to the fair market value of such non-cash distribution on each share of
Common Stock as determined in good faith by the Board of Directors of the
Company.
6.3 In case the Company shall at any time, or from time to
time, until such time that the Company consummates an initial public offering
registered under the Securities Act of 1933, as amended, issue any shares of
Common Stock or rights to acquire Common Stock (other than shares issued in any
transactions covered by paragraph (a) of Section 6.1 hereof), for a
consideration per share less than the Purchase Price with respect to the Warrant
Shares in effect on the date of such issue, then, forthwith upon such issue, the
Purchase Price with respect to the Warrant Shares shall be reduced to a price
determined by dividing (a) the sum of (i) the number of shares of Common Stock
of the Company outstanding immediately prior to such issue multiplied by the
Purchase Price of the Warrant Shares in effect immediately prior to such issue,
plus (ii) the consideration, if any, received by the Company upon such issue, by
(b) the number of shares of Common Stock of the Company outstanding immediately
after such issue. In order to reflect such adjustment to the Purchase Price, the
number of Warrant Shares then purchasable under each Warrant shall be
appropriately increased. For the purpose of the above determination, the
following provisions shall be applicable:
(a) In case the Company shall in any manner issue any options,
warrants or other rights to subscribe for or to purchase shares of
Common Stock, then, for the purposes of this Section 6.3, (i) all
shares which the holders of such rights shall be entitled thereby to
subscribe for or purchase shall be deemed to be issued as of the date
of issue of such rights, and (ii) the minimum aggregate consideration
payable pursuant to such rights for the shares covered thereby, plus
the consideration, if any, received by the Company for such rights,
shall be deemed to be the consideration actually received by the
Company (as of the date of the issue of such rights) for the issue of
the total number of shares underlying such rights.
(b) In case the Company shall in any manner issue any
securities or obligations directly or indirectly convertible into or
exchangeable for shares of Common Stock, then, for the purposes of this
Section 6.3, (i) all shares to which holders of such securities or
obligations shall thereby be entitled upon conversion or exchange shall
be deemed to be issued as of the date of issue of such securities or
obligations, and (ii) the aggregate amount received or receivable by
the Company in consideration for the issue of such securities or
obligations, plus the
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<PAGE> 6
minimum aggregate amount of additional consideration, if any, payable
upon conversion or exchange of such securities or obligations, shall be
deemed to be the consideration actually received (as of the date of the
issue of such securities or obligations) for the issue of the total
number of shares issuable upon conversion or exchange of such
securities or obligations.
(c) The consideration received by the Company for any shares
of Common Stock, or rights to acquire Common Stock, shall be deemed to
be the proceeds received for such shares or rights, excluding cash
received on account of accrued interest or accrued dividends and after
deducting therefrom any and all commissions and expenses paid or
incurred by the Company for any underwriting of, or otherwise in
connection with, the issue of such shares or rights.
(d) No adjustment of the Purchase Price of the Warrants Shares
shall be made as a result of or in connection with the issuance of any
shares of Common Stock, warrants, rights or options to purchase Common
Stock or securities convertible into or exchangeable for Common Stock
issued in connection with any duly authorized employee stock option
plan, stock purchase plan, restricted stock award plan of the Company
or similar compensatory plan.
(e) For the purposes of this Section 6.3, (i) the term "issue"
of shares or securities by the Company shall be deemed to include any
issuance, sale or other disposition of shares or securities of the
Company, including shares held in the treasury of the Company, (ii) the
term "Common Stock" shall include any capital stock of the Company
other than preferred stock with a fixed limit on dividends and a fixed
amount payable in the event of any liquidation and (iii) in no event
shall the Purchase Price with respect to the Warrant Shares be
increased, or the number of Warrant Shares purchasable under any
Warrant be decreased, as a result of the provisions of this Section
6.3.
6.4 No adjustment in the number of Warrant Shares purchasable
under the Warrants, or in the Purchase Price with respect to the Warrant Shares,
shall be required unless such adjustment would require an increase or decrease
of at least 1% in the number of Warrant Shares issuable upon the exercise of
such Warrant, or in the Purchase Price thereof; provided, however, that any
adjustments which by reason of this Section 6.4 are not required to be made
shall be carried forward and taken into account in any subsequent adjustment.
All final results of adjustments to the number of Warrant Shares and the
Purchase Price thereof shall be rounded to the nearest one thousandth of a share
or the nearest cent, as the case may be. Anything in this Section 6 to the
contrary notwithstanding, the Company shall be entitled, but shall not be
required, to make such changes in the number of Warrant Shares purchasable upon
the exercise of each Warrant, or in the Purchase Price thereof, in addition to
those required by such Section, as it in its discretion shall determine to be
advisable in order that any dividend or distribution in shares of Common Stock,
subdivision, reclassification or combination of shares of Common Stock, issuance
of rights, warrants or options to purchase Common Stock, or distribution of
shares of stock other than Common Stock, evidences of indebtedness or assets
(other than distributions of cash out of retained earnings) or convertible or
exchangeable securities hereafter made by the Company to the holders of its
Common
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<PAGE> 7
Stock shall not result in any tax to the holders of its Common Stock or
securities convertible into Common Stock.
6.5 Whenever the number of Warrant Shares purchasable upon the
exercise of each Warrant or the Purchase Price of such Warrant Shares is
adjusted, as herein provided, the Company shall mail to the Holder, at the
address of the Holder shown on the books of the Company, a notice of such
adjustment or adjustments, prepared and signed by the Chief Financial Officer or
Secretary of the Company, which sets forth the number of Warrant Shares
purchasable upon the exercise of each Warrant and the Purchase Price of such
Warrant Shares after such adjustment, a brief statement of the facts requiring
such adjustment and the computation by which such adjustment was made.
6.6 In the event that at any time prior to the expiration of
the Warrants and prior to their exercise:
(a) the Company shall declare any distribution (other than a
cash dividend or a dividend payable in securities of the Company with
respect to the Common Stock); or
(b) the Company shall offer for subscription to the holders of
the Common Stock any additional shares of stock of any class or any
other securities convertible into Common Stock or any rights to
subscribe thereto; or
(c) the Company shall declare any stock split, stock dividend,
subdivision, combination, or similar distribution with respect to the
Common Stock, regardless of the effect of any such event on the
outstanding number of shares of Common Stock; or
(d) the Company shall declare a dividend, other than a
dividend payable in shares of the Company's own Common Stock; or
(e) there shall be any capital change in the Company as set
forth in Section 6.1(d); or
(f) there shall be a voluntary or involuntary dissolution,
liquidation, or winding up of the Company (other than in connection
with a consolidation, merger, or sale of all or substantially all of
its property, assets and business as an entity);
(each such event hereinafter being referred to as a "Notification Event"), the
Company shall cause to be mailed to the Holder, not less than 20 days prior to
the record date, if any, in connection with such Notification Event (provided,
however, that if there is no record date, or if 20 days prior notice is
impracticable, as soon as practicable) written notice specifying the nature of
such event and the effective date of, or the date on which the books of the
Company shall close or a record shall be taken with respect to, such event. Such
notice shall also set forth facts indicating the effect of such action (to the
extent such effect may be known at the date of such notice) on the Purchase
Price and the
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<PAGE> 8
kind and amount of the shares of stock or other securities or property
deliverable upon exercise of the Warrants.
6.7 The form of Warrant Certificate need not be changed
because of any change in the Purchase Price, the number of Warrant Shares
issuable upon the exercise of a Warrant or the number of Warrants outstanding
pursuant to this Section 6, and Warrant Certificates issued before or after such
change may state the same Purchase Price, the same number of Warrants, and the
same number of Warrant Shares issuable upon exercise of Warrants as are stated
in the Warrant Certificates theretofore issued pursuant to this Agreement. The
Company may, however, at any time, in its sole discretion, make any change in
the form of Warrant Certificate that it may deem appropriate and that does not
affect the substance thereof, and any Warrant Certificates thereafter issued or
countersigned, whether in exchange or substitution for an outstanding Warrant
Certificate or otherwise, may be in the form as so changed.
7. Conversion Rights
7.1 In lieu of exercise of any portion of the Warrants as
provided in Section 2.1 hereof, the Warrants represented by this Warrant
Certificate (or any portion thereof) may, at the election of the Holder, be
converted into the nearest whole number of shares of Common Stock equal to: (1)
the product of (a) the number of shares of Common Stock then issuable upon the
exercise of each Warrant and (b) the excess, if any, of (i) the Market Price Per
Share (as determined pursuant to Section 9.2) with respect to the date of
conversion over (ii) the Purchase Price in effect on the business day next
preceding the date of conversion, divided by (2) the Market Price Per Share with
respect to the date of conversion.
7.2 The conversion rights provided under this Section 7 may be
exercised in whole or in part and at any time and from time to time while any
Warrants remain outstanding. In order to exercise the conversion privilege, the
Holder shall surrender to the Company, at its offices, this Warrant Certificate
accompanied by a duly completed Notice of Conversion in the form attached hereto
as Exhibit B. The Warrants (or so much thereof as shall have been surrendered
for conversion) shall be deemed to have been converted immediately prior to the
close of business on the day of surrender of such Warrant Certificate for
conversion in accordance with the foregoing provisions. As promptly as
practicable on or after the conversion date, the Company shall issue and shall
deliver to the Holder (i) a certificate or certificates representing the number
of shares of Common Stock to which the Holder shall be entitled as a result of
the conversion, and (ii) if the Warrant Certificate is being converted in part
only, a new certificate of like tenor and date for the balance of the
unconverted portion of the Warrant Certificate.
8. Voluntary Adjustment by the Company
The Company may, at its option, at any time during the term of
the Warrants, reduce the then current Purchase Price to any amount deemed
appropriate by the Board of Directors of the Company and/or extend the date of
the expiration of the Warrants.
8
<PAGE> 9
9. Fractional Shares and Warrants; Determination of
Market Price Per Share
9.1 Anything contained herein to the contrary notwithstanding,
the Company shall not be required to issue any fraction of a share of Common
Stock in connection with the exercise of Warrants. Warrants may not be exercised
in such number as would result (except for the provisions of this paragraph) in
the issuance of a fraction of a share of Common Stock unless the Holder is
exercising all Warrants then owned by the Holder. In such event, the Company
shall, upon the exercise of all of such Warrants, issue to the Holder the
largest aggregate whole number of shares of Common Stock called for thereby upon
receipt of the Purchase Price for all of such Warrants and pay a sum in cash
equal to the remaining fraction of a share of Common Stock, multiplied by its
Market Price Per Share (as determined pursuant to Section 9.2 below) as of the
last business day preceding the date on which the Warrants are presented for
exercise.
9.2 As used herein, the "Market Price Per Share" with respect
to any class or series of Common Stock on any date shall mean the closing price
per share of the Company's Common Stock for the trading day immediately
preceding such date. The closing price for each such day shall be the last sale
price regular way or, in case no such sale takes place on such day, the average
of the closing bid and asked prices regular way, in either case on the principal
securities exchange on which the shares of such Common Stock of the Company are
listed or admitted to trading or, if applicable, the last sale price, or in case
no sale takes place on such day, the average of the closing bid and asked prices
of such Common Stock on NASDAQ or any comparable system, or if such Common Stock
is not reported on NASDAQ, or a comparable system, the average of the closing
bid and asked prices as furnished by two members of the National Association of
Securities Dealers, Inc. selected from time to time by the Company for that
purpose. If such bid and asked prices are not available, then "Market Price Per
Share" shall be equal to the fair market value of such Common Stock as
determined in good faith by the Board of Directors of the Company.
10. Registration Rights
10.1 No sale, transfer, assignment, hypothecation or other
disposition of the Warrant Shares shall be made unless any such transfer,
assignment or other disposition will comply with the rules and statutes
administered by the Securities and Exchange Commission and (i) a registration
statement under the Securities Act of 1933, as amended (the "Act"), including
such shares is currently in effect, or (ii) in the opinion of counsel a current
registration statement is not required for such disposition of the shares.
10.2 The Company agrees that the Holder shall have the
one-time right, exercisable from six months after the effective date of a
registration statement covering the Company's Common Stock in its initial public
offering (the "IPO Effective Date") until the earlier to occur of (i) the second
anniversary of the Expiration Date and (ii) such time that all Warrant Shares
may be sold without limitation pursuant to Rule 144 of the Act, upon written
notice to the Company, to require that the Company prepare and promptly file a
registration statement, as may be required under the Act, in connection
9
<PAGE> 10
with the public offering of not less than 75% of the then outstanding Warrants
and/or Warrant Shares. In connection therewith, the Company shall be obligated
to prepare and file such registration statement within 45 days of receipt of any
such initial notice and shall be further obligated to use its best efforts,
including the filing of any amendments or supplements thereto, to have any such
registration statement declared effective under the Act and the rules and
regulations promulgated thereunder as soon as practicable after the filing date
thereof; provided, however that, to the extent requested by a representative of
the underwriters in the Company's initial public offering, the Company shall not
be obligated to declare any registration statement filed pursuant to this
Section 10.2 to be declared effective prior to nine months following the IPO
Effective Date. The Company shall also use its best efforts to keep any such
registration statement, and the accompanying prospectus, effective and current
under the Act at its expense for such period of time that is not otherwise
burdensome to the Company not to exceed nine months; provided, however, if such
registration statement is on Form S-2 or S-3 or any equivalent subsequent form,
such obligation shall extend until the earlier of such time that all Warrant
Shares included in such registration statement are sold and such time that the
Warrant Shares may be sold without limitation pursuant to Rule 144 of the Act.
10.3 In addition to the rights of the Holder pursuant to
Section 10.2, the Company agrees that, at any time or times hereafter, until the
second anniversary of the Expiration Date of the Warrants, as and when it
intends to register any of its securities under the Act other than pursuant to a
registration requested pursuant to Section 10.2 hereof, whether for its own
account and/or on behalf of selling stockholders (except in connection with an
offering solely to its employees or on Form S-8 or any subsequent similar form
or an offering solely related to an acquisition on a Form S-4 or any subsequent
similar form) the Company will notify the Holder of such intention and, upon
request from the Holder, will use its best efforts to cause the Warrant Shares
designated by the Holder to be registered under the Securities Act. The number
of Warrant Shares to be included in such offering may be reduced if and to the
extent that the underwriter of securities included in the registration statement
and offered by the Company shall be of the opinion that such inclusion would
adversely affect the marketing of the securities to be sold by the Company
therein; provided, however, that the percentage of the reduction of such Warrant
Shares shall be no greater than the percentage reduction of securities of other
selling stockholders, as such percentage reductions are determined in the good
faith judgment of the Company. The Company will use its best efforts to keep
each such registration statement current for such period of time that is not
otherwise burdensome to the Company not to exceed nine months; provided,
however, if such registration statement is on Form S-2 or S-3 or any equivalent
subsequent form, such obligation shall extend until the earlier of such time
that all Warrant Shares included in such registration statement are sold and
such time that the Warrant Shares may be sold without limitation pursuant to
Rule 144 of the Act.
10.4 Any registration statement referred to in subsection 10.2
or 10.3 hereof shall be prepared and processed in accordance with the following
terms and conditions:
(i) the Holder will cooperate in furnishing promptly to the
Company in writing any information requested by the Company in
connection with the
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<PAGE> 11
preparation, filing and processing of such registration statement.
(ii) To the extent requested by an underwriter of securities
included in the registration statement and offered by the Company, the
Holder will defer the sale of Warrant Shares for a period of one
hundred and eighty (180) days after the effective date of the
registration statement, provided that any principal shareholders of the
Company who also have shares included in the registration statement
will also defer their sales for a similar period.
(iii) The Company will furnish to the Holder such number of
prospectuses or other documents incident to such registration as may
from time to time be reasonably requested, and cause its shares to be
qualified under the blue-sky laws of those states reasonably requested
by the Holder.
(iv) The Company will indemnify the Holder (and any officer,
director or controlling person of the Holder) and any underwriters
acting on behalf of the Holder against all claims, losses, expenses,
damages and liabilities (or actions in respect thereof) to which they
may become subject under the Securities Act or otherwise, arising out
of or based upon any untrue or alleged untrue statement of any material
facts contained in any registration statement filed pursuant hereto, or
any document relating thereto, including all amendments and
supplements, or arising out of or based upon the omission or alleged
omission to state therein a material fact required to be stated therein
or necessary to make the statements therein contained not misleading,
and will reimburse the Holder (or such other aforementioned parties) or
such underwriters for any legal and all other expenses reasonably
incurred in accordance with investigating or defending any such claim,
loss, damage, liability or action; provided, however, that the Company
will not be liable where the untrue or alleged untrue statement or
omission or alleged omission is based upon information furnished in
writing to the Company by the Holder or any underwriter obtained by the
Holder expressly for use therein, or as a result of the Holder's or any
such underwriter's failure to furnish to the Company information duly
requested in writing by counsel for the Company specifically for use
therein. This indemnity agreement shall be in addition to any other
liability the Company may have. The indemnity agreement of the Company
contained in this paragraph (iv) shall remain operative and in full
force and effect regardless of any investigation made by or on behalf
of any indemnified party and shall survive the delivery of and payment
for the Warrant Shares.
(v) The Holder will indemnify the Company (and any officer,
director or controlling person of the Company) and any underwriters
acting on behalf of the Company against all claims, losses, expenses,
damages and liabilities (or actions in respect thereof) to which they
may become subject under the Securities Act or otherwise, arising out
of or based upon any untrue or alleged untrue statement filed pursuant
hereto, or any document relating thereto, including all amendments, and
supplements, or arising out of or based upon the omission or alleged
omission to state therein a material fact required to be stated therein
or necessary to make the statements therein contained not misleading,
and, will reimburse the Company (or such other aforementioned parties)
or such underwriters for any legal and
11
<PAGE> 12
other expenses reasonably incurred in connection with investigating or
defending any such claim, loss, damage, liability, or action; provided,
however, that the Holder will be liable as aforesaid only to the extent
that such untrue or alleged untrue statement or omission or alleged
omission is based upon information furnished in writing to the Company
by the Holder or any underwriter obtained by the Holder expressly for
use therein, or as a result of its or such underwriter's failure to
furnish the Company with information duly requested in writing by
counsel for the Company specifically for use therein. This indemnity
agreement contained in this paragraph (v) shall remain operative and in
full force and effect regardless of any investigation made by or on
behalf of any indemnified party and shall survive the delivery of and
payment for the Warrant Shares.
(vi) Promptly after receipt by an indemnified party under this
subsection 10.4 of notice of the commencement of any action, such
indemnified party will, if a claim in respect thereof is to be made
against the indemnifying party, promptly notify the indemnifying party
of the commencement thereof, but the omission so to notify the
indemnifying party will not relieve it from any liability which it may
have to any indemnified party otherwise than under this subsection
10.4. In case any such action is brought against any indemnified party,
and it notifies the indemnifying party of the commencement thereof, the
indemnifying party will be entitled to participate in, and, to the
extent that it may wish jointly with any other indemnifying party
similarly notified, to assume the defense thereof, with counsel
reasonably satisfactory to such indemnified party, and after notice
from the indemnifying party of its election so to assume the defense
thereof, the indemnifying party will not be liable to such indemnified
party under this subsection 10.4 for any legal or other expenses
subsequently incurred by such indemnified party in connection with the
defense thereof, other than reasonable costs of investigation or
out-of-pocket expenses or losses or cost incurred in collaborating in
the defense.
(vii) Except as set forth in subsection 10.4(viii), the
Company shall bear all costs and expenses incident to any registration
pursuant to this Section 10.
(viii) The Holder shall pay any and all underwriters'
discounts, brokerage fees and transfer taxes incident to the sale of
any securities sold by such Holder pursuant to this Section 10, and
shall pay the fees and expenses of any special attorneys or accountants
retained by it.
11. Governing Law
This Warrant Certificate shall be governed by and construed in
accordance with the laws of the State of New York.
12. Special Covenants of the Company. At all times prior to
the second anniversary of the Expiration Date, so long as such Warrant Shares
are outstanding, the Company shall deliver to the Holder:
(a) Financial Reporting: Business Information.
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<PAGE> 13
(i) Monthly Financial Statements -- prior to the date
(the "IPO Date") the Company first offers for sale its Common
Stock pursuant to an effective registration statement filed
under the Securities Act of 1933, as amended, as soon as
practicable after the end of each monthly fiscal period in
each fiscal year of the Company, and in any event within 30
days thereafter:
(A) a consolidated balance sheet as at the
end of such month;
(B) a consolidated income statement for such
month and for the portion of such fiscal year ending
with such month; and
(C) consolidated statements of changes in
stockholders' equity and cash flows for such month
and for the portion of such fiscal year ending with
such month;
for the Company, setting forth in each case in comparative
form the figures for the corresponding month in the previous
fiscal year of the Company, all in reasonable detail, and
certified by a senior officer of the Company as fairly
presenting, in all material respects, the financial position
of the Company and its results of operations and cash flows
(subject to changes resulting from year-end adjustments);
(ii) Post Initial Public Offering Information -- from
and after the IPO Date, promptly upon their becoming
available, a copy of each financial statement, report, notice
or proxy statement sent by the Company to stockholders
generally, and of each regular or periodic report (including,
without limitation, each Form 10-Q and Form 10-K) and any
registration statement, prospectus or written communication
(other than transmittal letters), and each amendment thereto,
in respect thereof filed by the Company with, or received by
the Company in connection therewith from, the National
Association of Securities Dealers, any securities exchange or
the Securities and Exchange Commission or any successor
agency; and
(iii) Annual Financial Statements -- in the event
that the IPO Date does not occur before March 31, 1998, as
soon as practicable after the end of each fiscal year of the
Company, and in any event within one hundred twenty (120) days
thereafter,
(i) consolidated balance sheets as
at the end of such year, and
(ii) consolidated statements of
income, changes in shareholders' equity and
cash flows for such year,
13
<PAGE> 14
for the Company and its consolidated subsidiaries, setting
forth in comparative form the financial statement for the
previous fiscal year, all in reasonable detail and accompanied
by an audit report thereon of independent certified public
accountants of recognized national standing, which report
shall state without qualification (including, without
limitation, qualifications related to the scope of the audit,
the compliance of the audit with generally accepted auditing
standards, or the ability of the Company or a material
subsidiary thereof to continue as a going concern), that such
financial statements have been prepared and are in conformity
with GAAP.
(iv) Requested Information -- with reasonable
promptness, such other data and information as from time to time may be
reasonably requested by the Holder.
(b) Inspection. The Company will permit officers and
designated representatives of the Holder, at the expense of the Company at any
time when an Event of Default exists, and otherwise at the expense of the
Holder, to visit and inspect any of its properties, and to examine its books of
account and to make copies and extracts therefrom, and discuss its affairs,
finances and accounts with, and be advised as to the same by, its officers and
its independent accountants (and by this provision the Company authorizes said
accountants to discuss the finances and affairs of the Company), all upon
reasonable notice and at such reasonable times and intervals and to such
reasonable extent as the Holder may reasonably request.
14
<PAGE> 15
IN WITNESS WHEREOF, the Company has caused this Warrant
Certificate to be duly executed by its officers thereunto duly authorized and
its corporate seal to be affixed hereon, as of this _____ day of ______________,
1997.
N2K Inc.
By: __________________________
Name:
Title:
15
<PAGE> 16
EXHIBIT A
NOTICE OF EXERCISE
The undersigned hereby irrevocably elects to exercise,
pursuant to Section 2 of the Warrant Certificate accompanying this Notice of
Exercise, _______ Warrants of the total number of Warrants owned by the
undersigned pursuant to the accompanying Warrant Certificate, and herewith makes
payment of the Purchase Price of such shares in full.
_________________________________
Name of Holder
_________________________________
Signature
Address:
_________________________________
_________________________________
_________________________________
16
<PAGE> 1
EXHIBIT 4.19
Portions of this Exhibit have been omitted pursuant to a request for
confidential treatment. The omitted portions, marked by [****], have been
separately filed with the Commission.
N2K INC.
55 Broad Street
New York, NY 10005
September 16, 1997
America Online, Inc.
22000 AOL Way
Dulles, Virginia 20166
Gentlemen:
You and we have entered into an Interactive Marketing Agreement dated as of
September 1, 1997 (the "Marketing Agreement") and have reached certain
understandings regarding your desire to participate in the equity of N2K Inc.
We, therefore, propose the following:
1. America Online, Inc. ("AOL") will commit to purchase $3,000,000 worth of N2K
Inc.'s ("N2K") Common Stock, par value $. 001 per share from the underwriters,
in a proposed initial public offering of N2K's shares of Common Stock that
satisfies the criteria set forth in the third sentence of this paragraph 1 (the
"IPO"), provided that such offering occurs no later than December 31, 1997. N2K
agrees to cause sufficient shares to be made available to the underwriters for
the purpose of fulfilling the requirements for the purchase of the N2K shares by
AOL as set forth in the first sentence of this paragraph 1 (the "N2K
Commitment"). The per share purchase price will be the same price as the per
share purchase price to the public in the offering (the "IPO Price"), but shall
not include any underwriting discounts or commissions on said sale, such that
all $3,000,000 shall apply to the purchase of shares. This commitment to
purchase shares will be contingent upon N2K entering into a firm commitment
underwriting agreement with one or more reputable underwriting firms (i.e. a
"bulge bracket" firm like PaineWebber or Goldman Sachs, a regional firm like
Robertson Humphreys or Raymond James or a known technology firm like Hambrecht &
Quist or Unterberg Harris) for an offering that will result in net proceeds to
N2K of at least $25 million (including the $3 million commitment from AOL
hereunder), a post-offering market capitalization of at least $100 million and a
listing on a national stock exchange or the NASDAQ National Market System. AOL
will agree to a lock-up on the shares purchased in the offering for a period not
to exceed 180 days (or such lesser period as may be requested by the
underwriters in the offering), provided that N2K uses it best efforts to cause
all holders of its shares to enter into a lock-up agreement on the terms
outlined above and the holders of at least 85% of the outstanding shares,
including all directors of N2K and its management so agree, and that only N2K's
shares are offered in the IPO, i.e. there are no selling shareholders in the
IPO.
2. Immediately following the purchase of the shares of N2K Common Stock on the
terms set forth in paragraph 1 hereof and the consummation of the IPO, N2K will
issue AOL a warrant
<PAGE> 2
exercisable for such number of shares as results from dividing $3,510,000 by the
per share IPO Price. For example, if the IPO Price is $15 per share, the warrant
will be exercisable for 234,000 shares. The exercise price for the warrant
shares shall be the IPO Price. The warrant will be exercisable as to one-half of
the total shares on the first anniversary of the issuance of the warrant and as
to the balance of the shares on the second anniversary of the issuance of the
warrant. The term of the warrant will be seven years from the date of issuance.
In the event of a change of control following the issuance of the warrants, the
warrant shall become immediately exercisable. For purposes of this paragraph, a
"change of control" shall mean one or more shareholders of N2K (other than
Messrs. Larry Rosen, Jon Diamond and Dave Grusin) obtains the right to designate
a majority of the members on N2K's Board of Directors or acquires sufficient
voting stock of N2K necessary to elect a majority of the seats on N2K's Board of
Directors, N2K merges with another entity and the N2K shareholders prior to the
merger do not retain control of the combined entity, or N2K sells substantially
all of its assets or capital stock.
3. If an IPO of N2K has occurred by December 31, 1997 then the terms of this
paragraph 3 shall not apply. If an IPO of N2K has not previously occurred, then
on the earlier to occur of: (a) the date N2K withdraws its S-1 Registration
Statement currently on file with the Securities and Exchange Commission and (b)
December 31, 1997, N2K will issue to AOL a warrant to purchase such number of
shares as would equal [****] of the outstanding shares of N2K's Common Stock on
a fully-diluted basis (i.e. assuming the exercise of all outstanding options and
warrants and the conversion or exchange of any securities convertible or
exchangeable into N2K Common Stock). The warrant will be exercisable into shares
of N2K Series G Preferred Stock, if N2K shareholders approve the designation and
issuance of additional shares of that series and N2K agrees to uses its diligent
and reasonable best efforts to cause this approval to be obtained. In the event
that such approval is not obtained, then the warrant will be exercisable into
shares of N2K Common Stock. The exercise price for the warrant shares will be
[****] per share, i.e the purchase price of the Series F and Series G Preferred
Stock of N2K (subject to appropriate adjustment in the event of stock splits,
stock dividends and recapitalizations) and the terms of the warrant will permit
either a cash or "cashless" exercise thereof. The term of the warrant will be
[****] years from the date of issuance and will be exercisable as to [****] of
the shares on the date of issuance. The warrant will not be exercisable as to
the balance of the shares issuable pursuant to the warrant until N2K has earned
[****] (as that term is defined in the Marketing Agreement). In the event of a
"change of control" as defined in paragraph 2 hereof (other than a change of
control that results in a termination of the Marketing Agreement), the warrant
shall become immediately exercisable. The terms of this warrant will provide
anti-dilution protection to AOL in the form of additional shares being made
subject to the warrant such that AOL will be able to exercise into [****] of the
outstanding shares of N2K Common Stock on a fully diluted basis. This
anti-dilution protection shall apply during the Initial Term of the Marketing
Agreement. Thereafter, no such adjustment shall be made to the number of shares
subject to the warrant. If, however, the warrant is exercisable into shares of
Common Stock rather than Series G Preferred, then the warrantholders will be
entitled, after the Initial Term of the Marketing Agreement, to the weighted
average anti-dilution protection provided in the terms of the Series G Preferred
Stock.
4. If an IPO of N2K occurs after December 31, 1997 but on or before September
30, 1998, then AOL shall, in its sole and absolute discretion, have the right to
elect to be subject to the terms of paragraphs 1 and 2 hereof, i.e. it can elect
to be obligated, subject to the N2K Commitment, to
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<PAGE> 3
make the purchase commitment specified in paragraph 1 hereof on the terms
specified therein notwithstanding the December 31, 1997 date set forth in
paragraph 1 and, if it does so, be entitled to obtain the warrants set forth in
paragraph 2 hereof on the terms specified therein. Regardless of whether or not
AOL exercises the option set forth in this paragraph 4, it shall, upon
consummation of the IPO (unless N2K has in the interim merged with another
entity and the N2K shareholders prior to the merger do not retain control of the
combined entity, or N2K has sold substantially all of its assets or capital
stock), forfeit any and all rights under the warrant issued under paragraph 3
hereof and shall surrender same to N2K without any cost to or payment by N2K,
and shall, at N2K's option, resell to N2K any shares acquired pursuant to an
exercise of the warrant at their original purchase price. The warrant and any
shares obtained by N2K pursuant to the terms of this paragraph shall be
cancelled by N2K.
5. If the warrant contemplated by paragraphs 2 or 3 is issued, N2K will provide
registration rights to AOL for the underlying Common Stock into which the
warrant is exercisable or if the warrant is exercisable into Series G Preferred
Stock, the shares of Common Stock into which they are convertible, on terms no
less favorable than those provided to its Series G Preferred Stockholders, which
include a demand right and unlimited "piggyback" rights, subject to pro rata
cut-back, if required by underwriters, which rights are embodied in Section 8 of
the Stock Purchase Agreement for the Series G Preferred Stock, dated as of 25
April, 1997 (the "Series G Stock Purchase Agreement").
6. In connection with the issuance of any warrants under either paragraphs 2 or
3 above, you hereby agree to provide customary representations regarding your
status as an "accredited investor" and investment intent, and N2K agrees to (a)
provide representations and warranties as are customary in transactions of this
type, including but not limited to the authority to issue the warrants, (b)
reserve and issue the appropriate number of shares of Common Stock or Series G
Preferred Stock and Common Stock to permit full exercise of the warrant and
conversion of any underlying convertible securities, and (c) grant to AOL,
provided it continues to hold any N2K shares or warrants, the benefits of the
same rights and the same covenants, on the same terms and conditions as are
provided to the holders of the Series G shares as set forth in Section 7 of the
Series G Stock Purchase Agreement.
7. AOL shall have the right to review any references to AOL that appear in any
registration statements filed with the Securities and Exchange Commission by
N2K, provided, that AOL shall not unreasonably object to such references and,
provided further, that this review right shall not impede N2K in meeting its
disclosure obligations under applicable securities laws, as reasonably
interpreted by its counsel.
8. The forms of the warrants and the terms of the registration rights specified
herein shall be substantially in the form of the warrants issued by N2K to
certain institutional investors in August 1997 and the form of the registration
rights granted to the Series G Preferred Stock in Section 8 of the Series G
Stock Purchase Agreement, each as modified by the express terms of this
agreement.
9. EXCEPT AS EXPRESSLY SET FORTH IN THIS AGREEMENT OR AS CONTEMPLATED BY
PARAGRAPH 6 HEREOF, NEITHER PARTY MAKES ANY, AND EACH PARTY HEREBY SPECIFICALLY
DISCLAIMS ANY REPRESENTATIONS OR WARRANTIES,
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<PAGE> 4
EXPRESS OR IMPLIED, WITH RESPECT TO THIS AGREEMENT OR THE TRANSACTIONS
CONTEMPLATED HEREBY.
10. The parties to this agreement are independent contractors. Neither party is
an agent, representative or partner of the other party. Neither party shall have
any right, power or authority to enter into any agreement for or on behalf of,
or incur any obligation or liability of, or to otherwise bind, the other party.
This agreement shall not be interpreted or construed to create an association,
agency, joint venture or partnership between the parties or to impose any
liability attributable to such relationship upon either party.
11. Any notice, approval, request, authorization, direction or other
communication under this agreement shall be given in writing and shall be deemed
to have been delivered and given for all purposes (i) on the delivery date if
delivered by electronic mail; (ii) on the delivery date if delivered personally
to the party to whom the same is directed; (iii) one business day after deposit
with a commercial overnight carrier, with written verification of receipt, or
(iv) five business days after the mailing date, whether or nor actually
received, if sent by U.S. mail, return receipt requested, postage and charges
prepaid, or any other means of rapid mail delivery for which a receipt is
available to the person(s) specified in writing from time to time by the
parties.
