<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 10, 1997
REGISTRATION NO. 333-33105
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 3
TO
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
N2K INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<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)
</TABLE>
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:
<TABLE>
<S> <C>
FRANK E. MORGAN II, ESQ. JULIE M. ALLEN, ESQ.
DEWEY BALLANTINE LLP 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: [ ]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
================================================================================
<PAGE> 2
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 OCTOBER 10, 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.
<TABLE>
<CAPTION>
=================================================================================================
Price to Proceeds to
Public Underwriting Company(2)
Discounts and
Commissions(1)
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share......................... $ $ $
- -------------------------------------------------------------------------------------------------
Total............................. $ $ $
- -------------------------------------------------------------------------------------------------
Total Assuming Full Exercise of
Over-Allotment Option(3)........ $ $ $
=================================================================================================
</TABLE>
(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. (See "Technology -- Audio Encoding and Delivery" for
information regarding the minimum hardware and software requirements to access
the Company's audio formats.) 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
3
<PAGE> 5
in joint promotions to customers of this co-branded area. The Company has also
entered into a website services agreement (the "Netscape Services Agreement")
with Netscape Communications Corporation ("Netscape"), pursuant to which the
Company will produce, develop and manage a retail website modeled after Music
Boulevard that will be promoted by Netscape and will be readily accessible by
visitors to Netscape's website to purchase music products and access related
information. In a related agreement, Netscape has granted the Company a
worldwide license to use, distribute and bundle a version of the Netscape
Navigator software with the Company's CD ROM products. In addition, the Company
has established an 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
<PAGE> 6
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, Excite and
Netscape, 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 October 10, 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.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
-------------------------------------------- ---------------------------
1994 1995 1996 1996 1997
----------- ----------- ------------ ----------- -----------
<S> <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............... 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
============= ============
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1997
--------------------------------------------------
ACTUAL PRO FORMA(5) AS ADJUSTED(6)
----------- ------------ ---------------
<S> <C> <C> <C>
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>
- ---------------
(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 October
10, 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
8
<PAGE> 10
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, Netscape, 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
9
<PAGE> 11
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
10
<PAGE> 12
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
11
<PAGE> 13
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
12
<PAGE> 14
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."
13
<PAGE> 15
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."
14
<PAGE> 16
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
15
<PAGE> 17
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 $33.8 million of the net proceeds of this
offering for specific uses including payments to AOL, Excite and Netscape,
repayment of short-term indebtedness, expansion of the Company's technical
infrastructure and marketing. The balance of the net proceeds, approximately
$9.2 million (approximately $15.9 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.
16
<PAGE> 18
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; to fund the $3.0 million due to Netscape under the
Netscape License Agreement (as defined herein) 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 October 10, 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 October 10, 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 October 10, 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.
25
<PAGE> 27
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
26
<PAGE> 28
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 October 10, 1997. See Note 1 of Notes to Consolidated Financial Statements.
See "Use of Proceeds."
27
<PAGE> 29
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 $1.5
million has been paid and $10.5 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.
N2K entered into a website services agreement with Netscape on September
27, 1997, pursuant to which the Company will produce, develop and manage a
retail website, to be maintained on the Company's servers and linked to
Netscape's website, that will be modeled after, but differentiated from, the
Company's Music Boulevard website. Under this Netscape Services Agreement,
visitors to Netscape's website may readily access the retail website, which will
be promoted by Netscape using content provided by the Company, for the online
purchase of music products and access to related information. The Netscape
Services Agreement provides for the Company to pay Netscape $1.0 million due 12
months after the date on which the service is fully functional and accessible to
end users and a second payment of $1.0 million 18 months after such date. In
addition, over the two-year contract term, Netscape and the Company will share
net revenues from the sale of
28
<PAGE> 30
certain music products, advertising services, subscriptions to content, fees
paid by content providers for the provision of pay-per-view access to end users
and sponsorships. N2K has entered into two additional agreements with Netscape.
Under a trademark license agreement (the "Netscape License Agreement") effective
as of September 28, 1997, Netscape granted to the Company a license to use
Netscape's trademark in connection with the retail website that will, in part,
promote Netscape's products and services. In exchange for the rights granted to
the Company under the license, the Company has agreed to pay Netscape a one-time
license fee of $4.0 million, $1.0 million of which was paid at the time of
execution of the agreement, $2.0 million of which must be paid by the first to
occur of December 1, 1997 or the consummation of this offering and $1.0 million
of which must be paid by March 28, 1998. Under a CD ROM agreement effective as
of September 27, 1997, Netscape granted to the Company a worldwide license to
use, distribute and bundle with the Company's CD ROM products for distribution
to the Company's customers a specified version of the Netscape Navigator
software and the related documentation. In consideration for the distribution of
such software by the Company, Netscape has agreed to pay the Company a fee for
each customer of the Company that registers with an Internet service provider
through Netscape's Internet access account server during the two-year contract
term.
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.
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
29
<PAGE> 31
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.
30
<PAGE> 32
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. The Company has also entered into the Netscape Services
Agreement, pursuant to which the Company will produce, develop and manage a
retail website modeled after Music Boulevard that will be promoted by Netscape
and will be readily accessible by visitors to Netscape's website to purchase
music products and access related information. In a related agreement, Netscape
has granted the Company a worldwide license to use, distribute and bundle a
version of the Netscape Navigator software with the Company's CD ROM products.
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
31
<PAGE> 33
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 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.
32
<PAGE> 34
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 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, Netscape, 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
33
<PAGE> 35
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.
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
34
<PAGE> 36
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, 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.
35
<PAGE> 37
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 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
36
<PAGE> 38
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 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
37
<PAGE> 39
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). 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
38
<PAGE> 40
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.
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. The Company has also entered into the Netscape Services
Agreement, pursuant to which the Company will produce, develop and manage a
retail website modeled after Music Boulevard that will be promoted by Netscape
and will be readily accessible by visitors to Netscape's website to purchase
music products and access related information. In a related agreement, Netscape
has granted the Company a worldwide license to use, distribute and bundle a
version of the Netscape Navigator software with the Company's CD ROM products.
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."
39
<PAGE> 41
- The Netscape Services Agreement provides for the Company to pay Netscape
$1.0 million due 12 months after the date on which the retail website is
fully functional and accessible to end users and a second payment of $1.0
million 18 months after such date. In addition, over the two-year
contract term, Netscape and the Company will share revenues from the sale
of certain music products, advertising services, subscriptions to
content, fees paid by content providers for the provision of pay-per-view
access to end users and sponsorships. Under the Netscape License
Agreement, the Company has agreed to pay Netscape a one-time license fee
of $4.0 million, $1.0 million of which was paid at the time of execution
of the agreement, $2.0 million of which must be paid by the first to
occur of December 1, 1997 or the consummation of this offering and $1.0
million of which must be paid by March 28, 1998. Under a third agreement
involving the distribution of Netscape Navigator software with the
Company's CD ROM products, Netscape will pay the Company a fee for each
customer of the Company that registers with an Internet service provider
through Netscape's Internet access account server during the two-year
contract term.
- 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 products/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.
40
<PAGE> 42
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 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
41
<PAGE> 43
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.
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.
42
<PAGE> 44
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
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.
43
<PAGE> 45
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 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
44
<PAGE> 46
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 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
45
<PAGE> 47
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 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
46
<PAGE> 48
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.
47
<PAGE> 49
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
48
<PAGE> 50
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
49
<PAGE> 51
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.
50
<PAGE> 52
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."
51
<PAGE> 53
(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.
52
<PAGE> 54
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.
53
<PAGE> 55
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
54
<PAGE> 56
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.
55
<PAGE> 57
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
56
<PAGE> 58
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
57
<PAGE> 59
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.
58
<PAGE> 60
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
59
<PAGE> 61
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
60
<PAGE> 62
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.
61
<PAGE> 63
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.
62
<PAGE> 64
(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.
63
<PAGE> 65
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
40,000,000 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."
64
<PAGE> 66
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
65
<PAGE> 67
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.
66
<PAGE> 68
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."
67
<PAGE> 69
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.
68
<PAGE> 70
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 LLP 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.
69
<PAGE> 71
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.
70
<PAGE> 72
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> 73
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> 74
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> 75
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> 76
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> 77
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> 78
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
<PAGE> 79
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
<PAGE> 80
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
<PAGE> 81
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> 82
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> 83
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> 84
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> 85
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> 86
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> 87
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> 88
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> 89
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> 90
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> 91
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> 92
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> 93
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> 94
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> 95
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> 96
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> 97
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> 98
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> 99
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> 100
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> 101
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> 102
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> 103
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> 104
[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> 105
======================================================
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.................... 3
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.............................. 31
Management............................ 48
Certain Transactions.................. 59
Principal Stockholders................ 62
Description of Capital Stock.......... 64
Shares Eligible for Future Sale....... 67
Underwriting.......................... 68
Legal Matters......................... 69
Experts............................... 70
Additional Information................ 70
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> 106
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> 107
(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> 108
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.X
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.X
4.17 -- Form of 14% Senior Note of the Company. X
4.18 -- Form of Warrant Certificate of the Company, issued in connection with the 14%
Senior Notes.X
4.19 -- Letter Agreement dated September 16, 1997 between the Company and America Online,
Inc.+X
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
</TABLE>
II-3
<PAGE> 109
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -------------------------------------------------------------------------------------
<C> <S>
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).X
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.X
10.16 -- Sponsorship Agreement dated September 23, 1997 between the Company and Excite,
Inc.+X
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.+X
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.+X
10.25 -- Memorandum of Understanding dated August 4, 1997 between the Company and
PointCast, Inc.+X
10.26 -- Music Producer's Agreement dated as of October 15, 1996 between the Company and
Phil Ramone, Inc.X
10.27 -- Web Site Services Agreement dated as of September 27, 1997 between Netscape
Communications Corporation and the Company.+
10.28 -- Trademark License Agreement dated as of September 28, 1997 between Netscape
Communications Corporation and the Company.+
10.29 -- CD ROM Agreement dated as of September 27, 1997 between Netscape Communications
Corporation and the Company.+
11.1 -- Statement re: Computation of Per Share Earnings.X
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).
</TABLE>
II-4
<PAGE> 110
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -------------------------------------------------------------------------------------
<C> <S>
24.1 -- Power(s) of Attorney.X
27.A -- Financial Data Schedule.X
27.B -- Financial Data Schedule.X
</TABLE>
- ---------------
+ 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> 111
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 3 to the Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in New York, New
York, on October 10, 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 Amendment
No. 3 to the Registration Statement has been signed by the following persons in
the capacities indicated on the 10th day of October, 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
/s/ JONATHAN V. DIAMOND Vice Chairman and Director
- ---------------------------------------------
Jonathan V. Diamond
/s/ ROBERT DAVID GRUSIN 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
/s/ ROBERT C. HARRIS, JR. Director
- ---------------------------------------------
Robert C. Harris, Jr.
/s/ SUSANNE HARRISON Director
- ---------------------------------------------
Susanne Harrison
*By:
- ---------------------------------------------
Bruce Johnson
Attorney-in-Fact
</TABLE>
II-6
<PAGE> 112
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.X
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.X
4.17 -- Form of 14% Senior Note of the Company.X
4.18 -- Form of Warrant Certificate of the Company, issued in connection with
the 14% Senior Notes.X
4.19 -- Letter Agreement dated September 16, 1997 between the Company and
America Online, Inc.+X
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
</TABLE>
<PAGE> 113
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- ------ --------------------------------------------------------------------------- ------------
<C> <S> <C>
10.6 -- Letter Agreement re: Revolving Line of Credit with CoreStates Bank, N.A.
(f.k.a. Meridian Bank).X
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.X
10.16 -- Sponsorship Agreement dated September 23, 1997 between the Company and
Excite, Inc.+X
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.+X
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.+X
10.25 -- Memorandum of Understanding dated August 4, 1997 between the Company and
PointCast, Inc.+X
10.26 -- Music Producer's Agreement dated as of October 15, 1996 between the
Company and Phil Ramone, Inc.X
10.27 -- Web Site Services Agreement dated as of September 27, 1997 between
Netscape Communications Corporation and the Company.+
10.28 -- Trademark License Agreement dated as of September 28, 1997 between
Netscape Communications Corporation and the Company.+
</TABLE>
<PAGE> 114
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- ------ --------------------------------------------------------------------------- ------------
<C> <S> <C>
10.29 -- CD ROM Agreement dated as of September 27, 1997 between Netscape
Communications Corporation and the Company.+
11.1 -- Statement re: Computation of Per Share Earnings.X
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.X
27.B -- Financial Data Schedule.X
</TABLE>
- ---------------
+ Confidential treatment requested.
X Previously filed.
<PAGE> 1
Exhibit 1.1
3,000,000 SHARES
N2K INC.
COMMON STOCK
UNDERWRITING AGREEMENT
October __, 1997
PAINEWEBBER INCORPORATED
UNTERBERG HARRIS
As Representatives of the
several Underwriters
c/o PaineWebber Incorporated
1285 Avenue of the Americas
New York, New York 10019
Ladies and Gentlemen:
N2K Inc., a Delaware corporation (the "Company"), proposes to
sell an aggregate of 3,000,000 shares (the "Firm Shares") of the Company's
Common Stock, $.001 par value per share (the "Common Stock"), to you and to the
other underwriters named in Schedule I (collectively, the "Underwriters"), for
whom you are acting as representatives (the "Representatives"). The Company has
also agreed to grant to you and the other Underwriters an option (the "Option")
to purchase up to an additional 450,000 shares of Common Stock (the "Option
Shares") on the terms and for the purposes set forth in Section 1(b). The Firm
Shares and the Option Shares are hereinafter collectively referred to as the
"Shares."
The initial public offering price per share for the Shares and
the purchase price per share for the Shares to be paid by the several
Underwriters shall be agreed upon by the Company and the Representatives, acting
on behalf of the several Underwriters, and such agreement shall be set forth in
a separate written instrument substantially in the form of Exhibit A hereto (the
"Price Determination Agreement"). The Price Determination Agreement may take the
form of an exchange of any standard form of written telecommunication among the
Company and the Representatives and shall specify such applicable information as
is indicated in Exhibit A hereto. The offering of the Shares will be governed by
this Agreement, as supplemented by the Price Determination Agreement. From and
after the date of the execution and delivery of the Price Determination
Agreement, this Agreement shall be deemed to incorporate, and, unless the
context otherwise indicates, all references contained herein to "this Agreement"
and to the phrase "herein" shall be deemed to include the Price Determination
Agreement.
The Company confirms as follows its agreements with the
Representatives and the several other Underwriters.
<PAGE> 2
1. Agreement to Sell and Purchase.
(a) On the basis of the representations, warranties and
agreements of the Company herein contained and subject to all the terms and
conditions of this Agreement, the Company agrees to sell to each Underwriter
named below, and each Underwriter, severally and not jointly, agrees to purchase
from the Company at the purchase price per share for the Firm Shares to be
agreed upon by the Representatives and the Company in accordance with Section
1(c) or 1(d) hereof (which purchase price shall not be higher than the maximum
price recommended by PaineWebber Incorporated acting as "qualified independent
underwriter" within the meaning of Rule 2720 (formerly Schedule E) to the
by-laws of the National Association of Securities Dealers, Inc. ("NASD")) and
set forth in the Price Determination Agreement, the number of Firm Shares set
forth opposite the name of such Underwriter in Schedule I, plus such additional
number of Firm Shares which such Underwriter may become obligated to purchase
pursuant to Section 8 hereof. Schedule I may be attached to the Price
Determination Agreement.
(b) Subject to all the terms and conditions of this Agreement,
the Company grants the Option to the several Underwriters to purchase, severally
and not jointly, up to 450,000 Option Shares from the Company at the same price
per share as the Underwriters shall pay for the Firm Shares. The Option may be
exercised only to cover over-allotments in the sale of the Firm Shares by the
Underwriters and may be exercised in whole or in part at any time (but not more
than once) on or before the 30th day after the date of this Agreement (or, if
the Company has elected to rely on Rule 430A, on or before the 30th day after
the date of the Price Determination Agreement), upon written or telegraphic
notice (the "Option Shares Notice") by the Representatives to the Company no
later than 12:00 noon, New York City time, at least two and no more than five
business days before the date specified for closing in the Option Shares Notice
(the "Option Closing Date") setting forth the aggregate number of Option Shares
to be purchased and the time and date for such purchase. On the Option Closing
Date, the Company will issue and sell to the Underwriters the number of Option
Shares set forth in the Option Shares Notice, and each Underwriter will purchase
such percentage of the Option Shares as is equal to the percentage of Firm
Shares that such Underwriter is purchasing, as adjusted by the Representatives
in such manner as they deem advisable to avoid fractional shares.
(c) The initial public offering price per share for the Firm
Shares and the purchase price per share for the Firm Shares to be paid by the
several Underwriters shall be agreed upon and set forth in the Price
Determination Agreement if the Company has elected to rely on Rule 430A (as
hereinafter defined). In the event such price has not been agreed upon and the
Price Determination Agreement has not been executed by the close of business on
the fourteenth business day following the date on which the Registration
Statement (as hereinafter defined) becomes effective, this Agreement shall
terminate forthwith, without liability of any party to any other party except
that Section 6 shall remain in effect.
(d) If the Company has elected not to rely on Rule 430A, the
initial public offering price per share for the Firm Shares and the purchase
price per share for the Firm Shares to be paid by the several Underwriters shall
be agreed upon and set forth in the Price Determination Agreement, which shall
be dated the date hereof, and an amendment to the
-2-
<PAGE> 3
Registration Statement containing such per share price information shall be
filed before the Registration Statement becomes effective.
2. Delivery and Payment. Delivery of the Firm Shares shall be
made to the Representatives for the accounts of the Underwriters at the office
of PaineWebber Incorporated, 1285 Avenue of the Americas, New York, New York
10019, against payment of the purchase price by wire transfer of Federal Funds
or similar same day funds to an account designated in writing by the Company to
PaineWebber Incorporated at least one business day prior to the Closing Date (as
hereinafter defined). Such payment shall be made at 10:00 a.m., New York City
time, on the third business day (or fourth business day, if the Price
Determination Agreement is executed after 4:30 p.m.) after the date on which the
first bona fide offering of the Shares to the public is made by the Underwriters
or at such time on such other date, not later than ten business days after such
date, as may be agreed upon by the Company and the Representatives (such date is
hereinafter referred to as the "Closing Date").
To the extent the Option is exercised, delivery of the Option
Shares against payment by the Underwriters (in the manner specified above) will
take place at the offices specified above for the Closing Date at the time and
date (which may be the Closing Date) specified in the Option Shares Notice.
Certificates evidencing the Shares shall be in definitive form
and shall be registered in such names and in such denominations as the
Representatives shall request at least two business days prior to the Closing
Date or the Option Closing Date, as the case may be, by written notice to the
Company. For the purpose of expediting the checking and packaging of
certificates for the Shares, the Company agrees to make such certificates
available for inspection at least 24 hours prior to the Closing Date or the
Option Closing Date, as the case may be.
The cost of original issue tax stamps, if any, in connection
with the issuance and delivery of the Firm Shares and Option Shares by the
Company to the respective Underwriters shall be borne by the Company. The
Company will pay and save each Underwriter and any subsequent holder of the
Shares harmless from any and all liabilities with respect to or resulting from
any failure or delay in paying Federal and state stamp and other transfer taxes,
if any, which may be payable or determined to be payable in connection with the
original issuance or sale to such Underwriter of the Firm Shares and Option
Shares.
3. Representations and Warranties of the Company. The Company
represents, warrants and covenants to each Underwriter that:
(a) A registration statement (Registration No. 333-33105) on
Form S-1 relating to the Shares, including a preliminary prospectus and such
amendments to such registration statement as may have been required to the date
of this Agreement, has been prepared by the Company under the provisions of the
Securities Act of 1933, as amended (the "Act"), and the rules and regulations
(collectively referred to as the "Rules and Regulations") of the Securities and
Exchange Commission (the "Commission") thereunder, and has been filed with the
Commission. The term "preliminary prospectus" as used herein means a preliminary
prospectus as contemplated by Rule 430 or Rule 430A ("Rule 430A") of the Rules
and Regulations included at any time as part of the registration statement.
Copies of such registration statement and
-3-
<PAGE> 4
amendments and of each related preliminary prospectus have been delivered to the
Representatives. The term "Registration Statement" means the registration
statement as amended at the time it becomes or became effective (the "Effective
Date"), including financial statements and all exhibits and any information
deemed to be included by Rule 430A or Rule 434 of the Rules and Regulations. If
the Company files a registration statement to register a portion of the Shares
and relies on Rule 462(b) of the Rules and Regulations for such registration
statement to become effective upon filing with the Commission (the "Rule 462
Registration Statement"), then any reference to the "Registration Statement"
shall be deemed to include the Rule 462 Registration Statement, as amended from
time to time. The term "Prospectus" means the prospectus as first filed with the
Commission pursuant to Rule 424(b) of the Rules and Regulations or, if no such
filing is required, the form of final prospectus included in the Registration
Statement at the Effective Date.
(b) On the Effective Date, the date the Prospectus is first
filed with the Commission pursuant to Rule 424(b) (if required), at all times
subsequent to and including the Closing Date and, if later, the Option Closing
Date and when any post-effective amendment to the Registration Statement becomes
effective or any amendment or supplement to the Prospectus is filed with the
Commission, the Registration Statement and the Prospectus (as amended or as
supplemented if the Company shall have filed with the Commission any amendment
or supplement thereto), including the financial statements included in the
Prospectus, did or will comply with all applicable provisions of the Act, and
the Rules and Regulations and will contain all statements required to be stated
therein in accordance with the Act and the Rules and Regulations. On the
Effective Date and when any post-effective amendment to the Registration
Statement becomes effective, no part of the Registration Statement or any such
amendment did or will contain any untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary in order to
make the statements therein not misleading. At the Effective Date, the date the
Prospectus or any amendment or supplement to the Prospectus is filed with the
Commission and at the Closing Date and, if later, the Option Closing Date, the
Prospectus did not or will not contain any untrue statement of a material fact
or omit to state a material fact necessary to make the statements therein, in
the light of the circumstances under which they were made, not misleading. The
foregoing representations and warranties in this Section 3(b) do not apply to
any statements or omissions made in reliance on and in conformity with
information relating to any Underwriter furnished in writing to the Company by
the Representatives specifically for inclusion in the Registration Statement or
Prospectus or any amendment or supplement thereto. For all purposes of this
Agreement, the information contained in the last paragraph on the cover page of
the Prospectus, the stabilization legend on the inside front cover page of the
Prospectus, the table of Underwriters set forth under the caption "Underwriting"
in the Prospectus and the amounts of the selling concession and reallowance set
forth in the Prospectus constitute the only information relating to any
Underwriter furnished in writing to the Company by the Representatives
specifically for inclusion in the Registration Statement, the preliminary
prospectus or the Prospectus. The Company has not distributed any offering
material in connection with the offering or sale of the Shares other than the
Registration Statement, the preliminary prospectus, the Prospectus or any other
materials, if any, permitted by the Act.
