<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
Commission File No. 0-23141
N2K INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 06-1455771
- ------------------------------- ------------------------------------
(State or other jurisdiction of (IRS Employer Identification Number)
incorporation or organization)
55 Broad Street, 26th Floor
New York, New York 10004
- ------------------------------- -----------------------------------
(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code:) (212) 378-5555
-------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES NO X
--- ----
Indicate the number of shares outstanding of each of the registrant's classes of
common stock as of November 21, 1997: 12,090,775 shares of common stock, par
value $.001 per share.
<PAGE> 2
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
N2K INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, 1997
---------------------------------
Pro Forma December 31,
ASSETS (Note 1) Actual 1996
------ -------------- --------------- -------------
(Unaudited)
CURRENT ASSETS:
<S> <C> <C> <C>
Cash and cash equivalents $ 60,101,268 $ 178,966 $ 4,483,450
Restricted cash 3,299,995 300,000 --
Accounts receivable, net 1,729,059 1,729,059 63,549
Prepaid expenses 4,362,317 4,362,317 703,657
Inventory 90,127 90,127 113,824
Advances and recoupable costs 1,236,185 1,236,185 86,525
------------- ------------ ------------
Total current assets 70,818,951 7,896,654 5,451,005
------------- ------------ ------------
NET ASSETS OF DISCONTINUED OPERATIONS -- -- 14,446
------------- ------------ ------------
PROPERTY AND EQUIPMENT:
Computer equipment 3,148,176 3,148,176 2,289,944
Office furniture and equipment 921,053 921,053 491,942
Leasehold improvements 1,778,735 1,778,735 486,877
Property and equipment under capital leases 1,076,663 1,076,663 868,436
------------- ------------ ------------
6,924,627 6,924,627 4,137,199
Less- Accumulated depreciation and amortization (1,832,392) (1,832,392) (1,002,435)
------------- ------------ ------------
Net property and equipment 5,092,235 5,092,235 3,134,764
------------- ------------ ------------
OTHER ASSETS:
Intangible assets, net 263,156 263,156 320,162
Restricted cash 167,000 167,000 167,000
Other 260,948 260,948 299,093
------------- ------------ ------------
Total other assets 691,104 691,104 786,255
------------- ------------ ------------
$ 76,602,290 $ 13,679,993 $ 9,386,470
============= ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
----------------------------------------------
CURRENT LIABILITIES:
Line of credit $ 650,000 $ 650,000 $ --
Management and Senior Notes -- 7,048,600 --
Current portion of capital lease obligations 224,889 224,889 182,868
Accounts payable 1,475,573 1,475,573 1,088,657
Accrued merchandise costs 564,361 564,361 24,740
Accrued compensation 596,930 596,930 529,063
Accrued royalties 259,151 259,151 --
Other accrued liabilities 3,982,196 4,158,047 1,571,012
------------- ------------ ------------
Total current liabilities 7,753,100 14,977,551 3,396,340
------------- ------------ ------------
CAPITAL LEASE OBLIGATIONS 243,129 243,129 235,153
------------- ------------ ------------
OTHER LONG-TERM LIABILITIES 312,136 312,136 309,100
------------- ------------ ------------
COMMON STOCK SUBJECT TO PUT RIGHTS 2,999,995 537,498 537,498
------------- ------------ ------------
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred stock, $.001 par value, 40,000,000 shares
authorized, none issued and outstanding pro forma;
17,757,417 and 15,397,088 shares issued and outstanding
-- 17,757 15,397
Common stock, $.001 par value, 100,000,000 shares
authorized, 12,038,960 shares issued and
outstanding pro forma; 3,083,009 and 2,923,216 shares issued and
outstanding 12,039 3,083 2,923
Additional paid-in capital 108,790,524 40,374,472 31,694,385
Accumulated deficit (43,508,633) (42,785,633) (26,804,326)
------------- ------------ ------------
Total stockholders' equity (deficit) 65,293,930 (2,390,321) 4,908,379
------------- ------------ ------------
$ 76,602,290 $ 13,679,993 $ 9,386,470
============= ============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE> 3
N2K INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the For the
Three Months Ended Nine Months Ended
September 30 September 30
--------------------------------------------------------------------
1997 1996 1997 1996
------------- ------------ ------------ ----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
NET REVENUES $ 3,569,969 $ 446,889 $ 6,506,864 $ 976,468
COST OF REVENUES 2,980,957 431,552 5,351,822 942,609
----------- ------------ ------------ ------------
Gross profit 589,012 15,337 1,155,042 33,859
OPERATING EXPENSES:
Operating and development 3,050,618 1,940,018 7,768,011 4,092,419
Sales and marketing 3,029,062 825,506 6,843,195 1,568,871
General and administrative 1,105,271 596,275 2,924,079 1,594,107
Charge for purchased research
and development -- -- -- 5,242,523
----------- ------------ ------------ ------------
Operating loss (6,595,939) (3,346,462) (16,380,243) (12,464,061)
INTEREST AND OTHER INCOME 80,891 155,472 166,312 260,673
INTEREST EXPENSE (434,386) (11,191) (484,486) (42,093)
----------- ------------ ------------ ------------
Loss from continuing operations
(6,949,434) (3,202,181) (16,698,417) (12,245,481)
LOSS FROM DISCONTINUED OPERATIONS
-- (363,455) (415,970) (206,184)
GAIN ON DISPOSAL OF
DISCONTINUED OPERATIONS 1,574,493 -- 1,574,493 --
----------- ------------ ------------ ------------
NET LOSS $(5,374,941) $ (3,565,636) $(15,539,894) $(12,451,665)
=========== ============ ============ ============
PRO FORMA NET LOSS PER COMMON SHARE (Note 1)
(Unaudited):
Loss from continuing operations $ (.84) $ (.39) $ (2.01) $ (1.48)
Loss from discontinued operations -- (.04) (.05) (.02)
Gain on disposal of discontinued
operations .19 -- .19 --
----------- ------------ ------------ ------------
Pro forma net loss per Common share
$ (.65) $ (.43) $ (1.87) $ (1.50)
=========== ============ ============ ============
SHARES USED IN COMPUTING
PRO FORMA NET LOSS PER COMMON SHARE
(Unaudited)
8,300,403 8,300,403 8,300,403 8,300,403
=========== ============ ============ ============
</TABLE>
<PAGE> 4
N2K INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the
Nine Months Ended
September 30
------------------------------------
1997 1996
------------- ------------------
(Unaudited)
OPERATING ACTIVITIES:
<S> <C> <C>
Net loss $ (15,539,894) $ (12,451,665)
Adjustments to reconcile net loss to
net cash used in operating activities-
Depreciation and amortization 959,312 497,519
Gain on disposal of discontinued operations (1,574,493) --
Loss on disposal of property and equipment 79,620 --
Amortization of discount on Management and Senior Notes 227,000 --
Provision for doubtful accounts and returns 504,215 13,500
Charge for purchased research and development -- 5,242,523
Issuance of Common stock for services rendered -- 14,250
Decrease (increase) in--
Restricted cash (300,000) 500,000
Accounts receivable (1,135,991) 28,150
Prepaid expenses (3,646,769) (428,292)
Inventories 23,697 --
Advances and recoupable costs (1,149,660) --
Other assets (24,501) (56,156)
Increase (decrease) in--
Accounts payable (90,250) 828,147
Accrued merchandise costs 539,621 (20,169)
Accrued compensation (119,340) 58,335
Accrued royalties 259,151 --
Other accrued liabilities 763,000 (345,300)
Other long-term liabilities 3,036 62,016
------------- ---------------
Net cash used in operating activities (20,222,246) (6,057,142)
-------------- ---------------
INVESTING ACTIVITIES:
Purchases of and deposits on property and equipment (2,636,803) (2,077,298)
Acquisition of New York N2K Inc., net of cash acquired -- (224,077)
Purchase of Rocktropolis website -- (671,744)
Proceeds from disposal of discontinued operations 3,000,000 --
------------- ---------------
Net cash provided by (used in) investing activities 363,197 (2,973,119)
------------- ---------------
FINANCING ACTIVITIES:
Net borrowings (repayments) under line of credit 650,000 (400,000)
Proceeds from Management and Senior Notes 7,771,600 --
Payments on capital lease obligations (158,229) (102,547)
Proceeds from issuance of Preferred stock, net 7,215,531 18,995,644
Proceeds from exercise of Common stock options 75,663 4,384
------------- ---------------
Net cash provided by financing activities 15,554,565 18,497,481
------------- ---------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (4,304,484) 9,467,220
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 4,483,450 547,624
------------- ---------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 178,966 $ 10,014,844
============= ===============
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE> 5
N2K INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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 13
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.
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
<PAGE> 6
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 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 bore interest at 14% per annum and were due on
the earlier of (i) a change of control of the Company, as defined, and (ii)
March 31, 1998; however, as the Management Notes were still outstanding, the
Management Notes converted into 92,103 shares of Common stock upon the
consummation of the Company's initial public offering (the "Management Note
Conversion"). 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. The Management
Notes were recorded net of the value ($150,000) associated with these
warrants. This discount was being amortized over the term of the debt through
March 31, 1998. As the Management Notes were converted into Common stock, on
October 17, 1997 the Company recorded a charge to its statement of operations
which was equal to the unamortized portion of the discount. The discount was
approximately $102,000 as of October 17, 1997.
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 bore interest at 14% per annum and
were 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 was used to
repay the Senior Notes. The Senior Notes were recorded net of the value
($800,000) associated with these warrants. This discount was being amortized
over the term of the debt through March 31, 1998. In connection with the
repayment of the Senior Notes on October 17, 1997, the Company recorded a charge
to its statement of operations which was equal to the unamortized portion of the
discount which was approximately $557,000 as of October 17, 1997.
In August 1997, the Company sold substantially all of the net assets of its
discontinued operations and received $3,000,000, which was paid in cash at
closing (see Note 3).
The Company and America Online, Inc. ("AOL") formed a strategic alliance as of
September 1, 1997, pursuant to an interactive marketing agreement (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 Music Boulevard 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 Music Boulevard
website. N2K will also be promoted on the results pages for certain
music-related searches conducted through the
<PAGE> 7
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 $1,500,000 was paid as of September 30, 1997 (included
in prepaid expenses) and $10,500,000 was paid upon the consummation of the
Company's initial public offering on October 17, 1997, with additional payments
of $3,000,000 to be made on each of November 1, 1998 and November 1, 1999. The
Company amortizes the costs associated with the AOL Contract over the initial
contract term of three years, primarily on a straight-line basis. For the three
and nine months ended September 30, 1997, the Company recorded amortization
expense of $158,000 related to the AOL Contract. The Company will continually
evaluate the realizability of the asset and if necessary, write down the asset
to its net realizable value. 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 purchased from the Company at the initial
public offering price per share (less underwriting discounts and commissions) an
aggregate amount of $3,000,000 (the "AOL Purchase"). The Company has granted AOL
certain shelf and other registration rights with respect to the shares purchased
by AOL in the AOL Purchase, including the right to require the Company to
register such shares for resale, and to have such registration statement
declared effective on or before 180 days after the consummation of the AOL
Purchase and to maintain the effectiveness of such registration statement for a
period of two years from the consummation of the AOL Purchase. In the event that
the Company fails to cause such registration statement to be declared effective
within 180 days after the consummation of the AOL Purchase, AOL will have the
right to require the Company to repurchase such shares for cash at a price equal
to the greater of the original purchase price therefor and the then-current fair
market value. The Company's repurchase obligation is secured by an escrow in the
form of cash and/or letter of credit in an amount agreed upon by the Company and
AOL, which amount shall not be less than $3,000,000 nor more than $7,500,000.
Accordingly, the value of these shares will not be included in Stockholder's
equity. In addition, the Company granted AOL a warrant for the future purchase
of up to 184,736 additional shares 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 is being 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
<PAGE> 8
Excite a guaranteed minimum total of $9,800,000 over a two-year contract term,
of which $500,000 was paid as of September 30, 1997 (included in prepaid
expenses), $500,000 was paid on November 17, 1997, the commencement date, and
$1,800,000 will be paid before December 31, 1997, with additional payments of
$2,875,000 during 1998 and $4,125,000 during 1999. The Company amortizes the
costs associated with the Excite Contract over the initial contract term which
expires on the second anniversary of the commencement date. The amortization
method is primarily based upon the number of impressions received during the
contract term. The Company will continually evaluate the realizability of this
asset and, if necessary, write down the asset to its net realizable value.
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.
On September 27, 1997, N2K 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, 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, which is anticipated to be mid-December 1997, and a second payment of
$1.0 million 18 months after such date. The Company amortizes this cost,
primarily as impressions are received during the two-year contract term. In
addition, over the two-year contract term, Netscape and the Company will share
net 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. 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, of which $1.0
million was paid on October 27, 1997, $2.0 million was paid on November 17,
1997, and the remainder which must be paid by March 28, 1998. The Company will
amortize this cost over the two-year contract term, primarily on a straight-line
basis. 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
will record this revenue when earned. The Company will continually evaluate the
realizability of these assets and, if necessary, write down the assets to their
net realizable value.
Stock Split and Reorganization
On October 15, 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
occurred on October 16, 1997. All share, stock option and warrant data have been
restated to reflect the reverse stock split.
<PAGE> 9
Pro Forma Consolidated Balance Sheet
On October 17, 1997, the Company completed its initial public offering (the
"Offering") of 3,330,221 shares of Common stock at a price of $19 per share.
Additionally, on October 22, 1997, the underwriter exercised their
over-allotment option for the purchase of 499,533 shares at a price of $19 per
share. The Company received net cash proceeds of approximately $66.1 million
from the Offering. The pro forma consolidated balance sheet reflects the
application of the net proceeds of the Offering as if it had occurred as of
September 30, 1997. In addition, the pro forma consolidated balance sheet
reflects i) the automatic conversion of all outstanding shares of the Company's
Preferred stock; $0.001 par value, into an aggregate of 4,986,778 shares of
Common stock upon the consummation of the Offering; ii) the automatic expiration
upon the consummation of the Offering of the put rights associated with 44,790
shares of Common stock issued in connection with the purchase of the rock
website, Rocktropolis; iii) the Management Note Conversion; iv) the AOL
Purchase; and v) the repayment of the Senior Notes.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Quarterly Financial Information and Results of Operations
The financial statements as of September 30, 1997 and for the three and nine
months ended September 30, 1997 and 1996, are unaudited and, in the opinion of
management, include all adjustments (consisting only of normal recurring
adjustments) necessary to present fairly the financial position as of September
30, 1997, and the results of operations and cash flows for the three and nine
months ended September 30, 1997 and 1996. The results for the three and nine
months ended September 30, 1997 are not necessarily indicative of the results to
be expected for the entire year. While the Company believes that the disclosures
presented are adequate to make the information not misleading, these
Consolidated Financial Statements should be read in conjunction with the
Consolidated Financial Statements and the notes included in the Company's Form
S-1 effective October 1997.
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.
<PAGE> 10
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 the 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 nine months ended September 30, 1997 and 1996, the Company paid interest
of $30,903 and $43,622, respectively. Income taxes paid in 1997 and 1996 were
immaterial. The Company incurred $208,226 of capital lease obligations during
the nine months ended September 30, 1997. There were no capital lease
obligations incurred during 1996.