12. The failure of either party to insist upon or enforce strict performance by
the other party of any provision of this agreement or to exercise any right
under this agreement shall not be construed as a waiver or relinquishment to any
extent of such party's right to assert or rely upon any such provision or right
in that or any other instance; rather, the same shall be and remain in full
force and effect.
13. The agreement and all other writings referred to herein sets forth the
entire agreement and supersedes any and all prior agreements of the parties with
respect to the transactions set forth herein. Neither party shall be bound by,
and each party specifically objects to, any term, condition or other provision
which is different from or in addition to the provisions of this agreement
(whether or nor it would materially alter this agreement) and which is proffered
by the other party in any correspondence or other document, unless the party to
be bound thereby specifically agrees to such provision in writing.
14. No change, amendment or modification of any provision of this agreement
shall be valid unless set forth in a written instrument signed by the party
subject to enforcement of such amendment.
15. Each party shall take such action (including, but not limited to, the
execution, acknowledgment and delivery of documents) as may reasonably be
requested by any other party for the implementation or continuing performance of
this agreement.
16. This agreement shall be fully binding upon, inure to the benefit of and be
enforceable by the parties hereto and their respective successors and assigns.
17. In the event that any provision of this agreement conflicts with the law
under which this agreement is to be construed or if any such provision is held
invalid by a court with jurisdiction over the parties to this agreement, (i)
such provision shall be deemed to be restated to reflect as
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<PAGE> 5
nearly as possible the original intentions of the parties in accordance with
applicable law, and (ii) the remaining terms, provisions, covenants and
restrictions of this agreement shall remain in full force and affect.
18. Except where otherwise specified, the rights and remedies granted to a party
under this agreement are the rights or remedies which the party may possess at
law or equity.
19. This agreement shall be interpreted, construed and enforced in all respects
in accordance with the laws of the Commonwealth of Virginia, except for its
conflicts of laws principles. Each party irrevocably consents to the exclusive
jurisdiction of the courts of the Commonwealth of Virginia and the federal
courts situated in the Commonwealth of Virginia, in connection with any action
to enforce the provisions of this Agreement, to recover damages or other relief
for breach or default under this agreement, or otherwise arising under or by
reason of this agreement.
20. The captions and headings used in this agreement are inserted for
convenience only and shall not affect the meaning or interpretation of this
agreement.
22. Without the consent of the other party, except as may be required to be
disclosed by applicable law, governmental authorities or judicial and
administrative proceedings, the parties shall seek to keep the terms of this
agreement confidential.
23. This agreement may be executed in counterparts, each of which shall be
deemed an original and all of which together shall constitute one and the same
document.
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<PAGE> 6
If the foregoing conforms to your understanding of our agreement, please sign
one copy of this letter agreement and return it to us. Thereupon, this letter
shall constitute a binding agreement between us.
Very truly yours,
N2K INC.
By: /s/ Jonathan V. Diamond
--------------------------
Name: Jonathan V. Diamond
--------------------
Title: VICE CHAIRMAN
--------------------
ACCEPTED AND AGREED TO:
AMERICA ONLINE, INC.
By: /s/ David M. Colburn
--------------------------------
Name: David M. Colburn
---------------------
Title: SVP
--------------------
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<PAGE> 1
EXHIBIT 10.6
[Letterhead of CoreStates Bank, N.A.]
September 16, 1997
N2K, Inc.
435 Devon Park Drive
Suite 600
Wayne, PA 19087
Attn: Mr. Bruce Johnson
Vice President and CFO
RE: Credit Facilities from CoreStates Bank,
successor-by-merger to Meridian Bank
(The "Bank") to N2K, Inc., formerly
known as Telebase, Inc. (The "Company")
Dear Bruce:
Pursuant to our letter to you of June 13, 1996 and documents dated August 15,
1996, the Bank set forth the terms and conditions of a credit facility to be
provided to the company, including a line of credit with a maximum outstanding
balance of up to $2,000,000 (the "Line of Credit"). The Company's indebtedness
and obligations to the Bank under this letter with respect to the Line of Credit
are secured and evidenced by various related documents, including a promissory
note most recently amended on August 15, 1996, a security agreement, various
UCC-1 financing statements and related agreements, documents and instruments
(collectively the "Loan Documents"). In addition there exists a letter dated
August 7, 1997 wherein the Bank agreed to extend the facility through August 31,
1997 and a letter dated August 19, 1997 which amended and released certain
collateral applicable to the sale of Telebase.
You have requested that the Bank extend the line of credit at the $2 million
level and we have approved the extension of the Line of Credit through December
31, 1997 subject to the terms and conditions noted below.
1. AMOUNT: $2,000,000.
2. BORROWER: N2K, Inc. and TSI Licensing, Inc.
<PAGE> 2
3. USE OF PROCEEDS: The advances under the line of credit shall be used
primarily for working capital and short-term borrowings.
4. TERM: The line of credit will be available to the Company until
December 31, 1997 at which time continuation of the line will be
considered by the Bank on the basis of the Company's financial
statements as of November 30, 1997 and other information available to
Bank, or which the Bank may reasonably request.
5. INTEREST RATE: The Bank's Prime Rate.
6. COMMITMENT FEE: $5,000. Payable upon acceptance of the commitment.
7. UNUSED COMMITMENT FEE: The above facility is subject to an unused
commitment fee. The Bank will determine the fee at 0.5% of the unused
portion of the line on a quarterly basis, as determined by its ledgers.
The fee shall be paid by Company within 30 days of receipt of bill. The
Bank will automatically charge the Company's checking account for any
unpaid balance.
8. BORROWING BASE: All advances made under the line of credit will be
limited to 80% of all Company's qualified accounts receivable under 90
days.
9. COLLATERAL: As security for the line of credit, the Company grants to
the Bank (and confirms its prior grant of) a continuing first priority
security interest perfected under the Uniform Commercial Code in all of
the Company's assets, including present and future accounts, chattel
papers, contracts, documents, equipment (including, but not limited to
fixtures, office equipment and furniture, and motor vehicles), and
accessions, general intangibles, instruments, inventory, investment
property and any products and proceeds of the foregoing. The Bank will
require evidence satisfactory to it and its counsel that the assets are
free and clear of any and all security interest, except liens on
certain equipment held by Meridian Leasing and its successor,
CoreStates Leasing.
10. FINANCIAL COVENANT: The Company shall maintain the following financial
covenant throughout the term of the commitment:
a) Cash level shall not be less than $1,000,000. at all times.
11. INSURANCE: The Company will provide fire and extended coverage
insurance on all insurable assets during the term of the line of
credit, satisfactory to the Bank as to form and insurer, containing the
standard mortgagee and/or loss payee clauses in favor of the Bank. The
amount of such coverage will not be less than 80% of the insurable
value of the assets or 100% of the loan amount, whichever is greater.
The insurance will be in effect evidenced by a certificate of insurance
submitted to the Bank prior to or at settlement. The policy shall
require a thirty-day notice of cancellation to the Bank.
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<PAGE> 3
12. EXPENSES: The Company shall pay all out-of-pocket costs and expenses
incurred by the Bank in connection with the financing arrangement
promptly upon the Bank's submission of a statement to the Company. This
will include, but not be limited to, attorney's fees, lien search fees
and filing fees.
13. DUE AUTHORIZATION: The Company will obtain all necessary authorization
of their respective boards of directors to enter into the agreement
evidenced by this letter and will obtain, prior to the making of the
loan, such further authorization of their respective boards of
directors and shareholders as may be necessary or appropriate to the
financing arrangements set forth herein.
14. DOCUMENTATION: Company shall duly execute and deliver such instruments
documents, certificates, opinions, assurances, and do such other acts
and things as the bank may reasonably request, to effect the purpose of
the transaction described in this commitment letter. All proceedings,
agreements, instruments, documents, and other matters relating to the
making of the loan, and all of the transactions herein contemplated,
shall be satisfactory in form and substance to the bank and its
counsel. Our counsel must be satisfied with respect to the legality,
validity, binding effect, and enforceability of all instruments,
agreements, and documents used to effect and consummate the loans
herein contemplated.
15. AGING/CERTIFICATIONS: The Company will submit a borrowing base
certification upon each request for an advance, but not less than
monthly. In addition, the Company will submit monthly accounts
receivable and accounts payable agings within 15 days of month end
along with the monthly borrowing base certification.
16. CERTIFICATE: The Company will submit to the Bank a monthly compliance
certificate to verify compliance with the financial covenant as defined
above.
17. FINANCIAL STATEMENTS: The Company shall deliver its annual financial
statements to the Bank within ninety (90) days after the close of each
fiscal year during the term of this proposal. The financial statements
will be audited by an independent accountant satisfactory to the Bank.
The statements will be prepared in accordance with generally accepted
accounting principles (GAAP). In addition, the Company will submit
monthly internally prepared balance sheet and profit and loss
statements in accordance with GAAP to be delivered to the Bank within
thirty (30) days of quarter end.
18. DEPOSIT RELATIONSHIP: The Company will maintain CoreStates Bank as its
primary bank of account and CoreStates Asset Management as its primary
investment manager for the term of the above commitment. The existing
segregated deposit account at the Bank will remain in place until
December 31, 1997.
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<PAGE> 4
19. SATISFACTORY FINANCIAL CONDITIONS: The Company shall maintain, in the
Bank's judgment, a satisfactory financial condition and shall notify
the Bank promptly in writing of any material adverse changes in its
financial condition since the date of issuance of this commitment.
20. COMMITMENT EXPIRATION: The Bank's commitment as outlined herein will
expire 5 days from the date of this letter unless accepted in its
entirety in writing as evidenced by executing the acknowledgement
below.
The availability of the within credit facility is contingent upon the Company
and the Bank entering into mutually acceptable loan documentation setting forth
the terms and conditions stated herein and such other terms and conditions,
covenants, warrants, and representations as may be required by the Bank. This
commitment shall terminate if there occurs a material adverse change in the
financial condition results of operations, assets, business, prospects or
management of the Company or if there occur any facts, events, or changes that
could adversely affect the ability to proceed to closing or perform after
closing of the Company.
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<PAGE> 5
We appreciate the opportunity of making this commitment available to you. If the
terms and conditions outlined herein are satisfactory, please execute the
acknowledgement on the original of this letter and returning it to the
undersigned. Should you have any questions regarding this letter, please feel
free to contact the undersigned at 610-834-2314.
Sincerely,
CORESTATES BANK, N.A.
/s/ Stasia H. Whiteman
Stasia H. Whiteman
Vice President
- --------------------------------------------------------------------------------
ACKNOWLEDGMENT:
We hereby accept the terms and conditions outlined herein this 16th day of
September, 1997.
BORROWER: N2K, INC.
By: /s/ Bruce Johnson Vice Pres.
Attest:
TSI LICENSING, INC.
By: /s/ Bruce Johnson Pres.
Attest:
5
<PAGE> 1
Exhibit 10.15
EMPLOYMENT AGREEMENT
This EMPLOYMENT AGREEMENT (the "Agreement") is entered into as of October 15,
1996 (the "Effective Date") between N2K Inc. ("Company") and Phil Ramone
("Employee").
RECITALS
A. Company, through its N2K ENCODED MUSIC division (the
"Division"), is engaged in the business of producing, manufacturing,
distributing, marketing and selling audio and audiovisual recordings and
enhanced compact discs (collectively, "Products") embodying the musical
performances and audiovisual creations of recording, multimedia and other
artists ("Company Artists").
B. Company desires to employ Employee, and Employee desires to
be employed by Company, on the terms and subject to the conditions set forth in
this Agreement.
TERMS AND CONDITIONS
1. TERM
The term of this Agreement shall commence on the Effective Date and shall
continue for three (3) years (the "Initial Term"). Company shall have the option
(the "Option"), in its sole discretion, to extend the term for an additional two
(2) year period (the "Option Period"). Company may exercise the Option at any
time during the Initial Term by providing written notice to Employee of its
intent to do so. Notwithstanding the foregoing, in the event that Company and
Employee are unable to agree on the amount of Employee's annual salary during
the Option Period after thirty (30) days good faith negotiations pursuant to
Section 4.1 below, then the Option shall be treated as if it had not been
exercised by Company.
As used herein, the "Term" shall signify both the Initial Term and, if Company
exercises the Option, the Option Period. "Contract Year" shall signify the
one-year period commencing on the Effective Date and each successive one-year
period commencing on the anniversary thereof occurring in 1997 and 1998 and, if
Company exercises the Option, in 1999 and 2000. "Fiscal Year" shall mean
Company's fiscal year.
2. DUTIES OF EMPLOYEE
2.1 Title
Employee shall be employed by Company as President of the Division, subject to
and consistent with the policies and budgets set by Company's Chief Executive
Officer (the "CEO") and/or Company's Board of Directors (the "Board"). As used
herein, "Company's Consent" shall mean the express consent of the CEO or the
Board, in his or its reasonable discretion.
Employee shall have his principal business office in New York, New York. Except
for the CEO, no other person employed by the Company in the Division shall have
a superior
<PAGE> 2
title than that held by Employee. Notwithstanding the foregoing, the Company
has employed a General Manager of the Division who shall report to the Company's
President and Chief Operating Officer and who shall have day-to-day
responsibility for financial management, control, and operations of the Division
but not for management of the Division's recording artists and record
production, which shall be the responsibility of Employee. Employee shall report
directly and only to the CEO and shall perform such duties as are assigned to
him from time to time by the CEO. Such duties shall include, but not be limited
to, the following:
a. Securing agreements with recording artists,
loanout companies or production companies
granting Company the right to manufacture
and sell Products embodying such artists'
performances (such recording artists,
loanout companies and production companies
shall be referred to herein collectively as
"Company Artists").
b. Supervising all recordings and record
production on behalf of the Division.
c. If requested by the Board, attending
meetings outside New York, New York, for the
purposes of consultation with the Board or
with the officers of Company or any of
Company's parents, subsidiaries or
affiliates.
d. Securing agreements with Company Artists to
acquire the copyrights for the Company in
and to musical compositions written, owned
or controlled, in whole or in part, by
Company Artists (hereinafter such musical
compositions shall be referred to as
"Compositions").
2.2 Prohibited Actions
Employee shall not do, authorize or contract to do any of the following without
Company's Consent:
a. Borrow money on behalf of Company or loan
any of Company's monies.
b. Assign, mortgage, encumber, transfer or sell
any of Company's assets or property.
c. Execute any agreement for a third party to
distribute, sell or manufacture Products.
d. Execute any agreements with any of Company
Artists in excess of the budgets approved by
the CEO or the Board.
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e. Execute any agreements with any Company
Artist to acquire Compositions in excess of
the budgets approved by the CEO or the
Board.
f. Purchase capital equipment (other than as
may be needed on an emergency basis and then
not to exceed $1,000 per item).
g. Purchase any real estate or enter into any
lease agreement with respect to buildings,
real property or equipment.
h. Purchase any other company or business, or
any interest or stock in any other company
or business.
i. Make any expenditures in excess of the
budgets approved by the CEO or the Board.
j. Enter into any agreement for the employment
or engagement by Company of any employee,
agent or contractor.
k. Obligate Company to pay any employee, agent
or contractor compensation based on the net
profits, revenues or gross sales of either
Company or the Division, or on any other
percentage-type basis.
2.3 Confidentiality
At no time during the Term or at any time thereafter shall Employee use or
disclose to any person any confidential, proprietary or trade secret information
of Company or its parents, subsidiaries or affiliates. No casual or inadvertent
violation of this subsection, if non-material, shall be deemed a breach of this
Agreement.
2.4 No Solicitation
At no time during the Term or within two years following the expiration or
termination of this Agreement shall Employee, or any agent acting on behalf of
Employee, directly or indirectly approach, solicit or enter into any agreement
with (a) any Company Artist or other artist, loanout company or production
company who is party to any agreement with Company or its parents, subsidiaries
or affiliates, or (b) any employee of Company or its parents, subsidiaries or
affiliates, for the purpose of procuring the services or employment of such
person, without Company's Consent.
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<PAGE> 4
2.5 Selection of Professionals
Notwithstanding any other provision of this Agreement, the CEO and the Board
shall have the right to designate the independent public accountants and the
attorneys who will service the Division.
3. OUTSIDE ACTIVITIES
3.1 Exclusive Services
Except as otherwise expressly provided in this Agreement, Employee shall devote
his full time and best efforts exclusively to Company, and shall not render any
business or professional services to any third party without Company's Consent.
Except as otherwise expressly provided in this Agreement, Employee shall not
serve as a director, officer or employee of, or as consultant to, any entity
save Company during the Term.
3.2 Permissible Outside Activities
a. Company acknowledges that Employee is the
owner of a music publishing company called
"Ramone Music, Inc." Company consents to
Employee's continued involvement in the
operation of Ramone Music, Inc., provided
that Employee's involvement with Ramone
Music, Inc. does not materially interfere
with the performance of Employee's duties
under this Agreement, and provided further
that Ramone Music, Inc. shall not, during
the Term, compete with Company in any
manner, or acquire any new or additional
music publishing rights with respect to any
composition, catalog of compositions or the
work of any songwriter.
b. Employee shall be permitted to sit on the
board of directors of ED Net; provided,
however, that if the CEO or the Board
reasonably concludes that (i) ED Net has
become, or has acquired or been merged with,
consolidated into or acquired by, a
competitor of Company or (ii) Employee's
service on the board of directors of ED Net
materially interferes with Employee's
performance of his duties under this
Agreement, then Employee shall resign his
position on the ED Net board of directors
promptly following receipt of a written
request from Company, setting forth the
reason for such request, that he resign such
position. If the Company requests such
resignation from ED Net, then Company shall
reimburse Employee on a going forward basis
for the cost of one T-1 fiberoptic line to
Employee's principal residence that is
currently provided at the expense of ED Net.
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c. Employee shall be permitted to produce
master recordings intended to be embodied
primarily on standard audio records for
recording artists other than Company
Artists; provided, however, that (a)
Employee shall devote no more than four
weeks (which need not be consecutive) to
such activities during any twelve-month
period; and (b) no such activities shall be
inconsistent with or interfere in any
material respect with Employee's duties
under this Agreement. Notwithstanding the
foregoing, Employee shall not be permitted
to pursue such activities in the fiscal year
which immediately follows a fiscal year in
which his total compensation from Company,
including any and all salary, bonus,
royalties (including advances against
royalties) and profit participations paid or
payable to Employee or to Phil Ramone, Inc.
("Lender") pursuant to this Agreement or
that producer's agreement between Company
and Lender executed concurrently herewith
(the "Producer's Agreement") equals or
exceeds $750,000.00, except with Company's
Consent.
d. For purposes of this Section 3, a person or
entity that engages in the business of
producing, manufacturing, distributing,
marketing or selling audio or audiovisual
recordings, dvd's or enhanced compact discs
shall be deemed to compete with and be a
competitor of Company.
4. COMPENSATION
As full and complete compensation for all of Employee's services, all of the
results and proceeds of Employee's services, all rights granted or to be granted
to Company and all representations, warranties, indemnities and agreements made
or given by Employee in connection with this Agreement, Company shall pay to
Employee the following compensation:
4.1 Salary
Employee shall be paid an annual salary of $450,000.00 for the first Contract
Year and $550,000.00 for the second and third Contract Years. If Company
exercises the Option, Employee shall be paid $650,000 in annual salary for the
fourth Contract Year, and such annual salary for the fifth Contract Year as the
parties shall determine after good faith negotiations (which negotiations the
parties shall use best efforts to conclude within thirty (30) days after
Company's exercise of the Option). Employee's salary shall be paid in
approximately equal installments in accordance with Company's then-prevailing
payroll policy.
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<PAGE> 6
4.2 Benefits and Perquisites
a. Employee shall be entitled to annual vacation time on
such terms as are afforded to Company's senior
executives, but in no event less than four (4) weeks
per annum.
b. Employee shall be entitled to a car
allowance in such amount and on such terms
as are afforded to Company's senior
executives, but in no event less than
$800.00 per month.
c. Company agrees to procure and maintain
medical and hospital, dental, life and
long-term disability insurance and to
include Employee thereunder during the Term,
on such terms and subject to such conditions
as shall apply to Company's senior
executives.
d. If Employee is required by Company business
to travel to a location outside of the New
York metropolitan area that is more than
seventy-five (75) miles from Company's
executive office, then Company shall (i) in
Company's discretion, furnish and pay for or
reimburse Employee for the cost of,
round-trip transportation, first-class if
available, by air if appropriate, between
Employee's residence or Company's office (or
wherever Employee may then be, if closer)
and such location; and (ii) reimburse
Employee for the cost of first-class lodging
and meal expenses incurred by Employee in
connection therewith. For the avoidance of
doubt, this provision shall not apply to
travel between Employee's residence and
Company's executive office. To facilitate
Company's compliance with its obligations to
reimburse Employee under this subsection,
Employee shall obtain a credit card to be
used solely for reimbursable business
expenses, the annual fee for which Company
shall reimburse Employee.
e. If Employee is required by Company business
to stay overnight in New York, New York,
then Company shall reimburse Employee for
reasonable hotel expenses incurred by
Employee, not to exceed $350 per night,
subject to cost of living adjustments as
determined by the CEO or the Board in his or
its reasonable discretion.
f. Company's obligation to reimburse Employee
for any expenses shall be subject to
Company's usual expense accounting
procedures.
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4.3 Bonus
a. On October 1, 1997, Employee shall be entitled to a
bonus of $100,000, payable in the form of a loan
whose principal and interest thereon will be forgiven
(provided that Employee has not been terminated by
the Company for cause as set forth in this agreement)
over a twelve (12) month period at a rate of
one-twelfth of the outstanding indebtedness on the
first day of each month beginning on October 1, 1998
and ending on September 1, 1999,. This loan shall be
evidenced by a promissory note substantially in the
form of Exhibit "A" attached hereto and incorporated
herein by reference.
b. If the gross revenues of the Division
(calculated in accordance with generally
accepted accounting principles ("Gross
Revenues")) are at least $8 million but not
in excess of $10 million in any Fiscal Year
during the Term, then Employee shall be paid
a bonus of $50,000.00 for any such Fiscal
Year. If Gross Revenues are in excess of $10
million in any Fiscal Year during the Term,
then Employee shall be paid a bonus of
$100,000.00 for any such Fiscal Year. In no
event shall Employee's bonus exceed
$100,000.00 with respect to any given Fiscal
Year. Any such bonus shall be paid within
ninety (90) days of the end of the relevant
Fiscal Year. If Employee is no longer in
Company's employ at the conclusion of any
given Fiscal Year, then Employee's bonus
shall be prorated by a ratio equal to the
number of days during the Fiscal Year that
Employee was employed by Company divided by
365.
c. For purposes of calculating any bonus due to
Employee under section 4.3(b), the
Division's Gross Revenues shall include only
gross revenues from Products produced,
manufactured, distributed and sold by the
Division or other divisions of the Company
that report directly to Employee (including
revenues received from the exploitation of
any master use license with respect to the
sound recording copyrights in such Products
and any licensing of the visual or other
nonmusical aspects of enhanced compact
discs). For the avoidance of doubt, gross
revenues shall not include:
(i) revenues generated by merchandising
or the exploitation of music
publishing rights with respect to
musical compositions, including
without limitation print rights,
mechanical rights, synchronization
rights, transcription rights and
public performance rights,
provided, however, that
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<PAGE> 8
if, as reasonably concluded by the
CEO or the Board, Employee was
substantially responsible for a
transaction leading to the
acquisition by Company of music
publishing rights, then gross
revenues (for purposes of this
section 4.3. only) shall include
twenty-five percent (25%) of the
net publisher's share earned by
such music publishing rights during
the relevant Fiscal Year; and
(ii) revenues generated by any business
of Company, including but not
limited to any business involving
the production, manufacture,
distribution, marketing or sale of
sound recordings and enhanced
compact discs, that is not within
Employee's purview as President of
the Division; provided, however,
that gross revenues (for purposes
of this section 4.3. only) shall
include an imputed fair-market
value transfer price or usage fee
for such assets of the Division as
may be used to generate revenue by
any other business of Company.
d. For purposes of calculating any bonus due to
Employee, the gross revenues of any business
of Company which is acquired by, merged into
or consolidated with Company subsequent to
the Effective Date and is thereafter within
Employee's purview as President of the
Division (the "Acquired Business") shall be
added to the gross revenues of the Division
solely to the extent that, during the
relevant accounting period, the gross
revenues of the Acquired Business exceed a
baseline gross revenue figure equal to the
gross revenues of the Acquired Business in
the twelve calendar months immediately
preceding its acquisition, merger or
consolidation, calculated according to
generally accepted accounting principles.
e. For purposes of this Section 4.3, the
Division's Gross Revenues for each Fiscal
Year shall be calculated and determined in
good faith in accordance with generally
accepted accounting principles by Company's
independent public accountants at the
conclusion of each Fiscal Year. Within
ninety (90) days after the end of each
Fiscal Year, the Company shall deliver to
Employee a statement setting forth a
determination of the Division's Gross
Revenues for each Fiscal Year.
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<PAGE> 9
4.4 Profit Participation
a. Employee shall be paid ten percent (10%) of that
portion of any after-tax net profit of the Company
during any given Fiscal Year that is fairly allocable
to the Division's operations. For purposes of this
subsection 4.4.a only, losses incurred by the
Division in Fiscal Years 1997 and 1998 of operation
shall not be carried forward in calculating the
after-tax net profit in any subsequent Fiscal Year.
Employee's profit participation under this subsection
4.4.a for such Fiscal Year, if any, shall be paid to
Employee within ninety (90) days following the end of
each Fiscal Year during the Term. If Employee is no
longer in Company's employ at the conclusion of any
given Fiscal Year (including by reason of a sale as
set forth in subsections 4.4.b and 4.4.c), then
Employee's profit participation under this subsection
4.4.a for such Fiscal Year shall be prorated by a
ratio equal to the number of days during the Fiscal
Year that Employee was employed by Company divided by
365.
b. If the business of the Division is sold as a
going concern to a third party, during the
Initial Term, then Employee shall be
entitled to participate in the proceeds of
that sale (net of any and all transaction
costs, including without limitation all
applicable commissions and fees) as if the
Division were a distinct corporate entity of
which Employee was a five percent (5%)
shareholder. If Company is sold as a going
concern, then Company's independent public
accountants shall reasonably allocate a
portion of such sale price to the Division,
and Employee shall be entitled to
participate in such allocated portion of the
sales price as set forth in the immediately
preceding sentence. The Company shall be
deemed to have been "sold" if (a) the
Company sells all or substantially all of
its assets to a single purchaser or group of
purchasers or (b) a single purchaser
acquires eighty percent (80%) or more of
Company's issued and outstanding voting
shares. Such participation shall be payable
thirty (30) days after receipt by Company of
the sale proceeds, at the option of Company
either entirely in cash or in cash,
securities or other property received by
Company as consideration in the sale, in
substantially the same proportion received
by Company. The Company shall exercise its
option as to whether to pay such
participation entirely in cash or in cash,
securities or other property received by the
Company as consideration in the sale by
giving written notice of its election to
Employee within ten (10) days after
consummation of the sale. If the Company
elects to pay
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<PAGE> 10
such participation in cash, the sales proceeds shall
be valued at the fair market value thereof.
c. If the business of the Division is sold as a going
concern to a third party during the Option Period,
then Employee shall be entitled to participate in the
proceeds of that sale (net of any and all transaction
costs, including without limitation all applicable
commissions and fees) as if the Division were a
distinct corporate entity of which Employee was a
seven and one-half percent (7.5%) shareholder. If
Company is sold as a going concern, then Company's
independent public accountants shall reasonably
allocate a portion of such sale price to the
Division, and Employee shall be entitled to
participate in such sale allocated portion of the
sales price as set forth in the immediately preceding
sentence. The Company shall be deemed to have been
"sold" if (a) the Company sells all or substantially
all of its assets to a single purchaser or group of
purchasers or (b) a single purchaser or group of
purchasers acquire eighty percent (80%) or more of
Company's issued and outstanding voting shares. Such
participation shall be payable thirty (30) days after
receipt by Company of the sale proceeds, at the
option of Company entirely in cash or in cash,
securities or other property received by Company as
consideration in the sale, in substantially the same
proportion received by Company. The Company shall
exercise its option as to whether to pay such
participation entirely in cash or in cash, securities
or other property received by the Company as
consideration in the sale by giving written notice of
its election to Employee within ten (10) days after
consummation of the sale. If the Company elects to
pay such participation in cash, the sales proceeds
shall be valued at the fair market value thereof.
d. If the business of the Division includes any Acquired
Business or the Division after the Effective Date has
been merged into or consolidated with another
business unit, affiliate or subsidiary of the Company
(each such Acquired Business or other business unit,
affiliate or subsidiary to the extent included in the
business of the Division being sometimes hereinafter
referred to as an "Other Business"), then for
purposes of determining any profit participation
payable to Employee under subsection 4.4.b or 4.4.c
above, the sum of the following amounts (if a
positive number) shall be deducted from the proceeds
of any sale prior to calculating such profit
participation: (i) the cost of the Other Business,
including the purchase price thereof and any
transaction costs allocable thereto; plus (ii) any
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<PAGE> 11
investment made by Company in the Other
Business; plus (iii) any and all financing
costs in connection with any acquisition,
merger or consolidation referred to in
clause (i) above or any additional
investment referred to in clause (ii) above;
plus (iv) Company's imputed cost of funds on
amounts under clauses (i) and (ii) above
from the date of payment to the date of sale
of the business of the Division. For
purposes of the preceding sentence,
Company's cost of funds shall be deemed to
be two (2) percentage points above the prime
rate publicly announced from time to time in
New York, New York by Morgan Guaranty Trust
Company of New York.
e. Any and all profit participations payable to
Employee under this Section 4 shall be
calculated in good faith by Company's
independent public accountants at the
conclusion of the relevant Fiscal Year or
following receipt by Company of sales
proceeds, as applicable. The net profits (or
net losses) of the Division shall be
determined in accordance with United States
generally accepted accounting principles,
consistently applied. In making the
computation of net profits (or net losses),
the following deductions, rules and
considerations, among other usual and
customary deductions, shall be applied:
(i) All usual charges and expenses of
the business of the Division,
including royalties and other
payments due in respect of rights
acquired by Company, reserves
against returns and bad debts, and
the remuneration of officers and of
employees (including the salary,
bonus and other compensation
hereunder, but not the profit
participations, payable to the
Employee for such Fiscal Year).
(ii) Interest and other financing costs
on any loans of any kind to either
Company or the Division, including
interest or other financing costs on
any loans made to Company or the
Division by Company's parents,
subsidiaries or affiliates, shall be
apportioned between the Division and
the other businesses of Company in
accordance with the use of the loan
proceeds. For purposes of this
subsection 4.4.e.(ii) only, no more
than fifty percent (50%) of the
Division's capital shall be in the
form of loans, and the interest on
such loans shall not exceed market
interest rates.
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<PAGE> 12
(iii) Except as provided in subsection
4.4.a, all net losses incurred
during a Fiscal Year shall be
treated for all purposes hereunder
as losses incurred in the next
succeeding Fiscal Year.
(iv) The treatment of advances to Company
Artists shall be in accordance with
Company's prudent judgment and the
likely commercial realities and not
necessarily in accordance with
Company's calculation of its state
or federal income taxes.
(v) The calculation of after-tax net
profits (or net losses) as provided
herein shall only be used for the
purposes of paying Employee's profit
participation and for no other
purpose hereunder.
(vi) Within ninety (90) days after the
end of each Fiscal Year, the Company
shall deliver to Employee a
statement setting forth in detail
the computation of the Company's
after-tax net profit for such Fiscal
Year as is fairly allocable to the
Division's operations allocated and
computed as herein required and
setting forth Employee's profit
participation under subsection 4.4.a
hereof with respect thereto.
(vii) If the Company is sold as a going
concern, within thirty (30) days
thereafter, the Company shall
deliver to Employee a statement
setting forth a description of such
sale, the consideration paid or
payable with respect thereto, the
determination of and the amount of
the sale price allocated by the
Company's independent public account
to the Division and the computation
in detail as to the amount payable
to Employee with respect to such
sale.
4.5 Stock Options
a. Employee shall be granted nontransferable,
non-qualified stock options (the "Stock
Options") to purchase an aggregate number of
294,708 shares (currently equal to
approximately one percent (1%) of the total
number of issued and outstanding shares) of
Company's common stock. The shares issuable
upon exercise of the Stock Options are
referred to herein as the "Employee Shares"
and may be adjusted based on stock splits,
reverse stock splits and other
recapitalizations.
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<PAGE> 13
b. The Stock Options shall have an exercise
price of $3.00 per share which may be
adjusted based on stock splits, revenue
stock splits and other recapitalizations..
c. The Stock Options shall vest as follows: (a)
twenty-five percent (25%) on the date of
grant; and (b) an additional twenty-five
(25%) percent on each of the first three (3)
anniversaries of the Effective Date,
provided that Employee is still in Company's
employ on the date of such vesting.
Notwithstanding the foregoing, the Stock
Options shall become fully vested two (2)
days prior to the consummation of any sale
of the Company (as described in subsections
4.4.b or 4.4.c hereof).
d. The Stock Options shall expire six (6) years
from the Effective Date, but not later than
one (1) year from the date Employee's
employment with Company is terminated.
e. Except (i) by bequest, inheritance or gift
to immediate family members or a bona fide
trust of whom Employee and/or Employee's
immediate family are the sole beneficiaries
and (ii) as specifically permitted below,
Employee shall not sell, transfer, assign,
encumber, hypothecate, donate or in any way
alienate or dispose of any of the Employee
Shares or any right or interest therein
without obtaining Company's Consent. The
word "transfer" includes any exchange or
gift, any creation of a security interest or
other encumbrance or any other disposition
of any kind (except as set forth above),
whether voluntary or involuntary, affecting
title to or possession of any of the
Employee Shares.