(c) The only subsidiaries (as defined in the Rules and
Regulations) of the Company are the subsidiaries listed on Exhibit 21 to the
Registration Statement (the "Subsidiaries"). The Company and each of its
Subsidiaries is, and at the Closing Date will be, a
-4-
<PAGE> 5
corporation duly organized, validly existing and in good standing under the laws
of its jurisdiction of incorporation. The Company and each of its Subsidiaries
has, and at the Closing Date will have, full power and authority to conduct all
the activities conducted by it, to own or lease all the assets owned or leased
by it and to conduct its business as described in the Registration Statement and
the Prospectus. The Company and each of its Subsidiaries is, and at the Closing
Date will be, duly licensed or qualified to do business and in good standing as
a foreign corporation in all jurisdictions in which the nature of the activities
conducted by it or the character of the assets owned or leased by it makes such
licensing or qualification necessary, except where the failure to so qualify
would not have a material adverse effect on the business, properties, business
prospects, condition (financial or otherwise) or results of operations of the
Company and its Subsidiaries, taken as a whole. All of the outstanding shares of
capital stock of the Subsidiaries have been duly authorized and validly issued
and are fully paid and non-assessable and are owned by the Company free and
clear of all liens, encumbrances and claims whatsoever. Except for the stock of
the Subsidiaries, the Company does not own, and at the Closing Date will not
own, directly or indirectly, any shares of stock or any other equity or
long-term debt securities of any corporation or have any equity interest in any
firm, partnership, joint venture, association or other entity. Complete and
correct copies of the certificate of incorporation and of the by-laws of the
Company and each of its Subsidiaries and all amendments thereto have been
delivered to the Representatives, and no changes therein will be made subsequent
to the date hereof and prior to the Closing Date or, if later, the Option
Closing Date.
(d) The outstanding shares of Common Stock have been, and the
Shares to be issued and sold by the Company upon such issuance will be, duly
authorized, validly issued, fully paid and nonassessable and will not be subject
to any preemptive or similar right. The description of the Common Stock in the
Registration Statement and the Prospectus is, and at the Closing Date will be,
complete and accurate in all material respects. Except as set forth in the
Prospectus, the Company does not have outstanding, and at the Closing Date will
not have outstanding, any options to purchase, or any rights or warrants to
subscribe for, or any securities or obligations convertible into, or any
contracts or commitments to issue or sell, any shares of Common Stock, any
shares of capital stock of any Subsidiary or any such warrants, convertible
securities or obligations.
(e) The financial statements and schedules included in the
Registration Statement or the Prospectus present fairly the consolidated
financial condition of the Company as of the respective dates thereof and the
consolidated results of operations and cash flows of the Company for the
respective periods covered thereby, all in conformity with generally accepted
accounting principles ("GAAP") applied on a consistent basis throughout the
entire period involved, except as otherwise disclosed in the Prospectus. The pro
forma financial statements, if any, and other pro forma financial information
included in the Registration Statement or the Prospectus (i) present fairly in
all material respects the information shown therein, (ii) have been prepared in
accordance with the Commission's rules and guidelines with respect to pro forma
financial statements and (iii) have been properly computed on the bases
described therein. The assumptions used in the preparation of the pro forma
financial statements, if any, and other pro forma financial information included
in the Registration Statement or the Prospectus are reasonable and the
adjustments used therein are appropriate to give effect to the transactions or
circumstances referred to therein. No other financial statements or schedules of
the Company are required by the Act or the Rules and Regulations to be included
in the Registration Statement or
-5-
<PAGE> 6
the Prospectus. Each of Richard A. Eisner & Company, LLP and Arthur Anderson LLP
(the "Accountants") who have expressed their opinions on the audited financial
statements and schedules included in the Registration Statement and the
Prospectus, are independent accountants with respect to the Company as required
by the Act and the Rules and Regulations. The statements included in the
Registration Statement with respect to the Accountants pursuant to Rule 509 of
Regulation S-K of the Rules and Regulations are true and correct in all material
respects.
(f) The Company and each of its Subsidiaries maintains a
system of internal accountings controls sufficient to provide reasonable
assurance that (i) transactions are executed in accordance with management's
general or specific authorization; (ii) transactions are recorded as necessary
to permit preparation of financial statements in conformity with GAAP and to
maintain accountability for assets; (iii) access to assets is permitted only in
accordance with management's general or specific authorization; and (iv) the
recorded accountability for assets is compared with existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences.
(g) Subsequent to the respective dates as of which information
is given in the Registration Statement and the Prospectus and prior to the
Closing Date, except as set forth in or contemplated by the Registration
Statement and the Prospectus, (i) there has not been and will not have been any
change in the capitalization of the Company, or any material adverse change in
the business, properties, business prospects, condition (financial or otherwise)
or results of operations of the Company and its Subsidiaries, taken as a whole,
arising for any reason whatsoever, (ii) neither the Company nor any of its
Subsidiaries has incurred nor will it incur any material liabilities or
obligations, direct or contingent, nor has it entered into nor will it enter
into any material transactions other than pursuant to this Agreement and the
transactions referred to herein and (iii) the Company has not and will not have
paid or declared any dividends or other distributions of any kind on any class
of its capital stock.
(h) The Company is not an "investment company" or an
"affiliated person" of, or "promoter" or "principal underwriter" for, an
"investment company," as such terms are defined in the Investment Company Act of
1940, as amended.
(i) Except as set forth in the Registration Statement and the
Prospectus, there are no actions, suits or proceedings pending or, to the
Company's knowledge, threatened against or affecting the Company or any of its
Subsidiaries or any of their respective officers in their capacity as such,
before or by any Federal or state court, commission, regulatory body,
administrative agency or other governmental body, domestic or foreign, wherein
an unfavorable ruling, decision or finding might materially and adversely affect
the Company or any of its Subsidiaries or its business, properties, business
prospects, condition (financial or otherwise) or results of operations, taken as
a whole.
(j) The Company and each of its Subsidiaries has, and at the
Closing Date will have, (i) all governmental licenses, permits, consents,
orders, approvals and other authorizations necessary to carry on its business as
contemplated in the Prospectus, except to the extent that the failure to have
any such license, permit, consent, order, approval or authorization will not
have a material adverse effect on the business, properties, business prospects,
condition
-6-
<PAGE> 7
(financial or otherwise) or results of operations of the Company and its
Subsidiaries, taken as a whole, (ii) complied in all respects with all laws,
regulations and orders applicable to it or its business, the violation of which
would have a material adverse effect on the business, properties, business
prospects, condition (financial or otherwise) or results of operations of the
Company and its Subsidiaries, taken as a whole, and (iii) performed all its
obligations required to be performed by it, and is not, and at the Closing Date
will not be, in default in any material respect, under any indenture, mortgage,
deed of trust, voting trust agreement, loan agreement, bond, debenture, note
agreement, lease, contract or other agreement or instrument (collectively, a
"contract or other agreement") to which it is a party or by which its property
is bound or affected. To the best knowledge of the Company and each of its
Subsidiaries, no other party under any contract or other agreement to which it
is a party is in default in any respect thereunder. Neither the Company nor any
of its Subsidiaries is, nor at the Closing Date will any of them be, in
violation of any provision of its certificate of incorporation or by-laws.
(k) No consent, approval, authorization or order of, or any
filing or declaration with, any court or governmental agency or body is required
in connection with the authorization, issuance, transfer, sale or delivery of
the Shares by the Company, in connection with the execution, delivery and
performance of this Agreement by the Company or in connection with the taking by
the Company of any action contemplated hereby, except such as have been obtained
under the Act or the Rules and Regulations and such as may be required under
state securities or Blue Sky laws or the by-laws and rules of the NASD in
connection with the purchase and distribution by the Underwriters of the Shares.
(l) The Company has full corporate power and authority to
enter into this Agreement. This Agreement has been duly authorized, executed and
delivered by the Company and constitutes a valid and binding agreement of the
Company and is enforceable against the Company in accordance with the terms
hereof, except as rights to indemnity and contribution hereunder may be limited
by federal or state securities laws or principles of public policy and subject
to the qualification that the enforceability of the Company's obligations
hereunder may be limited by bankruptcy, fraudulent conveyance, insolvency,
reorganization, moratorium and other laws relating to or affecting creditors'
rights generally and by general equitable principles. The performance of this
Agreement and the consummation of the transactions contemplated hereby and the
application of the net proceeds from the offering and sale of the Shares in the
manner set forth in the Prospectus under "Use of Proceeds" will not result in
the creation or imposition of any lien, charge or encumbrance upon any of the
assets of the Company or any of its Subsidiaries pursuant to the terms or
provisions of, or result in a breach or violation of any of the terms or
provisions of, or constitute a default under, or give any other party a right to
terminate any of its obligations under, or result in the acceleration of any
obligation under, the certificate of incorporation or by-laws of the Company or
any of its Subsidiaries, any contract or other agreement to which the Company or
any of its Subsidiaries is a party or by which the Company or any of its
Subsidiaries or any of its properties is bound or affected, or violate or
conflict with any judgment, ruling, decree, order, statute, rule or regulation
of any court or other governmental agency or body applicable to the business or
properties of the Company or any of its Subsidiaries, which individually or in
the aggregate would have a material adverse effect on the business, properties,
business prospects, condition (financial or otherwise) or results of operations
of the Company and its Subsidiaries, taken as a whole.
-7-
<PAGE> 8
(m) The Company and each of its Subsidiaries has good and
marketable title to all properties and assets described in the Prospectus as
owned by it, free and clear of all liens, charges, encumbrances or restrictions,
except such as are described in the Registration Statement and the Prospectus or
are not material to the business of the Company or its Subsidiaries. The Company
and each of its Subsidiaries has valid, subsisting and enforceable leases for
the properties described in the Prospectus as leased by it, with such exceptions
as are not material and do not materially interfere with the use made and
proposed to be made of such properties by the Company and such Subsidiaries.
(n) There is no document or contract of a character required
to be described in the Registration Statement or the Prospectus or to be filed
as an exhibit to the Registration Statement which is not described or filed as
required. All such contracts to which the Company or any Subsidiary is a party
have been duly authorized, executed and delivered by the Company or such
Subsidiary, constitute valid and binding agreements of the Company or such
Subsidiary and are enforceable against the Company or such Subsidiary in
accordance with the terms thereof, except as such enforceability may be limited
by bankruptcy, fraudulent conveyance, insolvency, reorganization, moratorium and
other laws relating to or affecting creditors' rights generally and by general
equitable principles.
(o) No statement, representation, warranty or covenant made by
the Company in this Agreement or made in any certificate or document required by
this Agreement to be delivered to the Representatives was or will be, when made,
inaccurate, untrue or incorrect.
(p) Neither the Company nor any of its directors, officers or
controlling persons has taken, directly or indirectly, any action intended, or
which might reasonably be expected, to cause or result, under the Act or
otherwise, in, or which has constituted, stabilization or manipulation of the
price of any security of the Company to facilitate the sale or resale of the
Shares.
(q) No holder of securities of the Company has rights to the
registration of any securities of the Company because of the filing of the
Registration Statement, other than such rights as have been duly waived in
accordance with the terms thereof.
(r) The Shares are duly authorized for listing, subject to
official notice of issuance, on the Nasdaq National Market.
(s) The Company and its Subsidiaries are in compliance with
all federal, state and local employment and labor laws, including, but not
limited to, laws relating to non-discrimination in hiring, promotion and pay of
employees; no labor dispute with the employees of the Company or any Subsidiary
exists or, to the knowledge of the Company, is imminent or threatened; and the
Company is not aware of any existing, imminent or threatened labor disturbance
by the employees of any of its principal suppliers, manufacturers or contractors
that could result in a material adverse effect on the condition (financial or
otherwise) or on the earnings, business, properties, business prospects or
operations of the Company and its Subsidiaries, taken as a whole.
-8-
<PAGE> 9
(t) The Company and its Subsidiaries own, or are licensed or
otherwise have the full exclusive right to use, the patents, patent rights,
licenses, inventions, copyrights, know-how (including trade secrets and other
unpatented and/or unpatentable proprietary or confidential information, systems
or procedures), trademarks, services marks and trade names (collectively,
"patent and proprietary rights") presently employed by them or which are
necessary in connection with the conduct of the business now operated by them.
Each person or entity to whom or to which any confidential information related
to the foregoing has been disclosed has entered into a related confidentiality
and nondisclosure agreement with the Company or one of its Subsidiaries. Neither
the Company nor any of its Subsidiaries has received any written notice or
otherwise has actual knowledge of any infringement of or conflict with asserted
rights of others or any other claims with respect to any patent or proprietary
rights, or of any basis for rendering any patent and proprietary rights invalid
or inadequate to protect the interest of the Company or any of its Subsidiaries.
(u) Neither the Company nor any of its Subsidiaries nor to the
Company's knowledge, any employee or agent of the Company or any Subsidiary has
made any payment of funds of the Company or any Subsidiary or received or
retained any funds in violation of any law, rule or regulation or of a character
required to be disclosed in the Prospectus.
(v) The Company has complied, and until the completion of the
distribution of the Shares will comply, with all of the provisions of
(including, without limitation, filing all forms required by) Section 517.075 of
the Florida Securities and Investor Protection Act and Regulation 3E-900.001
issued thereunder with respect to the offering and sale of the Shares.
(w) The Company and its Subsidiaries (i) are in compliance
with any and all applicable foreign, federal, state and local laws and
regulations relating to the protection of human health and safety, the
environment or imposing liability or standards of conduct concerning any
Hazardous Material (as hereinafter defined) ("Environmental Laws"), (ii) have
received all permits, licenses or other approvals required of them under
applicable Environmental Laws to conduct their respective businesses and (iii)
are in compliance with all terms and conditions of any such permit, license or
approval, except where such noncompliance with Environmental Laws, failure to
receive required permits, licenses or other approvals or failure to comply with
the terms and conditions of such permits, licenses or approvals would not,
individually or in the aggregate result in a material adverse effect on the
condition (financial or otherwise) or on the earnings, business, properties,
business prospects or operations of the Company and its Subsidiaries, taken as a
whole. The term "Hazardous Material" means (A) any "hazardous substance" as
defined by the Comprehensive Environmental Response, Compensation and Liability
Act of 1980, as amended, (B) any "hazardous waste" as defined by the Resource
Conservation and Recovery Act, as amended, (C) any petroleum or petroleum
product, (D) any polychlorinated biphenyl and (E) any pollutant or contaminant
or hazardous, dangerous, or toxic chemical, material, waste or substance
regulated under or within the meaning of any other Environmental Law.
(x) Except as set forth in the Registration Statement and the
Prospectus, there are no costs and liabilities associated with or arising in
connection with Environmental Laws as currently in effect (including, without
limitation, costs of compliance therewith) which would, singly or in the
aggregate have a material adverse effect on the condition (financial or
otherwise)
-9-
<PAGE> 10
or on the earnings, business, properties, business prospects or operations of
the Company and its Subsidiaries, taken as a whole.
(y) The Company maintains insurance with respect to its
properties and business of the types and in amounts generally deemed adequate
for its business and consistent with insurance coverage maintained by similar
companies and businesses, all of which insurance is in full force and effect.
(z) The Company has filed all material federal, state and
foreign income and franchise tax returns and has paid all taxes shown as due
thereon, other than taxes which are being contested in good faith and for which
adequate reserves have been established in accordance with GAAP; and the Company
has no knowledge of any tax deficiency which has been or might be asserted or
threatened against the Company. There are no tax returns of the Company or any
of its Subsidiaries that are currently being audited by state, local or federal
taxing authorities or agencies (and with respect to which the Company or any
Subsidiary has received notice), where the findings of such audit, if adversely
determined, would result in a material adverse effect on the condition
(financial or otherwise) or on the earnings, business, properties, business
prospects or operations of the Company and its Subsidiaries, taken as a whole.
(aa) With respect to each employee benefit plan, program and
arrangement (including, without limitation, any "employee benefit plan" as
defined in Section 3(3) of the Employee Retirement Income Security Act of 1974,
as amended ("ERISA")) maintained or contributed to by the Company, or with
respect to which the Company could incur any liability under ERISA
(collectively, the "Benefit Plans"), no event has occurred and, to the best
knowledge of the Company, there exists no condition or set of circumstances, in
connection with which the Company could be subject to any liability under the
terms of such Benefit Plan, applicable law (including, without limitation, ERISA
and the Internal Revenue Code of 1986, as amended (the "Internal Revenue Code"))
or any applicable agreement that could materially adversely affect the business,
properties, business prospects, condition (financial or otherwise) or results of
operations of the Company and its Subsidiaries, taken as a whole.
(ab) The merger of N2K Inc., a Pennsylvania corporation
("Pennsylvania N2K"), with and into the Company (the "Merger") has become
effective and the identity, existence, corporate organization, purposes, powers,
objects, franchises, privileges, rights, immunities, restrictions, debts,
liabilities and duties (the "Corporate Rights") of Pennsylvania N2K will
continue in effect and be unimpaired by the Merger, and the Corporate Rights of
Pennsylvania N2K have been merged with and into the Company, which is, as the
surviving corporation, fully vested therewith. All consents, approvals, orders
and authorizations of, and all registrations, declarations and filings with, all
persons (governmental and private) required to be obtained or made in connection
with the consummation of the Merger have been so obtained or made. The Merger
qualifies as a reorganization under the provisions of Section 368 of the
Internal Revenue Code.
4. Agreements of the Company. The Company agrees with the
several Underwriters as follows:
-10-
<PAGE> 11
(a) The Company will not, either prior to the Effective Date
or thereafter during such period as the Prospectus is required by law to be
delivered in connection with sales of the Shares by an Underwriter or dealer,
file any amendment or supplement to the Registration Statement or the
Prospectus, unless a copy thereof shall first have been submitted to the
Representatives within a reasonable period of time prior to the filing thereof
and the Representatives shall not have objected thereto in good faith.
(b) The Company will use its best efforts to cause the
Registration Statement to become effective, and will notify the Representatives
promptly, and will confirm such advice in writing, (1) when the Registration
Statement has become effective and when any post-effective amendment thereto
becomes effective, (2) of any request by the Commission for amendments or
supplements to the Registration Statement or the Prospectus or for additional
information, (3) of the issuance by the Commission of any stop order suspending
the effectiveness of the Registration Statement or the initiation of any
proceedings for that purpose or the threat thereof, (4) of the happening of any
event during the period mentioned in the second sentence of Section 4(e) that in
the judgment of the Company makes any statement made in the Registration
Statement or the Prospectus untrue or that requires the making of any changes in
the Registration Statement or the Prospectus in order to make the statements
therein, in light of the circumstances in which they are made, not misleading
and (5) of receipt by the Company or any representative or attorney of the
Company of any other communication from the Commission relating to the Company,
the Registration Statement, any preliminary prospectus or the Prospectus. If at
any time the Commission shall issue any order suspending the effectiveness of
the Registration Statement, the Company will make every reasonable effort to
obtain the withdrawal of such order at the earliest possible moment. The Company
will use its best efforts to comply with the provisions of and make all
requisite filings with the Commission pursuant to Rule 430A and to notify the
Representatives promptly of all such filings.
(c) The Company will furnish to the Representatives, without
charge, two signed copies of the Registration Statement and of any
post-effective amendment thereto, including financial statements and schedules,
and all exhibits thereto and will furnish to the Representatives, without
charge, for transmittal to each of the other Underwriters, a copy of the
Registration Statement and any post-effective amendment thereto, including
financial statements and schedules but without exhibits.
(d) The Company will comply with all the provisions of any
undertakings contained in the Registration Statement.
(e) On the Effective Date, and thereafter from time to time,
the Company will deliver to each of the Underwriters, without charge, as many
copies of the Prospectus or any amendment or supplement thereto as the
Representatives may reasonably request. The Company consents to the use of the
Prospectus or any amendment or supplement thereto by the several Underwriters
and by all dealers to whom the Shares may be sold, both in connection with the
offering or sale of the Shares and for any period of time thereafter during
which the Prospectus is required by law to be delivered in connection therewith.
If during such period of time any event shall occur which in the judgment of the
Company or counsel to the Underwriters should be set forth in the Prospectus in
order to make any statement therein, in the light of the circumstances under
which it was made, not misleading, or if it is necessary to supplement or amend
the
-11-
<PAGE> 12
Prospectus to comply with law, the Company will forthwith prepare and duly file
with the Commission an appropriate supplement or amendment thereto, and will
deliver to each of the Underwriters, without charge, such number of copies
thereof as the Representatives may reasonably request.
(f) Prior to any public offering of the Shares by the
Underwriters, the Company will cooperate with the Representatives and Counsel to
the Underwriters in connection with the registration or qualification of the
Shares for offer and sale under the securities or Blue Sky laws of such
jurisdictions as the Representatives may request; provided, that in no event
shall the Company be obligated to qualify to do business in any jurisdiction
where it is not now so qualified or to take any action which would subject it to
general service of process in any jurisdiction where it is not now so subject.
(g) During the period of five years commencing on the
Effective Date, the Company will furnish to the Representatives and each other
Underwriter who may so request copies of such financial statements and other
periodic and special reports as the Company may from time to time distribute
generally to the holders of any class of its capital stock, and will furnish to
the Representatives and each other Underwriter who may so request a copy of each
annual or other report it shall be required to file with the Commission.
(h) The Company will make generally available to holders of
its securities as soon as may be practicable but in no event later than the last
day of the fifteenth full calendar month following the calendar quarter in which
the Effective Date falls, an earnings statement (which need not be audited but
shall be in reasonable detail) for a period of 12 months ended commencing after
the Effective Date, and satisfying the provisions of Section 11 (a) of the Act
(including Rule 158 of the Rules and Regulations).
