<PAGE>
As filed with the Securities and Exchange Commission on June 17, 1999
Registration No. 333-77707
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
AMENDMENT NO. 1
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.
SCOTT J. LEICHTNER, ESQ.
KELLY AMES MOREHEAD, 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. [_]
---------------
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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 17, 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 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 leading digital music formats,
including audio compression formats, 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.
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. Our
platform 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.
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.
3
<PAGE>
. 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.
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.
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 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.
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<PAGE>
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 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,
the amount of trade accounts receivable more than 30 days past due was
$320,492. 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 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.
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.
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
13
<PAGE>
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.
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
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<PAGE>
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
Although we do not believe we infringe the proprietary rights of any third
parties, in the past third parties have asserted claims of this type against
us, and we cannot assure you that third 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."
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.
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."
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
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<PAGE>
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.
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
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<PAGE>
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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<PAGE>
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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<PAGE>
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.
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
23
<PAGE>
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>
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.
24
<PAGE>
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 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 write-off of
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. 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.
25
<PAGE>
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.
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.
26
<PAGE>
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
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.
27
<PAGE>
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, $6.2 million, $1.6 million and $2.0 million, respectively. Net cash
used for operating activities in each of these periods was primarily the result
of net losses before non-cash charges, offset by increases in deferred revenue
and accrued expenses and other current liabilities.
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), $(4.0) 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
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 $696,000,
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 and by the issuance of a
related-party note payable in the three months ended March 31, 1999.
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
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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 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
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.
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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, which means that it is designed to support leading digital music
formats, including mp3 (an audio compression format developed by the Motion
Picture Experts Group) and Dolby AC-3 (an audio compression format developed by
Dolby Laboratories, Inc.). 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 both breach of contract and fraud, 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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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. Ms. Winblad, one of our directors, is a general
partner of Hummer Winblad Venture Partners. Ms. Winblad disclaims
beneficial ownership of the shares held by the entities affiliated with
Hummer Winblad Venture Partners, except to the extent of her pecuniary
interest therein.
(2) Consists of common stock issuable upon automatic conversion of 998,803
shares of preferred stock owned by Vulcan Ventures, Inc. Mr. Robison, one
of our directors, is a business development associate of Vulcan Ventures,
Inc. Mr. Robison 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.
(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
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<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
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) (6,202) (1,642) (2,019)
------- ------- ------- ------- -------
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
------- ------- ------- ------- -------
Net cash provided by
(used in) investing
activities............. (83) (319) (3,983) (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 -- -- -- --
Proceeds from issuance of
note payable to related
party................... -- -- -- -- 378
------- ------- ------- ------- -------
Net cash provided by
(used in) financing
activities............. 2,006 6,593 21,941 (16) 696
------- ------- ------- ------- -------
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 $ -- $ -- $ -- $ --
</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 1998, 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 recorded at zero due to substantial doubt regarding
recoverability and the significant losses that are expected to be incurred
during LAJ's initial operating periods. 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
===== ====== ======
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.
<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
===== ====== ======
</TABLE>
F-14
<PAGE>
LIQUID AUDIO, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
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.
<TABLE>
<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
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.
F-15
<PAGE>
LIQUID AUDIO, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
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.
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.
F-16
<PAGE>
LIQUID AUDIO, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
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 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.
F-17
<PAGE>
LIQUID AUDIO, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
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.
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.
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>
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
F-18
<PAGE>
LIQUID AUDIO, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
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>
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).
F-19
<PAGE>
LIQUID AUDIO, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
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 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.
F-20
<PAGE>
LIQUID AUDIO, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
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, which will be recognized over the term of the related
agreement.
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................................. 50,000
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...................................................... 256,820
--------
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
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>
- --------
* filed as part of the initial filing of our Registration Statement on Form
S-1 on May 3, 1999
+ confidential treatment requested
++to be filed by amendment
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, 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
II-4
<PAGE>
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 17, 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 17, 1999
____________________________________ Officer and Director
Gerald W. Kearby (Principal Executive
Officer)
/s/ Gary J. Iwatani Chief Financial Officer June 17, 1999
____________________________________ (Principal Financial and
Gary J. Iwatani Accounting Officer)
/s/ Philip R. Wiser * Vice President of June 17, 1999
____________________________________ Engineering, Chief
Philip R. Wiser Technical Officer and
Director
/s/ Ann Winbald * Director June 17, 1999
____________________________________
Ann Winblad
/s/ Silvia Kessel * Director June 17, 1999
____________________________________
Silvia Kessel
/s/ Sanford R. Climan * Director June 17, 1999
____________________________________
Sanford R. Climan
/s/ Eric Robison * Director June 17, 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
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
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>
- --------
* filed as part of the initial filing of our Registration Statement on Form
S-1 on May 3, 1999
+ confidential treatment requested
++to be filed by amendment
<PAGE>
EXHIBIT 4.1
COMMON STOCK [LOGO OF LIQUID AUDIO] COMMON STOCK
NUMBER SHARES
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
THIS CERTIFICATE IS TRANSFERABLE SEE REVERSE FOR CERTAIN
IN RIDGEFIELD PARK, NJ OR NEW YORK, NY DEFINITIONS AND A STATEMENT
AS TO THE RIGHTS,
PREFERENCES, PRIVILEGES AND
RESTRICTIONS ON SHARES
CUSIP 53631T 10 2
THIS CERTIFIES THAT
IS THE RECORD HOLDER OF
FULLY PAID AND NON-ASSESSABLE SHARES OF THE COMMON STOCK,
$.001 PAR VALUE PER SHARE, OF
LIQUID AUDIO, INC.
transferable on the books of the Corporation by the holder hereof in person or
by duly authorized attorney upon surrender of this Certificate properly
endorsed. This Certificate is not valid until countersigned and registered by
the Transfer Agent and registered by the Registrar.
WITNESS the facsimile seal of the Corporation and the facsimile signatures of
its duly authorized officers.
Dated:
/s/ [CORPORATE SEAL /s/
OF LIQUID AUDIO, INC.]
SECRETARY CHIEF EXECUTIVE OFFICER
COUNTERSIGNED AND REGISTERED:
CHASEMELLON SHAREHOLDER SERVICES, L.L.C.
TRANSFER AGENT AND REGISTRAR
BY
AUTHORIZED SIGNATURE
<PAGE>
LIQUID AUDIO, INC.
A statement of the powers, designations, preferences and relative,
participating, optional or other special rights of each class of stock
or series thereof and the qualifications, limitations or restrictions of such
preferences and/or rights as established, from time to time, by the Certificate
of Incorporation of the Corporation and by any certificate of designation,
the number of shares constituting each class and series, and the designations
thereof, may be obtained by the holder hereof upon request and without charge
from the Secretary of the Corporation at the principal office of the
Corporation.
The following abbreviations, when used in the inscription on the face of this
certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM - as tenants in common UNIF GIFT MIN ACT-.........Custodian.........
TEN ENT - as tenants by the (Cust) (Minor)
entireties under Uniform Gifts to
JT TEN - as joint tenants with Minors Act..................
right of survivorship (State)
and not as tenants in UNIF TRF MIN ACT- .....Custodian (until age..)
common (Cust)
......under Uniform Transfer
(Minor)
to Minors Act...............
(State)
Additional abbreviations may also be used though not in the above list.
FOR VALUE RECEIVED, _____________________________ hereby sell, assign
and transfer unto
PLEASE INSERT SOCIAL SECURITY
OR OTHER IDENTIFYING NUMBER
OF ASSIGNEE
_____________________________
_____________________________
________________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
________________________________________________________________________________
________________________________________________________________________________
_________________________________________________________________________ Shares
of the common stock represented by the within Certificate,
and do hereby irrevocably constitute and appoint
________________________________________________________________________Attorney
to transfer the said stock on the books of the within named
Corporation with full power of substitution in the premises.
Dated ____________________________
X __________________________________
X __________________________________
NOTICE: THE SIGNATURE(S) TO THIS ASSIGNMENT
MUST CORRESPOND WITH THE NAME(S) AS
WRITTEN UPON THE FACE OF THE
CERTIFICATE IN EVERY PARTICULAR,
WITHOUT ALTERATION OR ENLARGEMENT OR
ANY CHANGE WHATEVER.
Signature(s) Guaranteed
By_________________________________
THE SIGNATURE(S) MUST BE GUARANTEED
BY AN ELIGIBLE GUARANTOR INSTITUTION
(BANKS, STOCKBROKERS, SAVINGS AND
LOAN ASSOCIATIONS AND CREDIT UNIONS
WITH MEMBERSHIP IN AN APPROVED
SIGNATURE GUARANTEE MEDALLION PROGRAM),
PURSUANT TO S.E.C. RULE 17Ad-15.
<PAGE>
Exhibit 10.39
SOFTWARE LICENSE AGREEMENT
Intel Corporation ("lntel") is interested in providing purchasers of certain
Intel-based computers with software that demonstrates an enhanced computing
experience. Intel may wish to provide such software via CD-ROM, via on-line
download, or other means of distribution. Liquid Audio ("You" or "Your") is
interested in providing its Music Player software for such use by Intel.
Intel and You agree as follows:
1. Definitions
1.1 General Definitions.
-------------------
(a) "Licensed Software" means the version of Your software program
provided to Intel by You, in object code form, as described in
Exhibit A, and any updates or new versions provided to Intel by
You.
(b) "Collateral" means packaging and marketing materials such a screen
shots, box shots, product descriptions, and all customer support
documents provided to Intel by You.
2. Specifications, Quality Assurance and Updates for the Licensed Software
-----------------------------------------------------------------------
2.1. The Licensed Software will conform to the technical specifications
contained in Exhibit A, and will be delivered to Intel according to the
schedule in Exhibit A.
2.2. The Licensed Software will also meet the Inters Quality Assurance and
Integration requirements.
2.3. Licensed Software will not change existing MIME type or Microsoft
Windows file type associations during install or run time.
2.4. During the term of this agreement, You will provide Intel with any
updates, bug fixes, and new versions of the Licensed Software as soon as
they are first available to other distributors, or to end users,
whichever is sooner.
2.5. During the term of this agreement, you will make the Licensed Software
publicly available.
3. License Grants
3.1. Licensed Software: To the extent You have the right to grant licenses
-----------------
within and of the scope set forth herein and without the requirement to
provide additional consideration to any third party, You grant to Intel
a royalty-free, fully paid-up, non-exclusive, worldwide license, under
Your or Your supplier's copyrights and patents to (a) reproduce, make,
have made, use, import, and modify the Licensed Software, Collateral,
and copies thereof; (b) distribute the Licensed Software, Collateral,
and copies thereof by any means now known or developed in the future,
including in a compilation with other software; (c) display and perform
publicly the Licensed Software; and (d) sublicense the foregoing rights
to third parties.
3.2. Trademarks: You grant to Intel a royalty free, non-exclusive, worldwide
----------
right to use Your trademarks set forth in Exhibit A in association with
the marketing, advertisement, and use and distribution of the Licensed
Software.
3.3. No Obligation. At its sole discretion, Intel may or may not use the
-------------
license granted to it under this Section, and You will neither expect
Intel to, nor rely in any way on Intel doing so.
Page 1
<PAGE>
4. Copyright Management Information. Intel may modify or remove any copyright
--------------------------------
management information contained in the Licensed Software, including but not
limited to shrinkwrap or clipwrap licenses and registration requirements, and
may substitute them with other shrinkwrap terms and conditions such as those
contained in Exhibit B.
5. Ownership of the Licensed Software. Subject to the licenses granted to Intel
----------------------------------
pursuant to this Agreement, all right, title and interest in and to the
Licensed Software and Collateral are and shall at all times remain Your or
Your supplier's sole and exclusive property.
6. Warranties. You warrant and represent that: (i) You or Your licensors have
----------
legal title and rights of ownership of the Licensed Software and Collateral;
(ii) You have full power and authority to provide the license granted by this
Agreement to Intel; (iii) Intel's use of the Licensed Software and Collateral
will in no way constitute an infringement or other violation of any patent,
copyright, trade secret, trademark or other proprietary right of any third
party; and (iv) the License Software may be exported under license exceptions
to U.S. export administration regulations to all destinations except
embargoed countries.
7. End-User Support.
----------------
7.1. Intel will provide first level installation support for the Licensed
Software to those people who receive copies of it from Intel.
7.2. You will provide to people who receive a copy of the Licensed Software
from Intel:
7.2.1. A free support website with FAQs and an email address to send
help questions to;
7.2.2. One business day responses to email help requests.
7.3. You will provide to Intel:
7.3.1. A single point of phone and email contact during normal business
hours for escalations to you from Inters first line support;
7.3.2. Copies of all product support documents, including FAQ's and
other web-based help;
7.3.3. Information on how to send end users to Your support offerings;
8. LIMITATION OF LIABILITY. IN NO EVENT SHALL EITHER PARTY HAVE ANY LIABILITY TO
THE OTHER PARTY, END USERS OR ANY OTHER THIRD PARTY, FOR ANY INDIRECT,
SPECIAL OR CONSEQUENTIAL DAMAGES ARISING OUT OF THIS AGREEMENT, UNDER ANY
CAUSE OF ACTION OR THEORY OF LIABILITY, AND WHETHER OR NOT SUCH PARTY HAS
BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGE; PROVIDED, HOWEVER, THAT THIS
LIMITATION SHALL NOT APPLY TO ANY BREACH OF THE WARRANTY OBLIGATIONS UNDER
SECTION 5.
9. Term and Termination
--------------------
9.1. Term: This Agreement shall commence on the Effective Date and shall
----
continue for the following two year period.
9.2. Termination:
-----------
9.2.1. Either party shall have the right to terminate this Agreement
should the other party materially default in the performance of
any of its obligations if, within thirty (30) clays after written
notice, the defaulting party has failed to cure the default.
9.2.2. For Convenience. You may terminate this Agreement without cause
---------------
upon 180 days written notice to Intel. Intel may terminate this
agreement without cause upon 30 days written notice to You.
9.2.3. Survival. The following provisions shall survive any expiration
--------
or termination of this Agreement: 1. Definitions; 5. Ownership;
----------- ---------
6. Warranties; and 8. Limitation of Liability.
---------- -----------------------
Page 2
<PAGE>
AGREED
INTEL CORPORATION LIQUID AUDIO
/s/ Mark W. Olson /s/ Gary Iwatani
- ---------------------------- ----------------------------
Signature Signature
Mark W. Olson Gary Iwatani
- ---------------------------- ----------------------------
Printed Name Printed Name
Director of Marketing CFO
- ---------------------------- ----------------------------
Title Title
5/4/99 4/15/99
- ---------------------------- ----------------------------
Date Date
Page 3
<PAGE>
EXHIBIT "A"
LICENSED SOFTWARE DESCRIPTION AND SPECIFICATIONS
DESCRIPTION OF LICENSED SOFTWARE
- --------------------------------
Liquid Music Player version 4.01
SPECIFICATIONS
- --------------
Windows-compatible version with faceless installation.
YOUR TRADEMARKS (if applicable):
- ---------------
Liquid(TM)
- ----------
Liquid(TM) Player
- -----------------
Liquid Audio(TM)
- ----------------
Page 4
<PAGE>
EXHIBIT C
Form Of Software Shrinkwrap License
Page 5
<PAGE>
PLUG-IN SOFTWARE LICENSE AGREEMENT
IMPORTANT- READ BEFORE COPYING, INSTALLING OR USING.
----------------------------------------------------
Do not use or load this software and any associated materials (collectively, the
"Software") until you have carefully read the following terms and conditions.
The following terms and conditions will apply from each of the following
Licensors for their respective Licensed Software only. By loading or using the
Software, you agree to the terms of this Agreement with each Licensor. If you do
not wish to so agree, do not install or use the Software.
LICENSOR LICENSED SOFTWARE
------------------------------------------------
1. Intel Install Application
2. Liquid Audio Liquid Music Player
3.
.
.
.
LICENSE. You may copy the Software onto a single computer for your personal,
- -------
noncommercial use, and you may make one back-up copy of the Software, subject to
these conditions:
1. You may not copy, modify, rent, sell, distribute or transfer any part of
the Software except as provided in this Agreement, and you agree to
prevent unauthorized copying of the Software.
2. You may not reverse engineer, decompile, or disassemble the Software.
3. You may not sublicense or permit simultaneous use of the Software by
more than one user.
4. The Software may include portions offered on terms in addition to those
set out here, as set out in a license accompanying those portions.
OWNERSHIP OF SOFTWARE AND COPYRIGHTS. Title to all copies of the Software
- ------------------------------------
remains with Licensors or their suppliers. The Software is copyrighted and
protected by the laws of the United States and other countries, and
international treaty provisions. You may not remove any copyright notices from
the Software. Licensors may make changes to the Software, or to items referenced
therein, at any time without notice, but are not obligated to support or update
the Software. Except as otherwise expressly provided, Licensors grant no express
or implied right under Licensors patents, copyrights, trademarks, or other
intellectual property rights. You may transfer the Software only if the
recipient agrees to be fully bound by these terms and if you retain no copies of
the Software.
LIMITED MEDIA WARRANTY. If the Software has been delivered by Intel on physical
- ----------------------
media, Intel warrants the media to be free from material physical defects for a
period of ninety days after delivery by Intel. If such a defect is found, return
the media to Intel for replacement or alternate delivery of the Software as
Intel may select.
EXCLUSION OF OTHER WARRANTIES. EXCEPT AS PROVIDED ABOVE, THE SOFTWARE IS
- -----------------------------
PROVIDED "AS IS" WITHOUT ANY EXPRESS OR IMPLIED WARRANTY OF ANY KIND INCLUDING
WARRANTIES OF MERCHANTABILITY, NONINFRINGEMENT, OR FITNESS FOR A PARTICULAR
PURPOSE. Licensor does not warrant or assume responsibility for the accuracy or
completeness of any information, text, graphics, links or other items contained
within the Software.
LIMITATION OF LIABILITY. IN NO EVENT SHALL LICENSORS OR THEIR SUPPLIERS BE
- -----------------------
LIABLE FOR ANY DAMAGES WHATSOEVER (INCLUDING, WITHOUT LIMITATION, LOST PROFITS,
BUSINESS INTERRUPTION, OR LOST INFORMATION) ARISING OUT OF THE USE OF OR
INABILITY TO USE THE SOFTWARE, EVEN IF LICENSORS HAVE BEEN ADVISED OF THE
POSSIBILITY OF SUCH DAMAGES. SOME JURISDICTIONS PROHIBIT EXCLUSION OR LIMITATION
OF LIABILITY FOR IMPLIED WARRANTIES OR CONSEQUENTIAL OR INCIDENTAL DAMAGES, SO
THE ABOVE LIMITATION MAY NOT APPLY TO YOU. YOU MAY ALSO HAVE OTHER LEGAL RIGHTS
THAT VARY FROM JURISDICTION TO JURISDICTION.
<PAGE>
TERMINATION OF THIS AGREEMENT. Licensors may terminate this Agreement at any
- -----------------------------
time if you violate its terms. Upon termination, you will immediately destroy
the Software or return all copies of the Software to Intel.
APPLICABLE LAWS. Claims arising under this Agreement shall be governed by the
- ---------------
laws of California, excluding its principles of conflict of laws and the United
Nations Convention on Contracts for the Sale of Goods. You may not export the
Software in violation of applicable export laws and regulations. Licensors are
not obligated under any other agreements unless they are in writing and signed
by an authorized representative of Intel.
GOVERNMENT RESTRICTED RIGHTS. The Software is provided with "RESTRICTED RIGHTS."
- ----------------------------
Use, duplication, or disclosure by the Government is subject to restrictions as
set forth in FAR52.227-14 and DFAR252.227-7013 et seq. or its successor. Use of
the Software by the Government constitutes acknowledgment of Licensors'
proprietary rights therein. Contractor or Manufacturer are Licensors
respectively.
<PAGE>
EXHIBIT 10.40
LIQUID REMOTE INVENTORY FULFILLMENT SYSTEM(TM)
MERCHANT AFFILIATE AND LICENSE AGREEMENT
----------------------------------------
WHEREAS Liquid Audio, Inc., a California corporation, with offices at 810
Winslow Avenue, Redwood City, California 94063, hereinafter referred to as
"Liquid Audio," owns and operates the Liquid Remote Inventory Fulfillment System
("RIFFS" or "RIFFS program"), pursuant to which Liquid Audio makes available to
online merchants a database of music tracks ("RIFFS Catalog"), which tracks can
be sold and digitally delivered to customers of merchant Web sites that are
licensed as RIFFS affiliates;
WHEREAS MTS, Inc., a California corporation with offices at 2500 Del Monte,
West Sacramento, CA, hereinafter referred to as "Merchant," desires to be
licensed to participate in the RIFFS program as a merchant affiliate in order to
receive the right to use the RIFFS Catalog to make online sales and digital
delivery of music tracks to its customers, upon the terms and conditions set
forth in Schedule "A" to this Agreement; and
NOW THEREFORE THE PARTIES HEREBY AGREE AS OF THIS 14TH DAY OF MAY 1999
("EFFECTIVE DATE") AS FOLLOWS:
RIFFS CATALOG CATEGORIES: All
MERCHANT SITE: www.towerrecords.com
AFFILIATION PERIOD: One year from Effective Date
MUSIC LICENSE: Web site linkage to RIFFS Catalog and digital delivery of music
titles to customers of Merchant Site, per Schedule "A".
LOGO/ICON LICENSE: Promotional use of Liquid Audio/RIFFS logo and icon license,
per Schedule "A".
ANNUAL MERCHANT AFFILIATION FEE: Waived.
DIGITAL DELIVERY FEES: Waived.
DIGITAL MUSIC SALES: Merchant accounts and pays Liquid Audio monthly for
wholesale distribution price for digital music sales transactions per Schedule
"A".
BANNER ADVERTISING: As mutually agreed.
IN WITNESS THEREOF, the parties hereto have executed this Agreement as of the
Effective Date first above written.
LIQUID AUDIO, INC.: FOR MERCHANT:
BY: /s/[SIGNATURE ILLEGIBLE]^^ BY: /s/[SIGNATURE ILLEGIBLE]^^
----------------------------- ----------------------------
TITLE: CEO TITLE: PRES.
------------------------- -------------------------
BY: /s/[SIGNATURE ILLEGIBLE]^^ BY: /s/[SIGNATURE ILLEGIBLE]^^
----------------------------- ----------------------------
TITLE: VP BUSINESS DEVELOPMENT TITLE: SEC
------------------------- -------------------------
-1-
<PAGE>
SCHEDULE "A"
------------
LIQUID REMOTE INVENTORY FULFILLMENT SERVICE
-------------------------------------------
MERCHANT AFFILIATION AND LICENSE STANDARD TERMS AND CONDITIONS
--------------------------------------------------------------
Annexed to and made part of that certain Liquid RIFFS Merchant Affiliation
and License Agreement ("Agreement") dated as of May 14, 1999, between Liquid
Audio, Inc. ("Liquid Audio") and MTS, Inc. ("Merchant").
I. Definitions.
------------
"Merchant Site" means the Web site or sites owned or controlled by Merchant as
identified by the URL or URLs listed in the Main Agreement.
"Link(s)" means one or more hyperlinks established from within the Merchant Site
to one or more pages within the RIFFS Catalog, as designated by Liquid Audio, to
enable Merchant to make online sales of music tracks to customers of the
Merchant Site.
"RIFFS Logo and Artwork" means the Liquid Audio logo and any other logo(s) for
RIFFS designated by Liquid Audio from time to time, and all artwork, graphics,
and other content provided by Liquid Audio for use in connection with the Links.
"RIFFS Catalog" means the compilation database owned by Liquid Audio and
marketed as the" Liquid Remote Inventory Fulfillment Service," "RIFFS" or under
such other branding as Liquid Audio may select from time to time, which database
is comprised of sound recordings made available by Liquid Audio in the Catalog
Categories identified in Schedule "B" (including any samples [forty-five (45)
second or less] of such sound recordings that may be made available for preview
purposes), and all other graphics, text, video, and other related content now or
hereafter offered by Liquid Audio in connection with the foregoing.
"RIFFS Server(s)" means the Liquid Audio server software that makes the RIFFS
Catalog available to Merchant for online sales and digital delivery of music
tracks to customers of the Merchant Site.
"Digital Music Sales Transactions" means the purchase by a customer of the
Merchant Site using the RIFFS Catalog of (i) one or more intangible copies of a
sound recording offered via the RIFFS Catalog, with online fulfillment of such
sale by digital delivery and downloading from the RIFFS Server to the end user's
personal computer hard drive, but not to any other tangible or intangible media.
II. License Grant. Subject to the payment by Merchant of the annual affiliation
-------------
fee set forth in Section IX below, Liquid Audio grants and Merchant accepts a
limited, personal, nontransferable, nonexclusive license as a RIFFS merchant
affiliate (i) to use, make available, and sell music tracks from the RIFFS
Catalog to customers of the Merchant Site; and (ii) subject to compliance with
Liquid Audio's branding guidelines and Section VIII below, to use the Logo and
Artwork as an icon to create one or more Links to the RIFFS Server. As a
condition to such license, Merchant shall comply with such channel restrictions
and other requirements relating to sale of the music tracks that are imposed by
Liquid Audio, the record label or other content owners or suppliers and
communicated to Merchant in writing from time to time; provided, however, that
such requirements shall impose no price-related restraints.
III. Reservation of Rights. The license herein granted shall be limited to the
---------------------
rights expressly set forth above. All other rights to the RIFFS Catalog are
expressly reserved by Liquid Audio. Without limiting the foregoing, Merchant may
not create or maintain any hyperlinks to the Catalog other than the Links to the
Merchant Site as permitted herein, and Merchant may not sublicense, remarket or
resell the RIFFS Catalog. In addition, Merchant shall impose no requirements of
any kind or character whatsoever (other than customarily required as part of or
incidental to an online sales transaction) for customers or potential customers
to access the RIFFS Catalog or make online purchase of music tracks using the
RIFFS Catalog via the Links, including without limitation, any subscription or
access fee or registration requirement to activate the Links to the RIFFS
Catalog.
IV. Joint Promotional Obligations Liquid Audio and Merchant will each make
-----------------------------
commercially reasonable efforts to promote the other and the relationship
described within this Agreement at any appropriate trade shows. Liquid Audio and
Merchant will jointly release a press release concerning the relationship
described in this Agreement upon execution hereof and upon launch of the RIFFS
program on the Merchant Site. Both parties will agree to the language of the
press release before it is issued.
V. Liquid Audio Promotional and Technical Obligations Liquid Audio will
--------------------------------------------------
include Merchant on the Liquid Audio Web Site in an area in which Liquid Audio
describes the RIFFS program, and Liquid Audio will provide a link from this
portion of its site to Merchant's home page as part of a listing of merchants
participating in the RIFFS program. In connection with the distribution of music
tracks in the RIFFS Catalog via the Merchant Site, Liquid Audio will provide
Merchant with the RIFFS Courier, the Liquid Audio proprietary client software
for participation in the RIFFS program, and Merchant hereby agrees to the terms
of Liquid Audio's end user license agreement for the RIFFS Courier, which is
attached hereto and incorporated herein as Schedule "C". Liquid Audio will be
responsible for enabling the RIFFS program functionality, using Liquid Audio's
technology and any third party technology obtained by Liquid Audio, through
operation of the RIFFS Server, maintenance of the RIFFS Catalog, and digital
delivery of music tracks through the RIFFS Catalog. Notwithstanding the
foregoing, Merchant shall be solely responsible for all other aspects of the
sales transaction and for the operation of the Merchant Site, including without
limitation establishment of the Links, installation and proper use of the RIFFS
Courier software, configuration and operation of the customer "shopping cart"
functionality, customer inquiries, orders, order
-2-
<PAGE>
calculation, presentment and collection of sales price and sales tax due, and
credit and debit card processing.
VI. Merchant Affiliate Promotional Obligations. In consideration of the RIFFS
------------------------------------------
Catalog made available to Merchant hereunder, the foregoing license requires
that the RIFFS program be featured in a prominent position on the Merchant Site.
Liquid Audio and Merchant shall negotiate this positioning in good faith but
could include such things as (i) placement of the RIFFS Logo as a Link on the
"home page" of the Merchant Site, or if no third-party content appears on the
"home page" then in the first page thereafter that does so (and/or on other
mutually agreed pages of sufficient prominence); (ii) placement of the Liquid
Audio Logo next to each Link to the RIFFS Catalog from the Merchant Site; (iii)
inclusion of an explanation of RIFFS reasonably acceptable to Liquid Audio in
any instruction section of the Merchant Site; (iv) inclusion of a digital
downloadable section as appropriate in a MY Tower page, as mutually agreed based
upon recommendations from either party.