(i) Each certificate for the Employee
Shares shall be stamped or
otherwise imprinted with a legend
substantially as follows:
"PURSUANT TO THAT CERTAIN EMPLOYMENT AGREEMENT DATED OCTOBER
15, 1996, BETWEEN THE ISSUER OF THESE SECURITIES AND PHIL
RAMONE, THE ORIGINAL HOLDER HEREOF, THE SECURITIES REPRESENTED
BY THIS CERTIFICATE ARE SUBJECT TO REPURCHASE BY THE ISSUER OR
ITS DESIGNEES UPON THE OCCURRENCE OF CERTAIN CONDITIONS."
(ii) Prior to the completion of an
initial public offering by Company,
except as provided under the first
sentence of this subsection 4.5.e
neither Employee nor Employee's
heirs, successors or assigns
(collectively, "Transferees"), if
any, shall transfer
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<PAGE> 14
any Employee Shares without Company's
Consent. Within a reasonable time after a
request by Employee or by any Transferee
that Company consent to any such transfer,
Company or its designee shall have the right
(but not the obligation) to repurchase, at a
price equal to Employee's proposed transfer
price, such Employee Shares as Employee or
such Transferee proposes to transfer. If
Company or its designee elects not to
repurchase such Employee Shares, then
Employee may transfer such Employee Shares
to any person or entity only upon (i) terms
no more favorable than those offered to
Company and (ii) the express written
agreement of such person or entity to be
bound by such terms and conditions of this
Agreement as relate to the ownership,
transfer and repurchase of the Employee
Shares, including without limitation this
subsection 4.5.e and section 8.4.
(iii) Subsequent to the completion of an initial
public offering by Company, the Employee
Shares shall be freely transferable.
f. Employee warrants, represents and covenants as
follows:
(i) He is acquiring the Stock Options and, upon
the exercise thereof, the Employee Shares
for his own account, for investment and not
with a view to the distribution thereof, nor
with any present intention of distributing
the same.
(ii) Employee understands that neither the Stock
Options nor the Employee Shares have been
registered or qualified under the Securities
Act of 1933, as amended, or any successor
Federal statute, and the rules and
regulations of the Securities and Exchange
Commission (or any other governmental body
or agency succeeding to the functions
thereof) thereunder, all as the same shall
be in effect from time to time (the
"Securities Act") or any applicable state
securities laws, by reason of their issuance
in a transaction exempt from the
registration or qualification requirements
of the Securities Act and such laws, and
that the Stock Options and the Employee
Shares must be held indefinitely unless a
subsequent disposition thereof is registered
or qualified under the Securities Act and
such laws or is exempt from such
registration or qualification.
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<PAGE> 15
(iii) Employee further understands that,
with respect to the Stock Options
and the Employee Shares, the
exemption from registration afforded
by Rule 144 (the provisions of which
are known to Employee) promulgated
under the Securities Act depends on
the satisfaction of various
conditions and that, if applicable,
Rule 144 may only afford the basis
for sales under certain
circumstances only in limited
amounts.
(iv) Employee is an "accredited
investor" (as defined in Rule 501(a)
of Regulation D promulgated under
the Securities Act). Employee (A)
has been furnished with or has had
access to all information that
Employee has requested from Company
regarding Company or otherwise
deemed necessary in order to make an
informed decision with respect to
the Stock Options and the Employee
Shares, (B) has had an opportunity
to discuss with management of
Company the business and financial
affairs of Company, and (C) has
generally such knowledge and
experience in business and financial
matters and with respect to
investments in securities, such as
the Stock Options and Employee
Shares, of privately held companies,
such as Company, so as to enable
Employee to understand and evaluate
the risks of, and make an informed
investment decision with respect to,
the Stock Options and the Employee
Shares.
4.6 Audit Rights
In connection with the calculation of any bonus or profit participations payable
pursuant to sections 4.3 or 4.4 hereof, Employee shall have the right at his
expense to audit the books and records of the Company that are necessary to
assume that the Company's calculations are accurate.
4.7 Business Expenses
Company shall, in accordance with Company's regular policies with respect to the
reimbursement of expenses as determined by the CEO or the Board from time to
time, reimburse the Employee for all reasonable and necessary expenses and other
disbursements incurred by him for or on behalf of Company in connection with the
performance of his duties hereunder, subject to Company's usual expense
accounting procedures.
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5. RIGHTS
5.1 Excluding songs written by Employee (which shall not be
deemed the results and proceeds of services rendered hereunder), Employee does
hereby acknowledge, certify and agree that all materials of whatever kind
created, produced, furnished and delivered to Company by Employee hereunder, and
all results and proceeds of whatever kind of the services rendered by Employee
hereunder (collectively referred to herein as the "Work). Company is and shall
be considered to be the author of the Work and, at all stages of creation or
completion, the sole and exclusive owner throughout the universe in perpetuity
of the Work and all right, title and interest therein, including all copyrights
therein, all renewals and extensions of such copyrights and all other ownership
and exploitation rights of any kind, nature or description in, to and with
respect to the Work that may be secured under the laws now or hereinafter in
effect in the United States or any other jurisdiction (collectively, the
"Rights"). If and to the extent that under any applicable law the Work is not
deemed a work made for hire for Company or Company is not deemed to be the
author of the Work and the sole and exclusive owner of the Work and all right,
title and interest therein (including all of the Rights), then to the fullest
extent allowable and for the full term of protection otherwise accorded Employee
under such applicable law, Employee hereby irrevocably assigns, grants and
transfers to Company throughout the universe in perpetuity the Rights and, in
connection therewith, all right, title and interest of Employee in, to and with
respect to any works now or hereafter created containing the Work.
5.2 Employee agrees to execute, acknowledge and deliver to
Company such further documents as Company may deem necessary or advisable in
order to evidence, establish, maintain, protect, enforce or defend its rights
in, to and with respect to the Work or otherwise to carry out the intent and
accomplish the purposes of this Agreement.
5.2 Name and Likeness
Employee hereby grants to Company the perpetual rights, without liability to any
person, to reproduce, print, publish and disseminate (and to license others to
reproduce, print, publish and disseminate) in any medium the name, approved
likeness and approved biographical information of or concerning Employee for
purposes of advertising, promotion and trade in connection with Employee, the
manufacture, sale, marketing, distribution and other exploitation of Products
and general goodwill advertising. Employee's approval of his likeness and
biographical information shall not be unreasonably withheld. Except in
connection with audio recordings which were recorded for third parties prior to
the commencement of the Term and which such third parties own and have the right
to exploit without Employee's consent, and except as otherwise permitted
hereunder, such rights with respect to Employee shall be exclusive to Company
during the Term and nonexclusive thereafter.
6. EMPLOYEE'S REPRESENTATIONS AND WARRANTIES
Employee represents, warrants and agrees that:
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<PAGE> 17
6.1 Employee is under no disability, restriction or
prohibition, whether contractual or otherwise, with respect to (a) his right to
enter into this Agreement; (b) his ability to grant and convey the intellectual
property and other rights with respect to his services and the results and
proceeds thereof; or (c) his ability to perform the terms and conditions of this
Agreement. Without limiting the generality of the foregoing, Employee
represents, warrants and agrees that (a) the execution, delivery and performance
of this Agreement by Employee does not and will not conflict with, breach,
violate or cause a default under any agreement, contract or instrument to which
the Executive is a party or any judgment, order or decree to which the Employee
is subject and (b) the Employee is not a party to or bound by any employment
agreement, consulting agreement, non-compete agreement, confidentiality
agreement or similar agreement with any other person or entity.
6.2 To the best of Employee's knowledge, none of the Work
produced by Employee hereunder is an imitation or copy of any other work, and no
use thereof by the Division, Company or their licensees will violate or infringe
the rights of any third party, and no adverse claims exist thereon.
6.3 Neither Employee nor any third party deriving any rights
from Employee will at any time do or authorize any person or entity to do
anything that diminishes, impairs or interferes with any of Company's rights
hereunder or the full and prompt performance of Employee's obligations
hereunder.
6.4 Employee shall indemnify Company and hold harmless Company
and Company's successors, assigns and licensees (each, an "Indemnified Party")
from any and all liabilities, losses, damages, expenses and costs, including
reasonable attorneys' fees (collectively "Losses"), incurred by any Indemnified
Party in connection with or arising from (a) Employee's breach of any warranty,
representation or agreement contained herein, or (b) any claim, demand, cause of
action or proceeding ("Claims") asserted by any third person that is
inconsistent with any of the warranties, representations or agreements made by
Employee in this Agreement. Company shall, within a reasonable time after its
discovery of any Claim, provide written notice to Employee of such Claim, and
such Losses shall be paid as incurred by such Indemnified Party. Each
Indemnified Party shall have the right to select counsel of its choice and to
control its defense, provided, however, that no Indemnified Party shall pay any
money in settlement of an indemnified Claim without Employee's prior written
consent, such consent not to be unreasonably withheld.
7. COMPANY'S REPRESENTATIONS AND WARRANTIES
7.1 Company represents, warrants and agrees that Company will
not engage in the production of recorded music except through the Division
during the Initial Term and, if Company exercises the Option, during the Option
Period.
7.2 Company shall maintain Employee as an additional named
insured on such directors and officers liability insurance policies and
comprehensive general liability insurance policies as may be purchased and/or
maintained by Company with respect to the Division. Nothing in this Agreement
shall obligate Company to purchase
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<PAGE> 18
or maintain any such insurance. In the absence of such insurance or if the
liability exceeds the amount of any available insurance, Company shall indemnify
Employee and hold harmless Employee from any and all liabilities, losses,
damages, expenses and costs, including reasonable attorneys' fees (collectively
"Employee Losses"), incurred by Employee within the course and scope of his
duties as President of the Division ("Employee Indemnified Claims"), provided,
however, that Company shall have no obligation to indemnify or hold harmless
Employee for Employee Losses arising from or in connection with Employee's
intentional malfeasance or gross negligence, as reasonably determined by the
Board. Company shall have the sole right to defend (including the right to
retain counsel of its choice) or, in its sole discretion, to settle or otherwise
dispose of any Employee Indemnified Claim, provided that such settlement or
resolution does not contain an admission of misconduct by Employee. Employee
shall, within a reasonable time after his discovery of any Employee Indemnified
Claim, provide written notice to Company of such Employee Indemnified Claim, and
shall cooperate fully in the defense and disposition of any such Employee
Indemnified Claim.
8. TERMINATION AND REMEDIES
8.1 Termination by Company
a. If the Employee dies during the Term, his employment
hereunder shall be deemed to cease as of the date of his death.
b. Company may terminate the employment of Employee for cause,
without prejudice to any other remedy to which Company might be entitled at law
or in equity, upon the occurrence of any of the following:
(i) The gross neglect by Employee of his duties
under this Agreement, provided that Employee
shall have ten (10) days to cure such
material neglect after Company gives written
notice thereof;
(ii) A willful material breach by Employee of any
term or condition of this Agreement;
(iii) Employee's gross breach of any fiduciary
duty or trust owed by him to Company;
(iv) Employee's disregard of lawful instructions,
consistent with this Agreement, of the CEO
or the Board;
(v) Employee being unable, for a period of 180
consecutive days, or an aggregate of 180
days in any twelve-month period, to perform
his duties owing to physical or mental
disability, regardless of type or cause;
(vi) Employee is convicted of a felony or of any
crime involving fraud, theft or dishonesty,
or is adjudicated non compos mentis;
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<PAGE> 19
(vii) Conduct by Employee that materially injures
Company.
c. In the event of termination by Company for cause, then
Company shall have no further obligation to pay any salary, bonus, profit
participation or other compensation, and the Stock Options shall not vest
further; provided, however, that if Company terminates for cause by reason of
Employee's disability (other than any disability caused by substance abuse or a
similar self-directed cause not attributable to a previously diagnosed physical
or mental illness), then any bonus, profit participation or other compensation
otherwise payable hereunder shall be paid after being prorated by a ratio equal
to the number of days during the Fiscal Year prior to such termination divided
by 365.
d. Promptly upon termination of the employment of Employee,
Employee shall deliver to Company or its designee, and shall retain no copies
of, any and all Records, books, papers, accounts and other property of Company
and/or the Division, and shall provide such information regarding Company's
and/or the Division's affairs as Company may reasonably request.
e. Employee's sole remedy for the wrongful termination of this
Agreement by Company shall be an action at law for money damages to recover
unpaid salary, bonus or profit participations, or any unvested Stock Options.
Employee hereby covenants not to assert any action against Company seeking
injunctive relief, or to seek any preliminary or ancillary relief in the nature
of a restraining order or preliminary injunction, based upon any claim to any
copyrights or other intellectual property allegedly relating to any of the Work.
Employee further covenants not to assert, and hereby waives and relinquishes,
any and all claims, past, present and future, against Company for damages for
emotional or mental suffering, lost publicity or other consequential damages
that allegedly arise from Company's termination of this Agreement.
9. UNIQUE SERVICES
Employee agrees and acknowledges that his services are of a special, unique,
unusual, extraordinary and intellectual character giving them a peculiar value,
the loss of which cannot be reasonably or adequately compensated for in damages.
In the event of a material breach of this Agreement by Employee, including
without limitation Employee's duty to render exclusive services or his wrongful
termination of this Agreement, Company shall, in addition to any and all other
contractual, legal or equitable remedies available to it, be entitled to
injunctive relief by way of a temporary restraining order, preliminary
injunction and/or permanent injunction.
9.1 Termination by Employee
a. Employee may terminate his employment with Company upon the
material breach by Company of this Agreement, or if Company directs a material
adverse change in Employee's duties or any change in title, or changes the
location of Employee's principal business office away from the New York City
metropolitan area, by giving written notice of such termination to Company.
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b. Company shall not be deemed to be in material breach of
this Agreement unless Employee gives Company notice of the alleged breach and
Company fails to remedy such alleged breach within thirty (30) days after its
receipt of such notice.
9.2 Repurchase of Stock
a. In the event that either Company or Employee terminates
Employee's employment prior to the end of the Term (other than pursuant to
Section 8.3 above) and prior to any initial public offering of shares of
Company's common stock, then Company or its designee shall have the right (but
not the obligation) to repurchase from Employee any or all of the Employee
Shares held by Employee upon the date of such termination, at a purchase price
equal to the fair market value of the Employee Shares (or, if the termination is
pursuant to Section 8.1.b above, at a purchase price equal to the price paid by
Employee for such Employee Shares). Any Employee Shares thus repurchased by
Company are called herein the "Repurchase Securities". The Company may elect to
pay the purchase price for Repurchase Securities in three (3) equal annual
installments by delivery of a promissory note as described in subsection 8.4c.
b. The repurchase right of Company under this section may be
exercised by written notice to Employee within fifteen (15) days of the date of
termination of Employee's employment (the "Repurchase Notice"). The Repurchase
Notice shall specify the type and number of Repurchase Securities to be
repurchased and the manner of payment, as permitted by this section. Upon the
delivery of such Repurchase Notice, Employee shall be obligated to sell to the
Company or its designee that type and number of Repurchase Securities specified
in such Repurchase Notice. Repurchases of the Repurchase Securities shall be
made at the executive offices of the Company on a mutually satisfactory business
day within fifteen (15) days after the delivery of the Repurchase Notice.
Delivery of certificates or other instruments evidencing such securities duly
endorsed for transfer and free and clear of all liens, claims and other
encumbrances shall be made on such date against payment of the purchase price
therefor.
c. Notwithstanding the foregoing, Company may, in its sole
discretion, repurchase the Repurchase Securities by delivery of a promissory
note (the "Note"), payable by Company in favor of Employee. The Note shall be
for a term of three years, principal payable in three equal installment together
with interest at the rate of eight percent (8%) per annum. All other terms and
conditions related to such repurchase shall be determined by Company provided
such terms and conditions are customary and reasonable for transactions of this
kind.
10. MISCELLANEOUS
10.1 Insurance
Employee hereby grants Company the right to obtain insurance on the Employee's
life for the benefit of Company and at Company's sole cost and expense, in such
amount up to Five Million Dollars ($5,000,000) as Company shall deem
appropriate, and Employee hereby agrees to submit to usual and customary medical
examinations and to execute all
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such documents as Company shall deem necessary in connection therewith.
Employee's uninsurability shall not be deemed a breach of this Agreement. The
right granted under this Section 9.1 shall terminate upon termination of
Employee's employment hereunder for any reason.
10.2 Assignment
This Agreement is intended to and shall inure to the benefit of Company's
successors and assigns. Company may assign or delegate all or any portion of
this Agreement to any corporation or other entity as may acquire all or
substantially all of Company's assets and goodwill, or which may result from a
division or reorganization of Company. Employee acknowledges and agrees that he
may not assign or delegate all or any portion of this Agreement without
Company's Consent.
10.3 Choice of Law
This Agreement shall be governed by the internal laws of the State of New York,
as applied to contracts made and wholly performed within the State of New York
by residents thereof.
10.4 Arbitration and Litigation Costs
a. Any and all disputes arising from or related in any manner
to this Agreement shall be submitted to binding arbitration in New York County,
New York, in accordance with the rules of the American Arbitration Association.
Notwithstanding any provision of state law, this Agreement shall be governed by
the Federal Arbitration Act. The authority of the arbitrator shall be complete,
and shall include the authority to determine any and all issues relating to the
formation, interpretation and performance of this Agreement. Company and
Employee agree and acknowledge that such issues include (i) the scope of this
Section 9.4; (ii) whether either party has waived the right to compel
arbitration; (iii) whether grounds for revoking this Agreement exist; (iv)
whether either party hereto is also a party to a pending court action or special
proceeding with a third party such that there is a possibility of conflicting
rulings on a common issue of law or fact; and (v) to fashion and award such
relief as is provided herein or by applicable law, including preliminary and
equitable relief.
b. In any and all disputes arising from or related in any
manner to this Agreement, the prevailing party shall be entitled to recover any
and all costs incurred in prosecuting or defending such claim or dispute,
including reasonable attorneys' fees and the costs of arbitration.
10.5 Integration/Modification
This Agreement is the entire agreement and understanding between the parties
hereto, and supersedes any prior or contemporaneous oral or written agreements,
understandings or representations by either party. This Agreement may be
modified or amended only in a writing signed by the party to be bound by the
modification or amendment.
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10.6 No Waiver
No waiver of any provision of this Agreement shall constitute a waiver of any
other provision, nor shall any waiver constitute a continuing waiver unless
expressly stated in writing by the party to be charged with such waiver.
10.7 Notices
Any notices which a party is required or may desire to give the other party
shall be in writing and shall be given by delivering, mailing or transmitting
such notice to the other party at the address shown below, or at such other
address as the other party may designate from time to time in writing in
accordance with this provision:
If to Company:
N2K, Inc.
55 Broad Street, 10th Floor
New York, New York 10004
With a copy to:
Dewey Ballantine
1301 Avenue of the Americas
New York, New York 10019
Attn: Frank E. Morgan II, Esq.
If to Employee:
Mr. Phil Ramone
449 Guard Hill Rd.
Bedford, NY 10508
Notice shall be sufficiently given when hand delivered, or deposited so
addressed, postage prepaid, in the United States mail, or when transmitted by
telegraph, telex, facsimile or similar means. By any of the aforementioned
methods, the effective date of notice shall be the date that such notice is
delivered; provided, however, that the effective date of any notice of a change
of address shall be the date of receipt.
10.8 Severability/Enforceability
If for any reason any provision in this Agreement is held to be invalid or
unenforceable by any court or arbitrator, such holding shall in no way affect
any other provision of this Agreement or the validity of the remainder of this
Agreement, and the affected provision shall be modified or curtailed only to the
extent necessary to bring it into compliance with the applicable law.
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10.9 Captions
The captions used in this Agreement are for convenience only and shall not be
deemed to be a part, or affect in any way the construction or interpretation, of
this Agreement.
10.10 Counterparts
This Agreement may be executed in any number of counterparts, each of which
shall be deemed an original and all of which, taken together, shall constitute
one and the same agreement.
11. LOAN TO EMPLOYEE
Upon the full execution and delivery of this Agreement, and subject to
Employee's execution and delivery to Company of a promissory note in the form of
Exhibit "A" attached hereto and incorporated herein by reference (the "Note"),
Company shall lend to Employee, and Employee shall borrow from Company, the sum
of $100,000.00 (the "Loan Amount"). Upon receipt of the Note, Company shall
transfer the Loan Amount to such bank account of Employee as Employee shall
designate in a notice to Company. Employee agrees to repay the Loan Amount by
the date specified and as otherwise provided in the Note. Employee further
agrees (and shall cause Lender to agree) that Company shall have the right (but
not the obligation) to deduct and withhold by way of set off, any Additional
Compensation (as defined below) owed by Company to Employee or Lender pursuant
to this Agreement or the Producer's Agreement in an aggregate amount not to
exceed the Loan Amount; provided, however, that except as set forth in this
sentence, the Note and any payments pursuant to the terms thereof shall not be
subject to any other offset, withholding, counterclaim or defense of any nature.
As used herein, the term "Additional Compensation" shall mean all amounts
payable by the Company to Employee or Lender pursuant to this Agreement or the
Producer's Agreement representing bonus, profit sharing, royalties or other
compensation, with the exception of base salary, employee benefits, expense
reimbursements and advances against royalties.
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IN WITNESS WHEREOF, the parties have executed and entered into
this Agreement as of the date first above written.
N2K INC.
By: /s/ Lawrence L. Rosen
--------------------------
Its: Chief Executive Officer
--------------------------
/s/ Phil Ramone
-------------------------------
Phil Ramone
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EXHIBIT "A"
PROMISSORY NOTE
OF
PHIL RAMONE
DUE OCTOBER 1, 2000
New York, New York
$100,000 September 26, 1997
FOR VALUE RECEIVED, the undersigned, PHIL RAMONE (together with his
successors and assigns, the "Maker"), hereby promises to pay to the order of N2K
INC. (together with its successors and assigns, the "Company"), the principal
sum of One Hundred Thousand Dollars ($100,000) (the "Principal Amount"), without
interest (except as expressly provided herein), in accordance with the terms,
conditions and procedures set forth below. All payments of principal and
interest hereunder shall be made in lawful money of the United States of America
in immediately available funds to the Company. This Note is being issued by the
Maker contemporaneously with and in connection with the consummation of the
transactions contemplated by that certain employment agreement, dated as of
October 15, 1996, between the Maker and the Company (the "Employment
Agreement").
Prepayments
The Maker shall have the right at any time, upon one Business Day
(as defined below) prior written notice to the Company, to prepay, without
premium or penalty, in whole or in part, the unpaid Principal Amount of this
Note and any accrued but unpaid interest thereon.
Maturity
Unless earlier prepaid or as otherwise provided herein, the
Principal Amount of this Note shall be due and payable to the Company as
follows:
October 1, 2000 $100,000
Each date on which all or a portion of the Principal Amount of this Note is due
and payable is hereinafter referred to as a "Payment Date." If a Payment Date
shall fall on a day on which banks in New York City are required or authorized
to close, such Payment Date shall be extended to the next succeeding day on
which such banks are not authorized or required to close (a "Business Day") and
such date shall be deemed to be a Payment Date for the purpose hereof.
Interest
Upon (i) an Event of Default (as defined below) or (ii) the failure
to pay the relevant portion of the Principal Amount on any Payment Date (a
"Payment Failure"), the interest rate on the unpaid Principal Amount shall, from
and after the day on which the Event of Default or the Payment Failure occurred
(the "Default Date"), be equal to 15% per annum (the "Default Rate") (to the
extent that the payment of such interest shall
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be legally enforceable) from the Default Date until such Event of Default has
been cured or waived. Interest on this Note shall be calculated on the basis of
a year of 360 days for the actual number of days elapsed from the Default Date,
as the case may be. All interest accrued hereunder shall be payable on the next
succeeding Payment Date after the accrual of such interest (or if later than the
last Payment Date quarterly thereafter). No interest shall be payable with
respect to this Note except as expressly provided in this paragraph. The
provisions of this paragraph shall be subject to the further provisions of this
Note under the heading "Set Off."
Usury
It is the intention of the Maker and the Company to conform strictly
to applicable usury and similar laws. Accordingly, notwithstanding anything to
the contrary in this Note, it is agreed that the aggregate of all charges which
constitute interest under applicable usury and similar laws that are contracted
for, chargeable or receivable under or in respect of this Note, shall under no
circumstances exceed the maximum amount of interest permitted by such laws, and
any excess, whether occasioned by acceleration of maturity of this Note or
otherwise, shall be canceled automatically, and if theretofore paid, shall be
either refunded to the Maker or credited on the principal amount of this Note.
Events of Default
If any of the following events ("Events of Default") shall occur:
(a) failure by the Maker to pay any portion of the Principal
Amount of this Note when the same becomes due and payable in accordance
with the terms hereof;
(b) failure by the Maker to pay any interest on this Note when
the same becomes due and payable in accordance with the terms hereof;
(c) default by the Maker in the performance of or compliance
in any material respect with any other term or agreement contained in
this Note, which default continues unremedied for a period of thirty
(30) days after notice by the Company requesting that such default be
cured;
(d) if the Maker shall make a general assignment for the
benefit of creditors, or shall file a voluntary petition in bankruptcy,
or shall file any petition or answer seeking for himself any
reorganization, arrangement, composition, readjustment, liquidation,
dissolution or similar relief under any present or future statute, law
or regulation, or shall file any answer admitting or not contesting the
material allegations of a petition filed against the Maker in any such
proceeding or shall seek or consent to or acquiesce in the appointment
of any trustee, receiver or liquidator of the Maker; or
(e) if there shall be filed against the Maker any petition or
application for relief under any bankruptcy or similar laws or which
seek the appointment of a
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<PAGE> 27
receiver or dissolution of the Maker, which is not discharged within
sixty (60) days after such petition or application is filed; or
(f) if the Maker shall cease for any reason to be employed by
the Company;
then the Company may at any time (unless all defaults shall have been sooner
remedied) at its option, by written notice to the Maker, declare the entire
unpaid Principal Amount and any accrued but unpaid interest thereon due and
payable, whereupon the same shall forthwith become immediately due and payable;
provided, however, (i) if such date shall not be a Business Day, all monies
payable pursuant to this paragraph shall be due and payable on the next
succeeding Business Day and (ii) no notice shall be required in the case of an
Event of Default under paragraphs (d) or (e) above (a "Bankruptcy Default") and
the entire unpaid amount of any accrued, but unpaid, interest shall
automatically become due and payable. No course of dealing and no delay on the
part of the Company or any registered assign which is a holder of this Note in
exercising any right, power or remedy shall operate as a waiver thereof or
otherwise prejudice rights of the Company or such holder. The Maker hereby
waives demand, protest, presentment for payment, notice of dishonor and
diligence and any and all other notices or demands in connection with this Note.
Transferability
The Maker may not transfer or assign its obligations hereunder
without the prior written consent of the Company. This Note may be not
negotiated, assigned, pledged or transferred by the Company except to: (a)
equity shareholders of the Company on the date hereof; (b) an Affiliate (as
defined below) of the Company; (c) any holder who receives an equity interest by
will or intestacy in each case in compliance with applicable federal and state
securities laws or (d) a bona fide pledgee (which is a U.S. domiciled and based
commercial bank of recognized national standing reasonably acceptable to the
Company) as security for indebtedness incurred by the Company pursuant to an
agreement entered into prior to or concurrently with the pledge, but only if
such pledgee shall, prior to the pledge, execute and deliver to the Company a
written agreement satisfactory to the Company not to dispose of this Note so
pledged, or retain any of this Note in full or partial satisfaction of such
indebtedness, without complying with the relevant provisions of this Note. In
the event of the assignment or transfer of this Note by the Company, the Maker
shall, if requested by the Company, assist in the execution and delivery of a
new Note or Notes in the name of the designated assignee(s) in a Principal
Amount or Amounts equal, in the aggregate, to the unpaid Principal Amount of,
and dated the date to which principal has been paid on, the Note so surrendered.
"Affiliate" shall mean, as to any person, any other person that
directly or indirectly, through one or more intermediaries, controls, is
controlled by or is under common control with, such person.
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Set Off
The Maker acknowledges and agrees that this Note is issued pursuant
to and in accordance with the terms of the Employment Agreement. The Maker
acknowledges and agrees, and shall cause Phil Ramone, Inc. ("Lender") to
acknowledge and agree, that the Company may deduct and withhold by way of set
off, any Additional Compensation (as defined below) owed by the Company to the
Maker pursuant to the Employment Agreement or to Lender pursuant to that
producer's agreement between Company and Lender executed concurrently herewith
(the "Producer's Agreement") in an amount not to exceed the Principal Amount
hereof; provided, however, that except as set forth in this sentence, this Note
and any payments pursuant to the terms thereof shall not be subject to any other
offset, withholding, counterclaim or defense of any nature. As used herein, the
term "Additional Compensation" shall mean all amounts payable by the Company to
Employee or Lender pursuant to this Agreement or the Producer's Agreement
representing bonus, profit sharing, royalties or other compensation, with the
exception of base salary, employee benefits, expense reimbursements and advances
against royalties.
Notices
Notices to be given hereunder shall be in writing and shall be
deemed to have been sufficiently given if delivered personally or sent by
overnight courier or messenger or sent by registered or certified mail (air mail
if overseas), return receipt requested, or by telex, facsimile transmission,
telegram or similar means of communication. Notices shall be deemed to have been
received on the date of personal delivery, telex, facsimile transmission,
telegram or similar means of communication, or if sent by overnight courier or
messenger, shall be deemed to have been received on the next delivery day after
depositing with the courier or messenger, or if sent by certified or registered
mail, return receipt requested, shall be deemed to have been received on the
third business day after the date of mailing. The address of the Maker is 449
Guard Hill Road, Bedford, New York 10508, Attention: Phil Ramone, Facsimile
Number: ___-___-____, and all notices shall be copied to ______________ , The
address of the Company is c/o N2K Inc., 55 Broad Street, 10th Floor, New York,
New York 10004, Attention: Larry Rosen, and all notices shall be copied to Dewey
Ballantine, 1301 Avenue of the Americas, New York, New York 10019, Attention:
Frank E. Morgan II, Esq., Facsimile Number: 212-259-6333. Each party shall give
written notice of any change of address to the other.
Miscellaneous
Any term of this Note may be amended and the observance of any term,
representation, warranty or covenant thereof may be waived (either generally or
in a particular instance) only with the written consent of the Maker and of the
Company. All of the provisions of this Note, as it may be amended from time to
time, shall bind and inure to the benefit of the Maker, the Company and their
respective successors and assigns and, in particular, shall inure to the benefit
of and be enforceable by any holder or holders at the time of the Note or any
part thereof. This Note shall be governed by, and
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<PAGE> 29
construed in accordance with the laws of the State of New York without regard
to choice of law doctrine.
IN WITNESS WHEREOF, the Maker has caused this Note to be executed
and delivered by its duly authorized officer, as of the day and year and the
place first above written.
/s/ Phil Ramone
------------------------------
Phil Ramone
29
<PAGE> 1
Exhibit 10.16
CONFIDENTIAL
Portions of this Exhibit have been omitted pursuant to a request for
confidential treatment. The omitted portions, marked by [****], have been
separately filed with the Commission.
SPONSORSHIP AGREEMENT
This agreement ("Agreement") is entered into as of the 23rd day of September,
1997 ("Effective Date"), by and between Excite, Inc., a California corporation,
located at 555 Broadway, Redwood City, California 94063 ("Excite"), and N2K
Inc., a Pennsylvania corporation, located at 55 Broad Street, 26th Floor, New
York, New York, 10004 ("Sponsor").
RECITALS
A. Excite maintains a site on the Internet at http://www.excite.com (the
"Excite Site") and owns and/or manages related Web Sites worldwide
(collectively, the "Excite Network") which, among other things, allow users
to search for and access content and other sites on the Internet.
B. Excite also maintains and/or manages certain Web pages which may be
delivered to users via email, desktop "channels" or Internet "push"
technologies (collectively, "Broadcast Pages") which may incorporate
content supplied to Excite by third parties for the purpose of providing
value to Excite users and providing access to the content, products and/or
services of such third parties.
C. Sponsor is in the business of distributing certain online retail music
merchandise and related content and maintains a Web site at
http://www.musicblvd.com (the "Sponsor Site") and other Web sites through
which it makes this merchandise and this content available to its users.
D. Sponsor wishes to be the exclusive retail store music sponsor of the Excite
Site and the Excite Broadcast Pages, to distribute its music-related
content through the Excite Site and the Excite Broadcast Pages and to
promote its online retail music merchandise business to Excite.com users.
Therefore, the parties agree as follows:
1. EXCLUSIVITY, TERM AND RIGHT OF FIRST REFUSAL
a) Sponsor will be the exclusive retail music store sponsor of
the Excite Site and the Excite Broadcast Pages. Excite will
not permit the display of advertising banners, promotional
buttons, promotional links or other promotional materials for
any retail sale of Music Products on the Excite Site, except
those Music Products offered by Sponsor, nor advertising by
any other Retail Music Store. "Retail Music Store" shall mean
any entity which is primarily engaged in the sale of Music
Products at retail to consumers. "Music Products"
<PAGE> 2
CONFIDENTIAL
shall mean pre-recorded music hard goods, digitally
distributed music (except live and/or cybercast events), music
books (to the extent this Agreement does not conflict with
Excite's existing agreement with Amazon.com), music-related
t-shirts and apparel, and music videos (except live and/or
cybercast events).