(i) Whether or not the transactions contemplated by this
Agreement are consummated or this Agreement is terminated, the Company will pay,
or reimburse if paid by the Representatives, all costs and expenses incident to
the performance of the obligations of the Company under this Agreement,
including but not limited to costs and expenses of or relating to (1) the
preparation, printing and filing of the Registration Statement and exhibits to
it, each preliminary prospectus, the Prospectus and any amendment or supplement
to the Registration Statement or the Prospectus, (2) the preparation and
delivery of certificates representing the Shares, (3) the word processing,
printing and reproduction of this Agreement, the Agreement Among Underwriters,
any Dealer Agreements and any Underwriters' Questionnaire, (4) furnishing
(including costs of shipping, mailing and courier) such copies of the
Registration Statement, the Prospectus and any preliminary prospectus, and all
amendments and supplements thereto, as may be requested for use in connection
with the offering and sale of the Shares by the Underwriters or by dealers to
whom Shares may be sold, (5) the listing of the Shares on the Nasdaq National
Market, (6) any filings required to be made by the Underwriters with the NASD,
and the reasonable fees, disbursements and other charges of counsel for the
Underwriters in connection therewith, (7) the registration or qualification of
the Shares for offer and sale under the securities or Blue Sky laws of such
jurisdictions designated pursuant to Section 4(f), including the reasonable
fees, disbursements and other charges of counsel to the Underwriters in
connection therewith, and the preparation and printing of preliminary,
supplemental and final Blue Sky
-12-
<PAGE> 13
memoranda, (8) counsel to the Company, (9) the transfer agent for the Shares and
(10) the Accountants.
(j) If this Agreement shall be terminated by the Company
pursuant to any of the provisions hereof (otherwise than pursuant to Section 8)
or if for any reason the Company shall be unable to perform its obligations
hereunder, the Company will reimburse the several Underwriters for all
out-of-pocket expenses (including the fees, disbursements and other charges of
counsel to the Underwriters) reasonably incurred by them in connection herewith.
(k) The Company will not at any time, directly or indirectly,
take any action intended, or which might reasonably be expected, to cause or
result in, or which will constitute, stabilization of the price of the shares of
Common Stock to facilitate the sale or resale of any of the Shares.
(l) The Company will apply the net proceeds from the offering
and sale of the Shares to be sold by the Company in the manner set forth in the
Prospectus under "Use of Proceeds" and shall file such reports with the
Commission with respect to the sale of the Shares and the application of the
proceeds therefrom as may be required in accordance with Rule 463 under the Act.
(m) During the period of 180 days commencing at the Closing
Date, the Company will not, without the prior written consent of PaineWebber
Incorporated, directly or indirectly, sell, offer to sell, grant any option for
the sale of, or otherwise dispose of, any Common Stock or securities convertible
into Common Stock, other than to the Underwriters pursuant to this Agreement and
other than pursuant to employee benefit plans.
(n) The Company will not, and will cause each of its executive
officers, directors and the beneficial owners of at least [ ]% of the
outstanding shares of Common Stock, which shall include each beneficial owner of
1% or more of the outstanding shares of Common Stock, to enter into agreements
with the Representatives in the form set forth in Exhibit B to the effect that
they will not, for a period of 180 days after the commencement of the public
offering of the Shares, without the prior written consent of PaineWebber
Incorporated, sell, contract to sell or otherwise dispose of any shares of
Common Stock or rights to acquire such shares (other than pursuant to employee
stock option plans or in connection with other employee incentive compensation
arrangements).
5. Conditions of the Obligations of the Underwriters. In
addition to the execution and delivery of the Price Determination Agreement, the
obligations of each Underwriter hereunder are subject to the following
conditions:
(a) Notification that the Registration Statement has become
effective shall be received by the Representatives not later than 5:00 p.m., New
York City time, on the date of this Agreement or at such later date and time as
shall be consented to in writing by the Representatives and all filings required
by Rule 424 of the Rules and Regulations and Rule 430A shall have been made.
(b) (i) No stop order suspending the effectiveness of the
Registration Statement shall have been issued and no proceedings for that
purpose shall be pending or
-13-
<PAGE> 14
threatened by the Commission, (ii) no order suspending the effectiveness of
the Registration Statement or the qualification or registration of the Shares
under the securities or Blue Sky laws of any jurisdiction shall be in effect and
no proceeding for such purpose shall be pending before or threatened or, to the
knowledge of the Company, contemplated by the Commission or the authorities of
any such jurisdiction, (iii) any request for additional information on the part
of the staff of the Commission or any such authorities shall have been complied
with to the satisfaction of the staff of the Commission or such authorities and
(iv) after the date hereof no amendment or supplement to the Registration
Statement or the Prospectus shall have been filed unless a copy thereof was
first submitted to the Representatives and the Representatives did not object
thereto in good faith, and the Representatives shall have received certificates,
dated the Closing Date and the Option Closing Date and signed by the Chief
Executive Officer or the Chairman of the Board of Directors of the Company and
the Chief Financial Officer of the Company (who may, as to proceedings
threatened, rely upon the best of their information and belief), to the effect
of clauses (i), (ii) and (iii).
(c) Since the respective dates as of which information is
given in the Registration Statement and the Prospectus, (i) there shall not have
been, and no development shall have occurred which could reasonably be expected
to result in, a material adverse change in the general affairs, business,
business prospects, properties, management, condition (financial or otherwise)
or results of operations of the Company and its Subsidiaries, taken as a whole,
whether or not arising from transactions in the ordinary course of business, in
each case other than as set forth in or contemplated by the Registration
Statement and the Prospectus and (ii) neither the Company nor any of its
Subsidiaries shall have sustained any material loss or interference with its
business or properties from fire, explosion, flood or other casualty, whether or
not covered by insurance, or from any labor dispute or any court or legislative
or other governmental action, order or decree, which is not set forth in the
Registration Statement and the Prospectus, if in the judgment of the
Representatives any such development makes it impracticable or inadvisable to
consummate the sale and delivery of the Shares by the Underwriters at the
initial public offering price.
(d) Since the respective dates as of which information is
given in the Registration Statement and the Prospectus, there shall have been no
litigation or other proceeding instituted against the Company or any of its
Subsidiaries or any of their respective officers or directors in their
capacities as such, before or by any Federal, state or local court, commission,
regulatory body, administrative agency or other governmental body, domestic or
foreign, in which litigation or proceeding an unfavorable ruling, decision or
finding would materially and adversely affect the business, properties, business
prospects, condition (financial or otherwise) or results of operations of the
Company and its Subsidiaries taken as a whole.
(e) Each of the representations and warranties of the Company
contained herein shall be true and correct in all material respects at the
Closing Date and, with respect to the Option Shares, at the Option Closing Date,
as if made at the Closing Date and, with respect to the Option Shares, at the
Option Closing Date, and all covenants and agreements herein contained to be
performed on the part of the Company and all conditions herein contained to be
fulfilled or complied with by the Company at or prior to the Closing Date and,
with respect to the Option Shares, at or prior to the Option Closing Date, shall
have been duly performed, fulfilled or complied with.
-14-
<PAGE> 15
(f) The Representatives shall have received an opinion, dated
the Closing Date and, with respect to the Option Shares, dated the Option
Closing Date, and satisfactory in form and substance to counsel for the
Underwriters, from Dewey Ballantine, counsel to the Company, to the effect set
forth in Exhibit C.
(g) The Representatives shall have received an opinion, dated
the Closing Date and the Option Closing Date, from O'Sullivan Graev & Karabell,
LLP, counsel to the Underwriters, with respect to the Registration Statement,
the Prospectus and this Agreement, which opinion shall be satisfactory in all
respects to the Representatives.
(h) On the date of the Prospectus, the Accountants shall have
furnished to the Representatives a letter, dated the date of its delivery,
addressed to the Representatives and in form and substance satisfactory to the
Representatives, confirming that they are independent accountants with respect
to the Company as required by the Act and the Rules and Regulations and with
respect to the financial and other statistical and numerical information
contained in the Registration Statement. At the Closing Date and, as to the
Option Shares, the Option Closing Date, the Accountants shall have furnished to
the Representatives a letter, dated the date of its delivery, which shall
confirm, on the basis of a review in accordance with the procedures set forth in
the letter from the Accountants, that nothing has come to their attention during
the period from the date of the letter referred to in the prior sentence to a
date (specified in the letter) not more than five days prior to the Closing Date
and the Option Closing Date which would require any change in their letter dated
the date of the Prospectus, if it were required to be dated and delivered at the
Closing Date and the Option Closing Date.
(i) At the Closing Date and, as to the Option Shares, the
Option Closing Date, there shall be furnished to the Representatives an accurate
certificate, dated the date of its delivery, signed by each of the Chief
Executive Officer and the Chief Financial Officer of the Company, in form and
substance satisfactory to the Representatives, to the effect that:
(i) Each signer of such certificate has carefully
examined the Registration Statement and the Prospectus and (A)
as of the date of such certificate, such documents are true
and correct in all material respects and do not omit to state
a material fact required to be stated therein or necessary in
order to make the statements therein not untrue or misleading
and (B) since the Effective Date, no event has occurred as a
result of which it is necessary to amend or supplement the
Prospectus in order to make the statements therein not untrue
or misleading in any material respect;
(ii) Each of the representations and warranties of
the Company contained in this Agreement were, when originally
made, and are, at the time such certificate is delivered, true
and correct in all material respects;
(iii) Each of the covenants required herein to be
performed by the Company on or prior to the delivery of such
certificate has been duly, timely and fully performed and each
condition herein required to be complied with by the Company
on or prior to the date of such certificate has been duly,
timely and fully complied with in every material respect; and
-15-
<PAGE> 16
(iv) Since the respective dates as of which
information is given in the Registration Statement and the
Prospectus, (A) there has not been, and no development has
occurred which could reasonably be expected to result in, a
material adverse change in the general affairs, business,
business prospects, properties, management, condition
(financial or otherwise) or results of operations of the
Company and its Subsidiaries, taken as a whole, whether or not
arising from transactions in the ordinary course of business,
in each case other than as set forth in or contemplated by the
Registration Statement and the Prospectus and (B) neither the
Company nor any of its Subsidiaries has sustained any material
loss or interference with its business or properties from
fire, explosion, flood or other casualty, whether or not
covered by insurance, or from any labor dispute or any court
or legislative or other governmental action, order or decree,
which is not set forth in the Registration Statement and the
Prospectus,
and such other matters as the Representatives may reasonable request.
(j) On or prior to the Closing Date, the Representatives shall
have received the executed agreements referred to in Section 4(n).
(k) The Shares shall be qualified for sale in such states as
the Representatives may reasonably request, each such qualification shall be in
effect and not subject to any stop order or other proceeding on the Closing Date
and the Option Closing Date.
(l) Prior to the Closing Date, the Shares shall have been
duly authorized for listing by the Nasdaq National Market upon official notice
of issuance.
(m) The NASD shall have approved the underwriting terms and
arrangements and such approval shall not have been withdrawn or limited.
(n) The company shall have furnished to the Representatives
such certificates, in addition to those specifically mentioned herein, as the
Representatives may have reasonably requested as to the accuracy and
completeness at the Closing Date and the Option Closing Date of any statement in
the Registration Statement or the Prospectus as to the accuracy at the Closing
Date and the Option Closing Date of the representations and warranties of the
Company herein, as to the performance by the Company of its obligations
hereunder, or as to the fulfillment of the conditions concurrent and precedent
to the obligations hereunder of the Representatives.
6. Indemnification.
(a) The Company will indemnify and hold harmless each
Underwriter, the directors, officers, employees and agents of each Underwriter
and each person, if any, who controls each Underwriter within the meaning of
Section 15 of the Act or Section 20 of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), from and against any and all losses, claims,
liabilities, expenses and damages (including, but not limited to, any and all
investigative, legal and other expenses reasonably incurred in connection with,
and any and all amounts paid in settlement of, any action, suit or proceeding
between any of the indemnified
-16-
<PAGE> 17
parties and any indemnifying parties or between any indemnified party and any
third party, or otherwise, or any claim asserted), as and when incurred to which
any Underwriter or any such person, may become subject under the Act, the
Exchange Act or other Federal or state statutory law or regulation, at common
law or otherwise, insofar as such losses, claims, liabilities, expenses or
damages arise out of or are based on (i) any untrue statement or alleged untrue
statement of a material fact contained in any preliminary prospectus, the
Registration Statement or the Prospectus or any amendment or supplement to the
Registration Statement or the Prospectus, or in any application or other
document executed by or on behalf of the Company or based on written information
furnished to or on behalf of the Company filed in any jurisdiction in order to
qualify the Shares under the Securities Laws thereof or filed with the
Commission; (ii) the omission or alleged omission to state in such document a
material fact required to be stated in it or necessary to make the statements in
it not misleading; or (iii) any act or failure to act or any alleged act or
failure to act by any Underwriter in connection with, or relating in any manner
to, the Shares or the offering contemplated hereby, and which is included as
part of or referred to in any loss, claim, liability, expense or damage arising
out of or based upon matters covered by clause (i) or (ii) above (provided that
the Company shall not be liable under this clause (iii) to the extent it is
finally judicially determined by a court of competent jurisdiction that such
loss, claim, liability, expense or damage resulted directly from any such acts
or failures to act undertaken or omitted to be taken by such Underwriter through
its gross negligence or willful misconduct); provided that the Company will not
be liable to the extent that such loss, claim, liability, expense or damage (A)
arises from the sale of the Shares in the public offering to any person by an
Underwriter and is based on an untrue statement or omission or alleged untrue
statement or omission made in reliance on and in conformity with information
relating to any Underwriter furnished in writing to the Company by the
Representatives on behalf of any Underwriter expressly for inclusion in the
Registration Statement, any preliminary prospectus or the Prospectus or (B)
results solely from an untrue statement of a material fact contained in, or the
omission of a material fact from, such preliminary prospectus, which untrue
statement or omission was completely corrected in the Prospectus (as then
amended or supplemented if the Company shall sustain the burden of proving that
the Underwriters sold Shares to the person alleging such loss, claim, liability,
expense or damage without sending or giving, at or prior to the written
confirmation of such sale, a copy of the Prospectus (as then amended or
supplemented) if the Company has previously furnished copies thereof to the
Underwriters within a reasonable amount of time prior to such sale or such
confirmation, and the Underwriters failed to deliver the corrected Prospectus,
if required by law to have so delivered it and if delivered would have been a
complete defense against the person asserting such loss, claim, liability,
expense or damage. This indemnity will be in addition to any liability that the
Company might otherwise have.
(b) The Company will also indemnify and hold harmless
PaineWebber Incorporated acting "as qualified independent underwriter" within
the meaning of Rules 2720(b)(15)(A) through (b)(15)(G) of the Conduct Rules, of
the NASD (the "QIU"), the directors, officers, employees, and agents and each
person, if any, who controls the QIU within the meaning of Section 15 of the Act
or Section 20 of the Exchange Act, against any losses, claims, liabilities,
expenses and damages (including, but not limited to, any and all investigative,
legal and other expenses reasonably incurred in connection with, and any and all
amounts paid in settlement of, any action, suit or proceeding between any of the
indemnified parties and any indemnifying parties or between, any indemnified
parties and any third party, or otherwise, or any claim asserted), as and when
incurred, as a result of the QIU's participation as a "qualified
-17-
<PAGE> 18
independent underwriter" in connection with the offering of the Common Stock,
except for any losses, claims, liabilities, expenses, damages and judgments
resulting from the QIU's or such controlling person's willful misconduct or
gross negligence.
(c) Each Underwriter will indemnify and hold harmless the
Company, each person, if any, who controls the Company within the meaning of
Section 15 of the Act or Section 20 of the Exchange Act, each director of the
Company and each officer of the Company who signs the Registration Statement to
the same extent as the foregoing indemnity from the Company to each Underwriter,
but only insofar as losses, claims, liabilities, expenses or damages arise out
of or are based on any untrue statement or omission or alleged untrue statement
or omission made in reliance on and in conformity with information relating to
any Underwriter furnished in writing to the Company by the Representatives on
behalf of such Underwriter expressly for use in the Registration Statement, the
preliminary prospectus or the Prospectus. This indemnity will be in addition to
any liability that each Underwriter might otherwise have; provided, however,
that in no case shall any Underwriter be liable or responsible for any amount in
excess of the underwriting discounts and commissions received by such
Underwriter.
(d) Any party that proposes to assert the right to be
indemnified under this Section 6 will, promptly after receipt of notice of
commencement of any action against such party in respect of which a claim is to
be made against an indemnifying party or parties under this Section 6, notify
each such indemnifying party of the commencement of such action, enclosing a
copy of all papers served, but the omission so to notify such indemnifying party
will not relieve it from any liability that it may have to any indemnified party
under the foregoing provisions of this Section 6 unless, and only to the extent
that, such omission results in the forfeiture of substantive rights or defenses
by the indemnifying party. If any such action is brought against any indemnified
party and it notifies the indemnifying party of its commencement, the
indemnifying party will be entitled to participate in and, to the extent that it
elects by delivering written notice to the indemnified party promptly after
receiving notice of the commencement of the action from the indemnified party,
jointly with any other indemnifying party similarly notified, to assume the
defense of the action, with counsel satisfactory to the indemnified party, and
after notice from the indemnifying party to the indemnified party of its
election to assume the defense, the indemnifying party will not be liable to the
indemnified party for any legal or other expenses except as provided below and
except for the reasonable costs of investigation subsequently incurred by the
indemnified party in connection with the defense. The indemnified party will
have the right to employ its own counsel in any such action, but the fees,
expenses and other charges of such counsel will be at the expense of such
indemnified party unless (1) the employment of counsel by the indemnified party
has been authorized in writing by the indemnifying party, (2) the indemnified
party has reasonably concluded (based on advice of counsel) that there may be
legal defenses available to it or other indemnified parties that are different
from or in addition to those available to the indemnifying party, (3) a conflict
or potential conflict exists (based on advice of counsel to the indemnified
party) between the indemnified party and the indemnifying party (in which case
the indemnifying party will not have the right to direct the defense of such
action on behalf of the indemnified party) or (4) the indemnifying party has not
in fact employed counsel to assume the defense of such action within a
reasonable time after receiving notice of the commencement of the action, in
each of which cases the reasonable fees, disbursements and other charges of
counsel will be at the expense of the indemnifying party or parties. It is
understood that the indemnifying party or parties shall not, in connection with
any proceeding or related proceedings in the same
-18-
<PAGE> 19
jurisdiction, be liable for the reasonable fees, disbursements and other charges
of more than one separate firm admitted to practice in such jurisdiction at any
one time for all such indemnified party or parties. All such fees, disbursements
and other charges will be reimbursed by the indemnifying party promptly as they
are incurred. An indemnifying party will not be liable for any settlement of any
action or claim effected without its written consent (which consent will not be
unreasonably withheld). No indemnifying party shall, without the prior written
consent of each indemnified party, settle or compromise or consent to the entry
of any judgment in any pending or threatened claim, action or proceeding
relating to the matters contemplated by this Section 6 (whether or not any
indemnified party is a party thereto), unless such settlement, compromise or
consent includes an unconditional release of each indemnified party from all
liability arising or that may arise out of such claim, action or proceeding.
Notwithstanding any other provision of this Section 6(d), if at any time an
indemnified party shall have requested an indemnifying party to reimburse the
indemnified party for fees and expenses of counsel, such indemnifying party
agrees that it shall be liable for any settlement effected without its written
consent if (i) such settlement is entered into more than 45 days after receipt
by such indemnifying party of the aforesaid request, (ii) such indemnifying
party shall have received notice of the terms of such settlement at least 30
days prior to such settlement being entered into and (iii) such indemnifying
party shall not have reimbursed such indemnified party in accordance with such
request prior to the date of such settlement.
(e) In order to provide for just and equitable contribution in
circumstances in which the indemnification provided for in the foregoing
paragraphs of this Section 6 is applicable in accordance with its terms but for
any reason is held to be unavailable from the Company or the Underwriters, the
Company and the Underwriters will contribute to the total losses, claims,
liabilities, expenses and damages (including any investigative, legal and other
expenses reasonably incurred in connection with, and any amount paid in
settlement of, any action, suit or proceeding or any claim asserted, but after
deducting any contribution received by the Company from persons other than the
Underwriters, such as persons who control the Company within the meaning of the
Act, officers of the Company who signed the Registration Statement and directors
of the Company, who also may be liable for contribution) to which the Company
and any one or more of the Underwriters may be subject in such proportion as
shall be appropriate to reflect the relative benefits received by the Company on
the one hand and the Underwriters on the other. The relative benefits received
by the Company on the one hand and the Underwriters on the other shall be deemed
to be in the same proportion as the total net proceeds from the offering (before
deducting expenses) received by the Company bear to the total underwriting
discounts and commissions received by the Underwriters, in each case as set
forth in the table on the cover page of the Prospectus. If, but only if, the
allocation provided by the foregoing sentence is not permitted by applicable
law, the allocation of contribution shall be made in such proportion as is
appropriate to reflect not only the relative benefits referred to in the
foregoing sentence but also the relative fault of the Company, on the one hand,
and the Underwriters, on the other, with respect to the statements or omissions
which resulted in such loss, claim, liability, expense or damage, or action in
respect thereof, as well as any other relevant equitable considerations with
respect to such offering. Such relative fault shall be determined by reference
to whether the untrue or alleged untrue statement of a material fact or omission
or alleged omission to state a material fact relates to information supplied by
the Company or the Representatives on behalf of the Underwriters, the intent of
the parties and their relative knowledge, access to information and opportunity
to correct or prevent such statement or omission. The Company and the
-19-
<PAGE> 20
Underwriters agree that PaineWebber Incorporated will not receive any additional
benefits hereunder for serving as the QIU in connection with the offering. The
Company and the Underwriters agree that it would not be just and equitable if
contributions pursuant to this Section 6(e) were to be determined by pro rata
allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take into account
the equitable considerations referred to herein. The amount paid or payable by
an indemnified party as a result of the loss, claim, liability, expense or
damage, or action in respect thereof, referred to above in this Section 6(e)
shall be deemed to include, for purpose of this Section 6(e), any legal or other
expenses reasonably incurred by such indemnified party in connection with
investigating or defending any such action or claim. Notwithstanding the
provisions of this Section 6(e), no Underwriter shall be required to contribute
any amount in excess of the underwriting discounts and commissions received by
it and no person found guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Act) will be entitled to contribution from any
person who was not guilty of such fraudulent misrepresentation. The
Underwriters' obligations to contribute as provided in this Section 6(e) are
several in proportion to their respective underwriting obligations and not
joint. For purposes of this Section 6(e), any person who controls a party to
this Agreement within the meaning of the Act will have the same rights to
contribution as that party, and each officer of the Company who signed the
Registration Statement will have the same rights to contribution as the Company,
subject in each case to the provisions hereof. Any party entitled to
contribution, promptly after receipt of notice of commencement of any action
against such party in respect of which a claim for contribution may be made
under this Section 6(e), will notify any such party or parties from whom
contribution may be sought, but the omission so to notify will not relieve the
party or parties from whom contribution may be sought from any other obligation
it or they may have under this Section 6(e). Except for a settlement entered
into pursuant to the last sentence of Section 6(d) hereof, no party will be
liable for contribution with respect to any action or claim settled without its
written consent (which consent will not be unreasonably withheld).
