-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, QY01ZWEbhora5/VE5II5SNm49aVfgoP8gkkdCHVdv6vfQ9PxWQpa1pXDVOFSCTct 5yzhp1i6MsMzVIA5bIt4Zg== 0000950134-98-005959.txt : 19980717 0000950134-98-005959.hdr.sgml : 19980717 ACCESSION NUMBER: 0000950134-98-005959 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 6 FILED AS OF DATE: 19980716 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: BROADCAST COM INC CENTRAL INDEX KEY: 0001061236 STANDARD INDUSTRIAL CLASSIFICATION: COMMUNICATION SERVICES, NEC [4899] IRS NUMBER: 752600532 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1/A SEC ACT: SEC FILE NUMBER: 333-52877 FILM NUMBER: 98667026 BUSINESS ADDRESS: STREET 1: 2914 TAYLOR STREET CITY: DALLAS STATE: TX ZIP: 75226 BUSINESS PHONE: 2147485660 MAIL ADDRESS: STREET 1: 2914 TAYLOR STREET CITY: DALLAS STATE: TX ZIP: 75226 S-1/A 1 AMENDMENT NO. 3 TO FORM S-1 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 16, 1998 REGISTRATION NO. 333-52877 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 --------------------- AMENDMENT NO. 3 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 broadcast.com inc. (Exact Name of Registrant as Specified in its Charter) DELAWARE 7375 75-2600532 (State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer of incorporation or organization) Classification Code Number) Identification Number)
2914 TAYLOR STREET DALLAS, TEXAS 75226 (214) 748-6660 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) TODD R. WAGNER CHIEF EXECUTIVE OFFICER BROADCAST.COM INC. 2914 TAYLOR STREET DALLAS, TEXAS 75226 (214) 748-6660 (Name, address, including zip code, and telephone number, including area code, of agent for service) --------------------- Copies to: SEAN P. GRIFFITHS, ESQ. NEIL WOLFF, ESQ. GIBSON, DUNN & CRUTCHER LLP WILSON SONSINI GOODRICH & ROSATI 200 PARK AVENUE PROFESSIONAL CORPORATION NEW YORK, NEW YORK 10166 650 PAGE MILL RD (212) 351-4000 PALO ALTO, CA 94304-1050 (650) 493-9300
--------------------- APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after the effective date of this Registration Statement. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box: [ ] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration number of the earlier effective registration statement for the same offering. [ ] ____________ If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] ____________ If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] ____________ If delivery of the Prospectus is expected to be made pursuant to Rule 434, please check the following box. [ ] --------------------- CALCULATION OF REGISTRATION FEE
- ---------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------- PROPOSED PROPOSED AMOUNT OF TITLE OF EACH CLASS AMOUNT TO BE MAXIMUM OFFERING MAXIMUM AGGREGATE REGISTRATION OF SECURITIES REGISTERED REGISTERED PRICE PER UNIT OFFERING PRICE(1) FEE(2) - ---------------------------------------------------------------------------------------------------------------------- Common Stock, $.01 par value........ 2,875,000 $16.00 $46,000,000 $0 - ---------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------
(1) Estimated solely for the purpose of calculating the registration fee in accordance with Rule 457(a) under the Securities Act of 1933. (2) A registration fee of $11,026 has already been paid in connection with the filing of the Registration Statement. --------------------- THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. PROSPECTUS (Subject to Completion) Issued July 16, 1998 2,500,000 Shares [broadcast.com LOGO] (formerly AudioNet, Inc.) COMMON STOCK ------------------------ ALL OF THE SHARES OF COMMON STOCK OFFERED HEREBY ARE BEING SOLD BY THE COMPANY. PRIOR TO THIS OFFERING, THERE HAS BEEN NO PUBLIC MARKET FOR THE COMMON STOCK OF THE COMPANY. IT IS CURRENTLY ESTIMATED THAT THE INITIAL PUBLIC OFFERING PRICE WILL BE BETWEEN $14 AND $16 PER SHARE. SEE "UNDERWRITERS" FOR A DISCUSSION OF THE FACTORS TO BE CONSIDERED IN DETERMINING THE INITIAL PUBLIC OFFERING PRICE. THE SHARES OF COMMON STOCK OFFERED HEREBY HAVE BEEN APPROVED FOR QUOTATION ON THE NASDAQ NATIONAL MARKET UNDER THE SYMBOL "BCST" SUBJECT TO OFFICIAL NOTICE OF ISSUANCE. ------------------------ THIS OFFERING INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS" COMMENCING ON PAGE 5 HEREOF. ------------------------ THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. ------------------------ PRICE $ A SHARE ------------------------
UNDERWRITING PRICE TO DISCOUNTS AND PROCEEDS TO PUBLIC COMMISSIONS(1) COMPANY(2) -------- -------------- ----------- Per Share........................ $ $ $ Total(3)......................... $ $ $
- ------------ (1) The Company and the Selling Stockholder have agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act of 1933, as amended. See "Underwriters." (2) Before deducting expenses payable by the Company estimated at $1,000,000. (3) The Company and the Selling Stockholder have granted the Underwriters an option, exercisable within 30 days of the date hereof, to purchase up to an aggregate of 375,000 additional Shares at the price to public less underwriting discounts and commissions for the purpose of covering over-allotments, if any. If the Underwriters exercise such option in full, the total price to public, underwriting discounts and commissions, proceeds to Company and proceeds to Selling Stockholder will be $ , $ , $ and $ , respectively. See "Underwriters." ------------------------ The Shares are offered, subject to prior sale, when, as and if accepted by the Underwriters named herein and subject to approval of certain legal matters by Wilson Sonsini Goodrich & Rosati, Professional Corporation, counsel for the Underwriters. It is expected that delivery of the Shares will be made on or about , 1998, at the office of Morgan Stanley & Co. Incorporated, New York, N.Y., against payment therefor in immediately available funds. ------------------------ MORGAN STANLEY DEAN WITTER DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION HAMBRECHT & QUIST , 1998 3 [Artwork] [Description of Artwork: Panel #1 includes down the left margin a broadcast.com Channel Guide. The remainder of the page includes screen shots of 15 Web pages highlighting broadcast.com content.] [Panel #1 copy:] WELCOME TO broadcast.com, THE LEADING AGGREGATOR AND BROADCASTER OF STREAMING MEDIA PROGRAMMING ON THE WEB. The Company delivers hundreds of live and on-demand audio and video programs to hundreds of thousands of users. (1) LARGE AGGREGATION OF STREAMING MEDIA CONTENT The broadcast.com Web sites offer a large and comprehensive selection of audio and video programming. LIVE RADIO WBAL page Police Scanner page WSIX page - 345+ radio stations and networks LIVE TV WFAA page Court TV page NetShow Player (Video) - 17 television stations and cable networks SPORTS PGA page Florida Seminoles page NHL page SuperBowl page RealPlayer (RealVideo) - Game broadcasts of 350+ college and professional sports teams MUSIC & CD JUKEBOX Willie Nelson page Blockbuster Rockfest page RealPlayer (RealAudio) - 2,100+ full-length music CDs NEWS CNN page BBC page - News and information broadcasts broadcast.com FIRSTS: - First live commercial radio station - First live sporting event - First live corporate quarterly earnings call - First live stockholders meeting [Description of Artwork: Panel #2 includes down the right margin the logos of 15 of the Company's business services customers. The remainder of the page includes screen shots of nine Web pages highlighting business services broadcasts.] [Panel #2 copy:] (2) LEADING PROVIDER OF INTERNET BUSINESS SERVICES BROADCASTS Broadcast.com provides cost-effective Internet and intranet broadcasting services to businesses and other organizations, including turnkey production of live and archived press conferences, earnings conference calls, 4 investor conferences, trade shows, stockholder meetings, product introductions, training sessions, distance learning telecourses and media events. SCREEN SHOTS: HARVARD CONFERENCE ON INTERNET & SOCIETY RealPlayer (RealVideo) A 113TH AT&T ANNUAL SHAREHOLDERS MEETING B SYBASE ADAPTIVE SERVER LAUNCH WEBCAST C COMERICA BANK ECONOMIC FORUM D MICROSOFT DIRECT ACCESS SEMINARS E AMERICA ONLINE EARNINGS CALL F BREAKFAST WITH DELL TECHNOLOGY BRIEFS G BELL & HOWELL'S 1998 ANNUAL SHAREHOLDERS MEETING LOGOS SELECTED BUSINESS SERVICES CUSTOMERS AOL AT&T Bell & Howell Comerica Dell ElOnline Charles Schwab Genzyme Microsoft Motorola PR Newswire Sybase Texaco Texas Instruments Yahoo! [Artwork in Panel #3: Panel #3 includes screen shots of Web pages highlighting the Company's differentiated, interactive, multimedia advertising as well as a map of the United States with dots representing the Company's radio station and network and television station and cable network broadcast partners.] [Panel #3 copy] (3) DIFFERENTIATED, INTERACTIVE, MULTIMEDIA ADVERTISING Unlike Web sites that offer only text-based banner ads, broadcast.com offers multimedia packages incorporating custom audio and video applications such as gateway ads with guaranteed click-thrus, channel and event sponsorships and multimedia and traditional banner ads. TITLE: AUDIO AND VIDEO GATEWAY ADS WITH GUARANTEED CLICK-THRUS Image: KXL News/Talk radio station, IBM gateway ad TITLE: CHANNEL AND EVENT SPONSORSHIPS Image: Kentucky Wildcats Men's Bball page with CBS SportsLine logo TITLE: MULTIMEDIA AND TRADITIONAL BANNER ADS Images: Nextcard Visa 125X125 button Quick & Reilly 468X60 banner Dell 120X60 button TRADITIONAL MEDIA ADVERTISING Using commercial spots the Company receives from its radio and television station providers, the Company provides advertisers with the opportunity to bundle Web and traditional media advertising. OVER 360 RADIO AND TV AFFILIATES [Panel #4 Artwork: Panel #4 includes a graphic representing how the Company receives, manages and broadcasts content. Panel #4 also includes a graphic illustrating its branded distribution and certain strategic relationships.] [Panel #4 Copy:] 5 (4) LEADING INTERNET BROADCAST NETWORK INFRASTRUCTURE CONTENT IN Private frame relay and T-1 Aggregation Network [icons]: Satellite feed Video feed Audio feed Analog Digital CONTENT RECEIVED, MONITORED AND ENCODED FOR DELIVERY broadcast.com - 22 satellite receiving dishes - 24 X 7 Broadcast Center - 580 multimedia streaming servers support 500 simultaneous live events MULTICAST Building the first large-scale commercial multicast network which provides the Company access to over 400,000 dial-up multicast ports UNICAST Multiple 45 Mbps and 155Mbps connections UUNet Sprint MCI GTEI CONTENT OUT - Daily average of 400,000+ unique users - broadcast.com principal Web site ranked in top 20 among all News/Information/Entertainment sites (source: Media Metrix) (5) BRANDED DISTRIBUTION Broadcast.com drives traffic to its sites and enhances brand awareness through strategic relationships with key Internet companies. The Company has established increased visibility among Internet users through its relationships with Yahoo!, RealNetworks, and Microsoft, among others. 6 CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK. SPECIFICALLY, THE UNDERWRITERS MAY OVERALLOT IN CONNECTION WITH THIS OFFERING, AND MAY BID FOR, AND PURCHASE, SHARES OF COMMON STOCK IN THE OPEN MARKET. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITERS." 2 7 PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and Financial Statements and Notes thereto appearing elsewhere in this Prospectus. THE COMPANY Broadcast.com inc. (formerly AudioNet, Inc.) is the leading aggregator and broadcaster of streaming media programming on the Web with the network infrastructure and expertise to deliver or "stream" hundreds of live and on-demand audio and video programs over the Internet to hundreds of thousands of users. The Company's Web sites offer a large and comprehensive selection of live and on-demand audio and video programming, including sports, talk and music radio, television, business events, full-length CDs, news, commentary and full-length audio-books. The Company broadcasts on the Internet 24 hours a day seven days a week, and its programming includes more than 345 radio stations and networks, 17 television stations and cable networks and game broadcasts and other programming for over 350 college and professional sports teams. The Company licenses such programming from content providers, in most cases under exclusive, multi-year agreements. The Company's Business Services Group provides cost-effective Internet and intranet broadcasting services to businesses and other organizations. These business services include the turnkey production of press conferences, earnings conference calls, investor conferences, trade shows, stockholder meetings, product introductions, training sessions, distance learning telecourses and media events. In addition to its business services, the Company derives revenues from the sale of advertising on its Web sites, including gateway ads with guaranteed click-thrus, channel and event sponsorships and multimedia and traditional banner ads, as well as the sale of radio and television ad spots the Company receives from stations in exchange for broadcasting their programming over the Internet. In March 1998, the Company's Web sites served a daily average of over 400,000 unique users and its principal Web site was ranked in the top 20 among all News/Information/Entertainment sites according to Media Metrix. THE OFFERING Common Stock offered................ 2,500,000 shares Common Stock to be outstanding after the offering........................ 16,883,451 shares(1) Use of proceeds..................... For general corporate purposes, including capital expenditures and working capital, and strategic acquisitions. See "Use of Proceeds." Nasdaq National Market symbol....... BCST SUMMARY FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA)
PERIOD FROM INCEPTION YEAR ENDED THREE MONTHS ENDED (MAY 19, 1995) DECEMBER 31, MARCH 31, TO DECEMBER 31, ----------------- --------------------- 1995 1996 1997 1997 1998 --------------- ------- ------- ------- ----------- STATEMENTS OF OPERATIONS DATA: Revenues........................................ $ -- $ 1,756 $ 6,856 $ 1,087 $ 3,176 Total operating expenses........................ 268 4,821 13,543 2,211 6,173 Net operating loss.............................. (268) (3,065) (6,687) (1,124) (2,997) Net loss........................................ (268) (2,989) (6,474) (1,063) (2,722) Basic and diluted net loss per share(2)......... $ (.04) $ (.31) $ (.55) $ (.09) $ (.19) Shares used in the net loss per share calculations(2)............................... 6,020 9,564 11,680 11,428 14,076
MARCH 31, 1998 ------------------------- AS ACTUAL ADJUSTED(3) ------- -------------- BALANCE SHEET DATA: Cash and cash equivalents................................... $22,400 $56,275 Total assets................................................ 30,134 64,009 Total stockholders' equity.................................. 28,306 62,181
- ------------ (1) Based on the number of shares outstanding as of March 31, 1998. Excludes (i) 2,027,856 shares of Common Stock issuable upon the exercise of options then outstanding, with a weighted average exercise price of $5.71 per share, (ii) 1,092,361 shares available for future issuance under the Company's stock plans as of March 31, 1998, (iii) an additional 1,000,000 shares of Common Stock reserved for issuance under the Company's 1998 Stock Option Plan, pursuant to an amendment approved in June 1998, and (iv) 250,000 shares of Common Stock reserved for issuance under the Company's Employee Stock Purchase Plan approved in June 1998. Also excludes 234,056 shares of Common Stock subject to outstanding warrants. See "Capitalization," "Management--Director Compensation," "--Employee Benefit Plans" and Note 6 of Notes to Financial Statements. (2) See Note 8 of Notes to Financial Statements for an explanation of the determination of the number of shares used in per share calculations. (3) As adjusted to reflect the sale of 2,500,000 shares of Common Stock offered by the Company hereby at an assumed initial public offering price of $15.00 per share and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by the Company. See "Use of Proceeds" and "Capitalization." 3 8 NO PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFERING MADE HEREBY TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN AS CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY SECURITIES OTHER THAN THE REGISTERED SECURITIES TO WHICH IT RELATES OR AN OFFER TO, OR A SOLICITATION OF, ANY PERSON IN ANY JURISDICTION WHERE SUCH AN OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF. ------------------------ UNTIL , 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATIONS OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. ------------------------ TABLE OF CONTENTS
PAGE ---- Prospectus Summary.................... 3 Risk Factors.......................... 5 The Company........................... 18 Use of Proceeds....................... 20 Dividend Policy....................... 20 Capitalization........................ 21 Dilution.............................. 22 Selected Financial Data............... 23 Management's Discussion and Analysis of Financial Condition and Results of Operations....................... 24
PAGE ---- Business.............................. 32 Management............................ 48 Certain Transactions.................. 56 Principal and Selling Stockholders.... 58 Description of Capital Stock.......... 59 Shares Eligible for Future Sale....... 62 Underwriters.......................... 64 Legal Matters......................... 66 Experts............................... 66 Available Information................. 66 Index to Financial Statements......... F-1
------------------------ The Company intends to furnish its stockholders with annual reports containing financial statements audited by an independent public accounting firm and quarterly reports containing unaudited financial data for the first three quarters of each year. ------------------------ broadcast.com, AudioNet and the broadcast.com logo are trademarks or registered trademarks of the Company. This Prospectus also includes trademarks of companies other than the Company. ------------------------ Unless the context otherwise requires, the terms "broadcast.com" and the "Company" refer to broadcast.com inc., a Delaware corporation. Except as otherwise noted herein, information in this Prospectus assumes (i) no exercise of the Underwriters' over-allotment option and (ii) the sixty-for-one split of the Company's Common Stock effected in the form of a stock dividend in April 1997. 4 9 RISK FACTORS In addition to the other information contained in this Prospectus, the following risk factors should be considered carefully before purchasing the shares of Common Stock offered hereby. This Prospectus contains forward-looking statements that involve risks and uncertainties. The Company's actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth below. Limited Operating History; History of Losses and Anticipation of Future Losses. The Company commenced broadcasting live audio programming on the Web in September 1995 and live video programming in March 1997. The Company first recognized business services revenues and Web advertising revenues in January 1996 and traditional media advertising revenues in January 1997 and has recorded a net loss for each year since its inception. As of March 31, 1998, the Company had an accumulated deficit of $12.5 million. Accordingly, the Company has a limited operating history on which to base an evaluation of its business and prospects. The Company and its prospects must be considered in light of the risks, difficulties and uncertainties frequently encountered by companies in an early stage of development, particularly companies in new and rapidly evolving markets such as the market for Internet content, business services and advertising. To achieve and sustain profitability, the Company believes it must, among other things, (i) provide compelling and unique content to Internet users, (ii) successfully market and sell its business services, (iii) effectively develop new and maintain existing relationships with advertisers, content providers, business customers and advertising agencies, (iv) continue to develop and upgrade its technology and network infrastructure, (v) respond to competitive developments, (vi) successfully introduce enhancements to its existing products and services to address new technologies and standards, (vii) effectively sell its inventory of radio and television ad spots and (viii) attract, retain and motivate qualified personnel. The Company's operating results are also dependent on factors outside the control of the Company, such as the availability of compelling content and the development of broadband networks that support multimedia streaming. There can be no assurance that the Company will be successful in addressing these risks, and failure to do so could have a material adverse effect on the Company's business, results of operations and financial condition. Additionally, the limited operating history of the Company makes the prediction of future operating results difficult or impossible, and there can be no assurance that the Company's revenues will increase or even continue at their current level, or that the Company will achieve or maintain profitability or generate sufficient cash from operations in future periods. The Company expects to continue to incur significant losses on a quarterly and annual basis for the foreseeable future. For these and other reasons, there can be no assurance that the Company will ever achieve profitability or, if profitability is achieved, that it can be sustained. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." Unpredictability of Future Revenues; Potential Fluctuations in Quarterly Operating Results. Because of the Company's limited operating history and the emerging nature of the markets in which it competes, the Company is unable to forecast accurately its revenues. The market for the Company's business services and the long-term acceptance of Web-based advertising are uncertain. The Company currently intends to increase substantially its operating expenses in order to, among other things, (i) expand its distribution network capacity, (ii) fund increased sales and marketing activities, (iii) acquire additional content, (iv) develop and upgrade technology and (v) purchase equipment for its operations. The Company's expense levels are based, in part, on its expectations with regard to future revenues, and to a large extent such expenses are fixed, particularly in the short term. To the extent the Company is unsuccessful in increasing its revenues, the Company may be unable to appropriately adjust spending in a timely manner to compensate for any unexpected revenue shortfall or will have to reduce its operating expenses, causing it to forego potential revenue generating activities, either of which could cause a material adverse effect in the Company's business, results of operations and financial condition. The Company's quarterly operating results may fluctuate significantly in the future as a result of a variety of factors, many of which are outside the Company's control. Factors that may affect the Company's quarterly operating results include (i) the cost of acquiring and the availability of content, (ii) the demand for the Company's business services, (iii) demand for Internet advertising, (iv) seasonal trends in Internet and advertising placements, (v) the advertising cycles for, or the addition or loss of, individual advertisers, (vi) the 5 10 level of traffic on the Company's Web sites, (vii) the amount and timing of capital expenditures and other costs relating to the expansion of the Company's operations, (viii) price competition or pricing changes in Internet broadcasting services, such as the Company's business services, and in Internet advertising, (ix) the seasonality of the content of the Company's broadcasts, such as sporting and other events, (x) the level of and seasonal trends in the use of the Internet, (xi) technical difficulties or system downtime, (xii) the cost to acquire sufficient bandwidth or to integrate efficient broadcast technologies, such as multicasting, to meet the Company's needs, (xiii) the mix of unicasting and multicasting from the Company's Web sites (see "--Scalability of Number of Users"), (xiv) the introduction of new products or services by the Company or its competitors and (xv) general economic conditions and economic conditions specific to the Internet, such as electronic commerce and online media. Any one of these factors could cause the Company's revenues and operating results to vary significantly in the future. In addition, as a strategic response to changes in the competitive environment, the Company may from time to time make certain pricing, service or marketing decisions or acquisitions that could cause significant declines in the Company's quarterly operating results. The Company expects that its revenues will be higher leading up to and during major United States sport seasons for sports that the Company broadcasts, such as the NHL and college football, and lower at other times of the year. The Company believes that advertising sales in traditional media, such as television, generally are lower in the first and third calendar quarters of each year, and that advertising expenditures fluctuate significantly with economic cycles. Depending on the extent to which the Internet is accepted as an advertising medium, seasonality and cyclicality in the level of Internet advertising expenditures could become more pronounced than it is currently. As a result, the Company believes that its revenues from Web and traditional media advertising sales have been affected by these cyclical factors and the Company expects its Web and traditional media advertising sales generally to follow the quarterly trends of traditional media advertising. The foregoing factors could have a material adverse effect on the Company's business, results of operations and financial condition. Due to all of the foregoing factors, the Company believes that period-to-period comparisons of its results of operations are not necessarily meaningful and should not be relied upon as indications of future performance. Furthermore, it is possible that the Company's operating results in one or more quarters will fail to meet the expectations of securities analysts or investors. In such event, the price of the Common Stock could be materially adversely affected. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." Dependence on Content Providers; License Fees Payable to Content Providers. The Company's future success depends in large part upon its ability to aggregate and deliver compelling content over the Internet. The Company typically does not create its own content. Rather, the Company relies on third party content providers, such as radio and television stations and cable networks, businesses and other organizations, universities and record labels for compelling and entertaining content. The Company's ability to maintain its existing relationships with such content providers and to build new relationships with additional content providers is critical to the success of its business. Although many of the Company's agreements with third party content providers are for initial terms of more than two years, the content providers may choose not to renew such agreements or may terminate such agreements prior to the expiration of their terms if the Company fails to fulfill its contractual obligations. The Company's inability to secure licenses from content providers or performance rights societies or the termination of a significant number of content provider agreements would decrease the availability of content that the Company can offer users. This may result in decreased traffic on the Company's Web sites and, as a result, decreased advertising revenue, which could have a material adverse effect on the Company's business, results of operations and financial condition. The Company's agreements with certain of its content providers are nonexclusive, and many of the Company's competitors offer, or could offer, content that is similar to or the same as that obtained by the Company from such nonexclusive content providers. Such direct competition could have a material adverse effect on the Company's business, results of operations and financial condition. See "--Competition." License fees payable to content providers and performance rights societies and other licensing agencies may increase as the Company continues to aggregate content and as competition for such content increases. 6 11 There can be no assurance that the Company's content providers, performance rights societies and other licensing agencies will enter into prospective agreements with the Company on the same or similar terms as those currently in effect or on terms acceptable to the Company if no agreement is in effect. If the Company is required to pay increased licensing fees, such increased payments could have a material adverse effect on the Company's business, results of operations and financial condition. See "--Government Regulation and Legal Uncertainty." Uncertain Acceptance of the Company's Business Services. The Company's ability to establish and maintain a leadership position in Internet and intranet broadcasting for businesses and in the distribution of other live and on-demand events will depend on, among other things, (i) the Company's success in providing quality programming at low and high bit rates over the Internet, (ii) the Company's marketing and sales efforts, (iii) market acceptance of the Company's current and future service offerings, (iv) the reliability of the Company's networks and services and (v) the extent to which end users are able to receive the Company's broadcasts at adequate bit rates to provide for high quality services, none of which can be assured. The Company operates in a market that is at a very early stage of development, is rapidly evolving and is characterized by an increasing number of market entrants who have introduced or developed competing broadcasting and distribution services. As is typical in the case of a new and rapidly evolving industry, demand and market acceptance for recently introduced services are subject to a high level of uncertainty and risk. Sales of the Company's business services may require an extended sales effort in certain cases. In addition, potential customers must accept the Company's audio and video broadcast services as a viable alternative to face-to-face meetings, traditional media, traditional business communications tools, such as audio teleconferences and video conferencing, and conventional classroom-based learning. Because the market for the Company's business services is new and evolving, it is difficult to predict the size of this market and its growth rate, if any. In addition, it is not known whether businesses and other organizations will utilize the Internet to any significant degree as a means of broadcasting business and other events. There can be no assurance that the market for the Company's business services will continue to develop or be sustainable. If the market fails to develop, develops more slowly than expected or becomes saturated with competitors, or if the Company's Web sites do not achieve or sustain market acceptance, the Company's business, results of operations and financial condition could be materially adversely affected. Uncertain Acceptance of Streaming Media Technology. The Company's success depends on the market acceptance of streaming media technology provided by companies such as RealNetworks, Inc. ("RealNetworks") and Microsoft Corporation ("Microsoft"). Prior to the advent of streaming technology, Internet users could not initiate the playback of audio or video clips until such content was downloaded in its entirety, resulting in significant waiting times. As a result, live broadcasts of audio and video content over the Internet or intranets were not possible. Early streaming media technology suffered from poor audio quality, and video streaming at 28.8 kbps (thousands of bits per second) currently is of lower quality than traditional media broadcasts. In addition, congestion over the Internet and packet loss may interrupt audio and video streams, resulting in unsatisfying user experiences. In order to receive streamed media adequately, users generally must have multimedia PCs with certain microprocessor requirements and at least 28.8 kbps Internet access and streaming media software. Users typically electronically download such software and install it on their PCs. Such installation may require technical expertise that some users do not possess. In addition, older versions of certain Web browsers may need to be reconfigured in order to receive streaming media from the Company's Web sites. Furthermore, in order for users to receive streaming media over corporate intranets, information systems managers may need to reconfigure such intranets. Because of bandwidth constraints on corporate intranets, some information systems managers may block reception of streamed media. Widespread adoption of streaming media technology depends on overcoming these obstacles, improving audio and video quality and educating customers and users in the use of streaming media technology. If streaming media technology fails to achieve broad commercial acceptance or such acceptance is delayed, the Company's business, results of operations and financial condition could be materially adversely affected. See "--Competition." Uncertain Acceptance of the Internet as an Advertising Medium. The market for Internet advertising has only recently begun to develop, is rapidly evolving and is characterized by an increasing number of market entrants. As is typical in the case of a new and rapidly evolving industry, demand and market acceptance for 7 12 recently introduced products and services are subject to a high level of uncertainty. The Company's ability to generate advertising revenue will depend on, among other factors, (i) the development of the Internet as an advertising medium, (ii) pricing of advertising on other Web sites, (iii) the amount of traffic on the Company's Web sites, (iv) the Company's ability to achieve and demonstrate user and member demographic characteristics that are attractive to advertisers, (v) the development and expansion of the Company's advertising sales force and (vi) the establishment and maintenance of desirable advertising sales agency relationships. Most potential advertisers and their advertising agencies have only limited experience with the Internet as an advertising medium and have not devoted a significant portion of their advertising expenditures to Web-based advertising. There can be no assurance that advertisers or advertising agencies will be persuaded to allocate or continue to allocate portions of their budgets to Web-based advertising or, if so persuaded, that they will find such advertising to be effective for promoting their products and services relative to traditional print and broadcast media. No standards have yet been widely accepted for the measurement of the effectiveness of Web-based advertising, and there can be no assurance that such standards will develop sufficiently to enable Web-based advertising to become a significant advertising medium. Acceptance of the Internet among advertisers and advertising agencies will also depend, to a large extent, on the level of use of the Internet by consumers and upon growth in the commercial use of the Internet. If widespread commercial use of the Internet does not develop, or if the Internet does not develop as an effective and measurable medium for advertising, the Company's business, results of operations and financial condition could be materially adversely affected. See "Business--Sales and Marketing." Management of Growth. The Company has rapidly and significantly expanded its operations and anticipates that significant expansion of its operations will continue to be required in order to address potential market opportunities. The Company expanded from fewer than 10 employees on September 30, 1995, to 191 employees on June 15, 1998, and the Company expects to increase its personnel significantly in the near future. The Company's recent growth has placed, and is expected to continue to place, a significant strain on its managerial, operational and financial resources and systems. To manage its growth, the Company must implement, improve and effectively utilize its operational, management, marketing and financial systems and train and manage its employees. Many of the Company's senior management have only recently joined the Company. These individuals have not previously worked together and are in the process of integrating as a management team. There can be no assurance that the Company will be able to manage effectively the expansion of its operations or that the Company's current personnel, systems, procedures and controls will be adequate to support the Company's operations. Any failure of management to manage effectively the Company's growth could have a material adverse effect on the Company's business, results of operations and financial condition. See "--Dependence on Key Personnel; Need for Additional Personnel." Risk of System Failure, Delays and Inadequacy; Single Site. The performance, reliability and availability of the Company's Web sites and network infrastructure are critical to its reputation and ability to attract and retain users, advertisers and content providers. A large portion of the Company's network infrastructure is located at a single, leased facility in Dallas, Texas. The Company's systems and operations are vulnerable to damage or interruption from fire, flood, power loss, telecommunications failure, Internet breakdowns, break-ins, tornadoes and similar events. The Company does not presently have redundant facilities or systems or a formal disaster recovery plan and does not carry sufficient business interruption insurance to compensate it for losses that may occur. Services based on sophisticated software and computer systems often encounter development delays and the underlying software may contain undetected errors that could cause system failures when introduced. Any system error or failure that causes interruption in availability of content or an increase in response time could result in a loss of potential or existing business services customers, users, advertisers or content providers and, if sustained or repeated, could reduce the attractiveness of the Company's Web sites to such entities or individuals. In addition, because the Company's Web advertising revenues are directly related to the number of advertisements delivered by the Company to users, system interruptions that result in the unavailability of the Company's Web sites or slower response times for users would reduce the number of advertisements delivered and reduce revenues. A sudden and significant increase in traffic on the Company's Web sites could strain the capacity of the software, hardware and telecommunications systems deployed or utilized by the Company, which could lead 8 13 to slower response times or system failures. The Company's operations also are dependent upon receipt of timely feeds from its content providers, and any failure or delay in the transmission or receipt of such feeds, whether due to system failure of the Company, its content providers, satellites or otherwise, could disrupt the Company's operations. The Company is also dependent upon Web browsers, Internet Service Providers ("ISPs") and online service providers ("OSPs") to provide Internet users access to the Company's Web sites. Users may experience difficulties accessing or using the Company's Web sites due to system failures or delays unrelated to the Company's systems. These difficulties may negatively affect audio and video quality or result in intermittent interruption in programming. In addition, the Company relies on third party ISPs to provide hosting services with respect to some of the Company's content providers. Any sustained failure or delay could reduce the attractiveness of the Company's Web sites to business services customers, users, advertisers and content providers. The occurrence of any of the foregoing events could have a material adverse effect on the Company's business, results of operations and financial condition. Security Risks. Despite the implementation of security measures, the Company's networks may be vulnerable to unauthorized access, computer viruses and other disruptive problems. A party who is able to circumvent security measures could misappropriate proprietary information or cause interruptions in the Company's Internet operations. ISPs and OSPs have in the past experienced, and may in the future experience, interruptions in service as a result of the accidental or intentional actions of Internet users, current and former employees or others. The Company may be required to expend significant capital or other resources to protect against the threat of security breaches or to alleviate problems caused by such breaches. Although the Company intends to continue to implement industry-standard security measures, there can be no assurance that measures implemented by the Company will not be circumvented in the future. Eliminating computer viruses and alleviating other security problems may require interruptions, delays or cessation of service to users accessing the Company's Web sites, which could have a material adverse effect on the Company's business, results of operations and financial condition. Dependence on Short-Term Advertising Contracts. A substantial portion of the Company's Web advertising revenues are derived from short-term contracts. Consequently, many of the Company's advertising customers can cease advertising on the Company's Web sites quickly and without penalty, thereby increasing the Company's exposure to competitive pressures. There can be no assurance that the Company's current advertisers will continue to purchase advertisements or that the Company will be able to secure new advertising contracts from existing or future customers at attractive rates or at all. Any failure of the Company to achieve sufficient advertising revenue could have a material adverse effect on the Company's business, results of operations and financial condition. Competition. The market for Internet broadcasting and services is highly competitive and the Company expects that competition will continue to intensify. The Company competes with (i) other Web sites, Internet portals and Internet broadcasters to acquire and provide content to attract users, (ii) videoconferencing companies, audio conferencing companies and Internet business services broadcasters, (iii) online services, other Web site operators and advertising networks, as well as traditional media such as television, radio and print, for a share of advertisers' total advertising budgets and (iv) local radio and television stations and national radio and television networks for sales of advertising spots. There can be no assurance that the Company will be able to compete successfully or that the competitive pressures faced by the Company, including those described below, will not have a material adverse effect on the Company's business, results of operations and financial condition. Competition among Web sites that provide compelling content, including streaming media content, is intense and is expected to increase significantly in the future. The Company competes against a variety of businesses that provide content through one or more mediums, such as print, radio, television, cable television and the Internet. Traditional media companies have not established a significant streaming media presence on the Internet and may expend resources to establish a more significant presence in the future. These companies have significantly greater brand recognition and financial, technical, marketing and other resources than the Company. The Company competes generally with other content providers for the time and attention of users and for advertising revenues. To compete successfully, the Company must license and then provide sufficiently compelling and popular content to generate users, support advertising intended to reach such users and attract 9 14 business and other organizations seeking Internet broadcasting and distribution services. The Company competes with other Internet broadcasters and Web sites to acquire Internet broadcasting rights to compelling content. The Company believes that the principal competitive factors in attracting Internet users include the quality of service and the relevance, timeliness, depth and breadth of content and services offered. In the market for Internet distribution of radio and television broadcasts, the Company competes with ISPs, radio and television stations and networks that originate their own Internet broadcasts. RealNetworks and MCI Communications Corporation ("MCI") announced a strategic alliance in August 1997 involving the introduction of a service currently called Real Broadcast Network that delivers audio and video broadcasts over the Internet. In the area of sports content, the Company competes with CBS SportsLine and ESPNET SportsZone. The Company also competes for the time and attention of Internet users with thousands of Web sites operated by businesses and other organizations, individuals, governmental agencies and educational institutions. For example, certain Web sites may provide a collection of links to other Web sites with streaming media content. The Company expects competition to intensify and the number of competitors to increase significantly in the future. In addition, as the Company expands the scope of its content and services, it will compete directly with a greater number of Web sites and other media companies. Because the operations and strategic plans of existing and future competitors are undergoing rapid change, it is extremely difficult for the Company to anticipate which companies are likely to offer competitive services in the future. The Company competes with videoconferencing and teleconferencing companies, along with companies that provide Internet broadcasting services to businesses and other organizations. Principal competitive factors include price, transmission quality, transmission speed, reliability of service, ease of access, ease of use, customer support, brand recognition and operating experience. The Company's current and potential competitors may have significantly greater financial, technical and marketing resources, longer operating histories and greater brand recognition. Traditional videoconferencing and teleconferencing may allow for a more interactive user experience. As prices for videoconferencing systems decrease and transmission quality increases, the installed base of videoconferencing systems may increase. Companies that provide media streaming software may also enter the market for Internet broadcast services. If media streaming technology and backbone bandwidth becomes more readily available to companies at low prices, the Company's customers may decide to broadcast their own programming. In particular, local exchange carriers, ISPs and other data communication service providers may compete in the future with a portion of or all of the Company's business services as technological advancements facilitate the ability of these providers to offer effectively these services. There can be no assurance that the Company will be able to compete successfully against current or future competitors for Internet broadcast services. The Company also competes with online services, other Web site operators and advertising networks, as well as traditional media such as television, radio and print for a share of advertisers' total advertising budgets. The Company believes that the principal competitive factors for attracting advertisers include the number of users accessing the Company's Web sites, the demographics of the Company's users, the Company's ability to deliver focused advertising and interactivity through its Web sites and the overall cost-effectiveness and value of advertising offered by the Company. There is intense competition for the sale of advertising on high-traffic Web sites, which has resulted in a wide range of rates quoted by different vendors for a variety of advertising services, making it difficult to project levels of Internet advertising that will be realized generally or by any specific company. Any competition for advertisers among present and future Web sites, as well as competition with other traditional media for advertising placements, could result in significant price competition. The Company believes that the number of companies selling Web-based advertising and the available inventory of advertising space have recently increased substantially. Accordingly, the Company may face increased pricing pressure for the sale of advertisements. Reduction in the Company's Web advertising revenues would have a material adverse effect on the Company's business, results of operations and financial condition. The Company competes for traditional media advertising sales with national radio and television networks, as well as local radio and television stations. Local radio and television content providers and national radio and television networks may have larger and more established sales organizations than the Company. These companies may have greater name recognition and more established relationships with advertisers and advertising agencies than the Company. Such competitors may be able to undertake more 10 15 extensive marketing campaigns, obtain a more attractive inventory of ad spots, adopt more aggressive pricing policies and devote substantially more resources to selling advertising inventory. The Company's traditional media advertising sales efforts depend on the Company's ability to obtain an inventory of ad spots across the top radio and television markets. If the Company is unable to obtain such inventory, it could have a material adverse effect on the Company's business, results of operations and financial condition. Risks Associated with Traditional Media Advertising Sales. The Company is dependent, in part, on its ability to sell its inventory of radio and television ad spots obtained from stations in exchange for the Company's Internet broadcast of their programming. Selling radio and television advertising is highly competitive. The Company depends on Premiere Radio Networks, Inc. ("Premiere Radio Networks") to sell a majority of its radio ad spots. The Company's traditional media advertising sales efforts are focused on selling ads to traditional national advertisers in order to avoid competing with advertising sales efforts of its local radio and television station content providers. Sales of ad spots to national advertisers are typically sold at a lower cost per thousand ("CPM") than local advertising. The Company competes for traditional media advertising sales with national radio and television networks. National radio and television networks typically have larger and more established sales organizations as compared to those of the Company. There can be no assurance that Premiere Radio Networks will continue to sell effectively the Company's inventory of ad spots or that competitive pressures with respect to traditional media advertising sales will not have a material adverse effect on the Company's business, results of operations and financial condition. See "--Competition." Scalability of Number of Users. The Company's success depends on its ability to broadcast audio and video programming to a large number of simultaneous users. Until recently, the Company only deployed unicasting (one user per Company originated stream) technology to broadcast audio and video programming to users over the Internet. The Company has deployed another broadcast technology, multicasting (multiple users per Company originated stream), on a trial basis since September 1997 and has begun to deploy this technology on a broader commercial basis only recently. The Company anticipates that unicasting will continue to be used to distribute its archived and on-demand programming and that multicasting or a similar broadcasting technology will be used for live and other events where a large audience for the content is expected. To increase the Company's unicast capacity, the Company will be required to successfully expand its network infrastructure through the acquisition and deployment of additional network equipment and bandwidth. There can be no assurance that the Company will be successful in such expansion. The Company believes that to be a successful Internet broadcaster it also must successfully deploy multicasting or a similar broadcasting technology that can deliver streaming media content to many users simultaneously through one- to-many Internet connections. To this end, the Company has deployed multicasting, but has not yet tested its full capacity during an actual broadcast. The Company will be required to test, deploy and successfully scale its multicast network infrastructure to serve mass audiences. There can be no assurance that the Company will be successful in doing so, that multicasting will be able to support a substantial audience or that an alternative technology will not emerge that offers superior broadcasting technology as compared to multicasting. In the event that multicasting technology is not successfully deployed in a timely manner or such an alternative technology emerges, the Company would likely be required to expend significant resources to deploy a technology other than multicasting, which could have a material adverse effect on the Company's results of operations during the period in which the Company attempts such deployment. If the Company fails to scale its broadcasts to large audiences of simultaneous users, such failure could have a material adverse effect on the Company's business, results of operations and financial condition. Dependence on Providers of Streaming Media Products. The Company relies on providers of streaming media products, such as RealNetworks and Microsoft, to provide a broad base of users with streaming media software. The Company currently licenses software products that enable the broadcast of streaming media from such companies and others. The Company may need to acquire additional licenses from such streaming media companies to meet its future needs. Users are currently able to download electronically copies of the RealNetwork's RealPlayer and Microsoft's NetShow Player software free of charge. If providers of streaming media products substantially increase license fees charged to the Company for the use of their products, refuse to license such products to the Company or begin charging users for copies of their player software, such 11 16 actions could have a material adverse effect on the Company's business, results of operations and financial condition. Dependence on Continued Growth in Use of the Internet and Streaming Media Content on the Internet. Rapid growth in use of and interest in the Internet is a recent phenomenon and there can be no assurance that acceptance and use of the Internet will continue to develop or that a sufficient base of users will emerge to support the Company's business. Future revenues of the Company will depend largely on the widespread acceptance and use of the Internet as a source of multimedia information and entertainment and as a vehicle for commerce in goods and services. The Internet may not be accepted as a viable commercial medium for broadcasting multimedia content, if at all, for a number of reasons, including (i) potentially inadequate development of the necessary infrastructure, (ii) inadequate development of enabling technologies, (iii) lack of acceptance of the Internet as a medium for distributing streaming media content and (iv) inadequate commercial support for Web-based advertising. To the extent that the Internet continues to experience an increase in users, an increase in frequency of use or an increase in the bandwidth requirements of users, there can be no assurance that the Internet infrastructure will be able to support the demands placed upon it, specifically the demands of delivering high-quality video content. Furthermore, user experiences on the Internet are affected by access speed. There is no assurance that broadband access technologies, such as xDSL and cable modems, will become widely adopted. In addition, the Internet could lose its viability as a commercial medium due to delays in the development or adoption of new standards and protocols required to handle increased levels of Internet activity, or due to increased government regulation. Changes in or insufficient availability of telecommunications services to support the Internet also could result in unacceptable response times and could adversely affect use of the Internet generally and of the Company's Web sites in particular. If use of the Internet does not continue to grow or grows more slowly than expected, or if the Internet infrastructure does not effectively support the growth that may occur, the Company's business, results of operations and financial condition could be materially adversely affected. Risk of Technological Change. The market for Internet broadcast services is characterized by rapid technological developments, frequent new product introductions and evolving industry standards. The emerging character of these products and services and their rapid evolution will require the Company to effectively use leading technologies, continue to develop its technological expertise, enhance its current services and continue to improve the performance, features and reliability of its network infrastructure. Changes in network infrastructure, transmission and content delivery methods and underlying software platforms and the emergence of new broadband technologies, such as xDSL and cable modems, could dramatically change the structure and competitive dynamic of the market for streaming media solutions. In particular, technological developments or strategic partnerships that accelerate the adoption of broadband access technologies or advancements in streaming and compression technologies may require the Company to expend resources to address these developments. There can be no assurance that the Company will be successful in responding quickly, cost effectively and sufficiently to these or other such developments. In addition, the widespread adoption of new Internet technologies or standards could require substantial expenditures by the Company to modify or adapt its Web sites and services. A failure by the Company to rapidly respond to technological developments could have a material adverse effect on the Company's business, results of operations and financial condition. Dependence on Key Personnel; Need for Additional Personnel. The Company's performance and development is substantially dependent on the continued services of certain members of senior management, including Todd R. Wagner, Chief Executive Officer, and Mark Cuban, President, as well as on the Company's ability to retain and motivate its other officers and key employees. The Company does not have "key person" life insurance policies on any of its officers or other employees. The Company's future success also depends on its continuing ability to attract and retain highly qualified technical personnel and management. Competition for such personnel is intense and there can be no assurance that the Company will be able to retain its key management and technical employees or that it will be able to attract or retain additional qualified technical personnel and management in the future. The inability to attract and retain the necessary technical personnel and management could have a material adverse effect upon the Company's business, result of operations and financial condition. See "Management--Employment Agreements." 