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>
<PAGE> 11
Advances and Recoupable Costs
In accordance with Statement of Financial Accounting Standards ("SFAS") 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 while 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.
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 September 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
<PAGE> 12
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.
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 nine months ended
September 30, 1997 and 1996, the Company incurred costs of $2,989,307 and
$2,040,966, respectively, relating to research and development. These amounts
are included in operating and development expenses as show in the accompanying
consolidated statements of operations.
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 is included in sales and marketing expenses in the
accompanying consolidated statements of operations.
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.
<PAGE> 13
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 and warrants 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 $19 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 converted into 171,276, 178,569,
566,399, 615,381, 1,501,755 and 1,333,321 shares, respectively, of Common stock
upon the Offering as if they were converted to Common stock on their
original date of issuance. The Series G Preferred stock, which converted into
620,077 shares of Common stock upon the Offering, have been included as
outstanding for all periods presented (using the treasury stock method and the
initial public offering price of $19 per Common share) since they were issued
during the twelve months immediately preceding the Offering.
Distribution Agreement
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 nine
months ended September 30, 1997, approximately $3,300,000 in gross product
revenues and approximately $2,400,000 in net product revenues were generated
through RED. Amounts due from RED as of September 30, 1997, were
approximately $1,900,000, which are included in accounts receivable in the
accompanying consolidated balance sheets.
Reclassifications
The consolidated financial statements for prior periods have been reclassified
to conform with the current period's presentation.
<PAGE> 14
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 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, 1996, the unaudited pro forma information for the nine months ended
September 30, 1996, after giving effect to the pro forma adjustments described
below, would have been as follows:
<TABLE>
<CAPTION>
<S> <C>
Unaudited pro forma revenues $ 1,045,095
-----------
Unaudited pro forma loss from continuing
operations $(8,496,088)
-----------
Unaudited pro forma net loss $(8,702,272)
-----------
Unaudited pro forma net loss per Common share $ (1.05)
===========
</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 $75,000 for the nine months ended
September 30, 1996. The amount of the acquired technology cost amortization pro
forma adjustment was $7,000 for the nine months ended September 30, 1996.
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 nine months ended September 30,
1996. This one-time charge would have increased the unaudited pro forma net loss
per Common share for the nine months ended September 30, 1996 by $.50.
<PAGE> 15
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 statement 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) was not included in Stockholders' equity in the accompanying
September 30, 1997 consolidated balance sheets. The "put" rights expired 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 accompanying consolidated 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
consisted of $3,000,000 which was paid 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 recorded a gain on the sale of
discontinued operations of $1,574,493. 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.
<PAGE> 16
Revenues and losses from discontinued operations in the accompanying
consolidated statements of operations were:
<TABLE>
<CAPTION>
For the Nine Months
Ended September 30
---------------------------
1997 1996
----------- -----------
<S> <C> <C>
Revenues $ 2,411,057 $ 6,400,149
=========== ===========
Loss before income taxes $ (415,970) $ (206,184)
Income taxes -- --
----------- -----------
Loss $ (415,970) $ (206,184)
=========== ===========
</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 of discontinued operations. A summary of these net
assets of discontinued operations is as follows:
<TABLE>
<CAPTION>
December 31,
1996
------------
<S> <C>
Current assets, excluding accounts receivable $ 11,891
Accounts receivable 1,033,734
Property and equipment, net 278,875
Other assets --
Current liabilities (1,310,054)
Long-term liabilities --
-----------
Net assets of discontinued operations $ 14,446
===========
</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 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.
<PAGE> 17
5. OTHER ACCRUED LIABILITIES:
Other accrued liabilities as of September 30, 1997 and December 31, 1996,
consist of the following:
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
------------- ------------
<S> <C> <C>
Office close-down $ 174,742 $ 500,722
Accrued professional fees 36,008 499,352
Accrued marketing costs 1,680,000 --
Other 2,267,297 570,938
---------- ----------
$4,158,047 $1,571,012
========== ==========
</TABLE>
As of September 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. Accrued
marketing costs represent payments due to Excite and Netscape under the Excite
Contract and the Netscape License Agreement, as well as advertising related to
N2K Encoded Music releases.
6. CREDIT AGREEMENTS:
The Company had a line of credit with a bank of $2,000,000 that 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). As of September 30,
1997, the line of credit requires the Company to meet certain financial
covenants. The Company was not in compliance with certain of these financial
covenants as of September 30, 1997; however, the Company has obtained a waiver
from the bank relating to such noncompliance.
<PAGE> 18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Safe Harbor for Forward-Looking Statements
From time to time, the Company may publish statements which are not historical
fact, but are forward-looking statements relating to such matters as anticipated
financial performance, business prospects, technological developments, new
products, research and development activities and similar matters. The Private
Securities Litigation Reform Act of 1995 provides safe harbor for
forward-looking statements.
These forward-looking statements are subject to certain risks and uncertainties
that could cause actual results to differ materially from historical and
anticipated results or other expectations expressed in the Company's
forward-looking statements. Such forward-looking statements may be identified by
the use of certain forward-looking terminology, such as "may," "will," "expect,"
"anticipate," "intend," "estimate," "believe," "goal," or "continue," or
comparable terminology that involves risks or uncertainties. Actual future
results and trends may differ materially from historical results or those
anticipated depending on a variety of factors, including, but not limited to
those set forth under "Overview" and "Liquidity and Capital Resources" included
in this Management's Discussion and Analysis of Financial Condition and Results
of Operations and in the "Risk Factors" section of the Company's final
prospectus dated October 17, 1997, as filed with the Securities and Exchange
Commission ("SEC"). Particular attention should be paid to the cautionary
statements involving the Company's limited operating history, the
unpredictability of its future revenues, the unpredictable and evolving nature
of its key markets, the intensely competitive online commerce and entertainment
environments, the Company's dependence on its strategic alliances and key
suppliers and distributors, and the risks associated with capacity constraints,
systems development, relationships with artists, and the management of growth.
Except as required by law, the Company undertakes no obligation to update any
forward-looking statement, whether as a result of new information, future events
or otherwise. Readers, however, should carefully review the factors set forth in
other reports or documents that the Company files from time to time with the
SEC.
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 Company recently decided to focus exclusively on its music entertainment
business, and , as such, has elected to discontinue its on-line information
<PAGE> 19
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.
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 13
recordings on the N2K Encoded Music label. Revenues have grown from $85,000 for
the three months ended December 31, 1995 to $3.6 million for the three months
ended September 30, 1997 while the Company incurred net losses for 1995 and 1996
and the first nine months of 1997 as it built its business. Gross profit since
its inception has been approximately $1.1 million. 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 the sale of CDs produced by the Company, which began in
1997, totaled $2.4 million for the nine months ended September 30, 1997.
The Company's strategy to develop products and services for the music
entertainment business was primarily responsible for the increase in net loss
for the periods ended September 30, 1997 and 1996. The Company incurred a net
loss of $15.5 million for the nine months ended September 30, 1997 and $12.5
million for the nine months ended September 30, 1996, of which $5.2 million
represents aggregate one-time charges in connection with the write-off of
purchased research and development.
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.
<PAGE> 20
Results of Operations
Quarterly Results
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.
Three Months Ended September 30, 1997 Compared With Three Months Ended
September 30, 1996
Revenues. Revenues for the three months ended September 30, 1997 totaled $3.6
million compared to $447,000 for the three months ended September 30, 1996.
Revenues for the three months ended September 30, 1997 and 1996 consisted
primarily of sales of CDs and cassettes produced by others. Sales of CDs
produced by the Company, which began in 1997, totaled $1.6 million.
Cost of Revenues. Cost of revenues totaled $3.0 million for the three months
ended September 30, 1997 compared to $432,000 for the three months ended
September 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's gross profit as a
percentage of revenues increased due to the sale of CDs produced by the Company
which began in 1997. 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 $1.9 million for the three months ended September 30, 1996 to $3.1 million
for the three months ended September 30, 1997, due to increased staffing as the
Company expanded its operations. Operating and development personnel totaled 100
full-time employees as of September 30, 1997 compared to 70 full-time employees
as of September 30, 1996. Operating and development expenses consist primarily
of software engineering,
<PAGE> 21
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
$826,000 for the three months ended September 30, 1996 to $3.0 million for the
three months ended September 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 49 full-time
employees as of September 30, 1997 compared to 21 full-time employees as of
September 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 percentage of revenues.
General and Administrative Expenses. General and administrative expenses
increased from $596,000 for the three months ended September 30, 1996 to $1.1
million for the three months ended September 30, 1997, primarily due to
increased staffing and facilities expenses. General and administrative personnel
totaled 45 full-time employees as of September 30, 1997 compared to 33 full-time
employees as of September 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, the use of the Company's revolving credit line and, during the
three months ended September 30, 1997, interest incurred on the Management and
Senior Notes. Interest income for the three months ended September 30, 1996
related to the Company investing the proceeds of equity financings received in
the second quarter of 1996.
Nine Months Ended September 30, 1997 Compared With Nine Months Ended
September 30, 1996
Revenues. Revenues for the nine months ended September 30, 1997 totaled $6.5
million compared to $976,000 for the nine months ended September 30, 1996.
Revenues for the nine months ended September 30, 1997 and 1996 consisted
primarily of sales of CDs and cassettes produced by others. Sales of CDs
produced by the Company, which began in 1997, totaled $2.4 million.
Cost of Revenues. Cost of revenues totaled $5.4 million for the nine months
ended September 30, 1997 compared to $943,000 for the nine months ended
September 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,
<PAGE> 22
profit participations payable to strategic alliance partners and content costs.
The Company's gross profit as a percentage of revenues increased due to the sale
of CDs produced by the Company which began in 1997. 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 $4.1 million for the nine months ended September 30, 1996 to $7.8 million
for the nine months ended September 30, 1997, due to increased staffing as the
Company expanded its operations. 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 $1.6
million for the nine months ended September 30, 1996 to $6.8 million for the
nine months ended September 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 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 revenues.
General and Administrative Expenses. General and administrative expenses
increased from $1.6 million for the nine months ended September 30, 1996 to $2.9
million for the nine months ended September 30, 1997, primarily due to increased
staffing and facilities expenses. 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, the use of the Company's revolving credit line and, during the
three months ended September 30, 1997, interest incurred on the Management and
Senior Notes. Interest income for the nine months ended September 30, 1997 and
1996 related to the Company investing the proceeds of equity financings received
in the second quarters of 1997 and 1996, respectively.
<PAGE> 23
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 September 30, 1997,
the Company had a cash balance of $179,000. On October 17, 1997, the Company
received approximately $66.1 million from the Offering. As discussed in Part I,
Item 1, Footnote No. 1, to the Consolidated Financial Statements of this Form
10-Q, the Company has entered into various agreements with AOL, Excite, and
Netscape whereby a significant portion of these proceeds will be used;
additionally, the Company is utilizing a portion of the proceeds to repay the
Senior Notes. The Company believes that the proceeds of the Offering and the AOL
Purchase, 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 any material impact on the Company's
operations.
Net cash of $20.2 million and $6.1 million was used in operating activities for
the nine months ended September 30, 1997 and 1996, respectively, primarily as a
result of the net losses generated during those periods. In addition, for the
nine months ended September 30, 1997, advances to artists and recoupable costs
under the N2K Encoded Music label increased $1.1 million and the Company made
payments of $2.0 million to AOL and Excite under the AOL and Excite Contracts
which are reflected through the increase in prepaid expenses (see discussion of
the Company's marketing agreements in Part I, Item 1, Footnote No. 1, to the
Consolidated Financial Statements of this Form 10-Q).
The Company financed these activities through the private placement of Series E
Preferred stock and Series F Preferred stock which yielded net proceeds of $19.0
million in the nine months ended September 30, 1996 and Series G Preferred stock
which yielded net proceeds of $7.2 million in the nine months ended September
30, 1997. In July and August 1997, the Company received $7.8 million from the
issuance of the Management and Senior Notes (see discussion of the Company's
financing in Part I, Item 1, Footnote No. 1, to the Consolidated Financial
Statements of this Form 10-Q). The Company made net borrowings of $650,000 and
net repayments of $400,000 under its revolving credit line in 1997 and 1996,
respectively.
Purchases of property and equipment totaled $2.7 million and $2.1 million for
the nine months ended September 30, 1997 and 1996, 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, and received proceeds
of $3.0 million from the sale of its on-line information services business in
the nine months ended September 30, 1997.
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 September 30, 1997, the Company had total
borrowings of $650,000 under the CoreStates Facility.
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
<PAGE> 24
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.
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, 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 of approximately $1.6 million. See Part I, Item 1, Footnote
No. 3 to the Consolidated Financial Statements of this Form 10-Q.
For the nine months ended September 30, 1997 and 1996, the discontinued
operations generated revenues of $2.7 million and $6.4 million, respectively.
The discontinued operations generated net losses of $491,000 and $206,000 for
the nine months ended September 30, 1997 and 1996, respectively.
<PAGE> 25
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. The following is a list of exhibits filed as part of this Form
10-Q.
4.1 Subscription Agreement dated as of October 22,
1997 between the Company and America Online, Inc.
4.2 Registration Rights Agreement dated as of October
22, 1997 between the Company and America Online,
Inc.
4.3 Form of Warrant Certificate of the Company,
issued in connection with the AOL Purchase.
11 Statement of Earnings per Share
27 Financial Data Schedule, which is submitted
electronically to the Securities and Exchange
Commission for information only.
b. There were no reports on Form 8-K filed during the quarter ended
September 30, 1997.
<PAGE> 26
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
N2K Inc.
Date: November 26, 1997 BY: /s/James E. Coane
----------------------------------
James E. Coane
President, Chief Operating Officer
and Director
Date: November 26, 1997 BY: /s/Bruce Johnson
----------------------------------
Bruce Johnson
Vice President, Secretary, Chief
Financial Officer (Principal
Accounting
Officer and Principal Financial
Officer)
and Director
<PAGE> 27
EXHIBIT INDEX
-------------
4.1 Subscription Agreement dated as of October 22, 1997 between the Company
and America Online, Inc.
4.2 Registration Rights Agreement dated as of October 22, 1997 between the
Company and America Online, Inc.
4.3 Form of Warrant Certificate of the Company, issued in connection with
the AOL Purchase.
11 Statement of Earnings per Share
27 Financial Data Schedule, which is submitted electronically to the
Securities and Exchange Commission for information only.
<PAGE> 1
Exhibit 4.1
N2K INC.
COMMON STOCK SUBSCRIPTION AGREEMENT
SUBSCRIPTION AGREEMENT, dated as of October 22, 1997 (this
"Agreement"), between N2K Inc., a Delaware corporation (the "Company") and
America Online, Inc., a Delaware corporation ("AOL").