(f) The indemnity and contribution agreements contained in
this Section 6 and the representations and warranties of the Company contained
in this Agreement shall remain operative and in full force and effect regardless
of (i) any investigation made by or on behalf of the Underwriters, (ii)
acceptance of the Shares and payment therefor or (iii) any termination of this
Agreement.
7. Termination. The obligations of the several Underwriters
under this Agreement may be terminated at any time on or prior to the Closing
Date (or, with respect to the Option Shares, on or prior to the Option Closing
Date), by notice to the Company from the Representatives, without liability on
the part of any Underwriter to the Company, if, prior to delivery and payment
for the Shares (or the Option Shares, as the case may be), in the sole judgment
of the Representatives, (i) these has been, since the respective dates as of
which information is given in the Registration Statement, any material adverse
change in the Company's business, properties, business prospects, condition
(financial or otherwise) or results of operations, (ii) trading in any of the
equity securities of the Company shall have been suspended by the Commission,
the NASD, by an exchange that lists the Shares or by the Nasdaq Stock Market,
(iii) trading in securities generally on the New York Stock Exchange or the
Nasdaq Stock Market shall have been suspended or limited or minimum or maximum
prices shall have been generally established on such exchange or over the
counter market or additional material
-20-
<PAGE> 21
governmental restrictions, not in force on the date of this Agreement, shall
have been imposed upon trading in securities generally by such exchange or by
order of the Commission or the NASD or any court or other governmental
authority, (iv) a general banking moratorium shall have been declared by either
Federal or New York State authorities or (v) any material adverse change in the
financial or securities markets in the United States or in political, financial
or economic conditions in the United States or any outbreak or material
escalation of hostilities or declaration by the United States of a national
emergency or war or other calamity or crisis shall have occurred the effect of
any of which is such as to make it, in the sole judgment of the Representatives,
impracticable or inadvisable to market the Shares on the terms and in the manner
contemplated by the Prospectus.
8. Substitution of Underwriters. If any one or more of the
Underwriters shall fail or refuse to purchase any of the Firm Shares which it or
they have agreed to purchase hereunder, and the aggregate number of Firm Shares
which such defaulting Underwriter or Underwriters agreed but failed or refused
to purchase is not more than one-tenth of the aggregate number of Firm Shares,
the other Underwriters shall be obligated, severally, to purchase the Firm
Shares which such defaulting Underwriter or Underwriters agreed but failed or
refused to purchase, in the proportions which the number of Firm Shares which
they have respectively agreed to purchase pursuant to Section 1 bears to the
aggregate number of Firm Shares which all such non-defaulting Underwriters have
so agreed to purchase, or in such other proportions as the Representatives may
specify; provided that in no event shall the maximum number of Firm Shares which
any Underwriter has become obligated to purchase pursuant to Section 1 be
increased pursuant to this Section 8 by more than one-ninth of the number of
Firm Shares agreed to be purchased by such Underwriter without the prior written
consent of such Underwriter. If any Underwriter or Underwriters shall fall or
refuse to purchase any Firm Shares and the aggregate number of Firm Shares which
such defaulting Underwriter or Underwriters agreed but failed or refused to
purchase exceeds one-tenth of the aggregate number of the Firm Shares and
arrangements satisfactory to the Representatives and the Company for the
purchase of such Firm Shares are not made within 48 hours after such default,
this Agreement will terminate without liability on the part of any
non-defaulting Underwriter or the Company for the purchase or sale of any Shares
under this Agreement. In any such case either the Representatives or the Company
shall have the right to postpone the Closing Date, but in no event for longer
than seven days, in order that the required changes, if any, in the Registration
Statement and in the Prospectus or in any other documents or arrangements may be
effected. Any action taken pursuant to this Section 8 shall not relieve any
defaulting Underwriter from liability in respect of any default of such
Underwriter under this Agreement.
9. Miscellaneous. Notice given pursuant to any of the
provisions of this Agreement shall be in writing and, unless otherwise
specified, shall be mailed or delivered (a) if to the Company, at the office of
the Company, N2K Inc., 55 Broad Street, 10th floor, New York, New York 10004,
Attention: Jonathan V. Diamond or (b) if to the Underwriters, to the
Representatives at the offices of PaineWebber Incorporated, 1285 Avenue of the
Americas, New York, New York 10019, Attention: Corporate Finance Department. Any
such notice shall be effective only upon receipt. Any notice under Section 7 or
8 may be made by telex or telephone, but if so made shall be subsequently
confirmed in writing.
-21-
<PAGE> 22
This Agreement has been and is made solely for the benefit of the
several Underwriters and the Company and of the controlling persons, directors
and officers referred to in Section 6, and their respective successors and
assigns, and no other person shall acquire or have any right under or by virtue
of this Agreement. The term "successors and assigns" as used in this Agreement
shall not include a purchaser, as such purchaser, of Shares from any of the
several Underwriters.
All representations, warranties and agreements of the Company
contained herein or in certificates or other instruments delivered pursuant
hereto, shall remain operative and in full force and effect regardless of any
investigation made by or on behalf of any Underwriter or any of its controlling
persons and shall survive delivery of and payment for the Shares hereunder.
Any action required or permitted to be taken by the Representatives
under this Agreement may be taken by them jointly or by PaineWebber
Incorporated.
THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH
THE LAWS OF THE STATE OF NEW YORK WITHOUT REGARD TO THE CONFLICT OF LAWS
PRINCIPLES OF SUCH STATE.
This Agreement may be signed in two or more counterparts with the
same effect as if the signatures thereto and hereto were upon the same
instrument.
In case any provision in this Agreement shall be invalid, illegal or
unenforceable, the validity, legality and enforceability of the remaining
provisions shall not in any way be affected or impaired thereby.
The Company and the Underwriters each hereby irrevocably waive any
right they may have to a trial by jury in respect of any claim based upon or
arising out of this Agreement or the transactions contemplated hereby.
This Agreement may not be amended or otherwise modified or any
provision hereof waived except by an instrument in writing signed by the
Representatives and the Company.
-22-
<PAGE> 23
Please confirm that the foregoing correctly sets forth the agreement
among the Company and the several Underwriters.
Very truly yours,
N2K INC.
By: _______________________________
Jonathan V. Diamond
Vice Chairman
Confirmed as of the date first
above mentioned:
PAINEWEBBER INCORPORATED UNTERBERG HARRIS
Acting on behalf of themselves and as the Representatives of the other several
Underwriters named in Schedule I hereof.
By: PAINEWEBBER INCORPORATED
By: ______________________________
Riza Dekidjiev, Jr.
First Vice President
UNTERBERG HARRIS
By: ______________________________
Name:
Title:
<PAGE> 24
SCHEDULE I
UNDERWRITERS
<TABLE>
<CAPTION>
NUMBER OF
NAME OF FIRM SHARES
UNDERWRITERS TO BE PURCHASED
------------ ---------------
<S> <C>
PaineWebber Incorporated
Unterberg Harris
3,000,000
</TABLE>
<PAGE> 25
EXHIBIT A
N2K INC.
________________________
PRICE DETERMINATION AGREEMENT
October __, 1997
PAINEWEBBER INCORPORATED
UNTERBERG HARRIS
As Representatives of the several Underwriters
c/o PaineWebber Incorporated
1285 Avenue of the Americas
New York, New York 10019
Dear Ladies and Gentlemen:
Reference is made to the Underwriting Agreement, dated October
__,1997 (the "Underwriting Agreement"), among N2K Inc., a Delaware corporation
(the "Company"), and the several Underwriters named in Schedule I thereto or
hereto (the "Underwriters"), for whom PaineWebber Incorporated and Unterberg
Harris are acting as representatives (the "Representatives").
The Underwriting Agreement provides for the purchase by the
Underwriters from the Company, subject to the terms and conditions set forth
therein, of an aggregate of 3,000,000 shares (the "Firm Shares") of the
Company's common stock, par value $ .001 per share. This Agreement is the Price
Determination Agreement referred to in the Underwriting Agreement.
Pursuant to Section 1 of the Underwriting Agreement, the undersigned
agree with the Representatives as follows:
The initial public offering price per share for the Firm Shares
shall be $ _____.
The purchase price per share for the Firm Shares to be paid by the
several Underwriters shall be $ __________ representing an amount equal to the
initial public offering price set forth above, less $_______ per share.
The Company represents and warrants to each of the Underwriters that
the representations and warranties of the Company set forth in Section 3 of the
Underwriting Agreement are accurate as though expressly made at and as of the
date hereof.
As contemplated by the Underwriting Agreement, attached as Schedule
I is a completed list of the several Underwriters, which shall be a part of this
Agreement and the Underwriting Agreement.
<PAGE> 26
THIS AGREEMENT SHALL BE GOVERNED BY THE LAW OF THE STATE OF NEW YORK
WITHOUT REGARD TO THE CONFLICT OF LAWS PRINCIPLES OF SUCH STATE.
If the foregoing is in accordance with your understanding of the
agreement among the Underwriters and the Company, please sign and return to the
Company a counterpart hereof, whereupon this instrument along with all
counterparts and together with the Underwriting Agreement shall be a binding
agreement among the Underwriters and the Company in accordance with its terms
and the terms of the Underwriting Agreement.
Very truly yours,
N2K INC.
By: _____________________________
Jonathan V. Diamond
Vice Chairman
Confirmed as of the date first
above mentioned:
PAINEWEBBER INCORPORATED
UNTERBERG HARRIS
Acting on behalf of themselves and as the Representatives of the other several
Underwriters named in Schedule I hereof.
By: PAINEWEBBER INCORPORATED
By: ______________________________
Riza Dekidjiev, Jr.
First Vice President
UNTERBERG HARRIS
By: ______________________________
Name:
Title:
<PAGE> 27
EXHIBIT B
__________, 1997
PAINEWEBBER INCORPORATED
UNTERBERG HARRIS
As Representatives of the several Underwriters
c/o PaineWebber Incorporated
1285 Avenue of the Americas
New York, New York 10019
Dear Sirs:
In consideration of the agreement of the several Underwriters, for
whom PaineWebber Incorporated and Unterberg Harris (the "Representatives")
intend to act as Representatives, to underwrite a proposed initial public
offering (the "Offering") of shares of the Common Stock, par value $.001 per
share (the "Common Stock"), of N2K Inc., a Pennsylvania corporation to be
reincorporated in Delaware (the "Company"), the undersigned hereby agrees that
the undersigned will not, for a period of 180 days after the commencement of
such initial public offering, without the prior written consent of PaineWebber
Incorporated, offer to sell, sell, contract to sell, grant any option to sell,
encumber, pledge or otherwise dispose of, or require the Company to file with
the Securities and Exchange Commission a registration statement under the
Securities Act of 1933 to register, any shares of Common Stock or securities
convertible into or exchangeable for Common Stock or warrants or other rights to
acquire shares of Common Stock (collectively, the "Common Stock Equivalents") of
which the undersigned is now, or may in the future become, the holder or a
beneficial owner within the meaning of Rule 13d-3 under the Securities Exchange
Act of 1934, as amended or modified from time to time.
Anything contained herein to the contrary notwithstanding, any
person to whom shares of Common Stock or Common Stock Equivalents are
transferred from the undersigned by operation of law or otherwise shall be bound
by the terms of this Agreement.
In order to enable the aforesaid covenants to be enforced, the
undersigned hereby consents to the placing of legends and/or stop-transfer
orders with any transfer agent of the Common Stock with respect to any shares of
Common Stock or Common Stock Equivalents.
[Name of Signatory]
By: ________________________________
Name:
Title:
<PAGE> 28
EXHIBIT C
FORM OF OPINION OF
COUNSEL TO THE COMPANY
The Company and each of its Subsidiaries is a corporation duly
organized, validly existing and in good standing under the laws of the
jurisdiction of its incorporation and has full corporate power and authority to
conduct all the activities conducted by it, to own or lease all the assets owned
or leased by it and to conduct its business as described in the Registration
Statement and the Prospectus. The Company is the sole record owner and, to our
knowledge, the sole beneficial owner of all of the capital stock of each of its
Subsidiaries.
All of the outstanding shares of Common Stock have been, and the
Shares, when paid for by the Underwriters in accordance with the terms of the
Agreement*, will be, duly authorized, validly issued, fully paid and
nonassessable and will not be subject to any preemptive or similar right under
(i) the statutes, judicial and administrative decisions, and the rules and
regulations of the governmental agencies of the State of Delaware, (ii) the
Company's certificate of incorporation or by-laws or (iii) any instrument,
document, contract or other agreement referred to in the Registration Statement
or any instrument, document, contract or agreement filed as an exhibit to the
Registration Statement. Except as described in the Registration Statement or the
Prospectus, to the best of our knowledge, there is no commitment or arrangement
to issue, and there are no outstanding options, warrants or other rights calling
for the issuance of, any share of capital stock of the Company or any Subsidiary
to any person or any security or other instrument that by its terms is
convertible into, exercisable for or exchangeable for capital stock of the
Company.
No consent, approval, authorization or order of, or any filing or
declaration with, any court or governmental agency or body is required in
connection with the authorization, issuance, transfer, sale or delivery of the
Shares by the Company, in connection with the execution, delivery and
performance of the Agreement* by the Company or in connection with the taking by
the Company of any action contemplated thereby, except such as have been
obtained under the Act and the Rules and Regulations and such as may be required
under state securities or "Blue Sky" laws or by the by-laws and rules of the
NASD in connection with the purchase and distribution by the Underwriters of the
Shares to be sold by the Company.
The authorized, issued and outstanding capital stock of the Company
is as set forth in the Registration Statement and the Prospectus under the
caption "Capitalization." The description of the Common Stock contained in the
Prospectus is complete and accurate in all material respects. The form of
certificate used to evidence the Common Stock is in due and proper form and
complies with all applicable statutory requirements.
The Registration Statement and the Prospectus comply in all material
respects as to form with the requirements of the Act and the Rules and
Regulations (except that we express no opinion as to financial statements,
schedules and other financial data contained in the Registration Statement or
the Prospectus).
- --------
* All references in this opinion to the Agreement shall include the Price
Determination Agreement.
<PAGE> 29
To the best of our knowledge, any instrument, document, lease,
license, contract or other agreement (collectively, "Documents") required to be
described or referred to in the Registration Statement or the Prospectus has
been properly described or referred to therein and any Document required to be
filed as an exhibit to the Registration Statement has been filed as an exhibit
thereto; and no default exists in the due performance or observance of any
material obligation, agreement, covenant or condition contained in any Document
filed or required to be filed as an exhibit to the Registration Statement.
To the best of our knowledge, except as disclosed in the
Registration Statement or the Prospectus, no person or entity has the right to
require the registration under the Act of shares of Common Stock or other
securities of the Company by reason of the filing or effectiveness of the
Registration Statement.
To the best of our knowledge, the Company is not in violation of, or
in default with respect to, any law, rule, regulation, order, judgment or
decree, except as may be described in the Prospectus or such as in the aggregate
do not now have and will not in the future have a material adverse effect upon
the operations, business or assets of the Company and the Subsidiaries, taken as
a whole.
All descriptions in the Prospectus of statutes, regulations or legal
or governmental proceedings are accurate and fairly present the information
required to be shown.
The Company has full corporate power and authority to enter into the
Agreement, and the Agreement has been duly authorized, executed and delivered by
the Company, is a valid and binding agreement of the Company and, except for the
indemnification and contribution provisions thereof, as to which we express no
opinion, is enforceable against the Company in accordance with the terms
thereof.
The execution and delivery by the Company of, and the performance by
the Company of its agreements in, the Agreement do not and will not (i) violate
the certificate of incorporation or by-laws of the Company, (ii) breach or
result in a default under, cause the time for performance of any obligation to
be accelerated under, or result in the creation or imposition of any lien,
charge or encumbrance upon any of the assets of the Company or any of its
Subsidiaries pursuant to the terms of, (x) any indenture, mortgage, deed of
trust, loan agreement, bond, debenture, note agreement, capital lease or other
evidence of indebtedness of which we have knowledge, (y) any voting trust
arrangement or any contract or other agreement to which the Company is a party
that restricts the ability of the Company to issue securities and of which we
have knowledge or (z) any Document filed as an exhibit to the Registration
Statement, (iii) breach or otherwise violate any existing obligation of the
Company under any court or administrative order, judgment or decree of which we
have knowledge or (iv) violate applicable provisions of any statute or
regulation in the State of Delaware, New York or of the United States.
Delivery of certificates for the Shares will transfer valid and
marketable title thereto to each Underwriter that has purchased such Shares in
good faith and without notice of any adverse claim with respect thereto.
<PAGE> 30
The Company is not an "investment company" or an "affiliated person"
of, or "promoter" or "principal underwriter" for, an "investment company," as
such terms are defined in the Investment Company Act of 1940, as amended.
The Shares have been duly authorized for listing by the Nasdaq
National Market upon official notice of issuance.
We hereby confirm to you that we have been advised by the Commission
that the Registration Statement has become effective under the Act and that no
order suspending the effectiveness of the Registration Statement has been issued
and no proceeding for that purpose has been instituted or is pending, threatened
or contemplated.
We hereby further confirm to you that there are no actions, suits,
proceedings or investigations pending or, to our knowledge, overtly threatened
in writing against the Company or any of its Subsidiaries, or any of their
respective officers or directors in their capacities as such, before or by any
court, governmental agency or arbitrator which (i) seek to challenge the
legality or enforceability of the Agreement, (ii) seek to challenge the legality
or enforceability of any of the Documents filed, or required to be filed, as
exhibits to the Registration Statement, (iii) seek damages or other remedies
with respect to any of the Documents filed, or required to be filed, as exhibits
to the Registration Statement, (iv) except as set forth in or contemplated by
the Registration Statement and the Prospectus, seek money damages in excess of
$100,000 or seek to impose criminal penalties upon the Company, any of its
Subsidiaries or any of their respective officers or directors in their
capacities as such and of which we have knowledge or (v) seek to enjoin any of
the business activities of the Company or any of its Subsidiaries or the
transactions described in the Prospectus and of which we have knowledge.
The merger of N2K Inc., a Pennsylvania corporation ("Pennsylvania
N2K"), with and into the Company (the "Merger") has become effective and the
identity, existence, corporate organization, purposes, powers, objects,
franchises, privileges, rights, immunities, restrictions, debts, liabilities and
duties (the "Corporate Rights") of Pennsylvania N2K will continue in effect and
be unimpaired by the Merger, and the Corporate Rights of Pennsylvania N2K have
been merged with and into the Company, which is, as the surviving corporation,
fully vested therewith. All consents, approvals, orders and authorizations of,
and all registrations, declarations and filings with, all persons (governmental
and, to our knowledge, private) required to be obtained or made in connection
with the consummation of the Merger have been so obtained or made. The Merger
qualifies as a reorganization under the provisions of Section 368 of the
Internal Revenue Code.
We have participated in the preparation of the Registration
Statement and the Prospectus and, without assuming any responsibility for the
accuracy, completeness or fairness of the statements contained in the
Registration Statement or the Prospectus or in any amendment or supplement
thereto, nothing has come to our attention that causes us to believe that, both
as of the Effective Date and as of the Closing Date or as of the Option Closing
Date, as the case may be, the Registration Statement or any amendment thereto
contained or contains any untrue statement of a material fact or omitted or
omits to state a material fact required to be stated therein or necessary to
make the statements therein not misleading or that any Prospectus or any
amendment or supplement thereto, at the time such Prospectus was issued, at the
time any such amended or supplemented Prospectus was issued, at the Closing Date
or at the Option Closing
<PAGE> 31
Date, as the case may be, contained or contains any untrue statement of a
material fact or omitted or omits to state a material fact necessary in order to
make the statements therein, in the light of the circumstances in which they
were made, not misleading (except that we express no opinion as to financial
statements, schedules and other financial data contained in the Registration
Statement or the Prospectus).
The foregoing opinion is subject to the qualification that the
enforceability of the Agreement may be: (i) subject to bankruptcy, insolvency,
reorganization, moratorium or similar laws affecting creditors' rights
generally; and (ii) subject to general principles of equity (regardless of
whether such enforceability is considered in a proceeding at law or in equity)
including principles of commercial reasonableness or conscionability and an
implied covenant of good faith and fair dealing.
This letter is furnished by us solely for your benefit in connection
with the transactions referred to in the Agreement and may not be circulated to,
or relied upon by, any other person, except that this letter may be relied upon
by your counsel in connection with the opinion letter to be delivered to you
pursuant to Section 5(g) of the Agreement.
<PAGE> 1
Exhibit 4.1
COMMON STOCK N2K COMMON STOCK
NUMBER SHARES
INCORPORATED UNDER THE LAWS N2K INC. CUSIP 629427 10 5
OF THE STATE OF DELAWARE
THIS CERTIFIES that
is the record holder of
FULLY PAID AND NON-ASSESSABLE SHARES OF THE COMMON STOCK,
PAR VALUE $.001 PER SHARE, OF
N2K INC.
transferable on the books of the Corporation by the holder hereof in person or
by duly authorized attorney, upon surrender of this certificate properly
endorsed.
This certificate is not valid until countersigned and registered by the
Transfer Agent and Registrar.
WITNESS the facsimile seal of the Corporation and the facsimile
signatures of its duly authorized officers.
Dated:
N2K Inc.
CORPORATE
SEAL
1996
DELAWARE
SECRETARY PRESIDENT
COUNTERSIGNED AND REGISTERED:
AMERICAN STOCK TRANSFER & TRUST COMPANY
TRANSFER AGENT
AND REGISTRAR
BY
AUTHORIZED SIGNATURE
<PAGE> 2
N2K INC.