VII. Liquid MusicPlayer. Merchant will provide a download button, in a design
------------------
consistent with Liquid Audio's branding guidelines, on the Merchant Site, that
enables end users to download the Liquid MusicPlayer from the Web site. Liquid
Audio win license the Liquid MusicPlayer directly to the end user. Liquid Audio
will be responsible for all customer support of this product, and win respond to
customer support requests within twenty-four hours of their receipt. Liquid
Audio will provide to Merchant separate Web pages, for inclusion within the
Merchant Site, which explain the relevant aspects of the Liquid Audio system,
and especially the Liquid MusicPlayer.
VIII Advertising. Upon execution of this Agreement, and until launch of the
-----------
RIFFS program on the Merchant Site, Merchant agrees to work with Liquid Audio in
good faith to promote the coming of the RIFFS program, and the existence of the
RIFFS program on Merchant' s site. In addition, Merchant shall make available to
Liquid Audio a mutually agreed amount of banner ads at a mutually agreed price,
which ads shall be for use exclusively in promoting highlighted music selections
available through the RIFFS Catalog. With respect to the page(s) on the Merchant
Site which contain the Link(s) to the RIFFS Catalog, Merchant shall control all
advertising and other content on such page, and shall retain all revenue derived
therefrom.
IX. Payments.
--------
(a) Merchant shall pay Liquid Audio the annual merchant affiliation fees
for the Catalog Categories selected by Merchant as set forth in Exhibit "B". The
parties agree that timely payment of all amounts due under this Section IX by
Merchant is of the essence of this Agreement. The due date for the annual
merchant affiliation fees shall be the Effective Date hereof and each
anniversary of such date. The due date for all payments in connection with
Digital Music Sales Transactions shall be as set forth in Section X below.
(b) With respect to all Digital Music Sales Transactions on the Merchant
Site, Merchant shall pay to Liquid Audio the Wholesale Price and the Digital
Delivery Fee for each music title sold. With respect to a Digital Music Sales
Transaction involving the sale of a single music track, the sale shall be deemed
to have occurred when the track has been downloaded by the consumer. With
respect to a Digital Music Sales Transaction involving the sale of a music title
comprised of multiple tracks (album sales), the sale shall be deemed to have
occurred when the first track has been downloaded by the consumer provided that
the remaining tracks have been made concurrently available to the consumer for
downloading. These tracks will be made available until the customer has
successfully downloaded all of the tracks. "Wholesale Price" means the wholesale
price set by Liquid Audio or its suppliers for the applicable track(s) sold as
published on the RIFFS Catalog or otherwise communicated to Merchant. "Digital
Delivery Fee" means Liquid Audio's per-transaction digital fulfillment fee, as
set forth in the Main Agreement. The parties acknowledge that Merchant will
determine the list and actual retail selling price to customers in its sole
discretion, and that Liquid Audio, the record labels or other content owners or
suppliers will determine the wholesale price in their sole discretion.
(c) Subject to the foregoing, the parties' sole compensation under this
Agreement shall be the mutual benefit derived from offering the RIFFS Catalog
through the Merchant Site and each party shall retain all revenues derived from
each of their respective activities hereunder.
X. Statements. Liquid Audio shall provide Merchant on a monthly basis with a
----------
statement of all amounts payable to Liquid Audio arising from Digital Music
Sales Transactions within ten (10) days after the end of each calendar month.
Merchant shall tender the amount due under such statement to Liquid Audio within
thirty (30) days after the end of the calendar month in which the invoice was
received. The statement shall contain information, which shall be mutually
agreed upon by Liquid Audio and Merchant, for Merchant to accurately verify the
amounts due and payable, including (i) the total number of each music track
sold, (ii) appropriate identifying data for each music track sold; (iii) the
wholesale price of each music track sold; (iv) the total wholesale revenues for
each music track sold; (v) the total number and wholesale revenues for all
tracks sold; (vi) the calculation of Liquid Audio digital delivery fee; (vii)
the calculation of the total amount due to Liquid Audio (viii) and/or such other
transaction data as Liquid Audio may elect to provide to Merchant hereunder. No
deductions or reserves from such amounts payable to Liquid Audio will be
permitted except in the event that Merchant disputes in good faith the accuracy
of any statement or statements, Merchant may withhold the disputed amounts until
such dispute is resolved. Each party will keep reasonable records in connection
with its respective performance under this Agreement, and will permit the other
party reasonable access to such records at such other party's expense upon
reasonable notice. Without limiting Liquid Audio's rights or remedies, Liquid
Audio reserves the right to suspend Merchant's access to the RIFFS program and
RIFFS Catalog hereunder in the event of any material breach of Merchant's
payment obligations hereunder.
XI. Warranties. Liquid Audio represents and warrants the following: (i) that it
----------
is the sole owner of the database compilation copyright in the RIFFS Catalog;
(ii) except with respect to public performance of music works which is provided
for in Section XII below, it has all
-3-
<PAGE>
rights necessary to license the RIFFS Catalog, and the individual music tracks
included therein, as provided in this Agreement; (iii) that it has obtained or
will secure on behalf of Merchant all licenses necessary for Merchant's use of
the RIFFS Courier software licensed pursuant to Schedule "C"; (iv) that it will
provide professional and courteous customer service to Merchant's customers in
connection with support of the Liquid Music Player pursuant to Section VI above;
(v) that it will maintain and operate the RIFFS Server in a manner consistent
with Section XVIII below; (vi) that throughout the term of this Agreement, it
will continue to have the capable to carry out its duties herein; and (viii)
that the RIFFS Server, the RIFFS Courier and all Liquid Audio or third party
software or hardware required by Liquid Audio for operation of RIFFS, will (a)
perform in accordance with their respective specifications prior to, during and
after January 1, 2000, and record, store, process, display and receive calendar
dates falling on or after January 1, 2000, in the same manner, and with the same
functionality, as such software or hardware records, processes, displays and
receives calendar dates falling on or before December 31, 1999: and (b) is
capable of correctly processing, providing and/or receiving data and date-
related data within and between the twentieth and twenty-first centuries,
including without limitation date data recognition, recognition of the year 2000
as a leap year, and calculations that accommodate same century and multi-century
formulas and values.
Liquid Audio will indemnify, defend and hold harmless Merchant against any and
all suits, proceedings at law or in equity, and any and all liability, loss,
costs or damages awarded in any final judgment entered against Merchant or
settlement approved by Liquid Audio, to the extent arising out of or in
connection with any third party claim, suit, demand or action relating to a
breach this Agreement or of the foregoing warranties made by Liquid Audio
hereunder or by reason of a claim that the exercise by Merchant of the license
rights granted herein infringes the U.S. intellectual property rights of others,
provided, however, that prompt detailed notice in writing of such claim is
provided to Liquid Audio. Liquid Audio shall have full control over the defense
and/or settlement of any such claim or litigation including the right to select
counsel, and Merchant shall not continue the use of the RIFFS Catalog after
receipt of notice of any such claim without the written consent of Liquid Audio.
Merchant shall cooperate fully with Liquid Audio in the defense or settlement of
any such claim or litigation.
Merchant will indemnify Liquid Audio from all claims or liabilities including
without limitation reasonable attorneys' fees arising from the breach of this
Agreement by Merchant or from the distribution of any material on the Merchant
Site other than material contained in the RIFFS Catalog or advertising as
delivered by Liquid Audio.
EXCEPT AS EXPRESSLY SET FORTH ABOVE, THE RIFFS PROGRAM, THE RIFFS CATALOG AND
ALL SERVICES, SOFTWARE, TECHNOLOGY AND CONTENT RELATING THERETO ARE PROVIDED ON
AN AS-IS BASIS. LIQUID AUDIO HEREBY DISCLAIMS ANY IMPLIED WARRANTIES OF
MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE.
Liquid Audio shall provide to Merchant a Broad Form Vendors Endorsement
Certificate of Insurance in an amount of one million dollars ($1,000,000.00)
evidencing Liquid Audio's liability insurance which said Certificate names
Merchant as an additional insured under said policy. Said policy will provide
that Merchant will be given ten (10) days notice of termination of said policy.
XII. Music Rights. Liquid Audio and/or the content owner, and not Merchant,
------------
shall be responsible for payment of any mechanical w obligations incurred in
connection with the RIFFS Catalog and Digital Music Sales Transactions. Liquid
Audio warrants to the best of its knowledge that the public performance rights
in the musical works contained in the RIFFS Catalog are (i) controlled by ASCAP,
BMI, SESAC or a performing rights society having jurisdiction, (ii) in the
public domain, or (iii) controlled by Liquid Audio or its licensors.
XIII. Withdrawal Rights. Liquid Audio may in its absolute discretion withdraw
-----------------
permanently or temporarily any licensed sound recording or other content from
the RIFFS Catalog if Liquid Audio determines in its sole discretion that the
distribution thereof would or might infringe the rights of others, violate any
law or governmental rule or regulation, interfere with actual or contemplated
use of the particular licensed sound recording or other element for any purpose
other than the distribution by Merchant or subject Liquid Audio to any potential
liability or litigation.
XIV. Term and Termination.
---------------------
(a) This Agreement will become effective on the Effective Date and shall
continue in effect for the period set forth in the Main Agreement, unless
otherwise terminated or canceled as provided herein. This Agreement shall
automatically renew for one or more renewal terms of one (1) year each at the
end of the initial term of any renewal term unless either party tenders written
notice of its intent to terminate at least thirty (30) days prior to the
scheduled expiration date.
(b) Either party hereto may, at its option, and without notice, terminate
this Agreement, effective immediately, should the other party hereto (i) admit
in writing its inability to pay its debts generally as they become due; (ii)
make a general assignment for the benefit of creditors; (iii) institute
proceedings to be adjudicated a voluntary bankrupt, or consent to the filing of
a petition of bankruptcy against it; (iv) be adjudicated by a court of competent
jurisdiction as being bankrupt or insolvent; (v) seek reorganization under any
bankruptcy act, or consent to the filing of a petition seeking such
reorganization; or (vi) 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.
(c) In the event that either party commits a material breach of its
obligations hereunder, the other party may, at its option, terminate this
Agreement, by thirty (30) days written notice of termination, which notice shall
identify and describe the basis for such termination; provided, however, that
if, prior to expiration of such period, the defaulting party cures such default,
termination shall not take place. Notwithstanding the foregoing, the cure period
for payment obligations is ten (10) days.
-4-
<PAGE>
(d) Upon any termination of this Agreement, Sections III, X, the
indemnification provisions under Section XI, XII and XV shall survive the
termination of this Agreement. Merchant shall immediately return to Liquid Audio
all copies of the RIFFS Logo and Artwork and all other Liquid Audio materials in
Merchant's possession or control Merchant shall deactivate all Links to the
RIFFS Catalog and shall not create any links thereto or to any other Liquid
Audio sites without the prior consent of Liquid Audio.
XV. Confidential Information
------------------------
(a) Each party acknowledges that by reason of its relationship to the
other party under this Agreement it will have access to certain information and
materials concerning the other party's business, plans, customers, technology
and products that are confidential and of substantial value to such party
(referred to in this Section as "Confidential Information"), which value would
be impaired if such Confidential Information were disclosed to third parties.
Each party agrees to maintain all Confidential Information received from the
other, both orally and in writing, in confidence and agrees not to disclose or
otherwise make available such Confidential Information to any third party
without the prior written consent of the disclosing party except for parties'
attorneys who will be subject to the confidentiality requirements herein. Each
party further agrees to use the Confidential Information only for the purpose of
performing this Agreement. No Confidential Information shall be deemed
confidential unless so marked if given in writing or, if given orally,
identified as confidential orally prior to disclosure and confirmed in writing
within thirty (30) days, or if a party knows or has reason to know of its
confidentiality, provided, however, that Licensor agrees that any Confidential
Information in whatever form relating to the design, functionality, operational
methods or coding of the RIFFS program, RIFFS Catalog, Liquid Audio software,
including but not limited to any complete or partial source or object code
versions of such software, shall be deemed Confidential Information of Liquid
Audio regardless of the presence or absence of any confidential markings or
identification. The terms of this Agreement will be considered Confidential
Information, but may be disclosed to the parties' accountants or auditors on a
need to know basis.
(b) The parties' obligations under this Section XV shall not apply to
Confidential Information which: (i) is or becomes a matter of public knowledge
though no fault of or action by the receiving party; (ii) was rightfully in the
receiving party's possession prior to disclosure by the disclosing (iii)
subsequent to disclosure, is rightfully obtained by the receiving party from a
third party who is lawfully in possession of such Confidential Information
without restriction; (iv) is independently developed by the receiving party
without resort to the disclosing party's Confidential Information; or (v) is
required by law or judicial order, provided that prior written notice of such
required disclosure is furnished to the disclosing party as soon as practicable
in order to afford the disclosing party an opportunity to seek a protective
order and that if such order cannot be obtained disclosure may be made without
liability. Unless otherwise required to maintain by law or judicial order,
whenever requested by a disclosing party, a receiving party shall immediately
return to the disclosing party all manifestations of the Confidential
Information or, at the disclosing party's option, shall destroy all such
Confidential Information as the disclosing party may designate.
XVI. Additional Provisions.
----------------------
(a) Merchant acknowledges that each music offering included in the RIFFS
Catalog category or categories was individually licensed and separately priced,
and that Liquid Audio offered each music offering without discrimination and
without conditioning the licensing of any one music offering upon the licensing
of any other music offering.
(b) Neither party shall be liable to the other for any delay or failure to
perform its obligations hereunder due to acts of God, failure of carriers, labor
disputes, war, public disaster or any other cause beyond the reasonable control
of the parties and such performance shall be excused to the extent of such force
majeure event.
(c) Merchant shall account and pay without limitation any tax, levy or
charge whatsoever by any statute, law, rule or regulation now or hereafter in
effect, related to the Digital Music Sales Transactions between Merchant and its
customers and related to the license fees payable under this Agreement, it being
the intent hereof that all amounts stated herein that are due to Liquid Audio
are net amounts, free and clear any such taxes, levy or charges whatsoever,
except for any taxes on Liquid Audio's net income.
(d) Neither the license granted to Merchant hereunder nor this Agreement
may be transferred or assigned by Merchant without the prior written consent of
Liquid Audio, nor shall Merchant sublicense or relicense the RIFFS Catalog
licensed hereunder, in whole or in part, or enter into any third-party linking
arrangements with respect thereto without Liquid Audio's prior written consent.
Any such purported transfer, assignment or other arrangements entered into
without Liquid Audio's consent shall be void. Subject to the foregoing, this
Agreement shall be binding upon and inure to the benefit of the parties and
their successors and assigns. Except, Merchant will have the absolute right to
assign this Agreement without being required to obtain prior consent of Liquid
Audio (a) to any affiliate, or (b) to any corporation into which Merchant may
merge or which result from the consolidation of Merchant with any other
corporation. No pledge, sale transfer, encumbrance, hypothecation, inheritance,
or other transfer of Merchant' s corporate stock will constitute assignment
hereunder.
(e) The headings of paragraphs hereof are inserted only for the purpose of
convenient reference; such headings shall not be deemed to govern, limit,
modify, or in any manner affect the scope, meaning or intent of the provisions
of this Agreement or any part or portion thereof; nor shall they otherwise be
given any legal effect.
(f) Nothing herein contained shall constitute a franchise relationship, or
partnership between, or joint venture by, Merchant and Liquid Audio, or
constitute Merchant or Liquid Audio the agent of the other.
(g) All notices hereunder win be hand delivered or sent by certified or
registered mail or by a reputable overnight delivery service
-5-
<PAGE>
to the parties at the addresses set forth above with a copy to the General
Counsel, or to such other addresses as may be designated by the parties in
writing.
(h) This Agreement shall be construed in accordance with the applicable
laws of the State of California with respect to agreements executed and to be
fully performed in that state.
(i) This Agreement represents the entire understanding of the parties
with respect to the subject matter hereof and supersedes any prior or
contemporaneous understandings. This Agreement may not be amended or modified
except in writing signed by both parties hereto; nor may any provision hereof be
waived unless in writing signed by the party to be charged with such waiver.
(j) If there is a conflict between any provision(s) of this Agreement and
any statute, law or regulation, the statute, law or regulation, shall prevail,
provided, however, that in such event the provision(s) of this Agreement so
affected shall be curtailed and limited only to the minimum extent necessary to
permit compliance with the minimum requirement of such statute, law or
regulation, and no other provisions of this Agreement shall be affected thereby
and all such other provisions shall continue in full force and effect unless an
essential purpose of this Agreement will be defeated.
(k) Merchant agrees that any litigation, action or proceeding arising out
of or relating to this Agreement shall be instituted in any state or federal
court sitting in California.
(l) EXCEPT PER LIABILITY UNDER SECTION XI HEREIN, AND INTENTIONAL OR
RECKLESS MISCONDUCT, LIQUID AUDIO'S AGGREGATE LIABILITY ARISING OUT OF OR
RELATING TO THIS AGREEMENT SHALL BE THE TOTAL AMOUNTS PAID BY MERCHANT. IN NO
EVENT SHALL LIQUID AUDIO BE LIABLE TO MERCHANT OR ANY OTHER PARTY PER
CONSEQUENTIAL, INCIDENTAL, SPECIAL, RELIANCE, OR INDIRECT DAMAGES, OR FOR LOST
DATA, LOST PROFITS, LOSS OF GOODWILL OR BUSINESS INTERRUPTION, HOWEVER CAUSED,
ON ANY LEGAL THEORY, WHETHER BREACH OF CONTRACT, TORT, OR OTHERWISE, REGARDLESS
WHETHER LIQUID AUDIO HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES.
MERCHANT AGREES THAT THE AMOUNTS PAYABLE TO LIQUID AUDIO UNDER THIS AGREEMENT
REFLECT THE FOREGOING ALLOCATION OF RISK.
XVII. Proprietary Rights
------------------
(a) Definitions: (i) "Merchant Pages" means the pages accessible via the
---------------------
Merchant Site that incorporate and integrate the Links, Liquid Audio Content and
Merchant Content; (ii) "Liquid Audio Content" means the text, pictures, graphics
sound, video, other data and computer software to be provided by Liquid Audio
hereunder, as such materials may be modified from time to time; (iii) "Marks"
means Domain Name and the Merchant loges and trademarks to be provided to Liquid
Audio in accordance with this Agreement; (iv) "Merchant Content" means the
materials provided by or created by or on behalf of Merchant (such as the Marks,
an HTML template for the "look and feel" of the Merchant Pages, files, data and
formulae) for incorporation in the Merchant Pages.
(b) License Grant By Merchant. Merchant hereby grants to Liquid Audio a
---
limited non-exclusive worldwide license to: (a) use the Marks on Liquid Audio's
Web Site. Liquid Audio shall have no right to sublicense the foregoing rights
without Merchant's prior written consent Any rights not expressly granted by
Merchant to Liquid Audio are reserved by Merchant, and all implied licenses
disclaimed. Liquid Audio shall not exceed the scope of the licenses granted
hereunder.
(c) Ownership of Marks, Merchant Content, and Merchant Site. All right,
---
title and interest in and to the Marks, Merchant Content and the Merchant Site
(other than Liquid Audio Content) (including without limitation, all rights
therein under copyright trademarks trade secret and similar laws) shall remain
with Merchant or its licensors and/or suppliers. Liquid Audio will not make any
modification to the Marks and/or Merchant' s Content in connection with its
performance hereunder, without Merchant' s prior written consent
(d) Ownership of Liquid Audio Content. All right, title and interest in
---
and to the Liquid Audio Content (including without limitation all rights therein
under copyright, trademark, trade secret and similar laws) shall remain with
Liquid Audio or its licensors and/or suppliers.
(e) Quality Control and Use Restrictions. Liquid Audio shall use the
---
Marks exactly in conformance with Merchant's trademark useage policies as
communicated to Liquid Audio from time to time. Merchant may immediately
terminate Liquid Audio' s license to use the Marks if Merchant reasonably
believes the such use dilutes, tarnishes or blurs the value of the marks. Liquid
Audio shall place a (R) or (as appropriate) with the Marks as requested by
Merchant. Liquid Audio acknowledges that Liquid Audio's use of the Marks will
not create in it, nor will it represent it has, any right, title or interest in
or to the Marks other than the limited license granted by Merchant above. Liquid
Audio will not challenge the validity of or attempt to register any of the Marks
or its interest therein as a licensee, nor will it adopt any derivative or
confusingly similar names, brands or marks or create any combination marks with
the Marks. Liquid Audio acknowledges Merchant' s and its affiliates' ownership
and exclusive right to use the marks and agrees that all goodwill arising as a
result of the use of the Marks shall inure to the benefit of Merchant and its
affiliates.
(f) Limited Promotional Use. Liquid Audio hereby grants a non-exclusive,
---
worldwide license to Merchant to use, reproduce, distribute, create derivative
works of, publicly perform, publicly display and digitally perform Liquid Audio
Content and the RIFFS Logo and Artwork solely in connection with reasonable
promotional activities by Merchant in connection with demonstrating and
promoting Merchant's Site
(g) Non Exclusivity. Nothing in this Agreement shall be deemed or
---
construed to prohibit (a) Liquid Audio from providing the Liquid Audio Content
(or similar material) to any third party, or (2)
-6-
<PAGE>
Merchant from procuring material similar in nature to Liquid Audio Content from
any third party.
(h) Execution of Documents. Each party agrees to execute such documents and
-
take such other actions as are reasonably necessary to effectuate the provisions
of this Section-- at the other party's request and sole expense. In the event
either party refuses or is unable to take such action, such party hereby
irrevocably appoints the other party as such party' s agent-in-fact for the
purposes of taking such action, which appointment is coupled with an interest.
XVIII. General Performance Standards
-----------------------------
Liquid Audio and its related operations must comply with the following
performance standards throughout the Term: (i) The RIFFS Server will be
operational and fully functional in all material respects at least 97% of the
time during any 30 day period; (ii) has been designed to provide an optimal
level of service this includes: Sun Unix machines colocated at one of the top
"tier 2" ISP's with an initial bandwidth of 100Mbps that is promptly expandable
to meet fluctuations in demand and is redundant to provide reliable service;
(iii) Merchant will receive prompt notification of all Network upgrades, outages
or any activity that will cause a sufficient deficiency in these general
performance standards; and (iv) Without limiting Merchant's rights or remedies,
if any of the performance standards set forth above are not met by Liquid Audio,
Merchant may immediately remove any or all links to the RIFFS Catalog at
Merchant's sole discretion. In such instance, Merchant will provide immediate
notice and 24 hours from said notice to cure. Further, if the RIFFS Server fails
to operate fully and functionally in any material respect for any period of four
or more consecutive hours, even if otherwise in compliance with the performance
standards, Merchant may immediately remove any or all links to the RIFFS
Catalog, at Merchant's sole discretion, until such time as Liquid Audio notifies
Merchant that the Server has resumed acceptable operation.
XIX. Maintenance
Upgrades and patches to be provided in a timely manner.
XIX. Non-solicitation of Employees
During the Term and for a period of six (6) months from the voluntary or
involuntary termination of this Agreement for any reason whatsoever, neither
party shall (i) solicit, interfere with, or endeavor to cause any employee of
the other party to leave his or her employment; or (ii) induce or attempt to
induce any such employee to breach her or his employment agreement with the
other party.
-7-
<PAGE>
SCHEDULE "B"
------------
RIFFS Catalog Categories Annual Affiliation Fees
- ------------------------ -----------------------
All Categories
Pop/R&B
Country
Rock
Jazz
Classical
-8-
<PAGE>
SCHEDULE "C"
------------
RIFFS COURIER END USER LICENSE AGREEMENT
LIQUID AUDIO, INC. ("LIQUID AUDIO") AGREES TO LICENSE TO YOU ("MERCHANT") THE
RIFFS COURIER SOFTWARE ("SOFTWARE") FOR USE IN CONNECTION WITH LIQUID AUDIO'S
REMOTE INVENTORY FULFILLMENT SERVICE ("RIFFS PROGRAM") ONLY ON THE CONDITION
THAT YOU ACCEPT ALL OF THE TERMS CONTAINED IN THIS AGREEMENT.
1. LICENSE GRANT AND RESTRICTIONS. Subject to the terms of this Agreement,
Liquid Audio grants to Merchant a non-exclusive, non-transferable, revocable
license to use during the term of this Agreement the object code copy of the
Software ("Copy") and related documentation as provided by Liquid Audio to
Merchant pursuant to that certain RIFFS Merchant Affiliate and License Agreement
between the parties ("RIFFS Agreement"). The Software may only be used in
connection with the RIFFS Program and on a single CPU, which may be changed from
time to time. Such license shall commence upon the date of delivery of the Copy
to Merchant or the date of complete execution of the RIFFS Agreement, whichever
occurs later, and shall continue until the expiration or termination of the
RIFFS Agreement, unless this Agreement is earlier terminated as provided herein.
Merchant may not (a) modify, disassemble, decompile or reverse engineer the
Software; (b) rent, lease, loan, resell, sublicense, distribute or otherwise
transfer the Software to any third party or use the Software to provide time-
sharing or similar services to any third party, (c) make any copy of the
Software except for a single boot-up copy and a single back-up copy; (d)
circumvent or disable any technological features or measures in the Software for
protection of intellectual property rights, or (e) delete the copyright and
other proprietary rights notices on the Software. This license does not include
any rights to maintenance or updates; provided, however, that if Liquid Audio
provides Merchant with any updates to the Software, Merchant shall promptly
implement such updates, and such updates shall be deemed to be included in the
license granted hereunder.
2. DIGITAL DELIVERY FEES. The continued effectiveness of this Agreement during
the term hereof is conditioned upon the receipt by Liquid Audio of any Digital
Delivery Fees (as such terms is defined in the RIFFS Agreement that are payable
by Merchant to Liquid Audio pursuant to the RIFFS Agreement. Such payments will
be made by Merchant pursuant to the terms and conditions set forth in the RIFFS
Agreement.
3. LIMITED WARRANTY. Liquid Audio represents and warrants during the term of
this Agreement that:
(i) The Software, including upgrades and patches, unless modified by
Merchant, will perform substantially in accordance with the documentation
provided by Liquid Audio. Merchant's sole remedy under this warranty is that
Liquid Audio will endeavor to correct within a reasonable period of time any
"Software Error" (i.e., material failure of the Software to perform
substantially in accordance with the documentation) that is reported during the
warranty period or, if Liquid Audio is unable to correct any Software Error,
terminate this Agreement. Liquid Audio does not warrant that the Software will
meet Merchant's requirements, that operation of the Software will be
uninterrupted, error-free or that all Software Errors will be corrected.
(ii) The media, if any (such as diskette or CD-ROM), provided by
Liquid Audio containing the Software will be free from defects in materials and
workmanship under normal use. Merchant's sole remedy under this warranty is that
Liquid Audio will replace any faulty media at no charge to Merchant if the same
is returned to Liquid Audio.
(iii) The Software, upgrades and patches will not infringe or
misappropriate any copyrights, trademarks, patents, privacy, publicity, and
other proprietary rights of any third party, or otherwise violate this Agreement
or any applicable law.
Indemnification. Liquid Audio agrees to defend, indemnify, and hold
harmless Merchant from and against any and all suits, prigs at law or in equity,
and any and all liability, loss, costs or damages, including reasonable
attorneys fees and expenses arising out of or in connection with any claim,
suit, demand or action relating to any actual or alleged violation of copyright,
trademark, trade name or patent laws with respect to the Software, upgrades or
patches provided to Merchant by Liquid Audio. Liquid Audio agrees
-9-
<PAGE>
to retain at the Liquid Audio's expense, legal counsel reasonably satisfactory
to Merchant, for the purpose of defending any said loss, claim, lawsuit,
petition, or other litigation; and to reimburse Merchant for all legal expenses
reasonably incurred by Merchant prior to the retention of said legal counsel by
Liquid Audio provided such expenses are reasonably pre-approved by Liquid Audio.
THE ABOVE WARRANTIES ARE EXCLUSIVE AND IN LIEU OF ALL OTHER WARRANTIES,
WHETHER EXPRESS OR IMPLIED, AND LIQUID AUDIO EXPRESSLY DISCLAIMS ALL OTHER
WARRANTIES, INCLUDING THE IMPLIED WARRANTIES OF MERCHANTABILITY, FITNESS FOR A
PARTICULAR PURPOSE AND NONINFRINGEMENT. NO ORAL OR WRITTEN INFORMATION OR ADVICE
GIVEN BY LIQUID AUDIO, ITS EMPLOYEES OR AGENTS SHALL INCREASE THE SCOPE OF THE
ABOVE WARRANTIES OR CREATE ANY NEW WARRANTIES.