[****] In no event will Excite enter into arrangements to make
available opportunities to purchase Music Products from
parties other than Sponsor that would prevent Sponsor from
being the exclusive source of such Music Products on the
Excite Site once the Music Products become available through
Sponsor.
b) The term of this Agreement will begin on the Effective Date and
will end on the second (2nd) anniversary of the Commencement
Date. The "Commencement Date" means the date on which Excite
commences delivery of Impressions (defined below). The parties
anticipate the Commencement Date will be on or about October
15, 1997.
c) The parties' existing agreements regarding sponsorship of the
WebCrawler Web site (http://webcrawler.com) and all of the
existing advertising buys on the Excite Network will be
terminated as of the Commencement Date. Excite will credit
Sponsor in an amount equal to [****]. This credit will be
applied to reduce the first year exclusivity fee described in
Section 7(b) and will be reflected in a reduction of Sponsor's
December 31, 1997 payment to Excite described in Section 7(e).
d) Excite will offer Sponsor the right of first refusal to
negotiate with Excite for renewal of this sponsorship.
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<PAGE> 3
CONFIDENTIAL
[****]
3
<PAGE> 4
CONFIDENTIAL
2. IMPRESSIONS
a) "Impression" means any appearance of a link to the Sponsor
Site whether graphic, text or any combination of graphic and
text. More than one Impression may appear on a page, except,
however, not more than three (3) Impressions per Channel page
will count towards delivery of guaranteed Impressions and, of
these 3 Impressions, at least two (2) will link to pages in
the Sponsor Site offering Music Products; not more than two
(2) Impressions per generic search results page will count
towards delivery of guaranteed Impressions and, of these 2
Impressions, at least one (1) will link to pages in the
Sponsor Site offering Music Products; and no more than one (1)
Impression per specific search results page will count towards
delivery of guaranteed Impressions. In all events, Excite will
make a good faith effort to avoid duplicate Impressions on a
single page, but in no event will more than one (1)
Impression for the same artist on a Music Product page count
towards delivery of guaranteed Impressions. For the purposes
of this Agreement, "generic search results page" is an Excite
Search results page displayed in response to a query
concerning generic music topics and a "specific search results
page" is an Excite Search results page displayed in response
to a query concerning a specific music artist or specific
album title.
b) Excite and Sponsor will work together in good faith to define
mutually agreeable Impressions in the Excite Site designed to
provide content of interest (defined below) to Excite users
and/or promote the Sponsor Site, in numbers sufficient to meet
the Impression guarantees stated in Section 3.
c) Excite and Sponsor will collaborate on the design, appearance,
and placement (the "look and feel") of all Impressions. Excite
will have final approval over the look and feel of the
promotional Impressions, which approval will not be
unreasonably withheld.
3. IMPRESSION GUARANTEES
a) During the first year of the sponsorship following the
Commencement Date, Excite will deliver not less than
[****] Impressions on the Excite Site.
b) During the second year of the sponsorship following the first
anniversary of the Commencement Date, Excite will deliver not
less than [****] Impressions on the Excite Site.
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CONFIDENTIAL
c) Excite will report traffic, Impressions and click-thrus to
Sponsor on a monthly basis.
4. CONTENT PROVIDED TO EXCITE
a) Sponsor will provide to Excite the content described in
Exhibit A ("Content"), subject to the terms and conditions
hereunder. Excite may incorporate music-related content on the
Excite Site from parties other than Sponsor so long as any
links in or associated with such third-party content relating
to opportunities to purchase Music Products will link to pages
in the Sponsor Site. Any Content which appears in the Excite
Site will be accompanied by attribution or branding
identifying Sponsor as the source of the Content and linking
to the Sponsor Site.
b) Sponsor will ensure that the Content will at all times feature
the full array of content and functionality as made generally
available by Sponsor at the Sponsor Site and its related Web
sites, through any other means of distribution of Sponsor's
own branded service or through any other third-party
relationship, where Sponsor controls the Content.
c) Sponsor and Excite will determine mutually agreeable methods
for the transmission and incorporation of updates to the
Content.
d) Excite will have sole control over the "look and feel" of the
Excite Site and the Excite Network. Excite will have sole
control over the content, composition, "look and feel" and
distribution of the Broadcast Pages. Excite will have sole
responsibility for providing, hosting and maintaining, at its
expense, the Excite Network and for providing and delivering
the Broadcast Pages and for integration of Content into the
Broadcast Pages.
e) Sponsor will have sole responsibility for providing, at its
expense, the Content to Excite.
5. THE CO-BRANDED AREA OF THE SPONSOR SITE AND DISTRIBUTION THROUGH THE
EXCITE SITE AND THE BROADCAST PAGES
a) Sponsor will design and create Web pages ("Co-Branded Pages"
or, collectively, the "Co-Branded Area") in the Sponsor Site
incorporating music-related content to be mutually determined
by the parties including but not limited to Content described
in Exhibit A, subject to the terms and conditions hereunder.
Each Co-Branded Page will display the name and/or brands of
Sponsor and Excite.
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CONFIDENTIAL
Sponsor and Excite will collaborate on the "look and feel" of
the Co-Branded Pages including, but not limited to, the
display, appearance and placement of the parties' respective
names and/or brands and of advertising displayed on the
Co-Branded Pages. Excite will have final approval over the
"look and feel" of the Co-Branded Pages, which approval will
not be unreasonably withheld.
b) The Co-Branded Area will reside completely on the Sponsor
Site. Sponsor will have sole responsibility for providing and
maintaining, at its expense, the Sponsor Site, the Co-Branded
Area, the content displayed on the Co-Branded Site and any
updates thereto.
c) Each Co-Branded Page will include one or more links to the
Excite Site. Excite will supply Sponsor with the URLs for
these links.
d) Excite may, upon fifteen (15) days prior notice to Sponsor,
request reasonable revisions to the Co-Branded Area as needed
to reflect changes that will not adversely affect Sponsor,
such as changes to Excite's name and/or brand or changes to
the URLs for the links to the Excite Site. Sponsor will use
reasonable efforts to accommodate Excite's requested changes
within the fifteen (15) day period.
e) Excite may incorporate reasonable portions of the Content on
the Excite Site. Each such display of the Content will count
as an Impression, as defined in Section 2(a). Excite will
provide links to the Co-Branded Area from any pages on the
Excite Site on which the Content appears. In its discretion,
Excite may elect to provide additional links to the Co-Branded
Area from other locations on the Excite Network and/or
Broadcast Pages.
f) Reasonable excerpts or portions of the Content may be
incorporated into Broadcast Pages, at Excite's discretion.
Excite will have sole control over of the content,
composition, "look and feel" and distribution of the Broadcast
Pages.
6. PROMOTIONS
a) Excite and Sponsor will work together in good faith to create
promotions specifically for customers of the Co-Branded Area.
Such joint promotions, when possible and where Sponsor
controls any applicable rights, will include but not be
limited to the following:
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<PAGE> 7
CONFIDENTIAL
- [****]
- [****]
- [****]
- [****]
- [****]
- [****]
- [****]
- [****]
- [****]
- [****]
b) Neither party will make any public statement, press release or
other announcement relating to the terms of or existence of
this Agreement without the prior written approval of the
other. Notwithstanding the foregoing, Sponsor hereby grants to
Excite the right to issue an initial press release, the timing
and wording of which will be subject to Sponsor's reasonable
approval, regarding the relationship between Excite and
Sponsor.
7. SPONSORSHIP FEES AND TRANSACTION COMMISSIONS
a) [****] will be due to Excite on the Effective Date as
compensation for Excite's costs of initiating access to the
Excite Site, programming costs, set-up costs and other
expenses associated with Excite's initiation of the links,
placements, advertisements and promotions contemplated by the
Agreement.
b) Sponsor will pay Excite [****] per year as compensation for
being the exclusive online retail music store sponsor of the
Excite Site.
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CONFIDENTIAL
c) Sponsor will pay Excite [****] in the first year of the term
of the Agreement as compensation for on-going programming,
links, placements, advertisements and promotions contemplated
by this Agreement.
d) Sponsor will pay Excite [****] in the second year of the term
of the Agreement as compensation for on-going programming,
links, placements, advertisements and promotions contemplated
by this Agreement.
e) Sponsor will make payments to Excite according to the
following schedule:
<TABLE>
<CAPTION>
DATE PAYMENT
---- -------
<S> <C>
Effective Date [****]
Commencement Date [****]
12/31/97 [****]
1/1/98 [****]
4/1/98 [****]
7/1/98 [****]
10/1/98 [****]
1/1/99 [****]
4/1/99 [****]
7/1/98 [****]
</TABLE>
f) Sponsor will pay Excite a share of all gross margins Sponsor
realizes on transactions, advertising, sponsorship, promotions
and any other revenue generated during each year of the term
of the Agreement on the Sponsor Site as a result of users
referred from the Excite Site ("Total Revenue"), subject to
the following conditions:
i) "Gross margin" is defined as [****].
ii) Total Revenue will be measured at the end of every
three months after the Commencement Date. This
three-month Total Revenue amount will be compared to
an amount equal to two (2) times the corresponding
three-month share of the applicable sponsorship fee
described in Sections 6(c) and 6(d) (each pro rata
share a "Revenue Floor").
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iii) If the Total Revenue earned by Sponsor during the
three-month period exceeds the total of the Revenue
Floor applicable to the same three-month period,
Sponsor will pay Excite [****] of the gross margin
Sponsor realizes on the gross revenue amount equal to
the excess of the Total Revenue over the Revenue
Floor during the three-month period.
iv) If the Total Revenue earned by Sponsor during the
three-month period does not exceed the Revenue Floor
applicable to the same three-month period, Sponsor
will not be obligated to pay Excite any share of the
gross revenue realized during the three-month period.
g) Payments of shared gross margin will be due to Excite within
thirty (30) days of the end of each calendar quarter in which
the revenue is recognized by Sponsor.
h) With each payment, Sponsor will provide to Excite
documentation reasonably detailing the calculation of the
payment.
i) Sponsor will maintain accurate records with respect to the
calculation of all payments due under this Agreement. Excite
may, upon no less than thirty (30) days prior written notice
to Sponsor, cause an independent Certified Public Accountant
to inspect the records of Sponsor reasonably related to the
calculation of such payments during Sponsor's normal business
hours. The fees charged by such Certified Public Accountant in
connection with the inspection will be paid by Excite unless
the payments made to Excite are determined to have been less
than ninety percent (90%) of the payment owed to Excite, in
which case Sponsor will be responsible for the payment of the
reasonable fees for such inspection.
8. USER DATA AND USAGE REPORTS
a) All data concerning users and their behavior relating to the
use of the Excite Site will be owned solely by Excite. Data
relating to the use of Sponsor's Site (excluding users
referred from the Excite Site) will be owned solely by
Sponsor. Data relating to the use of the Co-Branded Pages will
be jointly owned and shared by both parties.
b) All jointly owned and shared data will be held in confidence
and will not be used except in accordance with reasonable
guidelines to be mutually agreed upon by the parties.
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c) Sponsor and Excite will each provide the other via email usage
reports containing the information set forth in Exhibit B
("Usage Reports"). Each Usage Report will cover a calendar
month and will be delivered within fifteen (15) days following
the end of the applicable month. The parties may, by mutual
written agreement, alter the content of the Usage Reports.
d) SPONSOR AND EXCITE WILL USE REASONABLE EFFORTS TO ENSURE THE
ACCURACY OF THE USAGE REPORTS BUT NEITHER PARTY WARRANTS THAT
THE USAGE REPORTS WILL CONFORM TO ANY SPECIFICATIONS AT ANY
GIVEN TIME. NEITHER PARTY WILL BE HELD LIABLE FOR ANY CLAIMS
AS THEY RELATE TO SUCH USAGE REPORTS, EXCEPT TO THE EXTENT
THAT SUCH USAGE REPORTS SERVE AS THE BASIS FOR PAYMENTS UNDER
THIS AGREEMENT.
9. CONTENT OWNERSHIP AND LICENSE
a) Sponsor will retain all right, title and interest in and to
the Content worldwide (including, but not limited to,
ownership of all copyrights and other intellectual property
rights therein). Subject to the terms and conditions of this
Agreement, Sponsor hereby grants to Excite a royalty-free,
non-exclusive, worldwide license to use, reproduce,
distribute, transmit and publicly display the Content in
accordance with this Agreement and to sub-license the Content
to Excite's wholly-owned subsidiaries or to joint ventures in
which Excite participates for the sole purpose of using,
reproducing, distributing, transmitting and publicly
displaying the Content in accordance with this Agreement
b) Excite will retain all right, title, and interest in and to
the Excite Site and the Excite Network and the Broadcast Pages
worldwide (including, but not limited to, ownership of all
copyrights, look and feel and other intellectual property
rights therein).
10. TRADEMARK OWNERSHIP AND LICENSE
a) Sponsor will retain all right, title and interest in and to
its trademarks, service marks and trade names worldwide,
subject to the limited license granted to Excite hereunder.
b) Excite will retain all right, title and interest in and to its
trademarks, service marks and trade names worldwide, subject
to the limited license granted to Sponsor hereunder.
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CONFIDENTIAL
c) Each party hereby grants to the other a non-exclusive, limited
license to use its trademarks, service marks or trade names
only as specifically described in this Agreement. All such use
shall be in accordance with each party's reasonable policies
regarding advertising and trademark usage as established from
time to time.
d) Upon the expiration or termination of this Agreement, each
party will cease using the trademarks, service marks and/or
trade names of the other except:
i) As the parties may agree in writing; or
ii) To the extent permitted by applicable law.
11. TERMINATION
a) If Excite fails to deliver the guaranteed number of
Impressions on the Excite Site during the first year, Excite
will use commercially reasonable efforts to "make good" the
shortfall. If Excite fails to "make good" the shortfall within
[****] following the first year end, Sponsor may terminate the
Agreement in accordance with Section 11 (b).
b) If Excite fails to deliver the guaranteed number of
Impressions on the Excite Site during the second year, Excite
will use commercially reasonable efforts to "make good" the
shortfall within [****] following the second year end.
However, the term of this Agreement will continue until Excite
has made good the guaranteed number of Impressions on the
Excite Site. Sponsor will not be obligated to make
sponsorship, advertising or exclusivity payments to Excite
during the "make good" period after the second year of the
Agreement, but Sponsor will continue to make revenue sharing
payments as described in Section 7(e). For the purposes of the
calculation of revenue sharing during this "make good" period
only, the "Revenue Floor" from the last quarter of the second
year of the term of the Agreement will apply.
c) Either party may terminate this Agreement if the other party
materially breaches its obligations hereunder and such breach
remains uncured for thirty (30) days following the notice to
the breaching party of the breach, with the following
exceptions:
i) Excite will promptly notify Sponsor of any errors,
failures or outages of the Content. Sponsor will
promptly notify Excite of any errors, failures or
outages of the Co-Branded Area.
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<PAGE> 12
CONFIDENTIAL
Sponsor will take all reasonable measures to correct
any such errors or outages as soon as reasonably
possible. In the event of three or more errors,
failures or outages of the Content or the Co-Branded
Area in any thirty (30) day period, Excite may elect
to terminate this Agreement upon fifteen days written
notice to Sponsor, unless Sponsor demonstrates to
Excite's reasonable satisfaction before the
expiration of the fifteen (15) day notice period that
the cause(s) of the errors, failures or outages have
been corrected; or
ii) Sponsor will ensure that the Content will at all
times be at least substantially similar to any other
source of comparable topical content available on the
Internet in terms of the following factors, taken as
a whole: (i) breadth and depth of coverage, (ii)
timeliness of content updates and (iii) reputation
and ranking based on a cross-section of third party
reviewers in terms of features, functionality,
quality and other qualitative factors. In the event
that Sponsor fails to meet these quality criteria,
Excite may terminate this agreement on thirty (30)
days written notice and enter into an other
arrangements for the acquisition of similar content,
unless Sponsor demonstrates to Excite's reasonable
satisfaction before the expiration of the thirty (30)
day notice period that the deficiencies in the
Content have been corrected.
d) All payments that have accrued prior to the termination or
expiration of this Agreement will be payable in full within
thirty (30) days thereof.
e) The provisions of Section 12 (Confidentiality), Section 13
(Warranty and Indemnity), Section 14 (Limitation of Liability)
and Section 15 (Dispute Resolution) will survive any
termination or expiration of this Agreement.
12. CONFIDENTIALITY
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<PAGE> 13
CONFIDENTIAL
a) For the purposes of this Agreement, "Confidential Information"
means information about the disclosing party's (or its
suppliers') business or activities that is proprietary and
confidential, which shall include all business, financial,
technical and other information of a party marked or
designated by such party as "confidential" or "proprietary";
or information which, by the nature of the circumstances
surrounding the disclosure, ought in good faith to be treated
as confidential.
b) Confidential Information will not include information that (i)
is in or enters the public domain without breach of this
Agreement, (ii) the receiving party lawfully receives from a
third party without restriction on disclosure and without
breach of a nondisclosure obligation or (iii) the receiving
party knew prior to receiving such information from the
disclosing party or develops independently.
c) Each party agrees (i) that it will not disclose to any third
party or use any Confidential Information disclosed to it by
the other except as expressly permitted in this Agreement and
(ii) that it will take all reasonable measures to maintain the
confidentiality of all Confidential Information of the other
party in its possession or control, which will in no event be
less than the measures it uses to maintain the confidentiality
of its own information of similar importance.
d) Notwithstanding the foregoing, each party may disclose
Confidential Information (i) to the extent required by a court
of competent jurisdiction or other governmental authority or
otherwise as required by law or (ii) on a "need-to-know" basis
under an obligation of confidentiality to its legal counsel,
accountants, banks and other financing sources and their
advisors.
e) The information contained in the Usage Reports provided by
each party hereunder will be deemed to be the Confidential
Information of the disclosing party.
f) The terms and conditions of this Agreement will be deemed to
be the Confidential Information of each party and will not be
disclosed without the written consent of the other party.
13. WARRANTY AND INDEMNITY
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<PAGE> 14
CONFIDENTIAL
a) Sponsor warrants that it owns, or has obtained the right to
distribute and make available as specified in this Agreement,
any and all content provided to Excite or made available to
third parties in connection with this Agreement.
b) Sponsor warrants that the Content will comply with the
description and technical specifications contained in Exhibit
A.
c) Excite will indemnify, defend and hold harmless Sponsor, its
affiliates, officers, directors, employees, consultants and
agents from any and all third party claims, liability, damages
and/or costs (including, but not limited to, attorneys fees)
arising from the breach of any warranty, representation or
covenant in this Agreement. Sponsor will promptly notify
Excite of any and all such claims and will reasonably
cooperate with Excite with the defense and/or settlement
thereof; provided that, if any settlement requires an
affirmative obligation of, results in any ongoing liability to
or prejudices or detrimentally impacts Sponsor in any way and
such obligation, liability, prejudice or impact can reasonably
be expected to be material, then such settlement shall require
Sponsor's written consent (not to be unreasonably withheld or
delayed) and Sponsor may have its own counsel in attendance at
all proceedings and substantive negotiations relating to such
claim.
d) Sponsor will indemnify, defend and hold harmless Excite, its
affiliates, officers, directors, employees, consultants and
agents from any and all third party claims, liability, damages
and/or costs (including, but not limited to, attorneys fees)
arising from:
i) The breach of any warranty, representation or
covenant in this Agreement; or
ii) Any claim that the Content infringes or violates any
third party's copyright, patent, trade secret,
trademark, right of publicity or right of privacy or
contains any defamatory content.
Excite will promptly notify Sponsor of any and all such claims
and will reasonably cooperate with Sponsor with the defense
and/or settlement thereof; provided that, if any settlement
requires an affirmative obligation of, results in any ongoing
liability to or prejudices or detrimentally impacts Excite in
any way and such obligation, liability, prejudice or impact
can reasonably be expected to be material, then such
settlement shall require Excite's written consent (not to be
unreasonably withheld or
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<PAGE> 15
CONFIDENTIAL
delayed) and Excite may have its own counsel in attendance at
all proceedings and substantive negotiations relating to such
claim.
e) EXCEPT AS SPECIFIED IN THIS AGREEMENT, NEITHER PARTY MAKES ANY
WARRANTY IN CONNECTION WITH THE SUBJECT MATTER OF THIS
AGREEMENT AND HEREBY DISCLAIMS ANY AND ALL IMPLIED WARRANTIES,
INCLUDING ALL IMPLIED WARRANTIES OF MERCHANTABILITY AND
FITNESS FOR A PARTICULAR PURPOSE REGARDING SUCH SUBJECT
MATTER.
14. LIMITATION OF LIABILITY
EXCEPT UNDER SECTION 13(c) and (d), IN NO EVENT WILL EITHER
PARTY BE LIABLE TO THE OTHER FOR ANY SPECIAL, INCIDENTAL OR
CONSEQUENTIAL DAMAGES, WHETHER BASED ON BREACH OF CONTRACT,
TORT (INCLUDING NEGLIGENCE) OR OTHERWISE, WHETHER OR NOT THAT
PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGE. THE
LIABILITY OF EXCITE FOR DAMAGES OR ALLEGED DAMAGES HEREUNDER,
WHETHER IN CONTRACT, TORT OR ANY OTHER LEGAL THEORY, IS
LIMITED TO, AND WILL NOT EXCEED, THE AMOUNTS ACTUALLY PAID BY
SPONSOR TO EXCITE HEREUNDER.
15. DISPUTE RESOLUTION
a) The parties agree that any breach of either of the parties'
obligations regarding trademarks, service marks or trade names
and/or confidentiality would result in irreparable injury for
which there is no adequate remedy at law. Therefore, in the
event of any breach or threatened breach of a party's
obligations regarding trademarks, service marks or trade names
or confidentiality, the aggrieved party will be entitled to
seek equitable relief in addition to its other available legal
remedies in a court of competent jurisdiction.
b) In the event of disputes between the parties arising from or
concerning in any manner the subject matter of this Agreement,
other than disputes arising from or concerning trademarks,
service marks or trade names and/or confidentiality, the
parties will first attempt to resolve the dispute(s) through
good faith negotiation. In the event that the dispute(s)
cannot be resolved through good faith negotiation, the parties
will refer the dispute(s) to a mutually acceptable mediator.
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CONFIDENTIAL
c) In the event that disputes between the parties arising from or
concerning in any manner the subject matter of this Agreement,
other than disputes arising from or concerning trademarks,
service marks or trade names and/or confidentiality, cannot be
resolved through good faith negotiation and mediation, the
parties will refer the dispute(s) to the American Arbitration
Association for resolution through binding arbitration by a
single arbitrator pursuant to the American Arbitration
Association's rules applicable to commercial disputes.
16. GENERAL
a) Assignment. Neither party may assign this Agreement, in whole
or in part, without the other party's written consent (which
will not be unreasonably withheld), except that no such
consent will be required in connection with (i) a merger,
reorganization or sale of all, or substantially all, of such
party's assets or (ii) either party's assignment and/or
delegation of its rights and responsibilities hereunder to a
wholly-owned subsidiary or joint venture in which such party
holds a controlling interest. Any attempt to assign this
Agreement other than as permitted above will be null and void.
b) Governing Law. This Agreement will be governed by and
construed in accordance with the laws of the State of New York
c) Notice. Any notice under this Agreement will be in writing and
delivered by personal delivery, express courier, confirmed
facsimile, confirmed email or certified or registered mail,
return receipt requested, and will be deemed given upon
personal delivery, one (1) day after deposit with express
courier, upon confirmation of receipt of facsimile or email or
five (5) days after deposit in the mail. Notices will be sent
to a party at its address set forth below or such other
address as that party may specify in writing pursuant to this
Section.
d) No Agency. The parties are independent contractors and will
have no power or authority to assume or create any obligation
or responsibility on behalf of each other. This Agreement will
not be construed to create or imply any partnership, agency or
joint venture.
e) Force Majeure. Any delay in or failure of performance by
either party under this Agreement will not be considered a
breach of this Agreement and will be excused to the extent
caused by any occurrence beyond the reasonable control of such
party including,
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CONFIDENTIAL
but not limited to, acts of God, power outages and
governmental restrictions.
f) Severability. In the event that any of the provisions of this
Agreement are held by to be unenforceable by a court or
arbitrator, the remaining portions of the Agreement will
remain in full force and effect.
g) Entire Agreement. This Agreement is the complete and exclusive
agreement between the parties with respect to the subject
matter hereof, superseding any prior agreements and
communications (both written and oral) regarding such subject
matter. This Agreement may only be modified, or any rights
under it waived, by a written document executed by both
parties.
N2K Inc. Excite, Inc.
By: /s/ Jonathan Diamond By: /s/ George Bell
-------------------------- ------------------------
Name: Jonathan Diamond Name: George Bell
-------------------------- ------------------------
Title: Vice Chairman Title: Pres. and CEO
-------------------------- ------------------------
Date: 9/23/97 Date: 9/23/97
-------------------------- ------------------------
55 Broad Street, 26th Floor 555 Broadway
New York, New York, 10004 Redwood City, California 94063
415.568.6000 (voice)
415.568.6030 (fax)
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CONFIDENTIAL
EXHIBIT A
CONTENT DESCRIPTION AND TECHNICAL SPECIFICATIONS
FOR THE CONTENT
Sponsor content shall be defined as any or all content and services controlled
by N2K available via the main Music Boulevard site (http://www.musicblvd.com),
the Music Store. In addition, Excite reserves the right to draw upon the
editorial content controlled by N2K and available via N2K's network of
music-related sites including, but not limited to the following:
Music News
AllStar Mag - www.allstarmag.com
Labels
N2K record label, N2K Encoded Music - www.n2kencodedmusic.com
Music Genre Sites
Classical Insites - www.classicalinsites.com
Leonard Bernstein - www.leonardbernstein.com
Rocktropolis - www.rocktropolis.com
Jazz Central Station - www.jazzcentralstation.com
N2K will make good faith efforts to assist Excite in obtaining access to
music-related content under the control of third parties with which N2K has
existing relationships.
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EXHIBIT B
USAGE REPORTS
<PAGE> 1
Exhibit 10.21
Portions of this Exhibit have been omitted pursuant to a request for
confidential treatment. The omitted portions, marked by [****], have been
separately filed with the Commission.
LETTER OF INTENT
This letter sets forth in summary form the terms and conditions of the agreement
reached by and between MTV Networks ("MTVN"), a division of Viacom International
Inc. with its principle place of business located at 1515 Broadway, New York,
New York 10036, on behalf of MTV: Music Television ("MTV") and VH1 ("VH1") and
collectively ("MTV/VH1"), and N2K Entertainment, a division of N2K Inc.
("Music Boulevard" or "N2K"), with its principle place of business located at 55
Broad Street, New York, New York 10004, relating to the relationship set forth
below. The terms of our agreement are as follows:
CONCEPT:
Music Boulevard will become the music store for MTV/VH1 Online in exchange for
MTV/VH1 "owning" the Pop & Rock section of Music Boulevard (including its
subpages), which will be renamed the MTV/VH1 section (the "MTV/VH1 Section").
The MTV/VH1 Section shall be deemed to include all genres excluding jazz,
classical, country and eclectic. It is understood and agreed that MTV/VH1 Online
will provide Music Boulevard with content and present Music Boulevard as the
exclusive partner for MTV/VH1's online music sales both on-air and online in
exchange for MTV/VH1 Online receiving promotion, the right to sell advertising
and profit sharing from Music Boulevard.
TERM:
The term of the Agreement shall be for a two (2) year period commencing on the
Launch Date, provided that either party may terminate the Agreement with respect
to the second twelve (12) month period upon written notice not later than ninety
days (90) prior to the expiration of the first twelve (12) month period.
Thereafter the term shall renew automatically for one (1) year periods, unless
either party provides written notice of its election to terminate not later than
ninety (90) days prior to the expiration of the then-current term. The Launch
Date will be defined as the date when the MTV music navigation bar is linked to
Music Boulevard in accordance with this agreement ("Launch Date"). The
additional links required pursuant to this agreement will be phased in pursuant
to a mutually agreed upon schedule.
TERRITORY:
U.S., international, to be discussed.
<PAGE> 2
MTV/VH1 OFFER:
1) Exclusivity: MTV/VH1 agrees to partner with no other music retailer for
online music fulfillment services.
2) Promotion/Content:
a) VH1-On-air promotion on VH1 promoting Music Boulevard as the
partner in "VHl's Personal Music Store" online as more
specifically set forth on Exhibit B attached hereto.
b) MTV-On-air promotion on MTV promoting Music Boulevard as the
partner selling MTV music collections online as more
specifically set forth on Exhibit A attached hereto.
c) Online links to the MTV/VH1 Section throughout MTV/VH1 Online
(i.e., whenever an album is being presented, a link will be
provided to allow the user to purchase.) Whenever an artist is
being presented, a link to the artists discography will be
presented (see Exhibit #10). Each album of an artist's
discography that is available for sale will be linked to Music
Boulevard. In addition, a link to the MTV/VH1 Section will be
included in the MTV Online Navigation Bar utilized in its
music area.
d) Front screen headlines for MTV/VH1 Music News Stories on
MTV/VH1 Section as set forth on Exhibit 3. MTV/VH1 will make
available to N2K its news headlines for storage in the Music
Boulevard database during the term of this agreement. MTV will
assist N2K in the technical implementation of mirroring such
data from the MTV/VH1 servers to N2K servers. These headlines
will be sent to Music Boulevard to be used and stored in the
database as source material during the term of the agreement.
N2K will link from such headlines to the full stories on MTV
and VH1 sites. Spin will no longer appear on the Music
Boulevard site. Music Wire may continue to appear, but will
only cover country, jazz, classical, and "eclectic" genres.
e) Creation and maintenance of "MTV Collections" pages on the
MTVN server with links to Music Boulevard for purchasing. MTV
Collections shall include Top 20, Buzz Clips, Sonic Stew, MTV
Branded audio product (e.g. Compilation and Unplugged) and any
artists featured in MTV Online special programming (e.g. live
event).
f) Creation and maintenance of VH1 personal music shopper pages
on MTVN servers with links to Music Boulevard.
2
<PAGE> 3
N2K WILL PROVIDE:
1) Exclusivity: No other "Competitive" Brands (other than MTV, VH1 and Music
Boulevard) will appear on the MTV/VH1 Section, and no other source will
provide music news on those pages, or anywhere else on the Music
Boulevard site where pop/rock music news not relating to country, jazz,
classical or eclectic genres appears. "Competitive Brands" shall
include Sonic Net, Spin, E Entertainment, Rolling Stone, Addicted to
Noise, The Box, Mr. Showbiz, Much Music, Details and any other webzine
covering the MTV/VH1 genres, and Rocktropolis. It is acknowledged that
N2K has a commitment to link to the Enhanced CD database called Music
Fan from the pop/rock store. N2K may continue to link to such database
as long as it continues to contain no editorial content. This paragraph
does not preclude N2K from selling advertising to such Competitive
Brands outside of the MTV/VH1 Section which link to the respective
"Competitive Brands" sites.
2) Services:
Provide MTV/VH1 site with music fulfillment services. These services
will include:
a) Competitive pricing - Maximum non-sale of [****] (single CD),
[****] (single cassette) on all "New Releases" of Pop/Rock
titles. New Releases are defined as a release which have been
commercially available for one year or less. "Sale/Special
Price" of [****] (single CD), [****] (single cassette) or less
in MTV Collections, chat specials, VH1/MTV sales items. The
"Sale/Special Price" will be applicable to a total of 25
titles per MTV, 25 titles per VH1, and 25 titles per M2 at any
one time. The Sale/Special Price shall be applicable only to
CDs with a [****] (single CD), [****] (single cassette) or
less list price.
Competitive shipping/handling - N2K will make no margin on
shipping/ handling. If MTVN can secure a better deal and such
deal is implemented by N2K, then the current shipping/handling
will be reduced accordingly.
b) Excellent customer service.
FedEx shipping on most orders.
Open return policy to Music Boulevard.
3) Advertising Sales/Share of Revenue:
a) Right for MTV/VH1 Online to sell advertising and retain [****]
of the advertising revenue on following pages:
3
<PAGE> 4
i) MTV/VH1 Section, including all MTV/VH1 sub/pages
(e.g. New Releases, On Sale, Listening Post, Charts.)
It is understood that sub/pages are defined as pages
accessible through links from the MTV/VH1 Section of
Music Boulevard. Due to the agreement currently in
place between N2K and Billboard, for any pages
utilizing the Billboard Charts (e.g. charts subpage),
MTV will pay [****] of the net revenue from such page
to N2K, for accounting directly to Billboard.
b) MTV/VH1 has the right to sell advertising on the Store
Directory home page, Find Music home page, Browse home page
(Exhibit #4) and the subdirectory sections of Browse which
include the MTV/VH1 subgenres. (Examples include: Blues,
Christian Rock/Rap, Industrial, Techno, Pop Vocal, Pop/Rock,
R&B, Rap, and Reggae, or any pages that are substituted for
the above mentioned pages.) MTVN and N2K will split the net
advertising revenue [****] to MTV/VH1, and [****] to Music
Boulevard. In the event there is a redesign of the Music
Boulevard site, and Music Boulevard desires to remove any of
the above mentioned pages, Music Boulevard will grant to MTVN
the right to sell advertising on the same basis on other Music
Boulevard pages with similar functionality and similar levels
of traffic.
c) [****] of net profits on any sales coming from MTV/VH1 links.
d) Each party will provide the other party with a statement of
net revenues and pay the other party any amounts due within
sixty (60) days following the close of the preceding calendar
quarter. Additionally, N2K's statement will include actual
sales and expenditures. MTV/VH1 will have the ability to
access the advertising usage reports and traffic the ads
remotely.
4) Promotion:
a) All Pop/Rock pages and any references to Pop/Rock pages will
be branded with MTV/VH1, e.g., see Store Directory (Exhibit
#2), Pop/Rock Page (Exhibit #3), Browse (Exhibit #4), Pop/Rock
On Sale (Exhibit #5), Pop/Rock New Releases (Exhibit #6).
b) Links on non-artist specific pages from MTV/VH1 Section (#3),
Store Directory Page (#2), News & Views (#7), Newsstand (#8),
Related Articles (#9), to MTV Music News (replacing Music Wire
(except as set forth on #3)/Spin/Puncture). MTV and VH1 Online
will provide daily headlines.
c) Links from Pop/Rock page (#3), to MTV Collections page
featuring MTV categories (e.g. Top 20, Buzz Clips, etc.) and
links from the Browse home page (#4) directly to MTV specific
categories.
