<PAGE>
As filed with the Securities and Exchange Commission on June 30, 1999
Registration No. 333-77707
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
Under The Securities Act of 1933
---------------
LIQUID AUDIO, INC.
(Exact name of Registrant as specified in its charter)
---------------
<TABLE>
<CAPTION>
Delaware 7373 77-0421089
<S> <C> <C>
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
810 Winslow Street
Redwood City, CA 94063
(650) 549-2000
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
---------------
GERALD W. KEARBY
Chief Executive Officer
LIQUID AUDIO, INC.
810 Winslow Street
Redwood City, CA 94063
(650) 549-2000
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
---------------
Please send copies of all communications to:
HANK V. BARRY, ESQ. LAIRD H. SIMONS, III, ESQ.
ISSAC J. VAUGHN, ESQ. ROBERT A. FREEDMAN, ESQ.
KELLY AMES MOREHEAD, ESQ. SCOTT J. LEICHTNER, ESQ.
Wilson Sonsini Goodrich & Rosati, Fenwick & West LLP
P.C. Two Palo Alto Square
650 Page Mill Road Palo Alto, CA 94306
Palo Alto, CA 94304 (650) 494-0600
(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 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, as amended (the "Securities Act"), please check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
---------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in the prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell these securities and it is not soliciting an offer to buy these +
+securities in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Subject to Completion dated June 30, 1999
PROSPECTUS
3,600,000 Shares
[LIQUID AUDIO LOGO]
Common Stock
- --------------------------------------------------------------------------------
This is our initial public offering of shares of common stock. We are
offering 3,600,000 shares. No public market currently exists for our shares.
We propose to list the shares on the Nasdaq National Market under the symbol
"LQID." Anticipated price range of $10 to $12 per share.
Investing in the shares involves risks. "Risk Factors" begin on page 7.
<TABLE>
<CAPTION>
Per
Share Total
----- -----
<S> <C> <C>
Public Offering Price............................................... $ $
Underwriting Discount............................................... $ $
Proceeds to Liquid Audio............................................ $ $
</TABLE>
We have granted the underwriters a 30-day option to purchase up to 540,000
additional shares of common stock on the same terms and conditions as set forth
above solely to cover over-allotments, if any.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is accurate or complete. Any representation to the contrary is
a criminal offense.
Lehman Brothers expects to deliver the shares on or about , 1999.
- --------------------------------------------------------------------------------
Lehman Brothers
BancBoston Robertson Stephens
U.S. Bancorp Piper Jaffray
, 1999
<PAGE>
[INSIDE FRONT COVER]
Music is encoded using the Liquifier Pro software and is published to Liquid
Servers through multiple data centers.
Music is syndicated and promoted over the Internet through the Liquid Music
Network and, in the future, to online retailers through RIFFS.
Consumers preview, purchase and download music to their computer using the
Liquid Player software. Music can be recorded on a recordable compact disc or,
in the future, to portable consumer digital devices. We also provide e-
commerce and reporting services for artists and labels for digital music
sales.
[GRAPHIC DEPICTING OUR PLATFORM]
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 7
Use of Proceeds.......................................................... 19
Dividend Policy.......................................................... 19
Capitalization........................................................... 20
Dilution................................................................. 21
Selected Financial Data.................................................. 22
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 23
Business................................................................. 33
Management............................................................... 51
Related Party Transactions............................................... 58
Principal Stockholders................................................... 59
Description of Capital Stock............................................. 61
Shares Available for Future Sale......................................... 64
Underwriting............................................................. 65
Legal Matters............................................................ 67
Experts.................................................................. 67
Available Information.................................................... 67
Index to Financial Statements............................................ F-1
</TABLE>
ABOUT THIS PROSPECTUS
You should rely only on the information contained in this prospectus. We have
not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell, and seeking offers to
buy, shares of common stock only in jurisdictions where offers and sales are
permitted. The information contained in this prospectus is accurate only as of
the date of this prospectus, regardless of the time of delivery of this
prospectus or of any sale of common stock.
This preliminary prospectus is subject to completion prior to this offering.
Among other things, this preliminary prospectus describes our company as we
currently expect it to exist at the time of this offering.
See the section of this prospectus entitled "Risk Factors" for a discussion
of certain factors that you should consider before investing in the common
stock offered in this prospectus.
Certain statements under the captions "Prospectus Summary," "Risk Factors,"
"Use of Proceeds," "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and "Business" and elsewhere in this prospectus are
forward-looking statements. These forward-looking statements include, but are
not limited to, statements about our plans, objectives, expectations and
intentions and other statements contained in the prospectus that are not
historical facts. When used in this prospectus, the words "expects,"
"anticipates," "intends," "plans," "believes," "seeks" and "estimates" and
similar expressions are generally intended to identify forward-looking
statements. Because these forward-looking statements involve risks and
uncertainties, there are important factors that could cause actual results to
differ materially from those expressed or implied by these forward-looking
statements, including our plans, objectives, expectations and intentions and
other factors discussed under "Risk Factors."
All trademarks and trade names appearing in this prospectus are the property
of their respective holders.
Until , 1999, all dealers selling shares of the common stock, whether or
not participating in this offering, may be required to deliver a prospectus.
This is in addition to the obligation of dealers to deliver a prospectus when
acting as underwriters and with respect to their unsold allotments or
subscriptions.
<PAGE>
PROSPECTUS SUMMARY
You should read the following summary together with the more detailed
information regarding our company and the common stock being sold in this
offering and our financial statements and notes to those statements appearing
elsewhere in this prospectus.
Except as otherwise indicated, all information in this prospectus assumes
that the underwriters do not exercise the option granted by Liquid Audio to
purchase additional shares in this offering and assumes the conversion of all
of our preferred stock into common stock upon the closing of this offering. See
"Underwriting."
Liquid Audio
We provide a leading open platform that enables the digital delivery of music
over the Internet. Our open platform is a comprehensive, flexible solution
comprised of software products and services that gives artists, record
companies, websites and retailers the ability to create, syndicate and sell
recorded music with copy protection and copyright management. Through our
Liquid Music Network website affiliates, we help artists and record companies
promote and sell their recorded music. From our growing catalog of syndicated
music, consumers can preview and purchase digital music. Consumers then can
transfer downloaded music to recordable compact discs and, later in 1999, to
digital consumer devices.
Our solution is based on an open technical architecture, which means that it
is designed to support multiple leading digital music formats, including mp3
(an audio compression format developed by the Fraunhofer Institut) and Dolby
AC-3 (an audio compression format developed by Dolby Laboratories, Inc.). These
formats use compression technology to reduce the size of audio files,
facilitating the digital delivery of music over the Internet. Numerous
recording artists and record companies have used our platform to promote music
releases including BMG North America, Capitol Records, Columbia House,
Dreamworks Records, EMI Classics, Bruce Hornsby, The Dave Matthews Band, Sarah
McLachlan and Rounder Records.
The recorded music industry, which was approximately $38.7 billion worldwide
in 1998, represents one of the largest opportunities for online digital
delivery and commerce. The growing popularity of music on the Internet,
combined with recent technology advances, has made the Internet a compelling
medium for digital music delivery. Forrester Research has estimated that sales
of recorded music through digital transmission will grow from less than 1% of
all recorded music sales in the United States in 1999 to 7% of these sales in
2003.
We believe we are the first company to offer a complete, commercially-
available solution for the digital delivery of music over the Internet. Our
"end-to-end" solution facilitates the digital delivery of music from the point
where a musician prepares music for delivery over the Internet, through
transmission, to the point where the consumer downloads and listens to it. We
began licensing our software in March 1997 and our comprehensive solution that
incorporates the Liquid Music Network became commercially available in July
1998. Our platform, which has generated approximately $3.6 million dollars of
revenue through March 1999, provides the following benefits:
. Superior Consumer Experience. We make it simple for consumers to search
for, sample and buy digital music recordings from our growing catalog of
syndicated music.
. Global Reach. Our platform allows artists, record companies and retailers
to use the Internet as an additional global distribution channel to reach
more consumers.
. Increased Revenues and Lower Costs. Record companies and artists can
increase their revenues by offering consumers their entire catalog of
music online and achieve significant cost savings by reducing costs
associated with manufacturing, warehousing and shipping.
. Security and Compliance. Our platform protects against piracy by offering
copyright management and copy protection for songs. Our services are able
to restrict digital sales to consumers within specified geographic areas,
enabling resellers to comply with distribution restrictions.
3
<PAGE>
We offer artists, record companies and websites a range of products and
services for creating, syndicating and selling music digitally over the
Internet.
. Create Music. Our Liquifier Pro software product encodes, or prepares,
music for delivery over the Internet. Encoded music is published to our
Liquid Server software product, which manages the secure digital transfer
and sale of music to consumers. We also offer complete turnkey digital
music encoding and hosting services to artists and record companies.
. Syndicate Music. We help artists reach more consumers and sell more music
by syndicating their music for sale through our growing network of Liquid
Music Network affiliates, which is a group of over 200 music-related
websites and music retailer websites.
. Sell Music. Using our Liquid Player desktop software product, consumers
can preview, purchase and digitally download music to their computers.
Music can then be transferred to a recordable compact disc or, in the
future, to portable digital consumer devices. We also provide e-commerce
and reporting services for artists and labels for digital music sales.
Our objective is to be the premier enabling platform for the digital delivery
of music over the Internet. Our strategies include:
.Providing a Superior Consumer Experience;
. Continuing to Broaden our Distribution Reach;
. Expanding Syndicated Music Content;
. Extending Technology Leadership; and
. Generating Multiple Revenue Streams.
Since early 1999, we have increased our emphasis on developing and marketing
our digital delivery services. Many independent record labels have chosen to
use our solution for promotion and sale of their music, including Beggars
Banquet, Rounder Records, Rykodisc, Sub Pop Records and Twin/Tone Records. We
have increased the number of these syndicated music recordings for sale from
approximately 5,000 at the beginning of 1999 to over 60,000 committed as of May
31, 1999. In addition, in the second half of 1999, our Liquid Music Network
will begin offering syndicated music through music retailer websites.
We have established relationships with industry leaders to build brand
recognition and enhance our content creation, syndication and sales
opportunities worldwide. Our relationships include: Adaptec; Amazon.com; Dolby
Laboratories; EMI Recorded Music; Intel; Muze; RealNetworks; Sanyo; Texas
Instruments; Toshiba and Towerrecords.com. We have also established
international alliances in Korea and Japan to build our presence and
infrastructure outside the United States.
We currently generate the majority of our revenues from software product
licensing fees and business development agreements to establish our presence
internationally. As we expand our music delivery services, we expect to
generate increasing revenues from the following areas:
. Digital music downloads to consumers;
. Hosting and e-commerce services for artists; and
. Advertising and sponsorships.
Less than 1% of our total net revenues was attributable to our music delivery
services in the year ended December 31, 1998 and the three months ended March
31, 1999. Our accumulated deficit as of March 31, 1999 was approximately $20.2
million. In addition, we had net losses of approximately $8.5 million in 1998
and $4.1 million in the first quarter of 1999. Given our planned operating and
capital expenditures, we expect to continue to incur losses and negative cash
flows through at least 2002.
We incorporated in California in January 1996 and reincorporated in Delaware
in April 1999. Our principal executive offices are located at 810 Winslow
Street, Redwood City, California 94063. Our phone number is (650) 549-2000 and
our internet address is www.liquidaudio.com. Information contained on our
website does not constitute a part of this prospectus.
4
<PAGE>
The Offering
<TABLE>
<C> <S>
Common stock offered by Liquid Audio.. 3,600,000 shares
Common stock outstanding after the
offering............................. 17,532,264 shares
Use of proceeds....................... We estimate that we will receive net
proceeds from this offering of
$35,878,000, or $41,402,200 if the
underwriters exercise their over-
allotment option in full. We expect to
use the net proceeds for general
corporate purposes, including working
capital and capital expenditures,
enhancing research and development and
attracting key personnel. See "Use of
Proceeds."
Proposed Nasdaq National Market
symbol............................... "LQID"
</TABLE>
In addition to the 17,532,264 shares of common stock to be outstanding after
the offering, we may issue additional shares of common stock under the
following plans and arrangements:
. 2,570,052 shares issuable under our 1996 Equity Incentive Plan,
consisting of:
. 865,919 shares underlying options outstanding at a weighted average
exercise price of $1.25 per share, of which 860,919 were exercisable as
of June 15, 1999; and
. 1,704,133 shares available for future grants;
. 461,913 shares issuable upon the exercise of warrants outstanding at a
weighted average exercise price of $6.36 per share; and
. 500,000 shares available for issuance under our 1999 Employee Stock
Purchase Plan.
5
<PAGE>
Summary Financial Data
The following table summarizes the financial data of our business. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." The financial results as of March 31, 1999 and for the three
months ended March 31, 1998 and 1999 are unaudited.
<TABLE>
<CAPTION>
Period From
January 30,
1996 (inception) Year Ended Three Months
Through December 31, Ended March 31,
December 31, --------------------- ---------------------
1996 1997 1998 1998 1999
---------------- --------- ---------- --------- ----------
(in thousands, except share and per share data)
<S> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Total net revenues...... $ -- $ 256 $ 2,803 $ 224 $ 531
Gross profit (loss)..... -- (137) 2,034 71 204
Net loss................ (1,264) (6,216) (8,539) (1,985) (4,143)
Basic and diluted net
loss per share......... $(14.93) $ (4.95) $ (3.60) $ (0.99) $ (1.39)
Shares used in per share
calculation............ 84,635 1,256,114 2,370,564 1,998,865 2,972,398
Pro forma basic and
diluted net loss per
share.................. $(0.85) $(0.33)
Shares used in pro forma
per share
calculation............ 10,041,546 12,716,597
</TABLE>
The following table provides a summary of our balance sheet as of March 31,
1999. The pro forma column gives effect to the conversion of all outstanding
shares of preferred stock into common stock upon the closing of this offering.
The as adjusted column reflects the sale of 3,600,000 shares of common stock in
this offering at an assumed initial public offering price of $11.00 per share
after deducting the estimated underwriting discount and offering expenses
payable by us. See "Use of Proceeds" and "Capitalization."
<TABLE>
<CAPTION>
As of March 31, 1999
-------------------------------
Pro Forma,
Actual Pro Forma As Adjusted
-------- --------- -----------
(in thousands)
<S> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents..................... $ 15,497 $15,497 $51,375
Working capital............................... 11,708 11,708 47,586
Total assets.................................. 17,729 17,729 53,607
Long-term debt................................ 1,519 1,519 1,519
Mandatorily redeemable convertible preferred
stock and warrants........................... 29,801 -- --
Total stockholders' equity (deficit).......... (17,851) 11,950 47,828
</TABLE>
6
<PAGE>
RISK FACTORS
You should carefully consider the risks described below before making a
decision to buy our common stock. The risks and uncertainties described below
are not the only ones we face. Additional risks and uncertainties not presently
known to us or that we currently deem immaterial may also impair our business
operations. If any of the following risks actually occurs, our business could
be harmed. In that case, the trading price of our common stock could decline,
and you might lose all or part of your investment. You should also refer to the
other information set forth in this prospectus, including our financial
statements and the related notes.
Risks Related to Our Business
Our Limited Operating History in the New Market of Digital Delivery of Music
Over the Internet Increases the Possibility that the Value of Your Investment
Will Decline
We incorporated in January 1996. We did not start generating revenues until
the first quarter of 1997. In early 1999, we began to place greater emphasis on
developing and marketing our digital music delivery services. Accordingly, we
are still in the early stages of development and have only a limited operating
history upon which you can evaluate our business. You should evaluate our
chances of financial and operational success in light of the risks,
uncertainties, expenses, delays and difficulties associated with starting a new
business, many of which may be beyond our control.
Fluctuations in Our Quarterly Revenues and Operating Results Might Lead to
Reduced Prices for Our Stock
Our quarterly results of operation have varied in the past, and you should
not rely on quarter-to-quarter comparisons of our results of operations as an
indication of our future performance. In some future periods, our results of
operations are likely to be below the expectations of public market analysts
and investors. In this event, the price of our common stock would likely
decline. Factors that have caused our results to fluctuate in the past and that
are likely to affect us in the future including the following:
. competition for consumers from traditional retailers as well as providers
of online music services;
. the announcement and introduction of new products and services by us and
our competitors;
. our ability to increase the number of websites that will use our platform
for digital music delivery;
. the timing of our partners' introduction of new products and services for
digital music sales; and
. variability and length of the sales cycle associated with our product and
service offerings.
In addition, other factors may also affect us, including:
. market adoption and growth of sales of digitally downloaded recorded
music over the Internet;
. our ability to attract significant numbers of music recordings to be
syndicated in our format;
. market acceptance of new and enhanced versions of our products and
services;
. our ability to provide reliable and scalable service, including our
ability to avoid potential system failures; and
. the price and mix of products and services we offer.
Some of these factors are within our control and others are outside of our
control.
7
<PAGE>
We Have a History of Losses, We Expect Losses to Continue and We Might Not
Achieve or Maintain Profitability
Our accumulated deficit as of March 31, 1999 was approximately $20.2 million.
We had net losses of approximately $8.5 million in 1998 and $4.1 million in the
first quarter of 1999. Given the level of our planned operating and capital
expenditures, we expect to continue to incur losses and negative cash flows
through at least 2002. Even if we ultimately do achieve profitability, we may
not be able to sustain or increase profitability on a quarterly or annual
basis. If our revenues grow more slowly than we anticipate, or if our operating
expenses exceed our expectations and cannot be adjusted accordingly, our
business will be harmed. See "Selected Financial Data" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
If We Do Not Increase the Number of Websites That Use Our Platform, Our
Business Will Not Grow
In order to grow our business, we need to increase the number of websites,
including websites operated by music retailers, that use our technology and our
syndicated content to digitally deliver recorded music. To increase the number
of websites, we must do the following:
. offer competitive products and services that meet industry standards;
. attract more music content;
. make it easy and cost-effective for music-related websites to sell
digital music;
. develop relationships with online retailers, music websites, online
communities, broadband providers and Internet broadcasters; and
. develop relationships with international music websites, retailers and
broadband providers.
Any failure to achieve one or more of these objectives would harm our
business. We may not be successful in achieving any of these objectives.
We also intend to increase our expenditures on marketing the Liquid Audio
brand because we believe brand awareness will be critical to increasing our
affiliates and end-user awareness. If we do not increase our revenues as a
result of our branding and other marketing efforts or if we otherwise fail to
promote our brand successfully, our business would be harmed.
If Artists and Record Labels Are Not Satisfied That They Can Securely Digitally
Deliver Their Music Over the Internet, We Might Not Have Sufficient Content to
Attract Consumers
Our success depends on our ability to aggregate a sufficient amount and
variety of digital recorded music for syndication. In particular, until a
significant number of artists and their record labels adopt a strategy of
digitally delivering music over the Internet, the growth of our business might
be limited. We currently do not create our own content; rather, we rely on
record companies and artists for digital recorded music to be syndicated using
our format. We believe record companies will remain reluctant to distribute
their recorded music digitally unless they are satisfied that the digital
delivery of their music over the Internet will not result in the unauthorized
copying and distribution of that music. If record companies do not believe that
recorded music can be securely delivered over the Internet, they will not allow
the digital distribution of their recorded music and we might not have
sufficient content to attract consumers. If we cannot offer a sufficient amount
and variety of digital recorded music for syndication, our business might be
harmed.
8
<PAGE>
Due to the Many Factors that Influence Market Acceptance, Consumers Might Not
Accept Our Platform
Our success will depend on growth in consumer acceptance of our platform as a
method for digital delivery of recorded music over the Internet. Factors that
might influence market acceptance of our platform include the following, over
which we have little or no control:
. the availability of sufficient bandwidth on the Internet to enable
consumers to download digital recorded music rapidly and easily;
. the willingness of consumers to invest in computer technology that
facilitates the downloading of digital music;
. the cost of time-based Internet access;
. the number and variety of digital recordings available for purchase
through our system relative to those available through other online
digital delivery companies, digital music websites or through traditional
physical delivery of recordings;
. the availability of portable devices to which digital recorded music can
be transferred;
. the fidelity and quality of the sound of the digital recorded music; and
. the level of consumer comfort with the process of downloading and paying
for digital music over the Internet, including ease of use and lack of
concern about transaction security.
The Market for Digital Delivery of Music Over the Internet is Highly
Competitive, and if We Cannot Compete Effectively, Our Revenues Might Decline
Competition among companies in the business of digital delivery of music over
the Internet is intense. If we do not compete effectively or if we experience
pricing pressures, reduced margins or loss of market share resulting from
increased competition, our business might be harmed.
Competition is likely to increase as new companies enter the market and
current competitors expand their products and services. Many of these potential
competitors are likely to enjoy substantial competitive advantages, including
the following:
. larger audiences;
. larger technical, production and editorial staffs;
. greater brand recognition;
. access to more recorded music content;
. a more established Internet presence;
. a larger advertiser base; and
. substantially greater financial, marketing, technical and other
resources.
See "Business--Competition."
If Standards for the Secure Digital Delivery of Recorded Music Are Not Adopted,
the Piracy Concerns of Record Companies and Artists Might Not Be Satisfied, and
They Might Not Use Our Platform for Digital Delivery of Their Music
Because other digital recorded music formats, such as mp3, do not contain
mechanisms for tracking the source or ownership of digital recordings, users
are able to download and distribute unauthorized or "pirated"
9
<PAGE>
copies of copyrighted recorded music over the Internet. This piracy is a
significant concern to record companies and artists, and is the reason many
record companies and artists are reluctant to digitally deliver their recorded
music over the Internet. The Secure Digital Music Initiative (SDMI) is a
committee formed by the Recording Industry Association of America (RIAA) to
propose a standard format for the secure digital delivery and use of recorded
music. If a standard format is not adopted, however, pirated copies of recorded
music will continue to be available on the Internet, and record companies and
artists might not permit the digital delivery of their music. Additionally, as
long as pirated recordings are available, many consumers will choose free
pirated recordings rather than paying for legitimate recordings. Accordingly,
if a standard format for the secure digital delivery of music is not adopted,
our business might be harmed.
We have designed our current products to be adaptable to different music
industry and technology standards. Numerous standards in the marketplace,
however, could cause confusion as to whether our products and services are
compatible. If a competitor were to establish the dominant industry standard,
our business would be harmed.
If Our Platform Does Not Provide Sufficient Rights Reporting Information,
Record Companies and Artists Are Unlikely to Digitally Deliver Their Recorded
Music Using Our Platform
Record companies and artists must be able to track the number of times their
recorded music is downloaded so that they can make appropriate payments to
music rights organizations, such as the American Society of Composers, Authors
and Publishers, Broadcast Music Incorporated and SESAC, Inc. If our products
and services do not accurately or completely provide this rights reporting
information, record companies and artists might not use our platform to
digitally deliver their recorded music, and our business might be harmed.
Our Business Might Be Harmed if We Fail to Price Our Products and Services
Appropriately
The price of Internet products and services is subject to rapid and frequent
change. We may be forced for competitive or technical reasons to reduce or
eliminate prices for certain of our products or services. If this happens, our
business might be harmed.
If Our Relationships With Our International Partners Terminate, Our Revenues
Might Decline
We derive a portion of our revenues from business development fees generated
from relationships with our international partners, SK Group and Super Stage.
These relationships vary in size and scope. If one of these relationships, or
any other relationship that accounts for a significant portion of our revenues
in a given period, does not generate a similar amount of revenue, or any, in
subsequent periods, then our business could be harmed. As a consequence, our
revenues are not recurring from period-to-period, which might result in
unpredictability of our revenues.
Our Revenues Would Be Negatively Affected by the Loss of a Significant Customer
We have derived, and we believe that we will continue to derive, a
substantial portion of our net revenues from a limited number of customers and
projects. Our ten largest customers for the four quarters of 1998 represented
approximately 81%, 96%, 89%, and 88%, respectively, of our total net revenues.
The loss of Liquid Audio Japan, Liquid Audio Korea or Adaptec, Inc. or any
other significant customer or any significant reduction of total net revenues
generated by these or other significant customers would harm our business. The
volume of products or services we sell to specific customers is likely to vary
year to year, and a major customer in one year may not use our services in a
subsequent year. A customer's decision not to use our services in a subsequent
year might harm our business.
We Might Not Be Able to Scale Our Technology Infrastructure to Meet Demand for
Our Products and Services
Our success will depend on our ability to scale our technology infrastructure
to meet the demand for our products and services. Adding this new capacity will
be expensive, and we might not be able to do so
10
<PAGE>
successfully. In addition, we might not be able to protect our new or existing
data centers from unexpected events as we scale our systems. To the extent that
we do not address any capacity constraints effectively, our business would be
harmed.
We Might Not Be Successful In Our Attempts to Keep Up With Rapid Technological
Change and Evolving Industry Standards
The markets for our products and services are characterized by rapidly
changing technology, evolving industry standards, changes in customer needs,
emerging competition, and frequent new product and service introductions. Our
future success will depend, in part, on our ability to:
. use leading technologies effectively;
. continue to develop our strategic and technical expertise;
. enhance our current products and services;
. develop new products and services that meet changing customer needs;
. advertise and market our products and services; and
. influence and respond to emerging industry standards and other
technological changes.
This must be accomplished in a timely and cost-effective manner. We may not
be successful in effectively using new technologies, developing new products or
services or enhancing our existing products or services on a timely basis.
These new technologies or enhancements may not achieve market acceptance. Our
pursuit of necessary technological advances may require substantial time and
expense. Finally, we may not succeed in adapting our services to new
technologies as they emerge.
Companies Might Not Develop or Consumers Might Not Adopt Devices That Will Play
Digitally Downloaded Music
We believe that the market for digital recorded music delivered over the
Internet will not develop significantly until consumers are able to enjoy this
music other than solely through the use of a personal computer. Several
consumer electronics companies have introduced or announced plans to introduce
devices that will allow digital music delivered over the Internet to be played
away from the personal computer. If companies fail to introduce additional
devices, consumers do not adopt these devices or our products and services are
incompatible with these devices, our business would be harmed. In addition,
digital music can be transferred to a compact disc, but that transfer requires
a compact disc recorder (CD-R). Many desktop computer manufacturers offer CD-Rs
in their computers. If companies do not continue to offer CD-Rs in their
computers, consumers do not adopt CD-Rs or our products and services are
incompatible with CD-Rs, our business might be harmed.
We Might Not Be Successful in the Development and Introduction of New Products
and Services
We depend in part on our ability to develop new or enhanced products and
services in a timely manner and to provide new products and services that
achieve rapid and broad market acceptance. We may fail to identify new product
and service opportunities successfully and develop and bring to market new
products and services in a timely manner. In addition, product innovations may
not achieve the market penetration or price stability necessary for
profitability.
As the online medium continues to evolve, we plan to leverage our technology
by developing complementary products and services as additional sources of
revenue. Accordingly, we may change our business model to take advantage of new
business opportunities, including business areas in which we do not have
extensive experience. For example, we recently focused on, and will continue to
devote significant resources to, the development of digital music delivery
services, as well as our software licensing business. If we fail to develop
these or other businesses successfully, our business would be harmed.
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<PAGE>
We Might Experience Delays in the Development of New Products and Services
We must continue to innovate and develop new versions of our software to
remain competitive in the market for digital delivery of recorded music
solutions. Our software products and services development efforts are
inherently difficult to manage and keep on schedule. Our failure to manage and
keep those development projects on schedule might harm our business.
Our Products and Services Might Contain Errors
We offer complex products and services. They may contain undetected errors
when first introduced or when new versions are released. If we market products
and services that have errors or that do not function properly, then we may
experience negative publicity, loss of or delay in market acceptance, or claims
against us by customers, any of which might harm our business.
We Might Have Liability for the Content of the Recorded Music that We Digitally
Deliver
Because we digitally deliver recorded music to third parties, we might be
sued for negligence, copyright or trademark infringement or other reasons.
These types of claims have been brought, sometimes successfully, against
providers of online products and services in the past. Others could also sue us
for the content that is accessible from our website through links to other
websites. These claims might include, among others, claims that by hosting,
directly or indirectly, the websites of third parties, we are liable for
copyright or trademark infringement or other wrongful actions by these third
parties through these websites. Our insurance may not adequately protect us
against these types of claims and, even if these claims do not result in
liability, we could incur significant costs in investigating and defending
against these claims.
We have taken steps to prevent these claims. For example, we have
arrangements with companies that use our hosting services that will allow us to
delete potentially infringing or misappropriating materials quickly and
securely. We also have put into place indemnification agreements with music
content providers, where practicable. Under the Digital Millenium Copyright Act
of 1999, Internet service providers are insulated from several types of these
claims, upon compliance with the requirement that they appoint an agent to
receive claims relating to their service, and we intend to appoint an agent.
In 1998, Congress passed the Internet Freedom Act, which imposes a three-year
moratorium on state and local taxes on Internet-based transactions. We cannot
assure you that this moratorium will be extended. Failure to renew this
moratorium would allow various states to impose taxes on e-commerce, which
might harm our business.
Several of Our Customers Have Had Limited Operating Histories, are Unprofitable
and Might Have Difficulty Meeting Their Payment Obligations to Us
Several of our significant customers, including our international partners
Liquid Audio Japan and Liquid Audio Korea, have had limited operating histories
and have not achieved profitability. We believe that this will be true of other
customers in the future. You should evaluate the ability of these companies to
meet their payment obligations to us in light of the risks, expenses and
difficulties encountered by companies with limited operating histories. If one
or more of our customers were unable to pay for our services in the future, or
paid more slowly than we anticipate, our business might be harmed. As of March
31, 1999, 97% of trade accounts receivable, or $320,492, was more than 30 days
past due. We have provided adequate reserves for past due amounts.
System Failures or Delays Might Harm Our Business
Our operations depend on our ability to protect our computer systems against
damage from fire, water, power loss, telecommunications failures, computer
viruses, vandalism and other malicious acts, and similar unexpected adverse
events. Interruptions or slowdowns in our services have resulted from the
failure of our telecommunications providers to supply the necessary data
communications capacity in the time frame we
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<PAGE>
required, as well as from deliberate acts. Despite precautions we have taken,
unanticipated problems affecting our systems could in the future cause
temporary interruptions or delays in the services we provide. Our customers
might become dissatisfied by any system failure or delay that interrupts our
ability to provide service to them or slows our response time. Sustained or
repeated system failures or delays would affect our reputation, which would
harm our business. Slow response time or system failures could also result from
straining the capacity of our software or hardware due to an increase in the
volume of products and services delivered through our servers. While we carry
business interruption insurance, it might not be sufficient to cover any
serious or prolonged emergencies, and our business might be harmed.
We Might Be Unable to License or Acquire Technology
We rely on certain technologies that we license or acquire from third
parties, including Dolby Laboratories Licensing Corporation, Fraunhofer
Institut and RSA Data Security, Inc. These technologies are integrated with our
internally-developed software and used in our products, to perform key
functions and to enhance the value of our platform. These third-party licenses
or acquisitions may not continue to be available to us on commercially
reasonable terms or at all. Any inability to acquire such licenses or software
on commercially reasonable terms might harm our business.
Our Future Success Depends on Our Key Personnel
Our future success depends to a significant extent on the continued service
of our key technical, sales and senior management personnel and their ability
to execute our growth strategy. The loss of the services of any of our senior
level management, or certain other key employees, could harm our business. Our
future performance will depend, in part, on the ability of our executive
officers to work together effectively. Our executive officers may not be
successful in carrying out their duties or running our company. Any dissent
among executive officers could impair our ability to make strategic decisions
quickly in a rapidly changing market.
Our future success also depends on our ability to attract, retain and
motivate highly skilled employees. Competition for employees in our industry is
intense. Although we provide compensation packages that include incentive stock
options, cash incentives and other employee benefits, we may be unable to
retain our key employees or to attract, assimilate and retain other highly
qualified employees in the future. We have from time to time in the past
experienced, and we expect to continue to experience in the future, difficulty
in hiring and retaining highly skilled employees with appropriate
qualifications.
Our Management and Internal Systems Might Be Inadequate to Handle the Potential
Growth of Our Personnel
To manage future growth, our management must continue to improve our
operational and financial systems and expand, train, retain and manage our
employee base. Our management may not be able to manage our growth effectively.
If our systems, procedures and controls are inadequate to support our
operations, our expansion would be halted and we could lose our opportunity to
gain significant market share. Any inability to manage growth effectively may
harm our business.
We Depend on Proprietary Rights to Develop and Protect Our Technology
Our success and ability to compete substantially depends on our internally
developed technologies and trademarks, which we protect through a combination
of patent, copyright, trade secret and trademark laws. Patent applications or
trademark registrations may not be approved. Even if they are approved, our
patents or trademarks may be successfully challenged by others or invalidated.
If our trademark registrations are not approved because third parties own these
trademarks, our use of these trademarks would be restricted unless we enter
into arrangements with the third-party owners, which might not be possible on
commercially reasonable terms or at all.
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<PAGE>
The primary forms of intellectual property protection for our products and
services internationally are patents and copyrights. Patent protection
throughout the world is generally established on a country-by-country basis. To
date, we have not applied for any patents outside the United States. We may do
so in the future. Copyrights throughout the world are protected by several
international treaties, including the Berne Convention for the Protection of
Literary and Artistic Works. Despite these international laws, the level of
practical protection for intellectual property varies among countries. In
particular, United States government officials have criticized countries such
as China and Brazil for inadequate intellectual property protection. If our
intellectual property is infringed in any country without a high level of
intellectual property protection, our business could be harmed.
We generally enter into confidentiality or license agreements with our
employees, consultants and corporate partners, and generally control access to
and distribution of our technologies, documentation and other proprietary
information. Despite our efforts to protect our proprietary rights from
unauthorized use or disclosure, parties may attempt to disclose, obtain or use
our solutions or technologies. The steps we have taken may not prevent
misappropriation of our solutions or technologies, particularly in foreign
countries where laws or law enforcement practices may not protect our
proprietary rights as fully as in the United States. See "Business--
Intellectual Property."
We have licensed, and we may license in the future, certain proprietary
rights to third parties. While we attempt to ensure that the quality of our
brand is maintained by our business partners, they may take actions that could
impair the value of our proprietary rights or our reputation. In addition,
these business partners may not take the same steps we have taken to prevent
misappropriation of our solutions or technologies.
We Face and Might Face Intellectual Property Infringement Claims That Might Be
Costly to Resolve
In May 1999 Microtome, Inc. notified us that it believes our Liquifier Pro
Encoding Tool, when used in conjunction with our Liquid Music Player, infringes
two of their patents. This claim may result in litigation. Although we do not
believe we infringe the proprietary rights of Microtome, Inc. or any other
party, we cannot assure you that parties will not assert additional claims in
the future or that any claims will not be successful. We could incur
substantial costs and diversion of management resources to defend any claims
relating to proprietary rights, which could harm our business. In addition, we
are obligated under certain agreements to indemnify the other party for claims
that we infringe on the proprietary rights of third parties. If we are required
to indemnify parties under these agreements, our business could be harmed. If
someone asserts a claim against us relating to proprietary technology or
information, we might seek licenses to this intellectual property. We might not
be able to obtain licenses on commercially reasonable terms, or at all. The
failure to obtain the necessary licenses or other rights might harm our
business. See "Business--Litigation and Patent Infringement Claims."
Difficulties Presented by International Economic, Political, Legal, Accounting
and Business Factors Could Harm Our Business in International Markets
A key component of our strategy is to expand into international markets. The
following risks are inherent in doing business on an international level and we
have little or no control over them:
. unexpected changes in regulatory requirements;
. export restrictions;
. export controls relating to encryption technology;
. longer payment cycles;
. problems in collecting accounts receivable;
. political and economic instability; and
. potentially adverse tax consequences.
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<PAGE>
In addition, other factors that may also affect us and over which we have
some control include the following:
. difficulties in staffing and managing international operations;
. differences in music rights reporting structures; and
. seasonal reductions in business activity.
We have entered into individual agreements in Japan and Korea, and we may
enter into similar arrangements in the future in other countries. One or more
of the factors listed above may harm our present or future international
operations and, consequently, our business.
We Might Need Additional Capital in the Future and Additional Financing Might
Not Be Available
We currently anticipate that our available cash resources, combined with the
net proceeds from this offering and financing available under existing
equipment loan and lease agreements, will be sufficient to meet our anticipated
working capital and capital expenditure requirements for the next 18 months.
However, our resources may not be sufficient for these working capital and
capital expenditure requirements. We may need to raise additional funds through
public or private debt or equity financing in order to:
. take advantage of opportunities, including more rapid international
expansion or acquisitions of complementary businesses or technologies;
. develop new products or services; or
. respond to competitive pressures.
Any additional financing we may need may not be available on terms favorable
to us, or at all. If adequate funds are not available or are not available on
acceptable terms, we might not be able to take advantage of unanticipated
opportunities, develop new products or services, or otherwise respond to
unanticipated competitive pressures, and our business could be harmed. Our
forecast of the period of time through which our financial resources will be
adequate to support our operations is a forward-looking statement that involves
risks and uncertainties, and actual results could vary materially as a result
of a number of factors, including those set forth in this "Risk Factors"
section. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
Potential Year 2000 Risks Might Harm Our Business
Many currently installed computer systems and software products worldwide are
coded to accept only two-digit entries to identify a year in the date code
field. Consequently, on January 1, 2000, many of these systems could fail or
malfunction because they are not able to distinguish between the year 1900 and
the year 2000. Accordingly, many companies, including Liquid Audio and our
customers, potential customers, vendors and strategic partners, may need to
upgrade their systems to comply with applicable year 2000 requirements.
Because we and our customers depend, to a very substantial degree, upon the
proper functioning of computer systems, a failure of these systems to correctly
recognize dates beyond January 1, 2000 could disrupt operations. Any
disruptions could harm our business. Additionally, our failure to provide year
2000 compliant solutions to our customers could result in financial loss,
reputational harm and legal liability to us. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Year 2000
Compliance."
Risks Related to Our Industry
Internet Security Concerns Could Hinder E-Commerce
A significant barrier to e-commerce and communications over the Internet has
been the need for secure transmission of confidential information. Internet
usage may not increase at the rate we expect unless some of those concerns are
adequately addressed and found acceptable by the market. Internet usage could
also decline
15
<PAGE>
if any well-publicized compromise of security occurs. We may incur significant
costs to protect against the threat of security breaches or to alleviate
problems caused by these breaches. Protections may not be available at a
reasonable price or at all. If a third person were able to misappropriate a
user's personal information, users could bring claims against us.
Imposition of Sales and Other Taxes On E-Commerce Transactions Might Hinder E-
Commerce
We do not collect sales and other taxes when we sell our products and
services over the Internet. States or local governments may seek to impose
sales tax collection obligations on out-of-state companies, such as ours, which
engage in or facilitate e-commerce. A number of proposals have been made at the
state and local level that would impose additional taxes on the sale of
products and services through the Internet. These proposals, if adopted, could
substantially impair the growth of e-commerce and could reduce our opportunity
to derive profits from e-commerce. Moreover, if any state or local government
or foreign country were to successfully assert that we should collect sales or
other taxes on the exchange of products and services on our system, our
business might be harmed.
Demand for Our Products and Services Might Decrease if Growth in the Use of the
Internet Declines
Our future success substantially depends upon the continued growth in the use
of the Internet. The number of users on the Internet may not increase and
commerce over the Internet may not become more accepted and widespread for a
number of reasons, including the following, over which we have little or no
control:
. actual or perceived lack of security of information, such as credit card
numbers;
. lack of access and ease of use;
. inconsistent quality of service and lack of availability of cost-
effective, high speed service;
. possible outages due to year 2000 difficulties or other damage to the
Internet;
. excessive governmental regulation; and
. uncertainty regarding intellectual property rights.
If the necessary infrastructure, products, services or facilities are not
developed, or if the Internet does not become a viable commercial medium, our
business would be harmed.
Government Regulation of the Internet Might Harm Our Business
The applicability to the Internet of existing laws governing issues such as
property ownership, libel and personal privacy is uncertain. In addition,
governmental authorities may seek to further regulate the Internet with respect
to issues such as user privacy, pornography, acceptable content, e-commerce,
taxation, and the pricing, characteristics and quality of products and
services. Finally, the global nature of the Internet could subject us to the
laws of a foreign jurisdiction in an unpredictable manner. Any new legislation
regulating the Internet could inhibit the growth of the Internet and decrease
the acceptance of the Internet as a communications and commercial medium, which
might harm our business.
In addition, the growing use of the Internet has burdened the existing
telecommunications infrastructure and has caused interruptions in telephone
service. Telephone carriers have petitioned the government to regulate the
Internet and impose usage fees on Internet service providers. Any regulations
of this type could increase the costs of using the Internet and impede its
growth, which could in turn decrease the demand for our services or otherwise
harm our business.
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<PAGE>
Risks Related to This Offering
The Price of Our Common Stock is Likely to Be Volatile and Subject to Wide
Fluctuations
The market prices of the securities of Internet-related companies have been
especially volatile and these securities may be overvalued. Thus, the market
price of our common stock is likely to be subject to wide fluctuations. If our
revenues do not grow or grow more slowly than we anticipate, or if operating or
capital expenditures exceed our expectations and cannot be adjusted
accordingly, or if some other event adversely affects us, the market price of
our common stock could decline. In addition, if the market for Internet-related
stocks or the stock market in general experiences a loss in investor confidence
or otherwise fails, the market price of our common stock could fall for reasons
unrelated to our business, results of operations and financial condition.
Investors might be unable to resell their shares of our common stock at or
above the offering price. In the past, companies that have experienced
volatility in the market price of their stock have been the subject of
securities class action litigation. If we were to become the subject of
securities class action litigation, it could result in substantial costs and a
diversion of management's attention and resources.
You Might Not Be Able to Sell Your Stock if No Market Develops for Our Stock
Prior to this offering, you could not buy or sell our common stock publicly.
We have filed an application for the quotation of our common stock on The
Nasdaq National Market. However, an active public market for our common stock
may not develop or be sustained after the offering. If a market does not
develop or is not sustained, it may be difficult for you to sell your shares of
common stock at a price that is attractive to you or at all. The initial public
offering price of the common stock will be determined through negotiations
between the representatives of the underwriters and us and may not be
representative of the price that will prevail in the open market. See
"Underwriting."
Provisions in Our Charter Documents Might Deter Acquisition Bids for Us
We have adopted a classified board of directors and our stockholders are
unable to call special meetings of stockholders, to act by written consent, to
remove any director or the entire board of directors without cause, or to fill
any vacancy on the board of directors, and must meet advance notice
requirements for stockholder proposals. Our board of directors may also issue
preferred stock without any vote or further action by the stockholders. These
provisions and other provisions under Delaware law could make it more difficult
for a third party to acquire us, even if doing so would benefit our
stockholders. See "Description of Capital Stock."
Our Officers and Directors Exert Substantial Influence Over Us
We anticipate that our executive officers, our directors and entities
affiliated with them together will beneficially own approximately 42.4% of our
outstanding common stock following the completion of this offering. As a
result, these stockholders will be able to exercise substantial influence over
all matters requiring approval by our stockholders, including the election of
directors and approval of significant corporate transactions. This
concentration of ownership may also have the effect of delaying or preventing a
change in our control.
Management Could Invest or Spend the Proceeds of This Offering in Ways with
which the Stockholders Might Not Agree
We have no specific allocations for the net proceeds of this offering.
Consequently, management will retain a significant amount of discretion over
the application of these proceeds. Because of the number and variability of
factors that will determine our use of these proceeds, our applications may
vary substantially from our current intentions to invest the net proceeds of
the offering in short-term, interest bearing, investment grade marketable
securities.
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<PAGE>
Future Sales of Shares by Existing Stockholders Could Affect Our Stock Price
If our existing stockholders sell substantial amounts of our common stock in
the public market following this offering, the market price of our common stock
could decline. Based on shares outstanding as of June 15, 1999, upon completion
of this offering we will have outstanding 17,532,264 shares of common stock,
assuming no exercise of the underwriters' over-allotment option. Of these
shares, only the 3,600,000 shares of common stock sold in this offering will be
freely tradeable, without restriction, in the public market. After the lockup
agreements pertaining to this offering expire 180 days from the date of this
prospectus, an additional 13,828,193 shares will be eligible for sale in the
public market.
In addition, the 1,327,832 shares subject to outstanding options and warrants
and 2,204,133 shares reserved for future issuance under our stock option and
purchase plans and a stock purchase agreement are not available for sale for
180 days from the date of this prospectus.
You Will Incur Immediate and Substantial Dilution
The initial public offering price is expected to be substantially higher than
the pro forma net book value per share of the outstanding common stock. As a
result, investors purchasing common stock in this offering will incur immediate
substantial dilution in the amount of $8.22 per share. In addition, we have
issued options and warrants to acquire common stock at prices significantly
below the initial public offering price. To the extent these outstanding
options and warrants are exercised, there will be further dilution to investors
in this offering. See "Dilution."
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<PAGE>
USE OF PROCEEDS
We estimate the net proceeds from the offering to be approximately
$35,878,000, or $41,402,200 if the underwriters exercise their over-allotment
option in full, assuming an initial public offering price of $11.00 per share
and after deducting the estimated underwriting discount and offering expenses.
We expect to use the net proceeds from the offering for general corporate
purposes, including working capital and capital expenditures, enhancing
research and development and attracting key personnel. As of the date of this
prospectus, we cannot specify the particular uses for the net proceeds.
Accordingly, our management will have broad discretion in the application of
the net proceeds.
We intend to invest the net proceeds in short-term, interest bearing,
investment grade marketable securities.
DIVIDEND POLICY
We have never declared or paid any dividends on our common stock. We do not
anticipate paying any cash dividends in the foreseeable future. We currently
intend to retain future earnings, if any, to finance operations and the
expansion of our business. Any future determination to pay cash dividends will
be at the discretion of the board of directors and will depend upon our
financial condition, operating results, capital requirements and other factors
the board of directors deems relevant.
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<PAGE>
CAPITALIZATION
The following table sets forth our short-term debt and capitalization as of
March 31, 1999. Our capitalization is presented:
. on an actual basis;
. on a pro forma basis to give effect to the automatic conversion of all
outstanding shares of preferred stock into common stock upon the
consummation of the offering; and
. on a pro forma as adjusted basis to reflect our receipt of the estimated
net proceeds from the sale of 3,600,000 shares of common stock offered in
the offering at an assumed initial public offering price of $11.00 per
share and after deducting the estimated underwriting discount and
offering expenses.
<TABLE>
<CAPTION>
As of March 31, 1999
--------------------------------
Pro Forma
Actual Pro Forma As Adjusted
-------- --------- -----------
(in thousands, unaudited)
<S> <C> <C> <C>
Short-term debt................................ $ 632 $ 632 $ 632
======== ======== ========
Long-term debt, less current portion........... $ 1,519 $ 1,519 $ 1,519
Mandatorily redeemable convertible preferred
stock, $0.001 par value; 10,905,489 shares
authorized, 9,744,199 shares issued and
outstanding, actual; none authorized, issued
or outstanding, pro forma or pro forma as
adjusted...................................... 29,801 -- --
Stockholders' equity (deficit):
Preferred stock, $0.001 par value; 5,000,000
shares authorized; none issued or
outstanding, actual, pro forma or pro forma
as adjusted.................................. -- -- --
Common stock, $0.001 par value; 25,878,000
shares authorized; 3,892,293 shares issued
and outstanding, actual; 50,000,000 shares
authorized; 13,636,492 issued and
outstanding, pro forma; and 17,236,492 shares
issued and outstanding, pro forma as
adjusted..................................... 4 14 17
Additional paid-in capital.................... 4,450 34,241 70,116
Unearned compensation......................... (2,143) (2,143) (2,143)
Accumulated deficit........................... (20,162) (20,162) (20,162)
-------- -------- --------
Total stockholders' equity (deficit)......... (17,851) 11,950 47,828
-------- -------- --------
Total capitalization........................ $ 13,469 $ 13,469 $ 49,347
======== ======== ========
</TABLE>
We expect there to be 17,532,264 shares of common stock outstanding after the
offering. In addition to the shares of common stock to be outstanding after the
offering, we may issue additional shares of common stock under the following
plans and arrangements:
. 2,570,052 shares issuable under our 1996 Equity Incentive Plan,
consisting of:
. 865,919 shares underlying options outstanding at a weighted average
exercise price of $1.25 per share, of which 860,919 were exercisable
as of June 15, 1999; and
. 1,704,133 shares available for future grants;
. 461,913 shares issuable upon the exercise of warrants outstanding at a
weighted average exercise price of $6.36 per share; and
. 500,000 shares available for issuance under our 1999 Employee Stock
Purchase Plan.
Please read the capitalization table together with the sections of this
prospectus entitled "Selected Financial Data" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the financial
statements included in this prospectus.
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DILUTION
As of March 31, 1999, our net tangible book value on a pro forma basis giving
effect to the conversion of our preferred stock was $11,950,000, or $0.88 per
share of common stock. "Net tangible book value" per share represents the
amount of our total tangible assets reduced by the amount of our total
liabilities, divided by the number of shares of common stock outstanding. As of
March 31, 1999, our net tangible book value, on a pro forma basis as adjusted
for the sale of 3,600,000 shares offered in the offering at an assumed initial
public offering price of $11.00 per share and after deducting the estimated
underwriting discount and offering expenses, would have been approximately
$2.78 per share. This represents an immediate increase of $1.90 per share to
existing stockholders and an immediate dilution of $8.22 per share to new
investors. The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share................... $11.00
Pro forma net tangible book value per share as of March 31,
1999............................................................ $0.88
Increase per share attributable to new investors................. 1.90
-----
Pro forma net tangible book value per share after the offering.... 2.78
------
Dilution per share to new investors............................... $ 8.22
======
</TABLE>
The following table summarizes on a pro forma basis as of March 31, 1999 the
differences between the total consideration paid and the average price per
share paid by the existing stockholders and the new investors with respect to
the number of shares of common stock purchased from us based on an assumed
initial public offering price of $11.00 per share:
<TABLE>
<CAPTION>
Shares Purchased Total Consideration Average
------------------ ------------------- Price
Number Percent Amount Percent Per Share
---------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders..... 13,636,492 79.1% $29,822,000 43.0% $ 2.19
New investors............. 3,600,000 20.9 39,600,000 57.0 11.00
---------- ----- ----------- ----- ------
Total.................... 17,236,492 100.0% $69,422,000 100.0%
========== ===== =========== =====
</TABLE>
We expect there to be 17,532,264 shares of common stock outstanding after the
offering. In addition to the shares of common stock outstanding after the
offering, we may issue additional shares of common stock under the following
plans and arrangements:
. 2,570,052 shares issuable under our 1996 Equity Incentive Plan,
consisting of:
. 865,919 shares underlying options outstanding at a weighted average
exercise price of $1.25 per share, of which 860,919 were exercisable
as of June 15, 1999; and
.1,704,133 shares available for future grants;
. 461,913 shares issuable upon the exercise of warrants outstanding at a
weighted average exercise price of $6.36 per share; and
. 500,000 shares available for issuance under our 1999 Employee Stock
Purchase Plan.
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SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with our
financial statements and related notes and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included elsewhere
in this prospectus. The statement of operations data for the period from
January 30, 1996 (inception) through December 31, 1996 and for the years ended
December 31, 1997 and 1998, and the balance sheet data at December 31, 1997 and
1998, are derived from financial statements that PricewaterhouseCoopers LLP,
independent accountants, have audited and are included elsewhere in this
prospectus. The balance sheet data at December 31, 1996 are derived from
audited financial statements not included in this prospectus. The statement of
operations data for the three-month periods ended March 31, 1998 and 1999, and
the balance sheet data at March 31, 1999, are derived from unaudited interim
financial statements included elsewhere in this prospectus. The unaudited
financial statements have been prepared on substantially the same basis as the
audited financial statements and, in the opinion of management, include all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation of the results of operations for such periods. Historical
results are not necessarily indicative of the results to be expected in the
future, and results of interim periods are not necessarily indicative of
results for the entire year.
<TABLE>
<CAPTION>
Period From
January 30,
1996
(inception) Year Ended Three Months Ended
Through December 31, March 31,
December 31, ----------------------- ----------------------
1996 1997 1998 1998 1999
------------ ---------- ----------- --------- -----------
(in thousands, except share and per share data)
<S> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Net revenues:
License................ $ -- $ 246 $1,235 $192 $259
Services............... -- 10 268 32 89
Business development... -- -- 1,300 -- 183
------- ---------- ----------- --------- -----------
Total net revenues..... -- 256 2,803 224 531
Cost of net revenues:
License................ -- 302 312 49 47
Services............... -- 91 457 104 280
------- ---------- ----------- --------- -----------
Total cost of net reve-
nues.................. -- 393 769 153 327
------- ---------- ----------- --------- -----------
Gross profit (loss)..... -- (137) 2,034 71 204
Operating expenses:
Sales and marketing.... 237 2,820 4,879 942 2,339
Research and develop-
ment.................. 692 1,880 3,050 569 1,214
General and administra-
tive.................. 327 898 1,642 278 502
Stock compensation ex-
pense................. 31 534 1,241 259 425
------- ---------- ----------- --------- -----------
Total operating ex-
penses................ 1,287 6,132 10,812 2,048 4,480
------- ---------- ----------- --------- -----------
Loss from operations.... (1,287) (6,269) (8,778) (1,977) (4,276)
Interest income......... 24 125 379 12 184
Interest expense........ (1) (72) (140) (20) (51)
------- ---------- ----------- --------- -----------
Net loss................ $(1,264) $(6,216) $(8,539) $(1,985) $(4,143)
======= ========== =========== ========= ===========
Basic and diluted net
loss per share......... $(14.93) $(4.95) $(3.60) $(0.99) $(1.39)
Shares used in per share
calculation............ 84,635 1,256,114 2,370,564 1,998,865 2,972,398
Pro forma basic and
diluted net loss per
share.................. $(0.85) $(0.33)
Shares used in pro forma
per share calculation.. 10,041,546 12,716,597
</TABLE>
<TABLE>
<CAPTION>
December 31,
----------------------- March 31,
1996 1997 1998 1999
------ ------ ------- ---------
(in thousands)
<S> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents.................. $ 864 $2,387 $14,143 $15,497
Short-term investments..................... -- -- 3,001 --
Working capital............................ 660 858 15,060 11,708
Total assets............................... 1,086 3,335 20,026 17,729
Long-term debt............................. 103 218 969 1,519
Mandatorily redeemable convertible
preferred stock and warrants.............. 2,001 8,247 29,801 29,801
Total stockholders' deficit................ (1,228) (6,879) (14,133) (17,851)
</TABLE>
22
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of our financial condition and results of operations
should be read together with the financial statements and related notes that
are included later in this prospectus. This discussion contains forward-looking
statements that involve risks and uncertainties. Our actual results may differ
materially from those anticipated in these forward-looking statements as a
result of various factors, including those set forth under "Risk Factors" or in
other parts of this prospectus.
Overview
We are a leading provider of software products and services that enable
artists, record companies and retailers to create, syndicate and sell digital
recorded music over the Internet. Our products and services are based on an
open technical architecture that is designed to support a variety of digital
music formats. From our inception in January 1996 through early 1997, we
devoted substantially all of our efforts to product development, raising
capital and recruiting personnel. We first generated revenues in the first
quarter of 1997 through the licensing of our Liquifier Pro, Liquid Server and
Liquid Player software products. In November 1997, we introduced a
subscription-based hosting service for digital recorded music utilizing our
technology. In July 1998, to enhance consumer access to the music we were
hosting, we launched the Liquid Music Network (LMN), a syndicated network that
currently links over 200 affiliated music-related and music retailer websites.
In early 1999, we began to place greater emphasis on developing and marketing
our digital music delivery services. Since that time, we have invested
significant resources to increase our distribution reach by expanding the LMN,
building our syndicated music catalog available for sale, actively
participating in standards initiatives and establishing our international
presence. We also have established initiatives within Korea and Japan to lay
the groundwork for offering digital music download services to consumers in
these markets. The increased emphasis on digital music delivery services
resulted in a sequential decline in revenue from the fourth quarter of 1998 to
the first quarter of 1999. As a provider of digital music delivery services, we
expect our revenue sources to expand beyond software license sales to include
sales of digital recorded music and hosting service fees. Revenue from our
music delivery services represented less than 1% of total net revenues in 1998
and the first quarter of 1999. Our Liquid Music Network will begin offering
syndicated music through music retailer websites in the second half of 1999.
To date, we have derived our revenues principally from the licensing of
software products and fees associated with business development contracts. We
license our software products to record companies, artists and websites.
Software license revenues, net of a provision for estimated sales returns, are
recognized upon shipment of the product to the customer. We also generate
services revenues from maintenance fees related to our licensed software
products and hosting fees from record companies and artists. We defer and
recognize maintenance and hosting fees as service revenue ratably over the life
of the related contract, which is typically one year. We intend to increase our
services revenues by significantly expanding our hosting and music delivery
services. Revenue derived from hosting services will include subscription fees
from artists for encoding and storing music files, e-commerce services and
transaction reporting. Music delivery services revenue will include transaction
fees from sales of digital recorded music through our LMN website affiliates
and fees from music retailers and websites related to the Liquid Muze Previews
service for sample music clips. Business development revenues primarily consist
of fees from agreements under which we assist strategic partners with the
development of businesses that use our digital recorded music delivery
technology. These U.S. dollar-denominated, nonrefundable fees are based upon
agreements under which the strategic partners are contractually obligated to
pay us a fixed fee for the opportunity to develop businesses in various
countries using our proprietary technology. We recognize the fees as they are
earned; the specific timing of this recognition depends on the terms and
conditions of the particular contractual arrangements. We bear full credit risk
with respect to substantially all sales.
23
<PAGE>
We expense all research and development as incurred. Development costs
incurred in the period from achievement of technological feasibility, which we
define as the establishment of a working model, until the general availability
of this software to customers, have been short, and therefore software
development costs qualifying for capitalization have been insignificant.
Accordingly, we have not capitalized any software development costs to date.
We have a limited operating history upon which investors may evaluate our
business and prospects. Since inception we have incurred significant losses,
and as of March 31, 1999 we had an accumulated deficit of approximately $20.2
million. We intend to continue to expend significant financial and management
resources on the development of additional products and services, sales and
marketing, improved technology and expanded operations. As a result, we expect
to incur additional losses and continued negative cash flow from operations
through at least 2002. Our revenues may not increase or even continue at their
current levels or we may not achieve or maintain profitability or generate cash
from operations in future periods. Our prospects must be considered in light of
the risks, expenses and difficulties frequently encountered by companies in
their early stages of development, particularly companies in new and rapidly
evolving markets such as the digital delivery of recorded music. We may not be
successful in addressing these risks, and our failure to do so would harm our
business.
Results of Operations
The following table sets forth our statement of operations expressed as a
percentage of total net revenues:
<TABLE>
<CAPTION>
Year Ended Three Months
December Ended
31, March 31,
------------- ---------------
1997 1998 1998 1999
------ ---- ------ ------
<S> <C> <C> <C> <C>
Statement of Operations
Data:
Net revenues:
License.................. 96% 44% 86% 49%
Services................. 4 10 14 17
Business development..... -- 46 -- 34
------ ---- ------ ------
Total net revenues...... 100 100 100 100
Cost of net revenues:
License.................. 118 11 22 9
Services................. 36 16 46 53
------ ---- ------ ------
Total cost of net
revenues............... 154 27 68 62
------ ---- ------ ------
Gross profit (loss)....... (54) 73 32 38
Operating expenses:
Sales and marketing...... 1,101 174 421 440
Research and
development............. 734 109 254 229
General and
administrative.......... 351 59 124 94
Stock compensation
expense................. 209 44 116 80
------ ---- ------ ------
Total operating
expenses............... 2,395 386 915 843
------ ---- ------ ------
Loss from operations...... (2,449) (313) (883) (805)
Interest income........... 49 13 5 35
Interest expense.......... (29) (5) (8) (10)
------ ---- ------ ------
Net loss.................. (2,428)% (305)% (886)% (780)%
====== ==== ====== ======
</TABLE>
24
<PAGE>
Three Months Ended March 31, 1998 and 1999
Total Net Revenues
Total net revenues increased 137% from $224,000 for the three months ended
March 31, 1998 to $531,000 for the three months ended March 31, 1999.
License. License revenues increased 35% from $192,000 for the three months
ended March 31, 1998 to $259,000 for the three months ended March 31, 1999.
This increase was due to the recognition of deferred revenues on a specific
license of our Liquid Player software in the 1999 period. Due to our shift in
marketing emphasis from software licensing to the delivery of digital music
services, however, revenues from licensing of our Liquifier Pro and Liquid
Server software decreased from the 1998 period to the 1999 period, which
partially offset the increase in Liquid Player revenues described above.
Services. Services revenues increased 178% from $32,000 for the three months
ended March 31, 1998 to $89,000 for the three months ended March 31, 1999. This
increase was due to the recognition of revenues on a larger base of maintenance
and hosting fees in the 1999 period.
Business Development. Business development revenues increased from $0 for the
three months ended March 31, 1998 to $183,000 for the three months ended March
31, 1999. We derived these revenues from contracts signed with related parties
after March 31, 1998. Business development fees of $83,000 were earned from our
strategic partner in Japan and relate to a non-refundable fee of $1.0 million
that was received and is being recognized as business development revenue over
the 12-month term of the related agreement. Other fees of $100,000 relate to
the delivery of products to Liquid Audio Japan.
Two customers represented approximately 47% of total net revenues for the
three months ended March 31, 1998 and three customers represented approximately
75% of total net revenues for the three months ended March 31, 1999.
International revenues represented approximately 29% and 36% of total net
revenues for the three months ended March 31, 1998 and 1999, respectively.
Total Cost of Net Revenues
Our gross profit increased from approximately 32% of total net revenues for
the three months ended March 31, 1998 to approximately 38% of total net
revenues for the three months ended March 31, 1999.
License. Cost of license revenues primarily consists of royalties paid to
third-party technology vendors and costs of documentation, duplication and
packaging. Cost of license revenues was $49,000 for the three months ended
March 31, 1998 and $47,000 for the three months ended March 31, 1999, a
decrease of 4%. Cost of license revenues remained relatively constant because,
while we decided not to renew certain third-party software licenses, the
resulting reductions were offset by higher royalties paid due to the increase
in license revenues in the 1999 period.
Services. Cost of services revenues primarily consists of compensation for
customer service, operations and encoding personnel, Internet service provider
(ISP) connectivity charges, depreciation of website operations equipment, and
an allocation of our occupancy costs and other overhead. Cost of services
revenues increased 169% from $104,000 for the three months ended March 31, 1998
to $280,000 for the three months ended March 31, 1999. The increase in cost of
services revenues was due primarily to the addition of encoding and customer
service personnel, increased ISP connectivity charges for supporting our
services business and higher depreciation due to capital investments.
Operating Expenses
Sales and Marketing. Sales and marketing expenses consist primarily of
compensation for our sales, marketing and business development personnel,
advertising, trade show and other promotional costs, design and creation
expenses for marketing literature and our website, and an allocation of our
occupancy costs and other
25
<PAGE>
overhead. Sales and marketing expenses increased 148% from $942,000 for the
three months ended March 31, 1998 to $2.3 million for the three months ended
March 31, 1999. This increase was primarily due to increases in the number of
sales and marketing personnel from 17 to 32, the impairment loss on our
investment in Liquid Audio Japan of $378,000 due to substantial doubt regarding
recoverability of our investment and the significant losses that we expect this
entity to incur during its initial operating periods, and increased expenses
associated with promotion and marketing efforts. The impairment conclusion was
based upon the lack of sufficient earnings and cash flows for LAJ for the
foreseeable future, the lack of a defined product to introduce into the Japan
marketplace, the lack of a proven business model that will sustain the
competitive and technological challenges inherent in the local environment, and
the unstable nature of the economy in Japan. We expect that sales and marketing
expenses will increase both in absolute dollars and as a percentage of total
net revenues in future periods due to expanded efforts to market and promote
our products and services both domestically and internationally.
Research and Development. Research and development expenses consist primarily
of compensation for our research and development personnel and payments to
outside contractors and, to a lesser extent, depreciation on equipment used for
research and development and an allocation of our occupancy costs and other
overhead. Research and development expenses increased 113% from $569,000 for
the three months ended March 31, 1998 to $1.2 million for the three months
ended March 31, 1999. This increase was primarily due to increased personnel
and outside contractors needed to enhance our existing software products,
develop and enhance our online services and develop new products and services.
We expect that research and development expenses will increase in absolute
dollars in future periods due to expanded investments in the development of
enhanced and new products and online services.
General and Administrative. General and administrative expenses consist
primarily of compensation for personnel and payments to outside contractors for
general corporate functions, including finance, information systems, human
resources, facilities, legal and general management, fees for professional
services, bad debt expense, and an allocation of our occupancy costs and other
overhead. General and administrative expenses increased 81% from $278,000 for
the three months ended March 31, 1998 to $502,000 for the three months ended
March 31, 1999. This increase was primarily due to increases in the number of
personnel and outside contractors needed to support the growth of our business,
bad debt expense and professional fees. General and administrative expenses
decreased as a percentage of total net revenues because of the growth of total
net revenues. We expect that general and administrative expenses will increase
in absolute dollars as we hire additional personnel and incur additional
expenses relating to the growth of our business, such as costs associated with
increased infrastructure and our public company status.
Stock Compensation Expense. Stock compensation expense relates to stock-based
employee compensation arrangements. Stock compensation expense is based on the
difference between the fair market value of our common stock and the exercise
price of options to purchase that stock on the date of the grant, and is being
recognized on an appropriate accelerated basis over the vesting periods of the
related options, usually four years. The total unearned compensation recorded
by us from inception to March 31, 1999 was $4.4 million. The fair value per
share used to determine unearned compensation was derived by reference to the
preferred stock values, reduced by a nominal discount factor of 10%, since
inception with ratable increases between preferred stock issuance dates. We
recognized $259,000 and $425,000 of stock compensation expense for the three
months ended March 31, 1998 and 1999, an increase of 64%. We expect quarterly
amortization related to those options to be between $375,000 and $265,000 per
quarter during 1999 and between $205,000 and $135,000 per quarter during 2000
and annual amortization to be $340,000 during 2001 and $100,000 during 2002.
These future compensation charges would be reduced if any employee terminates
employment prior to the expiration of the employee's option vesting period.
Interest Income. Interest income consists of earnings on our cash, cash
equivalents and short-term investments. Interest income increased from $12,000
for the three months ended March 31, 1998 to $184,000 for the three months
ended March 31, 1999. This increase was primarily due to interest received on
higher average cash and cash equivalent balances resulting from private sales
of preferred stock in the third quarter of 1998.
26
<PAGE>
Interest Expense. Interest expense consists of expenses related to our
financing obligations, which include borrowings under equipment loans, short-
term loans and capital lease obligations. Interest expense increased 155% from
$20,000 for the three months ended March 31, 1998 to $51,000 for the three
months ended March 31, 1999. This increase was primarily due to higher average
financing obligation balances resulting from additional capital leases and
borrowings under the equipment loans during 1998.
Period From January 30, 1996 (inception) Through December 31, 1996 and Years
Ended December 31, 1997 and 1998
Total Net Revenues
We had no revenues in 1996, as we were still in an early development stage.
Total net revenues increased 995% from $256,000 in 1997 to $2.8 million in
1998.
License. License revenues increased 402% from $246,000 in 1997 to $1.2
million in 1998. This increase was due to higher sales of software product
licenses, resulting from the introduction in 1998 of new versions of our
software products and expansion to international markets.
Services. Services revenues increased from $10,000 in 1997 to $268,000 in
1998. This increase was due to higher maintenance fees related to the increase
in license revenues and increased sales of hosting services, which were
introduced in November 1997.
Business Development. Business development revenues were $0 in 1997 and $1.3
million in 1998. Business development revenues were recorded when contracts
with related parties in Korea and Japan were executed and related contractual
obligations were satisfied. Business development fees totalling $950,000 and
$250,000 were earned from our strategic partners in Korea and Japan,
respectively. Other fees of $100,000 relate to the delivery of products to the
Korean joint-venture entity.
Three customers represented approximately 71% of total net revenues for the
year ended December 31, 1997 and one customer represented approximately 34% of
total net revenues for the year ended December 31, 1998. International revenues
represented approximately 65% and 66% of total net revenues for the years ended
December 31, 1997 and 1998.
Total Cost of Net Revenues
Our gross profit (loss) increased from approximately (54)% for the year ended
December 31, 1997 to approximately 73% for the year ended December 31, 1998.
Total cost of net revenues increased 96% from $393,000 in 1997 to $769,000 in
1998.
License. Cost of license revenues was $302,000 in 1997 and $312,000 in 1998,
an increase of 3%. Cost of license revenues remained relatively constant
because, while we decided not to renew certain third-party software licenses,
the resulting reductions were offset by higher royalties paid due to the
increase in license revenues in the 1999 period.
Services. Cost of services revenues was $91,000 in 1997 and $457,000 in 1998,
an increase of 402%. This increase was primarily due to the addition of
customer service, operations and encoding personnel, higher depreciation due to
capital investments and ISP connectivity charges for supporting our services
business.
Operating Expenses
Sales and Marketing. Sales and marketing expenses increased from $237,000 to
$2.8 million to $4.9 million for the period from January 30, 1996 (inception)
through December 31, 1996 and the years ended December 31, 1997 and 1998,
respectively. The increases from period to period were primarily due to the
27
<PAGE>
addition of marketing personnel starting in the first quarter of 1998,
increased expenses associated with promotion and marketing efforts, and the
addition of a direct sales force, which we began building in the second half of
1997.
Research and Development. Research and development expenses increased 172%
and 62% from $692,000 to $1.9 million to $3.1 million for the period from
January 30, 1996 (inception) through December 31, 1996 and the years ended
December 31, 1997 and 1998, respectively. The increases from period to period
were primarily due to increased personnel and outside contractors needed to
enhance our existing software products, develop and enhance online services and
develop new products and services.
General and Administrative. General and administrative expenses increased
175% and 83% from $327,000 to $898,000 to $1.6 million for the period from
January 30, 1996 (inception) through December 31, 1996 and the years ended
December 31, 1997 and 1998, respectively. The increases from period to period
were primarily due to increases in the number of personnel and outside
contractors, the higher level of professional services required to support the
growth of our operations and increased infrastructure costs.
Stock Compensation Expense. We recognized $31,000, $534,000 and $1.2 million
of stock compensation expense for the period from January 30, 1996 (inception)
through December 31, 1996 and the years ended December 31, 1997 and 1998.
Interest Income. Interest income increased 421% and 203% from $24,000 to
$125,000 to $379,000 for the period from January 30, 1996 (inception) through
December 31, 1996 and the years ended December 31, 1997 and 1998, respectively.
The increases from period to period were primarily due to interest received on
higher average cash and cash equivalent balances resulting from private sales
of preferred stock in the second quarter of 1997 and the third quarter of 1998.
Interest Expense. Interest expense increased from $1,000 to $72,000 to
$140,000 for the period from January 30, 1996 (inception) through December 31,
1996 and the years ended December 31, 1997 and 1998, respectively. The
increases were primarily due to higher average financing obligation balances
resulting from borrowings under short-term loan agreements in 1997 and 1998,
additional capital leases in 1997 and 1998, and borrowings under the equipment
line of credit during 1998.
Income Taxes. At December 31, 1998, we had $13.0 million of federal and $12.9
million of state net operating loss carryforwards available to offset future
taxable income, which will expire in varying amounts beginning in 2011 and
2004, respectively. At December 31, 1998, we had $210,000 of federal and
$170,000 of state research and development credit carryforwards available to
offset future taxable income. The federal carryforwards expire in varying
amounts beginning in 2011. Under the Tax Reform Act of 1986, the amounts of and
benefits from net operating loss carryforwards may be impaired or limited in
certain circumstances. Subsequent to this offering, management has estimated
that the net operating loss carryforwards from inception will be limited to
$7.5 million annually. See note 8 of notes to financial statements.
28
<PAGE>
Quarterly Results of Operations
The following table sets forth statement of operations data for the three
months ended March 31, June 30, September 30 and December 31, 1998, and March
31, 1999. The information for each of these quarters has been prepared on
substantially the same basis as the audited financial statements included
elsewhere in this prospectus and, in our opinion, includes all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of the results of operations for these periods. Historical results
are not necessarily indicative of the results to be expected in the future, and
results of interim periods are not necessarily indicative of results for the
entire year.
<TABLE>
<CAPTION>
Three Months Ended
----------------------------------------------
June Sept. Dec.
March 31, 30, 30, 31, March 31,
1998 1998 1998 1998 1999
--------- ------- ------- ------- ---------
(in thousands, unaudited)
<S> <C> <C> <C> <C> <C>
Net revenues:
License......................... $ 192 $ 242 $ 374 $ 427 $ 259
Services........................ 32 33 104 99 89
Business development............ -- 225 525 550 183
------- ------- ------- ------- -------
Total net revenues............. 224 500 1,003 1,076 531
Cost of net revenues:
License......................... 49 63 63 137 47
Services........................ 104 69 128 156 280
------- ------- ------- ------- -------
Total cost of net revenues..... 153 132 191 293 327
------- ------- ------- ------- -------
Gross profit..................... 71 368 812 783 204
Operating expenses:
Sales and marketing............. 942 1,198 1,098 1,641 2,339
Research and development........ 569 645 759 1,077 1,214
General and administrative...... 278 329 548 487 502
Stock compensation expense...... 259 284 339 359 425
------- ------- ------- ------- -------
Total operating expenses....... 2,048 2,456 2,744 3,564 4,480
------- ------- ------- ------- -------
Loss from operations............. (1,977) (2,088) (1,932) (2,781) (4,276)
Interest income.................. 12 1 138 228 184
Interest expense................. (20) (46) (34) (40) (51)
------- ------- ------- ------- -------
Net loss......................... $(1,985) $(2,133) $(1,828) $(2,593) $(4,143)
======= ======= ======= ======= =======
</TABLE>
Our total net revenues increased in each quarter of 1998, but declined in the
quarter ended March 31, 1999. The increases in license revenues through the
quarter ended December 31, 1998 were due to higher sales of our software
product licenses and sales expansion in international markets. License revenues
declined in the quarter ended March 31, 1999 due to the shift of our marketing
efforts towards the development of our digital music delivery services
business. The increases in services revenues through the quarter ended
September 30, 1998 included consulting fees from non-recurring projects. The
decreases in services revenues from the quarter ended September 30, 1998 to the
quarter ended March 31, 1999 were due to decreases in software maintenance
revenues. Business development revenues fluctuated from quarter to quarter due
to the terms and conditions of the contractual arrangements with our strategic
partners in Korea and Japan.
Total cost of net revenues declined in the quarter ended June 30, 1998 and
increased in succeeding quarters through the quarter ended March 31, 1999. Cost
of license revenues fluctuated with total net revenues for the corresponding
periods and the varying timing of addition and elimination of certain third-
party software licenses. Cost of services revenues has increased since June 30,
1998 primarily due to the addition of customer service, operations and encoding
personnel, higher depreciation due to capital investments and ISP connectivity
charges for supporting our services business.
29
<PAGE>
Total operating expenses have increased in each of the quarters presented
reflecting the growth of our operations. The increase in sales and marketing
expenses for the quarter ended March 31, 1999 included the write-off of our
$378,000 investment in Liquid Audio Japan.
Our quarterly and annual operating results are likely to fluctuate
significantly in the future due to a variety of factors, many of which are
outside our control. Additionally, as a result of our limited operating history
and the emerging nature of the digital delivery of recorded music market in
which we compete, it is difficult for us to forecast our revenues or earnings
accurately. Our current and future expense levels are based largely on our
investment plans and estimates of future revenues and are, to a large extent,
fixed. We may be unable to adjust spending in a timely manner to compensate for
any unexpected revenue shortfall. Any significant shortfall in revenues
relative to our planned expenditures would harm our business. Due to these
factors, our quarterly revenues and operating results are difficult to
forecast. We believe that period to period comparisons of our operating results
may not be meaningful and should not be relied upon as an indication of future
performance. In addition, it is likely that in one or more future quarters our
operating results will fall below the expectations of securities analysts and
investors. In that event, the trading price of our common stock would likely
fall. See "Risk Factors--Our Limited Operating History in the New Market of
Digital Delivery of Music Over the Internet Increases the Possibility that the
Value of Your Investment Will Decline" and "--Fluctuations in Our Quarterly
Revenues and Operating Results Might Lead to Reduced Prices for Our Stock."
Liquidity and Capital Resources
Since inception, we have financed our operations primarily through the
private placement of our preferred stock, equipment financing, lines of credit
and short-term loans. As of March 31, 1999, we had raised $29.8 million through
the sale of our preferred stock and had approximately $15.5 million of cash and
cash equivalents.
Net cash used in operating activities in the period from January 30, 1996
(inception) through December 31, 1996, the years ended December 31, 1997 and
1998 and the three months ended March 31, 1998 and 1999 was $1.1 million, $4.8
million, $5.8 million, $1.6 million, respectively. Net cash used for operating
activities in each of these periods was primarily the result of net losses
before non-cash charges, which include equity investment losses in Liquid Audio
Korea and Liquid Audio Japan, offset by increases in deferred revenue and
accrued expenses and other current liabilities. We established an allowance for
doubtful accounts based on our estimate of customer accounts which may not be
collected by us. The allowance for doubtful accounts increased from $231,000 at
December 31, 1998 to $294,000 at March 31, 1999, representing 38% and 89% of
gross accounts receivable, respectively. This increase in the allowance is due
to our placing greater emphasis on developing and marketing our digital
delivery services in early 1999. This greater emphasis has resulted in our
making an assessment of receivables due from customers in markets in which we
previously focused. The increase in the allowance for doubtful accounts did not
have a material affect on our liquidity.
Net cash provided by (used in) investing activities in the period from
January 30, 1996 (inception) through December 31, 1996, the years ended
December 31, 1997 and 1998 and the three months ended March 31, 1998 and 1999
was $(83,000), $(319,000), $(4.4) million, $(114,000) and $2.7 million,
respectively. Net cash used in investing activities was related to the
acquisition of property and equipment, the purchase of short-term investments
and the equity investment in Liquid Audio Korea in 1998 and the sale of short-
term investments in the three months ended March 31, 1999.
Net cash provided by (used in) financing activities in the period from
January 30, 1996 (inception) through December 31, 1996, the years ended
December 31, 1997 and 1998 and the three months ended March 31, 1998 and 1999
was $2.0 million, $6.6 million, $21.9 million, $(16,000) and $318,000,
respectively. The net cash provided by financing activities for the period from
January 30, 1996 (inception) through December 31, 1996 and the years ended
December 31, 1997 and 1998 was due primarily to the sales of shares of our
preferred stock. Net cash was also provided by borrowings under a line of
credit in 1997 that was repaid in 1998, and proceeds from an equipment loan in
1998 and the three months ended March 31, 1999.
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We have a bank revolving line of credit for up to $1.0 million based on 80%
of eligible accounts receivable. As of March 31, 1999, we had no borrowings
under the revolving line of credit. Any advances would bear interest at the
bank's prime interest rate, 7.75% at March 31, 1999, and would be
collateralized by substantially all of our assets. We have a bank equipment
loan facility that provides for advances of up to $3.0 million through November
1999. Borrowings under the equipment loan facility are repayable in monthly
installments over three years and bear interest at the bank's prime interest
rate plus 0.25%, 8.0% at March 31, 1999. Borrowings are secured by the related
equipment and other assets. Under the equipment loan facility, we had borrowed
amounts totaling $1.3 million through March 31, 1999. We also have lease
financing agreements that provide for the lease of computers and office
equipment of up to $1.0 million. As of March 31, 1999, we had borrowed $737,000
under the lease financing agreements. Our other significant commitments consist
of a related party note in the amount of $378,000 that was issued in the three
months ended March 31, 1999 and obligations under non-cancelable operating
leases, which totaled $880,000 as of December 31, 1998 and are payable in
monthly installments through 2002.
Although we have no material commitments for capital expenditures, we
anticipate an increase in the rate of capital expenditures consistent with our
anticipated growth in operations, infrastructure and personnel. We anticipate
that we will continue to add computer hardware resources, deploy additional
computer data centers worldwide and expand our primary office facility during
the next 12 months. We may also use cash to acquire or license technology,
products or businesses related to our current business. In addition, we
anticipate that we will continue to experience significant growth in our
operating expenses for the foreseeable future and that our operating expenses
will be a material use of our cash resources.
We believe that the net proceeds from this offering, together with existing
cash and cash equivalents and our lines of credit will be sufficient to meet
our anticipated cash needs for working capital and capital expenditures for at
least the next 18 months, although we may seek to raise additional capital
during that period. The sale of additional equity or convertible debt
securities could result in additional dilution to our stockholders. There can
be no assurance that financing will be available in amounts or on terms
acceptable to us, if at all.
Market Risk Disclosure
At December 31, 1998, we had an investment portfolio of money market funds,
commercial securities and U.S. Government bonds including those classified as
short-term investments of $3.0 million. We had a related party loan outstanding
at March 31, 1999 of $378,000, which was denominated in Japanese yen and bore
interest at 3.1%. These instruments, like all fixed income instruments, are
subject to interest rate risk. The fixed income portfolio will fall in value
and the related party note payable interest would increase if there were an
increase in interest rates. If market interest rates were to increase
immediately and uniformly by 10% from levels as of December 31, 1998 and March
31, 1999, the decline of the fair value of the fixed income portfolio and
related party note payable would not be material. See notes 1 and 2 of notes to
financial statements.
Recent Accounting Pronouncements
In March 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants (AICPA) issued Statement of Position
98-1, "Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use" (SOP 98-1). SOP 98-1 requires all costs related to the
development of internal use software other than those incurred during the
application development stage to be expensed as incurred. Costs incurred during
the application development stage are required to be capitalized and amortized
over the estimated useful life of the software. SOP 98-1 is effective for our
fiscal year ending December 31, 1999. We do not expect its adoption to have a
material effect on our financial statements.
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS No. 133). SFAS No. 133 is effective
for fiscal years beginning after June 15, 1999. SFAS No. 133 requires that all
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derivative instruments be recorded on the balance sheet at their fair value.
Changes in the fair value of derivatives are recorded each period in current
earnings or other comprehensive income, depending on whether a derivative is
designed as part of a hedge transaction and, if so, the type of hedge
transaction. We do not expect that the adoption of SFAS No. 133 will have a
material effect on our financial statements.
In December 1998, the AICPA issued Statement of Position 98-9, "Modification
of SOP 97-2, Software Revenue Recognition, with Respect to Certain
Transactions" (SOP 98-9). SOP 98-9 amends certain elements of SOP 97-2 and
provides additional authoritative guidance on software revenue recognition. SOP
98-9 is effective for fiscal years beginning after March 15, 1999. We do not
expect its adoption to have a material effect on our financial statements. See
note 1 of notes to financial statements.
Year 2000 Compliance
Many currently installed computer systems and software products worldwide are
coded to accept only two-digit entries to identify a year in the date code
field. Consequently, on January 1, 2000, many of these systems could fail or
malfunction because they are not able to distinguish between the year 1900 and
the year 2000. Accordingly, many companies, including ourselves and our
customers, potential customers, vendors and strategic partners, may need to
upgrade their systems to comply with applicable year 2000 requirements.
Because we and our customers depend, to a very substantial degree, upon the
proper functioning of computer systems, a failure of these systems to correctly
recognize dates beyond January 1, 2000 could disrupt operations. Any
disruptions could harm our business. Additionally, our failure to provide year
2000 compliant solutions to our customers could result in financial loss,
reputational harm and legal liability to us. We believe that our products and
services are year 2000 compliant; however, our products and services are often
integrated with other systems that may not be compliant.
In 1998, we formed a year 2000 assessment and contingency planning committee
to review both our information technology systems and our non-information
technology systems, and where necessary to plan for and supervise the
remediation of those systems. The committee is headed by our Chief Technology
Officer. We believe the committee has identified all of our critical hardware
and software systems. The providers of these systems have confirmed that they
are year 2000 compliant. We have conducted tests and expect to conduct
additional tests of these systems as part of our year 2000 efforts.
We have initiated communication with our significant vendors to determine the
extent to which they are vulnerable to year 2000 issues. We have not yet
received sufficient information on year 2000 remediation plans of these vendors
to predict the outcome of their efforts.
We estimate that our cost to become year 2000 compliant has been $150,000,
and we believe that any additional costs related to becoming year 2000
compliant will not be material.
We have not made a full assessment of the extent to which our customers might
be vulnerable to year 2000 issues. Likewise, we have not made a full assessment
of the extent to which other third parties with which we transact business have
determined their vulnerability to year 2000 issues.
We are developing contingency plans for critical individual information
technology systems and non-information technology systems to address year 2000
risks not fully resolved by our year 2000 program. We believe that the year
2000 risk will not present significant operational problems for us. However,
there can be no assurance that our year 2000 program will prevent any harm to
our business.
If our Year 2000 program is inadequate and our business operations are
materially impacted, we could incur additional costs to recover any lost
information and replace affected systems. We believe that these systems could
be replaced without significant difficulty as replacement systems are generally
available on commercially reasonable terms. We also have regular data back-up
procedures that would assist in the recovery of lost business information.
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BUSINESS
We provide a leading open platform that enables the digital delivery of music
over the Internet. Our software products and services give artists, record
companies, websites and retailers the ability to create, syndicate and sell
recorded music with copy protection and copyright management. Through our
Liquid Music Network website affiliates, we help artists and record companies
promote and sell their recorded music. From our growing catalog of syndicated
music, consumers can preview and purchase digital music. Consumers then can
transfer downloaded music to recordable compact discs and, later in 1999, to
digital consumer devices. Our solution is based on an open technical
architecture that is designed to support multiple leading digital music
formats, including mp3 and Dolby AC-3. Numerous recording artists and record
companies have used our platform to promote music releases including BMG North
America, Capitol Records, Columbia House, Dreamworks Records, EMI Classics,
Bruce Hornsby, The Dave Matthews Band, Sarah McLachlan and Rounder Records.
Industry Background
The Recorded Music Industry
The recorded music industry represents one of the largest opportunities for
online digital delivery and commerce. According to the International Federation
of the Phonographic Industry (IFPI), worldwide recorded music sales represented
a $38.7 billion market in 1998. The United States music industry, which
represents nearly one-third of worldwide recorded music sales, encompasses more
than 200,000 professional musicians, 7,500 record labels, 100 distributors,
4,000 independent retailers and millions of consumers. The recorded music
industry has operated under the same basic business model for many years.
Typically, record companies sign artists to exclusive contracts under which the
record companies develop and promote artists' music. The companies then sell
this recorded music through wholesale and retail distribution channels to
consumers. In addition, there are millions of amateur musicians who do not have
access to distribution through traditional channels.
The Major Labels. Five major global record companies--BMG Entertainment, EMI
Music, Sony Corporation, Universal Music Group and Warner Communications Inc.--
and their numerous affiliated labels account for more than 80% of all recorded
music sales worldwide. Each of these companies is organized worldwide on a
geographic basis, with each local subsidiary having control over distribution
within its territory. These companies invest significant resources in
infrastructure to support their operations. They are vertically integrated and
operate recording, manufacturing, distribution, warehousing, and sales and
marketing organizations.
Each of the major record companies signs and introduces only a small number
of new artists each year. New artists are generally required to sign exclusive,
long-term agreements that do not obligate the record company to release any
records. In return, artists receive a royalty, typically based on a percentage
of the suggested retail list price of a record, but only after the record
company recoups production costs and other advances. For new artists in the
United States, this royalty generally ranges from 7% to 12%. Record companies
engage in large-scale promotional and marketing programs that utilize local
offices and staff in major cities to coordinate these programs through radio,
television and other traditional media. Each of these companies supports
multiple manufacturing plants, distribution centers and warehouses and uses
ground transportation to ship recorded music to retailers and wholesalers.
Independent Labels and Artists. In addition to the five major record
companies, there are thousands of independent record companies. Some of the
better-known independent labels are Beggars Banquet, Platinum Entertainment,
Rounder Records and Rykodisc. These independent labels account for a large
portion of the
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sound recordings published each year in the United States, and represent a
rapidly growing revenue segment of the United States recorded music industry.
These companies differ significantly from the major record companies in a
number of ways, including:
. they usually pay higher royalties to artists and offer shorter-term
recording agreements;
. they have more limited capital resources available for recording,
manufacturing and promotion costs; and
. they find national distribution difficult to obtain and expensive when
available.
The inherent difficulties and costs associated with this model have caused
many independent record companies to begin marketing programs to sell recorded
music directly to consumers. One notable example is The Artist Formerly Known
As Prince, who markets his recordings on his own label through his website and
through independent distributors.
Traditional Retail Distribution and Sales. The distribution channels for and
the retail sales of recorded music are becoming concentrated due to increased
competition and consolidation. Retail sales are primarily "hit" driven, with a
small number of titles accounting for the majority of retail sales in most
periods. In addition, in order to offer consumers a wide variety of music,
retailers bear the infrastructure costs necessary to stock recordings that are
not currently hits, known as catalog recordings. Current hits and catalog
recordings sold through retail stores represent only a small fraction of all
recorded music. In addition, distributors of recorded music are subject to
territorial restrictions, which limit the countries in which they can
distribute and sell.
The Recorded Music Industry and the Internet
The Internet presents a significant opportunity for the rapid and cost-
effective distribution, promotion and sale of recorded music. Music is one of
the most popular topics on the Internet as reflected by the increasing number
of music-related websites and the growth of online sales of compact discs. To
date, online recorded music sales have occurred primarily through the purchase
of compact discs through online retailers. Forrester Research expects online
vendors such as Amazon.com Inc. and CDnow Inc. to drive total online sales of
compact discs in the United States from an estimated $890 million in 1999 to an
estimated $6.7 billion in 2003. These online retailers generally do not take
physical custody of recordings, but rather refer their orders to fulfillment
houses that are responsible for shipping the compact discs to customers. The
popularity of online buying is also forcing traditional retailers to sell
recorded music using the Internet, either through their own websites or in the
future through in-store kiosks.
Advances in digital compression technologies now allow the transmission of
near-compact disc quality audio over the Internet. Due to the size of the
transmitted files, most digital music transmitted to date has been song samples
used by online retailers to allow shoppers to preview music. More recently,
however, many websites have begun to offer "full length," three to four minute,
single music recordings for transmission and storage in compressed formats.