WHEREAS, AOL wishes to subscribe for and purchase, and the Company
wishes to issue and sell, to AOL 169,779 shares (the "Shares")of common stock of
the Company ("Common Stock") on the terms set forth herein; and
WHEREAS, the parties originally agreed to include the Shares in the
S-1 Registration Statement filed by the Company with the Securities and Exchange
Commission (the "Commission") in connection the Company's initial public
offering, but upon review the staff of the Commission determined that the Shares
could not be so registered; and
WHEREAS, the staff of the Commission advised the Company that it
could proceed to effect the purchase and sale of the Shares in the manner
contemplated by the Agreement and would accept for filing a registration
statement of the Company registering the re-sale of the Shares by AOL in the
manner contemplated by Section 3 of the Registration Rights Agreement between
the Company and AOL of even date herewith; and
WHEREAS, both AOL and N2K desire that AOL purchase the Shares, with
the same economic terms and conditions for both parties as those set forth in
the letter agreement between the parties dated September 16, 1997 (the
"September 16 Agreement"), prior to its amendment by letter agreement between
the parties dated October 16, 1997 and to otherwise place AOL in the same
position AOL would have been in had AOL purchased the Shares as contemplated by
the September 16 Agreement; and
WHEREAS, both AOL and the Company desire that the Company issue a
warrant certificate to AOL for the future purchase of up to 184,736 additional
shares of Common Stock (the "Warrant Certificate") in conjunction with the
purchase
<PAGE> 2
of the Shares, with the same economic terms and conditions for both
parties as those set forth in the September 16 Agreement and to otherwise place
AOL in the same position AOL would have been in had AOL received the Warrant
Certificate as contemplated by the September 16 Agreement; and
WHEREAS, in connection therewith, the Company and AOL have agreed to
enter into an agreement providing for certain registration rights for the Shares
and the shares of Common Stock underlying the Warrant Certificate (the "Warrant
Shares")(the "Registration Rights Agreement"); and
WHEREAS, in connection therewith, the Company and AOL have agreed to
escrow the Purchase Price (as hereinafter defined) to be paid for the Shares in
a segregated account with AOL and at the time the obligation of the Company for
the Repurchase of the Shares (as defined in Section VIII.1 hereof) is first
available to AOL, for AOL to place the Purchase Price it holds in the segregated
account and for the Company to place any additional amount necessary from time
to time to fully satisfy the obligation to Repurchase the Shares (in an amount
not to exceed $7,500,000))in an escrow account with a third party escrow agent
and pursuant to an escrow agreement, in each case reasonably satisfactory to
AOL; and
WHEREAS, in connection therewith, AOL has agreed to enter into an
agreement with the representatives of the underwriters for the Company's initial
public offering restricting the sale or other disposition of the Shares for a
period of 180 days, in such form as entered into by the Company's officers,
directors and other holders of the Company's Common Stock (the "Lock Up
Agreement");
NOW THEREFORE, in consideration of the premises and mutual
agreements herein contained, the parties hereto hereby agree as follows:
ARTICLE I
SUBSCRIPTION FOR COMMON STOCK
Section I.1 The Common Stock. The Company has authorized the
issuance and sale pursuant to this Agreement of the Shares and the simultaneous
issuance of the Warrant Certificate to AOL. Subject to the terms and conditions
of
2
<PAGE> 3
this Agreement, AOL hereby irrevocably subscribes for and agrees to purchase
the Shares for an aggregate purchase price of $3,000,000. AOL shall not be
obligated to purchase any of the Shares unless the conditions set forth in
Article III hereof shall have been satisfied or waived by AOL on or prior to the
Closing Date. The Company shall not be obligated to sell any of the Shares to
AOL unless the conditions set forth in Article IV hereof shall have been
satisfied or waived on by the Company or prior to the Closing Date.
ARTICLE II
CLOSING
The closing (the "Closing") of the transactions contemplated by this
Agreement shall take place as follows:
(i) Subject to the terms and conditions of this Agreement
and on the basis of the representations and warranties herein set forth,
the Company will sell to AOL, and AOL will purchase from the Company, at
the Closing on October 22, 1997 (the "Closing Date"), 169,779 shares of
Common Stock in exchange for payment of an aggregate purchase price of
$3,000,000, (the "Purchase Price"), which the Company hereby authorizes
and directs be held in a segregated account by AOL until such time as the
Shelf Registration Statement (as that term is defined in the Registration
Rights Agreement of even date herewith) is declared effective and is
available for offers and sale of all Shares by AOL pursuant thereto, at
which point it shall be paid to or at the direction of the Company, or
until the parties agree to establish an escrow account as contemplated by
the seventh recital to this Agreement in which case it shall be deposited
with the escrow agent under the terms of those arrangements.
(ii) At the Closing, subject to the terms and conditions of
this Agreement and on the basis of the representations and warranties
herein set forth, the Company will deliver to, AOL or at the direction of,
AOL or a representative thereof, a certificate registered in the name of
AOL representing the Shares to be purchased by AOL, against payment of the
Purchase Price by AOL. The Company shall also deliver simultaneously
therewith the Warrant Certificate. The
3
<PAGE> 4
Closing will take place at the offices where the closing of the
Company's initial public offering is held in New York, N.Y. at 10:00
a.m., New York time, on the Closing Date.
ARTICLE III
CONDITIONS TO OBLIGATIONS OF THE PURCHASERS
The obligation of AOL to purchase Common Stock under this Agreement
is subject to the satisfaction at or prior to the Closing Date of each of the
following conditions:
Section III.1 Accuracy of Representations and Warranties. All
representations and warranties of the Company contained herein shall be true and
correct in all material respects on and as of the Closing Date as if made on and
as of the Closing Date.
Section III.2 Performance of Agreements; Regulatory Approvals. (i)
The Company shall have performed all obligations and agreements, and complied
with all covenants and conditions contained in this Agreement to be performed or
complied with by it prior to or at the Closing Date.
(ii) The Company shall have executed and delivered the
Registration Rights Agreement.
(iii) The Company shall have executed and delivered
the Warrant Certificate.
(iv) The Company shall have obtained all corporate
authorizations and approvals and all consents and approvals of regulatory bodies
and authorities necessary to issue the Shares and the Warrant Certificate and to
enter into and perform this Agreement, the Registration Rights Agreement and the
Warrant Certificate and to consummate the transactions contemplated hereby and
thereby.
Section III.3 Consummation of IPO. The Company shall have
consummated an initial public offering of Company common stock pursuant to a
registration statement (Registration No. 333-33105) on Form S-1 filed with the
Securities and Exchange Commission on October 15, 1997 (the
4
<PAGE> 5
"IPO").
Section III.4 Delivery of Certificates. At the Closing, the Company
shall deliver to AOL a certificate signed by a senior executive officer of the
Company certifying as to each of the matters set forth in Sections III.1, III.2
and III.3 and the Company shall deliver all other certificates customarily
delivered in transactions of this type.
Section III.5 Opinion of Dewey Ballantine LLP. Dewey Ballantine LLP,
special counsel for the Company, shall have delivered to AOL an opinion dated
the Closing Date in substantially the form attached as Annex I hereto.
If at or prior to the Closing all of the conditions of this Article
III have not been satisfied, AOL may elect to waive such conditions or to be
relieved of all further obligations hereunder.
ARTICLE IV
CONDITIONS TO THE
COMPANY'S OBLIGATIONS
The obligation of the Company to issue and sell the Common Stock
under this Agreement is subject to the satisfaction at the Closing Date of each
of the following conditions:
Section IV.1 Accuracy of Representations and Warranties. All
representations and warranties of AOL contained herein shall be true and correct
in all material respects on and as of the Closing Date as if made on and as of
the Closing Date.
Section IV.2 Performance of Agreements. AOL shall have performed all
obligations and agreements, and complied with all covenants and conditions,
contained in this Agreement to be performed or complied with by it prior to or
at the Closing Date.
Section IV.3 Payment for the Common Stock. AOL shall have delivered
to the Company and the Company shall have received full payment of the Purchase
Price of the Shares.
5
<PAGE> 6
Section IV.4 Lock Up Agreement. AOL shall have executed
and delivered the Lock Up Agreement.
ARTICLE V
REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE COMPANY
The Company represents, warrants and covenants to AOL as of the date
of this Agreement and as of the Closing Date as follows:
Section V.1 Due Organization, Valid Existence and Authority of the
Company and the Initial Subsidiaries. The Company has been duly incorporated and
is validly existing and in good standing under the laws of the State of
Delaware. The Company has full right, power and authority to carry on its
business as conducted and as proposed to be conducted. The Company has full
right, power and authority to enter into this Agreement, the Registration Rights
Agreement and the Warrant Certificate and perform its obligations hereunder and
thereunder.
Section V.2 Authorization and Validity of Agreements. This
Agreement, the Registration Rights Agreement and the Warrant Certificate have
been duly authorized and constitute valid and binding obligations of the Company
enforceable against the Company in accordance with their
terms.
Section V.3 No Conflict with Other Instruments; No Approvals
Required Except as Have Been Obtained. The execution and delivery of this
Agreement, the Registration Rights Agreement and the Warrant Certificate by the
Company and compliance by the Company with the terms and conditions hereof and
thereof, will not violate, with or without the giving of notice or the lapse of
time, or both, or require any registration, qualification, approval or filing
under, any provision of law, statute, ordinance or regulation applicable to the
Company and will not conflict with, or require any consent or approval under, or
result in the breach or termination of any provision of, or constitute a default
under, or result in the acceleration of the performance of the obligations of
the Company under, or result in the creation of any claim, lien, charge or
encumbrance upon any of the properties, assets or businesses
6
<PAGE> 7
of the Company pursuant to the Certificate of Incorporation or By-laws of the
Company or any order, judgment, decree, law, ordinance or regulation applicable
to the Company, or any contract, instrument, agreement or restriction to which
the Company is a party or by which the Company or any of its assets or
properties is bound.
Section V.4 Additional Representations and Warranties. All
representations and warranties of the Company contained in that certain
Underwriting Agreement, dated October 17, 1997 (the "Underwriting Agreement"),
between the Company and PaineWebber Incorporated and Unterberg Harris, as
representatives of the several underwriters named therein (the "Underwriters"),
except those that refer specifically to the Underwriting Agreement or
arrangements with the Underwriters that are not germane to the placement of the
Shares (other than those related generally to the IPO), are incorporated herein
by reference.
Section V.5 Lock Up of Other Shareholders. More than 90% of the
other holders of the Company's Common Stock, and all of the officers and
directors of the Company, have entered into agreements with the underwriters of
the IPO restricting the sale of their shares in substantially the same form as
the Lock Up Agreement.
Section V.6 Private Placement. The offer and sale of the Shares and
the Warrant Certificate by the Company are being accomplished in a transaction
exempt from registration under Section 5 of the Securities Act and from
registration or qualification under all applicable state securities and
"Blue-Sky" laws.
ARTICLE VI
REPRESENTATIONS AND WARRANTIES OF
AOL
AOL hereby represents and warrants to the Company as of the date of
this Agreement and as of the Closing Date as follows:
Section VI.1 Due Organization, Good Standing and Authority of the
Purchaser and the Founders. AOL is a corporation duly organized, validly
existing and in good standing under the laws of the State of Delaware.
7
<PAGE> 8
Section VI.2 Authorization and Validity of Agreements. This
Agreement, the Registration Rights Agreement and the Lock Up Agreement have been
duly authorized, executed and delivered by AOL and, assuming the due
authorization, execution and delivery by the Company, constitute valid and
binding obligations of AOL enforceable against AOL in accordance with their
terms.
Section VI.3 No Conflict with Other Instruments; No Approvals
Required Except as Have Been Obtained. AOL is not subject to any charter,
by-law, contract or other instrument or agreement, order, judgment, decree, law,
ordinance or regulation or any other restriction of any kind or character that
would prevent AOL from entering into this Agreement or from consummating the
transactions contemplated in accordance with the terms hereof.
Section VI.4 Purchaser Awareness . Such Purchaser acknowledges,
agrees and is aware that the Shares and the Warrant Shares have not been
registered under the Securities Act or under the securities laws of any other
jurisdiction, including any state of the United States. An offer or sale of the
Shares or the Warrant Shares by AOL in the absence of registration under such
securities laws will require the availability of an exemption thereunder. A
restrictive legend in substantially the form set forth in Section VII.1 hereof
shall be placed on the certificates representing the Shares and the Warrant
Shares and a notation shall be made in the appropriate records of the Company
indicating that the securities representing the Shares and the Warrant Shares
are subject to restrictions on transfer.
Section VI.5 Receipt of Information, Access to
Information. AOL acknowledges that it:
(a) has been furnished with sufficient information regarding
the Company and its prospects such that it has been able to understand and
evaluate the risks of a purchase of the Company's securities;
(b) has been given the opportunity to ask questions of, and
receive answers from, the Company concerning the terms and conditions of
the offering of the Company's securities hereunder and other matters
pertaining to an investment therein, has been given the
8
<PAGE> 9
opportunity to obtain such additional information necessary to evaluate
the merits and risks of a purchase of the securities to the extent the
Company possesses such information, and has received all documents and
information that it has requested relating to an investment in the
securities; and
(c) has carefully considered and has, to the extent AOL
believes such discussion necessary, discussed with its professional
legal, financial and tax advisors, the suitability of an investment in
the securities.
ARTICLE VII
RESTRICTIONS ON TRANSFER
The Shares and the Warrant Shares shall not be transferable except upon
the conditions specified in this Article VII, which are intended to insure
compliance with the provisions of the Securities Act in respect of the transfer
of any of the Shares or Warrant Shares.
Section VII.1 Restrictive Legends. Each certificate representing the
Shares or the Warrant Shares shall (unless otherwise permitted by the provisions
of this Article VII) be stamped or otherwise imprinted with a legend in
substantially the following form:
"THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT
OF 1933, AS AMENDED (THE "SECURITIES ACT") OR UNDER THE SECURITIES LAWS OF
ANY JURISDICTION AND MAY NOT BE TRANSFERRED, SOLD OR OTHERWISE DISPOSED OF
UNLESS A REGISTRATION STATEMENT IS IN EFFECT UNDER THE SECURITIES ACT AND
ANY APPLICABLE SECURITIES LAWS WITH RESPECT TO SUCH SECURITIES OR A
WRITTEN OPINION OF COUNSEL REASONABLY ACCEPTABLE TO THE COMPANY IS
PROVIDED TO THE COMPANY TO THE EFFECT THAT NO REGISTRATIONS ARE REQUIRED
UNDER SUCH SECURITIES LAWS."
Section VII.2 Notice of Proposed Transfers. (a) The holder of the
Shares or Warrant Shares bearing a restrictive legend set forth in Section VII.1
above ("Restricted Common Stock"), by acceptance thereof, agrees that, unless a
registration statement is in effect under the
9
<PAGE> 10
Securities Act and under applicable securities laws with respect to such
Restricted Common Stock or unless the transfer is pursuant to Rule 144(k), prior
to any transfer or attempted transfer of such Restricted Common Stock, such
holder will give the Company (i) written notice describing the proposed transfer
of any Restricted Common Stock in reasonable detail, (ii) such other information
about the proposed transfer of such Restricted Common Stock or the proposed
transferee of such Restricted Common Stock as the Company may reasonably request
and (iii) an opinion of counsel (both counsel and opinion reasonably
satisfactory to the Company) to the effect that the proposed transfer of such
Restricted Common Stock may be effected without registration of such Restricted
Common Stock under the Securities Act and under other applicable securities
laws.