4
<PAGE> 5
d) Links from Pop/Rock page (#3) to VH1 Personal Music Store.
e) Links on all appropriate artist specific pages, e.g.
Discography, Album Description, Recent Releases, Articles,
etc.
i) Links to MTV relevant content, e.g. Biorhythms,
reviews, editorials, etc.
ii) Link to VH1 Personal Music Store
f) Link to MTV Music News from headlines on Music Boulevard home
page.
5) Advertising Commitment:
Music Boulevard will commit to purchase a total of [****] in advertising online
in year one. In each successive year, if any, the parties will negotiate in good
faith for the advertising commitment for such year. [****] will be spent on
MTV Online and VH1 Online advertising in areas where there are no Music
Boulevard links, pursuant to this proposal (e.g. MTV/Yahoo! Guide). Music
Boulevard will be charged the lowest rate paid by any advertiser on the MTV
Online site and VH1 Online site during the initial term of the agreement. The
remaining [****] will be spent by advertising the MTV/VH1 section of Music
Boulevard on third party sites, with a direct link to the MTV/VH1 area on Music
Boulevard (e.g., Infoseek, Lycos, Netscape.)
6) Other
a) MTV/VH1 has the right of prior approval over all uses by Music
Boulevard of the MTV/VH1 logos and trademarks. N2K has the
right of prior approval over all uses by MTV/VH1 of N2K
trademarks and logos including the Music Boulevard logo. The
approval process will be mutually determined. MTV/VH1 has the
right to approve a substantial redesign of the MTV/VH1 Section
including its subpages.
b) Music Boulevard will provide a [****] discount on all CD and
cassette sales to MTV/VH1 employees. N2K will be obligated to
pay MTVN any bounty commission on those discounted sales to
MTV/VH1 employees.
c) Music Boulevard and MTV/VH1 will issue a joint press release
announcing the relationship.
d) Music Boulevard will include mention of MTV and VH1 in all
Music Boulevard inserts if included with its product. In
addition, upon MTV/VH1's request, Music Boulevard agrees to
include MTV/VH1 created inserts in its packaging, provided MTV
pays for all associated costs including
5
<PAGE> 6
manufacturing and insertion costs. N2K shall have approval
over the inserts and will not make any profit on MTV/VH1
created inserts.
This Agreement shall be binding on the parties immediately upon execution of
this Agreement by MTV Networks, a division of Viacom International Inc. and N2K.
The parties hereto contemplate entering into a long form agreement with respect
to the matters set forth herein. Until such time as this Agreement is superseded
by a more formal agreement, this Agreement shall be binding, effective and
enforceable.
If the above terms and conditions accurately reflect your understanding of our
agreement, please sign where indicated.
Sincerely, Agreed to and Accepted:
MTV Networks, a division N2K Entertainment, a division
of Viacom International Inc. of N2K Inc.
By: /s/ Matthew Farber By: /s/ J. J. Rosen
---------------------------- ---------------------------------------
Name: Matthew Farber Name: J.J. Rosen
-------------------------- -------------------------------------
Title: Sr. Vice President Title: Sr. Vice President & General Manager
------------------------- ------------------------------------
Dated: 12/18/96 Dated: December 17, 1996
-------------------------- ------------------------------------
6
<PAGE> 7
EXHIBIT A
MTV/MUSIC BOULEVARD ON-AIR PROMOTION
DIRECT PROMOTION
<TABLE>
<CAPTION>
Type of Promotion Runs/Year Value
- ----------------------------------------------------------------------------------------
<S> <C> <C>
1) Incorporation in :30 Online image promo 252 (21 times a month) [****]
2) Incorporation in Soundscan show 192 (4 times a week/ [****]
16 times a month) [****]
Total Value
</TABLE>
7
<PAGE> 8
EXHIBIT B
VH1/MUSIC BOULEVARD ON-AIR PROMOTION
DIRECT PROMOTION
<TABLE>
<CAPTION>
Type of Promotion Runs/Year Value
- --------------------------------------------------------------------------------
<S> <C> <C>
1) Incorporation in :30 Online promo 520 [****]
2) Incorporation in Dayparts, i.e. House Blend 260 [****]
3) Incorporation in The Number Ones show 156 [****]
Total 1997 Promotion 936 [****]
Total 1998 Promotion* 936 [****]
TOTAL VALUE (OVER TERM OF DEAL)
</TABLE>
ADDITIONAL VALUE
Music Boulevard will also benefit from the general VH1 Online web site on-air
promotion valued at over [****] during 1997, and at least [****] during 1998.
Total additional value over the term of the deal is OVER [****].
* Note: 1998 figures are estimated to be the same or higher than 1997 estimates.
8
<PAGE> 9
= Boulevard - Store
http://www.musicblvd.com/egi-bin/t_ixi'S&TEMPLATE_PATH=/mb2/live/main
2
[LOGO]
MTV/VH1 Jazz Classical Country Eclectic
Prince | Bush | Barbra Streisand
Emancipation | Razorblade Suitcase | Mirror Has Two Faces
[ART] | [ART] | [ART]
| |
27.99 | 11.99 | 11.99
| |
----------------------------------------------------------------------------
| STORE PRICE Barry Manilow Summer Of '78 |
----------------------------------------------------------------------------
Music Boulevard: The Ultimate Online Music Store!
MTV/VH1 Music Wire Frequent Buyers
Jazz Browse the Store Club
Classical Search for Music Store Directory
Country On Sale Music Charts
Eclectic New Releases Help & E-Mail
Newsstand Store Board
Sign in
-------------------------
| |
-------------------------
[CLICK ICON] [CLICK ICON] [CLICK ICON]
click here
- --------------------------------------------------------------------------------
Frequent Buyers Club
click here
9
<PAGE> 10
[LOGO]
<TABLE>
<S> <C> <C>
Prince Madonna Rod Stewart
Emancipation Evita If We Fall In Love
[illustration] [illustration] [illustration]
27.99 21.89 11.99
</TABLE>
link link
- ------------ ------------
MTV VH1 Personal
Collections Music Store
Page
- -------------------------------------------------------------------------------
Replace with MTV and VH1 Music News daily headlines
Music Wire
Covers only nonMTV/VH1 genres
- -------------------------------------------------------------------------------
CLICK HERE FOR
THE CITY
that cannot sleep
- --------------------------------------------------------------------------------
[illustration]
Enhanced CD Database
10
<PAGE> 11
Music Boulevard: Browsing Genres http://mbl.musicblvd.com/cgi-bin/t...42900
[LOGO]
MTV/VH1
Blues Christian Rock/Rap Industrial Pop Vocal Pop/Rock R & B
- ----- ------------------ ---------- --------- -------- -----
Bozz Clps MTV Top 20 MTV Heavy Rotation MTV Sonic Stew VH1 Personal Music Store
MTV Acid Jazz Big Band Jazz Jazz Vocal Latin Jazz Ragtime
--------- -------- ---- ---------- ---------- -------
branded Audio Product
Bluegrass Country Folk Western
------------------------------
Classical Opera
--------- -----
Cajun/Zydeco Children's Instrumental Irish/Celtic Miscellaneous New Age
- ------------ ---------- ------------ ------------ ------------- -------
Religious Shows/Movies World Music
--------- ------------ -----------
JAZZ CLASSICAL POP & ROCK COUNTRY ECLECTIC
faster text mode
----------------
N2K N2K [email protected]
---------------------
11
<PAGE> 12
MTV/VH1 Branded
[Music Boulevard Logo]
Back to MTV/VH1 New Releases On Sale Listening Post Charts
here
Next Page
- -----------------------------------------------------------------------------
Car Button Cloth MTV VH1
Lemonheads links
12.49 10.49 to
- ----------------------------------------------------------- content
Worm's Life (feature,
Crash Test Dummies stories,
13.99 10.49 reviews,
- ----------------------------------------------------------- etc.)
Factory Showroom if
They Might Be Giants available
13.99 10.49
- -----------------------------------------------------------
Life Is Peachy
Korn
13.99 10.49
- -----------------------------------------------------------
Picture This
Do Or Die
12.49 10.49
- -----------------------------------------------------------
Load
Metallica
13.99 10.49
- -----------------------------------------------------------
e. 1999 Eternal
Bone Thugs-N-Harmony
12.49 10.49
12
<PAGE> 13
[LOGO]
BACK TO MTV/VH1 NEW RELEASES ON SALE LISTENING POST CHARTS
--------------- ------------ ------- -------------- ------
HERE
Next page Same as
--------- "On Sale"
- ------------------------------------------------------------------------
Emancipation
- -----------
Prince
- ------
32.99 22.49
- ------------------------------------------------
Razorblade Suitcase
- -------------------
Bush
- ----
14.99 10.49
Dru Hill
- --------
Dru Hill
- --------
14.99 10.49
- ------------------------------------------------
Hell On Earth
- -------------
Mobb Deep
- ---------
14.99 10.49
- ------------------------------------------------
House Of Music
- --------------
Tony!Toni!Tone!
- ---------------
14.99 10.49
- ------------------------------------------------
You Can't Stop The Reign
- ------------------------
Shaquille O'Neal
- ----------------
14.99 10.49
- ------------------------------------------------------
Rock Spectacle
- --------------
Barenaked Ladies
- ----------------
14.99 10.49
- ------------------------------------------------
T.H.U.G.S.
- ----------
Flesh N' Bone
- -------------
14.99 10.49
- ------------------------------------------------
13
<PAGE> 14
MUSIC BOULEVARD NEWS & VIEWS
[LOGO]
MTV MUSIC VH1 MUSIC MUSIC WIRE @COUNTRY
--------- --------- ---------- --------
NEWS NEWS
Newsstand
- --------
What's New
- ----------
Web Site Seeing
- ---------------
JAZZ CLASSICAL POP&ROCK COUNTRY ECLECTIC
Click Here
----------
faster text mode
----------------
N2K [email protected]
--- ---------------------
14
<PAGE> 15
[LOGO]
MTV Music News
VH1 Music News
Music Wire
@Country
JazzTimes (hosted by Jazz Central Station)
SPIN
Puncture
15
<PAGE> 16
[LOGO]
Afrika Bambaataa, Aphex Twin, Chemical Brothers, Electric Skychurch,
Loop Guru, Meat Beat Manifesto, Moby, My Bloody Valentine, Ninja Tune, Orb,
Orbital, Porno for Pyros, Presidents of the United States of America, Sonic
Boom, Spacemen 3, Underworld
MTV/VH1
____JAZZ ____CLASSICAL ____POP&ROCK ____COUNTRY ____ELECTRIC
faster text mode
N2K [email protected]
16
<PAGE> 17
[PHOTO OF MELISSA ETHERIDGE] [ILLUSTRATION]
link to Melissa Etheridge
Music Blvd
Discography Page
[ILLUSTRATION]
[PHOTO OF (b. May 29, 1961, Leavenworth, Kansas)
MELISSA ETHERIDGE] Melissa Etheridge received her first guitar at the age of
eight, and began writing songs of personal experience at
the age of ten. During her teens she fronted local cover
bands, and at 18 Melissa left home to attend Berklee
College of Music in Boston to study guitar. While at
Berklee, she supplemented her studies by playing
coffeehouses throughout the Boston area.
Soon after, Melissa moved to Los Angeles to make music her career. She paid her
dues playing solo gigs, performing in bars in L.A., and continued to hone her
writing skills. It was about this time that Island Records founder Chris
Blackwell heard of her and, upon seeing her unique emotional set, signed her
"on the spot."
Etheridge's Island debut went platinum; the follow-up, Brave and Crazy, went
platinum as well, and 1992's Never Enough bore "Ain't it Heavy", the track
which earned the singer a Grammy for Best Female Rock Performance. Still, it
was album number four, 1993's Yes I Am that cemented both Etheridge's celebrity
and her status as one of America's premiere performers. Etheridge's
breakthrough set boasted three top 10 hits; "I'm The Only One," "Come To My
Window," and "If I Wanted To." Five albums later, Melissa Etheridge remains one
of the most compelling songwriters in music. Her most recent release, Your
Little Secret, continues in the tradition of her previous albums, searching for
the perfect context for her heartfelt, intensely emotional songs.
17
<PAGE> 1
EXHIBIT 10.24
Portions of this Exhibit have been omitted pursuant to a request for
confidential treatment. The omitted portions, marked by [****], have been
separately filed with the Commission.
CONFIDENTIAL
INTERACTIVE MARKETING AGREEMENT
This Agreement, dated as of September 1, 1997 (the "Effective Date"), is made
and entered into by and between America Online, Inc. ("AOL"), a Delaware
corporation, with its principal offices at 22000 AOL Way, Dulles, Virginia
20166, and N2K Inc. ("N2K"), a New York corporation, with its principal offices
at 55 Broad Street, 26th Floor, New York, NY 10004 (each a "Party" and
collectively the "Parties").
INTRODUCTION
AOL and N2K each desire to enter into the interactive marketing relationship
described below, subject to the terms and conditions set forth in this
Agreement. Defined terms used but not defined in the body of the Agreement shall
be as defined on Exhibit C attached hereto.
TERMS
1. PROMOTION, DISTRIBUTION AND MARKETING.
1.1 ONLINE LISTING AND PROMOTION OF N2K.
1.1.1 AOL SERVICE. N2K will receive an integrated package of
placements, promotions and links through the AOL Service
consisting of the following.
1.1.1.1 MUSICSPACE. AOL will continuously and
prominently place an N2K banner (the "MusicSpace
Banner") on the main screen of the "MusicSpace"
channel on the AOL Service ("MusicSpace"). The
MusicSpace Banner will continuously link to the main
page of the Customized MB Site (or such other
locations as may be mutually agreed upon by the
Parties). Branded genre screens within MusicSpace
(which currently include alternative, rock, pop,
country, r&b, jazz, world and classical and which may
be supplemented or modified by AOL in its editorial
discretion) will include (i) branded "Buy Now"
buttons which link to corresponding retailing
categories within the Customized MB Site, which
categories may include certain non-retailing-oriented
content, (or such other locations as may be mutually
agreed upon by the Parties), and (ii) unbranded "Buy
Now" links from Content related to individual
Products (including "New Releases" content) to
sales/fulfillment screens within the Customized MB
Site dedicated to the individual Products in question
or other fulfillment screens mutually agreed upon by
the Parties. The look and feel of
<PAGE> 2
the MusicSpace Banner and "Buy Now" buttons and links
will be as mutually agreed upon by the Parties and
N2K will provide the graphics for such promotional
icons. In addition, AOL will integrate promotions for
and integration of the Customized MB Site in other
aspects of MusicSpace in AOL's reasonable editorial
discretion. AOL will not provide promotions,
advertising or integration within MusicSpace for any
other Online Music Retailer. Without limiting the
generality of anything else contained herein, AOL
reserves the right to redesign or modify the
organization, structure, "look and feel," navigation
and other elements of MusicSpace. In the event such
modifications materially and adversely affect the
promotional placements for N2K described above and
implemented as part of the "re-launch" of MusicSpace,
AOL will work with N2K in good faith to provide N2K
with a comparable package of promotional placements
in MusicSpace which are reasonably satisfactory to
N2K.
1.1.1.2 SHOPPING CHANNEL. AOL will provide N2K with
an "Anchor Tenant" position in the music retailing
department (the "Music Department") of the "Shopping"
channel of the AOL Service ("Shopping"). Such
positioning shall include the components described on
Exhibit B. [****] Among "Anchor Tenant" positions
devoted to music, N2K will have its choice of such
positions. The foregoing placements will link to the
Customized MB Site.
1.1.1.3 BANNER ADVERTISING. AOL will provide banner
advertising (the "Banners") which link to the
Customized MB Site in other areas of the AOL Service.
The Banners will have a value of [****], based on
AOL's then-applicable rate card. The Banners will be
rotated through the "Entertainment" channel of the
AOL Service, "Entertainment" chat rooms of the AOL
Service with music themes, select "Greenhouse"
properties on the AOL Service, "E-mail" components of
the AOL Service and such other areas of the AOL
Service as may be mutually agreed upon by the
Parties. AOL will develop the media plan for rotation
of the Banners; provided that: (i) Banners will not
be rotated through areas containing separate N2K
promotions; and (ii) areas for rotation not
specifically described above (e.g., a specific
"Greenhouse" property) will be subject to N2K's prior
written approval, which shall not be unreasonably
withheld or delayed. AOL will run [****]
2
<PAGE> 3
worth of Banners each year. N2K understands and
acknowledges that AOL plans to run approximately
thirty three percent (33%) of the Banners allocable
to each year during the period from October 1st
through December 31st. The remaining Banners will be
spread in a relatively even manner through the
remaining Initial Term of the Agreement (except to
the extent otherwise mutually agreed upon by the
Parties).
1.1.1.4 KEYWORDS. N2K will receive keywords for N2K
trademarks associated with: (i) Music Boulevard and
each of the N2K music genre-related brands (including
Jazz Central Station, Rocktropolis and Classical
Insites); and (ii) a reasonable number of names for
sites for or from which N2K has a right or license to
use the site names as keywords on the AOL Service
(for example, sites for Leonard Bernstein, Rolling
Stones and David Bowie). Keywords for any name not
specifically identified above will be subject to
approval by AOL; provided that: (i) such approval
will not be unreasonably withheld or delayed; and
(ii) AOL reserves the right to eliminate or re-direct
keywords associated with site names in its reasonable
discretion. The keywords will be included in AOL's
"Find" and "Directory of Services" features on the
AOL Service and operate independently through the
"Keyword" functionality on the AOL Service. The
keywords will link to the version of the applicable
N2K site customized for the AOL audience.
1.1.1.5 AOL ENTERTAINMENT. [****]
1.1.1.6 ADDITIONAL PLACEMENT. To the extent that AOL
creates additional, substantial music-specific
Content areas within portions of the AOL Service
separate from the areas of the AOL Service noted
above, AOL will consult in good faith with N2K
regarding the establishment of "Buy Now" or other
appropriate links from such areas to the Customized
MB Site; provided that, to the extent AOL
independently establishes any such specific links,
such links will be subject to the approval of N2K,
which will not be unreasonably withheld or delayed.
1.1.1.7 ARTIST/LABEL PROMOTIONS. To the extent that
AOL includes promotions within MusicSpace for
specific artists, record labels or recordings (but
not solely for Online Music Retailers) ("Artist
Promotions"), AOL will use reasonable efforts to
establish, in coordination with N2K, a "Buy Now" or
other link from the Artist Promotion to the
applicable product offering(s)
3
<PAGE> 4
within the Customized MB Site. To the extent that (i)
such a link is not established (because it would
prevent AOL from being able to run the Artist
Promotion or is otherwise deemed inappropriate in
AOL's reasonable editorial judgment) and (ii) the
Artist Promotion links directly to a screen where AOL
Members have the ability to order online and have
fulfilled pre-recorded music products by an entity
other than N2K, then [****]. AOL will not, in bad
faith, attempt to circumvent the intent of the
foregoing arrangement.
1.1.1.8 ONLINE MUSIC RETAILER SPONSORSHIPS. AOL will
be entitled to include promotional references to
Online Music Retailers within MusicSpace in cases
when the Online Music Retailer is acting as a sponsor
with respect to an artist tour or other event or is
otherwise engaged in a capacity other than as a
direct retailer of pre-recorded music products
("Sponsorship References"); provided that: [****].
1.1.2 AOL.COM. N2K will receive an integrated package of
placements, promotions and links through AOL.com consisting of
the following.
1.1.2.1 ENTERTAINMENT CHANNEL/MUSIC AREAS. AOL will
provide N2K with continuous placement within the
"Entertainment" channel on AOL.com ("AOL.com
Entertainment") (or the AOL.com Music Channel, as
defined below, in the event such separate channel is
created), linking to the Customized MB Site. N2K
links and promotions will also be integrated into
other AOL-programmed portions of AOL.com which are
dedicated to music, including NetFind Keyword:
"Music" and the music-retailing department of the
principal AOL shopping channel that may be created
for AOL.com. In these
4
<PAGE> 5
areas, N2K will be promoted through a combination of
banner advertisements and cross-linking "we
recommend" buttons, each linking to the Customized MB
Site. In addition, AOL and N2K will work collectively
to develop special co-branding and promotional
opportunities to appear within these areas of AOL.com
(e.g., an N2K sponsored "album release of the week"
promotion).
1.1.2.2 AOL NETFIND SEARCH. N2K will be promoted on
the "results" pages for searches conducted through
the AOL NetFind search engine on AOL.com involving
music-specific search terms designated by N2K in
consultation with AOL, subject to reasonable
technical and implementation limitations specified by
AOL, and such non-music specific search terms as may
be mutually agreed upon. These "results" promotions
will link the Customized MB Site in a manner intended
to match the focus of the search with related
pre-recorded music products offered by N2K. The
"results" promotions will be comparable in nature to
similar promotions provided by AOL to any third party
(e.g., Amazon.com). There will initially be [****]
search terms giving rise to integrated "results"
promotions; and, by [****], AOL will also provide for
N2K advertising banners to appear in connection with
searches relating to agreed upon music search terms
for up to an additional [****] search terms. As and
to the extent AOL increases the number of search
terms giving rise to integrated "results" promotions,
AOL will decrease the number of search terms giving
rise to N2K advertising banners in a proportion to be
mutually agreed upon by the Parties (with such
proportion to, in any case, provide for greater than
one advertising banner search term to be reduced for
each integrated "results" promotion search term that
is added).
1.1.2.3 OTHER ONLINE MUSIC RETAILERS. [****]
5
<PAGE> 6
1.1.3 GENERAL. The specific N2K content to be contained within
the promotional vehicles (e.g., Banners, buttons and links)
described above will be as determined by N2K, subject to AOL
technical limitations and AOL's then-standard, generally
applicable policies relating to advertising and promotions.
Except to the extent expressly described above, the specific
form, placement and nature of the promotional vehicles
detailed above will be as determined by AOL in its reasonable
editorial discretion (consistent with the editorial
composition of the applicable screens).
1.1.4 CHANGES TO AOL SERVICE. AOL reserves the right to
redesign or modify the organization, structure, "look and
feel," navigation and other elements of each of the AOL
Service and AOL.com. In the event such modifications affect
the promotional placements for N2K described above, AOL will
work with N2K in good faith to provide N2K with a comparable
package of promotional placements which are reasonably
satisfactory to N2K.
1.1.5 THIRD PARTY AREAS. [****]
Upon N2K's request, AOL will use all reasonable efforts to
introduce N2K to the entities managing any appropriate
sub-services or third party content areas in order to assist
N2K in any efforts it undertakes to establish separate
relationships with such entities.
1.1.6 OTHERWISE RESTRICTED AGREEMENTS. AOL will not in bad
faith seek to enter into a transaction with a third party that
is substantially comparable to the named Online Music
Retailers, which transaction would otherwise be prohibited
hereunder if such third party had in fact been specifically
named as an Online Music Retailer (an "Otherwise Restricted
Agreement"). If, notwithstanding the foregoing, AOL enters
into an Otherwise Restricted Agreement with a third party that
is subsequently added to the list of Online Music Retailers
pursuant to notice by N2K: [****].
6
<PAGE> 7
1.1.7 PAYMENTS FROM AOL UNDER SECTION 1. AOL will pay N2K the
amounts required pursuant to Sections 1.1.1.7, 1.1.1.8 and
1.1.6 above on a quarterly basis. With each payment, AOL will
supply a report containing information which supports the
applicable payment.
1.2 N2K CROSS-PROMOTION.
1.2.1 GENERAL. Whenever N2K provides promotions for the
availability of the N2K Areas in off-line media, including
television, radio and print advertising, N2K will promote AOL
as the preferred access provider through which a user can
access the N2K Areas (and N2K shall not implement or authorize
any other promotions on behalf of any third parties which are
inconsistent with the foregoing).
1.2.2 SPECIFIC SITE PROMOTION. In any instances when N2K makes
off-line promotional reference to its interactive Sites,
including any promotional listings of the applicable "URL" for
such web site (each a "Site Reference"), N2K shall generally
include a comparable listing of the corresponding AOL
"keyword" for the Interactive Site N2K's N2K Areas, provided
such keyword exists. In addition, within each Interactive
Site, N2K shall include the following promotions during the
Term: (i) a prominent "Try AOL" feature where users can obtain
promotional information about AOL products and services and,
at AOL's option, download or order AOL's then-current version
of the client software for the America Online(R) brand service
and client software for any other AOL products or services
(e.g., AOL's Instant Messenger service); and (ii) links from
the Interactive Sites to AOL.com. AOL agrees to pay a bounty
to N2K for each AOL Member so acquired, which bounty shall be
negotiated by the parties in good faith.
1.2.3 OPERATING SYSTEM PROMOTION. [****]
7
<PAGE> 8
1.2.4 EXCEPTIONS. N2K's will not be obligated to provide the
promotions for AOL described in this Section 1.2 in cases
when: (a) N2K does not control the applicable media vehicle;
and the party or parties controlling the media vehicle object
to inclusion of the AOL promotions; (iii) implementation of
the promotions would prevent N2K from entering into a
relationship with a third party; or (iv) where N2k would, in
order to obtain or implement the promotion, incur an
incremental, material expense which AOL does not agree to bear
following notice from N2K.
1.2.5 AOL PURCHASERS. Beginning no later than November 15,
1997 (the "Implementation Date"), to the extent N2K sends any
form of communications to AOL Purchasers, N2K will promote the
Customized MB Site as the location at which to purchase
Products (as compared to any more general or other site or
location); provided that: (i) such obligation shall not apply
with respect to AOL Members who purchased from N2K prior to
execution of this Agreement; and (ii) such obligation shall
not apply with respect to marketing solely related to the sale
of digitally distributed music products until such time as AOL
provides N2K with the opportunity to promote such sales
hereunder. Prior to the Implementation Date, N2K will not send
communications to AOL Purchasers other than communications
directly related to purchases by such AOL Purchasers.
1.3 MEMBER ACQUISITION PROGRAMS. The Parties will implement direct
marketing acquisition programs in accordance with Exhibit F in the case
of "Enhanced CDs," N2K will present AOL with a written opportunity to
be integrated with such the Enhanced CD and will negotiate in good
faith for a reasonable period of time regarding such opportunity prior
to providing any other Internet or online service provider.
1.4 AOL RESTRICTIONS. The restrictions on AOL's relationships with
third parties contained in this Agreement (and related revenue sharing
provisions enumerated in Section 1.1.7) (collectively, the "AOL
Restrictions") shall only apply with respect to the online marketing
and fulfillment of pre-recorded music products (to the extent provided
herein) and shall not restrict AOL's rights with respect to
distribution of content. The AOL Restrictions shall not apply with
respect to a particular screen until the earlier of (i) such time as
the applicable N2K promotion appears on such screen and (ii) November
17, 1997 (unless delays in the launch of the applicable N2K promotions
are the result of N2K's failure to perform any obligations with respect
to the launch of such promotions or N2K's inability to accommodate user
capacity required with respect to such promotions); provided that (i)
AOL will promptly remove the prominent "@Tower" promotions within the
genre screens of MusicSpace; and (ii) both Parties will use
commercially reasonable good faith efforts to launch the N2K promotions
provided for hereunder as soon as reasonably practicable. The AOL
Restrictions shall not apply to the extent N2K does not offer a
specific Product or category, type or form of Product (consistent with
the terms of this Agreement) (an "Unavailable Product"); provided that,
prior to AOL offering through a third
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party an Unavailable Product in a manner which would otherwise be
restricted by the AOL Restrictions: (i) AOL will provide N2K with
notice of an Unavailable Product that it wishes to offer (the "Product
Notice"); and (ii) AOL may, in its good faith discretion, facilitate
discussions between N2K and the third party or parties offering such
Unavailable Product. In such case, N2K's relationship with the third
party or parties covering promotion and sale of the Unavailable Product
through the AOL Network will be subject to AOL's participation in such
relationship on terms to be agreed upon.
2. PRODUCTION, TECHNOLOGY AND CUSTOMIZATION.
2.1 SITE PRODUCTION. AOL will be responsible for the production
associated with the Rainman Screens. The specific production resources
which AOL allocates to any production work to be performed in
connection with the Rainman Screens will be as determined by AOL in its
reasonable discretion. AOL will track the cost of such production
services, based on AOL's then-applicable production rates, provided
such rates will be competitive with the rates charged for such services
by third parties in the northern Virginia market. The aggregate amount
of such production will be credited toward amounts to be recouped
pursuant to Section 4 below. N2K will be responsible for all production
associated with the Customized MB Site and other N2K Areas.
2.2 COMMUNICATIONS. N2K will utilize a dedicated high speed connection
to maintain quick and reliable transport of information to and from the
N2K data center and AOL's chosen data center. N2K will bear the cost of
such communication line(s).
2.3 CUSTOMIZATION OF N2K AREAS.
2.3.1 WELCOME MAT. N2K will create a customized "welcome mat"
for the AOL audience for each N2K Area linked to from AOL on a
continuous basis. Any third party advertising, promotions,
sponsorships or similar content appearing on such "welcome
mat" pages will be subject to AOL's prior written approval,
which won't be unreasonably withheld or delayed.
2.3.2 COMPETITIVE CONTENT. The N2K Areas will not contain
advertisements, promotions, links, sponsorships or similar
content (i) on behalf of any entity reasonably construed to be
in competition with AOL (of which N2K is provided advance
notice) or (ii) otherwise in conflict with AOL's standard
advertising policies or any contractual AOL exclusivities.
2.3.3 TRAFFIC FLOW. N2K will take reasonable efforts to insure
that AOL traffic is either kept within the N2K Areas or
channeled back into the AOL Network (with the exception of
advertising links sold and implemented pursuant to Section 3
herein). In no event will traffic link to another online or
Internet service provider. The parties will work together
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on mutually acceptable links (including links back to the AOL
Service and AOL.com) within the N2K Areas in order to create a
robust and engaging AOL Member experience.
2.3.4 THIRD PARTY CONTENT. N2K will not include third party
content or programming ("Third Party Content") or links to
Third Party Content in the N2K Areas within four "clicks" from
the main page of the applicable N2K Area, with the exception
of: (i) the Third Party Content outlined in Exhibit G; and
(ii) the "MTV News" content currently appearing in the N2K
Areas, provided that N2K will use best efforts to remove any
link from such content to any third party site). Third Party
Content will not include links or pointers from the N2K Areas
out to third party sites (excluding advertising links which
will be governed by Section 3 below). Before obtaining Third
Party Content for incorporation within an N2K Area, N2K will
use reasonable efforts to notify AOL and provide AOL with an
opportunity to provide such Third Party Content on terms to be
determined.
2.3.5 TECHNOLOGY. N2K will not make available "streaming
audio" or any comparable audio delivery technology (other than
"wav" files, mpeg files or other downloadable, non-streamed
audio files) through any pages of N2K Areas linked to N2K
promotions appearing on the AOL Service or AOL.com. As soon as
AOL makes a streaming audio delivery technology available
through the AOL Service or a third party uses such streaming
audio delivery technology on the AOL Service, which third
party is (i) authorized by AOL to use such technology, (ii)
actively promoted by AOL or (iii) subject to a contractual
obligation to AOL whereby AOL can implement restrictions on
such third party's use of the technology (a "Use Trigger"),
AOL will promptly notify N2K of such Use Trigger and will
permit N2K to utilize such technology through its linked N2K
pages at the time and to the extent (from a scope and capacity
perspective) of the utilization by AOL or such third parties.
AOL is investigating and will be actively pursuing
implementation of streaming audio technologies, subject to its
network and other operational considerations. More generally,
in the event that AOL reasonably believes that software,
technology or other technical components of the linked N2K
Areas will materially and adversely affect AOL network or
other operations, N2K will work in good faith with AOL to
limit access to such components from the AOL Service and
AOL.com as necessary. N2K will, in good faith, work with AOL
to adopt AOL's proprietary streaming audio technology
developed by AOL's Johnson Grace subsidiary to the extent
commercially and technically feasible for N2K.
2.3.6 PRODUCTS. N2K will make available the comprehensive
offering of pre-recorded music products described on Exhibit
A. In addition, N2K will be permitted to offer other
music-specific merchandise, consisting of music-related
t-shirts, posters, videos, books, apparel and specialty items;
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provided that: (i) AOL will have no promotional obligations
with respect to any such other merchandise; and [****].
The provisions restricting AOL's relationships with Online
Music Retailers shall be deemed to apply equally to their sale
of Digitally Distributed Products for so long as N2K's
offering of Digitally Distributed Products is generally
competitive with the offerings of Digitally Distributed
Products by other Online Music Retailers in terms, taken as
whole, of price, scope and selection, quality, licensing
rights (and associated indemnifications), ease of use and
network bandwidth requirements.
2.3.7 SPECIAL OFFERINGS. To the extent permitted under
applicable law, (i) N2K will make available preferred
offerings of pre-recorded music and other merchandise to AOL
Members; and (ii) N2K will not sell Products at a lower price
through its other channels of distribution, except in the case
of periodic, limited time, special sales or marketing
promotions. To the extent N2K makes special Product offers
exclusively available to AOL Members, N2K will be referenced
within AOL's "Member Exclusives" area on the AOL Service.