Several audio compression standards are currently used, including AAC, AC-3 and
mp3. To date, most digital music downloads have been promotional in nature.
Recorded music sales delivered through digital transmission have been minimal,
but are expected to reach 7% of all United States recorded music sales by 2003,
according to Forrester Research. Several manufacturers have introduced or
announced plans to introduce portable devices, such as the Rio from Diamond
Multimedia and the Lyra from Thomson Consumer Electronics, that will play
downloaded digital music.
Challenges of Digital Music Delivery and Commerce over the Internet
Music consumers increasingly want both to hear recorded music in real time on
their computers and to store these recordings for later playback on portable
devices as well as computers. But, as downloading music from the Internet has
become increasingly popular, music content copyright owners, including the
major record
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companies, have expressed concerns about unauthorized copying, or "pirating,"
of copyrighted sound recordings. Many compression technologies, including the
basic mp3 standard specification, lack copy protection. This can result in the
unauthorized downloading and replication of digital music. The major recording
industry association, the Recording Industry Association of America (RIAA), has
formed a committee, the Secure Digital Music Initiative (SDMI), to propose a
standard for the secure digital distribution and use of recorded music.
The e-commerce market for downloadable recorded music is just emerging and
there is limited availability of digital music on the Internet. The major
record companies to date have engaged only in limited efforts to sell recorded
music through digital transmission. The Internet as a commerce medium presents
several challenges to the record companies, including the ability to comply
with geographical territorial restrictions and copyright and trading concerns.
Most artists, restricted by their existing contracts with record companies,
have not been able to take advantage of selling their music over the Internet
directly to consumers. Retailers have had success selling compact discs online,
but have not had a way to integrate the sale of digital recorded music into
existing online stores.
We believe that there is a need for a comprehensive solution to create,
syndicate and sell music over the Internet. This solution must address the
following:
. Systems Optimized for Music Creation. Systems for encoding digital music
recordings must be easy to use, capable of being integrated into the
creative tools that recording producers use every day, create high
fidelity recordings, and be scalable--capable of encoding a significant
volume of material in a relatively short time.
. Copy Protection and Copyright Management. Systems must provide the
ability to limit and track the number of copies made of a particular
sound recording. A successful system must also have utilities for
cataloging, auditing and reporting sales and uses in a manner that is
consistent with existing industry practices. In addition, it must be
capable of distinguishing and reporting purchasers based on their
geographic location.
. Syndication. Systems must have an open architecture that will allow for a
large number of retailers and websites to easily integrate and offer a
large number of digital music recordings for promotion and sale.
. Standards-based. Systems must be compatible with existing technical
standards and be adaptable to emerging industry standards for the secure
digital delivery of music.
. Consumer Experience. Systems must provide consumers with a large variety
of digital music that is high fidelity and easy to acquire, catalog,
access and transfer to personal devices such as stand-alone players.
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The Liquid Audio Solution
We provide a leading open platform for the digital delivery of music over the
Internet. Our products and services enable the creation, syndication and sale
of digital recorded music through an open technical architecture that is
designed to support leading standards and formats. Our solutions enable
artists, record companies, music websites and retailers to promote and sell
high quality digital recorded music, while providing copy protection, copyright
management, syndication and e-commerce services. Our products and services give
consumers easy access to a large and growing volume of digital recorded music
that is high fidelity and accessible through a variety of sources, including
personal computers and portable devices.
The Liquid Audio Platform
[Graphic depicting our platform]
We provide a variety of products and services to enable the creation and
publication, syndication, and promotion and sale of downloadable digital music
over the Internet:
. Creation and Publication. We offer software tools to encode digital
music, and services that can encode up to approximately 20,000 individual
music samples per day. We also offer server software that hosts and
distributes encoded music files.
. Syndication. Our delivery service, the Liquid Music Network, makes
syndicated music content available to websites, including websites
operated by music retailers. We also offer Internet hosting services for
artists and record labels. In addition, we are developing software
applications to enable digital music delivery through kiosks located in
retail stores.
. Promotion and Sale. We offer server software and services to manage the
secure transfer and sale of digital music and report and audit digital
music sales. Our Liquid Player software, a desktop software application,
also allows the consumer to preview or purchase and download digital
recorded music. Our next version of the Liquid Player, targeted for
release in the second half of 1999, will enable the output of digital
music to portable consumer devices. We also provide a set of e-commerce
services, including credit card processing, the remittance of royalty
payments and detailed transaction reports.
Our solution provides the following benefits:
. Superior Consumer Experience. Our solution enables consumers to purchase
and download a wide variety of near compact-disc quality music online. We
make it simple to search for, sample and buy selected digital recorded
music from a rapidly growing inventory. Our Liquid Player also enables
digital music to be transferred to a compact disc by means of a
recordable compact disc device.
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. Global Reach. Our platform allows the Internet to be used as a global
distribution channel for artists, record companies and retailers. This is
particularly significant to independent record labels and amateur
musicians who have limited access to traditional retail distribution
channels.
. Increased Revenues and Lower Costs. Through our solution, record
companies and artists can generate increased revenues by offering their
entire catalog of existing music as well as singles and periodic
releases. Our products and services provide a cost-effective way to
digitally offer entire music catalogs to consumers by reducing the costs
associated with physical manufacturing, warehousing and shipping.
. Security and Compliance. Our platform protects against piracy by
authenticating, limiting and tracking the number of copies made of a
digitally delivered sound recording. Our platform also enables the sale
over the Internet of digital recorded music in compliance with geographic
distribution limitations.
Strategy
Our objective is to be the leading open platform for the creation,
syndication and sale of digital recorded music on the Internet. We seek to
achieve this objective through the following key strategies:
Provide a Superior Consumer Experience. In order to facilitate and promote
consumer adoption of digital music delivered over the Internet, we plan to
continue to improve the consumer experience. We are pioneers in providing music
consumers with a media rich music experience. Our Liquid Player not only
provides high quality audio delivery but also offers consumers music
information such as song lyrics, album liner notes and graphics. We believe
that by continuing to improve music search capabilities, we will enhance the
consumer experience and increase digital recorded music sales.
Continue to Broaden our Distribution Reach. We intend to expand our
distribution capabilities to reach greater numbers of consumers and to increase
the number of digital music purchase transactions. Since its launch in July
1998, the Liquid Music Network has grown to encompass more than 200 websites.
In the second half of 1999, we plan to expand sales of syndicated music through
music retailer websites. To enhance our ability to attract more music content,
we will continue to broaden this effort to music-related and other websites
that use our technology for digital distribution. We also have agreements with
strategic partners to distribute our Liquid Player with their products.
Expand Syndicated Music Content. We plan to increase the amount of music
content available through our delivery services to stimulate demand for digital
music by consumers and to further increase the number of digital music purchase
transactions. Currently, there are more than one million individual songs and
song samples that have been encoded using our technology and are available
through our Liquid Music Network and our Liquid Muze Previews service for
streaming or downloading. This compares to approximately 50,000 at the
beginning of 1999. We also offer a variety of hosting and software licensing
packages in order to provide content owners flexibility in the ways they make
their content available to consumers.
Leverage Strategic Industry Relationships. We have established strategic
relationships with a variety of partners including software and computer
hardware vendors, music copyright societies, entertainment and media companies,
consumer electronics manufacturers and music-oriented website companies. We
have also assembled an experienced management team with strong relationships in
the traditional music industry.
We intend to leverage our relationships to achieve a variety of goals
including:
. maximizing the distribution and adoption of our platform;
. solidifying our position as the technology leader in digital delivery of
music;
. acquiring premium content for syndication; and
. developing international markets.
Extend Technology Leadership. We intend to play a leadership role in
developing standards that will shape the digital music industry. We believe
that we are the first to market a comprehensive solution for digital music
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delivery, and our software products are already in their fourth generation of
commercial release. In accordance with our strategy, we have taken an active
role in SDMI, and are leaders in the Genuine Music coalition.
Generate Multiple Revenue Streams. We believe that we can leverage our market
penetration, technology leadership and industry position to diversify our
revenue base. We believe that the potential market for digital music delivery
over the Internet is substantial, and will present multiple revenue
opportunities for the leading companies. In early 1999, we increased our
emphasis on digital delivery services in order to take advantage of these
opportunities, leveraging our software licensing business. We anticipate
generating revenues from multiple sources in the future, including digital
recorded music sales, hosting services and advertising and sponsorship
revenues.
Strategic Relationships and Customers
We currently have relationships in four principal areas: music syndication;
player distribution; technology and international.
Music Syndication Relationships. We plan to continue to build relationships
with key third parties engaged in the distribution, promotion and syndication
of digital music. We believe that these relationships will enhance our ability
to provide a rich variety of music to consumers.
. Amazon.com. In April 1999, two new Sarah McLachlan recordings were made
exclusively available on Amazon.com for downloading using our technology.
This retailing experiment increased consumer interest for her upcoming
album. Based on the success of this event, in June 1999 we entered into
an Advertising Agreement with Amazon.com. Under that agreement, we are
collaborating with Amazon.com on event-based advertising using our
digital delivery services.
[Graphic of screen shot Amazon.com website]
. EMI Recorded Music. In June 1999, we entered into a letter agreement with
Virgin Holdings, Inc., an affiliate of EMI Recorded Music. Under this
agreement, we are granted the right, for a period of 3 years, to create
digitally encoded copies of designated EMI sound recordings using the
Liquid Audio and Genuine mp3 formats.
. Muze Inc. We are collaborating with Muze Inc. to jointly market and
operate the Liquid Muze Previews service. The Liquid Muze Previews
service will offer online music retailers a database of more than one
million sample audio clips to enhance the promotion and sale of music. We
launched the Liquid Muze Previews service in the second quarter of 1999.
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. Towerrecords.com. We have entered into an agreement with MTS, Inc., the
parent company of Tower Records, to provide digital delivery of music
titles to consumers through its online retail website, Towerrecords.com.
Through our Liquid Music Network, we will enable the Towerrecords.com
website to offer for sale syndicated music content.
[Graphic of screen shot TowerRecords.com website]
In addition, many independent record labels have chosen to make their
catalogs available using our solution, including Beggars Banquet, Del-Fi
Records, Rounder Records, Sub Pop Records, Twin/Tone Records and Vanguard
Records. As of May 31, 1999, record labels have chosen to promote and sell more
than 60,000 digital music recordings through our Liquid Music Network and, once
available, to music retailer websites. This compares to approximately 5,000
digital music recordings at the beginning of 1999.
Player Distribution Relationships. We have entered into several strategic
relationships to promote the distribution of our Liquid Player software.
Companies that have agreed to distribute our Liquid Player with certain of
their product lines include Adaptec, Intel and Iomega.
. Adaptec. Adaptec is licensing our Liquid Player software for distribution
with its compact disc recorder software, which allows consumers to copy
music from a personal computer to a compact disc, using a compact disc
recorder.
. Intel. We are working with Intel to distribute our Liquid Player software
to members of the Intel WebOutfitter Service, which enables Pentium(R)
III processor-based personal computer owners to access the latest
Internet plug-ins and applications. Our Liquid Player is included on the
Intel WebOutfitter Service tool kit compact disc that is delivered to
Pentium III processor-based owners that join the service.
. Iomega. We are collaborating with Iomega to offer consumers a way to
securely download music from the Internet directly onto Iomega's Zip(R)
disks. As part of this initiative, Iomega will be bundling the Liquid
Music Player with selected Zip drives.
Technology Relationships. We have established relationships with many of the
companies providing innovative technologies for the distribution of digital
recorded music. These include the following:
. Dolby Laboratories Inc. and Fraunhofer Institut. We have licensed Dolby's
AC-3 and Fraunhofer's AAC and mp3 audio compression technologies. These
technologies are used in our Liquifier Pro, Liquid Server and Liquid
Player products.
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. RealNetworks Inc. We have developed a software "plug-in" that enables
RealNetwork's RealPlayer G2 software to play music encoded in our format.
The plug-in, which will be distributed by RealNetworks, enables
syndicated music in our Liquid Music Network to be previewed by
RealPlayer G2 users.
. Texas Instruments Inc. We are collaborating with Texas Instruments to
develop a reference design based on our SP3 specification for secure
music delivery. Texas Instruments intends to use our SP3 reference design
in chipsets that will enable future flash memory-based consumer
electronics devices to be compatible with our platform.
. Toshiba Corporation and Sanyo Corporation. We are collaborating with
Toshiba and Sanyo to develop portable digital music playback devices that
are compatible with our SP3 specification.
International Relationships. We believe that relationships with key partners
outside the United States are important to establish a complementary
international distribution infrastructure. Because personal computers have not
achieved high levels of penetration in most international markets, our emphasis
in these markets has been and will continue to be on enabling the distribution
of digital music through physical kiosks and other consumer-oriented
technologies. In Korea, Liquid Audio and the SK Group have established Liquid
Audio Korea. Liquid Audio Korea is currently focused on kiosk-based retail
applications of our technology. These applications will allow consumers to
preview and purchase compact discs and other transportable media from retail
entertainment centers. Liquid Audio Korea expects to open these kiosks in the
second half of 1999. In Japan, along with Super Stage Itochu, Hikari Tsushin
and Hapinet, we have established Liquid Audio Japan. Liquid Audio Japan is the
exclusive reseller and distributor of our software products in Japan.
Customers. We license our software products and offer services to a variety
of customers from various market segments. A selected list of our customers
includes the following, each of which accounted for more than $10,000 of our
license revenues in 1998:
<TABLE>
<S> <C>
Amplified.com Audio Highway
Capitol Records Cell Ventures
Columbia House K-Tel International
Platinum Entertainment, Inc. The Music Connection
Warner Bros. Animation Web Music Company
</TABLE>
In 1997, Music.co.jp, Columbia House and DreamNet accounted for 49%, 12% and
10% of our total net revenues, respectively. In 1998, SK Group accounted for
34% of our total net revenues. In the first quarter of 1999, Adaptec, Liquid
Audio Japan, and Super Stage accounted for 40%, 19% and 16% of our total net
revenues, respectively.
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Promotional Relationships. Numerous recording artists and record labels have
used our products and services to promote new releases and create consumer
awareness. These mutually beneficial promotional efforts have generated little
or no direct revenue for us, individually or in the aggregate. The following
table lists artists and record labels for whom we have provided promotional
services:
Record Labels
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
Almo Records Angel Records Arista Records Inc.
Atomic Pop Blue Note Records BMG North America
Dreamworks Records EMI Classics Fuel 2000 Records
Geffen Records Giant/Revolution Hollywood Records
Interscope Records LaFace Records Mammoth Records
MCA Records RCA Records TVT Records
V2 Records Virgin Classics Windham Hill Records
- -------------------------------------------------------------------------------------
Recording Artists
- -------------------------------------------------------------------------------------
Alison Krauss and Union Station Beck Beth Orton
Brian Setzer Orchestra Bruce Hornsby Carlos Santana
Crash Test Dummies Creed Dar Williams
The Dave Matthews Band Duran Duran Emmylou Harris
Essence Fastball Herbie Hancock
Hole Jesus and Mary Chain Jimi Hendrix
Julian Lennon Primus Sarah McLachlan
</TABLE>
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Products and Services
Our platform includes a suite of software products and services that enable
the secure digital delivery and sale of recorded music over the Internet. Our
products and services can be represented graphically as follows:
[GRAPHIC OF LIQUID OPERATIONS CENTER]
- --------
Shaded area denotes future service.
Create and Publish
Liquifier Pro. This product is an audio mastering and encoding software tool
that enables the user to encode and publish music files for distribution on the
Internet. Our Liquifier Pro software is also used to set rules by which the
content can be used by consumers. It utilizes security features, including
encryption and watermarking, in order to provide copy protection. Our Liquifier
Pro software also enables the user to attach descriptive text, such as lyrics
or album liner notes, graphics such as compact disc cover art, and copyright
information to the music file. We include Liquifier Pro Software with various
hosted service offerings.
Encoding Services. These services prepare music for publishing through our
Liquid Server for artists and record companies that do not license our
Liquifier Pro software. These are scalable services and we have developed an
automated high capacity encoding production service that is currently able to
encode up to approximately 20,000 individual sample sound recordings per day.
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Liquid Server. Our Liquid Server software manages and delivers encoded music
files for streaming or downloading. We have built transaction, security and
copyright management functionality into the Liquid Server. Users can integrate
this product with a variety of e-commerce and database software applications so
that a large volume of digital music and associated information can be securely
sold or distributed through the Internet. Licenses for our Liquid Server start
at $10,000 and are priced based on the number of concurrent streams licensed
and digital music "tracks" available for sale.
Liquid Hosting Services. We can store and serve digital music for both
professional and amateur recording artists and labels. Artists can use our
service to feature music links on their websites and sell music without buying
our software products. Since launching these services in December 1997, more
than 1,300 artists have used our hosting services. These artists have made
9,000 songs available for downloading through the Liquid Music Network and
their own websites.
Syndicate
Liquid Music Network (LMN). The LMN, launched in July 1998, is a distributed
music network of more than 200 music-related and music retailer websites. The
LMN provides the music-related websites with a ready-made online music store
through which consumers can preview, purchase and download digital recorded
music. LMN participants sign up for the service and add hyperlinks to their
home page to begin selling digital music. Our LMN music-related website
affiliates include The Ultimate Band List and Atomic Pop. The LMN provides
music retailer websites with the ability to sell our syndicated music catalog
through their existing e-commerce websites. Retailer participants may choose
any of the music titles encoded in our Liquid Music format. Towerrecords.com is
our first LMN music retailer website affiliate and will be enabled to digitally
deliver our catalog in the second half of 1999.
Kiosks. We provide retailers with the ability to digitally deliver music
using the Liquid Audio platform through in-store physical kiosks located in
entertainment centers or other retail locations. With our partners in Korea, we
are developing Total Music Centers where consumers can preview music through
individual kiosks and then purchase songs which can be transferred on-site to a
compact disc. The first Total Music Center is scheduled to be opened in Korea
in the second half of 1999.
Promote and Sell
Liquid Player. Our Liquid Player is a consumer desktop software application
that communicates with our Liquid Server to manage playback streaming, display
data in the media fields, and manage the downloading of music content. Once
content is downloaded, our Liquid Player can be used to organize the content
into playlists for listening from the computer, to transfer the digital music
to a recordable compact disc or, in the future, to output to other consumer
electronics devices for later playback. Our Liquid Player can be downloaded
free of charge from our website and currently is distributed by a number of
third parties either in combination with their own products or as downloads
from their websites.
Liquid Muze Previews. Beginning in the second quarter of 1999, the Liquid
Muze Previews service will assist retailers in promoting and selling both
physical compact discs and digital downloads by providing a comprehensive
database of sample music recordings. Retailers and music sites will also be
able to offer digital music samples provided by the Liquid Muze Previews
service to let customers preview and learn about music and potentially
transform browsers into buyers.
Liquid Promotions. Liquid Promotions are event-based, Internet music
marketing and promotional services that help build awareness of artists and
increase consumer traffic to retail and music sites. Liquid Promotions include
Internet advertisements, promotional Internet events such as Liquid Live
performances and featured placement of artists' music on hundreds of websites.
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Liquid Operations Center (LOC). The LOC operates primarily as a security and
copyright management center. The LOC issues digital certificates for our Liquid
Server and our Liquid Player so that both of these pieces of software can be
used to deliver music securely. In addition, the LOC is in direct communication
with every Liquid Server and transmits streaming, downloading and purchase
information through tamper-resistant logs. This information is used for
commerce management and to generate reports and invoices for the appropriate
copyright owners.
Standards
We believe that a successful solution for digital music commerce must
incorporate technical and industry standards. We have participated in or are
leading standard-setting initiatives.
Secure Digital Music Initiative (SDMI). The SDMI is sponsored by the RIAA to
develop an open standard for the secure digital delivery and use of recorded
music. Over 200 companies are participating in this effort. To date, this
effort has focused on requirements for consumer portable music devices, such as
the Diamond Rio hand-held player. We are actively participating in these
efforts, and our Chief Technical Officer is currently the SDMI Specification
Editor.
Genuine Music. We have led an industry initiative to develop a standard for
an open form of the mp3 format that supports authentication functions. These
functions will protect consumers by providing visual confirmation that
downloaded mp3 or other digital recorded music files are authentic. Digital
recorded music formatted in this manner will play on all standard mp3 players
and will additionally contain information identifying the copyright owner and
the encoder. The copyright owner can also provide Internet links for additional
promotions. These features are not found in standard mp3 files. This initiative
has received support from 48 other companies, including mp3.com, Diamond
Multimedia, MediaOne Group, Inc. and Fraunhofer Institut.
Rights Reporting Organizations. A major portion of worldwide music industry
revenues is based on the reporting of sales and music performance information.
For example, the individuals and companies that administer the copyrights in
musical compositions receive payment each time a composition is publicly
performed. These individuals and companies believe that both the delivery of a
streaming digital music file and the downloading of a digital music file are
"performances" entitling them to receive a payment. These companies are
represented by several international rights reporting organizations. We are
engaged in the following initiatives with these organizations to simplify
rights information reporting:
. United States. ASCAP, BMI and SESAC--We have entered into agreements with
the American Society of Composers, Authors and Publishers, Broadcast
Music Incorporated and SESAC, the major rights reporting organizations in
the United States. Under each of these agreements, we have developed
technology to provide information regarding digital music delivered using
our products. This technology will enable the accurate payment of fees
based on Internet transmissions. We are also conducting a trial of
digital watermarking technologies with BMI.
. Europe. Imprimatur project--The Imprimatur project is an effort by the
major rights reporting organizations in Europe to integrate standardized
reporting efforts in a common data reporting format. We are providing
technology for the infrastructure for this effort focused on the
MusicTrial.com initiative website.
Secure Portable Player Protocol (SP3). Our SP3 initiative is intended to
provide an open technical architecture and reference specification for portable
digital music playback devices that satisfy music industry and technology
industry requirements. Any SP3-compatible digital music would be able to be
played on any compliant device while unauthorized copies would not be able to
be played. We have entered into an agreement with Texas Instruments for the
collaborative development of a reference design for a consumer playback device
based on this specification. We are also collaborating with Fraunhofer, the
developer of the leading digital audio encoder and encoding technology, on the
specifications for the SP3 standard.
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Technology
We have developed a technology base that is designed to optimize the digital
delivery of music. Our architecture is based on four principal technology
layers: component technologies, system technologies, network services and
content syndication. We have developed technology in all of these layers to
provide specific advantages for our music delivery products and services. The
implementation of our component and system technologies enables us to provide
our network services and content syndication offerings. Our network services
include the LOC and processing and rights reporting. Our content syndication
services encompass the LMN and kiosks. We have invested significant amounts
toward research and development to date. Our expenses in this area totaled
approximately $692,000, $1.9 million, $3.1 million and $1.2 million in the
period from January 30, 1996 (inception) through December 31, 1996, the years
ended December 31, 1997 and 1998, and the three months ended March 31, 1999,
respectively.
The Liquid Audio Architecture
[Graphic depicting our architecture.]
CONTENT SYNDICATION
-------------------
NETWORK SERVICES
----------------
SYSTEM TECHNOLOGIES
|
---------------------------------------------------------------
| | | | |
Open Secure Territory Device Passports
Interfaces Protocols Restrictions Interfaces
COMPONENT TECHNOLOGIES
|
-------------------------------------------
| | |
Watermarking Audio Multi-format
Compression Distribution Container
Component Technologies. Our architecture begins with component technologies,
which include watermarking, audio compression and a multi-format distribution
container.
. Watermarking. Watermarking embeds indelible and inaudible digital
information into the audio waveform. We have developed our own
watermarking technology that is specifically designed to operate in
conjunction with compression technologies. The embedded information is
useful for identifying and tracking audio usage and cannot be removed
without destroying the recorded music.
. Audio compression. Audio compression reduces the bandwidth required to
stream and download music over network connections. We have developed a
version of Dolby Digital technology (AC-3) that is optimized for online
music distribution. We have also implemented the AAC audio compression
technology, to which we have added extensions that further improve audio
quality. In addition, we have developed an exclusive, proprietary
lossless compression algorithm that is useful for professional audio
applications.
. Multi-format Distribution Container. We have developed a master media
container format that facilitates the delivery of media throughout our
system. This container structure is designed to permit
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extension to other media types such as video. The container is optimized
for music distribution and includes multiple images that can be used to
preview and purchase media content in multiple formats and at multiple
resolutions.
System Technologies. Our system technologies build on top of the base
features provided through our component technologies to enable our digital
music delivery services.
. Open Interfaces. We have developed interfaces to third-party systems for
commerce, databases and general purpose media delivery. Our commerce
interfaces allow our platform to take advantage of many payment methods
from credit cards to micro-payment solutions. The database interfaces
allow our system to dynamically update time sensitive information, such
as pricing, without requiring expensive re-encoding of content. Our
third-party system interfaces permit us to connect and provide
compatibility with general purpose media delivery systems such as those
provided by RealNetworks and Microsoft Corporation.
. Secure Protocols. We have created secure protocols for communication
between all parts of the system. Secure communications are necessary to
prevent theft of content as it moves through the system. Secure links
exist between the Liquid Server and content creation tools for
publishing, the server and Liquid Player for consumer downloading, and
the server and the LOC for transaction reporting.
. Territory Restrictions. We have developed specific technology that
identifies the approximate geographic location of consumers. We use this
technology to enforce rules for content access related to territory. This
enforcement is necessary since some content can only be sold in specific
territories.
. Device Interfaces. We have developed the Secure Portable Player Protocol
(SP3), which provides a set of security interfaces and techniques for
next generation portable devices. SP3 has been developed as an open
specification for use by many device manufacturers. SP3 is consistent
with the goals of the SDMI and is intended to be compatible with the
specification that results from the SDMI.
. Passports. We have developed a digital identification system, Liquid
Passport, that permits consumers to move their music to multiple machines
while still providing anti-piracy protections.
We believe that our technology architecture and our advanced stage of
development and deployment provide distinct competitive advantages. We are
currently developing the fifth generation of our digital music delivery
products. The advantages of our technology are summarized below:
. Open Technical Architecture. An open system design is important because
standard formats are not yet available for online music distribution. Our
technology has been designed to provide an open and flexible solution
that can adapt to many competing formats, including MPEGII Layer 3 (mp3)
and the MPEG Advanced Audio Codec (AAC), as well as future changes that
may occur in digital music distribution. Our open system design allows
the integration of new technologies while maintaining compatibility with
existing content. In addition, our flexible architecture allows us to
continue to integrate technologies such as audio compression and audio
watermarking as they continue to improve in the future.
. Robust and Scalable System Architecture. A comprehensive and robust
system architecture is important to meet the demands that may result from
large scale consumer adoption. We have developed a broad range of
technologies that enables efficient music distribution services. We have
developed specific technologies that permit our system to scale across
multiple systems and locations. This technology provides unique
advantages for efficiently delivering music and other media to a global
audience. We have also developed technology that allows us to extend our
system beyond online applications to include physical locations for sales
of music via kiosks, broadening our reach to include both online and
traditional consumers.
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. Superior Audio Quality. We believe consumers will pay for quality music,
and we believe that we have consistently provided superior audio quality
for digital music. We employ specific techniques and optimize industry
algorithms to improve sound quality. We believe that our use of
standardized compression algorithms such as MPEG AAC and mp3 provides
greater compatibility than proprietary audio compression solutions.
. Effective Copyright Management. Artists and labels have been reluctant to
embrace digital distribution of music given the current lack of copyright
management technologies. We have developed technology to address the
copyright management issue for online music distribution. Our security
technologies protect content from the time it is created to the time it
is consumed. These technologies include secure communication protocols
that allow content creators to publish and manage their content in the
distribution system. We have also developed specific anti-piracy
technology such as watermarking that embeds unique identification
information in the recorded music.
. Automated Production and Publication. We have created technologies that
improve the efficiency of online music distribution and reduce operating
costs. Our content encoding system allows us to format large amounts of
quality audio content for online use in a timely and cost effective
manner. We also have automated services, such as account creation, that
are necessary for content creators to publish and manage their content.
This automation avoids manual intervention for the publishing of content.
We have also developed database technology that permits us to manage the
large volume of content in our distribution system.
Sales and Marketing
Our sales and marketing efforts are principally concentrated on aggregating
digital music recordings for syndication and sale, and broadening our content
syndication reach by expanding the number of Liquid Music Network music-related
and music retailer website affiliates. We sell our products and services to
artists, record companies, websites and online retailers through a 34-person
sales and marketing organization. These employees are located in Redwood City,
Los Angeles and New York. Our software products and services are also bundled
and distributed by third-party manufacturers of various computer hardware,
software and musical instrument products.
We use a variety of marketing programs to create market awareness and
generate demand for our products and services. Our marketing activities include
event-based promotions with popular recording artists and record labels, web
advertising and sponsorships, press tours, participation in trade events and
conferences, and other public relations activities.
In addition to maintaining relationships with worldwide rights societies and
expanding the distribution opportunities for our products and services, our
business development group works to develop new international markets and
business opportunities for our products and services. We believe that
establishing strategic relationships in each of the major international markets
will accelerate the international deployment of our products and services.
Intellectual Property
Our success will depend in part on our ability to protect our proprietary
software and other intellectual property. To protect our proprietary rights, we
rely generally on patent, copyright, trademark and trade secret laws,
confidentiality agreements with employees and third parties, and license
agreements with consultants, vendors and customers. Despite these protections,
a third party could, without authorization, copy or otherwise obtain and use
our products or technology to develop similar technology independently.
Our agreements with employees, consultants and others who participate in
product and service development activities may be breached, we may not have
adequate remedies for any breach, and our trade secrets may become known or
independently developed by competitors.
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We currently have 17 patents pending in the United States relating to our
product architecture and technology and hold one patent. That patent expires in
October 2015. Any pending or future patent applications may not be granted,
existing or future patents may be challenged, invalidated or circumvented, and
the rights granted under a patent that has issued or any patent that may issue
may not provide competitive advantages to us. Many of our current and potential
competitors dedicate substantially greater resources to protection and
enforcement of intellectual property rights, especially patents. If a blocking
patent has issued or issues in the future, we would need either to obtain a
license or to design around the patent. We may not be able to obtain a required
license on acceptable terms, if at all, or to design around the patent.
We pursue the registration of our trademarks and service marks in the United
States and in other countries, although we have not secured registration of all
our marks. A significant portion of our marks begin with the word "Liquid." We
are aware of other companies that use "Liquid" in their marks, alone or in
combination with other words, and we do not expect to be able to prevent all
third-party uses of the word "Liquid." In addition, the laws of some foreign
countries do not protect our proprietary rights to the same extent as do the
laws of the U.S., and effective patent, copyright, trademark and trade secret
protection may not be available in these jurisdictions. We license our
proprietary rights to third parties, and these licensees may fail to abide by
compliance and quality control guidelines with respect to our proprietary
rights or take actions that would harm our business.
To license many of our products, we rely in part on "shrinkwrap" and
"clickwrap" licenses that are not signed by the end user and, therefore, may be
unenforceable under the laws of certain jurisdictions. As with other software
products, our products are susceptible to unauthorized copying and uses that
may go undetected. Policing unauthorized use is difficult.
We attempt to avoid infringing known proprietary rights of third parties in
our product and service development efforts. We have not, however, conducted
and do not conduct comprehensive patent searches to determine whether the
technology used in our products infringes patents held by third parties. In
addition, it is difficult to proceed with certainty in a rapidly evolving
technological environment in which there may be numerous patent applications
pending, many of which are confidential when filed, with regard to similar
technologies. If we were to discover that our products violate third-party
proprietary rights, we might not be able to obtain licenses to continue
offering these products without substantial reengineering. Effort to undertake
this reengineering might not be successful, licenses might be unavailable on
commercially reasonable terms, if at all, and litigation might not be avoided
or settled without substantial expense and damage awards.
Any claims relating to the infringement of third-party proprietary rights,
even if not meritorious, could result in the expenditure of significant
financial and managerial resources and could result in injunctions preventing
us from distributing certain products and services. These claims could harm our
business. We also rely on technology that we license from third parties,
including software that is integrated with internally developed software and
used in our products and services, to perform key functions. Third-party
technology licenses may not continue to be available to us on commercially
reasonable terms. The loss of any of these technologies could harm our
business. Moreover, although we are generally indemnified against claims that
third-party technology infringes the proprietary rights of others, this
indemnification may be unavailable for all types of intellectual property
rights, for example, patents may be excluded, and in some cases the scope of
indemnification is limited. Even if we receive broad indemnification, third-
party indemnitors are not always well capitalized and may not be able to
indemnify us in the event of infringement, resulting in substantial exposure to
us. Infringement or invalidity claims may arise from the incorporation of
third-party technology, and our customers may make claims for indemnification.
These claims, even if not meritorious, could result in the expenditure of
significant financial and managerial resources in addition to potential product
and service redevelopment costs and delays, all of which could harm our
business.
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Competition
Competition among companies in the business of delivering digital music over
the Internet is intense. We compete against a number of technology companies
that are offering or plan to offer products, services or technologies for the
delivery of digital music over the Internet. The number of websites competing
for the attention and spending of consumers and advertisers has increased, and
we expect it to continue to increase. We may also compete with consumer
electronics companies as they begin to market Internet music player devices.
See "Risk Factors--The Market for Digital Delivery of Music Over the Internet
is Highly Competitive, and If We Cannot Compete Effectively, Our Revenues Might
Decline."
We compete with the following types of companies with respect to the
aggregation of content and the syndication and distribution of digital music:
. providers of infrastructure technology, products and services such as
Microsoft, RealNetworks, IBM, AT&T/a2b, Sonique and MusicMatch;
. providers of online music services, such as mp3.com, RioPort.com,
SonicNet and UBL;
. internet retrieval and other "portal" companies, such as Excite,
Infoseek, Lycos and Yahoo!, and
. online music retailers, such as CDnow and Amazon.com.
We believe that the primary competitive factors in our market are the
following:
. quantity and variety of digital recorded music content;
. availability of sufficient bandwidth for the rapid and easy downloading
of digital recorded music;
. brand awareness;
. fidelity and quality of sound of digital recorded music; and
. ability to ensure secure digital delivery of recorded music.
We believe our products and services offer significant advantages over those
of our competitors:
. our Liquid Music Network features over 1,300 artists and 300 individual
record labels. We believe that we offer more artists and more labels than
most digital music distribution services;
. through our Liquid Music Network, we believe we have the potential to
reach more music consumers than other digital music delivery solutions;
. we believe our platform offers better copy-protection and copyright
management than mp3-based solutions; and
. we believe the fidelity and sound quality of music encoded by our
products and services to be superior to competitive systems due to
optimizations we perform on audio compression technologies used in our
products and services.
Employees
As of May 31, 1999, we had 88 full-time employees including 34 in sales and
marketing, 31 in research and development, 14 in general and administrative,
and 9 in operations. We consider our relationships with employees to be good.
None of our employees is covered by collective bargaining agreements.
Facilities
Our headquarters are located in 18,200 square feet of leased office space in
Redwood City, California. The lease term extends to November 15, 2002 with two
five-year renewals, at our option. We lease an office suite adjacent to our
headquarters in Redwood City on a month to month basis, for additional office
space and
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storage needs. We have recently leased an additional 11,400 square feet of
office space near our headquarters. The lease term for this additional space
extends to April 14, 2002 with a three-year renewal at our option.
Litigation and Patent Infringement Claims
On April 23, 1999, Arne Frager and Rose G. Frager filed a complaint against
us and our president, Gerald Kearby, in the Superior Court of the State of
California for the County of Marin (case number CV 991826). The complaint
alleges breach of contract and related claims. In particular, plaintiffs allege
that in January 1996, in connection with the formation of Liquid Audio, we
agreed to issue plaintiffs 200,000 shares of common stock. Plaintiffs further
allege that Liquid Audio entered into a consulting agreement with Mr. Frager
under which we allegedly agreed not to terminate Mr. Frager without good cause.
Plaintiff alleges that we breached each of these agreements, and seeks 587,870
shares of our common stock. We believe, after consultation with counsel, that
plaintiffs' claims are without merit, and intend to vigorously defend the
lawsuit. However, should we have to issue additional shares to the plaintiffs,
then-existing stockholders would experience dilution of their ownership
interests and we would need to record an accounting charge in our statement of
operations equal to the fair market value of the shares at the time of
issuance.
On May 25, 1999, Microtome, Inc. notified us that it believes our Liquifier
Pro Encoding Tool, when used in conjunction with our Liquid Music Player,
infringes United States Patents Nos. 5,734,823 and 5,734,891, in which
Microtome asserts it has rights, and asked us to cease and desist the
manufacture, sale and use of these products. To our knowledge, Microtome has
not yet filed a lawsuit alleging infringement of these patents, but it has
indicated an intention to do so if our response is not satisfactory. Microtome
has also indicated that it is willing to grant us a non-exclusive license to
these patents. In the event that we cannot come to an agreement with Microtome,
we might be drawn into litigation with them. We believe, after consultation
with counsel, that we have meritorious defenses to any claim that the
identified products infringe the claims of these patents and intend to
vigorously defend any lawsuit asserting infringement of those patents. However,
should any litigation be decided adversely to us, we might be required to pay
substantial damages to Microtome and could be enjoined from selling those of
our products that are held to infringe Microtome's patents unless and until we
are able to negotiate a license from them. See "Risk Factors--We Face and Might
Face Intellectual Property Infringement Claims That Might Be Costly to
Resolve."
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MANAGEMENT
Directors and Executive Officers
The following table sets forth our directors and executive officers, their
ages and the positions held by them as of June 9, 1999:
<TABLE>
<CAPTION>
Name Age Position
---------------------------- --- ------------------------------------------
<C> <C> <S>
Gerald W. Kearby............ 51 President, Chief Executive Officer and
Director
Robert G. Flynn............. 45 Vice President of Business Development and
Secretary
Philip R. Wiser............. 32 Vice President of Engineering, Chief
Technical Officer and Director
Gary J. Iwatani............. 37 Chief Financial Officer
Kevin M. Malone............. 33 Vice President of Sales
Richard W. Wingate.......... 47 Vice President of Content Development and
Label Relations
Mathieu ("Charly") Prevost.. 50 Vice President of Promotions
Andrea Cook Fleming......... 32 Vice President of Corporate Marketing
Ann Winblad................. 48 Director
Silvia Kessel............... 48 Director
Sanford R. Climan........... 43 Director
Eric P. Robison............. 39 Director
</TABLE>
Mr. Kearby co-founded Liquid Audio in January 1996. Since January 1996, Mr.
Kearby has served as our President and Chief Executive Officer and one of our
directors. From June 1995 to December 1995, Mr. Kearby was co-founder and Chief
Executive Officer of Integrated Media Systems, a manufacturer of computer-based
professional audio equipment. From January 1989 until June 1995, Mr. Kearby
served as Vice President of Sales and Marketing at Studer Editech Corporation,
a professional audio recording equipment company. Mr. Kearby holds a B.A. in
broadcast management and audio engineering from San Francisco State University.
Mr. Flynn co-founded Liquid Audio in January 1996. Since January 1996, Mr.
Flynn has served as our Vice President of Business Development and Secretary.
Mr. Flynn also served as our Chief Financial Officer from January 1996 to
August 1997 and as one of our directors from January 1996 to June 1996. From
March 1987 until November 1995, Mr. Flynn served as a general partner of
Entertainment Media Venture Partners I, L.P., an institutional venture capital
fund investing in the entertainment, media and communications technology
industries. During this time, Mr. Flynn also served on the board of directors
of Integrated Media Systems. Mr. Flynn holds a B.A. in English from Stanford
University and an M.B.A. from UCLA.
Mr. Wiser co-founded Liquid Audio in January 1996. Since May 1996, Mr. Wiser
has served as our Vice President of Engineering. Since June 1996, he has also
served as one of our directors and since November 1998 as our Chief Technical
Officer. From July 1995 to May 1996, Mr. Wiser served as a senior software
engineer, directing audio compression work at Chromatic Research, a multimedia
semiconductor device company. From October 1994 to July 1995, Mr. Wiser was a
senior software engineer and the director of digital signal processing research
for Studer Editech Corporation. From June 1994 to October 1994, Mr. Wiser was a
software engineer for Sonic Solutions, a developer of digital media tools. Mr.
Wiser holds a B.S. in electrical engineering from the University of Maryland,
College Park and an M.S. in electrical engineering from Stanford University.
Mr. Iwatani has served as our Chief Financial Officer since August 1997. From
May 1995 to April 1997, Mr. Iwatani was the Chief Financial Officer of Berkeley
Systems, Inc., a developer and marketer of multimedia entertainment consumer
software. From May 1991 to March 1995, Mr. Iwatani served as Director of
Finance and Operations at Insignia Solutions, Inc., a utility software company.
Mr. Iwatani holds a B.S. in accounting from Santa Clara University, as well as
a C.P.A. from the State of California.
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Mr. Malone has served as our Vice President of Sales since February 1998.
From June 1997 to February 1998, Mr. Malone was our Director, International
Sales. From May 1993 to June 1997, Mr. Malone held a variety of positions at
Silicon Graphics, Inc., a manufacturer of work stations, servers and
supercomputing systems, including Manager, Strategic Marketing, Operations
Manager, Portugal and International Business Development Manager. Mr. Malone
holds a B.S. in business administration from the University of Arizona and an
M.B.A. in international business studies from the University of South Carolina.
Mr. Wingate has served as our Vice President of Content Development and Label
Relations since August 1998. Mr. Wingate operated his own new media marketing
consulting company, Wingate Marketing, from July 1996 until June 1998. From
August 1997 to June 1998, Mr. Wingate was also a private music industry
consultant. From June 1994 to July 1996, Mr. Wingate was Senior Vice President,
Marketing for Arista Records Incorporated, a music recording company. Prior to
June 1994, Mr. Wingate held several senior management positions with major
music industry record labels, including Polygram, Inc. and Columbia Records.
Mr. Wingate holds a B.A. in communications from Brown University.
Mr. Prevost has served as our Vice President of Promotions since December
1998. From April 1996 to November 1998, Mr. Prevost was Vice President, Retail
at The Album Network, a media company trade journal. Prior to April 1996, Mr.
Prevost was president of his own company, the Charly Prevost Company, a
multimedia management company. Mr. Prevost has also held several senior
management positions within the music recording industry, including president
of Island Records.
Ms. Fleming has served as our Vice President of Corporate Marketing since
June 1999. From February 1999 to June 1999, Ms. Fleming was our Director of
Corporate Marketing. From December 1995 to February 1999, Ms. Fleming served as
Public Relations Director at Netscape Communications Corporation, an Internet
services provider. From June 1994 to December 1995, Ms. Fleming was a Corporate
Public Relations Manager for Microsoft Corporation, a software company. Ms.
Fleming holds a B.A. in English from Stanford University.
Ms. Winblad has served as one of our directors since May 1996. Ms. Winblad
has been a general partner of Hummer Winblad Venture Partners, a venture
capital investment firm, since 1989. She is a member of the board of trustees
of the University of St. Thomas and is an advisor to numerous entrepreneurial
groups such as the Software Development Forum, the Stanford/MIT Venture Forum
and the Massachusetts Computer Software Council, Software Industry Business
Practices. Ms. Winblad also serves on the boards of directors of Net
Perceptions Inc., a developer and supplier of realtime recommendation
technology for the Internet, and several private companies. Ms. Winblad holds a
B.S. in mathematics and business administration from the College of Saint
Catherine and an M.A. in education with an economics focus from the University
of St. Thomas.
Ms. Kessel has served as one of our directors since October 1998. Since
November 1995, Ms. Kessel has held several positions at Metromedia
International Group, Inc., a global communications and media company, including
Executive Vice President, Chief Financial Officer and Treasurer. From January
1993 to June 1997, Ms. Kessel was Executive Vice President and a director of
Orion Pictures Corporation, a movie production company. Since January 1994, Ms.
Kessel has served as Senior Vice President of Metromedia Company, a privately-
held partnership. Ms. Kessel has also served as President of Kluge & Company, a
privately-held company, for over five years. Ms. Kessel is currently a director
and Executive Vice President of Metromedia Fiber Network, Inc., a fiber optic
network provider, and Big City Radio, Inc., an owner and operator of radio
station combinations in New York City, Chicago and Los Angeles. Ms. Kessel
received an M.B.A. in finance from Columbia University.
Mr. Climan has served as one of our directors since April 1999. Since
February 1999, Mr. Climan has been President of Entertainment Media Ventures,
Inc., an investment and advisory company focused on traditional and new media.
From October 1995 to May 1997, Mr. Climan was Executive Vice President and
President of Worldwide Business Development for Universal Studios, Inc., a
media production company. From June 1997 to February 1999 and from June 1986 to
September 1995, Mr. Climan was a member of the senior management team at
Creative Artists Agency, a talent and literary representation firm. Mr. Climan
also serves
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<PAGE>
on the boards of directors of Equity Marketing, Inc., a provider of custom
promotional programs, and Sunterra Corporation, a developer and operator of
vacation ownership resorts. Mr. Climan holds a B.A. in chemistry from Harvard
College, an M.S. in health policy and management from the Harvard School of
Public Health and an M.B.A. from Harvard Business School.
Mr. Robison has served as one of our directors since April 1999. Since
January 1994, Mr. Robison has been a business development associate for Vulcan
Northwest, Inc., the holding company that manages all personal and business
interests for new media investor Paul G. Allen. Mr. Robison serves as a
Business Development Associate for Vulcan Ventures, Inc., the venture fund
division of Vulcan. Mr. Robison also serves on the boards of directors of
C|NET, Inc., Egghead.com, Inc. and ARI Network Services, Inc. Mr. Robison holds
a B.A. in communication studies from California State University, Sacramento
and an M.A. from the University of California, Davis.
Board Composition
We currently have six directors. Our restated certificate of incorporation,
to be filed upon the closing of this offering, states that the board of
directors will be divided into three classes: Class I, whose term will expire
at the annual meeting of stockholders to be held in 2000; Class II, whose term
will expire at the annual meeting of stockholders to be held in 2001; and Class
III, whose term will expire at the annual meeting of stockholders to be held in
2002. The Class I directors will be Sanford R. Climan and Eric P. Robison, the
Class II directors will be Silvia Kessel and Ann Winblad and the Class III
directors will be Gerald W. Kearby and Philip R. Wiser. At each annual meeting
of stockholders after the initial classification, the successors to directors
whose terms have expired will be elected to serve from the time of election and
qualification until the third annual meeting following their election. In
addition, our bylaws, to be adopted upon the closing of this offering, provide
that the authorized number of directors may be changed only by resolution of
the board of directors. Any additional directorships resulting from an increase
in the number of directors will be distributed among the three classes so that,
as nearly as possible, each class will consist of one-third of the total number
of directors. This classification of the board of directors may have the effect
of delaying or preventing changes in our control or management. See
"Description of Capital Stock."
Each officer is elected by, and serves at the discretion of, the board of
directors. Each of our officers and directors, other than nonemployee
directors, devotes his or her full time to our affairs. Our nonemployee
directors devote the amount of time necessary to discharge their duties to us.
There are no family relationships among any of our directors, officers or key
employees.
Board Committees
The audit committee of the board of directors reviews our internal accounting
procedures and consults with and reviews the services provided by our
independent accountants. The audit committee currently consists of Silvia
Kessel and Eric P. Robison.
The compensation committee of the board of directors reviews and recommends
to the board of directors the compensation and benefits of all of our executive
officers, administers our stock and option plans and establishes and reviews
general policies relating to compensation and benefits of our employees. The
compensation committee currently consists of Ann Winblad and Sanford R. Climan.
No interlocking relationships exist between our board of directors or
compensation committee and the board of directors or compensation committee of
any other company, nor has an interlocking relationship existed in the past.
Director Compensation
Our directors do not receive cash compensation for their service as members
of the board of directors, although they are reimbursed for certain expenses in
connection with attendance at board and committee meetings. We do not provide
additional compensation for committee participation or special assignments of
the
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<PAGE>
board of directors. In April 1999, we granted Sanford R. Climan options to
purchase 20,000 shares of common stock under our 1996 Equity Incentive Plan.
See "--Stock Plans."
Change of Control Arrangements
We have sold shares of our common stock to each of Gerald W. Kearby, Robert
G. Flynn and Philip R. Wiser. These shares are subject to a vesting schedule
that accelerates with respect to the lesser of 25% of their total shares or
their remaining unvested shares upon certain corporate transactions, as
described in their individual Founders Restricted Stock Purchase Agreements and
the amendments to those agreements. We have also granted an option to purchase
common stock to Gary J. Iwatani. The shares underlying the option are subject
to a vesting schedule that accelerates with respect to the lesser of 25% of the
total number of shares subject to the option or the remaining unvested shares
upon certain corporate transactions, as described in his individual option
grant.
Executive Compensation
The following table sets forth the total compensation received for services
rendered to us during 1998 by our Chief Executive Officer and our four other
most highly compensated executive officers who received salary and bonus in
1998 in excess of $100,000 (Named Executive Officers).
<TABLE>
<CAPTION>
Annual
Compensation
-------------------
Name and Principal Position Salary Bonus
- ----------------------------------------------------------- -------- -------
<S> <C> <C>
Gerald W. Kearby, President and Chief Executive Officer.... $158,077 $45,000
Robert G. Flynn, Vice President of Business Development.... 118,077 26,250
Philip R. Wiser, Vice President of Engineering and
Chief Technical Officer................................... 118,077 26,250
Gary J. Iwatani, Chief Financial Officer................... 126,930 26,250
Kevin M. Malone, Vice President of Sales................... 160,343(1) 26,250
</TABLE>
- --------
(1) Includes $34,694 earned as commissions.
We did not grant any stock options to any of the Named Executive Officers
during 1998. We have never granted any stock appreciation rights.
Fiscal Year End Option Values
The following table provides summary information concerning stock options
held as of December 31, 1998 by each of the Named Executive Officers. None of
these officers exercised options in 1998.
<TABLE>
<CAPTION>
Number of Securities
Underlying Unexercised Value of Unexercised
Options at Fiscal In-the-Money Options at
Year-End Fiscal Year-End(1)
------------------------- -------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ---------------------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Gerald W. Kearby............ -- -- -- --
Robert G. Flynn............. -- -- -- --
Philip R. Wiser............. -- -- -- --
Gary J. Iwatani............. 150,000 -- $271,000 --
Kevin M. Malone............. 112,500 -- 203,250 --
</TABLE>
- --------
(1) The value of unexercised in-the-money options at fiscal year-end is based
on a price per share of $2.00, as determined in good faith by the board of
directors, less the exercise price.
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<PAGE>
Stock Plans
1996 Equity Incentive Plan. Our 1996 Equity Incentive Plan provides for the
granting to employees of incentive stock options within the meaning of Section
422 of the Internal Revenue Code of 1986 (Code), and for the granting to
employees, directors and consultants of nonstatutory stock options and stock
purchase rights (SPRs). The 1996 Plan was approved by the board of directors
and the stockholders in September 1996. Unless terminated sooner, the 1996 Plan
will terminate automatically in 2009. A total of 3,272,354 shares of common
stock is reserved for issuance pursuant to the 1996 Plan, plus annual increases
on January 1st of each year equal to the least of (1) 1,500,000 shares, (2) 5%
of the outstanding shares on that date or (3) an amount determined by the
board.
The 1996 Plan may be administered by the board of directors or a committee of
the board, which committee must, in the case of options intended to qualify as
"performance-based compensation" within the meaning of Section 162(m) of the
Code, consist of two or more "outside directors" within the meaning of Section
162(m). The administrator has the power to determine the terms of the options
or SPRs granted, including the exercise price, the number of shares subject to
each option or SPR, the exercisability of the option or SPR, and the form of
consideration payable upon exercise. The board has the authority to amend,
suspend or terminate the 1996 Plan, provided that no action may affect any
share of common stock previously issued and sold or any option previously
granted under the 1996 Plan, unless the board and the option holder mutually
agree otherwise.
Options and SPRs granted under the 1996 Plan are not generally transferable
by the optionee, and each option or SPR is exercisable during the lifetime of
the optionee only by the optionee. Options granted under the 1996 Plan must
generally be exercised within three months of the optionee's separation of
service from us, or within twelve months after the optionee's termination by
death or disability, but in no event later than the expiration of the option's
ten-year term. In the case of SPRs, unless the administrator determines
otherwise, the restricted stock purchase agreement must grant us a repurchase
option exercisable upon the voluntary or involuntary termination of the
purchaser's service to us for any reason, including death or disability. The
purchase price for shares repurchased under the restricted stock purchase
agreement must be the original price paid by the purchaser and may be paid by
cancellation of any indebtedness of the purchaser to us. The repurchase option
will lapse at a rate determined by the administrator. The exercise price of all
incentive stock options granted under the 1996 Plan must be at least equal to
the fair market value of the common stock on the date of grant. The exercise
price of nonstatutory stock options and SPRs granted under the 1996 Plan is
determined by the administrator, but with respect to nonstatutory stock options
intended to qualify as "performance-based compensation" within the meaning of
Section 162(m) of the Code, the exercise price must be at least equal to the
fair market value of the common stock on the date of grant. With respect to any
participant who owns stock possessing more than 10% of the voting power of all
classes of our outstanding capital stock, the exercise price of any incentive
stock option granted must equal at least 110% of the fair market value of the
common stock on the date of grant and its term must not exceed five years. The
terms of all other options granted under the 1996 Plan may not exceed ten
years.
The 1996 Plan provides that, in the event of a merger of us with or into
another corporation or a sale of substantially all of our assets, each
outstanding option and SPR must be assumed or an equivalent option or SPR
substituted by the successor corporation. If the successor corporation refuses
to assume or substitute each outstanding option or SPR, each option or SPR will
expire on the completion of the transaction, except as may otherwise be
determined by the administrator.
1999 Employee Stock Purchase Plan. Our 1999 Employee Stock Purchase Plan was
adopted by the board of directors in April 1999 and by the stockholders in June
1999. A total of 500,000 shares of common stock has been reserved for issuance
under the 1999 Purchase Plan, plus annual increases on January 1st of each year
equal to the least of (1) 750,000 shares, (2) 3% of the outstanding shares on
that date or (3) an amount determined by the board.
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<PAGE>
The 1999 Purchase Plan, which is intended to qualify under Section 423 of the
Code, contains consecutive, overlapping, 24-month offering periods. Each
offering period includes four six-month purchase periods. The offering periods
start on the first trading day on or after June 1 and December 1 of each year,
except for the first offering period, which commences on the first trading day
on or after the effective date of this offering and ends on the last trading
day on or before May 31, 2001.
Employees are eligible to participate if they are customarily employed by us
or any participating subsidiary for at least 20 hours per week and more than
five months in any calendar year. However, any employee who (1) immediately
after grant owns stock possessing 5% or more of the total combined voting power
or value of all classes of our capital stock, or (2) whose rights to purchase
stock under all of our employee stock purchase plans accrues at a rate that
exceeds $25,000 worth of stock for each calendar year may be not be granted an
option to purchase stock under the 1999 Purchase Plan. The 1999 Purchase Plan
permits participants to purchase common stock through payroll deductions of up
to 15% of the participant's "compensation." Compensation is defined as the
participant's base straight time gross earnings, bonuses, commissions, payments
for overtime, shift premium payments and other cash compensation, exclusive of
any non-cash compensation. The maximum number of shares a participant may
purchase during a single purchase period is 2,500 shares.
Amounts deducted and accumulated by the participant are used to purchase
shares of common stock at the end of each purchase period. The price of stock
purchased under the 1999 Purchase Plan is generally 85% of the lower of the
fair market value of the common stock (1) at the beginning of the offering
period or (2) at the end of the purchase period. In the event the fair market
value at the end of a purchase period is less than the fair market value at the
beginning of the offering period, the participants will be withdrawn from the
current offering period following exercise and automatically re-enrolled in a
new offering period. The new offering period will use the fair market value as
of the first date of the new offering period to determine the purchase price
for future purchase periods. Participants may end their participation at any
time during an offering period, and they will be paid their payroll deductions
to date. Participation ends automatically upon termination of employment with
us.
Rights granted under the 1999 Purchase Plan are not transferable by a
participant other than by will, the laws of descent and distribution, or as
otherwise provided under the 1999 Purchase Plan. The 1999 Purchase Plan
provides that, in the event of a merger of us with or into another corporation
or a sale of substantially all of our assets, each outstanding option may be
assumed or substituted for by the successor corporation. If the successor
corporation refuses to assume or substitute for the outstanding options, the
offering period then in progress will be shortened and a new exercise date will
be set. The 1999 Purchase Plan will terminate in 2009. The board of directors
has the authority to amend or terminate the 1999 Purchase Plan, except that no
action may adversely affect any outstanding rights to purchase stock under the
1999 Purchase Plan.
401(k) Plan
We maintain a tax-qualified employee savings and retirement plan, a 401(k)
Plan, which covers all of our eligible employees. Pursuant to the 401(k) Plan,
participants may elect to reduce their current compensation, on a pre-tax
basis, up to the maximum annual limit under the Code and have the amount of the
reduction contributed to the 401(k) Plan. Participants' salary reduction
contributions are fully vested at all times. We may make matching employer
contributions and additional employer contributions to the 401(k) Plan.
Participants' interests in their matching contributions and additional employer
contributions, if any, vest in accordance with a four-year graduated vesting
schedule. Participants are eligible for a distribution from the 401(k) Plan
upon their reaching age 59, death, disability or separation from service with
us. The 401(k) Plan is intended to qualify under Section 401(a) of the Code,
and its accompanying trust is intended to be a tax-exempt trust under Section
501(a) of the Code. Contributions made on behalf of participants, on a pre-tax
basis, to the 401(k) Plan, and income earned on these contributions, are not
currently taxable to participants. All contributions are tax deductible by us.
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<PAGE>
Limitation of Liability and Indemnification Matters
Our restated certificate of incorporation limits the liability of directors
to the maximum extent permitted by Delaware law. Delaware law provides that
directors of a corporation will not be personally liable for monetary damages
for breach of their fiduciary duties as directors, except liability for:
. breach of their duty of loyalty to the corporation or its stockholders;
. acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
. unlawful payments of dividends or unlawful stock repurchases or
redemptions; and
. any transaction from which the director derived an improper personal
benefit.
This limitation of liability does not apply to liabilities arising under the
federal or state securities laws and does not affect the availability of
equitable remedies such as injunctive relief or rescission.
Our bylaws provide that we must indemnify our directors, officers, employees
and other agents to the fullest extent permitted by law. We believe that
indemnification under our bylaws covers negligence on the part of indemnified
parties. Our bylaws also permit us to secure insurance on behalf of any
officer, director, employee or other agent for any liability arising out of his
or her actions on behalf of us, regardless of whether our bylaws permit
indemnification under those circumstances.
We have entered into agreements to indemnify our directors and executive
officers, in addition to the indemnification provided for in our bylaws. These
agreements, among other things, indemnify our directors and executive officers
for certain expenses, including attorneys' fees, judgments, fines and
settlement amounts, incurred in any action or proceeding, including any action
on our behalf arising out of their services as a director, officer, employee,
agent or fiduciary, or on behalf of any of our subsidiaries or any other
company or enterprise to which the person provides services at our request. We
believe that these provisions and agreements are necessary to attract and
retain qualified persons as directors and executive officers.
At present, there is no material litigation or proceeding pending involving
any of our directors or officers in which indemnification is required or
permitted, and we are not aware of any threatened material litigation or
proceeding that may result in a claim for indemnification.
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<PAGE>
RELATED PARTY TRANSACTIONS
Since our inception in January 1996, we have never been a party to, and we
have no plans to be a party to, any transaction or series of similar
transactions in which the amount involved exceeded or will exceed $60,000 and
in which any director, executive officer or holder of more than 5% of our
common stock had or will have an interest, other than as described under
"Management" and the transactions described below.
Gerald W. Kearby, Philip R. Wiser and Robert G. Flynn, all current executive
officers, were involved in our founding and organization and may be considered
as our promoters. Following our inception in January 1996, we issued 937,500
shares of common stock to Mr. Kearby, 843,750 shares of common stock to
Mr. Wiser and 750,000 shares of common stock to Mr. Flynn. Mr. Kearby, Mr.
Wiser and Mr. Flynn each contributed a nominal amount of capital for our
initial capitalization.
From May to July 1996, we sold an aggregate of 3,049,989 shares of Series A
preferred stock to certain investors at a purchase price of $0.656 per share.
In May 1997, we sold an aggregate of 3,186,888 shares of Series B preferred
stock to certain investors at a purchase price of $1.96 per share. In July and
September 1998, we sold an aggregate of 3,507,322 shares of Series C preferred
stock to certain investors at a purchase price of $6.14 per share. The shares
of Series A, Series B and Series C preferred stock will automatically convert
into 9,744,199 shares of common stock upon the closing of this offering.
The holders of converted shares of common stock are entitled to demand and
piggy-back registration rights. See "Description of Capital Stock--Registration
Rights."
The investors in the preferred stock included the following entities, which
are 5% stockholders, affiliated with directors, or both:
<TABLE>
<CAPTION>
Shares of Shares of Shares of
Series A Series B Series C
Investor Preferred Stock Preferred Stock Preferred Stock
- ------------------------------- --------------- --------------- ---------------
<S> <C> <C> <C>
5% Stockholder Entities
Affiliated with Directors:
Entities affiliated with Ann
Winblad(1)................... 1,829,272 788,928 81,431
(Entities affiliated with
Hummer Winblad Venture
Partners)(2)
Entity affiliated with Eric P.
Robison(1)................... -- 510,204 488,599
(Vulcan Ventures, Inc.)
Entity affiliated with Silvia
Kessel(1).................... -- -- 977,198
(Metromedia Company)
Other 5% Stockholders:
Intel Corporation............. 763,398 612,245 1,140,065
Entities affiliated with The
Phoenix Partners(3).......... -- 637,756 162,866
</TABLE>
- --------
(1) Ann Winblad, Eric P. Robison and Silvia Kessel are each members of our
board of directors. Ms. Winblad is a general partner of Hummer Winblad
Venture Partners. Mr. Robison is a business development associate of Vulcan
Ventures, Inc. Ms. Kessel is a Senior Vice President of Metromedia Company.
(2) Hummer Winblad Venture Partners II, L.P. holds 1,756,098 shares of Series A
preferred stock, 757,370 shares of Series B preferred stock and 80,943
shares of Series C preferred stock. Hummer Winblad Technology Fund II, L.P.
holds 62,198 shares of Series A preferred stock and 26,825 shares of Series
B preferred stock. Hummer Winblad Technology Fund IIA, L.P. holds 10,976
shares of Series A preferred stock, 4,733 shares of Series B preferred
stock and 488 shares of Series C preferred stock.
(3) The Phoenix Partners III Liquidating Trust holds 177,154 shares of Series B
preferred stock and 45,241 shares of Series C preferred stock. The Phoenix
Partners IIIB Limited Partnership holds 141,724 shares of Series B
preferred stock and 36,192 shares of Series C preferred stock. The Phoenix
Partners IV Limited Partnership holds 318,878 shares of Series B preferred
stock and 81,433 shares of Series C preferred stock.
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth information with respect to beneficial
ownership of our common stock before and after the offering by:
. each person who beneficially owns more than 5% of the common stock;
. each of our executive officers;
. each of our directors; and
. all executive officers and directors as a group.
Except as otherwise noted, the address of each 5% stockholder listed in the
table is c/o Liquid Audio, Inc., 810 Winslow Street, Redwood City, CA 94063.
The table includes all shares of common stock issuable within 60 days of June
15, 1999 upon the exercise of options and other rights beneficially owned by
the indicated stockholders on that date. Beneficial ownership is determined in
accordance with the rules of the Securities and Exchange Commission and
includes voting and investment power with respect to shares. To our knowledge,
except under applicable community property laws or as otherwise indicated, the
persons named in the table have sole voting and sole investment control with
respect to all shares beneficially owned. The applicable percentage of
ownership for each stockholder is based on 13,932,264 shares of common stock
outstanding as of June 15, 1999, together with applicable options for that
stockholder. Shares of common stock issuable upon exercise of options and other
rights beneficially owned are deemed outstanding for the purpose of computing
the percentage ownership of the person holding those options and other rights,
but are not deemed outstanding for computing the percentage ownership of any
other person.
<TABLE>
<CAPTION>
Percent of
Number of Ownership
Shares of -----------------
Common Stock Before After
Name of Beneficial Owner Beneficially Owned Offering Offering
- ---------------------------------------- ------------------ -------- --------
<S> <C> <C> <C>
Entities affiliated with Hummer Winblad
Venture Partners(1).................... 2,699,631 19.4% 15.4%
Two South Park, Second Floor
San Francisco, CA 94107
Intel Corporation....................... 2,515,708 18.1 14.3
2200 Mission College Boulevard
Santa Clara, CA 95052
Vulcan Ventures, Inc.(2)................ 998,803 7.2 5.7
110 110th Avenue NE, Suite 500
Bellevue, WA 98004
Metromedia Company(3)................... 977,198 7.0 5.6
1 Meadowlands Plaza East
Rutherford, NJ 07073
Gerald W. Kearby........................ 937,500 6.7 5.3
Philip R. Wiser......................... 843,750 6.1 4.8
The Phoenix Partners(4)................. 800,622 5.7 4.6
1000 Second Avenue, Suite 3600
Seattle, WA 98104
Robert G. Flynn......................... 750,000 5.4 4.3
Gary J. Iwatani(5)...................... 150,000 1.1 *
Kevin M. Malone(6)...................... 112,500 * *
Richard W. Wingate(7)................... 86,000 * *
Mathieu Prevost(8)...................... 40,000 * *
Ann Winblad(1).......................... 2,699,631 19.4 15.4
Eric P. Robison(2)...................... 998,803 7.2 5.7
Silvia Kessel(3)........................ 977,198 7.0 5.6
Sanford R. Climan(9).................... 20,000 * *
All executive officers and directors as
a group (11 persons)(10)............... 7,615,382 53.1 42.4
</TABLE>
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<PAGE>
- --------
* Less than 1%
(1) Consists of common stock issuable upon automatic conversion of 2,594,411
shares of preferred stock owned by Hummer Winblad Venture Partners II,
L.P., 89,023 shares of preferred stock owned by Hummer Winblad Technology
Fund II, L.P. and 16,197 shares of preferred stock owned by Hummer Winblad
Technology Fund IIA, L.P. (collectively, the "Hummer Winblad Funds"). John
Hummer, Ann Winblad (one of our directors) and Mark Gorenberg are general
partners of Hummer Winblad Equity Partners II, L.P. ("HWII"), the general
partner of each of the Hummer Winblad Funds. Consequently, HWII and Mr.
Hummer, Ms. Winblad and Mr. Gorenberg may each be deemed to beneficially
own all of the shares held by the Hummer Winblad Funds. HWII, Mr. Hummer,
Ms. Winblad and Mr. Gorenberg each disclaim beneficial ownership of such
shares, except to the extent of their respective pecuniary interest
therein.
(2) Consists of common stock issuable upon automatic conversion of 998,803
shares of preferred stock owned by Vulcan Ventures, Inc. Paul Allen is the
sole shareholder of Vulcan Ventures, Inc. and the beneficial owner of the
shares held by Vulcan Ventures, Inc. Mr. Robison, one of our directors, is
a business development associate of Vulcan Ventures, Inc. Mr. Robison
possesses no investment or voting power over and disclaims beneficial
ownership of the shares held by Vulcan Ventures, Inc.
(3) Consists of common stock issuable upon automatic conversion of 977,198
shares of preferred stock owned by Metromedia Company. Ms. Kessel, one of
our directors is Senior Vice President of Metromedia Company. Ms. Kessel
disclaims beneficial ownership of shares held by Metromedia Company.
(4) Consists of common stock issuable upon automatic conversion of 222,395
shares of preferred stock owned by The Phoenix Partners III Liquidating
Trust, 177,916 shares of preferred stock owned by The Phoenix Partners
IIIB Limited Partnership and 400,311 shares of preferred stock owned by
The Phoenix Partners IV Limited Partnership (collectively, the "Phoenix
Funds"). David Johnston is the general partner and the beneficial owner of
the shares held by the Phoenix Funds.
(5) Consists of 150,000 shares of common stock issuable upon the exercise of
options exercisable within 60 days of June 15, 1999.
(6) Consists of 112,500 shares of common stock issuable upon the exercise of
options exercisable within 60 days of June 15, 1999.
(7) Consists of 86,000 shares of common stock issuable upon the exercise of
options exercisable within 60 days of June 15, 1999.
(8) Consists of 40,000 shares of common stock issuable upon the exercise of
options exercisable within 60 days of June 15, 1999.
(9) Consists of 20,000 shares of common stock issuable upon the exercise of
stock options exercisable within 60 days of June 15, 1999.
(10) Includes 408,500 shares of common stock issuable upon the exercise of
stock options exercisable within 60 days of June 15, 1999.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
General
Our restated certificate of incorporation, which will become effective upon
the closing of this offering, authorizes the issuance of up to 50,000,000
shares of common stock, par value $0.001 per share, and 5,000,000 shares of
preferred stock, par value $0.001 per share, the rights and preferences of
which may be established from time to time by our board of directors. As of
June 15, 1999, 4,188,065 shares of common stock were outstanding and 9,744,199
shares of mandatorily redeemable convertible preferred stock convertible into
9,744,199 shares of common stock upon the completion of this offering were
issued and outstanding. As of June 15, 1999, we had 59 stockholders.
Common Stock
Each holder of common stock is entitled to one vote for each share on all
matters to be voted upon by the stockholders and there are no cumulative voting
rights. Subject to preferences to which holders of preferred stock issued after
the sale of the common stock in this offering may be entitled, holders of
common stock will be entitled to receive ratably any dividends that may be
declared from time to time by the board of directors out of funds legally
available for that purpose. See "Dividend Policy." In the event of our
liquidation, dissolution or winding up, holders of common stock will be
entitled to share in our assets remaining after the payment of liabilities and
the satisfaction of any liquidation preference granted to the holders of any
outstanding shares of preferred stock. Holders of common stock have no
preemptive or conversion rights or other subscription rights and there are no
redemption or sinking fund provisions applicable to the common stock. All
outstanding shares of common stock are, and the shares of common stock offered
by us in this offering, when issued and paid for, will be, fully paid and
nonassessable. The rights, preferences and privileges of the holders of common
stock are subject to, and may be adversely affected by, the rights of the
holders of shares of any series of preferred stock that we may designate in the
future.
Preferred Stock
Upon the closing of this offering, the board of directors will be authorized,
subject to any limitations prescribed by law, without stockholder approval,
from time to time to issue up to an aggregate of 5,000,000 shares of preferred
stock, par value $0.001 per share, in one or more series, each series to have
rights and preferences, including voting rights, dividend rights, conversion
rights, redemption privileges and liquidation preferences, as may be determined
by the board of directors. The issuance of preferred stock, while providing
desirable flexibility in connection with possible acquisitions and other
corporate purposes, could have the effect of making it more difficult for a
third party to acquire, or of discouraging a third party from attempting to
acquire, a majority of our outstanding voting stock. We have no present plans
to issue any shares of preferred stock.
Warrants
As of June 15, 1999, giving effect to the conversion of all preferred stock
into common stock, we had outstanding a warrant to purchase 15,306 shares of
common stock at an exercise price of $1.96 per share, warrants to purchase a
total of 53,404 shares of common stock at an exercise price of $6.14 per share
and warrants to purchase a total of 393,203 shares of common stock at an
exercise price of $6.56 per share. Each warrant has a net exercise provision
under which the holder may, in lieu of payment of the exercise price in cash,
surrender the warrant and receive a net amount of shares, based on the fair
market value of our stock at the time of the exercise of the warrant, after
deducting the aggregate exercise price.
Registration Rights
Pursuant to our Second Amended and Restated Investor Rights Agreement dated
July 31, 1998, among us and our holders of preferred stock or warrants to
purchase preferred stock, the holders of approximately
61
<PAGE>
9,764,049 shares of common stock, 9,744,199 shares of which are issuable upon
conversion of an aggregate of 9,744,199 shares of preferred stock and 19,850 of
which are issuable upon conversion of preferred stock issuable upon exercise of
warrants, will have rights to register those shares under the Securities Act of
1933 within 180 days of this offering. Subject to limitations in the Rights
Agreement, the holders of at least 25% of the outstanding shares of registrable
securities, or a lesser number of shares if the anticipated aggregate offering
price, before underwriting discounts and commissions, would exceed $5,000,000,
may require, on two occasions, that we use our best efforts to register their
shares of registrable securities for public resale. If we register any of our
common stock for our own account or for the account of other security holders,
the parties to the Rights Agreement may include their shares of common stock in
the registration, subject to the ability of the underwriters to limit the
number of shares included in the offering. Subject to limitations in the Rights
Agreement, the holders of at least 20% of our outstanding shares of registrable
securities may require us to register all or a portion of their registrable
securities on Form S-3 when we are eligible to use that form, provided that the
proposed aggregate price to the public would equal or exceed $500,000. We will
bear all fees, costs and expenses of any registration on Form S-3, other than
underwriting discounts and commissions. Upon the effectiveness of any
registration statement filed to register our common stock, all shares so
registered would become freely tradable, without any restrictions imposed by
the Securities Act. The holders of registration rights have agreed to waive
their registration rights with respect to this offering.
Effect of Provisions of Our Certificate of Incorporation and Bylaws and the
Delaware Anti-takeover Statute
Provisions of our restated certificate of incorporation and bylaws, to be
effective following the offering, may have the effect of making it more
difficult for a third party to acquire, or of discouraging a third party from
attempting to acquire, control of us. These provisions could limit the price
that certain investors might be willing to pay in the future for shares of our
common stock. These provisions:
. divide our board of directors into three classes serving staggered three-
year terms;
. eliminate the right of stockholders to act by written consent without a
meeting;
. eliminate the right of stockholders to call special meetings;
. eliminate cumulative voting in the election of directors; and
. allow us to issue preferred stock without any vote or further action by
the stockholders.
The classification system of electing directors may tend to discourage a
third party from making a tender offer or otherwise attempting to obtain
control of us and may maintain the incumbency of our board of directors, as the
classification of the board of directors increases the difficulty of replacing
a majority of the directors. These provisions may have the effect of deferring
hostile takeovers, delaying changes in our control or management, or may make
it more difficult for stockholders to take certain corporate actions. The
amendment of any of these provisions would require approval by holders of at
least 66 2/3% of the outstanding common stock.
In addition, we are subject to Section 203 of the Delaware General
Corporation Law, which, subject to certain exceptions, prohibits a Delaware
corporation from engaging in any business combination with any interested
stockholder, unless:
. prior to the date of the proposed action, the board of directors of the
corporation approved either the business combination or the transaction
that resulted in the stockholder's becoming an interested stockholder;
. upon completion of the transaction that resulted in the stockholder's
becoming an interested stockholder, the interested stockholder owned at
least 85% of the voting stock of the corporation outstanding at the time
the transaction commenced, excluding for purposes of determining the
number of shares outstanding those shares owned by persons who are
directors and also officers and by employee stock
62
<PAGE>
plans in which employee participants do not have the right to determine
confidentially whether shares held subject to the plan will be tendered in
a tender or exchange offer; or
. on or subsequent to the date of the proposed action, the business
combination is approved by the board of directors and authorized at an
annual or special meeting of stockholders, and not by written consent, by
the affirmative vote of at least 66 2/3% of the outstanding voting stock
that is not owned by the interested stockholder.
Transfer Agent and Registrar
The transfer agent and registrar for the common stock is Chase Mellon
Shareholder Services.
63
<PAGE>
SHARES AVAILABLE FOR FUTURE SALE
Sales of substantial amounts of our common stock in the public market
following the offering could cause the market price of our common stock to fall
and could affect our ability to raise capital on terms favorable to us.
Of the 17,532,264 shares to be outstanding after the offering, assuming that
the underwriters do not exercise their over-allotment option, only the
3,600,000 shares of common stock sold in this offering will be freely tradable
without restriction in the public market unless the shares are held by
"affiliates," as that term is defined in Rule 144(a) under the Securities Act
of 1933. For purposes of Rule 144, an "affiliate" of an issuer is a person
that, directly or indirectly through one or more intermediaries, controls, or
is controlled by or is under common control with, the issuer. The remaining
shares of common stock to be outstanding after the offering are "restricted
securities" under the Securities Act of 1933 and may be sold in the public
market upon the expiration of the holding periods under Rule 144, described
below, subject to the volume, manner of sale and other limitations of Rule 144.
In general, under Rule 144 as currently in effect, a person who has
beneficially owned shares for at least one year, including an "affiliate," is
entitled to sell, within any three-month period, a number of shares that does
not exceed the greater of:
. 1% of the then outstanding shares of our common stock (approximately
175,323 shares immediately following the offering); or
. the average weekly trading volume during the four calendar weeks
preceding filing of notice of the sale of shares of common stock.
Sales under Rule 144 are also subject to certain manner of sale provisions,
notice requirements and the availability of current public information about
us. A stockholder who is deemed not to have been an "affiliate" of ours at any
time during the 90 days preceding a sale, and who has beneficially owned
restricted shares for at least two years, would be entitled to sell shares
under Rule 144(k) without regard to the volume limitations, manner of sale
provisions or public information requirements.
In addition, as of June 15, 1999, there were outstanding warrants to purchase
19,850 shares of preferred stock, warrants to purchase 442,063 shares of common
stock and options to purchase 865,919 shares of common stock, of which 395,796
options were fully vested. An additional 1,704,133 shares are reserved for
issuance under our 1996 Equity Incentive Plan. We intend to register the shares
of common stock issuable or reserved for issuance under the plan as soon as
practicable following the date of this prospectus.
Holders of warrants to purchase 19,850 shares of preferred stock and holders
of 9,744,199 shares of common stock issuable upon conversion of the preferred
stock are entitled to registration rights with respect to these shares for
resale under the Securities Act of 1933. If these holders, by exercising their
registration rights, cause a large number of shares to be registered and sold
in the public market, these sales could harm the market price for our common
stock. These registration rights may not be exercised prior to the expiration
of 180 days from the date of this prospectus. See "Description of Capital
Stock--Registration Rights."
Lock-Up Arrangements
Along with our officers and directors, all holders of our preferred stock,
common stock, warrants and options have agreed not to sell or otherwise dispose
of any shares of common stock for a period of 180 days after the date of this
prospectus without prior written consent.
64
<PAGE>
UNDERWRITING
Under the underwriting agreement, which is filed as an exhibit to the
registration statement relating to this prospectus, the underwriters named
below, for whom Lehman Brothers Inc., BancBoston Robertson Stephens Inc. and
U.S. Bancorp Piper Jaffray Inc. are acting as representatives, have each agreed
to purchase from us the respective number of shares of common stock shown
opposite its name below:
<TABLE>
<CAPTION>
Number of
Underwriters Shares
----------------------------------------------------------------- ---------
<S> <C>
Lehman Brothers Inc. ............................................
BancBoston Robertson Stephens Inc. ..............................
U.S. Bancorp Piper Jaffray Inc. .................................
---------
Total........................................................... 3,600,000
=========
</TABLE>
The underwriting agreement provides that the underwriters' obligations to
purchase shares of common stock depend on the satisfaction of the conditions
contained in the underwriting agreement and that, if any of the shares of
common stock are purchased by the underwriters under the underwriting
agreement, all of the shares of common stock that the underwriters have agreed
to purchase under the underwriting agreement, must be purchased. The conditions
contained in the underwriting agreement include the requirement that the
representations and warranties made by us to the underwriters are true, that
there is no material change in the financial markets and that we deliver to the
underwriters customary closing documents.
The representatives have advised us that the underwriters propose to offer
the shares of common stock directly to the public at the public offering price
set forth on the cover page of this prospectus, and to dealers, who may include
the underwriters, at this public offering price less a selling concession not
in excess of $ per share. The underwriters may allow, and the dealers may
reallow, a concession not in excess of $ per share to brokers and dealers.
After the offering, the underwriters may change the offering price and other
selling terms.
We have granted to the underwriters an option to purchase up to an aggregate
of 540,000 additional shares of common stock, exercisable solely to cover over-
allotments, if any, at the public offering price less the underwriting
discounts shown on the cover page of this prospectus. The underwriters may
exercise this option at any time until 30 days after the date of the
underwriting agreement. If this option is exercised, each underwriter will be
committed, so long as the conditions of the underwriting agreement are
satisfied, to purchase a number of additional shares of common stock
proportionate to the underwriter's initial commitment as indicated in the table
above and we will be obligated, under the over-allotment option, to sell the
shares of common stock to the underwriters.
We have agreed that, without the prior consent of Lehman Brothers, we will
not, directly or indirectly, offer, sell or otherwise dispose of any shares of
common stock or any securities that may be converted into or exchanged for any
shares of common stock for a period of 180 days from the date of this
prospectus. All of our executive officers and directors and stockholders
holding all of the shares of our capital stock, including all of the holders of
the preferred stock and the warrants, have agreed under lock-up agreements
that, without prior written consent, they will not, directly or indirectly,
offer, sell or otherwise dispose of any shares of common stock or any
securities that may be converted into or exchanged for any shares of common
stock for the period ending 180 days after the date of this prospectus. See
"Shares Eligible for Future Sale."
65
<PAGE>
Prior to the offering, there has been no public market for the shares of
common stock. The initial public offering price will be negotiated between the
representatives and us. In determining the initial public offering price of the
common stock, the representatives will consider, among other things and in
addition to prevailing market conditions:
. our historical performance and capital structure;
. estimates of our business potential and earning prospects;
. an overall assessment of our management; and
. the above factors in relation to market valuations of companies in
related businesses.
Application has been made to have our common stock approved for quotation on
the Nasdaq National Market under the symbol "LQID."
We have agreed to indemnify the underwriters against liabilities, including
liabilities under the Securities Act and liabilities arising from breaches of
the representations and warranties contained in the underwriting agreement, and
to contribute to payments that the underwriters may be required to make for
these liabilities.
Until the distribution of the common stock is completed, rules of the
Securities and Exchange Commission may limit the ability of the underwriters
and selling group members to bid for and purchase shares of common stock. As an
exception to these rules, the representatives are permitted to engage in
transactions that stabilize the price of the common stock. These transactions
may consist of bids or purchases for the purposes of pegging, fixing or
maintaining the price of the common stock.
The underwriters may create a short position in the common stock in
connection with the offering, which means that they may sell more shares than
are set forth on the cover page of this prospectus. If the underwriters create
a short position, then the representatives may reduce that short position by
purchasing common stock in the open market. The representatives also may elect
to reduce any short position by exercising all or part of the over-allotment
option.
The representatives also may impose a penalty bid on underwriters and selling
group members. This means that, if the representatives purchase shares of
common stock in the open market to reduce the underwriters' short position or
to stabilize the price of the common stock, they may reclaim the amount of the
selling concession from the underwriters and selling group members that sold
those shares as part of the offering.
In general, purchases of a security for the purpose of stabilization or to
reduce a syndicate short position could cause the price of the security to be
higher than it might otherwise be in the absence of these purchases. The
imposition of a penalty bid might have an effect on the price of a security to
the extent that it were to discourage resales of the security by purchasers in
an offering.
Neither we nor any of the underwriters makes any representation or prediction
as to the direction or magnitude of any effect that the transactions described
above may have on the price of the common stock. In addition, neither we nor
any of the underwriters makes any representation that the representatives will
engage in these transactions or that these transactions, once commenced, will
not be discontinued without notice.
Any offers in Canada will be made only under an exemption from the
requirements to file a prospectus in the relevant province of Canada in which
the sale is made.
Purchasers of the shares of common stock offered in this prospectus may be
required to pay stamp taxes and other charges under the laws and practices of
the country of purchase, in addition to the offering price listed on the cover
page of this prospectus.
66
<PAGE>
The representatives have informed us that they do not intend to confirm the
sales of shares of common stock offered by this prospectus to any accounts over
which they exercise discretionary authority.
At our request, the underwriters have reserved up to 180,000 shares of the
common stock offered by this prospectus for sale to our officers, directors,
employees and their family members and to our business associates at the
initial public offering price set forth on the cover page of this prospectus.
These persons must commit to purchase no later than the close of business on
the day following the date of this prospectus. The number of shares available
for sale to the general public will be reduced to the extent these persons
purchase the reserved shares.
LEGAL MATTERS
Wilson Sonsini Goodrich & Rosati, P.C., Palo Alto, California will pass upon
the validity of the common stock that we are selling in this offering. Fenwick
& West LLP, Palo Alto, California will pass upon legal matters for the
underwriters. As of the date of this prospectus, Wilson Sonsini Goodrich &
Rosati and its partners beneficially owned 4,071 shares of our common stock,
and an investment partnership comprised of partners of Fenwick & West
beneficially owned 22,863 shares of our common stock.
EXPERTS
Our financial statements as of December 31, 1997 and 1998 and for the period
from January 30, 1996 (inception) through December 31, 1996, and for the years
ended December 31, 1997 and 1998 have been included in this prospectus and in
the registration statement in reliance upon the reports of
PricewaterhouseCoopers LLP, independent accountants, appearing elsewhere, and
upon the authority of PricewaterhouseCoopers LLP as experts in accounting and
auditing.
AVAILABLE INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-1, including the exhibits filed with the registration
statement, under the Securities Act of 1933 with respect to the shares to be
sold in this offering. This prospectus does not contain all the information set
forth in the registration statement. For further information with respect to us
and the shares to be sold in this offering, we refer you to the registration
statement. Statements contained in this prospectus as to the contents of any
contract, agreement or other document to which we make reference, are not
necessarily complete, and in each instance we refer you to the copy of the
contract, agreement or other document filed as an exhibit to the registration
statement, each statement being qualified in all respects by the more complete
description of the matter involved.
You may read and copy all or any portion of the registration statement or any
reports, statements or other information we file at the Commission's public
reference room at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549 and at the regional offices of the Commission located at
Seven World Trade Center, 13th Floor, New York, New York 10048 and 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661. You can request copies of
these documents, upon payment of a duplicating fee, by writing to the
Commission. Please call the Commission at 1-800-SEC-0330 for further
information on the operation of the public reference rooms. Our Commission
filings, including the registration statement, will also be available to you on
the Commission's Internet site, http://www.sec.gov.
We intend to send to our stockholders annual reports containing audited
consolidated financial statements and quarterly reports containing unaudited
financial statements for the first three quarters of each fiscal year.
67
<PAGE>
LIQUID AUDIO, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Accountants.......................................... F-2
Balance Sheet.............................................................. F-3
Statement of Operations.................................................... F-4
Statement of Stockholders' Deficit......................................... F-5
Statement of Cash Flows.................................................... F-6
Notes to Financial Statements.............................................. F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Liquid Audio, Inc.
In our opinion, the accompanying balance sheet and the related statements of
operations, of stockholders' deficit and of cash flows present fairly, in all
material respects, the financial position of Liquid Audio, Inc. at December 31,
1997 and 1998, and the results of its operations and its cash flows for the
period from January 30, 1996 (inception) through December 31, 1996, and for the
years ended December 31, 1997 and 1998 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
San Jose, California
February 26, 1999, except
as to Note 10 which is as
of June 17, 1999
F-2
<PAGE>
LIQUID AUDIO, INC.
BALANCE SHEET
(in thousands except share data)
<TABLE>
<CAPTION>
Pro Forma
Stockholders'
December 31, Equity at
----------------- March March 31,
1997 1998 31, 1999 1999
------- -------- -------- -------------
Assets (unaudited)
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents............. $ 2,387 $ 14,143 $15,497
Short-term investments................ -- 3,001 --
Accounts receivable, net.............. 84 376 37
Receivables from related parties...... -- 615 177
Other current assets.................. 136 314 257
------- -------- --------
Total current assets................. 2,607 18,449 15,968
------- -------- --------
Property and equipment, net............ 671 1,507 1,671
Other assets........................... 57 70 90
------- -------- --------
Total assets....................... $ 3,335 $ 20,026 $ 17,729
======= ======== ========
<CAPTION>
Liabilities, mandatorily redeemable
convertible preferred stock and
warrants and stockholders' equity
(deficit)
<S> <C> <C> <C> <C>
Current liabilities:
Accounts payable...................... $ 405 $ 802 $ 518
Accrued expenses and other current
liabilities.......................... 732 932 1,337
Deferred revenue...................... 90 1,177 1,773
Capital lease obligations, current
portion.............................. 122 197 192
Equipment loan, current portion....... -- 281 440
Line of credit........................ 400 -- --
------- -------- --------
Total current liabilities............ 1,749 3,389 4,260
------- -------- --------
Capital lease obligations, non-current
portion............................... 218 330 312
Equipment loan, non-current portion.... -- 639 829
Note payable to related party.......... -- -- 378
------- -------- --------
Total liabilities.................. 1,967 4,358 5,779
------- -------- --------
Series A, B and C mandatorily
redeemable convertible preferred stock
and warrants (Note 5)................. 8,247 29,801 29,801 $ --
------- -------- --------
Commitments and contingencies (Note 9)
Stockholders' equity (deficit):
Common stock, $0.001 par value;
25,878,000 shares authorized;
3,899,643, 3,916,045 and 3,892,293
shares issued and outstanding........ 4 4 4 14
Additional paid-in capital............ 2,159 3,917 4,450 34,241
Unearned compensation................. (1,562) (2,035) (2,143) (2,143)
Accumulated deficit................... (7,480) (16,019) (20,162) (20,162)
------- -------- -------- --------
Total stockholders' equity
(deficit)......................... (6,879) (14,133) (17,851) $ 11,950
------- -------- -------- ========
Total liabilities, mandatorily
redeemable convertible preferred
stock and warrants and
stockholders' equity (deficit).... $ 3,335 $ 20,026 $ 17,729
======= ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
LIQUID AUDIO, INC.