(b) If the holder of the Restricted Common Stock delivers to the
Company an opinion of counsel that subsequent transfers of such Restricted
Common Stock will not require registration or qualification under the Securities
Act or under other applicable securities laws, the Company will or will cause
the transfer agent for such Restricted Common Stock promptly (but in any event
within 3 business days) after such contemplated transfer to deliver new
certificates for such Restricted Common Stock that do not bear that section of
the restrictive legend set forth in Section VII.1 above imposed by the
Securities Act and under other applicable securities laws of any other
jurisdictions. If the foregoing conditions entitling the holder to effect a
proposed transfer of such Restricted Common Stock without registration under the
Securities Act and under other applicable securities laws have not been
satisfied, AOL shall not transfer the Restricted Common Stock, and the Company
will cause the transfer agent not to transfer such Restricted Common Stock on
its books or issue any certificates representing such Restricted Common Stock.
Any purported transfer of Restricted Common Stock not in accordance with
applicable securities laws shall be void.
(c) The restrictions imposed by this Agreement with respect to the
Securities Act and under other applicable securities laws of any other
jurisdictions upon the transferability of any particular shares of Restricted
Common Stock shall cease and terminate when such shares of Restricted Common
Stock have been sold pursuant to an effective registration statement under the
Securities Act and under other applicable securities laws or transferred
10
<PAGE> 11
pursuant to Rule 144 promulgated under the Securities Act. The holder of any
Restricted Common Stock as to which such restrictions shall have terminated
shall be entitled to receive from the Company, without expense, a new
certificate representing Common Stock that does not bear the restrictive legend
set forth above imposed by the Securities Act and under other applicable
securities laws of any other jurisdictions.
(d) As used in this Agreement, the term "transfer" encompasses any
sale, transfer, pledge or other disposition of any Common Stock referred to
herein.
ARTICLE VIII
REPURCHASE OF SHARES AND ADDITIONAL AGREEMENTS
Section VIII. 1 Company Obligation. The Company hereby covenants to
and shall repurchase all of the Shares from AOL (the "Repurchase") as provided
in this Section VIII.1 in the event that (A) the Resale Shelf Registration
Statement (as that term is defined in the Registration Rights Agreement) is not
declared effective within 180 days of the issuance date of the Shares (or, if
earlier, by the Lock-Up Release Date (as that term is defined in the
Registration Rights Agreement)), (B) if the Resale Shelf Registration Statement
is declared effective, at any time during the Registration Period (as that term
is defined in the Registration Rights Agreement) during which the Resale Shelf
Registration Statement is not available for offers and sales of all of the
Shares or (C) for any reason the purchase and sale of the Shares under this
Agreement is required to be rescinded or restructured by any court or
governmental or regulatory body or agency. In any such event, AOL may cause the
Repurchase to occur by giving written notice to the Company that it wishes the
Repurchase to occur (the "Notice"). The Company will then be obligated to cause
the Repurchase to occur within five (5) days after the Notice has been given by
the Company.
Section VIII.2 Terms of the Repurchase. The Repurchase shall occur
at a price payable in cash equal to the greater of the Purchase Price or the
closing price of
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<PAGE> 12
the Shares then held by AOL on the trading day immediately preceding the day
Notice was given.
Section VIII.3 Escrow Arrangements. (a) The Company hereby
authorizes AOL to place and hold the Purchase Price in a segregated account, as
contemplated in Section II(i) of this Agreement (the "Escrow Fund"). Subject to
the provisions of clause (b) of this Section VIII.3, the Company hereby further
authorizes AOL to withdraw from the Escrow Fund and to pay over to itself that
amount of the Escrow Fund necessary to satisfy the Company's Repurchase
obligation under Section VIII.1; provided, however, that in the event the Escrow
Fund is insufficient to satisfy the Company's Repurchase obligation, the Company
hereby agrees that it shall immediately upon demand from AOL pay over to AOL the
difference between the amount of the Company's Repurchase obligation and the
Escrow Fund.
(b) If the Shelf Registration Statement (as that term is defined in
the Registration Rights Agreement) is not declared effective by the 180th day
following the Closing Date (or, if earlier, by the Lock-Up Release Date), AOL
shall, unless it has elected to have the Company Repurchase all of the Shares
and the Company has fully completed such Repurchase, transfer the Escrow Fund to
an escrow agent reasonably satisfactory to AOL in accordance with the terms of
the escrow agreement (which shall be reasonably satisfactory to AOL) entered
into by AOL and the Company and the disposition of the Escrow Fund shall
thereafter be governed exclusively by the terms and provisions of the escrow
agreement. The parties hereto agree that the escrow agreement shall provide that
the Company shall under certain circumstances be required to deliver an
additional sum into the Escrow Fund on the 180th day following the Closing Date
and may further be required to deliver additional sums into the Escrow Fund at
certain times thereafter. If the Shelf Registration is declared effective by the
180th day following the Closing Date and is available for the offer and sale of
all of the Shares, AOL shall pay the Escrow Fund amount to or at the direction
of the Company, subject to the provisions of Section VIII.3(d).
(c) In the event AOL and the Company have not entered into an escrow
agreement with an escrow agent on or prior to the 180th day following the
Closing Date and the Shelf Registration Statement is not then declared
effective, the Company shall be required to deliver additional funds to
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<PAGE> 13
AOL as additional security for its Repurchase obligations under this Agreement,
which additional funds shall be placed by AOL in the segregated account and
become part of the Escrow Fund.
(d) In the event that the Shelf Registration Statement is declared
effective but is not thereafter at any time during the Shelf Registration Period
available for offers and sales of all the Shares, the Company agrees to deposit
with the escrow agent or AOL if there is no escrow agent an amount, subject to
paragraph (e) below, necessary to satisfy the Repurchase obligation but only for
such period that the Shelf Registration Statement is not available. If the Shelf
Registration Statement is not available solely due to the failure of AOL to
provide information reasonably required therefor, no escrow or deposits will be
due under this section until AOL supplies such information.
(e) Subject to the provisions of clause (f) of this Section VIII.3,
at all times while the Escrow Fund is required to be maintained under this
Section VIII (the "Escrow Maintenance Period"), the Company shall be required to
deposit such additional sums in the manner provided in this clause (e) into the
Escrow Fund as is required to maintain the aggregate value of the Escrow Fund,
measured as of the last business day of each calendar month during the Escrow
Maintenance Period, equal to the value of the Shares then held by AOL based on
the Average Trading Price (as hereinafter defined) measured as of each such day.
The Company shall deposit such additional funds in the Escrow Fund on the last
business day of each month during the Escrow Maintenance Period in the form of
additional cash and/or an additional amount under an irrevocable letter of
credit in favor of AOL in form and substance satisfactory to AOL. Subject to the
provisions of clause (f) of this Section VIII.3, if, as of the last business day
of any calendar month during the Escrow Maintenance Period, the aggregate value
of the Escrow Fund is in excess of the value of the Shares then held by AOL
based on the Average Trading Price, the escrow agent or AOL, as the case may be,
within five (5) business days thereafter, shall promptly release and return such
excess amounts to the Company (in the form requested by the Company)(subject to
subsequent re-funding of additional amounts by the Company as provided above).
As used herein, the "Average Trading Price" shall mean, as of the date of
determination, the average closing price per
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<PAGE> 14
share of the Shares on the Nasdaq National Market for the twenty (20)
consecutive trading days ending on the trading day immediately preceding the
last business day of such month, as reported in The Wall Street Journal.
(f) In the case of clauses (b),(c),(d)and (e) of this Section, in no
event shall the Escrow Fund be less than $3,000,000 nor more than $7,500,000.
Section VIII.4 Indemnification. The Company shall indemnify, defend
and hold harmless AOL, its directors, officers, underwriters, or any other
person acting on behalf of AOL and each other person, if any, who controls any
of the foregoing persons, against all liability, loss or damage, together with
all reasonable costs and expenses related thereto (including legal and
accounting fees and expenses), arising from the untruth, inaccuracy or breach of
any of the representations, warranties, covenants or agreements of the Company
herein.
Section VIII.5. Same Position. The parties hereby agree that the
intent of this Agreement is to provide the same economic terms and conditions to
both the Company and AOL as those set forth in the Letter Agreement dated
September 16, 1997 between AOL and the Company (the "Letter Agreement") and to
otherwise place AOL in the same position AOL would have been in had AOL
purchased the Shares and the Warrant Certificate as contemplated by the Letter
Agreement prior to giving effect to any amendment of such Letter Agreement. In
connection therewith, the Company shall take all actions necessary in the
reasonable judgment of AOL to provide AOL with all rights, privileges and
benefits as it would have had had AOL purchased the Shares as contemplated by
the Letter Agreement (prior to giving effect to any amendment thereto). The
Company agrees to modify this Agreement or any other agreement contemplated
hereby or to enter into any additional agreements as AOL shall reasonably
determine necessary to effectuate the foregoing.
Section VIII.6. Special Covenants of Company. At all times prior to
the second anniversary of the Expiration Date (as defined in the Warrant
Certificate), so long as such Warrant Shares are outstanding, the Company shall
deliver to the Holder:
(a) Financial Reporting: Business Information.
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<PAGE> 15
(i) Monthly Financial Statements -- prior to the date (the
"IPO Date") the Company first offers for sale its Common Stock
pursuant to an effective registration statement filed under the
Securities Act of 1933, as amended, as soon as practicable after the
end of each monthly fiscal period in each fiscal year of the
Company, and in any event within 30 days thereafter:
(A) a consolidated balance sheet as at the end
of such month;
(B) a consolidated income statement for such month and
for the portion of such fiscal year ending with such month;
and
(C) consolidated statements of changes in stockholders'
equity and cash flows for such month and for the portion of
such fiscal year ending with such month;
for the Company, setting forth in each case in comparative form the
figures for the corresponding month in the previous fiscal year of
the Company, all in reasonable detail, and certified by a senior
officer of the Company as fairly presenting, in all material
respects, the financial position of the Company and its results of
operations and cash flows (subject to changes resulting from
year-end adjustments);
(ii) Post Initial Public Offering Information -- from and
after the IPO Date, promptly upon their becoming available, a copy
of each financial statement, report, notice or proxy statement sent
by the Company to stockholders generally, and of each regular or
periodic report (including, without limitation, each Form 10-Q and
Form 10-K) and any registration statement, prospectus or written
communication (other than transmittal letters), and each amendment
thereto, in respect thereof filed by the Company with, or received
by the Company in connection therewith from, the National
Association of Securities Dealers, any securities exchange or the
Securities and Exchange Commission or any successor agency; and
15
<PAGE> 16
(iii) Annual Financial Statements - in the event that the IPO
Date does not occur before March 31, 1998, as soon as practicable
after the end of each fiscal year of the Company, and in any event
within one hundred twenty (120) days thereafter,
(i) consolidated balance sheets as at
the end of such year, and
(ii) consolidated statements of income,
changes in shareholders' equity and cash flows
for such year,
for the Company and its consolidated subsidiaries, setting forth in
comparative form the financial statement for the previous fiscal
year, all in reasonable detail and accompanied by an audit report
thereon of independent certified public accountants of recognized
national standing, which report shall state without qualification
(including, without limitation, qualifications related to the scope
of the audit, the compliance of the audit with generally accepted
auditing standards, or the ability of the Company or a material
subsidiary thereof to continue as a going concern), that such
financial statements have been prepared and are in conformity with
GAAP.
(iv) Requested Information -- with reasonable promptness, such
other data and information as from time to time may be reasonably requested by
the Holder.
(b) Inspection. The Company will permit officers and designated
representatives of the Holder, at the expense of the Company at any time when an
Event of Default exists, and otherwise at the expense of the Holder, to visit
and inspect any of its properties, and to examine its books of account and to
make copies and extracts therefrom, and discuss its affairs, finances and
accounts with, and be advised as to the same by, its officers and its
independent accountants (and by this provision the Company authorizes said
accountants to discuss the finances and affairs of the Company), all upon
reasonable notice and at such reasonable times and intervals and to such
reasonable extent as the Holder may reasonably request.
16
<PAGE> 17
ARTICLE IX
Section IX.1 Survival of Representations, Warranties and Covenants.
The representations, warranties and covenants of the parties contained in this
Agreement and in any document delivered or to be delivered pursuant to this
Agreement and in connection with the Closing hereunder and the provisions of
Article V and Article VI of this Agreement shall survive the Closing. The
parties have made no representations or warranties other than those that are
expressly set forth in this Agreement.
Section IX.2 Entire Agreement. This Agreement (including the
Schedules, Exhibits and Annexes hereto), together with the Registration Rights
Agreement, the Warrant Certificate and the Lock Up Agreement to which any of the
parties hereto are parties, constitutes the entire agreement between the parties
hereto and supersede all prior agreements and understandings, oral and written,
between the parties hereto with respect to the subject matter hereof.
Section IX.3 Severability. Any provision of this Agreement that is
prohibited, unenforceable or not authorized in any jurisdiction shall, as to
such jurisdiction, be ineffective to the extent of such prohibition,
unenforceability or lack of authorization without invalidating the remaining
provisions hereof or affecting the validity, unenforceability or legality of
such provision in any other jurisdiction.
Section IX.4 Binding Effect; Benefit. This Agreement shall inure to
the benefit of and be binding upon the parties hereto, and their respective
successors, legal representatives and permitted assigns. Nothing in this
Agreement, expressed or implied, is intended to confer on any person other than
the parties hereto, and their respective successors, legal representatives and
permitted assigns, any rights, remedies, obligations or liabilities under or by
reason of this Agreement.
Section IX.5 Amendment; Waiver. No provision of this Agreement may
be amended, waived or otherwise modified except by an instrument in writing
executed by the parties hereto. The parties, however, agree to use their
respective best efforts to negotiate any amendments or supplemental
17
<PAGE> 18
agreements that may be necessary or advisable to reflect the transactions
contemplated by this Agreement and to provide AOL with the benefits reflected
in the recitals to this Agreement.
Section IX.6 Expenses. The Company shall pay all reasonable fees and
expenses, including reasonable attorney's fees, incurred by AOL in connection
with this Agreement and the other agreements and transactions contemplated
hereby but not any of AOL's other expenses, including attorney's fees, in
connection with any other negotiations, agreements, and understandings (i)
occurring prior to October 16, 1997 or (ii) not directly related to the Purchase
of the Shares.
Section IX.6 Headings. The Articles and Section headings contained
in this Agreement are for convenience only and shall not affect the meaning or
interpretation of this Agreement.
Section IX.7 Counterparts. This Agreement may be executed in any
number of counterparts, each of which shall be deemed to be an original and all
of which together shall be deemed to be one and the same instrument.
Section IX.8 Applicable Law. This Agreement shall be governed by,
and construed in accordance with, the laws of New York without giving effect to
the principles of conflicts of laws thereof.
Section IX.9 Remedies. The remedies provided in this
Agreement are cumulative and not exclusive of any remedies provided by
law.
Section IX.10 Notices and Payment. (a) All notices, requests,
demands and other communications hereunder shall be in writing and, except to
the extent otherwise provided in this Agreement, shall be deemed to have been
duly given if delivered by same day or next day courier or mailed, registered
mail, return receipt requested, or transmitted by telegram, telex or facsimile
(i) if to AOL, 22000 AOL Way, Dulles, Virginia 20166, Attention: David Colburn
and the General Counsel, and to Orrick, Herrington & Sutcliffe LLP, 666 Fifth
Avenue, New York, NY 10103, Attention: Martin H. Levenglick and (ii) if to the
Company, 55 Broad Street, New York, NY 10004, Attention: Jonathan V. Diamond
with a copy to Dewey
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<PAGE> 19
Ballantine LLP, 1301 Avenue of the Americas, New York, NY
10019, Attention: Frank E. Morgan, II or such other address as the Company may
have furnished to AOL in writing. A notice hereunder shall be deemed to have
been given on the day such notice is sent or transmitted; provided, however,
that if such notice is sent by next-day courier it shall be deemed to have been
given the day following sending and, if by registered mail, five days following
sending.