3. ADVERTISING.
3.1 ADVERTISING SALES. AOL will have the first right to sell any
advertising or promotional spaces which reside on AOL servers and
appear within (i) the
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Customized MB Site, (ii) the Rainman Screens and (iii) other portions
of the N2K Areas (to the extent applicable) (collectively, the "AOL Ad
Sale Areas"), N2K will have the first right to sell any advertising or
promotional spaces which reside on N2K's servers and appear within (i)
the Customized MB Site, (ii) the Rainman Screens (to the extent
applicable) and (iii) other portions of the N2K Areas (collectively,
the "N2K Ad Sale Areas" and with the AOL Ad Sale Areas, the "Ad Sale
Areas"). The specific advertising inventory within any Ad Sale Areas
shall be as mutually agreed upon by the Parties. The parties will
mutually agree upon and implement a process which provides N2K an
opportunity to sell advertising inventory within the AOL Ad Sale Areas
which AOL has been unable to sell after a reasonable time following the
availability of the advertising inventory. N2K and AOL will cooperate
with one another in promoting and facilitating the sale of the
advertising inventory in the Ad Sales Areas. Subject to applicable
antitrust or other laws and regulations, the Parties will mutually
agree upon the target or minimum rates for advertising inventory within
the Ad Sale Areas. The sale of advertising inventory within the Ad Sale
Areas for barter compensation will be subject to the approval of both
Parties. AOL will be responsible for administering, serving, reporting
and tracking advertising appearing in the AOL Ad Sale Areas and N2K
will be responsible for administering, serving, reporting and tracking
advertising appearing in the N2K Ad Sale Areas. To the extent a Party
sells an advertisement as part of an advertising package including both
an Ad Sale Area and some separate placement location, such Party shall
allocate the payment for such advertising package between or among such
locations in an equitable fashion. For example, in an advertising
package based on guaranteed impressions, the Party would allocate
payments to the Ad Sale Area based on the percentage of guaranteed
impressions to be delivered through the Ad Sale Area. Each Party will
provide the other Party with monthly reports providing detailed
information regarding any advertising sales by such Party and any other
information relevant to the computation and sharing of Advertising
Revenues hereunder.
3.2 ADVERTISING POLICIES. Any Ad Inventory sold by N2K or its
agents within the Ad Sales Areas shall be subject to AOL's
then-standard advertising policies. In the event that AOL notifies N2K
in writing that any advertising or promotional Content associated with
any Ad Sales Area is in violation of AOL's then-standard advertising
policies, then N2K shall take commercially reasonable steps to work
with AOL to block access by AOL Members to such advertising using N2K's
then-available ad server or other technology. In the event that N2K
cannot, through its commercially reasonable efforts, block access by
AOL Members to the advertising in question, then N2K shall provide AOL
prompt written notice of such fact. AOL may then, at its option, either
(i) restrict access from the AOL Network to the advertising in question
using technology available to AOL or (ii) terminate the link from the
AOL Network to the applicable N2K Area until such time as the
advertising in question is no longer displayed. N2K will cooperate with
AOL's reasonable requests to the extent AOL elects to implement any
such access restrictions.
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4. PAYMENTS; REPORTS.
4.1 FIXED PAYMENTS. N2K will pay AOL the following guaranteed
amounts: (i) two million dollars ($2,000,000) due upon execution of
this Agreement; (ii) ten million dollars ($10,000,000) due upon the
earlier of closing of N2K's initial public offering (the "IPO") and
December 1, 1997; (iii) three million ($3,000,000) due November 1,
1998; and (iv) three million ($3,000,000) due November 1, 1999.
4.2 MARGIN SHARING. N2K and AOL will share Site Revenues as
follows:
4.2.1 During each Quarter, AOL will receive (i) [****] of Site
Revenues until such time as N2K has recouped the Quarterly
Minimum Amount, (ii) [****] of Site Revenues until such time
as N2K has recouped the Quarterly Recoupment Amount and (iii)
[****] of Site Revenues during the remainder of the Quarter.
The "Quarterly Minimum Amount" shall be [****]. The "Quarterly
Recoupment Amount" shall be: [****] for the year consisting of
the first four Quarters; [****] for the year consisting of the
second four Quarters; [****] for the year consisting of the
third four Quarters. Once the Aggregate Recoupment Amount (as
defined below) has been recouped by N2K, AOL and N2K shall at
all times thereafter [****].
4.2.2 If, as of the end of the fourth Quarter, N2K has not
earned at least a total of (i) [****] plus (ii) any Site
Revenues paid by N2K to AOL through the prior four Quarters
less (iii) any amounts paid by AOL to N2K through the prior
four Quarters (the "Annual Recoupment Amount"), then,
beginning with the fifth Quarter, AOL's revenue sharing will
be reduced, following achievement of the Quarterly Minimum
Amount, to [****] of Site Revenues until such time as N2K has
earned the Annual Recoupment Amount for the period beginning
on the Effective Date. Once the Annual Recoupment Amount has
been earned, the revenue sharing will revert back to the
procedures set forth in the preceding subjection. If, as of
the end of eighth Quarter, N2K has not earned at least a total
of (i) [****] plus (ii) any Site Revenues paid by N2K to AOL
through the prior eight Quarters less (iii) any amounts paid
by AOL to N2K through the prior eight Quarters (the "Year 2
Recoupment Amount"), then, beginning with the ninth Quarter,
AOL's revenue sharing will be reduced, following achievement
of the Quarterly Minimum Amount, to [****] of Site Revenues
until such time as N2K has earned the Year 2 Recoupment
Amount. If such Year 2 Recoupment Amount has been earned by
the end of the tenth
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Quarter, the revenue sharing will revert back to the
procedures set forth in the preceding subsection.
4.2.3 If, at the end of the Initial Term, N2k has not earned
an aggregate (i) [****] plus (ii) any Site Revenues paid by
N2K to AOL during the Initial Term less (iii) any amounts paid
by AOL to N2K during the Initial Term (the "Aggregate
Recoupment Amount"), then AOL will provide N2K with excess
advertising inventory through the AOL Network with an
aggregate value (based on AOL's then-applicable rate cards)
equal to the difference between the Aggregate Recoupment
Amount and the amounts actually earned by N2K as of the
expiration of the Initial Term.
4.3 LATE PAYMENTS. Time of payment is of the essence under this
Agreement. All amounts owed hereunder not paid within thirty (30) days
of the date when due and payable will bear interest from the date such
amounts are due and payable at the lesser of (i) prime rate and (ii)
the maximum allowable rate of interest in the Commonwealth of Virginia
for transactions between sophisticated commercial parties.
4.4 AUDITING RIGHTS. N2K shall maintain complete, clear and
accurate records of all expenses, revenues and fees in connection with
the performance of this Agreement. For the sole purpose of ensuring
compliance with this Agreement, AOL shall have the right, at its
expense, to direct an independent certified public accounting firm to
conduct a reasonable and necessary inspection of portions of the books
and records of N2K which are relevant to N2K's performance pursuant to
this Agreement. Any such audit may be conducted after twenty (20)
business days prior written notice.
4.5 TAXES. N2K shall collect and pay and indemnify and hold AOL
harmless from, any sales, use, excise, import or export value added or
similar tax or duty not based on AOL's net income, including any
penalties and interest, as well as any costs associated with the
collection or withholding thereof, including attorneys' fees.
4.6 SALES REPORTS. N2K shall provide AOL with the following
categories of information arising from AOL Purchaser activity in the
N2K Areas on a monthly basis: (i) Summary Sales Information by Day
(Date, Number of Items, Number of Orders, Total Transaction Revenues);
and (ii) Detailed Sales Information (Order Date/Timestamp (with
timestamp subject to technical feasibility), User name, SKU or Product
Description) (the "User Information"). AOL will not disclose individual
User Information to any third party. AOL will restrict its use of the
User Information to (i) internal programming and advertising rotation
purposes and (ii) informational disclosures as part of broader
aggregate data regarding AOL Members. [****]
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(provided that the foregoing will not restrict AOL's ability to
market any products or services to its subscribers or any other persons
or entities as part of more general marketing efforts which do not make
use of the screenname lists provided to AOL by N2K hereunder). More
generally, when making a payment to AOL required hereunder, N2K shall
provide to AOL by N2K hereunder, N2K shall provide AOL with a report
containing information which supports the payment, including
information identifying gross sales revenues and all items deducted or
excluded from gross sales revenues to produce Transaction Revenues.
4.7 AOL PURCHASERS. For purposes of this Agreement, "AOL
Purchasers" shall be defined to include any AOL Member or visitor to
AOL.com who: (i) enters an N2K Area via any advertisement or
promotional link, placement or reference relating to N2K or the N2K
Areas as contemplated hereunder (collectively, "N2K Promotions"); and
(ii) purchases a Product through such N2K Area; provided that any
subsequent purchases of Products by such person or entity through an
N2K site shall also give rise to Transaction Revenues hereunder (and
shall not be conditioned on the person or entity reaching the N2K site
via an N2K Promotion). AOL Purchasers shall include, without
limitation, persons or entities who arrive at the N2K Areas via a third
party information provider area on the AOL Network (an "IP Area") with
respect to which there is a traceable link, provided that both Parties
shall use commercially reasonable efforts to ensure that any links from
such IP Areas are of a traceable nature (an "IP Area").
4.8 REVENUE SHARING COVERAGE. N2K will provide AOL with quarterly
reports indicating the dollar volume of transactions involving AOL
Members who do not qualify as AOL Purchasers hereunder. In the event
that such volume reaches a level of materiality relative to the dollar
volume of transactions by AOL Purchasers in a comparable period, then
N2K will discuss in good faith with AOL the possibility of adjusting
the definition of AOL Purchasers to include all or some portion of such
AOL Members not currently covered by the definition.
5. TERM, RENEWAL AND TERMINATION.
5.1 TERM; RENEWAL. Unless earlier terminated as set forth herein,
the initial term of this Agreement shall be for a period beginning on
the Effective Date and ending after twelve Quarters ("Initial Term").
AOL will have the right to renew the Agreement for up to [****]
successive one year terms (each a "Renewal Term") by providing N2K
written notice of AOL's intention to renew no later than thirty days
priors to the commencement of the Renewal Term at issue, under one of
the two following frameworks for any Renewal Term (at AOL's option):
(x) pursuant to the terms contained herein, except that N2K will not be
obligated to make any guaranteed, minimum payments with respect to the
Renewal Term, unless mutually agreed upon by the Parties prior to the
commencement of such Renewal Term; or (y) with a [****]sharing of
Advertising and Transaction Revenues and otherwise pursuant only to
Sections 2.3.1, 2.3.2, 2.3.3, 2.3.4, 3.2, 4.3, 4.4, 4.5, 4.6, 4.7, 4.8,
5, 6 and such other terms as the Parties may mutually
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agree upon (i.e., excluding, among other things, AOL's promotional,
placement and similar commitments, the AOL Restrictions and N2K's
cross-promotional obligations); provided that with respect to AOL's
rights to renew: (a) AOL shall only be entitled to renewal under
framework (y) above for up to [****] Renewal Terms; (b) subject to the
preceding clause (a), AOL may select any combination of frameworks (x)
and (y) to apply in successive Renewal Terms (e.g., AOL may choose
framework (x) in the first Renewal Term and framework (y) in the second
Renewal Term), but once AOL has chosen framework (y) to apply for a
Renewal Term, AOL may no longer select framework (x) to apply in any
upcoming Renewal Term; and (c) with respect to renewal under framework
(y), the provisions of Sections 2.3.2, 2.3.3 and 2.3.4 of this
Agreement shall only apply for the first such Renewal Term that is
selected by AOL under such framework (y). AOL's right to renew will
apply in connection with (i) an expiration of the Initial Term or
Renewal Term and (ii) any other termination of the Agreement.
5.2 TERMINATION. Either Party may terminate this Agreement at any
time in the event of a material breach by the other Party which remains
uncured after thirty (30) days written notice thereof; provided that
AOL will not be required to provide a notice to N2K in connection with
any failure by N2K to make payments pursuant to Section 4 (and the cure
period shall therefore begin upon the occurrence of the failure to
pay). In addition, either Party may terminate this Agreement
immediately following with written notice to the other Party if the
other Party ceases to do business in the normal course, becomes or is
declared insolvent or bankrupt, is the subject of any proceeding
related to its liquidation or insolvency which is not dismissed within
ninety (90) calendar days or makes an assignment for the benefit of
creditors.
6. STANDARD TERMS. The standard online commerce terms set forth on Exhibit D
attached hereto and standard legal terms and conditions set forth on Exhibit E
attached hereto are each hereby made a part of this Agreement.
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IN WITNESS WHEREOF, the Parties hereto have executed this Agreement as of the
Effective Date.
AMERICA ONLINE, INC. N2K INC.
By: /s/ David M. Colburn By: /s/ Jonathan V. Diamond
--------------------------- -----------------------------
Print Name: David M. Colburn Print Name: Jonathan V. Diamond
Title: Sr. Vice President Title: Vice Chairman
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EXHIBIT A
DESCRIPTION OF PRODUCTS TO BE OFFERED THROUGH N2K AREAS
N2K will make available a comprehensive offering of pre-recorded music products
for purchase by AOL Members.
All N2K offerings will be in the top three (3) in industry performance and
quality averages or standards, including, without limitation, the following
specific standards: The (i) pricing of Products, (ii) scope and selection of
Products, (iii) quality of Products, (iv) customer service and fulfillment
associated with the marketing and sale of Products and (v) ease of use of the
N2K Areas shall, with respect to each measure, be competitive with that which is
offered by other Online Music Retailers.
N2K will maintain sufficient servers, software and other technical
infrastructure necessary for N2K to receive and support traffic from the AOL
Service and AOL.com on a timely basis, without producing material delays. In the
event N2K fails to satisfy this requirement AOL will have the right (in addition
to any other remedies available to AOL hereunder) to regulate the promotions it
provides to N2K hereunder to the extent necessary to minimize user delays until
such time as N2K corrects its infrastructure deficiencies.
MERCHANT CERTIFICATION PROGRAM. N2K shall participate in any generally
applicable "Certified Merchant" program operated by AOL or its authorized agents
or contractors. Such program may require merchant participants on an ongoing
basis to meet certain reasonable standards relating to provision of electronic
commerce through the AOL Service and may also require the payment of certain
reasonable, administrative certification fees to AOL or its authorized agents or
contractors operating the program.
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EXHIBIT B
ANCHOR PROMOTION
N2k shall become an "Anchor" in the music retailing department of the AOL
shopping channel. As an Anchor, N2k shall be entitled to the following:
- - One continuous (24/7) button with corporate brand or logo on the department
front screen
- - One continuous (24/7) two-line text field to promote individual product
offerings
- - Featured product with text promotion for five days per month minimum on the
relevant department screen
- - Rotation through the shopping channel search screen advertising banners along
with all other Anchors and Tenants
- - One keyword for trade name or trademark (subject to availability)
- - Participation in the following programs at no additional charge:
- - Electronic Order Blank Area
- - Bargain Basement
- - Quick Gifts
- - Event and/or theme areas (e.g., Christmas Shop)
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EXHIBIT C
DEFINITIONS
The following definitions shall apply to this Agreement:
1. Advertising Revenues
(a) For the Rainman Screens and any other portions of N2K Areas
exclusively available to AOL Members or AOL Purchasers ("AOL Only Areas"),
aggregate amounts collected (including, without limitation, revenue sharing
royalties) plus the fair market value of any other compensation received (such
as barter advertising) by N2K, AOL or either Party's agents, as the case may be,
arising from the license or sale of promotions, advertisements, links, pointers,
sponsorships or similar services or rights on or through the N2K Areas, less
applicable Advertising Sales Commissions.
(b) For each promotion, advertisement, link, pointer, sponsorship or
similar service or right on any N2K Areas linked to the AOL Service other than
AOL Only Areas (the "Open N2K Areas") (an "Open N2K Area Advertisement"), the
product of: (a) the amount collected (including, without limitation, revenue
sharing royalties) plus the fair market value of any other compensation received
(such as barter advertising) by N2K or its agents arising from the license or
sale of such Open N2K Area Advertisement attributable to a given period of time
and (b) the quotient of (i) impressions on the page containing such
advertisement by AOL Members or other persons or entities reaching such page via
AOL.com during such period of time divided by (ii) total impressions on the page
containing such Online N2K Area Advertisement by all users during such period of
time (the "Internet Advertising Quotient") (or such other percentage or formula
as is mutually agreed upon in writing by the Parties).
2. Advertising Sales Commissions. (i) Actual amounts paid as commission to
third party agencies in connection with sale of the AOL Advertisement, up to a
maximum of [****], in the event the Party has sold the AOL Advertisement
directly and will not be deducting any third party agency commissions.
3. Affiliate. Any agent, distributor, or franchise of AOL, or an entity in
which AOL holds at least a thirty percent (30%) equity interest.
4. AOL Look and Feel. The elements of graphics, design, organization,
presentation, layout, user interface, navigation and stylistic convention
(including the digital implementations thereof) which are generally associated
with online areas within the America Online(R) brand service.
5. AOL.com. The U.S. AOL.com brand web site currently located at
www.aol.com.
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6. AOL Member(s). Authorized users of the AOL Network, including any
sub-accounts using the AOL Network under an authorized master account.
7. AOL Network. (i) The U.S. America Online(R) brand service (the "AOL
Service"), (ii) any international versions of the America Online service through
which AOL or its affiliates elect to offer the Licensed Content (collectively,
with the AOL Service, the "AOL Services") and (iii) any other product or service
owned, operated, distributed or authorized to be distributed by or through AOL
or its Affiliates worldwide through which such party elects to offer the
Licensed Content (which may include, without limitation, internet sites
promoting AOL products and services and any "offline" information browsing
products of AOL or its Affiliates).
8. AOL Sales Royalties. Per unit sales royalties paid to AOL for sales of
pre-recorded music products through a page directly linked to an Artist
Promotion.
9. Commercial Launch. The commencement of the general availability of the
N2K Areas to AOL Members (by means other than unadvertised keyword access).
10. Confidential Information. Any information relating to or disclosed in
the course of the Agreement, which is or should be reasonably understood to be
confidential or proprietary to the disclosing Party, including, but not limited
to, the material terms of this Agreement, information about AOL Members,
technical processes and formulas, source codes, product designs, sales, cost and
other unpublished financial information, product and business plans,
projections, and marketing data. "Confidential Information" shall not include
information (a) already lawfully known to or independently developed by the
receiving Party, (b) disclosed in published materials, (c) generally known to
the public, (d) lawfully obtained from any third party, or (e) required or
reasonably advised to be disclosed by law.
11. Content. Information, materials, features, Products, advertisements,
promotions, links, pointers and software.
12. Customized MB Site. A version of N2K's online retail store, branded
"Music Boulevard," customized in technical and editorial attributes to conform
to the terms contained herein.
13. Design Package. Content plans, flow charts and artwork which together
represent the appearance, user interface, content and operation of the N2K
Areas.
14. Licensed Content. All content, services and Products offered through
the N2K Areas pursuant to this Agreement, including any modifications, upgrades,
updates, enhancements and related documentation.
15. N2K Interactive Site. Any interactive site or area which is managed,
maintained or owned by N2K or its agents (excluding N2K encoded music record
company sites), including, by way of example and without limitation, (i) N2K
sites on the World Wide
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Web portion of the Internet or (ii) a channel or area delivered through a "push"
product such as the Pointcast Network or interactive environment such as
Microsoft's proposed "Active Desktop."
16. N2K Areas. The specific N2K Interactive Sites devoted to the promotion
and retail sale of pre-recorded music products which are part of or linked to
from the AOL Service and AOL.com (i.e., not linked through an intermediate third
party site) pursuant to the promotional terms set forth within the Agreement
(including, without limitation, the Rainman Screens, Genre Areas, e.g.,
Rocktropolis, and the Customized MB Site).
17. Online Music Retailer. The following third party entities: [****]. In
the event N2K notifies AOL in writing of any additional third party entities
engaged in the online marketing and sale of pre-recorded music products
substantially comparable to the entities named above, then the parties shall
discuss in good faith the addition of such entities to the foregoing list. If an
entity is also engaged in activities other than the online marketing and sale of
pre-recorded music products (including, without limitation, the sale of
memberships to a music buying club), then the restrictions described in the
Agreement with respect to Online Music Retailers shall only relate to the
portion of such entity which is devoted to the online music retailing
activities. In no event shall "Online Music Retailers" include any artists,
record labels, music buying clubs or general retailers of Products (e.g.,
Walmart) that are not primarily devoted to online music retailing activities (so
long as promotions of such general retailers appearing on the screens subject to
restrictions on Online Music Retailers do not promote the sale of pre-recorded
music products).
18. Overhead Accounts. Accounts of AOL Members for which AOL does not
require payment of standard AOL subscription and usage charges.
19. Products. Any product, good or service which N2K offers, sells or
licenses to AOL Purchasers through the N2K Areas.
20. Quarter. In the case of the first quarter, the period beginning on
September 1, 1997 and ending January 31, 1998; for each subsequent quarter,
three calendar months (e.g., February 1, 1998 through April 30, 1998, May 1,
1998 through July 31, 1998, etc.)
21. Rainman Screens. Certain introductory screens to the Customized MB Site
(up to four total) published in AOL's proprietary Rainman publishing language.
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22. Site Revenues. Site Revenues shall consist of Advertising Revenues, AOL
Sales Royalties, Transaction Revenues and, to the extent provided in Section 1
of the Agreement, Sponsorship Revenues.
23. Term. The Initial Term together with any Renewal Terms.
24. Transaction Revenues. Aggregate amounts collected by N2K and its agents
from the sale of Products to AOL Purchasers, less (a) the actual, direct costs
of Product (as described below), per unit sold content licensing fees, per unit
sold inventory charges, shipping, handling, credit card fees, and applicable
credits and refunds and, in the case of transactions by AOL Purchasers linking
to N2K from an IP Area, (b) actual royalties or commissions paid to the
information provider sponsoring such IP Area; provided that, except for credits
and refunds, any of the above fees which are "netted" out shall reflect (i)
actual fees paid to third parties in arms length transactions or, in the event
N2K provides the service associated with such fee, (ii) fee allocations which
are competitive with the rates charged for the applicable service by third
parties in the applicable market.
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EXHIBIT D - AOL ONLINE COMMERCE TERMS & CONDITIONS
1. AOL Network Distribution. N2K shall not authorize or permit any third
party to distribute or promote the N2K Areas through the AOL Network absent
AOL's prior written approval.
2. Additional Content. In the event that N2K wishes to offer any
categories or types of Content or Products in addition to those items described
on Exhibit A or elsewhere in the Agreement (the "Additional Content"), N2K shall
notify AOL in writing. N2K's right to offer any non-music-related Additional
Content through the Rainman Screens, Customized MB Site or other linked N2K Area
shall be subject to AOL's prior written approval.
3. Contests. N2K shall take all steps necessary to ensure that any
contest, sweepstakes or similar promotion conducted or promoted through an N2K
Areas (a "Contest") complies with all applicable federal, state and local laws
and regulations.
4. Navigational Icons. AOL shall be entitled to establish navigational
icons, links and pointers connecting each N2K Areas (or portions thereof) with
other content areas on or outside of the AOL Network.
5. Web Forms. In the event that all or any portions of the N2K Areas are
contained within HTML-based World Wide Web forms (or any other forms different
from AOL's proprietary publishing forms) ("Web Forms"), N2K shall take all
commercially reasonable steps to ensure that: (i) the functionally and features
within the Web Forms are optimized for the client software then in use by a
majority of AOL Members; and (ii) the Web Forms are designed and populated in a
manner intended to minimize delays when AOL Members attempt to access such Web
Forms.
6. Disclaimers. Upon AOL's request, N2K agrees to include within the
Rainman Screens a product disclaimer (the specific form and substance to be
mutually agreed upon by the Parties) indicating that transactions are solely
between N2K and AOL Members purchasing products from N2K.
7. AOL Look and Feel. N2K acknowledges and agrees that AOL shall own all
right, title and interest in and to the elements of graphics, design,
organization, presentation, layout, user interface, navigation and stylistic
convention (including the digital implementations thereof) which are generally
associated with online areas contained within the AOL Network ("the AOL Look and
Feel"), subject to N2K's ownership rights in any N2K trademarks or copyrighted
material within each N2K Areas.
8. Management of N2K Areas. N2K shall manage, review, delete, edit,
create, update and otherwise manage all Products available on or through each
N2K Areas, in a timely and professional manner and in accordance with the terms
of this Agreement. N2K shall ensure that each N2K Area is current, accurate and
well-organized at all times. N2K warrants that each N2K Areas: (i) shall not
infringe on or violate any copyright,
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trademark, U.S. patent or any other third party right (including, without
limitation, any music performance or other music-related right); (ii) shall not
violate AOL's then-applicable Terms of Service; and (iii) shall not contain any
Product which violates any applicable law or regulation. AOL shall have no
obligations with respect to the Products available on or through any N2K Areas,
including, but not limited to, any duty to review or monitor any such Products.
9. Duty to Inform. N2K shall promptly inform AOL of any information
related to any N2K Areas which could reasonably lead to a claim, demand, or
liability of or against AOL and/or its affiliates by any third party.
10. Customer Service. It is the sole responsibility of N2K to provide
customer service to persons or entities purchasing Products through the AOL
Network ("Customers"). N2K shall bear full responsibility for all customer
service, including without limitation, order processing, billing, fulfillment,
shipment, collection and other customer service associated with any Products
offered, sold or licensed through each N2K Area, and AOL shall have no
obligations whatsoever with respect thereto. N2K shall receive all emails from
Customers via a computer available to N2K's customer service staff and generally
respond to such emails within one business day of receipt. N2K shall receive all
orders electronically and generally process all orders within one business day
of receipt, provided Products ordered are not advance order items. N2K shall
ensure that all orders of Products are received, processed, fulfilled and
delivered undamaged in professional packaging on a timely and professional
basis, with no less than seventy percent (70%) of orders shipped within five
days from the date of order at any given time. N2K shall ship the displayed
Product at the price displayed in the N2K Areas without substituting and offer
AOL Members who purchase Products through such N2K Areas a money back
satisfaction guarantee. As part of N2K's customer service operations, N2K shall
provide the following e-mail correspondence to AOL Members ordering Products
through an N2K Areas: (i) an e-mail within twenty-four hours of receiving an
order confirming receipt of such order and any relevant information regarding
the status of the order (e.g., temporary back-order); and (ii) an e-mail within
twenty-four hours of shipping any Product which has been ordered through such
N2K Areas. Each such e-mail shall include the unique order number for the order,
N2K's toll-free customer service and an approximate delivery date for the
Product in question. N2K shall regularly monitor each N2K Areas to minimize or
eliminate Products which are either out-of-stock or discontinued and N2K shall
have the ability to handle volumes in excess of 25% to 50% of N2K's average
daily volume. N2K shall include a link within each N2K Area to a description of
N2K's shipping, return, warranty and other customer service policies. N2K shall
bear all responsibility for compliance with federal, state and local laws in the
event that Products are out of stock or are no longer available at the time an
order is received. N2K shall also comply with the requirements of any federal,
state or local consumer protection or disclosure law. Payment for Products shall
be collected by N2K directly from customers. As between N2K and AOL, N2K shall
bear the economic risk of shipment and payment for Products. N2K's order
fulfillment operation shall be subject to AOL's reasonable review.
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11. Access Equipment. N2K shall provide all computer, telephone and other
equipment or resources necessary for N2K to access the AOL Network, except for
the AOL proprietary client software necessary to access the AOL Network.
12. Overhead Accounts. To the extent N2K has been granted any Overhead
Accounts, N2K shall be responsible for the actions taken under or through its
Overhead Accounts, which actions are subject to AOL's applicable Terms of
Service and for any surcharges, including, without limitation, all premium
charges, transaction charges, and any applicable communication surcharges
incurred by any Overhead Account issued to N2K, but N2K shall not be liable for
charges incurred by any Overhead Account relating to AOL's standard monthly
usage fees and standard hourly charges, which charges AOL shall bear. Upon the
termination of this Agreement, all Overhead Accounts, related screen names and
any associated usage credits or similar rights, shall automatically terminate.
AOL shall have no liability for loss of any date or content related to the
proper termination of any Overhead Account.
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EXHIBIT E - STANDARD LEGAL TERMS & CONDITIONS
1. Promotional Materials/Press Releases. Each Party will submit to the
other Party, for its prior written approval, which shall not be unreasonably
withheld or delayed, any marketing, advertising, press releases, and all other
promotional materials related to the N2K Areas and/or referencing the other
Party and/or its trade names, trademarks, and service marks, including, without
limitation, any N2K disclosures in connection with its IPO (the "Materials");
provided, however, that either Party's use of screen shots of the N2K Areas for
promotional purposes shall not require the approval of the other Party so long
as the AOL Network is clearly identified as the source of such screen shots.
Each party shall solicit and reasonably consider the views of the other Party in
designing and implementing such Materials. Once approved, the Materials may be
used by a Party and its affiliates for the purpose of promoting the N2K Areas
and the content contained therein and reused for such purpose until such
approval is withdrawn with reasonable prior notice. In the event such approval
is withdrawn, existing inventories of Materials may be depleted. Notwithstanding
the foregoing, either Party may issue press releases and other disclosures as
required by law or as reasonably advised by legal counsel without the consent of
the other Party and in such event, prompt notice thereof shall be provided to
the other Party.
2. License. N2K hereby grants AOL a non-exclusive worldwide license to
market, license, distribute, reproduce, display, perform, transmit and promote
each N2K Area and the Products contained therein (or any portion thereof)
through such areas or features of the AOL Network as AOL deems appropriate. AOL
Members shall have the right to access and use each N2K Area.
3. Trademark License. In designing and implementing the Materials and
subject to the other provisions contained herein, N2K shall be entitled to use
the following trade names, trademarks, and service marks of AOL: the "America
Online(R) brand service, "AOL(TM)" service/software and AOL's triangle logo; and
AOL and its Affiliates shall be entitled to use the trade names, trademarks, and
service marks of N2K (collectively, together with the AOL marks listed above,
the "Marks"); provided that each Party: (i) does not create a unitary composite
mark involving a Mark of the other Party without the prior written approval of
such other Party; and (ii) displays symbols and notices clearly and sufficiently
indicating the trademark status and ownership of the other Party's Marks in
accordance with applicable trademark law and practice.
(a) Ownership of Trademarks. Each Party acknowledges the ownership of
other Party in the Marks of the other Party and agrees that all use of the other
party's Marks shall inure to the benefit, and be on behalf, of the other party.
Each Party acknowledges that its utilization of other party's Marks will not
create in it, nor will it represent it has, any right, title, or interest in or
to such Marks other than the licenses expressly granted herein. Each Party
agrees not to do anything contesting or impairing the trademark rights of the
other Party.
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(b) Quality Standards. Each Party agrees that the nature and quality of
its products and services supplied in connection with the other Party's Marks
shall conform to qualify standards set by the other Party. Each Party agrees to
supply the other Party, upon request, with a reasonable number of samples of any
Material publicly disseminated by such Party which utilize the other Party's
Marks. Each Party shall comply with all applicable laws, regulations, and
customs and obtain any required government approvals pertaining to use of the
other Party's Marks.
(c) Infringement Proceedings. Each Party agrees to promptly notify the
other Party of any unauthorized use of the other Party's Marks of which it has
actual knowledge. Each Party shall have the sole right and discretion to bring
proceedings alleging infringement of its Marks or unfair competition related
thereto; provided, however, that each Party agrees to provide the other Party
with its reasonable cooperation and assistance with respect to any such
infringement proceedings.
4. Representations and Warranties. Each Party represents and warrants to
the other Party that: (i) such Party has the full corporate right, power and
authority to enter into this Agreement and to perform the acts required of its
hereunder; (ii) the execution of this agreement by such Party, and the
performance by such Party of its obligations and duties hereunder, do not and
will not violate any agreement to which such Party is a party or by which it is
otherwise bound; (iii) when executed and delivered by such Party, this Agreement
will constitute the legal, valid and binding obligation of such Party,
enforceable against such Party in accordance with its terms; and (iv) such Party
acknowledges that the other Party makes no representations, warranties or
agreements related to the subject matter hereof that are not expressly provided
for in this Agreement.
5. Confidentiality. Each Party acknowledges that Confidential Information
may be disclosed to the other Party during the course of this Agreement. Each
Party agrees that it shall take reasonable steps, at least substantially
equivalent to the steps it takes to protect its own proprietary information,
during the term of this Agreement, and for a period of three years following
expiration or termination of this Agreement, to prevent the duplication or
disclosure of Confidential Information of the other Party, other than by or to
its employees or agents who must have access to such Confidential Information to
perform such Party's obligations hereunder, who shall each agree to comply with
this Section 6 of this Agreement.
6. Limitation of Liability; Disclaimer; Indemnification.
a) LIABILITY. UNDER NO CIRCUMSTANCES SHALL EITHER PARTY BE LIABLE
TO THE OTHER PARTY FOR INDIRECT, INCIDENTAL, CONSEQUENTIAL, SPECIAL OR EXEMPLARY
DAMAGES (EVEN IF THAT PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH
DAMAGES), ARISING FROM THE USE OR INABILITY TO USE THE AOL NETWORK OR ONLINE
AREA OR ANY OTHER PROVISION OF THIS AGREEMENT, SUCH AS, BUT NOT LIMITED TO, LOSS
OF REVENUE OR ANTICIPATED PROFITS OR LOST BUSINESS. EXCEPT AS PROVIDED IN
SECTION 6(C) OF
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THIS EXHIBIT, NEITHER PARTY SHALL BE LIABLE TO THE OTHER PARTY FOR MORE THAN THE
AGGREGATE AMOUNTS TO BE PAID TO AOL BY INFORMATION PROVIDER UNDER THIS
AGREEMENT.
b) NO ADDITIONAL WARRANTIES. EXCEPT AS EXPRESSLY SET FORTH IN
THIS AGREEMENT, NEITHER PARTY MAKES ANY, AND EACH PARTY HEREBY SPECIFICALLY
DISCLAIMS ANY REPRESENTATIONS OR WARRANTIES, EXPRESS OR IMPLIED, REGARDING THE
AOL NETWORK OR THE N2K AREAS, INCLUDING ANY IMPLIED WARRANTY OF MERCHANTABILITY
OR FITNESS FOR A PARTICULAR PURPOSE AND IMPLIED WARRANTIES ARISING FROM COURSE
OF DEALING OR COURSE OF PERFORMANCE. WITHOUT LIMITING THE GENERALITY OF THE
FOREGOING, AOL SPECIFICALLY DISCLAIMS ANY WARRANTY REGARDING THE PROFITABILITY
OF THE ONLINE AREA.
c) Indemnity. Either Party will defend, indemnify, save and hold
harmless the other Party and the officers, directors, agents, affiliates,
distributors, franchisees and employees of the other Party from any and all
third party claims, demands, liabilities, costs or expenses, including
reasonable attorneys' fees ("Liabilities"), resulting from the indemnifying
Party's material breach of any duty, representation, or warranty of this
Agreement, except where liabilities result from the gross negligence or knowing
and willful misconduct of the other Party.
d) Claims. Each Party agrees to (i) promptly notify the other
Party in writing of any indemnifiable claim and give the other Party the
opportunity to defend or negotiate a settlement of any such claim at such other
Party's expense, and (ii) cooperate fully with the other Party, at that other
Party's expense, in defending or settling such claim. AOL reserves the right, at
its own expense, to assume the exclusive defense and control of any matter
otherwise subject to indemnification by N2K hereunder, and in such event, N2K
shall have no further obligation to provide indemnification for such matter
hereunder.
e) Acknowledgement. AOL and N2K each acknowledges that the
provisions of this Agreement were negotiated to reflect an informed, voluntary
allocation between them of all risks (both known and unknown) associated with
the transactions contemplated hereunder. The limitations and disclaimers related
to warranties and liability contained in this Agreement are intended to limit
the circumstances and extent of liability. The provisions of this Section 6
shall be enforceable independent of and severable from any other enforceable or
unenforceable provision of this Agreement.