12 17 Risks Associated with broadcast.com Name Change. In May 1998, the Company changed its name from AudioNet, Inc. to broadcast.com inc. to better represent the diversity of its programming, service offerings and solutions. The Company believes that developing and strengthening the broadcast.com brand is critical to achieving widespread acceptance of its broadcast services and increasing traffic to its Web sites and that the importance of brand recognition will increase as competition in the market for Internet broadcasting increases. The Company has expended substantial resources in establishing brand recognition of the name and Web address www.audionet.com. Although users accessing www.audionet.com will automatically be taken to www.broadcast.com, the name change may cause confusion among users and customers. If the Company fails to promote and maintain its brand, if the Company's existing or future strategic relationships fail to promote the Company's brand or if the Company incurs excessive expenses in an attempt to promote and maintain its brand, then the Company's business, results of operations and financial condition could be materially adversely affected. There can be no assurance that the Company will be able to enforce rights related to the broadcast.com name, that it will be free to use the name in all jurisdictions, that there will be no challenges to the use of that name or that it will not be required to expend significant resources in defending the use of that name. Government Regulation and Legal Uncertainty. Although there are currently few laws and regulations directly applicable to the Internet, it is likely that new laws and regulations will be adopted in the United States and elsewhere covering issues such as music licensing, broadcast license fees, copyrights, privacy, pricing, sales taxes and characteristics and quality of Internet services. The adoption of restrictive laws or regulations could slow Internet growth or expose the Company to significant liabilities associated with content available on its Web sites. The application of existing laws and regulations governing Internet issues such as property ownership, libel and personal privacy is also subject to substantial uncertainty. There can be no assurance that current or new government laws and regulations, or the application of existing laws and regulations (including laws and regulations governing issues such as property ownership, content, taxation, defamation and personal injury), will not expose the Company to significant liabilities, significantly slow Internet growth or otherwise cause a material adverse effect on the Company's business, results of operations or financial condition. In November 1995, the Digital Performance Right in Sound Recordings Act of 1995 (the "1995 Act") was enacted. The 1995 Act provides that the owners of sound recordings have certain exclusive performance rights in such recordings, and, if applicable to the Company, could require the Company to pay additional licensing fees for its broadcasts. The Company believes, however, that its broadcasts are exempt from such fees under the 1995 Act. No assurance, however, can be given that the Company's belief is correct, particularly because the 1995 Act has not yet been sufficiently interpreted. An interpretation of the 1995 Act on this or other provisions of the Act that is adverse to the Company, could have a material adverse effect on the Company's business, results of operations and financial condition. The Company currently does not collect sales or other taxes with respect to the sale of services or products in states and countries where the Company believes it is not required to do so. The Company does collect sales and other taxes in the states it has offices and believes it is required by law to do so. One or more states or countries have sought to impose sales or other tax obligations on companies that engage in online commerce within their jurisdictions. A successful assertion by one or more states or countries that the Company should collect sales or other taxes on products and services, or remit payment of sales or other taxes for prior periods, could have a material adverse effect on the Company's business, results of operations and financial condition. The Communications Decency Act of 1996 (the "CDA") was enacted in 1996. Although those sections of the CDA that, among other things, proposed to impose criminal penalties on anyone distributing "indecent" material to minors over the Internet were held to be unconstitutional by the U.S. Supreme Court, there can be no assurance that similar laws will not be proposed and adopted. Although the Company does not currently distribute the types of materials that the CDA may have deemed illegal, the nature of such similar legislation and the manner in which it may be interpreted and enforced cannot be fully determined, and legislation similar to the CDA could subject the Company to potential liability, which in turn could have an adverse effect on the Company's business, financial condition and results of operations. Such laws could also damage 13 18 the growth of the Internet generally and decrease the demand for the Company's products and services, which could adversely affect the Company's business, results of operations and financial condition. See "Business--Governmental Regulation." Liability for Internet Content. As a distributor of Internet content, the Company faces potential liability for negligence, copyright, patent, trademark, defamation, indecency and other claims based on the nature and content of the materials that it broadcasts. Such claims have been brought, and sometimes successfully pressed, against Internet content distributors. In addition, the Company could be exposed to liability with respect to the content or unauthorized duplication or broadcast of content. Although the Company maintains general liability insurance, the Company's insurance may not cover potential claims of this type or may not be adequate to indemnify the Company for all liability that may be imposed. In addition, although the Company generally requires its content providers to indemnify the Company for such liability, such indemnification may be inadequate. Any imposition of liability that is not covered by insurance, is in excess of insurance coverage or is not covered by an indemnification by a content provider could have a material adverse effect on the Company's business, results of operations and financial condition. See "--Government Regulation and Legal Uncertainty." Intellectual Property. The Company regards its copyrights, trademarks, trade secrets and similar intellectual property as critical to its success, and the Company relies on a combination of copyright and trademark laws, trade secret protection, confidentiality and non-disclosure agreements and contractual provisions with its employees and with third parties to establish and protect its proprietary rights. There can be no assurance that these steps will be adequate, that the Company will be able to secure trademark registrations for all of its marks in the United States or other countries or that third parties will not infringe upon or misappropriate the Company's copyrights, trademarks, service marks and similar proprietary rights. In addition, effective copyright and trademark protection may be unenforceable or limited in certain countries, and the global nature of the Internet makes it impossible to control the ultimate destination of the Company's broadcasts. In the future, litigation may be necessary to enforce and protect the Company's trade secrets, copyrights and other intellectual property rights. The Company may also be subject to litigation to defend against claims of infringement of the rights of others or to determine the scope and validity of the intellectual property rights of others. If third parties hold trademark, copyright or patent rights that conflict with the business of the Company, then the Company may be forced to litigate infringement claims that could result in substantial costs to the Company. In addition, if the Company was unsuccessful in defending such a claim, it could have a material adverse effect on the Company's business, results of operations and financial condition. On or about July 8, 1998, a lawsuit was filed against the Company and one of its officers and directors. Although no assurance can be given as to the outcome of this lawsuit, the Company believes that the allegations in this action are without merit. The Company intends to vigorously defend against this action and seek its early dismissal. See "Business -- Legal Proceedings." If third parties prepare and file applications in the United States that claim trademarks used or registered by the Company, the Company may oppose those applications and be required to participate in proceedings before the United States Patent and Trademark Office to determine priority of rights to the trademark, which could result in substantial costs to the Company. An adverse outcome in litigation or privity proceedings could require the Company to license disputed rights from third parties or to cease using such rights. Any litigation regarding the Company's proprietary rights could be costly and divert management's attention, result in the loss of certain of the Company's proprietary rights, require the Company to seek licenses from third parties and prevent the Company from selling its services, any one of which could have a material adverse effect on the Company's business, results of operations and financial condition. In addition, inasmuch as the Company licenses a substantial portion of its content from third parties, its exposure to copyright infringement actions may increase because the Company must rely upon such third parties for information as to the origin and ownership of such licensed content. The Company generally obtains representations as to the origins and ownership of such licensed content and generally obtains indemnification to cover any breach of any such representations; however, there can be no assurance that such representations will be accurate or given, or that such indemnification will adequately protect the Company. See "--Liability for Internet Content" and "--Government Regulation and Legal Uncertainty." 14 19 In December 1997, the Company filed an application for a United States trademark registration for "broadcast.com." There can be no assurance that the Company will be able to secure such a registered trademark. In October 1996, the Company was issued a United States trademark for "AudioNet." The Company intends to pursue the registration of its trademarks based upon anticipated use internationally. There can be no assurance that the Company will be able to secure adequate protection for these trademarks in foreign countries. Many countries have a "first-to-file" trademark registration system and thus the Company may be prevented from registering its marks in certain countries if third parties have previously filed applications to register or have registered the same or similar marks. It is possible that competitors of the Company or others will adopt service names similar to the Company's, thereby impeding the Company's ability to build brand identity and possibly leading to customer confusion. In addition, there could be potential trademark or trademark infringement claims brought by owners of other registered trademarks or trademarks that incorporate variations of the term broadcast.com. The inability of the Company to protect its "broadcast.com," "AudioNet" and other marks adequately could have a material adverse effect on the Company's business, results of operations and financial condition. See "--Risks Associated with broadcast.com Name Change." As part of its confidentiality procedures, the Company generally enters into agreements with its employees and consultants and limits access to and distribution of its software, documentation and other proprietary information. There can be no assurance that the steps taken by the Company will prevent misappropriation of its proprietary information or that agreements entered into for that purpose would be enforceable. Notwithstanding the precautions taken by the Company, it might be possible for a third party to copy or otherwise obtain and use the Company's proprietary information without authorization. The laws of some countries may afford the Company little or no effective protection of its intellectual property. Acquisition Risk. The Company may pursue the acquisition of new or complementary businesses, services or technologies, although it has no present understandings, commitments or agreements with respect to any material acquisitions or investments. Any such future acquisitions would be accompanied by the risks commonly encountered in acquisitions of companies, including, among other things, the difficulty of integrating the operations and personnel of the acquired companies, the potential disruption of the Company's ongoing business, the inability of management to incorporate successfully acquired technology and rights into the Company's services and content offerings, additional expense associated with amortization of acquired intangible assets, the maintenance of uniform standards, controls, procedures and policies, and the potential impairment of relationships with employees, customers and strategic partners. Control by Certain Stockholders. Upon completion of this offering, the Company's directors and executive officers will beneficially own approximately 43.8% of the outstanding Common Stock (approximately 42.3% of the outstanding Common Stock assuming full exercise of the Underwriters' overallotment option). As a result, these stockholders, if they act as a group, will have a significant influence on all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions. Such control may have the effect of delaying or preventing a change in control of the Company. See "Principal and Selling Stockholders." Certain Anti-Takeover Provisions. The Company's Board of Directors has the authority to issue up to 5,000,000 shares of Preferred Stock and to determine the price, rights, preferences, privileges and restrictions, including voting rights, of those shares without any further vote or action by the stockholders of the Company. The rights of the holders of Common Stock will be subject to, and may be adversely affected by, the rights of the holders of any Preferred Stock that may be issued in the future. The issuance of Preferred Stock may have the effect of delaying, deferring or preventing a change in control of the Company, may discourage bids for the Company's Common Stock at a premium over the market price of the Common Stock and may adversely affect the market price of, and the other rights of the holders of, the Common Stock. The Company has no present plans to issue shares of Preferred Stock. In addition, certain provisions of the Company's Restated Certificate of Incorporation (the "Restated Certificate of Incorporation") and Amended and Restated Bylaws, as amended (the "Bylaws") will have the effect of delaying, deferring or preventing a change of control of the Company. These provisions provide, among other things, that the Board of Directors will be divided into three classes to serve staggered three-year terms following the first annual meeting after a public 15 20 offering, that stockholders may not take actions by written consent and that the ability of stockholders to call special meetings will be restricted. In addition, the Company is subject to the anti-takeover provisions of Section 203 of the Delaware General Corporation Law (the "DGCL"), which will prohibit the Company from engaging in a "business combination" with an "interested stockholder" for a period of three years after the date of the transaction in which the person became an interested stockholder, unless the business combination is approved in a prescribed manner. The Company's indemnification agreements with directors and officers, the Company's Restated Certificate of Incorporation and Bylaws provide that the Company will indemnify officers and directors against losses that they may incur in investigations and legal proceedings resulting from their services to the Company, which may be broad enough to include services in connection with takeover defense measures. Such provisions may have the effect of preventing changes in the management of the Company. See "Description of Capital Stock." No Specific Use of Proceeds. The Company has not designated any specific use for the net proceeds from the sale by the Company of the shares of Common Stock offered hereby. Rather, the Company intends to use the net proceeds primarily for general corporate purposes, including working capital and capital expenditures, and strategic acquisitions. The Company has no present plans or commitments and is not currently engaged in any negotiations with respect to strategic acquisitions. Accordingly, management will have significant flexibility in applying the net proceeds of this offering. The failure of management to apply such funds effectively could have a material adverse effect on the Company's business, results of operations and financial condition. See "Use of Proceeds." Year 2000 Compliance. There are issues associated with the programming code in existing computer systems as the year 2000 approaches. The "year 2000 problem" is pervasive and complex, as virtually every computer operation will be affected in some way by the rollover of the two digit year value to 00. The issue is whether computer systems will properly recognize date sensitive information when the year changes to 2000. Systems that do not properly recognize such information could generate erroneous data or cause a system to fail. The Company is in the process of working with its software vendors to assure that the Company is prepared for the year 2000. The Company has not verified that companies doing business with it are year 2000 compliant. The Company does not anticipate that it will incur significant operating expenses or be required to invest heavily in computer systems improvements to be year 2000 compliant. However, significant uncertainty exists concerning the potential costs and effects associated with any year 2000 compliance. Any year 2000 compliance problem of either the Company or its users, customers or advertisers could have a material adverse effect on the Company's business, results of operations and financial condition. No Prior Public Market. Prior to this offering, there has been no public market for the Common Stock. The initial public offering price will be determined by negotiation between the Company and the representatives of the Underwriters based upon several factors. The initial public offering price may not be indicative of future market prices. See "Underwriters" for a discussion of the factors to be considered in determining the initial public offering price. Possible Volatility of Stock Price. The trading price of the Common Stock is likely to be highly volatile and could be subject to wide fluctuations in response to factors such as actual or anticipated variations in quarterly operating results, announcements of technological innovations, new sales formats or new services by the Company or its competitors, changes in financial estimates by securities analysts, conditions or trends in Internet markets, changes in the market valuations of other Internet companies, announcements by the Company or its competitors of significant acquisitions, strategic partnerships, joint ventures, capital commitments, additions or departures of key personnel, sales of Common Stock and other events or factors, many of which are beyond the Company's control. In addition, the stock market in general, and the market for Internet-related and technology companies in particular, has experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of such companies. The trading prices of many technology companies' stocks are at or near historical highs and reflect price earnings ratios substantially above historical levels. There can be no assurance that these trading prices and price earnings ratios will be sustained. These broad market and industry factors may materially adversely affect the market price of the Common Stock, regardless of the Company's operating performance. In the past, following periods of volatility in the market price of a company's securities, securities class-action litigation 16 21 has often been instituted against such company. Such litigation, if instituted, could result in substantial costs and a diversion of management's attention and resources, which could have a material adverse effect on the Company's business, results of operations and financial condition. Shares Eligible for Future Sale; Registration Rights. Sales of a substantial number of shares of Common Stock in the public market following this offering could adversely affect the market price for the Company's Common Stock. The number of shares of Common Stock available for sale in the public market is limited by restrictions under the Securities Act of 1933, as amended (the "Securities Act"), and lock-up agreements under which the holders of such shares have agreed not to sell or otherwise dispose of any of their shares for a period of 180 days after the date of this Prospectus without the prior written consent of Morgan Stanley & Co. Incorporated. Morgan Stanley & Co. Incorporated, may, however, in its sole discretion and at any time without prior notice, release all or any portion of the Common Stock subject to these lock-up agreements. Morgan Stanley & Co. Incorporated currently has no plans to release any portion of the securities subject to lock-up agreements. When determining whether or not to release shares from the lock-up agreements, Morgan Stanley & Co. Incorporated will consider, among other factors, the stockholder's reasons for requesting the release, the number of shares for which the release is being requested and market conditions at the time. In addition to the 2,500,000 shares of Common Stock offered hereby (assuming no exercise of the Underwriters' overallotment option), there will be 14,401,031 shares of Common Stock outstanding upon completion of this offering (assuming no exercise of warrants or options), all of which are subject to lock-up agreements and are "restricted shares" under the Securities Act. On the date of this Prospectus, no shares other than the 2,500,000 shares offered hereby will be eligible for sale. Upon expiration of the lock-up agreements 180 days after the date of this Prospectus, an additional 13,977,905 shares will become eligible for sale in the public market, of which all but 3,260,940 shares shall be subject to the volume limitations and other conditions of Rule 144 adopted under the Securities Act ("Rule 144"). An additional 407,166 shares will become eligible for sale in the public market in March 1999, all of which shall be subject to the volume limitations and other conditions of Rule 144. The remaining 15,960 shares will become eligible for sale in July 1999, all of which shall be subject to the volume limitations and other conditions of Rule 144. In addition, on March 31, 1998, there were outstanding warrants to purchase 322,316 shares of the Company's Common Stock and options exercisable for 337,493 shares of the Company's Common Stock. In addition, the Company intends to register shortly after the date of this Prospectus a total of 4,105,360 shares of Common Stock subject to options outstanding or reserved for future issuance under the Company's 1996 Stock Option Plan, 1998 Stock Option Plan and 1996 Non-Employee Directors Stock Option Plan, and 250,000 shares of Common Stock reserved for issuance under the Company's Employee Stock Purchase Plan. Upon expiration of the lock-up agreements referred to above, holders of 4,533,631 shares of Common Stock and holders of warrants to purchase 218,096 shares of Common Stock will have certain rights to require the Company to register those shares of Common Stock and those shares issuable upon the exercise of warrants under the Securities Act. If such holders, by exercising their registration rights, cause a large number of shares to be registered and sold in the public market, such sales could have a material adverse effect on the market price for the Company's Common Stock. See "Description of Capital Stock--Registration Rights," "Shares Eligible for Future Sale" and "Underwriters." Dilution. Purchasers of the Common Stock in this offering will experience immediate and substantial dilution of $11.33 per share (based on an assumed public offering price of $15.00 per share). Additional dilution will occur upon exercise of outstanding stock options. See "Dilution." 17 22 THE COMPANY Broadcast.com inc. (formerly AudioNet, Inc.) is the leading aggregator and broadcaster of streaming media programming on the Web with the network infrastructure and expertise to deliver or "stream" hundreds of live and on-demand audio and video programs over the Internet to hundreds of thousands of users. The Company's Web sites offer a large and comprehensive selection of live and on-demand audio and video programming, including sports, talk and music radio, television, business events, full-length CDs, news, commentary and full-length audio-books. The Company broadcasts on the Internet 24 hours a day seven days a week, and its programming includes more than 345 radio stations and networks, 17 television stations and cable networks and game broadcasts and other programming for over 350 college and professional sports teams. The Company licenses such programming from content providers, in most cases under exclusive, multi-year agreements. The Company's Business Services Group provides cost-effective Internet and intranet broadcasting services to businesses and other organizations. These business services include the turnkey production of press conferences, earnings conference calls, investor conferences, trade shows, stockholder meetings, product introductions, training sessions, distance learning telecourses and media events. In addition to its business services, the Company derives revenues from the sale of advertising on its Web sites, including gateway ads with guaranteed click-thrus, channel and event sponsorships and multimedia and traditional banner ads, as well as the sale of radio and television ad spots the Company receives from stations in exchange for broadcasting their programming over the Internet. In March 1998, the Company's Web sites served a daily average of over 400,000 unique users and its principal Web site was ranked in the top 20 among all News/ Information/Entertainment sites according to Media Metrix. Broadcasting audio and video content over the Internet offers certain opportunities that are not generally available from traditional media. Currently available analog technology and government regulations limit the ability of radio and television stations to broadcast beyond certain geographic areas. Radios and televisions are not widely used in office buildings and other workplaces, where Internet access has become commonplace. Traditional business communication tools such as audio conferencing and videoconferencing can be costly, non-targeted and inconvenient. In addition, traditional broadcasters are limited in their ability to measure or identify in real time the listeners or viewers of a program. By using the Internet, targeted streaming media content can be broadcast to a geographically dispersed audience of customers, suppliers, employees and stockholders at relatively low costs. Internet users can interact with the broadcast content by responding to online surveys, voting in polls and obtaining additional information. In addition, Internet broadcasters can provide highly specific information about a program's audience to content providers, advertisers and users of Internet business services. The convergence of the Internet's capabilities and attributes has accelerated its acceptance as a business tool, leading to rapidly growing economic opportunities in Web-based advertising and business service offerings, including audio conferencing, electronic commerce and video transmission, among others. The Company believes it has accomplished numerous Internet achievements since its initial live broadcast in September 1995, including the Internet broadcasts of the first live commercial radio station, first live sporting event, first live corporate quarterly earnings call and first live stockholders' meeting. The Company's early entrance into the Internet broadcasting market has enabled the Company to establish strong brand recognition for its broadcasts and services and to form relationships with a diverse range of content providers. The Company currently offers content from a variety of sources, including radio and television, college and professional sports teams and leagues, production and film studios and record labels. The Company has broadcast over 11,000 live events such as the last three NFL Super Bowls and NCAA Basketball Tournaments, the Stanley Cup Playoffs, the entire 1997-98 season for 24 of the 26 NHL teams, game broadcasts for the entire season of over 300 college teams, the premiere event for the movie "Titanic," Blockbuster Rockfest '97 and backstage interviews from the 1998 Academy Awards Webcast. The Company has also amassed over 50,000 hours of on-demand broadcast programming, including over 2,100 full-length music CDs, sports programming, talk radio and business and media events. Broadcast.com's business services customers include the American Bar Association, AT&T Corporation ("AT&T"), Charles Schwab Corporation ("Charles Schwab"), Comerica Incorporated ("Comerica"), Gartner Group, Inc. ("GartnerGroup"), Harvard University, Intel Corporation ("Intel"), Microsoft, Motorola, Inc. ("Motorola"), PR Newswire, 18 23 Texas Instruments Incorporated ("Texas Instruments") and more than 290 other organizations. Business services broadcasts have originated from 36 states and nine countries. The Company's objective is to enhance its leadership position in Internet broadcasting by continuing to provide services that enable the delivery of a broad range of streaming media content over the Internet and intranets. The Company's strategy to achieve this objective includes enhancing and expanding exclusive content offerings, further penetrating the business services market, expanding network capacity, enhancing brand awareness and capturing and developing emerging revenue opportunities. The Company's name was changed from AudioNet, Inc. to broadcast.com inc. in May 1998. The Company's headquarters is located at 2914 Taylor Street, Dallas, Texas 75226. Its telephone number is 214.748.6660, fax number is 214.748.6657 and its principal Web site is located at http://www.broadcast.com. Other Company Web sites include: www.homematters.com, www.jukebox.com, www.pluggedin.com, www.policescanner.com, www.soapopera.com and www.sportsworld.com. Information contained on the Company's Web sites is not part of this Prospectus. 19 24 USE OF PROCEEDS The net proceeds to be received by the Company from the sale of the 2,500,000 shares of Common Stock offered by the Company hereby are estimated to be approximately $33.9 million (approximately $36.5 million, if the Underwriters' over-allotment option is exercised in full), at an assumed initial public offering price of $15.00 per share and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by the Company. The net proceeds are expected to be used for general corporate purposes, including capital expenditures and working capital, and strategic acquisitions. The Company has no present plans or commitments and is not currently engaged in any negotiations with respect to strategic acquisitions. Prior to such use, the Company intends to invest the net proceeds from this offering in short-term, interest-bearing, investment-grade securities. See "Risk Factors--Use of Proceeds." DIVIDEND POLICY The Company has never declared or paid any cash dividends on its Common Stock and does not anticipate paying cash dividends in the foreseeable future. 20 25 CAPITALIZATION The following table sets forth the capitalization of the Company as of March 31, 1998, and as adjusted to give effect to the issuance and sale of the shares of Common Stock offered by the Company (at an assumed initial public offering price of $15.00 per share after deducting estimated underwriting discounts, commissions and estimated offering expenses payable by the Company) and the application of the net proceeds therefrom. This table should be read in conjunction with the Company's Financial Statements and the Notes thereto included elsewhere in this Prospectus.
MARCH 31, 1998 ---------------------- ACTUAL AS ADJUSTED ------- ----------- (IN THOUSANDS) Stockholders' equity: Preferred Stock, $.01 par value; 5,000,000 shares authorized; no shares issued and outstanding....................... $ -- $ -- Common stock, $.01 par value; 60,000,000 shares authorized; 14,383,451 shares issued and outstanding, actual and 16,883,451 shares issued and outstanding, as adjusted(1)............................................ 90 115 Additional paid-in capital................................ 40,669 74,519 Accumulated deficit....................................... (12,453) (12,453) ------- ------- Total stockholders' equity........................... 28,306 62,181 ------- ------- Total capitalization.............................. $28,306 $62,181 ======= =======
- --------------- (1) Excludes (i) 2,027,856 shares of Common Stock issuable upon exercise of options outstanding on March 31, 1998, with a weighted average exercise price of $5.71 per share, (ii) 1,092,361 shares available for future issuance under the Company's stock plans as of March 31, 1998, (iii) an additional 1,000,000 shares of Common Stock reserved for issuance under the Company's 1998 Stock Option Plan, pursuant to an amendment approved in June 1998, and (iv) 250,000 shares of Common Stock reserved for issuance under the Company's Employee Stock Purchase Plan approved in June 1998. Also excludes 234,056 shares of Common Stock subject to outstanding warrants. See "Management--Director Compensation," "--Employee Benefit Plans" and Note 6 of Notes to Financial Statements. 21 26 DILUTION The net tangible book value of the Company as of March 31, 1998 was $28,114,512 or $1.95 per share. Net tangible book value per share is equal to the Company's total tangible assets, less its total liabilities, divided by the number of shares of Common Stock outstanding as of March 31, 1998. After giving effect to the issuance and sale of the 2,500,000 shares of Common Stock offered by the Company hereby and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by the Company, the as adjusted net tangible book value of the Company as of March 31, 1998 would have been $61,989,512 or $3.67 per share. This represents an immediate increase in net tangible book value of $1.72 per share to existing stockholders and an immediate dilution of approximately $11.33 per share to new public investors purchasing shares in this offering. The following table illustrates the per share dilution to new investors: Assumed initial public offering price per share............. $15.00 Net tangible book value per share as of March 31, 1998.... $ 1.95 Increase per share attributable to new public investors... 13.05 ------ As adjusted net tangible book value per share after the offering.................................................. 3.67 ------ Dilution per share to new public investors.................. $11.33 ======
The following table summarizes on a pro forma basis, as of March 31, 1998, the difference between the existing stockholders and the purchasers of shares of Common Stock in this offering (before deducting underwriting discounts and commissions and estimated offering expenses payable by the Company) with respect to the number of shares of Common Stock purchased from the Company, the total cash consideration paid and the average price paid per share.
SHARES PURCHASED TOTAL CONSIDERATION -------------------- --------------------- AVERAGE PRICE NUMBER PERCENT AMOUNT PERCENT PER SHARE ---------- ------- ----------- ------- ------------- Existing stockholders.................. 14,383,451 85.2% $40,039,419 51.6% $ 2.78 New public investors................... 2,500,000 14.8 37,500,000 48.4 15.00 ---------- ----- ----------- ----- Total........................ 16,883,451 100.0% $77,539,419 100.0% ========== ===== =========== =====
The foregoing discussion and tables assume no exercise of any stock options outstanding as of March 31, 1998 and no exercise of warrants to purchase 322,316 shares of Common Stock. As of March 31, 1998, there were options outstanding to purchase a total of 2,027,856 shares of Common Stock with a weighted average exercise price of $5.71 per share. To the extent that any of these options or warrants are exercised, there will be further dilution to new public investors. See "Capitalization," "Management--Director Compensation," "--Employee Benefit Plans" and Note 6 of Notes to Financial Statements. 22 27 SELECTED FINANCIAL DATA The following table sets forth selected financial information for the periods presented. The statement of operations data of the Company presented for the period from inception (May 19, 1995) to December 31, 1995, years ended December 31, 1996 and 1997 and the balance sheet data for the years then ended are derived from the financial statements of the Company audited by PricewaterhouseCoopers LLP, independent accountants, and are included elsewhere in this Prospectus. The selected financial data of the Company presented for the three months ended March 31, 1997 and 1998 were derived from the Company's unaudited financial statements also appearing herein and which, in the opinion of Company management, include all adjustments, consisting of normal recurring accruals and other adjustments, necessary for the fair presentation of the financial position and results of operations for these periods. The results of operations for the three months ended March 31, 1998 may not be indicative of results that may be expected for the full year ending December 31, 1998. The financial information set forth below should be read in conjunction with, and is qualified in its entirety by, the Financial Statements of the Company and related notes thereto that appear elsewhere in this Prospectus and "Management's Discussion and Analysis of Financial Condition and Results of Operations."
PERIOD FROM YEAR ENDED THREE MONTHS ENDED INCEPTION DECEMBER 31, MARCH 31, (MAY 19, 1995) TO ----------------- ------------------------ DECEMBER 31, 1995 1996 1997 1997 1998 ----------------- ------- ------- ------- -------------- (IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENTS OF OPERATIONS DATA: Revenues.......................... $ -- $ 1,756 $ 6,856 $ 1,087 $ 3,176 Operating expenses: Production costs................ -- 1,301 2,950 469 1,225 Operating and development....... -- 1,506 4,659 650 2,247 Sales and marketing............. 21 718 3,389 519 1,671 General and administrative...... 217 752 1,416 397 588 Depreciation and amortization... 30 544 1,129 176 442 ------ ------- ------- ------- ------- Total operating expenses.............. 268 4,821 13,543 2,211 6,173 ------ ------- ------- ------- ------- Net operating loss...... (268) (3,065) (6,687) (1,124) (2,997) Interest and other income......... -- 76 213 61 275 ------ ------- ------- ------- ------- Net loss................ $ (268) $(2,989) $(6,474) $(1,063) $(2,722) ====== ======= ======= ======= ======= Basic and diluted net loss per share(1)........................ $ (.04) $ (.31) $ (.55) $ (.09) $ (.19) ====== ======= ======= ======= ======= Shares used in the net loss per share calculations(1)........... 6,020 9,564 11,680 11,428 14,076
DECEMBER 31, -------------------------- MARCH 31, 1995 1996 1997 1998 ----- ------ ------- --------- (IN THOUSANDS) BALANCE SHEET DATA: Cash and cash equivalents............................. $ 142 $4,580 $21,337 $22,400 Working capital (deficit)............................. (75) 4,524 23,318 24,455 Total assets.......................................... 676 8,154 28,233 30,134 Total debt............................................ -- -- -- -- Total other liabilities............................... 320 546 1,040 1,828 Total stockholders' equity (deficit).................. (214) 7,608 27,193 28,306
- --------------- (1) See Note 8 of Notes to Financial Statements for an explanation of the determination of the number of shares used in per share calculations. 23 28 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the Financial Statements and Notes thereto appearing elsewhere in this Prospectus. The following discussion contains forward-looking statements. The Company's actual results may differ significantly from those projected in the forward-looking statements. Factors that might cause future results to differ materially from those projected in the forward-looking statements include, but are not limited to, those discussed in "Risk Factors" and elsewhere in this Prospectus. OVERVIEW Broadcast.com (formerly AudioNet) is the leading aggregator and broadcaster of streaming media programming on the Web with the network infrastructure and expertise to deliver or "stream" hundreds of live and on-demand audio and video programs over the Internet to hundreds of thousands of users. The Company's Web sites offer a large and comprehensive selection of live and on-demand audio and video programming, including sports, talk and music radio, television, business events, full-length CDs, news, commentary and full-length audio-books. During the period from the Company's inception on May 19, 1995 through December 31, 1995 (the "Inception Period"), the Company had no revenues and its operating activities related primarily to the investment in necessary network infrastructure and initial planning and development of the Company's Web sites and operations. During 1996, the Company generated revenues primarily from business services and Web advertising and the Company's operating activities related to the continued development of the network infrastructure required for large-scale streaming media broadcasts, continued enhancement of its Web sites and the opening of a sales office in New York. During 1997, the Company significantly increased revenues from business services and Web advertising and began generating revenues from traditional media advertising. Also during 1997, the Company continued to expand its network infrastructure, moved to a 28,000 square foot facility, continued the enhancement of its Web sites and added qualified sales, marketing, operations and general and administrative personnel. During 1998, the Company added television advertising sales to its traditional media advertising revenues, expanded its customer and user base, hired sales directors and vice presidents, opened sales offices in Los Angeles and San Francisco and continued to expand its network infrastructure. Throughout the Company's existence, it has expended significant resources in the aggregation of content by obtaining Internet broadcasting rights to audio and video programming. The Company derives substantially all of its revenues through the sale of business services, Web advertising and traditional media advertising. Business services revenues are derived from the Company's Internet and intranet broadcasts of its customers' business, educational or other programming. Business services revenues are recognized in the month in which the service is provided. Web advertising revenues are derived from the sale of gateway ads with guaranteed click-thrus, channel and event sponsorships and multimedia and traditional banner ads. Web advertising revenues are recognized over the period in which the advertisement is displayed on one of the Company's Web pages, except for sponsorship sales which are recognized ratably over the term of the sponsorship. Traditional media advertising revenues are derived from the sale of ad spots received from radio and television stations in exchange for the Company broadcasting their programming over the Internet and the sale of prepaid advertising. Traditional media advertising revenues are recognized in the month in which the spots are sold. Other revenues consist of electronic commerce sales as well as certain programming and promotional services performed by the Company and are recognized in the month in which the product is sold or the service is provided. The Company has incurred significant losses since its inception, and as of March 31, 1998 had an accumulated deficit of approximately $12.5 million. The Company believes that its success will depend largely on its ability to extend its leadership position as a source for streaming media programming and business services on the Web. Accordingly, the Company intends to invest heavily in sales and marketing, content acquisition and continued development of its network infrastructure. The Company expects to continue to incur substantial operating losses for the foreseeable future. In view of the rapidly evolving nature of the Company's business and its limited operating history, the Company believes that period-to-period comparisons of its revenues and operating results, including its gross 24 29 profit margin and operating expenses as a percentage of total net revenues, are not necessarily meaningful and should not be relied upon as indications of future performance. Although the Company has experienced sequential quarterly growth in revenues, it does not believe that its historical growth rates are necessarily sustainable or indicative of future growth. RESULTS OF OPERATIONS The following table sets forth certain financial data for the periods indicated as a percentage of total revenues. Data for the Inception Period is not presented as the Company had no revenues in the Inception Period.
YEAR ENDED THREE MONTHS ENDED DECEMBER 31, MARCH 31, ----------------- ------------------- 1996 1997 1997 1998 ------ ------ ------- ------- (UNAUDITED) Revenues: Business services.......................... 30.5% 41.1% 41.1% 35.5% Web advertising............................ 62.1 43.1 48.9 41.6 Traditional media advertising.............. -- 13.8 8.3 16.3 Other...................................... 7.4 2.0 1.7 6.6 ------ ------ ------ ------ Total revenues..................... 100.0 100.0 100.0 100.0 Operating expenses: Production costs........................... 74.1 43.0 43.2 38.6 Operations and development................. 85.8 68.0 59.8 70.8 Sales and marketing........................ 40.9 49.4 47.8 52.6 General and administrative................. 42.7 20.6 36.5 18.5 Depreciation and amortization.............. 31.0 16.5 16.2 13.9 ------ ------ ------ ------ Total operating expenses........... 274.5 197.5 203.5 194.4 ------ ------ ------ ------ Net operating loss................. (174.5) (97.5) (103.5) (94.4) Interest and other income.................... 4.3 3.1 5.7 8.7 ------ ------ ------ ------ Net loss........................... (170.2)% (94.4)% (97.8)% (85.7)% ====== ====== ====== ======
THREE MONTHS ENDED MARCH 31, 1997 AND 1998 REVENUES Total revenues increased $2.1 million, or 192.2%, from $1.1 million to $3.2 million for the three months ended March 31, 1997 and 1998, respectively. Business Services. Business services revenues increased $680,000, or 152.2%, from $447,000 to $1.1 million for the three months ended March 31, 1997 and 1998, respectively. Business services revenues represented 41.1% of total revenues for the three months ended March 31, 1997 and 35.5% of total revenues for the three months ended March 31, 1998. The increase in business services revenues was due primarily to an increase in the number of business services events broadcast by the Company from 120 events in the three months ended March 31, 1997 to 347 events in the three months ended March 31, 1998. Web Advertising. Web advertising revenues increased $792,000, or 149.0%, from $531,000 to $1.3 million for the three months ended March 31, 1997 and 1998, respectively. Web advertising revenues represented 48.9% of total revenues for the three months ended March 31, 1997 and 41.6% of total revenues for the three months ended March 31, 1998. Bartered Web advertising revenues increased $24,000, or 9.2%, from $256,000 to $280,000 for the three months ended March 31, 1997 and 1998, respectively, and represented 23.6% and 8.8% of total revenues, respectively. The Company anticipates that bartered Web advertising revenues, as a percentage of total revenues, will continue to decline. In prior periods, the Company used bartered Web advertising to assist in establishing its brand and to drive traffic to its Web sites. As a result of the Company's 25 30 decreased focus on the use of bartered Web advertising for these purposes, and the Company's increased cash flows from other revenue activities, the Company expects bartered Web advertising revenues to comprise corresponding smaller percentages of its revenues in future periods. The increase in Web advertising revenues was due primarily to an increase in ads sold to existing and new advertisers on the Company's Web sites, including increased sales of gateway ads, which sell at a higher rate than traditional banner ads. Traditional Media Advertising. Traditional media advertising revenues increased $426,000, from $91,000 to $517,000 for the three months ended March 31, 1997 and 1998, respectively. Traditional media advertising revenues represented 8.3% of total revenues for the three months ended March 31, 1997 and 16.3% of total revenues for the three months ended March 31, 1998. The increase was due primarily to increased sales of ad spots acquired through the licensing of additional radio stations. Other. Other revenues increased $192,000, from $18,000 to $210,000 for the three months ended March 31, 1997 and 1998, respectively, representing 1.7% and 6.6% of total revenues, respectively. The Company began selling promotional services and electronic commerce sales increased in the first quarter of 1998. OPERATING EXPENSES Production Costs. Production costs consist primarily of expenses from the sale of prepaid advertising credits, bartered Web advertising expenses, event production costs, direct personnel expenses associated with event production and performance license fees. Production costs increased $756,000, or 161.0%, from $469,000 to $1.2 million for the three months ended March 31, 1997 and 1998, respectively. Of the increase, $650,000 was due to the increase in sales of prepaid advertising credits and performance license fees. The increase was also due to added personnel and production costs required to support the broadcast of additional live events. Excluding both the revenues and expenses associated with bartered Web advertising transactions, production costs increased from 25.7% to 32.6% of revenues for the three month periods presented, respectively. Operating and Development. Operating and development expenses consist primarily of data communications expenses, personnel expenses associated with broadcasting, software and content license fees, operating supplies and overhead. Operating and development expenses increased $1.6 million, from $650,000 to $2.2 million, for the three months ended March 31, 1997 and 1998, respectively. Approximately $1.2 million of the increase was due to increased expenditures for data communications as user traffic increased, software license fees as the network infrastructure expanded and operations personnel to handle additional broadcasts as the Company obtained additional Internet broadcasting rights to programming. In future periods, operating and development expenses will reflect an additional $161,000 per month for additional access to bandwidth pursuant to a three year agreement entered into in April 1998. Such amounts will be reflected when access to such bandwidth becomes operational, which is anticipated to occur in July 1998. Sales and Marketing. Sales and marketing expenses consist primarily of personnel expenses associated with the sale of the Company's business services, Web advertising and traditional media advertising, marketing of the Company's Web sites, graphic design costs and overhead. Sales and marketing expenses increased $1.2 million, from $519,000 to $1.7 million for the three months ended March 31, 1997 and 1998, respectively. Approximately $1.0 million of the increase was due to growth in the Company's sales force and marketing staff and increased advertising expenses. General and Administrative. General and administrative expenses consist primarily of administrative personnel expenses, professional fees, expenditures for applicable facilities costs and overhead. General and administrative expenses increased $191,000, or 48.2%, from $397,000 to $588,000 for the three months ended March 31, 1997 and 1998, respectively. The increase was due primarily to increased personnel expenses and professional fees necessary to support the Company's growth. Depreciation and Amortization. Depreciation and amortization expenses consist of depreciation of property and equipment and amortization of intangible assets. Depreciation and amortization expenses increased $266,000, or 150.7%, from $176,000 to $442,000 for the three months ended March 31, 1997 and 26 31 1998, respectively. The increase was primarily due to the addition of property and equipment as the Company expanded its network infrastructure, incurred leasehold improvement costs and purchased equipment necessary to support the growth in personnel. INTEREST AND OTHER INCOME Interest and other income consist primarily of interest earnings on the Company's cash and cash equivalents. Interest and other income increased from $61,000 to $275,000 for the three months ended March 31, 1997 and 1998, respectively. The increase was due to interest earned from the investment of higher cash and cash equivalent balances derived from sales of the Company's Common Stock in December 1997. INCEPTION PERIOD AND YEARS ENDED DECEMBER 31, 1996 AND 1997 REVENUES Total revenues increased $5.1 million, or 290.4%, from $1.8 million to $6.9 million in 1996 and 1997, respectively. The Company had no revenues during the Inception Period. Business Services. Business services revenues increased $2.3 million, from $535,000 to $2.8 million in 1996 and 1997, respectively. Business services revenues represented 30.5% of total revenues in 1996 and 41.1% of total revenues in 1997. The increase in business services revenues was due primarily to an increase in the number of business services events broadcast by the Company from 238 events in 1996 to 740 events in 1997. Web Advertising. Web advertising revenues increased $1.9 million from $1.1 million to $3.0 million in 1996 and 1997, respectively. Web advertising revenues represented 62.1% of total revenues in 1996 and 43.1% of total revenues in 1997. Bartered Web advertising revenues increased $379,000, or 59.4%, from $638,000 to $1.0 million in 1996 and 1997, respectively, and represented 36.3% and 14.8% of total revenues, respectively. The increase in Web advertising revenues was due primarily to an increase in ads sold to existing and new advertisers on the Company's Web sites, including gateway ads, which the Company began selling in the first quarter of 1997. Traditional Media Advertising. Traditional media advertising was $942,000, or 13.8% of total revenues in 1997, as the Company began selling its ad spots acquired through the licensing of radio stations in the first quarter of 1997. Other. Other revenues increased $8,000, or 6.1%, from $130,000 to $138,000 in 1996 and 1997, respectively, representing 7.4% and 2.0% of total revenues, respectively. OPERATING EXPENSES Production Costs. Production costs increased $1.6 million, or 126.7%, from $1.3 million to $2.9 million in 1996 and 1997, respectively. The Company did not incur production costs during the Inception Period. The increase was primarily due to the increase in sales of prepaid advertising credits, barter expenses and production and personnel costs required for the broadcasting of additional business services events. Excluding both the revenues and expenses associated with bartered Web advertising transactions, production costs decreased from 59.3% to 33.1% of revenues for the periods presented, respectively. Operating and Development. Operating and development expenses increased $3.2 million, from $1.5 million to $4.7 million in 1996 and 1997, respectively. The Company did not incur operating and development expenses during the Inception Period. Approximately $2.6 million of the increase was due to expenditures for data communications as user traffic increased, operations personnel to handle the additional broadcasts of the Company's additional content, and content license fees for the acquisition of additional content. Sales and Marketing. Sales and marketing expenses increased from $21,000 in the Inception Period to $718,000 in 1996 to $3.4 million in 1997, an increase of $696,000 and $2.7 million, respectively. The increases were due primarily to growth in the Company's sales force and marketing staff. General and Administrative. General and administrative expenses increased from $217,000 in the Inception Period to $752,000 in 1996 to $1.4 million in 1997, an increase of $535,000 and $664,000, or 247.1% 27 32 and 88.4%, respectively. The increases were due primarily to increased personnel expenses, professional fees and building expenses necessary to support the Company's growth. Depreciation and Amortization. Depreciation and amortization expenses increased from $30,000 in the Inception Period to $544,000 in 1996 to $1.1 million in 1997, an increase of $514,000 and $585,000, respectively. The increases were primarily due to the addition of property and equipment as the Company expanded its network infrastructure, incurred leasehold improvement costs and purchased equipment necessary to support the growth in personnel. INTEREST AND OTHER INCOME Interest and other income consist primarily of interest earnings on the Company's cash and cash equivalents. Interest and other income increased from $76,000 in 1996 to $213,000 in 1997. The Company had no interest and other income in the Inception Period. SELECTED QUARTERLY OPERATING RESULTS The following table sets forth certain unaudited quarterly statements of operations data for the nine quarters ended March 31, 1998. This information has been derived from the Company's unaudited financial statements, which, in management's opinion, have been prepared on the same basis as the audited Financial Statements, and include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the information for the quarters presented. This information should be read in conjunction with the audited Financial Statements of the Company and the Notes thereto included elsewhere in this Prospectus. The operating results for any quarter are not necessarily indicative of the operating results for any future period.