The Corporation will furnish without charge to each stockholder who so
requests a statement of the powers, designations, preferences and relative,
participating, optional, or other special rights of each class of stock of
series thereof and the qualifications, limitations or restrictions of such
preferences and/or rights. Such request may be addressed to the Transfer Agent
and Registrar named on the face of this Certificate or to the Secretary of the
Corporation.
The following abbreviations, when used in the inscription on the face
of this certificate, shall be construed as though they were written out in
full according to applicable laws or regulations:
TEN COM -- as tenants in common
TEN ENT -- as tenants by the entireties
JT TEN -- as joint tenants with right of survivorship and
not as tenants in common
UNIF GIFT MIN ACT -- _________Custodian___________
(Cust) (Minor)
under Uniform Gifts to Minors
Act ______________________
(State)
Additional abbreviations may also be used though not in the above list.
For Value Received, ___________ hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
_______________________________________
______________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE OF ASSIGNEE)
______________________________________________________________________________
______________________________________________________________________________
_______________________________________________________________________ Shares
of the Common Stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
_____________________________________________________________________ Attorney
to transfer the said stock on the books of the within named Corporation with
full power of substitution in the premises.
Dated _______________________
_______________________________________________________________
NOTICE: The signature to this assignment must correspond with the
names as written upon the face of the certificate in every
particular without alteration or enlargement or any change
whatsoever. The signature of the person executing this power must
be guaranteed by an Eligible Guarantor Institution such as a
Commercial Bank, Trust Company, Securities Broker/Dealer, Credit
Union, or a Savings Association participating in a Medallion
program approved by the Securities Transfer Association, Inc
pursuant to S.E.C. Rule 17Ad-15.
<PAGE> 1
N2K Inc.
October 10, 1997
Page 1
EXHIBIT 5.1
[LETTERHEAD OF DEWEY BALLANTINE LLP]
October 10, 1997
N2K Inc.
55 Broad Street, 26th Floor
New York, New York 10004
Re: N2K Inc.--Registration Statement
on Form S-1 (the "Registration Statement")
Dear Ladies and Gentlemen:
We are acting as counsel for N2K Inc., a Delaware corporation (the
"Company"), in connection with the proposed issue and sale pursuant to the
Registration Statement (File No. 333-33105) of shares of common stock, par
value $0.001 per share, of the Company (the "Shares").
We have examined such corporate records, certificates and other
documents as we have considered necessary for the purposes hereof. In such
examination, we have assumed the genuineness of all signatures, the
authenticity of all documents submitted to us as originals, the conformity to
the original documents of all documents submitted to us as copies and the
authenticity of the originals of such latter documents. As to any facts
material to our opinion, we have, when relevant facts were not independently
established, relied upon the aforesaid records, certificates and documents.
Based on the foregoing, we are of the opinion that, upon issuance and
delivery in accordance with the Underwriting Agreement filed as Exhibit 1.1 to
the Registration Statement, the Shares will be duly authorized, validly issued,
fully paid and nonassessable.
<PAGE> 2
N2K Inc.
October 10, 1997
Page 2
Our opinion set forth herein is limited in all cases to matters arising
under the General Corporation Law of the State of Delaware. We consent to the
use of this opinion as an Exhibit to the Registration Statement and to the
reference to our firm under the caption "Legal Matters" in the prospectus that
is a part of the Registration Statement. In giving such consent, we do not
thereby concede that we are within the category of persons whose consent is
required under Section 7 of the Securities Act of 1933, as amended, or the
rules and regulations of the Commission thereunder.
Very truly yours,
<PAGE> 1
EXHIBIT 10.27
[NETSCAPE LOGO]
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.
NETSCAPE COMMUNICATIONS CORPORATION
WEB SITE SERVICES AGREEMENT
This Services Agreement ("AGREEMENT"), entered into by and between
Netscape Communications Corporation ("NETSCAPE"), a Delaware corporation located
at 501 East Middlefield Road, Mountain View, California 94043, and N2K Inc.
("N2K"), a Pennsylvania corporation with its principal place of business at 55
Broad Street, New York, New York 10004 is effective as of the date of execution
by Netscape ("EFFECTIVE DATE").
RECITALS
A. Netscape is in the business of developing, manufacturing, marketing
and distributing Internet-related products and technology, provides
related services, and in connection with its marketing efforts,
maintains World Wide Web sites;
B. N2K is in the business of providing Internet-based retail
opportunities for end users to purchase pre-recorded music and
related products and services; and
C. The parties wish to perform certain activities, and therefore wish to
enter into this Agreement to provide certain services in connection with
the performance of such activities.
NOW, THEREFORE, in consideration of the mutual covenants contained
herein, the parties agree as follows:
1. DEFINITIONS.
For purposes of this Agreement, in addition to the capitalized terms
defined elsewhere in this Agreement, the following terms shall have the meanings
set forth below:
"COMMERCE FRONT PAGE" means the HTML page first served to end users
accessing the commerce area of NetCenter, as described in Section 2.2.
<PAGE> 2
"CONTENT PROVIDER" means an entity which is (i) participating in the
Service by providing content, and (ii) linked to the Service. Entities providing
unbranded content to the Service and entities providing content to the Service
but which are not linked to the Service shall not be deemed Content Providers
for purposes of this Agreement.
[****]
"IMPRESSION" means the serving up to an end user of N2K Promotional
Content as part of an HTML page or layer.
"LAUNCH DATE" means the date on which the Service is fully
functional and accessible to end users, as described in this Agreement.
"LOCAL LANGUAGE" means the language for the Territory as such Local
Language is set forth in Exhibit A.
"MARKETPLACE" means that area within NetCenter which is primarily
designed around offering online shopping opportunities to end users.
"MARKETPLACE FRONT PAGE" means the HTML page first served to end
users accessing the Marketplace area of NetCenter, as described in Section 2.2.
"N2K BRAND SERVICE" means the Internet-related content service
specified as "N2K Brand Service" in Exhibit A.
"N2K PROMOTIONAL CONTENT" means the content supplied by N2K for use
in promotional activities on Netscape's Web Site as such activities are
described in Section 6.
"N2K'S CONTENT" means Content Provider listings and other materials
in the Service, the elements of the Service Front Page supplied and/or managed
by N2K, and the N2K Promotional Content.
"N2K'S WEB SITE" means the primary Local Language Web site which N2K
maintains and which is currently accessible by the public via the Internet at
the URL http://www.musicblvd.com.
"NET SEARCH PAGE" means the HTML page currently located at on
Netscape's Web Site at http://home.netscape.com/escapes/search/ntsrchrnd-1.html,
which page is the point of access for the Net Search Program.
"NET SEARCH PROGRAM" means the program on Netscape's Web Site for
providing end users with access to search and directory services.
2
<PAGE> 3
"NETCENTER FRONT PAGE" means the HTML page first served to end users
accessing NetCenter, as described in Section 2.2.
"NETCENTER" means that area of Netscape's Web Site which offers
online business services and shopping opportunities to end users.
"NETSCAPE'S WEB SITE" means the collection of Local Language HTML
documents targeted at end users in the Territory and accessible by the public
via the Internet at the URL http://home.netscape.com and/or at such other URL or
URLs as Netscape may designate.
"OTHER MARKETPLACE SERVICE FRONT PAGE" means the HTML page first
served to end users accessing a service within the Marketplace which is included
and featured in the Marketplace at the same hierarchical level as the Service.
"PAYMENT" means the amount specified as "Payment" in Exhibit B.
"SELECTOR LAYER" means the menu style layered interface that
Netscape currently presents to end users who access the home page of Netscape's
Web Site with Netscape Communicator client software, which interface presents a
menu of services and/or sites, as more fully described in Section 2.3.
"SERVICE AD INVENTORY" means the electronic advertising inventory
within the Service. The Service Ad Inventory shall not include any advertising
on the Service Front Page.
"SERVICE FRONT PAGE" means the page on the Internet which is the
initial point of entry for an end user accessing the Service.
"SERVICE NAME" means the name of the Service, if any, and as such
name shall be decided upon the mutual agreement of the parties.
"SERVICE" means the service described in Exhibit C, the operation of
which is further described this Agreement. For purposes of this Agreement, the
Service Front Page shall not be deemed a part of the Service.
"SUBSCRIBER" means an individual, sole proprietorship, partnership,
corporation, or other legal entity that registers for the Service in accordance
with the terms and conditions of this Agreement.
"TERM" means the period specified as "Term" in Exhibit A.
"TERRITORY" means the target geographic area listed in Exhibit A.
3
<PAGE> 4
2. SERVICE FEATURES. In addition to the features of the Service as
described in Exhibit C, the Service shall also conform with the following
requirements:
2.1. Location of Service. The Service will reside solely on N2K's servers
but will have a "Netscape.com" domain name and will be directly linked, within
one click away, to Netscape's Web Site. The parties acknowledge and agree that
all access to the Service shall be deemed to be via Netscape's Web Site, and
therefore shall be Netscape traffic. N2K shall not promote the Service from
another Web site without Netscape's prior written consent.
2.2. NetCenter Front Page and Marketplace.
(a) Netscape shall maintain, as part of Netscape's Web Site, the
NetCenter, a virtual online business-oriented service and shopping
area. Marketplace will be included within NetCenter, and the
NetCenter Front Page shall contain a hyperlink to the Commerce Front
Page which will, in turn, be linked to the Marketplace Front Page.
The category of [****] shall be included in the Marketplace, and the
Service Front Page will be directly linked (within one click away)
to the [****] subheading within the Marketplace section. The
NetCenter Front Page, the Commerce Front Page and the Marketplace
Front Page will: (i) be designed, developed, produced and managed
by Netscape, including but not limited to hiring and managing
creative and technical staff as needed to do so; (ii) hosted and
maintained solely on Netscape's servers; and (iii) have a
"Netscape.com" domain name (or such other domain name as Netscape
may determine).
(b) Within the Marketplace Front Page, the Service Front Page, any Other
Marketplace Service Front Page, the Service [****]; provided,
however, that nothing contained herein shall preclude other content
providers or services from participating in the Marketplace if they
offer [****]. After the Launch Date, Netscape shall not include any
advertisement for the sale of pre-recorded music delivered on hard
goods or through digital distribution on any page on Netscape's Web
Site on which N2K Promotional Content appears; provided, however,
[****] to the time during which N2K Promotional Content is actually
being published on such location on Netscape's Web Site.
(c) If Netscape creates a [****] topic as a top-level category within an
online service Netscape offers on Netscape's Web Site, [****]
4
<PAGE> 5
[****]; provided, however, that nothing contained herein shall
preclude other content providers or services from appearing [****]
within such service as N2K if such third party offers [****].
2.3. Selector Layer. During the Term, Netscape will produce Netscape's Web
Site so that when an end user using the appropriate client software first
accesses the home page of Netscape's Web Site, the end user is presented with
the Selector Layer. The Selector Layer shall include hyperlinks to various sites
and/or services (both within and outside the Netcenter) which will link to the
Service, as described herein, and may in Netscape's discretion include other
features including user configuration and navigation options. Notwithstanding
the foregoing, Netscape reserves the right, in its sole discretion, to (a) alter
the means whereby end users may access services, sites and functionality
(including the right to eliminate the Selector Layer in favor of an alternate
method) or (b) offer additional and/or different means of access to the Service,
services, sites and functionality; provided, however, that N2K's relative
prominence and accessibility after any such revision or reconfiguration shall
not be adversely affected.
2.4. Service Pages. The Service will: (i) be produced and managed by N2K,
including but not limited to hiring and managing creative, technical, customer
support, and general staff as needed to do so; (ii) hosted and maintained solely
on N2K's servers; and (iii) have a "Netscape.com" domain name (or such other
domain name as Netscape may determine). N2K and Netscape will mutually agree to
the initial design and look and feel of the Service and its Web pages. Netscape
will be responsible for assisting N2K with the navigational and architectural
structure for displaying the contents of the Service's Web pages (i.e., text and
graphical elements). [****].
2.5. Target Market. The Service's primary target market is as
specified as "Target Market" in Exhibit A. The Service will be provided by
N2K only in the Local Language and focused on the Territory, as described in
Exhibit A.
2.6. Name of the Service. The Service Name will be mutually agreed upon by
Netscape and N2K. N2K shall not independently use the Service Name without
Netscape's prior written consent unless such use occurs in connection with N2K's
advertising sales and promotional efforts on behalf of the Service. The Service
Name shall be displayed on every page of the Service and no other locations
without Netscape's prior written consent except in connection with such
advertising sales and promotional efforts on behalf of the Service. If the
Service Name includes a co-branding component, N2K may not use the corresponding
Service Name with Netscape's name expunged. N2K may not use the Service Name
independent of the Service except as provided for above in this Section 2.6.
5
<PAGE> 6
2.7. Design of Service. Every service within NetCenter shall include a
navigational toolbar [****]. Within the Service, such navigational toolbar shall
be co-branded equally by Netscape and N2K. The overall look and feel of the
co-branded toolbar shall be consistent with the look and feel of the other
navigational toolbars within NetCenter. N2K shall be responsible for creating
the graphic user interface including navigation, architecture, look and feel as
well as the tone of the Service, taking into consideration the cultural,
economic and linguistic qualities of the Service's Territory; provided, however,
that Netscape and N2K shall mutually agree to the initial design of the Service
and a phased implementation of features and functionalities to be included in
the Service.
2.8. Design of Service Front Page. The design of the Service Front Page
shall be as set forth in Exhibit C. Notwithstanding anything in this Agreement
to the contrary, Netscape reserves the right to revise the design of and manner
in which an end user accesses the NetCenter Front Page, the Commerce Front Page,
the Marketplace Front Page, the Service Front Page, and pages within the
Service; provided, however, that after any such redesign or reconfiguration,
N2K's relative position within the NetCenter shall not be materially diminished
either in accessibility or prominence.
2.9. Subscriber Registration. If an end user must register with the
Service for any reason, such registration process will comply with the terms and
conditions set forth in Exhibit F. [****] will be subject to the terms and
conditions of Exhibit F.
2.10. Billing. N2K will be responsible for billing for the
Subscribers' use of the Service.
2.11. Customer Support. N2K shall undertake to provide the following
customer support features in the Service: (i) a thirty (30) day money back
guarantee on purchases; (ii) seventy-two (72) hour response to customer
inquiries, on a best commercial efforts basis; (iii) twenty-four (24) hour
notification of order confirmation and estimated delivery time; (iv) a secure
transaction environment (supporting at least SSL 3.0, or the then current
industry standard); (v) programs including [****] and other programs and
features as the parties shall mutually agree.
3. TECHNICAL SUPPORT. During the Term:
3.1. Support Services. N2K shall provide technical support services for
the Service to Netscape on a timely basis, appoint a technical contact to whom
Netscape may address all technical questions relating to the Service, and use
its best efforts to promptly remedy any material misplacement or malfunctioning
of the Service.
3.2. Subscriber Support. N2K shall be responsible for each
Subscriber's maintenance and support requirements in connection with the
Service. In N2K's
6
<PAGE> 7
performance of such obligations, the Subscribers shall not be disadvantaged or
suffer from inferior performance relative to the customers of the N2K Brand
Service.
3.3. Content Provider Support. If N2K receives any questions from a
prospective or existing Content Provider relating to specific development or
technical support about Netscape technology, N2K will refer the prospective or
existing Content Provider to the Netscape Developer Program as described on
Netscape's Web Site.
3.4. Responsibility. N2K expressly agrees that N2K shall be solely
responsible for the purchase, implementation, maintenance and support of all
software and hardware required to fulfill its obligations under this
Agreement.
4. REPORTS.
4.1. Weekly Log Reports. [****] The information contained in the report
shall be Netscape's and N2K's Confidential Information, provided, however that
Netscape shall have the right to use the information contained in such reports
in Netscape's private and public reporting of the number of users accessing the
Service and Netscape's Web Site.
4.2. Search Field.
(a) A field providing search functionality will be included on pages
within the Service as the parties shall mutually determine. The
search executed from the search field will initially only cover
content within the Service itself. If an end user is given the
option of expanding the scope of the search to encompass the
World Wide Web, the search engines driving such query shall be
one or more of Netscape's Local Language Net Search Program
search engines, as Netscape shall determine. Netscape reserves
the right to review the financial effect of the search field in
the Service as such search functionality may impact Netscape's
own Net Search Program and require that the Internet-wide search
functionality in the Service be minimized or deleted.
(b) From time to time, N2K shall provide Netscape with a list [****].
Within fifteen (15) days of the end of each month during the Term,
N2K shall provide Netscape with monthly reports detailing the
following information for each day during the month covered in the
report: (i) the number of times the Service's internal search field
as well as each of Netscape's Local Language Search Program search
engines (if included in the Service) [****]; and (ii) [****].
Netscape shall determine the format and the date of submission for
this monthly report. The information contained in each
7
<PAGE> 8
report shall be Netscape's and N2K's Confidential Information;
however, Netscape reserves the right to provide the information
contained in a report pertaining to World Wide Web searches, if such
functionality is implemented in the Service, to the Net Search
Program companies.
5. CONTENT PROVIDER PARTICIPATION IN THE SERVICE.
5.1. Application Process. Netscape and N2K shall determine the criteria by
which Content Providers may participate in the Service. N2K will be responsible
for administering the Content Provider application process and serve as the
primary point of contact for companies interested in becoming Content Providers.
Netscape reserves the right to direct N2K not to include any particular Content
Provider that does not meet with the criteria.
5.2. Integrated Community. Netscape and N2K acknowledge that the intent of
the Service is to provide an "integrated community" experience for Netscape
users. Promotion of N2K's Web Site, the N2K Brand Service and Internet-related
services will be minimized to prevent diversion of user traffic from the
Service. Promotion of N2K within the Service will be subject to Netscape's
reasonable approval.
6. PROMOTION OF THE SERVICE IN NETSCAPE'S PRODUCTS.
6.1. Netscape's Promotion of the Service. Netscape shall include a button
for the Service in the Net Search Program on Netscape's Web Site, as such button
is described in Exhibit D. Netscape may also generate Impressions of N2K
Promotional Content through other promotional means including those described in
Exhibit D and which Impressions shall be included in the [****]. The parties may
mutually agree to change the number and/or composition of the [****] and/or
revise Exhibit D from time to time. Unless the parties mutually agree otherwise,
the serving up of a page which includes N2K Promotional Content shall give rise
to only [****].
6.2. [****]
(a) During each year beginning on the Launch Date, Netscape shall
provide N2K with [****] featuring N2K Promotional Content (including
promotional elements described in Exhibit D) on Netscape's Web Site;
provided, however, that the number of [****] if the Launch Date of
the Service is delayed beyond sixty (60) days after the Effective
Date.
(b) Every six (6) months after the Launch Date, the parties will compare
the actual [****] delivered by Netscape during the previous
six-month period with [****], the prorated [****]. If Netscape has
not [****]
8
<PAGE> 9
[****] then N2K's Payment otherwise due (as set forth in Exhibit B)
at the end of such six-month period [****] provided, however, that
if in the first six-month period in any year Netscape has [****] for
the first six-month period, such overage shall be carried forward to
the second six-month period and added to the [****] delivered during
such second six-month period.
(c) If, on the first anniversary of the Launch Date, Netscape has not
delivered [****] N2K may terminate this Agreement. Provided that N2K
has complied with its obligations hereunder, Netscape will continue
to place the N2K Promotional Content on Netscape's Web Site [****]
the Term until such time as [****] have been delivered.
(d) The parties may agree from time to time on other promotions which
shall feature N2K content and which may offer N2K [****]. If the
parties mutually agree, such [****] shall count towards [****] at a
mutually agreed upon rate, and the [****] Netscape is obligated to
deliver shall be [****].
7. N2K'S OBLIGATIONS.
7.1. Production, Technology and Content Programming.
(a) N2K shall be responsible for all production and content
programming of the Service. The Service shall use substantially
the same technology and advantages as N2K uses in N2K Brand
Service unless otherwise agreed to by the parties. The Service
shall not be disadvantaged or suffer from inferior production,
programming or performance relative to N2K Brand Service, or any
similar service which N2K might make available to, or operate on
behalf of, third parties. The Service shall perform
substantially up to the same performance standards as N2K Brand
Service, including, but not limited to, load time, timeliness of
content, and quality of programming. N2K shall perform its
duties described herein with substantially the same diligence and
vigor as it employs with respect to its own services and Web
sites and the services and Web sites N2K may operate for third
parties, and N2K shall not favor its own Web sites, or those of
any third party, over any Service.
(b) N2K shall use [****] provided that such use of
9
<PAGE> 10
[****] does not unduly burden the performance or production of the
Service, or impose on N2K unreasonable technical, operational or
financial undertakings.
(c) N2K's obligation to produce the Service, including production
services, technology and content programming which meet or exceed
standards established by N2K on its own Web site or services (or the
Web site or services N2K manages for any third party) and general
industry standards, is a material obligation of N2K under this
Agreement.
7.2. Advertising. [****]
7.3. Equivalent Effort. In selling advertising inventory and providing
advertising services hereunder, N2K will carry out such services with
substantially the same diligence and vigor as it employs when selling, managing
or maintaining similar advertising on its own services and Web sites. Without
limiting the foregoing, in the event N2K approaches a prospective advertiser
with spots for one or more of its own services and Web sites as well as for the
Service Ad Inventory, N2K shall not unreasonably favor its own Web site, or the
Web site or services of any third party, over the Service. [****]
7.4. N2K's Content. N2K is solely responsible for any legal liability
arising out of or relating to (i) N2K's Content and/or (ii) [****]. N2K
represents and warrants that it holds the necessary rights to permit the use of
N2K's Content by Netscape for the purpose of this Agreement; and that N2K's
Content and any material [****] will not violate any criminal laws, rights of
any third parties, or any applicable local, state, national or international
laws. If Netscape reasonably determines that N2K's Content or N2K's Web Site
contains any material that Netscape deems likely to cause Netscape material harm
[****] Netscape will inform N2K and direct N2K to remove, or remove the link to,
such material within one (1) business day after receipt of written notice from
Netscape. Netscape reserves the right not to include in the Service any N2K's
Content that does not completely conform to the specifications set forth herein.
If Netscape determines that the Service contains or presents any material that
could reasonably
10
<PAGE> 11
constitute an infringement of a third party's rights, [****].
7.5. [****] Compliance on N2K's Web Site and the Service.
(a) [****] to the Service if N2K decides to publish the button [****]
and use best efforts to include [****] N2K will produce the page
such that when an end user presses or clicks on the Netscape Now
button (or such other button used in connection with any successor
program to the Netscape Now program), the end user's Internet client
software will access the applicable HTML page located at a URL
supplied by Netscape.