7. Solicitation of Subscribers. During the term of this Agreement, and for
the two-year period following the expiration or termination of this Agreement,
neither N2K nor its agents shall use the AOL Network to (i) solicit, or
participate in the solicitation of AOL Members when that solicitation is for the
benefit of any entity (including N2K) which could reasonably be construed to be
or become in competition with AOL or (ii) promote any services which could
reasonably be construed to be in competition with AOL including, but not limited
to, services available through the Internet. In addition,
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N2K may not send AOL Members e-mail communications promoting N2K's Products
through the AOL Network without a "Prior Business Relationship." For purposes of
this Agreement, a "Prior Business Relationship" shall mean that the AOL Member
has either (i) engaged in a transaction with N2K through the AOL Network or (ii)
voluntarily provided information to N2K through a contest, registration, or
other communication, which included notice to the AOL Member that the
information provided by the AOL Member could result in an e-mail being sent to
that AOL Member by N2K or its agents. A Prior Business Relationship does not
exist by virtue of an AOL Member's visit to an N2K Area (absent the elements
above). More generally N2K will be subject to any standard policies regarding
e-mail distribution through the AOL Network which AOL may implement.
8. Collection of Subscriber Information. N2K is prohibited from collecting
AOL Member screennames from public or private areas of the AOL Network, except
as specifically provided below. N2K shall ensure that any survey, questionnaire
or other means of collecting AOL Member names, screennames, addresses or other
identifying information ("Subscriber Information"), including, without
limitation, requests directed to specific AOL Member screennames and automated
methods of collecting screennames (an "Information Request") complies with (i)
all applicable laws and regulations and (ii) any privacy policies which have
been issued by AOL in writing during the Term (the "AOL Privacy Policies"). Each
Information Request shall clearly and conspicuously specify to the AOL Members
at issue the purpose for which Subscriber Information collected through the
Information Request shall be used (the "Specified Purpose").
9. Use of Subscriber Information. N2K shall restrict use of the Subscriber
Information collected through an Information Request to the Specified Purpose.
In no event shall N2K (i) provide Subscriber Information to any third party
(except to the extent specifically (a) permitted under the AOL Privacy Policies
or (b) authorized by the members in question), (ii) rent, sell or barter
Subscriber Information, (iii) identify, promote or otherwise disclose such
Subscriber Information in a manner that identifies AOL Members as end-users of
the AOL Network or (iv) otherwise use any Subscriber Information in
contravention of Section 14 above. Notwithstanding the foregoing, in the case of
AOL Members who purchase Products from N2K, N2K shall be entitled to use
Subscriber Information from such AOL Members as part of N2K's aggregate list of
Customers; provided that N2K's use does not in any way identify, promote or
otherwise disclose such Subscriber Information in a manner that identifies AOL
Members as end-users of the AOL Network.
10. AOL Terms of Service. In the event that AOL notifies N2K that Content
within the N2K Areas violates AOL's then-standard Terms of Services (as set
forth on the America Online(R) brand service), the terms of this Agreement or
any other standard, generally applicable AOL Content policy, then N2K shall take
commercially reasonable steps to block access by AOL Members to such Content
using N2K's then-available technology. In the event that N2K cannot, through its
commercially reasonable efforts, block access by AOL Members to the Content in
question, then N2K shall provide AOL prompt written notice of such fact. AOL may
then, at its option, either (i) restrict access
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from the AOL Network to the Content in question using technology available to
AOL or (ii) terminate the link from the AOL Network to the applicable N2K Area
until such time as the Content in question is no longer displayed. N2K will
cooperate with AOL's reasonable requests to the extent AOL elects to implement
any such access restrictions.
11. Excuse. Neither Party shall be liable for, or be considered in breach
of or default under this Agreement on account of, any delay or failure to
perform as required by this Agreement as a result of any causes or conditions
which are beyond such Party's reasonable control and which such Party is unable
to overcome by the exercise of reasonable diligence.
12. Independent Contractors. The Parties to this Agreement are independent
contractors. Neither Party is an agent, representative or partner of the other
Party. Neither Party shall have any right, power or authority to enter into any
agreement for or on behalf of, or incur any obligation or liability of, or to
otherwise bind, the other Party. This Agreement shall not be interpreted or
construed to create an association, agency, joint venture or partnership between
the Parties or to impose any liability attributable to such a relationship upon
either Party.
13. Notice. Any notice, approval, request, authorization, direction or
other communication under this Agreement shall be given in writing and shall be
deemed to have been delivered and given for all purposes (i) on the delivery
date if delivered by electronic mail on the AOL Network; (ii) on the delivery
date if delivered personally to the Party to whom the same is directed; (iii)
one business day after deposit with a commercial overnight carrier, with written
verification of receipt; or (iv) five business days after the mailing date,
whether or not actually received, if sent by U.S. mail, return receipt
requested, postage and charges prepaid, or any other means of rapid mail
delivery for which a receipt is available, to the person(s) specified below at
the address of the Party set forth in the first paragraph of this Agreement.
14. No Waiver. The failure of either Party to insist upon or enforce strict
performance by the other Party of any provision of this Agreement or to exercise
any right under this Agreement shall not be construed as a waiver or
relinquishment to any extent of such Party's right to assert or rely upon any
such provision or right in that or any other instance; rather, the same shall be
and remain in full force and effect.
15. Return of Information. Upon the expiration or termination of this
Agreement, each Party shall, upon the written request of the other Party, return
or destroy (at the option of the Party receiving the request) all confidential
information, documents, manuals and other materials specified the other Party.
16. Survival. Sections 4, 5, 6 and 9 of this Exhibit E, shall survive the
completion, expiration, termination or cancellation of this Agreement.
17. Entire Agreement. This Agreement sets forth the entire agreement and
supersedes any and all prior agreements of the Parties with respect to the
transactions set forth herein. Neither Party shall be bound by, and each Party
specifically objects to, any term,
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condition or other provision which is different from or in addition to the
provisions of this Agreement (whether or not it would materially alter this
Agreement) and which is proffered by the other Party in any correspondence or
other document, unless the Party to be bound thereby specifically agrees to such
provision in writing.
18. Amendment. No change, amendment or modification of any provision of
this Agreement shall be valid unless set forth in a written instrument signed by
the Party subject to enforcement of such amendment.
19. Further Assurances. Each Party shall take such action (including, but
not limited to, the execution, acknowledgment and delivery of documents) as may
reasonably be requested by any other Party for the implementation or continuing
performance of this Agreement.
20. Assignment. N2K shall not assign this Agreement or any right, interest
or benefit under this Agreement without the prior written consent of AOL;
provided that such consent shall not be required in the case of assignment to an
affiliate of N2K or a successor by way of merger, consolidation or sale of all
or substantially all of N2K's assets or stock, so long as such assignee (i) has
the assets and resources required to fully and completely perform all of N2K's
obligations under the Agreement and (ii) is not reasonably construed to be a
competitor of AOL [i.e., entities that offer online or internet connectivity (or
any successor form of connectivity) and entities that are broad-based
aggregators and distributors of third party interactive content and/or
services]; provided that, in the event that AOL does not approve assignment to
such a competitor, then AOL will pay to N2K a pro rata portion of the guaranteed
amounts paid as of such time by N2K to AOL pursuant to Section 4.1 (the
"Then-Paid Guaranteed Amount"), determined by subtracting: (a) the product of
the number of months since the Effective Date multiplied by $474,000; and (b)
amounts which have been earned by N2K as of such time in connection with this
Agreement; from (c) the Then-Paid Guaranteed Amount. Such amounts will be paid
by AOL within thirty (30) days of AOL's notification of its election to withhold
approval of such assignment to a competitor. Subject to the foregoing, this
Agreement shall be fully binding upon, inure to the benefit of and be
enforceable by the Parties hereto and their respective successors and assigns.
21. Construction; Severability. In the event that any provision of this
Agreement conflicts with the law under which this Agreement is to be construed
or if any such provision is held invalid by a court with jurisdiction over the
Parties to this Agreement, (i) such provision shall be deemed to be restated to
reflect as nearly as possible the original intentions of the Parties in
accordance with applicable law, and (ii) the remaining terms, provisions,
covenants and restrictions of this Agreement shall remain in full force and
effect.
22. Remedies. Except where otherwise specified, the rights and remedies
granted to a Party under this Agreement are cumulative and in addition to, and
not in lieu of, any other rights or remedies which the Party may possess at law
or in equity.
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23. Applicable Law; Jurisdiction. This Agreement shall be interpreted,
construed and enforced in all respects in accordance with the laws of the
Commonwealth of Virginia except for its conflicts of laws principles. Each Party
irrevocably consents to the exclusive jurisdiction of the courts of the
Commonwealth of Virginia and the federal courts situated in the Commonwealth of
Virginia, in connection with any action to enforce the provisions of this
Agreement, to recover damages or other relief for breach or default under this
Agreement, or otherwise arising under or by reason of this Agreement.
24. Export Controls. Both parties shall adhere to all applicable laws,
regulations and rules relating to the export of technical data and shall not
export or re-export any technical data, any products received from the Other
Party or the direct product of such technical data to any proscribed country
listed in such applicable laws, regulations and rules unless properly
authorized.
25. Heading. The captions and headings used in this Agreement are inserted
for convenience only and shall not affect the meaning or interpretation of this
Agreement.
26. Counterparts. This Agreement may be executed in counterparts, each of
which shall be deemed an original and all of which together shall constitute one
and the same document.
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EXHIBIT F - DIRECT MARKETING PROGRAM
MEMBER ACQUISITION PROGRAMS
N2K will test a variety of co-marketing and AOL member acquisition programs for
possible eventual rollout potential.
- - N2K will distribute AOL software, at no cost to AOL, in all fulfillment
packages that do not conflict with marketing agreements that N2K has with
other companies. AOL to cover all costs to ship the software to the N2K
distribution location(s). AOL to cover incremental costs for pick and pack
fees, additional shipping and warehousing fees associated with this
promotion. Bounty payments to N2K will be reduced by the direct costs
associated with this promotion.
- - N2K will explore distributing the AOL Software in selected retail partner
locations through its distribution arrangement with Red Distribution. Such
distribution possibly may include POP in retail distribution locations and
the placement of the AOL software into customer packages at checkout.
- - N2K will consider a test allowing AOL access, at no cost to AOL, to its
customer database for list processing and mailing of the AOL software.
When N2K allows AOL access to its customer database, AOL will discuss
offering a pop-up screen to those new members signing on to AOL through
this promotion. The pop-up screen will allow the new member to click and
go directly to N2K's AOL site or its web site - whichever is available at
the time of the promotion. The screen could reappear to these members
after 30 or 60 days. This screen will appear after the AOL welcome screen.
- - AOL will pay N2K a bounty of [****] for each valid* registration acquired
as a result of the marketing programs outlined above.
- - N2K will consider bundling the AOL software client with N2K in-house
produced CDs. N2K will receive a [****] for all valid* registrations
received from this program.
*A valid registration is a new member who has completed one AOL billing cycle
after the free trial period.
- - AOL will, at a minimum, co-brand disk packages that will be used for all
software distribution programs listed hereunder with stickers.
- - AOL's will bear the costs associated with shipment of the AOL client
software to distribution points for the programs described above; AOL will
bear additional incremental distribution costs associated with fulfillment
bundling promotions outlined above. N2K's bounty will be reduced by these
additional incremental distribution costs. N2K will bear all other
distribution costs contemplated hereunder.
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EXHIBIT G
JAZZ CENTRAL STATION
1. Jazz Times: articles, CD reviews, video reviews
2. IAJE/Jazz Educators Journal: articles
3. WBGO-FM: without streaming audio
CLASSICAL INSITES
1. Fanfare: articles, CD reviews (links to MB but is displayed in Cl look)
2. WQXR-FM: station info; without streaming audio
BERNSTEIN
1. Library of Congress (via the Estate): images, photos, papers
2. Amberson: Prelude Fugue and Riffs (newsletter)
ROCKTROPOLIS
1. Album Network: In the Studio pre-packages shows
MUSIC BOULEVARD
1. MTV Online: News headlines
2. VH1 Online: News headlines
3. AMG: Title and artist databased information; reviews and biographies
4. Muze: Title and artist databased information
5. Blues Access: articles, reviews
6. Dirty Linen: articles, reviews
7. Fanfare: articles, reviews
8. Jazz Times: (links to JCS)
9. IAJE Jazz Educator's Journal (links to JCS)
10. Puncture: articles, reviews
11. Relix: articles
12. Spin: articles, reviews
13. Gail Publications: Contemporary Musician
14. Billboard Charts
35
<PAGE> 1
EXHIBIT 10.25
Portions of this Exhibit have been omitted pursuant to a request for
confidential treatment. The omitted portions, marked by [****], have been
separately filed with the Commission.
August 4, 1997
Mr. David Pakman
Sr. Director, Business Development
N2K, Inc.
55 Broad Street
10th Floor
New York, NY 10004
Dear David,
Pursuant to our most recent discussions, we have taken the opportunity to revise
our business proposal regarding a business relationship between N2K and
PointCast (the "Parties"). My hope would be that we can quickly come to an
agreement on the terms represented in this proposal so that we both may turn our
attentions towards integrating N2K into the launch of PointCast College Network
("PCN").
The overall proposal encompasses several areas of collaboration that form the
basis of a complete package offering. We feel that the product mix detailed
below provides N2K with and unequaled opportunity, within the Internet space, to
build brand awareness for Music Boulevard and N2K's music genre sites while at
the same time providing methods for increasing traffic and CD sales on the Music
Boulevard site.
Accordingly, and in the spirit of our discussions, we have compiled the
following NON-BINDING Memorandum of Understanding ("MOU") that, when signed by
the Parties shall state the intentions of Parties to enter into a business
relationship to be more specifically set forth in the provisions of a
contemplated Definitive Agreement comprised of the following:
POINTCAST - N2K BUSINESS PROPOSAL
1.0 THE POINTCAST COLLEGE NETWORK
A. N2K would become an online music retailer of the PCN with non-exclusive
rights to offer music items (CD's, merchandise, etc.) for sale to the PCN
viewer-base. Hypertext links to N2K's Music Boulevard WWW site (or other N2K
operated sites as appropriate) would be given prominent positioning within
the Music Zone channel of the PCN. It is anticipated that prominent
positioning would include:
<PAGE> 2
- - Hypertext links for each music single or title listed on each of the
six(1) Billboard Music Charts contained within the "Charts" tab of the
channel.
- - Placement of hypertext links to the Music Boulevard site within the
articles that comprise the channel(2).
- - Placement of a hypertext link(s) on the sidebar of all articles
comprising the Music Zone channel.
- - Placement of hypertext links to the Music Boulevard site on any channel
of the PCN where music or online music retailing is featured or
promoted. Such placement is subject to the mutual agreement of N2K,
PointCast and the associated information provider.
The Parties would agree that the details regarding the placement and final
disposition of such links will be more specifically set forth in the
resulting Definitive Agreement.
B. N2K would become the sponsor of the Music Zone channel on the PCN for two
academic years(3). The sponsorship would include category exclusivity,
premium placement within the software download kit, "Brought To You By"
branding on the Music Zone SmartScreen(TM) and at a minimum one animated
commercial airing on the PCN channels for each month of the agreement.
The fees for the sponsorship opportunity would be as follows (all fees
represented are net of agency commissions and PointCast applied discounts):
<TABLE>
<CAPTION>
----------------------------------------------------------------------
ACADEMIC YEAR MONTHLY SPONSORSHIP ANNUAL COMMITMENT
FEE
----------------------------------------------------------------------
<S> <C> <C>
Year 1 [****] [****]
----------------------------------------------------------------------
Year 2 [****] [****]
----------------------------------------------------------------------
</TABLE>
N2K would agree that for any month during the term of the agreement that
they would pay to PointCast the lesser of the then current rate card price
for the Music Zone channel or the Monthly Sponsorship Fee as stated above.
PointCast would further agree that all standard terms regarding PCN
sponsorships as detailed on PointCast Insertion Orders (attached) or
otherwise apply to the N2K sponsorship.
- ------------------
(1) Currently their are six charts on the PCN. Should the number of
charts increase, PointCast would agree that N2K would receive similar placement
on all additional charts.
(2) Such placement is subject to the mutual agreement of N2K, PointCast
and the information provider.
(3) The academic year commences September 1st of the current year and
ends June 30th of the following year for a total of ten (10) calendar months.
Advertising and sponsorship would be bonused for the months of July and August.
<PAGE> 3
C. PointCast would agree to provide N2K with two 30-second commercials for
the term of the agreement. One commercial would run at a minimum on all
PointCast-owned College Network channels (Sports, Weather, Music Zone,
Student Union) and be guaranteed 256,000 billable impressions per month.
The second commercial would run only on the Music Zone channel and be
guaranteed the lesser of 256,000 billable impressions or the billable
impressions stated on the then current rate card for the particular
channel. At PointCast's discretion, the second commercial may be placed on
additional PCN channels. N2K may have the option to include two URLs and
to run two 15-second commercials for each 30-second commercial.
D. PointCast would grant N2K a right of first refusal regarding another party
offering music merchandise for sale on the PCN through the placement of
transactional links on the on PCN channels. PointCast would submit in
writing to N2K, as soon as is reasonably practicable, the terms under
which another party may offer such merchandise. N2K would have ten (10)
business days from the date of notification receipt to respond in writing
to PointCast if they intend to exercise their right of first refusal. In
choosing to exercise the right of first refusal, N2K would agree to match
the terms, as specified in the notification letter.
If N2K chooses not to exercise its right of first refusal PointCast, in
its sole discretion, will determine the placement of transactional links
from the new party on the PCN, where N2K's transactional links will be at
least as favorably positioned as they were prior to the addition of links
from the new party. The Parties would also agree that the details of
"favorable positioning" would be more specifically defined in the
resulting Definitive Agreement.
E. N2K may include music content from its WWW sites on the Music Zone channel
subject to mutual agreement by the Parties as to the type and scope of
content. N2K would provide such content at no cost to PointCast and may
add transactional links to such content.
F. N2K would be responsible for all order processing, credit card
verification, EDI and fulfillment services related to the sale of
merchandise from the Music Zone channel. N2K would further agree that all
customer service issues related to the sale of merchandise to PCN viewers
would be the sole responsibility of N2K.
G. Should the PCN cease commercial operation, the Parties would agree to
negotiate in good faith the provisions of a new agreement that would
provide N2K with an equivalent presence on the PointCast Business Network.
If the Parties fail to reach agreement on new terms within forty five (45)
days from the start of negotiations then either Party may choose to
terminate the relationship by providing written notification to the other
Party.
2.0 THE POINTCAST BUSINESS NETWORK
<PAGE> 4
A. N2K would provide daily music news from the following N2K sites: Jazz
Central Station, Classical Insites and Rocktropolis/Allstar, at no cost to
PointCast, for inclusion in the existing Lifestyles channel of the
PointCast Business Network ("PBN"). Such content would not contain
hypertext links embedded within the content with the exception that any
branding element (logo) may link to the home page of its respective site
or other site as mutually agreed to by the Parties.
B. N2K would agree that the content provided for inclusion on the PBN and any
associated links on the PBN are of a non-exclusive relationship. N2K would
agree that PointCast may present other music related content within the
Lifestyle channel of the PBN.
C. N2K would agree that the placement of the content on the channel is
conditional on adherence to the existing PointCast guidelines for
presentation and editorial value. The Parties would agree to use their
reasonable best efforts to ensure the most compelling and attractive
presentation of N2K's content within the Lifestyle channel. It would be
expected that this may require some development resources by both Parties
(at their own expense) in meeting this objective.
D. The term of this component of the agreement would be for two years from
the date of initial program introduction.
3.0 POINTCAST SELECT
A. The Parties would agree to work together to define and produce music
offers of unique and exclusive value for the PointCast Select WWW site.
The details of such offers would be more specifically defined in the
resulting Definitive Agreement but would be anticipated to include fee
based "club/membership type" offers that would encourage repeat visits to
both PointCast and N2K WWW sites.
B. The term of the PointCast Select program would be two years from program
introduction.
4.0 REVENUE SHARE
A. N2K would agree to pay PointCast a royalty of [****] of the Music
Boulevard selling price on sales of all products sold by N2K (excluding
credit card validation fees, database processing fees, shipping, handling,
and packing fees, and taxes) to PointCast Viewers (College, Business and
Select). In no event would PointCast expect to receive such payments
("Payment Activation Date") until the earlier occurrence of 1) the
aggregate [****] royalty fee exceeds [****] during the term of the
agreement or 2) the expiration of the first 12 month term of the
agreement. At the occurrence of the Payment Activation Date, it is assumed
that the program to date aggregate sales would be [****] for the purposes
of future royalty payment calculations and PointCast would only be
receiving royalty payments for those sales that occur after the Payment
Activation Date.
<PAGE> 5
B. N2K would provide accounting to PointCast on a monthly basis after the
first month that royalty payments are due as defined in paragraph 4.0 A.
Accounting statements would include artist, album, number of units sold
and total income earned. Such statements for the previous month would be
delivered to PointCast by the thirtieth (30th) day of the following month.
N2K would pay PointCast for accrued royalties pursuant to paragraph 4.0
(A) once the payments to PointCast exceed [****].
David, upon execution of this agreement, we will quickly move forward in the
development of the Definitive Agreement and take all steps necessary to
incorporate N2K into the launch of the PointCast College Network.
Sincerely, Accepted By:
/s/ Francis G. Blot /s/ David Pakman
- ------------------------------------ ----------------------------------
Francis G. Blot David Pakman
Vice President, Business Development Sr. Director, Business Development
PointCast, Inc. N2K, Inc.
<PAGE> 6
POINTCAST COLLEGE NETWORK ADVERTISING CONTRACT
INSERTION ORDER
<TABLE>
<CAPTION>
COMPANY N2K AGENCY NONE
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Division Address
- -----------------------------------------------------------------------------------------------------
Contract Samantha Saturn
- -----------------------------------------------------------------------------------------------------
Address 55 Broad Street, 10th Floor
- -----------------------------------------------------------------------------------------------------
New York, NY 10004 Phone
- -----------------------------------------------------------------------------------------------------
Phone (212) 378-0522 Fax
- -----------------------------------------------------------------------------------------------------
Fax (212) 742-1755 Contact
- -----------------------------------------------------------------------------------------------------
Email [email protected] Email
- -----------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
BILLING CONTRACT: SAME AS ABOVE
- --------------------------------------------------------------------------------------------------
<S> <C>
Billing Address:
- --------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CONTRACT PERIOD: CONTRACT DETAILS:
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
Start date: September 1, 1997
- -----------------------------------------------------------------------------------------------------
End date: June 30, 1999
- -----------------------------------------------------------------------------------------------------
Program Package: Charter Channel Sponsor
- -----------------------------------------------------------------------------------------------------
Commercial Size: 50KB
- -----------------------------------------------------------------------------------------------------
Guaranteed Billable deliveries: [****] *Based on 150,000 viewers per month
- -----------------------------------------------------------------------------------------------------
Last date to cancel: July 31, 1997
- -----------------------------------------------------------------------------------------------------
Total Gross Cost: [****] Monthly gross cost: [****]
- -----------------------------------------------------------------------------------------------------
Less 20% Charter Discount [****] 25% channel premiums: [****]
- -----------------------------------------------------------------------------------------------------
Less 10% for year commitment [****] Total monthly costs: [****]
- -----------------------------------------------------------------------------------------------------
Less: 15% Agency discount [****]
- -----------------------------------------------------------------------------------------------------
Non commissionable
production fees:
- -----------------------------------------------------------------------------------------------------
Total Due: (Amounts due are [****] *For payments from September 1997
billed on a monthly basis) through June 1998. August 1997 and July
1998 are at no charge. Please see
attachment for pricing for September 1998
through June 1999.
- -----------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
ADVERTISER: ADVERTISING AGENCY: POINTCAST:
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
Authorized Signature: Authorized Signature: Authorized Signature:
/s/ Deborah Newman
- -----------------------------------------------------------------------------------------------------
/s/ Frank Blot
- -----------------------------------------------------------------------------------------------------
Printed Name Deborah Newman Printed Name Printed Name Frank Blot
- -----------------------------------------------------------------------------------------------------
Title VP Marketing Title Title Vice President
- -----------------------------------------------------------------------------------------------------
Business Development
- -----------------------------------------------------------------------------------------------------
Date Aug 4, 1997 Date Date August 1, 1997
- -----------------------------------------------------------------------------------------------------
</TABLE>
NOTE: THIS FORM IS GOVERNED BY THE TERMS & CONDITIONS SET FORTH ON PAGE 2 AND
ATTACHMENT A.
- ------------
Page 1 of 2
<PAGE> 7
Page 2 of 2
Terms and Conditions.
The following terms and conditions shall be deemed to be incorporated into the
Advertising Contract Insertion Order:
1. Definitions.
a. "Advertiser" as used herein means Advertiser and its Advertising Agency,
if any, jointly and severally.
b. "PointCast College Network" means a network of servers that deliver
content to viewers using a version of software directed towards the
college market.
1. Terms of Payment. Payment shall be made to PointCast Incorporated
("PointCast") upon receipt of invoice. Amounts paid after the invoice due
date shall bear interest at the rate of one and one half percent (1.5%) per
month or the highest rate permitted by law, if less. In the event of any
failure by Advertiser to make payment, Advertiser will be responsible for
all reasonable expenses (including attorneys' fees) incurred by PointCast in
collecting such amounts.
2. Impressions. All statistical reports provided by PointCast, and the
information they contain, are confidential and proprietary to PointCast,
Inc. They are intended solely for the internal use of Advertiser, and are
not to be distributed or otherwise to any third party.
3. Positioning. Except as otherwise expressly provided in the insertion order
agreement, positioning of commercials on the PointCast College Network is at
the sole discretion of PointCast.
4. Renewal. Except as expressly set forth in the insertion Order, any renewal
of the insertion order agreement and acceptance of any additional
advertising order shall be at PointCast's sole discretion. Pricing for any
renewal period is subject to the rate card in effect at the time the renewal
is made.
5. No Assignment or Resale of Ad Space. Advertiser may not resell, assign or
transfer any of its rights hereunder, and any attempt to resell, assign or
transfer such rights shall (a) result in immediate termination of this
agreement, without liability to PointCast and (b) result in all payments to
PointCast from Advertiser being accelerated and due immediately.
6. Limitation of Liability. In the event that PointCast fails to publish a
commercial in accordance with the insertion order agreement schedule
pursuant to this Agreement (or in the event of any other failure, technical
or otherwise, of such commercial to appear as provided in the insertion
order agreement), the sole liability of PointCast to Advertiser shall be
limited, at PointCast's option alone, to either a pro-rata refund of the
advertising fee or placement of the commercial at a later time in a
comparable position. IN NO EVENT WILL POINTCAST BE LIABLE TO ADVERTISER FOR
ANY INDIRECT, SPECIAL, INCIDENTAL, OR CONSEQUENTIAL DAMAGES, WHETHER BASED
ON BREACH OF CONTRACT, TORT (INCLUDING NEGLIGENCE), OR OTHERWISE, AND
WHETHER OR NOT POINTCAST SHALL HAVE BEEN ADVISED OF THE POSSIBILITY OF SUCH
DAMAGES. PointCast's liability for any act, error or omission, regardless of
whether the claim is based in contract or tort, shall not exceed the amount
payable by Advertiser under the insertion order agreement. Without limiting
the foregoing, PointCast shall have no liability for any failure or delay
resulting from any governmental action, fire, flood, insurrection,
earthquake, power failure, riot, explosion, embargo, strikes whether legal
or illegal, labor or material shortage, transportation interruption of any
kind, work slowdown or any other condition beyond the control of PointCast
affecting production or delivery in any manner.
7. Advertisers Representation; Indemnification. Commercials are accepted upon
the representation that Advertiser has the right to publish the contents of
the commercial, without infringement of any rights of any third party. In
consideration of such publication, Advertiser agrees to indemnify and hold
PointCast harmless against any and all expenses and losses of any kind
(including reasonable attorneys' fees and costs) incurred by PointCast in
connection with claims arising out of publication of the commercial and/or
any material to which users can link through the commercial.
8. Provision of Advertising Materials. Advertiser will provide all materials
for the commercial in accordance with PointCast's insertion order agreement
and production specifications. PointCast shall not be required to publish
any commercial that is not received in accordance with such policies.
9. Right to Reject Commercial. All contents of commercials are subject to
PointCast's approval. PointCast reserves the right to reject or cancel any
commercial, insertion order agreement, space reservation or position
commitment at any time. In addition, PointCast shall have the absolute right
to reject, without limitation, any URL link embodied within any commercial.
PointCast College Network does not accept tobacco, alcohol, pornography,
firearms.
10. Cancellations. Any requests by Advertiser for changes to and/or cancellation
of any order must be made by the date specified in the insertion order
agreement as the last day to cancel. Cancellations made, in whole or in
part, after the cancellation date are non-refundable.
11. Construction. No conditions other than those set forth in the insertion
order agreement or these Terms and Conditions shall be binding on PointCast
unless expressly agreed to in writing by PointCast. In the event of any
inconsistency between the insertion order agreement and the Terms and
Conditions, the Terms and Conditions shall control.
12. Governing Law. These Terms and Conditions, together with the insertion order
agreement shall be governed by and construed in accordance with, the laws of
the State of California, without giving effect to principles of conflicts of
law; may be amended only by a written agreement executed by an authorized
representative of each party; constitute the complete and entire expression
of the agreement between the parties; and shall supersede any and all other
agreements, whether written or oral, between the parties.
<PAGE> 8
ATTACHMENT A
The Advertising Contract Insertion Order is contingent upon the execution of the
Definitive Agreement between N2K and PointCast Inc. Additionally, such Insertion
Order shall not be valid until the execution of the Definitive Agreement. The
parties acknowledge that if the Definitive Agreement is not executed by
September 15, 1997 then this Insertion Order shall be null and void. The
significant terms of the Definitive Agreement are as follows:
1.0 The PointCast College Network
A. N2K would become an online music retailer of the PCN with non-exclusive
rights to offer music items (CD's, merchandise, etc.) for sale to the PCN
viewer-base. Hypertext links to N2K's Music Boulevard WWW site (or other N2K
operated sites as appropriate) would be given prominent positioning within
the Music Zone channel of the PCN. It is anticipated that prominent
positioning would include:
* Hypertext links for each music single or title listed on each of the
six(1) Billboard Music Charts contained within the "Charts" tab of
the channel.
* Placement of hypertext links to the Music Boulevard site within the
articles that comprise the channel(2).
* Placement of a hypertext link(s) on the sidebar of all articles
comprising the Music Zone channel.
* Placement of hypertext links to the Music Boulevard site on any
channel of the PCN where music or online music retailing is featured
or promoted. Such placement is subject to the mutual agreement of
N2K, PointCast and the associated information provider.
The Parties would agree that the details regarding the placement and final
disposition of such links will be more specifically set forth in the
resulting Definitive Agreement.
B. N2K would become the sponsor of the Music Zone channel on the PCN for two
academic years(3). The sponsorship would include category exclusivity,
premium placement within the software download kit, "Brought To You By"
branding on the Music Zone SmartScreen(TM) and at a minimum one animated
commercial airing on the PCN channels for each month of the agreement.
The fees for the sponsorship opportunity would be as follows (all fees
represented are net of agency commissions and PointCast applied discounts):
-------------------------------------------------------------------------
Academic Year Monthly Sponsorship Fee Annual Commitment
-------------------------------------------------------------------------
Year 1 [****] [****]
-------------------------------------------------------------------------
Year 2 [****] [****]
-------------------------------------------------------------------------
N2K would agree that for any month during the term of the agreement that
they would pay to PointCast the lesser of the then current rate card price
for the Music Zone channel or the Monthly Sponsorship Fee as stated above.
PointCast would further agree that all standard terms regarding PCN
sponsorships as detailed on PointCast Insertion Orders (attached) or
otherwise apply to the N2K sponsorship.
- -----------------------
(1) Currently their are six charts on the PCN. Should the number of charts
increase, the PointCast would agree that N2K would receive similar placement
on all additional charts.
(2) Such placement is subject to the mutual agreement of N2K, PointCast and the
information provider.
(3) The academic year commences September 1st of the current year and ends June
30th of the following year for a total of ten (20) calendar months.
Advertising and sponsorship would be bonused for the months of July and
August.