STATEMENT OF OPERATIONS
(in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
Period From
January 30, Three Months Ended
1996 (inception) Year Ended December 31, March 31,
Through December ------------------------- ---------------------
31, 1996 1997 1998 1998 1999
---------------- ----------- ------------ --------- ----------
(unaudited)
<S> <C> <C> <C> <C> <C>
Net revenues:
License................ $ -- $ 246 $ 1,235 $ 192 $ 259
Services............... -- 10 268 32 89
Business development
(related party)....... -- -- 1,300 -- 183
------- ----------- ------------ --------- ----------
Total net revenues.... -- 256 2,803 224 531
------- ----------- ------------ --------- ----------
Cost of net revenues:
License................ -- 302 312 49 47
Services............... -- 91 457 104 280
------- ----------- ------------ --------- ----------
Total cost of net
revenues............. -- 393 769 153 327
------- ----------- ------------ --------- ----------
Gross profit (loss)..... -- (137) 2,034 71 204
------- ----------- ------------ --------- ----------
Operating expenses:
Sales and marketing.... 237 2,820 4,879 942 2,339
Research and
development........... 692 1,880 3,050 569 1,214
General and
administrative........ 327 898 1,642 278 502
Stock compensation
expense............... 31 534 1,241 259 425
------- ----------- ------------ --------- ----------
Total operating
expenses............. 1,287 6,132 10,812 2,048 4,480
------- ----------- ------------ --------- ----------
Loss from operations.... (1,287) (6,269) (8,778) (1,977) (4,276)
Interest income......... 24 125 379 12 184
Interest expense........ (1) (72) (140) (20) (51)
------- ----------- ------------ --------- ----------
Net loss................ $(1,264) $ (6,216) $ (8,539) $ (1,985) $ (4,143)
======= =========== ============ ========= ==========
Net loss per share:
Basic and diluted...... $(14.93) $ (4.95) $ (3.60) $ (0.99) $ (1.39)
======= =========== ============ ========= ==========
Weighted average
shares................ 84,635 1,256,114 2,370,564 1,998,865 2,972,398
======= =========== ============ ========= ==========
Pro forma net loss per
share:
Basic and diluted
(unaudited)........... $ (0.85) $ (0.33)
============ ==========
Weighted average shares
(unaudited)........... 10,041,546 12,716,597
============ ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
LIQUID AUDIO, INC.
STATEMENT OF STOCKHOLDERS' DEFICIT
(in thousands except share amounts)
<TABLE>
<CAPTION>
Common Stock Additional
----------------- Paid-in Unearned Accumulated
Shares Amount Capital Compensation Deficit Total
--------- ------ ---------- ------------ ----------- --------
<S> <C> <C> <C> <C> <C> <C>
Issuance of common stock
to founders............ 3,431,244 $ 3 $ 2 $ -- $ -- $ 5
Unearned compensation... -- -- 239 (239) -- --
Amortization of unearned
compensation........... -- -- -- 31 -- 31
Net loss................ -- -- -- -- (1,264) (1,264)
--------- --- ------ ------- -------- --------
Balance at December 31,
1996................... 3,431,244 3 241 (208) (1,264) (1,228)
Exercise of stock
options................ 468,399 1 30 -- -- 31
Unearned compensation... -- -- 1,888 (1,888) -- --
Amortization of unearned
compensation........... -- -- -- 534 -- 534
Net loss................ -- -- -- -- (6,216) (6,216)
--------- --- ------ ------- -------- --------
Balance at December 31,
1997................... 3,899,643 4 2,159 (1,562) (7,480) (6,879)
Repurchase of founders'
common stock........... (87,868) -- -- -- -- --
Repurchase of common
stock in connection
with unvested stock
options previously
exercised.............. (24,219) -- (2) -- -- (2)
Exercise of stock
options................ 90,173 -- 6 -- -- 6
Issuance of common stock
in connection with
marketing agreement.... 38,316 -- 40 -- -- 40
Unearned compensation... -- -- 1,714 (1,714) -- --
Amortization of unearned
compensation........... -- -- -- 1,241 -- 1,241
Net loss................ -- -- -- -- (8,539) (8,539)
--------- --- ------ ------- -------- --------
Balance at December 31,
1998................... 3,916,045 4 3,917 (2,035) (16,019) (14,133)
Repurchase of common
stock in connection
with unvested stock
options previously
exercised (unaudited).. (28,689) -- (1) -- -- (1)
Exercise of stock
options (unaudited).... 4,937 -- 1 -- -- 1
Unearned compensation
(unaudited)............ -- -- 533 (533) -- --
Amortization of unearned
compensation
(unaudited)............ -- -- -- 425 -- 425
Net loss (unaudited).... -- -- -- -- (4,143) (4,143)
--------- --- ------ ------- -------- --------
Balance at March 31,
1999 (unaudited)....... 3,892,293 $ 4 $4,450 $(2,143) $(20,162) $(17,851)
========= === ====== ======= ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
LIQUID AUDIO, INC.
STATEMENT OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Period From
January 30,
1996 (inception) Year Ended Three Months
Through December 31, Ended March 31,
December 31, ---------------- ----------------
1996 1997 1998 1998 1999
---------------- ------- ------- ------- -------
Cash flows from operating
activities: (unaudited)
<S> <C> <C> <C> <C> <C>
Net loss................. $(1,264) $(6,216) $(8,539) $(1,985) $(4,143)
Adjustments to reconcile
net loss to net cash
used in operating
activities:
Depreciation and
amortization........... 34 121 451 80 168
Amortization of unearned
compensation........... 31 534 1,241 259 425
Allowance for doubtful
accounts............... -- 55 210 6 93
Equity investment
losses................. -- -- 400 -- 378
Changes in assets and
liabilities:
Accounts receivable..... -- (139) (502) (177) 246
Receivables from related
parties................ -- -- (615) -- 438
Other assets............ (38) (155) (191) (32) 37
Accounts payable........ 21 384 397 (173) (284)
Accrued expenses and
other current
liabilities............ 142 590 259 302 405
Deferred revenue........ 15 75 1,087 78 596
------- ------- ------- ------- -------
Net cash used in
operating activities... (1,059) (4,751) (5,802) (1,642) (1,641)
------- ------- ------- ------- -------
Cash flows from investing
activities:
Acquisition of property
and equipment........... (83) (319) (982) (114) (324)
Sale (purchase) of short-
term investments........ -- -- (3,001) -- 3,001
Equity investment........ -- -- (400) -- --
------- ------- ------- ------- -------
Net cash provided by
(used in) investing
activities............. (83) (319) (4,383) (114) 2,677
------- ------- ------- ------- -------
Cash flows from financing
activities:
Proceeds from issuance of
mandatorily redeemable
convertible preferred
stock................... 1,941 6,246 21,535 -- --
Proceeds from issuance of
common stock............ 5 31 4 5 --
Payments made under
capital leases.......... -- (84) (118) (21) (31)
Proceeds from equipment
loan.................... -- -- 920 -- 401
Payments made under
equipment loan.......... -- -- -- -- (52)
Proceeds from borrowings
under line of credit.... -- 400 -- -- --
Payments made under line
of credit............... -- -- (400) -- --
Proceeds from short-term
loan.................... -- 400 1,330 -- --
Payments on short-term
loan.................... -- (400) (1,330) -- --
Proceeds from issuance of
convertible promissory
note to related party... 60 -- -- -- --
------- ------- ------- ------- -------
Net cash provided by
(used in) financing
activities............. 2,006 6,593 21,941 (16) 318
------- ------- ------- ------- -------
Net increase (decrease)
in cash and cash
equivalents............. 864 1,523 11,756 (1,772) 1,354
Cash and cash equivalents
at beginning of period.. -- 864 2,387 2,387 14,143
------- ------- ------- ------- -------
Cash and cash equivalents
at end of period........ $ 864 $ 2,387 $14,143 $ 615 $15,497
======= ======= ======= ======= =======
Supplemental disclosures:
Cash paid for interest... $ 1 $ 72 $ 121 $ 20 $ 51
Non-cash investing and
financing activities:
Acquisition of property
and equipment through
capital leases.......... $ 135 $ 289 $ 305 $ -- $ 8
Issuance of common stock
for services rendered... $ -- $ -- $ 40 $ -- $ --
Conversion of convertible
promissory note to
Series A mandatorily
redeemable convertible
preferred stock......... $ 60 $ -- $ -- $ -- $ --
Equity investment with
note payable............ $ -- $ -- $ -- $ -- $ 378
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
LIQUID AUDIO, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1--THE COMPANY AND SUMMARY OF ITS SIGNIFICANT ACCOUNTING POLICIES:
The Company
Liquid Audio, Inc. (the "Company") was incorporated in California in January
1996 and reincorporated in Delaware in April 1999 (see note 10) with the goal
of becoming the premier provider of software applications and services that
enable the secure delivery and sale of digital music over the Internet. To this
end, the Company has developed an end-to-end solution for promoting and
distributing music over the Internet. The Company's solutions enable the secure
distribution of high quality music files while providing consumers with the
ability to access, preview and purchase that music via the Internet.
Unaudited interim results
The interim financial statements as of March 31, 1999 and for the three
months ended March 31, 1998 and 1999 are unaudited. The unaudited interim
financial statements have been prepared on the same basis as the annual
financial statements and, in the opinion of management, reflect all
adjustments, which include only normal recurring adjustments, necessary to
present fairly the Company's financial position, results of operations and cash
flows as of March 31, 1999 and for the three months ended March 31, 1998 and
1999. The financial data and other information disclosed in these notes to
financial statements related to these periods are unaudited. The results for
the three months ended March 31, 1999 are not necessarily indicative of the
results to be expected for the year ending December 31, 1999.
Use of estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires the Company's 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.
F-7
<PAGE>
LIQUID AUDIO, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Cash and cash equivalents and short-term investments
All highly liquid investments with a maturity of three months or less when
purchased are considered to be cash equivalents, and those with maturities
greater than three months are considered short-term investments. Cash and cash
equivalents consist of cash on deposit with banks, money market funds and
commercial securities that are stated at cost, which approximates fair value.
The Company classifies all short-term investments as available-for-sale.
Accordingly, these investments are carried at fair value. The fair value of
such securities approximates cost, and there were no material unrealized gains
or losses at December 31, 1998 and March 31, 1999 (unaudited). The following
schedule summarizes the estimated fair value of the Company's cash, cash
equivalents and short-term investments (in thousands):
<TABLE>
<CAPTION>
December 31,
-------------- March 31,
1997 1998 1999
------ ------- -----------
(unaudited)
<S> <C> <C> <C>
Cash and cash equivalents:
Cash................................................ $ 136 $ 1,034 $ 399
Money market funds.................................. 2,251 3,102 4,072
Commercial securities............................... -- 10,007 11,026
------ ------- -------
$2,387 $14,143 $15,497
====== ======= =======
Short-term investments:
U.S. Government bonds............................... $ -- $ 3,001 $ --
====== ======= =======
</TABLE>
All short-term investments had a contractual maturity of one year or less.
Concentration of credit risk
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist primarily of cash and cash equivalents,
short-term investments and accounts receivable. Substantially all of the
Company's cash and cash equivalents are invested in a highly-liquid money
market fund and commercial securities with major financial institutions. Short-
term investments are invested in government bonds. The Company performs ongoing
credit evaluations of its customers and maintains an allowance for potential
credit losses. Credit losses to date have been within management's estimates.
The following table sets forth customers comprising 10% or more of the
Company's total net revenues for each of the periods indicated:
<TABLE>
<CAPTION>
Period from
January 30, Three Months
1996 (inception) Year Ended Ended
Through December 31, March 31,
December 31, --------------- ---------------
Customer 1996 1997 1998 1998 1999
-------- ---------------- ------ ------ ------ ------
(unaudited)
<S> <C> <C> <C> <C> <C>
A....................... -- 49% -- --
B....................... -- 12 -- -- --
C....................... -- 10 -- -- --
D....................... -- -- 34% -- --
E....................... -- -- -- 26% --
F....................... -- -- -- 21 --
G....................... -- -- -- -- 40%
H....................... -- -- -- -- 19
I....................... -- -- -- -- 16
</TABLE>
F-8
<PAGE>
LIQUID AUDIO, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
At December 31, 1997, two customers represented 17% and 16%, respectively, of
gross accounts receivable. At December 31, 1998, one customer represented 26%
of gross accounts receivable. At March 31, 1999, three customers represented
26%, 11% and 10% (unaudited) of gross accounts receivable.
Fair value of financial instruments
The Company's financial instruments, including cash and cash equivalents,
short-term investments, accounts receivable, accounts payable, capital lease
obligations, an equipment loan, a line of credit and a note payable to a
related party are carried at cost. The Company's short-term financial
instruments approximate fair value due to their relatively short maturities.
The carrying value of the Company's long-term financial instruments approximate
fair value as the interest rates approximate current market rates of similar
debt. The Company does not hold or issue financial instruments for trading
purposes.
Property and equipment
Property and equipment, including leasehold improvements, are stated at
historical cost. Depreciation and amortization are computed using the straight-
line method over the estimated useful lives of the assets, generally three
years, or for leasehold improvements, the term of the lease, whichever is
shorter. Assets held under capital leases are amortized using the straight-line
method over the shorter of the estimated useful life of the asset or the life
of the lease, generally three years.
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 their net book value 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 their estimated fair
values. Based on its most recent analysis, the Company believes that no
impairment of long-lived assets existed at December 31, 1996, 1997, 1998, and
March 31, 1999 (unaudited).
Revenue recognition
The Company's revenues are derived from the licensing of software products
(including maintenance), hosting, music delivery, encoding, integration and
installation services, and business development contracts. Revenues are
recognized for the various contract elements based upon vendor-specific
objective evidence of the fair value for each element, in accordance with
Statement of Position No. 97-2, "Software Revenue Recognition" ("SOP 97-2") and
related guidance. License revenues are recognized when persuasive evidence of
an agreement exists, delivery of the product has occurred, no significant
Company obligations with regard to implementation or integration exist, the fee
is fixed or determinable and collectibility is probable. Provisions for sales
returns are provided at the time of revenue recognition based upon estimated
returns.
Maintenance and hosting fees are deferred and recognized as service revenue
on a straight-line basis over the life of the related contract, which is
typically one year. Music delivery service revenue is recognized at the time
digital music is delivered. Encoding, integration and installation service fees
are deferred and recognized as service revenue over the period the services are
provided.
Business development revenue consists of business development fees derived
from contractual agreements with the Company's strategic partners. These U.S.
dollar denominated nonrefundable fees are based upon agreements whereby the
strategic partners are contractually obligated to pay to the Company a fixed
fee for the opportunity to develop businesses in various countries using the
Company's proprietary technology. The fees are recognized by the Company as
earned, the specific timing of which depends on the terms and conditions of the
particular contractual arrangements. In addition to the business development
fees recognized by the Company, other fees are recognized as products are
delivered (see note 2).
F-9
<PAGE>
LIQUID AUDIO, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Research and development costs
Expenditures for research and development are charged to expense as incurred.
Under Statement of Financial Accounting Standards No. 86, "Accounting for the
Costs of Computer Software to be Sold, Leased or Otherwise Marketed," certain
software development costs are capitalized after technological feasibility has
been established. Development costs incurred in the period from achievement of
technological feasibility, which the Company defines as the establishment of a
working model, until the general availability of such software to customers,
has been short, and therefore software development costs qualifying for
capitalization have been insignificant. Accordingly, the Company has not
capitalized any software development costs as of December 31, 1998 or March 31,
1999 (unaudited).
Advertising
Advertising costs are expensed as incurred. The following table sets forth
advertising costs (in thousands):
<TABLE>
<CAPTION>
Period from
January 30, Three Months
1996 (inception) Year Ended Ended
Through December 31, March 31,
December 31, ------------- -------------
1996 1997 1998 1998 1999
---------------- ------ ------ ------ ------
(unaudited)
<S> <C> <C> <C> <C> <C>
Advertising costs.................. $ -- $ 53 $ 247 $ 50 $ 102
</TABLE>
Stock-based compensation
The Company accounts for stock-based employee compensation arrangements in
accordance with provisions of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB No. 25") and Financial
Accounting Standards Board Interpretation No. 28, "Accounting for Stock
Appreciation Rights and Other Variable Stock Option or Award Plans", and
complies with the disclosure provisions of Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123").
Under APB No. 25, compensation expense is based on the difference, if any, on
the date of the grant, between the fair value of the Company's stock and the
exercise price. The Company accounts for stock issued to non-employees in
accordance with the provisions of SFAS No. 123 and Emerging Issues Task Force
No. 96-18 "Accounting for Equity Instruments That Are Issued to Other Than
Employees for Acquiring, or in Conjunction with Selling, Goods or Services."
Income taxes
Income taxes are accounted for using the asset and liability approach, which
requires the recognition of taxes payable or refundable for the current year
and deferred tax liabilities and assets for the future tax consequences of
events that have been recognized in the Company's financial statements or tax
returns. The measurement of current and deferred tax liabilities and assets are
based on provisions of the enacted tax laws; the effects of future changes in
tax laws or rates are not anticipated. The measurement of deferred tax assets
is reduced, if necessary, by the amount of any tax benefits that, based on
available evidence, are not expected to be realized.
Net loss per share
The Company computes net loss per share in accordance with Statement of
Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS No. 128")
and SEC Staff Accounting Bulletin No. 98 ("SAB No. 98"). Under the provisions
of SFAS No. 128 and SAB No. 98, basic and diluted net loss per share
F-10
<PAGE>
LIQUID AUDIO, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
is computed by dividing the net loss available to common stockholders for the
period by the weighted average number of common shares outstanding during the
period. The calculation of diluted net loss per share excludes potential common
shares if the effect is anti-dilutive. Potential common shares consist of
unvested restricted common stock, incremental common shares issuable upon the
exercise of stock options, shares issuable upon conversion of the Series A,
Series B and Series C mandatorily redeemable convertible preferred stock and
common shares issuable upon the exercise of common and mandatorily redeemable
convertible preferred stock warrants.
The following table sets forth the computation of basic and diluted net loss
per share for the periods indicated (in thousands, except per share amounts):
<TABLE>
<CAPTION>
Period from
January 30, Year Ended Three Months
1996 (inception) December 31, Ended March 31,
Through December ---------------- ----------------
31, 1996 1997 1998 1998 1999
---------------- ------- ------- ------- -------
(unaudited)
<S> <C> <C> <C> <C> <C>
Numerator:
Net loss................. $(1,264) $(6,216) $(8,539) $(1,985) $(4,143)
------- ------- ------- ------- -------
Denominator:
Weighted average shares.. 2,288 3,682 3,888 3,964 3,725
Weighted average unvested
common shares subject to
repurchase.............. (2,203) (2,426) (1,517) (1,965) (753)
------- ------- ------- ------- -------
Denominator for basic and
diluted calculation..... 85 1,256 2,371 1,999 2,972
======= ======= ======= ======= =======
Net loss per share:
Basic and diluted........ $(14.93) $ (4.95) $ (3.60) $ (0.99) $ (1.39)
======= ======= ======= ======= =======
</TABLE>
The following table sets forth potential shares of common stock that are not
included in the diluted net loss per share calculation above because to do so
would be anti-dilutive for the periods indicated (in thousands):
<TABLE>
<CAPTION>
Period From Year Ended
January 30, December Three Months
1996 (inception) 31, Ended March 31,
Through December ----------- ----------------
31, 1996 1997 1998 1998 1999
----------------- ----- ----- ------- --------
(unaudited)
<S> <C> <C> <C> <C> <C>
Weighted average effect of
common stock equivalents:
Series A mandatorily redeemable
convertible preferred stock... 1,716 3,050 3,050 3,050 3,050
Series B mandatorily redeemable
convertible preferred stock... -- 1,859 3,187 3,187 3,187
Series C mandatorily redeemable
convertible preferred stock... -- -- 1,434 -- 3,507
Mandatorily redeemable
convertible preferred stock
warrants...................... -- 9 18 15 20
Unvested common shares subject
to repurchase................. 2,203 2,426 1,517 1,965 753
Common stock options........... 103 629 665 770 751
Common stock warrants.......... -- -- 49 49 49
----- ----- ----- ------- --------
4,022 7,973 9,920 9,036 11,317
===== ===== ===== ======= ========
</TABLE>
F-11
<PAGE>
LIQUID AUDIO, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Pro forma net loss per share (unaudited)
Pro forma net loss per share for the year ended December 31, 1998 and the
three months ended March 31, 1999 is computed using the weighted average number
of common shares outstanding, including the pro forma effects of the automatic
conversion of the Company's Series A, Series B and Series C mandatorily
redeemable convertible preferred stock into shares of the Company's common
stock effective upon the closing of the Company's initial public offering
("offering") as if such conversion occurred on January 1, 1998, or at date of
original issuance, if later. The resulting pro forma adjustment includes an
increase in the weighted average shares used to compute basic and diluted net
loss per share of 7,670,982 and 9,744,199 for the year ended December 31, 1998
and the three months ended March 31, 1999, respectively. The calculation of
diluted net loss per share excludes potential common shares as the effect would
be anti-dilutive. Pro forma common equivalent shares are composed of unvested
restricted common stock and incremental common shares issuable upon the
exercise of stock options and warrants.
Pro forma stockholders' equity (unaudited)
Effective upon the closing of this offering, the outstanding shares of Series
A, Series B and Series C mandatorily redeemable convertible preferred stock
will automatically convert into 9,744,199 shares of common stock. The pro forma
effects of these transactions are unaudited and have been reflected in the
accompanying pro forma stockholders' equity at March 31, 1999.
Comprehensive income
The Financial Accounting Standards Board ("FASB") recently issued Statement
of Financial Accounting Standards No. 130, "Reporting Comprehensive Income"
("SFAS No. 130"). SFAS No. 130 establishes standards for reporting
comprehensive income and its components in financial statements. Comprehensive
income, as defined, includes all changes in equity (net assets) during a period
from non-owner sources. The Company adopted SFAS No. 130 on January 1, 1998. To
date, the Company has not had any significant transactions that are required to
be reported as other comprehensive income other than its net loss.
Segment information
The FASB recently issued Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information" ("SFAS
No. 131"). SFAS No. 131 supersedes Statement of Financial Accounting
Standards No. 14, "Financial Reporting for Segments of a Business Enterprise,"
replacing the "industry segment" approach with the "management approach." The
management approach designates the internal organization that is used by
management for making operating decisions and assessing performance as the
source of the Company's reportable segments. SFAS No. 131 also requires
disclosures about products and services, geographic areas and major customers.
The Company adopted SFAS No. 131 on January 1, 1998. The Company has determined
that it does not have any separately reportable business or geographic
segments.
Recent accounting pronouncements
In March 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants ("AICPA") issued Statement of
Position 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use" ("SOP 98-1"). SOP 98-1 requires all costs related to
the development of internal use software other than those incurred during the
application development stage to be expensed as incurred. Costs incurred during
the application development stage are required to be capitalized and amortized
over the estimated useful life of the software. SOP 98-1 is effective for the
Company's fiscal year ending December 31, 1999. Adoption is not expected to
have a material effect on the Company's financial statements.
F-12
<PAGE>
LIQUID AUDIO, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
In June 1998, the FASB issued Statement of Financial Accounting Standards No.
133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS No.
133"). SFAS No. 133 is effective for fiscal years beginning after June 15,
1999. SFAS No. 133 requires that all derivative instruments be recorded on the
balance sheet at their fair value. Changes in the fair value of derivatives are
recorded each period in current earnings or other comprehensive income,
depending on whether a derivative is designed as part of a hedge transaction
and, if so, the type of hedge transaction. The Company does not expect that the
adoption of SFAS No. 133 will have a material effect on its financial
statements.
In December 1998, the AICPA issued Statement of Position 98-9, "Modification
of SOP 97-2, Software Revenue Recognition, with Respect to Certain
Transactions" ("SOP 98-9"), which amends certain elements of SOP 97-2 and
provides additional authoritative guidance on software revenue recognition. SOP
98-9 is effective for fiscal years beginning after March 15, 1999. The Company
does not expect that the adoption of SOP 98-9 will have a material effect on
its financial statements.
Reclassifications
Certain reclassifications have been made to the prior years' financial
statements to conform to current period presentation.
NOTE 2--RELATED PARTIES:
Investment in Liquid Audio Korea
In December 1998, the Company signed an agreement with a strategic partner
(the "strategic partner") to establish a Korean corporation, Liquid Audio Korea
Co. Ltd. ("LAK"), to develop a local business to enable the digital delivery of
music to customers in Korea. LAK is the exclusive reseller and distributor of
the Company's software products in Korea, under an agreement expiring on
December 31, 2003. The Company paid $400,000 for 40% of the outstanding common
stock of LAK and will account for its investment in LAK using the equity method
of accounting. As of December 31, 1998, the Company's investment in LAK is
recorded at zero due to the recognition of equity investee losses equal to the
investment balance. The equity investee losses of $400,000 were recorded as an
offset to the business development revenue recognized from LAK. The Company
will not record its share of additional losses during this development stage
since there is no obligation on the part of the Company to pay LAK or any other
party for those losses. If LAK generates sufficient profits to recoup its
initial operating losses, the Company will re-instate the equity method of
accounting.
Investment in Liquid Audio Japan
In April 1998, the Company signed an agreement with a strategic partner (the
"strategic partner") to establish a Japanese corporation, Liquid Audio Japan
("LAJ"). LAJ is the exclusive reseller and distributor of the Company's
software products in Japan. At December 31, 1998, the initial capitalization of
LAJ was provided by the strategic partner, and in March 1999, the Company
purchased 18% of the issued and outstanding shares in LAJ from the strategic
partner for $378,000. The Company retains the option, expiring on December 31,
2003, to purchase an additional 2% of the capital of LAJ from the strategic
partner, at the then fair market value of LAJ's shares. The Company also has a
put option whereby the Company can require the strategic partner to purchase
its shares in LAJ at the then fair market value, if certain performance
measures of LAJ, as defined, are not met. The Company's purchase of shares in
LAJ was funded by a loan from a related entity of the Japanese strategic
partner. This loan, denominated in Japanese yen, is repayable on December 31,
2003. Interest on the loan bears interest at 0.5% above a Japanese bank's prime
rate (3.1% at March 31, 1999 (unaudited)) and is payable quarterly. The loan is
classified in the balance sheet as a non-current note payable to a related
party and recorded at the prevailing exchange rate at March 31, 1999
(unaudited). The Company will use the equity method of accounting for this
investment due to the Company's ability to significantly
F-13
<PAGE>
LIQUID AUDIO, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
influence the LAJ operations. As of March 31, 1999 (unaudited), the Company's
investment in LAJ was deemed to be impaired due to substantial doubt regarding
recoverability and the significant losses that are expected to be incurred
during LAJ's initial operating periods. The impairment conclusion was based
upon the lack of sufficient earnings and cash flows for LAJ for the foreseeable
future, the lack of a defined product to introduce into the Japan marketplace,
the lack of a proven business model that will sustain the competitive and
technological challenges inherent in the local environment, and the unstable
nature of the economy in Japan. The $378,000 (unaudited) write-off of this
investment was recorded in March 1999 and is included in sales and marketing
expenses for the three months ended March 31, 1999. The Company will not record
its share of those losses during this development stage since there is no
obligation on the part of the Company to pay LAJ or any other party for those
losses. The Company discontinued use of the equity method of accounting at
March 31, 1999. If LAJ generates sufficient profits to recoup its initial
operating losses, the Company will re-instate the equity method of accounting.
Other transactions
During the year ended December 31, 1998 and the three months ended March 31,
1999, the Company recorded business development revenues totaling $1,300,000
and $183,000 (unaudited), respectively. The components of these amounts are as
follows (in thousands):
<TABLE>
<CAPTION>
Three Months
Year Ended Ended
December 31, March 31,
1998 1999
------------ ------------
(unaudited)
<S> <C> <C>
Business development revenues:
Business development fees from strategic partners.... $1,200 $ 83
Other fees from LAK and LAJ.......................... 100 100
------ ----
$1,300 $183
====== ====
</TABLE>
At March 31, 1999, fees received in advance of recognition as business
development revenues were $917,000 (unaudited). This amount is classified as
deferred revenue on the balance sheet and will be recognized ratably as revenue
over the eleven months ending February 28, 2000.
NOTE 3--BALANCE SHEET COMPONENTS (in thousands):
<TABLE>
<CAPTION>
December
31,
--------- March 31,
1997 1998 1999
---- ---- -----------
(unaudited)
<S> <C> <C> <C>
Accounts receivable, net:
Accounts receivable...................................... $140 $607 $331
Allowance for doubtful accounts.......................... 56 231 294
---- ---- ----
$ 84 $376 $ 37
==== ==== ====
</TABLE>
F-14
<PAGE>
LIQUID AUDIO, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Write-offs against the allowance for doubtful accounts were $34,000 and
$30,000 in the year ended December 31, 1998 and the three months ended March
31, 1999 (unaudited), respectively.
<TABLE>
<CAPTION>
December 31,
------------- March 31,
1997 1998 1999
----- ------ -----------
(unaudited)
<S> <C> <C> <C>
Property and equipment:
Computer equipment and purchased software........... $ 595 $1,460 $1,765
Furniture and fixtures.............................. 193 324 331
Leasehold improvements.............................. 38 329 349
----- ------ ------
826 2,113 2,445
Less: accumulated depreciation and amortization..... (155) (606) (774)
----- ------ ------
$ 671 $1,507 $1,671
===== ====== ======
Property and equipment includes $424,000, $729,000 and $737,000 (unaudited)
of equipment under capital leases at December 31, 1997 and 1998, and March 31,
1999, respectively. Accumulated depreciation and amortization for equipment
under capital leases was $129,000, $352,000 and $415,000 (unaudited) at
December 31, 1997 and 1998, and March 31, 1999, respectively.
<CAPTION>
December 31,
------------- March 31,
1997 1998 1999
----- ------ -----------
(unaudited)
<S> <C> <C> <C>
Accrued expenses and other current liabilities:
Compensation and benefits........................... $ 174 $ 345 $ 569
Consulting and professional services................ 172 147 212
Accrued marketing expenses.......................... 251 162 206
Other............................................... 135 278 350
----- ------ ------
$732 $932 $1,337
===== ====== ======
</TABLE>
NOTE 4--BORROWINGS:
Lines of credit
In 1996, the Company entered into a revolving credit agreement with a bank
(the "Bank") under which it could borrow up to $400,000. The Company had
$400,000 outstanding on this revolving line on December 31, 1997. The revolving
line of credit was collateralized by substantially all of the Company's assets,
bore interest at the Bank's prime rate plus 3% and expired on April 30, 1998,
at which time the principal was repaid.
In November 1998, the Company entered into a revolving line of credit with
the Bank which provides for borrowings of up to 80% of eligible accounts
receivable (as defined) up to a maximum of $1,000,000 through November 1999.
Any advances would bear interest at the Bank's prime interest rate (7.75% at
December 31, 1998 and March 31, 1999 (unaudited)). Borrowings under the line of
credit would be collateralized by substantially all of the Company's assets. No
advances have been obtained to date under the line of credit.
Equipment loan
Pursuant to the terms of an equipment financing agreement with the Bank, the
Company has a $3,000,000 line of credit to be used specifically to purchase
computer and office equipment. The line expires in November 1999. Under the
line, the Company borrowed amounts totalling $920,000 and $1,321,000 from the
F-15
<PAGE>
LIQUID AUDIO, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
date of the agreement (November 1, 1998) through December 31, 1998 and March
31, 1999 (unaudited), respectively. Borrowings under the line are repayable in
monthly installments over three years and bear interest at the Bank's prime
interest rate plus 0.25% (8.0% at December 31, 1998 and March 31, 1999
(unaudited)). Borrowings are secured by the related equipment and other assets
of the Company.
Under the equipment line of credit, the Company is required to meet certain
monthly reporting and financial covenants, including minimum operating results
and certain liquidity, leverage and debt service ratios. At December 31, 1998
and March 31, 1999 (unaudited), the Company was in compliance with all such
covenants.
Future minimum principal payments under the equipment line at December 31,
1998 are as follows (in thousands):
<TABLE>
<CAPTION>
Year Ending December 31,
------------------------
<S> <C>
1999.............................................................. $ 281
2000.............................................................. 307
2001.............................................................. 307
2002.............................................................. 25
-----
920
Less current portion............................................... (281)
-----
Non-current portion................................................ $ 639
=====
</TABLE>
Short-term loans
In May 1997, the Company entered into a short-term loan facility for
$1,000,000 with a bank. The company borrowed $400,000 during the year ended
December 31, 1997 under this facility. In April 1998, the company entered into
a short-term loan facility for $2,400,000 with a bank. The Company borrowed
$1,330,000 during the year ended December 31, 1998 under this facility. Both
short-term loans were repaid and the facilities have expired.
NOTE 5--MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK:
Mandatorily redeemable convertible preferred stock, $0.001 par value at
December 31, 1998, was comprised of the following (in thousands):
<TABLE>
<CAPTION>
Liquidation
Shares and
---------------------- Redemption
Authorized Outstanding Amount
---------- ----------- -----------
<S> <C> <C> <C>
Series A................................ 3,050 3,050 $ 2,001
Series B................................ 3,355 3,187 6,246
Series C................................ 4,500 3,507 21,554
------ ----- -------
10,905 9,744 $29,801
====== ===== =======
</TABLE>
The rights of holders of mandatorily redeemable convertible preferred stock
with respect to voting, dividends, liquidation and conversion and redemption
are as follows:
Voting
Each share of Series A, Series B and Series C mandatorily redeemable
convertible preferred stock has voting rights equal to an equivalent number of
shares of common stock into which it is convertible.
F-16
<PAGE>
LIQUID AUDIO, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Dividends
Holders of Series A, Series B and Series C mandatorily redeemable convertible
preferred stock are entitled to noncumulative, preferential dividends of
$0.059, $0.176 and $0.5526, respectively, per share per annum when and if
declared by the Board of Directors. The holders of Series A, Series B and
Series C mandatorily redeemable convertible preferred stock will also be
entitled to participate in dividends on common stock, when and if declared by
the Board of Directors, based on the number of shares of common stock into
which the mandatorily redeemable convertible preferred stock is convertible. As
of March 31, 1999, no dividends on mandatorily redeemable convertible preferred
stock or common stock had been declared or paid.
Liquidation
In the event of any liquidation, dissolution, winding up, or consolidation or
merger of the Company resulting in an ownership change of greater than 50%,
distributions to stockholders are to be made in the following manner:
The holders of the Series A, Series B and Series C mandatorily redeemable
convertible preferred stock are entitled to receive, prior and in preference to
any distribution of the assets of the Company to the holders of the common
stock, the amounts of $0.656, $1.96 and $6.14 per share, respectively, for each
share of Series A, Series B and Series C mandatorily redeemable convertible
preferred stock then held plus all declared and unpaid dividends, if any, on
such shares. If the assets of the Company are insufficient to permit this
distribution, the assets of the Company would be distributed ratably, between
the holders of Series A, Series B and Series C mandatorily redeemable
convertible preferred stock on a pari passu basis according to the liquidation
preferences of each series and as between the holders of shares of a particular
series, in proportion to the amount of such stock of such series owned by such
holder.
Thereafter, mandatorily redeemable convertible preferred stock and common
stock stockholders would share proceeds pro rata, on an as-converted basis,
until holders of Series A and Series B mandatorily redeemable convertible
preferred stock have recovered an amount of $3.936 per share (excluding amounts
already paid) and holders of Series C mandatorily redeemable convertible
preferred stock have recovered an amount of $8.18 per share (excluding amounts
already paid). All further proceeds would be distributed to the common
stockholders.
Conversion
Each share of Series A, Series B and Series C mandatorily redeemable
convertible preferred stock is convertible at the option of the holder at any
time into shares of common stock based on a conversion rate as defined in the
amended and restated Certificate of Incorporation, which currently results in a
conversion rate of 1:1. Each share of Series A, Series B and Series C
mandatorily redeemable convertible preferred stock will automatically be
converted into shares of common stock at the then effective conversion rate
upon the closing of a firm commitment underwritten initial public offering of
the Company's common stock at a price not less than $8.33 per share with total
proceeds in excess of $15,000,000 or on the date upon which the Company obtains
the consent of the holders of 2/3's of the then outstanding shares of
mandatorily redeemable convertible preferred stock.
Redemption
At the option of the holders of the Series A, Series B and Series C
mandatorily redeemable convertible preferred stock, subsequent to six years
from the date of first issuance of Series C mandatorily redeemable convertible
preferred stock, but within 30 days of written request from holders of not less
than 2/3's of the then
F-17
<PAGE>
LIQUID AUDIO, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
outstanding Series A, Series B and Series C mandatorily redeemable convertible
preferred stock, the Company will redeem the shares specified in such request
for a sum equal to $0.656, $1.96 and $6.14, respectively, per share plus all
declared but unpaid dividends.
Warrants
In connection with certain short-term loans received by the Company in 1997
and 1998 (see note 4), the Company issued warrants to purchase 15,306 shares of
Series B mandatorily redeemable preferred stock for $1.96 per share and 4,544
shares of Series C mandatorily redeemable preferred stock for $6.14 per share
respectively. The warrants expire on the earlier of 2002 and 2005,
respectively, or two years after an initial public offering. The Company
determined the value of the warrants issued in 1997 and in 1998 to be nominal,
based on the Black-Scholes option pricing model.
NOTE 6--COMMON STOCK:
In April 1999, the Company's Certificate of Incorporation was amended and
restated to authorize the issuance of 25,878,000 shares of common stock at
$0.001 par value.
In February 1998, the Company's Board of Directors authorized a three-for-two
stock split (i.e., one existing share is equivalent to one and one-half post-
split shares). All share and per share data in these financial statements have
been restated to reflect this stock split.
In April 1996, the Company issued 3,431,000 shares of restricted common stock
at $0.00133 per share to the Company's founders. The restricted common stock
vests at a rate of 25% at the end of the first year and then 2.083% each month
thereafter until 100% vested. The Company has the right to repurchase unvested
shares, and in October 1998, approximately 88,000 shares of unvested founders'
common stock was repurchased. At December 31, 1997, December 31, 1998 and March
31, 1999, approximately 1,644,000, 2,481,000 and 2,680,000 (unaudited) shares
had vested, respectively.
As of December 31, 1998, the Company had reserved the following number of
shares of common stock for future issuance (in thousands):
<TABLE>
<CAPTION>
December 31,
1998
------------
<S> <C>
Conversion of Series A mandatorily redeemable convertible
preferred stock............................................ 3,050
Conversion of Series B mandatorily redeemable convertible
preferred stock and warrants............................... 3,202
Conversion of Series C mandatorily redeemable convertible
preferred stock and warrants............................... 3,512
Common stock warrant........................................ 49
Options under Stock Option Plan............................. 1,138
------
10,951
======
</TABLE>
Warrants
In February 1997, the Company entered into a marketing agreement whereby the
Company and another company jointly developed and marketed a certain feature
specification of the Company's software products. Pursuant to this agreement,
the Company issued 38,316 shares of the Company's common stock and a warrant to
purchase 48,860 shares of common stock at $6.14 per share. The warrant expires
on January 1, 2001. The Company accrued $107,000 during the year ended December
31, 1997 for the estimated fair value of the warrant, based on the Black-
Scholes option pricing model.
In March 1999, pursuant to a strategic agreement, the Company issued a
warrant for 3,000 shares of common stock at $6.56 per share. The warrant
expires in March 2004.
F-18
<PAGE>
LIQUID AUDIO, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
NOTE 7--EMPLOYEE BENEFIT PLANS:
401(k) Savings plan
The Company sponsors a 401(k) defined contribution plan covering eligible
employees who elect to participate. The Company may elect to contribute
matching and discretionary contributions to the plan; however, no contributions
have been made by the Company since inception of the plan.
Stock Option Plan
In September 1996, the Board of Directors adopted the 1996 Equity Incentive
Plan (the "Plan") which initially provided for the granting of up to 1,144,000
incentive stock options and nonqualified stock options. In August 1997 and
October 1998, an additional 441,000 and 88,000 shares, respectively, were
authorized for grants under the Plan. Under the Plan, incentive stock options
may be granted to employees of the Company and nonqualified stock options and
stock purchase rights may be granted to consultants, employees, directors and
officers of the Company. Options granted under the Plan are for periods not to
exceed ten years, and must be issued at prices not less than 100% and 85%, for
incentive and nonqualified stock options, respectively, of the fair market
value of the stock on the date of grant as determined by the Board of
Directors. Options granted under the Plan generally vest 25% after the first
year and then 2.083% each month thereafter until 100% vested. Options granted
to stockholders who own greater than 10% of the outstanding stock must be for
periods not to exceed five years and must be issued at prices not less than
110% of the estimated fair market value of the stock on the date of grant as
determined by the Board of Directors.
The following table summarizes stock option activity under the Plan (shares
in thousands):
<TABLE>
<CAPTION>
Options Outstanding
----------------------
Weighted
Options Average
Available Exercise Price
for Grant Shares Per Share
--------- ------ --------------
<S> <C> <C> <C>
Authorized.................................. 1,144 -- $ --
Options granted............................. (419) 419 0.067
------ -----
Balance at December 31, 1996................ 725 419 0.067
Additional options authorized.............. 441 -- --
Options granted............................ (1,108) 1,108 0.154
Options exercised.......................... -- (469) 0.067
Options canceled........................... 197 (197) 0.067
------ -----
Balance at December 31, 1997................ 255 861 0.130
Additional options authorized.............. 88 -- --
Repurchase of common stock in connection
with unvested stock options previously
exercised................................. 24 -- --
Options granted............................ (512) 512 1.01
Options exercised.......................... -- (90) 0.067
Options canceled........................... 216 (216) 0.11
------ -----
Balance at December 31, 1998................ 71 1,067 0.68
Repurchase of common stock in connection
with unvested stock options previously
exercised (unaudited)..................... 29 -- --
Options granted (unaudited)................ (111) 111 3.22
Options exercised (unaudited).............. -- (5) 0.34
Options canceled (unaudited)............... 124 (124) 0.10
------ -----
Balance at March 31, 1999 (unaudited)....... 113 1,049 0.89
====== =====
</TABLE>
F-19
<PAGE>
LIQUID AUDIO, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
During the period from January 30, 1996 (inception) through December 31,
1996, the Company granted options to purchase 22,500 shares of common stock to
consultants in exchange for services at an exercise price of $0.067 per share.
The Company determined the value of the options granted to be nominal. During
the three months ended March 31, 1999 (unaudited), the Company granted an
option to purchase 20,000 shares of common stock to a consultant in exchange
for services at an exercise price of $2.50 per share. The Company determined
the value of the option to be $142,000, based on the Black-Scholes option
pricing model. Of this amount, $71,000 was recognized as research and
development expense in the three months ended March 31, 1999 (unaudited).
The following table summarizes information concerning outstanding and
exercisable options as of December 31, 1998 (shares in thousands):
<TABLE>
<CAPTION>
Options Vested and
Options Outstanding Exercisable
--------------------------------- --------------------
Weighted Weighted
Weighted Average Average
Average Exercise Exercise
Remaining Price Price
Number Contractual Per Number Per
Range of Exercise Prices Outstanding Life (years) Share Outstanding Share
------------------------ ----------- ------------ -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$0.067................. 129 7.65 $0.067 66 $0.067
0.194................. 534 8.63 0.194 152 0.194
0.333-0.40............ 154 9.24 0.393 -- --
1.50-2.00............. 250 9.76 1.750 30 1.50
----- ---
1,067 248
===== ===
</TABLE>
The following table summarizes information concerning outstanding and
exercisable options as of March 31, 1999 (unaudited, shares in thousands):
<TABLE>
<CAPTION>
Options Vested and
Options Outstanding Exercisable
-------------------------------- --------------------
Weighted Weighted Weighted
Average Average Average
Remaining Exercise Exercise
Contractual Price Price
Number Life Per Number Per
Range of Exercise Prices Outstanding (years) Share Outstanding Share
------------------------ ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$0.067.................. 127 7.40 $0.067 75 $0.067
0.194.................. 425 8.42 0.194 211 0.194
0.333-0.40............. 138 9.01 0.400 27 0.390
1.50-2.50.............. 327 9.52 1.930 46 2.500
5.00................... 32 9.93 5.000 -- --
----- ---
1,049 359
===== ===
</TABLE>
Fair value disclosures
Pro forma information regarding net loss and net loss per share is required
by FAS 123, which also requires that the information be determined as if the
Company has accounted for its employee stock options granted under the fair
value method. The fair value for these options was estimated using the Black-
Scholes option pricing model.
The Black-Scholes option pricing model was developed for use in estimating
the fair value of traded options that have no vesting restrictions and are
fully transferable. In addition, option pricing models require the input of
highly subjective assumptions, including the expected stock price volatility.
Because the Company's options have characteristics significantly different from
those of options of publicly traded
F-20
<PAGE>
LIQUID AUDIO, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
companies and because changes in the subjective input assumptions can
materially affect the fair value estimate, in the opinion of management, the
existing models do not necessarily provide a reliable single measure of the
fair value of its options.
The Company calculated the minimum fair value of each option grant on the
date of grant using the Black-Scholes option pricing method as prescribed by
SFAS No. 123 using the following assumptions:
<TABLE>
<CAPTION>
Period From
January 30, Three Months
1996 (inception) Year Ended Ended March
Through December 31, 31,
December 31, --------------- ---------------
1996 1997 1998 1998 1999
---------------- ------ ------ ------ ------
(unaudited)
<S> <C> <C> <C> <C> <C>
Risk-free rates......... 6.4% 6.2% 5.8% 5.8% 5.6%
Expected lives (in
years)................. 4.0 4.0 4.0 4.0 4.0
Dividend yield.......... 0.0% 0.0% 0.0% 0.0% 0.0%
Expected volatility..... 0.0% 0.0% 0.0% 0.0% 0.0%
</TABLE>
Had compensation costs been determined based upon the fair value at the grant
date for awards under these plans, consistent with the methodology prescribed
under SFAS No. 123, the Company's pro forma net loss attributable to common
stockholders and pro forma basic and diluted net loss per share under SFAS
No. 123 would have been:
<TABLE>
<CAPTION>
Period From
January 30, Three Months
1996 (inception) Year Ended Ended
Through December 31, March 31,
December 31, ------------- -------------
1996 1997 1998 1998 1999
---------------- ------ ------ ------ ------
(unaudited)
<S> <C> <C> <C> <C> <C>
Pro forma net loss (in
thousands)................ $1,267 $6,229 $8,579 $1,995 $4,172
Pro forma net loss per
share..................... $14.91 $4.96 $3.62 $1.00 $1.40
</TABLE>
The weighted average minimum value of options granted with an exercise price
less than the fair market value of stock on the date of grant were:
<TABLE>
<CAPTION>
Period From
January 30, Three Months
1996 (inception) Year Ended Ended
Through December 31, March 31,
December 31, ------------- -------------
1996 1997 1998 1998 1999
---------------- ------ ------ ------ ------
(unaudited)
<S> <C> <C> <C> <C> <C>
Weighted average minimum
value of options granted
during period............ $0.61 $ 1.80 $ 4.84 $ 4.08 $ 8.28
</TABLE>
Unearned stock-based compensation
In connection with certain stock option grants, the Company recognized
unearned compensation which is being amortized over the vesting periods of the
related options, usually four years, using an appropriate accelerated basis.
The total unearned compensation recorded by the Company from January 30, 1996
(inception) through March 31, 1999 was $4,374,000. The fair value per share
used to calculate unearned compensation was derived by reference to the
preferred stock values, reduced by a nominal discount factor (10%), since
inception. Future compensation charges are subject to reduction for any
employee who terminates employment prior to the expiration of such employee's
option vesting period.
F-21
<PAGE>
LIQUID AUDIO, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
The following table sets forth unearned compensation and the amortization of
unearned compensation (in thousands):
<TABLE>
<CAPTION>
Period From
January 30, Three Months
1996 (inception) Year Ended Ended
Through December 31, March 31,
December 31, ------------- -------------
1996 1997 1998 1998 1999
---------------- ------ ------ ------ ------
(unaudited)
<S> <C> <C> <C> <C> <C>
Unearned compensation....... $239 $1,888 $1,714 $192 $533
Amortization of unearned
compensation............... $ 31 $ 534 $1,241 $259 $425
</TABLE>
NOTE 8--INCOME TAXES:
The Company had approximately $13,000,000 and $16,800,000 (unaudited) of
federal and $12,900,000 and $16,600,000 (unaudited) of state net operating loss
carryforwards available to offset future taxable income at December 31, 1998
and March 31, 1999, respectively. The federal and state net operating loss
carryforwards expire in varying amounts beginning in 2011 and 2004,
respectively. At December 31, 1998, the Company had approximately $210,000 of
federal and $170,000 of state research and development credit carryforwards
available to offset future taxable income, which, in the case of the federal
carryforwards, expire in varying amounts beginning in 2011. Under the Tax
Reform Act of 1986, the amounts of and benefits from net operating loss
carryforwards may be impaired or limited in certain circumstances. Events that
cause limitations in the amount of net operating loss carryforwards that the
Company may utilize in any one year include, but are not limited to, a
cumulative ownership change of more than 50%, as defined, over a three-year
period. As a result of this offering, such a change in ownership is expected to
occur. Management has estimated that the net operating loss carryforwards from
inception will be limited to $7,500,000 annually.
Deferred taxes are composed of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
---------------- March 31,
1997 1998 1999
------- ------- -----------
(unaudited)
<S> <C> <C> <C>
Deferred tax assets (liabilities)
Depreciation and amortization............. $ (17) $ 12 $ 20
Other accruals and liabilities............ 151 102 408
Net operating loss and credit
carryforwards............................ 2,250 5,070 6,700
Research and development credit
carryforwards............................ 181 380 380
------- ------- -------
Total deferred tax assets................. 2,565 5,564 7,508
------- ------- -------
Less: Valuation allowance................. (2,565) (5,564) (7,508)
------- ------- -------
Net deferred tax assets.................... $ -- $ -- $ --
======= ======= =======
</TABLE>
The Company has incurred a loss in each period since its inception. Based on
the available objective evidence, including the Company's history of losses,
management believes it is more likely than not that the net deferred tax assets
will not be fully realizable. Accordingly, the Company has provided for a full
valuation allowance against its total deferred tax assets at December 31, 1997
and 1998 and March 31, 1999 (unaudited).
F-22
<PAGE>
LIQUID AUDIO, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
NOTE 9--COMMITMENTS AND CONTINGENCIES:
Leases
The Company leases its office facilities and certain equipment under
noncancelable operating lease agreements which expire at various dates through
2002. The terms of the facility lease provide for rental payments on a
graduated scale. The Company recognizes rent expense on a straight-line basis
over the lease period, and has accrued for rent expense incurred but not paid.
The lease requires that the Company pay all costs of maintenance, utilities,
insurance and taxes. Rent expense under these leases is as follows (in
thousands):
<TABLE>
<CAPTION>
Period From
January 30,
1996 Three Months
(inception) Year Ended Ended
Through December 31, March 31,
December 31, ------------- -------------
1996 1997 1998 1998 1999
------------ ------ ------ ------ ------
(unaudited)
<S> <C> <C> <C> <C> <C>
Rent expense..................... $32 $ 111 $ 294 $ 64 $ 77
</TABLE>
Future minimum lease payments under all noncancelable capital and operating
leases at December 31, 1998 are as follows (in thousands):
<TABLE>
<CAPTION>
Capital Operating
Year Ending December 31, Leases Leases
------------------------ ------- ---------
<S> <C> <C>
1999..................................................... $269 $241
2000..................................................... 188 234
2001..................................................... 86 216
2002..................................................... 19 189
---- ----
Total minimum payments............................... 562 $880
====
Less: amount representing interest....................... (35)
----
Present value of capital lease obligations............... 527
Less: Current portion.................................... (197)
----
Capital lease obligations, non-current portion........... $330
====
</TABLE>
Contingencies
From time to time, in the normal course of business, various claims are made
against the Company. In the opinion of the management, there are no pending
claims the outcome of which is expected to result in a material adverse effect
on the financial position or results of operations of the Company.
NOTE 10--SUBSEQUENT EVENTS:
Reincorporation
In April 1999, the Company was reincorporated in the State of Delaware. All
share information included in these financial statements has been adjusted to
reflect this reincorporation.
Employee Stock Purchase Plan
In April 1999, the Board of Directors adopted the 1999 Employee Stock
Purchase Plan (the "Purchase Plan") and reserved 500,000 shares of common stock
for issuance thereunder. The Purchase Plan was
F-23
<PAGE>
LIQUID AUDIO, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
approved by the stockholders in June 1999. On each January 1, the aggregate
number of shares reserved for issuance under the Purchase Plan will be
increased by the lesser of 750,000 shares, 3% of the outstanding shares on such
date or a lesser amount determined by the Board of Directors. The Purchase Plan
will become effective on the first business day on which price quotations for
the Company's common stock are available on the Nasdaq National Market.
Employees are eligible to participate if they are customarily employed by the
Company or any participating subsidiary for at least 20 hours per week and more
than five months in any calendar year and do not (i) immediately after grant
own stock possessing 5% or more of the total combined voting capital stock, or
(ii) possess rights to purchase stock under all of the employee stock purchase
plans at an accrual rate which exceeds $25,000 worth of stock for each calendar
year. The Purchase Plan permits participants to purchase common stock through
payroll deductions up to 15% of the participant's compensation, as defined in
the Purchase Plan, but limited to 2,500 shares per participant per purchase
period. Each offering period includes four six-month purchase periods which
will begin on June 1 and December 1 of each year, except for the offering
period which starts on the first trading day on or after the effective date the
public offering. The price at which the common stock is purchased under the
Purchase Plan is 85% of the lesser of the fair market value at the beginning of
the offering period or at the end of the purchase period. The Purchase Plan
will terminate after a period of ten years unless terminated earlier as
permitted by the Purchase Plan.
Stock Option Plan
In April 1999, the Board of Directors adopted an increase in the number of
shares reserved for issuance under the Company's 1996 Equity Incentive Plan
(the "Plan") by an additional 1,600,000 shares. The Plan was also amended to
provide for annual increases on January 1 equal to the lesser of 1,500,000
shares, 5% of the outstanding shares on such date or a lesser amount determined
by the Board of Directors.
Litigation
In April 1999, a former consultant of the Company filed a complaint against
the Company. The complaint alleges both breach of contract and fraud and seeks
approximately 588,000 shares of common stock. While there can be no assurances
as to the outcome of this litigation, the Company believes the complaint is
without merit, and intends to vigorously defend the complaint. No amount has
been accrued for any potential liability in relation to this matter.
In May 1999, an entity advised the Company that it believes the use of
certain of the Company's software tools and client software products together
infringes two patents to which this entity asserts it has rights. While there
can be no assurances as to the outcome of this claim, the Company believes the
claim is without merit, and intends to vigorously defend against the claim. No
amount has been accrued for any potential liability in relation to this matter.
Warrants
In March, May and June 1999, the Company signed strategic agreements with
several entities. Pursuant to these agreements, the Company issued warrants to
purchase approximately 396,000 shares of the Company's common stock at $6.56
per share of which 266,000 shares vest immediately and 127,000 shares vest over
a twelve month period commencing when the Company and the strategic entity sign
a definitive agreement to utilize the Company's technology. The warrants expire
through June 2004. With respect to the immediately vested shares, the Company
expects to value these warrants at approximately $2,200,000 which will be
recognized as sales and marketing expense over the term of the related
agreements.
License agreement
In June 1999, the Company signed an agreement with an entity to facilitate
the production, sale and distribution of music on the Internet utilizing the
Company's technology. Pursuant to this agreement, the Company issued and
delivered 100,000 shares of common stock to this entity. These shares have been
valued at $1,100,000.
F-24
<PAGE>
3,600,000 Shares
[LIQUID AUDIO LOGO]
Common Stock
-------------
PROSPECTUS
, 1999
-------------
Lehman Brothers
BancBoston Robertson Stephens
U.S. Bancorp Piper Jaffray
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the costs and expenses, other than the
underwriting discount, payable by the Registrant in connection with the sale of
the securities being registered. All amounts are estimates except the SEC
registration fee, the NASD filing fee and the Nasdaq National Market listing
fee.
<TABLE>
<S> <C>
SEC Registration Fee............................................... $ 16,680
NASD Filing Fee.................................................... 6,500
Nasdaq National Market Listing Fee................................. 94,000
Printing Costs..................................................... 150,000
Legal Fees and Expenses............................................ 300,000
Accounting Fees and Expenses....................................... 150,000
Blue Sky Fees and Expenses......................................... 10,000
Transfer Agent and Registrar Fees.................................. 10,000
Miscellaneous...................................................... 212,820
--------
Total............................................................ $950,000
========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the Delaware General Corporation Law authorizes a court to
award, or a corporation's Board of Directors to grant, indemnity to directors
and officers in terms sufficiently broad to permit such indemnification under
certain circumstances for liabilities (including reimbursement for expenses
incurred) arising under the Securities Act of 1933. Article VII of the Restated
Certificate of Incorporation to be filed upon the completion of this offering
(Exhibit 3.2 hereto) and Article VI of our Bylaws to be adopted upon the
completion of this offering (Exhibit 3.4 hereto) provide for indemnification of
our directors, officers, employees and other agents to the maximum extent
permitted by Delaware law. In addition, we have entered into Indemnification
Agreements (Exhibit 10.1 hereto) with our officers and directors that will
become effective upon the closing of this offering. The Underwriting Agreement
(Exhibit 1.1) also provides for cross-indemnification among Liquid Audio and
the Underwriters with respect to certain matters, including matters arising
under the Securities Act.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Since our incorporation in January 1996, we have sold and issued the
following securities:
1. On April 15, 1996 we issued 3,431,244 shares of common stock to seven
founders for an aggregate consideration of $4,574.99.
2. On May 31, 1996 we issued 2,286,591 shares of Series A mandatorily
redeemable convertible preferred stock (Series A) to seven investors for an
aggregate consideration of $1,500,004.68. On June 28, 1996 we issued
609,753 shares of Series A to one investor for an aggregate consideration
of $399,998.46. On July 30, 1996 we issued 153,645 shares (as adjusted for
stock splits) of Series A to the same investor to which we issued shares of
Series A on June 28, 1996, for an aggregate consideration of $100,791.12.
3. On May 5, 1997 we issued a warrant for 15,306 shares of Series B
mandatorily redeemable convertible preferred stock (Series B) to a bank in
connection with a short-term loan agreement. Such warrant has an exercise
price of $1.96 per share.
4. On May 23, 1997 we issued 2,421,581 shares of Series B to seven
investors for an aggregate consideration of $4,746,294.84. On May 28, 1997
we issued 765,307 shares of Series B to five investors, two of which we
issued shares of Series B to on May 23, 1997, for an aggregate
consideration of $1,499,999.76.
II-1
<PAGE>
5. On January 1, 1998 we issued a warrant for 48,860 shares of common
stock to one strategic partner. Such warrant has an exercise price of
$6.14 per share.
6. On January 1, 1998 we issued 38,316 shares of common stock to one
strategic partner for an aggregate consideration of $2,554.40.
7. On July 31, 1998 we issued 3,179,962 shares of Series C mandatorily
redeemable convertible preferred stock (Series C) to ten investors for an
aggregate consideration of $19,524,966.68. On September 25, 1998 we issued
325,732 shares of Series C to three investors for an aggregate
consideration of $1,999,994.48. On September 29, 1998 we issued 1,628
shares of Series C to one investor for an aggregate consideration of
$9,995.92.
8. On July 31, 1998 we issued a warrant for 4,544 shares of Series C to a
bank in connection with a short term loan agreement. Such warrant has an
exercise price of $6.14 per share.
9. On April 23, 1999 we issued 4,071 shares of common stock to one
employee for an aggregate consideration of $30,532.50.
10. From March 28 through April 30, 1999 we issued warrants exercisable
for a total of 12,000 shares of common stock to five strategic partners.
Such warrants have an exercise price of $6.56 per share.
11. On June 9, 1999 we issued warrants exercisable for a total of 381,203
shares of common stock to Amazon.com, Inc. Such warrants have an exercise
price of $6.56 per share.
12. On June 16, 1999 we issued 100,000 shares of common stock to Virgin
Holdings, Inc., an affiliate of EMI Recorded Music, in consideration for an
encoding license.
13. Since our incorporation, we have issued options to purchase an
aggregate of 2,386,230 shares of common stock with exercise prices ranging
from $0.0667 to $8.00 per share. Since our incorporation through June 15,
1999, we have issued 863,007 shares of common stock pursuant to stock
option exercises for an aggregate consideration of $113,694.33.
There were no underwriters employed in connection with any of the
transactions set forth in Item 15.
The issuances of securities described in Items 15(1) through 15(11) were
deemed to be exempt from registration under the Securities Act in reliance on
Section 4(2) of the Securities Act as transactions by an issuer not involving a
public offering. The issuances of securities described in Item 15(12) were
deemed to be exempt from registration under the Securities Act in reliance on
Section 4(2) or Rule 701 promulgated thereunder as transactions pursuant to
compensatory benefit plans and contracts relating to compensation.
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 the share certificates and other instruments issued in such
transactions. All recipients either received adequate information about the
Registrant or had access, through employment or other relationships, to such
information.
ITEM 16. EXHIBITS.
<TABLE>
<C> <S>
1.1 Form of Underwriting Agreement
3.1* Certificate of Incorporation as currently in effect
3.2* Form of Restated Certificate of Incorporation (to be filed with the
Delaware Secretary of State prior to the closing of the offering covered
by this Registration Statement)
3.3* Bylaws as currently in effect
3.4* Form of Bylaws (to be adopted upon the completion of the offering covered
by this Registration Statement)
4.1* Form of Specimen Stock Certificate
4.2* Second Amended and Restated Investor Rights Agreement dated July 31, 1998
</TABLE>
II-2
<PAGE>
<TABLE>
<C> <S>
5.1* Opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation,
regarding legality of the securities being issued
10.1* Form of Indemnification Agreement, entered into between the Registrant
and each of its directors and officers, to become effective upon the
closing of the offering made under this Registration Statement
10.2* 1996 Equity Incentive Plan
10.3* 1999 Employee Stock Purchase Plan
10.4* Licensing Agreement with SESAC dated May 21, 1998
10.5+* Software Cross License Agreement with Adaptec, Inc. dated June 12,
1998
10.6* Form of Liquid Music Network Agreement
10.7+* Letter Agreement with Compaq Computer Corporation dated March 23, 1998
10.8+* LA Agreement with Real Networks, Inc. dated April 26, 1998
10.9+* Binary Software License Agreement with Precept Software, Inc. dated
September 30, 1997
10.10+* Patent License Agreement with Fraunhofer-Gesellschaft, zur Forderung
der angewandten Forschung e.V. dated August 14, 1998
10.11+* Software License Agreement with Fraunhofer-Gesellschaft, zur Forderung
der angewandten Forschung e.V. dated August 14, 1998
10.12+* OEM Master License Agreement with RSA Data Security, Inc. dated July
18, 1997
10.13+* Agreement in Principle with N2K, Inc. dated February 12, 1997
10.14+* Patent License Agreement with Dolby Laboratories Licensing
Corporation, dated May 3, 1996
10.15+* Adjustment to Patent and License Agreement with Dolby Laboratories
Licensing Corporation, dated September 18, 1997
10.16+* Source Code, Trademark and Know-How License Agreement with Dolby
Laboratories Licensing Corporation dated May 3, 1996
10.17* Founders Restricted Stock Purchase Agreement (with amendments) with
Gerald W. Kearby dated April 25, 1996
10.18* Founders Restricted Stock Purchase Agreement (with amendments) with
Philip R. Wiser dated April 25, 1996
10.19* Founders Restricted Stock Purchase Agreement (with amendments) with
Robert G. Flynn dated April 25, 1996
10.20* Master Equipment Lease No. 0044 (with amendments) with Phoenix Leasing
Incorporated dated as of October 15, 1996
10.21* Summary Plan Description of 401(k) Plan
10.22* Loan and Security Agreement with Silicon Valley Bank dated April 16,
1998
10.23* Loan and Security Agreement with Silicon Valley Bank dated November
16, 1998
10.24* Lease Agreement with Master Lease, a Division of Tokai Financial
Services, Inc., dated March 3, 1998
10.25* Lease Agreement with John Anagnostou Realty and Michael J. Monte,
dated February 16, 1999, for property located at 2221 Broadway,
Redwood City, California
10.26* Lease and Service Agreement with Alliance Business Centers, dated
August 17, 1998, and Office Rider dated February 1, 1999, for
property located at 599 Lexington Avenue, New York, New York
10.27* Lease Agreement with New Retail Concepts Ltd., dated September 1,
1998, for property located at 21 Bridge Square, Westport, Connecticut
</TABLE>
II-3
<PAGE>
<TABLE>
<C> <S>
10.28* Commercial Lease with Jim and Jeannette Beeger, dated November 3,
1998, for property located at 820 Winslow Street, Redwood City,
California
10.29* Commercial Lease with John Anagnostou Realty, dated October 9, 1997,
for property located at 810 Winslow Street, Redwood City, California
10.30+ Software Reseller Agreement with Liquid Audio Japan, dated as of
August 9, 1998
10.31+* Shareholder Agreement with Super Stage, Inc., Liquid Audio Japan,
Inc., ITOCHU Corporation, and Hikari Tsushin, Inc., dated March 31,
1999
10.32 Loan Agreement with Super Factory, Inc., dated March 31, 1999
10.33+* Share Sale and Purchase and Option Agreement with Super Stage, Inc.,
dated March 31, 1999
10.34+ Shareholders Agreement with SKM Limited and Liquid Audio Korea Co.
Ltd. dated December 31, 1998
10.35+* Software Reseller and Services Agreement with Liquid Audio Korea Co.
Ltd. dated December 31, 1998
10.36+* Consulting Agreement with Liquid Audio Korea Co. Ltd. dated December
31, 1998
10.37+ Consulting Agreement with SKM Limited dated December 31, 1998
10.38* Guaranty issued to Liquid Audio, Inc. by SKM Limited dated December
31, 1998
10.39* Software License Agreement with Intel Corporation dated May 4, 1999
10.40* Liquid Remote Inventory Fulfillment System(TM) Merchant Affiliate and
License Agreement with MTS, Inc. dated May 14, 1999
10.41+* OEM Agreement with Sanyo Electric Co., Ltd. dated June 2, 1999
10.42* Amazon.com/Liquid Audio Advertising Agreement, including exhibits,
dated as of June 9, 1999
10.43+* Online Program Agreement with Muze Inc., dated as of February 9, 1999
10.44* Letter Agreement By and Between Texas Instruments Incorporated, dated
as of January 29, 1999
10.45+* OEM Agreement with Toshiba Corporation, dated June 9, 1999
10.46 Agreement with Iomega Corporation, dated November 14, 1999
10.47* Stock Option Agreement with Gary J. Iwatani, dated November 10, 1997
10.48* Letter Agreement with Virgin Holdings, Inc., an affiliate of EMI
Recorded Music, dated June 16, 1999
23.1 Consent of PricewaterhouseCoopers LLP
23.2* Consent of Wilson Sonsini Goodrich & Rosati, Professional Corporation
(contained in Exhibit 5.1)
24.1* Power of Attorney (contained in the signature page to this
Registration Statement)
27.1* Financial Data Schedule
</TABLE>
- --------
* previously filed
+ confidential treatment requested
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes to provide to the underwriters
at the closing specified in the underwriting agreements certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise,
II-4
<PAGE>
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 Securities Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the registrant of expenses incurred or paid by a director, officer, or
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this amendment to registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Palo Alto,
State of California on June 30, 1999.
/s/ Gerald W. Kearby
By:__________________________________
Gerald W. Kearby
Chief Executive Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS REGISTRATION
STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE
DATE INDICATED:
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Gerald W. Kearby President, Chief Executive June 30, 1999
____________________________________ Officer and Director
Gerald W. Kearby (Principal Executive
Officer)
/s/ Gary J. Iwatani Chief Financial Officer June 30, 1999
____________________________________ (Principal Financial and
Gary J. Iwatani Accounting Officer)
/s/ Philip R. Wiser * Vice President of June 30, 1999
____________________________________ Engineering, Chief
Philip R. Wiser Technical Officer and
Director
/s/ Ann Winbald * Director June 30, 1999
____________________________________
Ann Winblad
/s/ Silvia Kessel * Director June 30, 1999
____________________________________
Silvia Kessel
/s/ Sanford R. Climan * Director June 30, 1999
____________________________________
Sanford R. Climan
/s/ Eric Robison * Director June 30, 1999
____________________________________
Eric P. Robison
</TABLE>
/s/ Gary J. Iwatani
*By:___________________________
Gary J. Iwatani
Attorney-in-fact
II-6
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
No. Title
------- -----
<C> <S>
1.1 Form of Underwriting Agreement
3.1* Certificate of Incorporation as currently in effect
3.2* Form of Restated Certificate of Incorporation (to be filed with the
Delaware Secretary of State prior to the closing of the offering
covered by this Registration Statement)
3.3* Bylaws as currently in effect
3.4* Form of Bylaws (to be adopted upon the completion of the offering
covered by this Registration Statement)
4.1* Form of Specimen Stock Certificate
4.2* Second Amended and Restated Investor Rights Agreement dated July 31,
1998
5.1* Opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation,
regarding legality of the securities being issued
10.1* Form of Indemnification Agreement, to be entered into between the
Registrant and each of its directors and officers, to become
effective upon the closing of the offering made under this
Registration Statement
10.2* 1996 Equity Incentive Plan
10.3* 1999 Employee Stock Purchase Plan
10.4* Licensing Agreement with SESAC dated May 21, 1998
10.5+* Software Cross License Agreement with Adaptec, Inc. dated June 12,
1998
10.6* Form of Liquid Music Network Agreement
10.7+* Letter Agreement with Compaq Computer Corporation dated March 23, 1998
10.8+ LA Agreement with Real Networks, Inc. dated April 26, 1998 and
Amendment dated May 4, 1999
10.9+* Binary Software License Agreement with Precept Software, Inc. dated
September 30, 1997
10.10+ Patent License Agreement with Fraunhofer-Gesellschaft, zur Forderung
der angewandten Forschung e.V. dated August 14, 1998
10.11+ Software License Agreement with Fraunhofer-Gesellschaft, zur Forderung
der angewandten Forschung e.V. dated August 14, 1998
10.12+ OEM Master License Agreement with RSA Data Security, Inc. dated July
18, 1997
10.13+* Agreement in Principle with N2K, Inc. dated February 12, 1997
10.14+* Patent License Agreement with Dolby Laboratories Licensing
Corporation, dated May 3, 1996
10.15+ Adjustment to Patent and License Agreement with Dolby Laboratories
Licensing Corporation, dated September 18, 1997
10.16+ Source Code, Trademark and Know-How License Agreement with Dolby
Laboratories Licensing Corporation dated May 3, 1996
10.17* Founders Restricted Stock Purchase Agreement (with amendments) with
Gerald W. Kearby dated April 25, 1996
10.18* Founders Restricted Stock Purchase Agreement (with amendments) with
Philip R. Wiser dated April 25, 1996
10.19* Founders Restricted Stock Purchase Agreement (with amendments) with
Robert G. Flynn dated April 25, 1996
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Title
------- -----
<C> <S>
10.20* Master Equipment Lease No. 0044 (with amendments) with Phoenix Leasing
Incorporated dated as of October 15, 1996
10.21* Summary Plan Description of 401(k) Plan
10.22* Loan and Security Agreement with Silicon Valley Bank dated April 16,
1998
10.23* Loan and Security Agreement with Silicon Valley Bank dated November
16, 1998
10.24* Lease Agreement with Master Lease, a Division of Tokai Financial
Services, Inc., dated March 3, 1998
10.25* Lease Agreement with John Anagnostou Realty and Michael J. Monte,
dated February 16, 1999, for property located at 2221 Broadway,
Redwood City, California
10.26* Lease and Service Agreement with Alliance Business Centers, dated
August 17, 1998, and Office Rider dated February 1, 1999, for property
located at 599 Lexington Avenue, New York, New York
10.27* Lease Agreement with New Retail Concepts Ltd., dated September 1,
1998, for property located at 21 Bridge Square, Westport, Connecticut
10.28* Commercial Lease with Jim and Jeannette Beeger, dated November 3,
1998, for property located at 820 Winslow Street, Redwood City,
California
10.29* Commercial Lease with John Anagnostou Realty, dated October 9, 1997,
for property located at 810 Winslow Street, Redwood City, California
10.30+ Software Reseller Agreement with Liquid Audio Japan, dated as of
August 9, 1998
10.31+* Shareholder Agreement with Super Stage, Inc., Liquid Audio Japan,
Inc., ITOCHU Corporation, and Hikari Tsushin, Inc., dated March 31,
1999
10.32 Loan Agreement with Super Factory, Inc., dated March 31, 1999
10.33+* Share Sale and Purchase and Option Agreement with Super Stage, Inc.,
dated March 31, 1999
10.34+ Shareholders Agreement with SKM Limited and Liquid Audio Korea Co.
Ltd. dated December 31, 1998
10.35+* Software Reseller and Services Agreement with Liquid Audio Korea Co.
Ltd. dated December 31, 1998
10.36+* Consulting Agreement with Liquid Audio Korea Co. Ltd. dated December
31, 1998
10.37+ Consulting Agreement with SKM Limited dated December 31, 1998
10.38* Guaranty issued to Liquid Audio, Inc. by SKM Limited dated December
31, 1998
10.39* Software License Agreement with Intel Corporation dated May 4, 1999
10.40* Liquid Remote Inventory Fulfillment System(TM) Merchant Affiliate and
License Agreement with MTS, Inc. dated May 14, 1999
10.41+* OEM Agreement with Sanyo Electric Co., Ltd. dated June 2, 1999
10.42* Amazon.com/Liquid Audio Advertising Agreement, including exhibits,
dated as of June 9, 1999
10.43+* Online Program Agreement with Muze Inc., dated as of February 9, 1999
10.44* Letter Agreement By and Between Texas Instruments Incorporated, dated
as of January 29, 1999
10.45+* OEM Agreement with Toshiba Corporation, dated June 9, 1999
10.46 Agreement with Iomega Corporation, dated November 14, 1998
10.47* Stock Option Agreement with Gary J. Iwatani, dated November 10, 1997
10.48* Letter Agreement with Virgin Holdings, Inc., an affiliate of EMI
Recorded Music, dated June 16, 1999
23.1 Consent of PricewaterhouseCoopers LLP
23.2* Consent of Wilson Sonsini Goodrich & Rosati, Professional Corporation
(contained in Exhibit 5.1)
24.1* Power of Attorney (contained in the signature page to this
Registration Statement)
27.1* Financial Data Schedule
</TABLE>
- --------
* previously filed
+ confidential treatment requested
<PAGE>
EXHIBIT 1.1
DRAFT
3,600,000 Shares
LIQUID AUDIO, INC.
Common Stock, $0.001 par value per share
UNDERWRITING AGREEMENT
----------------------
_________ __, 1999
Lehman Brothers Inc.
BancBoston Robertson Stephens Inc.
U.S. Bancorp Piper Jaffray Inc.
As Representatives of the several
Underwriters named in Schedule 1,
c/o Lehman Brothers Inc.
Three World Financial Center
New York, New York 10285
Dear Sirs:
Liquid Audio, Inc., a Delaware corporation (the "Company"), proposes
to sell 3,600,000 shares (the "Firm Stock") of the Company's Common Stock, par
value $0.001 per share (the "Common Stock"). In addition, the Company proposes
to grant to the Underwriters named in Schedule 1 hereto (the "Underwriters") an
option to purchase up to an additional 540,000 shares of the Common Stock on the
terms and for the purposes set forth in Section 3 (the "Option Stock"). The Firm
Stock and the Option Stock, if purchased, are hereinafter collectively called
the "Stock." This is to confirm the agreement concerning the purchase of the
Stock from the Company by the Underwriters.
1. Representations, Warranties and Agreements of the Company. The
Company represents, warrants and agrees that:
(a) A registration statement on Form S-1, and amendments
thereto, with respect to the Stock has (i) been prepared by the Company in
conformity with the requirements of the United States Securities Act of 1933
(the "Securities Act") and the rules and regulations (the "Rule and
Regulations") of the United States Securities and Exchange Commission (the
"Commission") thereunder, (ii) been filed with the Commission under the
Securities Act and (iii) become effective under the Securities Act. Copies of
such registration statement and the amendments thereto have been delivered by
the Company to you as the representatives (the "Representatives") of the
Underwriters. As used in this Agreement, "Effective Time" means the date and the
time as of which such registration statement, or the most recent post-effective
amendment thereto, if any, was declared effective by the Commission; "Effective
Date" means the date of the Effective Time; "Preliminary Prospectus" means each
prospectus included in such registration statement, or amendments thereof,
before it became effective under the Securities Act and any prospectus filed
with the Commission by
<PAGE>
the Company with the consent of the Representatives pursuant to Rule 424(a) of
the Rules and Regulations; "Registration Statement" means such registration
statement, as amended at the Effective Time, including all information contained
in the final prospectus filed with the Commission pursuant to Rule 424(b) of the
Rules and Regulations in accordance with Section 5(a) hereof and deemed to be a
part of the registration statement as of the Effective Time pursuant to
paragraph (b) of Rule 430A of the Rules and Regulations; and "Prospectus" means
such final prospectus, as first filed with the Commission pursuant to paragraph
(1) or (4) of Rule 424(b) of the Rules and Regulations. The Commission has not
issued any order preventing or suspending the use of any Preliminary Prospectus.
(b) The Registration Statement conforms, and the Prospectus and any
further amendments or supplements to the Registration Statement or the
Prospectus will, when they become effective or are filed with the Commission, as
the case may be, conform in all respects to the requirements of the Securities
Act and the Rules and Regulations and do not and will not, as of the applicable
effective date (as to the Registration Statement and any amendment thereto) and
as of the applicable filing date (as to the Prospectus and any amendment or
supplement thereto) contain an untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading; provided that no representation or warranty
is made as to information contained in or omitted from the Registration
Statement or the Prospectus in reliance upon and in conformity with written
information furnished to the Company through the Representatives by or on behalf
of any Underwriter specifically for inclusion therein.
(c) The Company and each of its subsidiaries have been duly
incorporated and are validly existing as corporations in good standing under the
laws of their respective jurisdictions of incorporation, are duly qualified to
do business and are in good standing as foreign corporations in each
jurisdiction in which their respective ownership or lease of property or the
conduct of their respective businesses requires such qualification, and have all
power and authority necessary to own or hold their respective properties and to
conduct the businesses in which they are engaged; and none of the subsidiaries
of the Company is a "significant subsidiary," as such term is defined under Rule
405 of the Rules and Regulations.
(d) The Company has an authorized capitalization as set forth in the
Prospectus, and all of the issued shares of capital stock of the Company have
been duly and validly authorized and issued, are fully paid and non-assessable
and conform to the description thereof contained in the Prospectus; and all of
the issued shares of capital stock of each subsidiary of the Company have been
duly and validly authorized and are fully paid and non-assessable and all of the
shares of each subsidiary of the Company owned directly or indirectly by the
Company are owned free and clear of all liens, encumbrances, equities and claims
(e) The shares of the Stock to be issued and sold by the Company to
the Underwriters hereunder have been duly and validly authorized and, when
issued and delivered against payment therefor as provided herein, will be duly
and validly issued, fully paid and non-assessable, and the Stock will conform to
the descriptions thereof contained in the Prospectus.
(f) This Agreement has been duly authorized, executed and delivered by
the Company.
2
<PAGE>
(g) The execution, delivery and performance of this Agreement by the
Company and the consummation of the transactions contemplated hereby will not
conflict with or result in a breach or violation of any of the terms or
provisions of, or constitute a default under, any indenture, mortgage, deed of
trust, loan agreement or other agreement or instrument to which the Company or
any of its subsidiaries is a party or by which the Company or any of its
subsidiaries is bound or to which any of the property or assets of the Company
or any of its subsidiaries is subject, nor will such actions result in any
violation of the provisions of the charter or by-laws of the Company or any of
its subsidiaries or any statute or any order, rule or regulation of any court or
governmental agency or body having jurisdiction over the Company or any of its
subsidiaries or any of their properties or assets; and except for the
registration of the Stock under the Securities Act and such consents, approvals,
authorizations, registrations or qualifications as may be required under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and applicable
state securities laws in connection with the purchase and distribution of the
Stock by the Underwriters, no consent, approval, authorization or order of, or
filing or registration with, any such court or governmental agency or body is
required for the execution, delivery and performance of this Agreement by the
Company and the consummation of the transactions contemplated hereby.
(h) Except as set forth in the Prospectus, there are no contracts,
agreements or understandings between the Company and any person granting such
person the right (other than rights which have been waived or satisfied) to
require the Company to file a registration statement under the Securities Act
with respect to any securities of the Company owned or to be owned by such
person or to require the Company to include such securities in the securities
registered pursuant to the Registration Statement or in any securities being
registered pursuant to any other registration statement filed by the Company
under the Securities Act.
(i) Except as described in the Prospectus, the Company has not sold or
issued any shares of Common Stock during the six-month period preceding the date
of the Prospectus, including any sales pursuant to Rule 144A under, or
Regulations D or S of, the Securities Act, other than shares issued pursuant to
employee benefit plans, qualified stock options plans or other employee
compensation plans or pursuant to outstanding options, rights or warrants
outstanding prior to the commencement of such six-month period.
(j) Neither the Company nor any of its subsidiaries has sustained,
since the date of the latest audited financial statements included in the
Prospectus, any material loss or interference with its business from fire,
explosion, flood or other calamity, whether or not covered by insurance, or from
any labor dispute or court or governmental action, order or decree, otherwise
than as set forth or contemplated in the Prospectus; and, since such date, there
has not been any change in the capital stock or long-term debt of the Company or
any of its subsidiaries or any material adverse change, or any development
involving a prospective material adverse change, in or affecting the general
affairs, management, financial position, stockholders' equity or results of
operations of the Company and its subsidiaries, otherwise than as set forth or
contemplated in the Prospectus.
(k) The financial statements (including the related notes and
supporting schedules) filed as part of the Registration Statement or included in
the Prospectus present fairly the financial condition and results of operations
of the entities purported to be shown thereby, at the
3
<PAGE>
dates and for the periods indicated, and have been prepared in conformity with
generally accepted accounting principles applied on a consistent basis
throughout the periods involved. The selected and summary financial and
statistical data and information included in the Registration Statement present
fairly the information shown therein and have been compiled on a basis
substantially consistent with the financial statements presented therein.
(l) PricewaterhouseCoopers LLP, who have certified certain financial
statements of the Company, whose report appears in the Prospectus and who have
delivered the initial letter referred to in Section 7(f) hereof, are independent
public accountants as required by the Securities Act and the Rules and
Regulations and were independent accountants as required by the Securities Act
and the Rules and Regulations during the periods covered by the financial
statements on which they reported contained in the Prospectus.
(m) The Company and each of its subsidiaries have good and marketable
title in fee simple to all real property and good and marketable title to all
personal property owned by them, in each case free and clear of all liens,
encumbrances and defects except such as are described in the Prospectus or such
as do not materially affect the value of such property and do not materially
interfere with the use made and proposed to be made of such property by the
Company and its subsidiaries; and all real property and buildings held under
lease by the Company and its subsidiaries are held by them under valid,
subsisting and enforceable leases, with such exceptions as are not material and
do not interfere with the use made and proposed to be made of such property and
buildings by the Company and its subsidiaries.
(n) The Company and each of its subsidiaries carry, or are covered by,
insurance in such amounts and covering such risks as is adequate for the conduct
of their respective businesses and the value of their respective properties and
as is customary for companies engaged in similar businesses in similar
industries.
(o) Except as described in the Prospectus, the Company and each of its
subsidiaries own or possess adequate rights to use all material patents, patent
applications, trademarks, service marks, trade names, trademark registrations,
service mark registrations, copyrights and licenses necessary for the conduct of
their respective businesses and have no reason to believe that the conduct of
their respective businesses will conflict with, and have not received any notice
of any claim of conflict with, any such rights of others.
(p) There are no legal or governmental proceedings pending to which
the Company or any of its subsidiaries is a party or of which any property or
assets of the Company or any of its subsidiaries is the subject which, if
determined adversely to the Company or any of its subsidiaries, might have a
material adverse effect on the consolidated financial position, stockholders'
equity, results of operations, business or prospects of the Company and its
subsidiaries; and to the best of the Company's knowledge, no such proceedings
are threatened or contemplated by governmental authorities or threatened by
others.
(q) There are no contracts or other documents which are required to be
described in the Prospectus or filed as exhibits to the Registration Statement
by the Securities Act or
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by the Rules and Regulations which have not been described in the Prospectus or
filed as exhibits to the Registration Statement.
(r) No relationship, direct or indirect, exists between or among the
Company on the one hand, and the directors, officers, stockholders, customers or
suppliers of the Company on the other hand, which is required to be described in
the Prospectus which is not so described.
(s) No labor disturbance by the employees of the Company exists or, to
the knowledge of the Company, is imminent which might be expected to have a
material adverse effect on the consolidated financial position, stockholders'
equity, results of operations, business or prospects of the Company and its
subsidiaries.
(t) The Company is in compliance in all material respects with all
presently applicable provisions of the Employee Retirement Income Security Act
of 1974, as amended, including the regulations and published interpretations
thereunder ("ERISA"); no "reportable event" (as defined in ERISA) has occurred
with respect to any "pension plan" (as defined in ERISA) for which the Company
would have any liability; the Company has not incurred and does not expect to
incur liability under (i) Title IV of ERISA with respect to termination of, or
withdrawal from, any "pension plan" or (ii) Sections 412 or 4971 of the Internal
Revenue Code of 1986, as amended, including the regulations and published
interpretations thereunder (the "Code"); and each "pension plan" for which the
Company would have any liability that is intended to be qualified under Section
401(a) of the Code is so qualified in all material respects and nothing has
occurred, whether by action or by failure to act, which would cause the loss of
such qualification.
(u) The Company has filed all federal, state and local income and
franchise tax returns required to be filed through the date hereof and has paid
all taxes due thereon, and no tax deficiency has been determined adversely to
the Company or any of its subsidiaries which has had (nor does the Company have
any knowledge of any tax deficiency which, if determined adversely to the
Company or any of its subsidiaries might have) a material adverse effect on the
consolidated financial position, stockholders' equity, results of operations,
business or prospects of the Company and its subsidiaries.
(v) Since the date as of which information is given in the Prospectus
through the date hereof, and except as may otherwise be disclosed in the
Prospectus, the Company has not (i) issued or granted any securities, (ii)
incurred any liability or obligation, direct or contingent, other than
liabilities and obligations which were incurred in the ordinary course of
business, (iii) entered into any transaction not in the ordinary course of
business or (iv) declared or paid any dividend on its capital stock.
(w) The Company (i) makes and keeps accurate books and records and
(ii) maintains internal accounting controls which provide reasonable assurance
that (A) transactions are executed in accordance with management's
authorization, (B) transactions are recorded as necessary to permit preparation
of its financial statements and to maintain accountability for its assets, (C)
access to its assets is permitted only in accordance with management's
authorization and (D) the reported accountability for its assets is compared
with existing assets at reasonable intervals.
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(x) Neither the Company nor any of its subsidiaries is (i) in
violation of its charter or by-laws, (ii) in default in any material respect,
and no event has occurred which, with notice or lapse of time or both, would
constitute such a default, in the due performance or observance of any term,
covenant or condition contained in any material indenture, mortgage, deed of
trust, loan agreement or other agreement or instrument to which it is a party or
by which it is bound or to which any of its properties or assets is subject or
(iii) in violation in any material respect of any law, ordinance, governmental
rule, regulation or court decree to which it or its property or assets may be
subject or has failed to obtain any material license, permit, certificate,
franchise or other governmental authorization or permit necessary to the
ownership of its property or to the conduct of its business.
(y) Neither the Company nor any of its subsidiaries, nor any
director, officer, agent, employee or other person associated with or acting on
behalf of the Company or any of its subsidiaries, has used any corporate funds
for any unlawful contribution, gift, entertainment or other unlawful expense
relating to political activity; made any direct or indirect unlawful payment to
any foreign or domestic government official or employee from corporate funds;
violated or is in violation of any provision of the Foreign Corrupt Practices
Act of 1977; or made any bribe, rebate, payoff, influence payment, kickback or
other unlawful payment.
(z) There has been no storage, disposal, generation, manufacture,
refinement, transportation, handling or treatment of toxic wastes, medical
wastes, hazardous wastes or hazardous substances by the Company or any of its
subsidiaries (or, to the knowledge of the Company, any of their predecessors in
interest) at, upon or from any of the property now or previously owned or leased
by the Company or any of its subsidiaries in violation of any applicable law,
ordinance, rule, regulation, order, judgment, decree or permit or which would
require remedial action under any applicable law, ordinance, rule, regulation,
order, judgment, decree or permit, except for any violation or remedial action
which would not have, or could not be reasonably likely to have, singularly or
in the aggregate with all such violations and remedial actions, a material
adverse effect on the consolidated financial position, stockholders' equity,
results of operations, business or prospects of the Company and its
subsidiaries; there has been no material spill, discharge, leak, emission,
injection, escape, dumping or release of any kind onto such property or into the
environment surrounding such property of any toxic wastes, medical wastes, solid
wastes, hazardous wastes or hazardous substances due to or caused by the Company
or any of its subsidiaries or with respect to which the Company or any of its
subsidiaries have knowledge, except for any such spill, discharge, leak,
emission, injection, escape, dumping or release which would not have or would
not be reasonably likely to have, singularly or in the aggregate with all such
spills, discharges, leaks, emissions, injections, escapes, dumpings and
releases, a material adverse effect on the consolidated financial position,
stockholders' equity, results of operations, business or prospects of the
Company and its subsidiaries; and the terms "hazardous wastes", "toxic wastes",
"hazardous substances" and "medical wastes" shall have the meanings specified in
any applicable local, state, federal and foreign laws or regulations with
respect to environmental protection.
(aa) The Company is not an "investment company" within the meaning of
such term under the Investment Company Act of 1940 and the rules and regulations
of the Commission thereunder.
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(ab) The Company has reviewed, and is continuing to review, its
operations and products to evaluate the extent to which the business or
operations of the Company or any of its subsidiaries will be affected by the
Year 2000 Problem (that is, any significant risk that computer hardware or
software applications used by the Company or any of its subsidiaries will not,
in the case of dates or time periods occurring after December 31, 1999, function
at least as effectively as in the case of dates or time periods occurring prior
to January 1, 2000); as a result of such review, (i) the Company has no reason
to believe, and does not believe, that (A) there are any issues related to the
Company's or its subsidiaries' preparedness to address the Year 2000 Problem
that are of a character required to be described or referred to in the
Registration Statement or Prospectus which have not been accurately described in
the Registration Statement or Prospectus and (B) the Year 2000 Problem will have
a material adverse effect on the consolidated financial position, stockholders'
equity, results of operations, business or prospects of the Company and its
subsidiaries, or result in any material loss or interference with the business
or operations of the Company or any of its subsidiaries; and (ii) to the
Company's knowledge, the suppliers, vendors, customers or other material third
parties used or served by the Company or any of its subsidiaries are addressing
or will address the Year 2000 Problem in a timely manner, except to the extent
that a failure to address the Year 2000 Problem by any supplier, vendor,
customer or material third party would not have a material adverse effect on the
consolidated financial position, stockholders' equity, results of operations,
business or prospects of the Company and its subsidiaries.