4. LIMITATION OF LIABILITY. EXCEPT FOR SECTION 3, INTENTIONAL OR RECKLESS
MISCONDUCT BY LIQUID AUDIO ITS CONTRACTORS, AGENTS, OR EMPLOYEES, IN NO EVENT
WILL LIQUID AUDIO BE LIABLE TO MERCHANT OR ANY OTHER PARTY FOR CONSEQUENTIAL,
INCIDENTAL, INDIRECT, SPECIAL, OR RELIANCE DAMAGES OF ANY KIND OR FOR LOST DATA,
LOST PROFITS OR BUSINESS INTERRUPTION ARISING FROM USE OF THE COPY AND/OR THE
SOFTWARE EMBODIED THEREIN, WHETHER RESULTING FROM TORT (INCLUDING NEGLIGENCE),
BREACH OF CONTRACT OR OTHER FORM OF ACTION, ARISING IN ANY WAY OUT OF THIS
AGREEMENT, EVEN IF ADVISED OF THE POSSIBILITY OF SUCH DAMAGE. EXCEPT FOR SECTION
3, INTENTIONAL OR RECKLESS MISCONDUCT, LIQUID AUDIO'S TOTAL LIABILITY UNDER THIS
AGREEMENT WILL BE LIMITED TO THE TOTAL AMOUNTS PAID BY MERCHANT. Merchant
expressly acknowledges that the Digital Delivery Fees agreed to by the parties
reflect the foregoing allocation of risk.
5. OWNERSHIP; PERMISSIONS. Merchant agrees that Liquid Audio and/or its
suppliers own all right, title and interest in and to the Software and all
copies thereof, including without limitation any and all copyrights, patents,
trade secrets, trademarks and other intellectual property and proprietary rights
therein. Merchant will not acquire any additional licenses under any copyrights,
patents, trade secrets, trademarks or other intellectual property rights on
account of this Agreement. Merchant acknowledges that the Software embodies
trade secrets of Liquid Audio, the unauthorized use or disclosure of which may
cause substantial harm to Liquid Audio that could not be remedied by the payment
of damages alone. Accordingly, Liquid Audio may be entitled to preliminary and
permanent injunctive relief and other equitable relief for any breach of this
Section 1 or 5.
6. TERMINATION. Liquid Audio will have the right to terminate this Agreement
if Merchant breaches any term or condition of this Agreement (including without
limitation failure to pay any Digital Delivery Fees when due) and, if such
breach is subject to cure, fails to cure such breach within ten (10) days after
written notice from Liquid Audio. Upon termination of this Agreement, the rights
and licenses granted to Merchant under this Agreement shall automatically
terminate. Within five (5) days after termination, Merchant will return or
destroy all copies of the Software and documentation in Merchant's possession.
Upon request, Merchant will certify to Liquid Audio that all copies of the
Software have been returned to Liquid Audio or destroy. The exercise by Liquid
Audio of any remedies under this Agreement will be without prejudice to its
other remedies under this Agreement or otherwise. The rights and obligations of
the parties under Sections 2, 3, 4, 5, 6, 7, and 10 shall survive the expiration
or termination of this Agreement.
7. GOVERNMENT LICENSEE. If the Software is licensed by or for any unit or
agency of the United States Government, then the Software shall be classified as
"commercial computer software," as that term is defined in the applicable
provisions of the Federal Acquisition Regulation ("FAR") and supplements
thereto, including the Department of Defense ("DoD") FAR Supplement ("DFARS").
Liquid Audio represents that the Software was developed entirely at private
expense, and that no part of the Software was first produced in the performance
of a United States Government contract. If the Software is supplied for use by
DoD, the Software is delivered subject to the terms of this Agreement and either
(i) in accordance with DFARS 227.7202-1(a) and 227.7202-3(a), or (ii) with
restricted rights in accordance with DFARS 252.227-7013(c)(1)(ii) (OCT 1988), as
applicable. If the Software is supplied for use by a Federal agency other than
DoD, the Software is restricted computer software delivered subject to the terms
of this Agreement and (i) FAR 12.212(a); (ii) FAR 52.227-19; or (iii) FAR 52.
227-14(ALT III), as applicable.
8. EXPORT CONTROL. Merchant agrees to comply with all export laws and
restrictions and regulations of the United States Department of Commerce or
other United States or other sovereign agency or authority, and not to export,
or allow the export or re-export of any technical data or any Software in
violation of any such restrictions, laws or regulations, or unless and until all
required licenses and authorizations are obtained to the countries specified in
the applicable U.S. Export Administration Regulations (or any successor
supplement or regulations).
-10-
<PAGE>
9. GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of California, excluding its conflicts of
law principles. The parties agree that the United Nations Convention on
Contracts for the International Sale of Goods will not apply to this Agreement.
Except for disputes as to the ownership of intellectual property rights in the
Software, all disputes arising out of or relating to this Agreement or its
interpretation shall be finally settled by binding arbitration in Redwood City,
California pursuant to the Commercial Arbitration rules of the American
Arbitration Association by one arbitrator. All arbitrators will have knowledge
of and experience regarding the computer industry. The arbitration award may be
enforced in any court of competent jurisdiction. Merchant hereby consents to the
personal and exclusive jurisdiction and venue of the state and federal courts
located in California.
10. MISCELLANEOUS. This Agreement constitutes the entire agreement between the
parties with respect to its subject matter, and supersedes any and all written
or oral agreements previously existing between the parties with respect to such
subject matter. Any modifications of this Agreement must be in writing and
specifically reference amendment to this agreement. This Agreement will bind and
inure to the benefit of each party's successors and assigns, provided that
Merchant may not assign or transfer this Agreement, in whole or in pan, or any
rights, duties or obligations hereunder, whether by operation of law or
otherwise, without Liquid Audio's prior written consent, and any purported
transfer or assignment without such consent shall be void. Except, Merchant will
have the absolute right to assign this Agreement without being required to
obtain prior consent of Liquid Audio (a) to any affiliate or (b) to any
corporation into which Merchant may merge or which may result from the
consolidation of Merchant with any other corporation. No pledge, sale, transfer,
encumbrance, hypothecation, inheritance, or other transfer of Merchant's stock
will constitute assignment hereunder. If any provision of this Agreement is
found illegal or unenforceable, it will be enforced to the maximum extent
permissible, and the legality and enforceability of the other provisions of this
Agreement will not be affected. No failure of either party to exercise or
enforce any of its rights under this Agreement will act as a waiver of such
rights. No purchase order, invoice or similar document will by its terms amend
or supplement the terms and conditions of this Agreement, even if accepted or
signed by the receiving party. Performance of this Agreement may be suspended
due to any force majeure event.
MERCHANT ACKNOWLEDGES THAT IT HAS READ THIS AGREEMENT, UNDERSTANDS IT AND AGREES
TO BE BOUND BY ITS TERMS AND CONDITIONS.
THE SOFTWARE AND THE ACCOMPANYING DOCUMENTATION ARE PROTECTED BY UNITED STATES
COPYRIGHT LAW AND INTERNATIONAL TREATY. UNAUTHORIZED REPRODUCTION OR
DISTRIBUTION IS SUBJECT TO CIVIL AND CRIMINAL PENALTIES.
-11-
<PAGE>
EXHIBIT 10.41
OEM AGREEMENT
-------------
WHEREAS Liquid Audio, Inc., a California corporation, with offices at 810
Winslow Street, Redwood City, California 94063 (hereinafter referred to as
"Liquid Audio") has developed a specification (referred herein as the "Secured
Portable Player Protocol" or "SP-3") to download audio to be written to and
playable on consumer electronics devices; and
WHEREAS Sanyo Electric Co., Ltd., a Japanese corporation with offices at 1-
1, Sanyo-cho, Daito City, Osaka 574-8534, Japan hereinafter referred to as
"OEM", wishes to build a consumer electronics device utilizing the Secured
Portable Player Protocol;
NOW THEREFORE THE PARTIES HEREBY AGREE AS OF THIS 2nd DAY OF JUNE 1999
("EFFECTIVE DATE") AS FOLLOWS:
DELIVERABLES: Described in Attachment 2
DELIVERABLE SCHEDULE: Described in Attachment 2
EFFECTIVE DATE: June 2,1999
TERM: Two years from Effective Date
OEM PRODUCTS: Described in Attachment 3
ROYALTY FEE: [***]
NRE FEE: [***]
SHIP DATE OF DEVICE: September 1999
This Agreement (the "Agreement") consists of this cover page and
Attachments 1, 2, 3, 4 and 5 hereto and all Schedules thereto.
IN WITNESS THEREOF, the parties hereto have executed this Agreement as of
the date first above written.
FOR LIQUID AUDIO FOR SANYO ELECTRIC CO., LTD.
BY: /s/ Mr. Robert Flynn BY: /s/ Mr. Tatsuo Tanaka
----------------------------- -----------------------------
Mr. Robert Flynn Mr. Tatsuo Tanaka
TITLE: Vice President TITLE: Senior Manager
DATE: June 2, 1999 DATE: June 2, 1999
*Some material in this Exhibit has been omitted pursuant to a request for
confidential treatment. Such material has been filed separately with the
Securities and Exchange Commission.
<PAGE>
ATTACHMENT 1
------------
OEM AGREEMENT TERMS AND CONDITIONS
----------------------------------
Annexed to and made part of that certain OEM Agreement ("Agreement") dated as
of _____________________________________________________,1999, between Liquid
Audio, Inc. "Liquid Audio") and __________ ("OEM").
I. Definitions
-----------
"Deliverables" means Liquid Audio deliverables referred to in the cover page of
this Agreement.
"Devices" means a consumer electronic product developed based on Hardware
Designs incorporating OEM Software into the OEM Products.
"Hardware Designs" means the designs, specifications [and compliance test bench]
that will be used to build and manufacture the Device.
"Invention" means any innovation or feature, whether or not patentable or
registerable, made by or on behalf of either or both of the parties hereto,
which is made in the course of the performance of this Agreement and which
directly results from or directly arises out of the work pursuant to this
Agreement.
"Liquid Audio Products" means the Liquid Audio Player Software and Liquid Audio
Reference Software.
"Liquid Audio Player Software" means the object code version of Liquid Audio's
then current Player Software that Liquid Audio distributes to Liquid Audio's
customers.
"Liquid Audio Reference Software" means the specifications and/or the C level
source and object code version of Liquid Audio's SP-3 device module software
that enables interface protocol for authentication and data transfer, file
format parsing and content decryption.
"Patent Right" means any patent, utility model, registration, and/or design
patent, excluding trademarks, trade names, or copyrights, for any innovation,
discovery, improvement or feature issued in any country and/or filed prior to
one (1) year after termination or expiration of this Agreement.
"OEM Reference Design" means the Hardware Design and OEM Software.
"OEM Products" means OEM's consumer electronic products referred to on the cover
page of this Agreement.
"OEM Software" means versions of Liquid Audio Reference Software as modified for
OEM Products.
"Territory" means all countries and territories worldwide.
"Tools" means OEM's tools necessary or desirable to enable Liquid Audio to
provide technical engineering assistance to OEM hereunder.
II. Software License
----------------
(a) Liquid Audio License Grant. Subject to all the terms and conditions of
--------------------------
this Agreement, Liquid Audio hereby grants to OEM under Liquid Audio's patents,
copyrights, and trade secrets, during the Term, a non-exclusive, royalty-free,
nontransferable, non-sublicensable license in the Territory: (i) to use, copy,
modify and make derivative works of Liquid Audio Reference Software, including
source code thereof, to develop the OEM software; (ii) to incorporate OEM
Software, in object code only, into OEM Products to create Devices; (iii) to
copy Liquid Audio Player Software; (iv) to copy OEM Software, by embedding it in
Devices; and (v) to distribute in the Territory the Liquid Audio Player Software
and the OEM Software only on a bundled basis in connection with OEM's
distribution of Devices in the ordinary course of OEM's business.
(b) Limitations. Notwithstanding any other provision of this Agreement,
-----------
OEM shall not reproduce or have reproduced the OEM Software except in connection
with the production of Devices, nor shall OEM distribute any OEM Software except
as part of a Device or Liquid Audio Player Software except in connection with
the distribution of Devices.
(c) Reservation of Rights. Liquid Audio hereby reserves to itself all
---------------------
rights to the Liquid Audio Products not expressly granted to OEM herein. OEM
shall have no rights in or to the Liquid Audio Products except as expressly
granted herein.
(d) Player End-User License Agreements. OEM shall distribute each Device
----------------------------------
with an end-user license agreement substantially in the form attached hereto as
Attachment 4.
(e) No Reverse Engineering. OEM shall not, and shall not permit any third
----------------------
party to, alter, modify, adapt, translate, prepare derivative works from,
decompile, reverse engineer, disassemble, or otherwise attempt to derive
computer source code from, as applicable, the Liquid Audio Products, except as
may be expressly permitted by applicable local law or Section II(a) herein.
(f) Licensing Relationship. The Liquid Audio Products are licensed, not
----------------------
sold, by Liquid Audio to OEM and distributed by OEM to its customers, and
nothing in this Agreement shall be interpreted or construed as a sale or
purchase of the Liquid Audio Products.
-2-
<PAGE>
(g) Proprietary Rights Notices. OEM shall neither alter nor remove any
--------------------------
copyright notice or other proprietary rights notices which may appear on any
Liquid Audio Product. In addition, OEM agrees that any reproduction of any
Liquid Audio Product (or any portion thereof) authorized by Liquid Audio shall
include such copyright and other proprietary rights notices as are currently
contained on each such Liquid Audio Product or as may be reasonably specified
from time to time by Liquid Audio. All promotional material relating to any
Device shall also contain a reference, in such form as Liquid Audio shall
reasonably prescribe, to Liquid Audio's proprietary rights in the Liquid Audio
Products.
(h) Best Efforts. OEM shall use its best efforts to promote the marketing
------------
and distribution of Devices to realize the maximum sales potential for the
Devices in the Territory. OEM agrees that it will bundle the Liquid Audio Player
Software with Device for so long as Devices incorporate the OEM software. OEM
agrees that it will make the Liquid Audio Player Software available for download
from all appropriate Web sites that it operates or controls.
(i) OEM-branded Liquid Audio Player Software. OEM will provide graphics
----------------------------------------
for a co-branded to be included with the Liquid Audio Player Software to be
distributed hereunder with the Device. OEM hereby grants to Liquid Audio a non-
exclusive, non-sublicensable, non-assignable license to use trademarks provided
by OEM on such faceplate.
III. Use of Liquid Audio Trademarks and Liquid Audio Trademark License
-----------------------------------------------------------------
(a) Grant. Liquid Audio hereby grants to OEM a non-exclusive, non-
-----
sublicensable, non-assignable license to use the Licensed Trademarks in the
Territory during the Term solely in connection with the packaging, labeling,
promotion, advertising, and distribution of Devices. All such use shall be
strictly in accordance with any trademark guidelines that may be supplied by
Liquid Audio from time to time.
(b) Other Marks. OEM shall not use any mark confusingly similar to any of
-----------
the Licensed Trademarks at any time.
(c) Quality Control. OEM shall deliver to Liquid Audio, at no cost to
---------------
Liquid Audio, from time to time as reasonably requested by them, representative
samples of any and all items bearing any of the Licensed Trademarks. If, at any
time, any item made or assembled by OEM and bearing any of the Licensed
Trademarks shall, in the sole opinion of Liquid Audio, fail to conform to the
standards of quality set by Liquid Audio, OEM immediately shall take such steps
as are necessary to conform all such items to Liquid Audio's standard of
quality.
(d) Policing. OEM shall aid Liquid Audio in policing the use of the
--------
Licensed Trademarks and shall otherwise provide Liquid Audio with all reasonable
cooperation in protecting the Licensed Trademarks. OEM shall immediately notify
Liquid Audio of any apparent infringement of any of the Licensed Trademarks that
comes to OEMs attention.
(e) Branding. OEM shall place the Licensed Trademark (or otherwise
--------
provided by Liquid Audio) in a placement and prominence reasonably approved by
Liquid Audio on the product chassis and packaging for all Devices sold by OEM.
IV. Development and Delivery
------------------------
(a) Liquid Audio Deliverables. Liquid Audio will use reasonable commercial
-------------------------
efforts to deliver Deliverables to OEM promptly after development thereof in
accordance with the Deliverable Schedule set forth in Attachment 2 hereof.
(b) Title to Liquid Audio Deliverables. Title to Deliverables shall not
----------------------------------
pass from Liquid Audio to OEM or third parties, and Deliverables shall at all'
times remain the sole and exclusive property of Liquid Audio.
(c) Delivery of Tools. OEM shall deliver three (3) copies of Tools to
-----------------
Liquid Audio within thirty (30) days of the Effective Date.
(d) Title to Tools. Title to the Tools shall not pass from OEM to Liquid
--------------
Audio, and the Tools shall at all times remain the sole and exclusive property
of OEM.
(e) Engineering Support. OEM will develop the OEM Reference Design for the
-------------------
Device. Except as otherwise provided in this Agreement, each party will bear its
own expenses in connection with carrying out the development and any other
obligation set forth in this Agreement. During the development of Deliverables,
OEM shall evaluate the Deliverables and shall provide reasonable feedback to
Liquid Audio. Liquid Audio shall provide reasonable engineering support to OEM
in connection with OEM's development of the OEM Software. OEM will use
reasonable commercial efforts to commence sale of the Devices in commercial
quantities in accordance with the product launch date set forth in the cover
page of this Agreement.
V. Compensation and Reporting
--------------------------
(a) Compensation. The Parties' sole compensation under this Agreement
------------
shall be the mutual benefit derived from offering the OEM Software on the Device
and each party shall retain all revenues derived from their respective
activities.
(b) Licensing Statement. On or before the thirtieth (30th) day following
-------------------
the end of every calendar quarter; OEM shall deliver to Liquid Audio a written
statement showing the number of Devices distributed by OEM during the
immediately preceding calendar quarter.
VI. Support
-------
(a) End User Support. As between the parties, OEM will have the sole
----------------
responsibility to provide end user technical support to customers of Devices.
-3-
<PAGE>
VII. Marketing and Production Costs
------------------------------
(a) Joint Marketing of Device. Liquid Audio and OEM will collaborate on
-------------------------
a joint press release and launch plan including appropriate marketing promotions
and program, including, without limitation, press release, promotion with major
content providers, coupons, direct marketing to OEM customer base, and any other
appropriate promotions. All of Liquid Audio's promotions regarding devices
incorporating SP3 device module software shall describe OEM as one of Liquid
Audio's preferred partners for consumer products utilizing the Liquid Audio
Reference Software. All OEM's marketing promotion of the Device will refer to
Liquid Audio and SP-3 as one of the OEM's preferred technology partners. OEM
will aggressively promote (using its full complement of advertising/promotional
means) the Device and Liquid Audio's involvement therein.
(b) Production Costs. OEM shall be solely responsible for the cost of
----------------
(i) reproduction of the Liquid Audio Player Software and OEM Software, including
the cost for the media onto which such software is reproduced; (ii) manufacture
of any packaging or labeling in connection with the distribution of the Device;
and (iii) any other marketing and distribution costs related to its sale of
Devices.
(c) Press Release. Liquid Audio and OEM will collaborate to issue a
-------------
joint press release announcing the relationship contemplated by this Agreement.
VIII. Miscellaneous Terms
-------------------
(a) Liquid Music Network Agreement. During the Term of this Agreement,
------------------------------
Liquid Audio, at OEM's option, shall license OEM as a syndication affiliate of
the Liquid Music Network subject to the Liquid Music Network Syndication License
Agreement set forth in Attachment 5.
(b) Major Music Providers. Liquid Audio will collaborate with OEM to
---------------------
access the major global providers of musical content to provide content for sale
from designated Web Sites using the Device. If any such content is procured,
Liquid Audio will use reasonable efforts to license any required software to
OEM.
IX. Representations, Warranties, Disclaimers, Etc.
----------------------------------------------
(a) Warranty Disclaimer. THE LIQUID AUDIO PRODUCTS, AND ANY OTHER ITEMS
-------------------
OR GOODS LICENSED OR DELIVERED TO OEM HEREUNDER ARE LICENSED OR DELIVERED TO OEM
"AS IS," AND WITHOUT WARRANTY OF ANY KIND. LIQUID AUDIO HEREBY EXPRESSLY
DISCLAIMS ALL WARRANTIES IN CONNECTION WITH THE LIQUID AUDIO PRODUCTS AND THIS
AGREEMENT, INCLUDING, WITHOUT LIMITATION, THE IMPLIED WARRANTIES OF NON-
INFRINGEMENT, MERCHANTABILITY, AND FITNESS FOR A PARTICULAR PURPOSE. LIQUID
AUDIO MAKES NO, AND HEREBY EXPRESSLY DISCLAIMS ANY, WARRANTY (1) OF CONTINUOUS
OR UNINTERRUPTED OPERATION OF LIQUID AUDIO PRODUCTS, (2) THAT THE LIQUID AUDIO
PRODUCTS WILL RUN PROPERLY ON ALL HARDWARE OR COMBINATIONS THEREOF, OR (3) THAT
THE LIQUID AUDIO PRODUCTS WILL MEET OEM'S REQUIREMENTS OR THE REQUIREMENTS OF
ANY OF OEM'S CUSTOMERS.
X. Limitation of Liability
-----------------------
(a) Total Liability. LIQUID AUDIO'S TOTAL LIABILITY TO OEM FOR ANY KIND
---------------
OF LOSS, EXPENSE, COST, CLAIM OR DAMAGE ARISING UNDER OR IN CONNECTION WITH THIS
AGREEMENT, UNDER ANY THEORY OF LIABILITY, SHALL BE LIMITED TO THE AMOUNTS PAID
TO LIQUID AUDIO BY OEM HEREUNDER, IF ANY, IN THE TWELVE (12)-MONTH PERIOD
IMMEDIATELY PRECEDING THE EVENT TO WHICH SUCH LOSS OR DAMAGE RELATES.
(b) Exclusion of Damages. IN NO EVENT SHALL LIQUID AUDIO BE LIABLE TO
--------------------
OEM FOR ANY INDIRECT, SPECIAL, INCIDENTAL OR CONSEQUENTIAL DAMAGES, WHETHER
BASED ON BREACH OF CONTRACT, TORT (INCLUDING NEGLIGENCE), PRODUCT LIABILITY, OR
OTHERWISE, AND WHETHER OR NOT LIQUID AUDIO HAS BEEN ADVISED OF THE POSSIBILITY
OF SUCH DAMAGE. EXCEPT WITH RESPECT TO OR IN CONNECTION WITH ANY PROPRIETARY OR
INTELLECTUAL PROPERTY RIGHT OF LIQUID AUDIO, OEM SHALL NOT BE LIABLE TO LIQUID
AUDIO FOR ANY INDIRECT, SPECIAL, INCIDENTAL OR CONSEQUENTIAL DAMAGES, WHETHER
BASED ON BREACH OF CONTRACT, TORT (INCLUDING NEGLIGENCE), PRODUCT LIABILITY, OR
OTHERWISE, AND WHETHER OR NOT OEM HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH
DAMAGE.
XI. Term and Termination
--------------------
(a) Term. This Agreement shall commence on the Effective Date and shall
----
continue for the period set forth in the Main Agreement unless otherwise
terminated earlier in accordance with the terms of this Section XI.
(b) Events of Default. Any of the following events shall be an "Event of
-----------------
Default" for purposes of this Section XI:
(i) Insolvency Events: Either party shall cease conducting business
-----------------
in the normal course; become insolvent or become unable to meet its obligations
as they become due; make a general assignment for the benefit of creditors;
petition, apply for, suffer or permit with or without its consent the
appointment of a custodian, receiver, trustee in bankruptcy or similar officer
for all or any substantial part of its business or assets; avail itself or
become subject to any proceeding under the U.S. Bankruptcy Code or any similar
state, federal or foreign statute relating to bankruptcy, insolvency,
reorganization, receivership, arrangement,
-4-
<PAGE>
adjustment of debts, dissolution or liquidation, which proceeding is not
dismissed within one hundred twenty (120) days of commencement thereof; or
(ii) Material Defaults: Default shall be made by either party in
-----------------
the observance or performance of any material term, warranty, representation,
covenant or agreement contained in this Agreement for a period of thirty (30)
days from the date of receipt of written notice from the other party advising of
such default and the defaulting party has not cured such default and so notified
the other party within such thirty (30) day period.
(c) Termination Upon Event of Default. In any Event of Default, the
---------------------------------
party which is not in default, upon written notice any time to the other party,
may terminate this Agreement.
(d) Effect of Termination. Upon any expiration or termination of this
---------------------
Agreement, (a) all rights and licenses granted to OEM under this Agreement shall
terminate. Except as expressly provided herein, all of Liquid Audio's
proprietary rights and confidential information, if any, shall be promptly
returned to Liquid Audio or destroyed by OEM, and certification of destruction
shall be made in writing to Liquid Audio within ten (10) days after such return
or destruction.
(e) Nonexclusive Remedies. The rights and remedies provided to the
---------------------
parties in this Section X shall not be exclusive and are in addition to all
other rights and remedies provided by this Agreement or any other relevant
written agreement or available by law or in equity.
(f) Survival. Notwithstanding anything to the contrary contained in this
--------
Agreement, Sections I, II (except Section If(a)), V (except Section V Co)), VI,
X, IX, X, XI, XII and XIII shall survive any expiration or termination of this
Agreement.
XII. Confidential Information
------------------------
(a) Each party acknowledges that by reason of its relationship to the
other party under this Agreement it will have access to certain information and
materials concerning the other party's business, plans, customers, technology
and products that are confidential and of substantial value to such party
(referred to in this Section XII as "Confidential Information"), which value
would be impaired if such Confidential Information were disclosed to third
parties. The terms of this Agreement shall be deemed to constitute the
Confidential Information of Liquid Audio. Each party agrees to maintain all
Confidential Information received from the other, both orally and in writing, in
confidence and agrees not to disclose or otherwise make available such
Confidential Information to any third party without the prior written consent of
the disclosing party. Each party further agrees to use the Confidential
Information only for the purpose of performing this Agreement. No Confidential
Information shall be deemed confidential unless so marked if given in writing
or, if given orally, identified as confidential orally prior to disclosure and
confirmed in writing within thirty (30) days; provided, however, that Licensor
agrees that any Confidential Information in whatever form relating to the
design, functionality, operational methods or coding of Liquid Audio software,
including but not limited to any complete or partial source or object code
versions of such software, shall be deemed Confidential Information of Liquid
Audio regardless of the presence or absence of any confidential markings or
identification.
(b) The parties' obligations under this Section XII shall not apply to
Confidential Information which: (i) is or becomes a matter of public knowledge
though no fault of or action by the receiving party; (ii) was rightfully in the
receiving party's possession prior to disclosure by the disclosing party; (iii)
subsequent to disclosure, is rightfully obtained by the receiving party from a
third party who is lawfully in possession of such Confidential Information
without restriction; (iv) is independently developed by the receiving party
without resort to the disclosing party's Confidential Information; or (v) is
required by law or judicial order, provided that prior written notice of such
required disclosure is furnished to the disclosing party as soon as practicable
in order to afford the disclosing party an opportunity to seek a protective
order and that if such order cannot be obtained disclosure may be made without
liability. Whenever requested by a disclosing party, a receiving party shall
immediately return to the disclosing party all manifestations of the
Confidential Information or, at the disclosing party's option, shall destroy all
such Confidential Information as the disclosing party may designate. The
receiving party's obligation of confidentiality shall survive this Agreement for
a period of five (5) years from the date of its termination, and thereafter
shall terminate and be of no further force or effect.
XIII. Other Provisions
----------------
(a) Amendments. This Agreement may not in any way be modified, changed
----------
or amended except by a written instrument duly executed by the parties hereto.
This Agreement, when executed, constitutes the entire, final, complete and
exclusive agreement between the parties and supersedes any prior negotiations,
understanding or agreements, whether oral or in writing, concerning the subject
matter hereof.
(b) Governing Law. THIS AGREEMENT IS MADE IN ACCORDANCE WITH AND SHALL
-------------
BE GOVERNED AND CONSTRUED UNDER. THE LAWS OF THE STATE OF CALIFORNIA, WITHOUT
REFERENCE TO CONFLICTS OF LAWS PRINCIPLES. IN NO EVENT SHALL THIS AGREEMENT BE
GOVERNED BY THE UNITED NATIONS CONVENTION ON CONTRACTS FOR THE INTERNATIONAL
SALE OF GOODS.
(c) Jurisdiction. The State and federal courts in Santa Clara County,
------------
California shall have exclusive jurisdiction and venue over all controversies in
connection herewith, and each party hereby irrevocably consents to such
exclusive and personal jurisdiction and venue.
-5-
<PAGE>
(d) Injunctive Relief. In the event of any breach of Section II, III,
-----------------
VII or XII, either party may at any time apply to a court of competent
jurisdiction for relief in the form of a temporary restraining order,
preliminary injunction, or other provisional remedy.
(e) Assignments. OEM may not assign this Agreement or any right or
-----------
obligation hereunder, directly, indirectly, by operation of law or otherwise,
without Liquid Audio's prior written consent, and any attempt to do so shall be
void and of no force or effect. Any change of control of OEM shall be considered
an assignment. Notwithstanding the foregoing, this Agreement shall be binding
upon and inure to the benefit of the permitted successors and assigns of each
party.