(b) Unless otherwise provided in this Agreement, payments hereunder shall
be made by wire transfer of immediately available funds.
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<PAGE> 20
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above written.
COMPANY:
N2K INC.
By: /s/ Jonathan V. Diamond
-------------------------
Name: Jonathan V. Diamond
Title: Vice Chairman
PURCHASER:
AMERICA ONLINE, INC.
By: /s/ David M. Colburn
-------------------------
Name: David M. Colburn
Title:Senior Vice President
20
<PAGE> 21
ANNEX I
[Form of Dewey Ballantine Opinion]
<PAGE> 1
Exhibit 4.2
October 22, 1997
Ladies and Gentlemen:
N2K Inc., a Delaware corporation (the "Company"), proposes to issue and sell to
American Online, Inc., a Delaware corporation ("AOL"), upon the terms set forth
in a Common Stock Subscription Agreement of even date herewith (the "Purchase
Agreement"), 169,779 shares of the Company's common stock, $.001 par value per
share (the "Purchase Shares"). Simultaneously with the issuance and sale of the
Purchase Shares, the Company will issue to AOL a Warrant Certificate of even
date herewith for the future purchase of up to 184,736 additional shares of the
Company's common stock (the "Warrant Shares"). As an inducement to AOL to
purchase the Purchase Shares, the Company agrees with AOL as follows:
1. Definitions As used in this Agreement, the following terms
shall have the following respective meanings:
(i) "Commission" shall mean the Securities and Exchange
Commission, or any other Federal agency at the time administering the Securities
Act.
(ii)"Person" shall mean and include an individual, a
corporation, a partnership, a trust, an unincorporated organization and a
government or any department, agency or political subdivision thereof.
(iii) "Restricted Shares" shall mean the Purchase Shares, the
Warrant Shares and any shares of capital stock received in respect thereof,
evidenced by certificates bearing a restrictive legend substantially in the form
set forth in Section VII.1 of the Purchase Agreement.
(iv)"Securities Act" shall mean the Securities Act of 1933, as
amended, or any similar Federal statute, and the rules and regulations of the
Commission thereunder, all as the same shall be in effect at the time.
(v) "Transfer" shall include any disposition of any shares of
Restricted Shares or of any interest therein which would constitute a sale
thereof within the meaning of the Securities Act.
2. Registration Rights
(a) Incidental Registration. If the Company proposes for any
reason to register, including pursuant to Section 2(b) or 2(c) hereof, any of
its securities under the Securities Act (other than pursuant to a registration
statement on Forms S-8 or S-4 or similar or successor forms), it shall each such
time promptly give written notice to AOL
<PAGE> 2
of its intention to do so, and, upon the written request, given within 30 days
after receipt of any such notice of AOL to register any Restricted Shares (which
request shall specify the Restricted Shares intended to be sold or disposed of
by AOL), the Company shall use its best efforts to cause all such Restricted
Shares to be included in such registration under the Securities Act, all to the
extent requisite to permit the sale or other disposition (in accordance with the
Company's intended methods thereof, as aforesaid) by AOL of the Restricted
Shares so registered. In the event that the proposed registration by the Company
is, in whole or in part, an underwritten public offering of securities by the
Company, if the managing underwriter determines and advises in writing that the
inclusion of all Restricted Shares proposed to be included in the underwritten
public offering and other issued and outstanding shares of Common Stock proposed
to be included therein by persons other than AOL (the "Other Shares") would
interfere with the successful marketing of such securities by the Company, then
(i) the number of Restricted Shares and Other Shares shall be reduced, pro rata
among the holders of Other Shares and AOL (based upon the number of shares of
Common Stock requested by the holders thereof to be registered in such
underwritten public offering), and (ii) in each case those shares of Common
Stock which are excluded from the underwritten public offering shall be withheld
from the market by the holders thereof for a period, not to exceed 90 days,
which the managing underwriter reasonably determines as necessary in order to
effect the underwritten public offering.
(b) Registrations on Form S-2 or S-3. At such time as the
Company shall have qualified for the use of Form S-2 or S-3 (or any similar form
or forms promulgated by the Commission), AOL shall have the right to request an
unlimited number of registrations on Form S-2 or S-3 (which request or requests
shall be in writing, shall specify the Restricted Shares intended to be sold or
disposed of by AOL, shall state the intended method of disposition of such
Restricted Shares by AOL and shall relate to Restricted Shares having a proposed
aggregate gross offering price (before deduction of underwriting discounts and
expenses of sale) of at least $500,000), and the Company shall be obligated to
effect such registration or registrations on Form S-2 or Form S-3 (as the case
may be); provided, however, that the Company shall in no event be obligated to
cause the effectiveness of more than one such registration statement in any
calendar year. The Company shall not register securities for sale for its own
account in any registration requested pursuant to this Section 2(b) unless
requested to do so by the holders of Restricted Shares who hold at least 51% of
the stock as to which registration has been requested. The Company may not cause
any other registration of securities for sale for its own account (other than a
registration effected solely to implement an employee benefit plan or to acquire
another company) to become effective less than 90 days after the effective date
of any registration requested pursuant to this Section 2(b).
(c) Demand Registration. At any time prior to the time that
the Company shall have qualified for the use of Form S-2 or S-3 (or any similar
form or forms promulgated by the Commission) AOL shall have the one-time right
to request the Company to file a registration statement on any form which the
Company is then entitled to use. Such request shall be in writing, shall specify
the shares of Common Stock intended to be sold or disposed of by AOL, shall
state the intended method of disposition by AOL and shall relate to Common Stock
having a proposed aggregate gross offering price (before deduction of
underwriting discounts and expenses of sale) of at least
2
<PAGE> 3
$500,000, and the Company shall be obligated to effect such registration as
promptly as practical, subject in any event to all applicable securities laws;
provided, however, that the Company shall not be required to file such
registration statement prior to the expiration of 180 days from the effective
date of the Company's registration statement covering its initial public
offering.
(d) Designation of Underwriter.
(i) In the case of any registration effected pursuant to
Sections 2(b), 2(c) or 3, AOL shall have the right to designate the managing
underwriter (if any) in any such underwritten offering, provided that it is
reasonably acceptable to the Company.
(ii)In the case of any registration initiated by the Company,
the Company shall have the right to designate the managing underwriter in any
underwritten offering.
(e) Preparation and Filing. (A) If and whenever the Company is
under an obligation pursuant to the provisions of this Section 2 to effect the
registration of any Restricted Shares, the Company shall, as expeditiously as
practicable:
(i) prepare and file with the Commission a registration
statement with respect to such securities and use its best efforts to cause such
registration statement to become and remain effective;
(ii)prepare and file with the Commission such amendments and
supplements to such registration statements and the prospectus used in
connection therewith as may be necessary to keep such registration statement
effective and current for at least nine months and to comply with the provisions
of the Securities Act with respect to the sale or other disposition of all
Restricted Shares covered by such registration statement;
(iii) furnish to AOL such number of copies of a summary
prospectus or other prospectus, including a preliminary prospectus, in
conformity with the requirements of the Securities Act, and such other documents
as AOL may reasonably request in order to facilitate the public sale or other
disposition of such Restricted Shares;
(iv)use its best efforts to register or qualify the Restricted
Shares covered by such registration statement under the securities or blue sky
laws of such jurisdictions as AOL shall reasonably request (provided, however,
the Company shall not be required to consent to general service of process for
all purposes in any jurisdiction where it is not then qualified) and do any and
all other acts or things which may be necessary or advisable to enable AOL to
consummate the public sale or other disposition in such jurisdictions of such
securities;
(v) notify AOL, at any time when a prospectus relating thereto
covered by such registration statement is required to be delivered under the
Securities Act within the appropriate period mentioned in clause (ii) of this
Section 2(e), of the happening of any event as a result of which the prospectus
included in such registration statement, as then in effect, includes an untrue
statement of a material fact or omits to state a material fact required to be
stated therein or necessary to make the statements therein not misleading in
3
<PAGE> 4
light of the circumstances then existing and at the request of AOL, prepare and
furnish to AOL a reasonable number of copies of a Supplement to or an amendment
of such prospectus as may be necessary so that, as thereafter delivered to the
purchasers of such shares, such prospectus shall not include an untrue statement
of a material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein not misleading in light of
the circumstances then existing; and
(vi)furnish, upon request, to AOL a signed counterpart,
addressed to AOL, of (i) an opinion of counsel for the Company, dated the
effective date of the registration statement, and (ii) a "comfort" letter signed
by the independent public accountants who have certified the Company's financial
statements included in the registration statement, covering substantially the
same matters with respect to the registration statement (and the prospectus
included therein) and (in the case of the "comfort" letter) with respect to
events subsequent to the date of the financial statements, as are customarily
covered (at the time of such registration ) in opinions of issuer's counsel and
in "comfort" letters delivered to the underwriters in underwritten public
offerings of securities.
(vii) shall register or qualify or cooperate with AOL and its
counsel in connection with the registration or qualification of the Restricted
Shares for offer and sale under the securities or "blue sky" laws of such states
of the United States as AOL reasonably requests in writing and do any and all
other acts or things necessary or advisable to enable the offer and sale in such
jurisdiction of the Restricted Shares covered in the registration statement;
provided that the Company shall not be required to (i) qualify generally to do
business in any jurisdiction where it is not then so qualified or (ii) take any
action which would subject it to general service of process or to taxation in
any jurisdiction where it is not then so subject.
(viii) make reasonably available for inspection by AOL, any
underwriter participating in any disposition pursuant to the registration
statement and any attorney, accountant or other agent retained by AOL or any
such underwriter all relevant financial and other records, pertinent corporate
documents and properties of the Company and cause the Company's officers,
directors, employees, accountants and auditors to supply all relevant
information reasonably requested by AOL or any such underwriter, attorney,
accountant or agent in connection with the registration statement, in each case,
as shall be reasonably necessary to enable such persons to conduct a reasonable
investigation within the meaning of Section 11 of the Securities Act.
(B) The Company shall maintain the effectiveness of any
registration statement filed pursuant to Section 2(b) or 2(c) until such time
that all Restricted Shares included therein are sold or no longer constitute
Restricted Shares as defined in Section 1(a)(iii).
3. Resale Shelf Registration. The rights granted to AOL under
this Section 3 are independent of and in addition to any rights granted to AOL
under Sections 2(a), 2(b) and 2(c).
(a) The Company shall, at its cost, file, promptly after the
Closing, with the Commission and thereafter shall use its best efforts to cause
to be declared effective
4
<PAGE> 5
at the earliest practicable date, but not later than the earlier to occur of (i)
180 days after the Closing (as that term is defined in the Purchase Agreement)
or (ii) such date (the "Lock-Up Release Date") that the underwriters of the
Company's initial public offering (the "IPO") agree to release the shareholders
of the Company from the lock-up arrangements entered into in connection with the
IPO (but in the latter case not prior to 60 days after the Closing), a
registration statement (the "Resale Shelf Registration Statement") on Form S-1
under the Securities Act of 1933, as amended (the "Securities Act") relating to
the offer and sale of all of the Purchase Shares by AOL at any time and from
time to time in accordance with the methods of distribution set forth in the
Resale Shelf Registration Statement and Rule 415 under the Securities Act
(hereinafter, the "Resale Shelf Registration") during the Shelf Registration
Period (as defined herein).
(b) The Company shall use its best efforts to keep the Resale
Shelf Registration Statement continuously effective in order to permit the
prospectus included therein to be lawfully delivered by AOL, for a period of two
years (or for such longer period if extended pursuant to Section 5(i) below)
from the Closing Date or such shorter period that will terminate when all of the
Purchase Shares (i) have been sold by AOL thereunder or (ii) are immediately
saleable without limitation as to volume under Rule 144 of the Securities Act,
or any successor rule thereof (in any such case, such period being called the
"Shelf Registration Period"). Solely by way of example and not in limitation of
what constitutes "best efforts," the Company shall be deemed not to have used
its best efforts to keep the Resale Shelf Registration Statement effective
during the required period if it voluntarily takes any action that would result
in AOL not being able to offer and sell the Purchase Shares during that period,
unless such action is required by applicable law.
(c) Notwithstanding any other provisions of this Agreement to
the contrary, the Company shall cause the Resale Shelf Registration Statement
and the related prospectus and any amendment or supplement thereto, as of the
effective date of the Resale Shelf Registration Statement, amendment or
supplement, (i) to comply in all material respects with the applicable
requirements of the Securities Act and the rules and regulations of the
Commission and (ii) not to 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, in light of the circumstances under which
they were made, not misleading.
(d) Although the Company has existing agreements that provide
certain of its holders registration rights with respect to their holdings of the
Company's common stock, the Company agrees with AOL that it (i) will use its
best efforts (including but not limited to a request for a waiver of
participation in the Resale Shelf Registration Statement, advice regarding the
availability and use of Rule 144 for any proposed offers and sales and the offer
of a separate registration statement for their shares) to cause any of its
shareholders other than AOL which hold registration rights not to seek to join
in the Resale Shelf Registration Statement and (ii) in any event and in all
circumstances, will cause all of the Purchase Shares to be registered in the
Resale Shelf Registration Statement.
5
<PAGE> 6
(e) The parties hereto acknowledge that AOL has certain rights
under the Purchase Agreement to cause the Company to repurchase the Purchase
Shares and nothing in this Agreement shall be in any way deemed to impair,
qualify or prejudice any such rights of AOL.
4. Status of Purchase Shares. The parties hereby acknowledge
and agree that the Purchase Shares are intended to have rights and benefits
equivalent to those AOL would have if such shares were purchased by AOL in the
initial public offering and were immediately freely tradable by AOL without
restrictions under the Securities Act. The provisions of this Agreement will be
interpreted in such a manner as to respect the aforementioned intention of the
parties to this Agreement. In connection therewith, the Company agrees that it
shall make such additions and modifications to this Agreement as shall in the
reasonable judgment of AOL be necessary to effectuate the foregoing.
5. Registration Procedures. In connection with the Resale
Shelf Registration contemplated by Section 3 hereof, the provisions of Section
2(e) shall apply. In addition, the following provisions shall apply:
(a) The Company shall furnish to AOL, prior to the filing
thereof with the Commission, a copy of the Resale Shelf Registration Statement
and each amendment thereof and each supplement, if any, to the prospectus
included therein and shall use its best efforts to reflect in each such
document, when so filed with the Commission, such comments as AOL or its counsel
reasonably may propose.