2. Purchase of the Stock by the Underwriters. On the basis of the
representations and warranties contained in, and subject to the terms and
conditions of, this Agreement, the Company agrees to sell 3,600,000 shares of
the Firm Stock to the several Underwriters and each of the Underwriters,
severally and not jointly, agrees to purchase the number of shares of the Firm
Stock set opposite that Underwriter's name in Schedule 1 hereto. The respective
purchase obligations of the Underwriters with respect to the Firm Stock shall be
rounded among the Underwriters to avoid fractional shares, as the
Representatives may determine.
In addition, the Company grants to the Underwriters an option to
purchase up to 540,000 shares of Option Stock. Such option is granted for the
purpose of covering over-allotments in the sale of Firm Stock and is exercisable
as provided in Section 4 hereof. Shares of Option Stock shall be purchased
severally for the account of the Underwriters in proportion to the number of
shares of Firm Stock set opposite the name of such Underwriters in Schedule 1
hereto. The respective purchase obligations of each Underwriter with respect to
the Option Stock shall be adjusted by the Representatives so that no Underwriter
shall be obligated to purchase Option Stock other than in 100 share amounts.
The price of both the Firm Stock and any Option Stock shall be $_____ per share.
The Company shall not be obligated to deliver any of the Stock to be
delivered on any Delivery Date (as hereinafter defined), as the case may be,
except upon payment for all the Stock to be purchased on such Delivery Date as
provided herein.
3. Offering of Stock by the Underwriters.
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Upon authorization by the Representatives of the release of the Firm
Stock, the several Underwriters propose to offer the Firm Stock for sale upon
the terms and conditions set forth in the Prospectus.
It is understood that 180,000 shares of the Firm Stock will initially
be reserved by the several Underwriters for offer and sale upon the terms and
conditions set forth in the Prospectus and in accordance with the rules and
regulations of the National Association of Securities Dealers, Inc. to employees
and persons having business relationships with the Company who have heretofore
delivered to the Representatives offers to purchase shares of Firm Stock in form
satisfactory to the Representatives, and that any allocation of such Firm Stock
among such persons will be made in accordance with timely directions received by
the Representatives from the Company; provided, that under no circumstances will
the Representatives or any Underwriter be liable to the Company or to any such
person for any action taken or omitted in good faith in connection with such
offering to employees and persons having business relationships with the
Company. It is further understood that any shares of such Firm Stock which are
not purchased by such persons will be offered by the Underwriters to the public
upon the terms and conditions set forth in the Prospectus.
4. Delivery of and Payment for the Stock. Delivery of and payment
for the Firm Stock shall be made at the office of Wilson Sonsini Goodrich &
Rosati, P.C., 650 Page Mill Road, Palo Alto, California 94304 at 7:00 A.M.,
California time, on the [FOURTH] full business day following the date of this
Agreement or at such other date or place as shall be determined by agreement
between the Representatives and the Company. This date and time are sometimes
referred to as the "First Delivery Date." On the First Delivery Date, the
Company shall deliver or cause to be delivered certificates representing the
Firm Stock to the Representatives for the account of each Underwriter against
payment to or upon the order of the Company of the purchase price by wire
transfer in immediately available funds to a bank account designated by the
Company. Time shall be of the essence, and delivery at the time and place
specified pursuant to this Agreement is a further condition of the obligation of
each Underwriter hereunder. Upon delivery, the Firm Stock shall be registered
in such names and in such denominations as the Representatives shall request in
writing not less than two full business days prior to the First Delivery Date.
For the purpose of expediting the checking and packaging of the certificates for
the Firm Stock, the Company shall make the certificates representing the Firm
Stock available for inspection by the Representatives in New York, New York, not
later than 2:00 P.M., New York City time, on the business day prior to the First
Delivery Date.
The option granted in Section 2 will expire 30 days after the date of
this Agreement and may be exercised in whole or in part from time to time by
written notice being given to the Company by the Representatives. Such notice
shall set forth the aggregate number of shares of Option Stock as to which the
option is being exercised, the names in which the shares of Option Stock are to
be registered, the denominations in which the shares of Option Stock are to be
issued and the date and time, as determined by the Representatives, when the
shares of Option Stock are to be delivered; provided, however, that this date
and time shall not be earlier than the First Delivery Date nor earlier than the
second business day after the date on which the option shall have been exercised
nor later than the fifth business day after the date on which the option shall
have been exercised. The date and time the shares of Option Stock are delivered
are sometimes referred to as a
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"Second Delivery Date" and the First Delivery Date and any Second Delivery Date
are sometimes each referred to as a "Delivery Date".
Delivery of and payment for the Option Stock shall be made at the
place specified in the first sentence of the first paragraph of this Section 4
(or at such other place as shall be determined by agreement between the
Representatives and the Company) at 7:00 A.M., California time, on such Second
Delivery Date. On such Second Delivery Date, the Company shall deliver or cause
to be delivered the certificates representing the Option Stock to the
Representatives for the account of each Underwriter against payment to or upon
the order of the Company of the purchase price by wire transfer in immediately
available funds. Time shall be of the essence, and delivery at the time and
place specified pursuant to this Agreement is a further condition of the
obligation of each Underwriter hereunder. Upon delivery, the Option Stock shall
be registered in such names and in such denominations as the Representatives
shall request in the aforesaid written notice. For the purpose of expediting
the checking and packaging of the certificates for the Option Stock, the Company
shall make the certificates representing the Option Stock available for
inspection by the Representatives in New York, New York, not later than 2:00
P.M., New York City time, on the business day prior to such Second Delivery
Date.
5. Further Agreements of the Company. The Company agrees:
(a) To prepare the Prospectus in a form approved by the
Representatives and to file such Prospectus pursuant to Rule 424(b) under the
Securities Act not later than Commission's close of business on the second
business day following the execution and delivery of this Agreement or, if
applicable, such earlier time as may be required by Rule 430A(a)(3) under the
Securities Act; to make no further amendment or any supplement to the
Registration Statement or to the Prospectus except as permitted herein; to
advise the Representatives, promptly after it receives notice thereof, of the
time when any amendment to the Registration Statement has been filed or becomes
effective or any supplement to the Prospectus or any amended Prospectus has been
filed and to furnish the Representatives with copies thereof; to advise the
Representatives, promptly after it receives notice thereof, of the issuance by
the Commission of any stop order or of any order preventing or suspending the
use of any Preliminary Prospectus or the Prospectus, of the suspension of the
qualification of the Stock for offering or sale in any jurisdiction, of the
initiation or threatening of any proceeding for any such purpose, or of any
request by the Commission for the amending or supplementing of the Registration
Statement or the Prospectus or for additional information; and, in the event of
the issuance of any stop order or of any order preventing or suspending the use
of any Preliminary Prospectus or the Prospectus or suspending any such
qualification, to use promptly its best efforts to obtain its withdrawal;
(b) To furnish promptly to each of the Representatives and to
counsel for the Underwriters a signed copy of the Registration Statement as
originally filed with the Commission, and each amendment thereto filed with the
Commission, including all consents and exhibits filed therewith;
(c) To deliver promptly to the Representatives such number of
the following documents as the Representatives shall reasonably request: (i)
conformed copies of the Registration Statement as originally filed with the
Commission and each amendment thereto (in each
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case excluding exhibits other than this Agreement) and (ii) each Preliminary
Prospectus, the Prospectus and any amended or supplemented Prospectus; and, if
the delivery of a prospectus is required at any time after the Effective Time in
connection with the offering or sale of the Stock or any other securities
relating thereto and if at such time any events shall have occurred as a result
of which the Prospectus as then amended or supplemented would include an untrue
statement of a material fact or omit to state any material fact necessary in
order to make the statements therein, in the light of the circumstances under
which they were made when such Prospectus is delivered, not misleading, or, if
for any other reason it shall be necessary to amend or supplement the Prospectus
in order to comply with the Securities Act, to notify the Representatives and,
upon their request, to file such document and to prepare and furnish without
charge to each Underwriter and to any dealer in securities as many copies as the
Representatives may from time to time reasonably request of an amended or
supplemented Prospectus which will correct such statement or omission or effect
such compliance.
(d) To file promptly with the Commission any amendment to the
Registration Statement or the Prospectus or any supplement to the Prospectus
that may, in the judgment of the Company or the Representatives be required by
the Securities Act or requested by the Commission;
(e) Prior to filing with the Commission any amendment to the
Registration Statement or supplement to the Prospectus or any Prospectus
pursuant to Rule 424 of the Rules and Regulations, to furnish a copy thereof to
the Representatives and counsel for the Underwriters and obtain the consent of
the Representatives to the filing;
(f) As soon as practicable after the Effective Date (but in no event
later than 15 months after the Effective Date), to make generally available to
the Company's security holders and to deliver to the Representatives an earnings
statement of the Company (which need not be audited) complying with Section
11(a) of the Securities Act and the Rules and Regulations (including, at the
option of the Company, Rule 158);
(g) For a period of five years following the Effective Date, to
furnish to the Representatives copies of all materials furnished by the Company
to its stockholders and all public reports and all reports and financial
statements furnished by the Company to the principal national securities
exchange upon which the Common Stock may be listed pursuant to requirements of
or agreements with such exchange or to the Commission pursuant to the Exchange
Act or any rule or regulation of the Commission thereunder;
(h) Promptly from time to time to take such action as the
Representatives may reasonably request to qualify the Stock for offering and
sale under the securities laws of such jurisdictions as the Representatives may
request and to comply with such laws so as to permit the continuance of sales
and dealings therein in such jurisdictions for as long as may be necessary to
complete the distribution of the Stock; provided that in connection therewith
the Company shall not be required to qualify as a foreign corporation or to file
a general consent to service of process in any jurisdiction;
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(i) For a period of 180 days from the date of the Prospectus, not to,
directly or indirectly, (1) offer for sale, sell, pledge or otherwise dispose of
(or enter into any transaction or device which is designed to, or could be
expected to, result in the disposition by any person at any time in the future
of) any shares of Common Stock or securities convertible into or exchangeable
for Common Stock (other than the Stock and shares issued pursuant to employee
benefit plans, qualified stock option plans or other employee compensation plans
existing on the date hereof or pursuant to currently outstanding options,
warrants or rights), or sell or grant options, rights or warrants with respect
to any shares of Common Stock or securities convertible into or exchangeable for
Common Stock (other than the grant of options pursuant to option plans existing
on the date hereof), or (2) enter into any swap or other derivatives transaction
that transfers to another, in whole or in part, any of the economic benefits or
risks of ownership of such shares of Common Stock, whether any such transaction
described in clause (1) or (2) above is to be settled by delivery of Common
Stock or other securities, in cash or otherwise, in each case without the prior
written consent of Lehman Brothers Inc.; and to cause each officer and director
of the Company to furnish to the Representatives, prior to the First Delivery
Date, a letter or letters, in form and substance satisfactory to counsel for the
Underwriters, pursuant to which each such person shall agree not to, directly or
indirectly, (1) offer for sale, sell, pledge or otherwise dispose of (or enter
into any transaction or device which is designed to, or could be expected to,
result in the disposition by any person at any time in the future of) any shares
of Common Stock or securities convertible into or exchangeable for Common Stock
or (2) enter into any swap or other derivatives transaction that transfers to
another, in whole or in part, any of the economic benefits or risks of ownership
of such shares of Common Stock, whether any such transaction described in clause
(1) or (2) above is to be settled by delivery of Common Stock or other
securities, in cash or otherwise, in each case for a period of 180 days from the
date of the Prospectus, without the prior written consent of Lehman Brothers
Inc.;
(j) Prior to the Effective Date, to apply for the inclusion of the
Stock on the Nasdaq National Market and to use its best efforts to complete that
listing, subject only to official notice of issuance, prior to the First
Delivery Date;
(k) To apply the net proceeds from the sale of the Stock being sold
by the Company as set forth in the Prospectus; and
(l) To take such steps as shall be necessary to ensure that neither
the Company nor any of its subsidiaries shall become an "investment company"
within the meaning of such term under the Investment Company Act of 1940 and the
rules and regulations of the Commission thereunder.
6. Expenses. The Company agrees to pay (a) the costs incident to the
authorization, issuance, sale and delivery of the Stock and any taxes payable in
that connection; (b) the costs incident to the preparation, printing and filing
under the Securities Act of the Registration Statement and any amendments and
exhibits thereto; (c) the costs of distributing the Registration Statement as
originally filed and each amendment thereto and any post-effective amendments
thereof (including, in each case, exhibits), any Preliminary Prospectus, the
Prospectus and any amendment or supplement to the Prospectus, all as provided in
this Agreement; (d) the costs of producing and distributing this Agreement and
any other related documents in connection with the offering, purchase, sale and
delivery of the stock; (e) the filing fees incident to securing any required
review
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by the National Association of Securities Dealers, Inc. of the terms of sale of
the Stock; (f) any applicable listing or other fees, including, without
limitation, the fees for quotation of the Common Stock on the Nasdaq National
Market; (g) the fees and expenses (not in excess, in the aggregate, of $5,000)
of qualifying the Stock under the securities laws of the several jurisdictions
as provided in Section 5 and of preparing, printing and distributing a Blue Sky
Memorandum (including related fees and expenses of counsel to the Underwriters);
(h) all costs and expenses of the Underwriters, including the fees and
disbursements of counsel for the Underwriters, incident to the offer and sale of
shares of the Stock by the Underwriters to employees and persons having business
relationships with the Company, as described in Section 3; and (i) all other
costs and expenses incident to the performance of the obligations of the Company
under this Agreement; provided that, except as provided in this Section 6 and in
Section 11 the Underwriters shall pay their own costs and expenses, including
the costs and expenses of their counsel, any transfer taxes on the Stock which
they may sell and the expenses of advertising any offering of the Stock made by
the Underwriters.
7. Conditions of Underwriters' Obligations. The respective
obligations of the Underwriters hereunder are subject to the accuracy, when made
and on each Delivery Date, of the representations and warranties of the Company
contained herein, to the performance by the Company of its obligations
hereunder, and to each of the following additional terms and conditions:
(a) The Prospectus shall have been timely filed with the
Commission in accordance with Section 5(a); no stop order suspending the
effectiveness of the Registration Statement or any part thereof shall have been
issued and no proceeding for that purpose shall have been initiated or
threatened by the Commission; and any request of the Commission for inclusion of
additional information in the Registration Statement or the Prospectus or
otherwise shall have been complied with.
(b) No Underwriter shall have discovered and disclosed to the
Company on or prior to such Delivery Date that the Registration Statement or the
Prospectus or any amendment or supplement thereto contains an untrue statement
of a fact which, in the opinion of Fenwick & West LLP, counsel for the
Underwriters, is material or omits to state a fact which, in the opinion of such
counsel, is material and is required to be stated therein or is necessary to
make the statements therein not misleading.
(c) All corporate proceedings and other legal matters incident
to the authorization, form and validity of this Agreement, the Stock, the
Registration Statement and the Prospectus, and all other legal matters relating
to this Agreement and the transactions contemplated hereby shall be reasonably
satisfactory in all material respects to counsel for the Underwriters, and the
Company shall have furnished to such counsel all documents and information that
they may reasonably request to enable them to pass upon such matters.
(d) Wilson Sonsini Goodrich & Rosati, P.C. shall have furnished
to the Representatives their written opinion, as counsel to the Company,
addressed to the Underwriters and dated such Delivery Date, in form and
substance reasonably satisfactory to the Representatives, to the effect that:
(i) The Company and each of its subsidiaries have been duly
incorporated and are validly existing as corporations in good standing under the
laws of their
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respective jurisdictions of incorporation, are duly qualified to do business and
are in good standing as foreign corporations in each jurisdiction in which their
respective ownership or lease of property or the conduct of their respective
businesses requires such qualification and have all power and authority
necessary to own or hold their respective properties and to conduct the
businesses in which they are engaged.
(ii) The Company has an authorized capitalization as set
forth in the Prospectus, and all of the issued shares of capital stock of the
Company (including the shares of Stock being delivered on such Delivery Date)
have been duly and validly authorized and issued, are fully paid and non-
assessable and conform to the description thereof contained in the Prospectus;
and all issued shares of capital stock of each subsidiary of the Company have
been duly and validly authorized and issued and are fully paid, non-assessable
and the shares of each subsidiary owned directly or indirectly by the Company
are free and clear of all liens, encumbrances, equities and claims.
(iii) There are no preemptive or other rights to subscribe
for or to purchase, nor any restriction upon the voting or transfer of, any
shares of the Stock pursuant to the Company's charter or by-laws or any
agreement or other instrument known to such counsel;
(iv) To the best of such counsel's knowledge and other than
as set forth in the Prospectus, there are no legal or governmental proceedings
pending to which the Company or any of its subsidiaries is a party or of which
any property or assets of the Company or any of its subsidiaries is the subject
which, if determined adversely to the Company or any of its subsidiaries, might
have a material adverse effect on the consolidated financial position,
stockholders' equity, results of operations, business or prospects of the
Company and its subsidiaries; and, to the best of such counsel's knowledge and
other than as set forth in the Prospectus, no such proceedings are threatened or
contemplated by governmental authorities or threatened by others;
(v) The Registration Statement was declared effective
under the Securities Act as of the date and time specified in such opinion, the
Prospectus was filed with the Commission pursuant to the subparagraph of Rule
424(b) of the Rules and Regulations specified in such opinion on the date
specified therein and no stop order suspending the effectiveness of the
Registration Statement has been issued and, to the knowledge of such counsel, no
proceeding for that purpose is pending or threatened by the Commission;
(vi) The Registration Statement and the Prospectus and any
further amendments or supplements thereto made by the Company prior to such
Delivery Date (other than the financial statements and related schedules
therein, as to which such counsel need express no opinion) comply as to form in
all material respects with the requirements of the Securities Act and the Rules
and Regulations;
(vii) To the best of such counsel's knowledge, there are no
contracts or other documents which are required to be described in the
Prospectus or filed as exhibits to the Registration Statement by the Securities
Act or by the Rules and Regulations which have not been described or filed as
exhibits to the Registration Statement or incorporated therein by reference as
permitted by the Rules and Regulations;
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(viii) This Agreement has been duly authorized, executed
and delivered by the Company;
(ix) The issue and sale of the shares of Stock being
delivered on such Delivery Date by the Company and the compliance by the Company
with all of the provisions of this Agreement and the consummation of the
transactions contemplated hereby will not conflict with or result in a breach or
violation of any of the terms or provisions of, or constitute a default under,
any indenture, mortgage, deed of trust, loan agreement or other agreement or
instrument known to such counsel to which the Company or any of its subsidiaries
is a party or by which the Company or any of its subsidiaries is bound or to
which any of the property or assets of the Company or any of its subsidiaries is
subject, nor will such actions result in any violation of the provisions of the
charter or by-laws of the Company or any of its subsidiaries or any statute or
any order, rule or regulation known to such counsel of any court or governmental
agency or body having jurisdiction over the Company or any of its subsidiaries
or any of their properties or assets; and, except for the registration of the
Stock under the Securities Act and such consents, approvals, authorizations,
registrations or qualifications as may be required under the Exchange Act and
applicable state securities laws in connection with the purchase and
distribution of the Stock by the Underwriters, no consent, approval,
authorization or order of, or filing or registration with, any such court or
governmental agency or body is required for the execution, delivery and
performance of this Agreement; and
(x) To the best of such counsel's knowledge and except
as set forth in the Prospectus, there are no contracts, agreements or
understandings between the Company and any person granting such person the right
(other than rights which have been waived or satisfied) to require the Company
to file a registration statement under the Securities Act with respect to any
securities of the Company owned or to be owned by such person or to require the
Company to include such securities in the securities registered pursuant to the
Registration Statement or in any securities being registered pursuant to any
other registration statement filed by the Company under the Securities Act.
In rendering such opinion, such counsel may state that its opinion is
limited to matters governed by the Federal laws of the United States of America,
the laws of the State of California and the General Corporation Law of the State
of Delaware. Such counsel shall also have furnished to the Representatives a
written statement, addressed to the Underwriters and dated such Delivery Date,
in form and substance satisfactory to the Representatives, to the effect that
(x) such counsel has acted as outside counsel to the Company on a regular basis
(although the Company is also represented by other outside counsel with respect
to patents and certain other matters), has acted as counsel to the Company in
connection with previous financing transactions and has acted as counsel to the
Company in connection with the preparation of the Registration Statement, and
(y) based on the foregoing, no facts have come to the attention of such counsel
which lead it to believe that the Registration Statement, as of the Effective
Date, contained any untrue statement of a material fact or omitted to state a
material fact required to be stated therein or necessary in order to make the
statements therein not misleading, or that the Prospectus contains any untrue
statement of a material fact or omits to state a material fact required to be
stated therein or necessary in order to make the statements therein, in light of
the circumstances under which they were made, not misleading. The
14
<PAGE>
foregoing opinion and statement may be qualified by a statement to the effect
that such counsel does not assume any responsibility for the accuracy,
completeness or fairness of the statements contained in the Registration
Statement or the Prospectus except for the statements made in the Prospectus
under the captions "Business - Litigation and Patent Infringement Claims,"
"Description of Capital Stock" and "Shares Available for Future Sale", insofar
as such statements relate to the Stock and concern legal matters.
(e) The Representatives shall have received from Fenwick & West LLP,
counsel for the Underwriters, such opinion or opinions, dated such Delivery
Date, with respect to the issuance and sale of the Stock, the Registration
Statement, the Prospectus and other related matters as the Representatives may
reasonably require, and the Company shall have furnished to such counsel such
documents as they reasonably request for the purpose of enabling them to pass
upon such matters.
(f) At the time of execution of this Agreement, the Representatives
shall have received from PricewaterhouseCoopers LLP a letter, in form and
substance satisfactory to the Representatives, addressed to the Underwriters and
dated the date hereof (i) confirming that they are independent public
accountants within the meaning of the Securities Act and are in compliance with
the applicable requirements relating to the qualification of accountants under
Rule 2-01 of Regulation S-X of the Commission, (ii) stating, as of the date
hereof (or, with respect to matters involving changes or developments since the
respective dates as of which specified financial information is given in the
Prospectus, as of a date not more than five days prior to the date hereof), the
conclusions and findings of such firm with respect to the financial information
and other matters ordinarily covered by accountants' "comfort letters" to
underwriters in connection with registered public offerings.
(g) With respect to the letter of PricewaterhouseCoopers LLP referred
to in the preceding paragraph and delivered to the Representatives concurrently
with the execution of this Agreement (the "initial letter"), the Company shall
have furnished to the Representatives a letter (the "bring-down letter") of such
accountants, addressed to the Underwriters and dated such Delivery Date (i)
confirming that they are independent public accountants within the meaning of
the Securities Act and are in compliance with the applicable requirements
relating to the qualification of accountants under Rule 2-01 of Regulation S-X
of the Commission, (ii) stating, as of the date of the bring-down letter (or,
with respect to matters involving changes or developments since the respective
dates as of which specified financial information is given in the Prospectus, as
of a date not more than five days prior to the date of the bring-down letter),
the conclusions and findings of such firm with respect to the financial
information and other matters covered by the initial letter and (iii) confirming
in all material respects the conclusions and findings set forth in the initial
letter.
(h) The Company shall have furnished to the Representatives a
certificate, dated such Delivery Date, of its Chairman of the Board, its
President or a Vice President and its chief financial officer stating that:
(i) The representations, warranties and agreements of the
Company in Section 1 are true and correct as of such Delivery Date; the Company
has complied with all its agreements contained herein; and the conditions set
forth in Sections 7(a) and 7(i) have been fulfilled; and
15
<PAGE>
(ii) They have carefully examined the Registration Statement and
the Prospectus and, in their opinion (A) as of the Effective Date, the
Registration Statement and Prospectus did not include any untrue statement of a
material fact and did not omit to state a material fact required to be stated
therein or necessary to make the statements therein not misleading, and (B)
since the Effective Date no event has occurred which should have been set forth
in a supplement or amendment to the Registration Statement or the Prospectus.
(i) (i) The Company shall not have sustained since the date of the
latest audited financial statements included in the Prospectus any loss or
interference with its business from fire, explosion, flood or other calamity,
whether or not covered by insurance, or from any labor dispute or court or
governmental action, order or decree, otherwise than as set forth or
contemplated in the Prospectus or (ii) since such date there shall not have been
any change in the capital stock or long-term debt of the Company or any change,
or any development involving a prospective change, in or affecting the general
affairs, management, financial position, stockholders' equity or results of
operations of the Company, otherwise than as set forth or contemplated in the
Prospectus, the effect of which, in any such case described in clause (i) or
(ii), is, in the judgment of the Representatives, so material and adverse as to
make it impracticable or inadvisable to proceed with the public offering or the
delivery of the Stock being delivered on such Delivery Date on the terms and in
the manner contemplated in the Prospectus.
(j) Subsequent to the execution and delivery of this Agreement there
shall not have occurred any of the following: (i) trading in securities
generally on the New York Stock Exchange or the American Stock Exchange or in
the over-the-counter market, or trading in any securities of the Company on any
exchange or in the over-the-counter market, shall have been suspended or minimum
prices shall have been established on any such exchange or such market by the
Commission, by such exchange or by any other regulatory body or governmental
authority having jurisdiction, (ii) a banking moratorium shall have been
declared by Federal or state authorities, (iii) the United States shall have
become engaged in hostilities, there shall have been an escalation in
hostilities involving the United States or there shall have been a declaration
of a national emergency or war by the United States or (iv) there shall have
occurred such a material adverse change in general economic, political or
financial conditions (or the effect of international conditions on the financial
markets in the United States shall be such) as to make it, in the judgment of a
majority in interest of the several Underwriters, impracticable or inadvisable
to proceed with the public offering or delivery of the Stock being delivered on
such Delivery Date on the terms and in the manner contemplated in the
Prospectus.
(k) The Nasdaq National Market shall have approved the Stock for
inclusion, subject only to official notice of issuance and evidence of
satisfactory distribution.
(l) You shall have been furnished with such additional documents and
certificates as you or counsel for the Underwriters may reasonably request
related to this Agreement and the transactions contemplated hereby.
16
<PAGE>
All opinions, letters, evidence and certificates mentioned above or
elsewhere in this Agreement shall be deemed to be in compliance with the
provisions hereof only if they are in form and substance reasonably satisfactory
to counsel for the Underwriters.
8. Indemnification and Contribution.
(a) The Company shall indemnify and hold harmless each Underwriter,
its officers and employees and each person, if any, who controls any Underwriter
within the meaning of the Securities Act, from and against any loss, claim,
damage or liability, joint or several, or any action in respect thereof
(including, but not limited to, any loss, claim, damage, liability or action
relating to purchases and sales of Stock), to which that Underwriter, officer,
employee or controlling person may become subject, under the Securities Act or
otherwise, insofar as such loss, claim, damage, liability or action arises out
of, or is based upon, (i) any untrue statement or alleged untrue statement of a
material fact contained in any Preliminary Prospectus, the Registration
Statement or the Prospectus or in any amendment or supplement thereto, (ii) the
omission or alleged omission to state in any Preliminary Prospectus, the
Registration Statement or the Prospectus, or in any amendment or supplement
thereto, or in any Blue Sky Application any material fact required to be stated
therein or necessary to make the statements therein not misleading or (iii) any
act or failure to act or any alleged act or failure to act by any Underwriter in
connection with, or relating in any manner to, the Stock or the offering
contemplated hereby, and which is included as part of or referred to in any
loss, claim, damage, liability or action arising out of or based upon matters
covered by clause (i) or (ii) above (provided that the Company shall not be
liable under this clause (iii) to the extent that it is determined in a final
judgment by a court of competent jurisdiction that such loss, claim, damage,
liability or action resulted directly from any such acts or failures to act
undertaken or omitted to be taken by such Underwriter through its gross
negligence or willful misconduct), and shall reimburse each Underwriter and each
such officer, employee or controlling person promptly upon demand for any legal
or other expenses reasonably incurred by that Underwriter, officer, employee or
controlling person in connection with investigating or defending or preparing to
defend against any such loss, claim, damage, liability or action as such
expenses are incurred; provided, however, that the Company shall not be liable
in any such case to the extent that any such loss, claim, damage, liability or
action arises out of, or is based upon, any untrue statement or alleged untrue
statement or omission or alleged omission made in any Preliminary Prospectus,
the Registration Statement or the Prospectus, or in any such amendment or
supplement, in reliance upon and in conformity with written information
concerning such Underwriter furnished to the Company through the Representatives
by or on behalf of any Underwriter specifically for inclusion therein which
information consists solely of the information specified in Section 8(e). The
foregoing indemnity agreement is in addition to any liability which the Company
may otherwise have to any Underwriter or to any officer, employee or controlling
person of that Underwriter.
(b) Each Underwriter, severally and not jointly, shall indemnify and
hold harmless the Company, its officers and employees, each of its directors,
and each person, if any, who controls the Company within the meaning of the
Securities Act, from and against any loss, claim, damage or liability, joint or
several, or any action in respect thereof, to which the Company or any such
director, officer or controlling person may become subject, under the Securities
Act or otherwise, insofar as such loss, claim, damage, liability or action
arises out of, or is based upon, (i) any untrue statement or alleged untrue
statement of a material fact contained (A) in any Preliminary
17
<PAGE>
Prospectus, the Registration Statement or the Prospectus or in any amendment or
supplement thereto, or (B) in any Blue Sky Application or (ii) the omission or
alleged omission to state in any Preliminary Prospectus, the Registration
Statement or the Prospectus, or in any amendment or supplement thereto, or in
any Blue Sky Application any material fact required to be stated therein or
necessary to make the statements therein not misleading, but in each case only
to the extent that the untrue statement or alleged untrue statement or omission
or alleged omission was made in reliance upon and in conformity with written
information concerning such Underwriter furnished to the Company through the
Representatives by or on behalf of that Underwriter specifically for inclusion
therein, and shall reimburse the Company and any such director, officer or
controlling person for any legal or other expenses reasonably incurred by the
Company or any such director, officer or controlling person in connection with
investigating or defending or preparing to defend against any such loss, claim,
damage, liability or action as such expenses are incurred. The foregoing
indemnity agreement is in addition to any liability which any Underwriter may
otherwise have to the Company or any such director, officer, employee or
controlling person.
(c) Promptly after receipt by an indemnified party under this Section
8 of notice of any claim or the commencement of any action, the indemnified
party shall, if a claim in respect thereof is to be made against the
indemnifying party under this Section 8, notify the indemnifying party in
writing of the claim or the commencement of that action; provided, however, that
the failure to notify the indemnifying party shall not relieve it from any
liability which it may have under this Section 8 except to the extent it has
been materially prejudiced by such failure and, provided further, that the
failure to notify the indemnifying party shall not relieve it from any liability
which it may have to an indemnified party otherwise than under this Section 8.
If any such claim or action shall be brought against an indemnified party, and
it shall notify the indemnifying party thereof, the indemnifying party shall be
entitled to participate therein and, to the extent that it wishes, jointly with
any other similarly notified indemnifying party, to assume the defense thereof
with counsel reasonably satisfactory to the indemnified party. After notice
from the indemnifying party to the indemnified party of its election to assume
the defense of such claim or action, the indemnifying party shall not be liable
to the indemnified party under this Section 8 for any legal or other expenses
subsequently incurred by the indemnified party in connection with the defense
thereof other than reasonable costs of investigation; provided, however, that
the Representatives shall have the right to employ counsel to represent jointly
the Representatives and those other Underwriters and their respective officers,
employees and controlling persons who may be subject to liability arising out of
any claim in respect of which indemnity may be sought by the Underwriters
against the Company under this Section 8 if, in the reasonable judgment of the
Representatives, it is advisable for the Representatives and those Underwriters,
officers, employees and controlling persons to be jointly represented by
separate counsel, and in that event the fees and expenses of such separate
counsel shall be paid by the Company. No indemnifying party shall (i) without
the prior written consent of the indemnified parties (which consent shall not be
unreasonably withheld), settle or compromise or consent to the entry of any
judgment with respect to any pending or threatened claim, action, suit or
proceeding in respect of which indemnification or contribution may be sought
hereunder (whether or not the indemnified parties are actual or potential
parties to such claim or action) unless such settlement, compromise or consent
includes an unconditional release of each indemnified party from all liability
arising out of such claim, action, suit or proceeding, or (ii) be liable for any
settlement of any such action effected without its written consent (which
consent shall not be unreasonably withheld), but if settled with the consent of
the indemnifying party or if there be a final judgment of
18
<PAGE>
the plaintiff in any such action, the indemnifying party agrees to indemnify and
hold harmless any indemnified party from and against any loss or liability by
reason of such settlement or judgment.
(d) If the indemnification provided for in this Section 8 shall for
any reason be unavailable to or insufficient to hold harmless an indemnified
party under Section 8(a) or 8(b) in respect of any loss, claim, damage or
liability, or any action in respect thereof, referred to therein, then each
indemnifying party shall, in lieu of indemnifying such indemnified party,
contribute to the amount paid or payable by such indemnified party as a result
of such loss, claim, damage or liability, or action in respect thereof, (i) in
such proportion as shall be appropriate to reflect the relative benefits
received by the Company on the one hand and the Underwriters on the other from
the offering of the Stock or (ii) if the allocation provided by clause (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 (i) above but also
the relative fault of the Company on the one hand, and the Underwriters, on the
other, with respect to the statements or omissions which resulted in such loss,
claim, damage or liability, or action in respect thereof, as well as any other
relevant equitable considerations. The relative benefits received by the
Company on the one hand, and the Underwriters, on the other, with respect to
such offering shall be deemed to be in the same proportion as the total net
proceeds from the offering of the Stock purchased under this Agreement (before
deducting expenses) received by the Company on the one hand, and the total
underwriting discounts and commissions received by the Underwriters with respect
to the shares of the Stock purchased under this Agreement, on the other hand,
bear to the total gross proceeds from the offering of the shares of the Stock
under this Agreement, in each case as set forth in the table on the cover page
of the Prospectus. The relative fault shall be determined by reference to
whether the untrue or alleged untrue statement of a material fact or omission or
alleged omission to state a material fact relates to information supplied by the
Company or the Underwriters, the intent of the parties and their relative
knowledge, access to information and opportunity to correct or prevent such
statement or omission. The Company and the Underwriters agree that it would not
be just and equitable if contributions pursuant to this Section 8(d) were to be
determined by pro rata allocation (even if the Underwriters were treated as one
entity for such purpose) or by any other method of allocation which does not
take into account the equitable considerations referred to herein. The amount
paid or payable by an indemnified party as a result of the loss, claim, damage
or liability, or action in respect thereof, referred to above in this Section
8(d) shall be deemed to include, for purposes of this Section 8(d), 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 8(d), no Underwriter shall be required to contribute
any amount in excess of the amount by which the total price at which the Stock
underwritten by it and distributed to the public was offered to the public
exceeds the amount of any damages which such Underwriter has otherwise paid or
become liable to pay by reason of any untrue or alleged untrue statement or
omission or alleged omission. 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. The Underwriters' obligations to contribute as provided in
this Section 8(d) are several in proportion to their respective underwriting
obligations and not joint.
(e) The Underwriters severally confirm and the Company acknowledges
that the statements with respect to the public offering of the Stock by the
Underwriters set forth on the cover page of, the legend concerning over-
allotments on the inside front cover page of and the
19
<PAGE>
concession and reallowance figures appearing under the caption "Underwriting"
in, the Prospectus are correct and constitute the only information concerning
such Underwriters furnished in writing to the Company by or on behalf of the
Underwriters specifically for inclusion in the Registration Statement and the
Prospectus.
9. Defaulting Underwriters.
If, on either Delivery Date, any Underwriter defaults in the
performance of its obligations under this Agreement, the remaining non-
defaulting Underwriters shall be obligated to purchase the Stock which the
defaulting Underwriter agreed but failed to purchase on such Delivery Date in
the respective proportions which the number of shares of the Firm Stock set
opposite the name of each remaining non-defaulting Underwriter in Schedule 1
hereto bears to the total number of shares of the Firm Stock set opposite the
names of all the remaining non-defaulting Underwriters in Schedule 1 hereto;
provided, however, that the remaining non-defaulting Underwriters shall not be
obligated to purchase any of the Stock on such Delivery Date if the total number
of shares of the Stock which the defaulting Underwriter or Underwriters agreed
but failed to purchase on such date exceeds 9.09% of the total number of shares
of the Stock to be purchased on such Delivery Date, and any remaining non-
defaulting Underwriter shall not be obligated to purchase more than 110% of the
number of shares of the Stock which it agreed to purchase on such Delivery Date
pursuant to the terms of Section 2. If the foregoing maximums are exceeded, the
remaining non-defaulting Underwriters, or those other underwriters satisfactory
to the Representatives who so agree, shall have the right, but shall not be
obligated, to purchase, in such proportion as may be agreed upon among them, all
the Stock to be purchased on such Delivery Date. If the remaining Underwriters
or other underwriters satisfactory to the Representatives do not elect to
purchase the shares which the defaulting Underwriter or Underwriters agreed but
failed to purchase on such Delivery Date, this Agreement (or, with respect to
the Second Delivery Date, the obligation of the Underwriters to purchase, and of
the Company to sell, the Option Stock) shall terminate without liability on the
part of any non-defaulting Underwriter or the Company, except that the Company
will continue to be liable for the payment of expenses to the extent set forth
in Sections 6 and 11. As used in this Agreement, the term "Underwriter"
includes, for all purposes of this Agreement unless the context requires
otherwise, any party not listed in Schedule 1 hereto who, pursuant to this
Section 9, purchases Firm Stock which a defaulting Underwriter agreed but failed
to purchase.
Nothing contained herein shall relieve a defaulting Underwriter of any
liability it may have to the Company for damages caused by its default. If
other underwriters are obligated or agree to purchase the Stock of a defaulting
or withdrawing Underwriter, either the Representatives or the Company may
postpone the Delivery Date for up to seven full business days in order to effect
any changes that in the opinion of counsel for the Company or counsel for the
Underwriters may be necessary in the Registration Statement, the Prospectus or
in any other document or arrangement.
10. Termination. The obligations of the Underwriters hereunder may
be terminated by the Representatives by notice given to and received by the
Company prior to delivery of and payment for the Firm Stock if, prior to that
time, any of the events described in Sections 7(i) or 7(j), shall have occurred
or if the Underwriters shall decline to purchase the Stock for any reason
permitted under this Agreement.
20
<PAGE>
11. Reimbursement of Underwriters' Expenses. If (a) the Company
shall fail to tender the Stock for delivery to the Underwriters by reason of any
failure, refusal or inability on the part of the Company to perform any
agreement on its part to be performed, or because any other condition of the
Underwriters' obligations hereunder required to be fulfilled by the Company is
not fulfilled, the Company will reimburse the Underwriters for all reasonable
out-of-pocket expenses (including fees and disbursements of counsel) incurred by
the Underwriters in connection with this Agreement and the proposed purchase of
the Stock, and upon demand the Company shall pay the full amount thereof to the
Representatives. If this Agreement is terminated pursuant to Section 9 by
reason of the default of one or more Underwriters, the Company shall not be
obligated to reimburse any defaulting Underwriter on account of those expenses.
12. Notices, etc. All statements, requests, notices and agreements
hereunder shall be in writing, and:
(a) if to the Underwriters, shall be delivered or sent by mail,
telex or facsimile transmission to Lehman Brothers Inc., Three World Financial
Center, New York, New York 10285, Attention: Syndicate Department (Fax: 212-526-
6588), with a copy, in the case of any notice pursuant to Section 8(c), to the
Director of Litigation, Office of the General Counsel, Lehman Brothers Inc., 3
World Financial Center, 10th Floor, New York, NY 10285;
(b) if to the Company, shall be delivered or sent by mail, telex
or facsimile transmission to the address of the Company set forth in the
Registration Statement, Attention: Gerry Kearby (Fax: 650-549-2099);
provided, however, that any notice to an Underwriter pursuant to Section 8(c)
shall be delivered or sent by mail, telex or facsimile transmission to such
Underwriter at its address set forth in its acceptance telex to the
Representatives which address will be supplied to any other party hereto by the
Representatives upon request. Any such statements, requests, notices or
agreements shall take effect at the time of receipt thereof. The Company shall
be entitled to act and rely upon any request, consent, notice or agreement given
or made on behalf of the Underwriters by Lehman Brothers Inc. on behalf of the
Representatives.
13. Persons Entitled to Benefit of Agreement. This Agreement shall
inure to the benefit of and be binding upon the Underwriters, the Company, and
their respective personal representatives and successors. This Agreement and the
terms and provisions hereof are for the sole benefit of only those persons,
except that (A) the representations, warranties, indemnities and agreements of
the Company contained in this Agreement shall also be deemed to be for the
benefit of the person or persons, if any, who control any Underwriter within the
meaning of Section 15 of the Securities Act and (B) the indemnity agreement of
the Underwriters contained in Section 8(b) of this Agreement shall be deemed to
be for the benefit of directors of the Company, officers of the Company who have
signed the Registration Statement and any person controlling the Company within
the meaning of Section 15 of the Securities Act. Nothing in this Agreement is
intended or shall be construed to give any person, other than the persons
referred to in this Section 13, any legal or equitable right, remedy or claim
under or in respect of this Agreement or any provision contained herein.
21
<PAGE>
14. Survival. The respective indemnities, representations,
warranties and agreements of the Company and the Underwriters contained in this
Agreement or made by or on behalf on them, respectively, pursuant to this
Agreement, shall survive the delivery of and payment for the Stock and shall
remain in full force and effect, regardless of any investigation made by or on
behalf of any of them or any person controlling any of them.
15. Definition of the Terms "Business Day." For purposes of this
Agreement, "business day" means each Monday, Tuesday, Wednesday, Thursday or
Friday which is not a day on which banking institutions in New York are
generally authorized or obligated by law or executive order to close.
16. Governing Law. This Agreement shall be governed by and construed
in accordance with the laws of New York applicable to agreements made and to be
performed in the State of New York without regard to the conflict of law
provisions.
17. Counterparts. This Agreement may be executed in one or more
counterparts and, if executed in more than one counterpart, the executed
counterparts shall each be deemed to be an original but all such counterparts
shall together constitute one and the same instrument.
18. Headings. The headings herein are inserted for convenience of
reference only and are not intended to be part of, or to affect the meaning or
interpretation of, this Agreement.
If the foregoing correctly sets forth the agreement between the
Company and the Underwriters, please indicate your acceptance in the space
provided for that purpose below.
Very truly yours,
LIQUID AUDIO, INC.
By_______________________________________________
[Insert title of person executing agreement]
LEHMAN BROTHERS INC.
BANCBOSTON ROBERTSON STEPHENS INC.
U.S. BANCORP PIPER JAFFRAY INC.
For themselves and as Representatives
of the several Underwriters named
in Schedule 1 hereto
22
<PAGE>
By LEHMAN BROTHERS INC.
By_________________________________
Authorized Representative
23
<PAGE>
SCHEDULE 1
<TABLE>
<CAPTION>
Number of
Underwriters Shares
- ------------ ---------
<S> <C>
Lehman Brothers, Inc....................................
BancBoston Robertson Stephens Inc.......................
U.S. Bancorp Piper Jaffray Inc..........................
---------
Total 3,600,000
=========
</TABLE>
<PAGE>
EXHIBIT 10.8
LA AGREEMENT BETWEEN REALNETWORKS AND LIQUID AUDIO
This Agreement is entered into as of April 26, 1998 (the "Effective Date") by
and between Real Networks, Inc., a Washington corporation ("RN"), and Liquid
Audio, Inc. a California corporation ("LA").
WHEREAS, RN has developed and owns all right, title and interest in the
RealMedia Architecture ("RMA", as further defined below), an open platform for
development of streaming media applications and tools, which allows software
developers to build new applications and extend current applications to inter-
operate with a wide variety of datatypes; WHEREAS, LA is a developer of high
quality audio codec and datatypes. LA desires to modify and enhance its products
or develop new products based on RN's Real Media Architecture that are
interoperable with the Licensed Software (as defined below).
NOW, THEREFORE, in consideration of the mutual promises and covenants set forth
herein, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties agree as follows:
1. DEFINITIONS
1.1 "License Key" means the authorization code that is generated by the License
Key Tool and that enables RMA Server Software to stream RealMedia
datatypes. License Keys that generate User-Streams and enable features of a
LA Product are provided to a LA's end-user customers.
1.2 "License Key Tool" means the version of the License Key Tool that is
provided to LA by RN that is specific and unique to the applicable LA
Product. The License Key Tool is used to generate unique License Keys for a
LA Product.
1.3 "Licensed Software" means Real Players, the RealMedia SDK, including
associated RealMedia Libraries, RMA Server Software, whether in object code
or source code form, License Key Tools and License Keys, and related User
Documentation and specifications.
1.4 "New Release" means a new major release of the Licensed Software or the LA
products in which major new functionality has been added in addition to any
complement of bug fixes supplied, and which is designated as a change in
the digit to the left of the decimal point in the product version number
[(x).x.x]. "Update" means a minor release, enhancement, revision,
modification or upgrade of the Licensed Software Software or LA Products,
designated as a change in the tenths digit in the product version number
[x.(x).x], or in the digit to the right of the tenths digit in the product
version number [x.x.(x)]. By way of clarification, if either party markets
a new and distinct product along with and in addition to an existing
program, then such new and distinct product shall be treated as a New
Release, not an Update.
1.5 "LA Product(s)" means the products and applications developed by LA
hereunder incorporating the Licensed Software which are compatible with RMA
Server Software, as further described on Exhibit A hereto. LA Products
shall include:
(a) "LA Client Software," which means software that is incorporated in an
RMA Player and utilizes the RMA application programming interfaces
("APIs") and will not interoperate with any server software, other
than an RMA server, that streams files by any RMA supported protocol;
(b) "LA Tools," which means software tools that may import datatypes and
export datatypes using the RealMedia Libraries; and
(c) "LA Server Applications," which means LA software applications that
interface with RMA Server Software and add datatypes that can be
streamed from RMA Server Software.
<PAGE>
1.6 Reserved.
--------
1.7 "RealMedia Architecture" or "RMA" means the software platform developed by
RN that allows for the development of streaming media products and tools,
and which is designed specifically for the existing infrastructure of the
Internet and corporate intranets. RMA includes the following components:
(a) "Real Players," which are stand-alone applications, or components
embedded in other applications, that play RMA media files.
(b) "RealMedia Datatypes," which are datatypes that can be streamed using
RMA Server Software APIs and played using RMA Player APIs.
(c) "RealMedia Libraries," which are APIs contained in the RealMedia SDK
in object code form.
(d) "RealMedia SDK" or "SDK," which contains the tools and information
needed for software developers to create tools for use in producing
streaming media and to adopt or build applications that stream from
RMA Server Software and play in Players. The SDK contains a Player,
Player APIs, Server APIs, RealMedia Libraries, Sample Source Code and
RealMedia Server Software.
(e) "RMA Server Software" which is software in object code form, which
streams files over networks, and which has the capabilities set forth
on Exhibit B hereto.
(f) "Sample Source Code," which provides an example of how to develop an
RMA application.
1.8 "Term" is defined in Section 8.1.
-----------
1.9 "Territory" means the world, except as otherwise limited by Section 14.7.
------------
1.10 "User Documentation" means RN's user manuals, technical manuals, release
notes including advertisements for RMA Server Software, installation and
operation instructions, and other data and documentation describing the use
of RMA Server Software normally supplied to RN's customers.
1.11 "User-Stream" means the stream of Real Media datatypes from RMA Server
Software to a single end-user client computer. The number of User-Streams
being delivered by a single copy of the RMA Server Software is measured by
counting the number of end-users simultaneously served by User-Streams
originating from the RMA Server Software.
2. LA DEVELOPMENT OF RMA-BASED PRODUCTS AND INTEGRATION; LICENSE TO LA OF RMA
SDK FOR DEVELOPMENT
2.1 License; LA Development and Integration. Subject to the terms and
---------------------------------------
conditions of this Agreement, RN grants to LA a non-exclusive,
nontransferable license to use and install the RealMedia SDK for the sole
purpose of developing and using LA Products that are based upon the RMA
Architecture and interoperate with Licensed Software. Subject to Section
14.9 below, LA agrees that by September 30, 1998, LA shall have developed
commercially shippable versions of the LA Client Software and LA Server
Application. LA shall only use the SDK on a single computer or on a
computer network. LA may make a single copy of the SDK for back-up and
archival purposes only, provided that any copy must contain all proprietary
notices included in the original. LA may download associated online
documentation for purposes of using the SDK, but may not make further
copies of the documentation.
2
<PAGE>
2.2 Limitations.
-----------
(a) The SDK may be used solely to develop and test a LA Product. It may
not be used for any commercial, non-commercial, educational or
internal purpose, and may not be used in any way that allows or causes
the transmission of audio, video or other media files across the
Internet to any computer network without a separate written license
agreement from RN.
(b) LA is expressly prohibited from using, licensing, selling,
transferring or otherwise distributing any LA Product except as
expressly provided in this Agreement.
(c) Except as expressly provided herein, LA shall not copy, modify,
reproduce, display, decompile, reverse engineer, store, translate,
sublicense, assign, sell, lease or otherwise transfer or distribute
the SDK, or any of its rights therein, in whole or in part, nor may LA
use the SDK to clone any client, server or other RN product. All
rights not specifically granted herein to LA are reserved to RN.
(d) Nothing contained in this Agreement shall be deemed or construed to
grant LA the exclusive right to develop, or have distributed by RN, LA
Products for any particular category of datatypes.
3. DISTRIBUTION LICENSES; OBLIGATIONS CONCERNING LA PRODUCTS AND LICENSED
SOFTWARE
3.1 License from RN to LA. Subject to the terms and conditions set forth in
---------------------
this Agreement, RN grants LA the following licenses:
(a) LA Client Software. Except as provided in Section 4.1(b), LA agrees
------------------ -------------
that it shall not, under any circumstances, distribute any LA Client
Software without a separate written license agreement with RN, during
or after the Term. All LA Client Software shall be distributed by RN
in accordance with Section 3.2(a). Notwithstanding the foregoing, LA
--------------
may include a link offering or promoting the LA Client Software from
the LA website to a hidden link on a RN website from which the LA
Client Software will be downloadable, and may promote the LA Client
Software on LA's website.
(b) LA Tools; LA Server Applications. RN grants LA a non-exclusive,
--------------------------------
non-transferable license to market, promote and distribute LA Server
Applications and LA Tools containing any Licensed Software in the
Territory during the Term. RN hereby grants LA the non-exclusive,
royalty-free, non-transferable right and license to use and publicly
display the RMA Server Software and Real Players for internal,
demonstration and marketing purposes. LA shall not modify, decompile,
or reverse engineer the RMA Server Software or Real Players during or
after the Term.
(c) Limitations; Requirements. LA's end-user license agreements for the LA
-------------------------
Products shall prohibit further distribution, independently of the LA
Products, the RMA Libraries, any RMA files or other components of RMA
by LA's end-users.
(ii) LA shall include a prominent and valid copyright notice, in the
form reasonably requested by RN, in LA Products specifying that
components of LA's Products are owned by and used under license
from RN and its suppliers. LA shall not alter or remove any
copyright or trademark notices contained in any Licensed
Software or User Documentation. In addition, LA shall
prominently display RN's "RMA logo" and the words "RMA
Compatible" on the product packaging and all product manuals
and documentation, in accordance with the terms of Section 5.1.
-----------
(iii) LA shall ensure that the LA Products interoperate properly and
are compatible with the RMA Server Software. RN may elect to
test the LA Products or, at RN's option, will have the LA
Products tested by a third party testing lab at RN's expense,
to confirm that the LA Products interoperate properly and are
compatible with the RMA Server Software.
3
<PAGE>
(iv) LA shall promptly deliver to RN all releases, including beta
releases, of its LA Products, for use by RN as set forth in
Section 3.2.
-----------
3.2 Distribution By RN.
------------------
(a) LA Client Software. [*] In the event that RN secures a distribution
------------------
arrangement with an OEM or other distributor that necessitates the LA
Client Software be compiled or "ported" to run on a third-party
platform, the parties will negotiate in good faith and cooperate as
reasonably necessary to enable such arrangement. Notwithstanding the
foregoing, neither party shall be in breach of this Agreement if such
negotiations are unsuccessful. Notwithstanding anything to the
contrary set forth in this Agreement, LA shall have no obligation
hereunder with respect to the LA Client Software after the Term.
(b) LA Tools; LA Server Applications. LA hereby grants RN the non-
--------------------------------
exclusive, non-transferable right and license to market, promote and
distribute, by itself or through authorized distributors, the LA Tools
and LA Server Applications, in the Territory during the Term by any
means and in all channels of distribution, including as follows:
(i) RN will electronically distribute the LA Tools and LA Server
Applications from RN's Real Store, provided that they meet the
requirements for inclusion in the Real Store, and that RN and LA
sign an Electronic Distribution Agreement acceptable to both
parties.
(ii) LA hereby grants RN the non-exclusive, royalty-free, non-
transferable right and license to use and publicly display the LA
Tools and LA Server Applications for internal, demonstration and
marketing purposes., RN shall not modify, decompile, or reverse
engineer the LA Products during or after the Term.
(c) LA shall provide to RN LA's standard end user license agreement
embedded in LA's installation program for distribution by RN and its
Authorized Distributors along with LA's Products. The license granted
in such end-user license agreement shall be between LA and RN's end-
users.
3.3 Source Code Escrow, LA will deposit with Data Securities International,
------------------
Inc. (the "Escrow Agent"), a complete and correct set of the source and
object code version of the LA Client Software (the "Escrow Products") and
shall enter into the Escrow Agent's Master Preferred escrow agreement,
pursuant to which RN shall have the right to require that the Escrow Agent
provide some or all of the Escrow Products to RN or third parties in the
event that LA undertakes or is subject to any of the actions set forth in
Section 8.2(b); or in the event that it is of LA's breach of this Agreement
--------------
(other than a breach of Section 2.1) as determined by an arbitrator
pursuant to Section 14.6 hereof or as adjudicated by a court having
------------
jurisdiction over LA. RN shall pay any required escrow fee directly to the
Escrow Agent. In the event that the source code is released to RN, RN shall
use such source code only to support the LA Client Software then being
distributed by RN, and for no other purpose.
4. DISTRIBUTION OF RMA SERVER SOFTARE.
4.1 Grant of License. Subject to the terms and conditions of this Agreement,
----------------
and payment of the License Fees set forth in Section 6.1, RN grants LA a
-----------
non-exclusive, non-transferable right and license, in the Territory during
the Term, to:
(a) market, license and distribute object code copies of the RMA Server
Software and User Documentation to end-user customers only in
conjunction with both a LA Product and LA's electronic music
distribution and commerce server
* Certain information in this Exhibit has been omitted and filed separately
with the Commission. Confidential treatment has been requested with respect
to the omitted portions.
4
<PAGE>
("Music Server") and only for use in connection with the distribution
of sound recordings to end-user clients for a lee or for promotional
purposes.
(b) license and distribute one copy of the LA Client Software with each
copy of the RMA Server Software distributed to an end-user customer;
(c) generate License Keys with an authorized, RN-provided License Key
Tool, and duplicate, market and distribute License Keys associated
with LA Product to LA's authorized resellers and distributors
("Authorized Distributors") and end-user customers;
(d) sublicense to Authorized Distributors the right to market, license and
distribute object code copies of the RMA Server Software, User
Documentation and License Keys to end-user customers only in
conjunction with both a LA Product and LA's electronic music
distribution and commerce server ("Music Server") and only for use in
connection with the distribution of sound recordings to end-user
clients for a fee or for promotional purposes; and
(e) determine the price at which LA and its Authorized Distributors will
license and distribute the LA Products, RMA Server Software and
License Keys to end-user customers, independent of any License Fee
payable by LA to RN.
4.2 Distribution Requirements.
-------------------------
(a) End User License Agreements. LA shall distribute and shall cause its
---------------------------
Authorized Distributors to distribute to their end-user customers RN's
standard end-user Server Software License Agreement, which is
contained in RN's product packaging. The license granted in such end-
user license agreement shall be between RN and LA's end-users.
Accordingly, LA agrees that it shall promptly provide to RN the names
and addresses of all end-users to whom LA or its Authorized
Distributors distributes an RMA Server Software concurrently with the
provision of monthly reports, as set forth in Section 7.2.
-----------
(b) Fulfillment for RMA Servers Software. LA may either: (i) download RMA
------------------------------------
Servers from a private RN download site; or (ii) place an order with
RN for physical pre-packaged copies of the RMA Server Software. RN
will ship all physical product to LA or LA's authorized designee, by
shipment method specified by LA. All orders are shipped F.O.B. RN's
designated fulfillment location. As a convenience, RN may prepay
freight charges, and such charges will be billed to LA. All risk of
loss or damage in transit will be borne by LA. LA shall inspect the
RMA Server Software upon receipt at the delivery location. Acceptance
shall be deemed to occur unless LA provides RN with notice of non-
acceptance within three (3) days of receipt. A LA may only reject a
copy of RMA Server Software for one of the following reasons: (i)
missing labels or User Documentation, or (ii) defective media.
(c) Trademark Usage. If LA distributes the RMA Server Software as part of
---------------
a bundle, LA shall prominently display RN's "RMA logo" and the words
"RMA Compatible" on the product packaging and all product manuals and
documentation, in accordance with any Section 5.1.
-----------
5. TRADEMARK LICENSE.
5.1 LA shall have the right, but not the obligation except as expressly
provided herein, to use RN's trademarks and logos, royalty-free, in
connection with LA's user interfaces, packaging, collateral material and
website, subject to compliance with RN's Trademark Usage Guidelines, or as
otherwise designated in writing by RN from time to time, provided each such
use is approved by RN in writing in advance as follows: LA shall furnish RN
with samples of any proposed usage of such trademark or logo, and obtain
RN's prior approval for such usage, which approval will not be unreasonably
withheld or delayed.
5
<PAGE>
5.2 RN shall have the right to use LA's "Liquid Audio" trademark and logo in
connection with RN's user interfaces, packaging, collateral material and
website, subject to compliance with LA's Trademark Usage Guidelines, or as
otherwise designated in writing by LA from time to time, provided each such
use is approved by LA in writing in advance as follows: RN shall furnish LA
with samples of any proposed usage of such trademark or logo, and obtain
LA's prior approval for such usage, which approval will not be unreasonably
withheld or delayed.
6. SUPPORT AND UPGRADES.
6.1 Technical Support for LA Products. During the Term, LA shall be solely
---------------------------------
responsible for providing, and agrees that it will provide, all end-user
technical and customer support for the LA Products.
6.2 Technical Support for RMA Server Software. During the Term, LA agrees that
-----------------------------------------
it will provide first-tier technical and customer support, by telephone and
e-mail and in accordance with RN's minimum support requirements, for RMA
Server Software distributed by LA and its Authorized Distributors. RN will
enroll LA, without charge, in a one-day RealMedia technical training
seminar at RN's facilities, to train LA to provide first-line technical
support to its end-user customers for RMA Server Software. LA shall be
responsible for all out-of-pocket costs in incurs to attend such seminar.
RN shall provide second-tier technical support, by telephone and email,
from 8:00 A.M-5:00 P.M. PST Monday through Friday to LA's primary support
contact for RMA Server Software. RN's telephone "hotline" shall be staffed
by technical personnel with a working knowledge of the RMA Server Software.
RN shall not provide technical support to LA's Authorized Distributors or
end-users, unless such customers purchase technical support service from RN
directly.
6.3 LA Updates and New Releases. During the Term, LA shall make available to RN
---------------------------
at no charge, upon release by LA, a copy of all Updates and New Releases to
the LA Products. Each Update or New Release shall, upon release by LA, be
subject to all of the terms and conditions of the Agreement.
6.4 RN Updates and New Releases. During the Term, RN shall make available to LA
---------------------------
at no charge, upon release by RN, a copy of all corresponding Updates on
the RN website. RN shall make available at no charge all New Releases and
all Updates associated with developments of LA Products. Each Update or New
Release shall, upon release to LA, be subject to all of the terms and
conditions of the Agreement.
7. PAYMENT
7.1 License Fee. As consideration for the RMA Server Software distribution
rights granted herein, LA shall pay RN a license fee ("License Fee") of [*]
licensed by LA hereunder. License Fees for User Streams are [*]
7.2 Payment Terms. LA will provide RN with a written report by the 20th day of
-------------
each month for the preceding calendar month setting forth: (a) the number
of RMA Server Software distributed, (b) the names and address to whom the
RMA ServerSoftware was distributed; (c) the number of License Keys
distributed; and (d) the amount due to RN pursuant to Section 7.1 for the
preceding month. The report shall be accompanied by the payment due. All
payments due hereunder shall be made in United States Dollars, without
withholding or offset of any kind. Interest shall accrue on all amounts
past due hereunder at the monthly rate of one and one-half percent (1.5%)
or at the maximum legal rate, whichever is less.
7.3 Books and Records. During the Term and for three (3) years thereafter, LA
-----------------
shall keep books of account with respect to the amounts due and the
calculations required to be made under Section 7.1. Upon RN's reasonable
-----------
written request, and no more than once per year of the Term, RN may audit
and inspect all such books of account, through an independent third party
auditor and during normal business hours, provided that such
* Certain information in this Exhibit has been omitted and filed
seperately with the Commission. Confidential treatment has been
requested with respect to the omitted portions.
6
<PAGE>
auditor is a nationally recognized firm of certified public accountants and
shall undertake in writing to protect the confidentiality of the business
data and records of LA. The cost of any such audit shall be paid by RN.
provided, however, that in the event RN initiates an audit under this
Section 7.3 and it is finally determined that the amount reported and paid
-----------
by LA pursuant to Section 7.1 for the period(s) audited is, in the
-----------
aggregate, less than ninety-five per cent (95%) of the aggregate amount
actually due, then LA shall pay the reasonable costs and expenses of said
audit. If any such audit reveals an underpayment of license fees, LA shall
make any correcting payment within thirty (30) days. Any underpayment shall
be subject to interest of one and one-half percent (1.5%) per month or the
maximum amount allowed by law, whichever is less. LA will maintain the
books and records applicable to each reporting period for at least three
years following the close of such period.
7.4 Audit of Authorized Distributors. During the Term and for three (3) years
--------------------------------
thereafter, For all Authorized Distributors, LA, in its sole discretion,
shall either: (a) retain for itself the right to audit the books and
records of any such Authorized Distributor; or (b) require that the
Authorized Distributor agree in writing to permit, upon the written request
of RN to LA, an independent auditor paid by RN to examine the necessary
books and records of any such Authorized Distributor, provided that such
accountant shall agree to protect the confidentiality of the business data
and records and to disclose to RN only the accuracy or inaccuracy of the
reporting required hereunder. Any such audits shall be arranged through LA.
LA shall require its Authorized Distributors to maintain books and records
applicable to LA's payment obligations hereunder for at least three years
following the close of the applicable reporting period for such
obligations.
8. TERM AND TERMINATION
8.1 Term. This Agreement shall commence as of the Effective Date, and terminate
----
one (1) year from the Effective Date (the "Term"), unless earlier
terminated as provided herein.
8.2 Termination by Either Party. Either party may terminate this Agreement
---------------------------
immediately upon written notice to the other party in the event of any of
the following:
(a) should the other party fail to perform any material term or condition
of this Agreement, which shall constitute a default of this Agreement,
and such default has not been corrected within thirty (30) days of
notice from the non-breaching party. In the event of a breach of
Section 9 no cure period need be provided.
---------
(b) should the other party (i) make a general assignment for the benefit
of creditors; (ii) institute proceedings to be adjudicated a voluntary
bankrupt, or consent to the filing of a petition of bankruptcy against
it; (iii) be adjudicated by a court of competent jurisdiction as being
bankrupt or insolvent; (iv) seek reorganization under any bankruptcy
act, or consent to the filing of a petition seeking such
reorganization; or (v) have a decree entered against it by a court of
competent jurisdiction appointing a receiver, liquidator, trustee, or
assignee in bankruptcy or in insolvency covering all or substantially
all of such party's property or providing for the liquidation of such
party's property or business affairs, provided such decree is not
dismissed within 45 days.
8.3 Termination by RN or LA. RN may terminate this Agreement immediately upon
-----------------------
written notice to LA in the event of any attempted transfer or assignment
of this Agreement or any right or obligation hereunder (except as provided
in Section 14.3), or any sale, transfer, relinquishment, voluntary or
involuntary, by operation of law or otherwise, of more than a 5% interest
in the direct or indirect ownership or control of LA to an RN Competitor,
without RN's prior written approval. LA may terminate this Agreement
immediately upon written notice to RN in the event of any attempted
transfer or assignment of this Agreement or any right or obligation
hereunder (except as provided in Section 14.3), or any sale, transfer,
relinquishment, voluntary or involuntary, by operation of law or otherwise,
of more than a 5% interest in the direct or indirect ownership or control
of an LA Competitor to RN without LA's prior written approval. As used
herein, an "RN Competitor" means any of the companies identified in Exhibit
C hereto. As used herein, an "LA Competitor" means any
7
<PAGE>
of the companies identified in Exhibit D hereto. Any termination right
under this Section 8.3 must be exercised within ten (10) business days
after the applicable trigger event or shall be deemed forever waived For
the avoidance of doubt, a termination pursuant to this Section 8.3 shall
not constitute an event that triggers release of the source code escrow
pursuant to Section 3.3 above. An initial public offering of the common
stock of either LA or RN shall not constitute an event that shall trigger
either party's termination right hereunder.
8.4 Effect of Termination. Upon the effective date of termination of this
---------------------
Agreement, the non-perpetual licenses granted hereunder shall terminate
immediately. LA will either immediately return all Licensed Software to RN
or certify in writing to RN that all copies of all Licensed Software have
been destroyed, except that LA may retain one copy of the Licensed Software
for archival purposes and to furnish support services to end-user clients.
Perpetual licenses shall survive unless this Agreement is terminated for
default by the licensing party pursuant to Section 8.2. Notwithstanding
anything to the contrary herein, any licenses to use the Licensed Software
or the LA Products properly granted during the Term to the parties' end
users shall survive any termination of this Agreement.
9. CONFIDENTIALITY
"Confidential Information" means any trade secret information or
information otherwise designated by a party as being confidential relating
to either party's products, product plans, designs, computer code,
technical information, costs, pricing, financing, marketing plans, business
opportunities, personnel, research and development or know-how. All
Confidential Information that is disclosed orally shall be documented in
writing by the disclosing party and delivered to the receiving party within
twenty (20) business days after disclosure. Confidential Information shall
not include information that (i) is or becomes generally known or available
through no fault of the receiving party, (ii) was known by or disclosed to
the receiving party prior to disclosure, (iii) is independently developed
by the receiving party, or (iv) is made generally available by the
disclosing party without any restriction. The parties shall use reasonable
efforts and at least the same care that each uses to protect its own
Confidential Information of like importance, to prevent unauthorized
dissemination or disclosure of the other party's confidential information
during and for three (3) years following the last day of the Term. Neither
party will use the other's Confidential Information for purposes other than
those necessary to directly further the purposes of this Agreement. Neither
party will disclose to third parties the other's Confidential Information
without the prior written consent of the other party, provided, however,
that nothing will preclude a party from making disclosure to a third party
for the purpose of due diligence in a financing transaction, merger,
acquisition, business combination or other similar transaction, or from
making any disclosures to any governmental agency having jurisdiction over
the disclosing party, or unless otherwise required by law, government order
or court proceeding. Each party shall return the Confidential Information
to the other party upon termination of the Agreement or upon the request of
the other party. Except as expressly provided in this Agreement, no
ownership or license right is granted in any Confidential Information.
10. PROPRIETARY RIGHTS
10.1 LA. LA shall retain all right, title and interest in and to the LA
--
Products, including without limitation any copyright, patent, trade secret,
or other intellectual property rights therein, subject to RN's underlying
ownership in any Licensed Software included, therein, all LA trademarks,
and all LA Confidential Information, and any copies thereof, regardless of
the media or form on or in which the LA Products or copies may exist. RN
acknowledges and agrees that the LA Products are proprietary to LA, and are
protected by the copyright laws of the United States and international
copyright treaties. Unauthorized copying of the LA Products, including
modification, merger or inclusion with any other software, is expressly
forbidden. RN shall not be deemed, by anything contained in or done
pursuant to this Agreement, to acquire any right, title or interest in any
trademark, copyright, patent or other intellectual property of LA, and
shall do nothing to prejudice the value or validity of LA's rights therein
or ownership thereof.
8
<PAGE>
10.2 RN. RN shall retain all right, title and interest in and to the Licensed
--
Software, including without limitation any copyright, patent, trade secret,
or other intellectual property rights therein, all RN trademarks and all RN
Confidential Information, and any copies thereof, regardless of the media
or form on or in which the Licensed Software or copies may exist. LA
acknowledges and agrees that the Licensed Software is proprietary to RN,
and is protected by the copyright laws of the United States and
international copyright treaties. Unauthorized copying of the Licensed
Software, including modification, merger or inclusion with any other
software, is expressly forbidden. LA shall not be deemed, by anything
contained in or done pursuant to this Agreement, to acquire any right,
title or interest in any trademark, copyright, patent or other intellectual
property of RN, and shall do nothing to prejudice the value or validity of
RN's rights therein or ownership thereof.
10.3 In the event that, during or after the Term, LA is granted a patent on an
invention that was derived from LA's access to RN's SDK or Confidential
Information during development pursuant to Section 2.1 hereunder, LA shall
grant to RN, and hereby grants to RN, a nonexclusive, non-transferable,
perpetual, royalty-free license to exercise the patent rights under the
applicable patent. During and after the Term, RN shall grant to LA, and
hereby grants to LA, a nonexclusive, perpetual, irrevocable, royalty-free,
license to exercise the patent rights under any patents that are granted to
RN that are improvements on the patent(s), if any, licensed by LA under
this Section 10.3. In the event that during the Term either party files a
lawsuit against the other party alleging patent infringement by the other
party, the other party shall have the right to terminate this Agreement
immediately upon written notice to the party that filed the lawsuit. The
parties agree that in any dispute arising out of this Section 10.3, RN will
bear the burden of proof by a preponderance of the evidence.
11. LIMITED WARRANTY
11.1 RN's Limited Warranty.
---------------------
(a) RN warrants, solely for the benefit of LA, that for a period of ninety (90)
days from the date of delivery to LA: (i) the Licensed Software, if
operated as directed, will substantially achieve the functionality
described in the User Documentation, and (ii) that the media containing the
Licensed 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: (1)
the use of the Licensed Software strictly in accordance with the
instructions and User Documentation therefor; (2) the absence of misuse or
damage thereto; (3) the absence of any alteration or modification thereto;
and (4) LA's acceptance of Licensed Software for distribution with
knowledge that the media upon which the Licensed Software are reproduced
may contain certain defects. RN makes no representation or warranty that
the information or functions contained in the Licensed Software will meet
LA's requirements or that the use or operation of the Licensed Software
will be uninterrupted, error free or secure, or that any Licensed Software
defects are correctable or will be corrected. THE FOREGOING WARRANTY SHALL
NOT APPLY TO THE SAMPLE SOURCE CODE, WHICH IS PROVIDED TO LA AS IS, WITHOUT
WARRANTY OF ANY KIND.
(b) RN's entire liability and LA's exclusive remedy for any breach of the
limited warranty set forth in this Section 11.1 shall be, in RN's sole
------------
discretion: (i) to replace RN's defective media; or (ii) to advise LA how
to achieve substantially the same functionality with the Licensed Software
as described in the User Documentation through a procedure different from
that set forth in the User Documentation. Repaired, corrected or replaced
Licensed Software and User Documentation shall be covered by this limited
warranty for the period remaining under the warranty that covered the
original Software, or if longer, for thirty (30) days after the date RN
either shipped to LA the repaired or replaced Licensed Software or RN
advised LA as to how to operate the Licensed Software so as to achieve the
functionality described in the Documentation, whichever is applicable.
(c) NO OTHER WARRANTIES. TO THE MAXIMUM EXTENT PERMITTED BY APPLICABLE LAW RN
DISCLAIMS ALL OTHER WARRANTIES, EITHER EXPRESS OR IMPLIED, INCLUDING, BUT
NOT LIMITED TO IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A
PARTICULAR
9
<PAGE>
PURPOSE, WHICH ARE EXPRESSLY DISCLAIMED, WITH REGARD TO THE LICENSED
SOFTWARE AND THE USER DOCUMENTATION.
11.2 LA's Limited Warranty.
---------------------
LA warrants, solely for the benefit of RN, that for a period of ninety (90)
days from the date of delivery to RN (i) the LA Client Software, if
operated as directed, will substantially achieve the functionality
described in the documentation for the LA Client Software, and (ii) that
the media containing the LA Client Software, if provided by LA, 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: (1) the use of the LA Client Software strictly in
accordance with the instructions and user documentation therefor; (2) the
absence of misuse or damage thereto; (3) the absence of any alteration or
modification thereto; and (4) RN's acceptance of LA Client Software for
distribution with knowledge that the media upon which the LA Client
Software are reproduced may contain certain defects. LA makes no
representation or warranty that the information or functions contained in
the LA Client Software will meet RN's requirements or that the use or
operation of the LA Client Software will be uninterrupted, error free or
secure, or that any LA Product defects are correctable or will be
corrected.
(a) LA's entire liability and RN's exclusive remedy for any breach of the
limited warranty set forth in this Section 11.2 shall be, in LA's sole
------------
discretion: (i) to replace LA's defective media; or (ii) to advise RN
how to achieve substantially the same functionality with the LA Client
Software as are described in the user documentation through a
procedure different from that set forth in the user documentation.
Repaired, corrected or replaced LA Client Software and user
documentation shall be covered by this limited warranty for the period
remaining under the warranty that covered the original LA Client
Software, or if longer, for thirty (30) days after the date LA either
shipped to RN the repaired or replaced LA Product or LA advised RN as
to how to operate the LA Product so as to achieve the functionality
described in the documentation, whichever is applicable.
(b) NO OTHER WARRANTIES. TO THE MAXIMUM EXTENT PERMITTED BY APPLICABLE LAW
-------------------
LA DISCLAIMS ALL OTHER WARRANTIES, EITHER EXPRESS OR IMPLIED,
INCLUDING, BUT NOT LIMITED TO IMPLIED WARRANTIES OF MERCHANTABILITY
AND FITNESS FOR A PARTICULAR PURPOSE, WHICH ARE EXPRESSLY DISCLAIMED,
WITH REGARD TO THE LA PRODUCTS AND THE USER DOCUMENTATION.
12. INDEMNIFICATION
12.1 RN's Indemnification. RN shall defend LA and its directors, officers,
--------------------
agents, employees and representatives, in any third party action for
infringement by, or alleged infringement by the Licensed Software of any
trademark, service mark, patent, copyright, or misappropriation of any
trade secret by the Licensed Software, and will pay any final judgments
awarded or settlements entered into in any such action. LA agrees that it
shall notify RN of all threats, claims and proceedings related to any such
suit promptly after such threat, claim or proceeding comes to the attention
of LA. RN shall have sole control of the defense and/or settlement of any
such suit, and LA shall furnish to RN, upon request, information available
to LA for such defense, and shall provide RN with such assistance in
defending such suits as is requested by RN, at RN's expense. If LA's use of
the Licensed Software under the terms of this Agreement is, or in RN's
opinion is likely to be, enjoined due to the type of infringement or
misappropriation specified above, then RN may, at its sole option and
expense, either (i) procure for LA the right to continue using the Licensed
Software under the terms of this Agreement; or (ii) replace or modify the
affected Licensed Software so that it is noninfringing and substantially
equivalent in function to the enjoined Licensed Software. The foregoing
obligation of RN does not apply (i) with respect to versions of the
Licensed Software or portions or components thereof: (a) which are modified
after shipment, if the alleged infringement relates to such modification,
and if such modification was not authorized, expressly permitted or
performed by RN; (b) which are combined with other products, processes or
materials, if the alleged infringement relates to such combination and if
RN did not authorize or expressly permit the combination; or (c) where LA's
use of the Licensed Software is not in accordance with the license granted
under this Agreement; or (ii) for use or distribution of Licensed Software
or otherwise not in accordance with the terms and conditions of this
Agreement.
10
<PAGE>
12.2 LA Indemnification. LA shall defend RN and its directors, officers,
------------------
agents, employees and representatives, in any third party action for
infringement by, or alleged infringement by the LA Products of any
trademark, service mark, patent, copyright, or misappropriation of any
trade secret by the LA Products, and will pay any final judgments awarded
or settlements entered into in any such action. RN agrees that it shall
notify LA of all threats, claims and proceedings related to any such suit
promptly after such threat, claim or proceeding comes to the attention of
RN LA shall have sole control of the defense and/or settlement of any such
suit, and RN shall furnish to LA, upon request, information available to RN
for such defense, and shall provide LA with such assistance in defending
such suits as is requested by LA, at LA's expense. If RN's use of the LA
Products under the terms of this Agreement is, or in LA's opinion is likely
to be, enjoined due to the type of infringement or misappropriation
specified above, then LA may, at its sole option and expense, either (i)
procure for RN the right to continue using the LA Products under the terms
of this Agreement; or (ii) replace or modify the affected LA Products so
that it is noninfringing and substantially equivalent in function to the
enjoined LA Products. The foregoing obligation of LA does not apply (i)
with respect to versions of the LA Products or portions or components
thereof: (a) that are modified after shipment, if the alleged infringement
relates to such modification, and if such modification was not authorized,
expressly permitted or performed by LA; (b) that are combined with other
products, processes or materials, if the alleged infringement relates to
such combination and if LA did not authorize or expressly permit the
combination; or (c) where RN's use of the LA Products is not in accordance
with the license granted under this Agreement; or (ii) for use or
distribution of LA Products or otherwise not in accordance with the terms
and conditions of this Agreement.
13. LIMITATION OF LIABILITY
IN NO EVENT WILL EITHER PARTY BE LIABLE TO THE OTHER FOR ANY SPECIAL,
INDIRECT, INCIDENTAL OR CONSEQUENTIAL DAMAGE OR LOSS OF ANY NATURE (E.G.,
DAMAGE TO PROPERTY, LOSS OF PROFITS, BUSINESS INTERRUPTION, LOST SAVINGS,
LOSS OF USE, LOST OR DAMAGED FILES OR DATA, INJURY TO PERSON, OR ANY CLAIMS
OF THOSE NOT A PARTY TO THE AGREEMENT) WHICH MAY ARISE IN CONNECTION WITH
THE USE, ADAPTATION, MERGER, INCORPORATION, DISTRIBUTION, INSTALLATION,
REMOVAL OR SUPPORT OF THE LICENSED SOFTWARE AND/OR THE LA PRODUCTS PURSUANT
TO THIS AGREEMENT, REGARDLESS OF WHETHER SUCH CLAIMS ARE BASED IN WARRANTY,
CONTRACT, NEGLIGENCE, TORT, PRODUCTS LIABILITY OR OTHERWISE, EVEN IF THE
PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGE OR LOSS.
14. GENERAL.
14.1 Notice. Any notice or other communication permitted or required under this
------
Agreement shall be given in writing and shall be deemed effective upon the
business day after delivery (including courier service), overnight mail
delivery, upon confirmed facsimile transmission, or five (5) days after
deposit, postage prepaid, in the first class mail of the United States
properly addressed to the appropriate party at the address set forth below:
RN: RealNetworks, Inc.
1111 Third Avenue, Suite 2900
Seattle, Washington 98101
Point of contact: Len Jordan, Senior VP, Media Systems
Facsimile No.: 206-674-2305
With a copy to: General Counsel
Facsimile No.: 206-674-2695
LA: Liquid Audio, Inc.
810 Winslow Street
Redwood City, California 94063
Robert Flynn, VP of Business Development Facsimile No. (650) 549-2099
11
<PAGE>
with a copy to: Wilson, Sonsini, Goodrich & Rosati
650 Page Mill Road
Palo Alto, CA 94304
Point of Contact: Hank Barry
Facsimile No. (650) 496-4006
Either party may from time to time change such address by giving the other
party notice of such change in accordance with this section.
14.2 Independent Contractors. RN and LA are independent contractors in all
-----------------------
relationships and actions under and contemplated by the Agreement.
Notwithstanding anything in this Agreement to the contrary, the parties do
not by this Agreement intend to form, nor shall this Agreement be construed
to constitute, a LAship, joint venture, employment, or agency relationship
between them, or to authorize LA to enter into any commitment or agreement
binding on RN or to allow one party to accept service of any legal process
addressed to, or intended for, the other party. LA shall not make any
warranties, guarantees or any other commitments on behalf of RN pursuant to
the Agreement.
14.3 No Assignment. Neither party shall assign, transfer or otherwise dispose of
-------------
this Agreement or any rights or obligations hereunder without the other
party's written consent. This Agreement shall be binding upon and inure to
the benefit of the parties, their successors and permitted assigns.
14.4 Press Releases. Neither party shall issue any press releases relating to
--------------
this Agreement without the approval of the other.
14.5 Survival. The following provisions shall survive the expiration or
--------
termination of this Agreement: 1, 2.2, 7.3, 7.4, 8.4, 9-14, (except for
14.4), and any other terms herein that expressly state that they apply
after the Term.
14.6 Disputes. Any dispute arising out of or relating to this Agreement that is
--------
not resolved by the parties shall be submitted to non-binding mediation to
be held in accordance with the Commercial Mediation Rules of the American
Arbitration Association ("AAA"). The parties agree that their participation
in a mediation and the entire mediation proceeding, including but not
limited to all statements, discussions, conducts, rulings, findings or
determinations in that mediation proceeding will be confidential, will
constitute settlement negotiations under Rule 408 of the Federal Rules of
Evidence. The parties agree to perform whatever steps are necessary to
ensure that each mediation proceeding complies with this paragraph. If not
thus resolved, it shall be referred to a sole arbitrator knowledgeable in
the Internet and software industries in the United States, selected by the
parties within thirty days of mediation or, in the absence of such
selection, to AAA arbitration which shall be governed by the United States
Arbitration Act. The award shall be made within such months of selection of
the arbitrator and may be entered in any court having jurisdiction. The
mediation and arbitration shall be held in Seattle, Washington. The
arbitrator shall determine issues of arbitrability but may not limit,
expand, or otherwise modify the terms of the Agreement nor have authority
to award punitive or other damages in excess of compensatory damages, and
each party irrevocably waives any claim thereto. Each party shall bear its
own expenses but those related to the compensation of the mediator and the
arbitrator shall be divided equally. The parties, their representatives,
other participants and the mediator and arbitrator shall hold the
existence, content and result of mediation and arbitration in confidence.
Notwithstanding anything in this Section 14.6 to the contrary: (i)
------------
disputes relating to intellectual property rights shall not be subject to
mediation or arbitration; and (ii) either party may seek injunctive relief
for breaches of confidentiality or intellectual property rights or to
maintain the status quo pending mediation and arbitration in accordance
with this section.
14.7 U.S. Government Restricted Rights and Export Restriction. The Licensed
--------------------------------------------------------
Software and User Documentation are provided with RESTRICTED RIGHTS. Use,
duplication or disclosure by the Government is subject to restrictions set
forth in subparagraphs (a) through (d) of the Commercial Computer
Software--Restricted Rights at FAR 52.227-19 when applicable, or in
subparagraph (c)(1)(ii) of the Rights in Technical Data and
12
<PAGE>
Computer Software clause at DFARS 252.227-7013, and in similar clauses in
the NASA FAR supplement, as applicable. Manufacturer is RealNetworks,
Inc./1111 Third Avenue, Suite 500/ Seattle, Washington, 98101 LA
acknowledges that none of the Software or underlying information or
technology may be downloaded or otherwise exported or re-exported: (i)
into (or to a national or resident of) Cuba, Iran, Iraq, Libya, North
Korea, Syria, Sudan or Angola 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 Designated Nationals or the U.S. Commerce Department's Table
of Denial Orders. The LA Products are likewise provided hereunder by LA on
the same basis as set forth above with respect to the Licensed Software
provided by RN.
14.8 Miscellaneous. This Agreement, and the Exhibits attached hereto and
-------------
incorporated herein, constitute the complete and exclusive agreement
between RN and LA with respect to the subject matter hereof, and
supersedes all oral or written understandings, communications or
agreements not specifically incorporated herein. If any provision in this
Agreement is held by a court of competent jurisdiction to be invalid, void
or unenforceable, the remaining provisions will continue in full force
without being impaired or invalidated in any way. No waiver, amendment or
modification of any provision of this Agreement shall be effective unless
it is in a document that expressly refers to this Agreement and is signed
by authorized representatives of both parties. Except as specifically
provided herein, failure or delay by either party in exercising any rights
or remedy under this Agreement shall not operate as a waiver of any such
right or remedy. Headings shall not be considered in interpreting this
Agreement. This Agreement shall be governed by the laws of the State of
Washington, without regard to its conflict of law rules. The United
Nations Convention of Contracts for the International Sale of Goods is
expressly excluded. This Agreement may be executed in separate
counterparts, each of which shall be deemed an original, both of which
together shall constitute one and the same instrument.
14.9 Force Majeure. Neither party shall be liable to the other for any delay or
-------------
failure to perform arising out of or related to any causes beyond such
party's reasonable control, including without limitation, acts of God,
wars, embargoes, strikes or labor disputes, failure of suppliers.
14.10 Freedom of Action. This agreement shall not be construed to imply any
-----------------
obligations other than as are expressly set forth herein. Each party may
have similar agreements with others. Subject to the terms of this
Agreement, each party may design, develop, manufacture, acquire or market
competitive products or services and conduct its business in whatever way
it chooses. IN WITNESS WHEREOF, the parties have entered into this
Agreement as of the Effective Date written above.
REAL NETWORKS, INC. LIQUID AUDIO, INC.
By: /s/ Len K. Dorda By: /s/ Robert Flynn
--------------------------- ------------------------------
Name: LEN K. DORDAN Name: Robert Flynn
------------------------- ----------------------------
Title: SUP MS DIV Title: VP Business Development
------------------------ ---------------------------
Date: 5/28/98 Date: April 26, 1998
------------------------- ----------------------------
13
<PAGE>
EXHIBIT A
LA PRODUCTS
-----------
"LA Product(s)" means the products and applications developed by LA hereunder
incorporating the Licensed Software which are compatible with RMA Server
Software, including:
(a) "LA Client Software," which means software that is incorporated in an RMA
Player and utilizes the RMA application programming interfaces ("APIs") and
will not interoperate with any server software, other than an RMA server,
that streams files by any RMA supported protocol;
(b) "LA Tools," which means software tools that may import datatypes and export
datatypes using the RealMedia Libraries; and
(c) "LA Server Applications," which means LA software applications that
interface with RMA Server Software and add datatypes that can be streamed
from RMA Server Software.
14
<PAGE>
Exhibit B
RMA SERVER SOFTWARE CAPABILITIES
--------------------------------
The RMA Server Software includes the following:
1) installer for the appropriate operating system platform
2) operators manual
3) exposed interfaces to plug-in a monitor, administrator, file system,
datatype or broadcast datatype
4) base-level monitoring tool
5) ability to stream a datatype given a file format plug-in or broadcast plug-
in and license key
6) supports the following platforms Windows NT; Solaris
15
<PAGE>
Exhibit C
RN Competitors
--------------
1. Microsoft
2. Netscape
3. Cisco Systems
4. Apple Computer
5. Oracle
6. Sun Microsystems
7. JavaSoft
8. Xing
9. Starlight
10. Emblaze
11. Macromedia
16
<PAGE>
Exhibit D
LA Competitors
--------------
1. a2b music
2. Cerberus
3. Audiosoft
4. Intertrust
17
<PAGE>
EXHIBIT 10.8
AMENDMENT TO AGREEMENT EFFECTIVE AS OF APRIL 26, 1998 BY AND
BETWEEN REAL NETWORKS, INC. AND LIQUID AUDIO, INC.
This amendment (the "Amendment") dated as of May 4, 1999 to the "LA
Agreement between RealNetworks and Liquid Audio", effective April 26, by and
between Real Networks, Inc. with its principal place of business at 1111 Third
Avenue Suite 2900, Seattle WA 98101 ("RN") and Liquid Audio, Inc. ("LA") with
its principal place of business at 810 Winslow Street, Redwood City, CA 94065
(the "Agreement").
WHEREAS, the RN and LA desire to amend the terms of the Agreement as set
forth below;
NOW THEREFORE, in consideration of the mutual promises set forth herein, RN
and LA hereby agree as follows:
1. GENERAL
A. Except as otherwise specified herein, all capitalized terms shall have the
same meanings as set forth in the Agreement. This Amendment is supplementary
to and modifies the Agreement. To the extent there is any inconsistency or
discrepancy between the Agreement and this Amendment with respect to the
specific subject matter contained herein, the terms and conditions set forth
in this Amendment shall control and supersede. Nothing contained herein
shall be interpreted as invalidating the Agreement and the provisions of the
Agreement will continue to govern the relationship between RN and LA insofar
as they do not conflict with this Amendment.
2. TERM AND TERMINATION
A. Section 8.1 of the Agreement (Term) is hereby amended to reflect an
extension of the Term for the licensing and distribution relationship
described in the Agreement, as follows:
1. by changing the first sentence so that it now reads as follows: "This
Agreement shall commence as of the Effective Date, and terminate two (2)
years from the Effective Date (the "Term"), unless earlier terminated as
provided herein."
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of
the date first above written.
Real Networks, Inc. Liquid Audio, Inc.
By: /s/ Marc A. Bretl By: /s/ Robert Flynn
--------------------------- -----------------------------
Name: MARC A. BRETL Name: ROBERT FLYNN
-------------------------- ---------------------------
Title: VP Title: VP Business Development
------------------------- --------------------------
[SEAL APPEARS HERE]
<PAGE>
EXHIBIT 10.10
PATENT LICENSE AGREEMENT
between
FRAUNHOFER-GESELLSCHAFT, ZUR FORDERUNG DER
ANGEWANDTEN FORSCHUNG E. V.
and
LIQUID AUDIO, INC.