(b) [****] N2K shall use reasonable commercial efforts promptly to
remedy any misplacement of the [****] provided Netscape will fully
cooperate with N2K to remedy any such misplacement or
malfunctioning, and provided further that N2K shall not incur
liability for any failure to remedy such misplacement or
malfunctioning if such remedy is not within the reasonable
control of N2K. In the event that Netscape replaces the Netscape
Now program with a successor program, Netscape shall advise N2K
and N2K shall produce the page to conform to such successor
program, provided N2K's obligations under such successor program
shall not be materially increased.
(c) Netscape hereby grants N2K a nonexclusive, nontransferable,
nonassignable, nonsublicensable license to perform and display
the Netscape Now button directly in connection with fulfilling
the foregoing obligation. N2K's use of the Netscape Now button
shall be in accordance with Netscape's policies regarding
advertising and trademark usage as established from time to time
by Netscape, including the guidelines of the Netscape Now Program
published on Netscape's U.S. English-language Web Site at the URL
11
<PAGE> 12
http://home.netscape.com/comprod/mirror/netscape_now_guidelines.
html, or such other URL as Netscape may designate from time to time.
7.6. Content Provider Compliance. N2K will comply with its obligations as
set forth in Exhibit G, and as such criteria shall be mutually reviewed by
Netscape and N2K. Upon the advice of Netscape, N2K shall notify Content
Providers of their non-compliance. If a Content Provider fails to come into
compliance after receipt of notification, Netscape shall direct N2K to reduce
the listing status of a non-complying Content Provider or remove the Content
Provider from some or all of the Service, as Netscape shall determine.
7.7. Marketing Collateral. N2K will maintain on the Service marketing
collateral for such Service. The collateral will be updated regularly and on
an as-needed basis. The marketing collateral shall be located in an easily
accessible location. Each party shall include a link to the Service's
marketing collateral in an appropriate area of the party's primary web site.
7.8. Service Enrollment Support. N2K shall provide information and
sales support to Content Providers regarding participation in the Service.
8. JOINT ACTIVITIES.
8.1. Press Plans. N2K and Netscape agree to participate in a joint press
announcement regarding the Service which will take place on a mutually agreed
upon date. The parties shall agree to the form and content of the joint press
release. Notwithstanding the foregoing, either party may issue its own press
release, subject to the other party's prior approval of the content within the
release. With respect to major advertising and marketing deal announcements
regarding the Service, Netscape and N2K shall have forty-eight (48) hours to
respond, in writing, to any proposed announcement. In any press announcement
regarding any or all of the Service, both N2K and Netscape's name and logo shall
be included in the press release, and the names and logos shall appear with
equal prominence. Interviews with the press regarding announcement of the
Service shall be coordinated between both Netscape and N2K.
8.2. Research. If N2K conducts any research regarding the Service, such
research results shall be shared with Netscape on a timely basis and subject to
the obligations set forth in Exhibit F. If N2K or Netscape conducts a study on
their respective Web sites, both companies shall include the Service in the
study, as appropriate. N2K will use commercially reasonable efforts (taking into
account budgetary and other factors) to conduct substantially the same level and
as much research and data collection regarding the Service as N2K conducts with
respect to N2K Brand Service.
8.3. Quarterly Reviews of the Service. Netscape and N2K agree to
establish quarterly reviews of the Service to evaluate the success of the
Service and agree to modifications and improvements to the Service.
12
<PAGE> 13
8.4. Design Reviews and Ownership. The initial design and user interface
of the Service shall be jointly owned by the parties. Netscape and N2K shall
mutually agree to all major design changes in the Service, including, but not
limited to, significant new artwork or functional changes. As part of the
approval process for significant changes to the Service, the parties shall
determine the ownership rights with respect to newly added features or
functionality. Notwithstanding the foregoing, if either party has contributed to
the Service intellectual property rights owned by that party, the other party
shall be granted a royalty-free, irrevocable, perpetual worldwide license,
without payment or other charge therefor, to use, display, perform, reproduce
and distribute such intellectual property in connection with the Service during
the Term. Copyrighted elements contained in a Service shall be the property of
the copyright owner. Nothing contained herein shall prevent Netscape from
independently developing features or functionality which are similar to the
features and functionality owned by N2K and implemented in the Service, provided
that such independently developed features and functionality do not infringe any
of N2K's intellectual property rights.
8.5. [****] for Netscape Technology. [****]
(a) N2K and Netscape shall mutually establish a timetable whereby,
within a reasonable period of time, N2K shall implement within the
Service a [****] interface including [****] or the then current
client software technology (or subsequent features displayable by an
end user's browser) within the beta testing period of the client
software. Such features shall be [****] within the Service, and the
optimized content shall be fully operational and publicly accessible
at the time of the release of the new Netscape client products.
Netscape shall give N2K advance notice of any new features and
functionalities so that N2K has an opportunity to incorporate in the
Service such features and functionalities as described herein;
(b) N2K agrees to use [****] and, if requested, provide Netscape with
evidence of such use. Such [****] shall be provided to N2K free of
charge;
(c) Within the Service, N2K shall use [****] (unless such use would
impose unreasonable burdens on N2K as N2K shall notify to Netscape)
and N2K shall promote [****]
13
<PAGE> 14
[****]. Netscape acknowledges that as of the Effective Date, [****]
and
(d) N2K's course of dealing with respect to other services it may
operate shall be governed by the terms of Section 8.7, below.
8.6. Other Activities. In addition to joint activities set forth in
this Section 8, the parties shall participate in other activities related to
the Service and this Agreement as agreed to by the parties from time to time.
8.7. Course of Dealing. In consideration of (i) the use of the
netscape.com domain name for the Service, and (ii) the treatment of the Service
as a fundamental part of the NetCenter service, until such time as Microsoft
fully publicly documents and makes available its operating systems' programming
interfaces (where the term "programming interfaces" shall include, without
limitation, all operating system hooks, calls, resources and other facilities
that are used by Microsoft's applications, applets or user interfaces)
sufficiently to enable Netscape to make use of all of the facilities and
resources of those operating systems on a basis equal to that of Microsoft and
to the same extent that Microsoft makes use of them, N2K shall not [****] (i) on
all web pages that are located within the Service, (ii) on all web pages that
are [****] to the Service (unless otherwise agreed to by Netscape), and (iii) in
N2K's [****] materials and promotional activities. The foregoing shall not apply
to marketing materials and promotional activities which N2K is [****] N2K will
extend the requirement contained in this subsection to [****] unless its [****]
to such requirement.
9. PAYMENT.
9.1. Payment Amounts. For the benefits and services provided by
Netscape to N2K during the Term, N2K shall remit to Netscape the Payment set
forth in Exhibit B.
9.2. Timing of Payment. N2K shall pay Netscape the Payment in
accordance with the terms set forth in Exhibit B.
9.3. Payment of Revenue Splits. N2K shall pay to Netscape Netscape's
portion of the shared revenues and Netscape shall account to N2K with respect to
shared revenues from advertising undertaken by Netscape, as such revenue sharing
is described in Section 10 and in Exhibit B, within thirty (30) days of the end
of the six-month period in which the revenue is recognized by N2K.
14
<PAGE> 15
9.4. Currency, Interest and Taxes. All amounts payable hereunder are
denominated in U.S. Dollars, and all amounts payable to Netscape hereunder shall
be remitted in U.S. Dollars. Any portion of the Payment which has not been paid
to Netscape within the applicable time set forth herein shall bear interest at
the lesser of (i) the prime rate, or (ii) the maximum amount allowed by law. All
payments due hereunder are exclusive of any applicable taxes. N2K shall be
responsible for all applicable national, state and local taxes, value added or
sales taxes, exchange, interest, banking, collection and other charges and
levies and assessments pertaining to payments other than U.S. taxes based on
Netscape's net income. If N2K is required by law to make any deduction or to
withhold from any sum payable to Netscape by N2K hereunder, N2K shall effect
such deduction or withholding, remit such amounts to the appropriate taxing
authorities and promptly furnish Netscape with tax receipts evidencing the
payments of such amounts.
10. REVENUE SHARING. For all pages in the Service (including banner advertising
on the Service Front Page), the parties will share revenues derived from
advertising, fees paid by Content Providers and other sources of revenue as set
forth in Exhibit B.
11. NO DUPLICATION OF SERVICE. During the Term, and in order to encourage N2K to
focus on developing and maintaining the Service, N2K [****]. This section shall
[****] which meets [****] the following criteria: [****]
12. REPORTING AND AUDIT RIGHTS.
12.1 Reporting. Within fifteen (15) days after the end of each month
during the Term: (i) N2K shall provide Netscape with an access log report in
common log format describing the total number of hits and page impressions for
each of the pages in the Service, and such other tracking information as the
parties shall mutually agree, and (ii) Netscape shall provide N2K with a report
describing the number of redirects of traffic to the Service from Netscape's Web
Site, the number of [****] and such other tracking information as the parties
shall mutually agree.
12.2. Audit Rights. Each party shall retain complete, clear and accurate
records regarding its activities under this Agreement. Each June and December
during the Term,
15
<PAGE> 16
the parties shall review the financial results for the Service and access logs.
Each party shall have the right, upon no less than thirty (30) days prior
written notice to the other party, to cause an independent Certified Public
Accountant to inspect and audit, during the other party's normal business hours
and in such a way as to not cause undue interruption to the other party's
regular business operations, all relevant records of the other party upon which
revenue reports are based and the access logs. The costs of such audit shall be
paid by the auditing party provided, however, that if said inspection shall
reveal an error in excess of ten percent (10%) in monies due to the other party
or an error in excess of ten (10%) in traffic to the Service, the party being
audited shall pay for the audit. The audit rights as described herein shall
continue for two (2) months after the expiration or termination of this
Agreement. Neither party shall not perform audits any more frequently than once
per year; provided, however, that if any such audit reveals an error in excess
of ten percent (10%) as described above, the auditing party may perform
quarterly audits thereafter. Neither party may audit any one statement more than
once.
13. TERM AND TERMINATION.
13.1. Term. Unless earlier terminated pursuant to the provisions of
Section 6.2(c), Section 13.2, Section 16.3 or as described in Exhibit F, this
Agreement shall remain in force for the Term.
13.2. Termination for Cause. Either party shall have the right to
terminate this Agreement upon a material default by the other party of any of
its material obligations under this Agreement, unless within thirty (30)
calendar days after written notice of such default the defaulting party remedies
such default.
13.3. Rights Upon Termination or Expiration. [****] Notwithstanding the
foregoing, if, [****] Netscape has a [****] to take over a successor service to
the Service, Netscape shall [****] of the [****] and N2K shall respond in
writing to Netscape [****] whether or not N2K can at least match the third-party
offer. If, at the end of such [****] period, [****] Netscape shall be under no
further obligation to N2K with respect to a renewal of this Agreement. Netscape
shall have the right, without any additional payment, charge or royalty to N2K,
to produce versions of the Service which do not include N2K's proprietary
technology, logo or name but which might employ a graphic user interface which
is similar to the graphic user interfaces of the Service. In addition to the
right to receive amounts payable at the time of the termination of expiration of
this Agreement, Section 8.4 ("Design Reviews and Ownership"), Section 12.2
("Audit Rights"), Section 13.3 ("Rights Upon Termination or Expiration"),
Section 14 ("Warranties"), Section 15 ("Indemnity") and Section 16 ("General"),
and provisions in Exhibits attached hereto that provide for their survival,
16
<PAGE> 17
shall survive the termination or expiration of this Agreement for any reason.
Provisions of other Sections which, by their nature, must remain in effect
beyond the termination or expiration of this Agreement, shall also survive
termination or expiration of this Agreement for any reason.
14. WARRANTIES.
14.1. Title. N2K warrants that (i) it has the right to perform the
services set forth in this Agreement, (ii) such performance does not infringe on
any third parties' proprietary or personal rights, (iii) it owns or licenses all
rights, title and interest in and to the technology underlying the production of
the Service, (iv) Netscape shall not be obligated to pay any fees or royalties
for implementing the Service other than as specifically set forth in this
Agreement, and (v) there are no pending or threatened lawsuits concerning any
aspect of the technology underlying the Service.
14.2. Performance. N2K warrants that the Service will function
substantially in accordance with the specifications set forth in this Agreement
and as the parties may determine from time to time. In any given twenty-four
hour period during the Term, the Service shall have an uptime of at least [****]
with industry standard downtime for maintenance, provided that such downtime not
occur at peak traffic times. N2K shall repair any malfunctions of the Service
within a reasonable period of time (not to exceed [****] days) after notice by
any party of such condition.
14.3. Disclaimer. THE WARRANTIES PROVIDED BY THE PARTIES HEREIN ARE
THE ONLY WARRANTIES PROVIDED BY THE PARTIES WITH RESPECT TO THE SERVICE.
SUCH WARRANTIES ARE IN LIEU OF ALL OTHER WARRANTIES BY THE PARTIES, EXPRESS
OR IMPLIED, INCLUDING ANY IMPLIED WARRANTY OF MERCHANTABILITY OR FITNESS FOR
A PARTICULAR PURPOSE, WITH RESPECT TO THE SERVICE.
15. INDEMNITY.
15.1. N2K Indemnity. N2K shall indemnify, hold harmless and, at Netscape's
request, defend Netscape from and against any and all claims, liabilities,
losses, damages, expenses and costs (including attorneys' fees and costs)
relating to N2K's management of the Service, N2K's Content and any material to
which users [****] N2K's Content, or other information supplied by N2K, except
to the extent that Netscape is responsible under Section 15.2. N2K will pay
resulting costs, damages and legal fees finally awarded in such action in a
court or in a settlement which are attributable to such claim provided that: (i)
Netscape promptly notifies N2K in writing of any such claim; (ii) N2K has sole
control of the defense and all related settlement negotiations, and (iii)
Netscape cooperates with N2K, at N2K's expense, in defending or settling such
claim.
15.2. Netscape Indemnity. Netscape shall indemnify, hold harmless and, at
N2K's request, defend N2K in any action brought against N2K to the extent it is
based on a claim that the use by N2K of any content or materials licensed from
or provided by Netscape for use on or included in the Service in accordance with
this Agreement directly
17
<PAGE> 18
infringes any valid copyright or trade secret. Netscape will pay resulting
costs, damages and legal fees finally awarded in such action in a court or in a
settlement which are attributable to such claim provided that: (i) N2K promptly
notifies Netscape in writing of any such claim; (ii) Netscape has sole control
of the defense and all related settlement negotiations, and (iii) N2K cooperates
with Netscape, at Netscape's expense, in defending or settling such claim.
15.3. Limitation of Liability. IN NO EVENT WILL NETSCAPE BE LIABLE TO N2K
FOR LOST PROFITS OR ANY FORM OF INDIRECT, SPECIAL, INCIDENTAL, OR CONSEQUENTIAL
DAMAGES OF ANY CHARACTER FROM ANY CAUSES OF ACTION OF ANY KIND WITH RESPECT TO
THIS AGREEMENT WHETHER BASED ON BREACH OF CONTRACT, TORT (INCLUDING NEGLIGENCE),
OR OTHERWISE, AND WHETHER OR NOT NETSCAPE HAS BEEN ADVISED OF THE POSSIBILITY OF
SUCH DAMAGE. NOTWITHSTANDING ANYTHING IN THIS AGREEMENT TO THE CONTRARY,
NETSCAPE'S TOTAL LIABILITY TO N2K IN ANY WAY RELATED TO THE SUBJECT MATTER OF
THIS AGREEMENT, AND REGARDLESS OF WHETHER THE CLAIM FOR SUCH DAMAGES IS BASED
CONTRACT OR TORT OR ANY OTHER LEGAL THEORY, IS LIMITED TO AND SHALL NOT EXCEED
[****].
16. GENERAL.
16.1. Governing Law. This Agreement shall be subject to and governed in
all respects by the statutes and laws of the State of New York without regard to
the conflicts of laws principles thereof. For any dispute brought by N2K that
arises under or relates to this Agreement, the Superior Court of Santa Clara
County and/or the United States District Court for the Northern District of
California shall have exclusive jurisdiction and venue over all controversies in
connection herewith, and each party hereby consents to such exclusive and
personal jurisdiction and venue. For any dispute brought by Netscape that arises
under or relates to this Agreement, the Supreme Court of New York County and/or
the United States District Court for the Southern District of New York shall
have exclusive jurisdiction and venue over all controversies in connection
herewith, and each party hereby consents to such exclusive and personal
jurisdiction and venue.
16.2. Entire Agreement. This Agreement, including the Exhibits and
attachments referenced on the signature page hereto, constitutes the entire
Agreement and understanding between the parties and integrates all prior
discussions between them related to its subject matter. No modification of any
of the terms of this Agreement shall be valid unless in writing and signed by an
authorized representative of each party.
16.3. Assignment. Subject to the terms below, [****] in connection with
any merger, consolidation, sale of all or substantially all of such party's
assets or any other transaction in which [****] of such party's voting
securities are transferred (such events being collectively referred to as a
"Change in Control"), provided that: [****]
18
<PAGE> 19
[****]. With respect to all Change in Control transactions, [****] and Netscape
may object to such assignment pursuant to a Change in Control if [****] Netscape
reasonably believes that the Change in Control will have a material adverse
effect upon the Service, [****]. If Netscape objects to the proposed assignment
and, notwithstanding Netscape's objections, N2K proceeds with the Change of
Control event, Netscape shall have the right to terminate this Agreement as its
sole remedy. Any attempted assignment, delegation or transfer in derogation
hereof shall be null and void, and Netscape shall be entitled to terminate this
Agreement [****].
16.4. Notices. All notices required or permitted hereunder shall be given
in writing addressed to the respective parties as set forth below and shall
either be (i) personally delivered, (ii) transmitted by postage prepaid
certified mail, return receipt requested, or (iii) transmitted by
internationally-recognized private express courier, and shall be deemed to have
been given on the date of receipt if delivered personally, or two (2) days after
deposit in mail or express courier. Either party may change its address for
purposes hereof by written notice to the other in accordance with the provisions
of this Subsection. The addresses for the parties are as follows:
N2K: Netscape:
N2K Inc. Netscape Communications
55 Broad Street, 26th Floor Corporation
New York, New York 10004 501 East Middlefield Road
Mountain View, CA 94043
Fax: (212) 742-1755 Fax: (415) 528-4123
Attn: J.J. Rosen, Sr. Vice President Attn: General Counsel
With a copy to:
Arthur S. Weiner, Esq.
250 West 57th Street, Suite 1508
New York, New York 10019
Fax: (212) 873-7281
16.5. Confidentiality. All disclosures of proprietary and/or confidential
information in connection with this Agreement as well as the contents of this
Agreement, the financial arrangements described in this Agreement, the Content
Providers,
19
<PAGE> 20
advertising sales, end user information and research related to the Service
shall be governed by the terms of the Mutual Non-Disclosure Agreement attached
hereto as Exhibit E. The information contained in the reports provided by each
party hereunder shall be deemed the Confidential Information of the disclosing
party. Notwithstanding the foregoing, Netscape may, in its sole discretion, make
publicly available the auditing of traffic results and indicate that N2K is the
source of the information.
16.6. Force Majeure. Neither party will be responsible for any failure to
perform its obligations under this Agreement due to causes beyond its reasonable
control, including but not limited to, acts of nature, war, riot, embargoes,
acts of civil or military authorities, fire, floods or accidents.
16.7. Waiver. The waiver, express or implied, by either party of any
breach of this Agreement by the other party will not waive any subsequent
breach by such party of the same or a different kind.
16.8. Headings. The headings to the Sections and Subsections of this
Agreement are included merely for convenience of reference and shall not
affect the meaning of the language included therein.
16.9. Independent Contractors. The parties acknowledge and agree that they
are dealing with each other hereunder as independent contractors. Nothing
contained in this Agreement shall be interpreted as constituting either party
the joint venturer, employee or partner of the other party or as conferring upon
either party the power of authority to bind the other party in any transaction
with third parties. All sales and other agreements between N2K and its customers
are N2K's exclusive responsibility and shall have no effect on Netscape's
obligations under this Agreement.
16.10. Severability. In the event any provision of this Agreement is held
by a court or other tribunal of competent jurisdiction to be unenforceable, such
provision shall be reformed only to the extent necessary to make it enforceable,
and the other provisions of this Agreement will remain in full force and effect.
16.11. Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument. For purposes hereof, a
facsimile copy of this Agreement, including the signature pages hereto, shall be
deemed to be an original. Notwithstanding the foregoing, the parties shall
deliver original execution copies of this Agreement to one another as soon as
practicable following execution thereof.
20
<PAGE> 21
N2K: NETSCAPE:
N2K INC. NETSCAPE COMMUNICATIONS CORPORATION
By: /s/ Jonathan V. Diamond By: /s/ Michael Horner
-------------------------- -----------------------------------
Print Name: Jonathan V. Diamond Print Name: Michael Horner
------------------- ---------------------------
Title: Vice Chairman Title: Executive Vice President of Sales
------------------------ and Marketing
---------------------------------
Date: 9/27/97 Date: 9/27/97
------------------------- ----------------------------------
Address: Netscape Address:
55 Broad Street 501 East Middlefield Road
New York, New York 10004, 26th Floor Mountain View, California 94043
Attention: J.J. Rosen, Sr. Vice Attention: General Counsel
President
Facsimile: (212) 742-1755 Facsimile: (415) 528-4123
Attached Exhibits:
Exhibit A: Additional Definitions
Exhibit B: Payment, Payment Schedule and Revenue Sharing
Exhibit C: Service
Exhibit D: Netscape's Promotional Services
Exhibit E: Mutual Non-Disclosure Agreement
Exhibit F: End User Registration
21
<PAGE> 22
Exhibit G: Content Provider Criteria
22
<PAGE> 23
EXHIBIT A
ADDITIONAL DEFINITIONS
N2K Brand Service: N2K's online service for the sale of pre-recorded
music and offering music-related content aggregation as such service is
presently located at http://www.musicblvd.com.
Target Market: [****]
Term: Shall be the period of time beginning on the Effective Date
and ending [****] years after the Launch Date.