(f) Severability. If any provision of this Agreement is held to be
------------
illegal, unenforceable or invalid, no other provision of this Agreement shall be
affected thereby, and the remaining provisions of this Agreement shall be
construed and reformed and shall continue with the same effect as if such
illegal, unenforceable or invalid provision was not a part hereof; provided
--------
that, notwithstanding any other provision of this Agreement, if any limitation
- ----
on the grant of any license to OEM hereunder is found to be illegal,
unenforceable, or invalid, such license shall immediately terminate. The parties
agree to renegotiate in good faith any term held illegal, unenforceable or
invalid and to be bound by any mutually agreed substitute provision.
(g) Waiver. Any waiver (express or implied) by either party of any
------
default or breach of this Agreement shall not constitute a waiver of any other
or subsequent default or breach.
(h) Notices. All notices or other communications required or permitted
-------
to be given pursuant to this Agreement shall be in writing and shall be
considered properly given or made if hand delivered, mailed first class mail,
postage prepaid, sent by prepaid telegram (or telex or other facsimile
transmission) or sent by express overnight courier service to the relevant
addresses above or to such other address as either party hereto may designate by
like notice sent to the other party hereto. All notices shall be deemed given
when received. A mandatory copy of all notices delivered or sent to Liquid Audio
shall be sent to Wilson Sonsini Goodrich & Rosati, 650 Page Mill Road, Palo
Alto, California 94303-1050, Attention: Hank Barry, Esq.
(i) Headings. The headings and captions contained in this Agreement
--------
shall not be considered to be a part hereof for purposes of interpreting or
applying this Agreement, but are for convenience only.
(j) Import and Export Controls. OEM understands and acknowledges that
--------------------------
Liquid Audio is subject to regulation by agencies of the U.S. government,
including the U.S. Department of Commerce which prohibit export or diversion of
certain products, technology and technical data to certain countries. Any and
all obligations of Liquid Audio to provide the Liquid Audio Product, software,
documentation or any media in which any of the foregoing is contained, as well
as any training or technical assistance shall be subject in all respects to such
United States laws and regulations as shall from time:: to time govern the
license and delivery of technology, products and technical data abroad by
persons subject to the jurisdiction of the United States, including the Export
Administration Act of 1979, as amended, any successor legislation, and the
Export Administration Regulations issued by the Department of Commerce,
International Trade Administration, and Bureau of Export Administration.
(k) Contingency. Neither party hereto shall be held responsible for any
-----------
delay or failure in performance hereunder caused in whole or in part by fire,
strike, flood, embargo, labor dispute, delay or failure of any subcontract, act
of sabotage, riot, accident, delay of carrier or supplier, voluntary or
mandatory compliance with any governmental act, regulation or request, act of
God or by public enemy, or any act or omission or other cause beyond such
party's control. If any such contingency shall occur, this Agreement shall be
deemed extended by the length of time such contingency continues.
(l) Independent Contractors. The parties hereto are independent
-----------------------
contractors and neither party is an employee, agent, partner or joint venturer
of the other. Neither party shall have the right, nor shall either party
attempt, to bind the other party, whether directly or indirectly, to any
agreement with a third party or to incur any obligation or liability on behalf
of such other party, whether directly or indirectly.
-6-
<PAGE>
ATTACHMENT 2
------------
DELIVERABLES AND SCHEDULE
-------------------------
Deliverables
- ------------
SP3 API - A set of C function calls enabling a host application to communicate
with an SP3 compliant device.
SPT File Format - Documentation describing and reference libraries for parsing
the Secure Portable Track (SPT) file format.
SP3 Security Protocols - Documentation describing the SP3 security model and
reference C code/decryption libraries.
Hardware Reference - Design documentation describing the basic architecture of
an SP3-compliant device.
Compliance Test Bench - Documentation and code enabling the device manufacturer
to test and validate SP3 functionality.
<TABLE>
<CAPTION>
Schedule
- --------
TASK DRAFT BETA FINAL
- ---- ----- ---- -----
<S> <C> <C> <C>
SP3 API
Documentation 2/15 5/15 6/1
API 3/15 6/15 6/30
SPT File Format
Documentation 2/15 5/15 6/1
Reference files and code library 3/15 6/1 6/30
SP3 SECURITY PROTOCOLS
DOCUMENTATION 3/1 5/1 6/30
Reference code library 3/15 5/15 6/30
Hardware Reference
Documentation 3/15 5/15 6/30
Compliance Test Bench
Documentation and code 5/15 6/1 6/30
</TABLE>
-7-
<PAGE>
ATTACHMENT 3
------------
OEM PRODUCTS
. Portable Personal Stereo Devices
. Home Stereo Audio Decks
. Car Audio Devices
. Mobile Devices
-8-
<PAGE>
ATTACHMENT 4
------------
[Player Products]
END USER LICENSE AGREEMENT
--------------------------
PLEASE READ THIS AGREEMENT CAREFULLY BEFORE ATTEMPTING TO USE
-------
THE SOFTWARE AND BEFORE CLICKING ON THE "ACCEPT" BUTTON
-------
OR BREAKING THE SEAL OF ANY INSTALLATION DISKS.
LIQUID AUDIO, INC. ("LIQUID AUDIO") IS WILLING TO LICENSE THE SOFTWARE DESCRIBED
ABOVE (THE "SOFTWARE") TO YOU (THE "CUSTOMER") ONLY ON THE CONDITION THAT YOU
ACCEPT ALL OF THE TERMS CONTAINED IN THIS AGREEMENT. PLEASE READ THE TERMS
CAREFULLY BEFORE CLICKING ON THE "ACCEPT" BUTTON OR BREAKING THE SEAL OF ANY
INSTALLATION DISKS, AS CLICKING ON THE "ACCEPT" BUTTON OR BREAKING THE SEAL WILL
INDICATE YOUR AGREEMENT TO THESE TERMS.
IF YOU DO NOT AGREE TO THESE TERMS, THEN LIQUID AUDIO IS UNWILLING TO LICENSE
THE SOFTWARE TO YOU, AND YOU SHOULD CLICK ON THE "DO NOT ACCEPT" BUTTON TO
DISCONTINUE THE INSTALLATION PROCESS OR RETURN THE INSTALLATION DISKS FOR A
REFUND.
1. LICENSE GRANT AND RESTRICTIONS. Liquid Audio grants to Customer a non-
exclusive, non-transferable, revocable license to use the object code copy of
the Software distributed with this Agreement (the "Copy") along with related
documentation during the term of this Agreement on a single CPU, which may be
changed from time to time. Such license shall be perpetual upon the receipt by
Liquid Audio of full payment of the respective License Fee (as described below)
but shall be terminable as provided herein. Customer (a) may not modify,
disassemble, decompile or reverse-engineer the Software; (b) may not rent,
lease, loan, resell, sublicense, distribute or otherwise transfer the Software
to any third party or use the Software to provide time sharing or similar
services to any third party; (c) may not make any copy of the Software except
for a single working copy and a single backup copy; (d) may not circumvent or
disable any technological features or measures in the Software for protection of
intellectual property rights, and (e) may not delete the copyright and other
proprietary rights notices on the Software. Any attempt by Customer to transfer
any of the rights, duties or obligations hereunder except as expressly provided
for in this Agreement is void. This license does not include any rights to
maintenance or updates.
2. DISABLING SOFTWARE. THE SOFTWARE CONTAINS CODE WHICH MAY BE USED TO DISABLE
SUCH SOFTWARE. THIS DISABLING CODE MAY BE USED TO ENSURE THAT THE SOFTWARE IS
NOT USED IN VIOLATION OF THIS AGREEMENT, INCLUDING WITHOUT LIMITATION TO
INFRINGE INTELLECTUAL PROPERTY RIGHTS IN THE SOFTWARE OR ANY CONTENT. CUSTOMER
AGREES AND ACKNOWLEDGES THAT UPON ANY TERMINATION OR EXPIRATION OF THIS
AGREEMENT, AND PROVIDED THAT THE PARTIES HAVE NOT AGREED IN WRITING TO RENEW
THIS AGREEMENT, THE SOFTWARE MAY, AT LIQUID AUDIO'S DISCRETION, CEASE TO
FUNCTION IN SOME OR ALL RESPECTS, AND CUSTOMER MAY LOSE ACCESS TO DATA MADE
WITH, OR STORED USING, THE SOFTWARE. CUSTOMER AGREES TO INDEMNIFY LIQUID AUDIO
FROM ANY LIABILITY, INCLUDING LIABILITY DUE TO THIRD PARTY CLAIMS, RESULTING
FROM SUCH DISABLING OF SUCH SOFTWARE. CUSTOMER AGREES AND ACKNOWLEDGES THAT THE
DISABLING OF THE SOFTWARE IS A KEY FEATURE OF THE LICENSE RIGHTS AND
RESPONSIBILITIES CONVEYED UNDER THIS AGREEMENT.
3. LICENSE FEE. The effectiveness of this Agreement is conditioned on the
receipt by Liquid Audio or its reseller of the License Fee (or any initial
installment thereof) as set forth in Liquid Audio's or its reseller's invoice(s)
therefor. Such payment(s) will be made by Customer on the terms and conditions
specified in such invoice(s).
-9-
<PAGE>
4. LIMITED WARRANTY. Liquid Audio warrants for the period of ninety (90) days
from the date of deliver, of the Copy of the Software to Customer that:
(i) The Software, unless modified by Customer, will perform
substantially in accordance with the documentation provided by Liquid Audio.
Customer's sole remedy under this warranty is that Liquid Audio will either
correct within a reasonable period of time any "Software Error" (failure of the
Software to perform in accordance with the documentation) reported during the
warranty period or, if Liquid Audio is unable to correct any such Software
Error, refund to Customer the money paid for the Software. Liquid Audio does not
warrant that the Software will meet Customer's requirements that operation of
the Software will be uninterrupted, error-free or secure, or that all Software
Errors will be corrected.
(ii) The medium if any (such as diskette or CD Rom) provided by Liquid
Audio containing the Software will be free from defects in materials and
workmanship under normal use. Liquid Audio will, at its option, replace or
refund the purchase price of a faulty medium at no charge to Customer if the
same is returned to Liquid Audio.
THE ABOVE WARRANTIES ARE EXCLUSIVE AND 1N LIEU OF ALL OTHER WARRANTIES,
WHETHER EXPRESS OR IMPLIED, AND LIQUID AUDIO EXPRESSLY DISCLAIMS ALL OTHER
WARRANTIES, INCLUDING THE IMPLIED WARRANTIES OF MERCHANTABILITY, FITNESS FOR A
PARTICULAR PURPOSE AND NONINFRINGEMENT. NO ORAL OR WRITTEN INFORMATION OR ADVICE
GIVEN BY LIQUID AUDIO, ITS EMPLOYEES, RESELLERS OR AGENTS SHALL INCREASE THE
SCOPE OF THE ABOVE WARRANTIES OR CREATE ANY NEW WARRANTIES.
SOME STATES DO NOT ALLOW THE EXCLUSION OF IMPLIED WARRANTIES, SO THE ABOVE
EXCLUSION MAY NOT APPLY TO YOU. IN THAT EVENT, ANY IMPLIED WARRANTIES ARE
LIMITED IN DURATION TO NINETY (90) DAYS FROM THE DATE OF DELIVERY OF THE
SOFTWARE. THIS WARRANTY GIVES YOU SPECIFIC LEGAL RIGHTS. YOU MAY HAVE OTHER
RIGHTS, WHICH VARY FROM STATE TO STATE.
5. LIMITATION OF LIABILITY. IN NO EVENT WILL LIQUID AUDIO BE LIABLE TO
CUSTOMER OR ANY OTHER PARTY FOR DAMAGES OF ANY KIND ARISING FROM USE OF THE COPY
AND/OR THE SOFTWARE EMBODIED THEREIN, WHETHER RESULTING FROM TORT (INCLUDING
NEGLIGENCE), BREACH OF CONTRACT OR OTHER FORM OF ACTION, INCLUDING BUT NOT
LIMITED TO DIRECT, INDIRECT, SPECIAL, INCIDENTAL AND CONSEQUENTIAL DAMAGES
(INCLUDING LOST PROFITS) OF ANY KIND, ARISING IN ANY WAY OUT OF THIS AGREEMENT,
EVEN IF ADVISED OF THE POSSIBILITY OF SUCH DAMAGE. LIQUID AUDIO'S TOTAL
LIABILITY UNDER THIS AGREEMENT WILL BE LIMITED TO THE LICENSE FEE. Customer
expressly assumes all responsibility for any damages, lost data, lost profits
and other consequential damages that may result in any way out of this
Agreement, including without limitation, use of the Software. Customer expressly
agrees that the License Fee has been agreed to based in part upon the foregoing
limitation of Liquid Audio's liability.
6. OWNERSHIP; PERMISSIONS.
(a) Customer agrees that Liquid Audio and/or its suppliers owns all right,
title and interest in and to the Copy and the Software, including without
limitation any and all copyrights, patents, trade secrets, trademarks and other
intellectual property and proprietary rights therein. Customer will not acquire
any additional licenses under any copyrights, patents, trade secrets, trademarks
or other intellectual property rights on account of this Agreement.
(b) Customer will not alter, encode, copy or transmit any audio or other
information using the Software without obtaining all necessary copyright and
other permissions. Any failure to obtain such permissions constitutes a material
breach of this Agreement, shall cause irreparable harm to Liquid Audio, and
shall entitle Liquid Audio to receive equitable relief for such failure.
Customer will at its expense defend and indemnify Liquid Audio against all
liabilities, damages,
-10-
<PAGE>
claims, fines and expenses (including reasonable attorney's fees) arising out of
any claim that Customer has not obtained such permissions.
(c) CUSTOMER ACKNOWLEDGES THAT IN ORDER TO PURCHASE CONTENT, AND TO ACCESS
AND PLAY THE SAME, INCLUDING CONTENT PREVIOUSLY PURCHASED BY CUSTOMER, CUSTOMER
MUST BE AUTHORIZED BY A VALID TIME-LIMITED "PASSPORT" ISSUED PERIODICALLY BY
LIQUID AUDIO IN ACCORDANCE WITH LIQUID AUDIO'S THEN-CURRENT PASSPORT POLICY.
(d) Customer acknowledges that the Passport contains Customer's personal
and confidential information, INCLUDING CREDIT CARD INFORMATION, and that it is
essential to keep the Passport, and the password to the Passport confidential,
both to protect Customer's personal information, and to prevent third-parties
from using Customer's Passport to illegally download, copy, distribute or play
content. Customer agrees to keep his or her Passport confidential, and any
failure of Customer to do so shall be deemed a material breach of this
Agreement. Customer will at its expense defend and indemnify Liquid Audio
against all liabilities, damages, claims, fines and expenses (including
reasonable attorneys' fees) arising out of Customer's breach of this provision.
(e) Customer may be liable for the unauthorized use of Customer's credit
card. Customer is advised to consult the terms and conditions imposed by its
credit card issuer for notification requirements and limitations on Customer's
liability for loss, theft or unauthorized use of Customer's credit card. LIQUID
AUDIO DISCLAIMS ANY LIABILITY FOR ANY USE OF CUSTOMER'S PASSPORT OR CREDIT CARD,
INCLUDING ANY LOSS, THEFT OR UNAUTHORIZED USE THEREOF.
7. TERMINATION. Liquid Audio will have the right to terminate this Agreement
if Customer breaches any material term or condition of this Agreement
(including, if applicable, failure to pay any portion of the License Fee when
due as provided in Liquid Audio's invoice(s) therefor) and fail to cure such
breach within ten (10) days of written notice from Liquid Audio. Upon
termination of this Agreement, the rights and licenses granted to Customer under
this Agreement shall automatically terminate. Within five (5) days after
termination, Customer will return or destroy all copies of the Software and
documentation in Customer's possession. Upon request, Customer will certify to
Liquid Audio that all copies of the Software have been renamed to Liquid Audio
or destroyed. The exercise by Liquid Audio of any remedies under this Agreement
will be without prejudice to its other remedies under this Agreement or
otherwise. The rights and obligations of the parties under Sections 2, 4, 5, 6,
7 and 10 will survive the expiration or termination of this Agreement.
8. GOVERNMENT LICENSEE. If the Software is licensed by or for any unit or
agency of the United States Government, then the Software shall be classified as
"commercial computer software", as that term is defined in the applicable
provisions of the Federal Acquisition Regulation (the "FAR") and supplements
thereto, including the Department of Defense ("DoD") FAR Supplement (the
"DFARS"). Liquid Audio represents that the Software was developed entirely at
private expense, and that no part of the Software was first produced in the
performance of a United States Government contract. If the Software is supplied
for use by DoD, the Software is delivered subject to the terms of this Agreement
and either (i) in accordance with DFARS 227.7202-1 (a) and 227.7202-3(a), or
(ii) with restricted rights in accordance with DFARS 252.227-7013(c)(1)(ii) (OCT
1988), as applicable. If the Software is supplied for use by a Federal agency
other than DoD, the Software is restricted computer software delivered subject
to the terms of this Agreement and (i) FAR 12.212(a); (ii) FAR 52.227-19; or
(iii) FAR 52.227-14(ALT III), as applicable.
9. EXPORT CONTROL. Customer agrees to comply with all export laws and
restrictions and regulations of the United States Department of Commerce or
other United States or other sovereign agency or authority, and not to export,
or allow the export or re-export of any technical data or any Software in
violation of any such restrictions, laws or regulations, or unless and until all
required licenses and authorizations are obtained to the countries specified in
the applicable U.S. Export Administration Regulations (or any successor
supplement or regulations).
-11-
<PAGE>
10. GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of California, excluding its conflicts of
law principles. The parties agree that the United Nations Convention on
Contracts for the International Sale of Goods will not apply to this Agreement.
Except for disputes as to the ownership of intellectual property rights in the
Software, all disputes arising out of or relating to this Agreement or its
interpretation shall be finally settled by binding arbitration in Redwood City,
California pursuant to the Commercial Arbitration rules of the American
Arbitration Association by one arbitrator. All arbitrators will have knowledge
of and experience regarding the computer industry. Requests for equitable relief
shall be first submitted to the arbitrator. The arbitration award may be
enforced in any court of competent jurisdiction. Customer hereby consents to the
personal and exclusive jurisdiction and venue of the state and federal courts
located in San Mateo County of the State of California.
11. MISCELLANEOUS. This Agreement constitutes the entire agreement between the
parties with respect to its subject matter, and supersedes any and all written
or oral agreements previously existing between the parties with respect to such
subject matter. Any modifications of this Agreement must be in writing. This
Agreement will bind and inure to the benefit of each party's successors and
assigns, provided that Customer may not assign this Agreement, in whole or in
part, without Liquid Audio's prior written consent. If any provision of this
Agreement is found illegal or unenforceable, it will be enforced to the maximum
extent permissible, and the legality and enforceability of the other provisions
of this Agreement will not be affected. No failure of either party to exercise
or enforce any of its rights under this Agreement will act as a waiver of such
rights. No purchase order, invoice or similar document will by its terms amend
or supplement the terms and conditions of this Agreement, even if accepted or
signed by the receiving party. Performance of this Agreement may be suspended
due to any force majeure event.
CUSTOMER ACKNOWLEDGES THAT IT HAS READ THIS AGREEMENT, UNDERSTANDS IT AND AGREES
TO BE BOUND BY ITS TERMS AND CONDITIONS.
THE SOFTWARE AND THE ACCOMPANYING DOCUMENTATION ARE PROTECTED BY UNITED STATES
COPYRIGHT LAW AND INTERNATIONAL TREATY. UNAUTHORIZED REPRODUCTION OR
DISTRIBUTION IS SUBJECT TO CIVIL AND CRIMINAL PENALTIES.
Rev. ___.
-12-
<PAGE>
ATTACHMENT 5
------------
LIQUID MUSIC NETWORK/TM/
------------------------
SYNDICATION LICENSE AGREEMENT
-----------------------------
WHEREAS Liquid Audio, Inc., a California corporation, with offices at 810
Winslow Street, Redwood City, California 94063, hereinafter referred to as
"Liquid Audio," owns and operates the Liquid Music Network (the "LMN"), pursuant
to which Liquid Audio distributes on a syndicated basis an exclusive database of
music programming and other content for public performance and digital delivery
to select Web sites that are licensed as LMN syndication affiliates; and
WHEREAS _________________, a ______ corporation with offices at ________,
hereinafter referred to as "Licensee", wishes to be licensed as a syndication
affiliate of the Liquid Music Network and receive the right to carry the LMN
programming for distribution through Licensee's Web site or sites, upon the
terms and conditions set forth in Schedule "A" to this Agreement;
NOW THEREFORE THE PARTIES HEREBY AGREE AS OF THIS ______ DAY OF __________
199__ ("EFFECTIVE DATE") AS FOLLOWS:
PROGRAMMING CATEGORIES: [All or specify per Schedule "B"]
LICENSED WEB SITES: [insert Licensee URLs]
LICENSE PERIOD: One year from Effective Date
LICENSE GRANTED: Web site redistribution
ANNUAL SYNDICATION FEE: [$ _______ or Based on Programming Categories, per
Schedule "B"]
ADVERTISING REVENUE: 100% retention of Licensee Advertising.
DIGITAL MUSIC COMMERCE REVENUE: Licensee receives Net Revenue from sales.
CD/TANGIBLE MUSIC COMMERCE REVENUE:
Each pays the other X% of any referral fees they receive from third-party sales.
Licensee pays Liquid Audio a [Y% or $ _____] referral fee for sales by Licensee.
MUSICPLAYER & MUSICPLAYER CD: Licensee receives fee for Music Player CD sales =
$ ____
LOGO/ICON LICENSE: Yes
-13-
<PAGE>
IN WITNESS THEREOF, the parties hereto have executed this Agreement as of
the date first
above written.
FOR LIQUID AUDIO, INC.: FOR LICENSEE:
BY:________________________ BY:_____________________
TITLE:_____________________ TITLE:__________________
DATE:______________________ DATE:___________________
-14-
<PAGE>
SCHEDULE "A"
------------
LIQUID MUSIC NETWORK
--------------------
SYNDICATION LICENSE STANDARD TERMS AND CONDITIONS
-------------------------------------------------
Annexed to and made part of that certain Syndication License Agreement
("Agreement") dated as of ________ 199_, between Liquid Audio, Inc. ("Liquid
Audio") and ______________ ("Licensee").
I. Definitions.
------------
"Licensed Web Sites" means the Web sites owned or controlled by Licensee as
identified by the URLs listed in the Main Agreement.
"Link(s)" means one or more hyperlinks established from within the Licensed Web
Sites to one or more pages within the LMN Site(s), as designated by Liquid
Audio, to enable an end user of the Licensed Web Site to access the LMN
Programming.
"LMN Logo and Artwork" means the logo(s) for the LMN designated by Liquid Audio,
and all artwork, graphics, and other content provided by Liquid Audio for use in
connection with the Links.
"LMN Programming" means the compilation database owned by Liquid Audio and
marketed as the Liquid Music Network, comprised of sound recordings made
available by Liquid Audio in the Programming Categories identified in Schedule
"B" (including forty-five (45) second or less samples of such sound recordings),
and all other graphics, text, video, and other related content now or hereafter
offered by Liquid Audio in connection with the foregoing.
"LMN Site(s)" means the Web site(s) designated by Liquid Audio which operate
Liquid Audio's server and commerce software to deliver the LMN Programming to
LMN end users via the Licensed Web Sites.
"Music Commerce Transactions" means the purchase by an end user who accesses the
LMN Programming via the Licensed Web Sites of (i) one or more intangible copies
of a sound recording offered via the LMN Programming, with online fulfillment of
such sale by digital delivery and downloading from the LMN Sites to the end
user's computer hard drive; and/or (ii) one or more phonorecords offered via the
LMN Programming, including without limitation on compact disc, cassette tape or
other tangible media, with offline fulfillment of the sale made online at the
LMN Site or using a telephone number made available from the LMN Site.
II. License Grant. Subject to the payment by Licensee of the syndication
-------------
license fee set forth in Section IX below, Liquid Audio grants and Licensee
accepts a limited, personal, nontransferable, nonexclusive license as an LMN
syndication affiliate (i) to make available, carry, and distribute the LMN
Programming via the Licensed Web Site(s) to end users; and (ii) subject to
compliance with Liquid Audio's branding guidelines and Section VIII below, to
use the LMN Logo and Artwork as an icon to create one or more Links to the LMN
Site.
III. Reservation of Rights. The license herein granted shall be limited to the
---------------------
rights expressly set forth above. All other rights to the LMN Programming are
expressly reserved by Liquid Audio. Without limiting the foregoing, Licensee may
not sublicense or resell the LMN Programming, and Licensee shall impose no
requirements of any kind or character whatsoever for end users to access the LMN
Programming via the Links, including without limitation, any subscription or
access fee or registration requirement to activate the Link to the LMN
Programming.
IV. Joint Promotional Obligations Liquid Audio and Licensee will each promote
-----------------------------
the other and the relationship described within this Agreement at any
appropriate trade shows. Liquid Audio and Licensee will jointly release a press
release concerning the relationship described in this Agreement. Both parties
will agree to the language of the press release before it is issued.
V. Liquid Audio Obligations Liquid Audio will include Licensee on the LMN Site
------------------------
in an area in which Liquid Audio describes the LMN, and Liquid Audio will
provide a link from this portion of its site to Licensee's home page. In
connection with the distribution of the LMN Programming via the Licensed Web
Sites, Liquid Audio intends to enable end users (i) to preview a performance of
a sample of one or more sound recordings, (ii) to engage in Music Commerce
Transactions, and (iii) to download a copy of the then-current Liquid Audio
standard player software. Liquid Audio acknowledges that Liquid Audio and its
designees, and not Licensee, will be solely responsible for enabling the
foregoing functionality with Liquid Audio's technology and any third party
technology obtained by Liquid Audio, including without limitation all aspects of
online and offline fulfillment and processing of Music Commerce Transactions.
Notwithstanding the foregoing, where appropriate with respect to physical CD
products, Liquid Audio will consider utilizing any preferred vendor and/or
fulfillment source for these transactions and fulfillment designated by
Licensee, provided that such preferred vendor carries the appropriate inventory
to fulfill orders as reasonably required by Liquid Audio, and subject to
implementation of the appropriate technology within the LMN by Liquid Audio.
Licensee acknowledges that pricing and all other matters relating to Music
Commerce Transactions will be solely determined by Liquid Audio and/or its
licensors.
-15-
<PAGE>
VI. Syndication Affiliate Obligations. In consideration of the exclusive
---------------------------------
nature of the LMN Programming offered to Licensee hereunder, the foregoing
license requires that the LMN Programming be featured in a premiere position on
the Licensed Web Sites, which shall include at minimum (i) placement of the LMN
Logo as a Link on the "home page" of the Licensed Web Sites, or if no third-
party content appears on the "home page" then in the first page thereafter that
does so (and/or on other mutually agreed pages of sufficient prominence); (ii)
the most prominent placement on all other guides to content on the Licensed Web
Sites as compared to other music-related programming, including without
limitation on the "What's New" or similar pages, on any topical listing of
content available on such site. Licensee agrees that it will use Liquid Audio's
technology as the exclusive audio downloading and audio commerce technology on
the Licensed Web Sites.
VII. Liquid MusicPlayer and Liquid MusicPlayer CD. Licensee will provide a
--------------------------------------------
download button, in a design consistent with Liquid Audio's branding guidelines,
on the Licensed Web Sites, that enables end users to download the Liquid
MusicPlayer from the Web site. Liquid Audio will license the Liquid MusicPlayer
directly to the end user. Liquid Audio will be responsible for all customer
support of this product. In addition, Licensee will actively promote the sale of
the Liquid MusicPlayer CD on the Licensed Web Sites. Liquid Audio will be
responsible for the fulfillment of the orders of the Liquid MusicPlayer CD from
the Licensed Web Sites as a Music Commerce Transaction under this Agreement.
Liquid Audio will license the Liquid MusicPlayer CD directly to the end user.
Liquid Audio will be responsible for all customer support of this product.
Liquid Audio will provide to Licensee separate Web pages, for inclusion within
the Licensed Web Sites, which explain the relevant aspects of the Liquid Audio
system, and especially the Liquid MusicPlayer and the Liquid MusicPlayer CD.
VIII. Advertising. Upon execution of this Agreement, Licensee agrees to commence
-----------
insertion of banner advertising on the Licensed Web Sites announcing the coming
of the LMN. Liquid Audio will work with Licensee to design these banner ads.
Upon launch of the LMN on the Licensed Web Sites, Licensee may create and
maintain for its own account a frame that surrounds the LMN Programming for end
users who access the LMN via the Licensed Web Sites. With respect to such frame,
Licensee shall have the right to independently sell advertising for such frame
and shall retain for its own account all advertising revenue derived therefrom.
Notwithstanding the foregoing, Liquid Audio will be responsible for the final
approval of the framing space and shall have the right to finally resolve any
advertising booking conflict or to veto any advertising that is competitive with
Liquid Audio or the LMN. With respect to the page(s) on the Licensed Web Sites
which contain the Link(s) to the LMN Programming, Licensee shall also control
all advertising and other content on such page, and shall retain all revenue
derived therefrom, provided that no such advertising or content shall be placed
in direct relation to the Link such as to cause dilution or consumer confusion
with respect to the association of the Link to such advertising or content.