<PAGE> 9
C. PointCast would agree to provide N2K with two 30-second commercials for the
term of the agreement. One commercial would run at a minimum on all
PointCast-owned College Network channels (Sports, Weather, Music Zone,
Student Union) and be guaranteed 256,000 billable impressions per month. The
second commercial would run only on the Music Zone channel and be guaranteed
the lesser of 256,000 billable impressions or the billable impressions
stated on the then current rate card for this particular channel. At
PointCast's discretion, the second commercial may be placed on additional
PCN channels. N2K may have the option to include two URLs and to run two
15-second commercials for each 30-second commercial.
D. PointCast would grant N2K a right of first refusal regarding another party
offering music merchandise for sale on the PCN through the placement of
transactional links on the on PCN channels. PointCast would submit in
writing to N2K, as soon as is reasonably practicable, the terms under which
another party may offer such merchandise. N2K would have ten (10) business
days from the date of notification receipt to respond in writing to
PointCast if they intend to exercise their right of first refusal. In
choosing to exercise the right of first refusal, N2K would agree to match
the terms, as specified in the notification letter.
If N2K chooses not to exercise its right of first refusal PointCast, in its
sole discretion, will determine the placement of transactional links from
the new party on the PCN, where N2K's transactional links will be at least
as favorably positioned as they were prior to the addition of links from the
new party. The Parties would also agree that the details of ""favorable
positioning'' would be more specifically defined in the resulting Definitive
Agreement.
E. N2K may include music content from its WWW sites on the Music Zone channel
subject to mutual agreement by the Parties as to the type and scope of
content. N2K would provide such content at no cost to PointCast and may add
transactional lings to such comment.
F. N2K would be responsible for all order processing, credit card verification,
EDI and fulfillment services related to the sale of merchandise from the
Music Zone channel. N2K would further agree that all customer service issues
related to the sale of merchandise to PCN viewers would be the sole
responsibility of N2K.
G. Should the PCN cease commercial operation, the Parties would agree to
negotiate in good faith the provisions of a new agreement that would provide
N2K with an equivalent presence on the PointCast Business Network. If the
Parties fail to reach agreement on new terms within forty five (45) days
from the start of negotiations then either Party may choose to terminate the
relationship by providing written notification to the other Party.
<PAGE> 1
Exhibit 10.26
MUSIC PRODUCER'S AGREEMENT
THIS MUSIC PRODUCER'S AGREEMENT (the "Agreement") is entered into as
of October 15, 1996 (the "Effective Date") between N2K Inc. ("Company") and Phil
Ramone, Inc. ("Employer") for the services of Phil Ramone ("Employee") in
connection with the recording and production of master recordings ("Masters")
embodying the performances of one or more of Company's recording artists (each,
an "Artist" and, collectively, "Artists").
1. Engagement. Company hereby engages, and Employer hereby agrees to
furnish, the personal services of Employee hereunder to produce and record
Masters that embody the performances of one or more of Company's recording
artists (each, an "Artist"), subject in each case to Company's prior written
consent and the consent of the Artist concerned. Employer shall cause Employee
not to engage in producing activities that might derogate from or materially
interfere with Employee's performance of his duties as President of Company's
Encoded Music division (the "Division") and shall cause Employee to conduct all
producing activities in accordance with Employee's role as a fiduciary of
Company.
2. Services.
(a) Employer shall cause Employee to render producing services
hereunder to the best of his ability and in accordance with Company's standard
recording procedures (including those relating to compliance with U.S.
immigration laws and regulations). Recording sessions shall be held at times and
places mutually agreed between Employee and Company's CEO or other designee.
Employer shall cause Employee to record and re-record each selection until a
Digital Master, acceptable to Company's CEO or other designee as technically and
commercially satisfactory for Company's manufacture and sale of Records, is made
and delivered to Company. Employer shall further cause Employee to deliver to
Company all material recorded during recording sessions hereunder, including
rehearsal recordings, outtakes and other preliminary or alternate versions, all
of which shall be the sole and exclusive property of Company.
(b) Employer shall cause Employee, prior to commencing any
recording sessions or incurring any costs or expenses, to prepare and to submit
to Company's CEO or his designee a written recording proposal and a proposed
recording budget, in a form commonly utilized by the Division, that specifies
the date by which Employee is obligated to produce and deliver the Masters.
Employer shall cause Employee to refrain from commencing any recording sessions
or incurring any costs or expenses where such budget exceeds or would cause the
Division to exceed in any respect the approved budget of the Division or those
amounts set forth in the relevant Artist's agreement, without Company's prior
written approval.
(c) Employee shall be given credit in substantially the form
specified below with respect to Albums manufactured solely from Masters produced
and delivered by Employee hereunder: "Produced by Phil Ramone." Such credit
shall be given in liner notes (if any) and on the label of, and where space
permits in paid advertisements issued by Company with respect to, such Albums.
No casual or inadvertent failure of Company to comply with this
<PAGE> 2
provision, nor the failure of any third party to so comply with this provision,
shall be a breach of this Agreement.
3. Term. The term of this Agreement shall be coextensive with
the term of the employment agreement, dated as of October 15, 1996, between
Company and Employee.
4. Royalties.
(a) Provided that Employer and Employee are not in material
default hereunder, Company shall pay to Employer, in respect of Net Sales of
top-line LPs consisting entirely of Masters produced hereunder and sold by
Company or its licensees for distribution through Normal Retail Channels in the
United States, a basic royalty computed at four percent (4%) (the "Basic Rate")
of the applicable Royalty Base Price with respect to the Record concerned, it
being agreed that such royalties will be computed and paid in accordance with
all other provisions herein. With respect to each top-line LP consisting
entirely of Masters produced hereunder, the following escalations shall apply:
should the Net Sales through Normal Retail Channels in the United States ("USNRC
Net Sales") of such LP exceed 250,000 units, the Basic Rate shall be four and
one-half percent (4-1/2%) for USNRC Net Sales between 250,001 and 500,000 units
of such LP; should the USNRC Net Sales of such LP exceed 500,000 units, the
Basic Rate shall be five percent (5%) for USNRC Net Sales between 500,001 and
1,000,000 units of such LP; and should the USNRC Net Sales of such LP exceed
1,000,000 units, the Basic Rate shall be five and one-half percent (5-1/2%) for
USNRC Net Sales in excess of 1,000,000 units of such LP.
(b) Royalty rates payable to Employer in respect of Net Sales
of Records other than top-line LPs sold by Company or its licensees for
distribution through Normal Retail Channels in the United States shall bear the
same respective proportions to the Basic Rate (determined without regard to
escalations) that the royalty rates payable to Artist with respect to such sales
bear to the royalty rate payable to Artist on the first Net Sale of a top-line
LP pursuant to the recording agreement between Company and the Artist (the
"Artist Agreement").
(c) All royalties hereunder shall be subject to the same
proportionate reductions, deductions and configurational, territorial, category
and other variations (but not escalations) contained in the applicable Artist
Agreement. Royalties shall be computed and prorated, paid and not paid, in all
respects in the same manner, upon the same bases, at the same times and
(notwithstanding paragraph 8 below) subject to the same applicable definitions
as Company computes the royalties payable to the Artist pursuant to the
applicable Artist Agreement.
(d) The royalty with respect to any Master produced hereunder
for which Company utilizes the services of other producers shall be multiplied
by a fraction, the numerator of which is one (1) and the denominator of which is
the total number of producers (including Employee) utilized on such Master.
Company will utilize the services of other producers with respect to Masters
produced by Employee only with Employer's prior consent.
(e) The royalty with respect to Records that embody Masters
other
2
<PAGE> 3
than Masters produced by Employee hereunder shall be multiplied by a
fraction, the numerator of which is the number of Masters produced by Employee
hereunder embodied in such Record and the denominator of which is the total
number of Masters (including Masters produced by Employee hereunder) embodied in
such Record.
(f) Employer shall receive an advance of $10,000 with respect
to each LP produced entirely by Employee (prorated if Employee produces less
than all the Masters embodied in such LP) and an advance of $1,000 with respect
to each Single produced entirely by Employee (other than a Single which is
produced for inclusion in an Album to be produced in whole or in part by
Employee). Each such advance shall be fully recoupable by Company from royalties
otherwise payable to Producer pursuant to this Agreement.
(g) No royalties shall be payable to Employer for producing
services hereunder until Company has recouped, at the Artist's net royalty rate,
all recording costs of the Masters produced hereunder and all recording costs of
the Album on which such Masters are embodied, from royalties otherwise payable
to the Artist in connection with such Masters. Subject to the recoupment of any
Advances of Employer, commencing with Company's accounting for the period during
which such recoupment occurs, Company shall pay to Employer all royalties earned
by Employer hereunder retroactive to the first Net Sale of such Record, less any
excess costs charged to or incurred by Company. Employer further agrees, as a
material part of the consideration for the duties and obligations of Company
hereunder, to pay over to Company all advances and royalties otherwise payable
to Employer hereunder until such time as Employee has repaid to Company the
entire principal under that certain Promissory Note made by Employee in favor of
Company dated September 26, 1997.
5. Rights.
(a) Exclusive of songs written by Employee in collaboration
with others, Employer does hereby acknowledge, certify and agree, and shall
cause Employee to acknowledge, certify and agree, that all materials of whatever
kind created, produced, furnished or delivered by Employer and/or Employee
hereunder and all results and proceeds of whatever kind of the services rendered
by Employer and/or Employee hereunder, including all Masters produced or
delivered in whole or in part by Employer or Employee during the Term, all
products derived from such Masters, all music videos embodying such Masters or
otherwise produced during the Term ("Videos") and all rehearsal recordings,
outtakes and other preliminary or alternate versions of sound recordings which
are created during the production of the Masters hereunder ("Elements") (all
such materials and all such results and proceeds being collectively referred to
herein as the "Works"), are and shall be considered, from the inception of their
creation, "works made for hire" specially ordered or commissioned by Company for
use as a contribution to a collective work or as a part of a motion picture or
other audiovisual work. Accordingly, Company is and shall be considered to be
the author of the Works and, at all stages of creation or completion, the sole
and exclusive owner throughout the universe in perpetuity of the Works and all
right, title and interest therein, including all copyrights therein, all
renewals and extensions of such copyrights and all other ownership and
exploitation rights of any kind, nature or description in, to and with respect
to the Works that may be secured under the laws now or hereinafter in effect in
the United States or any other jurisdiction (collectively, the "Rights").
3
<PAGE> 4
The Rights shall include the right to authorize, prohibit and/or control the
production, reproduction, fixation, adaptation, distribution, rental, lending,
performance, broadcasting, communication to the public and other exploitation of
the Works in any and all media and by any and all means now known or hereafter
devised and the right to make such changes therein and such uses thereof as
Company may deem necessary or desirable. The Rights shall further include any
and all so-called rental rights, lending rights, fixation rights, reproduction
rights, distribution rights and neighboring rights pursuant to any international
treaties or conventions, any directives or other measures of the European
Economic Community or its successors and/or any enabling or implementing
legislation, laws or regulations relating to the foregoing (collectively, the
"EEC Rights"). If and to the extent that under any applicable law the Works are
not deemed works made for hire for Company or Company is not deemed to be the
author of the Works and the sole and exclusive owner of the Works and all right,
title and interest therein (including all of the Rights), then to the fullest
extent allowable and for the full term of protection otherwise accorded Employer
and/or Employee under such applicable law, Employer hereby irrevocably assigns,
grants and transfers, and shall cause Employee to assign, grant and transfer, to
Company throughout the universe in perpetuity the Rights and, in connection
therewith, all right, title and interest of Employer or Employee in, to and with
respect to all Masters produced by Employee hereunder, all Records derived
therefrom, all Videos and Elements and all other works now or hereafter created
containing the Works.
(b) Employer does hereby acknowledge, certify and agree, and
shall cause Employee to acknowledge, certify and agree, that the compensation
paid or to be paid by Company to Employer in connection with all Masters
hereunder, all Records derived therefrom, all Videos and Elements includes
adequate and equitable remuneration for each and every one of the EEC Rights
(including the rental rights) and constitutes a complete buy-out of all of the
EEC Rights. In connection with the foregoing, Employer hereby irrevocably
assigns, grants and transfers, and shall cause Employee to assign, grant and
transfer, to Company, throughout the universe in perpetuity, the right to
collect and retain for Company's own account any and all amounts payable to
Employer or Employee with respect to the EEC Rights and hereby irrevocably
directs and authorizes Company to direct any collecting societies or other
persons or entities receiving such amounts to pay such amounts to Company.
(c) Without limiting the generality of the foregoing, Employer
hereby acknowledges and agrees, and shall cause Employee to acknowledge and
agree, that Company and its licensees shall have the unlimited and exclusive
rights to do the following: to manufacture Records by any and all methods now or
hereafter known embodying any portion or all of the Masters produced hereunder;
to publicly perform such Records in any medium; to import, export, sell,
transfer, lease, rent, deal in or otherwise dispose of such Masters and Records
derived therefrom throughout the world under any trademarks, trade names or
labels designated by Company; to change, edit, add to, take from, dub, mix,
remix, adapt, reformat or reprocess the Masters in any manner for any reason,
including to conform to technological or commercial requirements in various
formats now or hereafter known or developed and to eliminate material which
might subject Company to any legal action; to use and authorize the use of the
Masters for background music, synchronization in motion pictures and television
soundtracks and other similar purposes, including use in means of transportation
and in commercials for any product in any and all media, without any payment
other than as provided
4
<PAGE> 5
herein; and to delay or refrain from doing any or all of the foregoing.
(d) To the fullest extent allowable under any applicable law,
Employer hereby irrevocably waives or assigns, and shall cause Employee to
irrevocably waive and assign, to Company any and all rights of "droit moral" or
"moral rights of authors" or similar rights which Employer or Employee may now
or later have in the Works and any other works now or hereafter created
containing the Works. Employer expressly acknowledges that many persons will
contribute to the Masters produced hereunder, the Records derived therefrom, the
Videos and Elements, and other works that will embody all or part of the Works.
Accordingly, if under any applicable law the above waiver or assignment by
Employer or Employee of such rights of droit moral or moral rights of authors or
similar rights is not effective, then (subject to the other provisions of this
Agreement) Employer agrees, and shall cause Employee to agree, to exercise such
rights in a manner which recognizes the contribution of and will not have an
adverse effect upon such other persons.
(e) Employer agrees to execute, acknowledge and deliver and
shall cause Employee to execute, acknowledge and deliver, to Company such
further documents as Company may deem necessary or advisable in order to
evidence, establish, maintain, protect, enforce or defend its rights in, to and
with respect to the Works or otherwise to carry out the intent and accomplish
the purposes of this Agreement. Employer hereby irrevocably appoints, and shall
cause Employee to appoint, Company as Employer's and Employee's true and lawful
attorney-in-fact (such appointment being a power coupled with an interest), with
full power of substitution and delegation, with the right (but not the
obligation) to execute, acknowledge and deliver in Employer or Employee's name
and on Employer's or Employee's behalf any such documents which Employer or
Employee fails to execute, acknowledge and deliver within five (5) days after
Company's written request therefor.
(f) Employer agrees not to make, and shall cause Employee not
to make, any claim or demand or to institute, support, maintain or permit any
suit, action, arbitration or other proceeding which will or might interfere with
or derogate from Company's rights in, to or with respect to the Masters, the
Records derived therefrom, the Elements, the Videos or any other Works, it being
expressly understood and agreed that Employer shall not have or be deemed to
have any lien, charge or other encumbrance upon the Works or any rights therein
or proceeds derived therefrom and that neither the breach of this Agreement by
Company, nor the termination or cancellation of this Agreement for any reason,
nor any other act, omission or event of any kind shall terminate or otherwise
adversely affect Company's sole and exclusive ownership of the Works and all
right, title and interest therein (including all of the Rights). Employer
further agrees, and shall cause Employee to agree, that Employer's or Employee's
sole remedy for any such breach or other event shall be an action at law to
recover such damages as may have been actually suffered by Employer or Employee
as a result thereof. Without limiting the foregoing, Employer hereby agrees, and
shall cause Employee to agree, not to institute, support, maintain or permit any
action, suit, arbitration or other proceeding on the ground that any of the
Masters or any other work based on the Works, or any other exercise of any of
the rights granted by Employer or Employee hereunder, in any way constitutes an
infringement or violation of any right of droit moral or any similar right, or
is in any way a defamation or mutilation of the Works or any part thereof or of
the reputation of Employer or Employee, or in
5
<PAGE> 6
any way contains unauthorized variations, alterations, modifications, changes or
translations.
6. Name and Likeness. Employer hereby grants, and shall cause
Employee to grant, to Company the perpetual rights, without liability to any
person, to reproduce, print, publish and disseminate (and to license others to
reproduce, print, publish and disseminate) in any medium the name, approved
likeness and approved biographical information of or concerning Employee for
purposes of advertising, promotion and trade in connection with Employee, the
manufacture, sale, marketing, distribution and other exploitation of Records and
general goodwill advertising.
7. Representations and Warranties. Employer hereby
represents, warrants and agrees (and shall cause Employee to represent,
warrant and agree) as follows:
(a) Employer and Employee are under no disability, restriction
or prohibition, whether contractual or otherwise, with respect to (i) Employer's
or Employee's right to enter into this Agreement; (ii) Employer's or Employee's
ability to grant and convey the intellectual property and other rights with
respect to Employee's services and the results and proceeds thereof; or (iii)
Employer's or Employee's ability to perform the terms and conditions of this
Agreement.
(b) The execution, delivery and performance of this Agreement
by Employer or Employee does not and will not conflict with, breach, violate or
cause a default under any agreement, contract or instrument to which Employer or
Employee is a party or any judgment, order or decree to which Employer or
Employee is subject.
(c) All Masters recorded hereunder and the performances
embodied thereon shall be produced in accordance with the rules and regulations
of the AFM, AFTRA and all other unions having jurisdiction. If necessary,
Employer shall cause Employee to become and remain a member in good standing of
all applicable labor unions or guilds.
(d) To the best of Employer's and Employee's knowledge, none
of the Records nor any of the Masters produced hereunder is or will be an
imitation or copy of any other work, and no use thereof by the Division, Company
or their licensees does or will violate or infringe the rights of any third
party, and no adverse claims do or will exist with respect thereto.
(e) Neither Employer or Employee nor any third party deriving
any rights from Employer or Employee will at any time do or authorize any person
or entity to do anything that diminishes, impairs or interferes with any of
Company's rights hereunder or the full and prompt performance of Employer's and
Employee's obligations hereunder.
(f) Employer is a bona fide corporate business entity
established for a valid business purpose within the meaning of the tax laws of
the United States and not a mere sham, conduit or agent for Employee.
(g) Employee is under a written contract of employment with
Employer for a term extending at least until the completion of all services of
Employee to Company, which
6
<PAGE> 7
contract gives Employer the right to loan or furnish the services of Employee to
Company as herein provided.
(h) Employer shall comply with all obligations imposed on an
employer under any applicable law, including obligations relating to
unemployment and disability insurance, social security contributions and
federal, state and local taxes.
(i) Employer shall indemnify Company and hold harmless Company
and Company's successors, assigns and licensees (each, an "Indemnified Party")
from any and all liabilities, losses, damages, expenses and costs, including
reasonable attorneys' fees (collectively, "Losses"), incurred by any Indemnified
Party in connection with or arising from (a) Employer's breach of any warranty,
representation or agreement contained herein, or (b) any claim, demand, cause of
action or proceeding (each, a "Claim") asserted by any third person that is
inconsistent with any of the warranties, representations or agreements made by
Employer in this Agreement. Company shall, within a reasonable time after its
discovery of any Claim, provide written notice to Employer of such Claim, and
such Losses shall be paid as incurred by such Indemnified Party. Each
Indemnified Party shall have the right to select counsel of its choice and to
control its defense.
8. Definitions. Except as otherwise provided herein
(including paragraph 4(c) above), the terms specified below shall be defined
as follows:
(a) "Album" or "LP" means a sufficient number of Masters
embodying Artist's featured performances to comprise one or more compact discs
(including an enhanced CD Audio-Visual Recording), or the equivalent, of not
less than forty-five minutes of playing time and containing at least ten
different Compositions.
(b) "Container Charge" means ten percent (10%) of the
Suggested Retail List Price for a single-fold analog disc Record in a standard
sleeve with no insert; fifteen percent (15%) of the Suggested Retail List Price
for an analog disc Record in a double-fold or gatefold jacket, in a nonstandard
sleeve or jacket, or with inserts; twenty percent (20%) of the Suggested Retail
List Price for analog cassette tape Records; and twenty-five percent (25%) of
the Suggested Retail List Price for Records in the form of compact discs,
digital compact cassettes or mini-discs, Records in the form of other digital
configurations, Electronic Transmissions, audiophile Records, Records in the
form of any other new configurations, Videos and any Records other than as
hereinabove provided.
(c) "Digital Master" means a fully mixed, edited, equalized
and leadered digital stereo tape Master, ready for the production of parts from
which satisfactory Records can be manufactured.
(d) "Electronic Transmission" means any transmission to the
consumer, whether of sound alone, sound coupled with an image, or sound coupled
with data, in any form, analog or digital, now known or later developed
(including direct broadcast satellite, point-to-multipoint satellite, multipoint
distribution service, point-to-point distribution service, cable system,
telephone system, and broadcast station) where a direct or indirect charge is
made
7
<PAGE> 8
to receive the transmission.
(e) "Enhancements" means Audio, visual and/or audiovisual or
other material of any kind or nature intended to be embodied on, to accompany
and/or as a complement to a predominantly audio record.
(f) "Master", "Recording", "Master Recording" mean any
recording of sound, whether or not coupled with a visual image, by any method
and on any substance or material, whether now or hereafter known, including
Audio-Visual Recordings and Enhancements.
(g) "Mechanical Royalties" shall mean royalties payable to any
person for the right to reproduce and distribute copyrighted musical
compositions on Records.
(h) "Net Sales" shall mean sales of Records paid for and not
returned, less returns and credits, after deduction of reserves against
anticipated returns and credits.
(i) "Record" shall mean all forms of reproduction, now or
hereafter known, manufactured and/or distributed primarily for personal use,
home use, school use, juke box use or use in means of transportation, including
sound-alone recordings, audiovisual recordings, interactive media (e.g.,
CD-ROM), and Electronic Transmissions.
(j) "Royalty Base Price" means the Suggested Retail List Price
less all excise, sales, value added and similar taxes included in the price and
less the applicable Container Charge.
(k) "Suggested Retail List Price" or "SRLP" means: (i) with
respect to Records sold for distribution in the United States, (A) other than
with respect to compact discs, digital compact cassettes, mini-discs, other
digital configurations, Electronic Transmissions and any and all new
technologies, Company's published suggested retail list price in the United
States during the applicable accounting period for the computation of royalties
to be made hereunder (it being understood that a separate calculation of the
suggested retail list price will be made for each price configuration of Records
manufactured and sold by Company), and (B) with respect to compact discs,
digital compact cassettes, mini-discs, other digital configurations, Electronic
Transmissions and any and all new technologies, one hundred thirty percent
(130%) of Company's average published wholesale price in the category of sale
concerned (it being understood that in the event such wholesale price changes
during an accounting period, the applicable wholesale price for the entire
accounting period will be deemed to be the average daily wholesale price during
the period); and (ii) with respect to Records sold for distribution outside the
United States, the retail equivalent price utilized by Company's licensee in
computing monies to be paid to Company for the Record concerned (provided that
in any county where there is no actual suggested or applicable retail list price
and where Company's licensee is wholly-owned by Company or Company's parent, the
SRLP will be deemed to be the price established by Company or its licensee(s) in
conformity with the general practice of the recording industry in such country).
Notwithstanding anything to the contrary contained herein, the Suggested Retail
List Price for premium Records will be Company's actual sales price of such
Records.
8
<PAGE> 9
Notwithstanding anything to the contrary contained herein, the Suggested Retail
List Price with respect to so-called home video devices will be Company's
published wholesale price for the device concerned.
9. Services Unique. Employer agrees and acknowledges that Employee's
services are of a special, unique, unusual, extraordinary and intellectual
character giving them a peculiar value, the loss of which cannot be reasonably
or adequately compensated for in damages and that a material breach of this
Agreement shall cause Company irreparable injury. Company shall be entitled, in
addition to any and all other contractual, legal or equitable remedies available
to it, to injunctive relief by way of a temporary restraining order, preliminary
injunction and/or permanent injunction.
10. Miscellaneous.
(a) This Agreement is intended to and shall inure to the
benefit of Company's successors and assigns. Company may assign or delegate all
or any portion of this Agreement to any corporation or other entity as may
acquire all or a substantial portion of Company's assets or goodwill, or which
may result from a division or reorganization of Company. Employer acknowledges
and agrees that it may not assign or delegate all or any portion of this
Agreement without Company's Consent.
(b) This Agreement shall be governed by the internal laws of
the State of New York, as applied to contracts made and wholly performed within
the State of New York by residents thereof.
(c) Any and all disputes arising from or related in any manner
to this Agreement shall be submitted to binding arbitration in New York County,
New York, in accordance with the rules of the American Arbitration Association.
Notwithstanding any provision of state law, this Agreement shall be governed by
the Federal Arbitration Act. The authority of the arbitrator shall be complete,
and shall include the authority to determine any and all issues relating to the
formation, interpretation and performance of this Agreement. Company and
Employer agree and acknowledge, and Employer shall cause Employee to agree and
acknowledge, that such issues include (i) the scope of this subparagraph (c);
(ii) whether either party has waived the right to compel arbitration; (iii)
whether grounds for revoking this Agreement exist; (iv) whether either party
hereto is also a party to a pending court action or special proceeding with a
third party such that there is a possibility of conflicting rulings on a common
issue of law or fact; and (v) to fashion and award such relief as is provided
herein or by applicable law, including preliminary and equitable relief. In any
and all disputes arising from or related in any manner to this Agreement, the
prevailing party shall be entitled to recover any and all costs incurred in
prosecuting or defending such claim or dispute, including reasonable attorneys'
fees and the costs of arbitration.
9
<PAGE> 10
(d) This Agreement is the entire agreement and understanding
between the parties hereto, and supersedes any prior or contemporaneous oral or
written agreements, understandings or representations by either party. This
Agreement may be modified or amended only in a writing signed by the party to be
bound by the modification or amendment.
(e) No waiver of any provision of this Agreement shall
constitute a waiver of any other provision, nor shall any waiver constitute a
continuing waiver unless expressly stated in writing by the party to be charged
with such waiver.
(f) Any notices which a party is required or may desire to
give the other party shall be in writing and shall be given by delivering,
mailing or transmitting such notice to the other party at the address shown
below (or at such other address as the other party may designate from time to
time in writing in accordance with this provision): (i) if to Company, to it at
55 Broad Street, 10th Floor, New York, New York 10004, Attn: Chief Executive
Officer, with a copy to Dewey Ballantine, 1301 Avenue of the Americas, New York,
New York 10019, Attn: Frank E. Morgan II, Esq.; and (ii) if to Employer, to it
at 449 Guard Hill Road, Bedford, New York 10508, Attn: Mr. Phil Ramone, with a
copy to _________________________, Attn: __________________. Notice shall be
sufficiently given when hand delivered, or deposited so addressed, postage
prepaid, in the United States mail, or when transmitted by telegraph, telex,
facsimile or similar means. By any of the aforementioned methods, the effective
date of notice shall be the date that such notice is delivered; provided,
however, that the effective date of any notice of a change of address shall be
the date of receipt.
(g) If for any reason any provision in this Agreement is held
to be invalid or unenforceable by any court or arbitrator, such holding shall in
no way affect any other provision of this Agreement or the validity of the
remainder of this Agreement, and the affected provision shall be modified or
curtailed only to the extent necessary to bring it into compliance with the
applicable law.
(h) The captions used in this Agreement are for convenience
only and shall not be deemed to be a part, or affect in any way the construction
or interpretation, of this Agreement.
(i) This Agreement may be executed in any number of
counterparts, each of which shall be deemed an original and all of which, taken
together, shall constitute one and the same agreement.
10
<PAGE> 11
IN WITNESS WHEREOF, the parties have executed and entered into
this Agreement as of the date first above written.
N2K INC.
By: /s/ Lawrence L. Rosen
-------------------------
Its: Chief Executive Officer
-------------------------
PHIL RAMONE, INC.
By: /s/ Phil Ramone
-------------------------
Its:
-------------------------
11
<PAGE> 12
INDUCEMENT
I have read and understood the above agreement and hereby confirm
the authority of Phil Ramone, Inc. ("Lender") to furnish my services in
accordance with the provisions thereof, to grant the rights granted or to be
granted thereunder and to make or give the representations, warranties,
indemnities and agreements made or given therein. As a material inducement to
N2K Inc., I agree to abide and be personally bound by all of the terms,
conditions and provisions of said agreement to which Lender is subject
(including all representations, warranties, indemnities, grants of rights and
agreements made or given by Lender therein) as if I were a direct party thereto
and to look solely to Lender for any and all compensation due to me in
connection with the foregoing.
/s/ Phil Ramone
-----------------------------
Phil Ramone
12
<PAGE> 1
EXHIBIT 11.1
N2K INC. AND SUBSIDIARY
PRO FORMA NET LOSS PER COMMON SHARE CALCULATION(A)
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, 1996 JUNE 30, 1997
----------------- ------------------
<S> <C> <C>
Pro forma net loss per common share:
Loss from continuing operations......................... $(17,939,235) $ (9,748,983)
Loss from discontinued operations....................... (968,674) (415,970)
--------------- ----------------
Net loss............................................. $(18,907,909) $(10,164,953)
============= ===============
Weighted average number of shares issued and
outstanding.......................................... 2,780,877 2,993,950
Incremental number of shares related to preferred stock
and common stock issuances and common stock options
and warrants granted within 12 months of the
initial public offering
- Preferred stock.................................... 158,203 79,102
- Common stock....................................... 122,226 102,403
- Common stock options and warrants.................. 348,990 348,990
Preferred stock converted into common stock upon
consummation of the initial public offering.......... 3,631,659 4,704,926
------------- ---------------
Adjusted weighted average number of shares
outstanding.......................................... 7,041,955 8,229,371
============= ===============
Pro forma net loss per common share:
Loss from continuing operations...................... $(2.55) $(1.19)
Discontinued operations.............................. (0.14) (0.05)
------------- ---------------
Pro forma net loss per Common share............... $(2.69) $(1.24)
============= ===============
</TABLE>
- ---------------
(A) Pro Forma Net Loss Per Common Share (Unaudited)
Pro forma net loss per Common share was calculated by dividing net loss by
the weighted average number of common shares outstanding for the respective
periods adjusted for the dilutive effect of common stock equivalents, which
consist of stock options using the treasury stock method. Pursuant to the
requirements of the Securities and Exchange Commission, common stock issued
by the Company during the 12 months immediately preceding the initial
public offering, plus the number of common equivalent shares which became
issuable during the same period pursuant to the grant of common stock
options and warrants, have been included in the calculation of the shares
used in computing pro forma net loss per Common share as if they were
outstanding for all periods presented (using the treasury stock method and
the initial public offering price of $16 per Common share). Pursuant to the
policy of the staff of the Securities and Exchange Commission, the
calculation of shares used in computing pro forma net loss per Common share
also includes the Series A, Series B, Series C, Series D, Series E and
Series F Preferred stock which will convert into 171,276, 178,569, 566,399,
651,381, 1,501,755 and 1,333,321 shares, respectively, of Common stock upon
the consummation of the Offering contemplated in this Prospectus as if they
were converted to Common stock on their original date of issuance. The
Series G Preferred stock which will convert into 620,077 shares of Common
stock upon the consummation of the Offering, have been included as
outstanding for all periods presented (using the treasury stock method and
the initial public offering price of $16 per Common share) since they were
issued during the 12 months immediately preceding the initial public
offering.
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
To N2K Inc.:
As independent public accountants, we hereby consent to the use of our report
and to all references to our firm included in or made a part of this
registration statement.
/s/ Arthur Andersen LLP
Philadelphia, PA
September 26, 1997
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the inclusion in this Registration Statement on Form S-1
of our report dated January 31, 1996, with respect to Note F, February 13,
1996, on our audit of the financial statements of N2K, Inc., a New York
Corporation, as at December 31, 1995 and for the period beginning March 7, 1995
(date of inception) through December 31, 1995. We also consent to the reference
to our firm under the caption "Experts."
/s/ Richard A. Eisner & Company, LLP
New York, New York
September 25, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 669,722
<SECURITIES> 0
<RECEIVABLES> 403,261
<ALLOWANCES> 0
<INVENTORY> 56,079
<CURRENT-ASSETS> 3,573,112
<PP&E> 5,551,670
<DEPRECIATION> (1,481,855)
<TOTAL-ASSETS> 8,397,980
<CURRENT-LIABILITIES> 5,175,398
<BONDS> 0
0
17,757
<COMMON> 3,083
<OTHER-SE> 2,013,780
<TOTAL-LIABILITY-AND-EQUITY> 8,397,980
<SALES> 2,936,895
<TOTAL-REVENUES> 2,936,895
<CGS> 2,477,643
<TOTAL-COSTS> 2,477,643
<OTHER-EXPENSES> 10,243,556
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 50,100
<INCOME-PRETAX> (10,164,953)
<INCOME-TAX> 0
<INCOME-CONTINUING> (9,748,983)
<DISCONTINUED> (415,970)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (10,164,953)
<EPS-PRIMARY> (1.24)
<EPS-DILUTED> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 4,483,450
<SECURITIES> 0
<RECEIVABLES> 63,549
<ALLOWANCES> 0
<INVENTORY> 113,824
<CURRENT-ASSETS> 5,451,005
<PP&E> 4,137,199
<DEPRECIATION> (1,002,435)
<TOTAL-ASSETS> 9,386,470
<CURRENT-LIABILITIES> 3,396,340
<BONDS> 0
0
15,397
<COMMON> 11,693
<OTHER-SE> 4,881,289
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</TABLE>