THREE MONTHS ENDED ------------------------------------------------------------------------------------------------ MAR. 31, JUNE 30, SEP. 30, DEC. 31, MAR. 31, JUNE 30, SEP. 30, DEC. 31, MAR. 31, 1996 1996 1996 1996 1997 1997 1997 1997 1998 -------- -------- -------- -------- -------- -------- -------- -------- -------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Revenues: Business services............. $ 13 $ 78 $ 217 $ 226 $ 447 $ 794 $ 804 $ 776 $ 1,127 Web advertising............... 23 34 167 867 531 538 693 1,193 1,322 Traditional media advertising................. -- -- -- -- 91 117 360 374 517 Other......................... 15 28 71 17 18 18 50 53 210 ------- ------- ------- ------- ------- ------- ------- ------- ------- Total revenues.......... 51 140 455 1,110 1,087 1,467 1,907 2,396 3,176 Operating expenses: Production costs.............. 45 58 207 992 469 593 995 893 1,225 Operations and development.... 128 233 371 774 650 1,128 1,285 1,597 2,247 Sales and marketing........... 47 106 213 351 519 780 908 1,183 1,671 General and administrative.... 46 84 273 347 398 256 338 425 589 Depreciation and amortization................ 119 128 142 156 176 223 315 414 442 ------- ------- ------- ------- ------- ------- ------- ------- ------- Total operating expenses.............. 385 609 1,206 2,620 2,212 2,980 3,841 4,512 6,174 ------- ------- ------- ------- ------- ------- ------- ------- ------- Net operating loss...... (334) (469) (751) (1,510) (1,125) (1,513) (1,934) (2,116) (2,998) Interest and other income....... 1 2 17 56 62 61 39 52 276 ------- ------- ------- ------- ------- ------- ------- ------- ------- Net loss................ $ (333) $ (467) $ (734) $(1,454) $(1,063) $(1,452) $(1,895) $(2,064) $(2,722) ======= ======= ======= ======= ======= ======= ======= ======= ======= Basic and diluted net loss per share......................... $ (.04) $ (.05) $ (.07) $ (.13) $ (.09) $ (.12) $ (.16) $ (.17) $ (.19) ======= ======= ======= ======= ======= ======= ======= ======= ======= Shares used in the net loss per share calculations............ 7,956 9,382 10,018 10,846 11,428 11,675 11,681 11,930 14,076
28 33
AS A PERCENTAGE OF TOTAL REVENUES ------------------------------------------------------------------------------------------------ MAR. 31, JUNE 30, SEP. 30, DEC. 31, MAR. 31, JUNE 30, SEP. 30, DEC. 31, MAR. 31, 1996 1996 1996 1996 1997 1997 1997 1997 1998 -------- -------- -------- -------- -------- -------- -------- -------- -------- Revenues: Business services............. 25.8% 55.9% 47.8% 20.4% 41.1% 54.1% 42.2% 32.4% 35.5% Web advertising............... 44.1 24.4 36.7 78.1 48.9 36.7 36.3 49.8 41.6 Traditional media advertising................. -- -- -- -- 8.3 8.0 18.9 15.6 16.3 Other......................... 30.1 19.7 15.5 1.5 1.7 1.2 2.6 2.2 6.6 ------- ------- ------- ------- ------- ------- ------- ------- ------- Total revenues.......... 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 ------- ------- ------- ------- ------- ------- ------- ------- ------- Operating expenses: Production costs.............. 88.1 41.3 45.4 89.3 43.2 40.4 52.1 37.3 38.6 Operations and development.... 248.3 166.9 81.7 69.7 59.8 76.9 67.4 66.6 70.8 Sales and marketing........... 91.4 75.9 46.9 31.6 47.8 53.2 47.6 49.4 52.6 General and administrative.... 89.3 60.4 60.1 31.4 36.5 17.5 17.8 17.7 18.5 Depreciation and amortization................ 230.6 91.1 31.1 14.1 16.2 15.2 16.5 17.3 13.9 ------- ------- ------- ------- ------- ------- ------- ------- ------- Total operating expenses.............. 747.7 435.6 265.2 236.1 203.5 203.2 201.4 188.3 194.4 ------- ------- ------- ------- ------- ------- ------- ------- ------- Net operating loss...... (647.7) (335.6) (165.2) (136.1) (103.5) (103.2) (101.4) (88.3) (94.4) Interest and other income....... 1.7 1.5 3.7 5.1 5.7 4.2 2.0 2.1 8.7 ------- ------- ------- ------- ------- ------- ------- ------- ------- Net loss................ (646.0)% (334.1)% (161.5)% (131.0)% (97.8)% (99.0)% (99.4)% (86.2)% (85.7)% ======= ======= ======= ======= ======= ======= ======= ======= =======
FACTORS AFFECTING OPERATING RESULTS The Company's operating results have varied on a quarterly basis during its short operating history and may fluctuate significantly in the future as a result of a variety of factors, many of which are outside the Company's control. Factors that may affect the Company's quarterly operating results include, but are not limited to, (i) the cost of acquiring and the availability of content, (ii) the demand for the Company's business services, (iii) demand for Internet advertising, (iv) seasonal trends in Internet and advertising placements, (v) the advertising cycles for, or the addition or loss of, individual advertisers, (vi) the level of traffic on the Company's Web sites, (vii) the amount and timing of capital expenditures and other costs relating to the expansion of the Company's operations, (viii) price competition or pricing changes in Internet broadcasting services, such as the Company's Internet advertising and business services, (ix) the seasonality of the content of the Company's broadcasts, such as sporting and other events, (x) the level of, and seasonal trends in, the use of the Internet, (xi) technical difficulties or system downtime, (xii) the cost to acquire sufficient bandwidth to integrate efficient broadcast technologies, such as multicasting, to meet the Company's needs, (xiii) the mix of unicasting and multicasting from the Company's Web sites, (xiv) the introduction of new products or services by the Company or its competitors and (xv) general economic conditions and economic conditions specific to the Internet such as electronic commerce and online media. Any one of these factors could cause the Company's revenues and operating results to vary significantly in the future. In addition, as a strategic response to changes in the competitive environment, the Company may from time to time make certain pricing, service or marketing decisions or acquisitions that could cause significant declines in the Company's quarterly operating results. The Company's limited operating history and the emerging nature of its markets make prediction of future revenues difficult. The Company's expense levels are based, in part, on its expectations with regard to future revenues, and to a large extent such expenses are fixed, particularly in the short term. There can be no assurance that the Company will be able to predict its future revenues accurately and the Company may be unable to adjust spending in a timely manner to compensate for any unexpected revenue shortfall. Accordingly, any significant shortfall in relation to the Company's expectations could cause significant declines in the Company's quarterly operating results. Due to all the foregoing factors, the Company's quarterly revenues and operating results are difficult to forecast. The Company believes that its quarterly revenues, expenses and operating results could vary significantly in the future, and that period-to-period comparisons should not be relied upon as indications of future performance. Due to the foregoing factors, it is likely that in some future quarters the Company's 29 34 operating results will fall below the expectations of securities analysts and investors, which could have a material adverse effect on the trading price of the Common Stock. LIQUIDITY AND CAPITAL RESOURCES Since its inception, the Company has financed its operations through private sales of Common Stock and warrants. Net proceeds from these sales from inception to March 31, 1998 have totaled approximately $40.8 million. At March 31, 1998, the principal source of liquidity for the Company was approximately $22.4 million of cash and cash equivalents. In April 1998, the Company entered into an operating lease facility which provides for up to $2.5 million for equipment, of which the Company has utilized approximately $550,000 as of April 30, 1998. In addition, in December 1997 the Company entered into a line of credit that provides for borrowings up to $2.5 million for working capital needs and equipment purchases. As of March 31, 1998 the Company had not made any borrowings against this line of credit. Net cash used in operating activities was $30,000, $4.3 million and $6.6 million in the Inception Period, 1996 and 1997, respectively. For the three month period ended March 31, 1998, net cash used in operating activities was $1.8 million. Net cash used in operating activities in all such periods was primarily attributable to net losses, offset in part by increases in accounts payable and accrued liabilities. Net cash used in investing activities was $414,000, $1.3 million and $2.7 million in the Inception Period, 1996 and 1997, respectively. For the three month period ended March 31, 1998, net cash used in investing activities was $983,000. Net cash used in investing activities in all such periods was primarily related to purchases of property and equipment. Net cash provided by financing activities was $586,000, $10.0 million and $26.1 million in the Inception Period, 1996 and 1997, respectively. For the three month period ended March 31, 1998, net cash provided by financing activities was $3.8 million. Net cash provided by financing activities resulted primarily from the issuances of Common Stock. The Company believes that the net proceeds from this offering, together with its current cash and cash equivalents, will be sufficient to meet its anticipated cash needs for working capital and capital expenditures for at least the next 12 months. The Company may need to raise additional funds through public or private financings, or other arrangements. There can be no assurance that such additional financings, if needed, will be available on terms attractive to the Company, if at all. Failure of the Company to raise capital when needed could have a material adverse effect on the Company's business, results of operations and financial condition. If additional funds are raised through the issuance of equity securities, the percentage ownership of the Company's then-current stockholders would be reduced. Furthermore, such equity securities might have rights, preferences or privileges senior to those of the Company's Common Stock. YEAR 2000 COMPLIANCE There are issues associated with the programming code in existing computer systems as the year 2000 approaches. The "year 2000 problem" is pervasive and complex, as virtually every computer operation will be affected in some way by the rollover of the two digit year value to 00. The issue is whether computer systems will properly recognize date sensitive information when the year changes to 2000. Systems that do not properly recognize such information could generate erroneous data or cause a system to fail. The Company is in the process of working with its software vendors to assure that the Company is prepared for the year 2000. The Company has not verified that companies doing business with it are year 2000 compliant. The Company does not anticipate that it will incur significant operating expenses or be required to invest heavily in computer systems improvements to be year 2000 compliant. However, significant uncertainty exists concerning the potential costs and effects associated with year 2000 compliance. Any year 2000 compliance problem of either the Company or its users, customers or advertisers could have a material adverse effect on the Company's business, results of operations and financial condition. 30 35 NET OPERATING LOSS CARRYFORWARDS As of December 31, 1997, the Company had available net operating loss carryforwards totaling $10.3 million, which expire beginning in 2011. See Note 5 of Notes to the Financial Statements included elsewhere herein. The Tax Reform Act of 1986 imposes limitations on the use of net operating loss carryforwards if certain stock ownership changes have occurred or could occur in the future. RECENT ACCOUNTING PRONOUNCEMENTS In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 130, Reporting Comprehensive Income ("FAS 130"). FAS 130 establishes standards for reporting and display of comprehensive income and its components (revenues, expenses, gains and losses) in a full set of general-purpose financial statements. Reclassification of financial statements for earlier periods provided for comparative purposes is required upon adoption. FAS 130 is effective for fiscal years beginning after December 15, 1997. The Company has adopted FAS 130 for the year ending December 31, 1998. In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 131, Disclosure About Segments of an Enterprise and Related Information ("FAS 131"). FAS 131 establishes standards for the way that public business enterprises report information about operating segments and requires those enterprises report selected information about operating segments in interim financial reports issued to shareholders. FAS 131 is effective for financial statements for periods beginning after December 15, 1997. The Company will adopt the reporting requirements of FAS 131 in its financial statements for the year ending December 31, 1998. On March 4, 1998, the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants issued Statement of Position No. 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use ("SOP 98-1"). SOP 98-1 requires computer software costs related to internal use software that are incurred in the preliminary project stage should be expensed as incurred. Once the capitalization criteria of SOP 98-1 have been met, external direct costs of materials and services consumed in developing or obtaining internal-use computer software; payroll and payroll-related costs for employees who are directly associated with and who devote time to the internal-use computer software project (to the extent of the time spent directly on the project); and interest costs incurred when developing computer software for internal use should be capitalized. SOP 98-1 is effective for financial statements for fiscal years beginning after December 15, 1998. Accordingly, the Company will adopt SOP 98-1 in its financial statements for the year ending December 31, 1999. The Company does not believe the adoption of SOP 98-1 will have a material effect on the Company's results of operations or financial condition. 31 36 BUSINESS Broadcast.com inc. (formerly AudioNet, Inc.) is the leading aggregator and broadcaster of streaming media programming on the Web with the network infrastructure and expertise to deliver or "stream" hundreds of live and on-demand audio and video programs over the Internet to hundreds of thousands of users. The Company's Web sites offer a large and comprehensive selection of live and on-demand audio and video programming, including sports, talk and music radio, television, business events, full-length CDs, news, commentary and full-length audio-books. The Company broadcasts on the Internet 24 hours a day seven days a week, and its programming includes more than 345 radio stations and networks, 17 television stations and cable networks and game broadcasts and other programming for over 350 college and professional sports teams. The Company licenses such programming from content providers, in most cases under exclusive, multi-year agreements. The Company's Business Services Group provides cost-effective Internet and intranet broadcasting services to businesses and other organizations. These business services include the turnkey production of press conferences, earnings conference calls, investor conferences, trade shows, stockholder meetings, product introductions, training sessions, distance learning telecourses and media events. In addition to its business services, the Company derives revenues from the sale of advertising on its Web sites, including gateway ads with guaranteed click-thrus, channel and event sponsorships and multimedia and traditional banner ads, as well as the sale of radio and television ad spots the Company receives from stations in exchange for broadcasting their programming over the Internet. In March 1998, the Company's Web sites served a daily average of over 400,000 unique users and its principal Web site was ranked in the top 20 among all News/ Information/Entertainment sites according to Media Metrix. The Company believes it has accomplished numerous Internet achievements since its initial live broadcast in September 1995, including the Internet broadcast of the first live commercial radio station, first live sporting event, first live corporate quarterly earnings call and first live stockholders' meeting. The Company's early entrance into the Internet broadcasting market has enabled the Company to establish strong brand recognition for its broadcasts and services and to form relationships with a diverse range of content providers. The Company currently offers content from a variety of sources including radio and television, college and professional sports teams and leagues, production and film studios and record labels. The Company has broadcast over 11,000 live events such as the last three NFL Super Bowls and NCAA Basketball Tournaments, the Stanley Cup Playoffs, the entire 1997-98 season for 24 of the 26 NHL teams, game broadcasts for the entire season of over 300 college teams, the premiere event for the movie "Titanic," Blockbuster Rockfest '97 and backstage interviews from the 1998 Academy Awards Webcast. The Company has also amassed over 50,000 hours of on-demand broadcast programming, including over 2,100 full-length music CDs, sports programming, talk radio and business and media events. Broadcast.com's business services customers include the American Bar Association, AT&T, Charles Schwab, Comerica, GartnerGroup, Harvard University, Intel, Microsoft, Motorola, PR Newswire, Texas Instruments and more than 290 other organizations. Business services broadcasts have originated from 36 states and nine countries. In May 1998, the Company changed its name from AudioNet, Inc. to broadcast.com inc. to better represent the diversity of its programming and services and to continue developing the Company's brand as a complete Internet content aggregator, broadcaster and distributor. INDUSTRY BACKGROUND The Internet has grown rapidly in recent years, spurred by developments such as easy-to-use Web browsers, the availability of multimedia PCs, the adoption of more robust network architectures and the emergence of compelling Web-based content and commerce applications. The broad acceptance of the Internet Protocol ("IP") standard has also led to the emergence of intranets and the development of a wide range of non-PC devices that allow users to access the Internet and intranets. International Data Corporation ("IDC") estimates that the number of Web users worldwide will increase from approximately 69 million at the end of 1997 to approximately 320 million by the end of 2002. Much of the Internet's rapid evolution towards becoming a mass medium can be attributed to the accelerated pace of technological innovation, which has expanded the Web's capabilities and improved users' 32 37 experiences. Most notably, the Internet has evolved from a mass of static, text-oriented Web pages and email services to a much richer environment, capable of delivering graphical, interactive and multimedia content. Prior to the development of streaming media technologies, users could not play back audio and video clips until the content was downloaded in its entirety. As a result, live Internet broadcasts were not possible. The development of streaming media products from companies such as Microsoft and RealNetworks enables the simultaneous transmission and playback (i.e., the Internet broadcast) of continuous "streams" of audio and video content over the Internet and intranets. These technologies have evolved to deliver audio and video over widely used 28.8 kbps narrow bandwidth modems, yet can scale in quality to take advantage of higher speed access that is expected to be provided by xDSL, cable modems and other emerging broadband technologies. Broadcasting audio and video content over the Internet offers certain opportunities that are not generally available from traditional media. Currently available analog technology and government regulations limit the ability of radio and television stations to broadcast beyond certain geographic areas. Radios and televisions are not widely used in office buildings and other workplaces, where Internet access has become commonplace. Traditional business communication tools such as audio conferencing and videoconferencing can be costly, non-targeted, and inconvenient. In addition, traditional broadcasters are limited in their ability to measure or identify in real time the listeners or viewers of a program. By using the Internet, targeted streaming media content can be broadcast to a geographically dispersed audience of customers, suppliers, employees and stockholders at relatively low costs. Internet users can interact with the broadcast content by responding to online surveys, voting in polls and obtaining additional information. In addition, Internet broadcasters can provide highly specific information about a program's audience to content providers, advertisers and users of Internet business services. The convergence of the Internet's capabilities and attributes has accelerated its acceptance as a business tool, leading to rapidly growing economic opportunities in Web-based advertising and business service offerings, including audio conferencing, electronic commerce and video transmission, among others. The Company believes that several challenges must be overcome to realize cost-effective Internet broadcasting: aggregating diverse and compelling content, scaling Internet broadcasts from small to large audiences, deploying new transmission and streaming technologies in a timely manner and providing multimedia advertisements and services. In order to aggregate content, Internet broadcasters must rapidly identify and secure licensing opportunities by demonstrating to content providers broad based distribution and the ability to deliver associated traffic. Successful Internet broadcasters serving a large number of simultaneous users around the clock also need to design, develop and integrate complex network elements, which include extensive bandwidth, streaming licenses, equipment and technical expertise. The rapid evolution of streaming media technologies requires Internet broadcasters to support multiple vendors, an investment which few companies have made. The Company believes, therefore, that a successful Internet broadcaster must develop a well-branded, highly-trafficked Web site which offers compelling content, a network capable of streaming audio and video programming to large audiences 24 hours a day seven days a week and an organization which can deliver quality broadcasting services to advertisers and businesses. THE broadcast.com SOLUTION Broadcast.com inc. (formerly AudioNet, Inc.) is the leading aggregator and broadcaster of streaming media programming on the Web with the network infrastructure and expertise to deliver or "stream" hundreds of live and on-demand audio and video programs over the Internet to hundreds of thousands of users. The Company's Web sites offer a large and comprehensive selection of live and on-demand audio and video programming, including sports, talk and music radio, television, business events, full-length CDs, news, commentary and full-length audio-books. In March 1998, the Company's Web sites served an average daily audience of over 400,000 unique users. The Company's Business Services Group provides cost-effective Internet and intranet broadcasting services to businesses and other organizations. These business services include the turnkey production of press conferences, earnings conference calls, investor conferences, trade shows, stockholder meetings, product introductions, training sessions, distance learning telecourses and media events. Broadcast.com's network infrastructure supports multiple streaming technologies and permits multimedia content to be broadcast efficiently and effectively to hundreds of thousands of users. Broadcast.com 33 38 believes it has established a significant brand for its broadcasts and services on the Internet due to its breadth of content, audience size and distribution capabilities. In addition, the Company's Web sites provide an attractive platform for advertisers seeking to target specific users with rich, compelling advertising solutions. Key elements of the broadcast.com solution include: LARGE AGGREGATION OF STREAMING MEDIA CONTENT Broadcast.com's Web sites offer a large and comprehensive selection of live and on-demand audio and video programming on the Internet, including sports, talk and music radio, television, business events, full-length CDs, news, commentary and audio-books. The Company currently has Internet broadcasting rights for more than 345 radio stations and networks, 17 television stations and cable networks and over 350 college and professional sports teams. The Company has also amassed over 50,000 hours of on-demand broadcast programming, including over 2,100 full-length music CDs, sports programming, talk radio and business and media events. Broadcast content providers include the NFL, the NHL, Major League Baseball, CNN, BBC World Service, SFX Broadcasting, Inc. ("SFX"), Learfield Communications, Inc. ("Learfield Communications") and over 200 record labels. The Company believes that its content aggregation has established www.broadcast.com as a leading destination for Internet users seeking streaming media content and also for multimedia content providers and advertisers seeking to reach large online audiences. This leading position, combined with the Company's broadcast networking capabilities and experience in establishing content relationships, further enables broadcast.com to attract compelling programming. LEADING PROVIDER OF INTERNET BUSINESS SERVICES BROADCASTS The Company leverages its network infrastructure and expertise by providing Internet and intranet broadcasting and distribution services to businesses and other organizations. The Company's business services enable customers to conduct cost-effective Internet or intranet broadcasts of live and on-demand business and educational programming, including press conferences, quarterly earnings conference calls, investor conferences, trade shows, stockholder meetings, product introductions, training sessions, distance learning opportunities and media events, tailored to each such customer's needs. The Company believes that these services differentiate its content and broaden its revenue base. The Company's business services customers include the American Bar Association, AT&T, Charles Schwab, Comerica, GartnerGroup, Harvard University, Intel, Microsoft, Motorola, PR Newswire, Texas Instruments and more than 290 other organizations. Business services broadcasts have originated from 36 states and nine countries. LEADING INTERNET BROADCAST NETWORK INFRASTRUCTURE The Company's network infrastructure and expertise permits the Company to stream hundreds of live and on-demand audio and video programs over the Internet to hundreds of thousands of users. Broadcast.com's distribution network can support over 500 simultaneous live events and includes approximately 580 multimedia servers that support multiple streaming technologies. These servers are linked through direct 45 Mbps (millions of bits per second) and 155 Mbps connections to major Internet backbone providers including GTE Internetworking ("GTEI"), MCI, Sprint Corporation ("Sprint") and UUNET Technologies, Inc. ("UUNET"), which, in turn, connect to over 80% of the downstream ISPs. The Company believes that direct connections to the major backbone providers help to enhance the end-user experience by avoiding the congestion of public peering points which can cause transmission delays or packet loss. The Company believes that its broadcast network infrastructure provides it with the flexibility to implement new software, hardware and system developments without incurring substantial redesign costs or down time. See "--Network." BRANDED DISTRIBUTION The Company believes it has established a leading brand for streaming media content through its Web sites, which have been ranked by Media Metrix as among the Internet's most frequently visited destinations. The Company drives traffic to its sites and enhances brand awareness through strategic relationships with key 34 39 Internet companies. The Company has established increased visibility among Internet users through its relationships with Yahoo!, RealNetworks and Microsoft, among others. See "--Strategic Relationships." DIFFERENTIATED, INTERACTIVE MULTIMEDIA ADVERTISING Broadcast.com offers exclusive and comprehensive audio and video programming that can be targeted to specific audiences and demographics. Additionally, unlike Web sites that offer only text-based banner ads, the Company offers multimedia packages incorporating custom audio and video applications such as gateway ads with guaranteed click-thrus, channel and event sponsorships and multimedia and traditional banner ads. Because the Company receives commercial spots from its radio and television station content providers, the Company also provides advertisers with the opportunity to bundle Web and traditional media advertising. Finally, the Company offers advertisers the ability to insert Internet-only commercials within existing broadcast.com programming. See "--Sales and Marketing--Web Advertising." STRATEGY The Company's objective is to enhance its leadership position in Internet broadcasting by aggregating comprehensive audio and video programming, preferably on an exclusive basis, and providing services enabling the delivery of a broad range of streaming media content over the Internet. Key elements of the Company's strategy include the following: ENHANCE AND EXPAND EXCLUSIVE CONTENT OFFERINGS Broadcast.com seeks to provide the most comprehensive audio and video programming on the Internet. To this end, the Company's objective is to acquire exclusive, long-term Internet broadcast rights to streaming media content provided by radio and television stations, networks and ownership groups, college and professional sports teams and leagues, production and film studios, record labels and other content providers. FURTHER PENETRATE THE BUSINESS SERVICES MARKET The Company's broadcast services enable businesses and other organizations to improve communication with, and the dissemination of information to, customers, suppliers, employees and the investment community. The Company believes that its network infrastructure, combined with the local and global reach of the Internet, provides business services customers with lower transmission costs than conventional broadcast and communications systems and enables these customers to access both large and small target audiences. The Company intends to continue to rapidly expand, enhance and optimize its turnkey broadcasting solutions to continue to enhance the broadcast experience for its business services customers. See "--Sales and Marketing--Business Services." EXPAND NETWORK INFRASTRUCTURE Broadcast.com intends to expand its network infrastructure through the acquisition and deployment of additional network equipment, bandwidth and broadcast scaling technologies. As part of its network expansion strategy, the Company is deploying its multicast network which is designed to provide streaming media content to hundreds of thousands of users simultaneously through one-to-many Internet connections. The Company has entered into agreements with over 30 ISPs and UUNET and is building the first large-scale commercial multicast network, which provides the Company with access to over 400,000 dial-up multicast ports. The Company is developing software to more efficiently handle the broadcast of hundreds of simultaneous live events and has developed proprietary software to handle broadcast blackouts, remote monitoring and remote server access. Although streaming video over the Internet does not currently offer broadcast television equivalent quality to a broad base of users, the Company believes that the quality of and demand for Internet video broadcasts will continue to improve as broadband Internet access technologies such as xDSL and cable modems become more commonly available. Further, the Company believes that video is an important and essential element in the future of Internet broadcasting. Accordingly, the broadcast.com 35 40 network has been video enabled and supports multiple leading video streaming technologies including RealNetwork's RealVideo and Microsoft's NetShow. See "--Network." ENHANCE BRAND AWARENESS In order to maximize its broadcast audience, broadcast.com (formerly AudioNet) seeks to co-brand its programming with other popular content providers in addition to providing access to its programming directly through its own Web sites. These relationships typically allow the co-branding partner to present broadcast.com's or its partners' programming through a link on the partner's Web site. To date, the Company has focused on co-branding its sports, music and entertainment content and intends to expand this effort to cover its news and business programming, talk shows and audio-books. Current co-branding arrangements include a recent Yahoo! co-promotion agreement which gives the Company prominent co-branded access to Yahoo!'s audience. Other co-branding relationships include RealNetworks, Microsoft, CNN, NHL and USA Today. In addition, the Company's radio and television content providers typically grant the Company a certain number of weekly commercial spots, which the Company can use for self-promotion. Radio and television stations also extend brand awareness for broadcast.com through on-air mentions during their broadcasts. CAPTURE AND DEVELOP EMERGING REVENUE OPPORTUNITIES Broadcast.com intends to capture strategic revenue growth opportunities as user demand increases and technological developments become more widely adopted. Such opportunities are expected to include pay-per-listen/view applications, fee-based sharing of the Company's exclusive content on other Web sites and electronic commerce opportunities. PROGRAMMING The Company believes its Web sites offer a large and comprehensive selection of live and on-demand audio and video programming on the Internet, including live continuous broadcasts of over 345 radio stations and networks, 17 television stations and cable networks, game broadcasts of more than 350 college and professional sports teams and over 50,000 hours of on-demand programming, including over 2,100 full-length music CDs, sports programming, talk radio and business and media events. The www.broadcast.com Web site is organized into content channels. The following is a description of certain elements of broadcast.com's programming, illustrating the breadth and depth of its content: SPORTS The Company believes that it provides the most comprehensive live and on-demand broadcasting of sporting events on the Internet. The Company's early entrance into Internet broadcasting has allowed it to establish relationships with a broad range of sports teams and leagues. Broadcast.com has the Internet broadcasting rights for certain sporting events, including football and basketball in most cases, for 98 colleges and universities participating in NCAA Division IA athletics, over 95% of which are on an exclusive basis. In addition, the Company is the exclusive streaming media partner for 24 of the 26 NHL teams and broadcasts on behalf of Major League Baseball most regular season and playoff games. The Company has handled the Internet broadcast for the last three Super Bowls, the 1998 Kentucky Derby and the Boston Marathon. In the case of such special events, the Company often broadcasts complementary programming such as stadium announcer press box feeds and full-length post-game press conferences with players and coaches in lieu of, or in addition to, the game broadcast. Broadcast.com typically archives audio game broadcasts until the next game is played so users can access sporting events they may have missed. In addition, a "Great Games" section contains archives of a wide variety of classic match-ups for fans to access at any time. The Company is expanding its sports coverage to include video programming as well, including recent arrangements with the NHL and PGA TOUR. 36 41 The following table illustrates the breadth of the sports content the Company is currently broadcasting, or has broadcast. broadcast.com SPORTS PROGRAMMING NATIONAL HOCKEY LEAGUE Anaheim Mighty Ducks Boston Bruins Buffalo Sabres Calgary Flames Carolina Hurricanes Colorado Avalanche Dallas Stars Detroit Red Wings Edmonton Oilers Florida Panthers Los Angeles Kings Montreal Canadiens New Jersey Devils New York Islanders New York Rangers Ottawa Senators Phoenix Coyotes Pittsburgh Penguins San Jose Sharks St. Louis Blues Tampa Bay Lightning Toronto Maple Leafs Vancouver Canucks Washington Capitals MAJOR LEAGUE BASEBALL Anaheim Angels Arizona Diamondbacks Baltimore Orioles Chicago White Sox Cincinnati Reds Cleveland Indians Houston Astros New York Mets New York Yankees Oakland Athletics Philadelphia Phillies San Diego Padres San Francisco Giants St. Louis Cardinals Texas Rangers GOLF PGA TOUR PGA of America Senior Tour USGA Golf Majors Nike Tour MAJOR LEAGUE SOCCER Chicago Fire Colorado Rapids Columbus Crew D.C. United NY/NJ Metrostars Dallas Burn Kansas City Wizards Los Angeles Galaxy Miami Fusion F.C. New England Revolution San Jose Clash Tampa Bay Mutiny AUTO RACING Selected In-car radio and events: ARCA CART NASCAR Winston Cup NASCAR Busch Series Toyota Atlantic PRO FOOTBALL 1997 NFL Training Camp Arena Football Canadian Football League 1997 Grey Cup (CFL) NFL Europe - Audio and Video NFL pre- and post-game coverage Super Bowls XXX, XXXI and XXXII HORSE RACING Belmont Stakes Kentucky Derby Preakness Stakes Breeder's Cup Keeneland Lone Star Park Racing Meadowlands Oaklawn Santa Anita PRO BASKETBALL 1996 NBA Draft 1997 Continental Basketball Association Finals and All-Star Game American Basketball League Finals and All-Star Game NBA Championship Press Conferences OTHER SPORTS COVERAGE Boston Marathon Continental Indoor Soccer League HBO World Championship Boxing: Prince Hamed vs. Kevin Kelly Minor League Baseball Minor League Hockey NBC 1996 Atlanta Olympics Interviews Tour de France United States Olympic Committee Press Conferences NCAA COLLEGES AND UNIVERSITIES Air Force Academy Falcons Alabama Crimson Tide Alaska-Fairbanks Nanooks Arizona Wildcats Arizona State Sun Devils Arkansas Razorbacks Baylor Bears Boise State Broncos Boston University Terriers Brigham Young Cougars Bucknell Bison Cal-Berkeley Bears Cal State Fullerton Titans Central Florida Golden Knights Central Michigan Chipawas Clemson Tigers Colorado Buffaloes Connecticut Huskies Cornell Big Red Dayton Flyers Denver Pioneers Duke Blue Devils East Carolina Pirates Florida Gators Florida State Seminoles Fresno State Bulldogs George Washington Colonials Georgetown Hoyas Georgia Bulldogs Georgia Tech Yellow Jackets Harvard Crimson Hawaii Rainbows Houston Cougars Idaho Vandals Illinois State Redbirds Illinois-Chicago Flames Indiana Hoosiers Iowa Hawkeyes Iowa State Cyclones James Madison Dukes Kansas Jayhawks Kansas State Wildcats Kentucky Wildcats Lamar Cardinals Long Beach State 49ers Louisiana State Tigers Louisiana Tech Bulldogs Louisville Cardinals Marquette Golden Eagles Marshall Thundering Herd Maryland Terrapins Massachusetts Minutemen Memphis Tigers Miami (Florida) Hurricanes Miami (Ohio) Redhawks Michigan State Spartans Mississippi Rebels Mississippi State Bulldogs Missouri Tigers Naval Academy Midshipmen UNC Tar Heels UNC-Charlotte 49ers Nebraska Cornhuskers New Hampshire Wildcats New Mexico Lobos North Carolina St. Wolfpack North Texas Eagles Northern Arizona Lumberjacks Notre Dame Fighting Irish Ohio Bobcats Oklahoma Sooners Oklahoma State Cowboys Oregon Ducks Oregon State Beavers Penn State Nittany Lions Pepperdine Waves Pittsburgh Panthers Princeton Tigers Purdue Boilermakers Rhode Island Rams Rice Owls Rutgers Scarlet Knights San Diego State Aztecs San Francisco Dons San Jose State Spartans SE Louisiana Lions Seton Hall Pirates SMU Mustangs South Carolina Gamecocks South Florida Bulls Southern Miss. Golden Eagles St. John's Red Storm St. Louis Billikens Stanford Cardinal SW Louisiana Cajuns Syracuse Orangemen TCU Horned Frogs Tennessee Volunteers Texas Longhorns Texas-El Paso Miners Texas A&M Aggies Texas Tech Red Raiders Toledo Rockets Tulane Green Wave Tulsa Hurricanes UCLA Bruins UNLV Rebels USC Trojans Utah Utes Vanderbilt Commodores Villanova Wildcats Virginia Cavaliers VA Commonwealth Rams Virginia Tech Hokies Wake Forest Demon Deacons Washington Huskies Washington State Cougars West Virginia Mountaineers Western Kentucky Hilltoppers Western Michigan Broncos William and Mary Tribe Wisconsin Badgers Wright State Raiders Wyoming Cowboys 37 42 RADIO Broadcast.com is the leading Internet broadcaster of radio programming, and has rights to broadcast more than 345 stations based in over 110 cities, in most cases under exclusive multi-year agreements. The Company's relationships with radio stations and networks provide it with content from 18 of the nation's top 20 radio markets. The Company has benefited from its ability to license radio content from ownership groups, such as a group of over 40 stations now part of Clear Channel Communications and a group of 72 stations which will be part of Capstar Broadcasting Corporation ("Capstar") following completion of its acquisition of SFX. Broadcast.com's radio programming spans all formats, from talk shows and news programs to country music and classic rock. The Company's audience benefits from the ability to receive local radio programming in-office and from outside the listener's geographic area, allowing users to select from hundreds of stations and dozens of formats. Broadcast.com archives selected talk radio programming so users can listen to their favorite shows and hosts when unable to listen to the live broadcast. Thousands of hours are currently available on demand for popular nationally syndicated hosts including Dr. Laura Schlessinger and Jim Rome. TELEVISION Broadcast.com has begun expanding its content aggregation strategy into television programming. The Company currently has video Internet broadcasting rights for 17 stations and cable networks, including Court TV and programming originated by affiliated local television stations such as WFAA-TV Dallas, one of ABC's top-rated local news stations. The Company provides archives of newscasts so users can access the latest information on breaking news 24 hours a day seven days a week from their home or office. The Company believes that the emergence of broadband Internet access technologies such as xDSL, cable modems and other technologies have the potential to increase the demand for and quality of Internet-delivered video content, leading to a convergence of the Internet and television. BUSINESS The Company is a leading aggregator of audio and video media business related content. In addition to the thousands of hours of events and special programming offered live and on demand from the Company's business services customers, the Company has also aggregated content from other sources to provide a complete business content channel. The Company offers hourly stock market updates, video interviews and features from CNBC/Dow Jones Business Video, business shows such as "Wall Street Review" and other business programming from its selection of radio and television content providers. Broadcast.com has broadcast quarterly earnings conference calls from companies such as Intel, Texaco, Inc. ("Texaco"), Texas Instruments and Yahoo!; product launches from Asymetrix Corporation ("Asymetrix"), Microsoft and Sybase, Inc. ("Sybase"); and keynote speeches from industry leaders such as Intel's Andy Grove, Hewlett Packard's Lewis Platt, Microsoft's Bill Gates and Dell's Michael Dell. Broadcast.com also provides supplemental data to accompany Internet broadcasts, such as proprietary database registration services and real-time audience measurement. See "--Business Services." ENTERTAINMENT The Company provides Internet broadcasting services to entertainment and media companies, film studios, broadcast networks and other content providers. Content providers utilize broadcast.com's distribution network, technology, services, Web site promotions and sizable audience base to deliver and drive traffic to high profile events. Examples include: all live and on-demand Webcasts of 1998 Academy Awards coverage with ABC.com, including red-carpet arrivals and backstage interviews in their entirety (which received approximately 600,000 video views), "The ER Live" Webcast, a co-venture between Warner Bros. Online and NBC Multimedia, Inc. for the 1997 season premiere for their top-rated television program and numerous broadcasts of coverage from movie premieres and parties, including "Titanic." 38 43 MUSIC Through the broadcast.com Jukebox, the Company believes it offers the largest selection of full-length CDs available for listening on demand over the Internet, currently numbering over 2,100 titles. The Company has entered into agreements with over 200 record labels to broadcast certain of their CDs in their entirety. Interscope Records recently entered into an agreement to establish broadcast.com as Interscope's preferred Internet broadcasting solution. Broadcast.com hosts frequent "listening parties" which feature scheduled CD broadcasts of many of Interscope's artists on www.broadcast.com, including No Doubt and the Wallflowers. In addition, the Company plans to broadcast an Interscope Internet-only radio station that will be available 24 hours a day and feature Interscope artists and special events. To expand its Jukebox selections, the Company intends to continue to form relationships with leading record companies. Broadcast.com and College Music Journal have recently developed The Internet Broadcast Chart, a compilation of the most frequently streamed songs from a representative sampling of Internet broadcasters. Current customer feedback indicates that listeners use the broadcast.com Jukebox as a way to sample new music and, in turn, purchase CDs that they enjoy. Accordingly, the Company believes that its Jukebox will provide an attractive platform for record labels and musicians to promote and sell their recordings over the Internet through broadcast.com. For example, Willie Nelson has recently teamed with broadcast.com in a co-promotion deal with Yahoo! and CDnow to promote and sell his latest studio recording for an exclusive period on the Internet prior to its general public release. OTHER PROGRAMMING The Company has aggregated thousands of hours of live and on-demand content in several other channels, providing broadcast.com users with a comprehensive selection of streaming media programming on the Company's Web sites. An illustrative list follows:
CHANNEL EXAMPLES ------- -------- AudioBooks Over 360 full length audio-books including: Charles Dickens' "The Lawyer and the Ghost" Gore Vidal's "Kalki" Education Distance Learning from University of Texas System and Rutgers University John F. Kennedy School of Government at Harvard University University of Wisconsin Distance Learning Telecourse News BBC World Service CNN Audioselect Over 47 leading news radio and television stations across the country Public Affairs C-SPAN White House Millennium Series with Stephen Hawking U.S. Department of State Daily Press Briefings Special Interest policescanner.com Best of Dr. Laura Schlessinger Art Bell Spiritual Focus on the Family with James Dobson Family Life Today For Faith and Family Technology CMP Net Insider The Computer Broadcast Network The Silicon Alley Reporter
39 44 BUSINESS SERVICES The Company's Business Services Group provides cost-effective Internet and intranet broadcasting services to businesses and other organizations. These business services include turnkey production of press conferences, earnings conference calls, investor conferences, tradeshows, stockholder meetings, product introductions, training sessions, distance learning telecourses and media events. Since January 1997, the Company has broadcast over 1,000 business services events for customers such as the American Bar Association, AT&T, Charles Schwab, Comerica, GartnerGroup, Harvard University, Intel, Microsoft, Motorola, PR Newswire, Texas Instruments and more than 290 other organizations. Business services broadcasts have originated from 36 states and nine countries. The Company's broadcast services enable businesses and other organizations to improve communication with, and the dissemination of information to, customers, suppliers, employees and the investment community by: COST-EFFECTIVELY REACHING THE IN-OFFICE USER The proliferation of multimedia enabled networked personal computers and other Internet-attached devices in the workplace has created the opportunity for businesses to use the Internet and intranet to cost-effectively broadcast streaming media communications to access both large and small targeted audiences. The Company is able to broadcast events to users who can view and listen to such broadcasts uninterrupted while continuing to perform other tasks on their computer. DELIVERING TURNKEY BROADCASTING SOLUTIONS The Company delivers turnkey Internet broadcasting solutions by providing analysis, telecommunications and, if necessary, on-site equipment and personnel to its business services customers. Based on the expertise gained from broadcasting more than 1,000 business services and over 10,000 other live events, the Company determines the most effective way to capture the broadcast feed, whether by satellite, coupler or on-site with a team of its engineers. Once captured, the broadcast feed is then integrated with other sources such as Powerpoint presentations and computer demo screens. Potential Internet congestion is bypassed by using a private point-to-point connection to the Company's broadcast center. The broadcast is then distributed by streaming media to the Internet audience via the Company's distribution network, or, if desired, restricted to a limited audience utilizing password-protected access or player authentication. In addition, the Company can supply its customers with the total number of devices receiving the broadcast, the length of time such devices are receiving the broadcast and the broadcast quality. See "--Network." The Company has initiated pay-per-view broadcasts of major conferences for GartnerGroup, as well as the introduction of their own branded Webcast channel, "GartnerGroup Live!" The Company broadcasts on behalf of Microsoft "DevTalk Live," a developer seminar, and Microsoft TV, a channel offering information technology business solutions. The Company's innovative broadcast services provide World Championship Wrestling's Web site additional revenue opportunities through exclusive Internet-only pay-per-view broadcasts. Broadcast.com's turnkey solutions are being used by the University of Wisconsin (Madison) to offer graduate level distance learning telecourses. Broadcast.com also coordinated all of the logistics associated with the first-ever Internet broadcast from China on behalf of Intel. INNOVATIVELY ENHANCING THE BROADCAST EXPERIENCE In order to provide business services customers with immediate feedback and to enhance the users' broadcast experience, users can interact with the broadcast content by responding to online surveys, voting in polls and obtaining additional information. For example, the Company has broadcast over the Internet the last three Bell & Howell Company ("Bell & Howell") annual stockholders' meetings. Stockholders can listen to meetings over the Internet and deliver proxies online. In addition, the effectiveness of broadcasts can be maximized by delivering text transcriptions, graphics, presentations and other supplemental information during the broadcasts. Broadcast.com business services broadcasts can also provide customers with real-time user information. Utilizing the Company's proprietary database registration services as an enhancement to the broadcast, corporate customers can identify the users accessing their broadcasts in real time. 40 45 The depth and breadth of broadcast.com's experience and expertise includes numerous other business services events. An illustrative selection includes: BUSINESS AND FINANCIAL SHOWS Calico Technology Seminar Series Catch a Rising Stock Charles Schwab Special Event CNBC/Dow Jones Business Video news updates Money Go Round Money Talk Tiger Investments: After Hours Trading DISTANCE LEARNING American Academy of Ophthalmology Events American Bar Association Tax May Meeting American Society of CW Web Education Network Microsoft SQL Server in Higher Education State Bar of Texas: New Developments in Summary Judgement U.S. Chamber of Commerce Quality Learnings Series UT Southwestern AIDS Research Presentation EARNINGS ANNOUNCEMENTS/INVESTOR RELATIONS America Online AT&T MicroAge Motorola SoftQuad Texaco Yahoo! KEYNOTE SPEECHES AT&T WorldNet Service: Former President Tom Evslin Compaq: Tradeshow events at ISPCON '98 Dell Computer: Michael Dell at Fall Internet World Hewlett Packard: CEO Lewis Platt at Spring Internet World IBM: John Brisbane at the WWW7 Conference Intel: CEO Dr. Andrew Grove Microsoft: Bill Gates, COMDEX PRODUCT LAUNCHES Ameritech: Clearpath Wireless Launch Asymetrix: Cool Tools Bell & Howell: Scanner Division General Motors Chevy Malibu Announcement Microsoft: Internet Explorer 4.0 Launch and NetShow 2.0 Launch Silicon Graphics Workstation Launch Sybase: Adaptive Server Launch PUBLIC RELATIONS Chicago Tribune Interactive: George Lazarus Communications Week: Meet the Editor Digital & Microsoft: Delivering Enterprise Solutions General Motors: Global Update News Conference MSNBC: Meet the Editors NationsBank and BankAmerica merger announcement Wall Street Journal Media Coffee SEMINARS Dell: Breakfast With Dell GartnerGroup Forums Harvard Seminar on Internet Society IBM: Teleconference for Internet Developers Price Waterhouse Forums and Seminars SAS Institute: Data Mining Forum Texas Instruments Forum '97 TRADE SHOWS/CONFERENCES ComNet '98 Internet World MacWorld Expo '97 National Association of Broadcasters: '97 and '98 National Investor Relations Institute: Annual Business Meeting NetWorld + Interop '97 SuperComm '97 SALES AND MARKETING The Company sells business services, Web advertising and traditional media advertising through its direct sales force and through reseller arrangements. The Company currently maintains distinct sales departments for each of these three revenue sources. In addition, the Company maintains a marketing and public relations department to promote the broadcast.com brand and its services. BUSINESS SERVICES To date, the Company has focused its business services marketing efforts on larger companies in varied industries. Based on the success of these direct sales efforts, broadcast.com believes that it can successfully market its services to medium-sized and smaller businesses as well. As a result, broadcast.com is taking advantage of existing distribution channels through reseller arrangements with vendors such as PR Newswire, one of the largest global and media relations distribution networks, and Trade Show Central to market these services to a broad range of potential customers. The Company seeks to expand its business services customer base and broadcast offerings by targeting industries and businesses that are early adopters of technological advancement. The hospitality industry and the growing popularity of corporate intranets and distance learning opportunities have provided new vertical markets for broadcast.com's streaming media solutions. The Company is expanding its sales team, adding directors and account executives in strategic regions across the United States to continue delivering personalized service and target new and emerging market opportunities. 41 46 WEB ADVERTISING The Company's wide variety of content offers the ability to sell advertising packages targeted to specific audiences and demographics. Additionally, unlike Web sites that offer only text-based banner advertisements, the Company offers multimedia packages incorporating custom audio and video applications such as gateway ads with guaranteed click-thrus, channel and event sponsorships and multimedia and traditional banner ads. Gateway Ads with Guaranteed Click-Thrus. Broadcast.com provides advertisers the opportunity to incorporate gateway ads into their Internet advertising packages. Gateway ads are audio or video clips that are inserted at the lead of selected programming, lasting from 15 to 30 seconds, that play prior to the audio or video content that has been selected by the user. A guaranteed click-thru is a pop-down browser window that automatically launches at the beginning of the gateway ad displaying an advertiser's Web site or other targeted information. Gateway ads are also available without guaranteed click-thrus. The Company currently sells these advertisements at a higher CPM than traditional banner ads because of their unique nature. Advertisers that have purchased gateway ads with guaranteed click-thrus include Bell Atlantic, CompareNet and 3Com. Channel and Event Sponsorships. The Company offers advertisers the ability to sponsor one or more of its programming channels or events, enabling advertisers to brand entire sections of the Company's Web sites. A channel or event sponsorship can involve the rotating and permanent placement of buttons, logos and Web site links, integrated gateway ads, multimedia banner ads and mention on the broadcast.com home page, channel home page and email newsletter (which has over 285,000 current subscribers in over 150 countries). These sponsorships may also include promotional advertisements utilizing broadcast.com's radio and television spot inventory. Event sponsorships have been purchased by CBS SportsLine, RCA and Microsoft. The Company typically sells these packages on a channel-by- channel or event-by-event basis. See "--Traditional Media Advertising." Multimedia and Traditional Banner Ads. The Company offers advertisers the ability to integrate audio and video into their text and graphics banner ads. The multimedia portion of the banner plays when the user clicks on the banner. In addition, visitors to the Company's Web sites are able to move to advertisers' Web sites while continuing to listen to or watch broadcast.com audio or video programming. Because audio and video can increase the impact of a banner ad, these packages are sold at a higher CPM than traditional banner ads. Purchasers of multimedia or traditional banner ads include Ford Motor Company, Citibank, N.A., Music Boulevard and Quick & Reilly. TRADITIONAL MEDIA ADVERTISING As compensation for broadcasting radio and television station feeds, the Company contractually receives on-air inventory of radio or television ad spots or direct cash payments. The Company sells the majority of these advertising spots to traditional radio and television advertisers. Premiere Radio Networks is currently selling most of the radio ad spot inventory on behalf of the Company. As of June 15, 1998, the Company had over 3,500 radio spots per week available for sale. MARKETING The Company's marketing efforts promote the broadcast.com brand and the Company's audio and video programming and business services. The Company utilizes traditional media vehicles for marketing and promotional purposes, including radio, television and print advertisements, as well as marketing arrangements with other leading Web sites, gateway ads on the Company's Web sites and email newsletters. Radio and Television. The Company's radio and television content providers typically grant the Company a certain amount of commercial spot inventory. The commercial spots that the Company receives as part of its radio and television hosting activities can be used by the Company for promotion of the Company's programming and services. Radio and television stations also extend brand awareness for broadcast.com through required on-air mentions during their broadcasts. 42 47 Print and Other Media. In exchange for Internet broadcasts of sporting events, colleges and universities provide advertising space for broadcast.com in various campus publications including game-day programs, newsletters and alumni magazines. Broadcast.com has also received advertising space in the official NCAA Basketball Tournament Final Four program and the College Hockey Guide. In addition, the Company has received billboard space at the NCAA Basketball Tournament Fanfest as well as at other sporting events. Stadium public address announcements during certain sporting events also extend the Company's brand awareness. The Company has also placed advertisements in targeted trade magazines including Broadcasting and Cable and Online Access. Online Marketing. The Company exchanges banner ads with other high traffic Web sites such as Infoseek, Tripod, Talk Cities, Go2Net, Los Angeles Times, CBS SportsLine, Music Boulevard, Games Domain and Lycos. The Company uses these opportunities to highlight its high profile live events and drive traffic to revenue generating channels. The banner ads are also used to promote business services customers' events in order to attract larger audiences. The Company extends brand awareness on the Web by requiring that its logo and distinctive "listen/view button" be placed prominently on the Web pages of broadcast partners. A number of search engines and live events guides feature broadcast.com such as CNET Events, Yahoo! Events, NetGuide Live, Microsoft's NetShow Gallery and Your Personal Net. Additionally, RealNetwork's Timecast Web site features broadcast.com programming, often as the "Event of the Day." Gateway Ads and Email Newsletters. The Company utilizes gateway ads to promote upcoming broadcast.com content offerings. The Company also distributes free semi-weekly email newsletters to over 285,000 registered subscribers in 150 countries which highlight events for the upcoming week. In addition, the Company utilizes the newsletter distribution list to alert broadcast.com users to major breaking news stories that are being broadcast on the Company's Web sites. The Company also distributes sports-focused and music-focused newsletters, and is developing additional specialty newsletters targeted to those interested in particular programming channels. STRATEGIC RELATIONSHIPS Broadcast.com has entered into strategic relationships with content providers, key Internet companies and technology and bandwidth providers. CONTENT PROVIDERS To expand its content offerings, broadcast.com has established relationships with various strategic partners. The Company believes that licensing content from third parties is preferable to creating content because such licensed content has existing demand and is self-replenishing. Key relationships include BBC World Service, CNN, Host Communications, Learfield Communications, the NHL, Major League Baseball, a group of over 40 stations now part of Clear Channel and a group of 72 stations which will be part of Capstar following completion of its acquisition of SFX. KEY INTERNET COMPANIES Broadcast.com leverages its content aggregation and Internet broadcast network through strategic relationships with key Internet companies to increase traffic and brand awareness. Broadcast.com and Yahoo!, an equity investor in the Company, recently agreed to establish a co-branded area on the Yahoo! Web site at sports.yahoo.com to make available broadcast.com's programming and link to listen/view pages on the www.broadcast.com Web site. Broadcast.com also has an agreement with RealNetworks which provides for the placement of a link on the drop-down menu item for RealNetworks' RealPlayer and RealPlayer Plus streaming products to the Company's home page and five key channels on its sites. The Company believes that RealNetworks' streaming products have been downloaded more than 43 million times. In addition, Microsoft selected broadcast.com as one of 34 platinum channels on its latest Internet Explorer Web browser, which is used by millions of people to navigate the Web. The Company believes these platinum channels will be preset, in some form, on all versions of the new Windows '98 Operating System. 43 48 TECHNOLOGY AND BANDWIDTH PROVIDERS In order to scale with future audience growth, broadcast.com has entered into an agreement with UUNET under which the Company acquired access to 155Mbps of bandwidth for unicasting and additional bandwidth for multicasting on UUNET's network which can be configured to allow up to 500 simultaneous live events. In addition, UUNET is part of the Company's multicasting buildout strategy. See "--Network--Distribution." Broadcast.com and Motorola have signed a letter of intent to create a joint venture for the deployment of audioSENSE, a front-end audio player which is designed to make it easier for visitors to the www.broadcast.com Web site to navigate the Radio and Jukebox channels. For example, audioSENSE enables users to create personal radio dials, selecting stations by location and genre. Users can also create personal presets, similar to those on a car radio, that make it easier to find their favorite radio stations. Through the audioSENSE player, radio stations will be able to deliver interactive advertising products over the Internet which the Company believes will create a new revenue stream for broadcasters on the broadcast.com network. NETWORK In order to support hundreds of thousands of simultaneous streaming media users on the Internet, the Company has developed and implemented an extensive streaming media aggregation and distribution network, designed to ensure the broadcast quality of the content received from broadcasters and distributed to users. AGGREGATION The Company aggregates content from broadcasters through satellite feeds and direct network connections from content providers to its broadcast center where it is monitored for broadcast quality and encoded for delivery over the Internet. The satellite receiving system is currently comprised of 22 satellite dishes which can receive hundreds of simultaneous feeds from traditional broadcasts and live events. The Company also receives radio and television signals over a private network comprised of frame relay and T1 point-to-point connections. This private network is designed to efficiently and securely feed content directly from broadcasters to the Company's headquarters, thus avoiding the congestion of public peering points on the Internet which can cause transmission delays or packet loss. The Company believes that the use of a private aggregation network enables the Company to control the broadcast quality of the content it receives. DISTRIBUTION Currently, the Company employs both unicasting (one user per Company originated stream) and multicasting (many users per Company originated stream) technologies to distribute streaming media content to users over the Internet. The Company's unicast network can provide content to tens of thousands of simultaneous users through 580 multimedia servers which support multiple streaming technologies. These servers are linked through direct 45Mbps and 155 Mbps connections to major Internet backbone providers including GTEI, MCI, Sprint and UUNET, which, in turn, connect to over 80% of the downstream ISPs. The Company believes that direct connections to these major backbone providers enhances the user experience by avoiding the congestion of public peering points which can cause transmission delays or packet loss. Although the Company anticipates that unicasting will remain essential for archived and on-demand applications, it believes that multicasting, or similar scaling technology, is essential to the future of large-scale Internet broadcasting to a mass audience. The Company believes multicasting is especially suited to audio and video broadcasting and will be increasingly used in the delivery of streaming media content. Currently, the Company is deploying its multicast network which is designed to provide streaming media content to hundreds of thousands of users simultaneously through one-to-many Internet connections. The Company has entered into agreements with over 30 ISPs and UUNET and is building the first large-scale commercial multicast network which provides the Company access to over 400,000 dial-up multicast ports. 44 49 COMPETITION The market for Internet broadcasting and services is highly competitive and the Company expects that competition will continue to intensify. The Company competes with (i) other Web sites, Internet portals and Internet broadcasters to acquire and provide content to attract users, (ii) videoconferencing companies, audio conferencing companies and Internet business services broadcasters, (iii) online services, other Web site operators and advertising networks, as well as traditional media such as television, radio and print, for a share of advertisers' total advertising budgets and (iv) local radio and television stations and national radio and television networks for sales of advertising spots. There can be no assurance that the Company will be able to compete successfully or that the competitive pressures faced by the Company, including those described below, will not have a material adverse effect on the Company's business, results of operations and financial condition. Competition among Web sites that provide compelling content, including streaming media content, is intense and is expected to increase significantly in the future. The Company competes against a variety of businesses that provide content through one or more mediums, such as print, radio, television, cable television and the Internet. Traditional media companies have not established a significant streaming media presence on the Internet and may expend resources to establish a more significant presence in the future. These companies have significantly greater brand recognition and financial, technical, marketing and other resources than the Company. The Company competes generally with other content providers for the time and attention of users and for advertising revenues. To compete successfully, the Company must license and then provide sufficiently compelling and popular content to generate users, support advertising intended to reach such users and attract business and other organizations seeking Internet broadcasting and distribution services. The Company believes that the principal competitive factors in attracting Internet users include the quality of service and the relevance, timeliness, depth and breadth of content and services offered. In the market for Internet distribution of radio and television broadcasts, the Company competes with ISPs, radio and television stations and networks that originate their own Internet broadcasts. RealNetworks and MCI announced a strategic alliance in August 1997 involving the introduction of a service currently called Real Broadcast Network that delivers audio and video broadcasts over the Internet. In the area of sports content, the Company competes with CBS SportsLine and ESPNET SportsZone. The Company also competes for the time and attention of Internet users with thousands of Web sites operated by businesses and other organizations, individuals, governmental agencies and educational institutions. For example, certain Web sites may provide a collection of links to other Web sites with streaming media content. The Company expects competition to intensify and the number of competitors to increase significantly in the future. In addition, as the Company expands the scope of its content and services, it will compete directly with a greater number of Web sites and other media companies. Because the operations and strategic plans of existing and future competitors are undergoing rapid change, it is extremely difficult for the Company to anticipate which companies are likely to offer competitive services in the future. The Company competes with videoconferencing and teleconferencing companies, along with companies that provide Internet broadcasting services to businesses and other organizations. Principal competitive factors include price, transmission quality, transmission speed, reliability of service, ease of access, ease of use, customer support, brand recognition and operating experience. The Company's current and potential competitors may have significantly greater financial, technical and marketing resources, longer operating histories and greater brand recognition. Traditional videoconferencing and teleconferencing may allow for a more interactive user experience. As prices for videoconferencing systems decrease and transmission quality increases, the installed base of videoconferencing systems may increase. Companies that provide media streaming software may also enter the market for Internet broadcast services. If media streaming technology and backbone bandwidth becomes more readily available to companies at low prices, the Company's customers may decide to broadcast their own programming. In particular, local exchange carriers, ISPs and other data communication service providers may compete in the future with a portion of or all of the Company's business services as technological advancements facilitate the ability of these providers to offer effectively these services. There can be no assurance that the Company will be able to compete successfully against current or future competitors for Internet broadcast services. 45 50 The Company also competes with online services, other Web site operators and advertising networks, as well as traditional media such as television, radio and print for a share of advertisers' total advertising budgets. The Company believes that the principal competitive factors for attracting advertisers include the number of users accessing the Company's Web sites, the demographics of the Company's users, the Company's ability to deliver focused advertising and interactivity through its Web sites and the overall cost-effectiveness and value of advertising offered by the Company. There is intense competition for the sale of advertising on high-traffic Web sites, which has resulted in a wide range of rates quoted by different vendors for a variety of advertising services, making it difficult to project levels of Internet advertising that will be realized generally or by any specific company. Any competition for advertisers among present and future Web sites, as well as competition with other traditional media for advertising placements, could result in significant price competition. The Company believes that the number of companies selling Web-based advertising and the available inventory of advertising space have recently increased substantially. Accordingly, the Company may face increased pricing pressure for the sale of advertisements. Reduction in the Company's Web advertising revenues would have a material adverse effect on the Company's business, results of operations and financial condition. The Company competes for traditional media advertising sales with national radio and television networks, as well as local radio and television stations. Local radio and television content providers and national radio and television networks may have larger and more established sales organizations than the Company. These companies may have greater name recognition and more established relationships with advertisers and advertising agencies than the Company. Such competitors may be able to undertake more extensive marketing campaigns, obtain a more attractive inventory of ad spots, adopt more aggressive pricing policies and devote substantially more resources to selling advertising inventory. The Company's traditional media advertising sales efforts depend on the Company's ability to obtain an inventory of ad spots across the top radio and television markets. If the Company is unable to obtain such inventory, it could have a material adverse effect on the Company's business, results of operations and financial condition. GOVERNMENTAL REGULATION Although there are currently few laws and regulations directly applicable to the Internet, it is likely that new laws and regulations will be adopted in the United States and elsewhere covering issues such as music licensing, broadcast license fees, copyrights, privacy, pricing, sales taxes and characteristics and quality of Internet services. It is possible that governments will enact legislation that may be applicable to the Company in areas such as content, network security, encryption and the use of key escrow, data and privacy protection, electronic authentication or "digital" signatures, illegal and harmful content, access charges and retransmission activities. Moreover, the applicability to the Internet of existing laws governing issues such as property ownership, content, taxation, defamation and personal privacy is uncertain. The majority of such laws were adopted before the widespread use and commercialization of the Internet and, as a result, do not contemplate or address the unique issues of the Internet and related technologies. Any such export or import restrictions, new legislation or regulation or governmental enforcement of existing regulations may limit the growth of the Internet, increase the Company's cost of doing business or increase the Company's legal exposure, which could have a material adverse effect on the Company's business, financial condition and results of operations. By distributing content over the Internet, the Company faces potential liability for claims based on the nature and content of the materials that it distributes, including claims for defamation, negligence or copyright, patent or trademark infringement, which claims have been brought, and sometimes successfully litigated, against Internet companies. While the CDA generally states that entities like the Company, which provide interactive computer services, shall not be treated as the publisher or speaker with respect to third party content they distribute, the scope of the CDA's definition and limitations on liability have not been widely tested in court. Accordingly, the Company may be subject to such claims. To protect itself from such claims, the Company maintains media liability insurance as well as general liability insurance. Additionally, in the Company's agreements with content providers, such content providers generally represent that they have the rights to distribute and transmit their programming on the Internet and, in most cases, indemnify the Company for liability based on a breach of such representations and warranties. The indemnification arrangements and the Company's media and general liability insurance may not cover all potential claims of 46 51 this type or may not be adequate to indemnify the Company for any liability that may be imposed. Any liability not covered by indemnification or insurance or in excess of indemnification or insurance coverage could have a material adverse effect on the Company's business, results of operations and financial condition. See "Risk Factors--Governmental Regulation and Legal Uncertainty." INTELLECTUAL PROPERTY The Company's success depends in part on its ability to protect its intellectual property. To protect its proprietary rights, the Company relies generally on copyright, trademark and trade secret laws, confidentiality agreements with employees and third parties, and license agreements with consultants, vendors and customers, although the Company has not signed such agreements in every case. Despite such protections, a third party could, without authorization, copy or otherwise obtain and use the Company's content. There can be no assurance that the Company's agreements with employees, consultants and others who participate in development activities will not be breached, that the Company will have adequate remedies for any breach, or that the Company's trade secrets will not otherwise become known or independently developed by competitors. The Company pursues the registration of certain of its trademarks and service marks in the U.S. and in certain other countries, although it has not secured registration of all its marks. In addition, the laws of some foreign countries do not protect the Company's proprietary rights to the same extent as do the laws of the U.S., and effective copyright, trademark and trade secret protection may not be available in such jurisdictions. In general, there can be no assurance that the Company's efforts to protect its intellectual property rights through copyright, trademark and trade secret laws will be effective to prevent misappropriation of its content, and the Company's failure or inability to protect its proprietary rights could materially adversely affect the Company's business, financial condition and results of operations. See "Risk Factors--Intellectual Property." LEGAL PROCEEDINGS On or about July 8, 1998, a lawsuit was filed against the Company and one of its officers and directors in the United States District Court for the Southern District of New York by Radio Channel Networks, Inc. In this action, plaintiff alleges that the Company's use of the term "radio channel" infringes a registered trade mark of the plaintiff. Plaintiff seeks to enjoin the Company from using the words "radio channel" on the Company's Web sites and seeks damages in an amount no less than $6,900,000 and that such damages be trebled. Although no assurance can be given as to the outcome of this lawsuit, the Company believes that the allegations in this action are without merit. The Company intends to vigorously defend against this action and seek its early dismissal. From time to time the Company has been, and expects to continue to be, subject to legal proceedings and claims in the ordinary course of its business, including claims of alleged infringement of third-party trademarks and other intellectual property rights by the Company and its licensees. Such claims, even if not meritorious, could result in the expenditure of significant financial and managerial resources. The Company is not aware of any legal proceedings or claims that it believes will have, individually or in the aggregate, a material adverse effect on its business, financial condition or results of operations. EMPLOYEES As of June 15, 1998, the Company had 191 full-time employees. None of the Company's employees is subject to a collective bargaining agreement and the Company believes that its relations with its employees are good. FACILITIES The Company's executive offices are located in Dallas, Texas in a 28,000 square foot facility that the Company leases at a current monthly rent of $3,920. The lease agreement terminates on February 1, 2002. The Company has an option to extend the lease agreement for three additional five-year terms. The Company also leases an office in New York, New York at a current monthly rent of $3,083. This lease expires 47 52 January 31, 2001. The Company also leases an office in San Francisco, California at a current monthly rent of $1,155. This lease expires September 30, 1998. The Company also leases an office in Houston, Texas at a current monthly rent of $450. This lease expires June 30, 1999. The Company anticipates that it will require additional space within the next 12 months and that suitable additional space will be available on commercially reasonable terms, although there can be no assurance in this regard. The Company does not own any real estate. MANAGEMENT EXECUTIVE OFFICERS, DIRECTORS AND KEY EMPLOYEES The following table sets forth certain information regarding the executive officers, directors and key employees of the Company as of June 30, 1998.