Liquid Audio shall control all other aspects of the LMN Programming, including
without limitation any advertising or promotional activities contained therein,
and shall retain any and all revenue derived from such advertising and
promotional activities. Each party shall be responsible for serving its own
advertising hereunder, and as such, neither party shall be obligated to report
tracking or usage data for advertising purposes hereunder.
IX. Payments.
---------
(a) Licensee shall pay Liquid Audio the annual syndication license fees
for the Programming Categories selected by Licensee as set forth in Exhibit "B".
The parties agree that timely payment of all license fees by Licensee is of the
essence of this Agreement, and any failure by Licensee to make such timely
payment shall constitute a material default hereunder. Any payment hereunder not
made within thirty (30) days after due date shall bear interest at the rate of
1% per month or the maximum rate allowed by law, whichever is less.
(b) With respect to Music Commerce Transactions involving distribution via
digital delivery, Liquid Audio shall pay to Licensee the Net Revenue derived
from sales. "Net Revenue" means the actual retail sales price paid by the
customer for the applicable track(s) sold (if different than list price), less
any sales tax included therein, the wholesale price of the applicable track(s)
sold, Liquid Audio's digital fulfillment fee, bank transaction processing fees,
[and any applicable mechanical rights fees that may not be included within the
wholesale price]. The parties acknowledge that Liquid Audio will determine the
list and actual retail selling price to customers in its sole discretion, unless
otherwise agreed, and that the record label or other content owner will
determine the wholesale price in its sole discretion.
(c) With respect to sales of the Liquid MusicPlayer CD, Liquid Audio shall
pay Licensee a fee for each sale as set forth in the Main Agreement.
(d) With respect to Music Commerce Transactions involving distribution on
CDs and other tangible media, Liquid Audio shall pay to Licensee the following:
(i) where Licensee is not the vendor and does not have a preferred vendor
arrangement, the applicable percentage of Liquid Audio's referral fees, as set
forth in the Main Agreement, received from any preferred vendor arrangement
maintained by Liquid Audio.
(e) With respect to Music Commerce Transactions involving distribution on
CDs and other tangible media, Licensee shall pay to Liquid Audio the following:
(i) where Licensee is the vendor, the applicable referral fee, as set forth in
the Main Agreement, and (ii) where Licensee is not the vendor but has a
preferred vendor arrangement, the applicable percentage of Licensee's referral
fees, as set forth in the Main Agreement, received from such preferred vendor.
(f) Subject to the foregoing, the parties' sole compensation under this
Agreement shall be the mutual benefit derived from
-16-
<PAGE>
offering the LMN Programming on the Licensed Web Sites and each party shall
retain all revenues derived from their respective activities, including without
limitation, all advertising revenue derived by each party pursuant to Section
VIII above.
X. Statements. Each party shall provide the other party with a statement of
----------
any amount payable arising from Music Commerce Transactions and shall tender the
appropriate amount due to the other party within thirty (30) days after the end
of each calendar month; provided, however, that any total amount payable that is
less than $100 may be retained until the aggregate amount payable equals or
exceeds $100. The statement shall contain sufficient information for the other
party to accurately verify the amounts due and payable, including (i) the net
amount of any referral fees, the calculation of such net amount, and the source
of any referral fees, and (ii) for direct sales, the sale price, the quantity
sold, the gross receipts generated, and an itemization of the permitted
deductions, if any. Liquid Audio reserves the right to suspend payments to
Licensee hereunder in the event of any delay, failure or incompleteness by
Licensee in its payment or reporting obligations hereunder.
XI. Warranties. Liquid Audio warrants that it is the sole owner of the LMN
----------
Programming compilation database, and except with respect to public performance
of music works which is provided for in Section XII below, it has all rights
necessary to license the LMN Programming as provided herein. Subject to the
performance by Licensee of its obligations hereunder, Liquid Audio will
indemnify Licensee against any damages awarded in any final judgment entered
against Licensee or settlement approved by Liquid Audio, as a result of a breach
of any warranty made by Liquid Audio hereunder or by reason of a claim that the
exercise by Licensee of the rights granted herein infringes the rights of
others, provided, however, prompt detailed notice in writing of such claim is
provided to Liquid Audio. Liquid Audio shall have full control over the defense
and/or settlement of any such claim or litigation including the right to engage
its own counsel and Licensee shall not continue the distribution of such LMN
Programming thereafter without the written consent of Liquid Audio. Licensee
shall cooperate fully with Liquid Audio in the defense or settlement of any such
claim or litigation. Licensee will indemnify Liquid Audio from all claims or
liabilities including without limitation reasonable attorneys' fees arising from
the breach of this Agreement by Licensee or from the distribution of any
material on the Licensed Web Sites other than material contained in the LMN
Programming as delivered by Liquid Audio.
XII. Music Rights. Liquid Audio warrants to the best of its knowledge that the
------------
public performance rights in the musical works contained in the LMN Programming
are (i) controlled by ASCAP, BMI, SESAC or a performing rights society having
jurisdiction, (ii) in the public domain, or (iii) controlled by Liquid Audio or
its licensors. If musical works in category (iii) above are contained in the LMN
Programming, a limited public performance license is deemed to be included
within the scope of the license set forth in Section lI above. If musical works
in category (i) above are contained in the LMN Programming, Licensee shall
contact BMI, ASCAP or the appropriate public performing rights organization to
obtain a license covering the uses contemplated by this Agreement, which may
include any preferred rates that may now or hereafter be negotiated by Liquid
Audio on behalf of its syndication licensees. Licensee at its sole cost and
expense shall be responsible for obtaining all licenses necessary to perform
such musical works, and Licensee agrees to indemnify Liquid Audio against any
liability loss or expenses arising form the performance of such musical works
via the Licensed Web Sites without such a license.
XIII. Withdrawal and Substitutions. Liquid Audio may in its absolute discretion
----------------------------
withdraw permanently or temporarily any licensed sound recording or other
content from the LMN Programming if Liquid Audio determines in its sole
discretion that the distribution thereof would or might infringe the rights of
others, violate any law or governmental rule or regulation, interfere with
actual or contemplated use of the particular licensed LMN Programming for any
purpose other than the distribution by Licensee or subject Liquid Audio to any
potential liability or litigation. In the event any part of the LMN Programming
is withdrawn on a temporary basis or permanent basis, Licensee shall be entitled
to delivery of substitute LMN Programming designated by Liquid Audio of
comparable quality.
XIV. Term and Termination.
---------------------
(a) This Agreement will become effective on the Effective Date and shall
continue in effect for the period set forth in the Main Agreement unless
otherwise terminated or canceled as provided herein. This Agreement shall
automatically renew for one or more renewal terms of one (1) year each at the
end of the initial term of any renewal term unless either party tenders written
notice of its intent to terminate at least thirty (30) days prior to the
scheduled expiration date.
(b) Either party hereto may, at is option, and without notice, terminate
this Agreement, effective immediately, should the other party hereto (i) admit
in writing its inability to pay its debts generally as they become due; (ii)
make a general assignment for the benefit of creditors; (iii) institute
proceedings to be adjudicated a voluntary bankrupt, or consent to the filing of
a petition of bankruptcy against it; (iv) be adjudicated by a court of competent
jurisdiction as being bankrupt or insolvent; (v) seek reorganization under any
bankruptcy act, or consent to the filing of a petition seeking such
reorganization; or (vi) 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.
(c) In the event that either party commits a material breach of its
obligations hereunder, the other party may, at its option, terminate this
Agreement, by thirty (30) days written notice of termination, which notice shall
identify and describe the basis for such termination; provided, however, that
if, prior to expiration of such period, the defaulting party cures such default,
termination shall not take place.
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<PAGE>
(d) Upon any termination of this Agreement, Sections III and XV shall survive
the termination of this Agreement. Licensee shall immediately return to Liquid
Audio all copies of the LMN Logo and Artwork and all other Liquid Audio
materials in Licensee's possession or control. Licensee shall deactivate all
Links to the LMN Sites and shall not create any links thereto without the prior
consent of Liquid Audio.
XV. Confidential Information
------------------------
(a) Each party acknowledges that by reason of its relationship to the
other party under this Agreement it will have access to certain information and
materials concerning the other party's business, plans, customers, technology
and products that are confidential and of substantial value to such party
(referred to in this Section as "Confidential Information"), which value would
be impaired if such Confidential Information were disclosed to third parties.
The terms of this Agreement shall be deemed to constitute the Confidential
Information of Liquid Audio. Each party agrees to maintain all Confidential
Information received from the other, both orally and in writing, in confidence
and agrees not to disclose or otherwise make available such Confidential
Information to any third party without the prior written consent of the
disclosing party. Each party further agrees to use the Confidential Information
only for the purpose of performing this Agreement. No Confidential Information
shall be deemed confidential unless so marked if given in writing or, if given
orally, identified as confidential orally prior to disclosure and confirmed in
writing within thirty (30) days; provided, however, that Licensor agrees that
any Confidential Information in whatever form relating to the design,
functionality, operational methods or coding of Liquid Audio software, including
but not limited to any complete or partial source or object code versions of
such software, shall be deemed Confidential Information of Liquid Audio
regardless of the presence or absence of any confidential markings or
identification.
(b) The parties' obligations under this Section XV shall not apply to
Confidential Information which: (i) is or becomes a matter of public knowledge
though no fault of or action by the receiving party; (ii) was rightfully in the
receiving party's possession prior to disclosure by the disclosing party; (iii)
subsequent to disclosure, is rightfully obtained by the receiving party from a
third party who is lawfully in possession of such Confidential Information
without restriction; (iv) is independently developed by the receiving party
without resort to the disclosing party's Confidential Information; or (v) is
required by law or judicial order, provided that prior written notice of such
required disclosure is furnished to the disclosing party as soon as practicable
in order to afford the disclosing party an opportunity to seek a protective
order and that if such order cannot be obtained disclosure may be made without
liability. Whenever requested by a disclosing party, a receiving party shall
immediately return to the disclosing party all manifestations of the
Confidential Information or, at the disclosing party's option, shall destroy all
such Confidential Information as the disclosing party may designate. The
receiving party's obligation of confidentiality shall survive this Agreement for
a period of five (5) years from the date of its termination, and thereafter
shall terminate and be of no further force or effect.
XVI. Additional Provisions.
----------------------
(a) Licensee acknowledges that each music offering included in the LMN
Programming category or categories was individually licensed and separately
priced, and that Liquid Audio offered each music offering without discrimination
and without conditioning the licensing of any one music offering upon the
licensing of any other music offering.
(b) Neither party shall be liable to the other for any delay in delivery
or inability to distribute the LMN Programming due to acts of God, failure of
carriers, labor disputes, failure or delay in software encoding, war, public
disaster or any other cause beyond the control of the parties and such
performance shall be excused to the extent of such force majeure event.
(c) Licensee shall pay without imitation any tax, levy or charge
whatsoever by any statute, law, rule or regulation now or hereafter in effect,
related to the license fees payable under this Agreement, it being the intent
hereof that the license fees herein shall be a net amount, free and clear any
such taxes, levy or charges whatsoever, except for any taxes on Liquid Audio's
net income.
(d) Neither the license granted to Licensee hereunder nor this Agreement
may be assigned by Licensee without the prior written consent of Liquid Audio,
nor shall Licensee sublicense or relicense any of the LMN Programming licensed
hereunder, or enter into any third-party linking arrangements with respect
thereto without Liquid Audio's prior written consent. Subject to the foregoing,
this Agreement shall be binding upon and inure to the benefit of the parties and
their successors and assigns.
(e) The headings of paragraphs hereof are inserted only for the purpose of
convenient reference; such headings shall not be deemed to govern, limit,
modify, or in any manner affect the scope, meaning or intent of the provisions
of this Agreement or any part or portion thereof; nor shall they otherwise be
given any legal effect.
(f) Nothing herein contained shall constitute a franchise relationship, or
partnership between ,or joint venture by, Licensee and Liquid Audio, or
constitute Licensee or Liquid Audio the agent of the other.
(g) All notices hereunder will be hand delivered or sent by certified or
registered mail to the parties at the addresses set forth above, or to such
other addresses as may be designated by the parties in writing. A mandatory copy
of all notices delivered or sent to Liquid Audio shall be sent to Wilson Sonsini
Goodrich & Rosati, 650 Page Mill Road, Palo Alto, California 94304-1050,
Attention: Hank Barry, Esq.
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<PAGE>
(h) This Agreement shall be construed in accordance with the applicable
laws of the State of California with respect to agreements executed and to be
fully performed in that state.
(i) This Agreement represents the entire understanding of the parties and
shall not be amended or modified except in writing signed by both parties
hereto; nor may any provision hereof be waived unless in writing signed by the
party to be charged with such waiver.
(j) If there is a conflict between any provision(s) of this Agreement and
any statute, law or regulation, the statute, law or regulation, shall prevail,
provided, however, that in such event the provision(s) of this Agreement so
affected shall be curtailed and limited only to the minimum extent necessary to
permit compliance with the minimum requirement of such statute, law or
regulation, and no other provisions of this Agreement shall be affected thereby
and all such other provisions shall continue in full force and effect.
(k) Licensee agrees that any litigation, action or proceeding arising out
of or relating to this Agreement shall be instituted in any state or federal
court sitting in the Northern District of California, and Licensee waives any
objection to such venue, irrevocably submits to such jurisdiction and waives any
claim or defense of inconvenient forum.
(1) In no event shall Liquid Audio be liable for consequential,
incidental, special, reliance or indirect damages, however caused, on any theory
of liability, and whether or not Liquid Audio has been advised of the
possibility of such damages.
-19-
<PAGE>
SCHEDULE "B"
------------
LMN Programming Syndication Categories License Fees
- -------------------------------------- ------------
All Categories
Pop/R&B
Country
Rock
Jazz
Classical
-20-
<PAGE>
Exhibit 10.42
Amazon.com/Liquid Audio
Advertising Agreement
This Agreement is entered into as of this 9th day of June, 1999 by and
between Liquid Audio, Inc., a California corporation with a principal place of
business at 810 Winslow Street Redwood City, CA 94063 ("Liquid Audio"), and
Amazon.com, Inc., a Washington corporation with a principal place of business at
1200 Twelfth Avenue South, Suite 1200, Seattle, Washington, 98144
("Amazon.com").
A. The parties are interested in performing certain cooperative marketing
activities.
B. In consideration of those activities, Liquid Audio is willing to grant to
Amazon.com certain rights to purchase shares of its Common Stock.
NOW, THEREFORE, for good and valuable consideration, the receipt of which is the
hereby acknowledged, the parties hereby agree as follows:
1. The parties will each perform cooperative marketing activities as follows:
(a) Relationship/Sarah McLachlan promotion: Within 30 days of the date
hereof, the parties will issue a mutually acceptable press release
stating that they have entered into a year-long promotional
relationship, and that the initial activity in connection with such
relationship shall be a promotion related to Sarah McLachlan.
(b) Liquid Artist Program: During the 30 day period commencing on the date
hereof (or such other period as the parties may agree upon), the
parties will negotiate in good faith the terms of an agreement under
which Amazon.com will implement Liquid Audio's Liquid Artist program on
the Amazon.com site; provided, that neither party shall have any
liability by reason of any failure or refusal to enter into any such
agreement for any reason.
2. Liquid Audio will grant Amazon net exercise warrants ("Warrants") to
purchase up to 381,203 shares of the Common Stock of Liquid Audio, currently
comprising two and one-half percent (2.5%) of the fully-diluted capital stock of
Liquid Audio. The forms of the Warrants are set forth as Exhibits A and B
attached hereto. The exercise price will be $6.56 per share. The Warrants
will be exercisable for five years from the date hereof, and shall be subject to
the conditions on exercise set forth herein. The Warrants will be allocated as
follows:
. Relationship/Sarah McLachlan promotion - 66 2/3% of the total or 254,135
shares
. Liquid Artist - 33 1/3% of the total or 127,068
shares
3. The Warrants set forth on Exhibit A shall be exercisable immediately as
set forth therein. Amazon.com agrees not to transfer the shares issued on
exercise of the warrant for one year as to the date of exercise. The Warrants
set forth on Exhibit B shall be subject to conditions on exercisability as
follows. Unless these conditions are met, the applicable Warrant will not be
exercisable.
<PAGE>
(a) Exhibit B Warrant: The Warrant set forth on Exhibit B shall first
become exercisable as to one-half of the shares at the time of the
signing of a definitive agreement (if any) between Amazon.com and
Liquid Audio concerning the implementation of the Liquid Artist program
on the Amazon.com site. The remaining Warrants set forth on Exhibit B
will be exercisable with respect to one-twelfth thereof for each month
during the first year of the program commencing on the date the Liquid
Artist program is available on the Amazon.com site, for so long as
Amazon.com continues to maintain the Liquid Artist program on its site
subject to the terms negotiated in the definitive agreement (if any).
4. Liquid Audio will offer Amazon.com most favored customer pricing on
applicable products and services for a period of one year from the date hereof,
or for the term of the Liquid Artist agreement, whichever is greater.
5. Subject to the terms and conditions of this Agreement, each party (the
"Indemnifying Party") agrees to indemnify, defend and hold the other party (the
"Indemnified Party") harmless against any liabilities and expenses (including
reasonable attorneys' fees), actually paid by a party in settlement of, or held
against a party arising out of, a claim that the use or embodiment of the
Indemnifying Party's contribution to any of the activities described herein
infringes any right of any third party when used as contemplated under this
Agreement; provided that the Indemnified Party agrees that the Indemnifying
Party shall be released from the foregoing obligations to the extent it is
prejudiced by any failure by the Indemnified Party to provide the Indemnifying
Party with (i) prompt written notice of the claim, (ii) full control over the
defense or settlement of such claim (except that the Indemnifying Party shall
not enter into or acquiesce to any settlement which contains any admission of or
stipulation to any guilt, fault, liability or wrongdoing on the part of the
Indemnified Party without the Indemnified Party's prior written consent), and
(iii) reasonable assistance in connection with the defense or settlement of such
claim. Subject to the foregoing, the Indemnified Party shall be entitled to
participate in the defense and settlement of any such claim, at its own expense,
with counsel of its own choosing.
THE FOREGOING STATES EACH PARTY'S ENTIRE LIABILITY AND OBLIGATION (EXPRESS,
IMPLIED, STATUTORY OR OTHERWISE) WITH RESPECT TO INTELLECTUAL PROPERTY
INFRINGEMENT OR CLAIMS THEREFOR. EXCEPT TO THE EXTENT THE SAME ARE AWARDED IN
CONNECTION WITH ANY THIRD PARTY CLAIM AGAINST WHICH A PARTY IS OBLIGATED TO
INDEMNIFY THE OTHER PARTY PURSUANT TO THIS SECTION 5, IN NO EVENT SHALL EITHER
PARTY BE LIABLE FOR LOST PROFITS, LOSS OF DATA, COST OF PROCUREMENT OF GOODS AND
SERVICES OR FOR ANY SPECIAL, CONSEQUENTIAL, INDIRECT, OR INCIDENTAL DAMAGES,
HOWEVER CAUSED, ON ANY THEORY OF LIABILITY AND WHETHER OR NOT SUCH PARTY HAS
BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES, ARISING UNDER ANY CAUSE OF
ACTION AND IN ANY WAY OUT OF THIS AGREEMENT OR THE DESIGNS, PRODUCTS,
INFORMATION OR OTHER TECHNOLOGY PROVIDED PURSUANT TO THIS AGREEMENT. THE
PROVISIONS OF THIS SECTION SHALL APPLY NOTWITHSTANDING THE FAILURE OF ANY
LIMITED REMEDIES HERE UNDER.
6. Each party acknowledges that the cooperative marketing efforts to be
undertaken hereunder are speculative in nature and that there is no guarantee
that the materials contributed by either party shall be sufficient or error
free. THEREFORE, EACH PARTY PROVIDES INFORMATION TO THE OTHER PARTY "AS IS," AND
NEITHER PARTY MAKES ANY
<PAGE>
WARRANTIES, EXPRESS, IMPLIED, STATUTORY OR OTHERWISE WITH RESPECT TO TECHNICAL
INFORMATION, AND EXPRESSLY DISCLAIMS ALL IMPLIED WARRANTIES OF MERCHANTABILITY
AND FITNESS FOR A PARTICULAR PURPOSE.
7. Nothing contained herein shall be construed to imply a joint venture or
principal and agent relationship between the parties, and neither party shall
have any right, power or authority to create any obligation, express or implied,
with respect to any third party in connection with their performance hereunder.
8. General.
(a) Governing Law. This Agreement shall be governed by and interpreted in
accordance with the laws of the State of California without reference to
conflict of law principles.
(b) Arbitration. Any dispute or claim arising out of or in connection with
this Agreement shall be finally settled by binding arbitration in San Jose,
California (if arbitration is initiated by Amazon.com) or Seattle, Washington
(if arbitration is initiated by Liquid Audio) under the rules of arbitration of
the American Arbitration Association by one arbitrator appointed in accordance
with said rules. Judgment on the award rendered by the arbitrator may be entered
in any court having jurisdiction thereof. Notwithstanding the foregoing, the
parties may apply to any court of competent jurisdiction for injunctive relief
without breach of this arbitration provision.
(c) 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, ordinance, demand or requirement of any government agency,
or any other act or condition beyond the control of the parties hereto, the
party so affected upon giving prompt notice to the other party shall be excused
from such performance during such prevention, restriction or interference for a
period of up to ninety (90) days.
(d) Assignment. Neither party may assign or delegate this Agreement or any
of its licenses, rights or duties under this Agreement without the prior written
consent of the other, except (i) to a person or entity into which it has merged
or which has otherwise succeeded to all or substantially all of its business and
assets, and which has assumed in writing or by operation of law its obligations
under this Agreement, or (ii) to any entity that controls or is controlled by or
under common control with a party hereto or of which a party beneficially owns
at least 50% of the equity interest therein.
(e) Authority. Each party represents that all corporate action necessary for
the authorization, execution and delivery of this Agreement by such party and
the performance of its obligations hereunder has been taken.
(f) Notices. All notices and other communications required or permitted
hereunder shall be in writing and shall be mailed by registered or certified
mail, postage prepaid, or otherwise delivered by hand, by messenger or by
telecommunication, addressed to the addresses first set forth above or at such
other address furnished with a notice in the manner set forth herein. Such
notices shall be deemed to have been served when delivered or, if delivery is
not accomplished by reason of some fault of the addressee, when tendered.
(g) Partial Invalidity. If any paragraph, provision, or clause thereof in
this Agreement shall be found or be held to be invalid or unenforceable in any
jurisdiction in which this
<PAGE>
Agreement is being performed, the remainder of this Agreement shall be valid and
enforceable. The waiver of one breach or default hereunder shall not constitute
the waiver of any subsequent breach or default.
(h) Entire Agreement. This Agreement and the Exhibits hereto represent and
constitute the entire agreement between the parties, may only be amended in
writing signed by both parties, and supersede all prior agreements and
understandings with respect to the matters covered by this Agreement. The
parties acknowledge that they have not relied upon any representations other
than the representations set forth herein.
AGREED AS OF THE DATE SET FORTH ABOVE:
LIQUID AUDIO, INC. AMAZON.COM, INC.
By: /s/ Robert Flynn By:
-------------------------- -------------------------
Print Name:Robert Flynn Print Name:
------------------ -----------------
Title:VP Business Development Title:
----------------------- ----------------------
<PAGE>
Agreement is being performed, the remainder of this Agreement shall be valid and
enforceable. The waiver of one breach or default hereunder shall not constitute
the waiver of any subsequent breach or default.
(h) Entire Agreement. This Agreement and the Exhibits hereto represent and
constitute the entire agreement between the parties, may only be amended in
writing signed by both parties, and supersede all prior agreements and
understandings with respect to the matters covered by this Agreement. The
parties acknowledge that they have not relied upon any representations other
than the representations set forth herein.
AGREED AS OF THE DATE SET FORTH ABOVE:
LIQUID AUDIO, INC. AMAZON.COM, INC.
By: By: /s/ Alan Ciph
-------------------------- -------------------------
Print Name: Print Name: Alan Ciph
------------------ -----------------
Title: Title: VP
----------------------- ----------------------
<PAGE>
COMMON STOCK PURCHASE WARRANT
THIS WARRANT HAS BEEN, AND THE SHARES OF COMMON STOCK WHICH MAY BE PURCHASED
PURSUANT TO THE EXERCISE OF THIS WARRANT (THE "SHARES") WILL BE, ACQUIRED SOLELY
FOR INVESTMENT AND NOT WITH A VIEW TO, OR FOR RESALE IN CONNECTION WITH, ANY
DISTRIBUTION THEREOF. NEITHER THIS WARRANT NOR THE SHARES (TOGETHER, THE
"SECURITIES") HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED
(THE "ACT"), OR ANY STATE SECURITIES LAWS. SUCH SECURITIES MAY NOT BE SOLD,
OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF SUCH REGISTRATION OR
AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY AND ITS COUNSEL THAT SUCH
DISPOSITION IS EXEMPT FROM THE REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS
OF THE ACT AND OF ANY APPLICABLE STATE SECURITIES LAWS.
No. W-A Void after June 9, 2004
LIQUID AUDIO, INC.
WARRANT TO PURCHASE 254,135 SHARES OF COMMON STOCK
THIS CERTIFIES THAT, for value received, Amazon.com, Inc. (the "Holder") is
entitled to subscribe for and purchase from Liquid Audio, Inc., a California
corporation (the "Company"), 254,135 shares (as adjusted pursuant to Section 3
hereof) of the fully paid and nonassessable Common Stock, no par value (the
"Shares"), of the Company at the price of $6.56 per share (the "Exercise Price")
(as adjusted pursuant to Section 3 hereof), subject to the provisions and upon
the terms and conditions hereinafter set forth.
This Warrant is subject to the following terms and conditions:
1. Method of Exercise; Payment.
---------------------------
(a) Cash Exercise. The purchase rights represented by this Warrant may
-------------
be exercised by the Holder, in whole or in part, from time to time by the
surrender of this Warrant (with the notice of exercise form (the "Notice of
Exercise") attached hereto as Exhibit A duly executed) at the principal office
---------
of the Company, and by the payment to the Company of an amount equal to the
<PAGE>
Exercise Price multiplied by the number of the Shares being purchased, which
amount may be paid, at the election of the Holder, by wire transfer or certified
check payable to the order of the Company. The person or persons in whose
name(s) any certificate(s) representing Shares shall be issuable upon exercise
of this Warrant shall be deemed to have become the holder(s) of record of, and
shall be treated for all purposes as the record holder(s) of, the Shares
represented thereby (and such Shares shall be deemed to have been issued)
immediately prior to the close of business on the date or dates upon which this
Warrant is exercised.
(b) Net Issue Exercise. In lieu of exercising this warrant pursuant to
------------------
Section l(a) hereof, the Holder may elect to receive a number of Shares equal to
the value (as determined below) of this Warrant (or the portion thereof being
canceled) by surrender of this Warrant at the principal office of the Company
together with Notice of Exercise in which alternative No. 1 is initiated by the
Holder. In such event, the Company shall issue to the Holder a number of Shares
computed using the following formula:
X = Y (A-B)
-------
A
Where X = the number of Shares to be issued to the Holder.
Y = the number of Shares subject to this warrant.
A = the fair market value of one share of the Company's Common Stock.
B = the Exercise Price (as adjusted to the date of such calculation).
(c) Fair market Value. For purposes of this Section 1, the fair market
-----------------
value of the Company's Common Stock shall mean:
(i) The average of the closing bid and asked prices of the
Company's Common Stock quoted in the Over-The-Counter Market Summary or the
closing price quoted on any exchange on which the Common Stock is listed,
whichever is applicable, as published in the Western Edition of The Wall Street
---------------
Journal for the ten trading days prior to the date of determination of fair
- -------
market value;
(ii) If the Company's Common Stock is not traded Over-The-
Counter or on an exchange, fair market value of the Common Stock per share shall
be the price per share as determined by the Company's Board of Directors.
Receipt and acknowledgment of this warrant by the Holder shall be definitely
deemed to be an acknowledgment and acceptance of any such fair market value
determination by the Company's Board of Directors as the final and binding
determination of such value for purposes of this Agreement.
(d) Stock Certificates. In the event of any exercise of the
------------------
rights represented by this Warrant, certificates for the shares of Common Stock
so purchased shall be delivered to the
<PAGE>
Holder within 30 days of such exercise and, unless this Warrant has been fully
exercised or has expired, a new Warrant representing the shares with respect to
which this Warrant shall not have been exercised shall also be issued to the
Holder within such time.
2. Stock Fully Paid; Reservation of Shares. All of the Shares
---------------------------------------
issuable upon the exercise of the rights represented by this Warrant will, upon
issuance and receipt of the Exercise Price therefor, be fully paid and
nonassessable, and free from all preemptive rights, rights of first refusal or
first offer, taxes, liens and charges with respect to the issuance thereof.