- --------------------------------------------------------------------------------
THIS AGREEMENT DOES NOT BIND OR OBLIGATE EITHER PARTY IN ANY MANNER UNLESS DULY
EXECUTED BY AUTHORIZED REPRESENTATIVES OF BOTH PARTIES
- --------------------------------------------------------------------------------
<PAGE>
FRAUNHOFER-GESELLSCHAFT ZUR FORDERUNG DER ANGEWANDTEN FORSCHUNG E.V.
/s/ DR. M. PAULUS
- --------------------------------- for
By (Sign)
Dr. M. Paulus
- ---------------------------------
Name (Print)
Director of Patent & License Dep.
- ---------------------------------
Title
August 20/1998
- ---------------------------------
Date
LIQUID AUDIO, INC.
/s/ ROBERT FLYNN
- ---------------------------------
By (Sign)
ROBERT FLYNN
- ---------------------------------
Name (Print)
VP Business Development
- ---------------------------------
Title
August 18, 1998
- ---------------------------------
Date
Page 2
<PAGE>
1. INTRODUCTION
This Agreement is made and entered into this 14th DAY OF AUGUST 1998 by and
between FRAUNHOFER-GESELLSCHAFT ZUR FORDERUNG DER ANGEWANDTEN FORSCHUNG e. V., a
non profit organization duly organized and existing under the laws of the
Federal Republic of Germany and having its principal office of LeonrodstraBe 54.
80636 Munchen, Germany, (hereinafter referred to as "FhG"), acting on behalf of
its Fraunhofer-Institut fur Integrierte Schaltungen (IIS) and LIQUID AUDIO,
Inc., a corporation duly organized under the laws of California and having its
principal office at 810 Winslow Avenue, Redwood City, California 94063, USA.
(hereinafter referred to as "LA").
WITNESSETH
WHEREAS, FhG and LA have already agreed on a Letter of Intent of October 22/29.
1997; and
WHEREAS, FhG is willing to enter into a separate agreement with LA to license a
certain software to LA, which is described in said separate software licensing
agreement, provided that the terms of the separate agreement are agreed to by
LA; and
WHEREAS, FhG is the owner of certain technology and wishes to have this
technology utilized by LA; and
WHEREAS, LA wishes to obtain a non-exclusive license to use the technology upon
the terms and conditions hereinafter set forth: and
WHEREAS, FhG Intends this Agreement to confer a license with LA retaining to its
own use all ownership rights in the technology, Including, but not limited to,
patent rights, copyrights, Implementation rights and licensing rights therein,
and further Intends that no license, expressed or implied, for use other than
herein set out shall be transferred hereby; and
WHEREAS, LA knows and accepts that this agreement only holds for an intermediate
time period until either the signing of a further Interim agreement which may
include licensing of content (the "Further Interim Agreement") or of a Patent
License for the technology, which was developed in collaboration between AT&T
Corporation., Dolby Laboratories Licensing Corporation, FhG and Sony Corporation
to create a Joint proposal for an extension of the ISO MPEG-audio standard (IS
13818-3) targeted at a proposed standard (IS 13818-7) for MPEG non-backward
compatible audio coders (the "Main Contract", see Section 10.1)
For and in consideration of the covenants herein contained as well as of other
good and valuable consideration the receipt and sufficiency of which is hereby
acknowledged, it is covenanted and agreed by and between the parties hereto
that:
Page 3
<PAGE>
2. DEFINITIONS
2.1. "AAC Standard" means the specifications and operating parameters
established by the Joint Technical Committee of the International Standards
Organization ISO/IEC IS 13818-7 information technology - Generic coding of
moving pictures and associated audio information - Part 7: Advanced Audio
Coding.
2.2. "FAC Technology" shall mean the technology which is part of the AAC
Standard and which was developed by FhG before and during or after the
collaboration to create a joint proposal for the extension of the MPEG-audio
standard and which is protected by patents and patent applications, which are
owned by FhG or for which FhG has the right to grant licenses.
2.3 "FAC Content" shall mean Content that is encoded in compliance with all or
a portion of the FAC Technology, regardless of whether the date representing
such encoded Content is manipulated or encrypted to protect the security or
privacy of such data after or during the encoding process.
2.4. "Content" shall mean music or any other information in analog or digital
audio form.
2.5. "Effective Date" shall be the date upon which the Parties have signed this
Agreement.
2.6. "Licensed Technology" means all patents now or hereafter owned or licensed
by FhG covering the FAC Technology, including without limitation all the patents
and patent applications scheduled at Appendix A, including any divisional,
continuation, or substitute application and/or reissue based on such patents or
patent applications and all corresponding foreign counterparts to such patents
and patent applications.
2.7. "Field of Use" shall mean the LA software used to store, deliver, serve,
play, encode, decode, convert or otherwise use or manipulate Content and/or FAC
Content.
2.8. "Licensed Product" shall mean any LA product which includes a decoding
and/or encoding device, or software capable of encoding and/or decoding Content
and/or FAC Content, all in compliance with all or a portion of the FAC
Technology, and which LA product infringes a valid claim to the Licensed
Technology but for this license agreement.
2.9. "Licensed Products Revenue" shall mean Licensee's gross revenues that are
actually received and non-refundable from the sale of the Licensed Products.
2.10. "Licensee" means the party identified on the title page of this Agreement
and its Subsidiaries.
2.11. "Licensor" means FhG and their respective successors and assigns.
Page 4
<PAGE>
2.12. "Parties" shall mean Licensor and Licensee.
2.13. "Party" shall mean any one of the Parties.
2.14. "Minimum Royalty" shall mean [*]
2.15. "Subsidiary" of a company means a corporation or other legal entity (a)
the majority of whose shares or other securities entitled to vote for election
of directors (or other managing authority) is now or hereafter controlled by
such company either directly or indirectly; or (b) the majority of the equity
interest in which is now or hereafter owned and controlled by such company
either directly or indirectly; or which does not have outstanding shares or
securities, as may be the case in a partnership, joint venture, or
unincorporated association, but more than 50% of the ownership interest
representing the right to make decisions for such corporation, company, or other
entity which is now or hereafter owned and controlled by such company either
directly or indirectly; but any such corporation or other legal entity shall be
deemed to be a Subsidiary of such company only so long as such control or such
ownership and control exists.
3. GRANTS OF LICENSE
3.1. "Grants of License": Subject to the terms of this Agreement including the
Limitations of Licenses below, the Licensor hereby grants to Licensee under the
Licensed Technology during the Term of this Agreement a non-exclusive, non-
sublicensable), non-transferable, worldwide license to make, have made, use,
sell and offer for sale only as permitted hereunder, import, or otherwise
distribute Licensed Products for use within the Field of Use. Licensee shall be
permitted to distribute the Licensed Products to its end user customers pursuant
to an end user license agreement that permits use of the Licensed Products but
prohibits further redistribution. exploitation, or use of the Licensed Product
by any party other than the end user customer that purchased the end user
license to the Licensed Product.
3.2. "Limitations of Licenses": The limits within this section 3.2 shall
supercede Section 3.1. to any extent they are inconsistent.
3.2.1. The License does not include the right to create, generate,
encode, decode or otherwise modify data or bitstreams using the Licensed
Technology other than for the Field of Use.
3.2.2. Licensee hereby declares and guarantees to inform its purchasers
of the Licensed Products about these restrictions in writing (e.g. in
manuals or end user license agreements).
3.3. The rights granted by Licensor under this Agreement are expressly limited
to the use of the FAC Technology, and no other rights are granted under the
Licensed Technology, any other patents or trade secrets, or to provide any
product or service that is not required by the FAC Technology.
4. ENFORCEMENT
* Certain information in this Exhibit has been omitted and filed
separately with the Commission. Confidential treatment has been
requested with respect to the omitted portions.
Page 5
<PAGE>
4.1. Licensee shall notify Licensor of all suspected or actual Infringements of
the Licensed Technology that come to its attention. Licensor shall have
exclusive authority to act thereon and in connection therewith, Licensee shall
cooperate with Licensor by furnishing evidence, documents, testimony, and the
like as Licensor reasonably requires. Licensor shall reimburse Licensee for out-
of-pocket expenses associated with the cooperation requested by Licensor.
4.2. Licensor shall have the option, but not the obligation, to seek redress
for such infringement at its own expense. Licensee has no right, authority or
standing to bring any action against any third party relating to the third
party's infringement of the Licensed Technology.
5. PUBLICITY
5.1. No party shall make public disclosures inconsistent with the rights and
obligations created hereunder. Any party may require the other party to promptly
supply a copy of any public disclosure it made related to the subject matter
hereof after the public disclosure is made. No party shall disclose the terms of
this Agreement to any third party without the written permission of the other
party, except as may be required by applicable law or regulation.
6. PAYMENTS AND REPORTS
6.1. In consideration of the rights granted herein Licensee shall pay Licensor
a royalty of [*] of the Licensed Products Revenue ("Running
Royalties").
6.2. For the purpose of timing of payments, a Licensed Product shall be
considered sold when Licensed Product Revenues are actually received and non-
refundable.
6.3. If Licensee sells or otherwise transfers Licensed Products to an other
licensee who pays content royalties to Licensor, then no royalties shall be due
on such Licensed Products provided that Licensee is not aware or has no reason
to be aware that such other licensee is re-selling or otherwise re-distributing
such Licensed Products for the purpose of avoiding royalties hereunder.
6.4. Within thirty (30) days after the end of each calendar half year ending on
June 30 or December 31, commencing on the half year containing the Effective
Date, Licensee shall pay Licensor the greater of either (a) the Running
Royalties accrued during such calendar half year or (b) the Minimum Royalty.
Simultaneously with such payment, Licensee shall provide Licensor with a report
certified by Licensee's chief financial officer or the chief financial officer's
designate (the "Royalty Report"), which includes:
6.4.1. the number of sold Licensed Products during the calendar half year
even if this number is zero;
6.4.2. the Running Royalties owed on such sold Licensed Products;
* Certain information in this Exhibit has been omitted and filed
separately with the Commission. Confidential treatment has been requested
with respect to the omitted portions.
Page 6
<PAGE>
6.4.3. the amount of Licensee's payment accompanying the Royalty Report;
6.4.4. any other information that the Licensor and Licensee deem
reasonable to ensure the Licensee is complying with this Agreement.
6.5. Payments to Licensor shall be made by wire transfer to the bank and
account indicated in this Agreement.
6.6. Licensor will credit to Licensee any overpayment of royalties made in
error if such error is identified and fully explained by written notice to
Licensor during the term of this Agreement.
6.7. Time is of the essence with respect to all payments required hereunder.
6.8. All dollar amounts in this Agreement refer to United States dollars unless
otherwise indicated. Any conversion to United States dollars shall be at the
prevalling rate for bank cable transfers as quoted for the last day of such
semiannual period by the Wall Street Journal.
6.9. Overdue payments shall be subject to a late payment charge calculated at
an annual rate of three percent (3%) over the prime rate or successive prime
rates (as posted in the Wall Street Journal) during the delinquency. If the
amount of such charge exceeds the maximum permitted by law, such charge shall be
reduced to such maximum.
7. BOOKS AND RECORDS
7.1. During the Term of this Agreement and for a period of six (6) years
thereafter, Licensee shall keep complete, full, and accurate books and records
of all information which may be required by Licensor in order to confirm the
accuracy of Licensee's reports and payments. Licensor shall have the right to
have a professionally registered accountant inspect such books and records of
Licensee to the extent necessary to verify their accuracy and that of other
statements provided for herein; provided however, that such activity shall be
made during regular business hours upon reasonable notice and Licensee may not
be audited more than once in any calendar year. Any royalty statement that is
not audited and specifically disputed by Licensor within two (2) years after
issuance shall be deemed to be binding and conclusive on Licensor. Such
accountant shall not reveal any information to Licensor other than what is
required to be reported under this Agreement, unless the accountant is ordered
to disclose additional information by a court of competent jurisdiction. The
cost of the examination shall be paid by Licensor unless the inspection reveals
that the total amount owed for the period under audit is greater than five
Percent (5%) of the amounts reported, in which case Licensee shall pay the
reasonable out-of-pocket costs of the inspection and collection.
7.2. Licensee shall be responsible for and shall pay any tax, duty, levy,
customs fee, or similar charge ("Taxes"), including interest and penalties
thereon, however designated, imposed on it as a result of the operation or
existence of this Agreement.
Page 7
<PAGE>
except for withholding and other Taxes based on Licensor's net income, which the
Parties acknowledge that Licensee may be required to withhold or deduct from
payments to Licensor.
8. CONFIDENTIALITY
8.1 "Confidential Information" shall include any information disclosed by one
Party ("Discloser") to the other Party ("Recipient"), and marked as
confidential, proprietary or with similar designation, or confirmed in writing
as such within 30 days after disclosure, including but not limited to Royalty
Reports, source code, specifications, designs, plans, drawings. Inventions,
software, data, prototypes, methods, processes, business and/or technical
information relating to the business of the Parties.
8.2. Recipient shall reproduce Confidential Information only to the extent
necessary to exercise its rights and obligations under this Agreement.
Reproductions of Confidential Information shall include any trade secret
legends, proprietary notices and/or copyright notices present in the
Confidential Information.
8.3. Recipient shall restrict disclosure of Confidential Information to its
employees with a need to know and advise such employees of the obligations
assumed herein, and Recipient shall not disclose Confidential Information to any
third party: provided however, that Recipient may disclose Confidential
Information to consultants and independent contractors which agree in writing to
maintain disclosures in confidence under terms and conditions at least as
restrictive as those herein.
8.4. All Confidential Information that is disclosed for the purpose(s) set
forth in this Agreement shall be subject to these restrictions and may not be
used for any other purpose. The fact that a discussion involving the disclosure
of Confidential Information will occur or has occurred shall be considered
Confidential Information.
8.5 All Confidential Information shall remain the property of Discloser.
Recipient's duty to protect Confidential Information commences upon receipt of
the Confidential Information.
8.6. These restrictions on the use and disclosure of Confidential Information
shall not apply to any Confidential Information:
8.6.1. independently developed by Recipient or lawfully received free of
restriction from another source having the right to furnish the
Confidential Information; or
8.6.2. after it has become generally available to the public without
breach of this Agreement by Recipient; or
8.6.3. that, at the time of disclosure to Recipient, was known to
Recipient free of restriction as evidenced by documentation in Recipient's
possession; or
8.6.4. that Discloser agrees in writing is free of such restrictions; or
Page 8
<PAGE>
8.6.5. that Recipient, on the advice of counsel, is required to disclose
under applicable law or other demand under lawful process. Including a
discovery request in a civil irrigation, if Recipient first gives Discloser
notice of the required disclosure and cooperates with Discloser, at
Discloser's sole expense. In seeking reasonable protective arrangements
with the party requiring disclosure under applicable law or other demand
under lawful process. In no event shall Recipient's cooperation with
Discloser require Recipient to take any action which, on the reasonable
advice of Recipient's counsel, could result in the imposition of any
sanctions or other penalties against Recipient.
8.7. The parties agree that in the case of the breach of any provision of the
section of this Agreement entitled Confidentiality, the aggrieved party shall
suffer immediate and irreparable harm, and that immediate injunctive relief will
therefore be appropriate.
9. REPRESENTATIONS, WARRANTIES AND LIABILITIES
9.1. Licensor represents and warrants that Licensor owns or has all rights
necessary to the Licensed Technology to grant the license to Licensee hereunder.
Licensor makes no representation, covenant, or warranty regarding:
9.2.1. the scope, enforceability, validity or non-infringement of the
Licensed Technology; or
9.2.2. the ongoing maintenance or prosecution of the Licensed Technology;
or
9.2.3. defense of Licensee against actions or suits of any nature brought
by third parties or
9.2.4. the sufficiency or completeness of the Licensed Technology for the
purpose of making, using or selling Licensed Products and/or FAC Content.
9.3. Each Party represents, covenants and warrants that:
9.3.1. this Agreement does not violate any of the Parties' existing
agreements:
9.3.2. it has the authority, power and right to convey the rights or
accept the obligations created hereunder;
9.3.3. the Royalties and Term of this Agreement represents a consideration
of the aggregate relative value of the Licensed Technology, their
expiration dates and the convenience of both Parties, and were selected by
the Parties to avoid the difficulty and expense of implementing a more
complex matrix of multiple rates dependant upon expiration dates and
valuation;
Page 9
<PAGE>
9.3.4. It is not aware (to the best of its knowledge and information) of
any written assertion received by such Party from any third party that
implementation of the FAC Technology infringes or misappropriates the third
party's intellectual property rights other than those written assertions
solicited received and distributed by the ISO in connection with its public
effort to identify rights holders of the AAC Standard.
9.4 LICENSOR MAKES NO WARRANTY OF ANY KIND WHATSOEVER. EXPRESS OR IMPLIED,
EXCEPT THOSE IN THIS SECTION. ANY AND ALL IMPLIED WARRANTIES OF MERCHANTABILITY
AND/OR FITNESS FOR A PARTICULAR PURPOSE AND NON-INFRINGEMENT ARE HEREBY
DISCLAIMED BY LICENSOR AND EXCLUDED.
9.5 In no event shall either party, or their trustees, officers, employees and
affiliates. be liable for any consequential, incidental, special, or indirect
damages, losses, costs, charges, claims, demands, fees, or expenses of any
nature or kind arising out of this Agreement.
9.6 Licensee represents, covenants and warrants that:
9.6.2. Licensee is aware that other entities have asserted to the ISO that
they own or control patents which relate to the FAC Standard and that this
Agreement grants licensee not rights with respect to such patents:
9.6.3. Licensee shall indemnify, and hold Licensor harmless from and
against any claim, loss or damage based in whole or in part on
Licensee's exploitation of Licensed Products in the manner set
forth in Section 9.7 below.
9.7 Licensee shall at all times during the term of this Agreement and
thereafter, Indemnify, defend and hold Licensor, its trustees, officers,
employees and affiliates, harmless against all claims and expenses arising out
of legal claims by third parties, including legal expenses and reasonable
attorneys' fees, arising out of the death of or injury to any person or persons
or out of any damage to property to the extent attributable to the Licensed
Products and against any other third-party claim, proceeding, demand, expense
and liability of any kind whatsoever to the extent attributable to the
production, manufacture, sole, use, lease, consumption or advertisement of the
Licensed Products. Licensee's obligations under this Section 9.7 shall be
conditioned upon prompt notice of such third-party claims from Licensor,
reasonable cooperation and assistance from Licensor at Licensee's expense and
Licensee's sole control of the defense and/or settlement of such action.
Licensee shall not be liable for any expenses incurred by Licensor without
Licensee's prior written consent.
10. TERM AND TERMINATION
10.1. This Agreement terminates when either the Further Interim Agreement
between Licensee and FHG or the Main Contract between Licensee and AT&T, Dolby,
FHG and Sony comes into force. If the Main Contract or Further Interim Agreement
does not
Page 10
<PAGE>
come into force, this Agreement terminates at the latest two years after the
Effective Date.
10.2. Failure to pay or perform any obligation hereunder within the time
prescribed shall constitute an event of default. Failure to cure any default
within sixty days after receipt of notice describing the non-performance (ten
business days with respect to undisputed non-payment of funds) shall entitle the
Party giving such notice to terminate or suspend this Agreement.
10.3. Licensee may terminate this Agreement, at will, subject to payment of all
Royalties due and upon sixty (60) days notice to Licensor.
10.4. Termination shall accelerate Licensee's royalty payment and half year
reporting obligations from "Within thirty (30) days after the end of each
calendar half year" to "Within thirty (30) days of termination".
10.5 The obligations of the Parties under this Agreement which expressly or by
their nature would continue beyond the termination, cancellation or expiration
of this Agreement shall remain in effect and survive termination, cancellation
or expiration of this Agreement, including by way of example only the Sections
pertaining to "Publicity". "Confidentiality" and "Representations, Warranties
and Liabilities". Immediately upon termination of this Agreement (other than for
breach by Licensor), Licensee shall pay to Licensor all royalties due through
the effective date of such termination.
11. GENERAL
11.1. Section Titles. Section titles are Intended only to aid and assist the
--------------
reader as an index device and are not intended to be descriptive of the contents
of the section or to be used for construction or interpretation.
11.2. Entire Agreement. This Agreement, together with its several exhibits and
----------------
appendices, contains the entire agreement between the parties, and supersedes
all other agreements between them relating to the subject matter hereof,
including without limitation the Letter of Intent dated October 22/29, 1997.
11.3. Compliance with U.S. Export Control Regulations. Licensee shall not
-----------------------------------------------
export any data acquired from Licensor under this Agreement, or the direct
product thereof, to any county in contravention of United States law. Nothing in
this Agreement shall be construed as requiring Licensor to export from the
United States any technical data or any commodities to any county in
contravention of United States law.
11.4. Costs. Any covenant requiring a Party to perform or provide an act or
-----
service shall be construed to impose upon such Party the burden of the cost
thereof unless otherwise provided for herein.
11.5. Assertion of Unenforceability. The failure of any provision of this
-----------------------------
Agreement by virtue of its being construed as invalid or otherwise unenforceable
shall render the entire Agreement cancelable at the option of the Party
asserting the enforceability of said provision.
Page 11
<PAGE>
11.6 Modification and Waiver. No provision of this Agreement shall be deemed
-----------------------
modified by any action or omission of Licensor, or by failure to object to any
actions of Licensee which may be inconsistent with the terms of this Agreement.
No waiver of a breach committed by either Party in one instance shall constitute
a waiver or license to commit or continue breaches in other or like instances.
11.7 Notices. All notices, reports, payments, consents, approvals, and the like
-------
made hereunder by Licensee to Licensor shall be in written English to the
address or facsimile number below and sent by a secure special delivery service
that provides proof of delivery, or by a properly transmitted facsimile. All
notices, reports, payments, consents, approvals, and the like made hereunder by
Licensor to Licensee shall be in written English, to the address or facsimile
number set forth on the signature page of this Agreement and sent by a secure
special delivery service that provides proof of delivery, or by a properly
transmitted facsimile. Licensee may change its address and bank account
information by providing appropriate notice to Licensor. Upon appropriate notice
by Licensor. Licensor may change its address and back account information, and
may require notices to Licensor to be sent to up to two different addresses and
portions of the royalties to be paid to up to two different bank accounts.
Notices to Licensee shall be sent to:
Liquid Audio, Inc.
810 Winslow Avenue
Redwood City, California 94063
Attention: John Stone
Notices to Licensor shall be sent to:
Fraunhofer-Institut fur Integrierte Schaltungen
Attn.: Mr. Dr. Karlheinz Brandenburg
Arn Weichselgorten 3
91058 Erlangen
Germany
telephone: +49(0)9131/776-3 03
fax: +49(0)9131/776-3 99
Payments to Licensor shall be made by wire transfer to Licensors bank
account as follows:
Postbank Munchen
BLZ 700 100 80
Page 12
<PAGE>
Konto-Nr. 56 255-801
der Fraunhofer-Patentstelle fur dle Deutsche Forschung.
11.8 Announcements. Neither Party shall make public disclosures inconsistent
-------------
with the rights and obligations created hereunder. Either Party may require the
other to promptly supply a copy of any public disclosure related to the subject
matter hereof .
11.9 Dispute Resolution. The Parties agree to submit any dispute or
-------------------
controversy arising out of or relating to this Agreement to arbitration to be
held in accordance with the Commercial Arbitration Rules of the American
Arbitration Association and shall be referred to a sole arbitrator selected by
the Parties. The award shall be made within six (6) months of selection of the
arbitrator and may be entered in any court having competent jurisdiction. The
arbitration shall be held in the State of California and shall be construed
according to the substantive law of the State of New York regardless of conflict
of law rules. The arbitrator shall determine issues of arbitrability but may not
limit, expand or otherwise modify the terms of the Agreement nor have authority
to award punitive or other damages in excess of compensatory damages and each
Party irrevocably waives any claim thereto. Each Party shall bear its own
expenses but those related to the compensation of the arbitrator shall be borne
equally. The Parties, their representatives, other participants and the
arbitrator shall hold the existence, content and result of the arbitration in
confidence. Issues relating to the validity, enforceability, scope or
infringement of intellectual property shall not be subject to mediation or
arbitration. In the event any dispute relates to this Agreement but is not
subject to arbitration, the Parties agree that their choice of forum to resolve
the dispute shall be either the United States Courts in the State of California
or the State Courts of the State of California.
11.10. Assignment. No rights, duties or privileges of Licensee hereunder shall
----------
be transferred or assigned by Licensee, except in connection with Licensee's
merger with or sale of entire business to, another entity, provided that such
entity shall first have agreed in writing with Licensor to perform all
Licensee's obligations and duties hereunder.
11.11. Strict Construction. Regardless of which Party may have drafted this
---------------
Agreement, no rule of strict contract construction shall be applied against
any Party.
11.12 Limitation of Liability. EXCEPT FOR INDEMNIFICATION OBLIGATIONS UNDER
-----------------------
SECTION 9 ABOVE, IN NO EVENT SHALL EITHER PARTY'S AGGREGATE LIABILITY TO
THE OTHER PARTY UNDER THIS AGREEMENT EXCEED THE AMOUNTS PAID BY LICENSEE
HEREUNDER, IN NO EVENT SHALL EITHER PARTY BE LIABLE FOR CONSEQUENTIAL,
INCIDENTAL, SPECIAL, INDIRECT OR RELIANCE DAMAGES ARISING OUT OF OR
RELATING TO THIS AGREEMENT, WHETHER BASED IN CONTRACT, TORT, OR ANY
OTHER LEGAL THEORY, REGARDLESS WHETHER SUCH PARTY HAS BEEN ADVISED OF
THE POSSIBILITY OF SUCH DAMAGES.
Page 13
<PAGE>
Appendix A
<TABLE>
<CAPTION>
==================================================================================================================
ENCODER: FRAUNHOFER GESELLSCHAFF
- ------------------------------------------------------------------------------------------------------------------
?? ?? ?? ?? ?? ??
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Digital Coding Process DE 3629434 C2 Optimal coder DE FhG E
EP 0 287 578 AT, BE, FhG
CH/LI, DE,
FR, GB, IT.
LU, NI, SE
US 07/640,550 US FhG
JP 62-505113 JP FhG
KR 700459/88 KR FhG
Digital Coding Process DE 3912605 Huffman code DE FhG E
EP 0 393 526 AT, BE, CH/ FhG
LI, DE, DK,
ES, FR, GB,
GR, IT, LU,
NI, SE
US 5,579,430 US FhG
JP 2,739,377 JP FhG
=================================================================================================================
</TABLE>
Page 14
<PAGE>
<TABLE>
=================================================================================================================
<S> <C> <C> <C> <C> <C>
NO 913931 NO FHG
==================================================================================================================
==================================================================================================================
FI 914886 FI FhG
KR 701385/91 KR FhG
RU 5010281/24 RU FhG
- ------------------------------------------------------------------------------------------------------------------
Windowing US 08/678,666 window shape US FhG, Dolby E
PCT/EP96/0514 AU, CA, EP. FhG. Dolby
5 JP, KR
WO98/02971
-----------------------------------------------------------------------------------------------------------------
Intensity Stereo DE 19628293 prediction DE FhG, AT&T, Lucent E
WO98/03037 AU, CA, FhG, AT&T, Lucent
CN, EP, JP.
PCT/EP97/0287 KR, NO, RU.
5 UA, US.
Coding Stereo Spectral DE 19628292 side information DE FhG, AT&T, Lucent E
Data
PCT/EP97/0287 AU, CA, FhG, AT&T, Lucent
4 CN, EP, JP,
KR, NO, RU,
WO98/03036 UA, US
Process for Reducing Data DE 4136825 CI Intensity stereo DE FhG O
CA 2,118,916 CA FhG
=================================================================================================================
</TABLE>
Page 15
<PAGE>
<TABLE>
=================================================================================================================
<S> <C> <C> <C> <C> <C>
AU 9227599 AU FhG
EP 0611516 AT, BE, CH/ FhG
LI, DE, DK,
FR, GB, IT,
NL, SE
=================================================================================================================
=================================================================================================================
JP 5-508077 JP FhG
KR KR FhG
700973/1994
NO 940935 NO FhG
RU 94 020 727 UA FhG
UA 94 005 493 UA FhG
US 08/211,547 US FhG
- -----------------------------------------------------------------------------------------------------------------
Interdependent Channels DE 4217276 C1 Intensity stereo DE FhG O
AU 40593/93 AU FhG
CA 2,118,402 CA FhG
EP 0 642 719 AT,BE, CH/ FhG
LL, DE, FR,
GB, NL,
JP 6-500080 JP FhG
KR KR FhG
704089/1994
=================================================================================================================
</TABLE>
Page 16
<PAGE>
<TABLE>
==================================================================================================================
<S> <C> <C> <C> <C>
NO 944285 NO FhG
RU 94 046 112 RU FhG
UA not known UA FhG
US 5,703,999 US FhG
- ------------------------------------------------------------------------------------------------------------------
Selecting Coding Type DE 4331376 C1 similarity DE FhG
measurement
=================================================================================================================
</TABLE>
<TABLE>
==================================================================================================================
<S> <C> <C> <C> <C> <C>
AU 678270 AU FhG
EP 0 719 483 AT,BE,CH/ FhG
LI, DE, DK,
FR, GB, IE,
IT, NL, SE
US 08/557,046 US FhG
- ------------------------------------------------------------------------------------------------------------------
Tonality DE 19505435 tonality via digital DE FhG O
C1 filter
CA not known CA FhG
EP 0 772 764 AT, BE, CH/ FhG
LI, DE, DK,
FR, GB, IE,
IT, NL, SE
==================================================================================================================
</TABLE>
Page 17
<PAGE>
<TABLE>
=================================================================================================================
<S> <C> <C> <C> <C> <C>
JP 8-524642 JP FhG
KR 97-705021 KR FhG
US 08/894.844 US FhG
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
Page 18
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
DECODER: FRAUNHOFER GESELLSCHATT
- ------------------------------------------------------------------------------------------------------------------
?? ?? ?? ?? ?? ??
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Digital Coding Process DE 3629434 C2 optimal coder DE FhG E
EP 0 287 578 AT, BE, FhG
CH/LI, DE,
FR, GB, IT,
LU, NL, SE
US 07/640.550 US FhG
JP 62-505113 JP FhG
KR 700459/88 KR FhG
- ------------------------------------------------------------------------------------------------------------------
Digital Coding Process DE 3912605 Huffman code DE FhG E
EP 0 393 526 AT, BE, FhG
CH/LI, DE,
DK, ES, FR,
GB, GR, IT,
LU, NL, SE
US 5,579,430 US FhG
JP 2,739,377 JP FhG
NO 913931 NO FhG
==================================================================================================================
</TABLE>
Page 19
<PAGE>
<TABLE>
==================================================================================================================
<S> <C> <C> <C> <C> <C>
FI 914886 FI FhG
KR KR FhG
RU 5010281/24 RU FhG
- ------------------------------------------------------------------------------------------------------------------
Windowing US 08/678,666 window shope US FhG, Dolby E
PCT/EP96/0514 AU, CA, FhG
6 EP, JP, KR
- ------------------------------------------------------------------------------------------------------------------
Intensity Stereo DE 19628293 prediction DE FhG, AT&T, Lucent E
PCT/EP97/0287 AU, CA, FhG
5 CN, EP,
JP, KR,
WO98/03037 NO, RU,
UA, US,
- ------------------------------------------------------------------------------------------------------------------
Coding Stereo Spectral DE 19628292 side Information DE FhG, AT&T; Lucent E
Data
PCT/EP97/0287 AU, CA, FhG
4 CN, EP,
KP, KR,
WO98/03036 NO, RU,
UA, US
- ------------------------------------------------------------------------------------------------------------------
Process for the defecting DE 4034017 C2 error detection DE FhG O
of
==================================================================================================================
</TABLE>
Psge 20
<PAGE>
<TABLE>
<S> <C> <C> <C>
============================================================================
US 08/039,478 US FhG
============================================================================
</TABLE>
Page 21
<PAGE>
EXHIBIT 10.11
SOFTWARE LICENSE AGREEMENT
between
FRAUNHOFER-GESELLSCHAFT, ZUR FORDERUNG DER
ANGEWANDTEN FORSCHUNG E. V.
and
LIQUID AUDIO, INC.
_______________________________________________________________________________
THIS AGREEMENT DOES NOT BIND OR OBLIGATE EITHER PARTY IN ANY MANNER UNLESS DULY
EXECUTED BY AUTHORIZED REPRESENTATIVES OF BOTH PARTIES
_______________________________________________________________________________
<PAGE>
FRAUNHOFER-GESELLSCHAFT ZUR FORDERUNG DER ANGEWANDTEN FORSCHUNG E.V.
Signed for /s/ DR. N. PAULUS
- ----------------------------------------
By (Sign)
Dr. N. Paulus
- ----------------------------------------
Name (Print)
Director of Patent & License Dep.
- ----------------------------------------
Title
August 20, 1998
- ----------------------------------------
Date
LIQUID AUDIO, INC.
/s/ ROBERT FLYNN
- ----------------------------------------
By (Sign)
Robert Flynn
- ----------------------------------------
Name (Print)
VP Business Development
- ----------------------------------------
Title
August 18, 1998
- ----------------------------------------
Date
This Agreement is made and entered into this 14TH DAY OF AUGUST 1998 ("Effective
Date") by and between FRAUNHOFER-GESELLSCHAFT ZUR FORDERUNG DER ANGEWANDTEN
FORSCHUNG e. V., a non profit organization duly organized and existing under the
Page 2
<PAGE>
Laws of the Federal Republic of Germany and having its principal office at
LeonrodstraBe 54, 80636 Munchen, Germany, (hereinafter referred to as "FhG"),
acting on behalf of its Fraunhofer-Institut fur Integrierte Schaltungen (IIS)
and LIQUID AUDIO. Inc., a corporation duly organized under the laws of
California and having its principal office at 810 Winslow Street Redwood City,
California 94063, USA, (hereinafter referred to as "Licensee").
WITNESSETH
WHEREAS: FhG and Licensee have already agreed on a Letter of Intent of Oct.
22/29, 1997; and
WHEREAS, FhG is the owner of certain "TECHNOLOGY" (as later defined herein), and
wishes to have this TECHNOLOGY utilized by Licensee; and
WHEREAS, Licensee wishes to obtain a non-exclusive license to use the TECHNOLOGY
upon the terms and conditions hereinafter set forth; and
WHEREAS, FhG Intends this Agreement to confer a license with Licensee, retaining
to its own use all ownership rights in the TECHNOLOGY, including, but not
limited to, patent rights, copyrights, implementation rights and licensing
rights therein, and further intends that no license, expressed or implied, for
use other than herein set out shall be transferred hereby.
WHEREAS, LICENSEE KNOWS AND ACCEPTS THAT LICENSEE NEEDS A PATENT LICENSE BY
DOLBY AND THOMSON MULTIMEDIA, 46 QUAL ALPHONSE LE GELLO, F-92648 BOULEGNE,
FRANCE, AND MAYBE BY OTHER THIRD PARTIES FOR THE EXPLOITATION OF THE LICENSED
PRODUCT(S).
Page 3
<PAGE>
NOW, THEREFORE, In consideration of the foregoing and of the mutual covenants,
terms and conditions herein contained the Parties agree as follows:
1. DEFINITIONS
For the purposes of this Agreement, the following words and phrases shall have
the following meanings:
1.1. "TECHNOLOGY" shall mean the software as described in Appendix A of this
Agreement.
1.2. "LICENSED PRODUCT" means any software, which incorporates, in whole or in
part, any TECHNOLOGY, and but for this license would constitute an
Infringement of such TECHNOLOGY.
1.3. "APIs" means the application programming interfaces for the TECHNOLOGY.
1.4. "SOURCE CODE" means software in human-readable, high-level language form,
which when compiled or assembled, becomes the executable "OBJECT CODE"
(as later defined herein) of a software program. All references to SOURCE
CODE in this Agreement shall include both human readable (listing) and
machine readable (source files) forms and all tools and documentation
needed to build such software, as well as program documentation as it
becomes available. Including flow charts, programmers comments and design
specifications for such software.
1.5. "OBJECT CODE" means machine-executable code in binary format, typically
the result of processing the SOURCE CODE with an assembler or compiler.
1.6. "GROSS REVENUES" shall mean Licensee's gross revenues that are actually
received and non-refundable from the sale of the LICENSED PRODUCT(s).
1.7. "Parties" shall mean FhG and Licensee. "Party" shall mean any one of the
Parties.
2. GRANT, DELIVERY OF TECHNOLOGY, MAINTENANCE, UPDATES, NEW VERSIONS,
ENHANCEMENTS IMPROVEMENTS
2.1.1. Source License Grant. FhG hereby grants to Licensee a non-exclusive,
--------------------
non-transferable,non-assignable (except as set forth in Section 11
below), non-sublicensable, worldwide limited license to use, copy,
display, perform, modify and create derivative works of the TECHNOLOGY in
SOURCE CODE form solely to design, develop, maintain, support and test
LICENSED PRODUCT(s) to enable such products to use TECHNOLOGY.
2.1.2. Distribution Rights - Object Code. FhG hereby grants to Licensee a non-
---------------------------------
exclusive,non-transferable, non-assignable (except as set forth in
Section 1)
Page 4
<PAGE>
below), non-sublicensable, worldwide, limited license to make, copy,
test, market, sell, distribute OBJECT CODE versions of the TECHNOLOGY,
and any derivative works thereof created by Licensee pursuant to Section
2.1.1, solely as part of LICENSED PRODUCT(s) provided that:
(a) Licensee does not expose or publish the APIs for the TECHNOLOGY in a
form in which applications other than LICENSED PRODUCT(s) could call
such APIs:
(b) Licensee does not permit further redistribution of the TECHNOLOGY by
Licensee's end users of LICENSED PRODUCT(s), except as part of
LICENSED PRODUCT(s);
(c) Licensee includes a valid copyright notice on LICENSED PRODUCT(s),
and
(d) Licensee agrees to Indemnify, hold harmless, and defend FhG from and
against any claims or lawsuits, including attorneys' fees, that arise
or result from the use of LICENSED PRODUCT(s) In the manner set forth
in Section 8.1 below.
Licensee shall be permitted to distribute the LICENSED PRODUCTS to its
end user customers pursuant to an end user license agreement that permits
use of the LICENSED PRODUCTS but prohibits further redistribution,
exploitation, or use of the LICENSED PRODUCT by any party other than the
end user customer that purchased the end user license to the LICENSED
PRODUCT.
2.1.3. Ownership. FhG shall retain all right, title and interest in and to the
----------
TECHNOLOGY,subject to the license grants in Sections 2.1.1 and 2.1.2.
Licensee shall be entitled to establish all proprietary rights for itself
in the Intellectual property represented by Licensee-created enhancements
and new features, whether in the nature of trade secrets, copyrights or
patent rights or other rights. FhG shall be entitled to establish all
proprietary rights for itself in the Intellectual property represented by
FhG-created enhancements and new features, whether in the nature of
patent rights or other rights.
2.1.4. No Other Rights. Except as expressly granted in this Agreement, Licensee
----------------
shall have no other rights in the TECHNOLOGY. Under no circumstances will
anything in this Agreement be constructed as granting, by implication,
estoppel or otherwise, a license to any FhG technology other than the
TECHNOLOGY.
2.1.5. Patent License. Licensee understands and accepts that it must execute a
---------------
patent license with the appropriate licensing entity in order to have all
necessary rights to create the LICENSED PRODUCT(s), Licensee will contact
Dolby and Thomson multimedia to get the necessary contracts and will
negotiate in good faith to complete those contracts.
2.2. The TECHNOLOGY has been delivered to Licensee by FhG, Licensee
acknowledges receipt of the TECHNOLOGY deliverables.
2.3.1. FhG will make available to licensee maintenance and updates with respect
to the TECHNOLOGY at no charge for the first year of the license. The
maintenance will provide licensee with access consistent with a most
favored nation status. Maintenance will include resolution of any
nontrivial program errors reported by Licensee within a reasonable
period. Thereafter, in any given year, FhG will make maintenance and
updates available to Licensee for no
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charge if the amount of royalty paid to FhG, as defined in Art.5.1.b, in
that year is equal to or greater than [*.] If the royalty amount paid to
FhG is less than [*] then Licensee may pay the difference between [*] and
the amount of royalty paid in order to receive maintenance support and
updates.
2.3.2. The updates to each MPEG-2 AAC (IS 13818-7) and MPEG Layer-3 (IS 11172-3
and 13818-3) will include all improvements made to the TECHNOLOGY as long
as those improvements are part of the respective standard for each source
code.
2.3.3. On a most favored nation basis. FhG shall make available to Licensee all
new versions, enhancements and improvements to the TECHNOLOGY as a beta
testing site. As a beta testing partner Licensee shall be obligated to
provide FhG with feedback on the performance of the new software being
evaluated, FhG will make commercially reasonable efforts to provide
Licensee and any other beta site with at least a one-month period from
the time Licensee receives the specific beta version of the TECHNOLOGY
until the time that the software is made available in a final release
version in OBJECT CODE form.
2.3.4. FhG and Licensee agree to discuss participation with each other in a
technology exchange partnership in which FhG will provide in-depth
updates of developments at FhG. Additionally, this partnership will
attempt to provide interoperability of FhG's MMP technology and the
Licensee MusicOn-Demand system. Neither party will have any liability to
the other for failure to enter into such relationship.
3. CONFIDENTIALITY
3.1. The license grant in Section 2 is expressly conditioned upon Licensee
retaining in confidence all information and know-how transmitted to
Licensee by FhG that FhG has identified as being proprietary and/or
confidential or that, by the nature of the circumstances surrounding the
disclosure, ought in good faith to be treated as proprietary and/or
confidential and is confirmed in writing as such within 30 days after
disclosure (the "Confidential Information"), and will make no use of the
Confidential Information except under the terms and during the existence
of this Agreement. The SOURCE CODE version of the TECHNOLOGY and any
derivative works thereof created by FhG are deemed to be Confidential
Information of FhG. Any derivative works thereof created by Licensee
shall be deemed to be the Confidential Information of Licensee, and
Licensee agrees to protect them as such.
3.2. Licensee shall have no obligation to maintain the confidentially of
Confidential Information that (a) it received rightfully from another
party prior to or after its receipt from FhG, (b) FhG has disclosed to a
third party without any obligation to maintain such information in
confidence; or (c) is independently developed
* Certain information in this Exhibit has been omitted and filed
separately with the Commission. Confidential treatment has been
requested with respect to the omitted portions.
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by Licensee: or (d) is publicly available or in the public domain.
Further. Licensee may disclose Confidential Information as required by
governmental or Judicial order, provided Licensee gives FhG prompt notice
of such order and compiles with any protective order (or equivalent)
Imposed on such disclosure.
3.3. Licensee shall not reproduce, duplicate, copy or otherwise disclose,
distribute, or disseminate the Confidential Information in any media,
except on Licensee's premises by Licensee's permanent employees.
3.4. Licensee's obligation under this Section 3 shall survive any termination
or expiration of the Agreement and shall extend to the earlier of such
time as the Confidential Information is in the public domain or five (5)
years following termination or expiration of this Agreement.
4. DUE DILIGENCE
4.1. Licensee shall use its reasonable best efforts (i) to bring LICENSED
PRODUCT(s) in combination with Licensee's related products to market
through a thorough, vigorous and diligent program for exploitation and
(ii) to continue active, diligent marketing efforts for LICENSED
PRODUCT(s) in combination with Licensee's related products throughout the
life of this Agreement.
4.2 Licensee's failure to perform in accordance with Section 4.1 above shall
be grounds for FhG to terminate this Agreement pursuant to Section 13.3
hereof.
5. ROYALTIES, PAYMENTS AND REPORTS
5.1. For the rights and license granted hereunder, Licensee shall pay
royalties and shall make payments to FhG as follows:
a.) A non creditable and non refundable initial payment of [*] shall be
payable in four installments. The first Installment of [*] has already
been paid at the signing of the letter of Intent of Oct. 22/29, 1997. The
second Installment of [*] shall be paid at the signing of this license
agreement. The third and fourth installments of [*] shall be payable at
the time that version 2.0 and 3.0 software deliverables are provided.
b.) A royalty at the rate of [*] of the GROSS REVENUES ("Running
Royalties"). The royalty rate shall be adjusted on a semiannual basis to
be equal to the most favored nation pricing for any source code license
granted to the TECHNOLOGY.
* Certain information in this Exhibit has been omitted and filed separately with
the Commission. Confidential treatment has been requested with respect to the
omitted portions.
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5.2. For the purpose of timing of payments, a LICENSED PRODUCT shall be
considered sold when revenues are actually received by Licensee and are
non-refundable.
5.3. Within thirty (30) days after the end of each calendar half year ending
on June 30 or December 31, commencing on the half year containing the
Effective Date. Licensee shall pay FhG the Running Royalties accrued
during such calendar half year. Simultaneously with such payment.
Licensee shall provide FhG with a report certified by Licensee's chief
financial officer or the chief financial officer's designate (the
"Royalty Report"), which Includes:
5.3.1. the number of sold LICENSED PRODUCT(s) during the calendar half
year even if this number is zero;
5.3.2. the Running Royalties owed on such sold LICENSED PRODUCT(s):
5.3.3. the amount of Licensee's payment accompanying the Royalty
Report:
5.3.4. any other information that FhG and Licensee deem reasonable to
ensure the Licensee is complying with this Agreement.
5.4. Payments to FhG shall be made by wire transfer to the bank and account
indicated in this Agreement.
5.5. FhG will credit to Licensee any overpayment of royalties made in error if
such error is identified and fully explained by written notice to FhG
during the term of this Agreement.
5.6. Time is of the essence with respect to all payments required hereunder.
5.7. All dollar amounts in this Agreement refer to United States dollars
unless otherwise indicated. Any conversion to United States dollars shall
be of the prevalling rate for bank cable transfers as quoted for the last
day of such semiannual period by the Wall Street Journal.
5.8. Overdue payments shall be subject to a late payment charge calculated at
an annual rate of three percent (3%) over the prime rate or successive
prime rates (as posted in the Wall Street Journal) during the
delinquency. If the amount of such charge exceeds the maximum permitted
by law, such charge shall be reduced to such maximum.
6. REPORTS AND RECORDS
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6.1. During the Term of this Agreement and for a period of six (6) years
thereafter. Licensee shall keep complete, full, and accurate books and
records of all information which may be reasonably required in order to
confirm the accuracy of Licensee's reports and payments. FhG shall have
the right to have a professionally registered accountant inspect of such
books and records of Licensee to the extent necessary to verify their
accuracy and that of other statements provided for herein; provided
however, that such activity shall be made during regular business hours
upon reasonable notice and Licensee may not be audited more than once in
any calendar year, Any royalty statement that is not audited and
specifically disputed by FhG within two (2) years after issuance shall be
deemed to be binding and conclusive on FhG. Such accountant shall not
reveal any information to FhG other than what is required to be reported
under this Agreement, unless the accountant is ordered to disclose
additional information by a court of competent jurisdiction. The cost of
the examination shall be paid by FhG unless the inspection reveals that
the total amount owed for the period under audit is greater than five
Percent (5%) of the amounts reported, in which case Licensee shall pay
the reasonable, out-of-pocket costs of the inspection and collection.
6.2. Licensee shall be responsible for and shall pay any tax, duty, levy,
customs fee, or similar charge ("Taxes"), including interest and
penalties thereon, however designated, imposed on it as a result of the
operation or existence of this Agreement, except for withholding and any
other taxes on FhG's net income, which FhG acknowledges that Licensee may
be required to withhold or deduct from payments to FhG.
7. INTRINGEMENT
7.1. Licensee: shall inform FhG promptly in writing of any alleged
infringement of the TECHNOLOGY by a third party, and of any available
evidence thereof, of which Licensee becomes aware.
7.2. During the term of this Agreement, FhG shall have the right, but shall
not be obligated, to prosecute at its own expense all infringements of
the TECHNOLOGY and, in furtherance of such right. Licensee hereby agrees
that FhG may include Licensee as a party plaintiff in any such suit,
without expense to Licensee, subject to Licensee's prior written consent.
The total cost of any such infringement action commenced or defended
solely by FhG shall be borne by FhG and FhG shall keep any recovery of
damages for past infringement derived therefrom.
7.3. If within six (6) months after having been notified of any alleged
infringement, FhG shall have been unsuccessful in persuading the alleged
infringer to desist and shall not have brought and shall not be
diligently prosecuting an infringement action, or if FhG shall notify
Licensee at any time prior thereto of its intention not to bring suit
against any alleged infringer, then, and in those events
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only, Licensee shall have the right, but shall not be obligated, to
prosecute at its own expense any infringement of the TECHNOLOGY, and
Licensee may, for such purposes, use the name of FhG as party plaintiff.
No settlement consent judgment or other voluntary final disposition of the
suit may be entered into without the consent of FhG, which consent shall
not unreasonably be withheld. Licensee shall indemnify FhG against any
order for costs that may be made against FhG in such proceedings.
7.4. In the event that Licensee shall undertake the enforcement and/or defense
of the TECHNOLOGY by litigation, Licensee may withhold up to fifty percent
(50%) of the payments otherwise thereafter due FhG under Article 5
hereunder and apply the same toward reimbursement of up to half of
Licensee's expenses. Including reasonable attorneys' fees, in connection
therewith. Any recovery of damages by Licensee for each such suit shall be
applied first in satisfaction of any unreimbursed expenses and legal fees
of Licensee relating to such suit, and next toward reimbursement of FhG
for any payments under Paragraph 5 past due or withheld and applied
pursuant to this Article 7. The balance remaining from any such recovery
shall be divided equally between Licensee and FhG.
7.5. In the event that a declaratory judgment action alleging invalidity or
noninfringement of any of the TECHNOLOGY shall be brought against
Licensee, FhG, at its option, shall have the right, within thirty (30)
days after commencement of such action, to intervene and take over the
sole defense of the action at its own expense.
7.6. In any infringement suit as either Party may institute to enforce the
TECHNOLOGY pursuant to this Agreement, the other Party hereto shall, at
the request and expense of the Party initiating such suit, cooperate in
all reasonable respects and, to the extent possible, have its employees
testify when reasonably requested and make available relevant records,
papers, information, samples, specimens, and the like as reasonably
necessary.
8. PRODUCT LIABILITY
8.1. Licensee shall at all times during the term of this Agreement and
thereafter. Indemnify, defend and hold FhG, its trustees, officers,
employees and affiliates, harmless against all claims and expenses arising
from third-party claims, including legal expenses and reasonable
attorneys' fees, arising out of the death of or injury to any person or
persons or out of any damage to property to the extent attributable to the
LICENSED PRODUCTS, and against any other third-party claim, proceeding,
demand, expense and liability of any kind whatsoever to the extent
attributable to the production, manufacture, sale, use, lease. consumption
or advertisement of the LICENSED PRODUCT(s). Licensee's obligations under
this Section 8.1 shall be conditioned upon prompt notice of such third-
party claims from FhG, reasonable cooperation and assistance from
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FhG at Licensee's expense and Licensee's sole control of the defense
and/or settlement of such action. Licensee shall not be liable for any
expenses incurred by FhG without Licensee's prior written consent. In no
event shall either party, its trustees, officers, employees and affiliates
be liable for special, direct, Indirect or consequential damages, losses,
costs, charges, claims, demands, fees or expenses of any nature or kind.
8.2. Licensee shall obtain or carry in full force and effect liability
insurance which shall protect Licensee and FhG in regard to events covered
by Paragraph 8.1 above. Such Insurance shall be written by a reputable
Insurance company authorized to do business in California, shall list FhG
as an additional named insured thereunder and shall require thirty (30)
days written notice to be given to FhG prior to any cancellation or
material change thereof. The limits of such occurrence shall not be less
than one Million Dollars ($1,000,000) per occurrence with an aggregate of
Two Million Dollars ($2,000,000) for property damage, Licensee shall
provide FhG with Certificates of Insurance evidencing the same on January
1 of each calendar year during the duration of this Agreement.
8.3. SUBJECT TO THE TERMS OF THE FIFTH RECITAL TO THIS AGREEMENT SET FORTH
ABOVE, FHG REPRESENTS AND WARRANTS THAT IT OWNS THE TECHNOLOGY OR HAS ALL
RIGHTS NECESSARY TO GRANT THE LICENSE TO LICENSEE HEREUNDER, EXCEPT AS
OTHERWISE EXPRESSLY SET FORTH IN THIS AGREEMENT, FHG MAKES NO
REPRESENTATIONS AND EXTENDS NO WARRANTIES OF ANY KIND, EITHER EXPRESS OR
IMPLIED, INCLUDING BUT NOT LIMITED TO WARRANTIES OF MERCHANTABILITY AND
FITNESS FOR A PARTICULAR PURPOSE, OF THE TECHNOLOGY, NOTHING IN THIS
AGREEMENT SHALL BE CONSTRUED AS A REPRESENTATION MADE OR WARRANTY GIVEN BY
FHG THAT THE PRACTICE BY LICENSEE OF THE LICENSE GRANTED HEREUNDER SHALL
NOT INFRINGE THE KNOW-HOW AND/OR INTELLECTUAL PROPERTY RIGHTS AND/OR OTHER
RIGHTS OF ANY THIRD PARTY.
9. EXPORT CONTROLS
It is understood that FhG is subject to German laws and regulations controlling
the export of technical data, computer software, laboratory prototypes and other
commodities and that its obligations hereunder are contingent on compliance with
applicable German export laws and regulations. The transfer of certain technical
data and commodities may require a license from the cognizant agency of the
German Government and/or written assurances by Licensee that Licensee shall not
export data or commodities to certain foreign countries without prior approval
of such agency. FhG neither represents that a license shall not be required nor
that, if required, it shall be issued.
10. MARKING
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Licensee will give clear reference to Fraunhofer IIS and its technology in any
LICENSED PRODUCT(s) and associated documentation, including a credits text audio
compression technology licensed by Fraunhofer IIS a URL to IIS audio home page,
and IIS logo.
11. ASSIGNMENT
No rights, duties or privileges of Licensee hereunder shall be transferred or
assigned by Licensee, except in connection with Licensee's merger with or sale
or entire business to, another entity, provided that such entity shall first
have agreed in writing with Licensee to perform all of Licensee's obligations
and duties hereunder.
12. DISPUTE RESOLUTION
12.1 The Parties agree to submit any dispute or controversy arising out of or
relating to this Agreement to arbitration to be held in accordance with
the Commercial Arbitration Rules of the American Arbitration Association
and shall be referred to a sole arbitrator selected by the Parties. The
award shall be made within six (6) months of selection of the arbitrator
and may be entered in any court having competent jurisdiction. The
arbitration shall be held in the State of California and shall be
construed according to the substantive law of the State of New York
regardless of conflict of law rules. The arbitrator shall determine issues
of arbitrability but may not limit, expand or otherwise modify the terms
of the Agreement nor have authority to award punitive or other damages in
excess of compensatory damages and each Party irrevocably waives any claim
thereto. Each Party shall bear its own expenses but those related to the
compensation of the arbitrator shall be borne equally. The Parties, their
representatives, other participants and the arbitrator shall hold the
existence, content and result of the arbitration in confidence. Issues
relating to the validity, enforceability, scope or Infringement of
Intellectual property shall not be subject to mediation or arbitration. In
the event any dispute relates to this Agreement but is not subject to
arbitration, the Parties agree that their choice of forum to resolve the
dispute shall be either the United States Courts in the State of
California or the State Courts of the State of California.
12.2 Notwithstanding the foregoing, nothing in this Article shall be construed
to waive any rights or timely performance of any obligations existing
under this Agreement.
13. TERM, TERMINATION
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13.1. The term of this license agreement will be five years. Thereafter,
Licensee will have an option to renew this license for an additional 5
years
13.2. If Licensee shall cease to carry on its business, this Agreement shall
terminate upon notice by FhG.
13.3. Failure to pay or perform any obligation hereunder within the time
prescribed shall constitute an event of default. Failure to cure any
default within sixty days after receipt of notice describing the non-
performance (ten business days with respect to undisputed non-payment of
funds) shall entitle the Party giving such notice to terminate or suspend
this Agreement.
13.4. Licensee may terminate this Agreement, at will, subject to payment of all
Royalties due and upon sixty (60) days notice to FhG.
13.5. Termination shall accelerate Licensee's royalty payment and half year
reporting obligations from "Within thirty (30) days after the end of each
calendar half year", to "Within thirty (30) days of termination".
13.6. The obligations of the Parties under this Agreement which expressly or by
their nature would continue beyond the termination, cancellation or
expiration of this Agreement shall remain in effect and survive
termination, cancellation or expiration of this Agreement, Including by
way of example only the Sections 1. 2,1,3,3,8, 11, 12 and 15. Immediately
upon termination of this Agreement (other than for default by FhG),
Licensee shall pay to FhG all royalties due through the effective date of
such termination.
13.7. Licensee may, however, after the effective date of such termination,
exploit all LICENSED PRODUCT(s) in combination with Licensee's related
products, and complete LICENSED PRODUCT(s) In combination with Licensee's
related products in the process of manufacture at the time of such
termination and sell the same, provided that Licensee shall make payments
to FhG of the Running Royalties thereon as required by Article 5 of this
Agreement and shall submit the reports required by Article 5 hereof on the
sales of LICENSED PRODUCT(s).
14. PAYMENTS, NOTICES AND OTHER COMMUNICATIONS
All notices, reports, payments, consents, approvals, and the like made hereunder
by Licensee to FhG shall be in written English, to the address or facsimile
number below and sent by a secure special delivery service that provides proof
of delivery, or by a properly transmitted facsimile. All notices, reports,
payments, consents, approvals, and The like made hereunder by FhG to Licensee
shall be in written English, to the address or facsimile number set forth on the
signature page of this Agreement and sent by a secure special delivery service
that provides proof of delivery, or by a properly transmitted facsimile.
Licensee may change its address and bank account information by providing
appropriate notice to FhG. Upon appropriate notice by FhG,
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FhG may change its address and back account Information, and may require notices
to FhG to be sent to up to two different addresses and portions of the royalties
to be paid to up to two different bank accounts.
Notices to Licensee shall be sent to:
Liquid Audio, Inc
810 Winslow Avenue
Redwood City, California 94063
Attention: John Stone
Notices to FhG shall be sent to:
Frounhofer-Institut for Integrierte Schaltungen
Attn.: Mr. Dr. Karlheinz Brandenburg
Arn Welchselgarten 3
91058 Erlangen
Germany
telephone: +49(0)9131/7 76-3 03
fax: +49(0)9131/7 76-3 99
Payments to FhG shall be made by wire transfer to FhG's bank account as
follows:
Postbank Munchen
BLZ 700 100 80
Konto-Nr, 56 255-801
der Frounhofer-Patentstelle for die Deutsche Forschung.
15. GENERAL
15.1. This Agreement shall be construed, governed, Interpreted and applied in
accordance with the laws of the Federal Republic of Germany.
15.2. The Parties hereto acknowledge that this Agreement sets forth the entire
Agreement and understanding of the Parties hereto as to the subject matter
hereof, and supersedes the Letter of Intent of Oct. 22/29 1997 and any
other prior agreements relating to the subject matter hereof. This
Agreement shall not be subject to any change or modification except by the
execution of a written Instrument subscribed to by the Parties hereto.
15.3. The provisions of this Agreement are severable and in the event that any
provisions of this Agreement shall be determined to be Invalid or
unenforceable under any controlling body of the law, such Invalidity or
unenforceability shall
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not in any way affect the validity or enforceability of the remaining
provisions hereof.
15.4. The failure of either Party to assert a right hereunder or to Insist upon
compliance with any term or condition of this Agreement shall not
constitute a waiver of that right of excuse a similar subsequent failure
to perform any such term or condition by the other Party,
15.5. EXCEPT FOR INDEMNIFICATION OBLIGATIONS UNDER SECTION 8 ABOVE, IN NO EVENT
SHALL EITHER PARTY'S AGGREGATE LIABILITY TO THE OTHER PARTY UNDER THIS AGREEMENT
EXCEED THE AMOUNTS PAID BY LICENSEE HEREUNDER. IN NO EVENT SHALL EITHER PARTY BE
LIABLE FOR CONSEQUENTIAL INCIDENTAL SPECIAL, INDIRECT OR RELIANCE DAMAGES
ARISING OUT OF OR RELATING TO THIS AGREEMENT, WHETHER BASED IN CONTRACT, TORT,
OR ANY OTHER LEGAL THEORY, REGARDLESS WHETHER SUCH PARTY HAS BEEN ADVISED OF THE
POSSIBILITY OF SUCH DAMAGES.
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APPENDIX A
I. DEFINITIONS
I.A. "AAC Standard" means the specifications and operating parameters
established by the Joint Technical Committee of the International
Standards Organization ISO/IEC IS 13818.7 information technology --
Generic coding of moving pictures and associated audio information -- Part
7: Advanced Audio Coding.
I.B. "FAC" shall mean the technology which is part of the AAC Standard and
which was developed by FhG before and during the collaboration to create a
joint proposal for the extension of the MPEG-audio standard and which is
protected by patents and patent applications, which are owned by FhG or
for which FhG has the right to grant licenses
II. DESCRIPTION OF TECHNOLOGY
TECHNOLOGY consists of "FAC Encoder" (as later defined herein), "FAC Decoder"
(as later defined herein). "MPEG Layer-3 Encoder" (as later defined herein) and
"MPEG Layer-3 Decoder" (as later defined herein) in SOURCE CODE format.
II.A. FAC ENCODER
II.A.1. OVERVIEW
"FAC Encoder" is a complete FAC compliant software implementation of the FAC
encoding algorithm in the programming language 'C'.
II.A.2. FEATURES
[*]
* Certain information in this Exhibit has been omitted and filed separately with
the Commission. Confidential treatment has been requested with respect to the
omitted portions.
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II.B. FAC DECODER
II.B.1. OVERVIEW
"FAC Decoder" is a complete FAC compliant software implementation of the FAC
decoding algorithm in the programming language "C++".
II.B.2. FEATURES
[*]
II.C. MPEG LAYER-3 ENCODER
II.C.1. OVERVIEW
"MPEG Layer-3 Encoder" is a complete IS 11172-3 and IS 13818-3 compliant
software implementation of the MPEG Layer-3 encoding algorithm in the
programming language "C". The MPEG Layer-3 Encoder is also compatible with the
proprietary FhG extension for sampling rates of 8, 11.025 and 12 kHz
("MPEG2.5").
II.C.2. FEATURES
[*]
II.D. MPEG LAYER-3 DECODER
II.D.1. OVERVIEW
"MPEG Layer-3 Decoder" is a complete IS 11172-3 and IS 13818-3 compliant
software implementation of the MPEG Layer-3 decoding algorithm in the
programming language "C". The MPEG Layer-3 Decoder is also compatible with the
proprietary FhG extension for sampling rates of 8, 11.025 and 12 kHz
("MPEG2.5").
II.D.2. FEATURES
[*]
* Certain information in this Exhibit has been omitted and filed separately with
the Commission. Confidential treatment has been requested with respect to the
omitted portions.
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[*]
* Certain information in this Exhibit has been omitted and filed separately with
the Commission. Confidential treatment has been requested with respect to the
omitted portions.
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EXHIBIT 10.12
RSA DATA SECURITY (TM)
OEM MASTER LICENSE AGREEMENT
THIS OEM MASTER LICENSE AGREEMENT ("Agreement"), effective as of the later
date of execution ("Effective Date"), is entered into by and between RSA Data
Security, Inc., a Delaware corporation ("RSA"), having a principal address at
100 Marine Parkway, Suite 500, Redwood City, California 94065, and the entity
named below ("OEM"), having a principal address as set forth below.
OEM:
Liquid Audio, Inc., a California corporation
- -----------------------------------------------------
(Name and jurisdiction of incorporation)
2421 Broadway, 2F
- -----------------------------------------------------
(Address)
Redwood City, CA 94063
- -----------------------------------------------------
OEM Legal Contact:
Harry Boadwee, Esq. (415) 858-7188
------------------------------------------------
(name, telephone and title)
OEM Billing Contact:
Philip Wiser, Vice President of Engineering
------------------------------------------------
(415) 562-0884
------------------------------------------------
(name, telephone and title)
OEM Technical Contact:
Philip Wiser, Vice President of Engineering
------------------------------------------------
(415) 562-0884
------------------------------------------------
(name, telephone and title)
OEM Commercial Contact:
Philip Wiser, Vice President of Engineering
------------------------------------------------
(415) 562-0884
------------------------------------------------
(name, telephone and title)
TERRITORY:
[_] North America (United States and Canada)
[X] Worldwide, subject to Section 10.7.
Separate Maintenance Agreement:
YES [X] NO [_]
1. DEFINITIONS
-----------
The following terms when used in this Agreement shall have the following
meanings:
1.1 "BUNDLED PRODUCT(S)" means one or more of the products or product
groups described on a License/Product Schedule attached hereto and referencing
this Agreement which has been or will be developed by OEM and which incorporates
in the OEM Product in any manner any portion of the RSA Object Code. A Bundled
Product must represent a significant functional and value enhancement to the
Licensed Software such that the primary reason for an End User Customer to
license such Bundled Product is other than the right to receive a license to the
Licensed Software included in the Bundled Product.
1.2 "DISTRIBUTOR" means a dealer or distributor in the business of
reselling Bundled Products to End User Customers, directly or through one or
more Distributors, by virtue of authority of OEM. Bundled Products resold by a
Distributor shall bear OEM's trademarks and service marks and shall not be
privately labeled by such Distributor or other parties. A Distributor shall have
no right to modify any part of the Bundled Product.
1.3 "END USER CUSTOMER" means a person or entity licensing RSA Object Code
as part of a Bundled Product from OEM or a Distributor solely for personal or
internal use and without right to license, assign or otherwise transfer such
Bundled Product to any other person or entity.
1.4 "INTERFACE MODIFICATION" means a modification to the RSA Source Code
constituting and limited to hooks, ports or interfaces and similar modifications
necessary to permit the Licensed Software to operate in accordance with the User
Manual in OEM Products.
1.5 "LICENSE/PRODUCT SCHEDULE" means a schedule substantially in the form
of Exhibit "A" hereto completed and executed with respect to a Bundled Product
and specifying the Licensed Software, Field of Use limitation (if any), license
and maintenance fees, and other matters with respect to such Bundled Product. A
License/Product Schedule can be amended pursuant to Section 10.5 with respect to
a specified Bundled Product; and additional Bundled Products may be added to
this Agreement by executing an additional License/Product Schedule referencing
this Agreement. All such License/Product Schedules are incorporated in this
Agreement by this reference.
1.6 "FIELD OF USE" means a use, method of incorporation or product purpose
limitation with respect to
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the Licensed Software for a Bundled Product specified on the License/Product
Schedule for such Bundled Product.
1.7 "LICENSED SOFTWARE" means those portions of the RSA Software which
perform the algorithm(s) specified on page 2 of a License/Product Schedule
hereto as having been licensed by OEM with respect to a particular Bundled
Product.
1.8 "NEW RELEASE" means a version of the RSA Software which shall
generally be designated by a new version number which has changed from the prior
number only to the right of the decimal point (e.g., Version 2.2 to Version
2.3).
1.9 "NEW VERSION" means a version of the RSA Software which shall
generally be designated by a new version number which has changed from the prior
number to the left of the decimal point (e.g., Version 2.3 to Version 3.0).
1.10 "OEM PRODUCT" means any product developed by OEM into which the
Licensed Software is to be incorporated to create a Bundled Product.
1.11 "RSA OBJECT CODE" means the Licensed Software in machine-readable,
compiled object code form.
1.12 "RSA SOFTWARE" means RSA proprietary software identified on a
License/Product Schedule hereto and as further described in the User Manuals
associated therewith. "RSA Software" shall also include all modifications and
enhancements (including all New Releases and New Versions) to such programs as
may be provided by RSA to OEM pursuant to this Agreement or a maintenance
agreement between RSA and OEM.
1.13 "RSA SOURCE CODE" means the mnemonic, high level statement versions
of the Licensed Software written in the source language used by programmers.
1.14 "TERRITORY" means those geographic areas specified on page 1.
1.15 "USER MANUAL" means the most current version of the user manual
and/or reference manual customarily supplied by RSA to OEMs who license the RSA
Software.
2. LICENSES
--------
2.1 LICENSE GRANT. During the term and within the Field of Use limitation
-------------
(if any) specified in the applicable License/Product Schedule, RSA hereby grants
OEM a non-exclusive, non-transferable license to:
2.1.1 use, if a source code license is specified in a
License/Product Schedule, a single copy of the RSA Source Code on a single
central processing unit accessed by one user at a time to: (i) modify the RSA
Source Code solely to create Interface Modifications; (ii) compile the RSA
Source Code to create object code; and (iii) maintain Bundled Products and
support End User Customers.
2.1.2 (i) incorporate the RSA Object Code into an OEM Product to
create a Bundled Product; (ii) reproduce and have reproduced the RSA Object Code
as incorporated in a Bundled Product as reasonably needed for inactive backup or
archival purposes and, if an internal use license is specified in a
License/Product Schedule, for distribution in the Territory solely to employees
of OEM and solely for use by such employees for OEM's internal business
purposes; and (iii) reproduce, have reproduced, and license or otherwise
distribute the RSA Object Code as incorporated in a Bundled Product in the
Territory.
2.1.3 (i) use the User Manual to support End User Customers; (ii)
modify and incorporate portions of the User Manual in Bundled Product document;
and (iii) reproduce, have reproduced and distribute in the Territory such
portions of the User Manual as incorporated in Bundled Product documentation.
2.2 LIMITATIONS ON LICENSES. The licenses granted in Section 2.1 are
-----------------------
further limited as follows:
2.2.1 LIMITATION ON DISTRIBUTEES. The RSA Object Code shall be
--------------------------
licensed or otherwise distributed only to (i) Distributors and (ii) End User
Customers.
2.2.2 NO EXPOSURE OF RSA SOFTWARE. The RSA Object Code may only be
---------------------------
accessed by the functionality of the Bundled Product in which it is included,
and a Bundled Product shall not make the RSA Object Code directly accessible to
End User Customers or to products other than the Bundled Product.
2.2.3 NO STANDALONE PRODUCT OR SERVICES. OEM may not in any way
---------------------------------
sell, lease, rent, license, sublicense or otherwise distribute the RSA Software
or any part thereof or the right to use the RSA Software or any part thereof to
any person or entity except as part of a Bundled Product. Unless a specific
grant of rights is included in the applicable License/Product Schedule, neither
OEM nor any Distributor or End User Customer may use the Bundled Product to
operate a service bureau or other revenue-generating service business.
2.2.4 LICENSE RESTRICTED TO LICENSED SOFTWARE AND FIELD OF USE. OEM
--------------------------------------------------------
may use or incorporate into a Bundled Product only that portion of the RSA
Software which is identified as Licensed Software in the applicable
License/Product Schedule. The RSA Object Code must be incorporated in a Bundled
Products, and may only be reproduced, licensed or distributed in accordance with
the Field of Use limitation, if any, specified in the applicable License/Product
Schedule.
2.2.5 PROHIBITED ACTIVITIES. OEM shall not modify (except to create
---------------------
Interface Modifications), translate, reverse engineer, decompile or disassemble
the RSA Software or any part thereof, and shall prohibit Distributors and End
User Customers from doing the same.
2.2.6 RSA ROOT KEYS. OEM may include the RSA/VeriSign, Inc. root
-------------
keys (the "RSA Root Keys") in any Bundled Product in which a hierarchy root key
is utilized or
page 2
<PAGE>
incorporated, provided that any such incorporation must make the, RSA Root Keys
functional within the Bundled Product and as accessible as any other hierarchy
root key within the Bundled Product.
2.3 TITLE.
-----
2.3.1 IN RSA. Except for the limited licenses expressly granted in
------
Section 2.1 and as further limited by Section 2.2, RSA does not by this
Agreement grant to OEM any right, title or ownership interest in and to the RSA
Software or in any related patents, trademarks, copyrights or proprietary or
trade secret rights.
2.3.2 IN OEM. Except as expressly provided below, OEM does not by
------
this Agreement grant to RSA any right, title or ownership interest in and to any
interface Modifications created by OEM as may be authorized hereunder or any
related patents, copyrights or proprietary or trade secret rights of OEM;
provided, however, that OEM hereby agrees that it will not assert against RSA
any of such patents, copyrights or proprietary or trade secret rights with
respect to any ports or interfaces developed by RSA without reference to the
source code of OEM's Interface Modifications.
3. LICENSE FEES
------------
3.1 LICENSE FEES. In consideration of RSA's grant to OEM of the limited
------------
license rights hereunder, OEM shall pay to RSA the amounts set forth below (the
"License Fees"):
3.1.1 SOURCE CODE LICENSE FEES. If RSA is ??anting to OEM RSA Source
------------------------
Code license rights as indicated on a License/Product Schedule, OEM shall pay to
RSA the source code License Fees specified on such License/Product Schedule upon
execution of such License/Product Schedule.
3.1.2 OBJECT CODE LICENSE FEES. In consideration of RSA's grant to
------------------------
OEM of the RSA Object Code license rights for the Bundled Products described in
each License/Product Schedule, OEM shall pay to RSA the object code License Fees
specified on each such License/Product Schedule in accordance with the terms
contained therein.
3.2 TAXES. All taxes, duties, fees and other governmental charges of any
-----
kind (including sales and use taxes, but excluding taxes based on the gross
revenues or net income of RSA) which are imposed by or under the authority of
any government or any political subdivision thereof on the License Fees or any
aspect of this Agreement shall be borne by OEM and shall not be considered a
part of, a deduction from or an offset against License Fees.
3.3 PREPAYMENT OF LICENSE FEES. OEM shall prepay License Fees in the
--------------------------
amount set forth in a License/Product Schedule, if any, upon execution of the
License/Product Schedule. In no event shall such prepayment be refundable. If
OEM has prepaid License Fees with respect to a Bundled Product, all of such
prepaid amounts may be offset against License Fees accrued at a rate of fifty
cents ($0.50) for each dollar ($1.00) of License Fees accrued until the
prepayments are exhausted. OEM shall show the application of prepaid License
Fees in the licensing reports provided to RSA pursuant to Section 3.7.
3.4 USE OF NET SALES PRICE. If a License Fee based on Net Sales Price is
----------------------
specified in a License/Product Schedule, the "Net Sales Price" means the gross
amount of all cash, in-kind or other consideration receivable by OEM at any time
in consideration of the licensing or other distribution of the Bundled Products,
excluding any amounts receivable by OEM for sales and use taxes, shipping,
insurance and duties, and reduced by all discounts, refunds or allowances
granted in the ordinary course of business. For the purposes of determining Net
Sales Price, the amount of in-kind or other non-cash consideration receivable by
OEM shall be deemed to have a dollar value equal to the standard price (as
listed in OEM's published price schedule on the date of the grant of the license
or the sale in question) for such Bundled Product, less all cash paid.
3.5 TERMS OF PAYMENT. Object code License Fees payable on an on-going
----------------
basis shall accrue with respect to Bundled Products licensed or otherwise
distributed by OEM or Distributors, as applicable, upon the date of invoice of
the Bundled Product to an End User Customer or Distributor. License Fees due RSA
hereunder shall be paid by OEM to the attention of the Software Licensing
Department at RSA's address set forth above on or before the thirtieth (30th)
day after the close of the calendar quarter during which the License Fees
accrued. A late payment penalty on any License Fees not paid when due shall be
assessed at the rate of one percent (1%) per thirty (30) days, beginning on the
thirty-first (31st) day after the last day of the calendar quarter to which the
delayed payment relates.
3.6 U.S. CURRENCY. All payments hereunder shall be made in lawful United
-------------
States currency and shall in no case be refundable. If OEM receives payment in
foreign currencies, the amount of its License Fees to RSA shall be calculated
using the closing exchange rate published in The Wall Street Journal, Western
Edition, on the last business day such journal is published in the calendar
quarter immediately preceding the date of payment.
3.7 LICENSING REPORT. A report in reasonably detailed form setting forth
----------------
the calculation of License Fees due from OEM and signed by a responsible officer
of OEM shall be delivered to RSA on or before the thirtieth (30th) day after the
close of each calendar quarter during the term of this Agreement, regardless of
whether License Fee payments are required to be made pursuant to Section 3.5.
The report shall include, at a minimum, the following information (if applicable
to the method of calculating License Fees designated in a License/Product
Schedule) with respect to the relevant quarter: (i) the total number of
copies/units of Bundled Products licensed or otherwise distributed by OEM and
Distributors (indicating the names and versions thereof); (ii) if applicable,
the total Net Sales Price invoiced to Distributors and End User Customers; and
(iii) total License Fees accrued.
<PAGE>
3.8 AUDIT RIGHTS. RSA shall have the right, at its sole cost and expense,
------------
to have an independent certified public accountant conduct during normal
business hours and not more frequently than annually, an audit of the
appropriate records of OEM to verify the number of copies/units of Bundled
Products licensed or otherwise distributed by OEM and OEM's calculation of
License Fees. If the License Fees accrued are different than those reported, OEM
will be invoiced or credited for the difference, as applicable. Any additional
License Fees, along with the late payment penalty assessed in accordance with
Section 3.5, shall be payable within thirty (30) days of such invoice. If the
deficiency in License Fees paid by OEM is greater than five percent (5%) of the
License Fees reported by OEM for any quarter, OEM will pay the reasonable
expenses associated with such audit, in addition to the deficiency.
3.9 EVALUATION COPIES. OEM may deliver copies of Bundled Products to
-----------------
prospective End User Customers on a trial basis for evaluation purposes only
(each, an "Evaluation Copy") provided that each such prospective End User
Customer has received a written or electronic trial license prohibiting the End
User Customer from copying, modifying, reverse engineering, decompiling or
disassembling the RSA Object Code or any part thereof. All Evaluation Copies
licensed shall contain a feature which disables the Evaluation Copy no later
than sixty (60) days after delivery to the prospective End User Customer. No
License Fees shall be reportable or payable with respect to Evaluation Copies
unless and until the Evaluation Copy is replaced with or converted to a standard
Bundled Product or the End User Customer is invoiced for the Bundled Product,
whichever occurs first.
4. LIMITED WARRANTY
----------------
4.1 LIMITED WARRANTY. During the initial ninety (90)-day term of each
----------------
License/Product Schedule RSA warrants that the Licensed Software specified in
such License/Product Schedule will operate in material conformance to RSA's
published specifications for the Licensed Software. RSA does not warrant that
the RSA Software or any portion thereof is error-free. OEM's exclusive remedy,
and RSA's entire liability in tort, contract or otherwise, shall be correction
of any warranted nonconformity as provided in Section 4.2 below. This limited
warranty and any obligations of RSA hereunder shall not apply to any Interface
Modifications or any nonconformities caused thereby and shall terminate
immediately if OEM makes any modification to the RSA Software other than
Interface Modifications.
4.2 ERROR CORRECTION. In the event OEM discovers an error in the Licensed
----------------
Software which causes the Licensed Software not to operate in material
conformance to RSA's published specifications therefor, OEM shall submit to RSA
a written report describing such error in sufficient detail to permit RSA to
reproduce such error. Upon receipt of any such written report, RSA will use its
reasonable business judgment to classify a reported error as either: (i) a
"Level 1 Severity" error, meaning an error that causes the Licensed software to
fail to operate in a material manner or to produce materially incorrect results
and for which there is no work around or only a difficult work around; or (ii) a
"Level 2 Severity" error, meaning an error that produces a situation in which
the Licensed Software is usable but does not function in the most convenient or
expeditious manner, and the use or value of the Licensed Software suffers no
material impact. RSA will acknowledge receipt of a conforming error report
within two (2) business days and (A) will use its continuing best efforts to
provide a correction for any Level 1 Severity error to OEM as early as
practicable; and (B) will use its reasonable efforts to include a correction for
any Level 2 Severity error in the next release of the RSA Software.
4.3 DISCLAIMER. EXCEPT FOR THE EXPRESS LIMITED WARRANTY PROVIDED IN THIS
----------
SECTION 4, THE RSA SOFTWARE IS PROVIDED "AS IS" WITHOUT ANY WARRANTY WHATSOEVER.
RSA DISCLAIMS ALL WARRANTIES, EXPRESS, IMPLIED OR STATUTORY, AS TO ANY MATTER
WHATSOEVER, INCLUDING ALL IMPLIED WARRANTIES OF MERCHANTABILITY, FITNESS FOR A
PARTICULAR PURPOSE AND NON-INFRINGEMENT OF THIRD PARTY RIGHTS. RSA DISCLAIMS ANY
WARRANTY OR REPRESENTATION TO ANY PERSON OTHER THAN OEM WITH RESPECT TO THE RSA
SOFTWARE. OEM SHALL NOT, AND SHALL TAKE ALL MEASURES NECESSARY TO INSURE THAT
ITS AGENTS AND EMPLOYEES DO NOT, MAKE OR PASS THROUGH ANY SUCH WARRANTY ON
BEHALF OF RSA TO ANY DISTRIBUTOR, END USER CUSTOMER OR OTHER THIRD PARTY.
5. ADDITIONAL OBLIGATIONS OF OEM
-----------------------------
5.1 BUNDLED PRODUCT MARKETING. OEM is authorized to represent to
-------------------------
Distributors and End User Customers only such facts about the RSA Software as
RSA states in its published product descriptions, advertising and promotional
materials or as may be stated in other non-confidential written material
furnished by RSA.
5.2 CUSTOMER SUPPORT. OEM shall, at its expense, provide all support for
----------------
the Bundled Products to Distributors and End User Customers.
5.3 LICENSE AGREEMENTS. OEM shall cause to be delivered to each
------------------
Distributor and End User Customer a license agreement which shall contain, at a
minimum, substantially all of the limitations of rights and the protections for
RSA which are contained in Sections 2.2, 5.4, 7, 10.7 and 10.8 of this
Agreement. OEM shall use commercially reasonable efforts to enforce the terms of
such agreements.
5.4 PROPRIETARY RIGHTS.
------------------
5.4.1 COPYRIGHT NOTICES; LICENSEE SEALS. OEM agrees not to remove or
---------------------------------
destroy any proprietary, trademark or copyright markings or notices placed upon
or contained within the RSA Source Code, RSA Object Code, User Manuals or any
related materials or documentation. OEM further agrees to insert and maintain:
(i) within every Bundled Product and any related materials or documentation a
copyright notice in the name of OEM; and (ii) within the splash screens, user
documentation, printed product
Page 4
<PAGE>
collateral, product packaging and advertisements for the Bundled Product, the
RSA "Licensee Seal" from the form attached as Exhibit "B" to this Agreement and
a statement that the Bundled Product contains the RSA Software.
5.4.2 TRADEMARKS. By reason of this Agreement or the performance
----------
hereof, OEM shall acquire no rights of any kind in any RSA trademark, trade
name, logo or product designation under which the RSA Software was or is
marketed and OEM shall not make any use of the same for any reason except as
expressly authorized by this Agreement or otherwise authorized in writing by
RSA. OEM shall cease to use the markings, or any similar markings, in any manner
on the expiration or other termination of this Agreement.
6. CONFIDENTIALITY
---------------
6.1 CONFIDENTIALITY. Each party acknowledges that in its performance of
---------------
its duties hereunder, the other party may communicate to it (or its designees)
certain confidential and proprietary information of such party, including the
RSA Software (in the case of RSA) and know-how, technology, techniques, and
business, product, and marketing plans of each such party (collectively, the
"Know-How"), all of which are confidential and proprietary to, and trade secrets
of, the disclosing party. The receiving party agrees to hold the Know-How
disclosed to it and, in the case of OEM the RSA Software, within its own
organization and shall not, without the specific written consent of the
disclosing party or as expressly authorized herein, utilize in any manner,
publish, communicate, or disclose any part of the disclosing party's Know-How or
the RSA Software (in the case of OEM) to third parties. This Section 6.1 shall
impose no obligations on either party with respect to any Know-How which: (i) is
in the public domain at the time disclosed by the disclosing party; (ii) enters
the public domain after disclosure other than by a breach of the receiving'
party's obligations hereunder or by a breach of another party's confidentiality
obligation; or (iii) is shown by documentary evidence to have been known by the
receiving party prior to its receipt from he disclosing party. Each party will
take such steps as are consistent with its protection of its own confidential
and proprietary information (but will in no event exercise less than reasonable
care) to insure that the provisions of this Section 6.1 are not violated by its
End User Customers, Distributors, employees, agents or any other person.
6.2 SOURCE CODE. OEM acknowledges the extreme importance of the
-----------
confidentiality and trade secret status of the RSA Source Code and OEM agrees,
in addition to complying with the requirements of Section 6.1 as it relates to
the RSA Source Code, to: (i) only use the RSA Source Code at the address set
forth on page 1 hereof or such alternate location specified in the applicable
License/Product Schedule; (ii) inform any employee that is granted access to all
or any portion of the RSA Source Code of the importance of preserving the
confidentiality and trade secret status of the RSA Source Code; and (iii)
maintain a controlled, secure environment for the storage and use of the RSA
Source Code.
6.3 PUBLICITY. Neither party will disclose to third parties, other than
---------
its agents and representatives on a need-to-know basis, the terms of this
Agreement or any exhibits hereto (including without limitation any
License/Product Schedule) without the prior written consent of the other party,
except (i) either party may disclose such terms to the extent required by law;
(ii) either party may disclose the existence of this Agreement; and (iii) RSA
shall have the right to disclose that OEM is an OEM of the RSA Software and that
any publicly-announced Bundled Product incorporates the RSA Software.
7. LIMITATION OF LIABILITY. IN NO EVENT WILL EITHER PARTY BE LIABLE TO THE
-----------------------
OTHER FOR INDIRECT, INCIDENTAL, SPECIAL, CONSEQUENTIAL OR EXEMPLARY DAMAGES
ARISING OUT OF OR RELATED TO THIS AGREEMENT, INCLUDING BUT NOT LIMITED TO LOST
PROFITS, BUSINESS INTERRUPTION OR LOSS OF BUSINESS INFORMATION, EVEN IF SUCH
PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES. REGARDLESS OF WHETHER
ANY ACTION OR CLAIM IS BASED ON WARRANTY, CONTRACT, TORT OR OTHERWISE: (I)
EXCEPT FOR RSA'S OBLIGATIONS ARISING UNDER SECTION 8, UNDER NO CIRCUMSTANCES
SHALL RSA'S TOTAL LIABILITY ARISING OUT OF OR RELATED TO THIS AGREEMENT EXCEED
THE TOTAL AMOUNT PAID BY OEM HEREUNDER, AND (II) EXCEPT FOR OEM'S LIABILITY
RESULTING FROM BREACH OF SECTIONS 2 AND 6, UNDER NO CIRCUMSTANCES SHALL OEM'S
TOTAL LIABILITY ARISING OUT OF OR RELATED TO THIS AGREEMENT EXCEED THREE (3)
TIMES THE TOTAL AMOUNT PAYABLE BY OEM TO RSA HEREUNDER.
8. INTELLECTUAL PROPERTY INDEMNITY
-------------------------------
8.1 DUTY TO DEFEND. RSA agrees that it shall, at its own expense, defend,
--------------
or at its option settle, any action instituted against OEM, and pay any award or
damages assessed or settled upon against OEM resulting from such action, insofar
as the same is based upon a claim that any Licensed Software used within the
terms of this Agreement and the applicable License/Product Schedule infringes
any United States patent, copyright or trade secret or a claim that RSA has no
right to license the Licensed Software hereunder, provided that OEM gives RSA;
(i) prompt notice in writing of such action, (ii) the right to control and
direct the investigation, preparation, defense and settlement of the action; and
(iii) reasonable assistance and information.
8.2 RSA OPTIONS. If, as a result of any binding settlement among the
-----------
parties or a final determination by a court of competent jurisdiction, any of
the Licensed Software is held to infringe and its use is enjoined, or if RSA
reasonably determines in its sole discretion that the Licensed Software may
become subject to an injunction, RSA shall have the option to: (i) obtain the
right to continue use of the Licensed Software; (ii) replace or modify the
Licensed Software so that it is no longer infringing; or (iii) refund the
License Fees paid by OEM hereunder less depreciation for use assuming straight
line depreciation over a five (5)-year useful life and terminate the Agreement.
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<PAGE>
8.3 EXCLUSIONS. Notwithstanding the foregoing, RSA shall have no liability
----------
under this Section 8 if the alleged infringement arises from (i) the use, in the
manner specified in the relevant User Manual, of other than the current
unaltered (including Interface Modifications) release of the Licensed Software,
or (ii) combination of the Licensed Software with other equipment or software
not provided by RSA, if such action would have been avoided but for such use or
combination.
8.4 EXCLUSIVE REMEDY. NOTWITHSTANDING ANYTHING TO THE CONTRARY IN THIS
----------------
AGREEMENT, THE FOREGOING STATES RSA'S ENTIRE LIABILITY AND OEM'S EXCLUSIVE
REMEDY FOR PROPRIETARY RIGHTS INFRINGEMENT.
9. TERM AND TERMINATION
--------------------
9.1 TERM. The license rights granted hereunder shall be effective with
----
respect to each License/Product Schedule as of the date thereof and shall
continue in full force and effect for each item of Licensed Software for the
period set forth on the applicable License/Product Schedule unless sooner
terminated pursuant to the terms of this Agreement.
9.2 TERMINATION. Either party shall be entitled to terminate this
-----------
Agreement at any time on written notice to the other in the event of a material
default by the other party and a failure to cure such default within a period of
thirty (30) days following receipt of written notice specifying that a default
has occurred.
9.3 INSOLVENCY. Upon (i) the institution of any proceedings by or against
----------
either party seeking relief, reorganization or arrangement under any laws
relating to insolvency, which proceeding are not dismissed within sixty (60)
days; (ii) the assignment for the benefit of creditors, or the appointment of a
receiver, liquidator or trustee, of any of either party's property or assets; or
(iii) the liquidation, dissolution or winding up of either party's business;
then and in any such events this Agreement may immediately be terminated by the
other party upon written notice.
9.4 TERMINATION FOR CONVENIENCE. The parties acknowledge and agree that
---------------------------
OEM may at any time delay, interrupt or cease use of the Licensed Software, but
this Agreement and all the terms and conditions contained herein or any
applicable License/Product Schedule shall continue in full force, including any
obligations to make quarterly reports. OEM may elect to terminate this Agreement
upon ninety (90) days written notice and it is expressly understood that such
termination shall not discharge any payment obligations accrued as of the date
of such termination or entitle OEM to a refund of any amounts previously paid to
RSA.