NAME AGE POSITION WITH THE COMPANY ---- --- ------------------------- Executive Officers and Directors Todd R. Wagner.................... 37 Chief Executive Officer, Secretary and Vice Chairman of the Board Mark Cuban........................ 39 President and Chairman of the Board Jack A. Riggs..................... 39 Chief Financial Officer, Treasurer and Director Kevin W. Parke.................... 39 Vice President--Operations Joseph W. Autem(1)(2)............. 40 Director Randall S. Battat................. 38 Director Steven D. Leeke(1)(2)............. 36 Director Key Employees Henry G. Heflich.................. 47 Vice President--Technology Tina M. Williamson................ 47 Vice President--Marketing Stan M. Woodward.................. 36 Vice President--Business Services
- ------------ (1) Member of Compensation Committee (2) Member of Audit Committee TODD R. WAGNER co-founded the Company in May 1995 and has served as Chief Executive Officer, Secretary and Vice Chairman of the Board since its inception. From 1989 to 1994, Mr. Wagner worked at the law firm of Hopkins & Sutter, where he was a partner from 1992 to 1994. Mr. Wagner became a certified public accountant in April 1988. Mr. Wagner holds a B.S. in Accounting from Indiana University and a J.D. from The University of Virginia School of Law. MARK CUBAN co-founded the Company in May 1995 and has served as President and Chairman of the Board of the Company since its inception. From 1991 to the present, Mr. Cuban has served as President of Radical Computing, Inc., a Dallas-based venture capital and investment company specializing in technology companies. In 1983, Mr. Cuban founded Microsolutions, Inc., a systems integration company that was sold to CompuServe Corporation in 1990. Mr. Cuban holds a B.S. in Business from Indiana University. JACK A. RIGGS has served as Chief Financial Officer and Treasurer of the Company since August 1997 and as a Director since December 1997. From June 1996 to August 1997, Mr. Riggs served as Corporate Controller of Kitty Hawk, Inc., a publicly traded international airfreight carrier. From 1994 to 1996 Mr. Riggs served as Corporate Controller of DHN Enterprises, Inc., a privately held wholesale distributor. Prior to that, Mr. Riggs served as Regional Controller of INACOM Corp., a computer reseller. Prior to joining INACOM, Mr. Riggs was with Coopers & Lybrand L.L.P. Mr. Riggs became a certified public accountant in 1990 and holds a B.S. in Accounting from Louisiana Tech University. KEVIN W. PARKE has served as Vice President--Operations of the Company since May 1997 and as the Director--Operations since March 1996. From 1993 to 1996, Mr. Parke served as Vice President and General 48 53 Counsel of Merritt Marketing Group, a national integrated marketing company, where he directed the production, finance, legal and accounting departments. From 1991 to 1993, Mr. Parke was a partner at the law firm of Hopkins & Sutter. Mr. Parke holds a B.A. in Economics from Vanderbilt University and a J.D. from Southern Methodist University School of Law. JOSEPH W. AUTEM has served as a Director of the Company since September 1996. Mr. Autem has served as Senior Vice President and Chief Financial Officer of CS Wireless, Inc., a privately held company that provides wireless video and high speed internet access, since June 1998. Mr. Autem has also been a partner of Vision Technology Partners, a private investment company, since March 1997. From July 1996 to December 1996, Mr. Autem served as Chief Financial Officer of the Company. From 1992 to 1996, Mr. Autem served as Vice President of Finance, Secretary, Treasurer and Chief Financial Officer of OpenConnect Systems, Inc., a software company. Mr. Autem became a certified public accountant in 1987 and holds a B.S. in Accounting from Pittsburg State University. RANDALL S. BATTAT has served as a Director of the Company since February 1998. Mr. Battat has been the Senior Vice President and General Manager for the Information Systems Group of Motorola since February 1997. From February 1994 to February 1997, Mr. Battat served as Corporate Vice President and General Manager of the Wireless Data Group of Motorola. Mr. Battat joined Apple Computer, Inc. in 1981, and held a number of positions including, most recently, Vice President of the Macintosh Desktop and Powerbook Division. Mr. Battat holds a B.S. in Electrical Engineering from Stanford University. STEVEN D. LEEKE has served as a Director of the Company since October 1996. Mr. Leeke is the Director and General Manager of Internet Content and Service Businesses for the Messaging Information and Media Sector of Motorola, a position he has held since September 1996. From March 1995 to September 1996, Mr. Leeke was the Director of Strategy for Motorola New Enterprises. Prior to joining Motorola, Mr. Leeke served in various capacities at Texas Instruments. Mr. Leeke holds an A.B. in Physics and Math from Dartmouth College and an M.S. and Ph.D. in Electrical Engineering from Stanford University. HENRY G. HEFLICH has served as Vice President--Technology for the Company since March 1998. From January 1996 to March 1998, Mr. Heflich co-founded and served as Chief System Architect for Genuity, Inc., a national ISP. From January 1981 to December 1995, Mr. Heflich served as President and Director of Engineering for MicroNet Research. Mr. Heflich holds a B.S. in Electrical Engineering from the Florida Institute of Technology, an M.S. in Electrical Engineering from Southern Methodist University and an M.B.A. from the University of Dallas. TINA M. WILLIAMSON has served as Vice President--Marketing for the Company since April 1998 and as the Director--Marketing since May 1997. From October 1996 to February 1997, Ms. Williamson served as Vice President, Director of Marketing for Deja News, Inc., an Internet search engine company, and from July 1995 to October 1996 was President and owner of TMW Group, an interactive media and marketing consulting firm. Ms. Williamson was also Senior Vice President and Associate Media Director at GSD&M Advertising. Ms. Williamson holds a B.S. in Advertising from the University of Texas at Austin. STAN M. WOODWARD has served as Vice President--Business Services for the Company since April 1998 and served as Director--Business Services for the Company since November 1997. From December 1993 to November 1997, Mr. Woodward served as Director of Sales for the South Central Region for Ascend Communications, Inc. He has also held sales and sales management positions with AMP Communication Systems, National Semiconductor Corporation and a number of start-up companies specializing in fiber-optic data transport. He holds a B.S. in Electrical Engineering from Oklahoma State University. Executive officers of the Company are appointed by the Board of Directors. The Company's current directors will be eligible for re-election at the Company's annual stockholder meeting in 1999 at which time the Board will be divided into three classes. The initial term of the Class I directors will expire at the Company's annual stockholders meeting in 2000, the initial term of the Class II directors will expire at the Company's annual stockholder meeting in 2001 and the initial term of the Class III directors will expire at the Company's annual stockholder meeting in 2002. Thereafter, the term of each class of directors will be three years. All directors hold office until the annual stockholder meeting at which their respective class is subject to 49 54 re-election and until their successors are duly elected and qualified, or until their earlier resignation or removal. BOARD COMMITTEES Compensation Committee. The Compensation Committee of the Board of Directors reviews and makes recommendations to the Board regarding the Company's compensation policies and all forms of compensation to be provided to executive officers and directors of the Company, including, among other things, annual salaries and bonuses, and stock option and other incentive compensation arrangements. In addition, the Compensation Committee reviews bonus and stock compensation arrangements for all other employees of the Company. As part of the foregoing, the Compensation Committee administers the Company's Stock Option Plans. The current members of the Compensation Committee are Messrs. Autem and Leeke. Audit Committee. The Audit Committee of the Board of Directors reviews and monitors the corporate financial reporting and the internal and external audits of the Company, including, among other matters, the Company's control functions, the results and scope of the annual audit and other services provided by the Company's independent accountants, and the Company's compliance with legal matters that have a significant impact on the Company's financial report. In addition, the Audit Committee consults with the Company's management and independent accountants prior to the presentation of financial statements to stockholders and, as appropriate, initiates inquiries into aspects of the Company's financial affairs. The Audit Committee also has the responsibility to consider and recommend the appointment of, and to review fee arrangements with, the Company's independent accountants. The current members of the Audit Committee are Messrs. Autem and Leeke. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION For the year ended December 31, 1997, the Company's Stock Option Plan Committee was comprised of Mr. Wagner, the Chief Executive Officer of the Company, and Mark Cuban, the President of the Company. The Company's Compensation Committee is currently comprised of Messrs. Autem and Leeke, both of whom are Directors of the Company. No interlocking relationship exists between any member of the Board of Directors or the Compensation Committee and any member of the board of directors or compensation committee of any other company, and no such interlocking relationship has existed in the past. DIRECTOR COMPENSATION Non-Employee Directors Stock Option Plan. Directors who are not employees of the Company are entitled to receive stock options pursuant to the Company's 1996 Non-Employee Directors Stock Option Plan (the "Directors' Plan"). All options granted under the Directors' Plan expire 10 years from the date of the option grant. The exercise price for options granted under the Directors' Plan is the fair market value of a share of Common Stock on the date of grant. No more than 150,000 shares of Common Stock may be issued upon exercise of options granted under the Directors' Plan, subject to adjustment for stock splits, stock dividends, reverse stock splits and other transactions affecting the number of outstanding shares of Common Stock. Options may be granted under the Directors' Plan until April 15, 2006. The Directors' Plan provides for the automatic grant of an option to purchase 15,000 shares of Common Stock to each of the Company's non-employee directors upon their initial election to the Board. Each non-employee director re-elected to the Board of Directors at a subsequent annual stockholders' meeting is granted an additional option to purchase 2,400 shares of Common Stock immediately following such annual stockholders' meeting. Assuming that the non-employee director optionee has remained eligible under the Directors' Plan for the entire period, 50% of the shares subject to his or her initial option becomes exercisable upon the earlier of (i) the first anniversary of the date of the option grant or (ii) immediately prior to the first annual stockholders' meeting following the date of the option grant. The remaining 50% of the shares subject to the option vest and become exercisable upon the earlier of (i) the second anniversary of the date of the option grant or (ii) immediately prior to the second annual stockholders' meeting following the date of the option 50 55 grant. Assuming that such optionee has remained eligible under the Directors' Plan for the entire period, each additional option will become exercisable upon the earlier of (i) the first anniversary of the date of each such grant or (ii) immediately prior to the first annual stockholders' meeting following the date of each such grant. In the event of a sale of substantially all of the Company's assets, the liquidation or dissolution of the Company, or certain changes in control of the Company or its Board of Directors, options granted under the Directors' Plan will become immediately exercisable prior to the occurrence of such event without regard to vesting requirements and will then terminate if not exercised prior to the occurrence thereof. As of March 31, 1998, options to purchase 7,500 shares of Common Stock were outstanding under the Directors' Plan. Other Director Compensation. The Company has agreed to pay each non-employee director $1,000 for each Board of Directors meeting attended, $500 for each meeting of a Committee of the Board of Directors attended and $200 for each unanimous consent executed in lieu of a Board of Directors meeting. The Company reimburses directors for all reasonable and documented expenses incurred as a director. Directors who are also employees of the Company, including Messrs. Wagner, Cuban and Riggs, are not compensated for their services as directors. EXECUTIVE COMPENSATION The following table sets forth, for the year ended December 31, 1997, all compensation of the Chief Executive Officer and the other executive officers of the Company who received compensation in excess of $100,000 in such year (collectively, the "Named Executive Officers"). SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION ------------ NAME AND PRINCIPAL POSITION SALARY --------------------------- ------------ Todd R. Wagner.............................................. $120,000 Chief Executive Officer Mark Cuban.................................................. 120,000 President and Chairman of the Board
The following table sets forth certain information concerning the grant of stock options to each of the Named Executive Officers. None of such Named Executive Officers exercised any options during the year ended December 31, 1997. AGGREGATED OPTION EXERCISES IN 1997 AND 1997 YEAR-END OPTION VALUES
VALUE OF UNEXERCISED NUMBER OF UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS HELD AT DECEMBER 31, 1997(1) AT DECEMBER 31, 1997(2) ----------------------------- ----------------------------- NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE ---- ----------- -------------- ----------- -------------- Todd R. Wagner........................... 47,160 188,640 $580,540 $2,322,158 Mark Cuban............................... 57,600 230,400 709,056 2,836,224
- --------------- (1) Options shown were granted under the Company's 1996 Stock Option Plan. These options become exercisable with respect to 20% of the shares covered by the option on the first anniversary of the date of grant and with respect to an additional 20% of these shares each year thereafter. Upon certain changes in control of the Company, all unvested options will automatically vest. See "--Stock Option Plans" for a description of the material terms of these options. (2) Based on an assumed initial public offering price of $15.00 per share and net of the option exercise price. 51 56 EMPLOYMENT AGREEMENTS AND CHANGE OF CONTROL CONSIDERATIONS The Company has entered into employment agreements with Messrs. Wagner and Cuban for a term commencing on June 15, 1998, and ending on December 31, 2001, subject to automatic successive one-year extensions in the absence of a notice of termination by either the Company or the employee. Each agreement provides for an annual base salary of $150,000 for 1998, plus a bonus equal to 1.5% of the pre-tax income of the Company, as determined by the Company's outside accountants in accordance with generally accepted accounting principles, in excess of certain scheduled net income thresholds. Each of the agreements has regularly scheduled increases in such salaries through the year 2001. Under the terms of the agreements, upon consummation of this offering, (i) Messrs. Wagner and Cuban shall each be paid a bonus of $50,000 and (ii) the current base salaries of Messrs. Wagner and Cuban shall each increase to $225,000. The employment agreements provide that at any time within six months following a Change of Control of the Company (as defined in the employment agreements), Messrs. Wagner and Cuban can terminate their agreements. Following such termination, the terminating employee is entitled to payment of Deferred Compensation (as defined in the employment agreements) equal to the sum of (a) the greater of (i) the remaining base salary payable to the employee through the date on which the employment agreement would have expired by its terms or (ii) 150% of the employee's total compensation during the two years prior to such termination, and (b) all additional benefits owing to the terminating employee under the agreement for the period of time which is the longer of (x) the period through the date on which the employment agreement would have expired by its terms or (y) one year. Messrs. Wagner and Cuban have been granted options to purchase 235,800 and 288,000 shares of Common Stock, respectively, pursuant to the Company's stock option plans, which plans provide for acceleration of vesting of such options so that such options shall immediately become fully exercisable in the event of certain changes of control. EMPLOYEE BENEFIT PLANS The 1996 Stock Option Plan. In April 1996, the Board of Directors adopted, and the stockholders of the Company approved, the Company's 1996 Stock Option Plan (the "1996 Plan"), pursuant to which officers, employees and consultants (excluding non-employee directors) are eligible to receive options to purchase shares of Common Stock. At the time of adoption, no more than 1,440,000 shares of Common Stock could be issued as a result of the exercise of options granted under the 1996 Plan. Generally, with certain exceptions, no eligible person could receive options to purchase more than 240,000 shares of Common Stock during any calendar year. In August 1997, the Board of Directors elected not to grant any further options under the 1996 Plan. At such time, there were options to purchase 1,226,134 shares of Common Stock outstanding. As of March 31, 1998, there were options to purchase 1,170,217 shares of Common Stock outstanding under the 1996 Plan. The 1998 Stock Option Plan. In August 1997 and April 1998, the Board of Directors adopted and amended, respectively, and in June 1998 the stockholders approved, the Company's 1998 Stock Option Plan (the "1998 Plan"), pursuant to which directors (other than non-employee directors), officers, employees, consultants and advisors are eligible to receive options to purchase shares of Common Stock. Subject to adjustment for stock splits, stock dividends, reverse stock splits and other transactions affecting the number of outstanding shares of Common Stock effected without the receipt of consideration by the Company, no more than 2,800,000 shares of Common Stock may be issued as a result of the exercise of options granted under the 1998 Plan, and no eligible person may be granted options to purchase more than 250,000 shares of Common Stock during any calendar year. Options may be granted under the 1998 Plan until August 19, 2007. As of March 31, 1998, there were options to purchase 850,139 shares of Common Stock outstanding under the 1998 Plan. Certain Provisions Applicable to the 1996 Stock Option Plan and the 1998 Stock Option Plan. The 1996 Plan and the 1998 Plan (the 1996 Plan and the 1998 Plan may herein be referred to collectively as the "Stock Option Plans") are being administered by the Compensation Committee. Under the terms of the Stock 52 57 Option Plans, as long as the Company has any class of securities registered pursuant to Section 12 of the Exchange Act, the Committee must be composed of at least two members of the Board of Directors of the Company, each of whom is required to be "disinterested" within the meaning of Rule 16b-3 under the Exchange Act. In April 1998, the Board of Directors dissolved its Stock Option Plan Committee and authorized the Compensation Committee (consisting of Messrs. Leeke and Autem) to administer the Stock Option Plans. Messrs. Leeke and Autem meet the requirements of Rule 16b-3. The Compensation Committee has the authority to interpret the Stock Option Plans; to determine the terms and conditions of options granted under the Stock Option Plans; to prescribe, amend and rescind the rules and regulations of the Stock Options Plans; and to make all other determinations necessary or advisable for the administration of the Stock Option Plans. Options granted under the Stock Option Plans may be incentive stock options, which are intended to qualify for favorable federal income tax treatment under the provisions of Section 422 of the Internal Revenue Code of 1986, as amended (the "Code") ("ISOs"), or non-qualified stock options, which do not so qualify ("NSOs"; ISOs and NSOs may be referred to herein collectively as "Options"). The Compensation Committee selects the eligible persons to whom Options will be granted and determines the dates, amounts, exercise prices (in no event less than the fair market value of a share of Common Stock on the date of grant), vesting periods and other relevant terms of the Options, including whether the Options will be ISOs or NSOs. Options are generally not transferable during the life of the optionee. Options vest and become exercisable as determined by the Compensation Committee, although Options granted under the 1996 Plan may vest no earlier than one year from the date of grant. Options may be exercised at any time after they vest and before their expiration date as determined by the Compensation Committee, provided, however, that no Option may be exercised more than 10 years after its date of grant (five years after grant in the case of certain ISOs). Options, whether or not vested, will generally terminate (i) immediately upon termination of the optionee's employment with the Company for just cause; (ii) 12 months after death, permanent disability or normal retirement (unless the Option expires earlier by its terms) under the 1996 Plan and six months thereafter under the 1998 Plan; and (iii) 90 days after termination of employment (180 days in the case of non-qualified Options granted thereunder) for any other reason under the 1996 Plan and 30 days with respect to the 1998 Plan (unless the Option expires earlier by its terms), although the Compensation Committee, in its discretion, may accelerate vesting and may extend the exercise period of any Options. The aggregate fair market value (determined at the time of the option grant) of the shares of Common Stock represented by ISOs that become exercisable in any calendar year may not exceed $100,000. Options in excess of this limit are treated as NSOs. If the Company consummates any reorganization, merger or consolidation, each outstanding Option will, upon exercise, entitle the optionee to receive the same consideration received by holders of shares of Common Stock in such reorganization or merger or consolidation, with appropriate exercise price adjustments. In the case of certain changes of control of the Company, any Options so specified at any time by the Compensation Committee or the Board in its discretion shall vest and become exercisable. Under the 1996 Plan, in the case of certain changes in control involving the liquidation of the Company, the disposition of substantially all of the Company's assets, and certain reorganizations, mergers or consolidations of the Company, all outstanding Options will automatically vest and become exercisable if, and to the extent that such Options are not, in connection with the change of control, to be cashed-out at full value, continued by the Company as the surviving corporation, assumed by the successor corporation or parent thereof or replaced with comparable options or other compensation programs. Under the 1998 Plan, in the event of a "Change of Control" (as defined therein), all outstanding Options will automatically vest and become exercisable. As of March 31, 1998, there were options to purchase 2,027,856 shares of Common Stock outstanding in the aggregate under the Stock Option Plans. 401(k) Plan. The Company sponsors a savings and investment plan (the "401(k) Plan") intended to be qualified under Section 401 of the Code. Participating employees may make pre-tax contributions, subject to limitations under the Code, of a percentage of their total compensation. Employees become eligible to 53 58 participate in the plan after being employed by the Company for six months. The Company, in its sole discretion, may make matching contributions for the benefit of all participants with at least one year of service who make pre-tax contributions. The Board of Directors has not yet determined the matching contribution, if any, that will be made for the 1998 plan year. Employee Stock Purchase Plan. In May 1998, the Board of Directors adopted, and in June 1998 the stockholders approved, the Company's 1998 Employee Stock Purchase Plan (the "Stock Purchase Plan"). Subject to meeting federal and state securities law requirements and such stockholder approval, the Stock Purchase Plan will become effective at the consummation of this offering, or as soon as practicable thereafter. The purpose of the Stock Purchase Plan is to maintain competitive equity compensation programs and to provide employees of the Company with an opportunity and incentive to acquire a proprietary interest in the Company through the purchase of Common Stock, thereby more closely aligning the interests of the Company's employees and shareholders. The Company has reserved a total of 250,000 shares of Common Stock for issuance and sale under the Stock Purchase Plan. The Stock Purchase Plan will be administered by the Compensation Committee, members of which are not eligible to participate in the Stock Purchase Plan. The Board, however, may from time to time in its discretion exercise any responsibilities or authority allocated to the Compensation Committee under the Stock Purchase Plan. All employees of the Company who have been employees for at least six months are eligible to participate in the Stock Purchase Plan, other than employees whose customary employment is less than 20 hours per week or is not for more than five months in a calendar year, or employees who are ineligible to participate due to federal tax restrictions. There are certain restrictions on the number of shares that a participant may purchase, including the requirement that the fair market value of shares that may be purchased by any employee during any calendar year may not exceed $25,000. The offering dates will be August 15 and February 15 of each Stock Purchase Plan year, and each such offering date will commence a new offering period, provided that the initial offering period shall commence as soon as practicable following consummation of this offering. The Company may alter the duration of any offering period if the change is announced at least 15 days before the relevant offering date. Shares purchased under the Stock Purchase Plan will be held in separate accounts for each participant. Eligible employees may enroll in any offering period by delivering to the Company a subscription agreement at least five days before the first day of such offering period. In the subscription agreement, the employee will specify a whole number percentage from 1% to 10% of his or her annual base compensation (including any cash bonus) to be deducted from such employee's paycheck during the offering period. The amounts so deducted and contributed are applied to the purchase of shares of Common Stock at 85% of the lesser fair market value of such shares on (i) the date of purchase or (ii) the offering date. Participants may increase or decrease their payroll deductions at any time (subject to such limits as the Compensation Committee may impose) during an offering period by filing with the Company a new subscription agreement authorizing such a change in the payroll deduction rate. Participants may withdraw from an offering period by giving written notice to the Company at least five days before the end of such offering period. If a participant withdraws from the Stock Purchase Plan, any contributions that have not been used to purchase shares shall be refunded. A participant who has withdrawn may not participate in the Stock Purchase Plan again until the next offering period. In the event of retirement or cessation of employment for any reason, any contributions that have not yet been used to purchase shares will be refunded to the participant, or to the participant's designated beneficiary in the case of death, and a certificate will be issued for the full shares in the participating account. The Compensation Committee may, at any time and for any reason, terminate or amend the Stock Purchase Plan, subject to stockholder approval in certain circumstances. Unless sooner terminated by the Committee, the Stock Purchase Plan will continue in effect for a term of 10 years. 54 59 INDEMNIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS AND LIMITATION OF LIABILITY The Company's Restated Certificate of Incorporation contains certain provisions permitted under the DGCL relating to the liability of directors. The Restated Certificate of Incorporation provides that, to the fullest extent permitted under the DGCL, no director of the Company will be liable to the Company or its stockholders for monetary damages for breach of fiduciary duty as a director. The Bylaws provide that (i) the Company is required to indemnify the directors, officers and employees of the Company against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement arising out of any action taken by such officer or director in good faith and in a manner reasonably believed by such officer or director to be in, or not opposed to, the best interests of the Company, (ii) the Company is required to advance expenses (including attorneys' fees) to its officers and directors in defending any civil, criminal, investigative action, suit or proceeding or appeal therefrom and (iii) the rights conferred in the Bylaws are not exclusive. The Company has entered into indemnification agreements with each of its current directors and executive officers to give such directors and executive officers additional contractual assurances regarding the scope of the indemnification set forth in the Company's Restated Certificate of Incorporation and the Company's Restated Bylaws and to provide additional procedural protections. At present, there is no pending litigation or proceeding involving a director, officer or employee of the Company regarding which indemnification is sought, nor is the Company aware of any threatened litigation that may result in claims for indemnification. 55 60 CERTAIN TRANSACTIONS The Company sold 2,640,000 shares, 920,040 shares, 990,000 shares and 59,700 shares of Common Stock to Mr. Cuban in May 1995, December 1995, March 1996 and August 1996, respectively. The Company sold 2,640,000 shares, 600 shares and 7,500 shares of Common Stock to Mr. Wagner in May 1995, December 1995, and August 1996, respectively. The Company sold 120,000 and 1,560 shares of Common Stock to Martin Woodall in May 1995 and August 1996, respectively. The Company entered into a Bill of Conveyance and Agreement to Assume Liabilities effective July 1995 with Cameron Broadcasting Systems, Inc. ("Cameron Broadcasting") pursuant to which (i) Cameron Broadcasting transferred certain intangible assets and rights to the Company, (ii) the Company assumed certain liabilities (relating solely to the assets and rights acquired) and (iii) the Company issued 600,000 shares of Common Stock to Cameron Broadcasting. Cameron Broadcasting has appointed Mr. Wagner as proxy to vote these 600,000 shares pursuant to a Proxy dated as of July 1995. The Company sold 33,540 additional shares of Common Stock to Cameron Broadcasting in August 1996. The Company repurchased 120,000 shares of Company Common Stock from Cameron Broadcasting in June 1996. Cameron Broadcasting and Messrs. Cuban and Wagner entered into a Buy-Sell Agreement effective July 1995 (as amended in August 1996, the "Buy-Sell Agreement") pursuant to which each party was given the right to buy a pro rata portion of shares that any other party offered for sale and, in certain situations, the right or obligation to co-sell shares sold by another party. The Buy-Sell Agreement terminates upon an initial public offering of any security of the Company. The Company issued 735,720 shares, 9,840 shares, 5,220 shares, 21,120 shares and 1,592,356 shares of Common Stock to Motorola in September 1996, January 1997, March 1997, April 1997 and December 1997, respectively pursuant to stock purchase agreements and the exercise of preemptive rights contained therein. The Company and Motorola entered into a Negotiation Rights Agreement in September 1996 pursuant to which the Company agreed (i) to offer Motorola a non-exclusive license to any technology which it licenses to other parties on a non-exclusive basis on the same or better terms, (ii) to give Motorola 30 days notice of the Company's intention to grant a license to any technology to other parties on an exclusive basis and (iii) to give Motorola a right of first negotiation to any license of certain wireless distribution technology. The Company, Motorola, and Messrs. Cuban and Wagner entered into a Stockholders Agreement (the "September Stockholders Agreement") in September 1996, as amended in December 1996, pursuant to which Messrs. Cuban and Wagner agreed (i) to vote their shares to ensure that two designees of Motorola are elected to the Company's Board of Directors (See "Description of Capital Stock--Stockholder Agreements") and (ii) to give Motorola certain tag-along rights with respect to certain sales of shares by Messrs. Cuban and Wagner after the date of the offering. Steven Leeke and Randall Battat, two of the Company's directors, were designees of Motorola pursuant to the September Stockholders Agreement. The September Stockholders Agreement will terminate upon the earlier to occur of (i) the third anniversary of the Company's offering and (ii) the date on which Motorola no longer holds at least 50% of the 735,720 shares purchased by Motorola in September 1996. On December 16, 1997, the Company and Motorola entered into a Joint Promotion and Advertising Sales Agreement pursuant to which the Company has agreed to assist Motorola in monitoring and developing an end-user interface for Internet delivery of audio content (the "audioSENSE Player"). In order for Motorola to develop the audioSENSE Player, the Company has agreed to allow the audioSENSE Player to reside on the Company's Web site as an interface for accessing certain content on the Company's Web sites. Motorola is also a customer of the Company, to whom the Company provides business services. These relationships with Motorola have generated revenues for the Company of $10,000 and $84,000 for the twelve months ending December 31, 1997 and the three months ending March 31, 1998, respectively. See "Business--Strategic Relationships--Key Internet Companies." 56 61 The Company issued 294,300 shares and 530,786 shares of Common Stock to Intel in February 1997 and December 1997, respectively, and a stock purchase warrant to Intel in February 1997, as amended in December 1997, (the "Intel Warrant") pursuant to which Intel was granted the right to purchase an additional 147,120 shares of Common Stock at an exercise price of $6.80 per share pursuant to stock and warrant purchase agreements. Intel's right to acquire 58,860 shares of Common Stock vested immediately upon the granting of the warrant. Intel's right to acquire the remaining 88,260 shares of Common Stock did not vest and expired on June 30, 1998. Intel is also a customer of the Company, to whom the Company provides business services, which services generated revenues for the Company of approximately $500,000 and $84,000 for the twelve months ending December 31, 1997 and the three months ending March 31, 1998, respectively. The Company, Messrs. Cuban and Wagner, Motorola, Intel and certain other shareholders of the Company are parties to a stockholders agreement (the "December Stockholders Agreement") which was originally entered into in December 1996 and amended in February 1997 and December 1997 pursuant to which Messrs. Cuban and Wagner granted Motorola, Intel and certain other shareholders a tag-along right with respect to certain sales of shares by Messrs. Cuban and Wagner after the date of this offering. See "Description of Capital Stock--Stockholder Agreements." The December Stockholders Agreement will terminate upon the third anniversary of the Company's Initial Public Offering. The Company, Motorola, Intel and certain other shareholders of the Company are party to a Registration Rights Agreement, which was originally entered into in September 1996 and amended in November 1996, December 1996, February 1997, and December 1997 (the "Registration Rights Agreement"), pursuant to which Motorola, Intel and certain other shareholders have rights (i) to request that the Company effect a registration of the sale of shares held by them and (ii) to request that the sale of shares held by them be included in registrations conducted by the Company. See "Description of Capital Stock--Registration Rights Agreement." The Company has entered into employment agreements with Messrs. Cuban and Wagner. See "Management--Employment Agreements and Change in Control Considerations." The Company has issued options to certain of its Directors and Officers. The Company has entered into Indemnification Agreements with its directors and executive officers. See "Management--Indemnification of Directors and Executive Officers and Limitation of Liability." Mr. Cuban has agreed to act as guarantor of the following June 1997 Company lease obligations with Green Tree Vender Services Corporation: (i) lease of voicemail system with monthly payments of $1,128 for a term of three years; (ii) lease of office furniture with monthly payments of $4,333 for a term of three years; and (iii) lease of Nortel Meridian system with monthly payments of $3,938 for a term of three years. 57 62 PRINCIPAL AND SELLING STOCKHOLDERS The following table sets forth certain ownership information with respect to the beneficial ownership of the Company's Common Stock as of March 31, 1998 (except as otherwise noted), and as adjusted to reflect the sale of shares of Common Stock hereby, by (i) each person who is known by the Company to own beneficially more than 5% of the Common Stock, (ii) each director of the Company, (iii) each of the Named Executive Officers, and (iv) all directors and executive officers of the Company as a group.
PERCENTAGE OF COMMON STOCK NUMBER OF BENEFICIALLY OWNED(1) SHARES ----------------------- BENEFICIALLY BEFORE AFTER NAME OF BENEFICIAL OWNER OWNED OFFERING OFFERING(2) ------------------------ ------------ -------- ----------- Mark Cuban(3)............................................... 4,724,940 32.6% 27.8% Todd R. Wagner(4)........................................... 2,742,420 18.9 16.2 Motorola, Inc.(5)........................................... 2,364,256 16.4 14.0 Intel Corporation(6)........................................ 883,946 6.1 5.2 Joseph W. Autem............................................. 19,620 * * Steven Leeke(7)............................................. 7,500 * * Kevin Parke(8).............................................. 6,000 * * All directors and executive officers as a group (9 persons)(9)............................................... 7,500,480 51.4 43.8
- ------------ * Less than one percent of the Company's Common Stock. (1) Unless otherwise indicated, and subject to community property laws where applicable, each of the stockholders named in this table has sole voting and investment power with respect to the shares shown as beneficially owned by it. A person is deemed to be the beneficial owner of securities that can be acquired by such person within 60 days from March 31, 1998 upon the exercise of options and warrants. Each beneficial owner's percentage ownership is determined by assuming that options that are held by such person (but not those held by any other person) and that are exercisable within 60 days from March 31, 1998 have been exercised. (2) Assumes that the Underwriter's overallotment option is not exercised. (3) Includes an aggregate of 115,200 shares of Common Stock issuable pursuant to options that are currently exercisable or are exercisable within 60 days of March 31, 1998. Mr. Cuban is required to vote his shares to ensure representation of Motorola on the Board of Directors. See "Description of Capital Stock--Stockholder Agreements." (4) Includes an aggregate of 94,320 shares of Common Stock issuable pursuant to options that are currently exercisable or are exercisable within 60 days of March 31, 1998. Mr. Wagner has granted the Underwriters an Option, exercisable within 30 days hereof, relating to the Offering, to purchase up to 187,500 shares of Common Stock at the price offered to the public less underwriting discounts and commissions for the purpose of covering overallotments, if any. If the Underwriters exercise such options in full, Mr. Wagner will beneficially own 2,554,920 shares or 14.9% of the Common Stock after the offering. Mr. Wagner holds voting rights with respect to an additional 600,000 shares of Common Stock, which shares are owned by Cameron Broadcasting and are subject to a proxy in favor of Mr. Wagner. See "Certain Transactions." Mr. Wagner is required to vote his shares to ensure representation of Motorola on the Board of Directors. See "Description of Capital Stock--Stockholder Agreements." (5) The address of Motorola, Inc. is 1303 E. Algonquin Road, Schaumburg, Illinois 60196. Messrs. Wagner and Cuban are each required to vote their shares to ensure representation of Motorola on the Board of Directors. See "Description of Capital Stock--Stockholder Agreements." Messrs. Battat and Leeke disclaim beneficial ownership of any shares of Common Stock beneficially owned by Motorola. (6) Includes an aggregate of 58,860 shares of Common Stock issuable pursuant to warrants that are currently exercisable or are exercisable within 60 days of March 31, 1998. The address of Intel Corporation is 2200 Mission College Boulevard, Santa Clara, California 95052. (7) Includes an aggregate of 7,500 shares of Common Stock issuable pursuant to options that are currently exercisable or are exercisable within 60 days of March 31, 1998. Pursuant to an agreement between Mr. Leeke and Motorola dated March 27, 1998. Mr. Leeke can exercise his options at the sole direction of, and for the benefit of, Motorola. (8) Includes an aggregate of 6,000 shares of Common Stock issuable pursuant to options that are currently exercisable or are exercisable within 60 days of March 31, 1998. (9) Includes an aggregate of 223,020 shares of Common Stock issuable pursuant to options that are currently exercisable or are exercisable within 60 days of March 31, 1998. 58 63 DESCRIPTION OF CAPITAL STOCK GENERAL The Company is authorized by its Restated Certificate of Incorporation to issue 60,000,000 shares of Common Stock, par value $0.01 per share, of which 14,401,031 were outstanding and held of record by 36 stockholders on July 13, 1998; and 5,000,000 shares of Preferred Stock, par value $0.01 per share, of which no shares are outstanding (collectively, the "Capital Stock"). The Company may not subdivide or combine any shares of its Common Stock, or pay any dividend or retire any share or make any other distribution on any share of its Common Stock, or accord any other payment, benefit or preference to any share of its Common Stock, except by extending such subdivision, combination, distribution, payment, benefit or preference equally to all shares of Common Stock. The Common Stock does not entitle holders to any preemptive rights upon the issuance of other securities of the Company. COMMON STOCK Holders of Common Stock are entitled to one vote per share on all matters to be voted on by stockholders and are entitled to receive such dividends as may be declared by the Board of Directors out of funds legally available therefore and to share pro rata in any distribution to holders of Capital Stock. Holders of Common Stock do not have the power to act by written consent. Actions required or permitted to be taken by the stockholders of the Company may be taken only at a duly called annual or special meeting of the stockholders. In the event of a liquidation, dissolution, or winding-up of the Company, holders of Common Stock will be entitled to share pro rata in the distribution to holders of Capital Stock of all remaining assets of the Company after the payment of all debts, liabilities, and obligations of the Company and the preference distributions, if any, to holders of the Company's Preferred Stock. Options entitling the holders thereof to purchase a total of 2,027,856 shares of Common Stock were outstanding under the Company's 1996 and 1998 Stock Option Plans and the Company's Directors' Plan as of March 31, 1998. PREFERRED STOCK Pursuant to the Company's Restated Certificate of Incorporation, the Board of Directors has the authority to issue up to 5,000,000 shares of Preferred Stock in one or more series with such designations, rights and preferences as may be determined from time to time by the Board of Directors. Accordingly, the Board of Directors is empowered, without stockholder approval, to issue Preferred Stock with dividend, liquidation, conversion, voting or other rights that may adversely affect the voting power or other rights of the holders of the Company's Common Stock. In the event of issuance, the Preferred Stock could be utilized, under certain circumstances, to discourage, delay or prevent an acquisition or change of control of the Company. The Company does not currently intend to issue any shares of its Preferred Stock. OPTIONS As of March 31, 1998, the Company had granted options, net of forfeitures to purchase up to 2,027,856 shares of Common Stock, of which 337,493 shares were then currently exercisable, at exercise prices that generally range from $1.07 to $10.43, pursuant to the provisions of the Company's Stock Option Plans and Directors' Plan. See "Management--Non-Employee Directors Compensation" and "--Stock Option Plans." Previous offerings under the Plans have been exempt from registration, and shares issued in connection therewith are subject to resale restrictions. The Company intends to file a Registration Statement on Form S-8 registering shares to be issued in connection with current and future option grants. See "Shares Eligible for Future Sale." 59 64 WARRANTS As of the effective date of this Prospectus, the Company has outstanding warrants entitling the holders thereof to purchase a total of 218,096 shares of Common Stock of the Company with exercise prices of either $6.80 or $9.42 per share. DIVIDENDS The Company has never paid any cash dividends on its Capital Stock. For the foreseeable future, the Company intends to retain all of its future earnings to finance its operations and does not anticipate paying cash dividends. CERTAIN PROVISIONS OF DELAWARE LAW The Company is a Delaware corporation and is subject to Section 203 of the DGCL. In general, Section 203 prevents an "interested stockholder" (defined generally as a person owning 15% or more of the Company's outstanding voting stock) from engaging in a "business combination" (as defined in Section 203) with the Company for three years following the date that person became an interested stockholder unless: (i) before that person became an interested stockholder, the Board approved the transaction in which the interested stockholder became an interested stockholder or approved the business combination, (ii) upon completion of the transaction that resulted in the interested stockholder becoming an interested stockholder, the interested stockholder owned at least 85% of the voting stock of the Company outstanding at the time the transaction commenced (excluding stock held by directors who are also officers of the Company and by employee stock plans that do not provide employees with the right to determine confidentially whether shares held subject to the plan will be tendered in a tender or exchange offer) or (iii) on or following the date on which that person became an interested stockholder, the business combination is approved by the Company's Board and authorized at a meeting of stockholders by the affirmative vote of the holders of at least 66 2/3% of the outstanding voting stock of the Company not owned by the interested stockholder. Under Section 203, these restrictions do not apply to certain business combinations proposed by an interested stockholder following the announcement or notification of one of certain extraordinary transactions involving the Company and a person who was not an interested stockholder during the previous three years or who became an interested stockholder with the approval of a majority of the Company's directors, if that extraordinary transaction is approved or not opposed by a majority of the directors (but not less than one) who were directors before any person became an interested stockholder in the previous three years or who were recommended for election or elected to succeed such directors by a majority of such directors then in office. Under Section 162 of the DGCL, the Board of Directors of the Company can, without stockholder approval, issue authorized but unissued shares of Capital Stock, which may have the effect of delaying, deferring or preventing a change of control of the Company. Except as contemplated hereby, the Company has no plan or arrangement for the issuance of any shares of Capital Stock other than in the ordinary course pursuant to the Plans. CERTAIN CHARTER AND BYLAW PROVISIONS The Company's Restated Certificate of Incorporation provides that following the consummation of an initial public offering of the Common Stock, no action may be taken by written consent in lieu of a meeting of the stockholders. The Company's Restated Certificate of Incorporation provides that at the first annual meeting following the consummation of an initial public offering of shares of Common Stock, the Board of Directors will be divided into three classes, and the directors will thereafter have staggered three-year terms. Directors may be removed from office only for cause, and only upon the affirmative vote of stockholders of the Company, voting as a single class, of not less than 67% of the total outstanding shares entitled to vote in the election of directors. The Restated Certificate of Incorporation further provides that the provisions thereof pertaining to the Board of Directors may be repealed or amended only in accordance with the DGCL and by the affirmative vote of 60 65 the stockholders of the Company, voting as a single class, of not less than 67% of the total outstanding shares entitled to vote in the election of directors. The Company's Bylaws provide that nominations for directors by stockholders and stockholder proposals to be presented at annual meetings of stockholders generally must be submitted to the Company not less than 120 calendar days in advance of the anniversary date of the Company's proxy statement sent to stockholders in connection with the previous year's annual meeting of stockholders. REGISTRATION RIGHTS AGREEMENT On February 24, 1997, the Company entered into that certain First Amended and Restated Registration Rights Agreement (the "Registration Rights Agreement") among Motorola, Premiere Radio Networks, Intel, Capitol and HMTF AudioNet Investors (collectively, the "Holders"). Yahoo! was made a Holder under the terms of the Registration Rights Agreement pursuant to the Addendum to First Amended and Restated Registration Rights Agreement dated as of December 30, 1997. Under the terms of the Registration Rights Agreement, Holders owning a majority of the shares subject to the agreement have the right to demand that the Company register shares held by them. The rights of the Holders to demand registration are subject to certain conditions and limitations regarding timing of such demands (including a six month restriction following an initial public offering), the number of demands, and other matters. In addition, if the Company proposes to register any of its securities under the Securities Act (other than in connection with an initial public offering), either for its own account or for the account of other security holders, the Holders are entitled to notice of such registration and are entitled to include their shares of Common Stock in the registration ("Piggyback Registration"). The Piggyback Registration rights of the Holders are subject to certain conditions and limitations, among them the right of the underwriters of a registered offering to limit the number of shares of Common Stock included in such registration. The Company has agreed to bear all expenses incurred in connection with all registrations, except to the extent that the Holders of the registration rights, and not the Company, initiate the request that a registration be withdrawn prior to its effectiveness. Pursuant to the Registration Rights Agreement, the Company has agreed, to the extent permitted by law, to grant certain indemnification rights for claims arising under the Securities Act in connection with material misstatements, omissions or violations by the Company in a registration statement effecting a registration under the Registration Rights Agreement. In addition, each Holder has agreed to indemnify the Company, to the extent permitted by law, for claims which arise out of any violation that occurs in reliance upon written information furnished to the Company by such Holder expressly for use in connection with such registration. STOCKHOLDER AGREEMENTS On September 4, 1996 Motorola, Todd R. Wagner and Mark Cuban entered into a stockholders agreement (as amended, the "September Stockholders Agreement") pursuant to which Messrs. Wagner and Cuban have agreed to vote all shares of Common Stock owned by them in a manner that ensures that (i) at all times two Motorola designees serve as members of the Board of Directors of the Company, subject to removal only under limited circumstances described in the September Stockholders Agreement, and (ii) at all times that the Board of Directors is segregated into classes, at least one such designee is a member of the class of directors with the longest initial term. In the event that Mr. Cuban or Mr. Wagner proposes to sell, transfer or otherwise dispose of shares of Common Stock representing 10% or more of the Company's outstanding shares of Common Stock, certain shareholders, including Intel and Motorola, have the right to co-sell a pro-rata number of shares of Common Stock, subject to a limited number of exempt transfers. TRANSFER AGENT AND REGISTRAR The transfer agent and registrar for the Common Stock is ChaseMellon Shareholder Services LLC. 61 66 SHARES ELIGIBLE FOR FUTURE SALE Prior to this offering, there has been no public market for the Common Stock of the Company. Future sales of substantial amounts of Common Stock in the public market could adversely affect prevailing market prices from time to time. Furthermore, since no shares owned prior to this offering will be available for sale shortly after this offering because of certain contractual and legal restrictions on resale (as described below), sales of substantial amounts of Common Stock of the Company in the public market after these restrictions lapse could adversely affect the prevailing market price and the ability of the Company to raise equity capital in the future. Upon completion of this offering, the Company will have outstanding an aggregate of 16,901,031 shares of Common Stock, assuming no exercise of any warrants or options and no exercise of the Underwriters' over-allotment option. Of these shares, all of the shares sold in this offering will be freely tradeable without restriction or further registration under the Securities Act, unless such shares are purchased by "affiliates" of the Company as that term is defined in Rule 144 under the Securities Act (the "Affiliates"). The remaining 14,401,031 shares of Common Stock held by existing stockholders are "restricted securities" as that term is defined in Rule 144 under the Securities Act ("Restricted Shares"). Restricted Shares may be sold in the public market only if registered or if they qualify for an exemption from registration under Rule 144 or 701 promulgated under the Securities Act, which rules are summarized below. All officers, directors, stockholders and option holders of the Company have agreed not to offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, or otherwise transfer or dispose of, directly or indirectly (or enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of), any shares of Common Stock or any securities convertible into or exercisable or exchangeable for shares of Common Stock, for a period of 180 days after the date of this Prospectus, without the prior written consent of Morgan Stanley & Co. Incorporated. Morgan Stanley & Co. Incorporated may in its sole discretion choose to release a certain number of these shares from such restrictions prior to the expiration of such 180 day period. Morgan Stanley & Co. Incorporated currently has no plans to release any portion of the securities subject to lock-up agreements. When determining whether or not to release shares from the lock-up agreements, Morgan Stanley & Co. Incorporated will consider, among other factors, the stockholder's reasons for requesting the release, the number of shares for which the release is being requested and market conditions at the time. As a result of such contractual restrictions and the provisions of Rule 144 and 701, the Restricted Shares will be available for sale in the public market as follows: (i) no shares will be eligible for immediate sale on the date of this Prospectus; (ii) 13,977,905 shares will be eligible for sale upon expiration of the contract restriction, 180 days after the date of this Prospectus, subject in the case of all but 3,260,940 shares to the volume limitations and other conditions of Rule 144 described below; (iii) 407,166 shares will become eligible for sale in March 1999, all of which will be subject to the volume limitations and other conditions of Rule 144; and (iv) the remaining 15,960 shares will become eligible for sale in July 1999, all of which will be subject to the volume limitations and other conditions of Rule 144. In general, under Rule 144 as currently in effect, beginning 90 days after the date of this Prospectus, a person (or persons whose shares are aggregated) who has beneficially owned Restricted Shares for at least one year (including the holding period of any prior owner except an Affiliate) would be entitled to sell within any three-month period a number of shares that does not exceed the greater of: (i) 1% of the number of shares of Common Stock then outstanding (which will equal approximately 169,010 shares immediately after this offering); or (ii) the average weekly trading volume of the Common Stock on the Nasdaq National Market during the four calendar weeks preceding the filing of an notice on Form 144 with respect to such sale. Sales under Rule 144 are also subject to certain manner of sale provisions and notice requirements and to the availability of current public information about the Company. Under Rule 144(k), a person who is not deemed to have been an Affiliate of the Company at any time during the 90 days preceding a sale, and who has beneficially owned the shares proposed to be sold for at least two years (including the holding period of any prior owner except an Affiliate), is entitled to sell such shares without complying with the manner of sale, public information, volume limitation or notice provisions of Rule 144; therefore, unless otherwise restricted, shares will quality as "144(k) shares" on the date of this Prospectus and may be sold immediately upon the 62 67 completion of this offering. Subject to certain limitations on the aggregate offering price of a transaction and other conditions, employees, directors, officers, consultants or advisors may rely on Rule 701 with respect to the resale of securities originally purchased from the Company prior to the date the issuer becomes subject to the reporting requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), pursuant to written compensatory benefit plans or written contracts relating to the compensation of such persons. In addition, the Securities and Exchange Commission has indicated that Rule 701 will apply to typical stock options granted by an issuer before it becomes subject to the reporting requirements of the Exchange Act, along with the shares acquired upon exercise of such options (including exercises after the date of this Prospectus). Securities issued in reliance on Rule 701 are restricted securities and, subject to the contractual restrictions described above, beginning 90 days after the date of this Prospectus, may be sold by persons other than Affiliates subject only to the manner of sale provisions of Rule 144, and by Affiliates under Rule 144 without compliance with its holding period requirements. Upon completion of this offering, the holders of approximately 4,751,727 shares of Common Stock currently outstanding or issuable upon exercise of warrants, or their transferees, will be entitled to certain rights with respect to the registration of such shares under the Securities Act. See "Description of Capital Stock--Registration Rights." Registration of such shares under the Securities Act would result in such shares becoming freely tradable without restriction under the Securities Act (except for share purchases by affiliates) immediately upon the effectiveness of such registration. The Company intends to file registration statements under the Securities Act covering a total of 4,105,360 shares of Common Stock subject to options outstanding or reserved for future issuance under the 1996 Plan, the 1998 Plan and the Directors' Plan and 250,000 shares of Common Stock reserved for issuance under the Stock Purchase Plan. See "Management--Employee Benefit Plans." Such registration statements are expected to be filed and become effective as soon as practicable after the effective date of this offering. Accordingly, shares registered under such registration statements will, subject to Rule 144 volume limitations applicable to Affiliates, be available for sale in the open market, beginning 180 days after the date of the Prospectus, unless such shares are subject to vesting restrictions with the Company. 63 68 UNDERWRITERS Under the terms and subject to the conditions contained in an Underwriting Agreement dated the date hereof (the "Underwriting Agreement"), the Underwriters named below (the "Underwriters"), for whom Morgan Stanley & Co. Incorporated, Donaldson, Lufkin & Jenrette Securities Corporation and Hambrecht & Quist LLC are acting as Representatives (the "Representatives"), have severally agreed to purchase, and the Company has agreed to sell to them, severally, the respective number of shares of Common Stock set forth opposite their respective names below:
NUMBER OF NAME SHARES ---- --------- Morgan Stanley & Co. Incorporated........................... Donaldson, Lufkin & Jenrette Securities Corporation......... Hambrecht & Quist LLC....................................... --------- Total............................................. 2,500,000 =========
The Underwriting Agreement provides that the obligations of the several Underwriters to pay for and accept delivery of the shares of Common Stock offered hereby are subject to the approval of certain legal matters by their counsel and to certain other conditions. The Underwriters are obligated to take and pay for all of the shares of Common Stock offered hereby (other than those covered by the over-allotment option described below) if any such shares are taken. The Underwriters initially propose to offer part of the shares of Common Stock directly to the public at the initial public offering price set forth on the cover page hereof and part to certain dealers at a price that represents a concession not in excess of $ a share under the public offering price. Any Underwriter may allow, and such dealers may reallow, a concession not in excess of $ a share to other Underwriters or to certain dealers. After the initial offering of the shares of Common Stock, the offering price and other selling terms may from time to time be varied by the Representatives. The Company and the Selling Stockholder have granted to the Underwriters an option, exercisable for 30 days from the date of this Prospectus, to purchase up to an aggregate of 375,000 additional shares of Common Stock at the initial public offering price set forth on the cover page hereof, less underwriting discounts and commissions. The Underwriters may exercise such option to purchase solely for the purpose of covering over-allotments, if any, made in connection with the offering of the shares of Common Stock offered hereby. To the extent such option is exercised, each Underwriter will become obligated, subject to certain conditions, to purchase approximately the same percentage of such additional shares of Common Stock as the number set forth next to such Underwriter's name in the preceding table bears to the total number of shares of Common Stock set forth next to the names of all Underwriters in the preceding table. The Underwriters have informed the Company that they do not intend sales to discretionary accounts to exceed five percent of the total number of shares of Common Stock offered by them. Each of the Company and the directors, executive officers, other stockholders and option holders of the Company has agreed that, without the prior written consent of Morgan Stanley & Co. Incorporated on behalf of the Underwriters, it will not during the period ending 180 days after the date of this Prospectus (i) offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase or otherwise transfer, lend or dispose of, directly or indirectly, any shares of Common Stock or any securities convertible into or exercisable or exchangeable for Common Stock or (ii) enter into any swap or other arrangement that transfers to another, in whole or in part, any of the 64 69 economic consequences of ownership of the Common Stock, whether any such transaction described in clause (i) or (ii) above is to be settled by delivery of Common Stock or such other securities, in cash or otherwise, except under certain limited circumstances. The restrictions described in this paragraph do not apply to (a) the sale of shares of Common Stock to the Underwriters, (b) the issuance by the Company of shares of Common Stock upon exercise of an option or a warrant or the conversion of a security outstanding on the date of this Prospectus of which the Underwriters have been advised in writing or (c) transactions by any person other than the Company relating to shares of Common Stock or other securities acquired in open market transactions after the completion of the offering of the Shares. At the request of the Company, the Underwriters have reserved for sale, at the initial offering price, up to twelve percent of the shares offered hereby (not including shares subject to the Underwriters' over-allotment option) for certain parties who have expressed an interest in purchasing such shares in this offering. The number of shares of Common Stock available for sale to the general public will be reduced to the extent such persons purchase such reserved shares. Any reserved shares which are not so purchased will be offered by the Underwriters to the general public on the same basis as the other shares offered hereby. In order to facilitate the offering of the Common Stock, the Underwriters may engage in transactions that stabilize, maintain or otherwise affect the price of the Common Stock. Specifically, the Underwriters may over-allot in connection with the offering, creating a short position in the Common Stock for their own account. In addition, to cover over-allotments or to stabilize the price of the Common Stock, the Underwriters may bid for, and purchase, shares of Common Stock in the open market. Finally, the underwriting syndicate may reclaim selling concessions allowed to any Underwriter or a dealer for distributing the Common Stock in the offering, if the syndicate repurchases previously distributed Common Stock in transactions to cover syndicate short positions, in stabilization transactions or otherwise. Any of these activities may stabilize or maintain the market price of the Common Stock above independent market levels. The Underwriters are not required to engage in these activities, and may end any of these activities at any time. The Company and the Underwriters have agreed to indemnify each other against certain liabilities, including liabilities under the Securities Act. PRICING OF THE OFFERING Prior to this offering, there has been no public market for the shares of Common Stock or any other securities of the Company. The initial public offering price for the shares of Common Stock will be determined by negotiations between the Company and the Representatives. Among the factors to be considered in determining the initial public offering price will be the future prospects of the Company and its industry in general, sales, earnings and certain other financial and operating information of the Company in recent periods, and the price-earnings ratios, price-sales ratios, market prices of securities and certain financial and operating information of companies engaged in activities similar to those of the Company. The estimated initial public offering price range set forth on the cover page of this Prospectus is subject to change as a result of market conditions and other factors. 65 70 LEGAL MATTERS The validity of the Common Stock offered hereby will be passed upon for the Company by Gibson, Dunn & Crutcher LLP, New York, New York. Sean P. Griffiths, a partner of Gibson, Dunn & Crutcher LLP, currently owns 20,220 shares of Common Stock of the Company. Certain legal matters will be passed upon for the Underwriters by Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo Alto, California. EXPERTS The financial statements of the Company for the period from inception (May 19, 1995) to December 31, 1995 and each of the two years in the period ended December 31, 1997, included in this Prospectus have been so included in reliance on the report of PricewaterhouseCoopers LLP, independent accountants, given on the authority of said firm as experts in auditing and accounting. AVAILABLE INFORMATION The Company has filed with the Commission a Registration Statement on Form S-1 under the Securities Act, with respect to the Common Stock offered hereby. This Prospectus does not contain all of the information set forth in the Registration Statement and the exhibits and schedules thereto. For further information with respect to the Company and the Common Stock, reference is hereby made to such Registration Statement and the exhibits and schedules thereto. A copy of the Registration Statement may be inspected by anyone without charge at the Commission's principal office in Washington, D.C., at the regional offices of the Commission located at 7 World Trade Center, New York, New York 10048, and Citicorp Center 500 West Madison Street, Suite 1400, Chicago, Illinois 60661, and through the SEC's Web site at http://www.sec.gov. Copies of all or any part of the Registration Statement may be obtained from the Public Reference Section of the Commission, 450 Fifth Street, N.W. Washington, D.C. 20549, upon payment of certain fees prescribed by the Commission. 66 71 broadcast.com inc. INDEX TO FINANCIAL STATEMENTS THE FINANCIAL STATEMENTS REFERRED TO BELOW ARE AS OF DECEMBER 31, 1996 AND 1997 AND MARCH 31, 1998 (UNAUDITED) AND FOR THE INCEPTION PERIOD ENDED DECEMBER 31, 1995, YEARS ENDED DECEMBER 31, 1996 AND 1997 AND THE THREE MONTHS ENDED MARCH 31, 1998 (UNAUDITED)
PAGE ---- Report of Independent Accountants........................... F-2 Balance Sheets.............................................. F-3 Statements of Operations.................................... F-4 Statements of Stockholders' Equity (Deficit)................ F-5 Statements of Cash Flows.................................... F-6 Notes to Financial Statements............................... F-7