During the period within which the rights represented by this Warrant may be
exercised, the Company shall at all times have authorized and reserved for
issuance sufficient shares of its Common Stock to provide for the exercise of
the rights represented by this Warrant.
3. Adjustment of Exercise Price and Number of Shares. Subject to
-------------------------------------------------
the provisions of Section 12 hereof, the number and kind of Shares purchasable
upon the exercise of this Warrant and the Exercise Price therefor shall be
subject to adjustment from time to time upon the occurrence of certain events,
as follows:
(a) Reclassification, Consolidation or Merger. In case of any
-----------------------------------------
reclassification of the Common Stock (other than a change in par value, or as a
result of a subdivision or combination), or in case of any consolidation or
merger of the Company with or into another corporation (other than a
consolidation or merger with another corporation in which the Company is a
continuing corporation and in which the Company's stockholders immediately
preceding such consolidation or merger own at least 50% of the voting securities
of the Company following such consolidation or merger and which does not result
in any reclassification of the Shares issuable upon exercise of this Warrant),
or in case of any sale of all or substantially all of the assets of the Company,
the Company, or such successor or purchasing corporation as the case may be,
shall execute a new Warrant, providing that the holder of this Warrant shall
have the right to exercise such new Warrant, and procure upon such exercise and
payment of the same aggregate Exercise Price, in lieu of the Shares of Common
Stock theretofore issuable upon exercise of this Warrant, the kind and amount of
shares of stock, other securities, money and property receivable upon such
reclassification, change, consolidation, sale of all or substantially all of the
Company's assets or merger by a holder of an equivalent number of shares of
Common Stock. Such new Warrant shall provide for adjustments which shall be as
nearly equivalent as may be practicable to the adjustments provided for in this
Section 3. The provisions of this subsection (a), subject to Section 12 hereof,
shall similarly apply to successive reclassifications, consolidations, mergers,
and the sale of all or substantially all of the Company's assets.
(b) Stock Splits, Dividends and Combinations. In the event that
----------------------------------------
the Company shall at any time subdivide the outstanding shares of Common Stock,
or shall issue a stock dividend on its outstanding shares of Common Stock, the
number of Shares issuable upon exercise of this Warrant immediately prior to
such subdivision or to the issuance of such stock dividend shall be
proportionately increased, and the Exercise Price shall be proportionately
decreased, and in the event that the Company shall at any time combine the
outstanding shares of Common Stock, the number of Shares issuable upon exercise
of this Warrant immediately prior to such combination shall be
<PAGE>
proportionately decreased, and the Exercise Price shall be proportionately
increased, effective at the close of business on the date of such subdivision,
stock dividend or combination, as the case may be.
4. Notices.
-------
(a) Upon any adjustment of the Exercise Price and any increase
or decrease in the number of Shares purchasable upon the exercise of this
Warrant in accordance with Section 3 hereof, then, and in each such case, the
Company, within thirty (30) days thereafter, shall give written notice thereof
to the Holder at the address of such Holder as shown on the books of the Company
which notice shall state the Exercise Price as adjusted and, if applicable, the
increased or decreased number of Shares purchasable upon the exercise of this
Warrant, setting forth in reasonable detail the method of calculation of each.
(b) In the event that the Company shall propose at any time to
effect a Public Offering, the Company shall send to the Holder at least thirty
(30) days prior written notice of the date when the same is anticipated to take
place.
(c) The Company shall send to the Holder not less than thirty
(30) days before the expiration of this Warrant, a written notice of the date on
which this Warrant will expire.
(d) Any written notice by the Company required or permitted
hereunder shall be given by hand delivery or first class mail, postage prepaid,
addressed to the Holder at the address shown on the books of the Company for the
Holder.
5. Transfer of Warrant Except in accordance with the conditions
-------------------
contained in Section 6 hereof, this Warrant and all rights hereunder are not
transferable. In order to effect any transfer of all or a portion of this
warrant or the Shares, the transferor shall deliver a completed and duly
executed Notice of Transfer (attached hereto as Exhibit B).
---------
6. Condition of Exercise or Transfer of Warrant.
--------------------------------------------
(a) Unless exercised pursuant to an effective registration
statement under the Act which includes the Shares so exercised, it shall be a
condition to any exercise or transfer of this Warrant that the Company shall
have received, at the time of such exercise or transfer, a representation in
writing from the recipient or transferee in the form attached hereto as Exhibit
-------
A-1 or Exhibit B-1, respectively, that the Shares being issued upon exercise, or
- --- -----------
this Warrant (or portion hereof) transferred, as the case may be, are being
acquired for investment and not with a view to any sale or distribution thereof.
(b) It shall be a further condition to any transfer of this
Warrant, or of any or all of the Shares issued upon exercise of this Warrant,
other than a transfer registered under the Act, that the Holder shall have given
written notice to the Company which shall describe the manner and circumstances
of the proposed transfer and be accompanied by a written opinion of Holder's
legal
<PAGE>
counsel or a "no-action" letter reasonably satisfactory to the Company stating
that such transfer is exempt from the registration and delivery requirements of
the Act and applicable state securities laws.
(c) Each certificate evidencing the Shares issued upon exercise
of this Warrant, or transfer of such shares (other than a transfer registered
under the Act or any subsequent transfer of shares so registered) shall be
stamped or imprinted with a legend substantially in the following form:
THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR
INVESTMENT AND NOT WITH A VIEW TO, OR FOR RESALE IN CONNECTION WITH, ANY
DISTRIBUTION THEREOF, AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED (THE "ACT") OR ANY STATE SECURITIES LAWS. SUCH SECURITIES MAY
NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF SUCH
REGISTRATION OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY AND ITS
COUNSEL THAT SUCH REGISTRATION IS NOT REQUIRED UNDER THE ACT.
Subject to this Section 6, the Company may instruct its transfer agent not
to register the transfer of all or a part of this Warrant, or any of the Shares,
unless one of the conditions specified in the above legend is satisfied.
7. Removal of Legend. Upon request of a holder of a certificate
-----------------
with the legend referred to in Section 6 hereof, the Company shall issue to such
holder a new certificate therefor free of any transfer legend, if, with such
request, the Company shall have received either an opinion of counsel or a "no-
action" letter referred to in Section 6(b) of this agreement to the effect that
any transfer by such holder of the shares evidenced by such certificate will not
violate the Act and applicable state securities laws; provided, however, that
the Company shall not be obligated to remove any such legends prior to the
closing date of the Public Offering.
8. Fractional Shares. No fractional shares of Common Stock will be
-----------------
issued in connection with any exercise hereunder, but in lieu of such fractional
shares the Company shall make a cash payment therefor upon the basis of the
Exercise Price then in effect.
9. Representations and Warranties of the Company. The Company
---------------------------------------------
represents and warrants to the Holder as follows:
(a) This Warrant has been duly authorized and executed by the
Company and is a valid and binding obligation of the Company enforceable in
accordance with its terms;
(b) The Shares have been duly authorized and reserved for
issuance by the Company and, when issued in accordance with the terms hereof,
will be validly issued, fully paid and nonassessable;
<PAGE>
(c) The rights, preferences, privileges and restrictions
granted to or imposed upon the Shares and the holders thereof are as set forth
in the Company's Certificate of Incorporation, a true and complete copy of which
has been delivered to the original Holder of this Warrant; and
(d) The execution and delivery of this Warrant are not, and the
issuance of the Shares upon exercise of this warrant in accordance with the
terms hereof will not be, inconsistent with the Company's Certificate of
Incorporation or Bylaws, as amended.
10. Representations and Warranties by the Holder. The Holder
--------------------------------------------
represents and warrants to the Company as follows:
(a) This Warrant is being acquired for its own account, for
investment and not with a view to, or for resale in connection with, any
distribution or public offering thereof within the meaning of the Act. Upon
exercise of this Warrant, the Holder shall, if so requested by the Company,
confirm in writing, in a form reasonably satisfactory to the Company, that the
Shares issuable upon exercise of this Warrant are being acquired for investment
and not with a view toward distribution or resale.
(b) The Holder understands that the Warrant and the Shares have
not been registered under the Act by reason of their issuance in a transaction
exempt from the registration and prospectus delivery requirements of the Act
pursuant to Section 4(2) thereof, and that they must be held by the Holder
indefinitely, and that the Holder must therefore bear the economic risk of such
investment indefinitely, unless a subsequent disposition thereof is registered
under the Act or is exempted from such registration. The Holder further
understands that the Shares have not been qualified under the California
Securities Law of 1968 (the "California Law") by reason of their issuance in a
transaction exempt from the qualification requirements of the California Law
pursuant to Section 25102(f) thereof, which exemption depends upon, among other
things, the bona fide nature of the Holder's investment intent expressed above.
(c) The Holder has such knowledge and experience in financial
and business matters that it is capable of evaluating the merits and risks of
the purchase of this Warrant and the Shares purchasable pursuant to the terms of
this Warrant and of protecting its interests in connection therewith.
(d) The Holder is able to bear the economic risk of the
purchase of the Shares pursuant to the terms of this Warrant.
11. Rights of Stockholders. No holder of this Warrant shall be
----------------------
entitled, as a Warrant holder, to vote or receive dividends or be deemed the
holder of Common Stock or any other securities of the Company which may at any
time be issuable on the exercise hereof for any purpose, nor shall anything
contained herein be construed to confer upon the holder of this Warrant, as
such, any of the rights of a stockholder of the Company or any right to vote for
the election of directors or upon any matter submitted to stockholders at any
meeting thereof, or to give or withhold consent to any corporate action (whether
upon any recapitalization, issuance of stock, reclassification of stock,
<PAGE>
change of par value, consolidation, merger, conveyance, or otherwise) or to
receive notice of meetings, or to receive dividends or subscription rights or
otherwise until the Warrant shall have been exercised and the Shares purchasable
upon the exercise hereof shall have become deliverable, as provided herein.
12. Expiration of Warrant. This Warrant shall expire and shall no
---------------------
longer be exercisable as of 5:00 p.m., California local time, on June 9, 2004.
13. Miscellaneous.
-------------
(a) This Warrant is being delivered in the State of California
and shall be construed and enforced in accordance with and governed by the laws
of such State.
(b) The headings in this Warrant are for purposes of reference
only, and shall not limit or otherwise affect any of the terms hereof.
(c) The terms of this Warrant shall be binding upon and shall
inure to the benefit of any successors or assigns of the Company and of the
holder or holders hereof and of the Shares issued or issuable upon the exercise
hereof.
(d) This Warrant and the other documents delivered pursuant
hereto constitute the full and entire understanding and agreement between the
parties with regard to the subjects hereof and thereof.
(e) The Company shall not, by amendment of its Articles of
Incorporation, or through any other means, directly or indirectly, avoid or seek
to avoid the observance or performance of any of the terms of this Warrant and
shall at all times in good faith assist in the carrying out of all such terms
and in the taking of all such action as may be necessary or appropriate in order
to protect the rights of the holder of this Warrant against impairment.
(f) Upon receipt of evidence reasonably satisfactory to the
Company of the loss, theft, destruction or mutilation of this Warrant and, in
the case of any such loss, theft or destruction, upon delivery of an indemnity
agreement reasonably satisfactory in form and amount to the Company or, in the
case of any such mutilation, upon surrender and cancellation of such Warrant,
the Company at its expense will execute and deliver to the holder of record, in
lieu thereof, a new Warrant of like date and tenor.
(g) This Warrant and any provision hereof may be amended,
waived or terminated only by an instrument in writing signed by the Company and
the Holder.
(h) Receipt of this Warrant by the holder hereof shall
constitute acceptance of and agreement to the foregoing terms and conditions.
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Warrant to be signed by its
duly authorized officer.
Issued this 9th day of June, 1999.
LIQUID AUDIO, INC.
By: /s/ illegible
--------------------------------
Title: VP Business Development
-----------------------------
Acknowledged and Accepted:
Amazon.com, Inc.
________________________
By:_____________________
Authorized Signatory
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Warrant to be signed by its
duly authorized officer.
Issued this 9th day of June, 1999.
LIQUID AUDIO, INC.
By:
--------------------------------
Title:
-----------------------------
Acknowledged and Accepted:
Amazon.com, Inc.
________________________
By: /s/ illegible
---------------------
Authorized Signatory
<PAGE>
EXHIBIT A
---------
NOTICE OF EXERCISE
-------------------
TO: Liquid Audio, Inc.
810 Winslow Street
Redwood City, CA 94063
Attention: President
1. In lieu of exercising the attached Warrant for cash or check, the
undersigned hereby elects to effect the net issuance provision of Section l(b)
of this Warrant and receive ____________ (leave blank if you choose Alternative
No. 2 below) shares of Common Stock pursuant to the terms of this Warrant.
(Initial here if the undersigned elects this alternative). ___________.
2. The undersigned hereby elects to purchase _______________ (leave
blank if you choose alternative No. 1 above) shares of Common Stock of Liquid
Audio, Inc. pursuant to the terms of this Warrant, and tenders herewith payment
of the purchase price of such shares in full.
3. Please issue a certificate or certificates representing said
shares of Common Stock in the name of the undersigned or in such other name as
is specified below:
--------------------------------------------
(Name)
--------------------------------------------
--------------------------------------------
(Address)
4. The undersigned hereby represents and warrants that the aforesaid
shares of Common Stock are being acquired for the account of the undersigned for
investment and not with a view to, or for resale, in connection with the
distribution thereof, and that the undersigned has no present intention of
distributing or reselling such shares and all representations and warranties of
the undersigned set forth in Section 10 of the attached Warrant are true and
correct as of the date hereof. In support thereof, the undersigned agrees to
execute an Investment Representation Statement in a form substantially similar
to the form attached to the Warrant as Exhibit A-1.
-----------
--------------------------------
(Signature and Date)
Title:
--------------------------
<PAGE>
EXHIBIT A-l
------------
INVESTMENT REPRESENTATION STATEMENT
PURCHASER :
SELLER : LIQUID AUDIO, INC.
COMPANY : LIQUID AUDIO, INC.
SECURITY : COMMON STOCK ISSUED UPON EXERCISE OF THE COMMON STOCK PURCHASE
WARRANT ISSUED ON ____________, ____
AMOUNT : _______________ SHARES
DATE :
In connection with the purchase of the above-listed Securities, I, the
Purchaser, represent to the Seller and to the Company the following:
(a) I am aware of the Company's business affairs and financial
condition, and have acquired sufficient information about the Company to reach
an informed and knowledgeable decision to acquire the Securities. I am
purchasing these Securities for my own account for investment purposes only and
not with a view to, or for the resale in connection with, any "distribution"
thereof for purposes of the Securities Act of 1933, as amended (the "Securities
Act").
(b) I understand that the Securities have not been registered
under the Securities Act in reliance upon a specific exemption therefrom, which
exemption depends upon, among other things, the bona fide nature of my
investment intent as expressed herein. In this connection, I understand that, in
the view of the Securities and Exchange Commission (the "SEC"), the statutory
basis for such exemption may be unavailable if my representation was predicated
solely upon a present intention to hold these Securities for the minimum capital
gains period specified under tax statutes, for a deferred sale, for or until an
increase or decrease in the market price of the Securities, or for a period of
one year or any other fixed period in the future.
(c) I further understand that the Securities must be held
indefinitely unless subsequently registered under the Securities Act or unless
an exemption from registration is otherwise available. Moreover, I understand
that the Company is under no obligation to register the Securities. In addition,
I understand that the certificate evidencing the Securities will be imprinted
with a legend which prohibits the transfer of the Securities unless they are
registered or such registration is not required in the opinion of counsel for
the Company.
(d) I am familiar with the provisions of Rule 144, promulgated
under the Securities Act, which, in substance, permits limited public resale of
"restricted securities" acquired, directly or
<PAGE>
indirectly, from the issuer thereof, in a non-public offering subject to the
satisfaction of certain conditions.
The Securities may be resold in certain limited circumstances subject to
the provisions of Rule 144, which requires among other things: (1) the
availability of certain public information about the Company, (2) the resale
occurring not less than one year after the party has purchased, and made full
payment for, within the meaning of Rule 144, the securities to be sold; and, in
the case of an affiliate, or of a non-affiliate who has held the securities less
than two years, (3) the sale being made through a broker in an unsolicited
"broker's transaction" or in transactions directly with a market maker (as said
term is defined under the Securities Exchange Act of 1934) and the amount of
securities being sold during any three month period not exceeding the specified
limitations stated therein, if applicable.
(e) I agree, in connection with the Company's initial
underwritten public offering of the Company's securities, (1) not to sell, make
short sale of, loan, grant any options for the purchase of, or otherwise dispose
of any shares of Common Stock of the Company held by me (other than those shares
included in the registration) without the prior written consent of the Company
or the underwriters managing such initial underwritten public offering of the
Company's securities for one hundred eighty (180) days from the effective date
of such registration, and (2) I further agree to execute any agreement
reflecting (1) above as may be requested by the underwriters at the time of the
public offering; provided however that the officers and directors of the Company
-------- -------
who own the stock of the Company also agree to such restrictions.
(f) I further understand that in the event all of the
applicable requirements of Rule 144 are not satisfied, registration under the
Securities Act, compliance with Regulation A, or some other registration
exemption will be required; and that, notwithstanding the fact that Rule 144 is
not exclusive, the Staff of the SEC has expressed its opinion that persons
proposing to sell private placement securities other than in a registered
offering and otherwise than pursuant to Rule 144 will have a substantial burden
of proof in establishing that an exemption from registration is available for
such offers or sales, and that such persons and their respective brokers who
participate in such transactions do so at their own risk.
------------------------
(Signature)
By:
---------------------
Title:
------------------
Date: ,
---------- --------
<PAGE>
EXHIBIT B
----------
NOTICE OF TRANSFER
(To be signed only upon transfer of Warrant)
FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers
unto _________________________________ the right represented by the attached
Warrant to purchase _______________* shares of Common Stock of Liquid Audio,
Inc., to which the attached warrant relates, and appoints ______________________
Attorney to transfer such right on the books of Liquid Audio, Inc. with full
power of substitution in the premises.
Dated:
------------------
--------------------------------------------------
(Signature must conform in all respects to name of
Holder as specified on the face of the Warrant)
--------------------------------------------------
(Address)
Signed in the presence of:
- ------------------------------
* Insert here the number of shares without making any adjustment for
additional shares of Common Stock or any other stock or other securities or
property or cash which, pursuant to the adjustment provisions of the Warrant,
may be deliverable upon exercise.
<PAGE>
EXHIBIT B-1
------------
INVESTMENT REPRESENTATION STATEMENT
PURCHASER :
TRANSFEROR :
COMPANY : LIQUID AUDIO, INC.
SECURITY : COMMON STOCK PURCHASE WARRANT ORIGINALLY ISSUED ON
_______________, ________
AMOUNT : ___________ SHARES
DATE :
In connection with the purchase of the above-listed Securities, I, the
Purchaser, represent to the Seller and to the Company the following:
(a) I am aware of the Company's business affairs and financial
condition, and have acquired sufficient information about the Company to reach
an informed and knowledgeable decision to acquire the Securities. I am
purchasing these Securities for my own account for investment purposes only and
not with a view to, or for the resale in connection with, any "distribution"
thereof for purposes of the Securities Act of 1933, as amended (the "Securities
Act").
(b) I understand that the Securities have not been registered
under the Securities Act in reliance upon a specific exemption therefrom, which
exemption depends upon, among other things, the bona fide nature of my
investment intent as expressed herein. In this connection, I understand that, in
the view of the Securities and Exchange Commission (the "SEC"), the statutory
basis for such exemption may be unavailable if my representation was predicated
solely upon a present intention to hold these Securities for the minimum capital
gains period specified under tax statutes, for a deferred sale, for or until an
increase or decrease in the market price of the Securities, or for a period of
one year or any other fixed period in the future.
(c) I further understand that the Securities must be held
indefinitely unless subsequently registered under the Securities Act or unless
an exemption from registration is otherwise available. Moreover, I understand
that the Company is under no obligation to register the Securities. In addition,
I understand that the certificate evidencing the Securities will be imprinted
with a legend which prohibits the transfer of the Securities unless they are
registered or such registration is not required in the opinion of counsel for
the Company.
(d) I am familiar with the provisions of Rule 144, promulgated
under the Securities Act, which, in substance, permits limited public resale of
"restricted securities" acquired, directly or
<PAGE>
indirectly, from the issuer thereof, in a non-public offering subject to the
satisfaction of certain conditions.
The Securities may be resold in certain limited circumstances subject to
the provisions of Rule 144, which requires among other things: (1) the
availability of certain public information about the Company, (2) the resale
occurring not less than one year after the party has purchased, and made full
payment for, within the meaning of Rule 144, the securities to be sold; and, in
the case of an affiliate, or of a non-affiliate who has held the securities less
than two years, (3) the sale being made through a broker in an unsolicited
"broker's transaction" or in transactions directly with a market maker (as said
term is defined under the Securities Exchange Act of 1934) and the amount of
securities being sold during any three month period not exceeding the specified
limitations stated therein, if applicable.
(e) I agree, in connection with the Company's initial
underwritten public offering of the Company's securities, (1) not to sell, make
short sale of, loan, grant any options for the purchase of, or otherwise dispose
of any shares of Common Stock of the Company held by me (other than those shares
included in the registration) without the prior written consent of the Company
or the underwriters managing such initial underwritten public offering of the
Company's securities for one hundred eighty (180) days from the effective date
of such registration, and (2) I further agree to execute any agreement
reflecting (1) above as may be requested by the underwriters at the time of the
public offering; provided however that the officers and directors of the Company
-------- -------
who own the stock of the Company also agree to such restrictions.
(f) I further understand that in the event all of the
applicable requirements of Rule 144 is not satisfied, registration under the
Securities Act, compliance with Regulation A, or some other registration
exemption will be required; and that, notwithstanding the fact that Rule 144 is
not exclusive, the Staff of the SEC has expressed its opinion that persons
proposing to sell private placement securities other than in a registered
offering and otherwise than pursuant to Rule 144 will have a substantial burden
of proof in establishing that an exemption from registration is available for
such offers or sales, and that such persons and their respective brokers who
participate in such transactions do so at their own risk.
--------------------------------
(Signature)
By:
-----------------------------
Title:
--------------------------
Date: ,
---------- ----------------
<PAGE>
COMMON STOCK PURCHASE WARRANT
THIS WARRANT HAS BEEN, AND THE SHARES OF COMMON STOCK WHICH MAY BE PURCHASED
PURSUANT TO THE EXERCISE OF THIS WARRANT (THE "SHARES") WILL BE, ACQUIRED SOLELY
FOR INVESTMENT AND NOT WITH A VIEW TO, OR FOR RESALE IN CONNECTION WITH, ANY
DISTRIBUTION THEREOF. NEITHER THIS WARRANT NOR THE SHARES (TOGETHER, THE
"SECURITIES") HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED
(THE "ACT"), OR ANY STATE SECURITIES LAWS. SUCH SECURITIES MAY NOT BE SOLD,
OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF SUCH REGISTRATION OR
AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY AND ITS COUNSEL THAT SUCH
DISPOSITION IS EXEMPT FROM THE REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS
OF THE ACT AND OF ANY APPLICABLE STATE SECURITIES LAWS.
No. W-B Void after June 9, 2004
LIQUID AUDIO, INC.
WARRANT TO PURCHASE 127,068 SHARES OF COMMON STOCK
THIS CERTIFIES THAT, for value received, Amazon.com, Inc. (the "Holder") is
entitled to subscribe for and purchase from Liquid Audio, Inc., a California
corporation (the "Company"), 127,068 shares (as adjusted pursuant to Section 3
hereof) of the fully paid and nonassessable Common Stock, no par value (the
"Shares"), of the Company at the price of $6.56 per share (the "Exercise Price")
(as adjusted pursuant to Section 3 hereof), subject to the provisions and upon
the terms and conditions hereinafter set forth.
This Warrant is subject to the following terms and conditions:
1. Conditions of Exercise. The Holder is not entitled to exercise the
----------------------
rights issued under this warrant, unless and until the following conditions have
been met:
(a) this Warrant shall first become exercisable as to one-half (1/2)
of the shares at the time of the signing of a definitive agreement, if any,
between the Holder and the Company concerning the implementation of the Liquid
Artist program on the Amazon.com site.
<PAGE>
(b) The remaining Warrants under this Agreement will be exercisable
with respect to one-twelfth thereof for each month during the first year of the
program commencing on the date the Liquid Artist program is available on the
Amazon.com site and continuing for so long as the Holder maintains the Liquid
Artist program on its site subject to the terms negotiated in the definitive
agreement, if any.
2. Method of Exercise; Payment.
------------------------------
(a) Cash Exercise. The purchase rights represented by this Warrant may
-------------
be exercised by the Holder, in whole or in part, from time to time by the
surrender of this Warrant (with the notice of exercise form (the "Notice of
Exercise") attached hereto as Exhibit A duly executed) at the principal office
of the Company, and by the payment to the Company of an amount equal to the
Exercise Price multiplied by the number of the Shares being purchased, which
amount may be paid, at the election of the Holder, by wire transfer or certified
check payable to the order of the Company. The person or persons in whose
name(s) any certificate(s) representing Shares shall be issuable upon exercise
of this Warrant shall be deemed to have become the holder(s) of record of, and
shall be treated for all purposes as the record holder(s) of, the Shares
represented thereby (and such Shares shall be deemed to have been issued)
immediately prior to the close of business on the date or dates upon which this
Warrant is exercised.
(b) Net Issue Exercise. In lieu of exercising this warrant pursuant to
Section l(a) hereof, the Holder may elect to receive a number of Shares equal to
the value (as determined below) of this Warrant (or the portion thereof being
canceled) by surrender of this Warrant at the principal office of the Company
together with Notice of Exercise in which alternative No. 1 is initiated by the
Holder. In such event, the Company shall issue to the Holder a number of Shares
computed using the following formula:
X = Y (A-B)
-------
A
Where X = the number of Shares to be issued to the Holder.
Y = the number of Shares subject to this warrant.
A = the fair market value of one share of the Company's Common Stock.
B = the Exercise Price (as adjusted to the date of such calculation).
(c) Fair market Value. For purposes of this Section 1, the fair market
-----------------
value of the Company's Common Stock shall mean:
(i) The average of the closing bid and asked prices of the
Company's Common Stock quoted in the Over-The-Counter Market Summary or the
closing price quoted on any exchange on which the Common Stock is listed,
whichever is applicable, as published in the Western
<PAGE>
Edition of The Wall Street Journal for the ten trading days prior to the date of
determination of fair market value;
(ii) If the Company's Common Stock is not traded Over-The-
Counter or on an exchange, fair market value of the Common Stock per share shall
be the price per share as determined by the Company's Board of Directors.
Receipt and acknowledgment of this warrant by the Holder shall be definitely
deemed to be an acknowledgment and acceptance of any such fair market value
determination by the Company's Board of Directors as the final and binding
determination of such value for purposes of this Agreement.
(d) Stock Certificates. In the event of any exercise of the rights
represented by this Warrant, certificates for the shares of Common Stock so
purchased shall be delivered to the Holder within 30 days of such exercise and,
unless this Warrant has been fully exercised or has expired, a new Warrant
representing the shares with respect to which this Warrant shall not have been
exercised shall also be issued to the Holder within such time.
3. Stock Fully Paid; Reservation of Shares. All of the Shares issuable
---------------------------------------
upon the exercise of the rights represented by this Warrant will, upon issuance
and receipt of the Exercise Price therefor, be fully paid and nonassessable, and
free from all preemptive rights, rights of first refusal or first offer, taxes,
liens and charges with respect to the issuance thereof. During the period within
which the rights represented by this Warrant may be exercised, the Company shall
at all times have authorized and reserved for issuance sufficient shares of its
Common Stock to provide for the exercise of the rights represented by this
Warrant.
4. Adjustment of Exercise Price and Number of Shares. Subject to the
-------------------------------------------------
provisions of Section 12 hereof, the number and kind of Shares purchasable upon
the exercise of this Warrant and the Exercise Price therefor shall be subject to
adjustment from time to time upon the occurrence of certain events, as follows:
(a) Reclassification, Consolidation or Merger. In case of any
-----------------------------------------
reclassification of the Common Stock (other than a change in par value, or as a
result of a subdivision or combination), or in case of any consolidation or
merger of the Company with or into another corporation (other than a
consolidation or merger with another corporation in which the Company is a
continuing corporation and in which the Company's stockholders immediately
preceding such consolidation or merger own at least 50% of the voting securities
of the Company following such consolidation or merger and which does not result
in any reclassification of the Shares issuable upon exercise of this Warrant),
or in case of any sale of all or substantially all of the assets of the Company,
the Company, or such successor or purchasing corporation as the case may be,
shall execute a new Warrant, providing that the holder of this Warrant shall
have the right to exercise such new Warrant, and procure upon such exercise and
payment of the same aggregate Exercise Price, in lieu of the Shares of Common
Stock theretofore issuable upon exercise of this Warrant, the kind and amount of
shares of stock, other securities, money and property receivable upon such
reclassification, change, consolidation, sale of all or substantially all of the
Company's assets or merger by a holder of an equivalent number of shares of
Common Stock. Such new Warrant shall provide for adjustments which shall be as
nearly equivalent
<PAGE>
as may be practicable to the adjustments provided for in this Section 3. The
provisions of this subsection (a), subject to Section 12 hereof, shall similarly
apply to successive reclassifications, consolidations, mergers, and the sale of
all or substantially all of the Company's assets.