(b) The Company shall give prompt written notice to AOL (which
notice pursuant to clauses (ii)-(v) hereof shall be accompanied by an
instruction to suspend the use of the prospectus until the requisite changes
have been made):
(i) when the Resale Shelf Registration Statement or
any amendment thereto has been filed with the Commission and when the
Resale Shelf Registration Statement or any post-effective amendment
thereto has become effective;
(ii) of any request by the Commission for amendments
or supplements to the Resale Shelf Registration Statement or the
prospectus included therein or for additional information;
(iii) of the issuance by the Commission of any stop
order suspending the effectiveness of the Resale Shelf Registration
Statement or the initiation of any proceedings for that purpose;
(iv) of the receipt by the Company or its legal
counsel of any notification with respect to the suspension of the
qualification of the Purchase Shares for sale in any jurisdiction or
the initiation or threatening of any proceeding for such purpose; and
(v) of the happening of any event that requires the
Company to make changes in the Resale Shelf Registration Statement or
the prospectus in order that the Resale Shelf Registration Statement or
the prospectus do not contain an untrue statement
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<PAGE> 7
of a material fact nor omit to state a material fact required to be
stated therein or necessary to make the statements therein (in the case
of the prospectus, in light of the circumstances under which they were
made) not misleading.
(c) The Company shall make every reasonable effort to obtain
the withdrawal at the earliest possible time, of any order suspending the
effectiveness of the Resale Shelf Registration Statement
(d) The Company shall furnish to AOL, without charge, at least
three copies of the Shelf Registration Statement and any post-effective
amendment thereto, including financial statements and schedules, and, if AOL so
requests in writing, all exhibits thereto (including those, if any, incorporated
by reference).
(e) The Company shall, during the Resale Shelf Registration
Period, deliver to AOL, without charge, as many copies of the prospectus
(including each preliminary prospectus) included in the Resale Shelf
Registration Statement and any amendment or supplement thereto as AOL may
reasonably request. The Company consents, subject to the provisions of this
Agreement, to the use of the prospectus or any amendment or supplement thereto
by AOL in connection with the offering and sale of the Purchase Shares covered
by the prospectus, or any amendment or supplement thereto, included in the
Resale Shelf Registration Statement.
(f) Prior to any public offering of the Purchase Shares,
pursuant to any Resale Shelf Registration Statement, the Company shall register
or qualify or cooperate with AOL and its counsel in connection with the
registration or qualification of the Purchase Shares for offer and sale under
the securities or "blue sky" laws of such states of the United States as AOL
reasonably requests in writing and do any and all other acts or things necessary
or advisable to enable the offer and sale in such jurisdictions of the Purchase
Shares covered by such Resale Shelf Registration Statement; provided, however,
that the Company shall not be required to (i) qualify generally to do business
in any jurisdiction where it is not then so qualified or (ii) take any action
which would subject it to general service of process or to taxation in any
jurisdiction where it is not then so subject.
(g) Prior to any public offering of the Purchase Shares,
pursuant to any Resale Shelf Registration Statement, the Company will use its
best efforts to list the Purchase Shares on the Nasdaq National Market (or
wherever the Common Stock of the Company is then listed) and to maintain such
listing.
(h) The Company shall cooperate with AOL to facilitate the
timely preparation and delivery of certificates representing the Purchase Shares
to be sold pursuant to any Resale Shelf Registration Statement free of any
restrictive legends and in such denominations as AOL may request a reasonable
period of time prior to sales of the Purchase Shares pursuant to such Resale
Shelf Registration Statement.
(i) Upon the occurrence of any event contemplated by
paragraphs (ii) through (v) of Section 5(b) above during the period for which
the Company is required to maintain an effective Resale Shelf Registration
Statement, the Company shall promptly
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<PAGE> 8
prepare and file a post-effective amendment to the Resale Shelf Registration
Statement or a supplement to the related prospectus and any other required
document so that, as thereafter delivered to AOL, the prospectus will not
contain an untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which they were made, not misleading. If the
Company notifies AOL in accordance with paragraphs (ii) through (v) of Section
5(b) above to suspend the use of the prospectus until the requisite changes to
the prospectus have been made, then AOL shall suspend use of such prospectus,
and the period of effectiveness of the Resale Shelf Registration Statement
provided for in Section 3(b) above shall be extended by the number of days from
and including the date of the giving of such notice to and including the date
when AOL shall have received such amended or supplemented prospectus pursuant to
this Section 5(i).
(j) The Company will comply with all rules and regulations of
the Commission to the extent and so long as they are applicable to the Resale
Shelf Registration and will make generally available to AOL (or otherwise
provide in accordance with Section 11(a) of the Securities Act) an earnings
statement satisfying the provisions of Section 11(a) of the Securities Act, no
later than 45 days after the end of a 12-month period (or 90 days, if such
period is a fiscal year) beginning with the first month of the Company's first
fiscal quarter commencing after the effective date of the Resale Shelf
Registration Statement, which statement shall cover such 12-month period.
(k) The Company may require AOL to furnish to the Company such
information regarding AOL and the distribution of the Purchase Shares as the
Company may from time to time reasonably require for inclusion in the Resale
Shelf Registration Statement.
(l) The Company shall enter into such customary agreements
(including, if requested, an underwriting agreement in customary form) and take
all such other action, if any, as AOL shall reasonably request in order to
facilitate the disposition of the Purchase Shares pursuant to any Resale Shelf
Registration.
(m) The Company shall (i) make reasonably available for
inspection by AOL, any underwriter participating in any disposition pursuant to
the Resale Shelf Registration Statement and any attorney, accountant or other
agent retained by AOL or any such underwriter all relevant financial and other
records, pertinent corporate documents and properties of the Company and (ii)
cause the Company's officers, directors, employees, accountants and auditors to
supply all relevant information reasonably requested by AOL or any such
underwriter, attorney, accountant or agent in connection with the Resale Shelf
Registration Statement, in each case, as shall be reasonably necessary to enable
such persons, to conduct a reasonable investigation within the meaning of
Section 11 of the Securities Act.
(n) The Company, if requested by AOL, shall cause (i) its
counsel to deliver an opinion and updates thereof relating to the Purchase
Shares in customary form addressed to AOL and the managing underwriters, if any,
regarding the due incorporation and good standing of the Company and its
subsidiaries, the qualification of the Company and its subsidiaries to transact
business as foreign corporations; the due authorization,
8
<PAGE> 9
execution and delivery of the relevant agreement of the type referred to in
Section 5(l) hereof; the due authorization, execution, and the validity,
enforceability and full paid and non-assessability, of the applicable Purchase
Shares; the absence of material legal or governmental proceedings involving the
Company and its subsidiaries; the absence of governmental approvals required to
be obtained in connection with the Resale Shelf Registration Statement, the
offering and sale of the applicable Purchase Shares, or any agreement of the
type referred to in Section 5(l) hereof; the compliance as to form of such
Resale Shelf Registration Statement and any documents incorporated by reference
therein with the requirements of the Securities Act; and, as of the date of the
opinion and as of the effective date of the Resale Shelf Registration Statement
or most recent post-effective amendment thereto, as the case may be, the absence
from such Resale Shelf Registration Statement and the prospectus included
therein, as then amended or supplemented, and from any documents incorporated by
reference therein of an untrue statement of a material fact or the omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein not misleading (in the case of any such documents, in the
light of the circumstances existing at the time that such documents were filed
with the Commission under the Exchange Act); (ii) its officers to execute and
deliver all customary documents and certificates and updates thereof requested
by any underwriters of the applicable Purchase Shares and (iii) its independent
public accountants, if any, with respect to any other entity for which financial
information is provided in the Resale Shelf Registration Statement to provide to
AOL and any underwriter therefor a comfort letter in customary form and covering
matters of the type customarily covered in comfort letters in connection with
primary underwritten offerings, receipt of appropriate documentation as
contemplated, and only if permitted, by Statement of Auditing Standards No. 72.
(o) The Company shall use its best efforts to take all other
steps necessary in the reasonable judgment of AOL to effect the registration of
the Purchase Shares covered by the Resale Shelf Registration Statement
contemplated hereby.
6. Registration Expenses. All expenses incurred by the Company
in complying with its obligations under Sections 2 and 3 hereof shall be paid by
the Company, including, without limitation, all registration and filing fees,
printing expenses, blue sky filing fees, fees and disbursements of counsel for
the Company, as well as the fees and disbursements of counsel designated for
AOL, and expenses of any required audits; provided, however, that all
underwriting discounts and selling commissions and other similar fees and costs
applicable to the Restricted Shares covered by registrations effected hereunder
shall be borne by AOL, in proportion to the number of Restricted Shares sold by
AOL.
7. Indemnification. (i) In the event of any registration of
any Restricted Shares under the Securities Act pursuant to this Agreement or
registration or qualification of any Restricted Shares under state securities or
blue sky laws, the Company shall indemnify and hold harmless AOL, its directors,
officers and underwriters or any other person acting on behalf of AOL and each
other person, if any, who controls any of the foregoing persons, within the
meaning of the Securities Act, against any losses, claims, damages or
liabilities, joint or several, or any action in respect thereof (including but
not limited to, any losses, claims, damages, liabilities or actions relating to
9
<PAGE> 10
the purchase and sale of Restricted Shares) to which any of the foregoing
persons may become subject under the Securities Act or otherwise, insofar as
such losses, claims, damages or liabilities (or actions in respect thereof)
arise out of or are based upon an untrue statement or alleged untrue statement
of a material fact contained in any registration statement under which such
Restricted Shares were registered under the Securities Act, any preliminary
prospectus or final prospectus contained therein, or any amendment or supplement
thereto, or any document prepared and/or furnished by the Company (incident to
the registration or qualification of any Restricted Shares under state
securities or blue sky laws, or arise out of or are based upon the omission or
alleged omission to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading or, with respect to
any prospectus, necessary to make the statements therein in light of the
circumstances under which they were made, not misleading, or any violation by
the Company of the Securities Act or state securities or blue sky laws
applicable to the Company and relating to action or inaction required of the
Company in connection with such registration or qualification under such state
securities or blue sky laws, and shall reimburse as incurred AOL, its directors,
officers and underwriters, or any other person acting on behalf of AOL and any
person controlling AOL for any legal or any other expenses reasonably incurred
by any of them in connection with investigating or defending any such loss,
claim, damage, liability or action; provided, however, that the Company shall
not be liable in any such case to the extent that any such loss, claim, damage
or liability arises out of or is based upon an untrue statement or alleged
untrue statement or omission or alleged omission made in said registration
statement, said preliminary prospectus or said prospectus or said amendment or
supplement or any document incident to the registration or qualification of any
Restricted Shares under state securities or blue sky laws, in reliance upon and
in conformity with written information pertaining to AOL furnished to the
Company by AOL or AOL's agent or representative specifically for use in the
preparation thereof, provided further, that this indemnity agreement will be in
addition to any liability which the Company may otherwise have to AOL, its
directors, officers and control persons.
(ii) AOL shall have agreed to indemnify and hold harmless (in
the same manner and to the same extent a set forth in the preceding paragraph
or, if different, in the manner and to the extent as is in accordance with
standard industry practice at the time of the proposed sale) the Company, each
director of the Company, each officer of the Company who shall sign such
registration statement, and any person who controls the Company within the
meaning of the Securities Act, with respect to any untrue statement or omission
from such registration statement, any preliminary prospectus or final prospectus
contained therein, or any amendment or supplement thereto, if such untrue
statement or omission was made in reliance upon and in conformity with written
information pertaining to AOL furnished to the Company by AOL or AOL's agent or
representative specifically for use in the preparation of such registration
statement, preliminary prospectus, final prospectus or amendment or supplement;
provided, however, that the amount of AOL's indemnification obligation shall be
limited to the net proceeds received by AOL from the sale of AOL's Restricted
Shares pursuant to the registration statement.
(iii) Promptly after receipt by an indemnified party of notice
of the commencement of any action involving a claim referred to in the preceding
paragraphs of
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<PAGE> 11
this Section 7, such indemnified party will, if a claim in respect thereof is
made against an indemnifying party, give written notice to the latter of the
commencement of such action. In case any such action is brought against an
indemnified party, the indemnifying party will be entitled to participate in and
to assume the defense thereof, jointly with any other indemnifying party
similarly notified to the extent that it may wish, with counsel reasonably
satisfactory to such indemnified party (who shall not, except with the consent
of the indemnified party, be counsel to the indemnifying party), and after
notice from the indemnifying party to such indemnified party of its election so
to assume the defense thereof, the indemnifying party shall not be responsible
for any legal or other expenses subsequently incurred by the indemnified party
in connection with the defense thereof; provided, however, that if any
indemnified party shall have reasonably concluded that there may be one or more
legal defenses available to such indemnified party which are different from or
additional to those available to the indemnifying party, or that such claim or
litigation involves or could have an effect upon matters beyond the scope of the
indemnity agreement provided in this Section 7, the indemnifying party shall not
have the right to assume the defense of such action on behalf of such
indemnified party and such indemnifying party shall reimburse such indemnified
party and any person controlling such indemnified party for that portion of the
fees and expenses of any counsel retained by the indemnified party which are
reasonably related to the matters covered by the indemnity agreement provided in
this Section 7.
(iv) The indemnifying party shall not make any settlement of
any claims indemnified against hereunder without the written consent of the
indemnified party or parties, which consent shall not be unreasonably withheld.
(v)In order to provide for just and equitable contribution in
circumstances in which the indemnification provided for in this Section 7 is due
in accordance with its terms but is for any reason held by a court to be
unavailable from the Company or AOL on grounds of public policy or otherwise,
the Company and AOL shall contribute to the aggregate losses, claims, damages
and liabilities (including legal or other expenses reasonably incurred in
connection with investigating or defending the same) to which the Company and
AOL or an underwriter (and any person who controls any of the foregoing persons,
and any person acting on behalf of any of the foregoing persons in connection
with such registration), including, without limitation, any officer, director,
broker, employee, agent, attorney and accountant, and in the case of a
partnership, each of its partners) is subject, as the case may be, in such
proportion as is appropriate to reflect the relative fault of the Company and
AOL or such underwriter (and any person who controls any of the foregoing
persons, and any person acting on behalf of any of the foregoing in connection
with such registration, including, without limitation, any officer, director,
broker, employee, agent, attorney or accountant, and in the case of a
partnership, each of its partners), as the case may be, in connection with the
statements or omissions which resulted in such losses, claims, damages or
liabilities, as well as all other relevant equitable considerations; provided,
however, that no person guilty or fraudulent misrepresentation (within the
meaning of Section 11(f) of Securities Act) shall be entitled to contribution
from any person who was not guilty of such fraudulent representation; provided,
further, that in the case of AOL, the maximum amount of such contribution shall
be limited to an amount equal to the net proceeds actually received by AOL from
the sale of Restricted Shares effected pursuant to such registration. Any party
entitled to
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<PAGE> 12
contribution under this paragraph shall, promptly after receipt of notice of
commencement of any action, suit or proceeding against such party in respect of
which a claim for contribution may be made against another party or parties
under this paragraph, notify such other party or parties from whom contribution
my be sought, but the omission to so notify such other party or parties shall
not relieve the party or parties from whom contribution may be sought from any
other contribution obligation it or they may have under this paragraph or
otherwise.
(vi) The agreement contained in this Section 7 shall survive
the sale of the Restricted Shares pursuant to Sections 2 and 3 hereof and shall
remain in full force and effect, regardless of any termination or cancellation
of this Agreement or any investigation made by or on behalf of any indemnified
party.