F-1 72 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of broadcast.com inc. In our opinion, the accompanying balance sheets and the related statements of operations, of stockholders' equity (deficit) and of cash flows present fairly, in all material respects, the financial position of broadcast.com inc. at December 31, 1996 and 1997 and the results of its operations and its cash flows for the period from inception (May 19, 1995) to December 31, 1995 and the years ended December 31, 1996 and 1997 in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. PRICEWATERHOUSECOOPERS LLP Dallas, Texas February 1, 1998, except as to Note 10, which is as of July 9, 1998 F-2 73 broadcast.com inc. BALANCE SHEETS
DECEMBER 31, ------------------------- MARCH 31, 1996 1997 1998 ASSETS ---------- ----------- ----------- (UNAUDITED) Current assets: Cash and cash equivalents.......................... $4,580,286 $21,337,116 $22,400,176 Accounts receivable, net of allowance of $34,826, $76,240 and $141,679, respectively.............. 406,802 1,976,765 2,448,561 Prepaid expenses................................... 65,760 1,032,198 1,382,182 Other.............................................. 17,912 11,311 52,986 ---------- ----------- ----------- Total current assets....................... 5,070,760 24,357,390 26,283,905 Property and equipment, net.......................... 1,186,182 2,812,971 3,289,255 Prepaid expenses..................................... 1,715,000 935,720 369,834 Intangible assets, net............................... 182,414 126,733 191,480 ---------- ----------- ----------- Total assets............................... $8,154,356 $28,232,814 $30,134,474 ========== =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable................................... $ 91,545 $ 362,214 $ 674,333 Accrued liabilities................................ 454,926 677,662 1,154,149 ---------- ----------- ----------- Total current liabilities.................. 546,471 1,039,876 1,828,482 ---------- ----------- ----------- Commitments and contingencies (Note 4) Stockholders' equity: Preferred stock, 5,000,000 shares authorized, $.01 par value, no shares issued and outstanding..... -- -- -- Common stock, 60,000,000 shares authorized, $.01 par value, 11,134,140, 13,976,285 and 14,383,451 shares issued and outstanding, respectively..... 57,341 85,763 89,835 Additional paid-in capital......................... 10,807,309 36,838,152 40,669,584 Accumulated deficit................................ (3,256,765) (9,730,977) (12,453,427) ---------- ----------- ----------- Total stockholders' equity................. 7,607,885 27,192,938 28,305,992 ---------- ----------- ----------- Total liabilities and stockholders' equity................................... $8,154,356 $28,232,814 $30,134,474 ========== =========== ===========
The accompanying notes are an integral part of these financial statements. F-3 74 broadcast.com inc. STATEMENTS OF OPERATIONS
PERIOD FROM INCEPTION (MAY 19, 1995) YEAR ENDED THREE MONTHS ENDED TO DECEMBER 31, MARCH 31, DECEMBER 31, ------------------------- ------------------------- 1995 1996 1997 1997 1998 -------------- ----------- ----------- ----------- ----------- (UNAUDITED) Revenues: Business services............ $ -- $ 535,201 $ 2,820,449 $ 446,711 $ 1,126,515 Web advertising.............. -- 1,090,629 2,955,259 531,306 1,322,911 Traditional media advertising............... -- -- 942,090 90,751 516,707 Other........................ -- 130,270 138,235 18,189 209,811 --------- ----------- ----------- ----------- ----------- Total revenues....... -- 1,756,100 6,856,033 1,086,957 3,175,944 --------- ----------- ----------- ----------- ----------- Operating expenses: Production costs............. -- 1,301,253 2,949,641 469,422 1,224,957 Operating and development.... -- 1,506,449 4,659,249 649,565 2,247,141 Sales and marketing.......... 21,413 717,547 3,389,069 519,182 1,670,727 General and administrative... 216,609 751,785 1,416,276 396,832 588,179 Depreciation and amortization.............. 29,896 544,003 1,129,120 176,463 442,456 --------- ----------- ----------- ----------- ----------- Total operating expenses........... 267,918 4,821,037 13,543,355 2,211,464 6,173,460 --------- ----------- ----------- ----------- ----------- Net operating loss... (267,918) (3,064,937) (6,687,322) (1,124,507) (2,997,516) Interest and other income...... -- 76,090 213,110 61,010 275,066 --------- ----------- ----------- ----------- ----------- Net loss............. $(267,918) $(2,988,847) $(6,474,212) $(1,063,497) $(2,722,450) ========= =========== =========== =========== =========== Basic and diluted net loss per share........................ $ (0.04) $ (0.31) $ (0.55) $ (0.09) $ (0.19) ========= =========== =========== =========== =========== Shares used in the net loss per share calculations........... 6,020,432 9,563,771 11,679,777 11,427,591 14,075,604 ========= =========== =========== =========== ===========
The accompanying notes are an integral part of these financial statements. F-4 75 broadcast.com inc. STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) FOR THE INCEPTION PERIOD ENDED DECEMBER 31, 1995, THE YEARS ENDED DECEMBER 31, 1996 AND 1997 AND THE THREE MONTHS ENDED MARCH 31, 1998 (UNAUDITED)
TOTAL COMMON STOCK ADDITIONAL STOCKHOLDERS' -------------------- PAID-IN ACCUMULATED EQUITY SHARES AMOUNT CAPITAL DEFICIT (DEFICIT) ---------- ------- ----------- ------------ ------------- Issuance of Common Stock to founders in May 1995......................... 5,400,000 $ -- $ 1,000 $ -- $ 1,000 Issuance of Common Stock; purchase of transmission and digital programming rights from Cameron Broadcasting, Inc. ............................... 600,000 6,000 44,000 -- 50,000 Issuance of Common Stock; payment for services............................ 30,180 302 2,198 -- 2,500 Net loss incurred during development stage............................... -- -- -- (267,918) (267,918) ---------- ------- ----------- ------------ ----------- BALANCES, DECEMBER 31, 1995........... 6,030,180 6,302 47,198 (267,918) (214,418) Issuance of Common Stock.............. 5,103,960 51,039 10,760,111 -- 10,811,150 Net loss.............................. -- -- -- (2,988,847) (2,988,847) ---------- ------- ----------- ------------ ----------- BALANCES, DECEMBER 31, 1996........... 11,134,140 57,341 10,807,309 (3,256,765) 7,607,885 Issuance of Common Stock.............. 2,842,145 28,422 25,310,843 -- 25,339,265 Issuance of warrants.................. -- -- 720,000 -- 720,000 Net loss.............................. -- -- -- (6,474,212) (6,474,212) ---------- ------- ----------- ------------ ----------- BALANCES, DECEMBER 31, 1997........... 13,976,285 85,763 36,838,152 (9,730,977) 27,192,938 Issuance of Common Stock.............. 407,166 4,072 3,831,432 -- 3,835,504 Net loss.............................. -- -- -- (2,722,450) (2,722,450) ---------- ------- ----------- ------------ ----------- BALANCES, MARCH 31, 1998 (UNAUDITED)......................... 14,383,451 $89,835 $40,669,584 $(12,453,427) $28,305,992 ========== ======= =========== ============ ===========
The accompanying notes are an integral part of these financial statements. F-5 76 broadcast.com inc. STATEMENTS OF CASH FLOWS
PERIOD FROM INCEPTION (MAY 19, 1995) YEAR ENDED THREE MONTHS ENDED TO DECEMBER 31, MARCH 31, DECEMBER 31, ------------------------- ------------------------- 1995 1996 1997 1997 1998 -------------- ----------- ----------- ----------- ----------- (UNAUDITED) Cash flows from operating activities: Net loss............................................... $(267,918) $(2,988,847) $(6,474,212) $(1,063,497) $(2,722,450) Adjustments to reconcile net loss to net cash from operating activities: Depreciation......................................... 22,936 488,037 1,060,340 162,461 427,203 Amortization......................................... 6,960 55,966 68,780 14,002 15,253 Issuance of Common Stock for services................ 2,500 -- -- -- -- Provision for doubtful accounts...................... -- 84,006 86,240 9,720 88,500 Changes in operating assets and liabilities: Accounts receivable................................ -- (490,808) (1,656,203) (294,570) (560,296) Prepaid expenses................................... (87,168) (1,693,592) (200,257) 13,500 215,902 Other assets....................................... (11,663) (6,559) 6,601 (372) (41,675) Accounts payable and accrued liabilities........... 304,644 241,827 493,405 (39,936) 788,606 ----------- ---------- ---------- ---------- ---------- Net cash used in operating activities............ (29,709) (4,309,970) (6,615,306) (1,198,692) (1,788,957) ----------- ---------- ---------- ---------- ---------- Cash flows from investing activities: Purchases of intangible assets......................... -- -- -- -- (80,000) Purchases of property and equipment.................... (414,227) (1,282,928) (2,687,129) (688,824) (903,487) ----------- ---------- ---------- ---------- ---------- Net cash used in investing activities............ (414,227) (1,282,928) (2,687,129) (688,824) (983,487) ----------- ---------- ---------- ---------- ---------- Cash flows from financing activities: Proceeds from Common Stock issuances................... 1,000 10,045,790 25,339,265 3,542,940 3,835,504 Proceeds from sale of warrants......................... -- -- 720,000 120,000 -- Proceeds from stock subscription deposits.............. 570,330 -- -- -- -- Proceeds from (repayment of) stockholder loan.......... 14,980 (14,980) -- -- -- Purchase of treasury stock............................. -- (160,000) -- -- -- Proceeds from sale of treasury stock................... -- 160,000 -- -- -- ----------- ---------- ---------- ---------- ---------- Net cash provided by financing activities........ 586,310 10,030,810 26,059,265 3,662,940 3,835,504 ----------- ---------- ---------- ---------- ---------- Net increase in cash and cash equivalents................ 142,374 4,437,912 16,756,830 1,755,424 1,063,060 Cash and cash equivalents at beginning of period......... -- 142,374 4,580,286 4,580,286 21,337,116 ----------- ---------- ---------- ---------- ---------- Cash and cash equivalents at end of period............... $ 142,374 $ 4,580,286 $21,337,116 $ 6,335,710 $22,400,176 ========= =========== =========== =========== ===========
(See disclosure of noncash transactions in Notes 2 and 7) The accompanying notes are an integral part of these financial statements. F-6 77 broadcast.com inc. NOTES TO FINANCIAL STATEMENTS 1. NATURE OF BUSINESS Cameron Audio Networks, Inc. ("Cameron") was incorporated and filed its Articles of Incorporation (the "Articles") with the Secretary of State of Texas on May 19, 1995. The Articles authorized the issuance of one million shares of no par Common Stock. In December 1995, Cameron filed the Articles of Amendment to the Articles to increase the number of authorized no par shares of Common Stock to ten million. On May 15, 1996, Cameron purchased the rights to the name AudioNet and subsequently filed a Certificate of Incorporation to form AudioNet, Inc. ("AudioNet"), a new entity, in the state of Delaware, on September 19, 1996. On November 1, 1996, Cameron and AudioNet filed a Certificate of Merger, effectively a stock-for-stock merger, whereby Cameron merged with and into AudioNet, with AudioNet continuing as the surviving entity. Each share of common stock of Cameron was converted to one share of Common Stock of AudioNet, and Cameron ceased to exist at the date of such merger. Effective as of the merger date, the number of shares authorized increased from 10,000,000 shares of Common Stock, no par value, to 5,000,000 shares of Preferred Stock, $0.01 par value, and 45,000,000 shares of Common Stock, $0.01 par value. The financial statements have been retroactively restated to reflect this reincorporation, except for the original issuance of founders' shares (see Note 7). In April 1997, the Company declared a sixty-for-one stock split to be effected in the form of a stock dividend to stockholders of record on April 28, 1997. Concurrent with the stock split, the number of authorized common shares was increased from 10,000,000 to 45,000,000. As stated in Note 2, the financial statements have been adjusted retroactively for the sixty-for-one stock split. Effective May 1998, the Company changed its name to broadcast.com inc. ("broadcast.com" or the "Company"). (Unaudited -- see Note 10). Additionally, in June 1998, the Company filed Restated Certificate of Incorporation which increases the number of authorized shares of Common Stock to 60,000,000. (Unaudited -- see Note 10). The Company aggregates content and is a broadcaster of streaming media programming on the Web with the network infrastructure and expertise to deliver or "stream" live and on-demand audio and video content on the Internet. The Company offers a comprehensive selection of live and on-demand audio and video programming on the Internet, including sports, talk and music radio, television, business events, full-length music CDs, news, commentary and full-length audio-books. The Company broadcasts on the Internet 24 hours a day seven days a week, and its programming includes radio stations, television stations and cable networks and game broadcasts and other programming for college and professional sports teams. The Company licenses such programming from content providers, in most cases under exclusive, multi-year agreements. The Company's Business Services Group also provides Internet and intranet broadcasting services to businesses and other organizations. These business services include turnkey production of press conferences, earnings conference calls, stockholder meetings, product introductions, training sessions, distance learning telecourses and media events. 2. SIGNIFICANT ACCOUNTING POLICIES USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS 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. REVENUES The Company generates revenues through business services, Web advertising and traditional media advertising. F-7 78 broadcast.com inc. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) Business Services. In 1996 and 1997, the Company derived 31% and 41%, respectively, of revenues from business services. Business services revenues are derived by providing Internet or intranet broadcasting services to businesses and other organizations. Business services revenues are recognized in the month in which the service is performed, provided that no significant Company obligations remain and collection of the resulting receivable is probable. Web Advertising. In 1996 and 1997, the Company derived 62% and 43%, respectively, of its revenues from the sale of Web advertisements. Web advertising revenues are derived from the sale of gateway ads with guaranteed click-thrus ads, channel and event sponsorships and multimedia and traditional banner ads. Bartered Web advertising revenues are derived from transactions in which the Company trades advertising on its Web sites in exchange for advertisements on the Web sites of other companies. Bartered Web advertising revenues are recognized at the fair market value of consideration received or provided, whichever is lower. If a barter agreement extends over the end of any accounting period, an asset and a liability are each recorded related to the fair value of the prepaid advertising expense and for advertisement obligations remaining at such period end. Because historically all bartered Web advertising agreements have been for periods not exceeding 30 days, all bartered Web advertising revenues are offset by an equal amount of bartered Web advertising expense in production costs. Bartered Web advertising revenues, which were $638,000 in 1996 and $1,018,000 in 1997, represented 59% and 34% of Web advertising revenues, or 36% and 15% of total revenues in 1996 and 1997, respectively. The corresponding expenses recorded for bartered Web advertising were $638,000 and $1,018,000 in 1996 and 1997, respectively. Web advertising revenues are recognized in the period in which the advertisement is displayed on one of the Company's Web pages, except for sponsorship sales which are recognized ratably over the term of the sponsorship, provided that no significant Company obligations remain and collection of the resulting receivable is probable. The duration of the Company's advertising commitments has generally ranged from one week to one year. Traditional Media Advertising. In 1997, the Company derived 14% of its revenues from traditional media advertising. Traditional media advertising revenues are derived from the sale of ad spots received from radio and television stations in exchange for the Company broadcasting their programming over the Internet and the sale of prepaid advertising. Traditional media advertising revenues are recognized in the month in which the advertisement is run. Other. Other revenues consist of electronic commerce sales as well as certain programming and promotional services performed by the Company and are recognized in the month the service is provided or the product is shipped. In 1996, two customers of the Company each accounted for 10% of revenues, one of which is currently a stockholder. In 1997, no customer accounted for more than 10% of revenues. PRODUCTION COSTS Production costs consist primarily of expenses from the sale of prepaid advertising credits, bartered Web advertising expenses, event production costs, direct personnel expenses associated with event production and performance license fees. OPERATING AND DEVELOPMENT EXPENSES Operating and development expenses consist primarily of data communications expenses, personnel expenses associated with broadcasting, content and software license fees, operating supplies and overhead. F-8 79 broadcast.com inc. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) SALES AND MARKETING EXPENSES Sales and marketing expenses consist primarily of personnel expenses associated with the sale of the Company's business services and advertising, marketing of the Company's Web sites, graphic design costs and overhead. GENERAL AND ADMINISTRATIVE EXPENSES General and administrative expenses consist primarily of administrative personnel expenses, professional fees, expenditures for applicable facilities costs and overhead. CASH EQUIVALENTS The Company considers investments with original maturities dates of 90 days or less to be cash equivalents. The carrying values of these investments are approximately equal to their fair market values at the end of the year. ADVERTISING EXPENSES Advertising expenses are either charged to operations when incurred or purchased in advance and capitalized for future use or sale and expensed as the advertising credits are used or sold. The cost of advertising used by the Company is charged to operations while the cost of advertising sold to customers is included in production costs. PREPAID EXPENSES In December 1997, the Company entered into an agreement with Yahoo! Inc. ("Yahoo!"), an existing stockholder, to integrate their services and conduct certain joint marketing activities. Amounts paid under this agreement for prepaid advertising credits are capitalized and expensed as the advertising credits are utilized. Amounts paid under this agreement for the use, reproduction and display of the broadcast.com brand, page views received from Yahoo! for banner advertising, sponsorships and promotions for the Company are capitalized and expensed ratably over the term of the agreement, which terminates on January 31, 1999. In conjunction with a stock transaction with Premiere Radio Networks, Inc. ("Premiere"), the Company entered into an agreement in November 1996 to pay Premiere $2,000,000 in exchange for an equal value of advertising credits. The Company is required to utilize a minimum of $250,000 in each twelve-month period over a maximum of four years. The asset has been and will continue to be expensed in the period the advertising credits are utilized (see Advertising expenses). In 1996 and 1997, the Company utilized approximately $285,000 and $780,000, respectively, in advertising credits. Prepaid advertising credits that will be utilized within the next twelve months are classified as current assets. PROPERTY AND EQUIPMENT Property and equipment is stated at cost and is depreciated over its estimated useful life, ranging from one to five years. The Company provides for depreciation of assets using the straight-line method for financial reporting purposes and accelerated methods for income tax purposes. Prior to 1996, capitalized software costs were being amortized over three years. However, in 1996, the Company changed the estimated life of all capitalized software costs to one year. The effect of this change was to increase the net loss during 1996 by approximately $240,000, or $0.03 per share. Leasehold improvements are amortized over the life of the lease using the straight-line method. Expenditures for maintenance and repairs are charged to operations in the period they are incurred. F-9 80 broadcast.com inc. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) Long-lived assets held and used by the Company, or to be disposed of, are reviewed for impairment whenever events or changes in circumstances indicate that the net book value of the asset may not be recoverable. An impairment loss is recognized if the sum of the expected future cash flows (undiscounted and before interest) from the use of the asset is less than the net book value of the asset. The amount of the impairment loss will generally be measured as the difference between net book value of the assets and the estimated fair value of the related assets. Based on its most recent analysis, the Company believes that no impairment of long-lived assets existed at December 31, 1997. INTANGIBLE ASSETS Intangible assets consist of certain transmission and digital programming distribution rights acquired under license agreements that are accounted for as a purchase of rights by the Company. Assets and related liabilities associated with license agreements are reported at cost when the license period begins and the program material is available for distribution. Intangible assets are reported at the lower of unamortized cost or estimated net realizable value, on a program by program basis, based on management's expectation of the programs' usefulness and are amortized on a straight-line basis over the term of the license agreement. In May 1995, the Company acquired certain transmission and digital programming distribution rights from Cameron Broadcasting Systems, Inc. ("Cameron Broadcasting") and entered into an agreement to purchase a license from Universal Sports America, Inc. (formerly "University Sports America, Inc.") ("Universal Sports") (see Note 7). The transmission agreements acquired from Cameron Broadcasting, an unrelated third party, are stated at an historical cost of $50,000, less accumulated amortization of approximately $24,000 and $40,000 at December 31, 1996 and 1997, respectively, and are being amortized on a straight-line basis over a three-year period. In January 1996, the Company entered into an agreement to purchase a license from Universal Sports in exchange for 390,060 shares of Common Stock. The license provides the Company with the right to broadcast several college and university sports programs over the Internet. The license is stated at an historical cost of $195,030, less accumulated amortization of approximately $39,000 and $78,000 at December 31, 1996 and 1997, respectively, and is being amortized on a straight-line basis over a five-year period. FINANCIAL INSTRUMENTS As of December 31, 1996 and 1997, the fair values of the Company's accounts receivable and accounts payable and accrued liabilities approximate the related carrying values. ACCRUED LIABILITIES At December 31, 1996, accrued liabilities included approximately $145,000 in software license fees, approximately $61,000 in expense reimbursements to employees, approximately $56,000 in legal fees, approximately $51,000 for computer hardware costs, and approximately $13,000 for leasehold improvements. At December 31, 1997, accrued liabilities included approximately $368,000 in software license fees, approximately $82,000 in deferred revenue, and approximately $55,000 in advertising expenses. At March 31, 1998, accrued liabilities included approximately $497,000 in content license fees, approximately $417,000 in software license fees, and approximately $92,000 in deferred revenue. INCOME TAXES The Company presents income taxes pursuant to Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes ("FAS 109"). FAS 109 uses an asset and liability approach to account for income taxes, wherein deferred taxes are provided for book and tax basis differences for assets and liabilities. F-10 81 broadcast.com inc. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) In the event differences between the financial reporting basis and the tax basis of the Company's assets and liabilities result in deferred tax assets, an evaluation of the probability of being able to realize the future benefits indicated by such assets is required. A valuation allowance is provided for a portion or all of the deferred tax assets when there is sufficient uncertainty regarding the Company's ability to recognize the benefits of the assets in future years. ACCOUNTING FOR STOCK-BASED COMPENSATION Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation ("FAS 123"), encourages, but does not require, companies to record compensation cost for stock-based employee compensation plans at fair value. The Company has elected to continue to account for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations. Accordingly, compensation cost for stock options issued to employees is measured as the excess, if any, of the fair market value of the Company's Common Stock at the date of grant over the amount the employee must pay to acquire the stock. Pro forma disclosure of net loss based on the provisions of FAS 123 is discussed in Note 6. STOCK SPLIT A sixty-for-one split of the Company's Common Stock was effected in the form of a stock dividend in April 1997. All references in the financial statements to shares, share prices, per share amounts and stock plans have been adjusted retroactively for the sixty-for-one stock split(see Note 1). UNAUDITED QUARTERLY FINANCIAL DATA The quarterly financial information presented herein should be read in conjunction with the Company's annual financial statements for the year ended December 31, 1997. The unaudited interim financial statements reflect all adjustments (all of which are of a normal recurring nature) which are, in the opinion of management, necessary for a fair presentation of the results of the interim periods. The results for the interim periods are not necessarily indicative of the results to be expected for the year. RECENT ACCOUNTING PRONOUNCEMENTS In June 1997, Statement of Financial Accounting Standards No. 130, Reporting Comprehensive Income ("FAS 130"), was issued. FAS 130 establishes standards for reporting and display of comprehensive income and its components (revenues, expenses, gains and losses) in a full set of general-purpose financial statements. Reclassification of financial statements for earlier periods provided for comparative purposes is required upon adoption. FAS 130 is effective for fiscal years beginning after December 15, 1997. The Company adopted FAS 130 for the year ending December 31, 1998. The Company had no comprehensive income items to report for the three months ended March 31, 1998. In June 1997, Statement of Financial Accounting Standards No. 131, Disclosure About Segments of an Enterprise and Related Information ("FAS 131"), was issued. FAS 131 establishes standards for the way that public business enterprises report information about operating segments in annual financial statements and requires those enterprises report selected information about operating segments in interim financial reports issued to stockholders. FAS 131 is effective for financial statements for periods beginning after December 15, 1997. The Company will adopt the reporting requirements of FAS 131 in its financial statements for the year ending December 31, 1998. On March 4, 1998, the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants issued Statement of Position No. 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use ("SOP 98-1"). SOP 98-1 requires computer software costs F-11 82 broadcast.com inc. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) related to internal use software that are incurred in the preliminary project stage should be expensed as incurred. Once the capitalization criteria of SOP 98-1 have been met, external direct costs of materials and services consumed in developing or obtaining internal-use computer software; payroll and payroll-related costs for employees who are directly associated with and who devote time to the internal-use computer software project (to the extent of the time spent directly on the project); and interest costs incurred when developing computer software for internal use should be capitalized. SOP 98-1 is effective for financial statements for fiscal years beginning after December 15, 1998. Accordingly, the Company will adopt SOP 98-1 in its financial statements for the year ending December 31, 1999. The Company does not believe the adoption of SOP 98-1 will have a material effect on the Company's results of operations or financial condition. 3. PROPERTY AND EQUIPMENT Property and equipment consist of the following:
DECEMBER 31, ------------------------ 1996 1997 ---------- ---------- Computer hardware........................................... $1,031,198 $2,794,395 Computer software........................................... 492,894 575,582 Furniture and equipment..................................... 66,645 222,175 Leasehold improvements...................................... 106,418 792,132 ---------- ---------- 1,697,155 4,384,284 Accumulated depreciation.................................... (510,973) (1,571,313) ---------- ---------- $1,186,182 $2,812,971 ========== ==========
Computer software represents software purchased from outside vendors for internal use and is being amortized over one year. 4. COMMITMENTS AND CONTINGENCIES A summary of future minimum lease payments under operating leases for buildings and equipment as of December 31, 1997 is as follows:
FISCAL YEAR ENDING DECEMBER 31, ------------------------------- 1998.............................................. $159,806 1999.............................................. 159,806 2000.............................................. 84,629 2001.............................................. 47,040 2002.............................................. 3,920 -------- Total............................................. $455,201 ========
During 1995, the President and co-founder of the Company provided office space to the Company for no cost. The fair market value of the office space provided was immaterial for the period from Inception (May 19, 1995) to December 31, 1995. Rental expense of approximately $25,000 and $178,000 was incurred during 1996 and 1997, respectively. Pursuant to an agreement with Capitol Radio Network, Inc. ("Capitol"), the Company is obligated to purchase a minimum of $75,000 of advertising spots from Capitol each year during the term of the agreement which began in February 1997 and which expires on December 31, 2000 (see Note 7). In December 1997, the Company entered into an agreement with Yahoo! to integrate their services and conduct certain joint marketing activities. In December 1997, the Company paid Yahoo! $1,000,000, representing a prepaid advertising credit (see Note 2). The Company agreed to pay Yahoo! an additional F-12 83 broadcast.com inc. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) $1,500,000 in 1998, pursuant to which Yahoo! agreed to promote broadcast.com programming on its Web site. As of March 31, 1998, the Company had paid Yahoo! $750,000 of such amount. The agreement terminates on January 31, 1999. In December 1997, the Company entered into a line of credit, which provides for borrowings of up to $2,500,000 for working capital needs and equipment purchases. The Company's right to make borrowings under the line of credit can be terminated by the lender upon the occurrence of a default by the Company, including an uncured failure to pay principal or interest due under the facility, certain breaches of the representations and warranties made by the Company in connection with the establishment of the line of credit, and certain insolvency events of the Company. The Company is obligated to pay monthly interest on amounts outstanding under the line of credit, but no commitment fee is payable by the Company in respect of unaccessed funding capacity. As of March 31, 1998, the Company had not made any borrowings against this line of credit. From time to time, the Company is subject to legal proceedings and claims in the ordinary course of business, including claims of alleged infringement of trademarks and other intellectual property rights. The Company is not currently aware of any legal proceedings or claims that the Company believes will have, individually or in the aggregate, a material adverse effect on the Company's financial position or results of operations. 5. INCOME TAXES As of December 31, 1997, the Company has available net operating loss carryforwards totaling approximately $10,269,000 which expire beginning in 2011. Utilization of net operating loss carryforwards may be limited by ownership changes which may have occurred or could occur in the future. Deferred taxes are provided for those items reported in different periods for income tax and financial reporting purposes. The net deferred tax asset has been fully reserved because of uncertainty regarding the Company's ability to recognize the benefit of the asset in future years. The tax effects of temporary differences that give rise to significant portions of the deferred tax assets are presented below:
DECEMBER 31, -------------------------- 1996 1997 ----------- ----------- Deferred tax assets: Net operating loss carryforwards........................ $ 1,088,606 $ 3,796,343 Intangible amortization................................. 20,984 35,231 Depreciation............................................ 88,352 127,201 Contribution carryover.................................. 370 370 Accrual to cash adjustment.............................. 3,793 -- ----------- ----------- Gross deferred tax assets............................... 1,202,105 3,959,145 Deferred tax liabilities: Accrual to cash adjustment.............................. -- 367,680 ----------- ----------- Net deferred tax assets................................... 1,202,105 3,591,465 Valuation allowance....................................... (1,202,105) (3,591,465) ----------- ----------- Deferred tax balance...................................... $ -- $ -- =========== ===========
F-13 84 broadcast.com inc. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) The provision for income taxes is different than the amount computed using the applicable statutory federal income tax rate with the difference for each year summarized below:
1995 1996 1997 ---- ---- ---- Federal tax benefit at statutory rate....................... (34)% (34)% (34)% State taxes, net of federal benefit......................... (4) (4) (3) Adjustment due to increase in valuation allowance........... 38 38 37 --- --- --- Provision for income taxes.................................. --% --% --% === === ===
6. STOCK-BASED COMPENSATION The Company's 1996 Stock Option Plan for employees and consultants was approved by the Board of Directors and stockholders of the Company in April 1996 and authorizes the grant of up to 1,440,000 shares of the Company's Common Stock in the form of incentive stock options ("ISOs") and nonqualified stock options ("NSOs"). The plan is administered by the Stock Option Committee of the Board of Directors (the "Committee"). Options typically expire 10 years from the date of grant, and under Committee policy become exercisable in installments of 20% per year commencing one year from the date of grant, or over such other vesting period determined by the Committee. Shares granted come from the Company's authorized but unissued or reacquired Common Stock. The Company's 1998 Stock Option Plan for employees and consultants was approved by the Board of Directors in August 1997 and approved by the stockholders of the Company in June 1998 (unaudited -- see Note 10), and, as amended, authorizes the grant of up to 2,800,000 shares of the Company's Common Stock in the form of ISOs and NSOs. The plan is administered by the Compensation Committee of the Board of Directors (the "Compensation Committee"). Options typically expire 10 years from the date of grant, and become exercisable in installments of 20% per year commencing one year from the date of grant, or over such other vesting period determined by the Compensation Committee. Compensation expense is recorded and amortized over the options' vesting period for options granted to consultants. The amount of compensation expense is calculated based on the fair value of the options determined using the Black-Scholes Option Pricing Model. Shares granted come from the Company's authorized but unissued or reacquired Common Stock. Under the 1996 and 1998 Stock Option Plans, the Company has issued options to purchase a total, net of forfeitures, of 1,898,004 and 2,020,356 shares of Common Stock and has 1,075,654 and 949,861 options available for issuance as of December 31, 1997 and March 31, 1998, respectively. Effective August 19, 1997, the Company discontinued the 1996 Stock Option Plan. The Company's 1996 Stock Option Plan for Non-Employee Directors, which was approved by the Board of Directors and the stockholders in April 1996, authorizes the grant of up to 150,000 shares of the Company's Common Stock in the form of ISOs and NSOs. The plan is administered by the Committee. Options typically expire 10 years from the date of grant, and under Committee policy become exercisable in installments of 20% per year commencing one year from the date of grant, or over such other vesting period determined by the Committee. Shares granted come from the Company's authorized but unissued or reacquired Common Stock. During 1996, the Company granted to a non-employee director an option to purchase 15,000 shares of Common Stock at an exercise price of $1.07 per share. At December 31, 1997 and March 31, 1998, 15,000 and 7,500, respectively, of these options were outstanding. There were no stock options granted prior to 1996. If compensation cost for the Company's stock option plans had been determined based on the fair value at the grant date for awards issued in 1996, 1997 and the F-14 85 broadcast.com inc. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) three months ended March 31, 1998 consistent with the provisions of FAS 123, then the Company's net loss would have been increased to the pro forma amounts indicated below:
THREE MONTHS ENDED 1996 1997 MARCH 31, 1998 ---------- ---------- -------------- Net loss--as reported......................... $2,988,847 $6,474,212 $2,722,450 Net loss--pro forma........................... 3,050,003 6,790,334 2,804,823 Basic and diluted net loss per share--as reported.................................... (0.31) (0.55) (0.19) Basic and diluted net loss per share--pro forma....................................... (0.32) (0.58) (0.20)
The weighted average fair value at date of grant for options granted during 1996, 1997 and the three months ended March 31, 1998 was $0.46, $1.10 and $1.50 per option, respectively. The fair value of each option grant was estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions used:
THREE MONTHS ENDED 1996 1997 MARCH 31, 1998 --------- --------- --------------- Dividend yield................................. -- -- -- Expected volatility............................ -- -- -- Risk-free rate of return....................... 6.2% 5.9% 5.8% Expected life.................................. 3.0 years 3.0 years 3.0 years Expected forfeiture rate....................... -- 15.0% 15.0%
The following table summarizes activity under the Company's stock option plans during the years ended December 31, 1996 and 1997 and the three months ended March 31, 1998:
WEIGHTED AVERAGE EXERCISE EXERCISE OPTIONS PRICE PRICE --------- ------------- -------- Outstanding at December 31, 1995................ -- $ -- $ -- Granted....................................... 719,249 1.07 - 13.47 3.10 ------------- ----- Forfeited..................................... (10,500) --------- Outstanding at December 31, 1996................ 708,749 1.07 - 13.47 3.10 Granted....................................... 1,280,795 6.80 - 10.73 6.82 Forfeited..................................... (76,540) 2.69 - 6.80 5.86 --------- ------------- ----- Outstanding at December 31, 1997................ 1,913,004 1.07 - 10.73 5.43 ------------- ----- Granted....................................... 140,852 9.42 - 10.43 9.43 Forfeited..................................... (26,000) 1.07 - 6.80 5.15 Outstanding at March 31, 1998................... 2,027,856 1.07 - 10.43 5.71 ========= ============= ===== Options exercisable at December 31, 1997........ 208,707 1.07 - 10.73 4.68 Options exercisable at March 31, 1998........... 337,493 $1.07 - 10.43 $5.55
F-15 86 broadcast.com inc. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) The following table summarizes information about stock options outstanding as of December 31, 1997 and March 31, 1998:
WEIGHTED AVERAGE NUMBER REMAINING NUMBER EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISABLE - --------------- ----------- ---------------- ----------- December 31, 1997 $ 1.07........................................... 15,000 8.4 years 7,500 2.69........................................... 646,200 4.6 years 133,128 3.33........................................... 6,000 8.8 years 6,000 6.80........................................... 1,209,457 9.5 years 25,732 10.73........................................... 36,347 6.0 years 36,347 March 31, 1998 1.07........................................... 7,500 8.0 years 7,500 2.69........................................... 646,200 4.4 years 133,128 3.33........................................... 6,000 8.5 years 6,000 6.80........................................... 1,190,966 9.3 years 133,468 9.42........................................... 139,793 4.1 years 20,000 10.43........................................... 37,397 5.8 years 37,397
In addition to the option activity described above, in September 1996, the Company issued a warrant to purchase 15,960 shares of Common Stock at an exercise price of $6.80 per share. In February and December 1997, the Company issued 147,120 and 159,236 warrants, respectively, for the purchase of Common Stock to two participants in private placement offerings at exercise prices of $6.80 and $9.42, respectively (see Note 7). 7. STOCKHOLDERS' EQUITY In May 1995, founders of the Company were issued a total of 5,400,000 shares of Common Stock for $1,000. In May 1995, the Company issued 600,000 shares valued at $50,000 in consideration for a purchase agreement in which the Company acquired certain assets and intangible rights and assumed the obligations and duties under certain transmission agreements. In August 1995, the Company issued 30,180 shares of Common Stock in order to satisfy a $2,500 liability for legal fees. Between January and March 1996, the Company issued a total of 3,280,560 shares of Common Stock to new and existing stockholders of the Company for $0.50 per share or $1,640,280. In June 1996, the Company issued 499,080 shares of Common Stock to new and existing stockholders for $536,012 or approximately $1.07 per share. In July 1996, the Company repurchased 120,000 shares of Common Stock from Cameron for $1.33 per share or $160,000 and subsequently resold these shares to new and existing stockholders for $1.33 per share. Between September 1996 and May 1997, the Company issued a total of 1,870,680 shares of Common Stock to new and existing stockholders, including Motorola and Intel, for approximately $6.80 per share or $12,712,830. In connection with Motorola's investment in September 1996, the two largest stockholders agreed to vote their shares so as to elect a nominee of Motorola to the Board of Directors. In February 1997, the Company issued a warrant to Intel for $120,000 representing the right to acquire 147,120 shares of the Company's Common Stock at a price of $6.80 per share, or $1,000,416. Under the terms of the warrant, the right to acquire 58,860 shares is exercisable immediately and expires on February 23, 2004. However, the right to acquire the remaining 88,260 shares of the Company's Common Stock at $6.80 per share will have expired prior to the effectiveness of the Prospectus if the Company and Intel have not entered into a subsequent agreement prior to June 30, 1998. The Company does not anticipate that it will enter into such an agreement. F-16 87 broadcast.com inc. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) In addition, an underwriting fee related to certain of these transactions totalling approximately $365,000 was recorded as a reduction in additional paid-in capital. In December 1997, the Company issued 2,295,785 shares of Common Stock for $21,626,294 or $9.42 per share to new and existing stockholders, including Motorola, Intel and Yahoo! In connection with these transactions, the two largest stockholders agreed to vote their shares so as to elect a second nominee of Motorola to the Board of Directors and the Company issued a warrant to Yahoo! for approximately $600,000 representing the right to purchase 159,236 shares of the Company's Common Stock at a strike price of $9.42 per share or $1,500,000. The warrant is exercisable immediately and expires on December 30, 2000. In March 1998, the Company issued 407,166 shares of Common Stock to new and existing stockholders for $3,835,504 or $9.42 per share. The Company has granted to certain owners of Common Stock preemptive rights that expire immediately prior to consummation of an initial public offering. 8. NET LOSS PER SHARE Basic net loss per share has been computed in accordance with FAS 128 using the weighted average number of common shares outstanding. The provisions and disclosure requirements for FAS 128 were required to be adopted for interim and annual periods ending after December 15, 1997, with restatement of EPS for all prior periods. Diluted net loss per share gives effect to all dilutive potential common shares that were outstanding during the period. The Company had a net loss for all periods presented herein; therefore, none of the options and warrants outstanding during each of the periods presented, as discussed in Note 6, were included in the computations of diluted earnings per share because they were antidilutive. See Note 6 for a list of options and warrants outstanding at December 31, 1997 that were excluded from the diluted EPS computation because they were antidilutive. Options and warrants outstanding at March 31, 1998 which were not included in the computation of diluted EPS because they were antidilutive were as follows:
EXERCISE PRICE NUMBER OF EXPIRATION PER SHARE OPTIONS/WARRANTS DATE - --------- ---------------- ---------- $ 1.07............................. 7,500 2006 2.69............................. 646,200 2006 3.33............................. 6,000 2006 6.80............................. 1,354,046 2004-2007 9.42............................. 299,029 2000-2008 10.43............................. 37,397 2008
9. RELATED PARTY TRANSACTIONS During 1995, certain computer equipment and office space, owned by a corporation wholly-owned by the Company's President, were provided to the Company at no cost. Also in 1995, certain travel and other expenses were incurred by the President for the direct benefit of the Company. The cost of these assets, rent and travel expenses were immaterial to the financial statements as a whole and were not included in the 1995 financial statements. Additionally, the Company's President has agreed to act as guarantor of certain current equipment loan obligations of the Company. The Company and Motorola, a stockholder of the Company, entered into a Negotiation Rights Agreement in September 1996 pursuant to which the Company agreed to offer Motorola a non-exclusive license to certain of its technologies as well as certain rights of notice and first negotiation with Motorola regarding licenses that the Company proposes to grant to other parties. In connection with this agreement, the F-17 88 broadcast.com inc. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) Company, Motorola, and Messrs. Cuban and Wagner entered into a stockholders agreement pursuant to which Motorola was granted representation rights on the Company's Board of Directors and certain tag-along rights with respect to certain sales of shares by Messrs. Cuban and Wagner after the date of the Offering. Motorola is also a customer of the Company, to which the Company provides business services. These relationships with Motorola have generated revenues for the Company of $10,000 and $84,000 for the twelve months ending December 31, 1997 and the three months ending March 31, 1998, respectively. 10. SUBSEQUENT EVENTS (UNAUDITED) In April 1998, the Company entered into an operating lease facility which provides the Company with the ability to obtain additional equipment under operating leases with total equipment costs of up to $2.5 million. As of May 31, 1998, the Company had entered into operating leases for equipment with purchase prices aggregating $550,000 under this facility. In April 1998, the Company entered into a three year agreement to acquire additional access to bandwidth for unicasting and multicasting. The agreement provides for a cost to the Company of $161,000 per month. Once the bandwidth is operational, such cost will be expressed as incurred during the term of the agreement. In April 1998, the Company granted options to employees to purchase a total of 329,195 shares of Common Stock with exercise prices equal to the fair market value at the date of grant, or $9.42 per share. In May and June 1998, the Company granted options to employees to purchase a total of 234,000 shares of Common Stock with exercise prices equal to the fair market value at the date of grant, or $9.90 per share. In July 1998, the Company granted options to employees to purchase a total of 17,000 options at the initial offering price. In May 1998, the Board of Directors adopted, and in June 1998 the stockholders approved, the Company's 1998 Employee Stock Purchase Plan (the "Stock Purchase Plan"). Subject to meeting federal and state securities law requirements and such stockholder approval, the Stock Purchase Plan will become effective at the consummation of this offering, or as soon as practicable thereafter. The Stock Purchase Plan will be administered by the Compensation Committee of the Board of Directors, members of which are not eligible to participate in the Stock Purchase Plan. The Company has reserved a total of 250,000 shares of Common Stock for issuance and sale under the Stock Purchase Plan. Eligible employees may purchase Common Stock through voluntary payroll deductions, not to exceed 10% of the employee's base salary. Payroll deductions are made over a six month period. At the end of the deduction period, employees have the option to purchase Common Stock at 85% of the lesser of fair market value of such shares on the date of purchase or the offering date. The offering dates will be August 15 and February 15 of each Stock Purchase Plan year. Employee contributions not used to purchase Common Stock will be refunded to the employee. Effective May 1998, the Company's name was changed from AudioNet, Inc. to broadcast.com inc. Additionally, in June 1998, the Company filed Restated Certificate of Incorporation increasing the number of authorized shares of Common Stock to 60,000,000. Further, the stockholders of the Company approved the Company's 1998 Stock Plan in June 1998, as amended, authorizing the issuance of up to 2,800,000 shares of the Company's Common Stock. F-18 89 (THIS PAGE INTENTIONALLY LEFT BLANK) 90 [broadcast.com LOGO] 91 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The Registrant estimates that expenses in connection with the offering described in this registration statement will be as follows: Securities and Exchange Commission registration fee......... $ 10,325 NASD filing fee............................................. 4,000 Printing expenses........................................... 200,000 Accounting fees and expenses................................ 175,000 Legal fees and expenses..................................... 430,000 Nasdaq National Market listing fee.......................... 90,000 Blue Sky fees and expenses.................................. 10,000 Transfer agent's fees and expenses.......................... 15,000 Miscellaneous............................................... 65,675 ---------- Total............................................. $1,000,000 ==========
All amounts except the Securities and Exchange Commission registration fee and the NASD filing fee are estimated. ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS Section 145(a) of the DGCL provides that a Delaware corporation may indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the corporation) by reason of the fact that such person is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation or enterprise, against expenses, judgments, fines and amounts paid in settlement actually and reasonably incurred by such person in connection with such action, suit or proceeding if he or she acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no cause to believe his or her conduct was unlawful. Section 145(b) of the DGCL provides that a Delaware corporation may indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the corporation to procure a judgment in its favor by reason of the fact that such person acted in any of the capacities set forth above, against expenses actually and reasonably incurred by such person in connection with the defense or settlement of such action or suit if he or she acted under similar standards, except that no indemnification may be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable for negligence or misconduct in the performance of his or her duty to the corporation unless and only to the extent that the court in which such action or suit was brought shall determine that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to be indemnified for such expenses which the court shall deem proper. Section 145 of DGCL further provides that to the extent a director or officer of a corporation has been successful in the defense of any action, suit or proceeding referred to in subsection (a) and (b) or in the defense of any claim, issue or matter therein, such officer or director shall be indemnified against expenses actually and reasonably incurred by him or her in connection therewith; that indemnification provided for by Section 145 shall not be deemed exclusive of any other rights to which the indemnified party may be entitled; and that the corporation may purchase and maintain insurance on behalf of a director or officer of the corporation against any liability asserted against such officer or director and incurred by him or her in any such II-1 92 capacity or arising out of his or her status as such, whether or not the corporation would have the power to indemnify him or her against such liabilities under Section 145. As permitted by Section 102(b)(7) of the DGCL, the Company's Restated Certificate of Incorporation, as amended, provides that a director shall not be liable to the Company or its stockholders for monetary damages for breach of fiduciary duty as a director. However, such provision does not eliminate or limit the liability of a director for acts or omissions not in good faith or for breaching his or her duty of loyalty, engaging in intentional misconduct or knowingly violating a law, paying a dividend or approving a stock repurchase which was illegal, or obtaining an improper personal benefit. A provision of this type has no effect on the availability of equitable remedies, such as injunction or rescission, for breach of fiduciary duty. The Company's Bylaws require the Company to indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the Company) by reason of the fact that he is or was a director, officer or employee of the Company, or that being such a director, officer or employee he is or was serving at the request of the Company as a director, officer or employee of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Company, and with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, does not, of itself, create a presumption that the person did not act in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the Company, and, with respect to any criminal action or proceeding, that he had reasonable cause to believe that his conduct was unlawful. In addition, the Company's Bylaws require the Company to indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the Company to procure a judgment in its favor by reason of the fact that he is or was a director, officer, employee or agent of the Company, or that being such a director, officer or employee he is or was serving at the request of the Company as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against expenses (including attorneys' fees) actually and reasonably incurred by him in connection with the defense or settlement of such action or suit if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Company, except that no indemnification may be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable for negligence or misconduct in the performance of his duty to the Company unless and only to the extent that the Court of Chancery or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the Court of Chancery or such other court shall deem proper. Any indemnification (unless ordered by a court) made by the Company may be only as authorized in the specific case upon a determination that indemnification of the director, officer, employee or agent is proper in the circumstances because he has met the applicable standard of conduct as set forth above. Such determination must be made (i) by the Board by a majority vote of a quorum consisting of directors who were not parties to such action, suit or proceeding, or (ii) if such a quorum is not obtainable, or, even if obtainable, a quorum of disinterested directors so directs, by independent legal counsel in a written opinion, or (iii) by the stockholders. To the extent that a director, officer, employee or agent of the Company has been successful on the merits or otherwise in defense of any covered action, suit or proceeding, or in defense of any covered claim, issue or matter therein, he will be indemnified against expenses (including attorneys' fees) actually and reasonably incurred by him in connection therewith. II-2 93 Expenses incurred by an officer or director in defending a civil or criminal action, suit or proceeding may be paid by the Company in advance of the final disposition of such action, suit or proceeding as authorized by the Board in the specific case upon receipt of an undertaking by or on behalf of the director or officer to repay such amount unless it shall ultimately be determined that he is entitled to be indemnified by the Company as authorized in the Bylaws. Such expenses incurred by other employees and agents may be so paid upon such terms and conditions, if any, as the Board deems appropriate. The Company maintains policies of directors' and officers' liability insurance. The Company and the Underwriters will enter into an agreement that the Company anticipates will provide for indemnification by the Underwriters of the Company, its directors and officers, and by the Company of the Underwriters, in each case for certain liabilities, including liabilities arising under the Act and affords certain rights of contribution with respect thereto. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES The Registrant has not issued or sold securities within the past three years pursuant to offerings that were not registered under the Securities Act, except as follows:
NUMBER OF ACQUIROR DATE SHARES PRICE PER SHARE -------- ---- --------- --------------- Mark Cuban............................. May 1995 2,640,000 Founding Contribution Todd R. Wagner......................... May 1995 2,640,000 Founding Contribution Martin Woodall......................... May 1995 120,000 Founding Contribution Cameron Broadcasting................... May 1995 600,000 Contract Rights(1) Steven R. Block........................ July 1995 20,100 Payment of Legal Fees(2) Ray A. Balestri........................ July 1995 10,080 Payment of Legal Fees(3) Mark Cuban............................. December 1995 920,040 $0.50 Ray A. Balestri........................ December 1995 34,980 $0.50 Rex Farrior............................ December 1995 120,000 $0.50 John Lemak............................. December 1995 60,000 $0.50 Rawleigh H. Ralls IV................... December 1995 60,000 $0.50 Mark Landry............................ December 1995 34,980 $0.50 Sean P. Griffiths...................... December 1995 19,980 $0.50 Mark E. Jennings....................... December 1995 60,000 $0.50 Mark A. Nouss.......................... December 1995 40,020 $0.50 Steven H. Stodghill.................... December 1995 30,000 $0.50 Todd R. Wagner......................... December 1995 600 $0.50 Universal Sports....................... January 1996 390,060 Contract Rights(4) Stanley Woodward....................... March 1996 60,000 $0.50 Andrew G. Matthes...................... March 1996 60,000 $0.50 Ray A. Balestri........................ March 1996 9,900 $0.50 Mark Cuban............................. March 1996 990,000 $0.50 Richard Pollock........................ March 1996 100,020 $0.50 Stuart W. Cartner...................... March 1996 160,020 $0.50 Bruce W. Berg.......................... March 1996 79,980 $0.50 Goldstein Ventures..................... March 1996 19,980 $0.50 Mark Landry............................ March 1996 10,020 $0.50 Matthew Dolan.......................... March 1996 19,980 $0.50 Big Bend Investments, L.P. ............ April 1996 465,540 $1.07 Cameron Broadcasting................... April 1996 33,540 $1.07 Martin Woodall......................... August 1996 1,560 $1.33 Steven R. Block........................ August 1996 240 $1.33 Ray A. Balestri........................ August 1996 720 $1.33
II-3 94
NUMBER OF ACQUIROR DATE SHARES PRICE PER SHARE -------- ---- --------- --------------- Mark Cuban............................. August 1996 59,700 $1.33 Rex Farrior............................ August 1996 1,560 $1.33 John Lemak............................. August 1996 780 $1.33 Rawleigh H. Ralls IV................... August 1996 780 $1.33 Mark Landry............................ August 1996 600 $1.33 Sean P. Griffiths...................... August 1996 240 $1.33 Mark E. Jennings....................... August 1996 780 $1.33 Mark A. Nouss.......................... August 1996 540 $1.33 Steven H. Stodghill.................... August 1996 420 $1.33 Todd R. Wagner......................... August 1996 7,500 $1.33 Universal Sports....................... August 1996 5,100 $1.33 Stanley Woodward....................... August 1996 780 $1.33 Andrew G. Matthes...................... August 1996 780 $1.33 Richard Pollock........................ August 1996 1,320 $1.33 Stuart W. Cartner...................... August 1996 2,100 $1.33 Bruce W. Berg.......................... August 1996 1,020 $1.33 Goldstein Ventures..................... August 1996 240 $1.33 Big Bend Investments, L.P. ............ August 1996 6,120 $1.33 Joseph W. Autem........................ August 1996 19,620 $1.33 Daniel G. Routman...................... August 1996 7,500 $1.33 Motorola, Inc. ........................ September 1996 735,720 $6.80 Premiere Radio Networks, Inc. ......... November 1996 588,600 $6.80 HMTF Company Investors................. December 1996 138,360 $6.80 Motorola, Inc. ........................ January 1997 9,840 $6.80 Capital Radio Network, Inc. ........... February 1997 73,620 $6.80 Intel Corporation...................... February 1997 294,300 $6.80 Motorola, Inc.......................... March 1997 5,220 $6.80 Motorola, Inc.......................... April 1997 21,120 $6.80 HMTF Company Investors................. May 1997 3,900 $6.80 Intel Corporation...................... December 1997 530,786 $9.42 Motorola, Inc.......................... December 1997 1,592,356 $9.42 HMTF Company Investors................. December 1997 78,025 $9.42 Killian McCabe & Associates............ December 1977 15,000 $9.42 Yahoo! Inc. ........................... December 1997 79,618 $9.42 HMTF Company Investors................. March 1998 382,166 $9.42 Henry G. Heflich, Jr................... March 1998 25,000 $9.42 Mark Powell(5)......................... May 1998 1,320 $6.80 Richard Greenhut(6).................... June 1998 300 $6.80 BT Alex. Brown(7)...................... July 1998 15,960 $6.80
- --------------- (1) These 600,000 shares of Common Stock were issued to Cameron Broadcasting as consideration for the Company's purchase from Cameron Broadcasting of rights to certain agreements and intangible property owned by Cameron Broadcasting. The approximate value of such assets at the time of the issuance was $50,000, based on the sale price of shares of Common Stock issued shortly after the issuance to Cameron Broadcasting. (2) The issuance of 20,100 shares of Common Stock to Mr. Block, along with the contemporaneous issuance of 10,080 shares of Common Stock to Mr. Balestri, was in satisfaction of legal fees in the amount of $2,500 owing from the Company to Block & Balestri, P.C. (3) The issuance of 10,080 shares of Common Stock to Mr. Balestri, along with the contemporaneous issuance of 20,100 shares of Common Stock to Mr. Block, was in satisfaction of legal fees in the amount of $2,500 owing from the Company to Block & Balestri, P.C. II-4 95 (4) These 390,060 shares of Common Stock were issued to Universal Sports as consideration for Universal Sports' contribution to the Company of a perpetual license enabling the Company to provide digital distribution of athletic events and related programming for certain colleges and professional sports organizations. The approximate value of the license at the time of the issuance was $195,030, based on the $0.50 sale price of shares of Common Stock issued shortly before and after this issuance to Universal Sports. (5) The issuance of 1,320 shares of Common Stock to Mr. Powell was pursuant to Mr. Powell's exercise of certain vested options which were originally granted to Mr. Powell in January and February 1997 pursuant to the 1996 Plan. The terms of the options provided an exercise price of $6.80 per share. (6) The issuance of 300 shares of Common Stock to Mr. Greenhut was pursuant to Mr. Greenhut's exercise of certain vested options which were originally granted to Mr. Greenhut in February 1997 pursuant to the 1996 Plan. The terms of the options provided an exercise price of $6.80 per share. (7) The issuance of 15,960 shares of Common Stock to BT Alex. Brown was pursuant to BT Alex. Brown's exercise of certain warrants which were originally granted to BT Alex. Brown in December 1996 for services rendered. The term of the warrants provided an exercise price of $6.80 per share. In February and December 1997 the Company issued warrants to purchase 147,120 and 159,236 shares of Common Stock, respectively, at exercise prices of $6.80 and $9.42 per share, respectively, to investors. As of the effectiveness of this Prospectus, stock options entitling the holders thereof to purchase 2,534,295 shares of the Company's Common Stock at exercise prices generally ranging from $1.07 to the initial offering price per share are outstanding pursuant to grants since May 1996 under the Company's stock option plans. Since May 1996, the Company has issued no shares of Common Stock to employees, consultants and directors upon exercise of stock options (except as described above). The transactions set forth above, other than the purchases by Messrs. Powell and Greenhut in June 1998 and the grants of options to employees, consultants and directors of the Company were undertaken in reliance upon the exemption from registration requirements of the Securities Act afforded by Section 4(2) thereof and/or Regulation D promulgated thereunder, as sales not involving a public offering. The June 1998 issuances to Messrs. Powell and Greenhut and the grants of stock options to employees, consultants and directors of the Company were undertaken in reliance upon the exemption from registration requirements of the Securities Act afforded by rule 701 promulgated under the Securities Act, as sales by an issuer to employees, directors, officers, consultants or advisors pursuant to written compensatory benefit plans or written contracts relating to the compensation of such persons. The recipients of securities in each such transaction represented their intention to acquire the securities for investment only and not with a view to, or for sale in connection with, any distribution thereof, and appropriate legends were affixed to share certificates and instruments issued in such transactions. All recipients had adequate access, through their relationships with the Company, to information about the Company. II-5 96 ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) Exhibits
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT ------- ---------------------- 1.1 -- Underwriting Agreement 3.1* -- Restated Certificate of Incorporation of the Company, as amended (filed June 19, 1996) 3.1.1* -- Restated Certificate of Incorporation (filed June 23, 1998) 3.2* -- Amended and Restated Bylaws of the Company 3.2.1* -- Amendment to Amended and Restated Bylaws of the Company 4.1* -- Form of Common Stock Certificate 5.1* -- Opinion of Gibson, Dunn & Crutcher LLP 10.1.1* -- Employment Agreement, dated as of June 15, 1998, between the Company and Todd R. Wagner. 10.1.2* -- Employment Agreement, dated as of June 15, 1998, between the Company and Mark Cuban. 10.2.1* -- Stock Purchase Agreement, dated as of September 4, 1996, between the Company and Motorola, Inc. 10.2.2* -- Stock Purchase Agreement, dated as of November 15, 1996, between the Company and Premiere Radio Networks, Inc. 10.3* -- First Amended and Restated Registration Rights Agreement, dated as of February 24, 1997 among the Company, Motorola, Inc., Premiere Radio Networks, Inc., Capitol Radio Network, Inc., Intel Corporation and HMTF AudioNet Investors, as amended by the Addendum to First Amended and Restated Registration Rights Agreement dated as of December 30, 1997, among the Company, Yahoo! Inc., Motorola, Inc. and Intel Corporation. 10.4* -- Stockholders Agreement, dated as of September 4, 1996, among the Company, Motorola, Inc., Todd R. Wagner and Mark Cuban, as amended by Amendment No. 1 on December 30, 1996 and Amendment No. 2 on December 19, 1997. 10.5* -- December Stockholders Agreement, dated as of December 31, 1996, among the Company, Todd R. Wagner, Mark Cuban, HMTF AudioNet Investors, Motorola, Inc., Premiere Radio Networks, Inc., as amended by an Addendum to December Stockholders Agreement dated February 24, 1997, between Intel Corporation, the Company, Todd R. Wagner and Mark Cuban, and as further amended by an Addendum to December Stockholders Agreement dated December 30, 1997, between Yahoo! Inc., the Company, Todd R. Wagner and Mark Cuban. 10.6+ -- Network Radio Sales Representation Agreement dated as of November 15, 1996, between the Company and Premiere Radio Networks, Inc. 10.7* -- The Company's 1998 Employee Stock Purchase Plan. 10.8* -- The Company's 1996 Stock Option Plan. 10.9* -- The Company's 1998 Stock Option Plan, as amended. 10.10* -- Form of the Company's Stock Option Agreement under the 1998 Stock Option Plan. 10.11* -- The Company's 1996 Non-Employee Directors Stock Option Plan. 10.12+ -- RealNetworks License Agreement, dated as of January 1, 1998, between the Company and RealNetworks, Inc.