(b) Stock Splits, Dividends and Combinations. In the event that the
----------------------------------------
Company shall at any time subdivide the outstanding shares of Common Stock, or
shall issue a stock dividend on its outstanding shares of Common Stock, the
number of Shares issuable upon exercise of this Warrant immediately prior to
such subdivision or to the issuance of such stock dividend shall be
proportionately increased, and the Exercise Price shall be proportionately
decreased, and in the event that the Company shall at any time combine the
outstanding shares of Common Stock, the number of Shares issuable upon exercise
of this Warrant immediately prior to such combination shall be proportionately
decreased, and the Exercise Price shall be proportionately increased, effective
at the close of business on the date of such subdivision, stock dividend or
combination, as the case may be.
5. Notices.
-------
(a) Upon any adjustment of the Exercise Price and any increase or
decrease in the number of Shares purchasable upon the exercise of this Warrant
in accordance with Section 3 hereof, then, and in each such case, the Company,
within thirty (30) days thereafter, shall give written notice thereof to the
Holder at the address of such Holder as shown on the books of the Company which
notice shall state the Exercise Price as adjusted and, if applicable, the
increased or decreased number of Shares purchasable upon the exercise of this
Warrant, setting forth in reasonable detail the method of calculation of each.
(b) In the event that the Company shall propose at any time to effect
a Public Offering, the Company shall send to the Holder at least thirty (30)
days prior written notice of the date when the same is anticipated to take
place.
(c) The Company shall send to the Holder not less than thirty (30)
days before the expiration of this Warrant, a written notice of the date on
which this Warrant will expire.
(d) Any written notice by the Company required or permitted hereunder
shall be given by hand delivery or first class mail, postage prepaid, addressed
to the Holder at the address shown on the books of the Company for the Holder.
6. Transfer of Warrant Except in accordance with the conditions
-------------------
contained in Section 6 hereof, this Warrant and all rights hereunder are not
transferable. In order to effect any transfer of all or a portion of this
warrant or the Shares, the transferor shall deliver a completed and duly
executed Notice of Transfer (attached hereto as Exhibit B).
---------
7. Condition of Exercise or Transfer of Warrant.
--------------------------------------------
(a) Unless exercised pursuant to an effective registration statement
under the Act which includes the Shares so exercised, it shall be a condition to
any exercise or transfer of this
<PAGE>
Warrant that the Company shall have received, at the time of such exercise or
transfer, a representation in writing from the recipient or transferee in the
form attached hereto as Exhibit A-1 or Exhibit B-1, respectively, that the
----------- -----------
Shares being issued upon exercise, or this Warrant (or portion hereof)
transferred, as the case may be, are being acquired for investment and not with
a view to any sale or distribution thereof.
(b) It shall be a further condition to any transfer of this Warrant,
or of any or all of the Shares issued upon exercise of this Warrant, other than
a transfer registered under the Act, that the Holder shall have given written
notice to the Company which shall describe the manner and circumstances of the
proposed transfer and be accompanied by a written opinion of Holder's legal
counsel or a "no-action" letter reasonably satisfactory to the Company stating
that such transfer is exempt from the registration and delivery requirements of
the Act and applicable state securities laws.
(c) Each certificate evidencing the Shares issued upon exercise of
this Warrant, or transfer of such shares (other than a transfer registered under
the Act or any subsequent transfer of shares so registered) shall be stamped or
imprinted with a legend substantially in the following form:
THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR
INVESTMENT AND NOT WITH A VIEW TO, OR FOR RESALE IN CONNECTION WITH, ANY
DISTRIBUTION THEREOF, AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED (THE "ACT") OR ANY STATE SECURITIES LAWS. SUCH SECURITIES MAY
NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF SUCH
REGISTRATION OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY AND ITS
COUNSEL THAT SUCH REGISTRATION IS NOT REQUIRED UNDER THE ACT.
Subject to this Section 6, the Company may instruct its transfer agent not
to register the transfer of all or a part of this Warrant, or any of the Shares,
unless one of the conditions specified in the above legend is satisfied.
8. Removal of Legend. Upon request of a holder of a certificate with the
-----------------
legend referred to in Section 6 hereof, the Company shall issue to such holder a
new certificate therefor free of any transfer legend, if, with such request, the
Company shall have received either an opinion of counsel or a "no-action" letter
referred to in Section 6(b) of this agreement to the effect that any transfer by
such holder of the shares evidenced by such certificate will not violate the Act
and applicable state securities laws; provided, however, that the Company shall
not be obligated to remove any such legends prior to the closing date of the
Public Offering.
9. Fractional Shares. No fractional shares of Common Stock will be
-----------------
issued in connection with any exercise hereunder, but in lieu of such fractional
shares the Company shall make a cash payment therefor upon the basis of the
Exercise Price then in effect.
10. Representations and Warranties of the Company. The Company represents
---------------------------------------------
and warrants to the Holder as follows:
<PAGE>
(a) This Warrant has been duly authorized and executed by the Company
and is a valid and binding obligation of the Company enforceable in accordance
with its terms;
(b) The Shares have been duly authorized and reserved for issuance by
the Company and, when issued in accordance with the terms hereof, will be
validly issued, fully paid and nonassessable;
(c) The rights, preferences, privileges and restrictions granted to or
imposed upon the Shares and the holders thereof are as set forth in the
Company's Certificate of Incorporation, a true and complete copy of which has
been delivered to the original Holder of this Warrant; and
(d) The execution and delivery of this Warrant are not, and the
issuance of the Shares upon exercise of this warrant in accordance with the
terms hereof will not be, inconsistent with the Company's Certificate of
Incorporation or Bylaws, as amended.
11. Representations and Warranties by the Holder. The Holder represents
--------------------------------------------
and warrants to the Company as follows:
(a) This Warrant is being acquired for its own account, for investment
and not with a view to, or for resale in connection with, any distribution or
public offering thereof within the meaning of the Act. Upon exercise of this
Warrant, the Holder shall, if so requested by the Company, confirm in writing,
in a form reasonably satisfactory to the Company, that the Shares issuable upon
exercise of this Warrant are being acquired for investment and not with a view
toward distribution or resale.
(b) The Holder understands that the Warrant and the Shares have not
been registered under the Act by reason of their issuance in a transaction
exempt from the registration and prospectus delivery requirements of the Act
pursuant to Section 4(2) thereof, and that they must be held by the Holder
indefinitely, and that the Holder must therefore bear the economic risk of such
investment indefinitely, unless a subsequent disposition thereof is registered
under the Act or is exempted from such registration. The Holder further
understands that the Shares have not been qualified under the California
Securities Law of 1968 (the "California Law") by reason of their issuance in a
transaction exempt from the qualification requirements of the California Law
pursuant to Section 25102(f) thereof, which exemption depends upon, among other
things, the bona fide nature of the Holder's investment intent expressed above.
(c) The Holder has such knowledge and experience in financial and
business matters that it is capable of evaluating the merits and risks of the
purchase of this Warrant and the Shares purchasable pursuant to the terms of
this Warrant and of protecting its interests in connection therewith.
(d) The Holder is able to bear the economic risk of the purchase of
the Shares pursuant to the terms of this Warrant.
<PAGE>
12. Rights of Stockholders. No holder of this Warrant shall be entitled,
----------------------
as a Warrant holder, to vote or receive dividends or be deemed the holder of
Common Stock or any other securities of the Company which may at any time be
issuable on the exercise hereof for any purpose, nor shall anything contained
herein be construed to confer upon the holder of this Warrant, as such, any of
the rights of a stockholder of the Company or any right to vote for the election
of directors or upon any matter submitted to stockholders at any meeting
thereof, or to give or withhold consent to any corporate action (whether upon
any recapitalization, issuance of stock, reclassification of stock, change of
par value, consolidation, merger, conveyance, or otherwise) or to receive notice
of meetings, or to receive dividends or subscription rights or otherwise until
the Warrant shall have been exercised and the Shares purchasable upon the
exercise hereof shall have become deliverable, as provided herein.
13. Expiration of Warrant. This Warrant shall expire and shall no longer
---------------------
be exercisable as of 5:00 p.m., California local time, on June 9, 2004.
14. Miscellaneous.
-------------
(a) This Warrant is being delivered in the State of California and
shall be construed and enforced in accordance with and governed by the laws of
such State.
(b) The headings in this Warrant are for purposes of reference only,
and shall not limit or otherwise affect any of the terms hereof.
(c) The terms of this Warrant shall be binding upon and shall inure to
the benefit of any successors or assigns of the Company and of the holder or
holders hereof and of the Shares issued or issuable upon the exercise hereof.
(d) This Warrant and the other documents delivered pursuant hereto
constitute the full and entire understanding and agreement between the parties
with regard to the subjects hereof and thereof.
(e) The Company shall not, by amendment of its Articles of
Incorporation, or through any other means, directly or indirectly, avoid or seek
to avoid the observance or performance of any of the terms of this Warrant and
shall at all times in good faith assist in the carrying out of all such terms
and in the taking of all such action as may be necessary or appropriate in order
to protect the rights of the holder of this Warrant against impairment.
(f) Upon receipt of evidence reasonably satisfactory to the Company of
the loss, theft, destruction or mutilation of this Warrant and, in the case of
any such loss, theft or destruction, upon delivery of an indemnity agreement
reasonably satisfactory in form and amount to the Company or, in the case of any
such mutilation, upon surrender and cancellation of such Warrant, the Company at
its expense will execute and deliver to the holder of record, in lieu thereof, a
new Warrant of like date and tenor.
<PAGE>
(g) This Warrant and any provision hereof may be amended, waived or
terminated only by an instrument in writing signed by the Company and the
Holder.
(h) Receipt of this Warrant by the holder hereof shall constitute
acceptance of and agreement to the foregoing terms and conditions.
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Warrant to be signed by its
duly authorized officer.
Issued this 9th day of June, 1999.
LIQUID AUDIO, INC.
By: /s/ illegible
---------------------------------
Title: VP Business Development
------------------------------
Acknowledged and Accepted:
Amazon.com, Inc.
- ----------------
By:_____________________
Authorized Signatory
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Warrant to be signed by its
duly authorized officer.
Issued this 9th day of June, 1999.
LIQUID AUDIO, INC.
By:
---------------------------------
Title:
------------------------------
Acknowledged and Accepted:
Amazon.com, Inc.
- ----------------------------
By: /s/ illegible
-------------------------
Authorized Signatory
<PAGE>
EXHIBIT A
---------
NOTICE OF EXERCISE
-------------------
TO: Liquid Audio, Inc.
810 Winslow Street
Redwood City, CA 94063
Attention: President
1. In lieu of exercising the attached Warrant for cash or check,
the undersigned hereby elects to effect the net issuance provision of Section
l(b) of this Warrant and receive ____________ (leave blank if you choose
Alternative No. 2 below) shares of Common Stock pursuant to the terms of this
Warrant. (Initial here if the undersigned elects this alternative).
___________.
2. The undersigned hereby elects to purchase _______________ (leave
blank if you choose alternative No. 1 above) shares of Common Stock of Liquid
Audio, Inc. pursuant to the terms of this Warrant, and tenders herewith payment
of the purchase price of such shares in full.
3. Please issue a certificate or certificates representing said
shares of Common Stock in the name of the undersigned or in such other name as
is specified below:
------------------------------------
(Name)
------------------------------------
------------------------------------
(Address)
4. The undersigned hereby represents and warrants that the
aforesaid shares of Common Stock are being acquired for the account of the
undersigned for investment and not with a view to, or for resale, in connection
with the distribution thereof, and that the undersigned has no present intention
of distributing or reselling such shares and all representations and warranties
of the undersigned set forth in Section 10 of the attached Warrant are true and
correct as of the date hereof. In support thereof, the undersigned agrees to
execute an Investment Representation Statement in a form substantially similar
to the form attached to the Warrant as Exhibit A-1.
-----------
----------------------------------------
(Signature and Date)
Title:
----------------------------------
<PAGE>
EXHIBIT A-l
------------
INVESTMENT REPRESENTATION STATEMENT
PURCHASER :
SELLER : LIQUID AUDIO, INC.
COMPANY : LIQUID AUDIO, INC.
SECURITY : COMMON STOCK ISSUED UPON EXERCISE OF THE COMMON STOCK PURCHASE
WARRANT ISSUED ON ____________, ____
AMOUNT : _______________ SHARES
DATE :
In connection with the purchase of the above-listed Securities, I, the
Purchaser, represent to the Seller and to the Company the following:
(a) I am aware of the Company's business affairs and financial
condition, and have acquired sufficient information about the Company to reach
an informed and knowledgeable decision to acquire the Securities. I am
purchasing these Securities for my own account for investment purposes only and
not with a view to, or for the resale in connection with, any "distribution"
thereof for purposes of the Securities Act of 1933, as amended (the "Securities
Act").
(b) I understand that the Securities have not been registered under the
Securities Act in reliance upon a specific exemption therefrom, which exemption
depends upon, among other things, the bona fide nature of my investment intent
as expressed herein. In this connection, I understand that, in the view of the
Securities and Exchange Commission (the "SEC"), the statutory basis for such
exemption may be unavailable if my representation was predicated solely upon a
present intention to hold these Securities for the minimum capital gains period
specified under tax statutes, for a deferred sale, for or until an increase or
decrease in the market price of the Securities, or for a period of one year or
any other fixed period in the future.
(c) I further understand that the Securities must be held indefinitely
unless subsequently registered under the Securities Act or unless an exemption
from registration is otherwise available. Moreover, I understand that the
Company is under no obligation to register the Securities. In addition, I
understand that the certificate evidencing the Securities will be imprinted with
a legend which prohibits the transfer of the Securities unless they are
registered or such registration is not required in the opinion of counsel for
the Company.
(d) I am familiar with the provisions of Rule 144, promulgated under
the Securities Act, which, in substance, permits limited public resale of
"restricted securities" acquired, directly or
<PAGE>
indirectly, from the issuer thereof, in a non-public offering subject to the
satisfaction of certain conditions.
The Securities may be resold in certain limited circumstances subject to
the provisions of Rule 144, which requires among other things: (1) the
availability of certain public information about the Company, (2) the resale
occurring not less than one year after the party has purchased, and made full
payment for, within the meaning of Rule 144, the securities to be sold; and, in
the case of an affiliate, or of a non-affiliate who has held the securities less
than two years, (3) the sale being made through a broker in an unsolicited
"broker's transaction" or in transactions directly with a market maker (as said
term is defined under the Securities Exchange Act of 1934) and the amount of
securities being sold during any three month period not exceeding the specified
limitations stated therein, if applicable.
(e) I agree, in connection with the Company's initial underwritten
public offering of the Company's securities, (1) not to sell, make short sale
of, loan, grant any options for the purchase of, or otherwise dispose of any
shares of Common Stock of the Company held by me (other than those shares
included in the registration) without the prior written consent of the Company
or the underwriters managing such initial underwritten public offering of the
Company's securities for one hundred eighty (180) days from the effective date
of such registration, and (2) I further agree to execute any agreement
reflecting (1) above as may be requested by the underwriters at the time of the
public offering; provided however that the officers and directors of the Company
-------- -------
who own the stock of the Company also agree to such restrictions.
(f) I further understand that in the event all of the applicable
requirements of Rule 144 are not satisfied, registration under the Securities
Act, compliance with Regulation A, or some other registration exemption will be
required; and that, notwithstanding the fact that Rule 144 is not exclusive, the
Staff of the SEC has expressed its opinion that persons proposing to sell
private placement securities other than in a registered offering and otherwise
than pursuant to Rule 144 will have a substantial burden of proof in
establishing that an exemption from registration is available for such offers or
sales, and that such persons and their respective brokers who participate in
such transactions do so at their own risk.
--------------------------------
(Signature)
By:
-----------------------------
Title:
-------------------------
Date: ,
-------------- ------------
<PAGE>
EXHIBIT B
----------
NOTICE OF TRANSFER
(To be signed only upon transfer of Warrant)
FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers
unto _________________________________ the right represented by the attached
Warrant to purchase _______________* shares of Common Stock of Liquid Audio,
Inc., to which the attached warrant relates, and appoints ______________________
Attorney to transfer such right on the books of Liquid Audio, Inc. with full
power of substitution in the premises.
Dated:
--------------
--------------------------------------------------
(Signature must conform in all respects to name of
Holder as specified on the face of the Warrant)
--------------------------------------------------
(Address)
Signed in the presence of:
- -------------------------------
* Insert here the number of shares without making any adjustment for
additional shares of Common Stock or any other stock or other securities or
property or cash which, pursuant to the adjustment provisions of the Warrant,
may be deliverable upon exercise.
<PAGE>
EXHIBIT B-1
------------
INVESTMENT REPRESENTATION STATEMENT
PURCHASER :
TRANSFEROR :
COMPANY : LIQUID AUDIO, INC.
SECURITY : COMMON STOCK PURCHASE WARRANT ORIGINALLY ISSUED ON
_______________, ________
AMOUNT : ___________ SHARES
DATE :
In connection with the purchase of the above-listed Securities, I, the
Purchaser, represent to the Seller and to the Company the following:
(g) I am aware of the Company's business affairs and financial
condition, and have acquired sufficient information about the Company to reach
an informed and knowledgeable decision to acquire the Securities. I am
purchasing these Securities for my own account for investment purposes only and
not with a view to, or for the resale in connection with, any "distribution"
thereof for purposes of the Securities Act of 1933, as amended (the "Securities
Act").
(h) I understand that the Securities have not been registered under the
Securities Act in reliance upon a specific exemption therefrom, which exemption
depends upon, among other things, the bona fide nature of my investment intent
as expressed herein. In this connection, I understand that, in the view of the
Securities and Exchange Commission (the "SEC"), the statutory basis for such
exemption may be unavailable if my representation was predicated solely upon a
present intention to hold these Securities for the minimum capital gains period
specified under tax statutes, for a deferred sale, for or until an increase or
decrease in the market price of the Securities, or for a period of one year or
any other fixed period in the future.
(i) I further understand that the Securities must be held indefinitely
unless subsequently registered under the Securities Act or unless an exemption
from registration is otherwise available. Moreover, I understand that the
Company is under no obligation to register the Securities. In addition, I
understand that the certificate evidencing the Securities will be imprinted with
a legend which prohibits the transfer of the Securities unless they are
registered or such registration is not required in the opinion of counsel for
the Company.
(j) I am familiar with the provisions of Rule 144, promulgated under
the Securities Act, which, in substance, permits limited public resale of
"restricted securities" acquired, directly or
<PAGE>
indirectly, from the issuer thereof, in a non-public offering subject to the
satisfaction of certain conditions.
The Securities may be resold in certain limited circumstances subject to
the provisions of Rule 144, which requires among other things: (1) the
availability of certain public information about the Company, (2) the resale
occurring not less than one year after the party has purchased, and made full
payment for, within the meaning of Rule 144, the securities to be sold; and, in
the case of an affiliate, or of a non-affiliate who has held the securities less
than two years, (3) the sale being made through a broker in an unsolicited
"broker's transaction" or in transactions directly with a market maker (as said
term is defined under the Securities Exchange Act of 1934) and the amount of
securities being sold during any three month period not exceeding the specified
limitations stated therein, if applicable.
(k) I agree, in connection with the Company's initial underwritten
public offering of the Company's securities, (1) not to sell, make short sale
of, loan, grant any options for the purchase of, or otherwise dispose of any
shares of Common Stock of the Company held by me (other than those shares
included in the registration) without the prior written consent of the Company
or the underwriters managing such initial underwritten public offering of the
Company's securities for one hundred eighty (180) days from the effective date
of such registration, and (2) I further agree to execute any agreement
reflecting (1) above as may be requested by the underwriters at the time of the
public offering; provided however that the officers and directors of the Company
-------- -------
who own the stock of the Company also agree to such restrictions.
(l) I further understand that in the event all of the applicable
requirements of Rule 144 is not satisfied, registration under the Securities
Act, compliance with Regulation A, or some other registration exemption will be
required; and that, notwithstanding the fact that Rule 144 is not exclusive, the
Staff of the SEC has expressed its opinion that persons proposing to sell
private placement securities other than in a registered offering and otherwise
than pursuant to Rule 144 will have a substantial burden of proof in
establishing that an exemption from registration is available for such offers or
sales, and that such persons and their respective brokers who participate in
such transactions do so at their own risk.
--------------------------------
(Signature)
By:
----------------------------
Title:
-------------------------
Date: ,
------------------- ------
<PAGE>
EXHIBIT 10.43
ONLINE PROGRAM AGREEMENT
This Online Collaboration Agreement ("Agreement") is effective as of
February 9, 1999 ("Effective Date"), by and between Muze Inc., a New York
corporation with principal offices at 304 Hudson Street, New York, New York
10013 ("Muze"), and Liquid Audio, Inc., a California corporation with principal
offices at 810 Winslow Street, Redwood City, California 94063 ("Liquid").
WHEREAS, Liquid and Muze desire to collaborate in order to encode sound
clips and related content and to provide online services with such encoded sound
clips linked to Muze database information as set forth herein and on Exhibit A
attached hereto and hereby incorporated herein (the "Online Program");
NOW, THEREFORE, in consideration of the mutual covenants and agreements set
forth herein, the parties agree as follows:
1. Online Program.
---------------
1.1 Cooperative Efforts. Each party shall use commercially reasonable
---------------------
efforts to develop, market, and otherwise further the Online Program. Each party
shall cooperate with and assist the other party in all aspects of the Online
Program. The Online Program shall commence on the Effective Date and shall
continue for the duration of the Term of this Agreement, unless the parties
mutually agree to terminate this Agreement.
1.2 Encoding and Technical Responsibilities. Liquid and Muze will jointly
---------------------------------------
undertake the encoding of music samples matched to the Muze database ("Linked
Sound Clips"), which will be encoded using the Liquid file format. The parties
contemplate that the Linked Sound Clips will generally be thirty (30) seconds
long, except with respect to jazz and classical music, for which the Linked
Sound Clips will generally be sixty (60) seconds long. Liquid will develop and
operate the server infrastructure to host and serve the Linked Sound Clips to
Online Merchants pursuant to the Online Program. The parties specific
responsibilities are set forth in Exhibit A.
1.3 Online Merchants Program. Liquid and Muze will jointly collaborate to
--------------------------
develop the Online Program. Each party will use reasonable commercial efforts to
promote and market the Online Program to online retailers, record labels and
other sound recording owners, portals, online service providers, and related
third parties (together, "Online Merchants"). Both parties will work to sign up
Online Program participants and execute appropriate customer agreements with
Online Merchants.
1.4 Customer Contacts. The parties will determine in advance which party,
------------------
if any, is to serve as the primary contact for servicing Online Program customer
relationships with the Online Merchants, and in each case the secondary contact,
if requested, shall refer all Online Program
1
* Some Material in this Exhibit have been omitted pursuant to a request for
confidential treatment. Such material has been filed separately with the
Securities and Exchange Commission.
<PAGE>
customer relationship issues to the primary contact and otherwise cooperate with
the primary contact in serving the customer relationship. If neither party has
been determined to be the primary contact, the parties will co-market and co-
administer the Online Program and will ensure that each party is fully informed
and included as reasonably appropriate in customer relationships that are
formed.
1.5 Online Program Revenue and Expenses. The development of the Online
-----------------------------------
Program shall include documentation of the parties' agreement with respect to
the treatment of revenue and expenses associated with the Online Program,
including the matters already agreed to and set forth in Exhibit A and the
process by which each of Liquid and Muze will recoup expenses against any
revenues generated from providing the Linked Sound Clips to the Online Merchants
pursuant to the Online Program. All further documentation of the parties'
agreement on these subjects shall be mutually agreed to in writing, signed and
attached to this Agreement as a part of Exhibit A. Any agreement to share
expenses or revenues from any source other than as expressly set forth in
Exhibit A shall not be effective unless set forth in writing and signed by both
parties. Further details for Exhibit A will be developed pursuant to the
progress review meeting process set forth in Section 2.1 below, or as otherwise
agreed between the parties.
1.6 Revenue Exclusions. [***]
-------------------
2. Progress and Technical Reporting and Review; Limited Exclusivity of
-------------------------------------------------------------------
Arrangement.
- ------------
2.1 Progress Review Meetings. The parties shall, at the senior management
------------------------
level, review the overall progress of the Online Program no less frequently than
monthly. In addition to those set forth in Exhibit A, the parties may agree upon
milestones for the various phases of the Online Program, and each party shall
use reasonable commercial efforts to achieve all milestones and devote
appropriate resources and a high-level of priority to the Online Program. The
parties acknowledge that certain details of the development, commercialization,
and administration of the Program and other aspects of the Online Program cannot
yet be anticipated. However, any procedures that depart from the allocation of
rights and responsibilities set forth in this Agreement, including Exhibit A,
shall be implemented only by a signed, written amendment of this Agreement.
2
* Material has been omitted pursuant to a request for confidential treatment.
Such material has been filed separately with the Securities and Exchange
Commission.
<PAGE>
2.2 Technical Review Meetings. The parties shall, at a technical
-------------------------
management level (senior engineer or higher), review progress of technical
aspects of the Online Program and report their results to each other in a format
and at intervals to be mutually agreed in writing.
2.3 Limited Exclusivity of Arrangement. During the term hereof, neither
--------------------------
party shall operate a service substantially the same as the Online Program.
Other than as expressly set forth in the immediately preceding sentence, neither
party shall be precluded from entering into any similar agreement, program,
alliance, collaboration, or licensing scheme with any third party or parties
regarding the subject matter of this Agreement. For the avoidance of doubt, Muze
shall be permitted to license its music database to third parties, including
links to sound clips that are not Linked Sound Clips, and Liquid shall be
permitted to encode sound clips and create links to music databases that are not
Muze databases.
3. Intellectual Property Rights and Ownership.
-------------------------------------------
3.1 Trademark Rights. Each party grants the other party the right to use
----------------
its trade name and logos solely in promoting and administering the Programs.
Each party covenants with the other that it will in such activities uphold the
high standards of quality and customer service associated with the other's trade
names and adhere to the reasonable trademark guidelines of the other party. Any
breach of this covenant shall be deemed a material breach of this Agreement, and
the parties acknowledge that such breaches may also entitle the aggrieved party
to injunctive relief. All other trademarks and branding developed for use in
connection with the Online Program shall be owned as the parties shall agree,
such agreement to be included in this Agreement as an attachment.
3.2 Independent Development and Ownership. Each party shall retain
-------------------------------------
ownership and control of its pre-existing intellectual property rights, lines of
business, and customers. Each party shall retain ownership of independently
developed intellectual property rights (i.e., developments created without use
of the other parties' intellectual property, including Confidential Information)
during the term of this Agreement. There shall be no joint development of
intellectual property rights under this Agreement unless expressly agreed to in
writing by the parties describing the joint development project and the terms
relating thereto.
3.3 Rights to Linked Sound Clips and Cross-License Among Parties. During
------------------------------------------------------------
the term of this Agreement, each party may retain and use a copy of the Linked
Sound Clips library for use only in conjunction with the Online Program. In
addition, Muze grants to Liquid a royalty-free, nonexclusive license to use the
Muze music database content in connection with the Online Program. Liquid grams
to Muze a royalty-free, nonexclusive license to use its encoding, file, server,
and delivery technology in connection with the Online Program. Such licenses
shall be extended on commercially reasonable terms upon termination or
expiration of this Agreement. Upon termination or expiration of this Agreement,
each party may retain a copy of the Linked Sound Clips library for any and all
purposes, with no duty to account to the other party. Except as expressly set
forth in this Agreement, no other rights or licenses are granted or implied
hereunder.
3
<PAGE>
4. Term and Termination.
---------------------
4.1 Term. The term of this Agreement shall be for two (2) years from the
----
Effective Date. This Agreement shall be renewed automatically for up to five
successive one-year periods unless either party notifies the other of its desire
to avoid such automatic renewal at least sixty (60) days prior to the end of the
term or any successive term.
4.2 Termination. Either party may terminate this Agreement for material
-----------
breach by the other party that remains uncured for more than thirty (30) days
after written notice specifying the breach. Either party may terminate this
Agreement upon written notice to the other party in the event of termination for
default by the other party of any other agreement between the parties. Any party
may terminate this Agreement upon written notice in the event that a voluntary
or involuntary petition in bankruptcy is filed by or against any party, or any
party makes an assignment for the benefit of creditors or is involved in any
other insolvency proceedings.