8. Rule 144. The Company shall use its best efforts to file
the reports required to be filed by it under the Securities Act and the Exchange
Act in a timely manner and, if at any time the Company is not required to file
such reports, it will, upon the request of AOL, make publicly available other
information so long as necessary to permit sales of the Restricted Shares
pursuant to Rule 144. The Company covenants that it will take such further
action as AOL may reasonably request, all to the extent required from time to
time to enable AOL to sell the Restricted Shares without registration under the
Securities Act within the limitation of the exemptions provided by Rule 144. The
Company will provide a copy of this Agreement to prospective purchasers of the
Shares identified to the Company by AOL upon request. Upon the request of AOL,
the Company shall deliver to AOL a written statement as to whether it has
complied with such requirements. The Company shall furnish to AOL upon request
its most recent annual or quarterly report of the Company and other reports or
documents so filed by the Company.
9. Underwritten Registrations. If any of the Restricted Shares
are to be sold in an underwritten offering, the investment banker or investment
bankers and manager or managers that will administer the offering will be
selected by AOL, provided that it or they are reasonably acceptable to the
Company. If the Shares are sold in an underwritten offering, AOL agrees to (i)
sell the Shares on the basis reasonably provided in any underwriting
arrangements approved by AOL, (ii) complete and execute all questionnaires,
powers of attorney, indemnities, underwriting agreements and other documents
reasonably required under the terms of such underwriting arrangements and (iii)
provide such information to the Company as is necessary to include AOL as a
selling stockholder.
10. Granting of Registration Rights.
(a) The Company shall not grant any rights to any person(s) to
register any shares of capital stock or other securities of the Company if such
rights would be superior to the rights of AOL granted pursuant to this
Agreement, unless AOL is given the same or comparable rights.
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<PAGE> 13
(b) The Company shall not grant any rights to any person(s) to
register any shares of capital stock or other securities of the Company if such
rights would conflict with or impair AOL's rights under this Agreement.
11. Miscellaneous.
(a) Registration Review. AOL shall have the right to review
any references to AOL that appear in any registration statements filed with the
Securities and Exchange Commission by the Company, provided, that AOL shall not
unreasonably object to such references and, provided further, that this review
right shall not impede the Company in meeting its disclosure obligations under
applicable securities laws, as reasonably interpreted by its counsel.
(b) Amendments and Waivers. The provisions of this Agreement
may not be amended. modified or supplemented, and waivers or consents to
departures from the provisions hereof may not be given, except with the written
consent of the Company and AOL.
(c) Notices. All notices and other communications provided for
or permitted hereunder shall be made in writing by hand delivery, first-class
mail, facsimile transmission, or air courier which guarantees overnight
delivery:
(1) if to AOL:
America Online, Inc.
22000 AOL Way
Dulles, Virginia 20166
Fax No.: (212) 265-1202
Attention: David Colburn and General Counsel
with a copy to:
Orrick, Herrington & Sutcliffe LLP
666 Fifth Avenue
New York, NY 10103
Fax No.: (212) 506-5151
Attention: Martin H. Levenglick
(2) if to the Company, at its address as follows:
N2K Inc.
55 Broad Street
New York, NY 10004
Fax No.: (212) 742-1778
Attention: Jonathan V. Diamond
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<PAGE> 14
with a copy to:
Dewey Ballantine LLP
1301 Avenue of the Americas
New York, New York 10019
Fax No.: (212) 259-6333
Attention: Frank E. Morgan II
All such notices and communications shall be deemed to have
been duly given: at the time delivered by hand, if personally delivered; three
business days after being deposited in the mail, postage prepaid, if mailed;
when receipt is acknowledged by recipient's facsimile machine operator, if sent
by facsimile transmission; and on the day delivered, if sent by overnight air
courier guaranteeing next day delivery.
(d) Successors and Assigns. This Agreement shall be binding
upon and inure to the benefit of AOL and the Company and their respective
successors and assigns. The registration rights of AOL under Sections 2(a), 2(b)
and 2(c) hereof (and, except as provided in the next sentence, all other rights
and benefits under this Agreement) may be transferred to a transferee that
acquires at least 20% of the Purchase Shares originally issued to AOL. The
registration rights of AOL under Sections 2(a), 2(b), 2(c) and 3 hereof (and all
other rights and benefits under this Agreement) may be transferred to a
transferee that is a current or future affiliate of AOL or to another party
reasonably acceptable to the Company without restriction as to minimum transfer
amount. The Company shall be given written notice by the holder at the time of
such transfer stating the name and address of the transferee and identifying the
securities with respect to which the registration rights are being assigned
pursuant to this Section 11(d). The registration rights of AOL under this
Agreement shall not be otherwise transferable without the consent of the
Company.
(e) Counterparts. This Agreement may be executed in any number
of counterparts and by the parties hereto in separate counterparts, each of
which when so executed shall be deemed to be an original and all of which taken
together shall constitute one and the same agreement. Signatures may be provided
by facsimile, provided that actual execution copies are sent by an overnight
delivery service on the same date as the facsimile transmission.
(f) Headings. The headings in this Agreement are for
convenience of reference only and shall not limit or otherwise affect the
meaning hereof.
(g) Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY, AND
CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK WITHOUT REGARD
TO PRINCIPLES OF CONFLICTS OF LAWS.
(h) Severability. If any one or more of the provisions
contained herein, or the application thereof in any circumstance, is held
invalid, illegal or unenforceable, the validity, legality and enforceability of
any such provision in every other respect and of the remaining provisions
contained herein shall not be affected.
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<PAGE> 15
If the foregoing is in accordance with your understanding of
our agreement, please sign and return to the Company a counterpart hereof,
whereupon this instrument, along with all counterparts, will become a binding
agreement between us in accordance with its terms.
Very truly yours,
N2K INC.
By /s/ Jonathan V. Diamond
--------------------------------
Name: Jonathan V. Diamond
Title: Vice Chairman
The foregoing Registration Rights Agreement
is hereby confirmed and accepted as
of the date first above written.
AMERICA ONLINE, INC.
By /s/ David M. Colburn
------------------------------------
Name: David M. Colburn
Title: Senior Vice President
15
<PAGE> 1
Exhibit 4.3
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933 OR THE LAWS OF ANY STATE. THEY MAY NOT BE SOLD OR
OTHERWISE TRANSFERRED UNLESS THEY ARE REGISTERED UNDER SUCH
ACT AND APPLICABLE STATE SECURITIES LAWS OR AN EXEMPTION FROM
REGISTRATION IS AVAILABLE.
184,736 Warrants
(Subject to Adjustment as
Provided Herein)
N2K INC.
WARRANT CERTIFICATE
This warrant certificate ("Warrant Certificate") certifies
that for value received AMERICA ONLINE, INC., 22000 AOL Way, Dulles, Virginia
20166, or its registered assigns (the "Holder") is the owner of the number of
warrants ("Warrants") specified above, each of which entitles the Holder thereof
to purchase, one fully paid and non-assessable share of Common Stock, $.001 par
value ("Common Stock"), of N2K Inc. a Delaware corporation (the "Company"), at a
purchase price of $19.00 per share of Common Stock in lawful money of the United
States of America in cash or by certified or cashier's check or a combination of
cash and certified or cashier's check (subject to adjustment as hereinafter
provided).
1. Warrant; Purchase Price
Each Warrant shall entitle the Holder initially to purchase
one share of Common Stock of the Company and the purchase price payable upon
exercise of the Warrants (the "Purchase Price") shall initially be $19.00 per
share of Common Stock. The Purchase Price and number of shares of Common Stock
issuable upon exercise of each Warrant are subject to adjustment as provided in
Article 6. The shares of Common Stock issuable upon exercise of the Warrants
(and/or other shares of Common Stock so issuable by reason of any adjustments
pursuant to Article 6) are sometimes referred to herein as the "Warrant Shares.
<PAGE> 2
2. Exercise; Expiration Date
2.1 The Warrants are exercisable, at the option of the Holder,
in whole or in part at any time and from time to time beginning, as to 92,368
Warrants on or after October 22, 1998 and, as to the remaining 92,368 Warrants
on or after October 22, 1999 and ending on the Expiration Date, upon surrender
of this Warrant Certificate to the Company together with a duly completed Notice
of Exercise, in the form attached hereto as Exhibit A, and payment of an amount
equal to the Purchase Price times the number of Warrants to be exercised. In the
case of exercise of less than all the Warrants represented by this Warrant
Certificate, the Company shall cancel the Warrant Certificate upon the surrender
thereof and shall execute and deliver a new Warrant Certificate for the balance
of such Warrants. Notwithstanding the foregoing provisions of this Section 2.1,
in the event of a Change of Control (as hereafter defined), any outstanding
Warrants granted hereunder that are not then exercisable, in accordance with the
vesting provisions set forth in this Section 2.1, shall become immediately
exercisable. For purposes of this Section 2.1, a Change of Control shall mean
(i) one or more shareholders of the Company (other than Messrs. Lawrence Rosen,
Jonathan Diamond and David Grusin) obtains the right to designate a majority of
the members of the Company's Board of Directors or acquires sufficient shares of
the Company's outstanding voting stock to cause the election of a majority of
the seats on the Company's Board of Directors, (ii) the Company merges with
another entity and the Company's stockholders prior to the merger do not retain
control of the combined entity, or (iii) the Company sells substantially all of
its assets or capital stock.
2.2 The term "Expiration Date" shall mean 5:00 p.m. New York
time on October 22, 2004 or if such day shall in the State of New York be a
holiday or a day on which banks are authorized to close, then 5:00 p.m. New York
time the next following day which in the State of New York is not a holiday or a
day on which banks are authorized to close.
3. Registration and Transfer on Company Books
3.1 The Company shall maintain books for the registration and
transfer of the Warrants and the registration and transfer of the Warrant
Shares.
3.2 Prior to due presentment for registration of transfer of
this Warrant Certificate, or the Warrant Shares, the Company may deem and treat
the registered Holder as the absolute owner thereof.
4. Reservation of Shares
The Company covenants that it will at all times reserve and
keep available out of its authorized capital stock, solely for the purpose of
issue upon exercise of the Warrants, such number of shares of capital stock as
shall then be issuable upon the exercise of all outstanding Warrants. The
Company covenants that all shares of capital stock which shall be issuable upon
exercise of the Warrants shall be duly and validly issued and fully paid and
non-assessable and free from all taxes, liens and charges with
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<PAGE> 3
respect to the issue thereof, and that upon issuance such shares shall be listed
on each national securities exchange, if any, on which the other shares of such
outstanding capital stock of the Company are then listed.
5. Loss or Mutilation
Upon receipt by the Company of reasonable evidence of the
ownership of and the loss, theft, destruction or mutilation of any Warrant
Certificate and, in the case of loss, theft or destruction, of indemnity
reasonably satisfactory to the Company (provided that if Holder is an
institutional investor or a nominee of an institutional investor, such
institutional investor's own unsecured agreement of indemnity shall be deemed to
be satisfactory for such purpose), or, in the case of mutilation, upon surrender
and cancellation of the mutilated Warrant Certificate, the Company shall execute
and deliver in lieu thereof a new Warrant Certificate representing an equal
number of Warrants.
6. Adjustment of Purchase Price and Number of Shares
Deliverable
6.1 The number of Warrant Shares purchasable upon the exercise
of each Warrant and the Purchase Price with respect to the Warrant Shares shall
be subject to adjustment as follows:
(a) In case the Company shall (i) declare a dividend or make a
distribution on its Common Stock payable in shares of its capital
stock, (ii) subdivide its outstanding shares of Common Stock through
stock split or otherwise, (iii) combine its outstanding shares of
Common Stock into a smaller number of shares of Common Stock, or (iv)
issue by reclassification of its Common Stock (including any
reclassification in connection with a consolidation or merger in which
the Company is the continuing corporation) other securities of the
Company, the number and/or nature of Warrant Shares purchasable upon
exercise of each Warrant immediately prior thereto shall be adjusted so
that the Holder shall be entitled to receive the kind and number of
Warrant Shares or other securities of the Company which it would have
owned or have been entitled to receive after the happening of any of
the events described above, had such Warrant been exercised immediately
prior to the happening of such event or any record date with respect
thereto. Any adjustment made pursuant to this paragraph (a) shall
become effective retroactively as of the record date of such event.
(b) In case the Company shall issue rights, options or
warrants or securities convertible into or exercisable or exchangeable
directly or indirectly into Common Stock to all holders of its shares
of Common Stock , entitling them to subscribe for or purchase shares of
Common Stock at a price per share which (together with the value of the
consideration, if any, payable for such rights, options, warrants or
convertible securities) is lower on the record date referred to below
than the then Market Price Per Share of such Common Stock (as
determined pursuant to Section 9.2) the number of Warrant Shares
thereafter purchasable upon the exercise of each Warrant shall be
determined by multiplying the number of Warrant Shares immediately
theretofore purchasable upon exercise
3
<PAGE> 4
of each Warrant by a fraction, of which the numerator shall be the
number of shares of Common Stock outstanding on such record date plus
the number of additional shares of Common Stock offered for
subscription or purchase, and of which the denominator shall be the
number of shares of Common Stock outstanding on such record date plus
the number of shares which the aggregate offering price of the total
number of shares of Common Stock so offered would purchase at the then
Market Price Per Share of such Common Stock. Such adjustment shall be
made whenever such rights, options, warrants or convertible securities
are issued, and shall become effective retroactively as of the record
date for the determination of shareholders entitled to receive such
rights, options, warrants or convertible securities. In the case such
subscription price may be paid in consideration, part of which or all
of which is in a form other than cash, the value of such consideration
shall be determined in good faith by the Board of Directors of the
Company.
(c) In case the Company shall distribute to all holders of its
shares of Common Stock, or all holders of Common Stock shall otherwise
become entitled to receive, shares of capital stock of the Company
(other than dividends or distributions on its Common Stock referred to
in paragraph (a) above), evidences of its indebtedness or rights,
options, warrants or convertible securities providing the right to
subscribe for or purchase any shares of the Company's capital stock or
evidences of its indebtedness (other than any rights, options, warrants
or convertible securities referred to in paragraph (b) above), then in
each case the number of Warrant Shares thereafter purchasable upon the
exercise of each Warrant shall be determined by multiplying the number
of Warrant Shares theretofore purchasable upon the exercise of each
Warrant, by a fraction, of which the numerator shall be the then Market
Price Per Share of the Warrant Shares (as determined pursuant to
Section 9.2) on the record date mentioned below in this paragraph (c),
and of which the denominator shall be the then Market Price Per Share
of the Warrant Shares on such record date, less the then fair value (as
determined by the Board of Directors of the Company, in good faith) of
the portion of the shares of the Company's capital stock other than
Common Stock, evidences of indebtedness, or of such rights, options,
warrants or convertible securities, distributable with respect to each
Warrant Share. Such adjustment shall be made whenever any such
distribution is made, and shall become effective retroactively as of
the record date for the determination of shareholders entitled to
receive such distribution.