II-6 97
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT ------- ---------------------- 10.13+ -- NetShow License Agreement, dated as of January 1, 1998, between the Company and Microsoft Corporation. 10.14* -- Form of Directors and Officers Indemnification Agreement. 10.15* -- Lease Agreement, dated as of December 2, 1996, between the Company and George W. Lollis and Daisy Lollis. 10.16* -- Master Lease of Personal Property No. 3769, dated April 15, 1998, between the Company and Charter Financial, Inc. 10.17* -- The Security and Loan Agreement (Accounts Receivable), dated December 15, 1997, between the Company and Imperial Bank. 10.18* -- Imperial Bank Note, dated December 15, 1997, between the Company and Imperial Bank. 21.1* -- Subsidiary of the Company 23.1 -- Consent of PricewaterhouseCoopers LLP 23.2* -- Consent of Gibson, Dunn & Crutcher LLP (contained in Exhibit 5.1) 24.1* -- Power of Attorney 27.1* -- Financial Data Schedule
- ------------ + Information contained in such agreement has been omitted in connection with a confidential treatment request, marked with asterisks and filed separately with the Commission. * Previously filed. b) Financial Statement Schedule Schedule II -- Valuation and Qualifying Accounts All other Schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission have been omitted because they are not required under the related instructions, are not applicable or the information has been provided in the Financial Statements or the Notes thereto. ITEM 17. UNDERTAKINGS (a) The undersigned registrant hereby undertakes to provide to the Underwriters at the closing specified in the Underwriting Agreement certificates in such denominations and registered in such names as required by the Underwriters to permit prompt delivery to each purchaser. (b) Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. II-7 98 (c) The undersigned registrant hereby undertakes that: (l) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of Prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of Prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of Prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-8 99 SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS PERIOD FROM INCEPTION (MAY 19, 1995) TO DECEMBER 31, 1995 AND THE YEARS ENDED DECEMBER 31, 1996 AND 1997
ADDITIONS BALANCE AT -------------------------------------- BEGINNING CHARGED TO CHARGED TO BALANCE AT DESCRIPTION OF PERIOD COSTS AND EXPENSES OTHER ACCOUNTS(A) DEDUCTIONS END OF PERIOD ----------- ---------- ------------------ ----------------- ---------- ------------- 1995: Provision for doubtful accounts -- accounts receivables......... $ -- $ -- $ -- $ -- $ -- Tax valuation reserve............. -- 101,429 -- -- 101,429 ---------- ---------- -------- -------- ---------- Total.......... $ -- $ 101,429 $ -- $ -- $ 101,429 ========== ========== ======== ======== ========== 1996: Provision for doubtful accounts -- accounts receivables......... $ -- $ 84,006 $(49,180) $ -- $ 34,826 Tax valuation reserve............. 101,429 1,100,676 -- -- 1,202,105 ---------- ---------- -------- -------- ---------- Total.......... $ 101,429 $1,184,682 $(49,180) $ -- $1,236,931 ========== ========== ======== ======== ========== 1997: Provision for doubtful accounts -- accounts receivables......... $ 34,826 $ 86,240 $(44,826) $ -- $ 76,240 Tax valuation reserve............. 1,202,105 2,389,360 -- -- 3,591,465 ---------- ---------- -------- -------- ---------- Total.......... $1,236,931 $2,475,600 $(44,826) $ -- $3,667,705 ========== ========== ======== ======== ==========
- --------------- (a) Such amounts relate to the utilization of the valuation and qualifying accounts to specific items for which they were established in the accounts receivables and tax valuation reserve accounts. II-9 100 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this Amendment No. 3 to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Dallas, State of Texas, on July 14, 1998. broadcast.com inc. By: /s/ TODD R. WAGNER ---------------------------------- Name: Todd R. Wagner Title: Chief Executive Officer Pursuant to the requirements of the Securities Act of 1933, this Amendment No. 3 has been signed by the following persons in the capacity indicated on July 14, 1998.
SIGNATURE TITLE --------- ----- /s/ TODD R. WAGNER Chief Executive Officer (Principal Executive - ----------------------------------------------------- Officer) Todd R. Wagner /s/ MARK CUBAN Chairman of the Board and President - ----------------------------------------------------- Mark Cuban * Director - ----------------------------------------------------- Steven D. Leeke * Director - ----------------------------------------------------- Randall S. Battat * Director - ----------------------------------------------------- Joseph W. Autem /s/ JACK A. RIGGS Chief Financial Officer (Principal Financial - ----------------------------------------------------- and Accounting Officer) and Director Jack A. Riggs
*By: /s/ TODD R. WAGNER ------------------------------------------------ Todd R. Wagner Attorney-in-fact
II-10 101 INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT ------- ---------------------- 1.1 -- Underwriting Agreement 3.1* -- Restated Certificate of Incorporation of the Company, as amended (filed June 19, 1996) 3.1.1* -- Restated Certificate of Incorporation (filed June 23, 1998) 3.2* -- Amended and Restated Bylaws of the Company 3.2.1* -- Amendment to Amended and Restated Bylaws of the Company 4.1* -- Form of Common Stock Certificate 5.1* -- Opinion of Gibson, Dunn & Crutcher LLP 10.1.1* -- Employment Agreement, dated as of June 15, 1998, between the Company and Todd R. Wagner. 10.1.2* -- Employment Agreement, dated as of June 15, 1998, between the Company and Mark Cuban. 10.2.1* -- Stock Purchase Agreement, dated as of September 4, 1996, between the Company and Motorola, Inc. 10.2.2* -- Stock Purchase Agreement, dated as of November 15, 1996, between the Company and Premiere Radio Networks, Inc. 10.3* -- First Amended and Restated Registration Rights Agreement, dated as of February 24, 1997 among the Company, Motorola, Inc., Premiere Radio Networks, Inc., Capitol Radio Network, Inc., Intel Corporation and HMTF AudioNet Investors, as amended by the Addendum to First Amended and Restated Registration Rights Agreement dated as of December 30, 1997, among the Company, Yahoo! Inc., Motorola, Inc. and Intel Corporation. 10.4* -- Stockholders Agreement, dated as of September 4, 1996, among the Company, Motorola, Inc., Todd R. Wagner and Mark Cuban, as amended by Amendment No. 1 on December 30, 1996 and Amendment No. 2 on December 19, 1997. 10.5* -- December Stockholders Agreement, dated as of December 31, 1996, among the Company, Todd R. Wagner, Mark Cuban, HMTF AudioNet Investors, Motorola, Inc., Premiere Radio Networks, Inc., as amended by an Addendum to December Stockholders Agreement dated February 24, 1997, between Intel Corporation, the Company, Todd R. Wagner and Mark Cuban, and as further amended by an Addendum to December Stockholders Agreement dated December 30, 1997, between Yahoo! Inc., the Company, Todd R. Wagner and Mark Cuban. 10.6+ -- Network Radio Sales Representation Agreement dated as of November 15, 1996, between the Company and Premiere Radio Networks, Inc. 10.7* -- The Company's 1998 Employee Stock Purchase Plan. 10.8* -- The Company's 1996 Stock Option Plan. 10.9* -- The Company's 1998 Stock Option Plan, as amended. 10.10* -- Form of the Company's Stock Option Agreement under the 1998 Stock Option Plan. 10.11* -- The Company's 1996 Non-Employee Directors Stock Option Plan. 10.12+ -- RealNetworks License Agreement, dated as of January 1, 1998, between the Company and RealNetworks, Inc.
102
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT ------- ---------------------- 10.13+ -- NetShow License Agreement, dated as of January 1, 1998, between the Company and Microsoft Corporation. 10.14* -- Form of Directors and Officers Indemnification Agreement. 10.15* -- Lease Agreement, dated as of December 2, 1996, between the Company and George W. Lollis and Daisy Lollis. 10.16* -- Master Lease of Personal Property No. 3769, dated April 15, 1998, between the Company and Charter Financial, Inc. 10.17* -- The Security and Loan Agreement (Accounts Receivable), dated December 15, 1997, between the Company and Imperial Bank. 10.18* -- Imperial Bank Note, dated December 15, 1997, between the Company and Imperial Bank. 21.1* -- Subsidiary of the Company 23.1 -- Consent of PricewaterhouseCoopers LLP 23.2* -- Consent of Gibson, Dunn & Crutcher LLP (contained in Exhibit 5.1) 24.1* -- Power of Attorney 27.1* -- Financial Data Schedule
- ------------ + Information contained in such agreement has been omitted in connection with a confidential treatment request, marked with asterisks and filed separately with the Commission. * Previously filed. EX-1.1 2 UNDERWRITING AGREEMENT 1 EXHIBIT 1.1 SHARES --------------- BROADCAST.COM INC. COMMON STOCK, $0.01 PAR VALUE UNDERWRITING AGREEMENT , 1998 - ---------- 2 , 1998 ------------- Morgan Stanley & Co. Incorporated Donaldson, Lufkin & Jenrette Securities Corporation Hambrecht & Quist LLC c/o Morgan Stanley & Co. Incorporated 1585 Broadway New York, New York 10036 Dear Sirs and Mesdames: broadcast.com, a Delaware corporation (the "COMPANY"), proposes to issue and sell to the several Underwriters named in Schedule II hereto (the "UNDERWRITERS"), an aggregate of _______________ shares of the Common Stock, $0.01 par value of the Company (the "FIRM SHARES"). The Company and a certain stockholder of the Company (the "Selling Stockholder") named in Schedule I hereto severally also propose to issue and sell to the several Underwriters not more than an additional ______________ shares of its Common Stock, $0.01 par value, (the "ADDITIONAL SHARES"), of which ______ shares are to be issued and sold by the Company and ____ shares are to be sold by the Selling Stockholder, if and to the extent that you, as Managers of the offering, shall have determined to exercise, on behalf of the Underwriters, the right to purchase such shares of common stock granted to the Underwriters in Section 3 hereof. The Firm Shares and the Additional Shares are hereinafter collectively referred to as the "SHARES". The shares of Common Stock, $0.01 par value, of the Company to be outstanding after giving effect to the sales contemplated hereby are hereinafter referred to as the "COMMON STOCK". The Company and the Selling Stockholder are hereinafter sometimes collectively referred to as the "SELLERS". The Company has filed with the Securities and Exchange Commission (the "COMMISSION") a registration statement, including a prospectus, relating to the Shares. The registration statement as amended at the time it becomes effective, including the information (if any) deemed to be part of the registration statement at the time of effectiveness pursuant to Rule 430A under the Securities Act of 1933, as amended (the "SECURITIES ACT"), is hereinafter referred to as the "REGISTRATION STATEMENT"; the prospectus in the form first used to confirm sales of Shares is hereinafter referred to as the "PROSPECTUS". If the Company has filed an abbreviated registration statement to register additional shares of Common Stock pursuant to Rule 462(b) under the 1 3 Securities Act (the "RULE 462 REGISTRATION STATEMENT"), then any reference herein to the term "REGISTRATION STATEMENT" shall be deemed to include such Rule 462 Registration Statement. As part of the offering contemplated by this Agreement, Hambrecht & Quist LLC ("H&Q") has agreed to reserve out of the Shares set forth opposite its name on Schedule II to this Agreement, up to ___________ shares, for sale to the Company's employees, officers, and directors and other parties associated with the Company (collectively, "PARTICIPANTS"), as set forth in the Prospectus under the heading "Underwriting" (the "DIRECTED SHARE PROGRAM"). The Shares to be sold by H&Q pursuant to the Directed Share Program (the "DIRECTED SHARES") will be sold by H&Q pursuant to this Agreement at the public offering price. Any Directed Shares not orally confirmed for purchase by any Participants by the end of the business day on which this Agreement is executed will be offered to the public by H&Q as set forth in the Prospectus. 1. Representations and Warranties of the Company. The Company represents and warrants to and agrees with each of the Underwriters that: (a) The Registration Statement has become effective; no stop order suspending the effectiveness of the Registration Statement is in effect, and no proceedings for such purpose are pending before, or to the Company's knowledge, threatened by the Commission. (b) (i) The Registration Statement, when it became effective, did not contain and, as amended or supplemented, if applicable, will not contain any 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, (ii) the Registration Statement and the Prospectus comply and, as amended or supplemented, if applicable, will comply in all material respects with the Securities Act and the applicable rules and regulations of the Commission thereunder and (iii) the Prospectus does not contain and, as amended or supplemented, if applicable, will not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, except that the representations and warranties set forth in this paragraph do not apply to statements or omissions in the Registration Statement or the Prospectus based upon information relating to any Underwriter furnished to the Company in writing by such Underwriter through you expressly for use therein. (c) The Company has been duly incorporated, is validly existing as a corporation in good standing under the laws of the jurisdiction of its incorporation, has the corporate power and authority to own its property and to conduct its business as described in the Prospectus and is duly qualified to transact business and is in good standing in each jurisdiction in which the conduct of its business or its ownership or leasing of property requires such qualification, except to the extent that the failure to be so qualified or be in good standing would not have a material adverse effect on the Company and its subsidiaries, taken as a whole. 2 4 (d) Each subsidiary of the Company has been duly incorporated, is validly existing as a corporation in good standing under the laws of the jurisdiction of its incorporation, has the corporate power and authority to own its property and to conduct its business as described in the Prospectus and is duly qualified to transact business and is in good standing in each jurisdiction in which the conduct of its business or its ownership or leasing of property requires such qualification, except to the extent that the failure to be so qualified or be in good standing would not have a material adverse effect on the Company and its subsidiaries, taken as a whole; all of the issued shares of capital stock of each subsidiary of the Company have been duly and validly authorized and issued, are fully paid and non-assessable and are owned directly by the Company, free and clear of all liens, encumbrances, equities or claims. (e) This Agreement has been duly authorized, executed and delivered by the Company. (f) The authorized capital stock of the Company conforms as to legal matters to the description thereof contained in the Prospectus. (g) The shares of Common Stock (including the Shares to be sold by the Selling Stockholder) outstanding prior to the issuance of the Shares to be sold by the Company have been duly authorized and are validly issued, fully paid and non-assessable; except as described in the Prospectus, and except for preemptive rights which will terminate by their terms on or before the Closing Date, the Company does not have any outstanding options to purchase, or any preemptive rights or other rights to subscribe for or to purchase, any securities or obligations convertible into, or any contracts or commitments to issue or sell, shares of its capital stock or any such options, rights, convertible securities or obligations; and all outstanding shares of capital stock and options and other rights to acquire capital stock have been issued in compliance with the registration and qualification provisions of all applicable securities laws and were not issued in violation of any preemptive rights, rights of first refusal or other similar rights, or the Company has obtained a waiver of such a violation. (h) The Shares to be sold by the Company have been duly authorized and, when issued and delivered against payment therefor in accordance with the terms of this Agreement, will be validly issued, fully paid and non-assessable, and the issuance of such Shares will not be subject to any preemptive or similar rights. (i) The execution and delivery by the Company of, and the performance by the Company of its obligations under, this Agreement will not contravene any provision of applicable law or the certificate of incorporation or by-laws of the Company or any agreement or other instrument binding upon the Company or any of its subsidiaries that is material to the Company and its subsidiaries, taken as a whole, or any judgment, order or decree of any governmental body, agency or court having jurisdiction over the Company or any subsidiary, and no consent, approval, authorization or order of, or qualification with, any 3 5 governmental body or agency ("Approval") is required for the performance by the Company of its obligations under this Agreement, except such as may be required by the securities or Blue Sky laws of the various states in connection with the offer and sale of the Shares, and except for Approvals which if not obtained would not have a material adverse effect on the Company and would not materially impair the Company's performance of its obligations under this Agreement. (j) There has not occurred any material adverse change, or any development involving a prospective material adverse change, in the condition, financial or otherwise, or in the earnings, business or operations of the Company and its subsidiaries, taken as a whole, from that set forth in the Prospectus (exclusive of any amendments or supplements thereto subsequent to the date of this Agreement). (k) There are no legal or governmental proceedings pending or to the Company's knowledge threatened to which the Company or any of its subsidiaries is a party or to which any of the properties of the Company or any of its subsidiaries is subject that are required to be described in the Registration Statement or the Prospectus and are not so described or any statutes, regulations, contracts or other documents that are required to be described in the Registration Statement or the Prospectus or to be filed as exhibits to the Registration Statement that are not described or filed as required. (l) The Company has all necessary consents, authorizations, approvals, orders, certificates and permits of and from, and has made all declarations and filings with, all foreign, federal, state, local and other governmental authorities, all self-regulatory organizations and all courts and other tribunals, to own, lease, license and use its properties and assets and to conduct its business in the manner described in the Prospectus, except to the extent that the failure to obtain or file would not, singly or in the aggregate, have a material adverse effect on the Company. (m) Each preliminary prospectus filed as part of the registration statement as originally filed or as part of any amendment thereto, or filed pursuant to Rule 424 under the Securities Act, complied when so filed in all material respects with the Securities Act and the applicable rules and regulations of the Commission thereunder, except that the preliminary prospectus filed as part of the registration statement as initially filed (which was not circulated by the Company) omitted certain information relating to the number and dollar amount of shares registered, the estimated offering price range, and related data derived from this information. (n) The Company is not and, after giving effect to the offering and sale of the Shares and the application of the proceeds thereof as described in the Prospectus, will not be an "investment company" as such term is defined in the Investment Company Act of 1940, as amended. 4 6 (o) The Company and its subsidiaries (i) are in material compliance with any and all applicable foreign, federal, state and local laws and regulations relating to the protection of human health and safety, the environment or hazardous or toxic substances or wastes, pollutants or contaminants ("ENVIRONMENTAL LAWS"), (ii) have received all material permits, licenses or other approvals required of them under applicable Environmental Laws to conduct their respective businesses and (iii) are in material compliance with all terms and conditions of any such permit, license or approval, except where such noncompliance with Environmental Laws, failure to receive required permits, licenses or other approvals or failure to comply with the terms and conditions of such permits, licenses or approvals would not, singly or in the aggregate, have a material adverse effect on the Company and its subsidiaries, taken as a whole. (p) There are no costs or liabilities associated with Environmental Laws (including, without limitation, any capital or operating expenditures required for clean-up, closure of properties or compliance with Environmental Laws or any permit, license or approval, any related constraints on operating activities and any potential liabilities to third parties) which would, singly or in the aggregate, have a material adverse effect on the Company and its subsidiaries, taken as a whole. (q) Subsequent to the respective dates as of which information is given in the Registration Statement and the Prospectus, (i) the Company has not incurred any material liability or obligation, direct or contingent, nor entered into any material transaction not in the ordinary course of business; (ii) the Company has not purchased any of its outstanding capital stock, nor declared, paid or otherwise made any dividend or distribution of any kind on its capital stock other than ordinary and customary dividends; and (iii) there has not been any material change in the capital stock, short-term debt or long-term debt of the Company, except in each case as described in the Prospectus. (r) The Company does not own any real property or a non-leasehold interest in real property. All personal property owned by the Company that is material to the business of the Company is owned by the Company free and clear of any security interest, lien, encumbrance, claim, defect or adverse interest of any nature except such as are described in the Prospectus or such as do not have a material adverse effect on the Company and its subsidiaries taken as a whole; and any real property and buildings held under lease by the Company are held by it under valid, subsisting and enforceable leases with such exceptions as do not have a material adverse effect on the Company and its subsidiaries taken as a whole, in each case except as described in the Prospectus. (s) Except as disclosed in the Prospectus, (i) the Company owns or possesses, or can acquire on reasonable terms, adequate licenses or other rights to use all patents, patent rights, inventions, trade secrets, copyrights, trademarks, service marks, trade names, technology and know-how employed by it in connection with its business as described in the Prospectus; (ii) the Company is not obligated to pay a royalty, grant a license, or provide 5 7 other consideration to any third party in connection with its patents, copyrights, trademarks, service marks, trade names, or technology; (iii) the Company has not received any notice of infringement or conflict with (and the Company does not know of any infringement or conflict with) asserted rights of others with respect to any patents, patent rights, inventions, trade secrets, copyrights, trademarks, service marks, trade names, technology or know-how which would result in any material adverse effect upon the Company and its subsidiaries taken as a whole; and (iv) the discoveries, inventions, products or processes of the Company referred to in the Prospectus do not, to the knowledge of the Company, infringe or conflict with any right or patent of any third party, or any discovery, invention, product or process which is the subject of a patent application filed by any third party known to the Company and its subsidiaries taken as a whole, which would have a material adverse effect on the Company. (t) No material labor dispute with the employees of the Company exists, except as described in the Prospectus, or, to the knowledge of the Company, is imminent; other than those that would not have a material adverse effect on the Company and its subsidiaries taken as a whole. (u) The Company is insured by insurers of recognized financial responsibility against such losses and risks and in such amounts as are prudent and customary in the businesses in which they are engaged; and the Company does not believe that it will not be able to renew its existing insurance coverage as and when such coverage expires or to obtain similar coverage from similar insurers as may be necessary to continue its business at a cost that would not have a material adverse effect on the Company and its subsidiaries taken as a whole, except as described in the Prospectus. (v) The Company possesses all material certificates, authorizations and permits issued by the appropriate federal, state or foreign regulatory authorities necessary to conduct its business, and the Company has not received any notice of proceedings relating to the revocation or modification of any such certificate, authorization or permit which, singly or in the aggregate, if the subject of an unfavorable decision, ruling or finding, would have a material adverse effect on the Company, except as described the Prospectus. (w) The Company maintains a system of internal accounting controls sufficient to provide reasonable assurance that (1) transactions are executed in accordance with management's general or specific authorizations; (2) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain asset accountability; (3) access to assets is permitted only in accordance with management's general or specific authorization; and (4) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences. 6 8 (x) The Nasdaq Stock Market, Inc. has approved the Common Stock for quotation on the Nasdaq National Market, subject only to official notice of issuance. (y) The Company has delivered to the Underwriters or their counsel a complete and accurate list of all holders of Common Stock or options, warrants or rights to buy Common Stock (collectively "Company Securities"). The Company has delivered to the Underwriters or their counsel an originally executed "Lock-Up Agreement", to the Company's knowledge signed by each such holder of a Company Security, in the form of Exhibit A (with exceptions to such form as approved by Underwriters' counsel in each instance). To the Company's knowledge, each person who signed a Lock-Up Agreement was authorized to do so and signing the Lock-Up Agreement did not conflict with or violate the security holder's constitutive documents or any agreement binding on the security holder or the security. (z) The Company (i) has notified each stockholder who is party to the Registration Rights Agreement dated February 24, 1997, as amended (the "REGISTRATION RIGHTS AGREEMENT"), that pursuant to the terms of the Registration Rights Agreement, none of the shares of the Company's capital stock held by such stockholder may be sold or otherwise transferred or disposed of for a period of 180 days after the date of the initial public offering of the Shares and (ii) has imposed a stop-transfer instruction with the Company's transfer agent in order to enforce the foregoing lock-up provision imposed pursuant to the Registration Rights Agreement. There are no other contracts, agreements or understandings between the Company and any person granting such person the right to require the Company to file a registration statement under the Securities Act with respect to any securities of the Company or to require the Company to include such securities with the Shares registered pursuant to the Registration Statement. There is no legal or beneficial owner of any securities of the Company who has any rights, not effectively satisfied or waived, to require registration of any shares of capital stock of the Company in connection with the filing of the Registration Statement. (aa) The Company has not offered, or caused the Underwriters to offer, Shares to any person pursuant to the Directed Share Program with the specific intent to unlawfully influence (i) a customer or supplier of the Company to alter the customer's or supplier's level or type of business with the Company, or (ii) a trade journalist or publication to write or publish favorable information about the Company or its products. (bb) The Company has complied with all provisions of Section 517.075, Florida Statutes relating to doing business with the Government of Cuba or with any person or affiliate located in Cuba. 2. Representations and Warranties of the Selling Stockholder. The Selling Stockholder represents and warrants to and agrees with each of the Underwriters that: 7 9 (a) This Agreement has been duly authorized, executed and delivered by or on behalf of the Selling Stockholder. (b) The execution and delivery by the Selling Stockholder of, and the performance by the Selling Stockholder of the Selling Stockholder's obligations under, this Agreement will not contravene any provision of applicable law (excluding any violation arising from a breach of the Company's representation in Section 1(b)), or any agreement or other instrument binding upon the Selling Stockholder or any judgment, order or decree of any governmental body, agency or court having jurisdiction over the Selling Stockholder, and no Approval is required for the issuance and sale of the Additional Shares by the Selling Stockholder to the Underwriters pursuant to the terms of this Agreement, except such as may be required by the securities or Blue Sky laws of the various states in connection with the offer and sale of the Additional Shares by the Selling Stockholder, and except for Approvals which if not obtained would not have a material adverse effect on the Selling Stockholder and would not materially impair the Selling Stockholder's performance of its obligations under this Agreement. (c) The Selling Stockholder has, and on the Closing Date will have, valid title to the Additional Shares to be sold by the Selling Stockholder and the legal right and power, and all authorization and approval required by law, to enter into this Agreement and to sell, transfer and deliver the Additional Shares to be sold by the Selling Stockholder. (d) Delivery of the Shares to be sold by the Selling Stockholder pursuant to this Agreement will pass title to such Shares free and clear of any security interests, claims, liens, equities and other encumbrances created or suffered by the Selling Stockholder except restrictions imposed by applicable securities laws. (e) All information furnished in writing by or on behalf of such Selling Stockholder relating to the Selling Stockholder for use in the Registration Statement does not, and on the Closing Date will not, contain any untrue statement of a material fact or omit to state any material fact necessary to make such information not misleading, and all information furnished in writing by or on behalf of such Selling Stockholder relating to the Selling Stockholder expressly for use in the Prospectus does not contain any untrue statement of a material fact or omit to state any material fact necessary to make such information not misleading in the light of the circumstances under which they were made. 3. Agreements to Sell and Purchase. The Company hereby agrees to sell to the several Underwriters, and each Underwriter, upon the basis of the representations and warranties herein contained, but subject to the conditions hereinafter stated, agrees, severally and not jointly, to purchase from the Company the respective numbers of Firm Shares set forth in Schedule II hereto opposite its name at $______ a share (the "PURCHASE PRICE"). 8 10 On the basis of the representations and warranties contained in this Agreement, and subject to its terms and conditions, each Seller, severally and not jointly, agrees to sell to the Underwriters the Additional Shares, and the Underwriters shall have a one-time right to purchase, severally and not jointly, up to _______________ Additional Shares at the Purchase Price, of which _______shares are to be issued and sold by the Company and ______ shares are to be sold by the Selling Stockholder. If you, on behalf of the Underwriters, elect to exercise such option, you shall so notify the Company and the Selling Stockholder in writing not later than 30 days after the date of this Agreement, which notice shall specify the number of Additional Shares to be purchased by the Underwriters and the date on which such shares are to be purchased. Such date may be the same as the Closing Date (as defined below) but not earlier than the Closing Date nor later than ten business days after the date of such notice. Additional Shares may be purchased as provided in Section 5 hereof solely for the purpose of covering over-allotments made in connection with the offering of the Firm Shares. If any Additional Shares are to be purchased, each Underwriter agrees, severally and not jointly, to purchase the number of Additional Shares (subject to such adjustments to eliminate fractional shares as you may determine) that bears the same proportion to the total number of Additional Shares to be purchased as the number of Firm Shares set forth in Schedule II hereto opposite the name of such Underwriter bears to the total number of Firm Shares. Each Seller hereby agrees that, without the prior written consent of Morgan Stanley on behalf of the Underwriters, it will not, during the period ending 180 days after the date of the Prospectus, (i) offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, lend, or otherwise transfer or dispose of, directly or indirectly, any shares of Common Stock or any securities convertible into or exercisable or exchangeable for Common Stock or (ii) enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of the Common Stock, whether any such transaction described in clause (i) or (ii) above is to be settled by delivery of Common Stock or such other securities, in cash or otherwise. The foregoing sentence shall not apply to (A) the Shares to be sold hereunder, (B) the issuance by the Company of shares of Common Stock upon the exercise of an option or warrant or the conversion of a security outstanding on the date hereof, (C) transactions by any person other than the Company relating to shares of Common Stock or other securities acquired in open market transactions after the completion of the offering of the Shares, (D) the issuance by the Company of shares of Common Stock under the employee stock purchase plan described in the Prospectus, or (E) the grant by Company of options to purchase Common Stock under the stock option plan described in the Prospectus. 4. Terms of Public Offering. The Sellers are advised by you that the Underwriters propose to make a public offering of their respective portions of the Shares as soon after the Registration Statement and this Agreement have become effective as in your judgment is advisable. The Sellers are further advised by you that the Shares are to be offered to the public initially at $_____________ a share (the "PUBLIC OFFERING PRICE") and to certain dealers selected by you at a price that represents a concession not in excess of $______ a share under the Public 9 11 Offering Price, and that any Underwriter may allow, and such dealers may reallow, a concession, not in excess of $_____ a share, to any Underwriter or to certain other dealers. 5. Payment and Delivery. Payment for the Firm Shares shall be made to the Company in Federal or other funds immediately available in New York City against delivery of such Firm Shares for the respective accounts of the several Underwriters at 10:00 a.m., New York City time, on ____________, 1998, or at such other time on the same or such other date, not later than _________, 1998, as shall be designated in writing by you. The time and date of such payment are hereinafter referred to as the "CLOSING DATE". Payment for any Additional Shares shall be made to each Seller in Federal or other funds immediately available in New York City against delivery of such Additional Shares for the respective accounts of the several Underwriters at 10:00 a.m., New York City time, on the date specified in the notice described in Section 3 or at such other time on the same or on such other date, in any event not later than _______, 1998, as shall be designated in writing by you. The time and date of such payment are hereinafter referred to as the "OPTION CLOSING DATE". Certificates for the Firm Shares and Additional Shares shall be in definitive form and registered in such names and in such denominations as you shall request in writing not later than one full business day prior to the Closing Date or the Option Closing Date, as the case may be. The certificates evidencing the Firm Shares and Additional Shares shall be delivered to you on the Closing Date or the Option Closing Date, as the case may be, for the respective accounts of the several Underwriters, with any transfer taxes payable in connection with the transfer of the Shares to the Underwriters duly paid, against payment of the Purchase Price therefor. 6. Conditions to the Underwriters' Obligations. The obligations of the Company to sell the Shares to the Underwriters and the several obligations of the Underwriters to purchase and pay for the Shares on the Closing Date are subject to the condition that the Registration Statement shall have become effective not later than 2:00 p.m. (New York City time) on the date hereof. The several obligations of the Underwriters are subject to the following further conditions: (a) Subsequent to the execution and delivery of this Agreement and prior to the Closing Date there shall not have occurred any change, or any development involving a prospective change, in the condition, financial or otherwise, or in the earnings, business or operations of the Company and its subsidiaries, taken as a whole, from that set forth in the Prospectus (exclusive of any amendments or supplements thereto subsequent to the date of this Agreement) that, in your judgment, is material and adverse and that makes it, in your judgment, impracticable to market the Shares on the terms and in the manner contemplated in the Prospectus. 10 12 (b) The Underwriters shall have received on the Closing Date a certificate, dated the Closing Date and signed by an executive officer of the Company, to the effect that (i) there has not occurred any material adverse change, or any development involving a prospective material adverse change, in the condition, financial or otherwise, or in the earnings, business or operations of the Company and its subsidiaries, taken as a whole, from that set forth in the Prospectus (exclusive of any amendments or supplements thereto subsequent to the date of this Agreement); (ii) the representations and warranties of the Company contained in this Agreement are true and correct in all material respects as of the Closing Date and (iii) the Company has complied with all of the agreements and satisfied all of the conditions on its part to be performed or satisfied hereunder on or before the Closing Date. The officer signing and delivering such certificate may rely upon the best of his or her knowledge as to proceedings threatened. (c) The Underwriters shall have received on the Closing Date an opinion of Gibson Dunn & Crutcher LLP, outside counsel for the Company, dated the Closing Date, to the effect that: (i) the Company has been duly incorporated, is validly existing as a corporation in good standing under the laws of the State of Delaware, has the corporate power and corporate authority to own its property and to conduct its business as described in the Prospectus and is duly qualified to transact business and is in good standing in the States of _______________, _______________, _______________ and _______________; (ii) [AudioNet, Inc.] has been duly incorporated, is validly existing as a corporation in good standing under the laws of the State of Delaware, has the corporate power and corporate authority to own its property and to conduct its business as presently conducted; (iii) the authorized capital stock of the Company conforms in all material aspects as to legal matters to the description thereof contained in the Prospectus; (iv) the shares of Common Stock outstanding prior to the issuance of the Shares have been duly authorized are validly issued and non-assessable and to such counsel's knowledge are fully paid; except as described in the Prospectus, and except for preemptive rights which by their terms will terminate on or before the Closing Date such counsel is not aware that any person has outstanding any options to purchase, or any preemptive rights or other rights to subscribe for or to purchase, any securities or obligations convertible into, or any contracts or commitments to issue or sell, shares of the Company's capital stock or any such options, rights, convertible securities or obligations; and all outstanding shares of capital stock of the Company 11 13 and options and other rights to acquire capital stock issued since September 1, 1996 have been issued in compliance with the registration and qualification provisions of all applicable securities laws and such capital stock were not issued in violation of any preemptive rights contained in the Company's Certificate of Incorporation or Bylaws, or to such counsel's knowledge any rights of first refusal or other similar rights (and excluding any violation for which the Company has obtained a waiver). (v) all of the issued shares of capital stock of each subsidiary of the Company have been duly authorized and validly issued, are non-assessable, to such counsel's knowledge are fully paid and are owned directly by the Company, free and clear of all liens, encumbrances, equities or claims; (vi) the Shares to be sold by the Company have been duly authorized and, when issued and delivered in accordance with the terms of this Agreement, will be validly issued, fully paid and non-assessable, and the issuance of such Shares will not be subject to any preemptive or similar rights pursuant to the Company's certificate of incorporation or bylaws or to such counsel's knowledge, any other agreement or instrument binding on the Company; (vii) this Agreement has been duly authorized, executed and delivered by the Company; (viii) the execution and delivery by the Company of, and the performance by the Company of its obligations under, this Agreement will not contravene any provision of applicable law or the certificate of incorporation or bylaws of the Company or, to such counsel's knowledge, any agreement or other instrument binding upon the Company or any of its subsidiaries that is material to the Company and its subsidiaries, taken as a whole, or, to such counsel's knowledge, any judgment, order or decree of any governmental body, agency or court having jurisdiction over the Company or any subsidiary, and no consent, approval, authorization or order of, or qualification with, any governmental body or agency ("Approval") is required for the performance by the Company of its obligations under this Agreement, except such as may be required by the securities or Blue Sky laws of the various states in connection with the offer and sale of the Shares, and except for Approvals which if not obtained would not have a material adverse effect on the Company and would not materially impair the Company's performance of its obligations under this Agreement; (ix) the statements (A) in the Prospectus under the captions "Risk Factors--Shares Eligible for Future Sale,""Management--Director Compensation," "Management--Employee Benefit Plans," "Management--Indemnification of Directors and Executive Officers and Limitation of Liability," "Certain Transactions," "Description of Capital Stock," and "Shares Eligible for Future Sale" and (B) in the Registration Statement in Items 14 and 15, in each case insofar as such statements 12 14 constitute summaries of the legal matters, documents or proceedings referred to therein, have been reviewed by such counsel, fairly present the information called for with respect to such legal matters, documents and proceedings, and are accurate in all material respects; (x) to such counsel's knowledge, such counsel does not know of any legal or governmental proceedings pending or threatened to which the Company or any of its subsidiaries is a party or to which any of the properties of the Company or any of its subsidiaries is subject that are required to be described in the Registration Statement or the Prospectus and are not so described or of any statutes, regulations, contracts or other documents that are required to be described in the Registration Statement or the Prospectus or to be filed as exhibits to the Registration Statement that are not described or filed as required; (xi) the Company is not and, after giving effect to the offering and sale of the Shares and the application of the proceeds thereof as described in the Prospectus, will not be an "investment company" as such term is defined in the Investment Company Act of 1940, as amended; (xii) to such counsel's knowledge there is no legal or beneficial owner of any securities of the Company who has any rights, not effectively satisfied or waived, to require registration of any shares of capital stock of the Company in connection with the filing of the Registration Statement; (xiii) to the best of such counsel's knowledge: (A) based solely on oral advice of the Staff of the Commission the Registration Statement has become effective under the Securities Act, (B) based solely on oral advice of the Staff of the Commission no stop order proceedings with respect thereto have been instituted or are pending or threatened under the Securities Act, and nothing has come to such counsel's attention to lead it to believe that such proceedings are contemplated; and (C) any required filing of the Prospectus and any supplement thereto pursuant to Rule 424(b) under the Securities Act has been made in the manner and within the time period required by such Rule 424(b); and (xiv) based on a letter from the Nasdaq Stock Market, the Shares to be sold under this Agreement to the Underwriters are duly authorized for quotation on the Nasdaq National Market. (xv) in addition, such counsel shall state that they have participated in conferences with officers and other representatives of the Company; representatives of the independent auditors of the Company and the Underwriters representatives and counsel at which the contents of the Registration Statement and Prospectus and related matters were discussed, and shall state that because the purpose of such 13 15 counsel's professional engagement was not to establish or confirm factual matters and because the scope of their examination of the affairs of the Company did not permit them to verify the accuracy, completeness or fairness of the statements set forth in the Registration Statement or Prospectus, such counsel are not passing upon and do not assume any responsibility for the accuracy, completeness or fairness of the statements contained in the Registration Statement or Prospectus except to the extent set forth below (and in response to Section 6(c)(ix)). On the basis of the foregoing and except for the financial statements and schedules and the other financial and statistical data included therein, as to which such counsel shall express no opinion or belief, such counsel shall state that: (A) the Registration Statement at the time it became effective, and the Prospectus as of the date thereof and as of the date of such opinion, appeared on their face to be appropriately responsive in all material respects to the relevant requirements of the Securities Act and the applicable rules and regulations of the Commission promulgated thereunder, (B) no facts have come to such counsel's attention that lead them to believe that (1) the Registration Statement at the time it became effective contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading or (2) the Prospectus as of its date or as of the date of such opinion contained an untrue statement of a material fact or omitted to state a 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. In rendering the opinion referred to in this Section 6(c), such counsel may rely upon certificates of officers of the Company as to matters of fact and upon certificates of public officials. Such opinion shall expressly be limited to the federal laws of the United States, the laws of the State of New York and the General Corporation Law of the State of Delaware. (d) The Underwriters shall have received on the Option Closing Date an opinion of Gibson Dunn & Crutcher LLP, counsel for the Selling Stockholder, dated the Option Closing Date, to the effect that: (i) this Agreement has been duly authorized, executed and delivered by the Selling Stockholder; (ii) the execution and delivery by the Selling Stockholder of, and the performance by the Selling Stockholder of his obligations under, this Agreement will not contravene any provision of applicable law, or, to such counsel's knowledge, any agreement or other instrument binding upon the Selling Stockholder or, to the best of such counsel's knowledge, any judgment, order or decree of any governmental body, agency or court having jurisdiction over the Selling Stockholder, and no consent, approval, authorization or order of, or qualification with, any governmental body or agency ("Approval") is required for the sale of the Additional Shares by the Selling 14 16 Stockholder to the Underwriters pursuant to the terms of this Agreement, except such as may be required by the securities or Blue Sky laws of the various states in connection with the offer and sale of the Additional Shares by the Selling Stockholder, and except for Approvals which if not obtained would not have a material adverse effect on the Selling Stockholder and would not materially impair the Selling Stockholder's performance of the Selling Stockholder's obligations under this Agreement; (iii) the Selling Stockholder has the legal power, and all authorization and approval required by law, to enter into this Agreement and to sell, transfer and deliver the Additional Shares to be sold by the Selling Stockholder; (iv) upon delivery of certificates issued to the Underwriters for the Additional Shares being sold by the Selling Stockholder in registered form and payment thereof, each Underwriter who takes such delivery and makes such payment in good faith and without notice of any adverse claim, will acquire all the rights of the Selling Stockholder in such Additional Shares free of any adverse claim, lien in favor of the Company and restriction on transfer imposed by the Company; and (v) in addition, such counsel shall state that they have participated in conferences with officers and other representatives of the Company, representatives of the independent auditors of the Company and the Underwriters' representatives and counsel at which the contents of the Registration Statement and Prospectus and related matters were discussed, and shall state that because the purpose of such counsel's professional engagement was not to establish or confirm factual matters and because the scope of their examination of the affairs of the Company did not permit them to verify the accuracy, completeness or fairness of the statements set forth in the Registration Statement or Prospectus, such counsel are not passing upon and do not assume any responsibility for the accuracy, completeness or fairness of the statements contained in the Registration Statement except to the extent set forth below (and in response to Section 6(c)(ix)). On the basis of the foregoing, and except for the financial statements and schedules and the other financial and statistical data included therein, as to which such counsel shall express no opinion or belief, such counsel shall state that: (A) the Registration Statement at the time it became effective, and the Prospectus as of the date thereof and as of the date of such opinion, appeared on their face to be appropriately responsive in all material respects to the relevant requirements of the Securities Act and the applicable rules and regulations of the Commission promulgated thereunder, (B) no facts have come to such counsel's attention that lead them to believe that (1) the Registration Statement at the time it became effective contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading or (2) the Prospectus as of its date or as of the date of such opinion contained an untrue statement of a material fact or omitted to state a material fact 15 17 required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading. In rendering the opinion referred to in this Section 6(d), such counsel may rely upon certificates of officers of the Company as to matters of fact and upon certificates of public officials. Such opinion shall expressly be limited to the federal laws of the United States, the laws of the State of New York and the General Corporation Law of the State of Delaware. (e) The Underwriters shall have received on the Closing Date an opinion of Fish and Richardson, outside counsel for the Company, dated the Closing Date, to the effect that the statements in the Prospectus under the captions "Risk Factors--Intellectual Property" and "Business--Intellectual Property", insofar as such statements constitute summaries of the legal matters, documents or proceedings referred to therein, have been reviewed by such counsel, fairly present the information called for with respect to such legal matters, documents and proceedings, and are accurate in all material respects. (f) The Underwriters shall have received on the Closing Date an opinion of McDermott, Will and Emery, counsel to the Company, dated the Closing Date, to the effect that the statements in the Prospectus under the captions "Risk Factors--Government Regulation Legal Uncertainty" and "Business--Governmental Regulation", insofar as such statements constitute summaries of the legal matters, documents or proceedings referred to therein, have been reviewed by such counsel, fairly present the information called for with respect to such legal matters, documents and proceedings, and are accurate in all material respects. (g) The Underwriters shall have received on the Closing Date an opinion of Block & Balestri, counsel to the Company, dated the Closing Date, covering the matters referred to in Sections 6(c)(iv) (without limitations based on time), 6(c)(x) and 6(c)(xii). (h) The Underwriters shall have received on the Closing Date an opinion of Wilson Sonsini Goodrich & Rosati, counsel for the Underwriters, dated the Closing Date, covering the matters referred to in Sections 6(c)(vi), 6(c)(vii), 6(c)(ix) (but only as to the statements in the Prospectus under "Description of Capital Stock" and "Underwriters") and 6(c)(xiii) above. The opinions of Gibson Dunn & Crutcher LLP described in Sections 6(c) and 6(d) , of Fish and Richardson described in Section 6(e), of McDermott, Will and Emery described in Section 6(f) and of Block & Balestri described in Section 6(g) shall be rendered to the Underwriters at the request of the Company or the Selling Stockholder, as the case may be, and shall so state therein. (i) The Underwriters shall have received, on each of the date hereof and the Closing Date, a letter dated the date hereof or the Closing Date, as the case may be, in form 16 18 and substance satisfactory to the Underwriters, from Price Waterhouse LLP, independent public accountants, stating that Price Waterhouse LLP are, and during the periods covered by their report included in the Registration Statement were, independent certified public accountants with respect to the Company within the meaning of the Securities Act; and containing statements and information of the type ordinarily included in accountants' "comfort letters" to underwriters with respect to the financial statements and certain financial information contained in the Registration Statement and the Prospectus; provided that the letter delivered on the Closing Date shall use a "cut-off date" not earlier than the date hereof. (j) The "Lock-Up" Agreements, each substantially in the form of Exhibit A hereto, between you and certain stockholders, optionholders, warrantholders, officers and directors of the Company relating to sales and certain other dispositions of shares of Common Stock or certain other securities, delivered to you on or before the date hereof, shall be in full force and effect on the Closing Date. (k) The Underwriters shall have received on the Option Closing Date a certificate, dated the Option Closing Date and signed by the Selling Stockholder, to the effect that the representations and warranties of the Selling Stockholder contained in this Agreement are true and correct as of the Option Closing Date and that the Selling Stockholder has complied with all of the agreements and satisfied all of the conditions to be performed or satisfied on the part of the Selling Stockholder hereunder on or before the Option Closing Date. The several obligations of the Underwriters to purchase Additional Shares hereunder are subject to the delivery to you on the Option Closing Date of such documents as you may reasonably request with respect to the good standing of the Company, the due authorization and issuance of the Additional Shares and other matters related to the issuance of the Additional Shares. 