9.5 EFFECT OF TERMINATION. Upon the expiration or termination of this
---------------------
Agreement (or the license rights under a particular License/Product Schedule),
OEM shall cease making copies of, using or licensing the RSA Software, User
manual and Bundled Products, excepting only such copies of Bundled Products
necessary to fill orders placed with OEM prior to such expiration or
termination. OEM shall destroy all copies of the RSA Software, User Manual and
Bundled Products not subject to any then-effective license agreement with an End
User Customer and all information and documentation provided by RSA to OEM
(including all Know-How), other than such copies of the RSA Object Code, the
User Manual and the Bundled Products as are necessary to enable OEM to perform
its continuing support obligations in accordance with Section 5.2, if any.
Notwithstanding the foregoing, if OEM has licensed RSA Source Code hereunder,
for a period of one (1) year after the date of expiration or termination of the
license rights granted under this Agreement for any reason other than as a
result of default or breach by OEM, OEM may retain one (1) copy of the RSA
Source Code and is hereby licensed for such term to use such copy solely for the
purpose of supporting End User Customers. Upon the expiration of such one (1)-
year period, OEM shall return such single copy of the RSA Source Code to RSA or
certify to RSA that the same has been destroyed. Any expiration or termination
shall not discharge any obligation to pay License Fees which have accrued or are
owing as of the effective date of such expiration or termination.
9.6 SURVIVAL OF CERTAIN TERMS. The following provisions shall survive any
-------------------------
expiration or termination: 2.2, 2.3, 3.8, 4.3, 6, 7, 9 and 10.
10. MISCELLANEOUS PROVISIONS
------------------------
10.1 GOVERNING LAW AND JURISDICTION. This Agreement will be governed by
------------------------------
and construed in accordance with the laws of the State of California,
irrespective of its choice of law principles. All disputes arising out of this
Agreement will be subject to the exclusive jurisdiction and venue of the
California state courts and the United States District Court for the Northern
District of California, and the parties consent to the personal and exclusive
jurisdiction of these courts. The parties agree that the United Nations
Convention on Contracts for the International Sale of Goods shall not apply to
this Agreement.
10.2 BINDING UPON SUCCESSORS AND ASSIGNS. Except as otherwise provided
-----------------------------------
herein, this Agreement shall be binding upon, and inure to the benefit of, the
successors, representatives, administrators and assigns of the parties hereto.
Notwithstanding the generality of the foregoing, this Agreement shall not be
assignable by OEM, by operation of law or otherwise, without the prior written
consent of RSA, which shall not be unreasonably withheld; provided, however,
that RSA may withhold its consent to the assignment of this Agreement with
respect to any License/Product Schedule providing for a paid-up License Fee. Any
such purported assignment or delegation without RSA's written consent shall be
void and of no effect.
10.3 SEVERABILITY. If any provision of this Agreement is found to be
------------
invalid or unenforceable, such provision shall be severed from the Agreement and
the remainder of this Agreement shall be interpreted so as best to reasonably
effect the intent of the parties hereto. It is expressly understood and agreed
that each and every provision of this Agreement is intended by the parties to be
severable and
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<PAGE>
independent of any other provision and to be enforced as such.
10.4 ENTIRE AGREEMENT. This Agreement and the exhibits and schedules
----------------
hereto constitute the entire understanding and agreement of the parties hereto
with respect to the subject matter hereof and supersede all prior and
contemporaneous agreements, representations and understandings between the
parties.
10.5 AMENDMENT AND WAIVERS. Any term or provision of this Agreement may be
---------------------
amended, and the observance of any term of this Agreement may be waived, only by
a writing signed by the party to be bound.
10.6 NOTICES. Any notice, demand, or request with respect to this
-------
Agreement shall be in writing and shall be effective only if it is delivered by
hand or mailed, certified or registered mail, postage prepaid, return receipt
requested, addressed to the appropriate party at its address set forth on page
1. Such communications shall be effective when they are received by the
addressee; but if sent by certified or registered mail in the manner set forth
above, they shall be effective not later than ten (10) days after being
deposited in the mail. Any party may change its address for such communications
by giving notice to the other party in conformity with this Section.
10.7 EXPORT COMPLIANCE AND FOREIGN RESHIPMENT LIABILITY. THIS AGREEMENT IS
--------------------------------------------------
EXPRESSLY MADE SUBJECT TO ANY LAWS, REGULATIONS, ORDERS OR OTHER RESTRICTIONS ON
THE EXPORT FROM THE UNITED STATES OF AMERICA OF THE RSA SOFTWARE OR BUNDLED
PRODUCTS OR OF INFORMATION ABOUT THE RSA SOFTWARE OR BUNDLED PRODUCTS WHICH MAY
BE IMPOSED FROM TIME TO TIME BY THE GOVERNMENT OF THE UNITED STATES OF AMERICA.
NOTWITHSTANDING ANYTHING CONTAINED IN THIS AGREEMENT. TO THE CONTRARY, OEM SHALL
NOT EXPORT OR REEXPORT, DIRECTLY OR INDIRECTLY, ANY RSA SOFTWARE OR BUNDLED
PRODUCTS OR INFORMATION PERTAINING THERETO TO ANY COUNTRY TO WHICH SUCH EXPORT
OR REEXPORT IS RESTRICTED OR PROHIBITED, OR AS TO WHICH SUCH GOVERNMENT OR ANY
AGENCY THEREOF REQUIRES AN EXPORT LICENSE OR OTHER GOVERNMENTAL APPROVAL AT THE
TIME OF EXPORT OR REEXPORT WITHOUT FIRST OBTAINING SUCH LICENSE OR APPROVAL.
10.8 FEDERAL GOVERNMENT LICENSE. OEM and each of OEM's Distributors shall
--------------------------
in all proposals and agreements with the United States government or any
contractor of the United States government identify and license the Bundled
Product, including the RSA Object Code incorporated therein, as follows: (i) for
acquisition by or on behalf of civilian agencies, as necessary to obtain
protection as "commercial computer software" and related documentation in
accordance with the terms of OEM's or such Distributor's customary license, as
specified in 48 C.F.R. 12.212 of the Federal Acquisition Regulations and its
successor regulations; or (ii) for acquisition by or on behalf of units of ??
Department of Defense, as necessary to obtain ??tection as "commercial computer
software" as defined in 48 C.F.R. 227.7014(a)(1) of the Department of Defense
Federal Acquisition Regulation Supplement (DFARS) and related documentation in
accordance with the terms of OEM's or such Distributor's customary license, as
specified in 48 C.F.R. 227.7202.1 of DFARS and its successor regulations.
10.9 REMEDIES NON-EXCLUSIVE. Except as otherwise expressly provided, any
----------------------
remedy provided for in this Agreement is deemed cumulative with, and not
exclusive of, any other remedy provided for in this Agreement or otherwise
available at law or in equity. The exercise by a party of any remedy shall not
preclude the exercise by such party of any other remedy.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
of the last signature below.
OEM:
LIQUID AUDIO, INC.
By: /s/ PHILIP R. WISER
--------------------------------
Printed Name: Philip R. Wiser
----------------------
Title: V.P. Engineering
-----------------------------
Date: 7/11/97
------------------------------
RSA DATA SECURITY, INC.
By: /s/ D. JAMES BIDZOS
--------------------------------
Printed Name: D. James Bidzos
----------------------
Title: President
-----------------------------
Date: 7/18/97
------------------------------
Page 7
<PAGE>
License/Product Schedule Number: 0797-LIQ-O-LPS-1
----------------
EXHIBIT "A"
LICENSE/PRODUCT SCHEDULE
OEM:
Liquid Audio, Inc.
- ---------------------------------------
OEM Master License Agreement Number:
0797-LIQ-O-MLA-1
- ---------------------------------------
Date of OEM Master License Agreement:
July 11, 1997
- ---------------------------------------
This License/Product Schedule Amends Schedules Dated:
N/A
- ---------------------------------------
Term of Agreement for this Bundled Product:
Perpetual
- ---------------------------------------
Bundled Products:
OEM's software products and successor versions thereof for transmission of audio
over
networks, currently known as:
- ------------------------------
1) "Liquifer," an author-generated database ("Author Bundled Product");
2) "Liquid Music Server" ("Server Bundled Product"); and
3) "Liquid Music Machine," which shall be distributed to End User Customers
("Client Bundled Software".)
RSA Software:
BSAFE v. 3.0, BCERT v. 1.0 (provided by RSA in Windows platform)
OEM may obtain copies of the RSA Software on other platforms as may be generally
available at RSA's then current published list price, each additional platform
version of which will be covered RSA Software under this License/Product
Schedule.
Delivery of RSA Software to OEM:
- -------------------------------
One (1) copy of each of the RSA Object Code, the RSA Source Code (if licensed
hereunder) and the User Manual for the RSA Software identified above:
[ ] has been received by OEM, or
[X] will be delivered by RSA as soon as practicable, but not later than
ten (10) business days after the date of execution of this License/Product
Schedule.
Page 1
<PAGE>
<TABLE>
<CAPTION>
LICENSED SOFTWARE AND FIELD OF USE RESTRICTION FOR THIS BUNDLED PRODUCT
- -----------------------------------------------------------------------
RIGHT TO
INCLUDE
OBJECT
SOURCE CODE IN DESCRIBE
CODE BUNDLED FIELD OF USE FIELD OF USE
LICENSE PRODUCT RESTRICTION RESTRICTION
BSAFE YES NO YES NO YES NO
<S> <C> <C> <C> <C> <C> <C> <C>
RSA Public Key Cryptosystem [_] [X] [X] [_] [X] [_] / */
---
Diffie-Hellman Key Negotiation [_] [X] [X] [_] [X] [_] / */
---
Bloom-Shamir Secret Sharing [_] [X] [_] [_] [_] [_]
Data Encryption Standard (DES) [_] [X] [X] [_] [X] [_]
Extended Data Encryption [_] [X] [_] [_] [_] [_]
Standard (DESX)
Triple DES (3DES) [_] [X] [_] [X] [_] [_]
RC2 Variable-Key Size Symmetric [_] [X] [_] [X] [_] [_]
Block Cipher
RC4 Variable-Key Size Symmetric [_] [X] [X] [_] [X] [_] / */
Stream Cipher ---
RC5 Variable-Key Size Symmetric [_] [X] [X] [_] [X] [_] / */
Block Cipher ---
MD Hashing Algorithm [_] [X] [_] [X] [_] [_]
MD2 Hashing Algorithm [_] [X] [_] [X] [_] [_]
MD5 Hashing Algorithm [_] [X] [X] [_] [X] [_] / */
---
Secure Hashing Algorithm (SHA) [_] [X] [X] [_] [X] [_] / */
---
Digital Signature Algorithm (DSA) [_] [X] [X] [_] [X] [_] / */
---
TIPEM (all set forth below) [_] [X] [_] [X] [_] [_]
RSA Public Key Cryptosystem
Data Encryption Standard (DES)
RC2 Variable Key Size Symmetric
Block Cipher
MD2 Hashing Algorithm
MD5 Hashing Algorithm
BCERT [_] [X] [X] [_] [X] [_] / */
---
- ---------------------------------------------------------------------------------------------------------------------------
_______________________________
/*/ Solely for privacy protection, privacy and authentication within and among the
Bundled Products for (i) transmission and reception of audio over the Internet
or other packet-switched networks, and (ii) transmission and reception of
related content (such as liner notes, attributions, and the like) over the same
channel solely to facilitate the transmission and reception of audio as
described above.
</TABLE>
Page 2
<PAGE>
LICENSE AND MAINTENANCE FEES
- ----------------------------
Source Code License Fee for this License/Product Schedule:
- ---------------------------------------------------------
N/A
Object Code License Fees for this License/Product Schedule:
- ----------------------------------------------------------
A. PERCENTAGE OF NET SALES PRICE LICENSE FEE FOR THE AUTHOR AND SERVER BUNDLED
---------------------------------------------------------------------------
PRODUCTS: In consideration of the rights granted herein, OEM shall pay RSA
- ---------
License Fees as a percentage of the Net Sales Price of the Author and Server
Bundled Products as follows:
* For the Author Bundled Product:
------------------------------
[*]
* For the Server Bundled Product:
------------------------------
[*]
B. ANNUAL LICENSE FEE FOR UNLIMITED DISTRIBUTION OF THE CLIENT BUNDLED
-------------------------------------------------------------------
PRODUCT: In consideration of the rights granted herein, OEM shall pay RSA an
- -------
annual License Fee for unlimited distribution of the Client Bundled Product, in
the amount of [*] payable upon execution of this License/Product Schedule and
every anniversary date thereafter.
Prepayment of License Fees for the Author and Server Bundled Products under this
- --------------------------------------------------------------------------------
License/Product Schedule: [*] payable upon execution of this License/Product
- ------------------------
Schedule
Present Annual Maintenance Fee for this License/Product Schedule:
- ----------------------------------------------------------------
[*]
SPECIAL TERMS AND CONDITIONS
- ----------------------------
The following Special Terms and Conditions shall apply to the Bundled Products
covered by this License/Product Schedule:
1. Co-Branding. Notwithstanding anything to the contrary in Section 1.2 of the
-----------
Agreement, OEM may authorize a Distributor to co-brand the Bundled Products for
redistribution to End User Customers by such Distributor; provided that OEM
indicates in its licensing reports delivered pursuant to Section 3.7 of the
Agreement the identity of any Distributor so authorized and the name of the co-
branded Bundled Products, as well as the number of copies of Bundled Products
which are distributed by all such Distributors and OEM's Net Sales Price with
respect thereto. It is understood and agreed that a Distributor authorized to
co-brand a Bundled Product may not otherwise modify the Bundled Product or
incorporate it into another product for distribution; provided, however, that
this prohibition does not prevent a Distributor authorized to co-brand a Bundled
Product from packaging the co-branded Bundled Product with other products. OEM
may authorize Distributors authorized to co-brand Bundled Products to use the
RSA Licensee Seal, to the extent OEM is authorized to do so in the Agreement, to
meet the requirements in Section 5.4.1 of the Agreement. OEM shall pay RSA
License Fees pursuant to Section 3.5 of the Agreement with respect to co-branded
Bundled Products based on OEM's Net Sales Price to the Distributor and/or number
of copies distributed, as applicable, applying a percentage of such Net Sales
Price of 2.3% and the per copy/unit minimum License Fees referred to above for
the co-branded Bundled Products.
2. End User Customers. Notwithstanding the provisions of Section 1.4 of the
------------------
Agreement to the contrary, an End User Customer shall have the right to assign
or transfer the Bundled Products covered by this License/Product Schedule to
another person or entity, provided that all of such End User Customer's rights
are transferred subject to the applicable license agreement and no rights are
retained by such End User Customer and provided that the End User Customer's
primary purpose in licensing the Bundled Product was its own personal or
internal use of the Bundled Product.
3. Right to Subcontract. Notwithstanding any provision of the Agreement to the
--------------------
contrary, OEM shall be entitled to exercise its rights under the Agreement to
develop and test the Bundled Products covered by this License/Product Schedule
either itself or through third parties performing on behalf of OEM pursuant to a
subcontract arrangement; provided, however, that OEM shall be responsible for
insuring that any such subcontractor complies with the restrictions and duties
imposed by this Agreement upon OEM.
4. No Service Bureau. The second sentence of Section 2.2.3 of the Agreement is
-----------------
amended in its entirety to read as follows:
Neither OEM nor any Distributor or End User Customer may use the Bundled
Product to operate a revenue-generating service business whose purpose is
to provide direct use of the Bundled Product, except where the business
provides a substantial service to third parties other than the use of the
Bundled Product and the Bundled Product is used by third parties solely to
access, retrieve or store data, content, goods, or other information as
part of or related to the services provided.
* Certain information in this Exhibit has been omitted and filed separately
with the Commission. Confidential treatment has been requested with respect
to the omitted portions.
Page 3
<PAGE>
THE PROVISIONS OF THIS LICENSE/PRODUCT SCHEDULE ARE PROVIDED AS A BASIS OF
DISCUSSION BETWEEN OEM AND RSA AND WILL BECOME BINDING UPON THE PARTIES ONLY IF
(1) OEM HAS EXECUTED A OEM MASTER LICENSE AGREEMENT AND HAVE INDICATED THEIR
ACCEPTANCE OF THE TERMS CONTAINED IN THIS LICENSE/PRODUCT SCHEDULE BY THEIR
SIGNATURES BELOW ON OR BEFORE JULY 11, 1997; AND (2) RSA HAS EXECUTED THE OEM
MASTER LICENSE AND THIS LICENSE/PRODUCT SCHEDULE.
OEM:
LIQUID AUDIO, INC.
By: /s/ Philip R. Wiser
--------------------------
Printed Name: Philip R. Wiser
----------------
Title: V.P. Engineering
------------------------
Date: 7/11/97
------------------------
RSA DATA SECURITY, INC.
By: /s/ D. James Bidzos
--------------------------
Printed Name: D. James Bidzos
-----------------
Title: President
-----------------------
Date: 7/18/97
------------------------
Page 4
<PAGE>
EXHIBIT "C"
SPECIAL TERMS AND CONDITIONS
OEM: Liquid Audio, Inc.
--------------------------------------------------------------------
Master License Agreement Number: 0797-LIQ-O-MLA-1
----------------------------------------
Master License Agreement Date: July 11, 1997
------------------------------------------
Exhibit "C" Date: July 11, 1997
-------------------------------------------------------
THE OEM MASTER LICENSE AGREEMENT between RSA Data Security, Inc. and the
OEM set forth above dated as of the date set forth above ("AGREEMENT") is
---------
amended as set forth below.
1. DEFINITIONS. Capitalized terms used and not otherwise defined in this
-----------
Exhibit "C" shall have the meanings designated for such terms in the Agreement.
2. AMENDMENTS TO AGREEMENT. The following provisions of the Agreement,
-----------------------
referenced by the applicable Section numbers in the Agreement, are hereby
amended as follows:
2.1 SECTION 2.1.2. Subpart (iii) of Section 2.1.2 is amended by
-------------
inserting the following language before the word "license": "...market,
display, perform, transmit,...."
2.2 SECTION 2.1.3. Subpart (i) of Section 2.1.3 is amended by
-------------
inserting the following language before the words "End User Customers":
"...Distributors and...." Subpart (ii) of Section 2.13 is amended by inserting
the following language after the words "have reproduced": "...market, display,
perform, transmit...."
2.3 SECTION 3.4. The first sentence of Section 3.4 is amended by
-----------
replacing all of the language beginning with the word "excluding" to the end of
the sentence with the following: "...excluding any amounts receivable by OEM for
sales taxes, value-added taxes and use taxes, shipping, insurance and duties,
and reduced by all discounts, refunds, allowances, price protection and returns
granted in the ordinary course of business."
2.4 SECTION 3.8. The last sentence of Section 3.8 is amended by
-----------
inserting the following language before the words "... the greater of Three
Thousand Dollars ($3,000.00) or...."
2.5 SECTION 3.9. The first sentence of Section 3.9 is amended by
-----------
inserting the following language after each occurrence of the words "End User
Customer(s)": "...and Distributor(s)...."
2.6 SECTION 4.1. The first sentence of Section 4.1 is amended by
-----------
adding the following after the word "specifications": "...and/or User
Manual...."
2.7 SECTION 4.2. The first sentence of Section 4.2 is amended by
-----------
adding the following after the word "specifications": "...and/or User
Manual...."
2.8 SECTION 5.2. Section 5.2 is amended by inserting the following
-----------
language after the word "OEM": "...or its Distributors...."
2.9 SECTION 5.3. Section 5.3 is amended by replacing the reference to
-----------
Section 2.2 with a reference to Section 2.2.5, and by adding the following
language after the reference to Section 10.8: "...(if applicable)...."
2.10 SECTION 6.1. The first sentence of Section 6.1 is amended by
-----------
adding the following immediately preceding the definition of the term "Know-
How": "..., and the information provided by OEM pursuant to Sections 3.7 and
3.8...." The third sentence of Section 6.1 is amended by deleting the word "or"
before subpart (iii) thereof and by adding the following at the end thereof:
"...; (iv) to the extent disclosed by the receiving party pursuant to a
requirement of a court order, governmental agency or law, provided that the
receiving party provides prompt written
Page 1
<PAGE>
notice of such requirement so as to afford the disclosing party an opportunity
to intervene and prevent or limit the disclosure; or (v) is disclosed or used
for the purpose of enforcement of this Agreement."
2.11 SECTION 6.3. Subpart (iii) of Section 6.3 is amended by
-----------
replacing the first occurrence of the word "RSA" with the words "either party."
2.12 SECTION 7. Subpart (i) of Section 7 is amended by inserting the
---------
following after the word "SECTION": "...6 AND...."
2.13 SECTION 8.1. Section 8.1 is replaced in its entirety with the
-----------
following:
8.1 DUTY TO DEFEND. RSA agrees that it shall, at its own
--------------
expense, defend, or at its option settle, any action or claim
instituted against OEM, and pay any award or damages assessed or
settled upon against OEM resulting from such action or claim, insofar
as the same is based upon a claim that any Licensed Software, User
Manual, or the Licensee Seal used within the terms of this Agreement
and the applicable License/Product Schedule infringes any United
States patent, copyright, trademark or trade secret or a claim that
RSA has no right to license the Licensed Software or User Manual
hereunder, provided that OEM gives RSA: (i) prompt notice in writing
of such action, (ii) the right to control and direct the
investigation, preparation, defense and settlement of the action; and
(iii) reasonable assistance and information. RSA will reimburse OEM's
reasonable out-of-pocket expenses incurred prior to RSA's assuming the
control of the investigation, preparation, defense or settlement of
the action or claim, and in providing requested assistance to RSA, and
responding to subpoenas and discovery notices and orders with respect
to any such action or claim.
2.14 SECTION 8.2. Section 8.2 is amended by inserting the following
-----------
after each occurrence of the words "Licensed Software": "...or User Manual.... "
Section 8.2 is further amended by adding the following at the end of subpart
(ii) thereof: "...and is substantially similar in functionality to the enjoined
Licensed Software or User Manual."
2.15 SECTION 9.5. The first sentence of Section 9.5 is amended by
-----------
inserting the word "affected" before the first occurrence of the words "RSA
Software." The second sentence of Section 9.5 is amended by inserting the words
"or its Distributors" after the words "as are necessary to enable OEM."
2.16 SECTION 9.6. Section 9.6 is amended by including a reference to
-----------
Section 8 of the Agreement as a surviving term.
2.17 SECTION 10.10. A new Section 10.10 is added, as follows:
-------------
10.10 COUNTERPARTS. This Agreement may be signed in one or more
------------
counterparts, each of which shall be an original, and all of which
together shall constitute one instrument .
3. EFFECT OF AMENDMENT. This Exhibit "C" is an amendment to the
-------------------
Agreement. Except as expressly amended above, the Agreement shall remain in full
force and effect.
IN WITNESS WHEREOF, the parties have executed this Exhibit "C" as of the
date set forth above.
OEM:
LIQUID AUDIO, INC. RSA DATA SECURITY, INC.
By: /s/ Philip R. Wiser By: /s/ D. James Bidzos
--------------------------- ---------------------------
Printed Name: Philip R. Wiser Printed Name: D. James Bidzos
----------------- -----------------
Title: V.P. Engineering Title: President
------------------------ ------------------------
Page 2
<PAGE>
RSA DATA SECURITY(TM)
MAINTENANCE AND SUPPORT AGREEMENT
OEM Master License: 0797-LIQ-O-MLA-1 Date: July 11, 1997
----------------------- ------------------------
License/Product Schedule: 0797-LIQ-O-LPS-1 Date: July 11, 1997
------------------ -------------------------
THIS MAINTENANCE AND SUPPORT AGREEMENT ("Agreement"), effective as of the
later date of execution ("Effective Date"), is entered into by and between RSA
Data Security, Inc., a Delaware corporation ("RSA"), having a principal address
at 100 Marine Parkway, Suite 500, Redwood City, California 94065, and the entity
named below ("OEM"), having a principal address as set forth below.
OEM:
Liquid Audio, Inc., a California corporation
- ---------------------------------------------------
(Name and jurisdiction of incorporation)
2421 Broadway, 2F
- ---------------------------------------------------
(Address)
Redwood City, CA 94063
- ---------------------------------------------------
OEM Legal Contact:
Harry Boadwee, Esq. (415) 858-7188
-----------------------------------------------
(name, telephone and title)
OEM Billing Contact:
Philip Wiser, Vice President of Engineering
-----------------------------------------------
(415) 562-0884
-----------------------------------------------
(name, telephone and title)
OEM Technical Contact:
Philip Wiser, Vice President of Engineering
-----------------------------------------------
(415) 562-0884
-----------------------------------------------
(name, telephone and title)
OEM Commercial Contact:
Philip Wiser, Vice President of Engineering
-----------------------------------------------
(415) 562-0884
-----------------------------------------------
(name, telephone and title)
INITIAL ANNUAL MAINTENANCE FEE: [*]
1. DEFINITIONS
-----------
All capitalized terms used in this Agreement shall have the meaning set
forth in the OEM Agreement and License/Product Schedule, unless an alternate
definition is set forth below. In the event of any inconsistency, the
definitions set forth in this Agreement shall be controlling, but only for the
purposes of interpreting or construing this Agreement.
1.1 "LICENSE/PRODUCT SCHEDULE" means the schedule identified and having
the effective date set forth above which specifies the RSA Software, Licensed
Software, use limitations (if any), License Fees, and other matters with respect
to the Bundled Product licensed under such License/Product Schedule.
1.2 "NEW RELEASE" means a version of the RSA Software which shall
generally be designated by a new version number which has changed from the prior
number only to the right of the decimal point (e.g., Version 2.2 to Version
2.3).
1.3 "NEW VERSION" means a version of the RSA Software which shall
generally be designated by a new version number which has changed from the prior
number to the left of the decimal point (e.g., Version 2.3 to Version 3.0).
1.4 "OEM AGREEMENT" means the agreement identified and having the
effective date as set forth above and which specifies the terms and conditions
of license of the RSA Software, as further defined in the License/Product
Schedule.
1.5 "RSA OBJECT CODE" means the Licensed Software in machine-readable,
compiled object code form.
1.6 "RSA SOFTWARE" means RSA proprietary software identified as RSA
Software on the License/Product Schedule.
1.7 "RSA SOURCE CODE" means the mnemonic, high level statement versions of
the Licensed Software written in the source language used by programmers.
* Certain information in this Exhibit has been omitted and filed
separately with the Commission. Confidential treatment has been
requested with respect to the omitted portions.
Page 1
<PAGE>
2. MAINTENANCE AND SUPPORT SERVICES
--------------------------------
2.1 GENERAL. This Agreement sets forth the terms under which RSA will
-------
provide maintenance and support to OEM for the RSA Software licensed to OEM
under the License/Product Schedule identified on the first page hereof, which
use is governed by the terms of the OEM Agreement and such License/Product
Schedule. The use of and license to any software provided to OEM hereunder shall
be governed by the terms of the OEM Agreement and License/Product Schedule.
2.2 SUPPORT AND MAINTENANCE. RSA agrees to provide the maintenance and
-----------------------
support specified in this Agreement and OEM agrees to pay RSA's then-current
annual support and maintenance fee ("Maintenance Fee").
2.3 ADDITIONAL CHARGES. In the event RSA is required to take actions to
------------------
correct a difficulty or defect which is traced to OEM errors, modifications,
enhancements, software or hardware, then OEM shall pay to RSA its time and
materials charges at RSA's rates then in effect. In the event RSA's personnel
must travel to perform maintenance or on-site support, OEM shall reimburse RSA
for any reasonable out-of-pocket expenses incurred, including travel to and from
OEM's sites, lodging, meals and shipping, as may be necessary in connection with
duties performed under this Section 2 by RSA.
2.4 MAINTENANCE PROVIDED BY RSA. For periods for which OEM has paid the
---------------------------
Maintenance Fee, RSA will provide OEM with the following services:
2.4.1 TELEPHONE SUPPORT. RSA will provide telephone support to OEM
-----------------
during RSA's normal business hours. RSA may provide on-site support reasonably
determined to be necessary by RSA at OEM's location specified on page 1 hereof.
RSA shall provide the support specified in this Section 2.4.1 to OEM's employees
responsible for developing Bundled Products, maintaining Bundled Products, and
providing support to End User Customers. No more than two (2) OEM employees may
obtain such support from RSA at any one time. On RSA's request, OEM will provide
a list with the names of the employees designated to receive support from RSA.
OEM may change the names on the list at any time by providing written notice to
RSA.
2.4.2 ERROR CORRECTION. In the event OEM discovers an error in the
----------------
Licensed Software which causes the Licensed Software not to operate in material
conformance to RSA's published specifications therefor, OEM shall submit to RSA
a written report describing such error in sufficient detail to permit RSA to
reproduce such error. Upon receipt of any such written report, RSA will use its
reasonable business judgment to classify a reported error as either: (i) a
"Level 1 Severity" error, meaning an error that causes the Licensed Software to
fail to operate in a material manner or to produce materially incorrect results
and for which there is no workaround or ?? a difficult workaround; or (ii) a
"Level 2 Severity" error, meaning an error that produces a situation in which
the Licensed Software is usable but does not function in the most convenient or
expeditious manner, and the use or value of the Licensed Software suffers no
material impact. RSA will acknowledge receipt of a conforming error report
within two (2) business days and (A) will use its continuing best efforts to
provide a correction for any Level 1 Severity error to OEM as early as
practicable; and (B) will use its reasonable efforts to include a correction for
any Level 2 Severity error in the next release of the RSA Software.
2.4.3 NEW RELEASES AND NEW VERSIONS. RSA will provide OEM information
-----------------------------
relating to New Releases and New Versions of the RSA Software during the term of
this Agreement. New Releases will be provided at no additional charge. New
Versions will be provided at RSA's standard upgrade charges in effect at the
time. Any New Releases or New Versions acquired by OEM shall be governed by all
of the terms and provisions of this Agreement.
2.5 LAPSED MAINTENANCE. If this Agreement has lapsed, OEM may obtain a
------------------
license of a New Release of the applicable RSA Software or any service which is
provided as a part of maintenance and support by becoming current on Maintenance
Fees as provided in Section 3.1 to the date such New Release is licensed or such
service is provided.
3. MAINTENANCE AND SUPPORT FEES
----------------------------
3.1 MAINTENANCE AND SUPPORT FEES. In consideration of RSA's providing the
----------------------------
maintenance and support services described herein, OEM agrees to pay RSA the
initial Maintenance Fee set forth on the first page hereof. Such amount shall be
payable for the first year upon the execution of this Agreement and for each
subsequent year in advance of the commencement of such year. The Maintenance Fee
may be modified by RSA for each renewal term by written notice to OEM at least
ninety (90) days prior to the end of the then-current term. If OEM elects not to
renew this Agreement for successive terms (as provided in Section 6.1 below) OEM
may re-enroll only upon payment of the annual Maintenance Fee for the coming
year and for all Maintenance Fees that would have been paid had OEM not ceased
maintenance and support.
3.2 TAXES. All taxes, duties, fees and other governmental charges of any
-----
kind (including sales and use taxes, but excluding taxes based on the gross
revenues or net income of RSA) which are imposed by or under the authority of
any government or any political subdivision thereof on the Maintenance Fees or
any aspect of this Agreement shall be borne by OEM and shall not be considered a
part of, a deduction from or an offset against Maintenance Fees.
3.3 TERMS OF PAYMENT. Maintenance Fees due RSA hereunder shall be paid by
----------------
OEM to the attention of the Software Licensing Department at RSA's address set
Page 2
<PAGE>
forth above on or before the thirtieth (30th) day after the Effective Date and,
in the case of renewal terms, prior to the each anniversary thereof. A late
payment penalty on any Maintenance Fees not paid when due shall be assessed at
the rate of one percent (1%) per thirty (30) days.
3.4 U.S. CURRENCY. All payments hereunder shall be made in lawful United
-------------
States currency.
4. CONFIDENTIALITY
---------------
The parties agree that all obligations and conditions respecting
confidentiality, use of source code and publicity in Section 5 of the OEM
Agreement shall apply to the parties' performance of this Agreement.
5. USE LIMITATIONS; TITLE; INTELLECTUAL PROPERTY INDEMINITY; LIMITATION OF
-----------------------------------------------------------------------
LIABILITY.
- ----------
Any and all RSA Software provided to OEM pursuant to this Agreement shall
constitute RSA Software under the OEM Master License Agreement. As such, the
parties respective interests and obligations relating to the RSA Software,
including but not limited to license and ownership rights thereto, use
limitations (if any), intellectual property indemnity and limitation of
liability, shall be governed by the terms of the OEM Agreement and the
License/Product Schedule.
6. TERM AND TERMINATION
--------------------
6.1 TERM. This Agreement shall commence on the Effective Date hereof and
----
shall remain in full force and effect for an initial period of one (1) year,
unless sooner terminated in accordance with this Agreement. Upon expiration of
the initial period and each successive period, this Agreement shall
automatically renew for an additional one (1) year period, unless either party
has notified the other of its intent to terminate as set forth in Section 6.2.3
herein.
6.2 TERMINATION.
-----------
6.2.1 Either party shall be entitled to terminate this Agreement at
any time on written notice to the other in the event of a material default by
the other party of this Agreement and a failure to cure such default within a
period of thirty (30) days following receipt of written notice specifying that a
default has occurred.
6.2.2 This Agreement shall automatically terminate in the event that
the OEM Agreement is terminated in accordance with its terms.
6.2.3 This Agreement may also be terminated by OEM for any or no
reason by providing written notice of such intent at least ninety (90) days
prior to the end of the then-current term. RSA may cease to offer support and
maintenance for future maintenance terms by notice delivered to OEM ninety (90)
days or more before the end of the then-current maintenance term.
6.2.4 Upon (i) the institution of any proceedings by or against
either party seeking relief, reorganization or arrangement under any laws
relating to insolvency, which proceedings are not dismissed within sixty (60)
days; (ii) the assignment for the benefit of creditors, or upon the appointment
of a receiver, liquidator or trustee, of any of either party's property or
assets; or (iii) the liquidation, dissolution or winding up of either party's
business, then and in any such events this Agreement may immediately be
terminated by the other party upon written notice.
6.3 SURVIVAL OF CERTAIN TERMS. The following provisions shall survive any
-------------------------
expiration or termination: 2.2, 2.3, 4, 6 and 7.
7. MISCELLANEOUS PROVISIONS
------------------------
This Agreement incorporates by this reference Section 10 of the OEM
Agreement in its entirety.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
of the later signature below.
OEM:
LIQUID AUDIO, INC.
By: /s/ Philip R. Wiser
---------------------------
Printed Name: Philip R. Wiser
------------------
Title: V.P. Engineering
------------------------
Date: 7/11/97
------------------------
RSA DATA SECURITY, INC.
By: /s/ D. James Bidzos
---------------------------
Printed Name: D. James Bidzos
-----------------
Title: President
------------------------
Date: 7/18/97
-------------------------
Page 3
<PAGE>
EXHIBIT "A"
MAINTENANCE AND SUPPORT AGREEMENT
---------------------------------
OEM: Liquid Audio, Inc.
-----------------------------------------------------------------
Maintenance and Support Agreement Date: July 11, 1997
-------------------------------
OEM Master License Agreement Number: 0797-LIQ-O-MLA-1
----------------------------------
Exhibit "A" Date: July 11, 1997
-----------------------------------------------------
THE MAINTENANCE AND SUPPORT AGREEMENT between RSA Data Security, Inc. and
the OEM set forth above dated as of the date set forth above ("AGREEMENT") is
---------
amended as set forth below.
1. DEFINITIONS. Capitalized terms used and not otherwise defined in this
-----------
Exhibit "A" shall have the meanings designated for such terms in the Agreement.
2. AMENDMENTS TO AGREEMENT. The following provisions of the Agreement,
-----------------------
referenced by the applicable Section numbers in the Agreement, are hereby
amended as follows:
2.1 SECTION 1.6. Section 1.6 is amended by adding the following at
-----------
the end thereof: "'RSA Software' shall also include all modifications and
enhancements (including all New Releases and New Versions) to such programs as
may be provided by RSA to OEM pursuant to this Agreement."
2.2 SECTION 2.3. The second sentence of Section 2.3 is amended by
-----------
adding the following after the words "on-site support": "...with OEM's prior
consent, ...." Section 2.3 is further amended by adding the following at the end
thereof: "With respect to any reported error, if OEM does not consent to RSA's
providing on-site support at RSA's request, RSA shall have no further
obligations under this Agreement with respect to such reported error."
2.3 SECTION 2.4.2. The first sentence of Section 2.4.2 is amended by
-------------
adding the following after the word "specifications": "...and/or User
Manual...."
2.4 SECTION 2.4.3. Section 2.4.3 is amended by adding the following
-------------
at the end thereof: "New Releases and New Versions provided to OEM hereunder
shall include related updates to the User Manual, if any."
2.5 SECTION 3.1. The third sentence of Section 3.1 is amended by
-----------
adding the following after the words "renewal term": "...to conform to RSA's
then-current standard annual Maintenance Fee...."
2.6 SECTION 5. Section 5 is amended by inserting the following after
---------
each occurrence of the words "RSA Software": "...and User Manuals...."
Page 1
<PAGE>
2.7 SECTION 6.3. Section 6.3 is amended by deleting the reference
-----------
to Section 2.2 and by adding references to Section 2.5 and 3.1 to the extent
they provide for the reinstatement of lapsed maintenance.
3. EFFECT OF AMENDMENT. This Exhibit "A" is an amendment to the Agreement.
-------------------
Except as expressly amended above, the Agreement shall remain in full force
and effect.
IN WITNESS WHEREOF, the parties have executed this Exhibit "A" as of the
date set forth above.
OEM:
LIQUID AUDIO, INC. RSA DATA SECURITY, INC.
By: /s/ Philip R. Wiser By: /s/ D. James Bidzos
--------------------------- ---------------------------
Printed Name: Philip R. Wiser Printed Name: D. James Bidzos
----------------- -----------------
Title: V.P. Engineering Title: 7/18/97
------------------------ ------------------------
Page 2
<PAGE>
[LOGO] DOLBY
DOLBY LABORATORIES INC
DOLBY LABORATORIES LICENSING CORPORATION
Signal Processing and Noise Reduction Systems
100 Potrero Avenue
San Francisco, California 94103-4813
Telephone 415-558-0200
September 18, 1997 Facsimile 415-863-1373
EXHIBIT 10.15
Mr. Gerry Kearby
Co-Founder & CEO
Liquid Audio
2421 Broadway
2d Floor
Redwood City, CA 94063
Mr. Kearby:
As you're aware, we remain extremely concerned about the availability of the
fully functional AC-3 decoder which Liquid Audio, Inc. ("LA") is providing for
free and without copy protection. We've discussed the situation internally, and
believe that we've developed a proposal which, by providing LA a number of items
it wants, will incent it to implement the Modified Decoder Dolby believes its
critical.
Accordingly:
Dolby agrees to:
1) Change the existing payment schedule in section 4.02 of the Digital Audio
System License Agreement - Source Code, Trademark and Know-How License, dated
May 3, 1996 (the "Agreement"):
-------------------------------
first quarter [*]
-------------------------------
second quarter [*]
-------------------------------
third quarter [*]
-------------------------------
fourth quarter [*]
-------------------------------
fifth quarter [*]
-------------------------------
sixth quarter [*]
-------------------------------
seventh quarter [*]
-------------------------------
eight quarter [*]
-------------------------------
to the following payment schedule:
-------------------------------
first quarter [*]
-------------------------------
second quarter [*]
-------------------------------
third quarter [*]
-------------------------------
fourth quarter [*]
-------------------------------
fifth quarter [*]
-------------------------------
sixth quarter [*]
-------------------------------
seventh quarter [*]
-------------------------------
eighth quarter [*]
-------------------------------
ninth quarter [*]
-------------------------------
tenth quarter [*]
-------------------------------
eleventh quarter [*]
--------------------------------
Confidential Licensee / Licensor Communication
* Certain information in this Exhibit has been omitted and filed
separately with the Commission. Confidential treatment has been
requested with respect to the omitted portions.
<PAGE>
Mr. Gerry Kearby September 18. 1997
Liquid Audio Page 2
2) Work with LA as an early adopter, if/when [***] intellectual property
becomes available for license by Dolby. Dolby cannot offer exclusivity at
this time due to uncertainties associated with the licensing terms of [***]
technology; however, Dolby will consider exclusivity and other strategic
considerations in the business relationship with LA in the future.
3) Provide LA's watermarking partners Solana and Aris access to AC-3
evaluation code and telephone assistance in implementing watermarking with
the LA version of AC-3.
4) Extend the period of exclusivity in Section 2.01 of the Agreement by [*]
with the requirement for additional minimum payments as follows:
--------------------------------
twelfth quarter [*]
--------------------------------
thirteenth quarter [*]
--------------------------------
5) Allow Intel to provide Intel source code for an MMX-optimized Dolby Digital
decoder to LA. This decoder must be modified by LA as per item 1 in the "LA
agrees to" section below. The LA modified MMX-optimized decoder must be
tested and certified by Dolby before deployment.
In exchange for the above items, Liquid Audio agrees to:
1) Replace the current LA AC-3 decoder with a modified version of the Dolby
AC-3 decoder (which will not decode ATSC standard AC-3) to be provided by
Dolby in Source Code Form by September 19, 1997.
2) Deploy the Modified Decoder, and to cease distribution of current AC-3
decoder, in the first release of version 2.0 and not later 30 NOV 97.
3) Ensure that Phil Wiser is available to interface with the appropriate
technical staff at Dolby to ensure the Dolby Modified Decoder is deployed
by the above date.
4) Limit sublicensing to the extent necessary to replicate and distribute its
complete, stand-alone Licensor-certified Licensed Products by "bundling."
Such bundling shall not include any combination of a Licensed Product with
a product of a third party where the functionality of such Licensed Product
is accessible independently of the Licensed Product or its primary
interface. In other words, Licensed Products may not be integrated with the
core functionality of such third party products, and sublicensing shall be
strictly limited to enabling replication for the distribution of complete,
stand-alone Licensed Products in combination with third party products.
In our view, LA is well positioned to capitalize on the opportunities the
internet provides for the distribution of pre-recorded audio. LA appears to have
an excellent job of preparing and positioning its product, and we look forward
to a long and fruitful partnership. A critical element to both our interests
however, is our continuing ability to exclude third parties from offering for
free the same goods and services our two companies offer for a price.
Time is of the essence. Our intent was to structure this package in a way that
gives LA the ability to accept it immediately. Please indicate your assent to
our proposal by signing below and returning this letter to us by fax.
Sincerely, Agreed
On behalf of Liquid Audio:
/s/ Ed Schummer /s/ Gerry Kearby
/s/ Ed Schummer Gerry Kearby
Dolby Laboratories Licensing Corp. Date
* Certain information in this Exhibit has been omitted and filed
separately with the Commission. Confidential treatment has been
requested with respect to the omitted portions.
<PAGE>
EXHIBIT 10.16
[LOGO OF DOLBY LABORATORIES LICENSING CORPORATION APPEARS HERE]
L3D-INT
DIGITAL AUDIO SYSTEM LICENSE AGREEMENT
INTERNET CODERS
SOURCE CODE, TRADEMARK AND KNOW-HOW LICENSE
AN AGREEMENT
- ------------
BY AND BETWEEN
- --------------
Dolby Laboratories Licensing Corporation and Liquid Audio, Inc.
(hereinafter called "LICENSOR") (hereinafter called "LICENSEE")
of 100 Potrero Avenue of 2421 Broadway
San Francisco, CA 94103-4813 Redwood City, CA 94063
Facsimile telephone number of LICENSOR (Sections 4.05 and 8.04): (415) 863-1373
LICENSOR's bank and account number for wire transfer of royalty payments
(Section 4.05):
Bank: Wells Fargo Bank
Address: 464 California Street, San Francisco, CA 94104 U.S.A.
Account Name: Dolby Laboratories Licensing Corporation
Account Number: 4001-191451
ABA Number: 121000248
Identification of bank with respect to whose prime rate interest is calculated
on overdue royalties (Section 4.06): Wells Fargo Bank
Facsimile telephone number of LICENSEE (Section 8.04): (415) 364-4217
Address of LICENSEE for communications not otherwise specified (Section 8.04):
SIGNATURES:
<TABLE>
<CAPTION>
- -----------
<S> <C>
On behalf of LICENSOR On behalf of LICENSEE
By /s/ [SIGNATURE ILLEGIBLE] By /s/ Gerald Kearby
----------------------------------------- --------------------------------------
Place SAN FRANCISCO Place San Francisco
-------------------------------------- ------------------------------------
Date 3 May 1996 Date 3 May 1996
--------------------------------------- -------------------------------------
Witnessed By: /s/ [SIGNATURE ILLEGIBLE] Witnessed By: /s/ [SIGNATURE ILLEGIBLE]
------------------------------ ----------------------------
Effective Date of Agreement: 3 May 1996 Initial Payment: $10,000
---------------
</TABLE>
DOLBY
100 Potrero Avenue Wooton Bassett
San Francisco, California 94103-4813 Wiltshire SN4 8QJ England
Telephone 415-558-0200 Telephone 1793-842100
Facsimile 415-863-1373 Facsimile 1793-842101
Signal Processing and Noise Reduction Systems.
* Certain information in this Exhibit has been omitted and filed
separately with the Commission. Confidential treatment has been
requested with respect to the omitted portions.
<PAGE>
DIGITAL AUDIO SYSTEM LICENSE AGREEMENT
INTERNET CODERS
INDEX
-----
Preamble
I. DEFINITIONS
Section 1.01 - "LICENSOR"
Section 1.02 - "LICENSEE"
Section 1.03 - "AC-3 Digital Audio System Specifications"
Section 1.04 - "Licensed Trademark"
Section 1.05 - "Licensed Products"
Section 1.06 - "Licensed Copyrighted Works"
Section 1.07 - Section Deleted
Section 1.08 - "LICENSOR Deliverables"
Section 1.09 - "Know-How"
Section 1.10 - "Confidential Information"
Section 1.11 - "Improvements"
Section 1.12 - "LICENSEE's Trade Name and Trademarks"
Section 1.13 - "Other-Trademark Purchaser"
Section 1.14 - Section Deleted
Section 1.15 - The "Effective Date"
Section 1.16 - LICENSEE's Modified AC-3 Specification
Section 1.17 - "Internet"
Section 1.18 - "AC-3 Source Code"
II. LICENSES GRANTED
Section 2.01 - Licenses Granted to LICENSEE
Section 2.02 - Limitation of Licenses Granted
Section 2.03 - Exclusivity Limitation
III. OTHER OBLIGATIONS OF THE LICENSEE AND LICENSOR
Section 3.01 - Use of Licensed Trademarks
Section 3.02 - Ownership of the Licensed Trademarks
Section 3.03 - Maintenance of Trademark Rights
Section 3.04 - Trademark Enforcement
Section 3.05 - Other-Trademark Purchasers
Section 3.06 - Section Deleted
Section 3.07 - Copyright Notice
Section 3.08 - Furnishing of Licensed Copyrighted Works
Section 3.09 - License Notice
Section 3.10 - Furnishing of LICENSOR Deliverables and Know-How
Section 3.11 - Use of Know-How and Confidential Information
Section 3.12 - Best Efforts
<PAGE>
IV. PAYMENTS
Section 4.01 - Initial Payment
Section 4.02 - Royalties
Section 4.03 - Section Deleted
Section 4.04 - Royalty Applicability
Section 4.05 - Royalty Payments and Statements
Section 4.06 - Section Deleted
Section 4.07 - Books and Records
Section 4.08 - Rights of Inspecting Books and Records
V. STANDARDS OF MANUFACTURE AND QUALITY
Section 5.01 - Standardization and Quality
Section 5.02 - Right to Inspect Quality
VI. TERMINATION AND EFFECT OF TERMINATION
Section 6.01 - Expiration of Agreement
Section 6.02 - Termination for Cause
Section 6.03 - Section Deleted
Section 6.04 - Effect of Termination
Section 6.05 - Revision of Terms
VII. LIMITATIONS OF RIGHTS AND AUTHORITY
Section 7.01 - Limitation of Rights
Section 7.02 - Limitation of Authority
Section 7.03 - Disclaimer of Warranties and Liability; Hold Harmless
Section 7.04 - Limitation of Assignment by LICENSEE
Section 7.05 - Compliance with U.S. Export Control Regulations
VIII. MISCELLANEOUS PROVISIONS
Section 8.01 - Language of Agreement; Language of Notices
Section 8.02 - Stability of Agreement
Section 8.03 - Public Announcements
Section 8.04 - Address of LICENSEE and LICENSOR for all
Other Communications
Section 8.05 - Applicable Law
Section 8.06 - Choice of Forum; Attorneys' Fees
Section 8.07 - Construction of Agreement
Section 8.08 - Captions
Section 8.09 - Singular and Plural
Section 8.10 - Complete Agreement
Section 8.11 - Severability
Section 8.12 - No Conflict Representation and Warranty
Section 8.13 - Execution
Appendix A - Appendix Deleted
Appendix B - Dolby AC-3 Digital Audio System
Appendix C - Preliminary Specifications for Dolby AC-3 System
Appendix D - Licensee Information Manual
Appendix E - Royalty Schedule
<PAGE>
DIGITAL AUDIO SYSTEM LICENSE AGREEMENT
WHEREAS, LICENSOR is engaged in the field of audio signal processing
systems and has developed signal processing systems useful for audio recording
and playback and for other applications;
WHEREAS, LICENSOR's signal processing systems have acquired a reputation
for excellence and LICENSOR's trademarks have acquired valuable goodwill;
WHEREAS, LICENSOR has licensed over 160 companies to make, use and sell
consumer audio hardware incorporating LICENSOR's signal processing systems and
marked with LICENSOR's trademarks; and
WHEREAS, LICENSOR has developed the model AC-3 digital audio system which
uses a new technique for encoding and decoding of audio frequency data in
digital form with a substantially reduced bit-rate while maintaining a high
quality decoded audio signal;
WHEREAS, LICENSOR represents and warrants that it has rights to grant
licenses under its copyrights, know-how and trademarks;
WHEREAS, LICENSEE is engaged in the development, marketing and sale
(including licensing) of software products for the purpose of delivering high
quality audio content over the internet;
WHEREAS, LICENSEE believes it can develop a substantial demand for software
products marked with LICENSOR's trademarks used to encode or decode audio
signals using a modified version of LICENSOR's model AC-3 digital audio system;
WHEREAS, LICENSEE desires an [*] as set forth herein, to develop, market
and sell professional and consumer encoding and decoding software products using
a variable bit rate modified version of LICENSOR's model AC-3 digital audio
system based on LICENSOR's source code and using LICENSOR's know-how and trade
secrets and under LICENSOR's trademarks; and
WHEREAS, LICENSOR is willing to grant such a license under the terms and
conditions set forth in this Agreement.
NOW, THEREFORE, it is agreed by and between LICENSOR and LICENSEE as
follows:
* Certain information in this Exhibit has been omitted nad filed
separately with the Commission. Confidential treatment has been
requested with respect to the omitted portions.
<PAGE>
ARTICLE I
DEFINITIONS
-----------
Section 1.01 - "LICENSOR" means Dolby Laboratories Licensing Corporation, a
-------------------------
corporation of the State of New York, having a place of business as indicated on
the title page of this Agreement, and its successors and assigns.
Section 1.02 - "LICENSEE" means the corporation identified on the title
------------------------
page of this Agreement and any subsidiary thereof of whose ordinary voting
shares more than 50% are controlled directly or indirectly by such corporation,
but only so long as such control exists.
Section 1.03 - "AC-3 Digital Audio System Specifications" means the
--------------------------------------------------------
specifications for the AC-3 digital audio system, comprising the claims and
teachings of the Scheduled Patents defined in the Digital Audio System License
Agreement (Patent License), of even date herewith, the AC-3 Digital Audio System
operating parameters as specified in Appendix B entitled "Dolby AC-3 Digital
Audio System," the "Preliminary Specifications for Dolby AC-3 System" as
specified in Appendix C, attached hereto and an integral part of this Agreement,
and any applicable modifications, improvements or enhancements owned or
licensable by LICENSOR.
Section 1.04 - "Licensed Trademark" means one or more of the following: (a)
----------------------------------
the word mark "Dolby", (b) the device mark which is also referred to as the
'Double-D' symbol, and (c) any mark adopted by LICENSOR chiefly associated with
or identifying internet coders using the Dolby AC-3 Digital Audio System, which
LICENSOR may subsequently agree to license under this Agreement.
Section 1.05 - "Licensed Products" shall mean:
---------------------------------
Software products and documentation, which conform to LICENSEE's Modified
AC-3 Specification, and which can be any of the following:
(1) an encoder used to prepare audio content to be sent over the Internet
(2) a decoder used to decode audio content received from the Internet; or
(3) a combined encoder/decoder package to prepare and/or decode audio
content to be sent over and/or received from the Internet.
Section 1.06 - "Licensed Copyrighted Works" shall mean all copyrighted
------------------------------------------
works including the AC-3 Source Code and related documentation, owned by
LICENSOR or owned by others to which LICENSOR
<PAGE>
has the right to sublicense, relating to AC-3 and which are useful for the
development, design, manufacture, sale, license or use of Licensed Products.
Section 1.07 - Section Deleted
------------------------------
Section 1.08 - "LICENSOR Deliverables" shall mean any and all items
-------------------------------------
delivered or to be delivered by LICENSOR to LICENSEE which enable LICENSEE to
develop and test Licensed Products, including:
(1) AC-3 Source Code of the latest revision,
(2) Documentation accompanying said source code,
(3) Test documentation and test vectors to verify bitstream compliance.
Section 1.09 - "Know-How" means all proprietary information, trade secrets,
------------------------
skills, experience, recorded or unrecorded, accumulated by LICENSOR, from time
to time prior to and during the term of this Agreement, or licensable by
LICENSOR, relating to Licensed Products and all designs, drawings, reports,
memoranda, blue-prints, specifications and the like, prepared by LICENSOR or by
others and licensable by LICENSOR, insofar as LICENSOR deems the same to relate
to and be useful for the development, design, manufacture, sale or use of
Licensed Products. Know-How does not include Licensed Copyrighted Works, whether
or not published.
Section 1.10 - "Confidential Information" means non-technical proprietary
----------------------------------------
information of LICENSOR or LICENSEE, including, without limiting the foregoing,
marketing information, product plans, business plans, royalty, and sales
information.
Section 1.11 - Section Deleted
------------------------------
Section 1.12 - "LICENSEE's Trade Name and Trademarks" means any trade name
----------------------------------------------------
or trademark used and owned by LICENSEE.
Section 1.13 - "Other-Trademark Purchaser" means any customer of LICENSEE
-----------------------------------------
who, with LICENSEE's knowledge, intends to resell, use or lease the Licensed
Products under a trademark other than LICENSEE's Trade Name and Trademarks.
Section 1.14 - Section Deleted
------------------------------
Section 1.15 - The "Effective Date" of this Agreement is the date of
----------------------------------
execution hereof by the last party to execute the Agreement, or, if this
Agreement requires validation by any governmental or quasi-governmental body,
the "Effective Date" is the date of validation of this Agreement.
<PAGE>
Section 1.16 - "LICENSEE's Modified AC-3 Specification" shall mean
------------------------------------------------------
modifications developed by LICENSEE to the AC-3 Digital Audio System
Specifications, to provide for variable data rates.
Section 1.17 - "Internet" shall mean data networks using the "Internet
-------------------------
Protocol" (commonly known as "IP").
Section 1.18 - "AC-3 Source Code" shall mean all computer program code
--------------------------------
developed and owned or licensable by LICENSOR implementing the encoder and/or
decoder functions of the AC-3 Digital Audio System in any form including
LICENSEE's Modified AC-3 Specification.
ARTICLE II
LICENSES GRANTED
----------------
Section 2.01 - Licenses Granted to LICENSEE
-------------------------------------------
LICENSOR hereby grants to LICENSEE:
a personal, non-transferable, indivisible license throughout the world,
which shall be exclusive for the specific purpose of "audio on demand", which is
defined as the delivery of audio content, which is not encoded in real-time,
over the Internet to one or more individual users, with such delivery controlled
(i.e. start, stop, fast forwards and rewind) separately and independently by
each individual user and not a "broadcast" to multiple users at the same time
without such separate and individual controls, for a period of 24 months from
the Effective Date, or 18 months from the commercial release of LICENSEE's first
Licensed Product, whichever occurs first, and non-exclusive thereafter, and non-
exclusive for other purposes, subject to LICENSEE fulfilling its obligations
under this Agreement,
a) to use, copy, display, perform and modify the Licensed Copyrighted
Works (including the AC-3 Source Code), and to use the Know-How, to develop,
prepare, copy and test Licensed Products; and
b) (i) to market, sell, distribute, maintain, and support the Licensed
Products,
(ii) to grant end-user licenses to Licensed Products; provided, that
to the extent the Licensed Products incorporate any portions of the Licensed
Copyrighted Works (including the AC-3 Source Code) or Know-How, such portions
shall be made available and licensed to end-users only in object code form
without the right of such end-users to modify such object code.
<PAGE>
(iii) to copy, display and perform the Licensed Products for
execution, backup, and archival purposes and for the purposes in the preceding
clauses (i) and (ii), subject to the conditions set forth in this Agreement and
LICENSEE's performance of its obligations, including the payment of royalties.
Section 2.02 - Limitation of Licenses Granted
---------------------------------------------
Notwithstanding the licenses granted under Section 2.01:
(1) no license is granted under this Agreement to lease, sell, transfer,
or otherwise dispose of any subset or portion of a Licensed Product.
(2) no license is granted under this Agreement to use any Licensed
Trademark in connection with offering for sale or in advertising and/or
informational material relating to any Licensed Product which is not marked with
the mark specified in Section 3.01(1) of this Agreement;
(3) no license is granted under this Agreement with respect to the use of
any Licensed Trademark on or in connection with products other than Licensed
Products;
(4) no right is granted with respect to LICENSOR's trade name "Dolby
Laboratories" except with respect to the use of said tradename on and in
connection with Licensed Products in the trademark acknowledgment and license
notice required by Sections 3.01(6) and 3.09, respectively; and
(5) no right to grant sublicenses other than end-user licenses
specifically allowed under Section 2.01 is granted under this Agreement.
Section 2.03 - Exclusivity Limitation
-------------------------------------
The exclusivity of the License granted in Section 2.01 shall terminate and
such License shall become non-exclusive in the event LICENSEE fails to comply
with either the minimum royalty payment provisions of Section 4.02, or the best
efforts requirements of Section 3.12, and LICENSEE fails to remedy the default
within 14 days of receiving notice of such default from LICENSOR.
ARTICLE III
OTHER OBLIGATIONS OF THE LICENSEE AND LICENSOR
----------------------------------------------
Section 3.01 - Use of Licensed Trademarks
-----------------------------------------
The Licensed Trademarks have acquired a reputation for high quality among
professionals and consumers around the world. The performance capability of the
AC-3 digital audio system is such that
<PAGE>
LICENSOR is willing, by virtue of this Agreement, to allow the use of the
Licensed Trademarks on Licensed Products, or on the user interface to Licensed
Products and in connection with their advertising, marketing and sale, provided
that the quality of such products conforms with the general reputation for high
quality associated with the Licensed Trademarks. LICENSEE's use of the Licensed
Trademarks shall be subject to the obligations of this Agreement as well as
detailed regulations issued from time to time by LICENSOR. Use of Licensed
Trademarks on or in connection with Licensed Products conforming to the
LICENSEE's Modified AC-3 Specification shall be subject to additional specific
certification and approval by LICENSOR prior to any public or non-public
demonstration of such Licensed Product pursuant to (i) bitstream compliance test
adapted by LICENSOR in good faith from LICENSOR's bitstream compliance tests for
the AC-3 Digital Audio System Specifications and (ii) other appropriate tests
developed in good faith by LICENSOR. LICENSEE shall comply with the requirements
of the body of this Agreement and such additional regulations as LICENSOR may
issue and shall ensure that its subsidiaries, agents, distributors, and dealers
throughout the world comply with such requirements:
(1) LICENSEE shall prominently mark the Licensed Product or the user
interface to the Licensed Product in the following way:
[LOGO OF DOLBY DIGITAL APPEARS HERE]
(2) The mark specified in subsection (1) of this Section 3.01, shall also
be used at least once in a prominent manner in all advertising and promotions
for such Licensed Product, except for audio-only advertising and promotion and
mere links to LICENSEE's Internet site(s); such usages shall be no less
prominent and in the same relative size as the most prominent third party
trademark(s) appearing on such Licensed Product or in the advertising and
promotion thereof.
(3) LICENSEE may not use the Licensed Trademarks in advertising and
promotion of a product not marked in accordance with subsection (1) of this
Section 3.01.
(4) In every use of a Licensed Trademark LICENSEE shall give notice to the
public that such Licensed Trademark is a trademark by using the superscript
letters "TM" after the respective trademark, or by use of the trademark
registration symbol "(R)" (the capital letter R enclosed in a circle) as a
<PAGE>
superscript after the respective trademark. LICENSOR shall inform LICENSEE as to
which notice form is to be used.
(5) LICENSEE shall use its best efforts to ensure that the appropriate
trademark notices, as set forth in subsection (4) above, appear in advertising
for such Licensed Products at the retail level.
(6) LICENSOR's ownership of Licensed Trademarks shall be indicated
whenever used by LICENSEE, whether use is on a product or on descriptive,
instructional, advertising, or promotional material, by the most relevant of the
following acknowledgments: "Dolby' is a trademark of Dolby Laboratories
Licensing Corporation", "The 'Double-D' symbol is a trademark of Dolby
Laboratories Licensing Corporation", or "'Dolby' and the 'Double-D' symbol are
trademarks of Dolby Laboratories Licensing Corporation." On Licensed Products
not distributed online such words shall be used on an exposed surface, such as
the back or the bottom, or if distributed online, in the "About..." (or
equivalent) menu of such Licensed Products. LICENSEE shall use its best efforts
to ensure that such an acknowledgment appears in advertising at the retail
level.
(7) Licensed Trademarks shall always be used in accordance with
established United States practices for the protection of trademark and service
mark rights, unless the requirements in the country or jurisdiction in which the
product will be sold are more stringent, in which case the practice of such
country or jurisdiction shall be followed. In no event shall any Licensed
Trademark be used in any way that suggests or connotes that it is a common,
descriptive or generic designation. Whenever the word "Dolby" is used, the
letter D shall be upper-case. The word "Dolby" shall be used only as an
adjective referring to a digital audio product, never as a noun or in any other
usage which may contribute to a generic meaning thereof. In descriptive,
instructional, advertising, or promotional material or media relating to
Licensed Products, LICENSEE must use the Licensed Trademarks and expressions
which include the Licensed Trademark "Dolby" with an appropriate generic or
descriptive term (e.g. "Dolby Digital AC-3 encoder", "Dolby Digital audio
circuit", "Dolby AC-3 transmission" etc.), with reference to Licensed Products
and their use.
(8) All uses of the Licensed Trademarks are subject to approval by
LICENSOR, as set forth in the first paragraph of this Section 3.01. LICENSOR
reserves the right to require LICENSEE to submit proposed uses to LICENSOR for
written approval prior to actual use. Upon request of LICENSOR,
<PAGE>
LICENSEE shall submit to LICENSOR samples of its own usage of the Licensed
Trademarks and usage of the Licensed Trademarks by its subsidiaries, agents,
distributors, and dealers.
(9) Licensed Trademarks shall be used in a manner that distinguishes them
from other trademarks, service marks, symbols or trade names, including
LICENSEE's Trade Name and Trademarks.
(10) LICENSEE may not use the Licensed Trademarks on or in connection with
products that do not meet LICENSOR's quality standards as set forth in the first
paragraph of this Section 3.01.
(11) LICENSEE may not use the Licensed Trademarks on or in connection with
products other than Licensed Products.
Section 3.02 - Ownership of the Licensed Trademarks
---------------------------------------------------
LICENSEE acknowledges the validity and exclusive ownership by LICENSOR of
the Licensed Trademarks.
LICENSEE further acknowledges that it owns no rights in the Licensed
Trademarks nor in the tradename "Dolby Laboratories." LICENSEE acknowledges and
agrees that all rights that it may accrue in the Licensed Trademarks and in the
tradenames "Dolby Laboratories" will inure to the benefit of the owner thereof,
LICENSOR or LICENSOR's parent Dolby Laboratories, Inc.
LICENSEE further agrees that it will not file any application for
registration of the Licensed Trademarks or "Dolby Laboratories" in any country,
region, or under any arrangement or treaty. LICENSEE also agrees that it will
not use nor will it file any application to register in any country, region, or
under any arrangement or treaty any mark, symbol or phrase, in any language,
which is confusingly similar to the Licensed Trademarks or "Dolby Laboratories".
Section 3.03 - Maintenance of Trademark Rights
----------------------------------------------
The expense of obtaining and maintaining Licensed Trademark registrations
shall be borne by LICENSOR. LICENSOR, as it deems necessary, will advise
LICENSEE of the grant of registration of such trademarks. As LICENSOR deems
necessary, LICENSEE and LICENSOR will comply with applicable laws and practices
of the country of registration, including, without limiting the foregoing, the
marking with notice of registration and the recording of LICENSEE as a
registered or licensed user of such trademarks. The expense of registering or
recording LICENSEE as a registered user or otherwise complying with the laws of
any country pertaining to such registration or the recording of trademark
<PAGE>
agreements shall be borne by LICENSEE. LICENSEE shall advise LICENSOR of all
countries where Licensed Products are sold, leased or intended to be used.
Section 3.04 - Trademark Enforcement
------------------------------------
LICENSEE shall immediately inform LICENSOR of all infringements, potential
or actual, which may come to its attention, of the Licensed Trademarks. It shall
be the exclusive responsibility of LICENSOR, at its own expense, to terminate,
compromise, or otherwise act at its discretion with respect to such
infringements. LICENSEE agrees to cooperate with LICENSOR by furnishing, without
charge, except out-of-pocket expenses, such evidence, documents and testimony as
may be required therein.
Section 3.05 - Other-Trademark Purchasers
-----------------------------------------
The following conditions shall apply if LICENSEE sells or leases Licensed
Products on a mass basis to an Other-Trademark Purchaser who does not hold a
license with terms and conditions substantially similar to this Agreement.
LICENSEE shall inform LICENSOR of the name, place of business, trademarks, and
trade names of the Other-Trademark Purchaser before such Other-Trademark
Purchaser sells, leases, or uses Licensed Products. LICENSEE shall obtain
agreement from such Other-Trademark Purchaser not to modify, install, use,
lease, sell, provide written material for or about, advertise, or promote
Licensed Products in any way which is in conflict with any provision of this
Agreement. It shall be the responsibility of LICENSEE to inform the Other-
Trademark Purchaser of the provisions of this Agreement, to notify such Other-
Trademark Purchaser that the provisions of this Agreement shall be applicable,
through LICENSEE, in the same way as if the Licensed Products were sold by
LICENSEE under LICENSEE's Trade Names and Trademarks, to ensure by all
reasonable means that such provisions are adhered to and, if requested by
LICENSOR, to provide to LICENSOR samples on a loan basis of the Other-Trademark
Purchaser's embodiment of the Licensed Products, as well as copies of such
Other-Trademark Purchaser's advertising, public announcements, literature,
instruction manuals, and the like.
Section 3.06 - Section Deleted
------------------------------
Section 3.07 - Copyright Notice
-------------------------------
3.07(1) - Where Applied LICENSEE shall apply the copyright notice
-----------------------
specified in subsection 3.07(2) of this Section 3.07 to all media in which the
Licensed Product is distributed as
<PAGE>
permitted by this Agreement, or if distributed online in the "About..." (or
equivalent) menu of such Licensed Products.
3.07(2) - Form of Notice LICENSEE shall apply the following copyright
------------------------
notice as required in subsection 3.07(1) of this Section 3.07:
"This product contains one or more programs protected under international
and U.S. copyright laws as unpublished works. They are confidential and
proprietary to Dolby Laboratories Licensing Corporation. Their reproduction or
disclosure, in whole or in part, or the production of derivative works therefrom
without the express permission of Dolby Laboratories Licensing Corporation is
prohibited. Copyright 1992-1995 by Dolby Laboratories, Inc. All rights
reserved."
Section 3.08 - Furnishing of Licensed Copyrighted Works
-------------------------------------------------------
Subject to any restrictions under the export control regulations of the
United States or any other applicable restrictions, LICENSOR will promptly after
the Effective Date, furnish to LICENSEE copies of all Licensed Copyrighted Works
including the AC-3 Source Code. LICENSEE agrees to use such Licensed Copyrighted
Works only as specifically laid out in this Agreement.
Upon termination of this Agreement, LICENSEE shall promptly return to
LICENSOR, at LICENSEE's expense, all documents and things supplied to LICENSEE
as Licensed Copyrighted Works, as well as all copies and reproductions thereof.
Section 3.09 - License Notice
-----------------------------
On all Licensed Products, LICENSEE shall acknowledge that the Licensed
Products are manufactured under license from LICENSOR. The following notice
shall be used by LICENSEE on an exposed surface, such as the back or the bottom,
of all Licensed Products or if distributed online in the "About..." (or
equivalent) menu of such Licensed Products: "Manufactured under license from
Dolby Laboratories Licensing Corporation". Such notice shall also be used in all
instruction and servicing manuals.
Section 3.10 - Furnishing of LICENSOR Deliverables and Know-How
---------------------------------------------------------------
Subject to any restrictions under the export control regulations of the
United States or any other applicable restrictions, LICENSOR will promptly after
the Effective Date, furnish to LICENSEE:
(1) The LICENSOR Deliverables and copies of all documents and things
comprising the Know-How; and
<PAGE>
(2) when requested by LICENSEE, provide, as LICENSOR deems reasonable,
consulting services regarding design considerations and general advice relating
to the Licensed Products and the sale and use thereof, for all of which LICENSEE
will reimburse LICENSOR for travel and reasonable per diem expenses.
Section 3.11 - Use of Know-How and Confidential Information
-----------------------------------------------------------
3.11(1) - By LICENSEE
---------------------
LICENSEE shall use all Know-How and Confidential Information obtained
heretofore or hereafter from LICENSOR solely for the purpose of exercising its
license rights under Section 2.01, shall not use such Know-How or Confidential
Information in an unauthorized way, and shall not divulge such Know-How or
Confidential Information or any portion thereof to third parties, unless such
Know-How or Confidential Information (a) was known to LICENSEE prior to its
obtaining the same from LICENSOR; (b) becomes known to LICENSEE from sources
other than either directly or indirectly from LICENSOR; (c) becomes public
knowledge other than by breach of this Agreement by LICENSEE or by another
licensee of LICENSOR; (d) is required by law to be disclosed or (e) is required
to be disclosed to enforce this Agreement. The obligations of this subsection
3.11(1) shall cease three (3) years from the date on which such Know-How or
Confidential Information are acquired by LICENSEE from LICENSOR under this
Agreement.
Upon termination of this Agreement, with respect to Know-How or
Confidential Information subject to the obligations of this subsection 3.11(1),
LICENSEE shall promptly return to LICENSOR, at LICENSEE's expense, all documents
and things supplied to LICENSEE as Know-How, as well as all copies and
reproductions thereof.
3.11(2) - By LICENSOR
---------------------
Except as provided by Article IV of this Agreement, LICENSEE is not
obligated to disclose to LICENSOR any information that it deems proprietary or
confidential. LICENSOR hereby agrees that throughout the term of this Agreement
it shall not divulge to third parties, nor use in an unauthorized way
Confidential Information or trade secrets belonging to LICENSEE unless said
Confidential Information or trade secrets (a) were known to LICENSOR prior to
its receipt of said Confidential Information or trade secrets from LICENSEE; (b)
becomes known to LICENSOR from sources other than either directly or indirectly
from LICENSEE; (c) becomes a matter of public knowledge other than by breach of
this
<PAGE>
Agreement by LICENSOR; (d) is required by law to be disclosed or (e) is required
to be disclosed to enforce this Agreement. The above obligations of LICENSOR
shall in any event cease three (3) years from the date on which such
confidential information or trade secrets have been acquired by LICENSOR from
the LICENSEE under this Agreement.
Section 3.12 - Best Efforts
---------------------------
LICENSEE agrees that it will use its best efforts to bring the first
Licensed Products to market no later than six months from the Effective Date.
During such six-month period LICENSEE shall demonstrate progress toward that
goal by giving LICENSOR regular, brief progress reports every 30 days, and
holding a design review with LICENSOR's technical staff every 60 days.
ARTICLE IV
PAYMENTS
--------
Section 4.01 - Initial Payment
------------------------------
LICENSEE shall promptly upon the Effective Date of this Agreement pay
LICENSOR the sum specified on the title page and shall pay all local fees, taxes
(other than taxes on LICENSOR's income or profits), duties, or charges of any
kind and shall not deduct them from such sum due unless such deductions may be
offset against LICENSOR's own tax liabilities.
Section 4.02 - Royalties
------------------------
Subject to the provisions of Section 4.05, LICENSEE shall pay to LICENSOR
royalties on "net sales" (as defined in Appendix E hereto) of Licensed Products
which are commercially used, sold, leased, or otherwise disposed of by LICENSEE,
except for Licensed Products returned to LICENSEE by customers of LICENSEE,
other than in exchange for an upgraded product, on which a credit has been
allowed by LICENSEE to said customers. The royalty payable is set forth in
Appendix E of this Agreement.
In order for the exclusivity provisions of Section 2.01 to remain in
effect, LICENSEE shall make minimum royalty payments as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
At the end of the first quarter following the Effective Date: [*]
" second quarter " [*]
" third quarter " [*]
" fourth quarter " [*]
</TABLE>
* Certain information in this Exhibit has been omitted and filed
separately with the Commission. Confidential treatment has been
requested with respect to the omitted portions.
<PAGE>
<TABLE>
<S> <C> <C> <C>
" fifth quarter " [*]
" sixth quarter " [*]
" seventh quarter " [*]
" eighth quarter " [*]
</TABLE>
* Certain information in this Exhibit has been omitted and filed
separately with the Commission. Confidential treatment has been
requested with respect to the omitted portions.
<PAGE>
Section 4.03 - Section Deleted
------------------------------
Section 4.04 - Royalty Applicability
------------------------------------
A Licensed Product shall be considered sold under Section 4.02 when
invoiced, or if not invoiced, delivered to another by LICENSEE or otherwise
disposed of or put into commercial use by LICENSEE, except for consignment
shipments, which will be considered sold when the payment for such shipments is
agreed upon between LICENSEE and customer.
Section 4.05 - Royalty Payments and Statements
----------------------------------------------
LICENSEE shall render statements and royalty payments as follows:
(1) LICENSEE shall deliver to the address shown on the cover sheet of this
Agreement or such place as LICENSOR may from time to time designate, quarterly
reports certified by LICENSEE's chief financial officer or the officer's
designate within 30 days after each calendar quarter ending with the last day of
March, June, September and December. Alternatively, such reports may be
delivered by facsimile by transmitting them to LICENSOR's facsimile telephone
number shown on the cover sheet of this Agreement or such other number as
LICENSOR may from time to time designate. Royalty payments are due for each
quarter at the same time as each quarterly report and shall be made by wire
transfer in United States funds to LICENSOR's bank as identified on the cover
sheet of this Agreement or such other bank as LICENSOR may from time to time
designate. LICENSEE shall pay all local fees, taxes (other than taxes on
LICENSOR's income or profits), duties, or charges of any kind and shall not
deduct them from the royalties due unless such deductions may be offset against
LICENSOR's own tax liabilities.
Each quarterly report shall:
(a) state the number of each model type of Licensed Products leased, sold,
or otherwise disposed of by LICENSEE during the calendar quarter with respect to
which the report is due; and
(b) contain such other information and be in such form as LICENSOR or its
outside auditors may prescribe.
(2) Any remittance in excess of royalties due with respect to the calendar
quarter for which the report is due shall be applied by LICENSOR to the next
payment due.
(3) LICENSEE's first report shall be for the calendar quarter in which
LICENSEE sells its first Licensed Product.
<PAGE>
(4) LICENSEE shall deliver a final report and payment of royalties to
LICENSOR certified by LICENSEE's chief financial officer or the officer's
designate within 30 days after termination of this Agreement throughout the
world. Such a final report shall include a report of all royalties due with
respect to Licensed Products not previously reported to LICENSOR. Such final
report shall be supplemented at the end of the next and subsequent quarters, in
the same manner as provided for during the term of the Agreement, in the event
that LICENSEE learns of any additional royalties due.
(5) LICENSEE shall pay interest to LICENSOR from the due date to the date
payment is made of any overdue royalties or fees, including the Initial Payment,
at the rate of 2% above the prime rate as is in effect from time to time at the
bank identified on the cover page of this Agreement, or another major bank
agreed to by the LICENSOR and LICENSEE in the event that the identified bank
should cease to exist, provided however, that if the interest rate thus
determined is in excess of rates allowable by any applicable law, the maximum
interest rate allowable by such law shall apply.
Section 4.06 - Section Deleted
------------------------------
Section 4.07 - Books and Records
--------------------------------
LICENSEE shall keep complete books and records of all sales, leases,
commercial uses, returns, or other disposals by LICENSEE of Licensed Products
for three years after the relevant accounting period.
Section 4.08 - Rights of Inspecting Books and Records
-----------------------------------------------------
LICENSOR shall have the right, through a professionally registered
accountant at LICENSOR's expense for three years after the relevant accounting
period, to inspect, examine and make abstracts of the said books and records
insofar as may be necessary to verify the accuracy of the same and of the
statements provided for herein but such inspection and examination shall be made
during business hours upon reasonable notice and not more often than once per
calendar year. LICENSOR agrees not to divulge to third parties any Confidential
Information obtained from the books and records of LICENSEE as a result of such
inspection unless such information (a) was known to LICENSOR prior to its
acquisition by LICENSOR as a result of such inspection; (b) becomes known to
LICENSOR from sources other than directly or indirectly from LICENSEE; (c)
becomes a matter of public knowledge other than by breach of this Agreement by
LICENSOR; (d) is required by law to be disclosed or (e) is required to be
disclosed to enforce this Agreement.
<PAGE>
ARTICLE V
STANDARDS OF MANUFACTURE AND QUALITY
------------------------------------
Section 5.01 - Standardization and Quality
------------------------------------------
LICENSEE shall abide by the AC-3 Digital Audio System Specifications,
hereto appended in Appendix C and as modified from time to time by LICENSOR as
soon as possible, but no later than 180 days after notice from LICENSOR and by
the modifications reflected in LICENSEE's Modified AC-3 Specifications. All
Licensed Product types are subject to acceptance testing by LICENSOR pursuant to
a bitstream compliance test adapted by LICENSOR in good faith from LICENSOR's
bitstream compliance tests for the AC-3 Digital Audio System Specifications. All
Licensed Products marked with the Licensed Trademarks must additionally comply
with all applicable minimum quality standards issued and modified from time to
time by LICENSOR. On all Licensed Products marked with the Licensed Trademarks
LICENSEE shall abide by reasonable standards of quality and workmanship. Such
quality standards shall apply to all aspects of Licensed Products which
influence or reflect upon the audio quality or performance of the Licensed
Products as perceived by the end user. LICENSEE shall with respect to all
Licensed Products conform to any reasonable new quality standards requirements
as specified by LICENSOR within a period of within 180 days after notice from
LICENSOR and by the modifications reflected in LICENSEE's Modified AC-3
Specifications.
Licensed Products shall not be designed, presented or advertised in any way
which contributes to confusion of the AC-3 digital audio system with any of
LICENSOR's other digital audio systems, audio noise reduction or headroom
extension systems or LICENSOR's motion picture sound system.
Section 5.02 - Right to Inspect Quality
---------------------------------------
LICENSEE shall provide LICENSOR with such non-confidential information
concerning Licensed Products as it may reasonably require in performing its
right to enforce quality standards under this Agreement. LICENSEE will, upon
request, provide on a loan basis to LICENSOR a reasonable number of samples of
Licensed Products for testing, together with instruction and service manuals. In
the event that LICENSOR shall complain that any Licensed Product does not comply
with LICENSOR's quality standards, excepting newly specified standards falling
within the 180 day time limit of Section 5.01, it shall
<PAGE>
promptly so notify LICENSEE by written communication whereupon LICENSEE shall
within ninety (90) days suspend the lease, sale or other disposal of the same.
ARTICLE VI
TERMINATION AND EFFECT OF TERMINATION
-------------------------------------
Section 6.01 - Expiration of Agreement
--------------------------------------
Unless this Agreement already has been terminated in accordance with the
provisions of Section 6.02, this Agreement shall terminate five years from the
Effective Date and thereafter is renewable at LICENSEE's request at terms and
conditions in force at the time of renewal for reasonably comparable licenses of
LICENSOR.
Section 6.02 - Termination for Cause
------------------------------------
At the option of LICENSOR, in the event that LICENSEE breaches any of its
material obligations under this Agreement, subject to the conditions of Section
6.04, this Agreement shall terminate upon LICENSOR's giving sixty (60) days
advance notice in writing, effective on dispatch of such notice, of such
termination, giving reasons therefor to LICENSEE, provided however, that, if
LICENSEE, within the sixty (60) day period, remedies the failure or default upon
which such notice is based, then such notice shall not become effective and this
Agreement shall continue in full force and effect. Notwithstanding the sixty
(60) day cure period provided under the provisions of this Section 6.02,
interest due under Section 4.05 shall remain payable and shall not waive,
diminish, or otherwise affect any of LICENSOR's rights pursuant to this Section
6.02.
Section 6.03 - Section Deleted
------------------------------
Section 6.04 - Effect of Termination
------------------------------------
Upon termination of the Agreement, as provided in Sections 6.01 or 6.02,
all licenses granted by LICENSOR to LICENSEE under this Agreement shall
terminate, all rights LICENSOR granted to LICENSEE shall revest in LICENSOR, and
all other rights and obligations of LICENSOR and LICENSEE under this agreement
shall terminate except that the following rights and obligations of LICENSOR and
LICENSEE shall survive to the extent necessary to permit their complete
fulfillment and discharge:
<PAGE>
(1) LICENSEE's obligation to deliver a final royalty report and supplements
thereto as required by Section 4.05;
(2) LICENSOR's right to receive and LICENSEE's obligation to pay royalties,
under Article IV, including interest on overdue royalties, accrued or accruable
for payment at the time of termination and interest on overdue royalties
accruing subsequent to termination;
(3) LICENSEE's obligation to maintain books and records and LICENSOR's
right to examine, audit, and copy as provided in Sections 4.07 and 4.08;
(4) any cause of action or claim of either party accrued or to accrue
because of any breach or default by the other party;
(5) Both parties' obligations with respect to Know-How and Confidential
Information under Section 3.11 and LICENSOR's obligations with respect to
Confidential Information under Section 4.08;
(6) LICENSEE's obligations to cooperate with LICENSOR with respect to
Trademark Enforcement under Section 3.04, with respect to matters arising before
termination;
(7) LICENSEE's and LICENSOR's obligations regarding Public Announcements
under Section 8.03; and
(8) LICENSEE shall be entitled to fill orders for Licensed Products already
received and to make or have made for it and to sell Licensed Products for which
commitments to vendors have been made at the time of such termination, subject
to payment of applicable royalties thereon and subject to said Licensed Products
meeting LICENSOR's quality standards, provided that LICENSEE promptly advises
LICENSOR of such commitments upon termination.
The portions of the Agreement specifically identified in the sub-parts of
this Section shall be construed and interpreted in connection with such other
portions of the Agreement as may be required to make them effective.
Section 6.05 - Revision of Terms
--------------------------------
If LICENSOR after the termination of license exclusivity grants to another
party a license to make Licensed Products for sale in the market at a royalty
rate which is lower than that granted to LICENSEE, LICENSOR shall so notify
LICENSEE, and LICENSOR, at its own option, either shall grant such lower royalty
rate to LICENSEE on a retroactive basis to the date of such other license or
shall inform LICENSEE of any special conditions related to such other license
which justify said lower royalty rate. In
<PAGE>
the event LICENSEE believes that such special conditions are insufficient to
make the present Agreement equitable to LICENSEE then LICENSEE may inform
LICENSOR of its belief in writing and the reasons for such belief, whereupon the
LICENSEE and LICENSOR shall negotiate in good faith with the view toward
revising this Agreement so as to make its terms reasonably equivalent to those
granted to such other party. In the event LICENSEE and LICENSOR cannot, within
ninety (90) days after LICENSOR has received said written notice from LICENSEE,
resolve this situation, then the parties hereto shall within thirty (30) days
following the end of such ninety (90) day period submit in good faith the
problem for resolution to a group of three disinterested persons, one chosen by
LICENSEE, one chosen by LICENSOR and the third to be chosen jointly by the first
two persons. The majority opinion of this group shall be binding upon the
parties hereto. The expense of such submission shall be borne equally by the
parties.
ARTICLE VII
LIMITATIONS OF RIGHTS AND AUTHORITY
-----------------------------------
Section 7.01 - Limitation of Rights
-----------------------------------
No right or title whatsoever in the Licensed Trademarks is granted by
LICENSOR to LICENSEE or shall be taken or assumed by LICENSEE except as is
specifically laid down in this Agreement.
Section 7.02 - Limitation of Authority
--------------------------------------
Neither party shall in any respect whatsoever be taken to be the agent or
representative of the other party and neither party shall have any authority to
assume any obligation for or to commit the other party in any way.
Section 7.03 - Disclaimer of Warranties and Liability; Hold Harmless
--------------------------------------------------------------------
LICENSOR has provided LICENSEE the rights and privileges contained in this
Agreement in good faith. However, nothing contained in this Agreement shall be
construed as (1) a warranty or representation by LICENSOR that the AC-3 Digital
Audio System technology, Know-How, Licensed Copyrighted Works, the Licensed
Trademarks, or any Licensed Product, or part thereof embodying any of them will
be free from infringement of patents, copyrights, trademarks, service marks, or
other proprietary rights of third parties; or (2) an agreement to defend
LICENSEE against actions or suits of any nature brought by any third parties.
<PAGE>
LICENSOR disclaims all liability and responsibility for property damage,
personal injury, whether or not foreseeable, that may result from the
manufacture, use, lease, or sale of Licensed Products and parts thereof, and
LICENSEE agrees to assume all liability and responsibility for all such damage
and injury.
LICENSEE agrees to indemnify, defend, and hold LICENSOR harmless from and
against all claims (including, without limitation, product liability claims),
suits, losses and damages, including reasonable attorneys' fees and any other
expenses incurred in investigation and defense, arising out of LICENSEE's
manufacture, use, lease, or sale of Licensed Products, or out of any allegedly
unauthorized use of any trademark, service mark, Patent, copyright, process,
idea, method, or device (excepting Licensed Trademarks) by LICENSEE or those
acting under its apparent or actual authority, except for claims that the
Licensed Products, or the manufacture, use, lease or sale thereof, solely to the
extent the same incorporate or conform to the AC-3 Digital Audio System
Specifications, infringe any patent, copyright, trademark, service mark or other
proprietary right of third parties.
In no event will either party be liable for any lost profits, lost data, or
any form of incidental, consequential or punitive damages of any kind (whether
or not foreseeable).
Section 7.04 - Limitation of Assignment by LICENSEE
---------------------------------------------------
The rights, duties and privileges of LICENSEE hereunder shall not be
transferred or assigned by it either in part or in whole without prior written
consent of LICENSOR. However, LICENSEE shall have the right to transfer its
rights, duties and privileges under this Agreement in connection with its merger
and consolidation with another firm or the sale of its entire business to
another person or firm, provided that such person or firm shall first have
agreed with LICENSOR to perform the transferring party's obligations and duties
hereunder.
Section 7.05 - Compliance with U.S. Export Control Regulations
--------------------------------------------------------------
(1) LICENSEE agrees not to export any technical data acquired from LICENSOR
under this Agreement, nor the direct product thereof, either directly or
indirectly, to any country in contravention of United States law.
(2) Nothing in this Agreement shall be construed as requiring LICENSOR to
export from the United States, directly or indirectly, any technical data or any
commodities to any country in contravention of United States law.
<PAGE>
ARTICLE VIII
MISCELLANEOUS PROVISIONS
------------------------
Section 8.01 - Language of Agreement; Language of Notices
---------------------------------------------------------
The language of this Agreement is English. If translated into another
language, this English version of the Agreement shall be controlling. Except as
may be agreed by LICENSOR and LICENSEE, all notices, reports, consents, and
approvals required or permitted to be given hereunder shall be written in the
English language.
Section 8.02 - Stability of Agreement
-------------------------------------
No provision of this Agreement shall be deemed modified by any acts of
LICENSOR, its agents or employees or by failure to object to any acts of
LICENSEE which may be inconsistent herewith, or otherwise, except by a
subsequent agreement in writing signed by LICENSOR and LICENSEE. No waiver of a
breach committed by either party in one instance shall constitute a waiver or a
license to commit or continue breaches in other or like instances.
Section 8.03 - Public Announcements
-----------------------------------
Neither party shall at any time heretofore or hereafter publicly state or
imply that the terms specified herein or the relationships between LICENSOR and
LICENSEE are in any way different from those specifically laid down in this
Agreement. LICENSEE shall not at any time publicly state or imply that any
unlicensed products use the AC-3 Digital Audio System Specifications. If
requested by one party, the other party shall promptly supply the first party
with copies of all public statements and of all publicity and promotional
material relating to this Agreement, the AC-3 Digital Audio System
Specifications, or the Licensed Trademarks.
Section 8.04 - Address of LICENSOR and LICENSEE for all Other
-------------------------------------------------------------
Communications
--------------
Except as otherwise specified in this Agreement, all notices, reports,
consents, and approvals required or permitted to be given hereunder shall be in
writing, signed by an officer of LICENSEE or LICENSOR, respectively, and sent
postage or shipping charges prepaid by certified or registered mail, return
receipt requested showing to whom, when and where delivered, or by Express mail,
or by a secure overnight or one-day delivery service that provides proof and
date of delivery, or by facsimile, properly addressed or transmitted to LICENSEE
or LICENSOR, respectively, at the address or facsimile number
<PAGE>
set forth on the cover page of this Agreement or to such other address or
facsimile number as may from time to time be designated by either party to the
other in writing. Wire payments from LICENSEE to LICENSOR shall be made to the
bank and account of LICENSOR as set forth on the cover page of this agreement or
to such other bank and account as LICENSOR may from time to time designate in
writing to LICENSEE.