Local Language: [****]
Territory: [****]
<PAGE> 24
EXHIBIT B
PAYMENT, PAYMENT SCHEDULE AND
REVENUE SHARING
Payment: N2K shall pay Netscape the following amounts as the Payment. All
Payment amounts shall be received by Netscape no later than the date payment
is due as set forth below:
1. Payment Amounts.
<TABLE>
<CAPTION>
AMOUNT DATE PAYMENT DUE
<S> <C>
$1,000,000 Twelve months after the Launch Date
$1,000,000 Eighteen months after the Launch Date
</TABLE>
2. Revenue Sharing.
(a) Gross Revenue. For the purposes of this Exhibit B, "Gross Revenue"
shall mean all revenue relating to the Service, including but not limited to,
revenue from the [****] revenue from advertising on the Service as well as
advertising on the Service Front Page, subscriptions to content through the
Service, pay-per-view access to content through the Service, and sponsorships on
the Service.
(b) Net Revenues. For the purposes of this Exhibit B, "Net Revenues" shall
mean [****] Netscape will provide N2K with a monthly statement of all
advertising revenue booked by Netscape with respect to the Service Front Page
and indicating the applicable share of such advertising revenues to be factored
into the calculation of Net Revenues, as defined herein. [****] If
revenue-generating products or services other than [****] and advertising are
undertaken by the parties pursuant to this Agreement, the parties shall mutually
agree on a Net Revenue calculation which shall apply to such product or service
and which shall be included in the calculation of Net Revenues.
<PAGE> 25
(c) Percentage Splits: Every [****] after the Launch Date, N2K and
Netscape shall calculate the Net Revenues generated by the Service, and N2K and
Netscape shall share Net Revenues generated by the Service in the following
manner:
If the cumulative Net Revenues beginning on the Launch Date are less
than [****], N2K shall pay Netscape [****] of the cumulative Net
Revenues;
If the cumulative Net Revenues beginning on the Launch Date are less
than [****] but greater than [****], N2K shall pay Netscape [****] of
the cumulative Net Revenues;
If the cumulative Net Revenues beginning on the Launch Date are
greater than [****], N2K shall pay Netscape [****] of the cumulative
Net Revenues
Notwithstanding the foregoing, if N2K offers deeply discounted Music Products
such that the Net Revenues generated by the sale of such Music Products is less
than [****] of the selling price of the Music Products, such Net Revenues from
the sale of deeply discounted Music Products shall not be included in the
calculation of Net Revenues to be shared between the parties; provided, however,
that the sale of deeply discounted Music Products shall not account for over
[****] of the total number of units of Music Products sold in any given
six-month period.
(d) Timing and Report. N2K shall deliver to Netscape a report describing
in detail the calculation of Gross Revenues and Net Revenues for each six-month
period, and shall pay to Netscape Netscape's portion of such Net Revenues within
thirty (30) days following the end of the six-month period.
<PAGE> 26
EXHIBIT C
SERVICE
Description of Service. The primary features and functions of the Service will
provide to end users in the Target Market [****] about the music industry. The
Service will be modeled after, yet differentiated from, the N2K Brand Service.
Notwithstanding the foregoing, N2K shall develop, subject to Netscape's
approval, the concept, look and feel of the Service to attract and retain
members of the Target Market and to be distinct from N2K Brand Service.
Initially, access to and use of the information provided on the Service will be
provided free of charge to end users.
Design of Service Front Page. Netscape shall designate a portion of the Service
Front Page to be used for co-branding the Service and a portion to be used for
banner advertising. The remainder of the Service Front Page shall be allocated
between the parties as follows: (i) at least [****] area ([****] of the [****]
above-the-fold "white space" area) shall be dedicated to content or promotional
collateral for the Service, which content or collateral shall be placed by N2K,
subject to Netscape's prior approval; and (ii) the remainder of such area shall
be dedicated to Netscape's individual use for content or promotional collateral
for other services and products. The Service Front Page shall have a
"netscape.com" domain name, and traffic to the Service Front Page shall be
counted as Netscape traffic.
<PAGE> 27
EXHIBIT D
NETSCAPE'S PROMOTIONAL SERVICES
NET SEARCH PROGRAM PROMOTION
- - Net Search Page. Within the Net Search Page, Netscape shall include a
prominently positioned button for search functionality provided by N2K.
[****] N2K's button on the Net Search Page shall comply with Netscape's
standard technical specifications for buttons on the Net Search Page.
Netscape reserves the right to redesign and/or reconfigure the Net Search
Page and the technical specifications for any buttons therefor, provided,
however, that N2K's prominence shall not be materially decreased. [****] N2K
shall notify Netscape in writing as to whether N2K wishes to continue N2K's
button placement on the Net Search Program page [****]
OTHER IMPRESSION-GENERATING PROMOTIONS
Netscape may offer to N2K other promotional opportunities in addition to the Net
Search Program, which promotional opportunities will generate Impressions of N2K
Promotional Content and be included in the [****]. Such promotions may include,
but are not limited to:
- - Net Search Banner Advertising. On the Net Search Page on Netscape's Web
Site, N2K Promotional Content may be featured in a banner advertisement
position from time to time.
- - Netscape Home Page Banner Advertising. On the Home Page on Netscape's Web
Site accessible by end users running Netscape Navigator 3.x, N2K Promotional
Content may be featured in a banner advertisement position from time to time.
- - NetCenter Front Page and Marketplace Front Page Promotions. Netscape may
include promotional flash items for the Service on the NetCenter Front Page
and the NetCenter Marketplace Front Page from time to time. Such promotions
may vary depending on the client software being run by the end user.
- - Other. The parties may also agree to other promotions for N2K
Promotional Content within Netscape's Web Site.
<PAGE> 28
EXHIBIT E
MUTUAL NON-DISCLOSURE AGREEMENT
<PAGE> 29
EXHIBIT F
END USER REGISTRATION
1. Registration Process. [****] Initially, the Service will use N2K Brand
Service's registration back-end database in conjunction with a co-branded
front-end form of registration presented to end users. At the time the end user
is asked to register, the end user will be notified as to what personal data is
required for them to provide, how the personal data will be used and who will
have access to the data. [****] The parties hereto acknowledge that it is their
intent to integrate the Service's user registration processes with Netscape's
"Universal Registration" system when such system becomes available. At such time
as each registration process is transferred to Netscape, Netscape shall use
reasonable commercial efforts to collect the same data from the Service
registration process as was collected by N2K. At such time as Netscape's
"Universal Registration" system is deployed, Netscape will provide to N2K
information about users registering for the Service by means of the "Universal
Registration" system in a format and timeframe to be mutually agreed upon by
Netscape and N2K.
2. Unsubscribe. If at any time an end user elects to "unsubscribe" from
NetCenter, as Netscape shall notify to N2K from time to time, N2K shall no
longer communicate with such end user and shall remove any information about
such end user from N2K's databases.
3. Additional User Information. [****]
4. Personal Data Confidential; Ownership. N2K may use information collected
about end users from whatever means ("End User Information") only for internal
marketing purposes, and N2K shall not resell or disclose such End User
Information to any third party; provided, however, that N2K may sell or disclose
such End User Information to third parties upon prior notice to and consent from
such end users. If Netscape determines that N2K is not complying with the terms
of use of personal data published on Netscape's Web Site at
http://home.netscape.com/netcenter/index.html, or such other URL as Netscape may
determine from time to time, Netscape may terminate this Agreement upon notice
to N2K if N2K has not cured its performance within five (5) days of written
notice from Netscape. End User Information shall be the jointly owned
<PAGE> 30
Confidential Information of both parties; provided, however that information
collected about end users may be aggregated and such aggregated information
shall not be deemed confidential End User Information.
30
<PAGE> 31
EXHIBIT G
CONTENT PROVIDER CRITERIA
[****]
[****]
[****]Netscape Technology. [****] HTML Frames, layers, absolute positioning,
Java, JavaScript or the then current client software technology (or subsequent
features displayable by an end user's browser) within the beta testing period of
the client software.
Relative Prominence. In the Service, Content Providers will accord Netscape's
products and services a [****] as well as on an [****]
[****] Program Compliance. [****] Content Providers shall comply with the
guidelines for [****] published on Netscape's Web Site at
http://search.netscape.com/comprod/mirror/netscape_now_guidelines.html, or such
other URL as Netscape may specify from time to time.
<PAGE> 1
EXHIBIT 10.28
[GRAPHIC OMITTED]
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.
TRADEMARK LICENSE AGREEMENT
This Trademark License Agreement ("Agreement") is effective as of
the 28th day of September 1997 ("Effective Date") and is entered into by and
between Netscape Communications Corporation ("Netscape"), a Delaware corporation
located at 501 East Middlefield Road, Mountain View California 94043, and N2K
Inc. ("Licensee"), a Pennsylvania corporation located at 55
Broad Street, 26th Floor, New York, New York 10004.
RECITALS
A. Netscape owns and uses the name and/or trademark NETSCAPE and the
registered trademarks therefor as listed on Exhibit A attached hereto
(collectively referred to as the "Marks"), in connection with its
Internet-related software products, services and technology;
B. Licensee produces Web sites and performs other Internet-related
services;
C. Licensee desires to use the trademark NETSCAPE solely in the titles set
forth in Exhibit A in connection with Internet music distribution and
content aggregation services in the languages and geographic territories
set forth opposite such titles in Exhibit A; and
D. Netscape is willing to permit such use of the Marks under the terms and
conditions set forth in this Agreement.
NOW THEREFORE, THE PARTIES AGREE AS FOLLOWS:
1. GRANT OF LICENSE.
1.1 GRANT OF LICENSE. Netscape hereby grants to Licensee a [****],
nontransferable, license to use the Marks in the titles set forth in Exhibit A
[****] aggregation services in the languages and geographic territories set
forth in Exhibit A opposite such titles (the "Music Content Aggregation
Services") which shall, in part, promote Netscape's products and services, will
be jointly developed by Netscape and Licensee, and which services shall reside
on Licensee's web site located at "www.musicblvd.com" deploying Licensee's
servers and be located one click away from Netscape's web site. Licensee may
only use the Marks as a collective whole and shall not separately use any
element or elements of the Marks.
<PAGE> 2
1.2 RESERVATION OF RIGHTS. Netscape hereby reserves any and all rights not
expressly and explicitly granted in this Agreement, including Netscape's right
to authorize or license use of the Marks or any other trademarks or names
containing NETSCAPE, to any third party for use in connection with any goods and
services, including, but not limited to, [****]. Without limiting the rights
reserved in the preceding sentence, Netscape hereby reserves any and all rights
to use, authorize use or license use of the Marks or any other trademarks or
names containing NETSCAPE in any geographic territory listed in Exhibit A in a
language or language(s) different from the language listed next to such
geographic territory in Exhibit A.
2. LICENSE FEE. For the rights granted to Licensee herein, Licensee shall
pay Netscape a one-time [****] license fee of Four Million Dollars ($4,000,000),
One Million Dollars ($1,000,000) of which license fee shall be due at the time
of the execution of this Agreement, Two Million Dollars ($2,000,000) which shall
be payable by the first to occur of December 1, 1997 or Licensee's initial
public stock offering, and One Million Dollars ($1,000,000) which shall be paid
within six (6) months of the Effective Date. The license fee due hereunder is
exclusive of any applicable taxes. Licensee shall be responsible for all
applicable national, state and local taxes, value added or sales taxes,
exchange, interest, banking, collection and other charges and levies and
assessments pertaining to payments other than U.S. taxes based on Netscape's net
income. If Licensee is required by law to make any deduction or to withhold from
any sum payable to Netscape by Licensee hereunder, Licensee shall effect such
deduction or withholding, remit such amounts to the appropriate taxing
authorities and promptly furnish Netscape with tax receipts evidencing the
payments of such amounts.
3. AUTHORITY; OWNERSHIP OF MARKS.
3.1. AUTHORITY. Netscape hereby warrants that Netscape is the owner
of the Marks described herein and that Netscape has the full authority to
grant to Licensee the rights described herein.
3.2. OWNERSHIP. Licensee hereby acknowledges that Netscape is the owner of
the Marks, and any trademark applications and/or registrations thereto, agrees
that it will do nothing inconsistent with such ownership and agrees that all use
of the Marks by Licensee shall inure to the benefit of Netscape. Licensee agrees
that nothing in this Agreement shall give Licensee any right, title or interest
in the Marks other than the right to use the Marks in accordance with this
Agreement. Licensee agrees not to register or attempt to register the Marks or
the Logo as a trademark, service mark, Internet domain name, trade name, or any
similar trademarks or name, with any domestic or foreign governmental or
quasi-governmental authority which would be likely to cause confusion with the
Marks. Licensee may not register or use the Marks or an abbreviation of the
Marks as part of an Internet domain name. The provisions of this paragraph shall
survive the expiration or termination of this Agreement.
4. USE OF THE MARKS; PROTECTION OF THE MARKS.
2
<PAGE> 3
4.1 PROPER USE. Licensee agrees that all use of the Marks shall only occur
in connection with the Music Content Aggregation Services and shall be in strict
compliance with the terms of this Agreement. Licensee may use the Marks as set
forth in Section 1.1 as well as in connection with the promotion of the Music
Content Aggregation Services. Licensee shall use the Marks in conformance with
Netscape's trademark guidelines ("Trademark Guidelines"), set forth in Exhibit
B, which Trademark Guidelines may be revised by Netscape from time to time.
Licensee agrees not to use any other trademark or service mark in combination
with the Marks other than as described in Section 1.1. Licensee has no right to
sublicense, transfer or assign the use of the Marks or use the Marks for any
other purpose other than the purpose described herein. Licensee may not use the
Mark in connection with, or for the benefit of, any third party's products or
services. Licensee further agrees not to use the Marks on or in connection with
any products or services that are or could be deemed by Netscape, in its
reasonable judgment, to be obscene, pornographic, disparaging of Netscape or its
products or products, or otherwise in poor taste, or that are themselves
unlawful or whose purpose is to encourage unlawful activities by others.
4.2 QUALITY STANDARDS. Licensee agrees to maintain a consistent level of
quality of the Music Content Aggregation Services performed in connection with
the Marks substantially equal to that found in Licensee's existing Web site
services. Licensee further agrees to maintain a level of quality in connection
with its use of the Marks that is consistent with general industry standards.
4.3 MONITORING BY NETSCAPE. Licensee acknowledges that Netscape has no
further obligations under this Agreement other than the right to periodically
monitor Licensee's use of the Marks in conjunction with the Music Content
Aggregation Services. Upon request by Netscape, Licensee shall provide Netscape
with representative samples of each such use prior to the time the Marks are
published on the Internet or in press materials or marketing or advertising
materials. If Netscape determines that Licensee is using the Marks improperly,
and/or in connection with Music Content Aggregation Services which do not meet
the standards set forth in Section 4.1 or Section 4.2, Netscape shall notify
Licensee, and Licensee shall remedy the improper use within [****] business
days following receipt of such notice from Netscape. Use of the Marks on goods
or services other than the Music Content Aggregation Services or the promotion
of the Music Content Aggregation Services, or in a manner inconsistent with the
Trademark Guidelines, shall constitute material breach of this Agreement. If
such material breach has not been cured within three (3) business days following
receipt of notice from Netscape, this Agreement shall be terminated.
4.4 LEGEND; DISCLAIMER. Licensee shall include with any online publication
or publication in print of the Marks a trademark legend indicating that the
Marks are those of Netscape, used under license, and a disclaimer that Licensee
and not Netscape has produced the Music Content Aggregation Services and is
responsible for the content thereof.
4.5 MUSIC CONTENT AGGREGATION SERVICES. If Netscape reasonably determines
that the Music Content Aggregation Services contain or present any material that
constitutes an infringement of Netscape's trademark or copyrights, Licensee's
right to use the Marks pursuant to the grant described in Section 1.1 shall,
upon written notice
3
<PAGE> 4
from Netscape of such determination and a [****] period to cure, be suspended
until Licensee has revised, removed or removed links to such material to
Netscape's reasonable satisfaction. If such revision or removal of, or removal
of links to, such material to Netscape's reasonable satisfaction has not
occurred within [****] of the notice from Netscape described in the preceding
sentence, Netscape may immediately terminate the license grant described in
Section 1.1. If Netscape determines that the Music Content Aggregation Services
contain or present any material that could reasonably constitute an infringement
of a third party's rights, Netscape and N2K shall mutually agree on a proper
course of action.
4.6 LICENSEE WEB SITES. If Netscape, in its sole discretion, at any time
determines that material directly linked to the Music Content Aggregation
Services on Licensee's web sites or sites operated by Licensee on behalf of
other parties contain any material or present any material in a manner that
Netscape reasonably deems an improper tarnishment of Netscape, the Netscape
products or the Marks, or unlawful in any country or territory, Netscape may
immediately terminate this Agreement if Licensee has not revised to Netscape's
reasonable satisfaction that material or presentation within [****] of written
notice from Netscape. If Netscape determines that the Music Content Aggregation
Services contain or present any material that could reasonably constitute an
infringement of a third party's rights, [****].
5. CONFIDENTIAL INFORMATION AND DISCLOSURE. Unless required by law, and except
to assert its rights hereunder or for disclosures to its own employees on a
"need to know" basis, Licensee agrees not to disclose the terms of this
Agreement or matters relating thereto without the prior written consent of
Netscape, which consent shall not be unreasonably withheld.
6. INDEMNIFICATION
6.1. LICENSEE INDEMNIFICATION. Licensee agrees to indemnify Netscape and
to hold Netscape harmless from any and all liability, loss, damages, claims or
causes of action, including reasonable legal fees and expenses that may be
incurred by Netscape, arising out of Licensee's use of the marks and content on
Licensee's web sites directly linked to or presented in conjunction with the
Marks, except for liability, loss, damages, claims or causes of action arising
out of third party claims (i) that Licensee's use of the Marks infringe that
third party's valid and subsisting U.S. trademark registration in the Marks or
(ii) in respect of any act or omission of Netscape giving rise to liability.
Netscape shall provide Licensee with prompt written notice of any claim for
which indemnification is sought and cooperating fully with and allowing Licensee
to control the defense and settlement of such claim. Netscape may not settle any
such claim without Licensee's prior written consent, which consent shall not be
unreasonably withheld. Netscape shall have the right, at its own expense, to
participate in the defense of any such claim.
6.2. NETSCAPE INDEMNIFICATION. Netscape shall defend or settle, at its
option, any action brought against Licensee only to the extent that it is based
on a claim that the Marks Licensee is licensed to use hereunder directly
infringes any United States
4
<PAGE> 5
trademark, provided the Marks are used in accordance with the terms of this
Agreement. Netscape will pay resulting costs, damages and legal fees finally
awarded against Licensee in such action which are attributable to such claim
provided that Licensee (a) promptly (within twenty (20) days) notifies Netscape
in writing of any such claim and Netscape has sole control of the defense and
all related settlement negotiations, and (b) cooperates with Netscape, at
Netscape's expense, in defending or settling such claim
7. TERMINATION
7.1 TERM AND TERMINATION. This Agreement and the term of the license
granted herein [****] as provided in Section 4.3, Section 4.5 or this Section
7.1. Netscape shall have the right to terminate this Agreement upon the
occurrence of one or more of the following: (a) any material breach by Licensee
of its obligations under this Agreement which remains uncured for [****] days or
more following written notice of such breach from Netscape, (b) use of the Marks
by Licensee in a manner which is disparaging of Netscape or its products and
services and which remains uncured for [****] following notice from Netscape,
(c) Licensee decides not to [****] or (d) [****].
7.2 EFFECT OF TERMINATION. Upon termination of the Agreement,
Licensee agrees it shall immediately cease any and all use of the Marks.
8. GENERAL
8.1 GOVERNING LAW. This Agreement shall be subject to and governed in all
respects by the statutes and laws of the State of New York without regard to the
conflicts of laws principles thereof. For any dispute brought by N2K that arises
under or relates to this Agreement, the Superior Court of Santa Clara County
and/or the United States District Court for the Northern District of California
shall have exclusive jurisdiction and venue over all controversies in connection
herewith, and each party hereby consents to such exclusive and personal
jurisdiction and venue. For any dispute brought by Netscape that arises under or
relates to this Agreement, the Supreme Court of New York County and/or the
United States District Court for the Southern District of New York shall have
exclusive jurisdiction and venue over all controversies in connection herewith,
and each party hereby consents to such exclusive and personal jurisdiction and
venue.
8.2 ENTIRE AGREEMENT. This Agreement, including Exhibit A and Exhibit B
attached hereto, constitutes the entire Agreement and understanding between the
parties and integrates all prior discussions between them related to its subject
matter. No modification of any of the terms of this Agreement shall be valid
unless in writing and signed by an authorized representative of each party.
8.3 ASSIGNMENT. Subject to the terms below, [****] in connection with any
merger, consolidation, sale of all or substantially all of such party's assets
or any other transaction in which [****] of such party's voting securities are
transferred (such events being collectively referred to as a "Change in
Control"), provided that: (i) in the case of a Change of Control of N2K, the
entity managing the Music Content
5
<PAGE> 6
Aggregation Services subsequent to such Change in Control [****]. With respect
to all Change in Control transactions, [****] and Netscape may object to such
assignment pursuant to a Change in Control if [****] Netscape reasonably
believes that the Change in Control will have a material adverse effect upon the
Service, [****] If Netscape objects to the proposed assignment and,
notwithstanding Netscape's objections, N2K proceeds with the Change of Control
event, Netscape shall have the right to terminate this Agreement [****]. Any
attempted assignment, delegation or transfer in derogation hereof shall be null
and void, and Netscape shall be entitled to terminate this Agreement as its sole
remedy.
8.4 NOTICES. All notices required or permitted hereunder shall be given in
writing addressed to the respective parties as set forth below and shall either
be (a) personally delivered or (b) transmitted by nationally-recognized private
express courier, and shall be deemed to have been given on the date of receipt
if delivered personally, or two (2) days after deposit with such express
courier. Either party may change its address for purposes hereof by written
notice to the other in accordance with the provisions of this Subsection. The
addresses for the parties are as follows:
LICENSEE: NETSCAPE:
N2K Inc. Netscape Communications
Corporation
55 Broad Street, 26th Floor 501 East Middlefield Road
New York, New York 10004 Mountain View, CA 94043
Fax: (212) 742-1755 Fax: (415) 528-4123
Attn: J.J. Rosen, Sr. Vice President Attn: General Counsel
With a copy to:
Arthur S. Weiner, Esq.
250 West 57th Street, Suite 1508
New York, New York 10019
Fax: (212) 873-7281
8.5 FORCE MAJEURE. Neither party will be responsible for any failure to
perform its obligations under this Agreement due to causes beyond its reasonable
control, including but not limited to acts of nature, war, riot, embargoes, acts
of civil or military authorities, fire, floods or accidents.