7. Covenants of the Company. In further consideration of the agreements of the Underwriters herein contained, the Company covenants with each Underwriter as follows: (a) To furnish to you, without charge, four signed copies of the Registration Statement (including exhibits thereto) and for delivery to each other Underwriter a conformed copy of the Registration Statement (without exhibits thereto) and to furnish to you in New York City, without charge, prior to 3:00 p.m. New York City time on the business day next succeeding the date of this Agreement and during the period mentioned in Section 7(c) below, as many copies of the Prospectus and any supplements and amendments thereto or to the Registration Statement as you may reasonably request. (b) Before amending or supplementing the Registration Statement or the Prospectus, to furnish to you a copy of each such proposed amendment or supplement and not to file any such proposed amendment or supplement to which you reasonably object, and to file with the Commission within the applicable period specified in Rule 424(b) under the Securities Act any prospectus required to be filed pursuant to such Rule. 17 19 (c) If, during such period after the first date of the public offering of the Shares as in the opinion of counsel for the Underwriters the Prospectus is required by law to be delivered in connection with sales by an Underwriter or dealer, any event shall occur or condition exist as a result of which it is necessary to amend or supplement the Prospectus in order to make the statements therein, in the light of the circumstances under which they were made when the Prospectus is delivered to a purchaser, not misleading, or if, in the opinion of counsel for the Underwriters, it is necessary to amend or supplement the Prospectus to comply with applicable law, forthwith to prepare, file with the Commission and furnish, at its own expense, to the Underwriters and to the dealers (whose names and addresses you will furnish to the Company) to which Shares may have been sold by you on behalf of the Underwriters and to any other dealers upon request, either amendments or supplements to the Prospectus so that the statements in the Prospectus as so amended or supplemented will not, in the light of the circumstances under which they were made when the Prospectus is delivered to a purchaser, be misleading or so that the Prospectus, as amended or supplemented, will comply with law. (d) To endeavor to qualify the Shares for offer and sale under the securities or Blue Sky laws of such jurisdictions as you shall reasonably request; provided, however, than in no event shall the Company be obligated to qualify to do business in any jurisdiction where it is not now so qualified or to take any action which would subject it to general service or process in any jurisdiction where it is not now so subject. (e) To make generally available to the Company's security holders and to you as soon as practicable an earning statement covering the twelve-month period ending September 30, 1999 that satisfies the provisions of Section 11(a) of the Securities Act and the rules and regulations of the Commission thereunder. (f) In connection with the Directed Share Program, the Company will ensure that the Directed Shares will be restricted to the extent required by the National Association of Securities Dealers, Inc. (the "NASD") or the NASD rules from sale, transfer, assignment, pledge or hypothecation for a period of three months following the date of the effectiveness of the Registration Statement. H&Q will notify the Company as to which Participants will need to be so restricted. The Company will direct the transfer agent to place stop transfer restrictions upon such securities for such period of time. (g) To pay all fees and disbursements of counsel incurred by the Underwriters in connection with the Directed Share Program and stamp duties, similar taxes or duties or other taxes, if any, incurred by the Underwriters in connection with the Directed Share Program. (h) To (i) enforce the terms of each Lock-up Agreement, (ii) issue stop-transfer instructions to the transfer agent for the Common Stock with respect to any transaction or contemplated transaction that would constitute a breach of or default under the applicable Lock-up Agreement and (iii) upon written request of Morgan Stanley & Co. Incorporation 18 20 ("MORGAN STANLEY") to release from the Lock-up Agreements those shares of Common Stock held by those holders set forth in such request. In addition, except with the prior written consent of Morgan Stanley, the Company agrees (i) not to amend or terminate, or waive any right under, any Lock-up Agreement, or take any other action that would directly or indirectly have the same effect as an amendment or termination, or waiver of any right under, any Lock-up Agreement, that would permit any holder of shares of Common Stock, or securities convertible into or exercisable or exchangeable for Common Stock, to sell, make any short sale of, grant any option for the purchase of, or otherwise transfer or dispose of, any of such shares of Common Stock or other securities prior to the expiration of 180 days after the date of the Prospectus in violation of the terms of such Lock-Up Agreement, and (ii) not to consent to any sale, short sale, grant of an option for the purchase of, or other disposition or transfer of shares of Common Stock, or securities convertible into or exercisable or exchangeable for Common Stock, subject to a Lock-up Agreement. (i) Without the prior written consent of Morgan Stanley, the Company will not release any stockholder or option holder from the market standoff provision imposed by the Company pursuant to the terms of the Registration Rights Agreement or other agreement earlier than 180 days after the date of the initial public offering of the Shares. 8. Expenses. Whether or not the transactions contemplated in this Agreement are consummated or this Agreement is terminated, the Sellers agree to pay or cause to be paid all of their respective expenses incident to the performance of their obligations under this Agreement, including: (i) the fees, disbursements and expenses of the Company's counsel, the Company's accountants and counsel for the Selling Stockholder of the Company in connection with the registration and delivery of the Shares under the Securities Act and all other fees or expenses of the Company in connection with the preparation and filing of the Registration Statement, any preliminary prospectus, the Prospectus and amendments and supplements to any of the foregoing, including all printing costs associated therewith, and the mailing and delivering of copies thereof to the Underwriters and dealers, in the quantities hereinabove specified, (ii) all costs and expenses related to the transfer and delivery of the Shares to the Underwriters, including any transfer or other taxes payable thereon, (iii) the cost of printing or producing any Blue Sky or Legal Investment memorandum in connection with the offer and sale of the Shares under state securities laws and all expenses in connection with the qualification of the Shares for offer and sale under state securities laws as provided in Section 7(d) hereof, including filing fees and the reasonable fees and disbursements of counsel for the Underwriters in connection with such qualification and in connection with the Blue Sky or Legal Investment memorandum, (iv) all filing fees and the reasonable fees and disbursements of counsel to the Underwriters incurred in connection with the review and qualification of the offering of the Shares by the NASD, (v) all fees and expenses in connection with the preparation and filing of the registration statement on Form 8-A relating to the Common Stock and all costs and expenses incident to listing the Shares on the Nasdaq National Market, (vi) the cost of printing certificates representing the Shares, (vii) the costs and charges of any transfer agent, registrar or depository, (viii) the costs and expenses of the Company relating to investor presentations on any "road show" undertaken in connection with the marketing of the offering of the Shares, including, without 19 21 limitation, expenses associated with the production of road show slides and graphics, fees and expenses of any consultants engaged in connection with the road show presentations with the prior approval of the Company, travel and lodging expenses of the representatives and officers of the Company and any such consultants, and one-half of the cost of any aircraft chartered in connection with the road show, and (ix) all other costs and expenses incident to the performance of the obligations of the Company hereunder for which provision is not otherwise made in this Section. It is understood, however, that except as provided in this Section, Section 9 entitled "Indemnity and Contribution", and the last paragraph of Section 11 below, the Underwriters will pay all of their costs and expenses, including fees and disbursements of their counsel, stock transfer taxes payable on resale of any of the Shares by them and any advertising expenses connected with any offers they may make. The provisions of this Section shall not supersede or otherwise affect any agreement that the Sellers may otherwise have for the allocation of such expenses among themselves. 9. Indemnity and Contribution. (a) The Company agrees to indemnify and hold harmless each Underwriter and each person, if any, who controls any Underwriter within the meaning of either Section 15 of the Securities Act or Section 20 of the Securities Exchange Act of 1934, as amended (the "EXCHANGE ACT"), from and against any and all losses, claims, damages and liabilities (including, without limitation, any legal or other expenses reasonably incurred in connection with defending or investigating any such action or claim) caused by any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement or any amendment thereof, any preliminary prospectus or the Prospectus (as amended or supplemented if the Company shall have furnished any amendments or supplements thereto), or caused by any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein (in the case of the Prospectus or any preliminary prospectus, in light of the circumstances under which they were made) not misleading, except insofar as such losses, claims, damages or liabilities are caused by any such untrue statement or omission or alleged untrue statement or omission based upon information relating to any Underwriter furnished to the Company in writing by such Underwriter through you expressly for use therein; and provided further that the foregoing indemnity with respect to any preliminary prospectus shall not inure to the benefit of any Underwriter from whom the person asserting any such losses, claims, damages or liabilities, purchased Shares, or any person controlling such Underwriter, if a copy of the Prospectus (as then amended or supplemented if the Company shall have furnished any amendments or supplements thereto) was not sent or given by or on behalf of such Underwriter to such person, if required by law to have been so delivered at or prior to the written confirmation of the sale of the Shares to such person, and if the Prospectus (as so amended or supplemented) would have cured the defect giving rise to such losses, claims, damages or liabilities, unless such failure is the result of noncompliance by the Company with Section 7(a) hereof. (b) The Selling Stockholder agrees to indemnify and hold harmless each Underwriter and each person, if any who controls any Underwriter within the meaning of either 20 22 Section 15 of the Securities Act or Section 20 of the Exchange Act, or is under common control with, or is controlled by, any Underwriter, and the Company, its directors, its officers who sign the Registration Statement and each person, if any, who controls the Company within the meaning of either Section 15 of the Securities Act or Section 20 of the Exchange Act, from and against any and all losses, claims, damages and liabilities (including, without limitation, any legal or other expenses reasonably incurred in connection with defending or investigating any such action or claim) caused by any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement or any amendment thereof, any preliminary prospectus or the Prospectus (as amended or supplemented if the Company shall have furnished any amendments or supplements thereto), or caused by any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein (in the case of the Prospectus or any preliminary prospectus, in light of the circumstances under which they were made) not misleading, but only with reference to information relating to such Selling Stockholder furnished in writing by or on behalf of such Selling Stockholder expressly for use in the Registration Statement, any preliminary prospectus, the Prospectus or any amendments or supplements thereto, except insofar as such losses, claims, damages, or liabilities are caused by any such untrue statement or omission or alleged untrue statement or omission based upon information relating to any Underwriter furnished to the Company in writing by such Underwriter through you expressly for use therein; and provided further that the foregoing indemnify with respect to any preliminary prospectus shall not inure to the benefit of any Underwriter from whom the person asserting any such losses, claims, damages or liabilities purchased Shares, or any person controlling such Underwriter, if a copy of the Prospectus (as then amended or supplemented if the Company shall have furnished any amendments or supplements thereto) was not sent or given by or on behalf of such Underwriter to such person, if required by law to have been so delivered at or prior to the written confirmation of the sale of the Shares to such person, and if the Prospectus (as so amended or supplemented) would have cured the defect giving rise to such losses, claims, damages or liabilities, unless such failure is the result of noncompliance by the Company with Section 7(a) hereof. The liability of the Selling Stockholder under this Agreement shall be limited to an amount equal to the net proceeds received by the Selling Stockholder from the offering of Additional Shares sold by such Selling Stockholder, except with respect to (i) any breaches of the representations and warranties set forth in paragraphs (a), (b), (c) and (d) of Section 2 hereof, (ii) intentional misrepresentation or (iii) fraud. (c) Each Underwriter agrees, severally and not jointly, to indemnify and hold harmless the Company, the Selling Stockholder, the directors of the Company, the officers of the Company who sign the Registration Statement and each person, if any, who controls the Company or any Selling Stockholder within the meaning of either Section 15 of the Securities Act or Section 20 of the Exchange Act from and against any and all losses, claims, damages and liabilities (including, without limitation, any legal or other expenses reasonably incurred in connection with defending or investigating any such action or claim) caused by any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement or any amendment thereof, any preliminary prospectus or the Prospectus (as amended or supplemented if the Company shall have furnished any amendments or supplements thereto), or caused by any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein (in the case 21 23 of the Prospectus or any preliminary prospectus, in light of the circumstances under which they were made) not misleading, but only with reference to information relating to such Underwriter furnished to the Company in writing by such Underwriter through you expressly for use in the Registration Statement, any preliminary prospectus, the Prospectus or any amendments or supplements thereto. (d) In case any proceeding (including any governmental investigation) shall be instituted involving any person in respect of which indemnity may be sought pursuant to this Section 9, such person (the "INDEMNIFIED PARTY") shall promptly notify the person against whom such indemnity may be sought (the "INDEMNIFYING PARTY") in writing and the indemnifying party shall retain counsel reasonably satisfactory to the indemnified party to represent the indemnified party and any others the indemnifying party may designate in such proceeding and shall pay the fees and disbursements of such counsel related to such proceeding, and to the extent that it shall wish, the indemnifying party, jointly with any other indemnifying party similarly notified, may assume the defense thereof. Notwithstanding the prior sentence, in any such proceeding, any indemnified party shall have the right to retain its own counsel and assume its own defense in such proceeding, but the fees and expenses of such counsel shall be at the expense of such indemnified party unless (i) the indemnifying party and the indemnified party shall have mutually agreed in writing to the retention of such counsel, (ii) the indemnifying party shall have failed to assume the defense and employ counsel; or (iii) the named parties to any such proceeding (including any impleaded parties) include both the indemnifying party and the indemnified party and representation of both parties by the same counsel would be inappropriate due to actual or potential differing interests between them. It is understood that the indemnifying party shall not, in respect of the legal expenses of any indemnified party in connection with any proceeding or related proceedings in the same jurisdiction, be liable for (i) the fees and expenses of more than one separate firm (in addition to any local counsel) for all Underwriters and all persons, if any, who control any Underwriter within the meaning of either Section 15 of the Securities Act or Section 20 of the Exchange Act, (ii) the fees and expenses of more than one separate firm (in addition to any local counsel) for the Company, its directors, its officers who sign the Registration Statement and each person, if any, who controls the Company within the meaning of either such Section and (iii) the fees and expenses of more than one separate firm (in addition to any local counsel) for the Selling Stockholder, and that all such fees and expenses shall be reimbursed as they are incurred. In the case of any such separate firm for the Underwriters and such control persons of any Underwriters, such firm shall be designated in writing by Morgan Stanley. In the case of any such separate firm for the Company, and such directors, officers and control persons of the Company, such firm shall be designated in writing by the Selling Stockholder. The indemnifying party shall not be liable for any settlement of any proceeding effected without its written consent, but if settled with such consent or if there be a final judgment for the plaintiff, the indemnifying party agrees to indemnify the indemnified party from and against any loss or liability by reason of such settlement or judgment. Notwithstanding the foregoing sentence, if at any time an indemnified party shall have requested an indemnifying party to reimburse the indemnified party for fees and expenses of counsel as contemplated by the second and third sentences of this paragraph, the indemnifying party agrees that it shall be liable for any settlement of any proceeding effected without its written consent if (i) such settlement is entered into more than 60 days after receipt by such indemnifying party of the aforesaid request and (ii) such 22 24 indemnifying party shall not have reimbursed the indemnified party in accordance with such request prior to the date of such settlement. No indemnifying party shall, without the prior written consent of the indemnified party, effect any settlement of any pending or threatened proceeding in respect of which any indemnified party is or could have been a party and indemnity could have been sought hereunder by such indemnified party, unless such settlement includes an unconditional release of such indemnified party from all liability on claims that are the subject matter of such proceeding. (e) To the extent the indemnification provided for in this Section 9 is unavailable to an indemnified party or insufficient in respect of any losses, claims, damages or liabilities referred to therein, then each indemnifying party, in lieu of indemnifying such indemnified party thereunder, shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages or liabilities (i) in such proportion as is appropriate to reflect the relative benefits received by the indemnifying party or parties on the one hand and the indemnified party or parties on the other hand from the offering of the Shares or (ii) if the allocation provided by clause 9(e)(i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause 9(e)(i) above but also the relative fault of the indemnifying party or parties on the one hand and of the indemnified party or parties on the other hand in connection with the statements or omissions that resulted in such losses, claims, damages or liabilities, as well as any other relevant equitable considerations. The relative benefits received by the Sellers on the one hand and the Underwriters on the other hand in connection with the offering of the Shares shall be deemed to be in the same respective proportions as the net proceeds from the offering of the Shares (before deducting expenses) received by each Seller and the total underwriting discounts and commissions received by the Underwriters, in each case as set forth in the table on the cover of the Prospectus, bear to the aggregate Public Offering Price of the Shares. The relative fault of the Sellers on the one hand and the Underwriters on the other hand shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Sellers or by the Underwriters and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Underwriters' respective obligations to contribute pursuant to this Section 9 are several in proportion to the respective number of Shares they have purchased hereunder, and not joint. (f) The Sellers and the Underwriters agree that it would not be just or equitable if contribution pursuant to this Section 9 were determined by pro rata allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation that does not take account of the equitable considerations referred to in Section 9(e). The amount paid or payable by an indemnified party as a result of the losses, claims, damages and liabilities referred to in the immediately preceding paragraph shall be deemed to include, subject to the limitations set forth above, any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this Section 9, no Underwriter shall be required to contribute any amount in excess of the amount by which the total price at which the Shares underwritten by it and distributed to the public were offered to the public exceeds the amount of any damages that such Underwriter has otherwise been required 23 25 to pay by reason of such untrue or alleged untrue statement or omission or alleged omission, and the Selling Stockholder shall not be required to contribute any amount in excess of the net proceeds received by the Selling Stockholder from the offering of Additional Shares sold by the Selling Stockholder, except with respect to (i) any breach of the representations and warranties in Section 2(a), (b), (c) and (d), (ii) intentional misrepresentation or (iii) fraud. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. Except as provided in the last sentence of Section 9(b), the remedies provided for in this Section 9 are not exclusive and shall not limit any rights or remedies which may otherwise be available to any indemnified party at law or in equity. (g) The indemnity and contribution provisions contained in this Section 9 and the representations, warranties and other statements of the Company and the Selling Stockholder contained in this Agreement shall remain operative and in full force and effect regardless of (i) any termination of this Agreement, (ii) any investigation made by or on behalf of any Underwriter or any person controlling any Underwriter, the Selling Stockholder, or the Company, its officers or directors or any person controlling the Company and (iii) acceptance of and payment for any of the Shares. 10. Termination. This Agreement shall be subject to termination by notice given by you to the Company, if (a) after the execution and delivery of this Agreement and prior to the Closing Date (i) trading generally shall have been suspended or materially limited on or by, as the case may be, any of the New York Stock Exchange, the National Association of Securities Dealers, Inc., or the Nasdaq Stock Market (ii) trading of any securities of the Company shall have been suspended on the Nasdaq Stock Market, (iii) a general moratorium on commercial banking activities in New York shall have been declared by either Federal or New York State authorities or (iv) there shall have occurred any outbreak or escalation of hostilities or any change in financial markets or any calamity or crisis that, in your judgment, is material and adverse and (b) in the case of any of the events specified in clauses 10(a)(i) through 10(a)(iv), such event, singly or together with any other such event, makes it, in Morgan Stanley's judgment, impracticable to market the Shares on the terms and in the manner contemplated in the Prospectus. 11. Effectiveness; Defaulting Underwriters. This Agreement shall become effective upon the execution and delivery hereof by the parties hereto. If, on the Closing Date or the Option Closing Date, as the case may be, any one or more of the Underwriters shall fail or refuse to purchase Shares that it has or they have agreed to purchase hereunder on such date, and the aggregate number of Shares which such defaulting Underwriter or Underwriters agreed but failed or refused to purchase is not more than one-tenth of the aggregate number of the Shares to be purchased on such date, the other Underwriters shall be obligated severally in the proportions that the number of Firm Shares set forth opposite their respective names in Schedule II bears to the aggregate number of Firm Shares set forth opposite the names of all such non-defaulting Underwriters, or in such other proportions as you may specify, to purchase the Shares which such defaulting Underwriter or Underwriters agreed but failed or refused 24 26 to purchase on such date; provided that in no event shall the number of Shares that any Underwriter has agreed to purchase pursuant to this Agreement be increased pursuant to this Section 11 by an amount in excess of one-ninth of such number of Shares without the written consent of such Underwriter. If, on the Closing Date, any Underwriter or Underwriters shall fail or refuse to purchase Firm Shares and the aggregate number of Firm Shares with respect to which such default occurs is more than one-tenth of the aggregate number of Firm Shares to be purchased, and arrangements satisfactory to you, the Company and the Selling Stockholders for the purchase of such Firm Shares are not made within 36 hours after such default, this Agreement shall terminate without liability on the part of any non-defaulting Underwriter, the Company or the Selling Stockholders. In any such case either you or the relevant Sellers shall have the right to postpone the Closing Date, but in no event for longer than seven days, in order that the required changes, if any, in the Registration Statement and in the Prospectus or in any other documents or arrangements may be effected. If, on the Option Closing Date, any Underwriter or Underwriters shall fail or refuse to purchase Additional Shares and the aggregate number of Additional Shares with respect to which such default occurs is more than one-tenth of the aggregate number of Additional Shares to be purchased, the non-defaulting Underwriters shall have the option to (i) terminate their obligation hereunder to purchase Additional Shares or (ii) purchase not less than the number of Additional Shares that such non-defaulting Underwriters would have been obligated to purchase in the absence of such default. Any action taken under this paragraph shall not relieve any defaulting Underwriter from liability in respect of any default of such Underwriter under this Agreement. If this Agreement shall be terminated by the Underwriters, or any of them, because of any failure or refusal on the part of any Seller to comply with the terms or to fulfill any of the conditions of this Agreement, or if for any reason any Seller shall be unable to perform its obligations under this Agreement, the Sellers will reimburse the Underwriters or such Underwriters as have so terminated this Agreement with respect to themselves, severally, for all out-of-pocket expenses (including the fees and disbursements of their counsel) reasonably incurred by such Underwriters in connection with this Agreement or the offering contemplated hereunder. 12. Counterparts. This Agreement may be signed in two or more counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. 13. Applicable Law. This Agreement shall be governed by and construed in accordance with the internal laws of the State of New York. 14. Headings. The headings of the sections of this Agreement have been inserted for convenience of reference only and shall not be deemed a part of this Agreement. 25 27 Very truly yours, broadcast.com inc. By: ---------------------------- Name: Title: Selling Stockholder ------------------------------- Todd R. Wagner Accepted as of the date hereof Morgan Stanley & Co. Incorporated Donaldson, Lufkin & Jenrette Securities Corporation Hambrecht & Quist LLC Acting severally on behalf of themselves and the several Underwriters named in Schedule II hereto. By: Morgan Stanley & Co. Incorporated By:--------------------------- Name: D. Rex Golding Title: Managing Director 28 SCHEDULE I
Number of Additional Shares Selling Stockholder To Be Sold --------------------------------------------------------------------------------- ----------------- Todd R. Wagner . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -------------- Total . . . . . . . . . . . . . . . . . . . . . . . . . ==============
29 SCHEDULE II
Number of Firm Shares Underwriter To Be Purchased --------------------------------------------------------------------------------- --------------- Morgan Stanley & Co. Incorporated . . . . . . . . . . . . . . . . . . . . . . . . Donaldson, Lufkin & Jenrette Securities Corporation . . . . . . . . . . . . . . . Hambrecht & Quist LLC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -------------- Total . . . . . . . . . . . . . . . . . . . . . . . . . ==============
30 EXHIBIT A [FORM OF LOCK-UP LETTER] ____________, 1998 Morgan Stanley & Co. Incorporated Donaldson, Lufkin & Jenrette Securities Corporation Hambrecht & Quist LLC c/o Morgan Stanley & Co. Incorporated 1585 Broadway New York, NY 10036 Dear Sirs and Mesdames: The undersigned understands that Morgan Stanley & Co. Incorporated ("MORGAN STANLEY") proposes to enter into an Underwriting Agreement (the "UNDERWRITING AGREEMENT") with broadcast.com, a Delaware corporation (the "COMPANY"), providing for the public offering (the "PUBLIC OFFERING") by the several Underwriters, including Morgan Stanley (the "UNDERWRITERS"), of shares (the "SHARES") of the Common Stock, $0.01 par value of the Company (the "COMMON STOCK"). To induce the Underwriters that may participate in the Public Offering to continue their efforts in connection with the Public Offering, the undersigned hereby agrees that, without the prior written consent of Morgan Stanley on behalf of the Underwriters, it will not, during the period commencing on the date hereof and ending 180 days after the date of the final prospectus relating to the Public Offering (the "PROSPECTUS"), (1) offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, lend, or otherwise transfer or dispose of, directly or indirectly, any shares of Common Stock or any securities convertible into or exercisable or exchangeable for Common Stock, or (2) enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of the Common Stock, whether any such transaction described in clause (1) or (2) above is to be settled by delivery of Common Stock or such other securities, in cash or otherwise. The foregoing sentence shall not apply to (a) the sale of any Shares to the 31 Underwriters pursuant to the Underwriting Agreement or (b) transactions relating to shares of Common Stock acquired in the Public Offering or in open market transactions after the completion of the Public Offering. In addition, the undersigned agrees that, without the prior written consent of Morgan Stanley on behalf of the Underwriters, it will not, during the period commencing on the date hereof and ending 180 days after the date of the Prospectus, make any demand for or exercise any right with respect to, the registration of any shares of Common Stock or any security convertible into or exercisable or exchangeable for Common Stock. Whether or not the Public Offering actually occurs depends on a number of factors, including market conditions. Any Public Offering will only be made pursuant to an Underwriting Agreement, the terms of which are subject to negotiation between the Company and the Underwriters. Very truly yours, ------------------------- (Name) ------------------------- (Address) 2 EX-10.6 3 NETWORK RADIO SALES REPRESENTATIVE AGMT - 11/15/96 1 EXHIBIT 10.6 NETWORK RADIO SALES REPRESENTATION AGREEMENT THIS AGREEMENT made and entered into this 15th day of November 1996, between AudioNet, Inc., a Delaware corporation ("Supplier) and Premiere Radio Networks, Inc., a Delaware corporation ("Representative"). APPOINTMENT AND TERM 1. Supplier appoints Representative as its exclusive national representative for the sale of network radio broadcast time ("Inventory") to [*] acquired by Supplier from its Internet services provided to radio stations, provided, however, that Supplier may sell Inventory to [*] if (i) the advertisements aired using such Inventory sold by Supplier are not of the same copy or substantially the same copy as [*] radio commercials aired by said advertiser, and (ii) such advertisements aired using Inventory sold by Supplier reference the Internet. The foregoing restriction shall not apply to advertising copy created as a result of Supplier's collaboration with an advertiser to create copy which references the Internet for use on Supplier's Internet services and such copy is thereafter used on the radio. This Agreement shall be for a period of thirty-six (36) months beginning January 1, 1997 and ending on December 31, 1999, and shall automatically renew for successive one-year terms unless terminated by either party on sixty (60) days notice. All sales of Inventory made by Representative on behalf of Suppliers to advertisers who are not [*] shall be on a non-exclusive basis. [*] provided, however, that if Representative fails to sell at least [*] of the Qualified Inventory available for resale during the first year of this Agreement by the first anniversary date of the Agreement, this exclusivity provision and Supplier's obligation [*] shall automatically terminate. Qualified Inventory shall be defined as contiguous blocks of at least seven minutes per week of non-preemptible 6:00 a.m. to 12:00 midnight radio station commercial inventory. Subject to the provision in the first sentence of this Paragraph 1, Supplier shall have the right to sell any Inventory including Qualified Inventory to [*] in the event it remains unsold by Representative after fourteen (14) days prior to broadcast air date. SCOPE OF SERVICES 2. Representative shall use commercially reasonable efforts to effect national sales and sell radio broadcast time on the Inventory on terms subject to the approval of Supplier prior to booking. Supplier agrees to cooperate to the extent necessary * Confidential Treatment Requested 1 2 with Representative and to supply Representative with all current information relating to Supplier, including its staff, radio station affiliations and similar matters necessary to effect such sales. Representative shall cooperate with Supplier and provide Supplier with services, facilities and personnel to carry out the terms of this Agreement. AREA OF SERVICE 3. Representative shall function under this Agreement in the radio markets of [*]. COMPENSATION 4. Supplier shall pay Representative a commission for all sales of the Inventory made by the Representative during the term hereof, including any extension of this Agreement. The commission paid to Representative shall be [*] of net revenues provided that in the event of barter sales, (i.e. non-cash), the commission paid to Representative shall be [*] of the net barter revenues actually collected by Representative on behalf of the Supplier from sales of Inventory. Supplier shall have the option to not participate in any barter sales. "Net revenues" shall be defined as [*]. The term "net barter revenues" shall mean the [*]. Commissions payable with respect to net revenues shall be paid in cash; commissions payable with respect to net barter revenues shall be paid in barter. Representative shall bill and collect on behalf of Supplier, and send Supplier by the fifteenth of each month following the broadcast month, a detailed statement of actual commercials broadcast in that broadcast month along with all amounts collected and accounts receivable credited that are applicable to the Inventory. Representative shall first deduct from said collected amounts the commissions due to Representative as determined under Section 4 above and shall then pay to Supplier an amount equal to the remainder. 5. [*] Any Commission paid or payable to Representative or any agency with respect to the sale of such Inventory shall be appropriately adjusted such that Supplier pays no commissions with respect to the rebates, credits or refunds. 6. Supplier acknowledges that the network radio inventory is sold in packages encompassing several programs and services together. Supplier agrees that the Inventory will be sold in conjunction (packaged) with other program and/or services inventory. The valuation allocated to the Inventory shall be based on * Confidential Treatment Requested 2 3 its Arbitron Average Quarter Hour ("AQH") audience contribution to the package as compared to the audience level of the other inventory packaged along with it. For example, if the AQH audience level of the Inventory represents 20% of the total audience of the network on a particular advertiser buy, then the Inventory shall be allocated 20% of that network buy. Example: if the Inventory is packaged with PNI inventory, and the Inventory represents 200,000 of the 1,000,000 total AQH, then the Inventory shall be allocated 20% of the revenues on that particular buy. [*] OTHER PROVISIONS 7. Supplier shall have the right to audit Representative's financial records concerning this Agreement twice in any twelve month period, upon one week's written notice, and provided that said audit is conducted during normal business hours. Representative shall cooperate fully with such audit and shall make its officers and employees available to the Company's auditors. 8. No waiver by Representative or Supplier shall be effective unless made in writing and signed by it. No representations are made except as expressly set forth herein. This is the only Agreement concerning the subject matter hereof between the parties. It may not be changed or terminated except in writing signed by both parties. 9. This Agreement shall be binding upon and inure to the benefit of all successors and assigns of the parties hereto; provided, however, that neither party shall assign their rights and/or obligations hereunder to any third party without the prior written consent of the other except for assignments to entities controlling, controlled by or under common control with such party, and except in connection with a sale of substantially all of the assets of the assigning party. 10. This Agreement shall be construed and enforced in accordance with the laws of the State of New York as if this Agreement were made and to be performed entirely within New York. 11. The terms of this Agreement shall be held strictly confidential and may not be disclosed without the prior written consent of both parties. 12. (a) All disputes between the Supplier and Representative arising out of or in connection with the execution, interpretation and performance of this Agreement (including the validity, scope and enforceability of this arbitration provision) shall 3 4 be solely and finally settled by arbitration. The arbitration proceedings shall be held in New York, New York and shall be conducted in accordance with the commercial arbitration rules of the American Arbitration Association ("AAA Rules"). The arbitration shall be governed by the provisions of the Federal Arbitration Act unless otherwise provided herein, and shall be conducted by a sole arbitrator appointed by the American Arbitration Association (the "Arbitrator"). In case of conflict between the AAA Rules and this Agreement, the provision of this Agreement shall govern. All arbitrations commenced with respect to this Agreement shall be consolidated for hearing before a sole Arbitrator as prescribed herein. (b) If a party hereto determines to submit a dispute for arbitration pursuant to this Paragraph 12, such party (the "Petitioner") shall furnish the party with whom it has the dispute (the "Respondent") with a dated, written statement (the "Arbitration Notice") indicating (i) such party's intent to commence arbitration proceedings, (ii) such nature, with reasonable detail, of the dispute, and (iii) the remedy such party will seek. A copy of the Arbitration Notice shall be concurrently provided to the AAA along with a copy of this Agreement and a request to appoint an Arbitrator. (c) At any time within 40 days after the date of the Arbitration Notice, the Petitioner and Respondent can make discovery requests of the other in any form permitted under the United States Federal Rules of Civil Procedure. The recipient of a discovery request shall have 10 days after the receipt of such request to object to any or all portions of such request and shall respond to any portions of such request not so objected to within 20 days of the receipt of such request. All objections shall be in writing and shall indicate the reasons for such objections. The objecting party shall insure that all objections and responses are received by other parties within the above time periods. Any party seeking to compel discovery following receipt of an objection shall file with the other parties and the Arbitrator a motion to compel, including a copy of the initial request and the objection. The Arbitrator shall allow five days for responses to the motion to come before ruling. Claims of privilege and other objections shall be determined as they would be in United States federal court in a case applying New York law. (d) Hearings must commence no later than the 83rd day following the date of the Arbitration Notice and such hearings shall be conducted for no more than five days, unless otherwise agreed by the parties or ordered by the Arbitrator. (e) Each of the Petitioner and Respondent shall submit a brief, outlining each party's claim for relief or defense to any claim, to the other and to the Arbitrator on or before the 10th day following the last day of the hearing. Reply briefs must be exchanged and submitted to the Arbitrator on or before the 20th day following the last day of the hearing. The Arbitrator shall render the decision that, in its judgment, is most consistent with the terms of this Agreement and applicable law. (f) The foregoing time periods and procedural steps may be modified or extended by agreement of the parties or by the Arbitrator in its discretion to the extent it deems necessary to prevent fundamental unfairness; provided that at all times the Arbitrator shall be mindful of the parties' desire for the most expeditious possible 4 5 resolution of their disputes; and provided further, that a final decision of the Arbitrator shall be rendered within 120 days of the Arbitration Notice. (g) To the extent permissible under applicable law, the parties hereto agree that the award of the Arbitrator shall be final and shall be subject only to the judicial review permitted by the Federal Arbitration Act. Judgment on the arbitration award may be entered and enforced in any court having jurisdiction over the parties or their assets. It is the intent of the parties that the arbitration provisions hereof be enforced to the fullest extent permitted by applicable law. In no event shall any demand for arbitration be made after the date that institution of legal or equitable proceedings based upon the claim, dispute or other matter would be barred by the applicable statute of limitations or otherwise barred by this Agreement. (h) The Arbitrator may not award punitive damages and the parties hereby irrevocably waive any right to punitive damages. 13. Notices shall be sent to each party as follows: TO SUPPLIER TO REPRESENTATIVE AudioNet, Inc. Premiere Radio Networks, Inc. Attention: Todd Wagner Attention: Steve Lehman, President 2929 Elm Street 15260 Ventura Boulevard, Suite 500 Dallas, Texas 75226 Sherman Oaks, CA 91403 With a copy to: Gibson, Dunn & Crutcher LLP Attention: Sean P. Griffiths, Esq. 200 Park Avenue New York, New York 10166 Agreed to and Accepted: AudioNet, Inc. Premiere Radio Networks, Inc. By /s/ MARK CUBAN By /s/ STEVE LEHMAN ----------------------------------- -------------------------------- Mark Cuban, Chief Executive Officer Steve Lehman, President 5 6 EXHIBIT A [PREMIERE LETTERHEAD] [*] * Confidential Treatment Requested EX-10.12 4 REALNETWORKS LICENSE AGMT DATED 1/1/98 1 EXHIBIT 10.12 REALNETWORKS LICENSE AGREEMENT THIS REALNETWORKS LICENSE AGREEMENT (this "Agreement" or the "RN License Agreement") is made and entered into as of the 1st day of January, 1998 (the "Effective Date"), by and between AudioNet, Inc., a Delaware corporation and RealNetworks, Inc., a Washington corporation ("RN"). WHEREAS, RN is the owner of certain server technology and software [*] [*] (as so described, the "RN Software"). The RN Software shall include [*] WHEREAS, AudioNet is the business of, among other things, the support, implementation, deployment and delivery of AudioNet's current and future Internet-based products and services; and WHEREAS, AudioNet desires to use the RN Software in connection with [*] NOW, THEREFORE, AudioNet and RN have reached certain agreements with respect to the licensing of the RN Software by AudioNet upon the terms and conditions more particularly described herein; and, inasmuch as the parties desire to set forth their agreements and understandings in writing, in consideration of the promises, covenants and matters hereinafter set forth, the parties mutually covenant, contract and agree, each with the other, as follows: 1. LICENSE. (a) License to RN Software. RN hereby grants to AudioNet, for the Term (as defined in Section 9(a)), a [*] license to: (i) reproduce and install up to [*] copies of the RN Software and associated "Documentation," on AudioNet servers (the "AudioNet Servers") for the purpose of [*]; [*] (ii) deliver up to [*] simultaneous "User-Streams" [*] * Confidential Treatment Requested 2 (iii) [*] AudioNet agrees to inform RN of the mechanisms it intends to implement for monitoring its use of the RN Software and delivery of User-Streams to ensure that it does not exceed authorized User-Stream or RN Software counts, and will cooperate with RN to ensure that such mechanism is acceptable to RN; and (iv) [*] Under no circumstances may AudioNet: [*] (b) [*]. RN hereby grants [*] (c) [*]. RN hereby grants to AudioNet [*] (d) Delivery of Upgrades, Etc. RN shall promptly (and in no event later than RN makes the following available to RN hosting customers) deliver to AudioNet any upgrades, updates, enhancements, additions, improvements, successor versions, modifications, maintenance releases, bug fixes and corrections to the RN Software licensed hereunder and the associated Documentation commercially released during the Term. RN shall also provide AudioNet with the technical assistance and support as set forth on Exhibit B. (e) No Reverse Engineering. AudioNet shall not attempt to reverse engineer, disassemble or decompile the RN Software, or create derivative works based thereon, or otherwise seek to reconstruct the source code of RN Software. (f) Ownership. RN shall retain all right, title and interest (including all copyrights, patents, service marks, trademarks and other intellectual property rights) in the RN Software. Except as expressly * Confidential Treatment Requested 2 3 licensed to AudioNet in this Section 1, AudioNet shall not acquire any interest in the RN Software or any other RN software and technologies, or any copies or portions thereof (g) Records. AudioNet shall keep accurate records relating to the RN Software to the extent necessary to determine compliance with restrictions on the use of the RN Software contained herein. [*]. Upon not less than fifteen (15) days prior written notice, such records shall be made available for inspection to RN in AudioNet's offices during normal business hours. (h) RN SDKs. Upon the execution of this Agreement, the parties agree to engage in good faith negotiations with regard to the terms and conditions pursuant to which RN may grant a license to AudioNet to use RN's SDKs to integrate RN software and technologies with non-RN software and technologies. * Confidential Treatment Requested 3 4 2. TRADEMARKS. (a) Notices. For so long as AudioNet is using the RN Software, AudioNet shall place notices on the AudioNet web site in locations reasonably requested by RN which notice shall read substantially as follows: "The RealServer is included under license from RealNetworks, Inc. RealAudio, RealVideo and the Real logo are trademarks or registered trademarks of RealNetworks, Inc. RealPlayer, RealServer, and other marks are trademarks of RealNetworks, Inc. Copyright 1995-1998. RealNetworks, Inc. All rights reserved." AudioNet shall place one or more RN Marks on each of its web sites in reasonably prominent locations or other locations reasonably requested by RN and agreed to by AudioNet and shall display such marks any time files link to AudioNet Content that has been encoded in RN formats. (b) License to RN Marks. AudioNet acknowledges that RN, RealAudio, RealVideo, the Real logo, RealPlayer, RealServer, and other marks used by RN (the "RN Marks") are trademarks of RN. RN hereby grants to AudioNet for the Term a nonexclusive, nontransferable, non-assignable, license to use, and AudioNet agrees to, the RN Marks in connection with the advertising, marketing, promotion and rendering of the AudioNet Services when using or referencing the RN Software AudioNet's use of the RN Marks shall be in accordance with RN's policies regarding advertising and trademark usage as set forth on Exhibit C hereto and on RN's website at http://www.real.com/corporate/logos, as updated from time to time. AudioNet acknowledges that its use of any of the RN Marks in connection with this Agreement shall not create any right, title or interest, in or to the RN Marks (except as expressly licensed to AudioNet in this Section 2(b)) and that all goodwill associated with the RN Marks shall inure to the benefit of RN. 3. LICENSE FEE. (a) Calculation of License Fee. In consideration for the license granted hereunder, AudioNet agrees to pay RN during the Term the greater of: (a) [*] (b) Payment. The License Fee shall be payable once each calendar quarter within 45 days of the end of the calendar quarters ending on March 31, June 30 and September 30 and within 90 days of the end of the calendar quarter ending on December 31. AudioNet's financial statements shall be audited yearly by a nationally recognized firm of accountants and the License Fee payable for the calendar quarter ending December 31 shall be adjusted for AudioNet's net revenue as set forth in the audited financial statements for the year then ended. (c) Audit. RN shall have the right to have an inspection and audit [*] for one year from the expiration or termination of this Agreement. Such audit shall be conducted at RNs expense (subject to the last sentence hereof) during regular business hours at AudioNet's offices and, for purposes of inspecting the RN Software, at other locations where AudioNet owns, leases or provides servers on which the RN Software may reside in such a manner as to not interfere with AudioNet's normal business activities. In no event shall audits be made hereunder more frequently than every year. [*] 4. OTHER RN OBLIGATIONS. * Confidential Treatment Requested 4 5 (a) Support. During the Term, RN shall provide AudioNet with reasonable support consistent with the support levels provided by RN to direct hosting and/or large scale broadcast customers as set forth on Exhibit B. [*] (b) [*] (c) Training by RN. RN shall provide, without charge, up to three (3) days of training in the use of the RN Software to AudioNet personnel at RN's headquarters in Seattle, Washington, and two (2) days of training at AudioNet's headquarters in Dallas, Texas, on dates to be mutually agreed upon. RN shall also provide to AudioNet, at AudioNet's request and cost, at RN's facility, and on dates to be mutually agreed upon, additional training in the use of the RN Software. AudioNet may also attend general training sessions that RN provides to the public, provided that AudioNet shall provide RN reasonable notice of its intent to attend such training and shall limit attendance to no more than four (4) AudioNet personnel at any one general training session. AudioNet may send additional personnel to such training at the cost of $200 per person. AudioNet shall be responsible for all travel, lodging and other personal out-of-pocket expenses incurred by its personnel in connection with any training. If AudioNet desires to receive additional training at AudioNet's facilities, it shall provide reasonable notice to RN for coordination of mutually acceptable dates, shall pay RN's current standard rate for on-site training, and shall reimburse RN for its travel, lodging and other personal out-of-pocket expenses incurred by its personnel in connection with such training. (d) [*] (e) Regular Communications. The parties shall engage in regular communications to discuss matters of ongoing importance under this Agreement. The parties shall meet in person at least once per quarter, and shall have frequent telephone conversations as needed. 5. RN SOFTWARE WARRANTY. (a) Limited RN Software Warranty. RN warrants, solely for the benefit of AudioNet, that for a period of ninety (90) days from the Effective Date (or the date of delivery to AudioNet for future released versions, if any, of RN Software made during the term hereof): (i) the final or "Gold" version of the RN Software, if operated as directed, will substantially achieve the functionality described in the Documentation; and (ii) that the media containing the Gold version of the RN Software, if provided by RN, is free in material respects from defects in material and workmanship; provided, however, that the foregoing warranty is expressly contingent (and shall be otherwise void) upon: (A) the use of the RN Software strictly in accordance with the instructions and Documentation therefor; (B) the absence of misuse or damage thereto; and (C) the absence of any alteration or modification thereto. RN makes no warranty that AudioNet's use of the RN Software will be uninterrupted or that the operation of the RN Software will be error-free or secure. In no case will RN be liable for any representation or warranty made to any third party by AudioNet. TO THE MAXIMUM EXTENT PERMITTED BY APPLICABLE LAW, RN AND ITS SUPPLIERS DISCLAIM ALL OTHER WARRANTIES, EITHER EXPRESS OR IMPLIED, INCLUDING, BUT NOT LIMITED TO, IMPLIED WARRANTIES OF MERCHANTIBILITY AND FITNESS FOR A PARTICULAR PURPOSE WITH RESPECT TO THE RN SOFTWARE. * Confidential Treatment Requested 5 6 (b) Remedies. RN's sole liability for any failure of the warranty contained in Section 5(a) shall be, in RN's sole discretion: (i) to replace AudioNet's defective media with fully functioning media; or (ii) to advise AudioNet how to achieve substantially the same functionality with the RN Software as described in the Documentation through a procedure different from that set forth in the Documentation. Only if AudioNet informs RN of the problem with the RN Software during the applicable warranty period will RN be obligated to honor this limited warranty. 