Section 8.05 - Applicable Law
-----------------------------
This Agreement shall be construed in accordance with the substantive laws,
but not the choice of law rules, of the State of California.
Section 8.06 - Choice of Forum; Attorneys' Fees
-----------------------------------------------
To the full extent permitted by law, LICENSOR and LICENSEE agree that their
choice of forum, in the event that any dispute arising under this agreement is
not resolved by mutual agreement, shall be the United States Courts in the State
of California and the State Courts of the State of California.
In the event that any action is brought for any breach or default of any of
the terms of this Agreement, or otherwise in connection with this Agreement, the
prevailing party shall be entitled to recover from the other party all costs and
expenses incurred in that action or any appeal therefrom, including without
limitation, all reasonable attorneys' fees and costs actually incurred.
Section 8.07 - Construction of Agreement
----------------------------------------
This Agreement shall not be construed for or against any party based on any
rule of construction concerning who prepared the Agreement or otherwise.
Section 8.08 - Captions
-----------------------
Titles and captions in this Agreement are for convenient reference only and
shall not be considered in construing the intent, meaning, or scope of the
Agreement or any portion thereof.
Section 8.09 - Singular and Plural
----------------------------------
Throughout this Agreement, words in the singular shall be construed as
including the plural and words in the plural shall be construed as including the
singular.
Section 8.10 - Complete Agreement
---------------------------------
This Agreement contains the entire agreement and understanding between
LICENSOR and LICENSEE with respect to its subject matter and merges all prior or
contemporaneous oral or written communication between them. Neither LICENSOR nor
LICENSEE now is, or shall hereafter be, in any
<PAGE>
way bound by any prior, contemporaneous or subsequent oral or written
communication except insofar as the same is expressly set forth in this
Agreement or in a subsequent written agreement duly executed by both LICENSOR
and LICENSEE.
Section 8.11 - Severability
---------------------------
Should any portion of this Agreement be declared null and void by operation
of law, or otherwise, the remainder of this Agreement shall remain in full force
and effect.
Section 8.12 - No Conflict Representation and Warranty
------------------------------------------------------
Each party represents and warrants to the other that such first party is
not a party to any agreement, and is not subject to any statutory or other
obligation or restriction, which might prevent or restrict it from performing
all of its obligations and undertakings under this License Agreement, and that
the execution and delivery of this Agreement and the performance by such first
party of its obligations hereunder have been authorized by all necessary action,
corporate or otherwise.
Section 8.13 - Execution
------------------------
IN WITNESS WHEREOF, the said LICENSOR has caused this Agreement to be
executed on the cover page of this Agreement, in the presence of a witness, by
an officer duly authorized and the said LICENSEE has caused the same to be
executed on the cover page of this Agreement, in the presence of a witness, by
an officer duly authorized, in duplicate original copies, as of the date set
forth on said cover page.
<PAGE>
APPENDIX A - APPENDIX DELETED
<PAGE>
APPENDIX B - "DOLBY AC-3 DIGITAL AUDIO SYSTEM"
Compliance with the algorithm description and operating parameters as specified
in ATSC document A/52, the "Dolby AC-3 Licensing Manual", the "Software
Interface Protocol" issued by LICENSOR and any further reasonable specifications
and requirements as LICENSOR may issue from time to time.
<PAGE>
APPENDIX C - PRELIMINARY SPECIFICATIONS FOR DOLBY AC-3 SYSTEM
Dolby AC-3 digital audio system encoding equipment shall comply with the
following audio specifications in production (when measured through a standard
decoder):
Audio data rate for two channels: 192 kb/sec
Frequency Response: 20 Hz - 20 kHz +/- 0.2 dB
Dynamic Range: Greater than 85 dB
Distortion: Less than 0.1% at 1 kHz
Less than 0.5%, 20 Hz - 20 kHz
Crosstalk: Less than -80 dB
Level Stability: Better than 0.2 dB
<PAGE>
APPENDIX D - LICENSEE INFORMATION MANUAL
<PAGE>
APPENDIX E - ROYALTY SCHEDULE
ROYALTIES ON LICENSED PRODUCTS: [*]
The term "net sales" means revenues of LICENSEE in connection with the
sale, lease or other disposition for cash or other consideration of the Licensed
Products less: (a) prompt payment discounts, quantity discounts, returns (other
than in exchange for an upgraded product, on which a credit has been allowed by
LICENSEE to the customer); (b) sales/distribution commissions and fees; (c) a
reasonable reserve for returns; and (d) price protection actually paid or
credited.
* Certain information in this Exhibit has been omitted and filed
separately with the Commission. Confidential treatment has been
requested with respect to the omitted portions.
<PAGE>
EXHIBIT 10.30
SOFTWARE RESELLER AGREEMENT
This Agreement is made and entered into effective as of August 9, 1998 (the
"Effective Date"), by and between Liquid Audio, Inc. ("LA"), a corporation
organized under the laws of the State of California, and Liquid Audio Japan
("Reseller"), a corporation organized under the laws of Japan. Capitalized terms
not otherwise defined shall have their meaning as set forth in Section 1 below.
WHEREAS, the Reseller desires to be appointed on an exclusive basis to
reproduce and resell Software Copies of the LA Software to End-Users in the
Licensed Territory;
WHEREAS, LA is willing to make such appointment in exchange for the
Reseller's payment obligations to LA hereunder, including certain minimum annual
payment commitments, and certain other promises, as set forth in this Agreement;
WHEREAS, the Reseller desires that the LA Software be localized for use in
the Licensed Territory, and LA is willing to cooperate with the Reseller to
cause certain Localized Versions of the LA Software to be developed; and
NOW, THEREFORE, in consideration of the mutual covenants and agreements set
forth herein, the parties hereby agree as follows:
1. DEFINITIONS
-----------
a. "Dealer-Reseller" shall mean any dealer, reseller or other
third party intermediary which (i) purchases Software Copies from Reseller for
resale solely to End-Users hereunder, and not for further resale and (ii) is
either a Subsidiary of Reseller or has been preapproved in writing by LA. All
Dealer-Resellers shall be identified in Exhibit C hereto, which shall be updated
by addenda thereto signed by both parties.
b. "Documentation" shall mean any instruction manuals or
documentation provided by LA with the LA Software.
c. "End-User" shall mean an end-user customer located within the
Licensed Territory who is licensed to use a Software Copy for its internal
purposes, and not for resale, redistribution, or any other purpose.
d. "End-User License Agreement" shall mean an end user license
agreement pursuant to which the Reseller licenses End-Users to use a Software
Copy, which shall (i) be in a form approved by LA that is at least as protective
of the Software Copy under applicable local law as LA's then-current standard
end user license agreement for the applicable LA Software, (ii) require the End-
Users to register their names and other appropriate information with Reseller as
a condition to obtaining the LA Software and (iii) require the End-Users to
register with LA's Liquid Operations Center before using the LA Software to
purchase downloadable digital music files.
e. "LA Software" shall mean the United States version of the
Liquid Audio software identified in Exhibit A hereto, and any Updates delivered
by LA to Reseller and any
<PAGE>
Localized Versions prepared hereunder. LA may, at any time, amend Exhibit A to
add other software products which shall be available to Reseller under the terms
of this Agreement, and LA shall be under no obligation to continue the
production of any software product, and may delete any discontinued software
products from Exhibit A at any time upon written notice.
f. "LA Trade Secrets" shall mean certain know-how, techniques,
processes, methods, and other trade secrets that may be disclosed by LA to the
Reseller relating to the LA Software.
g. "LAJ Shareholder Agreement" shall mean that certain agreement to
be entered into by and among LA, Super Stage, Inc. and certain investors,
pursuant to which LA, Super Stage, Inc. and certain investors have agreed to
certain terms concerning the management of Reseller.
h. "License Term" means the term of this Agreement commencing upon the
Effective Date and expiring on December 31, 2003, unless earlier terminated
pursuant to the terms of Section 10 below.
i. "Licensed Territory" means Japan.
j. "Localized Version" shall mean a version of the LA Software and
Documentation that has been localized for use in the Japanese language and has
been (i) requested in writing by the Reseller with a detailed description of the
desired localization changes, (ii) reasonably determined by LA to be
commercially feasible to develop and implement; and (iii) reasonably determined
by LA to constitute a necessary customization of the LA Software for use in the
Licensed Territory.
k. "Maintenance Services" means the sale of maintenance and support
services to End-Users, which may include distribution of Updates, in accordance
with LA's minimum requirements as set forth in Section 4(b) below.
l. "Purchase Price" shall mean the price to Reseller for each
Software Copy, calculated based on LA's then-current international retail list
price for the applicable LA Software or Maintenance Services, subject to the
applicable reseller discount set forth in Exhibit A.
m. "Sale" or "selling" of the LA Software or Software Copies shall
mean the sale of a license to use such LA Software or Software Copies. All
-------
references in this Agreement to the purchase, sale or distribution of LA
Software or Software Copies shall mean the purchase, sale or distribution of a
license to use such LA Software or Software Copy.
- -------
n. "Software Copy" or "Software Copies" shall mean an object code
(machine-readable) copy or copies of the LA Software, together with a copy or
copies of any accompanying Documentation relating thereto that is designated by
LA for distribution to End-Users, along with all related materials required by
LA for distribution of finished goods, including without limitation, duplication
media, envelopes, labels, and packaging. All such copies shall be fixed on CD-
ROM, diskette or other tangible media, except as expressly permitted in Section
2(b) below.
2
<PAGE>
o. "Subsidiaries" means all current and future business entities of
which the Reseller owns, directly or indirectly, at least fifty percent (50%) of
the equity securities or other equity interest granting voting rights
exercisable in electing the management of the entities, for so long as such
ownership exists.
p. "Update" means a release or version of the LA Software that is
generally made available at no additional cost to LA's end-user customers who
have purchased support and maintenance services from LA.
2. APPOINTMENT AND AUTHORITY OF RESELLER
-------------------------------------
a. Appointment of Reseller. Subject to the terms and conditions set
-----------------------
forth herein, LA hereby appoints Reseller to resell Software Copies of the LA
Software in the Licensed Territory, including related Maintenance Services, and
Reseller hereby accepts such appointment. Such appointment shall be on an
exclusive basis during the initial three (3) years of the License Term and shall
remain on an exclusive basis thereafter for the duration of the License Term,
unless the Minimum Annual Payment Obligations set forth in Section 6(e) are not
fulfilled, in which case such appointment shall automatically convert to a
nonexclusive basis. Reseller's sole remuneration for the distribution of the LA
Software shall be the difference between the Purchase Price for each Software
Copy and related Maintenance Services, and Reseller's price to its customers. As
a reseller, Reseller shall have the non-transferable, personal, revocable right
and license to reproduce Software Copies and to market, distribute and resell
such Software Copies to End-Users both directly and indirectly through a resale
network approved by LA of Dealer-Resellers in the Licensed Territory. All
proposed Dealer-Resellers must meet the criteria set forth in Section 1(a) above
and shall be identified in Exhibit C hereto. The Reseller shall contractually
obligate all Dealer-Resellers to comply with the terms of this Agreement, and
the Reseller further guarantees the performance of its Dealer-Resellers under
this Agreement and shall indemnify and hold LA harmless from and against all
losses, costs, liabilities and expenses arising out of or relating to any breach
or default by such Dealer-Resellers of this Agreement. All Software Copies
distributed by the Reseller will be accompanied by a copy of the End User
License Agreement, and the Reseller agrees to enforce the terms and conditions
of the End User License Agreement in the event of any violation by an End-User.
b. Territorial and Other Resale Restrictions. All End-Users shall
-----------------------------------------
have a ship-to address within the Licensed Territory and the End-User License
Agreement shall limit use of the LA Software to within the Licensed Territory.
The Reseller's marketing rights are expressly limited to the marketing of the LA
Software under approved LA Trademarks pursuant to Section 3 below. The
Reseller's distribution license is limited to distribution of Software Copies in
tangible packaged goods media, in the format(s) specified by LA, which may
include without limitation CD-ROM or diskette, and no right or license is
granted to distribute Software Copies via the Internet or any wide area network
(WAN) or otherwise in electronic media, except as stated in the following two
sentences. Reseller may permit downloading of the player software products
identified in Exhibit A from its own Web site, from the Web site of any Dealer-
Reseller, and from any other Web sites as may be approved by LA. Reseller may
distribute and permit the distribution by Dealer-Resellers of the server
software products identified in Exhibit A by FTP (file transfer protocol) to
End-Users with a billing address in the Licensed Territory who certify that they
reside in the Licensed Territory. In addition, the Reseller may not distribute
the LA Software on a bundled or value-added basis, or
3
<PAGE>
through original equipment manufacturers without the prior written consent of
LA. The Reseller shall pursue aggressive sales policies and procedures to
realize the maximum sales potential for the Software Copies in the Licensed
Territory. The Reseller shall not advertise, market, distribute, sell, or ship
the Software Copies outside the Licensed Territory. The Reseller shall not sell
or distribute, or permit the sale or distribution by any party, of the LA
Software in any scheme being a lottery, as premiums, give-aways, close-outs, or
discounts, as bundled merchandise, or in conjunction with any co-branded or
other marketing arrangement not approved by LA, or for any other purposes not
expressly contemplated and permitted by this Agreement.
c. Additional Restrictions on the LA Software. Except to the extent
------------------------------------------
permitted in Section 4(a) below with respect to Localized Versions, the Software
Copies may not be modified, translated or otherwise altered by the Reseller. The
Reseller agrees that it will not itself, or through any Subsidiary, affiliate or
other third party: (i) rent, lease, timeshare, or encumber the LA Software; (ii)
attempt to decompile, disassemble or reverse engineer the LA Software in whole
or in part, or otherwise attempt to derive the source code of the LA Software,
or take any other action in derogation of LA's or its suppliers' intellectual
property rights; (iii) market, distribute, sell, develop or cause to be
developed any derivative software or any other software program based upon or
competitive with the LA Software or any LA Trade Secrets or Confidential
Information of LA; or (iv) alter, encode, copy or transmit any audio or other
information using the LA Software without obtaining all necessary copyright and
other permissions, and Reseller will at its expense and indemnify LA and its
officers, directors, and employees against all liabilities, damages, claims,
fines and expenses arising out of any claim that Reseller has not obtained such
permissions.
d. Golden Master and Duplication Requirements. Upon receipt of the
------------------------------------------
advance payment set forth in Section 6(b) below, LA shall deliver to Reseller,
one object code (machine-readable) golden master copy of the LA Software, along
with one (1) copy of the Documentation. Upon completion of any Localized
Versions, LA shall likewise deliver a golden master copy thereof to Reseller.
Reproduction of Software Copies by Reseller shall be solely for the purposes of
reselling such Software Copies pursuant to the terms of this Agreement, and
shall be subject to accounting and payment of the applicable Purchase Price for
all such Software Copies pursuant to Section 6 below. All Software Copies shall
be subject to LA's quality control and related requirements set forth in Section
2(e) below. The Software Copies may not be modified, translated or otherwise
altered by Reseller, and on each Software Copy the Reseller shall reproduce
without alteration, distortion or obfuscation all proprietary, confidential,
copyright or other notices of a similar nature that appear on or in the LA
Software in the same form and location as they appear in the original.
e. Quality Control. Reseller will perform duplication, labeling,
---------------
packaging and all related activities that may be required by LA to prepare the
Software Copies for resale to End-Users. All such activities shall be performed
in accordance with LA's quality standards, as communicated to Reseller from time
to time, it being understood that in order to maintain the value and goodwill
associated with LA's Trademarks, all aspects of the Software Copies in finished
goods form will be subject to the approval of LA. LA will have the right to
monitor all aspects of the foregoing activities, and upon request at any time,
Reseller will provide LA with access to its manufacturing facilities, warehouse
and other facilities in order to perform quality control. Inventory levels of
Software Copies maintained by Reseller shall be subject to the review and
approval of LA. All
4
<PAGE>
subcontractors that may be used by Reseller hereunder shall be subject to the
prior written approval of LA. Reseller shall bear all costs and expenses in
connection with its obligations hereunder, except for those costs and expenses
incurred by LA in connection with its monitoring activities, including without
limitation, LA's traveling and lodging expenses.
f. Reservation of Rights. All rights not expressly granted hereunder
---------------------
are reserved by LA. This Agreement does not authorize or imply any rights other
than as expressly set forth herein. Without limiting the foregoing, LA reserves
the right under all of its intellectual property rights to make, have made,
develop, market, license, sell and distribute within the Licensed Territory any
software products other than the LA Software licensed for resale hereunder, to
distribute the LA Software in the Licensed Territory on a bundled or original
equipment manufacturer basis, and to distribute the LA Software in the Licensed
Territory via the Internet or any wide area network (WAN) or otherwise in
electronic media; provided that LA will not grant a license to any third party
to distribute the Localized Versions in the Licensed Territory via the Internet.
Subject to the foregoing, LA will report to Reseller the contact information for
any potential End-User customer located within the Licensed Territory that
contacts LA directly in regard to the purchase of Software Copies.
g. Other Reseller Activities. In the event that Reseller contemplates
-------------------------
entering into operational activities (other than resale or distribution of the
LA Software and Maintenance Services), partnering with third parties with
respect to the same, or receiving revenues from transactions that are enabled by
the LA Software, LA agrees to negotiate in good faith with Reseller to establish
such operations, if such operations are mutually agreed, under terms to be
negotiated at the appropriate time. Notwithstanding the foregoing, LA reserves
the right not to negotiate contracts with Reseller for these types of
relationships, if LA, in its sole business discretion, concludes that such
activities would materially affect the core reseller operation of Reseller in an
adverse manner, and LA shall have no liability to Reseller hereunder whatsoever
in the event LA fails to enter into or negotiate any such contract with
Reseller. In addition, Reseller acknowledges that this Agreement is subject to
termination by Reseller pursuant to Section 10 in the event that Reseller
engages in any such operational activities without the prior written consent of
LA.
h. Ownership. LA retains ownership of the LA Software and all right,
---------
title and interest therein. The Reseller acknowledges and agrees that it is
acquiring only a limited right to resell certain Software Copies the LA Software
hereunder. All patents, copyrights, trade secrets and other intellectual
property rights in and to the LA Software shall remain the exclusive property of
LA or its suppliers.
3. TRADEMARKS AND TRADE NAMES.
--------------------------
a. Right to Use. During the term of this Agreement, the Reseller
------------
shall have the right and shall be required to indicate to the public within the
Licensed Territory that it is an authorized reseller of the LA Software and to
operates is business under the name "Liquid Audio Japan," and shall have the
right and shall be required to market and advertise the LA Software under the
"Liquid Audio" trade name, and any other trademarks, marks, and trade names that
LA may approve for use in connection therewith in the Licensed Territory
(collectively, "LA's Trademarks").
5
<PAGE>
All rights to use LA's trade names are granted solely to the extent such trade
names are legally protectible in the Licensed Territory. Notwithstanding the
foregoing, any use of LA's Trademarks on Web sites or other postings on the
Internet or in other electronic transmissions via computer networks shall be
subject to the prior written approval of LA. The Reseller shall not use LA's
Trademarks, or any other copyright, trademark, logo or other right of LA in any
manner contrary to public morals, in any manner which is deceptive or
misleading, which is derogatory to LA's Trademarks, or which compromises or
reflects unfavorably upon the goodwill, good name, reputation or image of LA or
LA's Trademarks, or which might jeopardize or limit LA's proprietary interest in
LA's Trademarks. Any such misuse will give rise to LA's rights for immediate
termination of this Agreement. Nothing herein shall grant to the Reseller any
right, title or interest in LA's Trademarks. All uses of LA's Trademarks
hereunder by the Reseller shall inure solely to the benefit of LA. At no time
during or after the term of this Agreement shall the Reseller challenge or
assist other to challenge LA's Trademarks or the registration thereof or attempt
to register any trademarks, marks or trade names confusingly similar to those of
LA.
b. Approval of Representations. All representations of LA's
---------------------------
Trademarks that the Reseller intends to use shall first be submitted to LA for
approval in writing (which shall not be unreasonably withheld) of design, color,
and other details or shall be exact copies of those used by LA. The Reseller
shall not use any of LA's Trademarks in conjunction with another trademark on or
in relation to any other software without LA's prior written approval. All uses
shall be subject to approval by LA to ensure that the LA's Trademarks are not
used by the Reseller in a manner that is unintended by LA, and notwithstanding
any approval by LA, the Reseller is responsible for the contents of such
advertising and compliance with all laws and regulations within the Licensed
Territory relating thereto.
c. Registered User Agreements. LA and the Reseller shall enter into
--------------------------
registered user agreements with respect to LA's Trademarks to the extent now or
hereafter required, if at all, by applicable trademark law requirements in the
Licensed Territory. The Reseller shall be responsible for proper filing of the
registered user agreements, if any, with government authorities within the
Licensed Territory and shall pay all costs or fees associated with such filings.
d. Infringement Actions. Reseller shall cooperate with LA in all
--------------------
respects at LA's reasonable request in connection with any action or proceeding
prosecuted by LA involving LA's Trademarks or other intellectual property
rights. Reseller shall promptly notify LA of any such infringements or any acts
of unfair competition by third parties that come to Reseller's attention. LA
shall have the exclusive right, exercisable at its discretion, to institute in
its own name and/or Reseller's name and to control, all actions against third
parties relating to LA's Trademarks, and other intellectual property rights, at
LA's expense. With respect to any such actions, LA shall employ counsel of its
own choice to direct the handling of the litigation and any settlement thereof.
LA shall be entitled to receive and retain all amounts awarded, if any, as
damages, profits or otherwise in connection with such suits handled by LA.
Reseller shall not, without LA's prior written consent, institute any suit or
take any action on account of such infringements, acts of unfair competition or
unauthorized uses. LA's consent shall not be unreasonably withheld with respect
to any infringement of rights licensed on an exclusive basis hereunder, and LA's
consent may be withheld in its sole discretion with respect to any infringement
of rights licensed on a non-exclusive basis hereunder. LA shall endeavor to
provide Reseller with notice of its consent or lack thereof on
6
<PAGE>
an expedited basis in the event of an emergency that requires Reseller to seek
immediate relief in order to prevent further infringement of rights licensed on
an exclusive basis hereunder. If, with LA's consent, Reseller institutes, at its
sole cost and expense, such a suit or action, the handling of the litigation and
any settlement thereof shall remain subject to LA's approval, which shall not be
unreasonably withheld. Reseller shall be entitled to recover all reasonable
costs and expenses incurred in any such suit or action handled by Reseller from
any financial recovery awarded or obtained, and the damages Reseller incurred,
to the extent compensatory damages were awarded therefor, and the remainder
shall be retained by LA. LA shall incur no liability to Reseller by reason of
LA's failure or refusal to prosecute or by LA's refusal to permit Reseller to
prosecute, any alleged infringement by third parties, nor by reason of any
settlement to which LA may agree.
4. LOCALIZED VERSIONS AND MAINTENANCE SERVICES.
-------------------------------------------
a. Localized Versions. LA will cooperate with Reseller to develop
------------------
Localized Versions pursuant to the terms of this Section 4(a); provided that all
matters relating to the Localized Versions shall remain subject to the final
approval and control of LA. LA will prepare a schedule of the processes to be
accomplished in creating the Localized Versions and will allow Reseller to
participate in the development of the Localized Versions where this
participation is acceptable to LA in its sole discretion. In the event that the
Reseller desires the development of a Localized Version, the Reseller will
submit a localization request to LA that contains a detailed description of the
desired localization, and LA shall evaluate the request and determine whether
the requested localization meets the criteria for a Localized Version as set
forth in Section 1(j) above. If LA reasonably determines that the requested
localization meets the requirements set forth in Section 1(j) above, LA will
cooperate with Reseller to develop the requested localization, which cooperation
may include without limitation (i) using reasonable commercial efforts to
perform any source code modifications that LA determines are necessary for the
Localized Version, (ii) providing any application programming interfaces that LA
determines are necessary for Reseller to complete the Localized Version, and
(iii) providing any other reasonable assistance that LA determines is necessary
for Reseller to complete the Localized Version. LA shall have no liability to
the Reseller in the event that completion of any Localized Version is delayed
for any reason or abandoned due to technical difficulties after a reasonable
level of sustained diligent efforts by LA's personnel. LA's obligations
hereunder with respect to Localized Versions shall continue during the License
Term so long as Reseller's right to resell the LA Software under Section 2 is
exclusive within the Licensed Territory. The Reseller shall bear all costs
associated with the development and on-going production of the Localized
Versions. Development costs shall include without limitation the development
services of LA valued on "cost-plus" basis (i.e., time and materials with time
being computed based on fully-burdened labor costs of the dedicated personnel
plus fifteen percent 15% of the total). On-going production costs include
without limitation the cost of creation and production of any physical media or
materials that are distributed as part of the Localized Versions, including
without limitation, manuals, diskettes, labels and boxes required for the
Software Copies in finished goods form pursuant to Section 2(d) above. In the
event that the Reseller prepares any Japanese-language translations or interface
modification designs necessary for such localization, the Reseller will be
solely responsible for, and shall ensure the accuracy and correctness, of all
such Japanese-language translations and interface modification designs provided
by the Reseller. The scope of the initial Localized Version to be developed
hereunder is set forth in Exhibit D, and the parties intend to
7
<PAGE>
collaborate on the specifications for the development of such initial Localized
Version within a reasonable period following execution of this Agreement.
b. Updates and Maintenance Services. LA will deliver to the Reseller
--------------------------------
any Updates to the LA Software on a periodic basis consistent with LA's general
release practices to its customers. Updates may be resold by Reseller as stand-
alone Updates or as part of Maintenance Services. The Reseller will be
responsible for all front-line maintenance and support for the LA Software for
all End-User customers that purchase Maintenance Services from Reseller, and
Reseller and will ensure a minimum level of support to End-Users consistent with
LA's then-current maintenance services agreement, and the goodwill and
reputation associated with LA's Trademarks.
c. Ownership Rights. All Updates and Localized Versions are included
----------------
in the LA Software licensed to the Reseller hereunder, and LA will own all
right, title and interest in and to the Localized Versions and Updates, all
specifications, designs, inventions, and all related work product in all stages
of development ("Work Product"), including without limitation all translations,
interfaces and other contributions by the Reseller hereunder, and all copyrights
and other intellectual property rights therein and thereto. The Reseller hereby
forever and irrevocably assigns and transfers to LA all right, title and
interest in and to the Work Product, including without limitation, all
copyrights, patents, trade secrets and other intellectual property rights
therein and thereto, and LA shall have the exclusive right to file patents and
other intellectual property registrations with respect thereto. All Updates and
Localized Versions are provided on an AS-IS basis. LA cannot guarantee that
program error reported by the Reseller relating to the LA Software will be
corrected.
d. Cooperation by the Reseller. In order to facilitate prompt and
---------------------------
efficient completion of any Localization Versions hereunder, the Reseller and
its personnel are required to cooperate fully with LA and its personnel in all
respects, including without limitation providing information as to customer
requirements, and providing access to (i) all necessary information relating to
any localization request as requested by LA, (ii) Reseller's software systems
and facilities; and (iii) officers and other personnel of the Reseller.
5. ADDITIONAL OBLIGATIONS OF THE RESELLER.
--------------------------------------
a. Reseller Reports. The Reseller agrees to provide LA with a
----------------
quarterly resale and inventory report for itself and for each Dealer-Reseller,
showing, at a minimum, the number of Software Copies of the LA Software
duplicated and/or distributed during each calendar quarter, and the End-Users'
names and addresses, and the quarter-end inventory position on hand. This report
must be forwarded to LA within forty-five (45) days after the close of each
calendar quarter.
b. Promotional Activities. The parties shall mutually agree on
----------------------
promotional activities that Reseller will perform to assist LA in developing its
brand identity in the Licensed Territory. At minimum, the Reseller shall, at its
own expense, actively promote the distribution of the LA Software, including
advertising in trade and other appropriate publications within the Licensed
Territory, and participating in appropriate trade shows, seminars, and joint
marketing programs with applicable marketing partners as may be designated or
approved by LA.
c. Finances and Personnel. The Reseller shall maintain a net worth
----------------------
and working capital sufficient, in Reseller's reasonable judgment, to enable the
Reseller to use its best efforts to
8
<PAGE>
perform fully and faithfully its obligations under this Agreement. The Reseller
shall devote sufficient financial resources and technically qualified sales and
service personnel to the LA Software to fulfill its responsibilities under this
Agreement, including without limitation its Minimum Annual Payment Obligations
set forth in Section 6(c) below.
d. Customer Relations. The Reseller shall, at its own expense (i)
------------------
provide adequate contact with existing and potential End-Users within the
Licensed Territory on a regular basis, consistent with good business practice;
(ii) assist LA in assessing customer requirements for the LA Software, including
modifications and improvements thereto, in terms of quality, design, functional
capability, and other features; (iii) submit market research information, as
reasonably requested by LA, regarding customer feedback, competition and changes
in the market within the Licensed Territory; and (iv) promote the use of the LA
Software in the major recording industry corporate accounts market segments; and
develop and serve major recording industry corporate accounts.
e. Standard of Business Practices. The Reseller shall establish and
------------------------------
maintain, and shall cause its Dealer-Resellers, employees, consultants and
agents to establish and maintain a high standard of ethical business practices
in connection with its appointment to resell the LA Software hereunder in the
Licensed Territory, including, without limitation, full compliance with Sections
11(o) and (p) below. The Reseller shall comply with all laws and regulations
relating or pertaining to the distribution, sale, advertising or use of the LA
Software in the Licensed Territory, and shall comply with the regulations and
directives of any regulatory agencies which shall have jurisdiction over the LA
Software.
f. Representations of Reseller. The Reseller represents and warrants
---------------------------
on a continuous basis that it is a corporation duly organized and validly
existing under the laws of the country of organization first set forth above; it
has full right, power and authority to enter into this Agreement and to perform
all of its obligation hereunder; its execution, delivery and performance of this
Agreement have been duly and properly authorized by all necessary actions and
this Agreement constitutes its valid and binding obligation, enforceable against
it in accordance with its terms; and its execution, delivery and performance of
this Agreement will not, with or without the giving of notice or passage of
time, or both, conflict with, or result in a default or loss of rights under,
any provision of its Articles of Incorporation, By-Laws or other organizational
documents or any other agreement to which it is a party.
g. Intellectual Property Registrations and Government Approvals. LA
------------------------------------------------------------
shall be responsible for obtaining any copyright, trademark or other
intellectual property rights protection, in LA's name, for the LA Software in
the Licensed Territory. The Reseller shall promptly notify LA in writing of, and
shall be responsible for obtaining, any necessary government approvals that may
be required with respect to this Agreement. LA shall be responsible for all fees
or expenses incurred in connection with such intellectual property registrations
or filings other than registered trademark user filings pursuant to Section 3
above, if any. The Reseller shall be responsible for all fees or expenses
incurred in connection with obtaining any necessary government approvals with
respect to this Agreement.
6. TERMS OF PURCHASE BY RESELLER
-----------------------------
9
<PAGE>
a. Payment Terms. All payments due hereunder shall be made in United
-------------
States Dollars, and the Reseller shall be solely responsible for all costs of
any currency conversion to United States Dollars, and such costs shall not
reduce the amounts due to LA hereunder. All payments required hereunder shall be
made by wire transfer to the account of LA, or in accordance with such other
instructions as LA may from time to time provide to the Reseller. All payments
hereunder shall be made without set-off of any amount whatsoever, whether based
upon any claimed debt or liability of LA to the Reseller. Any past due amounts
shall bear interest at the lesser of 1.5 percent per month or the maximum rate
permitted by applicable law. To secure payments hereunder, LA hereby retains and
Reseller hereby grants to LA a security interest in the LA Software inventory
duplicated by Reseller and all proceeds therefrom. Reseller agrees to promptly
execute documents requested by LA to perfect and protect such security interest.
Reseller shall pay all of LA's costs and expenses (including reasonable
attorneys' fees) to enforce LA's rights under this Subsection 6(a).
b. Initial Advance Payment. Upon execution of this Agreement,
-----------------------
Reseller shall make payment to LA in the amount of [*] which amount shall
constitute a nonrefundable advance payment for the Purchase Price for an initial
inventory of Software Copies to be duplicated by the Reseller hereunder. The
composition of this initial inventory shall be mutually agreed upon by the
parties.
c. Minimum Annual Payment Obligations. The Reseller shall guarantee
----------------------------------
and pay to LA the minimum, nonrefundable, guaranteed amounts during each Annual
Period from resale of Software Copies hereunder (the "Minimum Annual Payment
Obligations") as set forth in Exhibit B hereto. As used herein, "Annual Period"
means the twelve (12) month calendar year period commencing on January 1, 1999,,
and each subsequent twelve-month period thereafter during the License Term.
Payments for Software Copies made in any given Annual Period that are in excess
of the required annual minimum may not be carried backward or forward to meet
the required annual minimums for any other Annual Period. The Minimum Annual
Payment Obligations may only be fulfilled by payment duly made to LA based on
Software Copies resold hereunder during the applicable Annual Period. In the
event that Reseller fails to meet the Minimum Annual Payment Obligation for any
Annual Period, Reseller's appointment shall be automatically converted to a
nonexclusive basis upon the commencement of the next Annual Period.
d. Taxes. In addition to the Purchase Price and other charges
-----
specified above, the Reseller shall pay directly any and all taxes, imposts,
duties or similar charges, including without limitation, sales, use, ad valorem,
value added, franchise, withholding or other taxes, duties, imposts or charges
that may be imposed by any jurisdiction in connection with any of the amounts
payable by the Reseller to LA hereunder, however designated or levied, it being
understood that the amounts payable hereunder are net amounts and may not be
reduced or deducted from with any taxes, duties, imposts or other charges. The
Reseller shall indemnify and hold LA forever harmless from, all such taxes,
customs, duties, levies, impost or any other charges now or hereafter imposed,
including without limitation any penalties, interest or other assessments that
may be incurred due to failure, delay or errors by the Reseller in reporting or
payment thereof.
e. Statements. With respect to all Software Copies duplicated by or
----------
for the Reseller pursuant to Section 2 above, within forty-five (45) days after
the end of each quarterly period during the License Term (commencing with the
first quarter-end during the first Annual
* Certain information in this Exhibit has been omitted and filed separately with
the Commission. Confidential treatment has been requested with respect to the
omitted portions.
10
<PAGE>
Period), the Reseller shall deliver to LA a written statement setting forth an
itemized report for the preceding quarterly period, together with full payment
of the Purchase Price for all Software Copies resold during such period. Each
statement shall contain information on the number and type of Software Copies
duplicated by Reseller, the number and type of such Software Copies held in
inventory, and the number and type resold by Reseller during the applicable
period, names and other information collected by Reseller from End-Users of such
Software Copies, along with such supporting or additional information as LA may
from time to time reasonably request. Acceptance of payment by LA shall not
preclude LA from questioning the correctness of any statement at any time. In
addition to the foregoing, with respect to any of the LA Software for which LA
makes a practice of issuing certificates to End-Users, Reseller shall provide LA
with written notice of the resale of any Software Copies thereof, along with
End-User names and related information, within five (5) business days after
completion of the applicable sale to the End-User.
f. Accounting and Audit Rights. The Reseller shall keep and maintain
---------------------------
full and accurate books of account and records covering all Software Copies
duplicated by Reseller pursuant to Section 2 above. LA or its designees shall be
entitled, at its expense, to audit and inspect such books and records on a
quarterly basis during or after the License Term during reasonable business
hours and in each case upon five business (5) days prior written notice to the
Reseller, and make copies and summaries of such books and records. All such
books of account and records shall be retained by the Reseller for a minimum of
seven (7) years after expiration or termination of this Agreement. If LA or its
duly authorized representative discovers a deficiency in the payments to LA
pursuant to any statement in the period under audit (an "Audit Deficiency"), the
Reseller shall promptly pay such Audit Deficiency to LA and, if such Audit
Deficiency is three percent (3%) or more of the payments made to LA pursuant to
any statement in such audit period, the Reseller shall promptly pay all costs
and expenses incurred by LA in connection with such audit. If such Audit
Deficiency is twenty percent (20%) or more of the amounts paid to LA pursuant to
any statement in the period under audit, then in addition to the above, LA may,
at its sole option, immediately terminate the Agreement upon written notice to
the Reseller, even if the Reseller tenders the Audit Deficiency and associated
costs and expenses to LA.
7. LIMITED WARRANTY.
----------------
a. Standard Limited Warranty to End Users. Reseller shall pass on to
--------------------------------------
end users LA's standard limited warranty and other terms contained in the
applicable End User License Agreement for each Software Copy.
b. No Other Warranty. EXCEPT FOR LA'S STANDARD LIMITED WARRANTY TO
-----------------
END USERS, LA GRANTS NO OTHER WARRANTIES OR CONDITIONS, EXPRESS OR IMPLIED, BY
STATUTE OR OTHERWISE, REGARDING THE LA SOFTWARE, THEIR FITNESS FOR ANY PURPOSE,
THEIR QUALITY, THEIR MERCHANTABILITY, OR OTHERWISE.
8. INDEMNIFICATION OBLIGATIONS
---------------------------
a. Indemnification by LA. The Reseller agrees that LA has the right
---------------------
to defend, or at its option to settle, and LA agrees, at its own expense, to
defend or at its option to settle, any
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<PAGE>
claim, suit or proceeding brought against the Reseller on the issue of
infringement by the LA Software of any registered patent, copyright or trademark
issued in the Licensed Territory prior to the Effective Date of this Agreement,
or, with respect to Updates and Localized Versions, issued in the Licensed
Territory prior to the date of release to Reseller, subject to the limitations
hereinafter set forth. LA shall have sole control of any such action or
settlement negotiations, and LA agrees to pay, subject to the limitations
hereinafter set forth, any final judgment entered against the Reseller on such
issue in any such suit or proceeding defended by LA. The Reseller agrees that LA
at its sole option shall be relieved of the foregoing obligations unless the
Reseller notifies LA promptly in writing of such claim, suit or proceeding and
gives LA authority to proceed as contemplated herein, and, at LA's expense,
gives LA proper and full information and assistance to settle and/or defend any
such claim, suit or proceeding. If the LA Software, or any part thereof, is, or
in the opinion of LA may become, the subject of any claim, suit or proceeding
for infringement of any patent, copyright, or trademark or other intellectual
property right, then LA may, at its option and expense: (i) procure for the
Reseller the right to sell or use, as appropriate, the LA Software or such part
thereof; (ii) replace the LA Software, or portions thereof, with other suitable
LA Software or portions thereof; (iii) suitably modify the LA Software, or
portions thereof; or (iv) if none of the foregoing is commercially feasible in
LA's judgment, terminate this Agreement and the Reseller's license to the LA
Software. LA shall not be liable for any costs or expenses incurred without its
prior written authorization.
b. Limitation. Notwithstanding the provisions of Section 8(a) above,
----------
LA assumes no liability for (i) infringements covering any combination, method
or process in which any of the LA Software may be used but not covering the LA
Software when used alone, including without limitation any use of software
belonging to third parties, regardless of whether such software may be necessary
to the use or modification of, or compatible with, the LA Software, (ii)
infringements involving the modification or servicing of the LA Software, or any
part thereof, unless such modification or servicing was performed by LA, (iii)
failure of the Reseller to implement any Updates to the LA Software, if the
infringement would have been avoided by the use of the Update, (iv) any
trademark infringements involving any marking or branding other than LA's
Trademarks when used alone; or (v) infringements arising from uses of the LA
Software which do not comply with the uses permitted under this Agreement.
c. Entire Liability. The provisions of this Section 8 state the
----------------
entire liability and obligations of LA and the exclusive remedy of the Reseller
and its customers, with respect to any alleged infringement of patents,
copyrights, trademarks or other intellectual property rights by the LA Software
or any part thereof. The provisions of this Section 8 state the entire liability
and obligations of both parties and the exclusive remedy of both parties with
respect to any indemnification obligations, other than as set forth in Section
11(k) below
d. Indemnification by the Reseller. Except for LA's indemnification
-------------------------------
obligations set forth above, the Reseller will indemnify, defend and hold
harmless LA, its parents, subsidiaries, affiliates, and each of their respective
successors and permitted assigns, directors, officers, employees,
representatives, agents, consultants, and contractors in respect of any and all
losses, claims, suits, proceedings, liabilities, causes of action, damages,
costs, expenses (including reasonable attorneys' fees and expenses) arising out
of or relating to the breach or inaccuracy of, or failure to comply with, any of
the representations, warranties, covenants, agreements, terms or
-12-
<PAGE>
conditions made by the Reseller hereunder, the use, operation or distribution of
the LA Software, use of any audio recordings or other copyrighted material in
connection with the LA Software, or the actions or omissions, including
negligence and other tortious conduct, of the Reseller's or its Dealer-
Resellers' employees, officers, agents or contractors.
9. PROPERTY RIGHTS AND CONFIDENTIALITY
-----------------------------------
a. Property Rights. Reseller agrees that LA owns all right, title,
---------------
and interest in the product lines that include the LA Software and in all of
LA's patents, trademarks, trade names, inventions, copyrights, know-how, and
trade secrets relating to the design, manufacture, operation or service of the
LA Software. The use by Reseller of any of these property rights is authorized
only for the purposes herein set forth, and upon termination of this Agreement
for any reason such authorization shall cease.
b. Confidential Information. "Confidential Information" means this
------------------------
Agreement and its Exhibits, any addenda hereto signed by both parties, all LA
Software and Documentation, all information models, logic diagrams, data,
drawings, benchmark tests, specifications, structure, sequence, and
organization, object code and source code of or relating to the LA Software, if
disclosed to Reseller hereunder in written, electronic or verbal form, provided
that any verbal disclosure shall be confirmed in writing within thirty (30)
days, and any adaptations of the aforementioned, all knowledge and know-how
inherent to the LA Software, as well as the knowledge and know-how that is
applied to the configuration of the LA Software, and any other proprietary
information supplied to the Reseller by LA hereunder in written, electronic or
verbal form, provided that any verbal disclosure shall be confirmed in writing
within thirty (30) days. The Reseller acknowledges that LA's proprietary
interest in the Confidential Information includes LA's Trade Secrets, and
acknowledges that any use of the Confidential Information inconsistent with this
Agreement shall constitute an infringement of LA's intellectual property rights,
a misappropriation of LA's Trade Secrets, unfair competition and a breach of
this Agreement. The Reseller further acknowledges that the LA Software is
protected as an unpublished trade secret and embodies LA's copyrights and LA's
Trade Secrets.
c. Nondisclosure Obligations. The Reseller acknowledges that the
-------------------------
Confidential Information constitutes valuable trade secrets of LA and the
Reseller agrees that it shall use the Confidential Information solely in
accordance with the provisions of this Agreement and will not disclose, or
permit to be disclosed, the same, directly or indirectly, to any third party
without LA's prior written consent, except as expressly permitted by this
Agreement pursuant to the distribution of the LA Software; provided that the
End-User License Agreement contains provisions sufficiently protective of the
Confidential Information. The Reseller agrees to exercise a high standard of
care in protecting the Confidential Information from unauthorized use and
disclosure. Without limiting the foregoing, the Reseller shall adopt whatever
measures may be required to limit access to the Confidential Information to
those of its employees that are subject to non-disclosure obligations and who
require such access in order to use the LA Software in a manner consistent with
this Agreement. In addition, the Reseller assumes all responsibility and shall
indemnify LA for the fraudulent use or illegal copying or use of the
Confidential Information by its employees or related third parties.
-13-
<PAGE>
d. Reseller Confidential Information. "Reseller Confidential
---------------------------------
Information" means valuable business and technical information which is not
publicly available and is protected by Reseller as confidential information and
which is disclosed in tangible or intangible form by Reseller to LA in
connection with this Agreement, provided that any verbal disclosure must be
confirmed in writing within thirty (30) days. The Reseller Confidential shall
include, without limitation, all advertising material, price schedules and all
customer, marketing, sales, financial and trading information, relating to the
LA Software or Reseller's business, provided that the foregoing is not publicly
available and is protected by Reseller as confidential information. LA shall
observe the same obligations with respect to the Reseller Confidential
Information as imposed on Reseller above with respect to LA's Confidential
Information.
e. Exceptions to Nondisclosure Obligations. Notwithstanding the
---------------------------------------
above, the receiving party shall have no liability to the disclosing party with
regard to Confidential Information or Reseller Confidential Information which:
(i) was generally known and available in the public domain at
the time it was disclosed or becomes generally known and available in the public
domain through no fault of the receiving party;
(ii) was known to the receiving party at the time of disclosure as
shown by the files of the receiving party in existence at the time of
disclosure;
(iii) is disclosed with the prior written approval of the
disclosing party;
(iv) is independently developed by the receiving party without
any use of Confidential Information and by employees or other agents of the
receiving party who have not been exposed to such Confidential Information:
(v) becomes known to the receiving party from a source other
than the disclosing party without breach of this Agreement by the receiving
party and otherwise not in violation of the disclosing party's rights; or
(vi) is disclosed pursuant to the order or requirement of a
court, administrative agency, or other governmental body; provided, that the
receiving party shall provide prompt, advance notice thereof to enable the
disclosing party to seek a protective order or otherwise prevent such
disclosure, and provided that the receiving party's disclosure is limited to the
extent expressly required by such court, administrative agency or other
governmental body.
10. TERM AND TERMINATION. This Agreement shall commence upon the
--------------------
Effective Date and continue until expiration of the License Term, unless earlier
terminated in accordance with the provisions of this Agreement.
a. Mutual Agreement. This Agreement may be terminated pursuant
----------------
to the mutual, written agreement of the parties.
b. Termination Due to Related Events. This Agreement shall
---------------------------------
terminate automatically if the LAJ Shareholder Agreement is terminated for any
reason.
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<PAGE>
c. Termination for Default by the Reseller. If the Reseller
---------------------------------------
defaults in the performance of any material provision of this Agreement, then LA
may give written notice to the Reseller that if the default is not cured within
thirty (30) days the Agreement will be terminated; provided that the cure period
shall be ten (10) days for payment obligations, and there shall be no cure
period of the nature of the default is not subject to cure. If LA gives such
notice and the default is not cured during the applicable period (if any), then
the Agreement shall automatically terminate at the end of that period.
d. Termination for Insolvency of the Reseller. This Agreement
------------------------------------------
may be terminated by LA, on notice, (i) upon the institution by or against the
Reseller of insolvency, receivership or bankruptcy proceedings or any other
proceedings for the settlement of the Reseller's debts, (ii) upon the Reseller's
making an assignment for the benefit of creditors, or (iii) upon the Reseller's
dissolution, winding up or ceasing to conduct business in the normal course.
e. Termination for Changes in Reseller's Business. This Agreement
----------------------------------------------
may be terminated by LA, upon written notice, upon the occurrence of any of the
following events, unless LA has granted its advance written approval (which
approval shall be deemed to be granted if approved by an LA-nominated director
pursuant to Section 3.3 of the LAJ Shareholder Agreement) in regard to the
applicable event: (i) upon the Reseller's making any basic change in the general
nature or scope of its business (as specified in Section 3.3 of the LAJ
Shareholder Agreement), including without limitation, changes to its articles of
incorporation, including any increase or reduction in authorized share capital
and any changes in the rights of outstanding shares; (ii) upon the removal of
the director from Reseller's board that was nominated by LA, if any; (iii) upon
the sale of any equity of Reseller other than pursuant to the initial formation
thereof as agreed by LA and Super Stage, Inc.; (iv) upon the merger or
consolidation of Reseller with another company, or the sale of all or
substantially all of the business or assets of Reseller, or any other change of
control of Reseller; (v) upon the establishment by Reseller, Super Stage, Inc.,
or any of their investors, of a business relationship with any direct competitor
of LA, including any directly or indirectly participating in any entity that
sells, resells or distributes any software product or service that materially
competes with the LA Software; (vi) upon the investment by Reseller in any other
business or entity; (vii) upon Reseller's entering into any material
transactions not in the ordinary course of business or between Reseller and a
director or shareholder of Reseller or an affiliate of such a shareholder, other
than the LAJ Shareholder Agreement; (viii) upon Reseller's entering into any
operational activities (other than resale or distribution of the LA Software and
related maintenance), partnering with third parties with respect to the same, or
receiving revenues from transactions that are enabled by the Liquid Audio
Software.
f. Legal or Regulatory Prohibitions. If any law or regulation
--------------------------------
applicable to LA or the Reseller prohibits use of the LA Software by the
Reseller in the manner contemplated by this Agreement, or permits the use of the
LA Software by the Reseller in a manner not expressly licensed by this
Agreement, this Agreement may be terminated by LA by giving written notice of
termination to the Reseller, such termination to be immediately effective upon
the giving of such notice.
g. Limitation on Termination Liability. In the event of
-----------------------------------
termination by LA in accordance with any of the provisions of this Agreement, LA
shall not be liable to the Reseller, because of such termination, for
compensation, reimbursement or damages on account of the loss of
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<PAGE>
prospective profits or anticipated sales or on account of expenditures,
inventory, investments, leases or commitments in connection with the business or
goodwill of the Reseller. Termination shall not, however, relieve either party
of obligations incurred prior to the termination.
h. Return of Materials. Pursuant to Section 9(a) above, all
-------------------
trademarks, trade names, patents, copyrights, designs, drawings, formulas,
algorithms, golden masters, translations, artwork or other data, photographs,
samples, literature, and sales aids of every kind relating to the LA Software
shall be and remain the property of LA. Within thirty (30) days after the
expiration or termination of this Agreement, Reseller shall prepare all such
items in its possession for shipment, as LA may direct, at LA's expense.
Reseller shall not make or retain any copies of any confidential items or
information which may have been entrusted to it. Upon expiration of this
Agreement (but not upon any earlier termination hereof), Reseller shall have
limited sell-off rights in a manner consistent with this Agreement for a period
of forty-five (45) days with respect to inventory on hand in an amount not
greater than the immediately preceding quarter's total unit sales amount.
Effective upon the termination of this Agreement, Reseller shall cease to use
all trademarks, marks, and trade names of LA.
i. Survival of Certain Terms. The provisions of Sections 4(c),
-------------------------
6(d), 6(e), 6(f), 7, 8, 9, 10, 11, 12, along with all End-User License
Agreements for Software Copies previously distributed, shall survive the
expiration or termination of this Agreement for any reason. All other rights and
obligations of the parties shall cease upon termination of this Agreement.
11. MISCELLANEOUS PROVISIONS.
------------------------
a. Arbitration of Disputes. Except as otherwise provided in this
-----------------------
Agreement, any dispute, controversy or claim arising out of or relating to this
Agreement or to a breach hereof, including the interpretation, performance or
termination, shall be exclusively and finally resolved by binding arbitration.
Arbitration shall be conducted by the International Chamber of Commerce (the
"ICC") which shall administer the arbitration under its commercial rules (the
"Rules"). Arbitration under this Section 11(a) shall be initiated by a written
demand for arbitration specifying the controversy or claim on which arbitration
is sought, as well as the relief requested. Service of the arbitration demand
shall be effective if made pursuant to the notification provisions contained in
Section 11(e) below. The arbitration shall be conducted by a panel of three (3)
arbitrators chosen in accordance with said Rules within thirty (30) days after
receipt by the respondent of the demand to arbitrate. The arbitration, including
the rendering of the award, shall take place in Palo Alto, California, if
initiated by Reseller, or in Tokyo, Japan, if initiated by LA, as the case may
be, and shall be the exclusive forum for resolving such dispute, controversy or
claim. The arbitration proceedings and all pleadings and rulings shall be
conducted and written in the English language. For the purpose of any
arbitration proceeding, this Agreement shall be governed by the governing law
described in Section 11(c) below. This arbitration agreement is intended by the
parties to be self-executing. The panel shall have sole jurisdiction to
determine whether (i) a claim is subject to arbitration, (ii) the arbitration
may proceed even if one of the parties refuses to attend or participate and
(iii) an award against that party may be ordered pursuant to default or
otherwise by the panel. The parties agree that they will arbitrate all claims
agreed to be arbitrated herein regardless of the existence of any related
dispute, action or special proceeding between any or all of the parties hereto
and/or any third party. The arbitration panel shall render a written arbitration
decision with its
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<PAGE>
award, and the decision of the arbitration panel shall be final and binding upon
the parties hereto, and the parties hereby waive any right of appeal under
applicable law. Judgment upon the award rendered by the arbitration panel may be
entered in any court of competent jurisdiction. The prevailing party shall be
entitled to recover its reasonable attorneys' fees and its share of the costs
including any auditing costs or expenses of expert witnesses.
b. Injunctive Relief. In the event of actual or threatened breach
-----------------
of the provisions of Section 2 or 9 above, the nonbreaching party will have no
adequate remedy at law and will be entitled to immediate and injunctive or other
equitable relief, without bond and without the necessity of showing actual money
damages, and notwithstanding Section 11(a) above, each party shall have the
right to institute judicial proceedings against the other party or anyone acting
by, through or under such other party in order to seek such injunctive or other
equitable relief. The prevailing party in any such legal action for injunctive
or equitable relief shall be entitled, in addition to any other rights and
remedies it may have, to reimbursement for its expenses, including court costs
and reasonable attorneys' fees. With respect to any such legal action for
injunctive or equitable relief, the State courts sitting in Santa Clara County,
California, and the Federal courts for the Northern District of California shall
have nonexclusive jurisdiction, and the parties hereby irrevocably consent to
personal jurisdiction of and venue in such courts in any such matter and waive
any objection thereto.
c. Governing Laws. The validity, construction and enforceability
--------------
of this Agreement shall be governed in all respects by the laws of the State of
California (and applicable United States federal law) applicable to agreements
negotiated, executed and performed in the State of California by California
parties, without reference to conflict of law principles. For the avoidance of
doubt, the rights and obligations of the parties under this Agreement shall not
be governed by the 1980 United Nations Convention on Contracts for the
International Sale of Goods.
d. Disclosure; Publicity. Except as specifically provided herein,
---------------------
nothing in this Agreement shall be deemed to give either party any rights to use
the other party's trademarks or trade names without the other party's specific,
written consent. LA and the Reseller shall consult with each other before
issuing any press releases or otherwise making any public statements with
respect to this Agreement and the transactions contemplated hereby. Neither LA
nor the Reseller shall issue any such press release or make any public statement
without the agreement of the other party, except as may be required by law.
e. Notices. All notices required hereunder shall be in writing
-------
and shall be made by personal delivery, or by legible facsimile or by first
class, registered or certified mail, postage prepaid, or by express courier, to
LA and to the Reseller at the address and telecopier numbers indicated below:
(1) For the Reseller:
Sunfelista Meguro Building
9/th/ Floor, 27-1, Kami-Osaki 2-Chome
Shinagawa-ku, Tokyo 141-0021, Japan
Attention: Masahiro Kuroki
Telecopy: (3)3403-6999
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<PAGE>
With a mandatory copy to:
Nishimura & Partners
Ark Mori Building, 29/th/ Floor
12-32, Akasaka 1-Chome
Minato-Ku, Tokyo, 107-6029, Japan
Attention: Takanobu Takehara, Esq.
Telecopy: (03)5561-9711
(2) For LA:
Liquid Audio, Inc.
810 Winslow Street
Redwood City, California 94063
Attention: Robert Flynn
Telecopy: 650.549.2099
With a mandatory copy to:
Wilson Sonsini Goodrich & Rosati
650 Page Mill Road
Palo Alto, California 94306-1050
Attention: Hank Barry, Esq.
Telecopy: 650.493.6811
or such other address or addresses as may have been furnished in writing to LA
by the Reseller or to the Reseller by LA. Any notice or other communication
required to be given hereunder shall have been duly given five (5) business days
after posting when enclosed in a properly sealed envelope addressed as
aforesaid, registered or certified, and deposited postage prepaid, or if by
legible facsimile, when received or, if by express courier or in person, when
received.
f. Severability. Whenever possible, each provision of this
------------
be interpreted in such manner as to be effective and valid under applicable law,
but if any provision or portion of any provision of this Agreement should be
invalid under applicable law, such provision or portion of such provision shall
be ineffective to the extent of such invalidity, without invalidating the
remainder of such provision or remaining provisions of this Agreement.
g. Waiver. A provision of this Agreement may be waived only by a
------
written instrument executed by the party entitled to the benefit of such
provision. The failure of any party at any time to require performance of any
provision of this Agreement shall in no manner affect such party's right at a
later time to enforce the same. A waiver of any breach of any provision of this
Agreement shall not be construed as a continuing waiver of other breaches of the
same or other provisions of this Agreement.
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<PAGE>
h. Further Assurances. The parties shall each perform such acts,
------------------
execute and deliver such instruments and documents, and do all such other things
as may be reasonably necessary to accomplish the transactions contemplated by
this Agreement. In the event that the Reseller fails to promptly execute any
documents reasonably necessary to confirm or set of record LA's rights to the LA
Software, Updates, Localized Versions or any other Work Product owned by LA
hereunder, the Reseller hereby appoints LA as its attorney-in-fact for the
purpose of executing such documents, which appointment shall be deemed a power
coupled with an interest and shall be irrevocable.
i. Subject Headings; Counterparts. The subject headings of the
------------------------------
sections of this Agreement are included for the purposes of convenience only,
and shall not affect the construction or interpretation of any of its
provisions. This Agreement may be executed in counterparts. Each executed
counterpart may be delivered to the other party by facsimile and copies bearing
the facsimile signature of a party will constitute a valid and binding execution
and delivery of this Agreement.
j. Entire Agreement. This Agreement, including the Exhibits
----------------
attached hereto, constitutes the entire agreement of the parties with respect to
the subject matter hereof and supersedes all prior agreements, communications
and understandings between them with respect thereto. No modification of this
Agreement shall be effective without the mutual written agreement of both
parties. No terms or conditions of any purchase order, acknowledgment or other
business form that the Reseller may use in connection with the acquisition or
licensing of the LA Software will have any effect on the rights and obligations
of the parties hereunder, or otherwise modify this Agreement, regardless of any
failure by LA to object to such terms or conditions.
k. Independent Contractors. The relationship of LA and the Reseller
-----------------------
established by this Agreement is that of independent contractors, and nothing
contained in this Agreement shall be construed to (i) give either party the
power to direct and control the day-to-day activities of the other, (ii)
constitute the parties as partners, co-owners or otherwise as participants in a
joint or common undertaking, or (iii) allow the Reseller to create or assume any
obligation on behalf of LA for any purpose whatsoever. All financial obligations
associated with the Reseller's business are the sole responsibility of the
Reseller. All sales and other agreements between the Reseller and its customers
are the Reseller's exclusive responsibility and shall have no effect on the
Reseller's obligations under this Agreement. The Reseller shall be solely
responsible for, and shall indemnify and hold LA free and harmless from, any and
all claims, damages or lawsuits (including LA's reasonable attorneys' fees)
arising out of the negligence or other tortious conduct of the Reseller, its
employees or its agents in performing Reseller's obligations or exercising
Reseller's rights under this Agreement. LA shall indemnify and hold Reseller
free and harmless from any and all claims, damages or lawsuits (including
Reseller's reasonable attorneys' fees) arising out of the negligence or other
tortious conduct of LA's employees or agents in performing LA's obligations
under this Agreement.
l. Nonassignability and Binding Effect. A mutually agreed
-----------------------------------
consideration for LA's entering into this Agreement is the reputation, business
standing, and goodwill honored and enjoyed by the Reseller under its present
ownership, and, accordingly, the Reseller agrees that its license and other
rights and obligations under this Agreement may not be transferred or assigned
-19-
<PAGE>
directly or indirectly, whether by operation of law or otherwise, without the
prior written consent of LA, and any purported transfer or assignment without
such consent shall be void ab initio. Subject to the foregoing sentence, this
-- ------
Agreement shall be binding upon and inure to the benefit of the parties hereto,
their successors and assigns.
m. Force Majeure. Except for payment obligations hereunder, neither
-------------
party shall incur liability to the other party due to any delay or failure in
performance hereunder caused by reason of any occurrence or contingency beyond
its reasonable control, including but not limited to failure of suppliers,
strikes, lockouts or other labor disputes, riots, acts of war or civil unrest,
earthquake, fire, the elements or acts of God, novelty of product manufacture,
unanticipated product development problems, or governmental restrictions or
other legal requirements; provided, that such party notifies the other party in
writing immediately upon commencement of such event and makes diligent efforts
to resume performance immediately upon cessation of such event. In the event
such events continue for a period of one hundred eighty (180) days in the
aggregate, the other party shall have the right to terminate this Agreement upon
written notice to such party.
n. Language. This Agreement is in the English language only, which
--------
language shall be controlling in all respects, and all versions hereof in any
other language shall not be binding on the parties hereto. All communications
and notices to be made or given pursuant to this Agreement shall be in the
English language.
o. Compliance with Laws. The Reseller shall, at its own expense,
--------------------
pay all import licenses and permits, pay customs charges and duty fees, and take
all other actions required to accomplish the import and use of the LA Software
in the Licensed Territory. The Reseller shall ensure compliance with any
applicable laws relating to its activities under the terms of this Agreement,
and Reseller hereby represents and warrants that no consent, approval or
authorization, or designation, declaration or filing with any governmental
authority in the Licensed Territory is required in connection with the valid
execution, delivery and performance of this Agreement.
p. Government Regulations. The Reseller acknowledges that LA may be
----------------------
subject to regulation by various government agencies having jurisdiction, which
may prohibit use, export, re-export or diversion of certain products and
technology in or to the Licensed Territory. Any and all obligations of LA to
provide the LA Software, Documentation, or any media in which any of the
foregoing is contained, as well as any other technical assistance shall be
subject in all respects to such applicable laws and regulations as shall from
time to time govern the license and delivery of technology and products. The
Reseller agrees to cooperate with LA, including, without limitation, providing
required documentation, in order to obtain any necessary export licenses or
exemptions therefrom. The Reseller warrants that it will use its reasonable
efforts to comply with all such applicable laws and regulations governing use,
exportation and reexportation in effect from time to time.
12. LIMITATION OF LIABILITY. EXCEPT FOR INDEMNIFICATION OBLIGATIONS UNDER
-----------------------
SECTION 8 ABOVE, IN NO EVENT SHALL LA'S AGGREGATE LIABILITY HEREUNDER EXCEED THE
TOTAL AMOUNTS PAID BY THE RESELLER HEREUNDER DURING THE ANNUAL PERIOD(S) IN
WHICH SUCH CLAIM(S) AROSE. IN NO EVENT SHALL LA BE LIABLE TO THE RESELLER OR ANY
OTHER ENTITY FOR ANY
-20-
<PAGE>
SPECIAL, CONSEQUENTIAL, INCIDENTAL, INDIRECT OR RELIANCE DAMAGES, HOWEVER
CAUSED, WHETHER FOR BREACH OF CONTRACT, NEGLIGENCE OR UNDER ANY OTHER LEGAL
THEORY, WHETHER FORESEEABLE OR NOT AND WHETHER OR NOT LA HAS BEEN ADVISED OF THE
POSSIBILITY OF SUCH DAMAGES, AND NOTWITHSTANDING THE FAILURE OF ESSENTIAL
PURPOSE OF ANY LIMITED REMEDY. IN NO EVENT SHALL LA BE LIABLE FOR LOST DATA,
LOST PROFITS, BUSINESS INTERRUPTION, FAILURE OF THE SOFTWARE, OR COSTS OF
PROCUREMENT OF SUBSTITUTE GOODS BY ANYONE. THE RESELLER AGREES THAT THESE
LIMITATIONS OF LIABILITY ARE AGREED ALLOCATIONS OF RISK AND ARE REFLECTED IN THE
ROYALTIES AND FEES AGREED UPON BY THE PARTIES.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed by their respective officers thereunto duly authorized.
LIQUID AUDIO, INC. LIQUID AUDIO JAPAN, INC.
By: /s/ ROBERT FLYNN By:____________________________
--------------------------------- (Signature)
(Signature)
Name: /s/ ROBERT FLYNN Name: ___________________________
------------------------------- (Print or Type)
(Print or Type)
Title: VP BUSINESS DEVELOPMENT Title: __________________________
------------------------------
List of Exhibits:
- -----------------
Exhibit A: LA Software and Discount Schedule
- ----------------------------------------------
Exhibit B: Minimum Annual Payment Obligations
- -----------------------------------------------
Exhibit C: Authorized Dealer-Resellers
- ----------------------------------------
Exhibit D: Scope of Initial Localized Version
- -----------------------------------------------
-21-
<PAGE>
EXHIBIT A
---------
LA SOFTWARE AND DISCOUNT SCHEDULE
---------------------------------
LA Software
- -----------
All current LA client, server and content creation software which LA itself has
the right to license in Japan, including both US versions and Localized Versions
Discount
- --------
[*]
* Certain information in this Exhibit has been omitted and filed separately with
the Commission. Confidential treatment has been requested with respect to the
omitted portions.
-22-
<PAGE>
EXHIBIT B
---------
MINIMUM ANNUAL PAYMENT OBLIGATIONS
----------------------------------
Annual Period (commencing) Minimum Annual Payment Obligation
- -----------------------------------------------------------------------------
1998 [*]
1999 [*]
2000 [*]
2001 [*]
2002 [*]
2003 [*]
* Certain information in this Exhibit has been omitted and filed separately with
the Commission. Confidential treatment has been requested with respect to the
omitted portions.
-23-
<PAGE>
EXHIBIT C
---------
AUTHORIZED DEALER-RESELLERS
---------------------------
None
-24-
<PAGE>
EXHIBIT D
---------
SCOPE OF INITIAL LOCALIZED VERSION
----------------------------------
Development of Localized Version of the interface to the Liquid Music Player
-25-
<PAGE>
EXHIBIT 10.32
LOAN AGREEMENT
This Loan Agreement is made as of March 31, 1999 by and between Super
Factory, Inc., a Japanese corporation with its principal place of business at
Sunfelista Meguro Building, 9th Floor, 27-1 Kami-Osaki 2-Chome, Shinagawa-ku,
Tokyo 141-0021, Japan as lender (the "LENDER"), and Liquid Audio, Inc., a
California corporation with its principal place of business at 810 Winslow
Street, Redwood City, California 94063, U.S.A., as borrower (the "BORROWER").
WHEREAS, the Borrower wishes to obtain a loan in the amount referred to
below from the Lender, and the Lender is willing to make such loan to the
Borrower on the terms and conditions hereinafter set forth.
NOW THEREFORE, in consideration of those premises and mutual covenants
hereinafter contained, it is hereby agreed as follows:
SECTION 1. DEFINITIONS
-----------
Unless the context otherwise requires, the following terms shall have the
meanings set forth below:
1.01 "AGREEMENT" shall mean this Loan Agreement.
1.02 "BUSINESS DAY" shall mean a day, other than a Saturday, Sunday or legal
holiday, on which banks are open for business in Tokyo and Redwood City.
1.03 "EVENT OF DEFAULT" shall have the meaning set forth in Section 8.01
hereof.
1.04 "GOVERNMENTAL APPROVAL" shall mean any consent, authorization, license of,
or filing or registration with, any ministry, department, agency,
instrumentality or other juridical entity of any jurisdiction.
1.05 "INITIAL SHARES" shall have the meaning assigned to such term in the
Purchase Agreement.
1.06 "LAJ" shall mean Liquid Audio Japan, Inc., a Japanese corporation.
1.07 "LOAN" shall mean the aggregate principal amount of the loan of Yen
45,000,000 made by the Lender to the Borrower hereunder or, where the context so
requires, the amount thereof then outstanding.
1.08 "PARTY" shall mean Borrower or Lender, as applicable. "Parties" shall mean
Borrower and Lender.
1.09 "PERSON" shall mean a natural individual, partnership, firm, company,
corporation, and any other form of business association.
1.10 "PURCHASE AGREEMENT" shall mean the Share Sale and Purchase and Option
Agreement, dated March 31, 1999, between Super Stage, Inc. and Liquid Audio,
Inc.
<PAGE>
- 2 -
1.11 "REPAYMENT DATE" shall mean December 31, 2003, provided that if any such
--------
date is not a
Business Day, the Repayment Date shall be the immediately preceding Business
Day.
1.12 "SPECIFIED RATE" shall mean the long-term prime rate per annum quoted by
Sumitomo Bank from time to time.
1.13 "YEN" or the sign "Yen " shall mean the lawful currency from time to time
of Japan.
SECTION 2. THE LOAN
--------
2.01 Agreement to Lend
-----------------
Subject to the terms and conditions of this Agreement, the Lender hereby
lends to the Borrower and the Borrower acknowledges the receipt of and agrees to
repay the Loan.
2.02 Purpose of the Loan
-------------------
The Loan shall be used by the Borrower solely for the purpose of
consummating the purchase of the Initial Shares in accordance with the Purchase
Agreement. The Borrower shall not use the Loan for any other purpose.
2.03 Interest
--------
The Loan shall bear simple interest at the per annum rate of 0.5% plus the
Specified Rate. Interest shall accrue on the basis of the actual number of days
elapsed and a year of 365 days.
2.04 Default Interest
----------------
If the Borrower shall fail to make payment when due of any sum hereunder
(whether at its stated maturity, by acceleration or otherwise), the Borrower
shall pay to the Lender default interest on the unpaid amount during the period
from and including such due date to and including the date of the payment of
said sum in full (after as well as before judgment) at the rate of ten percent
(10%) per annum. Such default interest shall accrue on the basis of the actual
number of days elapsed and a year of 365 days and shall be payable on demand of
the Lender.
2.05 Repayment of Loan; Payment of Interest
--------------------------------------
The Borrower shall repay the Loan in full, together with accrued and
unpaid interest thereon in accordance with the terms of this Agreement, to the
Lender on the Repayment Date. During the term of this Agreement on the last day
of each calendar quarter, the Borrower shall pay the interest on the Loan
accrued during the calendar quarter up to and including such last day.
<PAGE>
-3-
2.06 Prepayment of Loan
------------------
The Borrower may prepay the outstanding amount of the Loan together with
the accrued interest thereon, with one week prior written notice thereof to the
Lender.
2.07 Payments
--------
(a) All sums payable to the Lender hereunder shall be payable in Yen and
in immediately available funds on the day in question by payment to the Lender
at such account as it shall specify to the Borrower.
(b) Any payments made to the Lender hereunder shall be applied first
against default interest, if any, due to the Lender; then against interest due
on the Loan; and thereafter against the portion of the Loan then due and
payable.
(c) Except as otherwise provided herein, if any date on which a payment
is due hereunder would otherwise fall on a day which is not a Business Day, such
due date shall instead fall on the immediately following Business Day unless
such following Business Day falls in the next calendar month, in which event
such due date shall be the immediately preceding Business Day.
2.08 Loan Account
------------
The Lender shall open and maintain on its books a loan account showing the
Loan, prepayments, repayments, the computation and payment of interest and other
amounts due and sums paid hereunder or under any document provided for
hereunder. The entries made in such loan account shall, in the absence of
manifest error, be the conclusive evidence of the existence and amount of the
obligations of the Borrower.
2.09 Security
--------
To secure its obligations hereunder, the Borrower shall pledge to the
Lender the shares of LAJ common stock it shall purchase pursuant to the Purchase
Agreement with the proceeds of the Loan and tender the share certificates
representing such shares to the Lender.
SECTION 3. YIELD PROTECTION
----------------
3.01 Taxes
-----
(a) All sums payable by the Borrower to the Lender hereunder, whether of
principal, interest or expenses or otherwise, shall be paid in full and without
set-off or counterclaim, free of any deductions or withholdings for or on
account of any present or future tax, assessment, duty or other charge imposed
by any tax authority of any jurisdiction. Should at any time (x) any payment to
be made under this Agreement be required by applicable law to be made subject to
any such tax, assessment, duty or other charge, or (y) the Borrower or any other
person acting on behalf of the Borrower be compelled by applicable law to make
any such deduction or withholding from any such payment for or on account of any
such tax, assessment, duty or other charge:
<PAGE>
-4-
(i) the Borrower shall pay, or procure the payment of, such tax,
assessment, duty or other charge, when due; and
(ii) the Borrower shall on the due date for payment of such payment pay, or
procure that there is paid, to the Lender in respect of such payment
such additional amount as may be necessary to ensure that the Lender
receives an amount equal to the full amount which the Lender should
have received had such payment not been made subject to such tax,
assessment, duty or other charge, or had the relevant deduction or
withholding not been made from such payment for or on account of such
tax, assessment, duty or other charge.
(b) Upon payment by the Borrower of withholding taxes as provided for
herein, the Borrower shall promptly forward to the Lender official receipts or
other documentation issued by the appropriate governmental authority or other
evidence acceptable to the Lender establishing payment of such amounts within 30
days of the due date for payment thereof.
3.02 Currency of Payment
-------------------
This is an international loan transaction in which the specification of Yen
is of the essence and Yen shall be the currency of account and of payment in all
events. The payment obligation under this Agreement and each document provided
for hereunder shall not be discharged by an amount paid in another currency or
in another place whether pursuant to a judgment or otherwise. In the event that
any payment whether pursuant to a judgment or otherwise shall be made in a
currency other than Yen such amount shall be promptly converted to Yen under
normal banking procedures. In the event that such payment does not satisfy the
obligations of the Borrower under this Agreement and each document provided for
hereunder, the Lender shall be entitled to immediate payment of and shall have a
separate cause of action for the Yen deficiency in respect of the payments due
to the Lender.
SECTION 4. EXPENSES
--------
4.01 Expenses
--------
(a) Any costs and expenses (including without limitation any applicable
stamp duties) in connection with the execution and delivery of this Agreement
shall be borne by the Borrower. Each party shall bear its own costs and expenses
in connection with the negotiation and preparation of this Agreement.
(b) The Borrower shall reimburse the Lender promptly after demand for its
reasonable costs and expenses (including, without limitation, reasonable
attorney's fees) incurred in connection with the enforcement of this Agreement
from and after the occurrence of an Event of Default or an event that, with the
giving of notice or the passing of time, or both, would constitute an Event of
Default.
<PAGE>
-5-
SECTION 5. REPRESENTATIONS AND WARRANTIES
------------------------------
The Borrower hereby represents, warrants and covenants to the Lender as
follows:
5.01 Organization and Good Standing.
------------------------------
The Borrower is a corporation duly organized, validly existing and in good
standing under the laws of the State of California and has the corporate power
and authority to enter into this Agreement and to perform its obligations
hereunder.
5.02 Authorization.
-------------
All corporate action on the part of the Borrower and the Borrower's
officers and directors necessary for the authorization, execution, delivery and
performance of this Agreement has been taken. This Agreement constitutes a valid
and legally binding obligation of the Borrower, enforceable against the Borrower
in accordance with its terms except as such enforceability may be limited by
bankruptcy, insolvency, reorganization, moratorium or other laws affecting
generally the rights of creditors.
5.03 Governmental Approvals
----------------------
All Governmental Approvals, if any, required of the Borrower necessary in
connection with the Borrower's execution and delivery of this Agreement and with
the performance by the Borrower of its obligations hereunder, including, without
limitation, any payment to be made hereunder have been obtained, completed or
duly filed and are in full force and effect.
5.04 Effect of Agreement.
-------------------
The Borrower's execution and delivery of this Agreement, performance of its
obligations hereunder and its consummation of the transactions contemplated
hereby will not, (i) to its knowledge, violate any provision of any law,
statute, rule or regulation to which it is subject; (ii) violate any judgment,
order, writ, injunction or decree of any court applicable to it; (iii) to its
knowledge, have any effect on its compliance with any laws, statutes, rules,
regulations, orders, decrees, licenses, permits or authorizations which would
materially and adversely affect it; (iv) to its knowledge, result in the breach
of, or be in conflict with, any term, covenant, condition or provision of, or
affect the validity, enforceability and subsistence of any agreement, lease or
other commitment to which it is a party and which would materially and adversely
affect it; or (v) to its knowledge, result in the creation or imposition of any
lien, pledge, mortgage, claim, charge, or encumbrance upon any of its assets.
5.05 Ranking of Loan
---------------
The obligations of the Borrower hereunder rank and will rank at least pari
passu in priority of payment and in all other respect with all unsecured and
<PAGE>
-6-
unsubordinated indebtedness of the Borrower other than as preferred by
applicable statute.
5.06 Disclosure.
----------
No representation or warranty by the Borrower contained in this Agreement
and no writing, certificate, exhibit, list or other instrument required to be
furnished pursuant hereto contains or will contain any untrue statement of a
material fact or omits or will omit any material fact necessary in order to make
the statements and information contained herein or therein not misleading.
SECTION 6. COVENANTS
---------
In addition to the other undertakings herein contained, the Borrower
hereby covenants to the Lender that, so long as any amount is outstanding under
this Agreement, it shall act as follows and shall perform the following
obligations:
6.01 Information
-----------
The Borrower shall provide the Lender with such information relating to
the Borrower as the Lender may from time to time reasonably request.
6.02 Performance and Notice
----------------------
The Borrower shall promptly give notice to the Lender of the occurrence of
any Event of Default or any event that, with the giving of notice or the passing
of time, or both, would constitute an Event of Default.
6.03 Governmental Approvals
----------------------
The Borrower shall do and cause to be done all things necessary to comply
with applicable laws and shall use its best efforts to obtain all Governmental
Approvals which may at any time be required with respect to the obligations of
the Borrower under this Agreement and shall use its best efforts to take all
necessary and appropriate action to ensure the continuance of all Governmental
Approvals so obtained to the extent necessary for the performance by the
Borrower of such obligations.
6.04 Ranking of Loan
---------------
The Borrower shall ensure that at all times its obligations hereunder
constitute and will constitute direct, unconditional, general obligations of
such Borrower and rank and will rank at least pari passu with all unsecured and
unsubordinated indebtedness of such Borrower, present and future.
6.05 Further Assurances
------------------
The Borrower shall perform all acts, execute and deliver all such
instruments and documents, and do all such other acts and things as the Lender
may reasonably
<PAGE>
-7-
require to carry out the transactions contemplated herein or in the documents
required to be delivered hereunder.
SECTION 7. CONDITIONS OF LOAN
------------------
7.01 Conditions
----------
The obligation of the Lender to make available the Loan is subject to the
fulfillment of the following conditions precedent on or prior to the date of the
drawdown:
(a) Authorizations, Etc. The Lender shall have received:
--------------------
(i) up-to-date certified copies of the Certificate of Incorporation
and the certificate of good standing of the Borrower;
(ii) a certified copy of the resolution of the Borrower, authorizing
the borrowing of the Loan and the execution, delivery and performance of this
Agreement and granting authority to the person(s) executing this Agreement or
other documents to be executed and delivered in connection herewith on behalf of
the Borrower; and
(iii) such other documents as the Lender may reasonably request.
(b) Share Pledge In respect of the Loan, the Lender shall have received
the share certificates representing the shares of LAJ common stock purchased
pursuant to the Purchase Agreement with the proceeds of the Loan.
(c) Promissory Note The Lender shall have received promissory notes
(yakusoku tegata) evidencing such Loan, which shall have been executed by the
Borrower in the form attached hereto as Exhibit A.
(d) Governmental Approvals The Lender shall have received copies of any
----------------------
Governmental Approval, if required, in connection with the execution,
delivery or performance of this Agreement.
SECTION 8. EVENTS OF DEFAULT
-----------------
8.01 Events of Default
-----------------
Each of the following events and occurrences shall constitute an Event of
Default under this Agreement:
(a) The Borrower fails to pay any amount that it is required to pay under
this Agreement on the date on which such amount becomes due and payable.
(b) (i) Any representation or warranty made or deemed to be made by the
Borrower herein proves to have been incorrect or misleading when made or
confirmed.
<PAGE>
-8-
(ii) Any representation or warranty made or deemed to be made by the
Borrower in the Purchase Agreement proves to have been materially incorrect or
materially misleading when made or confirmed.
(c) The Borrower fails to perform or violates any other provision of this
Agreement (other than a default or violation referred to elsewhere in this
Section 8.01) or the Purchase Agreement and such failure or violation is not
remediable or, if remediable, continues unremedied for a period of five (5) days
after notice from the Lender to such Borrower with respect thereto.
(d) Any indebtedness of the Borrower in an aggregate amount exceeding Yen
5,000,000, or its equivalent in any other currency, shall become due and payable
prior to its stated maturity by reason of such Borrower's default in respect
thereof, or is not paid when the same has become due, or within any grace
period.
(e) Bankruptcy, reorganization or other insolvency proceedings are
instituted against or by the Borrower, or the Borrower stops payments or admits
in writing that it is unable to pay its indebtedness.
(f) The Borrower is unable to pay its debts as they fall due, commences
negotiations with any one or more of its creditors with a view to the general
readjustment or rescheduling of its indebtedness or makes a general assignment
for the benefit of or a composition with its creditors.
(g) The Borrower takes any action for the purposes of its dissolution or
liquidation.
8.02 Consequence of Default
----------------------
If an Event of Default shall occur and be continuing, the Lender shall be
entitled (but not obligated) to (i) declare by notice to the Borrower the Loan
together with accrued interest and any other sum payable to the Lender hereunder
to be immediately due and payable and the Loan shall thereupon become due and
payable (together with any accrued interest thereon to and including the date of
such repayment and any other sum payable to the Lender hereunder) without
requirement of a demand, protest or notice of any kind (other than the notice
required by this Section 8.02) all of which are expressly waived by the Borrower
and (ii) acquire the title to the LAJ shares, in which case the initial amount
of the Loan shall be deemed to have been paid by the Borrower in accordance with
Section 2.07(b).
SECTION 9. MISCELLANEOUS
-------------
9.01 Arbitration; Forum.
-------------------
(a) Except as otherwise provided herein, all disputes, controversies or
claims arising out of or relating to this Agreement, or the breach, termination
or validity thereof, shall be resolved (i) first by good-faith, face-to-face
discussions among the Chief Executive Officers (or such persons holding a
position of equivalent authority) of each affected Party, which discussions
shall be held in Hong Kong, or such other place as the Parties may mutually
agree, within 30 days
<PAGE>
-9-
after receipt of a notice requesting such discussions, and (ii) failing
resolution within 14 days of the commencement of such good faith discussions, by
3 arbitrators under the Rules of Conciliation and Arbitration of the
International Chamber of Commerce as then in effect ("Rules"). The arbitrators
shall be chosen in accordance with the Rules within 30 days after receipt by the
respondent of the demand to arbitrate, which demand may be delivered only after
the conclusion of the above-mentioned good faith discussions. The place of
arbitration shall be Hong Kong. The language to be used in the arbitration
proceedings shall be English, provided that any Party may submit testimony or
documentary evidence in Japanese, and shall, on the request of any other Party,
furnish a translation or interpretation into English of any such testimony or
documentary evidence. The arbitrators may be of any nationality. Upon the
request of either Borrower or Lender, any arbitration hereunder shall be
combined or consolidated with arbitration initiated pursuant to Section 9.2 of
the Shareholder Agreement relating to the same or directly related subject
matter. The arbitral award shall be rendered in writing and state the reasons
for the award. Judgment on any award may be entered by any court of competent
jurisdiction or application may be made to such a court for judicial acceptance
or recognition of the award and any appropriate order including enforcement.
(b) Notwithstanding the foregoing, each Party may apply to any court of
competent jurisdiction for a temporary restraining order, preliminary
injunction, or other interim or conservatory relief, as necessary, without
breach of this Section, and without any abridgement of the powers of the
arbitrator.
(c) In case of arbitration, the arbitrators shall award reasonable
attorneys' fees and expenses to either Party in such manner and to such extent
as the arbitrators deem equitable. In case of a court proceeding arising out of
this Agreement, the prevailing Party shall be entitled to recover its reasonable
attorneys' fees and expenses from the other Party.
9.02 Governing Law.
-------------
This Agreement shall be governed by the laws of Japan.
9.03 Publicity.
---------
Prior to issuing any reports, statements, press releases or other
disclosures to third parties regarding this Agreement or the transactions
contemplated herein, the Parties shall exchange copies of such documents and
shall consult with each other regarding their content. Except as otherwise
required by law, neither Party shall issue any such disclosure without the prior
approval of the other Party.
9.04 Notices and Other Communications.
--------------------------------
Every notice by either Party shall be in writing and delivered either by
personal delivery, or by express mail or any similar overnight courier service,
or by registered or certified mail, postage prepaid, or by facsimile, addressed
to the Party for whom such notice intended at its address or facsimile number
set forth below, or at such other address or facsimile number as the intended
recipient previously
<PAGE>
-10-
shall have designated by written notice to the other party. All notices
delivered in person shall be deemed to have been delivered to and received by
the addressee and shall be effective on the date of personal delivery. All
notices delivered by express mail or any other similar overnight courier, or by
registered or certified mail, or by facsimile, shall be effective upon receipt.
If to the Borrower:
Liquid Audio, Inc.
810 Winslow Street, Redwood City
California 94063, U.S.A.
Facsimile No.: 1-650-549-2099
Attention: Mr. Robert Flynn
Vice President
If to the Lender:
Super Factory, Inc.
Sunfelista Meguro Building
Ninth Floor
27-1, Kami-Osaki 2-chome
Shinagawa-Ku, Tokyo 141-0021
Japan
Facsimile No.: 81-5496-4055
Attention: Mr. Masahiro Kuroki
President and CEO
9.05 Counterparts.
------------
This Agreement may be executed in any number of English language
counterparts or duplicate originals, and each such counterpart or duplicate
original shall constitute an original instrument, but all such separate
counterparts or duplicate originals shall constitute one and the same
instrument.
9.06 Written Agreement to Govern.
---------------------------
This Agreement and the documents to be delivered hereunder set forth the
entire understanding and supersede all prior and contemporaneous agreements and
discussions among the Parties relating to the subject matter contained herein
and therein, and no Party shall be bound by any definition, condition,
representation, warranty, covenant or provision other than as expressly stated
in or contemplated herein or therein or as subsequently shall be set forth in
writing and executed by a duly authorized representative of the Party to be
bound thereby.
9.07 No Waiver of Rights.
-------------------
All waivers hereunder must be made in writing, and failure at any time to
require another party's performance of any obligation under this Agreement shall
not affect the right subsequently to require performance of that obligation. No
waiver of any breach of any provision of this Agreement shall be construed as a
<PAGE>
-11-
waiver of any continuing or succeeding breach of such provision or a waiver or
modification of such provision.
9.08 Severability.
------------
Whenever possible, each provision of this Agreement shall be interpreted
in such manner as to be effective and valid under applicable law, but if any
provision of this Agreement should be prohibited or invalid under applicable
law, such provisions shall be ineffective to the extent of such prohibition or
invalidity without invalidating the remainder of such provision or the remaining
provisions of this Agreement. In such event, the Parties agree to negotiate, in
good faith, a valid, legal and enforceable substitute provision which most
nearly effects the Parties' intent in entering into this Agreement.
9.09 Subject Headings.
----------------
The subject headings of the Sections of this Agreement are included for
the purposes of convenience only, and shall not affect the construction or
interpretations of any of its provisions.
9.10 Expenses.
--------
The Parties shall each bear their own costs and expenses (including
attorneys' fees) incurred in connection with the negotiation and preparation of
this Agreement and the consummation of the transactions contemplated hereby.
9.11 Language.
--------
This Agreement is in the English language only, which language shall be
controlling in all respects, and all versions hereof in any other language shall
be for accommodation only and shall not be binding upon the Parties hereto. All
communications and notices to be made or given pursuant to this Agreement shall
be in the English language.
9.12 Assignment.
----------
This Agreement shall inure to benefit of, and shall be binding upon, the
Parties and their respective successors and assigns. No Party may assign or
delegate this Agreement or any of its rights or duties under this Agreement
without the prior written consent of the other Parties or to a Person into which
it has merged or which has otherwise succeeded to all or substantially all of
the assets of the assignor, and which has assumed in writing or by operation of
law the assignor's obligations under this Agreement.
<PAGE>
-12-
IN WITNESS WHEREOF, the Parties hereto have caused this Agreement to be
executed on the day and year first written above.
BORROWER: Liquid Audio, Inc.
By /s/ Robert Flynn
-----------------------------
Name: Robert Flynn
Title: VP Business Department
Date:
Place:
LENDER: Super Factory, Inc.
By /s/ SIGNATURE IN JAPANESE
_____________________________
Name: Masahiro Kuroki
Title: President and C.E.O
Date: March 31, 1999
Title: Tokyo Japan
<PAGE>
Exhibit A
Form of Promissory Note (Yakusoku Tegata)
-----------------------------------------
PROMISSORY NOTE
---------------
To: Super Factory Inc.
Maturity Date: December 31, 2003
Place of Payment: Shinagawa-ku, Tokyo
Location of Payment: Super Factory, Inc.
Sum: 45,000,000 Yen
We shall pay the above-mentioned sum and the interest thereon at the per annum
rate of 0.5% plus the long-term prime rate per annum quoted by Sumitomo Bank
from time to time from the day of making of the note until the maturity date, to
or to the order of you in exchange for this Promissory Note.
Date: March 31, 1999
Place of Execution: _________________________________________________________
Address of Maker: 810 Winslow Street, Red Wood City, California 94063, U.S.A.
Liquid Audio, Inc.
By ___________________
Name:
Title:
<PAGE>
(Back)
Please pay the sum stated on the front of this Promissory Note to or to the
order of the endorsee referred to below.
Non-Payment Certificate Not Required
Date: __________________________________
Address: _______________________________
___________________
(Name of Endorser)
By _____________________________________
Name:
Title:
To: (Name of Endorsee)
Please pay the sum stated on the front of this Promissory Note to or to the
order of the endorsee referred to below.
Non-Payment Certificate Not Required
Date: __________________________________
Address: _______________________________
_____________________
(Name of Endorser)
By _____________________________________
Name:
Title:
To: (Name of Endorsee)
Please pay the sum stated on the front of this Promissory Note to or to the
order of the endorsee referred to below.