8.6 WAIVER. Any waiver, either expressed or implied, by either party of
any default by the other in the observance and performance of any of the
conditions, covenants of duties set forth herein shall not constitute or be
construed as a waiver of any subsequent or other default.
6
<PAGE> 7
8.7 HEADINGS. The headings to the Sections and Subsections of this
Agreement are included merely for convenience of reference and shall not affect
the meaning of the language included therein.
8.8 INDEPENDENT CONTRACTORS. The parties acknowledge and agree that they
are dealing with each other hereunder as independent contractors. Nothing
contained in the Agreement shall be interpreted as constituting either party the
joint venture or partner of the other party or as conferring upon either party
the power of authority to bind the other party in any transaction with third
parties.
8.9 SURVIVAL. The provisions of Section 1.2 (Reservation of Rights), 3
(Ownership of Marks), 4.4 (Legend; Disclaimer), 5 (Confidential Information and
Disclosure), 6 (Indemnification by Licensee), 7.2 (Effect of Termination) and 8
(General) will survive any termination of this Agreement.
8.10 EQUITABLE RELIEF. Licensee recognizes and acknowledges that a breach
by Licensee of this Agreement will cause Netscape irreparable damage which
cannot be readily remedied in monetary damages in an action at law, and may, in
addition thereto, constitute an infringement of the Marks. In the event of any
default or breach by Licensee that could result in irreparable harm to Netscape
or cause some loss or dilution of Netscape's goodwill, reputation, or rights in
the Marks, Netscape shall be entitled to immediate injunctive relief to prevent
such irreparable harm, loss, or dilution in addition to any other remedies
available.
8.11 SEVERABILITY. Except as otherwise set forth in this Agreement, the
provisions of this Agreement are severable, and if any one or more such
provisions shall be determined to be invalid, illegal or unenforceable, in whole
or in part, the validity, legality and enforceability of any of the remaining
provisions or portions thereof shall not in any way be affected thereby and
shall nevertheless be binding between the parties hereto. Any such invalid,
illegal or unenforceable provision or portion thereof shall be changed and
interpreted so as to best accomplish the objectives of such provision or portion
thereof within the limits of applicable law.
8.12 ATTORNEY'S FEES. In the event of any action, suit, or proceeding
brought by either party to enforce the terms of this Agreement, the prevailing
party shall be entitled to receive its costs, expert witness fees, and
reasonable attorneys fees and expenses, including costs and fees on appeal.
7
<PAGE> 8
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
Effective Date.
LICENSEE NETSCAPE COMMUNICATIONS CORPORATION
N2K INC.
By: /s/ Jonathan V. Diamond By: /s/ Michael Horner
--------------------------- -----------------------------
Name: Jonathan V. Diamond Name: Michael Horner
--------------------------- -----------------------------
Title: Vice Chairman Title: Executive Vice President of
--------------------------- Sales and Marketing
-----------------------------
Date: 9/27/97 Date: 9/27/97
--------------------------- -----------------------------
Exhibit A: Titles; Target Language and Geographic Combinations
Exhibit B: Trademark Guidelines
<PAGE> 9
EXHIBIT A
TITLES; TARGET LANGUAGE AND GEOGRAPHIC COMBINATIONS
<TABLE>
<CAPTION>
Title Target Language Geographic Territory
- ----- --------------- --------------------
<S> <C> <C>
Netscape [****] [****] [****]
</TABLE>
<PAGE> 10
EXHIBIT B
TRADEMARK USE GUIDELINES
Netscape's Trademark Guidelines are published at the following URL:
http://home.netscape.com/misc/trademarks.html#trademarks
<PAGE> 11
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.
EXHIBIT 10.29
CD ROM AGREEMENT
This CD ROM Agreement (the "Agreement") is by and between N2K, Inc., a company
organized under the laws of Pennsylvania, with its principal place of business
at 55 Broad Street, 26th Floor, New York, New York 10004 ("Licensee"), and the
Netscape entity identified below as a signatory to the Agreement ("Netscape"),
effective as of the date of execution by Netscape ("Effective Date").
RECITALS
WHEREAS, Licensee desires to bundle the standard Netscape Navigator Dial Up Kit
product for version 3.0 with dial up kit for Macintosh, Windows 3.1 and
Windows95 platform; English language, U.S. version; exportable/nonexportable and
related documentation ("Software") with Licensee CD ROM products with music
content for distribution to Licensee customers ("Licensee Products"); and
WHEREAS, Netscape desires to grant the rights necessary for such distribution;
NOW, THEREFORE, in consideration of the mutual covenants contained herein, the
parties agree to the terms and conditions set forth below:
1. Subject to the terms of this Agreement, Netscape hereby grants to Licensee a
worldwide, nonexclusive and nontransferable license to use, reproduce,
distribute and bundle with Licensee Products the object code version of the
Software for purposes of distribution to Licensee customers. [****] which are
shipped during the Term. Notwithstanding the foregoing, Licensee shall not be
obligated to bundle the Software with a particular Licensee's Products if [****]
Additionally, Licensee agrees not to (and agrees to obligate its users not to)
decompile, reverse engineer or otherwise determine source code for the Software.
2. When the Navigator 4.0 Dial Up Kit becomes commercially available, Licensee
may request Netscape to provide the 4.0 Software version for purposes of this
Agreement.
<PAGE> 12
3. Licensee agrees to include the coupon/rebate offer to be provided by Netscape
for purchase of Netscape retail products in electronic form with Software and
Licensee Product for distribution hereunder. The Software shall contain a
mechanism which displays the coupon/rebate offer to an end user of the Software
the first time the end user uses the browser component of the Software; after
the first time the end user uses the browser component of the Software, the
browser will access a home page designated by Licensee. Licensee agrees that it
will not alter the "user agent" string or the preferences file of the Software,
or make any other changes to the Software or Licensee Product, in a manner which
prevents the presentation of the coupon/rebate offer the first time an end user
uses the browser component of the Software.
4. Licensee agrees to keep accurate records reflecting the number of Licensee
Products distributed pursuant to this Agreement, and such records shall be
subject to audit by Netscape to ensure compliance with the terms of this
Agreement.
5. For each Licensee customer using the Licensee Product that selects and
registers with an Internet Service Provider through Netscape's Internet Access
Account Server, Netscape agrees to pay Licensee a fee of [****]. After Netscape
has received quarterly reports from and has been paid by its Internet Service
Provider, Netscape shall generate and provide a quarterly report for Licensee
indicating the number of Licensee customers that have registered through the
Internet Registration Server. Based on such quarterly reports and the fee
structure identified above, Netscape shall pay Licensee net [****] from date of
receipt of such quarterly report.
6. The Software subject to this Agreement does not come with support or updates
of any kind and is provided to Licensee "As Is" without warranties or conditions
of any kind. Netscape expressly disclaims all warranties, including any implied
warranties or conditions of merchantability, noninfringement or fitness for a
particular purpose.
7. Licensee agrees and shall require its distributors and users to agree to
comply fully with all applicable laws, rules and regulations relating to the
export of the Software, including but not limited to any regulations of the U.S.
Office of Export Administration and other applicable governmental agencies.
8. Licensee agrees that each Licensee Product will include an end user license
agreement in electronic form containing terms at least as protective as those
contained in Attachment A hereto. In no event will Netscape be liable for any
indirect, incidental, special, consequential or direct damages under this
Agreement, even if advised of the possibility of such damages and
notwithstanding any failure of essential purpose of any limited remedy.
9. Licensee agrees that all trademarks, trade names, copyright or other
proprietary notices, legends, symbols or labels appearing on the Software shall
be reproduced by Licensee without change. All right, title and interest in and
to the Software lies with Netscape and its suppliers.
2
<PAGE> 13
10. The term of this Agreement shall be for the lesser of (i) [****] from the
Effective Date, or (ii) upon earlier termination as provided for below.
11. Netscape shall have the right to terminate this Agreement and all rights
hereunder for Licensee's default if such default is not cured by Licensee within
fifteen (15) days of notice.
12. This Agreement shall be governed by the laws of the State of California and
any dispute shall be heard by a competent court in the County of Santa Clara in
the State of California. This Agreement may not be assigned without Netscape's
prior written consent.
13. The terms of this Agreement are confidential and Licensee shall not disclose
any portion of the Agreement without Netscape's prior written consent.
14. This Agreement constitutes the entire agreement between the parties
concerning the subject matter hereof and supersedes all prior and
contemporaneous agreements and communications, whether oral or written, between
the parties relating to the subject matter hereof, and all past courses of
dealing or industry custom. The terms and conditions hereof shall prevail over
any conflicting purchase order or other written instrument submitted by
Licensee.
15. This Agreement may be executed in counterparts or by facsimile, each of
which shall be deemed an original, and all of which together shall constitute
one and the same agreement.
3
<PAGE> 14
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed by
duly authorized representatives of the parties effective as of the Effective
Date.
NETSCAPE COMMUNICATIONS CORPORATION LICENSEE
("Netscape")
By: /s/ Michael Horner By: /s/ Jonathan V. Diamond
----------------------------- --------------------------------
Signature Signature
Name: Michael Horner Name: Jonathan V. Diamond
--------------------------- ------------------------------
Print or Type Print or Type
Title: Executive Vice President Title: Vice Chairman
of Sales and Marketing -----------------------------
---------------------------
Date: 9/27/97 Date: 9/27/97
Address:__________________________________________
__________________________________________________
For Internal Purposes:______________________________________
Netscape Sales Rep:_________________________________________
Telephone Number:
4
<PAGE> 15
ATTACHMENT A
WARNING! OPENING THIS APPLICATION MEANS YOU AGREE TO THE PROVISIONS BELOW
("CD ROM AGREEMENT"). IF YOU DO NOT AGREE TO THE TERMS OF THIS AGREEMENT,
PROMPTLY RETURN THIS PACKAGE UNOPENED UPON RECEIPT BY YOU.
Use of this CD ROM ("CD ROM") is granted by Licensee and its suppliers
("Licensors") as to all contents and the browser interface, only to a single
user at a time ("User") directly accessing the CD ROM (and not for use other
than in conjunction with this CD ROM), and only on a single operating system at
a time, for informational noncommercial purposes; provided User may print from
the CD ROM whole or partial copies of documents, subject to retention of all
related intellectual and proprietary rights by Licensors. User shall not
decompile, reverse engineer or otherwise attempt to determine the source code.
No assignment is permitted without the Licensors' prior written consent;
California, USA, law applies, without regard to conflict of laws principles; the
prevailing party in any suit hereunder is entitled to cost, expenses, attorney
fees; this is the entire agreement between Licensors and you relating to this
subject matter, superseding all other oral or written agreements; the term
hereof is until the earlier of (1) expiration of related intellectual and/or
proprietary rights, or (2) prior written notice to you from either of Licensors
of your breach. Licensors' trademarks or other indicia of ownership referenced
in the CD ROM are as catalogued therein; all others are the property of their
respective owners.
THIS CD ROM IS PROVIDED "AS IS" WITH NO WARRANTIES OR CONDITIONS OF ANY KIND,
INCLUDING WITHOUT LIMITATION THAT IT: (1) IS ERROR FREE; (2) DOES NOT INFRINGE
ON ANY THIRD PARTY INTELLECTUAL OR PROPRIETARY RIGHTS; (3) DOES NOT CONTAIN ANY
ELEMENT DESIGNED TO MALICIOUSLY DISTURB OTHER TECHNOLOGY; OR (4) DOES NOT
INFRINGE ANY RIGHT OF PUBLICITY OR PRIVACY. LICENSORS ARE NOT LIABLE FOR ANY
DAMAGES INCLUDING ANY SPECIAL, INDIRECT, INCIDENTAL OR CONSEQUENTIAL DAMAGES
RELATED HERETO, HOWEVER CAUSED, OR ON ANY THEORY OF LIABILITY INCLUDING WITHOUT
LIMITATION CONTRACT, STRICT LIABILITY OR NEGLIGENCE OR OTHER TORT, EVEN IF
ADVISED OF THE POSSIBILITY OF SUCH DAMAGES AND NOTWITHSTANDING ANY FAILURE OF
ESSENTIAL PURPOSE OF ANY LIMITED REMEDY. SOME JURISDICTIONS DO NOT ALLOW
EXCLUSION OF OR LIMITATION ON IMPLIED CONDITIONS, WARRANTIES OR DAMAGES, SO SOME
OR ALL OF THE FOREGOING MAY NOT APPLY TO YOU.
HIGH RISK ACTIVITIES. The CD-ROM is not fault-tolerant and is not designed,
manufactured or intended for use or resale as on-line control equipment in
hazardous environments requiring fail-safe performance, such as in the operation
of nuclear facilities, aircraft navigation or communication systems, air traffic
control, direct life support machines, or weapons systems, in which the failure
of the CD-ROM could lead
4
<PAGE> 16
directly to death, personal injury, or severe physical or environmental damage
("High Risk Activities"). Accordingly, Licensors specifically disclaim any
express or implied warranty of fitness for High Risk Activities.
6
<PAGE> 1
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.
EXHIBIT 10.29
CD ROM AGREEMENT
This CD ROM Agreement (the "Agreement") is by and between N2K, Inc., a company
organized under the laws of Pennsylvania, with its principal place of business
at 55 Broad Street, 26th Floor, New York, New York 10004 ("Licensee"), and the
Netscape entity identified below as a signatory to the Agreement ("Netscape"),
effective as of the date of execution by Netscape ("Effective Date").
RECITALS
WHEREAS, Licensee desires to bundle the standard Netscape Navigator Dial Up Kit
product for version 3.0 with dial up kit for Macintosh, Windows 3.1 and
Windows95 platform; English language, U.S. version; exportable/nonexportable and
related documentation ("Software") with Licensee CD ROM products with music
content for distribution to Licensee customers ("Licensee Products"); and
WHEREAS, Netscape desires to grant the rights necessary for such distribution;
NOW, THEREFORE, in consideration of the mutual covenants contained herein, the
parties agree to the terms and conditions set forth below:
1. Subject to the terms of this Agreement, Netscape hereby grants to Licensee a
worldwide, nonexclusive and nontransferable license to use, reproduce,
distribute and bundle with Licensee Products the object code version of the
Software for purposes of distribution to Licensee customers. [****] which are
shipped during the Term. Notwithstanding the foregoing, Licensee shall not be
obligated to bundle the Software with a particular Licensee's Products if [****]
Additionally, Licensee agrees not to (and agrees to obligate its users not to)
decompile, reverse engineer or otherwise determine source code for the Software.
2. When the Navigator 4.0 Dial Up Kit becomes commercially available, Licensee
may request Netscape to provide the 4.0 Software version for purposes of this
Agreement.
<PAGE> 2
3. Licensee agrees to include the coupon/rebate offer to be provided by Netscape
for purchase of Netscape retail products in electronic form with Software and
Licensee Product for distribution hereunder. The Software shall contain a
mechanism which displays the coupon/rebate offer to an end user of the Software
the first time the end user uses the browser component of the Software; after
the first time the end user uses the browser component of the Software, the
browser will access a home page designated by Licensee. Licensee agrees that it
will not alter the "user agent" string or the preferences file of the Software,
or make any other changes to the Software or Licensee Product, in a manner which
prevents the presentation of the coupon/rebate offer the first time an end user
uses the browser component of the Software.
4. Licensee agrees to keep accurate records reflecting the number of Licensee
Products distributed pursuant to this Agreement, and such records shall be
subject to audit by Netscape to ensure compliance with the terms of this
Agreement.
5. For each Licensee customer using the Licensee Product that selects and
registers with an Internet Service Provider through Netscape's Internet Access
Account Server, Netscape agrees to pay Licensee a fee of [****]. After Netscape
has received quarterly reports from and has been paid by its Internet Service
Provider, Netscape shall generate and provide a quarterly report for Licensee
indicating the number of Licensee customers that have registered through the
Internet Registration Server. Based on such quarterly reports and the fee
structure identified above, Netscape shall pay Licensee net [****] from date of
receipt of such quarterly report.
6. The Software subject to this Agreement does not come with support or updates
of any kind and is provided to Licensee "As Is" without warranties or conditions
of any kind. Netscape expressly disclaims all warranties, including any implied
warranties or conditions of merchantability, noninfringement or fitness for a
particular purpose.
7. Licensee agrees and shall require its distributors and users to agree to
comply fully with all applicable laws, rules and regulations relating to the
export of the Software, including but not limited to any regulations of the U.S.
Office of Export Administration and other applicable governmental agencies.
8. Licensee agrees that each Licensee Product will include an end user license
agreement in electronic form containing terms at least as protective as those
contained in Attachment A hereto. In no event will Netscape be liable for any
indirect, incidental, special, consequential or direct damages under this
Agreement, even if advised of the possibility of such damages and
notwithstanding any failure of essential purpose of any limited remedy.
9. Licensee agrees that all trademarks, trade names, copyright or other
proprietary notices, legends, symbols or labels appearing on the Software shall
be reproduced by Licensee without change. All right, title and interest in and
to the Software lies with Netscape and its suppliers.
2
<PAGE> 3
10. The term of this Agreement shall be for the lesser of (i) [****] from the
Effective Date, or (ii) upon earlier termination as provided for below.
11. Netscape shall have the right to terminate this Agreement and all rights
hereunder for Licensee's default if such default is not cured by Licensee within
fifteen (15) days of notice.
12. This Agreement shall be governed by the laws of the State of California and
any dispute shall be heard by a competent court in the County of Santa Clara in
the State of California. This Agreement may not be assigned without Netscape's
prior written consent.
13. The terms of this Agreement are confidential and Licensee shall not disclose
any portion of the Agreement without Netscape's prior written consent.
14. This Agreement constitutes the entire agreement between the parties
concerning the subject matter hereof and supersedes all prior and
contemporaneous agreements and communications, whether oral or written, between
the parties relating to the subject matter hereof, and all past courses of
dealing or industry custom. The terms and conditions hereof shall prevail over
any conflicting purchase order or other written instrument submitted by
Licensee.
15. This Agreement may be executed in counterparts or by facsimile, each of
which shall be deemed an original, and all of which together shall constitute
one and the same agreement.
3
<PAGE> 4
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed by
duly authorized representatives of the parties effective as of the Effective
Date.
NETSCAPE COMMUNICATIONS CORPORATION LICENSEE
("Netscape")
By: /s/ Michael Horner By: /s/ Jonathan V. Diamond
----------------------------- --------------------------------
Signature Signature
Name: Michael Horner Name: Jonathan V. Diamond
--------------------------- ------------------------------
Print or Type Print or Type
Title: Executive Vice President Title: Vice Chairman
of Sales and Marketing -----------------------------
---------------------------
Date: 9/27/97 Date: 9/27/97
Address:__________________________________________
__________________________________________________
For Internal Purposes:______________________________________
Netscape Sales Rep:_________________________________________
Telephone Number:
4
<PAGE> 5
ATTACHMENT A
WARNING! OPENING THIS APPLICATION MEANS YOU AGREE TO THE PROVISIONS BELOW
("CD ROM AGREEMENT"). IF YOU DO NOT AGREE TO THE TERMS OF THIS AGREEMENT,
PROMPTLY RETURN THIS PACKAGE UNOPENED UPON RECEIPT BY YOU.
Use of this CD ROM ("CD ROM") is granted by Licensee and its suppliers
("Licensors") as to all contents and the browser interface, only to a single
user at a time ("User") directly accessing the CD ROM (and not for use other
than in conjunction with this CD ROM), and only on a single operating system at
a time, for informational noncommercial purposes; provided User may print from
the CD ROM whole or partial copies of documents, subject to retention of all
related intellectual and proprietary rights by Licensors. User shall not
decompile, reverse engineer or otherwise attempt to determine the source code.
No assignment is permitted without the Licensors' prior written consent;
California, USA, law applies, without regard to conflict of laws principles; the
prevailing party in any suit hereunder is entitled to cost, expenses, attorney
fees; this is the entire agreement between Licensors and you relating to this
subject matter, superseding all other oral or written agreements; the term
hereof is until the earlier of (1) expiration of related intellectual and/or
proprietary rights, or (2) prior written notice to you from either of Licensors
of your breach. Licensors' trademarks or other indicia of ownership referenced
in the CD ROM are as catalogued therein; all others are the property of their
respective owners.
THIS CD ROM IS PROVIDED "AS IS" WITH NO WARRANTIES OR CONDITIONS OF ANY KIND,
INCLUDING WITHOUT LIMITATION THAT IT: (1) IS ERROR FREE; (2) DOES NOT INFRINGE
ON ANY THIRD PARTY INTELLECTUAL OR PROPRIETARY RIGHTS; (3) DOES NOT CONTAIN ANY
ELEMENT DESIGNED TO MALICIOUSLY DISTURB OTHER TECHNOLOGY; OR (4) DOES NOT
INFRINGE ANY RIGHT OF PUBLICITY OR PRIVACY. LICENSORS ARE NOT LIABLE FOR ANY
DAMAGES INCLUDING ANY SPECIAL, INDIRECT, INCIDENTAL OR CONSEQUENTIAL DAMAGES
RELATED HERETO, HOWEVER CAUSED, OR ON ANY THEORY OF LIABILITY INCLUDING WITHOUT
LIMITATION CONTRACT, STRICT LIABILITY OR NEGLIGENCE OR OTHER TORT, EVEN IF
ADVISED OF THE POSSIBILITY OF SUCH DAMAGES AND NOTWITHSTANDING ANY FAILURE OF
ESSENTIAL PURPOSE OF ANY LIMITED REMEDY. SOME JURISDICTIONS DO NOT ALLOW
EXCLUSION OF OR LIMITATION ON IMPLIED CONDITIONS, WARRANTIES OR DAMAGES, SO SOME
OR ALL OF THE FOREGOING MAY NOT APPLY TO YOU.
HIGH RISK ACTIVITIES. The CD-ROM is not fault-tolerant and is not designed,
manufactured or intended for use or resale as on-line control equipment in
hazardous environments requiring fail-safe performance, such as in the operation
of nuclear facilities, aircraft navigation or communication systems, air traffic
control, direct life support machines, or weapons systems, in which the failure
of the CD-ROM could lead
4
<PAGE> 6
directly to death, personal injury, or severe physical or environmental damage
("High Risk Activities"). Accordingly, Licensors specifically disclaim any
express or implied warranty of fitness for High Risk Activities.
6
<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
October 10, 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
October 10, 1997