(d) In the event of any capital reorganization or any
reclassification of the capital stock of the Company or in case of the
consolidation or merger of the Company with another corporation (other
than a consolidation or merger in which the outstanding shares of the
Company's Common Stock are not converted into or exchanged for other
rights or interests), or in the case of any sale, transfer or other
disposition to another corporation of all or substantially all the
properties and assets of the Company, the Holder of each Warrant shall
thereafter be entitled to purchase (and it shall be a condition to the
consummation of any such reorganization, reclassification,
consolidation, merger, sale, transfer or other
4
<PAGE> 5
disposition that appropriate provisions shall be made so that such
Holder shall thereafter be entitled to purchase) the kind and amount of
shares of stock and other securities and property (including cash)
which the Holder would have been entitled to receive had such Warrants
been exercised immediately prior to the effective date of such
reorganization, reclassification, consolidation, merger, sale, transfer
or other disposition; and in any such case appropriate adjustments
shall be made in the application of the provisions of this Article 6
with respect to rights and interest thereafter of the Holder of the
Warrants to the end that the provisions of this Article 6 shall
thereafter be applicable, as near as reasonably may be, in relation to
any shares or other property thereafter purchasable upon the exercise
of the Warrants. The provisions of this Section 6.1(d) shall similarly
apply to successive reorganizations, reclassifications, consolidations,
mergers, sales, transfers or other dispositions.
(e) Whenever the number of Warrant Shares purchasable upon the
exercise of each Warrant is adjusted, as provided in this Section 6.1,
the Purchase Price with respect to the Warrant Shares shall be
accordingly adjusted in order to reflect the number of Warrant Shares
then and thereafter issuable.
6.2 In the event the Company shall declare a dividend, or make
a distribution to the holders of its Common Stock generally, whether in cash,
property or assets of any kind, including any dividend payable in stock or
securities of any other issuer owned by the Company (excluding any dividend or
distribution referred to in Section 6.1(a) or (c) above), the Purchase Price of
each Warrant shall be reduced, without any further action by the parties hereto,
by the Per Share Value (as hereinafter defined) of the dividend. For purposes of
this Section 6.2, the "Per Share Value" of a cash dividend or other distribution
shall be the dollar amount of the distribution on each share of Common Stock and
the "Per Share Value" of any dividend or distribution other than cash shall be
equal to the fair market value of such non-cash distribution on each share of
Common Stock as determined in good faith by the Board of Directors of the
Company.
6.3 No adjustment in the number of Warrant Shares purchasable
under the Warrants, or in the Purchase Price with respect to the Warrant Shares,
shall be required unless such adjustment would require an increase or decrease
of at least 1% in the number of Warrant Shares issuable upon the exercise of
such Warrant, or in the Purchase Price thereof; provided, however, that any
adjustments which by reason of this Section 6.3 are not required to be made
shall be carried forward and taken into account in any subsequent adjustment.
All final results of adjustments to the number of Warrant Shares and the
Purchase Price thereof shall be rounded to the nearest one thousandth of a share
or the nearest cent, as the case may be. Anything in this Section 6 to the
contrary notwithstanding, the Company shall be entitled, but shall not be
required, to make such changes in the number of Warrant Shares purchasable upon
the exercise of each Warrant, or in the Purchase Price thereof, in addition to
those required by such Section, as it in its discretion shall determine to be
advisable in order that any dividend or distribution in shares of Common Stock,
subdivision, reclassification or combination of shares of Common Stock, issuance
of rights, warrants or options to purchase Common Stock, or distribution of
shares of stock other than Common Stock, evidences of indebtedness or
5
<PAGE> 6
assets (other than distributions of cash out of retained earnings) or
convertible or exchangeable securities hereafter made by the Company to the
holders of its Common Stock shall not result in any tax to the holders of its
Common Stock or securities convertible into Common Stock.
6.4 Whenever the number of Warrant Shares purchasable upon the
exercise of each Warrant or the Purchase Price of such Warrant Shares is
adjusted, as herein provided, the Company shall mail to the Holder, at the
address of the Holder shown on the books of the Company, a notice of such
adjustment or adjustments, prepared and signed by the Chief Financial Officer or
Secretary of the Company, which sets forth the number of Warrant Shares
purchasable upon the exercise of each Warrant and the Purchase Price of such
Warrant Shares after such adjustment, a brief statement of the facts requiring
such adjustment and the computation by which such adjustment was made.
6.5 In the event that at any time prior to the expiration of
the Warrants and prior to their exercise:
(a) the Company shall declare any distribution (other than a
cash dividend or a dividend payable in securities of the Company with
respect to the Common Stock); or
(b) the Company shall offer for subscription to the holders of
the Common Stock any additional shares of stock of any class or any
other securities convertible into Common Stock or any rights to
subscribe thereto; or
(c) the Company shall declare any stock split, stock dividend,
subdivision, combination, or similar distribution with respect to the
Common Stock, regardless of the effect of any such event on the
outstanding number of shares of Common Stock; or
(d) the Company shall declare a dividend, other than a
dividend payable in shares of the Company's own Common Stock; or
(e) there shall be any capital change in the Company as set
forth in Section 6.1(d); or
(f) there shall be a voluntary or involuntary dissolution,
liquidation, or winding up of the Company (other than in connection
with a consolidation, merger, or sale of all or substantially all of
its property, assets and business as an entity);
(each such event hereinafter being referred to as a "Notification Event"), the
Company shall cause to be mailed to the Holder, not less than 20 days prior to
the record date, if any, in connection with such Notification Event (provided,
however, that if there is no record date, or if 20 days prior notice is
impracticable, as soon as practicable) written notice specifying the nature of
such event and the effective date of, or the date on which
6
<PAGE> 7
the books of the Company shall close or a record shall be taken with respect to,
such event. Such notice shall also set forth facts indicating the effect of such
action (to the extent such effect may be known at the date of such notice) on
the Purchase Price and the kind and amount of the shares of stock or other
securities or property deliverable upon exercise of the Warrants.
6.6 The form of Warrant Certificate need not be changed
because of any change in the Purchase Price, the number of Warrant Shares
issuable upon the exercise of a Warrant or the number of Warrants outstanding
pursuant to this Section 6, and Warrant Certificates issued before or after such
change may state the same Purchase Price, the same number of Warrants, and the
same number of Warrant Shares issuable upon exercise of Warrants as are stated
in the Warrant Certificates theretofore issued pursuant to this Agreement. The
Company may, however, at any time, in its sole discretion, make any change in
the form of Warrant Certificate that it may deem appropriate and that does not
affect the substance thereof, and any Warrant Certificates thereafter issued or
countersigned, whether in exchange or substitution for an outstanding Warrant
Certificate or otherwise, may be in the form as so changed.
7. Conversion Rights
7.1 In lieu of exercise of any portion of the Warrants as
provided in Section 2.1 hereof, the Warrants represented by this Warrant
Certificate (or any portion thereof) may, at the election of the Holder, be
converted into the nearest whole number of shares of Common Stock equal to: (1)
the product of (a) the number of shares of Common Stock then issuable upon the
exercise of each Warrant and (b) the excess, if any, of (i) the Market Price Per
Share (as determined pursuant to Section 9.2) with respect to the date of
conversion over (ii) the Purchase Price in effect on the business day next
preceding the date of conversion, divided by (2) the Market Price Per Share with
respect to the date of conversion.
7.2 The conversion rights provided under this Section 7 may be
exercised in whole or in part and at any time and from time to time while any
Warrants remain outstanding, provided that they are at the time currently
exercisable. In order to exercise the conversion privilege, the Holder shall
surrender to the Company, at its offices, this Warrant Certificate accompanied
by a duly completed Notice of Conversion in the form attached hereto as Exhibit
B. The Warrants (or so much thereof as shall have been surrendered for
conversion) shall be deemed to have been converted immediately prior to the
close of business on the day of surrender of such Warrant Certificate for
conversion in accordance with the foregoing provisions. As promptly as
practicable on or after the conversion date, the Company shall issue and shall
deliver to the Holder (i) a certificate or certificates representing the number
of shares of Common Stock to which the Holder shall be entitled as a result of
the conversion, and (ii) if the Warrant Certificate is being converted in part
only, a new certificate of like tenor and date for the balance of the
unconverted portion of the Warrant Certificate.
8. Voluntary Adjustment by the Company
7
<PAGE> 8
The Company may, at its option, at any time during the term of
the Warrants, reduce the then current Purchase Price to any amount deemed
appropriate by the Board of Directors of the Company and/or extend the date of
the expiration of the Warrants.
9. Fractional Shares and Warrants; Determination of
Market Price Per Share
9.1 Anything contained herein to the contrary notwithstanding,
the Company shall not be required to issue any fraction of a share of Common
Stock in connection with the exercise of Warrants. Warrants may not be exercised
in such number as would result (except for the provisions of this paragraph) in
the issuance of a fraction of a share of Common Stock unless the Holder is
exercising all Warrants then owned by the Holder. In such event, the Company
shall, upon the exercise of all of such Warrants, issue to the Holder the
largest aggregate whole number of shares of Common Stock called for thereby upon
receipt of the Purchase Price for all of such Warrants and pay a sum in cash
equal to the remaining fraction of a share of Common Stock, multiplied by its
Market Price Per Share (as determined pursuant to Section 9.2 below) as of the
last business day preceding the date on which the Warrants are presented for
exercise.
9.2 As used herein, the "Market Price Per Share" with respect
to any class or series of Common Stock on any date shall mean the closing price
per share of the Company's Common Stock for the trading day immediately
preceding such date. The closing price for each such day shall be the last sale
price regular way or, in case no such sale takes place on such day, the average
of the closing bid and asked prices regular way, in either case on the principal
securities exchange on which the shares of such Common Stock of the Company are
listed or admitted to trading or, if applicable, the last sale price, or in case
no sale takes place on such day, the average of the closing bid and asked prices
of such Common Stock on NASDAQ or any comparable system, or if such Common Stock
is not reported on NASDAQ, or a comparable system, the average of the closing
bid and asked prices as furnished by two members of the National Association of
Securities Dealers, Inc. selected from time to time by the Company for that
purpose. If such bid and asked prices are not available, then "Market Price Per
Share" shall be equal to the fair market value of such Common Stock as
determined in good faith by the Board of Directors of the Company.
10. Registration and Information Rights
The Holder shall be entitled to the registration rights, the
special covenants of the Company relating to certain rights to information, and
other covenants contained in the Purchase Agreement.
11. Governing Law
This Warrant Certificate shall be governed by and construed in
accordance with the laws of the State of New York.
8
<PAGE> 9
IN WITNESS WHEREOF, the Company has caused this Warrant
Certificate to be duly executed by its officers thereunto duly authorized and
its corporate seal to be affixed hereon, as of this 22nd day of October, 1997.
N2K INC.
By:
----------------------------------
Name:
Title:
9
<PAGE> 10
EXHIBIT A
NOTICE OF EXERCISE
The undersigned hereby irrevocably elects to exercise,
pursuant to Section 2 of the Warrant Certificate accompanying this Notice of
Exercise, _______ Warrants of the total number of Warrants owned by the
undersigned pursuant to the accompanying Warrant Certificate, and herewith makes
payment of the Purchase Price of such shares in full.
----------------------------------
Name of Holder
----------------------------------
Signature
Address:
----------------------------------
----------------------------------
----------------------------------
10
<PAGE> 11
EXHIBIT B
NOTICE OF CONVERSION
The undersigned hereby irrevocably elects to convert, pursuant to Section 7 of
the Warrant Certificate accompanying this Notice of Conversion, _________
Warrants of the total number of Warrants owned by the undersigned pursuant to
the accompanying Warrant Certificate into shares of the Common Stock of the
Company (the "Shares").
The number of Shares to be received by the undersigned shall be calculated in
accordance with the provisions of Section 7.1 of the accompanying Warrant
Certificate.
----------------------------------
Name of Holder
----------------------------------
Signature
Address:
----------------------------------
----------------------------------
----------------------------------
11
<PAGE> 1
Exhibit 11
N2K INC. AND SUBSIDIARY
PRO FORMA NET LOSS PER COMMON SHARE CALCULATION(A)
<TABLE>
<CAPTION>
For the For the
Three Months Ended Nine Months Ended
September 30 September 30
--------------------------------------------------------------------
1997 1996 1997 1996
------------- ------------ ------------ ----------
<S> <C> <C> <C> <C>
Pro forma net loss per common share:
Loss from continuing operations....................... (6,949,434) (3,202,181) (16,698,417) (12,245,481)
Loss from discontinued operations..................... -- (363,455) (415,970) (206,184)
Gain on disposal of discontinued operations........... 1,574,493 -- 1,574,493 --
---------- ---------- ----------- ----------
Net loss............................................ (5,374,941) (3,565,636) (15,539,894) (12,451,665)
========== ========== =========== ===========
Weighted average number of shares issued and
outstanding............................................ 3,039,227 3,039,227 3,039,227 3,039,227
Incremental number of shares related to preferred
stock and common stock issuances and common stock
options and warrants granted within 12 months of the
initial public offering:
-- Preferred stock................................... 152,954 152,954 152,954 152,954
-- Common stock...................................... 71,334 71,334 71,334 71,334
-- Common stock options and warrants................. 441,802 441,802 441,802 441,802
Preferred stock converted into common stock upon
consummation of the initial public offering.......... 4,595,086 4,595,086 4,595,086 4,595,086
---------- ---------- ---------- ----------
Adjusted weighted average number of shares
outstanding.......................................... 8,300,403 8,300,403 8,300,403 8,300,403
========== ========== ========== ==========
Pro forma net loss per common share:
Loss from continuing operations...................... (.84) (.39) (2.01) (1.48)
Discontinued operations.............................. -- (.04) (.05) (.02)
Gain on disposal of discontinued operations.......... .19 -- .19 --
----------- ------------ ------------ ------------
Pro forma net loss per Common share............... (.65) (.43) (1.87) (1.50)
=========== ============ ============ ============
</TABLE>
- --------------------
(A) Pro Forma Net Loss Per Common Share (Unaudited)
Pro forma net loss per Common shares 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 and warrants 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 $19 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 converted into 171,276,
178,569, 566,399, 651,381, 1,501,755 and 1,333,321 shares, respectively, of
Common stock upon the Offering as if they were converted to Common stock
on their original date of issuance. The Series G Preferred stock which
converted into 620,077 shares of Common stock upon the Offering, have been
included as outstanding for all periods presented (using the treasury stock
method and the initial public offering price of $19 per Common share) since
they were issued during the 12 months immediately preceding the Offering.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JUL-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 178,966
<SECURITIES> 0
<RECEIVABLES> 1,813,321
<ALLOWANCES> (84,262)
<INVENTORY> 90,127
<CURRENT-ASSETS> 7,896,654
<PP&E> 6,924,627
<DEPRECIATION> (1,832,392)
<TOTAL-ASSETS> 13,679,993
<CURRENT-LIABILITIES> 14,977,551
<BONDS> 0
0
17,757
<COMMON> 3,083
<OTHER-SE> (2,411,161)
<TOTAL-LIABILITY-AND-EQUITY> 13,679,993
<SALES> 3,569,969
<TOTAL-REVENUES> 3,569,969
<CGS> 2,980,957
<TOTAL-COSTS> 2,980,957
<OTHER-EXPENSES> 7,100,689
<LOSS-PROVISION> 84,262
<INTEREST-EXPENSE> 434,386
<INCOME-PRETAX> (5,374,941)
<INCOME-TAX> 0
<INCOME-CONTINUING> (6,949,434)
<DISCONTINUED> 1,574,493
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,374,941)
<EPS-PRIMARY> (.65)
<EPS-DILUTED> (.65)
</TABLE>