Non-Payment Certificate Not Required
Date: __________________________________
Address: _______________________________
_____________________
(Name of Endorser)
By _____________________________________
Name:
Title:
To: (Name of Endorsee)
<PAGE>
EXHIBIT 10.34
SHAREHOLDERS AGREEMENT
This Shareholders Agreement ("Agreement") is entered into as of December 31,
1998 by Liquid Audio, Inc., a California corporation with its principal place of
business at 810 Winslow Street, Redwood City, California 94063, U.S.A. ("Liquid
Audio"), SKM Limited, a joint-stock company (chusik-hoesa) organized and
existing under the laws of the Republic of Korea ("Korea") with its principal
place of business at HaeSung 1 Building, 5f, 942 Daechi 3-Dong, Kangnam-Gu,
Seoul 135-283, Korea ("SKM"), and Liquid Audio Korea Co. Ltd., a joint-stock
company (chusik-hoesa) organized and existing under the laws of Korea with its
principal place of business at 3f, WonKyung Bldg. 788-16, Yoksam-Dong, Kangnam-
Gu, Seoul, 135-080, Korea ("LAK"). The Parties agree as follows:
1. DEFINITIONS
-----------
For the purpose of this Agreement, the following definitions shall apply:
1.1 "Affiliate" means a Person that directly, or indirectly through one or
more intermediaries, controls, or is controlled by, or is in common control
with, the Person specified. "Control," as used herein, for purposes of defining
an "Affiliate," shall mean the ability to direct the management of a Person,
whether by voting of shares, election of directors, by terms of a contract or
otherwise.
1.2 "Articles" means the Articles of Incorporation of LAK in the form
attached in the English language as Exhibit A, and as hereafter amended. The
Parties agree that among the Parties, the English language version of the
Articles shall be controlling and that if any discrepancies should exist between
the two versions, then the Parties shall take such steps to ensure that the
Korean version of the Articles shall be amended to be in accord with the English
version.
1.3 "Board" means the board of directors of LAK.
1.4 "Change in Control" with respect to a Party means (i) a merger of that
Party with or into another Person, or a sale of all or substantially all of a
Party's assets to another Person, if as a result of the merger or asset sale the
holders of a majority of the Party's voting securities before the transaction
hold less than a majority of the voting securities of the surviving entity (or
its parent), or (ii) the acquisition by a Person or a group acting in concert of
a majority of a Party's voting securities.
1.5 "Code" means the Commercial Code of the Republic of Korea, as amended.
1.6 "Consulting Agreement" means the Consulting Agreement to be entered
into by LAK and Liquid Audio substantially in the form attached hereto as
Exhibit B.
1.7 "Guaranty" means the form of Guaranty to be executed by SKM
substantially in the form attached hereto as Exhibit C.
<PAGE>
1.8 "Holder" means Liquid Audio or SKM or their permitted successors and
assigns, as applicable. "Holders" means Liquid Audio and SKM and their permitted
successors and assigns.
1.9 "Party" means Liquid Audio, SKM or LAK, as applicable. "Parties"
means Liquid Audio, SKM and LAK.
1.10 "Person" means a natural individual, partnership, firm, company,
corporation, and any other form of business association.
1.11 "Pro Rata Share" of a Holder means the percentage interest that the
Holder holds in LAK by virtue of those Shares owned by that Holder, after
assuming conversion or exercise of any warrant, stock option and other equity
securities of LAK.
1.12 "Reseller Agreement" means the Reseller Agreement to be entered into
by Liquid Audio and LAK substantially in the form attached hereto as Exhibit D.
1.13 "Shares" means shares of Common Stock of LAK with a par value of [*]
Won per share.
1.14 "Won" means the Republic of Korea Won.
2. SUBSCRIPTION FOR SHARES
-----------------------
2.1 Company Name. The name of LAK shall be "Liquid Audio Korea Co., Ltd."
------------
in English and "Liquid Audio Korea Chusik Hoesa" in Korean.
2.2 Head Office. The head office of LAK shall be located in Seoul, Korea.
-----------
2.3 Articles of Incorporation. Prior to Liquid Audio's subscription for
-------------------------
Shares as set forth in Section 2.5, SKM shall procure that the current Articles
are amended so that they are substantially the same as Exhibit A. If any
discrepancy is found between this Agreement and the Articles, the terms of this
Agreement shall prevail and the Parties shall amend the Articles so as to be in
accord with this Agreement.
2.4 Authorized Capital. Prior to Liquid Audio's subscription for Shares as
------------------
set forth in Section 2.5, the authorized capital of LAK shall be increased to
[*] Won consisting of one single class of [*] shares of common stock with a par
value of [*] Won each.
2.5 Share Subscription. On the fifth Korean banking day ("Closing Date")
------------------
after Liquid Audio's receipt of confirmation of its foreign investment report
from a foreign exchange bank, designated by Liquid Audio, pursuant to the
Foreign Investment Promotion Act, the Holders shall have subscribed for a total
of [*] Shares in LAK as follows and the paid-in capital of the Company after
such subscription shall be [*] Won:
* Certain information in this Exhibit has been omitted and filed separately
with the Commission. Confidential treatment has been requested with respect
to the omitted portions.
-2-
<PAGE>
(a) SKM and LAK represent and warrant that SKM is currently the sole
shareholder in LAK with [*] Shares, at the aggregate value of [*] Won.
(b) SKM shall subscribe in cash for [*] Shares, the aggregate issue
price of which shall be [*] Won.
(c) Liquid Audio shall subscribe in cash for [*] Shares, the aggregate
issue price of which shall be [*] Won.
2.6 Additional Investment/Loans. SKM shall be responsible for securing any
----------------------------
financing required by LAK beyond that provided for in Section 2.5 hereof. Such
additional financing may be in the form of a third party or shareholder loan,
bearing interest at commercially reasonable rates, or in the form of a capital
investment which shall be in the form of a non-voting, non-participating
preferred stock with a dividend rate equal to the then prevailing rate for
comparable transactions. Notwithstanding the preceding sentence, any such
financing shall require the approval described in Section 3.3(e) hereof.
2.7 Preemptive Rights. Except for the Shares subscribed under Section 2.5,
-----------------
and subject to the pertinent Korean laws, this Agreement and the Articles, each
Holder shall have pre-emptive rights with respect to any new issuance of shares
by LAK in the same ratio as their respective shareholding ratios immediately
prior to such issuance. If any Holder is not permitted by law from exercising
its pre-emptive right to subscribe to new issues of shares, then Holder shall
have the right to transfer its pre-emptive right to a third legally qualified
purchaser who will be able to acquire such Holder's proportion of the new shares
issued by the Company. If any Holder does not wish to exercise its pre-emptive
rights in whole or in part, such Holder shall notify the Board of such intention
within seven (7) days from the day as of which the allocation of the new shares
is to be made. In this case, such Holder shall transfer to the other Holder its
pre-emptive right to such new shares.
2.8 Additional Agreements. Contemporaneously with the execution hereof,
---------------------
SKM and Liquid Audio shall execute and deliver the Guaranty, and LAK and Liquid
Audio shall execute and deliver the Reseller Agreement and Consulting Agreement.
2.9 Covenants. LAK and SKM covenant that from the date of this Agreement
---------
until the Closing Date, (i) LAK shall remain as a dormant company and (ii) no
shares or any other type of securities of LAK shall be issued (other than that
provided under Section 2.5) nor any option or pre-emptive rights be granted to
any party over any shares of LAK.
3. MANAGEMENT OF LAK
-----------------
3.1 Board of Directors.
------------------
(a) Director Positions. The Board shall have [*] authorized
------------------
members. SKM shall have the right to nominate [*] members to the Board, and
Liquid Audio shall have the right to nominate [*] members to the Board. Each
Holder shall have the right to request removal, whether with or without cause,
of any director which such Holder is solely entitled to nominate, at
* Certain information in this Exhibit has been omitted and filed separately
with the Commission. Confidential treatment has been requested with respect
to the omitted portions.
-3-
<PAGE>
any time effective upon notice to LAK, the director to be removed and to the
other Holder, provided, however, that if such dismissal is without cause, the
Holder proposing the dismissal shall indemnify and hold harmless LAK and the
other Holder from any and all damages and other expenses that may arise from
such action. Each Holder shall vote all of its Shares so as to elect the other
Holder's nominees, remove directors for whom removal has been requested, and
maintain the Board constituency described in this Section 3.1. Any vacancy on
the Board shall be filled pursuant to the nomination procedure described in this
Section 3.1.
(b) Compensation and Expenses. LAK shall reimburse reasonable travel
-------------------------
costs of any director attending a Board meeting. No director of LAK shall be
entitled to any additional compensation, unless such director is also serving in
a management capacity with LAK.
3.2 Quorum of the Board; Approval by Board. A quorum of the Board shall be
--------------------------------------
deemed present at any duly noticed Board meeting if a majority of the directors
are present, including at least one (1) director nominated by Liquid Audio and
one (1) director nominated by SKM. A director may be present at a Board meeting
physically or, to the extent subsequently permitted by applicable Korean law, by
telephone or video conference. Any action or determination by the Board shall
require the affirmative vote of a majority of the Board members present at the
meeting. The meetings of the Board shall be held at least quarterly at times and
places to be determined by the Board.
3.3 Liquid Audio's Approval. So long as Liquid Audio is a shareholder of
-----------------------
LAK, the following actions shall not be taken by LAK without prior approval of
Liquid Audio. Such approval of Liquid Audio shall be considered given upon (a) a
special Board resolution approved by three (3) members of the Board of
Directors, or (b) a special shareholder resolution approved by [*] of the
outstanding shares of LAK.
(a) Making any basic change in the general nature or scope of business
of LAK;
(b) Amending the Articles of LAK, including, without limitation, any
increase or decrease in the number of authorized shares of LAK, any change in
the rights, preferences or privileges of the Shares and any increase or decrease
in the authorized number of directors on the Board;
(c) Removing the directors nominated by Liquid Audio;
(d) Dissolving or liquidating LAK;
(e) Issuing any security of LAK, whether shares securities convertible
into shares, other equity securities or debt securities (except that LAK may
issue shares under Section 2.5 without further approval by Liquid Audio);
(f) Merging or consolidating LAK with another Person, or selling,
leasing, pledging, mortgaging, encumbering or otherwise disposing of all or
substantially all of the assets of LAK, whether in one transaction or a series
of transactions;
* Certain information in this Exhibit has been omitted and filed separately
with the Commission. Confidential treatment has been requested with respect
to the omitted portions.
-4-
<PAGE>
(g) Establishing a business relationship with any direct competitor of
Liquid Audio;
(h) Investing in any other Person;
(i) Entering into any agreement or transaction (except this Agreement,
the Reseller Agreement and Consulting Agreement) with or for the benefit of any
director or shareholder of LAK or an Affiliate (or any direct lineal descendent
or ancestor, sibling, spouse, mother-in-law, father-in-law, son-in-law or
daughter-in-law) of such director or shareholder;
(j) Amending the business plan of LAK;
(k) Appointment, employment and compensation decisions and scope of
responsibility for officers of LAK, including salary and wages, cash advances
and relocation expenses;
(l) Capital expenditures for single items of 100,000,000 Won or more;
(m) Entering into contracts that have a term in excess of one year or
that require aggregate payments of 100,000,000 Won or more;
(n) Disposition or transfer to a third party of at least 20% of LAK's
assets;
(o) Authorizing loans by LAK, except for payment terms for trade
credits in the ordinary course of business;
(p) Assuming or incurring any debt, loan, guaranty or liability with
an aggregate value of 500,000,000 Won or more;
(q) Change in the outside accountant to LAK;
(r) Creating any lien on LAK's property, except liens incurred in the
ordinary course of business;
(s) Approving LAK's annual budget;
(t) Changing the strategic direction of LAK and approving LAK's long-
range plans;
(u) Approval of annual financial statements;
(v) Opening or closing an account with a bank or financial house in
Korea or overseas; and
(w) Paying any dividend or making any other distribution;
-5-
<PAGE>
(x) Approving or amending the internal regulations of LAK relating to
important procedures including, but not limited to, employee regulations,
regulations relating to the issuance or transfer of shares and the issuance or
loss of share certificates, Board regulations and regulations governing meetings
of shareholders.
3.4 Board and Shareholder Meetings. All Board and shareholder meetings
------------------------------
shall be conducted in the English language. The minutes of any such meeting will
be prepared in both the Korean and English languages, and compared for accuracy
by the interpreter. In the event of a conflict in terms, the minutes prepared in
the English language shall control.
3.5 Senior Officers.
---------------
(a) President and Chief Executive Officer of LAK. The Board shall
--------------------------------------------
elect as the President and Chief Executive Officer of LAK the candidate selected
by SKM. The President shall also be the sole representative director.
(b) Chief Financial Officer of LAK. The Board shall elect as the Chief
-------------------------------
Financial Officer of LAK the candidate selected by Liquid Audio. The Chief
Financial Officer shall be responsible for oversight of the finance and
accounting functions of LAK.
(c) Other Officers; Management Structure. The other officers of LAK
------------------------------------
shall be selected by the Board.
3.6 Statutory Auditors. Except as required by applicable law, LAK shall
------------------
have two (2) statutory auditors. Liquid Audio shall nominate one (1) statutory
auditor, and SKM shall nominate one (1) statutory auditor.
3.7 Financial Statements. LAK's financial year shall be January 1 through
--------------------
December 31 of the following year. LAK's auditors shall be an independent
accounting firm acceptable to SKM and Liquid Audio, who shall be responsible for
preparing the annual financial statements of LAK in accordance with Korean
generally accepted accounting principles consistently applied, and corresponding
annual financial statements in the English language in compliance with U.S.
generally accepted accounting principles. LAK shall deliver, and SKM shall cause
LAK to deliver, to all Holders (i) such annual audited financial statements
within three (3) months after the end of each financial year and (ii) promptly
after delivery to any other Holder, other financial and operating reports of LAK
prepared for one or more Holders.
3.8 Right of Inspection. During reasonable office hours of LAK, the
-------------------
Holders shall have full access to all properties, books of account, records and
the like of LAK with the right to make copies at the offices of LAK. Any
information obtained by the Holders through exercising this right shall (i) be
used by such Holder only for purposes which are consistent with its status as an
equity holder in LAK and not for the pursuit of business interests outside LAK
(except to the extent such Holder shall otherwise have rights for access to such
information or to the extent used to determine compliance with this Agreement)
and (ii) be subject to the confidentiality provisions of Section 8.1.
-6-
<PAGE>
3.9 Employee Matters. Each employee of LAK, and any employee of another
----------------
entity working for LAK but not a regular employee of LAK, shall sign an
agreement reasonably acceptable to SKM and Liquid Audio providing for
confidentiality of information disclosed by LAK and for ownership by LAK of
inventions or original works of authorship created by such individuals.
3.10 Business Plan. The five-year business plan for LAK has been agreed
-------------
between the Holders and attached as Exhibit E (the "Business Plan"). The Board
-------------
shall discuss and update the Business Plan at least once a year.
4. REPRESENTATIONS
---------------
4.1 Liquid Audio. Liquid Audio represents and warrants as follows to the
------------
other Holders as of the date of this Agreement:
(a) Organization and Good Standing of Liquid Audio. Liquid Audio is a
----------------------------------------------
corporation duly organized, validly existing and in good standing under the laws
of the State of California and has the corporate power and authority to enter
into this Agreement and to perform its obligations hereunder.
(b) Authorization. All corporate action on the part of Liquid Audio
-------------
and Liquid Audio's officers and directors necessary for the authorization,
execution, delivery and performance of this Agreement has been taken. This
Agreement constitutes a valid, legally binding and enforceable obligation of
Liquid Audio, assuming due authorization and delivery hereof by SKM and LAK.
(c) Government and Other Consents. Except for approvals contemplated
-----------------------------
by this Agreement, no consent, authorization, license, permit, registration or
approval of any governmental or public body or authority is required in
connection with Liquid Audio's execution and delivery of this Agreement or with
the performance by Liquid Audio of its obligations hereunder.
(d) Effect of Agreement. Liquid Audio's execution and delivery of this
-------------------
Agreement, performance of its obligations hereunder and its consummation of the
transactions contemplated hereby will not, (i) to its knowledge, violate any
provision of any law, statute, rule or regulation to which it is subject; (ii)
violate any judgment, order, writ, injunction or decree of any court applicable
to it; (iii) to its knowledge, have any effect on its compliance with any laws,
statutes, rules, regulations, orders, decrees, licenses, permits or
authorizations which would materially and adversely affect it; (iv) to its
knowledge, result in the breach of, or be in conflict with, any term, covenant,
condition or provision of, or affect the validity, enforceability and
subsistence of any agreement, lease or other commitment to which it is a party
and which would materially and adversely affect it; or (v) to its knowledge,
result in the creation or imposition of any lien, pledge, mortgage, claim,
charge, or encumbrance upon any of its assets.
(e) Disclosure. No representation or warranty by Liquid Audio
----------
contained in this Agreement and no writing, certificate, exhibit, list or other
instrument required to be furnished pursuant hereto contains or will contain any
untrue statement of a material fact or omits or will omit
-7-
<PAGE>
any material fact necessary in order to make the statements and information
contained therein not misleading.
4.2 SKM. SKM represents and warrants to the other Holders as follows as of
---
the date of this Agreement.
(a) Organization and Good Standing of SKM. SKM is a corporation duly
-------------------------------------
organized, validly existing and in good standing under the laws of the Republic
of Korea and has the corporate power and authority to enter into this Agreement
and to perform its obligations hereunder.
(b) Authorization. All corporate action on the part of SKM and its
-------------
officers and directors necessary for the authorization, execution, delivery an
performance of this Agreement has been taken. This Agreement constitutes a
valid, legally binding and enforceable obligation of SKM, assuming due
authorization, execution and delivery hereof by Liquid Audio and LAK.
(c) Government and Other Consents. Except for approvals contemplated
-----------------------------
by this Agreement no consent, authorization, license, permit, registration or
approval of governmental or public body or authority is required in connection
with execution and delivery of this Agreement by SKM or with the performance by
SKM of any of its respective obligations hereunder.
(d) Effect of Agreement. SKM's execution and delivery of this
-------------------
Agreement, performance of its obligations hereunder and its consummation of the
transactions contemplated hereby will not, (i) to its knowledge, violate any
provision of any law, statute, rule or regulation to which it is subject; (ii)
violate any judgment, order, writ, injunction or decree of any court applicable
to it; (iii) to its knowledge, have any effect on its compliance with any laws,
statutes, rules, regulations, orders, decrees, licenses, permits or
authorizations which would materially and adversely affect it; (iv) to its
knowledge, result in the breach of, or be in conflict with, any term, covenant,
condition or provision of, or affect the validity, enforceability and
subsistence of any agreement, lease or other commitment to which it is a party
and which would materially and adversely affect it; or (v) to its knowledge,
result in the creation or imposition of any lien, pledge, mortgage, claim,
charge, or encumbrance upon any of its assets.
(e) Brokers, Finders. SKM has not retained any person to act on its
----------------
behalf, nor has any person contended that such person was so retained, to assist
as its broker, finder or agent in connection with this transaction.
(f) Disclosure. No representation or warranty by SKM contained in this
----------
Agreement and no writing, certificate, exhibit, list or other instrument
required to be furnished pursuant hereto contains or will contain any untrue
statement of a material fact or omits or will omit any material fact necessary
in order to make the statements and information contained therein not
misleading.
4.3 LAK. LAK and SKM each represent and warrant to Liquid Audio as follows
---
as of the date of this Agreement:
-8-
<PAGE>
(a) Organization and Good Standing of LAK. LAK is a corporation duly
-------------------------------------
organized, validly existing and in good standing under the laws of the Republic
of Korea and has the corporate power and authority to enter into this Agreement
and to perform its obligations hereunder.
(b) Authorization. All corporate action on the part of LAK and its
-------------
officers and directors necessary for the authorization, execution, delivery and
performance of this Agreement has been taken. This Agreement constitutes a
valid, legally binding and enforceable obligation of LAK, assuming due
authorization, execution and delivery hereof by the Holders.
(c) Government and Other Consents. Except for approvals contemplated
-----------------------------
by this Agreement, no consent, authorization, license, permit, registration or
approval of governmental or public body or authority is required in connection
with execution and delivery of this Agreement by LAK or with the performance by
LAK of any of its respective obligations hereunder.
(d) Effect of Agreement. LAK's execution and delivery of this
-------------------
Agreement, performance of its obligations hereunder and its consummation of the
transactions contemplated hereby will not, (i) to its knowledge, violate any
provision of any law, statute, rule or regulation to which it is subject; (ii)
violate any judgment, order, writ, injunction or decree of any court applicable
to it; (iii) to its knowledge, have any effect on its compliance with any laws,
statutes, rules, regulations, orders, decrees, licenses, permits or
authorizations which would materially and adversely affect it; (iv) to its
knowledge, result in the breach of, or be in conflict with, any term, covenant,
condition or provision of, or affect the validity, enforceability and
subsistence of any agreement, lease or other commitment to which it is a party
and which would materially and adversely affect it; or (v) to its knowledge,
result in the creation or imposition of any lien, pledge, mortgage, claim,
charge, or encumbrance upon any of its assets.
(e) Brokers, Finders. LAK has not retained any person to act on its
----------------
behalf, nor has any person contended that such person was so retained, to assist
as its broker, finder or agent in connection with this transaction.
(f) Shares. As of the date of this Agreement and immediately prior to
------
the share subscription set forth in Section 2.5, LAK will have authorized
capital of [*] Won divided into [*] Shares, of which [*] Shares have been duly
issued, fully paid and non-assessable, free of all liens, encumbrances and
restrictions other than those specifically set forth in this Agreement. As of
the Closing Date, the issuance of the Shares under Section 2.5 will have been
duly authorized by LAK and, when delivered and paid for pursuant to this
Agreement, will have been duly and validly issued, fully paid and non-
assessable. As of the date of this Agreement and through the date of share
subscription by Liquid Audio, there are no outstanding securities convertible
into or exchangeable for, or warrants, rights or options to purchase from LAK,
or obligations of LAK to issue (other than those set forth under Section 2.5),
any capital stock.
(g) No Operation of LAK or Outstanding Liabilities. Since its
----------------------------------------------
establishment, LAK has been a dormant company with no business activity, other
than those disclosed to Liquid Audio in writing. As of the date of this
Agreement and through the date of share subscription by Liquid Audio, except as
previously disclosed to Liquid Audio in writing, LAK has no debts or
* Certain information in this Exhibit has been omitted and filed separately
with the Commission. Confidential treatment has been requested with respect
to the omitted portions.
-9-
<PAGE>
liabilities of any kind (including without limitation contingent liabilities)
nor has LAK given any type of Guaranty (including without limitation payment
Guaranties) to any party nor has LAK created or permitted to be created any
charge, lien, pledge, mortgage, or any other encumbrance on its assets nor is
LAK involved in any litigation, arbitration or any quasi-judicial proceeding.
(h) Disclosure. No representation or warranty by LAK contained in this
----------
Agreement and no writing, certificate, exhibit, list or other instrument
required to be furnished pursuant hereto contains or will contain any untrue
statement of a material fact or omits or will omit any material fact necessary
in order to make the statements and information contained therein not
misleading.
5. TERM AND TERMINATION.
--------------------
5.1 Term and Termination. This Agreement shall continue in full force and
--------------------
effect unless and until terminated as provided herein.
(a) Grounds for Termination. This Agreement shall be terminated:
-----------------------
(i) by mutual written agreement of the Parties;
(ii) by a Holder in accordance with this Section 5;
(iii) by Liquid Audio, at its election, effected immediately by
written notice to SKM, upon (A) the permitted termination of the Reseller
Agreement or the Consulting Agreement by Liquid Audio, (B) SKM's failure to pay,
when due, the [*] payable to Liquid Audio pursuant to that certain Consulting
Agreement dated September 30, 1998 between SKM and Liquid Audio, or (C) breach
by SKM of its obligations under the Guaranty;
(iv) by Liquid Audio in the event that any Affiliate of SKM
shall engage in conduct which would, if done by SKM itself, constitute a breach
of Section 7(a) hereof;
(v) at such time as only one Holder remains subject to this
Agreement; or
(vi) otherwise by lawful exercise by a Holder of its rights
under applicable laws.
(vii) by any Party if performance by another party has been
excused pursuant to Section 8.3 by a force majeure condition which has continued
for at least ninety (90) days.
5.2 Termination Upon Bankruptcy or Insolvency of a Holder.
-----------------------------------------------------
(a) Notice of Bankruptcy Event. If any of the following events occurs
--------------------------
with respect to a Holder, such Holder shall immediately notify the other Holders
and LAK of the occurrence of such event:
* Certain information in this Exhibit has been omitted and filed separately
with the Commission. Confidential treatment has been requested with respect
to the omitted portions.
-10-
<PAGE>
(i) Such Holder becomes insolvent or unable to pay any or all of its
debts as they mature or ceases to pay any or all of its debts as they mature in
the ordinary course of business.
(ii) Any application or petition is submitted, by or for such Holder,
for commencement of proceedings of bankruptcy, reorganization, composition or
other similar proceedings under the applicable law.
(b) Right to Terminate. If the event is not cured within sixty (60)
------------------
days following the event, the non-affected Holder shall have the right to
terminate this Agreement by giving notice in writing to all other Holders and
LAK.
(c) Right to Purchase. After notice of termination described in
-----------------
Section 5.3, the Holders shall make a reasonable effort to consult in good faith
for sixty (60) days concerning the disposition of their respective interests in
LAK and the future operations of LAK. If the Holders do not sign a written
agreement regarding such matters during such sixty (60) days, then the Holder
which gave notice of termination shall have the option to purchase the Shares of
such bankrupt Holder pursuant to Section 5.6.
5.3 Termination Upon Bankruptcy or Insolvency of LAK.
------------------------------------------------
(a) Right to Terminate. If any of the following events occurs with
------------------
respect to LAK, any Holder shall have the right to terminate the Agreement by
giving notice in writing to all other Holders:
(i) LAK becomes insolvent or unable to pay any or all of its
debts as they mature or ceases to pay any or all of its debts as they mature in
the ordinary course of business.
(ii) Any application or petition is submitted, by or for LAK,
for commencement of proceedings of bankruptcy, reorganization, composition or
other similar proceedings under the applicable law.
(b) Right to Dissolve. After notice of termination, the Holders
-----------------
shall consult in good faith for sixty (60) days concerning the disposition of
their respective interests in LAK and the future operations of LAK. If the
Holders do not sign a written agreement regarding such matters within such sixty
(60) days and if any application or petition is not submitted for the
commencement of any proceedings described in Section 5.3(a)(ii), then each
Holder shall have the option to cause dissolution of LAK under the Code by
giving written notice of dissolution to the other Holders and LAK. Upon such
notice, each Holder and LAK shall take all actions (including voting of Shares
in favor for dissolution) required to dissolve and liquidate LAK in accordance
with applicable laws and regulations.
5.4 Termination Upon Material Breach.
--------------------------------
(a) Right to Terminate. If a Party commits a material breach of this
------------------
Agreement and such breach is not cured within sixty (60) days following notice
thereof to the breaching Party
-11-
<PAGE>
by any of the other Parties, the Party sending such notice shall have the right
to terminate this Agreement by giving notice thereof in writing to all other
Parties.
(b) Right to Purchase or Sell Shares. After notice of termination, the
--------------------------------
Holders shall consult in good faith for sixty (60) days concerning the
disposition of their respective interests in LAK and the future operations of
LAK. If the Holders do not resolve such matters in writing within such sixty
(60) days, the non-breaching Holder shall have the option to purchase the Shares
of such breaching Holder pursuant to Section 5.6 or to cause the breaching party
to purchase all of the Shares then held by the non-breaching Holder pursuant to
Section 5.6.
(c) Remedies Not Affected. The foregoing shall not limit the ability
---------------------
of any Party to seek such legal and equitable remedies (including damages)
related to a material breach by a Party or the failure of a Party to perform any
other duty or obligation.
5.5 Change in Control.
-----------------
(a) Right to Terminate. If SKM undergoes a Change in Control, Liquid
------------------
Audio shall have the right to terminate this Agreement by giving notice thereof
in writing to all other Holders.
(b) Right to Purchase/Sell. After notice of termination pursuant to
----------------------
Section 5.5(a), the Holders shall consult in good faith for sixty (60) days
concerning the disposition of their respective interests in LAK and the future
operations of LAK. If the Holders do not resolve such matters in writing within
such sixty (60) days, Liquid Audio shall have the option to purchase the Shares
of SKM or to have SKM purchase all of the Shares then held by Liquid Audio,
pursuant to Section 5.6.
5.6 Purchase Procedures.
-------------------
(a) The purchase price for the Shares to be sold pursuant to this
Section shall be the "Fair Market Value" of such Shares.
(b) Fair Market Value per share under this Section 5 shall be
determined as follows:
(i) If the Shares are publicly traded on the Korea Stock Exchange
or KOSDAQ, the Korean OTC market, the value shall be deemed to be the average of
the closing prices of the Shares on such exchange or market, as the case may be,
over the 30-day period ending three (3) business days prior to the closing of
the purchase of the Shares.
(ii) If there is no active public market for the Shares, the value
shall be the fair market value thereof immediately following any act giving rise
to the right to sell or purchase shares under this Section 5, such fair market
value as determined by a good faith negotiation between the Selling Holder or
Holders ("Seller") and the purchasing Holder or Holders ("Purchaser"). If such
negotiation fails to determine the fair market value within forty-five (45) days
after the date of the notice of termination, the fair market value shall be
determined as follows:
-12-
<PAGE>
(A) Seller (as a group if Seller is more than one Holder)
and Purchaser (as a group if Purchaser is more than one Holder) shall each
retain at its expense an investment bank expert in the industry. If Seller or
Purchaser does not select an investment bank within fifteen (15) days after the
end of the 45-day good faith negotiation period (the "Negotiation Period")
referred to in subsection (ii) above, such Holder or Holders shall not be
entitled to retain an investment bank and shall present whatever materials it
has available by the deadline regarding the valuation of LAK.
(B) Subject to execution of customary confidentiality
agreements by the investment banks, LAK shall provide or cause to be provided to
each investment bank all material information, including any material changes in
such information, reasonably necessary to value LAK or reasonably requested by
the investment banks.
(C) During the 15-day period after both Seller and Purchaser
have selected an investment bank, or the end of the Negotiation Period if Seller
and/or Purchaser does not select an investment bank, Seller, Purchaser and their
respective investment banks shall meet on at least two occasions to present
their respective views on valuation and shall negotiate in good faith to reach a
written agreement on the fair market value.
(D) If the fair market value has not been agreed to in
writing by the end of the Negotiation Period, Seller and Purchaser shall each
submit a final valuation proposal with a supporting analysis to the other Holder
or Holders and to the "Arbitrator" within ten (10) days after the end of the
Negotiation Period. The "Arbitrator" shall be a Person with expertise in valuing
high technology companies, shall not have a material business relationship with
any Party and shall be reasonably acceptable to both Seller and Purchaser,
provided however that in the event that the Parties are unable to agree upon the
Arbitrator within ten (10) days of the end of the Negotiation Period, then the
Arbitrator shall be determined within an additional ten (10) days by agreement
of the respective investment banks of the Parties, provided further that (x) if
no such investment bank has been selected by a Party, or if such Party's
investment bank does not recommend an Arbitrator, then the selection of the
other Party shall prevail, and (y) if the investment banks are unable to agree
on an Arbitrator, the valuation shall be determined in accordance with the
dispute resolution provisions of Section 8.2 hereof.
(E) If Seller or Purchaser does not submit in a timely
manner a final valuation proposal, then the valuation proposal of the other
Holder or Holders shall be used to establish the fair market value. If the final
proposals differ by less than 10%, then the average of the proposals shall be
the fair market value. If the final proposals differ by 10% or more, then the
Arbitrator shall choose one or the other proposal. The Arbitrator's
determination shall be final and binding on both Seller and Purchase; provided,
however, that the Arbitrator must select one of the final valuation proposals as
submitted.
(c) Each Holder purchasing Shares under this Section 5.6 shall pay in
cash or other immediately available funds the aggregate purchase price for the
Shares to be sold to such Holder upon receipt of the certificate or certificates
for the Shares to be sold to such Holder.
(d) When Holders have the right to purchase their pro rata share of
another Holder's Shares pursuant to this Section 5 and not all of those Holders
exercise their purchase right,
-13-
<PAGE>
the Holders exercising their purchase right shall also have the right to
purchase the pro rata share of the Shares of the Holders not exercising their
purchase right (the "Remaining Shares"). If more than one Holder elects to
exercise its purchase right as to the Remaining Shares, each Holder who wishes
to purchase the Remaining Shares shall be entitled to purchase that portion of
the Remaining Shares as the total number of Shares then owned by such Holder
bears to the total number of Shares then owned by all Holders who wish to
purchase the Remaining Shares.
5.7 Continuation of Business. During any period in which a Holder has the
------------------------
right to purchase or is purchasing the Shares of any other Holder, or in which
Liquid Audio has the right to cause the other Holders to purchase its Shares,
pursuant to this Section 5, until the closing of the purchase of the Shares
thereunder:
(a) LAK shall continue its business in the ordinary course. All of the
Holders shall use their best efforts to maintain and preserve the business of
LAK pending the consummation of such purchase.
(b) The Holders shall negotiate in good faith an agreement providing
that employees of such selling Holder working full time for LAK shall be made
available full time to LAK for such period as is reasonably required for up to
six (6) months following the closing of such purchase of Shares to effect an
orderly transition to a new ownership by non-selling Holders, and each Holder
shall use its best efforts to make all such employees available on this basis.
6. PERMITTED TRANSFERS; RIGHT OF FIRST REFUSAL
-------------------------------------------
6.1 Restrictions. Each Holder agrees not to sell or transfer in any manner
------------
any of such Holder's Shares or any right or interest therein except as provided
below in this Section:
(a) No Holder may transfer or otherwise dispose of its Shares without
the prior approval of the Board, which shall not be withheld as long as the
requirements of this Section 6 have been satisfied.
(b) For a period of three (3) years after the effective date of the
incorporation of LAK, such Holder may transfer or otherwise dispose of its
Shares only if a Holder or Holders of a majority of Shares owned by all of other
Holders approve in advance in writing such transfer or disposition.
(c) After three (3) years from the effective date of the incorporation
of LAK,
(i) A Holder which wishes to transfer its Shares shall first give
written notice ("Notice") to all of the other Holders stating its bona fide
intention to transfer, the name of the proposed transferee, the number of
offered Shares and the price, terms and conditions of the proposed sale or
transfer.
(ii) Each other, non-offering Holder shall have the right to
purchase that portion of the Shares offered as the total number of Shares then
owned by such Holder bears to the total number of Shares then owned by all of
the non-offering Holders. Such right shall be
-14-
<PAGE>
exercisable by written notice to the offering Holder not later than thirty (30)
days after delivery of the Notice. The price and terms for the non-offering
Holders shall be the price and terms stated in the Notice.
(iii) If all of the non-offering Holders do not exercise their
rights described in paragraph (ii) of Section 6.1(c), the offering Holder shall
so notify in writing ("Second Notice") each Holder which exercised its right
under paragraph (ii) of Section 6.1(c), and each such Holder shall have the
right to purchase all of the remaining Shares offered, which right shall be
exercisable by written notice to the offering Holder within ten (10) days after
delivery of the Second Notice. If more than one Holder elects to purchase such
remaining Shares, each Holder who wishes to purchase such remaining Shares shall
be entitled to purchase that portion of such remaining Shares as the total
number of Shares then owned by such Holder bears to the total number of Shares
then owned by all Holders who wish to purchase such remaining Shares.
(d) The Shares not purchased by the non-offering Holders pursuant to
Section 6.1(c) may, during ninety (90) days beginning on the expiration of the
last applicable right of the non-offering Holders, be transferred to the
transferee named in the Notice; provided that (i) such sale or transfer is not
at a lower price or on terms more favorable to the transferee than those
specified in the Notice; and (ii) prior to such transfer, such transferee agrees
in writing to become bound by the terms and conditions of this Agreement upon
transfer of such Shares.
(e) Notwithstanding any term or condition of this Section 6, each
Holder may transfer its Shares to an Affiliate of that Holder or in connection
with a merger or sale of all or substantially all of the assets of the Holder
provided that: (i) prior to such transfer, such Affiliate or transferee agrees
in writing to become bound by the terms and conditions of this Agreement upon
transfer of such Shares; (ii) the transferring Holder notifies all of the other
Holders not less than thirty (30) days prior to any such transfer; and (iii) any
such transfer shall not serve to excuse or terminate any of the obligations of
the transferring Holder under this Agreement.
(f) Each Holder which has the right to purchase the Shares under
Section 6.1(c) may designate and assign an Affiliate to exercise all or part of
such Holder's rights under Section 6.1(c).
(g) The restrictions and other provisions of this Section 6 shall
apply to any Shares acquired by a Holder during the term of this Agreement.
(h) Since damages arising from a breach of the obligations under this
Section 6.1 may be difficult to determine with precision, the Holders agree that
any Holder found to have breached the terms of Section 6.1 shall pay to the non-
breaching Holders as liquidated damages a sum equivalent to two times the gross
compensation received by the breaching Holder in the transaction whereby the
breach occurred, or two times the aggregate par value of the transferred shares,
whichever is higher. The Parties have understood that such liquidated damages
are fair and reasonable. Application of this liquidated damage provision shall
not prevent a Party from enforcing its rights or augmenting its protection by
such other remedies as may be available.
-15-
<PAGE>
6.2 Legend. The instruments representing the Shares shall bear a legend
------
stating that such Shares are (i) subject to restrictions on transfer and other
provision of this Agreement and (ii) not transferable without the Board's
written approval. Each Holder agrees to cause LAK's Board not to consent to any
transfer or other disposition of any Shares made other than in accordance with
this Agreement.
7. NONCOMPETITION
--------------
(a) SKM agrees that as long as SKM is a shareholder of LAK, SKM will
not engage, either directly or indirectly, as a principal or for its own account
or solely or jointly with others, or as a stockholder in any corporation or
joint stock association (including rights to participate in present or future
profits pursuant to an option or other agreement), in any entity that sells,
resells, or distributes any software product or service that competes with the
sale of the Liquid Audio secure music distribution software carried by LAK, or
in any entity that controls, licenses, distributes or sells pre-recorded music.
(b) If any provision contained in this Section shall for any reason be
held invalid, illegal or unenforceable in any respect, such invalidity,
illegality of unenforceability shall not affect any other provisions of this
Section, but this Section shall be construed as if such invalid, illegal or
unenforceable provision had never been contained herein. It is the intention of
the Parties that if any of the restrictions or covenants contained herein is
held to cover a geographic area or to be for a length of time which is not
permitted by applicable law, or in any way construed to be too broad or to any
extent invalid, such provision shall not be construed to be null, void and of no
effect, but to the extent such provision would be valid or enforceable under
applicable law, a court of competent jurisdiction shall construe and interpret
or reform this Section to provide for a covenant having the maximum enforceable
geographic area, time period and other provisions (not greater than those
contained herein) as shall be valid and enforceable under such applicable law.
(c) SKM acknowledges that Liquid Audio would be irreparably harmed by
any breach or threatened breach of this Section and that there would be no
adequate remedy at law or in damages to compensate Liquid Audio for any such
breach or threatened breach. In recognition of this fact, SKM agrees that, in
the event of such a breach or threatened breach, in addition to any remedies at
law, Liquid Audio, without posting any bond, shall be entitled to obtain
equitable relief in the form of specific performance, temporary restraining
order, temporary or permanent injunction or any other equitable remedy which may
then be available, and SKM consents to the entry thereof.
8. GENERAL PROVISIONS
------------------
8.1 Confidentiality.
---------------
(a) Each Party acknowledges and agrees that certain information it
receives from the other Parties constitutes the confidential and proprietary
trade secrets of the disclosing Party (or of third parties pursuant to
confidentiality agreements between such third parties and the disclosing Party),
and that the receiving Party's protection thereof is essential to this Agreement
and a condition of the receiving Party's use and possession thereof. Each Party
shall retain in strict confidence any and all such confidential information
(collectively "Confidential Information") and use such
-16-
<PAGE>
Confidential Information only as expressly authorized herein. A Party will under
no circumstances distribute or in any way disseminate Confidential Information
to third parties without the prior written permission of the disclosing Party.
(b) Notwithstanding the above, Confidential Information shall not
include information which:
(i) was generally known and available in the public domain at the
time it was disclosed or becomes generally known and available in the public
domain through no fault of the receiving Party;
(ii) was known to the receiving Party at the time of disclosure as
shown by the files of the receiving Party in existence at the time of
disclosure;
(iii) was independently developed by the receiving Party without
any use of Confidential Information and by employees or other agents of the
receiving Party who have not been exposed to such Confidential Information;
(iv) becomes known to the receiving Party from a source other than
the disclosing Party without breach of this Agreement by the receiving Party and
otherwise not in violation of the disclosing Party's rights; or
(v) is disclosed pursuant to the order or requirement of a court,
administrative agency, or other governmental body; provided, that the receiving
Party shall to the extent reasonably practicable, provide prompt, advanced
notice thereof to enable the disclosing Party to seek a protective order or
otherwise prevent such disclosure, and provided that the receiving Party's
disclosure is limited to the extent expressly required by such court,
administrative agency or other governmental body.
(c) Each Party will enter into a confidentiality agreement with each
employee or consultant who is given access to the Confidential Information of
the other Parties which incorporates the protections and restrictions
substantially as set forth herein.
(d) Each Party agrees to notify the other Parties in the event of any
breach of its security under conditions in which it would appear that
Confidential Information was prejudiced or exposed to loss. Each Party shall,
upon request of the disclosing Party, take all other reasonable steps necessary
to recover any compromised Confidential Information disclosed to or placed in
its possession by virtue of this Agreement. The cost of taking such steps shall
be borne solely by the receiving Party.
(e) Each Party acknowledges that any breach of any of its obligations
under this Section 8.1 is likely to cause or threaten irreparable harm to the
other Parties, and, accordingly, each Party agrees that in such event the
disclosing Party shall be entitled to equitable relief to protect its interests,
including but not limited to preliminary and permanent injunctive relief, as
well as money damages.
-17-
<PAGE>
(f) Each Party agrees that such Holder shall return, or cause to be
returned, to the disclosing Party Confidential Information disclosed by such
disclosing Party promptly after such Holder ceases to be a shareholder of LAK.
8.2 Arbitration; Forum.
------------------
(a) Except as otherwise provided herein, all disputes, controversies
or claims arising out of or relating to this Agreement, or the breach,
termination or validity thereof, shall be resolved by one arbitrator under the
Rules of Conciliation and Arbitration of the International Chamber of Commerce
as then in effect ("Rules"). The arbitrator shall be chosen in accordance with
the Rules. The place of arbitration shall be Tokyo, Japan. The language to be
used in the arbitration proceedings shall be English. The arbitrator may be of
any nationality. The arbitral award shall be rendered in writing, state the
reasons for the award and shall be final and binding on the Parties. Judgment on
any award may be entered by any court of competent jurisdiction or application
may be made to such a court for judicial acceptance or recognition of the award
and any appropriate order including enforcement. This arbitration agreement is
intended by the parties to be self-executing. The arbitrator shall have sole
jurisdiction to determine whether (i) a claim is subject to arbitration, (ii)
the arbitration may proceed even if one of the Parties refuses to attend or
participate and (iii) an award against that party may be ordered pursuant to
default or otherwise by the panel. The Parties agree that they will arbitrate
all claims agreed to be arbitrated herein regardless of the existence of any
related dispute, action or special proceeding between any or all of the Parties
hereto and/or any third party.
(b) Notwithstanding the foregoing, each Party may apply to any court
of competent jurisdiction for a temporary restraining order, preliminary
injunction, or other interim or conservatory relief, as necessary, without
breach of this Section, and without any abridgement of the powers of the
arbitrator.
(c) In case of arbitration, the arbitrator shall award reasonable
attorneys' fees and expenses to any of the parties in such manner and to such
extent as the arbitrators deem equitable. In case of a court proceeding arising
out of this Agreement, the prevailing party shall be entitled to recover its
reasonable attorneys' fees and expenses from the other party(ies).
8.3 Force Majeure. If the performance of this Agreement or any obligations
-------------
hereunder is prevented, restricted or interfered with by reason of fire or other
casualty or accident, strikes or labor disputes, war or other violence, any law,
order, proclamation, regulations, ordinance, demand or requirement of any
government agency, or any other act or condition beyond the reasonable control
of the Parties, the Party so affected upon giving prompt notice to the other
Parties shall be excused from such performance during such prevention,
restriction or interference.
8.4 Governing Law. This Agreement shall be governed by the laws of the
-------------
Republic of Korea.
8.5 Publicity. Prior to issuing any reports, statements, press releases or
---------
other disclosures to third parties regarding this Agreement or the transactions
contemplated herein, the Parties shall exchange copies of such documents and
shall consult with each other regarding their content.
-18-
<PAGE>
Except as otherwise required by law, neither Party shall any such disclosure
without the prior approval of the other Party.
8.6 Notices and Other Communications. Every notice by either Party shall
--------------------------------
be in writing and delivered either by personal delivery, or by express mail or
any similar overnight courier service, or by registered or certified mail,
postage prepaid, or by facsimile or electronic mail, addressed to the Party for
whom intended at its address set forth above, or at such other address as the
intended recipient previously shall have designated by written notice to the
other Party. All notices delivered in person shall be deemed to have been
delivered to and received by the addressee and shall be effective on the date of
personal delivery. All notices delivered by express mail or any other similar
overnight courier shall be effective upon the earlier of (i) three days
following the date sent, and (ii) the date received. All notices delivered by
registered or certified mail, or by facsimile or electronic mail, shall be
effective upon receipt.
8.7 Counterparts. This Agreement may be executed in any number of English
------------
language counterparts or duplicate originals, and each such counterpart or
duplicate original shall constitute an original instrument, but all such
separate counterparts or duplicate originals shall constitute one and the same
instrument.
8.8 Written Agreement to Govern. This Agreement sets forth the entire
---------------------------
understanding and supersedes all prior and contemporaneous agreements and
discussions among the Parties relating to the subject matter contained herein
and therein, except for the $850,000 payment obligation of SKM arising pursuant
to that certain Consulting Agreement dated September 30, 1998, between SKM and
Liquid Audio and such agreements as are executed contemporaneously herewith by
the Parties pursuant to the express provisions of this Agreement, and no Party
shall be bound by any definition, condition, representation, warranty, covenant
or provision other than as expressly stated in or contemplated herein or therein
or as subsequently shall be set forth in writing and executed by a duly
authorized representative of the Party to be bound thereby.
8.9 No Waiver of Rights. All waivers hereunder must be made in writing,
-------------------
and failure at any time to require another Party's performance of any obligation
under this Agreement shall not affect the right subsequently to require
performance of that obligation. No waiver of any breach of any provision of this
Agreement shall be construed as a waiver of any continuing or succeeding breach
of such provision or a waiver or modification of such provision.
8.10 Severability. Whenever possible, each provision of this Agreement
------------
shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement should be prohibited or
invalid under applicable law, such provisions shall be ineffective to the extent
of such prohibition or invalidity without invalidating the remainder of such
provision or the remaining provisions of this Agreement. In such event, the
Parties agree to negotiate, in good faith, a valid, legal and enforceable
substitute provision which most nearly effects the Parties' intent in entering
into this Agreement.
8.11 Subject Headings. The subject headings of the Sections of this
----------------
Agreement are included for the purposes of convenience only, and shall not
affect the construction or interpretations of any of its provisions.
-19-
<PAGE>
8.12 Further Assurances. The Parties shall each perform such acts, execute
------------------
and deliver such instruments and documents, and do all such other things as may
be reasonably necessary to accomplish the transactions contemplated in this
Agreement.
8.13 Expenses and Finder's Fees. The Parties shall each bear their own
--------------------------
costs and expenses (including attorneys' fees) incurred in connection with the
negotiation and preparation of this Agreement and the consummation of the
transactions contemplated hereby. Each Party shall indemnify the other against
any claim for brokerage or finder's fees arising out of the transactions
contemplated herein by any Person claiming to have been engaged by the
indemnifying Party based upon any action or communication, or any alleged action
or communication, by the indemnifying Party or any of its officers or employees.
8.14 Relationship Between Parties. Each Party will in all matters relating
----------------------------
to this Agreement be and act as an independent contractor. Neither Party will
represent that it has any authority to assume or create any obligation, express
or implied, on behalf of the other Party, or to represent the other Party as
agent, employee, or in any other capacity.
8.15 Language. This Agreement is in the English language only, which
--------
language shall be controlling in all respects, and all versions hereof in any
other language shall be for accommodation only and shall not be binding upon the
Parties. All communications and notices to be made or given pursuant to this
Agreement shall be in the English language.
8.16 Assignment. This Agreement shall inure to benefit of, and shall be
----------
binding upon, the Parties and their respective successors and assigns. No Party
may assign or delegate this Agreement or any of its rights or duties under this
Agreement without the prior written consent of the other Parties except as
expressly set forth herein or to a Person into which it has merged or which has
otherwise succeeded to all or substantially all of the assets of the assignor,
and which has assumed in writing or by operation of law the assignor's
obligations under this Agreement.
8.17 SURVIVAL. The Parties' respective obligations pursuant to Sections 7
--------
and 8 shall survive a termination for any reason.
LIQUID AUDIO, INC. SKM LIMITED
By: /s/ Robert Flynn By: Kyu Hwa Lee /s/ K H Lee
----------------
Title: VP Business Development Title: Vice President
----------------------- --------------
Dated: 12/31/98 Dated: 12/31/98
-------- --------
LIQUID AUDIO KOREA CO., LTD.
By: Kyu Hwa Lee /s/ K H Lee
-----------
Title: President
---------
Dated: 12/31/98
--------
-20-
<PAGE>
EXHIBIT A
ARTICLES OF INCORPORATION
[ENGLISH LANGUAGE]
<PAGE>
ARTICLES OF INCORPORATION
OF
LIQUID AUDIO KOREA CO., LTD.
CHAPTER I. GENERAL PROVISIONS
Article 1. Corporate Name
The name of the Company shall be "LIQUID AUDIO KOREA CHUSIK HOESA" in
Korean and "LIQUID AUDIO KOREA CO., LTD." in English.
Article 2. Business Objectives
The business objectives of the Company shall be the following:
(a) to license technology from Liquid Audio, Inc. relating to the
marketing and sale of audio products;
(b) to utilize such technology to host one or more internet based audio
sales and marketing sites;
(c) to resell Liquid Audio, Inc. software and certain related products
for use by end-user sellers of music and other audio products;
(d) to resell Liquid Audio, Inc. products to consumer end-users;
(e) to engage in any and all other conduct, activities or businesses
which are related, directly or indirectly, to the attainment and
continuation of the foregoing purposes.
Article 3. Head Office, Branches, Etc.
3.1 The head office of the Company shall be located in Seoul, the Republic of
Korea ("Korea").
3.2 Branches, other business offices or other agencies may be established,
relocated or closed, as required by resolution of the Board of Directors.
Article 4. Method Of Public Notices
Public notices of the Company shall be given in MAEIL BUSINESS NEWSPAPER, a
daily newspaper of general circulation published in Seoul, Korea.
<PAGE>
CHAPTER II. CAPITAL AND SHARES
Article 5. Shares
5.1 The total number of shares that the Company is authorized to issue shall be
Two Hundred Sixty Thousand (260,000) shares of Common Stock.
5.2 The total number of the shares to be issued by the Company at the time of
incorporation shall be Sixty Thousand (60,000) shares of Common Stock.
5.3 Shares to be issued by the Company shall be one class of Common Stock, in
registered form. The shares of Common Stock shall have a par value of Five
Thousand (5,000) Won, with full voting rights.
Article 6. Share Certificates
6.1 The share certificates of the Company shall be numbered, shall set forth
the number and class of shares represented thereby and the holder's name,
and shall be entered in the Register of Shareholders of the Company upon
issuance.
6.2 The share certificates shall be issued in denominations of one (1), ten
(10), fifty (50), one hundred (100), five hundred (500), one thousand
(1000), and ten thousand (10,000) shares or such other denominations as the
shareholders may reasonably request.
6.3 The share certificates shall bear the following words:
"Transfer of the shares of stock represented by this certificate is subject
to the Shareholders Agreement dated the 31st of December 1998, a copy of
which is on file at the principal office of the Company."
Article 7. Payment For Shares
Unless otherwise decided by the Board of Directors of the Company, payment
for subscribed shares shall be made in cash, payable to a bank or banks
designated by the Company. Only those shares that have been fully paid for
may be issued.
Article 8. Register Of Shareholders
A shareholder desiring an alteration of any entry in the Register of
Shareholders due to the transfer of shares of otherwise, or the
registration of a pledge shall submit an application therefor to the
Company, in the form prescribed by the Company, together with its share
certificates involved and supporting documents as requested by the Company.
Article 9. Transfer Of Shares
9.1 Any transfer of shares in the Company to a non-shareholder must be approved
by the Board of Directors.
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9.2 The Company may appoint its transfer agent and entrust it with procedures
of change of entry in the Register of Shareholders of the Company.
Article 10. Report of Addresses and Seals
10.1 Shareholders shall report to the Company their names, addresses, seals and
any changes therein; provided, however, that foreigners who customarily use
signatures may use signatures in place of seals.
10.2 Shareholders who reside in foreign countries may, in addition, inform the
Company of their or their agents' provisional addresses in Korea to which
notices may be dispatched.
10.3 An attorney for a shareholder shall submit to the Company a certificate of
his power of attorney in advance before he acts on behalf of such
shareholder.
Article 11. Record Date and Closing of Register of Shareholders
11.1 Subject to the restrictions provided in the applicable law, in order to
determine persons who are entitled to exercise voting rights, pre-emptive
rights to newly issued shares or other rights as shareholders or pledgees,
the Company may suspend entry of alterations in the Register of
Shareholders for a certain period, or the Company may deem any shareholder
or pledgee whose name appears in the Register of Shareholders on a
specified date to be the shareholder or pledgee who is entitled to exercise
the rights enumerated above in connection with such shares.
11.2 In particular, the Company shall treat the shareholders appearing on the
Register of Shareholders as of the 31st of each December as the
shareholders for the payment of dividends and the Company shall suspend
entry of alterations in the Register of Shareholders during the period from
the next day following the last day of the previous fiscal year to the date
on which the Ordinary General Meeting of Shareholders for such fiscal year
is closed.
11.3 The Company shall give public notice of the period or date referred to in
Paragraphs 11.1 and 11.2 at least two (2) weeks in advance of the
commencement of such period or of the occurrence of such date.
Article 12. Reissuance of Share Certificates
12.1 A shareholder desiring reissuance of a share certificate for reason of
partition or amalgamation of shares, or damage or soiling to a share
certificate, shall submit an application therefor to the Company, in the
form prescribed by the Company, together with the share certificate to be
cancelled. When the damage or soiling is so extreme that the share
certificate is not legible, however, it shall be regarded as lost and the
following provision shall apply for its replacement.
12.2 A shareholder desiring issuance of a new share certificate due to loss of
his share certificate shall submit to the Company an application, in the
form prescribed by the Company, together with the original or the certified
copy of a judgement of nullification with respect to the lost share
certificate.
Article 13. Pre-emptive Rights
3
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Each shareholder shall be entitled to subscribe to new shares issued by the
Company in proportion to its shareholding ratio. If any shareholder is not
permitted by law to exercise its pre-emptive right to subscribe to new
issues of shares, then such shareholder shall have the right to transfer
its pre-emptive right to a third legally qualified purchaser who will be
able to acquire such shareholder's proportion of the new shares issued by
the Company. If any shareholder does not wish to exercise its pre-emptive
rights in whole or in part, such shareholder shall notify the Board of
Directors of such intention at least seven (7) days prior to the day as of
which the allocation of the new shares is to be made. In this case, the
Board shall transfer to the other shareholder(s) such pre-emptive right to
such unsubscribed new shares.
Article 14. Other Matters relating to Shares
All questions and procedures relating to the registration of a transfer of
shares, registration of a pledge or cancellation thereof, indication of
trust property, reissuance of share certificates and other similar matters
and the fees therefor shall be governed by the Share Handling Regulations
to be established by the Board of Directors.
CHAPTER III. GENERAL MEETINGS OF SHAREHOLDERS
Article 15. Types of General Meetings
15.1 Genera Meetings of the Shareholders of the Company shall be of two types:
ordinary and extraordinary.
15.2 The Ordinary General Meeting of Shareholders shall be held within three (3)
months following the last day of each fiscal year.
15.3 An Extraordinary General Meeting of Shareholders may be convened at any
time in compliance with a resolution of the Board of Directors and
applicable laws.
Article 16. Convening of General Meetings
16.1 All General Meetings of Shareholders shall be convened by the
Representative Director upon the resolution of the Board of Directors or
upon the request in writing of one or more shareholders representing at
least five percent (5%) of the issued shares of the Company. The place for
convening each General Meeting of Shareholders shall be the head office of
the Company unless otherwise decided by the Board of Directors.
16.2 Each General Meeting of Shareholders shall be called by the Board of
Directors giving thirty (30) days' prior notice, stating in the English
language the date, time, place and agenda of the meeting and dispatched via
registered mail to the shareholders who are residents of Korea and via
registered airmail, facsimile transmission or telex to all other
shareholders. The notice requirement may be waived by the unanimous written
consent of all shareholders at the meeting. The General Meeting of
Shareholders may not resolve matters other than those stated in the notice
of the meeting, unless all the shareholders entitled to vote, whether
present or not, unanimously agree otherwise.
Article 17. Presiding Officer
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The Representative Director shall preside at all General Meetings of
Shareholders. If the Representative Director is absent or fails to serve as
presiding officer at a General Meeting of Shareholders, the Director
designated by the Board of Directors shall preside at such meeting in his
place.
Article 18. Resolution Requirement
18.1 Except as otherwise provided by applicable mandatory requirements of Korean
law or by these Articles of Incorporation, all resolutions of each General
Meeting of Shareholders shall be adopted by the affirmative vote of the
shareholders who hold shares representing more than one-half (1/2) of the
shares of the Company present at the meeting, provided that such
affirmative vote represents at least one-fourth (1/4) of the total shares
issued and outstanding. Notwithstanding the foregoing, the following
matters shall require the vote of more than two-thirds (2/3) of the total
shares issued and outstanding, or such higher rate as is required by the
applicable law:
(a) Any change to the Articles of Incorporation or by-laws of the Company;
(b) A reduction of the paid-in capital of the Company and the manner
thereof;
(c) The liquidation of the Company or its merger into, or consolidation or
amalgamation with any other company;
(d) Transfer or pledge of the whole or a substantial part of the assets or
undertakings of the Company or the acquisition by the Company of the
whole or part of the undertaking of any other person or entity, or the
capital stock of the Company, or entry by the Company into any joint
venture or partnership;
(e) Removal of a director from office; or
(f) Any other matters the adoption of which requires a special resolution
of the shareholders at a General Meeting under the laws of Korea.
Article 19. Voting
19.1 Each shareholder shall have one (1) vote for each share registered in its
name.
19.2 A shareholder may exercise its vote by proxy. In that case, the proxy
holder must file with the Company a document evidencing his proper
authority at each General Meeting of Shareholders at which he acts as
proxy.
Article 20. Minutes of General Meeting
The proceedings and conclusions of each General Meeting of Shareholders
shall be held in the English language and recorded in minutes in the
English and Korean languages, which minutes shall bear the names and the
signatures and/or seals of the presiding officer and of the Directors
present at the meeting, and shall be preserved at the Company's head
office. If any discrepancy should arise between the two versions of the
minutes, the English language version shall be controlling.
CHAPTER IV. DIRECTORS, STATUTORY AUDITOR, BOARD OF DIRECTORS AND OFFICERS
Article 21. Number of Directors and Auditor
5
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The Company shall have at least four (4) Directors and at least two (2)
Statutory Auditors.
Article 22. Election
The Directors and Statutory Auditors shall be elected at and by the General
Meeting of Shareholders, and any such vacancies may be filled at a General
Meeting of Shareholders.
Article 23. Term of Office
23.1 The term of office of a Director shall be three (3) years; provided,
however, that the term of office shall be extended until the close of the
Ordinary General Shareholders Meeting convened in respect of the last
fiscal year which ended in their term of office.
23.2 The term of office of a Statutory Auditor shall commence from the date of
acceptance of office and expire at the close of the Ordinary General
Meeting of Shareholders convened with respect to the last fiscal year
within three (3) years from the date of acceptance of office.
23.3 The term of office of a Director or a Statutory Auditor elected to fill a
vacancy shall be the remainder of the term of office of his predecessor.
Article 24. Board of Directors, Representative Director and Officers
24.1 The Board shall decide by resolution all important matters relative to the
management of the Company except as otherwise required by law or the
Articles of Incorporation.
24.2 The Board of Directors shall elect from among its members one (1)
Representative Director, who shall serve as the President of the Company.
The Representative Director/President shall represent the Company and shall
manage the day-to-day business of the Company under the control and
supervision of the Board of Directors. The Representative
Director/President shall have authority to execute contracts on behalf of
the Company within limitations established by the Board of Directors.
24.3 Other officers may be elected or appointed by the Board of Directors. All
such officers' service with the Company shall be on such basis as is
determined by the Board of Directors.
Article 25. Meetings of Board of Directors
25.1 Meetings of the Board of Directors may be convened from time to time by
three (3) directors or the Representative Director/President when he deems
the same to be necessary or advisable. Each Board meeting shall be called
by the Representative Director/President giving at least fourteen (14)
days' prior notice in the English language, stating the date, time and
place of the meeting, to each Director and Statutory Auditor and stating
the agenda of the meeting. The notice requirement may be waived with the
written consent of all Directors and Statutory Auditors.
6
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25.2 Board meetings shall be held at the Company's head office, unless the Board
of Directors may determine otherwise.
25.3 The Representative Director shall preside at all meetings of the Board of
Directors. If the Representative Director is absent or fails to serve as
presiding officer of any meeting, the Director designated by the Board of
Directors shall preside at such meeting in his place.
Article 26. Adoption of Resolutions
A quorum at any Board meeting shall consist of at least a majority of the
directors then in office. Unless otherwise required by applicable laws or
the Articles of Incorporation , any actions and resolutions taken at a
Board meeting shall be adopted by the affirmative vote of at least a
majority of the directors then in office. Notwithstanding the foregoing,
the following matters shall be for the exclusive authority of the Board,
other than those that require ratification by the general shareholders
meeting under the applicable law, and shall be decided upon the vote of at
least three directors:
(a) Making any basic change in the general nature or scope of business of
the Company;
(b) Issuing any security of the Company, whether shares or securities
convertible into shares, other equity securities or debt securities;
(c) Merging or consolidating the Company with another party, or selling,
leasing, pledging, mortgaging, encumbering or otherwise disposing of
all or substantially all of the assets of the Company, whether in one
transaction or a series of transactions;
(d) Establishing a business relationship with any direct competitor or
shareholder;
(e) Investing in any other party;
(f) Entering into any agreement or transaction with or for the benefit of
any director or shareholder of the Company or an affiliate (or any
direct lineal descendent or ancestor, sibling, spouse, mother-in-law,
father-in-law, son-in-law, daughter-in-law, brother-in-law or sister-
in-law) of such director or shareholder;
(g) Amending the business plan of the Company;
(h) Appointment, employment and compensation decisions and scope of
responsibility for officers of the Company, including salary and
wages, cash advances and relocation expenses;
(i) Capital expenditures for single items of 100,000,000 Won or more;
(j) Entering into contracts that have a term in excess of one year or that
require aggregate payments of 100,000,000 Won or more;
(k) Disposition or transfer to a third party of at least 20% of the
Company's assets;
(l) Authorizing loans by the Company, except for payment terms for trade
credits in the ordinary course of business;
(m) Assuming or incurring any debt, loan, guaranty or liability with an
aggregate value of 500,000,000 Won or more;
(n) Change in the outside accountant to the Company;
(o) Creating any lien on the Company's property, except liens incurred in
the ordinary course of business;
(p) Approving the Company's annual budget;
(q) Changing the strategic direction of the Company and approving the
Company's long-range plans;
(r) Approval of annual financial statements;
7
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(s) Opening or closing an account with a bank or financial house in Korea
or overseas; and
(t) Paying any dividend or making any other distribution.
Article 27. Minutes of Meetings of the Board of Directors
The proceedings and conclusions of each meeting of the Board of Directors
shall be held in the English language and recorded in minutes in the
English and Korean languages, which minutes shall bear the names and the
signatures and/or seals of the presiding officer and all other Directors
and Statutory Auditor in attendance at the meeting and shall be preserved
at the Company's head office. If any discrepancy should arise between the
two versions of the minutes, the English language version shall be
controlling.
Article 28. Compensation
28.1 The compensation of the Directors and Statutory Auditor of the Company
shall be determined by resolution of a General Meeting of Shareholders.
28.2 Severance allowances for the Directors and Statutory Auditor shall be paid
in accordance with the regulations of the Company adopted by resolution of
a General Meeting of Shareholders.
CHAPTER V. ACCOUNTING
Article 29. Fiscal Year
29.1 The fiscal year of the Company shall commence on the 1st of January and end
on the 31st of December each year.
29.2 Notwithstanding the foregoing Paragraph 29.1, the first fiscal year of the
Company shall commence on the date of incorporation of the Company and end
on the following 31st of December.
Article 30. Approval of Financial Statements, etc.
30.1 The Representative Director/President shall submit to the Statutory
Auditors at least six (6) weeks before each Ordinary General Meeting of
Shareholders the following documents, after obtaining approval of such
documents from the Board of Directors in connection with the subject
Ordinary General Meeting of Shareholders:
(a) A balance sheet;
(b) A profit and loss statement;
(c) A statement of disposition of retained earnings or deficit;
(d) Supplementary schedules for (a), (b) and (c) above; and
(e) A business report.
8
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30.2 The Statutory Auditors shall submit an audit report thereof to the
Representative Director/President, within four (4) weeks of receipt of the
documents described in Paragraph 30.1 above.
30.3 The Representative Director/President shall, without delay, give public
notice of the balance sheet approved by the Ordinary General Meeting of
Shareholders.
Article 31. Disposition of Profit
Subject to Korean laws and regulations, profit for each fiscal year shall
be disposed of in the following order of priority:
(a) Establishment of any reserves required by law;
(b) Establishment of such other reserves as may be decided by a General
Meeting of Shareholders; and
(c) Payment of all or a portion of the remainder of such profit as
dividends to shareholders in accordance with the resolution of a
General Meeting of Shareholders.
Article 32. Payment of Dividends
32.1 Dividends, if declared, shall be determined by the General Meeting of
Shareholders, and paid to the shareholders of the Company who were duly
entered in the Register of Shareholder as of the end of the subject fiscal
year.
32.2 Dividends shall be paid within thirty (30) days after the declaration of
dividends, unless otherwise resolved by a General Meeting of Shareholders.
CHAPTER VI. SUPPLEMENTARY PROVISIONS
Article 33. By-laws
The Company may adopt, with the approval of the Board of Directors, by-laws
and other regulations as may be required for the administration of the
affairs of the Company.
Article 34. Execution of Agreements with Representative Director
All agreements, including employment agreements, between the Company and
its Representative Director/President shall be executed or countersigned by
another Director designated in a resolution of the Board of Directors.
Article 35. Other Matters
Matters not specifically provided for herein shall be determined in
conformity with resolutions adopted by the Board of Directors or the
General Meeting of Shareholders of the Company, or with relevant provisions
of the Korean Commercial Code, as the case may be.
9
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EXHIBIT B
CONSULTING AGREEMENT
(Filed as Exhibit 10.36)
<PAGE>
EXHIBIT C
GUARANTY
(Filed as Exhibit 10.38)
<PAGE>
EXHIBIT D
RESELLER AGREEMENT
(Filed as Exhibit 10.35)
<PAGE>
EXHIBIT E
FIVE YEAR BUSINESS PLAN
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EXHIBIT 10.37
CONSULTING AGREEMENT
THIS CONSULTING AGREEMENT (the "Agreement") is made an entered into as of
the 31 day of December, 1998 (the "Effective Date"), by and between Liquid
Audio, Inc., a corporation duly incorporated and existing under the laws of the
State of California, U.S.A. with its principal place of business at 2403
Broadway, Redwood City, California 94063 U.S.A. ("Liquid Audio") and SKM
Limited, a corporation duly incorporated and existing under the laws of the
Republic of Korea with its principal place of business at HaeSung 1 Building,
5F, 942 Daechi 3-Dong, Kangnam-Gu, Seoul, 135-283 Korea ("SKM").
WITNESSETH
----------
WHEREAS, Liquid Audio and SKM desire to establish a relationship in order
to form a joint venture company, a.k.a. Liquid Audio Korea ("LAK"), in the
Republic of Korea.
WHEREAS, as one of the efforts made by SKM to form and promote the joint
venture, SKM desires to obtain the benefit of consulting and advisory services
of Liquid Audio, with focus on the technical and business aspects; and
WHEREAS, Liquid Audio is willing to render such consulting and advisory
services to SKM.
NOW THEREFORE, in consideration of the premises and the mutual covenants
and agreements set forth below, it is agreed as follows:
Article 1. Appointment
-----------
Subject to the terms and conditions hereinafter set forth, SKM hereby
appoints Liquid Audio as its consultant to provide consulting and advisory
services as described in Article 2 hereunder during the term of this Agreement
as set forth in Article 4 hereof, and Liquid Audio hereby accepts such
appointment.
Article 2. Scope of Services
-----------------
The consulting and advisory services, further details of which are
described in Exhibits 1 nd 2 attached hereto, to be provided by Liquid Audio for
SKM shall mainly include, but shall not be limited to, the following:
1. Providing technical consulting and support, one of the projects being
the creation of a consumer electronic product (including flash memory
music players);
2. Providing business consulting and support;
(collectively, the "Services")
In respect of the Services, SKM acknowledges that the Services have been
provided since 1 October 1998 and that such Services shall continue until 31
December 1998.
<PAGE>
SKM acknowledges that all Services are provided on an as-is basis without
warranty of any kind, and Liquid Audio disclaims any and all warranties, whether
express or implied. Liquid Audio reserves all ownership rights in and to the
work product and pre-existing materials delivered or disclosed to SKM pursuant
to the Services (herein, "LA Materials"). SKM shall have a limited license to
use the LA Materials internally for the purpose of furthering the contemplated
joint venture between the parties in a manner subject to the mutual approval of
both parties, and for no other purpose. During and after the term of this
Agreement, all LA Materials are and remain the confidential information of
Liquid Audio and SKM agrees to maintain the confidentiality of such materials
and not to disclose such materials to any other party.
Article 3. Consulting Fee
--------------
In consideration of the Services rendered by Liquid Audio under Article 2,
SKM shall provide to Liquid Audio the consulting fee of [*] net of any
withholding tax. The consulting fee shall be paid to Liquid Audio within ten
days of the end of the term. The payment shall be made by means of telegraphic
transfer to the bank account designated by Liquid Audio.
Article 4. Term
----
The term of this Agreement shall be from the Effective Date to 31 December
1998.
Article 5. Termination
-----------
Either party may terminate this Agreement by written notice to the other
party, should the other party breach any material term and condition of this
Agreement and fail to cure such material breach within five (5) days of
receiving the written notice of such breach specifying the particulars thereof.
Article 6. Notices
-------
Any notices required or permitted hereunder shall be given to the
appropriate party at the address specified below or at such other address as the
party may specify in writing. Such notice shall be deemed served upon personal
delivery, or if sent by certified or registered mail, portage prepaid, then
shall be deemed served ten (10) days after the date of mailing. Notice by
facsimile shall be deemed served upon receipt; provided that a confirmation copy
is also dispatched immediately thereafter by first-class registered mail.
Liquid Audio: Attn: Robert Flynn
Liquid Audio, Inc.
2403 Broadway, Redwood City
California, 94603 U.S.A.
Fax: (1-650) 549-2099
SKM: Attn: Kyu Hwa Lee
SKM Limited
<PAGE>
HaeSung 1 Building, 5F
942 Daechi 3-Dong, Kangnam-Gu
Seoul, 135-283
Fax: (82-2) 528-3013
Article 7. Miscellaneous
-------------
7.1 Conduct
- ------------
All Services to be performed by Liquid Audio shall be performed from Liquid
Audio's facilities in the State of California in the United States of America.
Liquid Audio shall at all time conduct its affairs under this Agreement in
accordance with a high standard of business ethics and propriety and in
accordance with the laws of the State of California and the United States of
America.
7.2 Independent Contractor
- ---------------------------
Nothing herein shall be construed to place Liquid Audio and SKM in
relationship of partners, joint ventures or principal and agent. The parties
hereto have negotiated and entered into this Agreement in good faith solely as
Independent contractors, and no employer-employee relationship exists, nor shall
be deemed to exist between them.
7.3 Expenses
- -------------
The parties shall bear their respective portions of costs and expenses
arising from, or in connection with, this Agreement.
7.4 Governing Law
- ------------------
This Agreement shall be governed by the laws of the Republic of Korea
without regard to its conflicts of laws provisions.
7.5 Enforceability
- -------------------
Should any provision of this Agreement be deemed unenforceable in any
judicial proceeding, such determination shall not affect the validity and
enforceability of the balance of the Agreement.
7.6 No Waiver
- --------------
Any waiver by either party of any provision of this Agreement, or of any
breach of this Agreement, shall be effective only if in writing signed by such
party, and such waiver shall not be deemed a continuing waiver of such provision
or a waiver of any subsequent breach of a similar or different nature.
7.7 Force Majeure
- ------------------
In the event of any failure or delay in the performance of this Agreement
due to war, civil commotion, fire, natural disaster, or any other similar cause
whatsoever beyond the reasonable control of a party whose performance is
affected thereby, the party so affected shall not be liable for such failure or
delay or the results thereof. Upon
<PAGE>
Exhibit 1
---------
Technical Consulting Services
-----------------------------
1. Technical Support for Player Reference Design
2. Techincal Support for the Development of Decoding Chip
3. Technical Rcommendation regarding all aspects of development for chipset
configuration and PCB layout, etc.
4. Technical support regarding system design for optimal performance of, (I)
Unauthorized copying prevention system for Liquid Audio's products, and (II)
Identification System.
5. Technical support in Liquid Audio's SP3 initiative.
<PAGE>
Exhibit 2
---------
Business Consulting Services
----------------------------
1. Support for Joint Research and development of business plan for Liquid Audio
Korea (the joint Venture company, a.k.a., LAK) and Liquid TMC Corporation.
Including, but not limited to, the following: (i) Research on music
industry. (ii) Research on tax and incentive benefits. (iii) Consumer market
behaviour. (iv) Detailed financial projections.
2. Support for education regarding Liquid Audio's global business operations.
3. Support for education regarding Liquid Audio's technology and business plan
in the United States.
4. Provision of information on worldwide trends: internet and global music
industry.
5. Support for establishment of relationship with representatives of the local
music industry.
6. Support for contacting and developing relationships with the intellectual
property (IP - related) governmental agencies in Korea.
7. Support for education regarding the intellectual property rights and royalty
reports.
8. Support for development of the management and organizational structures of
Liquid Audio Korea.
<PAGE>
EXHIBIT 10.46
LETTER OF INTENT
IOMEGA CORPORATION - LIQUID AUDIO
Confidential
November 14, 1998
INTRODUCTION
- ------------
The Internet is an increasingly important method of distribution for all
types of knowledge, entertainment and business information. Recent advances in
Internet security have created secure techniques for users of the Internet to
exchange sensitive or confidential information, including credit card numbers
and personal information. Many companies are poised to take advantage of the
convergence of these factors to create powerful and convenient on-line shopping
experiences for their respective customers. Browsing, sampling and purchasing
music on-line is one such area. Today, the bulk of music purchased in the $23
million dollar on-line marketplace from companies like SoundStone and CD-Now are
delivered on pre-recorded compact discs.
The next wave of consumer interest will likely be the ability to download
digital versions of the same music that is purchased on-line today. This
digital music that is delivered to the customer's computer rather than his or
her doorstep will be playable on a variety of portable audio devices and
personal computers. The same content can already be used to create compact
discs on a customer's home computer using CD-R and CD-RW optical disk
technology. Currently there is not much "consumer-demanded" music content on-
line for a variety of reasons, including but not limited to concerns regarding
piracy, channel-conflict, quality and a personal-computer centric model (that
is, people want to listen to music wherever they may be). Along with music
being delivered electronically is the ability to sideband additional content and
information, URL's and even advertising. Also, security techniques like
watermarking and encryption can be enabled.
Iomega Corporation ("Iomega") and Liquid Audio, Inc. ("Liquid Audio") have
been discussing a possible joint marketing activity that would be to their
individual best interests. The current state of negotiations between Iomega and
Liquid Audio is set forth below in Section 2 of this Letter of Intent. Any
omission from the list set forth in Section 2 below does not diminish its
importance or indicate a lack of its necessity in the definitive and binding
agreements among the parties, if any ("Final Agreement"). Except as set forth
in Section 1 below, Iomega and Liquid Audio (the "parties") agree that neither
of them has any legal rights or obligations with respect to the matters set
forth herein, and that either party may withdraw from the discussions at any
time for any or no reason without any obligation to the other.
11/14/98 CONFIDENTIAL Page 1
<PAGE>
SECTION 1 -- BINDING TERMS
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1.01 CONFIDENTIALITY -- The parties agree to continue to abide by the
provisions of the "Mutual Nondisclosure Agreement" executed among them as of
________________, 1998, a copy of which is appended hereto as Appendix A and
incorporated herein by reference.
1.02 PAYMENT OF EXPENSES -- Except as otherwise provided in this Section
1, Iomega and Liquid Audio agree that they will each bear their own expenses
related to the matters set forth in this Letter of Intent.
1.03 PUBLIC DISCLOSURE -- No party hereto shall announce or otherwise
disclose publicly the existence of this Letter of Intent or the existence of the
on-going discussions between the parties as to the matters generally set forth
in Section 2 hereof without the express written consent of the other party.
1.04 REASONABLE EFFORTS -- The parties shall make all reasonable efforts
to conclude negotiations and execute the Final Agreement, if any, concerning the
matters set forth below in Section 2 hereof, prior to 5:00 p.m. M.S.T. on
December 11, 1998.
1.05 COMDEX Technology Demonstration Deliverables
* Liquid Audio will deliver an application demo prior to COMDEX (which
begins on November 16, 1998), as follows:
1. Four copies of one working demo will be required (2 for the LVCC
booth and one each for the booth meeting room and The Beach
press/customer events).
2. Liquid Audio will ensure that the "Record-to-Zip" button included
in the Promo pane of the Liquid Music Player will work with and
link to the SoundStone web site to download music (local or HD
server).
* Iomega will provide all required computer hardware and sound
equipment to run the four demo stations.
* Iomega and Liquid Audio will provide appropriate levels of technical
and marketing support during COMDEX.
1.06 COMDEX -- Events
* Liquid Audio will pay Iomega $25,000 on or before November 16, 1998 to
help defray the costs for the COMDEX customer event to be held at the
Beach on Tuesday, November 17, 1998. Additional investments which may
be required to enhance the event can be made by either party at its
own discretion and will be agreed upon in
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writing and acknowledged by all event participants (Iomega, Liquid
Audio, SoundStone and Texas Instruments).
* Iomega will develop creative and print approximately 5,000 invitations
and envelopes. It will be the responsibility of Liquid Audio to post
and/or deliver its share of the invitations and VIP passes.
Participant PR activities should be coordinated through Iomega PR.
* Liquid Audio will provide its appropriate company signage (to be
coordinated in advance with Iomega event director Jodee Warwick) for
The Beach events.
* Each party will provide a minimum of one event coordinator for Tuesday
November 17 (early a.m. through tear-down) to support planning and
execution of the press luncheon and evening customer event. Liquid
Audio's event coordinator will support/manage event set-up, execution
and tear down and work with Iomega event coordinators.
1.07 COMDEX -- Press Activities
* Iomega and Liquid Audio will announce during COMDEX the signing of
this Letter of Intent for the Record-to-Zip marketing initiative,
including but not limited to, the versions of the Liquid Music Players
that will enable Record-to-Zip functionality as enabled by the
IomegaReady Toolkit with the Record-to-Play extensions.
* Liquid Audio CEO Gerry Kearby (or an Iomega-approved Kearby proxy)
will participate in the Press Luncheon on Tuesday Nov. 17 and will
coordinate with Iomega PR, as appropriate, to:
1. Provide an authorized, pre-briefed company spokesperson
2. Determine target press
3. Develop joint and/or individual press materials and provide to
Iomega PR for review/approval
1.08 NON-EXCLUSIVITY -- The parties acknowledge that each of them may
pursue arrangements similar to those set forth in this Letter of Intent with
third parties without incurring any obligation or liability to the other party.
Notwithstanding the foregoing, the parties shall perform in good faith the
obligations set forth in this Section 1.
SECTION 2 -- NON-BINDING TERMS
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2.01 IN GENERAL -- Iomega and Liquid Audio propose to work together to
develop techniques to help resolve the music industry's concerns over piracy and
channel conflict, and to promote the new capabilities that are a result of our
cooperation. Specifically, Liquid Audio
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intends to develop a Liquid Music Player to support removable storage products
using Iomega removable storage products only ("Iomega Version"), including but
not limited to Iomega CDs (both CD-Rs and CD-RWs) (as allowable with Liquid
Audio's agreement with Adaptec), Zip disks, Clik! disks, and Jaz cartridges
(collectively "Iomega Media"). Liquid Audio shall also develop and release
enhancements to its existing and future Liquid Music Players so that they
support Iomega Media as well as other devices and media ("Other Versions").
The security enhancements to provide support for Iomega Media will use the
"IomegaReady Toolkit" to detect the presence of Iomega Media. Then, using an
Iomega patent-pending technique to interrogate the Iomega Media to retrieve
the serial number from the Media, the Liquid Music Player will create an
encrypted track on the Iomega Media that cannot be played or used unless the
specific piece of Iomega Media is present and mounted on the player/computer
or recognized by the target player device. The intent of this technique
(referred to herein, as it applies to the Iomega Media, as "Record-to-Zip",
"Record-to-Play", "Record-2-Zip," "R2Z", "Record-2-Play" and "R2P") is to
facilitate the binding of audio content to the Iomega Media in such a way as
to help the music and entertainment industries become more comfortable about
the electronic distribution of audio content. Iomega has other patents pending
to use the aforementioned technique to facilitate the distribution of music,
games, software, entertainment content or intellectual property through the
distribution and use of media. The same technique of serial number
interrogation of Iomega Media will be employed to identify the "download
value" of the target Iomega Media.
2.02 RECORD-TO-ZIP SPECIFICATION DELIVERABLES
A. GRAPHIC STANDARDS AND PROMOTIONAL GUIDELINES
* Iomega will develop graphic standards, including marks used to
designate software applications ability, to support Record-to-Zip. The
use of these graphic standards in any way by Liquid Audio, including
software, advertising, packaging, PR etc., must first be approved in
writing by an authorized Iomega representative.
* Liquid Audio will incorporate the Record-to-Zip logo on the faceplate
in the Iomega Version, and as it deems appropriate on the software,
packaging and promotional materials in Other Versions.
* Iomega and Liquid Audio will promote the availability of tracks that
can be copied to Iomega Media on their respective web sites and in
promotional material as appropriate.
* Iomega and Liquid Audio will jointly develop an announcement strategy
and messaging for specific promotional activity related to the
announcement and promotion of the Liquid Music Player(s) supporting
Record-to-Play.
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* Press releases issued by Liquid Audio relating to Record-to-Play must
first be approved by an authorized Iomega representative. Press
releases issued by Iomega that relate to Liquid Audio must first be
approved by an authorized Liquid Audio representative.
* The aforementioned graphic standards and promotional guidelines as
described in this section must be passed through to Liquid Audio
licensees or partners using the Record-to-Zip capability. Any Liquid
Audio graphics utilized by Iomega or its licensees must adhere to
Liquid Audio's approved style guide.
2.03 RECORDING, COPYING OR TRANSFERRING TO IOMEGA MEDIA
* Liquid Audio will incorporate the IomegaReady Toolkit API in the
Iomega Version, and in the Other Versions, (i) to automatically detect
the presence of valid Iomega Media and (ii) if detected, to
automatically display a "Record-to-Zip button" on the Liquid Music
Player in a manner that Liquid Audio deems appropriate. The foregoing
Versions will include the ability to:
1. Integrate the Iomega patent pending media serialization scheme
detailed in the IomegaReady Toolkit into the Iomega Version so
that it automatically and transparently "locks" a music track to a
particular Iomega Media. Iomega intends to provide a royalty-free
license for the IomegaReady Toolkit for a period of time to be
negotiated by the parties in good faith. Also, the Iomega Version
will provide this functionality in an appropriately transparent
and automatic fashion to end users. This functionality shall
prohibit users from playing the track copied onto any other
removable storage media.
2. Integrate the Iomega patent pending media serialization scheme
detailed in the IomegaReady Toolkit into the Other Versions so
that, as one option, the user can automatically and transparently
"lock" a music track to a particular Iomega Media. Iomega intends
to provide a royalty-free license for the Iomega Ready Toolkit for
a period of time to be negotiated by the parties in good faith.
Also, the Liquid Music Player will provide this functionality in
an appropriately transparent and automatic fashion to end-users.
This functionality shall prohibit users from copying and playing
the track onto any other media without first returning the track
to the control of the Liquid Music Player.
3. In the Iomega Version, give users the option to name the Iomega
Media being used in the download via a pop up screen utilizing the
IomegaReady Toolkit.
2.04 PLAYING FROM IOMEGA MEDIA
* An Iomega Media "track" may be played on an Iomega Version or the
Other Versions by either of the two following methodologies:
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1. Once a user inserts the Iomega Media and clicks on the appropriate
tracks' icons, utilizing the IomegaReady Toolkit, Liquid Music Player
is automatically is started and ready to play.
2. If a track is selected from the disk in Windows Explorer, the Liquid
Music Player is automatically started and ready to play.
2.05 PROMOTIONAL ACTIVITIES & DELIVERABLES
* Iomega and Liquid Audio will attempt to obtain endorsements for
promotional purposes supporting the Record-to-Zip concept and
promoting the use of the Iomega Ready Toolkit with Record-to-Zip
extensions from:
1. SPA, RIAA and other key industry trade associations
1. Major record labels
2. Computer industry press and analysts
3. Music industry press and analysts
4. Tools, OS & Security Vendors etc.
2.06 CONSUMER LAUNCH ACTIVITIES
* Liquid Audio will make best efforts to meet the following release
dates: (i) Iomega Version and the Other Versions on or before January
31, 1999; (ii) alpha code of the Iomega Version by January 1, 1999
(code freeze, all functionality implemented); and (iii) beta code of
the Iomega Version by January 15, 1999 (all data loss bugs fixed).
These releases should be jointly reviewed by both Iomega and Liquid
Audio.
* Iomega will provide resources to implement a web-based beta program
beginning in January 1999 after the release of the beta code.
* Liquid Audio shall make a best effort to deliver localized software
for the Iomega Version in French, German and Japanese June 30, 1999
(Iomega release date for the International version of the IomegaWare
Tools Disk.
* All software for the Iomega Version and the Other Versions must first
be certified by the Iomega Product Assurance team. Iomega will provide
test resources beginning in December 1998 to work jointly with Liquid
Audio on this certification process. Iomega and Liquid Audio agree to
negotiate in good faith to develop a mutually acceptable test plan.
* Iomega will provide technical guidance/assistance for working with
Iomega drives upon request from Liquid Audio.
* Iomega will provide the Iomega branded faceplate using the Faceplate
Developers Kit provided by Liquid Audio.
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* Iomega and Liquid Audio will jointly develop an integrated product
launch plan for the Iomega Version and the Other Versions that could
include but is not limited to press and analysts activities, trade-
show participation, launch event participation and web site
promotional activity.
* Liquid Audio will attempt to obtain "download" and promotional rights
for two Dave Matthew's Band (or an Iomega approved proxy) tracks that
can be played on the Iomega Version and the Other Versions.
Additionally, Liquid Audio will:
1. Ensure those tracks are available for download - along with the
Iomega Version - beginning at launch for an agreed upon and
disclosed amount of time from Iomega's, SoundStone's and Liquid
Audio's web sites, including the Liquid Music Network.
2. Broadly promote the availability of and encourage the download of
those tracks in connection with the Iomega Version.
* Liquid Audio will support the Iomega/SoundStone "Tunus Collectus"
promotion on its web site and in promotional materials and activity
for a period of 12 months.
* For a period of twelve months Iomega will include the Iomega Version
on its IomegaWare disk that is distributed, at a minimum, in-box with
external Zip drives. At its discretion, Iomega may promote the Iomega
Version in the execution of its packaging or in-box promotional
materials. Liquid Audio intends to provide a royalty-free license for
the Iomega Version for a minimum of twelve months.
* For a period of twelve months Iomega will make the Iomega Version
available for download on its web site for 12 months. At its
discretion Iomega may from time-to-time promote the availability of
the Other Versions on its web site and its partner download sites.
* Iomega will feature the introduction of the Iomega Version and the
Tunus Collectus promotion for at least one month from the introduction
of the promotion on the "front-page" of its web site.
* Liquid Audio will make the Iomega Version available for download on
its web site for 12 months. At its discretion Liquid Audio may from
time-to-time promote the availability of the Iomega Version on its web
site and its partner download sites.
* At Liquid Audio's cost, Iomega will send a direct mail promotion about
the Iomega Version to the Iomega installed base 2 times in 1999
providing that the conditions as outlined in this agreement are met.
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2.07 MARKETING ALLIANCE EXTENSIONS
1. Application Development
* Liquid Audio shall incorporate the Iomega-Ready Toolkit with the Other
Versions.
* The parties shall determine distribution terms, cross-promotional
subscriber base opportunities, etc., regarding for the Other Versions.
2. Record-to-Zip Enhancements
* The parties shall further investigate subsequent enhancements to
technical specifications, strategic relationships and promotional
opportunities for the Other Versions to:
1. Create an increasingly robust solution for secure download
(Develop a complete roadmap for this product line)
2. Expand content access, endorsements
3. Potentially encompass new technologies
WHEREFORE, each of the parties has caused this Letter of Intent to be
executed by its duly authorized officer or representative as of the date first
written above.
IOMEGA CORPORATION
Signature: /s/ Mike Lungren
Name: Mike Lungren
Title: Sr. Director Marketing
LIQUID AUDIO
Signature: /s/ Robert Flynn
Name: Robert Flynn
Title: VP Business Development
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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 26, 1999,
except as to the reincorporation described in Note 10 which is as of April 28,
1999, relating to the financial statements of Liquid Audio, Inc., which appears
in such Prospectus. 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
San Jose, California
June 30, 1999