6. INDEMNITY (a) By RN. (i) RN shall, at its expense and AudioNet's request, defend any claim or action brought against AudioNet, or any of AudioNet's subsidiaries, directors, officers, and employees, to the extent such claim or action is based upon a claim (A) that the RN Software infringes or violates any patent, copyright, trademark, trade secret or other proprietary right of a third party or (B) that RN does not have the rights to grant AudioNet the rights granted in Section I ("RN Claims"), and RN will indemnify and hold AudioNet harmless from and against any costs, damages and fees reasonably incurred by AudioNet, including but not limited to fees of attorneys, as a result of such RN Claims; provided, that RN shall have no liability for such infringement or violation arising directly out of information, technology or materials provided by AudioNet or which unavoidably arises out of conformance with specifications provided by AudioNet, or such claim or suit which would have been avoided but for the combination, operation or use of RN's technology with technology not supplied by RN or its subcontractors. AudioNet shall: (A) provide RN prompt notice in writing of any such RN Claims and permit RN, through counsel mutually acceptable to AudioNet and RN, to answer and defend such RN Claims; and (B) provide RN information, assistance and authority, at RN's expense, to help RN to defend such RN Claims. RN will be responsible for any settlement made by AudioNet only if RN's written permission has been obtained, which permission shall not be unreasonably withheld. (ii) RN may not settle any RN Claim under this Section 6(a) on AudioNet's behalf without first obtaining AudioNet's written permission, which permission shall not be unreasonably withheld. In the event AudioNet and RN agree to settle a RN Claim, the parties agree not to publicize the settlement without first obtaining the other's written permission, which permission shall not be unreasonably withheld. (b) By AudioNet. (i) AudioNet shall, at its expense and RN's request, defend any claim or action brought against RN, or any of RN's subsidiaries, directors, officers, and employees, to the extent such claim or action is based upon a claim that the AudioNet Services infringe or violate any patent, copyright, trademark, trade secret or other proprietary right of a third party, except to the extent such claim or action arises solely from AudioNet's use of the RN Software ("AudioNet Claims"), and AudioNet will indemnify and hold RN harmless from and against any costs, damages and fees reasonably incurred by RN, including but not limited to fees of attorneys and other professionals, as a result of such AudioNet Claims. RN shall: (A) provide AudioNet prompt notice in writing of any such AudioNet Claims and permit AudioNet, through counsel mutually acceptable to RN and AudioNet, to answer and defend such AudioNet Claims; and (B) provide AudioNet information, assistance and authority, at AudioNet's expense, to help AudioNet to defend such AudioNet Claims. AudioNet will be responsible for any settlement made by RN only if AudioNet's written permission has been obtained, which permission shall not be unreasonably withheld. (b) AudioNet may not settle any AudioNet Claim under this Section 6(b) on RN's behalf without first obtaining RN's written permission, which permission will not be unreasonably withheld. In the event RN and AudioNet agree to settle an AudioNet Claim, the parties agree not to publicize the settlement without first obtaining the other's written permission, which permission shall not be unreasonably withheld. 6 7 7. REPRESENTATIONS AND WARRANTIES OF AUDIONET. AudioNet hereby represents and warrants to RN that, as of the date hereof: (a) Organization and Good Standing; Corporate Power. AudioNet is a corporation duly organized and validly existing under the laws of the State of Delaware, and is in good standing under such laws, and has all necessary licenses and permits required by all governmental authorities to carry on its business, except where the failure to have obtained such licenses and permits would not have a material adverse effect on AudioNet. AudioNet has all requisite legal and corporate power to own, lease and operate its property and assets, to carry on its business as presently conducted, to enter into this Agreement and to carry out and perform its obligations under the terms of this Agreement. (b) Authorization. The execution and delivery of this Agreement and the performance of its obligations hereunder, has been duly authorized by all necessary corporate action of AudioNet. This Agreement constitutes a legal, valid and binding obligation of AudioNet enforceable in accordance with its terms except as such enforcement may be limited by bankruptcy, insolvency, reorganization, moratorium and other laws of general application affecting the rights and remedies of creditors, as well as general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law). 8. REPRESENTATIONS AND WARRANTIES OF RN. RN hereby represents and warrants to AudioNet that, as of the date hereof: (a) Organization and Good Standing; Corporate Power. RN is a corporation duly organized and validly existing under the laws of the State of Washington, and is in good standing under such laws, and has all necessary licenses and permits required by all governmental authorities to carry on its business, except where the failure to be so qualified or to have obtained such licenses and permits would not have a material adverse effect on RN. RN has all requisite legal and corporate power to own, lease and operate its property and assets, to carry on its business as presently conducted, to enter into this Agreement and to carry out and perform its obligations under the terms of this Agreement. (b) Authorization. The execution and delivery of this Agreement and the performance of its obligations hereunder, has been duly authorized by all necessary corporate action of RN. This Agreement constitutes a legal, valid and binding obligation of RN enforceable in accordance with its terms except as such enforcement may be limited by bankruptcy, insolvency, reorganization, moratorium and other laws of general application affecting the rights and remedies of creditors, as well as general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law). 9. TERM AND TERMINATION. (a) Term. Unless sooner terminated as provided in this Agreement, this Agreement shall commence as of January 1, 1998 and shall continue in full force and effect until December 31, 1998 (the "Term"). (b) Termination for Breach. This Agreement may be terminated by either party only for cause immediately by written notice upon the occurrence of any of the following events: (i) if the other ceases to do business, or otherwise terminates its business; (ii) if the other breaches any material provision of this Agreement [*] and fails to fully cure such breach within forty-five (45) days' of written notice describing the breach; or (iii) if the other becomes insolvent or seeks protection under any bankruptcy, receivership, trust, deed, creditor's arrangement, or comparable proceeding, or if any such proceeding is instituted against the other and not dismissed within forty-five (45) days. * Confidential Treatment Requested 7 8 (c) Effect of Termination. (i) Expiration. Upon the expiration of the Term, AudioNet shall have the following options: (a) AudioNet may [*] (b) Audionet may renew [*] this Agreement [*] under the same terms and conditions [*] for an additional one year period by providing at least forty-five (45) days' written notice to RN prior to the expiration of the Term. All rights and obligations of the AudioNet [*] shall be extended during such renewal period. [*] If AudioNet elects this option, it shall pay RN [*] on a monthly basis during the renewal period. [*] (c) AudioNet may renew [*] this Agreement [*] under the same terms and conditions [*] for an additional one year period by providing at least forty-five (45) days' written notice to RN prior to the expiration of the Term. All rights and obligations of the AudioNet [*] shall be extended during such renewal period. [*] If AudioNet elects this option, it shall pay RN [*] on a monthly basis during the renewal period. [*] (ii) AudioNet's Breach. Immediately upon termination of this Agreement for AudioNet's material breach of this Agreement, all rights and licenses under this Agreement shall immediately terminate, and AudioNet shall immediately return all copies of the RN Software licensed under this Agreement. If AudioNet elects to acquire replacement software from RN's site, or from another distributor or value-added reseller, it shall be bound by the terms of the "shrinkwrap" licenses distributed therewith. * Confidential Treatment Requested 8 9 (iii) RN's Breach. Immediately upon termination of this Agreement for RN's material breach of this Agreement [*], AudioNet shall have a fully paid-up license to the RN Software consistent with the terms of Sections 1(a) hereof but for a perpetual term, and only to the released version thereof and any released beta versions thereof in existence on the date of termination, and RN shall provide support and maintenance to AudioNet for the remainder of the initial Term. Thereafter, RN shall provide support and maintenance to AudioNet pursuant to the terms of RN's standard price list for support and maintenance of the RN Software for RN's direct hosting and/or large scale broadcast customers. (d) Non-RN Supplied Software. If AudioNet acquires replacement, updated, or additional software from RN's site, or from another distributor or value-added reseller, either during or after the Term, it shall be bound by the terms of the "shrinkwrap" licenses distributed therewith. (e) No Waiver. RN's licensing of RN Software to AudioNet or any other of act of either party after termination of this Agreement shall not be construed as a renewal of this Agreement for any further term nor as a waiver of the termination or of any other rights or claims that the terminating party may have as against the other party because of the breach of this Agreement. Any termination of this Agreement shall not act as a release of either party hereto from any liability for breach of such party's obligations under this Agreement. 10. CONFIDENTIAL INFORMATION. (a) Confidential Information. "Confidential Information" shall mean information about the disclosing party's business or activities that are proprietary or confidential, which shall include all business, financial, technical and other information of a party marked or designated by such party as "confidential" or "proprietary"; or information which, by the nature of the circumstances surrounding the disclosure, ought in good faith to be treated as confidential, including without limitation information relating to the RN Software; and the fact that the parties are in negotiation and the proposed offer, terms and conditions of this Agreement; provided that information shall not be considered Confidential Information of a party if it can be shown that such information: (i) is known to the recipient on the Effective Date directly or indirectly from a source other than one having an obligation of confidentiality to the providing party; (ii) hereafter becomes known (independently of disclosure by the providing party) to the recipient from a source other than one having an obligation of confidentiality to the providing party; or (iii) becomes publicly known or otherwise ceases to be confidential, except through a breach of this Agreement by the recipient. (b) Protection of Confidential Information. RN and AudioNet recognize that, in connection with the performance of this Agreement, each of them may disclose to the other its Confidential Information, including the creation of materials and the development of technology and techniques that are not generally known in the industry. The party receiving any Confidential Information of the other party agrees to maintain the confidential status of such Confidential Information and not to use any such Confidential Information for any purpose other than the purposes for which it was originally disclosed to the receiving party, and not to disclose any of such Confidential Information to any third party. In addition, each party agrees not to disassemble, decompile, or otherwise reverse engineer the products or technology of the other party or otherwise attempt to learn the source code, structure or algorithms or ideas underlying such products or technology or any Confidential Information. The parties' obligations set forth in this section shall survive any expiration or termination of this Agreement. (c) Permitted Disclosure. RN and AudioNet acknowledge and agree that each may disclose any given Confidential Information: (i) as required by law; (ii) to their respective directors, officers, employees, attorneys, accountants and other advisors or independent contractors, who are under an obligation of confidentiality, on a "need-to-know" basis; (iii) to investors or joint venture partners, who are under an obligation of confidentiality, on a "need-to-know" basis; or (iv) in connection with any arbitration *Confidential Treatment Requested 9 10 or litigation between the parties involving such Confidential Information and each party shall endeavor to limit disclosure to that purpose. (d) Applicability. The foregoing obligations of confidentiality shall apply to directors, officers, employees and representatives of the parties and any other person to whom the parties have delivered copies of, or permitted access to, such Confidential Information in connection with the performance of this Agreement, and each party shall advise each of the above of the obligations set forth in this Section 10. 11. RESOLUTION OF DISPUTES. (a) Dispute Resolution. Any dispute arising out of or relating to this Agreement shall be resolved in accordance with the procedures specified in this Section 11, which shall be the sole and exclusive procedures for the resolution of any such dispute. (b) Executive Negotiations. The parties shall attempt in good faith to resolve any dispute relating to this Agreement promptly by negotiation between executives who have authority to settle the controversy. In the event a dispute cannot be resolved, either party may give the other party written notice of any dispute not resolved in the normal course of business. Within fifteen (15) days after delivery of such a notice, the receiving party shall submit to the other a written response. The notice and response shall include a statement of each party's position and a summary of arguments supporting that position. Within thirty (30) days after delivery of the disputing party's notice, the senior executive officers of AudioNet and RN shall meet at a mutually acceptable time and place, and thereafter as often as they reasonably deem necessary, to attempt to resolve the dispute. All reasonable requests for information made by one party to the other will be honored. All negotiations pursuant to this Section 11 are confidential and shall be treated as compromise and settlement negotiations for purposes of the Federal Rules of Evidence and any state rules of evidence. (c) Arbitration. If any dispute relating to this Agreement shall not have been resolved through the use of the non-binding procedures specified in Section 11 within one hundred (100) days of the initial notice of either party to the other of a dispute, such dispute shall be settled by binding arbitration; provided, however, that if one party has requested the other to participate in the non-binding procedure specified in Section 11 and the other has failed to participate, the requesting party may initiate arbitration before expiration of the above stated period. Arbitration shall be governed by AAA Rules, with arbitrators to be mutually agreed upon by the parties. Arbitration shall take place in Los Angeles County, California and the arbitrators shall apply, to the greatest extent possible, the laws of the State of California without giving regard to its conflict of laws principles. The arbitrators shall not be empowered to award damages in excess of compensatory damages, and each party hereby irrevocably waives any right to recover such damages with respect to any dispute or disagreement resolved by arbitration. (d) Provisional Remedies. A party, without prejudice to the mandatory procedures of this Section 11, may file a complaint for statute of limitations or venue reasons, or seek a preliminary injunction or other provisional judicial relief, if in its sole judgment such action is necessary to avoid irreparable damage or to preserve the status quo. Notwithstanding such action, the parties will continue to participate in good faith in the procedures specified in this Section 11. 12. GENERAL. (a) Independent Contractor. The relationship created by this Agreement is one of independent contractors, and not partners, franchisees or joint venturers. No employees, consultants, contractors or agents of one party are employees, consultants, contractors or agents of the other party, nor do they have any authority to bind the other party by contract or otherwise to any obligation, except as expressly set forth herein. Neither party will represent to the contrary, either expressly, implicitly or otherwise. 10 11 (b) Export Licenses. The parties acknowledge that the laws and regulations of the United States may restrict the export and re-export of certain commodities and technical data of United States origin. Each party agrees that it will not export or re-export the RN Software in any form without the appropriate United States or foreign government licenses. In particular but without limitation, none of the RN Software, Documentation or underlying information or technology may be exported or re-exported (i) into (or to a national or resident of) Cuba, Iraq, Libya, Yugoslavia (Serbia and Montenegro), North Korea, Iran, Angola, Sudan, Syria or any other country to which the U.S. has embargoed goods; or (ii) to anyone on the U.S. Treasury Department's list of Specially Designed Nationals or the U.S. Commerce Department's Table of Deny Orders. (c) Miscellaneous. This Agreement, and the Exhibits attached hereto and made a part hereof, [*] constitute the complete and exclusive agreement between RN and AudioNet and supersedes all prior oral or written understandings or agreements not specifically incorporated herein. This Agreement may not be modified except in a writing duly signed by an authorized officer of RN and AudioNet. If any provision of this Agreement is held to be unenforceable for any reason, such provision shall be reformed only to the extent necessary to make it enforceable, and such decision shall not affect the enforceability of such provision under other circumstances, or of the remaining provisions hereof under all circumstances. Headings shall not be considered in interpreting this Agreement. (d) Governing Law. This Agreement shall be governed by the laws of the State of California, United States of America, excluding that body of law known as conflicts of law. This Agreement shall not be governed by the United Nations Convention of Contracts for the International Sale of Goods, the application of which is hereby expressly excluded. (e) Survival of Agreements and Representations and Warranties. All agreements, representations and warranties contained herein or made in writing in connection herewith, to the extent applicable, shall survive the execution and delivery of this Agreement and the consummation of the transactions contemplated hereby. In addition, the following provisions shall survive the termination of this Agreement for any reason.: 1(e), (f) and (g), 2(a) and (d), 3(d), 6, 9(c), 10, 11 and 12(d), (e) and (l). (f) Binding Effect. All covenants, representations, warranties and other stipulations in this Agreement, given by or on behalf of any of the parties hereto, shall bind and inure to the benefit of the respective successors and permitted assigns of the parties hereto. (g) Cumulative Powers. No remedy herein conferred upon a party to this Agreement is intended to be exclusive of any other remedy, and each such remedy shall be cumulative and in addition to every other remedy given hereunder or now or hereafter existing at law, or in equity or by statute or otherwise. (h) Notices. All notices, requests, demands and other communications hereunder shall be in writing and shall be deemed to have been given (i) when hand delivered, including delivery by messenger or courier service (or if delivery is refused, at the time of refusal), to the address set forth below, (ii) when received or refused as evidenced by the postal receipt if sent by United States mail as Certified Mail, Return Receipt Requested, with proper postage prepaid, addressed as set forth below or (iii) when received as evidenced by the transmission report of the telecopy machine of the transmitting party acknowledging a good transmission if sent by telecopy to the number set forth below: A. If to RN: RealNetworks, Inc. 1111 Third Avenue, Suite 2900 Seattle, WA 98101 Attn: Bruce Jacobsen *Confidential Treatment Requested 11 12 Telephone No.: 206.674. Telecopy No.: 206.674. E-mail: brucej@real.com With a copy to: RealNetworks, Inc. 1111 Third Avenue, Suite 2900 Seattle, WA 98101 Attn: Kelly Jo MacArthur Telephone No.: 206.674.2213 Telecopy No.: 206.674.2695 E-mail: kellyjo@real.com B. If to AudioNet: AudioNet, Inc. 2914 Taylor Street Dallas, Texas 75226 Attn: Todd R. Wagner Telephone No.: 214.748.6657 Telecopy No.: 214.748.6660 E-mail: twagner@audionet.com With a copy to: Gibson, Dunn & Crutcher LLP 200 Park Avenue New York, New York 10166 Attn: Sean P. Griffiths, Esq. Telephone No.: 212.351.3872 Telecopy No.: 212.351.4035 E-mail: sgriffiths@gdclaw.com Any party may change its mailing address or telecopy number, by giving notice to the other party pursuant to this Section 12(h) as long as the mailing address and telecopy number is within the United States of America. (i) Multiple Originals. This Agreement may be executed simultaneously in one or more counterparts, each of which shall be deemed an original, and it shall not be necessary in making proof of this Agreement to produce or account for more than one such counterpart. (j) Assignment. Neither this Agreement, nor any interest herein or any rights hereunder, shall be assigned by either party without the prior written consent of the other party. (k) Waiver. Failure or delay on the part of either party to exercise any right, remedy, power, privilege or option hereunder which is not subject to an express time limitation with respect to exercise shall not operate or be construed to operate as a waiver thereof. A waiver, to be effective, must be in writing and be signed by the party making the waiver. No written waiver of any term or condition of this Agreement shall operate or be construed to operate as a waiver of any other term or condition, nor shall any written waiver of any breach or default operate or be construed to operate as a waiver of any other breach or default or of the same type of breach or default on a subsequent occasion or operate or be construed to operate as a continuing waiver. 12 13 (l) Limitation of Liability. UNDER NO CIRCUMSTANCES AND UNDER NO LEGAL THEORY, WHETHER IN TORT, CONTRACT OR OTHERWISE, SHALL EITHER PARTY BE LIABLE TO THE OTHER, OR ANY OTHER PERSON FOR ANY INDIRECT, SPECIAL, INCIDENTAL OR CONSEQUENTIAL DAMAGES OF ANY CHARACTER ARISING OUT OF THIS AGREEMENT INCLUDING, WITHOUT LIMITATION, DAMAGES FOR LOSS OF GOODWILL, WORK STOPPAGE, COMPUTER FAILURE OR MALFUNCTION, EVEN IF SUCH PARTY SHALL HAVE BEEN INFORMED OF THE POSSIBILITY OF SUCH DAMAGES, OR FOR ANY CLAIM BY ANY OTHER PARTY. IN ADDITION, THE LIABILITY OF EACH PARTY UNDER SECTION 6 ABOVE SHALL BE LIMITED TO A SUM TOTAL OF TWO MILLION DOLLARS ($2,000,000). IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed and delivered as of the day and year first above written. REALNETWORKS, INC. AUDIONET, INC. By: /s/ BRUCE JACOBSEN By: /s/ TODD R. WAGNER ------------------------ ------------------------ TITLE: President TITLE: CEO --------------------- --------------------- 13 14 EXHIBIT A DESCRIPTION OF REALSYSTEM PROFESSIONAL SERVER SYSTEM HOSTING SKU (THE "RN SOFTWARE") [*] *Confidential Treatment Requested 14 15 ATTACHMENT A UPGRADE AND SUPPORT OBLIGATIONS This Attachment A (this "Attachment") to the RN License Agreement (the "Agreement") between RealNetworks, Inc. ("RN") and AudioNet, Inc. ("AudioNet") sets forth the upgrade and support obligations of RN and related obligations of AudioNet. 1. DEFINITIONS. 1.1 In addition to the capitalized terms defined elsewhere in this Attachment, the following terms used herein shall have the meanings ascribed to them below: (a) "Level 1 Error" shall mean any condition that precludes core functions of the Real Server (e.g. complete system hang or unrecoverable loss of data) from being performed due to suspected or actual Errors in the Real Server, for which no Workaround solution is available, and which (i) in the case of an Error in the RealAudio Server, affects more than 25% of the Real Players, or (ii) in the case of an Error in the Real Player, affects more than 25% of the Real Players. All other Errors which preclude core functions in the Real Server from being performed shall be Level 2 Errors. (b) "Error" shall mean any instance in which the Real Server do not materially conform to the Documentation; provided, however, than an Error shall not include any material nonconformance that is due to hardware, software, or other equipment not referred to in the Documentation as being compatible with the Real Server. (c) "First Level Support" shall consist of accepting and handling end user calls and troubleshooting to the point of verifying that there is an Error and that the Error, if any, is in the Real Server. (d) "Level 3 Error" shall mean any condition that results in a significant loss or degradation of functionality of the Real Server due to suspected or actual Errors in the Real Server. (e) "Level 4 Error" shall mean any condition (i) that precludes one or more nonessential functions of the Real Server from being performed due to suspected or actual Errors in the Real Server; or (ii) in which AudioNet's technical support personnel need reasonable assistance or information regarding the Real Server. (f) "AudioNet Contact" shall mean an individual designated in writing by AudioNet who is authorized to contact the Support Center. AudioNet may substitute AudioNet Contacts at any time or from time to time upon written notice thereof to RN. (g) "Level 2 Error" shall mean any condition that precludes one or more major functions of the Real Server (e.g. intermittent system hang or temporary loss of data) from being performed due to suspected or actual Errors in the Real Server, and which (i) in the case of an Error in the RealAudio Server, affects more than 25% of the Real Players, or (ii) in the case of an Error in the Real Player, affects more than 25% of the Real Players. All other Errors which preclude one or more major functions in the Real Server from being performed shall be Level 3 Errors. 16 (h) "Second Level Support" shall consist of telephone and remote diagnostic support to AudioNet (not directly to end users or other third parties) with regard to the operation and utilization of the Real Server a maintenance modifications, error corrections or bug fixes necessary to bring the Real Server into conformance with the Documentation therefor. (i) "Support Center" shall mean the RN facility or facilities from which support obligations are to provided hereunder. As of the Effective Date, RN's Support Center is located at 1111 Third Avenue, Suite 290 Seattle, Washington 98101. (k) "Upgrades" shall mean all maintenance releases, error corrections, bug fixes, updates, upgrade and enhancements to the RN Software that RN makes generally available; provided that Upgrades shall not include any software developed by RN exclusively for, or specially commissioned under, a specific license, or any versions of the Real Player that are licensed for a fee. (k) "Workaround" shall mean: (i) a modification to the Real Server; (ii) an alteration to configuration of the end user's computer or software; or (iii) a change in the way the end user accomplishes a using the Real Server; any of which may be of a temporary nature, to help avoid the Error. 1.2 All other capitalized terms used in this Attachment and not otherwise defined herein shall have the meanings ascribed to them in the Agreement. 2. AUDIONET OBLIGATIONS 2.1 AudioNet shall be responsible for providing First Level Support for the Real Server. RN shall not be required to have direct contact with AudioNet's distributors or end users with regard to Real Server support. 2.2 AudioNet shall ascertain the nature of each reported Error, and the circumstances under which such Error occurs. AudioNet shall use reasonable commercial efforts to provide RN with information, traces, server access or documentation sufficient for RN to duplicate the Error. Upon RN's duplication of such Error, the parties shall mutually determine in good faith the reasonable classification of such Error. 2.3 AudioNet shall designate a reasonable number of AudioNet Contacts, not to exceed three (3) individuals at any given time, for communication with RN's representatives at the Support Center and shall make reasonable efforts to minimize redundancy in support requests. All AudioNet support requests must come through an AudioNet Contact. Each AudioNet Contact shall have adequate technical expertise, training and experience to fulfill his or her responsibilities. AudioNet shall immediately provide RN with the name, title and 24-hour contact information for each AudioNet Contact. 2.4 AudioNet agrees that when requesting support services, it shall follow the following procedures: (i) AudioNet shall first contact the Support Center through standard support channels. (ii) If AudioNet does not receive a response from the Support Center within the requisite time frame set forth in Section 3.2 below, it shall contact the technical support server lead and the technical support manager, from whom RN will provide contact information. 2.5 AudioNet agrees that it will provide its end users up-to-date technical support information through a link to RN's technical support site (Http://service.real.com), and the Frequently Asked Questions pages for the most current version of the Real Server and Real Player. AudioNet 17 agrees that it will remove all other RN technical support information from its site within five (5) days of the Effective Date, and will not post any further information without RN's prior written consent. 3. RN SUPPORT OBLIGATIONS. 3.1 Support Center personnel shall be available for telephone contact Monday through Friday (7:00 AM - 5:00 PM) PST time at the Support Center, exclusive of RN's local holidays. RN shall ensure that AudioNet has the ability to contact a Support Center technician 24 hours per day, 7 days per week, with regard to Level 1 Errors, through pager support. RN shall also provide AudioNet with a means of reporting Errors to RN by priority electronic mail, voice mail, fax or telephonic recording capability. AudioNet shall have access to RN's toll-free support line at 888-768-4327 (888-rntechs). 3.2 RN shall provide Second Level Support to AudioNet in connection with the Real Server as follows: (i) assist AudioNet Contacts in determining the cause of Errors encountered by AudioNet or end users in the use of Real Server; (ii) make commercially reasonable efforts to classify and correct in accordance with the time frame set forth in the chart below, all Errors that a AudioNet Contact identifies, classifies and reports to RN and that RN can substantiate; and (iii) provide an Upgrade if appropriate. RN shall not be required to correct any Error caused by any failure to implement any Upgrades to the Real Server that are provided by RN to AudioNet.
Type of Error RN to assign Patch work- Upgrade within: technician to investigate around or temporary Error within: fix within: Level 1 thirty (30) minutes 4 business days 30 days from having been alerted from assignment of technician Level 2 four (4) business hours 15 business days from 60 days from having been alerted assignment of technician Level 3 eight (8) business 45 days from the next scheduled hours from having assignment of Upgrade been alerted (or, in technician the case of technical personnel requiring assistance or information, RN to provide such assistance or information within eight (8) business hours) Level 4 two (2) business days 90 days from the next from having been alerted assignment of scheduled Upgrade technician
18 3.3 If AudioNet desires to receive on-site technical support at any of its locations, it shall pay RN based on RN's standard list prices for such support or consulting services, and shall pay all direct RN expenses associated therewith, including transportation, accommodations and meals. 3.4 For the avoidance of doubt, RN shall not have any support obligations with respect to beta versions of Real Server. 3.5 RN shall provide to AudioNet all Upgrades for the Real Server. Such Upgrades shall be provided to AudioNet electronically unless AudioNet requests other or additional means of delivery, together with applicable Documentation and instructions for installation, use and duplication. RN shall deliver to AudioNet the beta and final release of each Upgrade as and at the same time as such versions are generally made available. 3.6 With respect to training, RN shall provide to AudioNet with generally available training materials, if any, for the Real Server. RN authorizes AudioNet to copy such training material for AudioNet's internal use, provided that: (i) all copies made by AudioNet shall include all trademarks, proprietary rights and copyright notices supplied by RN; and (ii) such copies shall be used only by AudioNet employees for the purpose of providing support for the Real Server. RN grants to AudioNet, solely for the purpose of providing training on Real Server to AudioNet support personnel, a limited, nonexclusive, nontransferable, worldwide license and right to duplicate, distribute, and incorporate into AudioNet training materials, the RN training materials provided to AudioNet, provided that all copies (in whole or in part and in any form) shall include all trademarks, proprietary rights and copyright notices supplied by RN. All other training obligations shall be as set forth in the RN License Agreement. 19 (l) Limitation of Liability. UNDER NO CIRCUMSTANCES AND UNDER NO LEGAL THEORY, WHETHER IN TORT, CONTRACT OR OTHERWISE, SHALL EITHER PARTY BE LIABLE TO THE OTHER, OR ANY OTHER PERSON FOR ANY INDIRECT, SPECIAL, INCIDENTAL OR CONSEQUENTIAL DAMAGES OF ANY CHARACTER ARISING OUT OF THIS AGREEMENT INCLUDING, WITHOUT LIMITATION, DAMAGES FOR LOSS OF GOODWILL, WORK STOPPAGE, COMPUTER FAILURE OR MALFUNCTION, EVEN IF SUCH PARTY SHALL HAVE BEEN INFORMED OF THE POSSIBILITY OF SUCH DAMAGES, OR FOR ANY CLAIM BY ANY OTHER PARTY. IN ADDITION, THE LIABILITY OF EACH PARTY UNDER SECTION 6 ABOVE SHALL BE LIMITED TO A SUM TOTAL OF TWO MILLION DOLLARS ($2,000,000). IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed and delivered as of the day and year first above written. REALNETWORKS, INC. AUDIONET, INC. BY: BY: ----------------------- ---------------------------- Bruce Jacobsen Todd R. Wagner TITLE: President TITLE: President -------------------- ------------------------- EX-10.13 5 NETSHOW LICENSE AGREEMENT DATED JANUARY 1, 1998 1 EXHIBIT 10.13 NETSHOW LICENSE AGREEMENT This NetShow License Agreement (the "Agreement") is entered into and effective as of August 5, 1997 (the "Effective Date") by and between MICROSOFT CORPORATION, a Washington corporation located at One Microsoft Way, Redmond, WA 98052 ("Microsoft") and AUDIONET, INC., a Delaware corporation located at 2914 Taylor Street, Dallas, TX 75226 ("AudioNet"). RECITALS Microsoft is the owner and/or authorized licensor of a line of Internet streaming audio and video client and server technology known as NetShow. Under this Agreement, Microsoft wishes to grant, and AudioNet wishes to receive, a license to NetShow and other software and technology licensable from Microsoft. The parties hereby agree as follows: AGREEMENT 1. DEFINITIONS 1.1 "AudioNet Services Support" means [*] 1.2 "AudioNet Services" means [*] 1.3 "Beta Quality" means software which passes system testing, contains substantially all of the intended core features, is ready for production testing and contains a limited number of significant errors. 1.4 "Confidential Information" means: (i) any source code of Microsoft Software; and (ii) the terms and conditions of this Agreement. "Confidential Information" shall not include information that: (a) is or becomes generally known or available by publication, commercial use or otherwise through no fault of the receiving party; (b) is known and has been reduced to tangible form by the receiving party at the time of disclosure and is not subject to restriction; (c) is independently developed or learned by the receiving party; (d) is lawfully obtained from a third party that has, to the knowledge of the receiving party, the right to make such disclosure; or (e) is made generally available by the disclosing party without restriction on disclosure. 1.5 "Microsoft Software" means NetShow, [*] 1.6 "NetShow" means [*] 1.7 [*] * Confidential Treatment Requested Confidential & Proprietary Page 1 of 11 2 AudioNet/Microsoft NetShow License Agreement August 5, 1997 1.8 "Production Quality" means software which has either no significant errors or only significant errors which are documented and mutually agreed to be rare or remote in likelihood of occurrence, and which has passed mutual, reasonable acceptance criteria during beta testing in a production environment. 1.9 "Term" means a period of five (5) years commencing upon the Effective Date. 1.10 "Third Party Contractor" means a third party company or other entity under written agreement with AudioNet to perform AudioNet Services Support, where such written agreement is consistent with the terms and conditions of this Agreement including, but not limited to, Sections 3 and 6. 1.11 "Updates" means, as to any Microsoft Software, all subsequent public releases (including maintenance releases) thereof by Microsoft during the Term, including public releases of error corrections, upgrades, enhancements, additions, improvements, extensions, modifications and successor versions, for which Microsoft has the right to license to AudioNet. 1.12 [*] 2. DELIVERY 2.1 NetShow. Microsoft shall deliver to AudioNet, on such media as AudioNet reasonably requests, a copy of [*] within five (5) days after the Effective Date. Updates of NetShow which are separate release versions shall be delivered to AudioNet as follows: BETA QUALITY [*] --------------------------------------------------------------- PRODUCTION QUALITY [*] 2.2 [*] 2.3 [*] 3. OBJECT CODE LICENSE GRANTS 3.1 License Grant - NetShow [*]. Microsoft hereby grants to AudioNet a [*] license to use [*] * Confidential Treatment Requested Confidential & Proprietary Page 2 of 11 3 AudioNet/Microsoft NetShow License Agreement August 5, 1997 [*] 3.2 License Grant - [*]. Microsoft hereby grants to AudioNet a [*] 3.3 Ownership. Except as expressly licensed to AudioNet in Sections 3.1 and 3.2, Microsoft retains all right, title and interest in and to the Microsoft Software. 3.4 No Distribution/Other Rights. AudioNet agrees that this Agreement does not grant to it any distribution or resale rights to the Microsoft Software, in any form (except solely with respect to the rent and/or reuse of connections or streams or the sublicense rights to Third Party Contractors, as provided in Sections 3.1 and 3.2, respectively). Except as expressly granted in this Agreement, AudioNet shall have no other rights in the Microsoft Software. Under no circumstances will the license grant set forth in Sections 3.1 and 3.2 be construed as granting, by implication, estoppel or otherwise, a license to any Microsoft technology other than the Microsoft Software. 4. NONEXCLUSIVE Nothing in this Agreement will be construed as restricting Microsoft's ability to license, develop, sublicense, manufacture, deploy or distribute Microsoft Software or any other technology, for itself or for or to any third party. 5. CONSIDERATION As partial consideration for the licenses under this Agreement, AudioNet shall, [*], pay Microsoft the license fee set forth in Exhibit B. 6. CONFIDENTIALITY 6.1 The confidentiality provisions of this Agreement shall only apply to disclosures regarding the terms, conditions and existence of this Agreement. All other disclosures of Confidential Information shall be pursuant a separate, confidentiality agreement between the parties executed as of the Effective Date. Each party shall protect the other's Confidential Information from unauthorized dissemination and use with the same degree of care that such party uses to protect its own like information. Neither party will use the other's Confidential Information for purposes other than those necessary to directly further the purposes of this Agreement. Each party will use its best efforts not to disclose to third parties the other's Confidential Information without the prior written consent of the other party. Except as expressly provided in this Agreement, no ownership or license rights is granted in any Confidential Information. 6.2 The parties' obligations of confidentiality under this Agreement shall not be construed to limit either party's right to independently develop or acquire products without use of the other party's * Confidential Treatment Requested Confidential & Proprietary Page 3 of 11 4 AudioNet/Microsoft NetShow License Agreement August 5, 1997 Confidential Information. Further, either party shall be free to use for any purpose the residuals resulting from access to or work with such Confidential Information, provided that such party shall maintain the confidentiality of the Confidential Information as provided herein. The term "residuals" means information in non-tangible form, which may be retained by persons who have had rightful and good faith access to the Confidential Information, including ideas, concepts, know-how or techniques contained therein. Neither party shall have any obligation to limit or restrict the assignment of such persons or to pay royalties for any work resulting from the use of residuals. However, the foregoing shall not be deemed to grant to either party a license under the other party's copyrights or patents. 6.3 Microsoft hereby consents to the following limited disclosures of Microsoft Confidential Information: (i) AudioNet may disclose the existence of this Agreement; (ii) AudioNet may disclose the terms of this Agreement to third party customers, suppliers and current and prospective investors solely as provided in Exhibit C; and (iii) AudioNet may disclose this Agreement as required by applicable law, rule or regulation, including without limitation the Securities Act of 1933, as amended, the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the rules and regulations promulgated by the Securities and Exchange Commission (the "SEC") thereunder; provided that, AudioNet shall (a) give written notice to Microsoft prior to such disclosure and shall comply with any protective order or equivalent that Microsoft obtains and (b) cooperate with Microsoft in structuring a SEC Rule 406 request for confidential treatment with respect to as many of the terms of this Agreement as may reasonably be achieved. 7. WARRANTIES 7.1 Microsoft warrants and represents that the Microsoft Software, to the best of its knowledge, does not infringe any third party copyright, patent or trade secret. 7.2 AudioNet warrants and represents that the AudioNet Services, to the best of its knowledge, shall not infringe any third party copyright, patent or trade secret. 8. DISCLAIMER OF FURTHER WARRANTIES EXCEPT AS EXPRESSLY WARRANTED IN SECTION 7.1, THE MICROSOFT SOFTWARE IS PROVIDED TO AUDIONET "AS IS" WITHOUT FURTHER WARRANTY OF ANY KIND. MICROSOFT DISCLAIMS ALL FURTHER WARRANTIES, EITHER EXPRESS OR IMPLIED, INCLUDING BUT NOT LIMITED TO, THE IMPLIED WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, TITLE AND NONINFRINGEMENT. EXCEPT AS EXPRESSLY WARRANTED IN SECTION 7.2, THE AUDIONET SERVICES ARE PROVIDED "AS IS" WITHOUT FURTHER WARRANTY OF ANY KIND. AUDIONET DISCLAIMS ALL FURTHER WARRANTIES, EITHER EXPRESS OR IMPLIED, INCLUDING BUT NOT LIMITED TO, THE IMPLIED WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, TITLE AND NONINFRINGEMENT. 9. INDEMNITY 9.1 By Microsoft. (a) Microsoft shall, at its expense and AudioNet's request, defend any claim or action brought against AudioNet, or any of AudioNet's subsidiaries, affiliates, directors, officers, employees, Confidential & Proprietary Page 4 of 11 5 AudioNet/Microsoft NetShow License Agreement August 5, 1997 agents and independent contractors, to the extent such claim or action is based upon a claim (i) that the Microsoft Software infringes or violates any patent, copyright, trademark, trade secret or other proprietary right of a third party or (ii) that Microsoft does not have the rights to grant AudioNet the rights granted in Section 3 ("Microsoft Claims"), and Microsoft will indemnify and hold AudioNet harmless from and against any costs, damages and fees reasonably incurred by AudioNet, including but not limited to fees of attorneys and other professionals, as a result of such Microsoft Claims. AudioNet shall: (i) provide Microsoft reasonably prompt notice in writing of any such Microsoft Claims and permit Microsoft, through counsel mutually acceptable to AudioNet and Microsoft, to answer and defend such Microsoft Claims; and (ii) provide Microsoft information, assistance and authority, at Microsoft's expense, to help Microsoft to defend such Microsoft Claims. Microsoft will be responsible for any settlement made by AudioNet only if Microsoft's written permission has been obtained, which permission will not be unreasonably withheld. (b) Microsoft may not settle any Microsoft Claim under this Section 9.1 on AudioNet's behalf without first obtaining AudioNet's written permission, which permission will not be unreasonably withheld. In the event AudioNet and Microsoft agree to settle a Microsoft Claim, Microsoft agrees not to publicize the settlement without first obtaining AudioNet's written permission, which permission will not be unreasonably withheld. (c) The obligations of this Section 9.1 shall be AudioNet's exclusive remedy for any breach of Microsoft's warranties under Section 7. (d) Notwithstanding anything to the contrary in this Section 9.1, Microsoft shall have no obligation to indemnify and hold AudioNet harmless with respect to any breach of contract claim made against AudioNet under a contract between AudioNet and any third party. 9.2 By AudioNet. (a) AudioNet shall, at its expense and Microsoft's request, defend any claim or action brought against Microsoft, or any of Microsoft's subsidiaries, affiliates, directors, officers, employees, agents and independent contractors, to the extent such claim or action is based upon a claim that the AudioNet Services infringe or violate any patent, copyright, trademark, trade secret or other proprietary right of a third party, except to the extent such claim or action arises solely from AudioNet's use of the Microsoft Software ("AudioNet Claims"), and AudioNet will indemnify and hold Microsoft harmless from and against any costs, damages and fees reasonably incurred by Microsoft, including but not limited to fees of attorneys and other professionals, as a result of such AudioNet Claims. Microsoft shall (i) provide AudioNet reasonably prompt notice in writing of any such AudioNet Claims and permit AudioNet, through counsel mutually acceptable to Microsoft and AudioNet, to answer and defend such AudioNet Claims; and (ii) provide AudioNet information, assistance and authority, at AudioNet's expense, to help AudioNet to defend such AudioNet Claims. AudioNet will be responsible for any settlement made by Microsoft only if AudioNet's written permission has been obtained, which permission will not be unreasonably withheld. (b) AudioNet may not settle any AudioNet Claim under this Section 9.2 on Microsoft's behalf without first obtaining Microsoft's written permission, which permission will not be unreasonably withheld. In the event Microsoft and AudioNet agree to settle an AudioNet Claim, AudioNet agrees not to publicize the settlement without first obtaining Microsoft's written permission, which permission will not be unreasonably withheld. (c) The obligations of this Section 9.2 shall be Microsoft's exclusive remedy for any breach of AudioNet's warranties under Section 7.2. Confidential & Proprietary Page 5 of 11 6 AudioNet/Microsoft NetShow License Agreement August 5, 1997 10. TERMINATION 10.1 Term. Unless earlier terminated in accordance with Section 10.2, this Agreement shall commence upon the Effective Date and continue in full force and effect through the Term. 10.2 Termination By Either Party For Cause. Either party may suspend performance and/or terminate this Agreement immediately upon written notice at any time if: (a) The other party is in material breach of any material warranty, term, condition or covenant of this Agreement, other than those contained in Section 6, and fails to cure that breach within sixty (60) days after written notice thereof; or (b) The other party is in material breach of Section 6 and fails to cure that breach within five (5) business days after written notice thereof. 10.3 Effect of Termination. (a) Neither party shall be liable to the other for damages of any sort resulting solely from terminating this Agreement in accordance with its terms. (b) Should the Term of this Agreement expire or should this Agreement be terminated by AudioNet for Microsoft's material breach AudioNet's license grant under Section 3 shall survive in perpetuity but only with respect to the then current version of Microsoft Software in AudioNet's possession as of the effective date of termination. (c) Should this Agreement be terminated due to AudioNet's material breach (other than a material breach of Sections 3 and 6), AudioNet's license grants under Section 3 shall survive in perpetuity, but only with respect to the versions of the Microsoft Software in AudioNet's possession as of the effective date of termination. (d) Should this Agreement be terminated due to AudioNet's material breach of Sections 3 or 6), AudioNet's license grants under Section 3 shall not survive termination. Nothing in this Section 11.3 shall limit Microsoft's ability to enforce its rights and AudioNet's obligations under Sections 3 or 6 by equitable relief such as injunction or specific performance. 10.4 Survival. In the event of termination or expiration of this Agreement for any reason, Sections 4, 6, 8, 9, 11 and 12 shall survive termination. 11. LIMITATION OF LIABILITIES IN NO EVENT SHALL EITHER PARTY BE LIABLE FOR ANY CONSEQUENTIAL, INDIRECT, INCIDENTAL, PUNITIVE OR SPECIAL DAMAGES WHATSOEVER, INCLUDING WITHOUT LIMITATION, DAMAGES FOR LOSS OF BUSINESS PROFITS, BUSINESS INTERRUPTION, LOSS OF BUSINESS INFORMATION, AND THE LIKE, ARISING OUT OF THIS AGREEMENT OR THE USE OF OR INABILITY TO USE THE MICROSOFT SOFTWARE OR EITHER PARTY'S CONFIDENTIAL INFORMATION, EVEN IF A PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES. THIS SECTION SHALL NOT APPLY TO SECTIONS 6 AND 9. Confidential & Proprietary Page 6 of 11 7 AudioNet/Microsoft NetShow License Agreement August 5, 1997 12. GENERAL PROVISIONS 12.1 Notices. All notices and requests in connection with this Agreement shall be deemed given as of the day they are received either by messenger, delivery service, or in the United States of America mails, postage prepaid, certified or registered, return receipt requested, and addressed as follows: TO AUDIONET: TO MICROSOFT: AudioNet, Inc. Microsoft Corporation 2914 Taylor Street One Microsoft Way Dallas, TX 75226 Redmond, WA 98052-6399 Attention: Todd R. Wagner, CEO Attention: Twagner@audionet.com Phone: (214) 748-6656 Phone: (425) 882-8080 Fax: (214) 748-6657 Fax: (425) 936-7329 Copy to: Copy to: Sean P. Griffiths Microsoft Corporation Gibson Dunn & Crutcher One Microsoft Way 200 Park Avenue Redmond, WA 98052-6399 New York, NY 10012 Attention: Law & Corporate Affairs sgriffiths@gdclaw.com Phone: (212) 351-3872 Phone: (425) 882-8080 Fax: (212) 351-4035 Fax: (425) 936-7409 or to such other address as a party may designate pursuant to this notice provision. 12.2 Independent Parties. Nothing in this Agreement shall be construed as creating an employer-employee relationship, a partnership, or a joint venture between the parties. 12.3 Governing Law. This Agreement shall be governed by the laws of the State of Washington. 12.4 Attorneys' Fees. In any action or suit to enforce any right or remedy under this Agreement or to interpret any provision of this Agreement, the prevailing party shall be entitled to recover its costs, including reasonable attorneys' fees. 12.5 Assignment. This Agreement shall be binding upon and inure to the benefit of each party's respective successors and lawful assigns; provided, however, that AudioNet may not assign its rights under this Agreement, in whole or in part, to any third party without the prior written approval of Microsoft. For purposes of this Agreement, a merger, consolidation, or other corporate reorganization in which AudioNet is not the surviving entity, the sale of all or substantially all of AudioNet's assets or the sale in a single transaction or a series of related transactions of more than 50% of the securities of AudioNet entitled to vote in the election of directors to a person or "group" (as such term is defined in the Exchange Act) other than any such group that may exist or be deemed to exist as of the date hereof, shall be deemed to be an assignment of this Agreement. 12.6 Construction. If for any reason a court of competent jurisdiction finds any provision of this Agreement, or portion thereof, to be unenforceable, that provision of the Agreement will be enforced to the maximum extent permissible so as to effect the intent of the parties, and the remainder of this Agreement will continue in full force and effect. Failure by either party to enforce any provision of this Agreement will not be deemed a waiver of future enforcement of that or any other provision. This Agreement has been negotiated by the parties and their respective counsel and will be interpreted fairly in accordance with its terms and without any strict construction in favor of or against either party. Confidential & Proprietary Page 7 of 11 8 AudioNet/Microsoft NetShow License Agreement August 5, 1997 12.7 Entire Agreement. This Agreement does not constitute an offer by Microsoft and it shall not be effective until signed by both parties. This Agreement constitutes the entire agreement between the parties with respect, to the subject matter hereof and merges all prior and contemporaneous communications. It shall not be modified except by a written agreement dated subsequent to the date of this Agreement and signed on behalf of AudioNet and Microsoft by their respective duly authorized representatives. IN WITNESS WHEREOF, the parties have entered into this Agreement as of the Effective Date written above. MICROSOFT CORPORATION AUDIONET, INC. /s/ JIM DURKIN /s/ MARK CUBAN - ----------------------------- ----------------------------- By (Sign) By (Sign) Jim Durkin Mark Cuban - ----------------------------- ----------------------------- Name (Print) Name (Print) Product Unit Manager President - ----------------------------- ----------------------------- Title Title 8/5/97 August 5, 1997 - ----------------------------- ----------------------------- Date Date Confidential & Proprietary Page 8 of 11 9 AudioNet/Microsoft NetShow License Agreement August 5, 1997 EXHIBIT A DESCRIPTION OF MICROSOFT SOFTWARE [*] Confidential & Proprietary Page 9 of 11 * Confidential Treatment Requested 10 AudioNet/Microsoft NetShow License Agreement August 5, 1997 EXHIBIT B CONSIDERATION [*] Confidential & Proprietary Page 10 of 11 * Confidential Treatment Requested 11 AudioNet/Microsoft NetShow License Agreement August 5, 1997 EXHIBIT C LIMITED THIRD PARTY DISCLOSURE AudioNet may disclose the following in communications to its third party customers, suppliers and current and prospective investors: To be mutually agreed upon by the parties within five (5) days of the Effective Date. Confidential & Proprietary Page 11 of 11 EX-23.1 6 CONSENT OF PRICEWATERHOUSECOOPERS LLP 1 EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the use in the Prospectus constituting part of this Registration Statement on Form S-1 of our report dated February 1, 1998, except as to Note 10, which is as of July 9, 1998, relating to the financial statements of broadcast.com, which appears in such Prospectus. We also consent to the application of such report to the Financial Statement Schedule for the period from May 19, 1995 (inception) to December 31, 1995 and the two years ended December 31, 1997 listed under Item 16 (b) of this Registration Statement when such schedule is read in conjunction with the financial statements referred to in our report. The audits referred to in such report also included this schedule. We also consent to the references to us under the headings "Experts" and "Selected Financial Data" in such Prospectus. However, it should be noted that PricewaterhouseCoopers LLP has not prepared or certified such "Selected Financial Data." PricewaterhouseCoopers LLP Dallas, Texas July 14, 1998 -----END PRIVACY-ENHANCED MESSAGE-----