4.3 Effect of Termination. During the term of this Agreement and after
---------------------
termination or expiration of this Agreement, all rights to receive Linked Sound
Clips granted to third parties pursuant to the Online Program shall continue in
effect according to the terms of the agreement governing such services. Upon
termination or expiration of this Agreement: (i) each party shall retain its
copy of the Linked Sound Clips library, the assets allocated to each as may have
been agreed pursuant to Exhibit A, and all pre-existing rights; (ii) the parties
shall settle any revenue or expense sharing issues, as well as any asset
allocation issues (except for the Linked Sound Clips library, which may be
retained by both parties), as soon as practicable after such termination or
expiration, but in any event within ninety (90) days thereof; and (iii) if
requested by Muze, Liquid shall continue to host the Linked Sound Clips for a
period not to exceed ninety (90) days, as well as assist Muze during such period
in effecting a transfer (or replication, if applicable) of hosting and related
operations from Liquid (or the hosting service provider then in place) to Muze
(or Muze's designated hosting service provider), on commercially reasonable
terms. All rights and obligations that do not by their terms survive this
Agreement shall terminate.
5. Confidential Information.
-------------------------
5.1 Confidential Information. During the Online Program and in the
------------------------
development, commercialization, and operation of the Programs relating thereto,
the parties will have access to certain of each other's proprietary and
confidential information and materials, including, but not limited to, marketing
plans, strategies, software and/or hardware design, and other information and
materials developed by the parties or for them by third parties. Such
information shall be designated in writing as confidential, or if orally
disclosed, confirmed in writing as confidential within thirty (30) days of
disclosure ("Confidential Information").
5.2 Confidentiality Obligations. Nothing contained in this Agreement
---------------------------
shall grant any party rights to use any such Confidential Information of the
other parties in any manner except in the performance of this Agreement (i.e.,
in connection with the Online Program). Each party shall use at least a
reasonable degree of care in protecting the other party's Confidential
Information.
4
<PAGE>
Neither party shall disclose to any third party or make public in any manner any
Confidential Information of the other party without the prior written consent of
that party. Upon the expiration or prior termination of this Agreement, each
party shall return all Confidential Information of the other party in that
party's possession including all copies thereof, and shall continue to keep all
Confidential Information confidential.
5.3 Injunctive Relief. The parties acknowledge that breach of these
-----------------
confidentiality obligations may cause irreparable harm and that a non-breaching
party may be entitled to temporary restraint and/or injunctive relief to prevent
or limit any breach by the other party. In any such proceeding for injunctive
relief, no bond shall be required.
5.4 Exceptions. These obligations shall not apply to Confidential
----------
Information: (a) in the public domain (now or hereafter, unless through fault of
the party against whom enforcement of this provision is sought), (b) rightfully
disclosed to a party by a third party without obligation of confidentiality, (c)
required to be disclosed pursuant to a court order or other government
requirement, provided that the disclosing party is given reasonable opportunity
to seek a protective order or confidential treatment, or (d) independently
developed by the receiving party, as evidenced by that party's business records.
6. Indemnification.
----------------
6.1 Indemnification Obligations. Each party agrees to indemnify the other
---------------------------
party against claims by third parties arising out of the negligence or other
tortious conduct of such party or its employees or agents in performing under
this Agreement. The indemnitor shall have the right and obligation to conduct
the defense of any such claim, subject to: (a) the indemnitee's reasonable right
to participate, (b) the indemnitee's full cooperation in the defense, and (c)
the indemnitee's approval of any settlement that purports to bind it to a term
or condition that is not the payment of money damages (which shall be paid by
the indemnitor), which approval shall not be unreasonably withheld. If relevant,
the indemnitor shall resolve any material restriction on the indemnitee's
exercise of any rights licensed by the indemnitor, at the indemnitor's expense,
by (a) obtaining the necessary license from the third party or (b) providing a
non-infringing substitute or work-around to the indemnitee.
7. Miscellaneous Provisions.
-------------------------
7.1 Independent Contractors. The parties are independent contractors and
-----------------------
nothing contained in this Agreement shall be construed to create a relationship
of agent and principal, partners, joint venturers, or employer and employee.
7.2 Assignment. This Agreement may not be assigned without the prior,
----------
written consent of the other party, which shall not be unreasonably withheld,
except no consent shall be required for assignments to any party that acquires
or succeeds to all or substantially all of the assigning party's business or
assets.
5
<PAGE>
7.3 Governing Law. This Agreement shall be governed by the law of the
-------------
State of California applicable to contracts made and to be performed in the
State of California, without reference to the conflicts of laws principles
thereof.
7.4 Non-Solicitation. During the term of this Agreement and for a period
----------------
of one year thereafter, neither party shall solicit for employment, the
personnel of the other party without that party's written consent.
7.5 Entire Agreement. This Agreement is the entire agreement of the
----------------
parties hereto with respect to the subject matter hereof and shall not be
modified or amended except in writing signed by all parties.
7.6 Limitation of Liability. Other than as may arise from willful
-----------------------
misconduct, in no event shall any party be liable for any consequential,
incidental, indirect or special damages arising out of or related to this
Agreement or its termination, including without limitation lost data or lost
profits, regardless of whether such party has been advised of the possibility of
such damages and notwithstanding the failure of essential purpose of any limited
remedy. All software and services are provided on an as-is basis without
warranty, express or implied.
IN WITNESS WHEREOF, the duly authorized representatives of the parties have
executed this Agreement as of the date first written above.
MUZE INC. LIQUID AUDIO, INC.
By: /s/ Anthony Laudico By: /s/ Gerry Kearby
-------------------------- --------------------------
Anthony Laudico Gerry Kearby
Chief Executive Officer Chief Executive Officer
6
<PAGE>
EXHIBIT A
---------
Online Program, Revenue, & Expense Sharing Points
Revenue and Expense Sharing:
- ----------------------------
. Each party initially bears expenses associated with its responsibilities
under the Online Program
. Each party to share Online Program gross revenues equally
. Each party to account to the other and share Online Program expenses
equally
. Allocation of expenses to the Online Program to be determined according
to agreed-upon guidelines, to be attached to this Exhibit A; parties
each to use separate cost accounting for the Online Program
[***]
. Capital costs to be allocated, rather than shared, if accounting and/or
tax advantages dictate, as parties may agree
. Original CDs to reside at Muze's facility (copies at Liquid's facility)
Parties' Specific Responsibilities: Each party will assist the other in
- ----------------------------------
performing its primary responsibilities and the parties will work together to
find the most time- and cost-effective means of developing and promoting the
Program
<TABLE>
<CAPTION>
Muze Liquid Audio
<S> <C>
[***]
</TABLE>
Timelines/Deliverables:
- -----------------------
. Muze to provide CDs at an ongoing rate sufficient to permit Liquid to meet
all encoding deadlines
*Material has been omitted pursuant to a request for confidential treatment.
Such material has been filed separately with the Securities and Exchange
Commission.
7
<PAGE>
[***]
. Parties to agree on expense sharing accounting guidelines in first Progress
Review Meeting or by February 19, 1999, whichever comes first
Technical Details
- -----------------
. Encoding to be AAC for 28.8 kbps and ISDN streaming rates
. Separate MP3 encoded files for 64 kbps streaming rate for use outside the
Program by Muze (for in-store listening systems)
Product Offerings (Planned and potential)
- -----------------
. Standard Online Program Linked Sound Clip hosting service
. Data mining services (with respect to Linked Sound Clips only)
. Only if necessary for competitive masons, a server and Linked Sound Clips
library product (not service)
. Linked Sound Clips library (AAC or MP3) for use in physical retail or similar
environments with listening systems not equipped for interactive audio
streaming (this product to be offered by Muze only)
Territory
- ---------
[***]
Branding
- --------
. All Liquid file format players distributed in conjunction with the online
Program shall contain both Liquid and Muze Branding, in a format to be agreed
upon during the Progress Review Meetings.
* Material has been omitted pursuant to a request for confidential treatment.
Such material has been filed seperately with the Securities and Exchange
Commission.
8
<PAGE>
EXHIBIT 10.44
TI/Liquid Audio
Agreement # 15907
Page 1 of 11
02/02/99
Letter Agreement
By and Between
Texas Instruments Incorporated
And
Liquid Audio, Inc.
January 29, 1999
The purpose of this binding letter agreement ("Letter") dated as of the date
written above ("Effective Date") is to provide a framework and confirm the
material terms under which TI and LA will proceed with development of a
hardware reference design for the portable consumer electronics market using
TI's digital signal processors and LA's Player Software. The material terms of
this framework are as follows:
1. The terms, expressions, and definitions used in the text of this Agreement
which are "capitalized" have the meaning(s) set forth below:
A. "Hardware Design" means the circuit board designs, circuit boards,
schematics and the list of parts that will be used to build and manufacture
a portable audio player (also known as a bill of materials) using LA's
Player Software.
B. "Invention" means any innovation or feature, whether or not patentable or
registerable, made by or on behalf of either or both of the parties hereto,
which is made in the course of the performance of this Letter and which
directly results from or directly arises out of the work pursuant to this
Letter.
C. "LA's Player Software" means the object code version of LA's then current
Player Software it distributes to LA customers and derivatives thereof.
D. "LA Software" means the C level source and object code version of LA's SP-3
device module software that enables interface protocol for authentication
and data transfer, file format parsing and content decryption.
E. "NDA" means the Nondisclosure Agreement #15417 dated as of October 12, 1998
between the parties ("NDA").
F. "Patent Right" means any patent, utility model, registration, and/or design
patent, excluding trademarks, trade names, or copyrights, for any
innovation, discovery, improvement or feature issued in any country and/or
filed prior to 1 year after termination or expiration of this Letter.
G. "Reference Design" means the Hardware Design, TI Software and all software
developed under this Letter excluding LA Software and LA's Player Software.
H. "TI Software" means the version of LA Software as ported to devices
manufactured by TI.
I. "Tools" means 3 copies each of TI's TMDS325L855-02 C compiler, Assembler,
Linker for PC, 2 units each of TI's TMDS00510 XDS510 board & JTAG cable, and
3 copies each of TI's TMDS32401L0 XDS510 C source debugger for PC.
<PAGE>
TI/Liquid Audio
Agreement # 15907
Page 2 of 11
02/02/99
2. Liquid Audio, Inc. with principal offices located at 2403 Broadway Redwood
City, CA 94063 ("LA") and Texas Instruments Incorporated with principal
offices located at 8505 Forest Lane, Dallas, Texas ("TI") desire to jointly
develop the Reference Design. Promptly after development of the LA Software,
LA will deliver LA Software to TI. LA will not be liable to TI by reason of
any delay in delivery of, or failure to deliver the LA Software.
3. Promptly after execution of this Letter, both parties will designate a
program manager who will act as a technical liaison and coordinate day to
day activities. The program managers will designate non-binding milestone
targets for development of the Reference Design, and, subject to each
party's right to terminate pursuant to Section 15 below, each party will use
its reasonable commercial efforts to achieve the development milestones.
4. TI has delivered to LA Tools and LA will use the Tool only for the
development of the Reference Design. LA's use of the Tools will be subject
to the terms and conditions attached as Exhibit 1 and incorporated by this
reference.
5. Except as otherwise provided by this Letter, each party will bear its own
expenses in connection with carrying out the development and any other
obligation set forth in this Letter.
6. Each party represents to the other that it has, or will have prior to
commencement of the development contemplated by this Letter, valid and
sufficient arrangements and agreements with its respective employees and
consultants, such that the ownership of any and all Inventions made by an
employee or contractor vests in the party employing or contracting said
employee or consultant, subject to the provisions of the applicable law
governing ownership of such Inventions.
7. TI will retain all rights, title and interest in and to all Tools and
derivatives thereof. LA will assign and TI will retain all rights, title and
interest in and to the Reference Design and TI Software (subject to LA's
underlying rights in LA Software) including without limitation any and all
copyrights, patents, trade secrets, trademarks, and other intellectual
property rights and proprietary rights therein. LA will retain all right,
title and interest in and to the LA Software, and LA's Player Software
including without limitation any and all copyrights, patents, trade secrets,
trademarks, and other intellectual property rights and proprietary rights
therein.
8. LA grants TI under LA's patents, copyrights, and trade secrets world-wide,
non-exclusive, royalty-free, perpetual (subject to termination pursuant to
Section 15) license (without rights to sublicense) to the source code
version of LA Software to use, copy, modify and make derivatives thereof for
the sole purpose of porting to TI's digital signal processors for use with
the Hardware Design.
<PAGE>
TI/Liquid Audio
Agreement # 15907
Page 3 of 11
02/02/99
9. LA grants TI under LA's patents, copyrights, and trade secrets a world-wide,
non-exclusive, royalty-free, perpetual (subject to termination pursuant to
Section 15 below) license to the object code version of LA Software and any
derivatives thereof and right to sublicense to TI's customers to use, copy,
and distribute the LA Software and any derivatives thereof to TI's customers
subject to the terms and conditions set forth in Exhibit 2 (attached and
incorporated by this reference) solely for use with TI's digital signal
processors.
10. If LA delivers LA Software to TI, LA discontinues to offer and distribute
LA's Player Software to TI's customers free of charge, and LA's Player
Software is not commercially available to TI customers from a third party
source free of any license fee, royalty or other charge, LA will deliver to
TI LA's Player Software and grant TI under LA's patents, copyrights, and
trade secrets a worldwide, non-exclusive, royalty-free, perpetual (subject
to termination pursuant to Section 13) license to LA's Player Software to
use, copy, and distribute LA's Player Software to TI's customers. TI will
not remove or otherwise obscure the terms and conditions included in LA's
Player Software a copy of which is attached as Exhibit 1. In addition, TI
will not destroy or otherwise obscure any copyright notice or other
proprietary notice included in LA Software delivered to TI and will include
on a prospective basis any other such notices reasonably requested by LA.
11. Except as otherwise provided in this Letter:
A. TI will own any Invention made solely by any employee or consultant of
TI.
B. LA will own any Invention made solely by an employee or consultant of
LA.
C. TI and LA will jointly own any Invention made jointly by a TI employee
or consultant and a LA employee or consultant, with each party owning an
undivided equal interest in such joint Invention with no obligation of
accounting to the other. LA and TI will notify the other's Program
manager within 90 days after the date such joint Invention is disclosed
to the inventing Party's personnel responsible for patent matters.
12. Except as expressly set forth under this Letter, nothing in this Letter
constitutes an implied license, of either party's patent, copyright, trade
secret or other intellectual property rights. All rights not expressly
granted hereunder are reserved by each party
13. Notwithstanding anything in this Letter to the contrary, both parties will
use the Reference Design and TI Software only with digital signal processors
manufactured by TI and not digital signal processors manufactured by a party
other than TI.
14. This Letter must not be construed as a requirement to file or prosecute in
any country any application for Patent Rights, or to institute or defend any
litigation, or to apply for or obtain any reissue, renewal, validation or
extension of any Patent Right.
15. The term of this Letter will commence on the Effective Date and continue
until terminated. Either party may terminate this relationship for
convenience with 10 days prior written notice to the other. Either party may
terminate this relationship for material
<PAGE>
TI/Liquid Audio
Agreement # 15907
Page 4 of 11
02/02/99
breach or default upon written notice to the other party. Neither party will
have any liability whatsoever to the other for its discontinuance of any
activity related to this Letter except in connection with material breach or
default of the terms hereof by such party. Upon expiration or termination of
this Letter, the following provisions will survive 5, 6, 7, 11, 12, 13, 14,
15, 16, 17, 18, 21 and 22. The rights and obligations of TI's customers
and/or end users will survive any termination or expiration of this Letter.
Provisions 8, 9 and 10 of this Letter will survive for 2 years after
termination of this Letter for LA's convenience or for LA's breach.
Provisions 9 and 10 of this Letter will survive for the sole purpose of
distributing product to TI's existing customers for 12 months after
termination of this Letter for TI's convenience or for TI's material breach.
Upon termination of the licenses set forth in Section 8, 9 and 10, TI will
promptly return to LA all copies of LA's software in TI's possession or
control (other than copies distributed pursuant to Exhibit 1). LA will
promptly return all Tools.
16. Neither party will disclose the existence of this Letter nor the terms and
conditions of this Letter to any third party whether by means of press
release, announcement, or in any other manner, without the prior written
consent of the other party, and subject to any disclosures required by
applicable law. Such consent will not be unreasonably withheld.
17. NOTHING IN THIS LETTER MAY BE CONSTRUED AS A WARRANTY, EXPRESS OR IMPLIED,
OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE. ALL RIGHTS
LICENSED AND TECHNOLOGY DELIVERED HEREUNDER ARE PROVIDED ON AN AS-IS
BASIS.
18. NEITHER PARTY WILL BE LIABLE FOR SPECIAL, INCIDENTAL, INDIRECT, RELIANCE
OR CONSEQUENTIAL DAMAGES ARISING OUT OF THIS LETTER, WHETHER UNDER
CONTRACT, TORT OR OTHER LEGAL THEORY, EVEN IF ADVISED OF THE POSSIBILITY
OF SUCH DAMAGES.
19. TI and LA will conduct the work to be performed under this Letter as an
independent contractor and not as an agent or employee of the other.
Subject to the provisions of this Letter, each party will, at its sole
discretion, choose the means to be employed and the manner of carrying out
its obligations under this Letter. It is recognized by the parties that
the work to be performed under this Letter is state-of-the-art and that
the parties will be responsible only to use its reasonable efforts in the
performance of its obligations.
20. Neither party may assign or transfer this Letter in whole or in part
without written permission of the other and any purported assignment not
permitted under this Letter is void. Written permission may not be
unreasonably withheld by either party.
21. Nothing contained in this Letter may be construed as a restriction upon
either party's independent development, manufacture and sale, for itself
or others, of any product, whether it is the same as or similar to the
product developed under this Letter, provided that such independent
development does not utilize or otherwise infringe the patent, copyright,
trade secrets or other intellectual property rights of the other party.
<PAGE>
TI/Liquid Audio
Agreement # 15907
Page 5 of 11
02/02/99
22. This Letter shall be governed by the laws of the State of Texas without
reference to its choice of law provisions. The Reference Design and the
source code version of LA Software and TI Software are confidential
information subject to the terms and conditions set forth in the NDA. TI
is not obligated to confidentiality obligations set forth in this
paragraph with respect to object code or executable forms of LA Software
or the Player Software. Notwithstanding anything in this letter to the
contrary, TI may not remove or otherwise obscure the terms and conditions
embedded in LA's Player Software, a copy of which is attached as Exhibit
1. Use of confidential information shall be limited to development of the
Reference Design. The period for disclosure will be the term of this
Letter. In the event of any inconsistency between the NDA and this
Letter, this Letter shall govern. If either LA or TI desires to disclose
confidential information other than the Reference Design and/or the source
code version of the LA Software and or TI Software, such information will
be treated as confidential if only if TI and LA execute a separate written
non-disclosure agreement.
23. The exercise of a remedy under this Agreement including and without
limitation remedies for material breach of any license granted hereunder
will be without prejudice to any other remedy available under this Agreement
or under law or equity. No term or provision may be deemed waived and no
breach excused by consent unless such waiver or consent is in writing and
signed by the party claimed to have waived or consented.
24. This Letter, together with the NDA, constitutes the entire and binding
agreement between the parties with respect to the subject matter hereof and
supersedes all prior or contemporaneous discussions, understandings, or
agreements with respect hereto, and this Letter may not be modified without
the mutual written agreement of both parties. No waiver shall be deemed
effective unless in writing signed by the party to be charged with such
waiver.
25. This Letter may be executed in any number of counterparts, each of which
shall be deemed an original and all of which together shall constitute one
and the same instrument.
TEXAS INSTRUMENTS INCORPORATED LIQUID AUDIO, INC.
Signature: /s/ Michael J. Hames Signature: [ILLEGIBLE]
-------------------------- --------------------------
Name: Michael J. Hames Name: [ILLEGIBLE]
--------------------------
Title: Vice President Title: [ILLEGIBLE]
Date: [ILLEGIBLE] Date: [ILLEGIBLE]
<PAGE>
TI/Liquid Audio
Agreement # 15907
Page 6 of 11
02/02/99
Exhibit 1
[Player Products]
END USER LICENSE AGREEMENT
--------------------------
PLEASE READ THIS AGREEMENT CAREFULLY BEFORE ATTEMPTING TO USE
------
THE SOFTWARE AND BEFORE CLICKING ON THE "ACCEPT" BUTTON
------
OR BREAKING THE SEAL OF ANY INSTALLATION DISKS.
LIQUID AUDIO, INC. ("LIQUID AUDIO") IS WILLING TO LICENSE THE SOFTWARE DESCRIBED
ABOVE (THE "SOFTWARE") TO YOU (THE "CUSTOMER") ONLY ON THE CONDITION THAT YOU
ACCEPT ALL OF THE TERMS CONTAINED IN THIS AGREEMENT. PLEASE READ THE TERMS
CAREFULLY BEFORE CLICKING ON THE "ACCEPT" BUTTON OR BREAKING THE SEAL OF ANY
INSTALLATION DISKS, AS CLICKING ON THE "ACCEPT" BUTTON OR BREAKING THE SEAL WILL
INDICATE YOUR AGREEMENT TO THESE TERMS.
IF YOU DO NOT AGREE TO THESE TERMS, THEN LIQUID AUDIO IS UNWILLING TO LICENSE
THE SOFTWARE TO YOU, AND YOU SHOULD CLICK ON THE "DO NOT ACCEPT" BUTTON TO
DISCONTINUE THE INSTALLATION PROCESS OR RETURN THE INSTALLATION DISKS FOR A
REFUND.
1. LICENSE GRANT AND RESTRICTIONS. Liquid Audio grants to Customer a non-
exclusive, non-transferable, revocable license to use the object code copy of
the Software distributed with this Agreement (the "Copy") along with related
documentation during the term of this Agreement on a single CPU, which may be
changed from time to time. Such license shall be perpetual upon the receipt by
Liquid Audio of full payment of the respective License Fee (as described below)
but shall be terminable as provided herein. Customer (a) may not modify,
disassemble, decompile or reverse-engineer the Software; (b) may not rent,
lease, loan, resell, sublicense, distribute or otherwise transfer the Software
to any third party or use the Software to provide time sharing or similar
services to any third party; (c) may not make any copy of the Software except
for a single working copy and a single backup copy; (d) may not circumvent or
disable any technological features or measures in the Software for protection of
intellectual property rights, and (e) may not delete the copyright and other
proprietary rights notices on the Software. Any attempt by Customer to transfer
any of the rights, duties or obligations hereunder except as expressly provided
for in this Agreement is void. This license does not include any rights to
maintenance or updates.
2. DISABLING SOFTWARE. THE SOFTWARE CONTAINS CODE WHICH MAY BE USED TO DISABLE
SUCH SOFTWARE. THIS DISABLING CODE MAY BE USED TO ENSURE THAT THE SOFTWARE IS
NOT USED IN VIOLATION OF THIS AGREEMENT, INCLUDING WITHOUT LIMITATION TO
INFRINGE INTELLECTUAL PROPERTY RIGHTS IN THE SOFTWARE OR ANY CONTENT. CUSTOMER
AGREES AND ACKNOWLEDGES THAT UPON ANY TERMINATION OR EXPIRATION OF THIS
AGREEMENT, AND PROVIDED THAT THE PARTIES HAVE NOT AGREED IN WRITING TO RENEW
THIS AGREEMENT, THE SOFTWARE MAY, AT LIQUID AUDIO'S DISCRETION, CEASE TO
FUNCTION IN SOME OR ALL RESPECTS, AND CUSTOMER MAY LOSE ACCESS TO DATA MADE
WITH, OR STORED USING, THE SOFTWARE. CUSTOMER AGREES TO INDEMNIFY LIQUID AUDIO
FROM ANY LIABILITY, INCLUDING LIABILITY DUE TO THIRD PARTY CLAIMS, RESULTING
FROM SUCH DISABLING OF SUCH SOFTWARE. CUSTOMER AGREES AND ACKNOWLEDGES THAT THE
DISABLING OF THE SOFTWARE IS A KEY FEATURE OF THE LICENSE RIGHTS AND
RESPONSIBILITIES CONVEYED UNDER THIS AGREEMENT.
3. LICENSE FEE. The effectiveness of this Agreement is conditioned on the
receipt by Liquid Audio or its reseller of the License Fee (or any initial
installment thereof) as set forth in Liquid Audio's or its reseller's invoice(s)
therefor. Such payment(s) will be made by Customer on the terms and conditions
specified in such invoice(s).
<PAGE>
TI/Liquid Audio
Agreement # 15907
Page 7 of 11
02/02/99
4. LIMITED WARRANTY. Liquid Audio warrants for the period of ninety (90) days
from the date of delivery of the Copy of the Software to Customer that:
(i) The Software, unless modified by Customer, will perform substantially
in accordance with the documentation provided by Liquid Audio. Customer's sole
remedy under this warranty is that Liquid Audio will either correct within a
reasonable period of time any "Software Error" (failure of the Software to
perform in accordance with the documentation) reported during the warranty
period or, if Liquid Audio is unable to correct any such Software Error, refund
to Customer the money paid for the Software. Liquid Audio does not warrant that
the Software will meet Customer's requirements that operation of the Software
will be uninterrupted, error-free or secure, or that all Software Errors will be
corrected.
(ii) The medium if any (such as diskette or CD Rom) provided by Liquid
Audio containing the Software will be free from defects in materials and
workmanship under normal use. Liquid Audio will, at its option, replace or
refund the purchase price of a faulty medium at no charge to Customer if the
same is returned to Liquid Audio.
THE ABOVE WARRANTIES ARE EXCLUSIVE AND IN LIEU OF ALL OTHER WARRANTIES,
WHETHER EXPRESS OR IMPLIED, AND LIQUID AUDIO EXPRESSLY DISCLAIMS ALL OTHER
WARRANTIES, INCLUDING THE IMPLIED WARRANTIES OF MERCHANTABILITY, FITNESS FOR A
PARTICULAR PURPOSE AND NONINFRINGEMENT. NO ORAL OR WRITTEN INFORMATION OR
ADVICE GIVEN BY LIQUID AUDIO, ITS EMPLOYEES, RESELLERS OR AGENTS SHALL INCREASE
THE SCOPE OF THE ABOVE WARRANTIES OR CREATE ANY NEW WARRANTIES.
SOME STATES DO NOT ALLOW THE EXCLUSION OF IMPLIED WARRANTIES, SO THE ABOVE
EXCLUSION MAY NOT APPLY TO YOU. IN THAT EVENT, ANY IMPLIED WARRANTIES ARE
LIMITED IN DURATION TO NINETY (90) DAYS FROM THE DATE OF DELIVERY OF THE
SOFTWARE. THIS WARRANTY GIVES YOU SPECIFIC LEGAL RIGHTS. YOU MAY HAVE OTHER
RIGHTS, WHICH VARY FROM STATE TO STATE.
5. LIMITATION OF LIABILITY. IN NO EVENT WILL LIQUID AUDIO BE LIABLE TO CUSTOMER
OR ANY OTHER PARTY FOR DAMAGES OF ANY KIND ARISING FROM USE OF THE COPY AND/OR
THE SOFTWARE EMBODIED THEREIN, WHETHER RESULTING FROM TORT (INCLUDING
NEGLIGENCE), BREACH OF CONTRACT OR OTHER FORM OF ACTION, INCLUDING BUT NOT
LIMITED TO DIRECT, INDIRECT, SPECIAL, INCIDENTAL AND CONSEQUENTIAL DAMAGES
(INCLUDING LOST PROFITS) OF ANY KIND, ARISING IN ANY WAY OUT OF THIS AGREEMENT,
EVEN IF ADVISED OF THE POSSIBILITY OF SUCH DAMAGE. LIQUID AUDIO'S TOTAL
LIABILITY UNDER THIS AGREEMENT WILL BE LIMITED TO THE LICENSE FEE. Customer
expressly assumes all responsibility for any damages, lost data, lost profits
and other consequential damages that may result in any way out of this
Agreement, including without limitation, use of the Software. Customer
expressly agrees that the License Fee has been agreed to based in part upon the
foregoing limitation of Liquid Audio's liability.
6. OWNERSHIP; PERMISSIONS.
(a) Customer agrees that Liquid Audio and/or its suppliers owns all right,
title and interest in and to the Copy and the Software, including without
limitation any and all copyrights, patents, trade secrets, trademarks and other
intellectual property and proprietary rights therein. Customer will not acquire
any additional licenses under any copyrights, patents, trade secrets, trademarks
or other intellectual property rights on account of this Agreement.
(b) Customer will not alter, encode, copy or transmit any audio or other
information using the Software without obtaining all necessary copyright and
other permissions. Any failure to obtain such permissions constitutes a
material breach of this Agreement, shall cause irreparable harm to Liquid Audio,
and shall entitle Liquid Audio to receive equitable relief for such failure.
Customer will at its expense defend and indemnify Liquid Audio against all
liabilities, damages, claims, fines and expenses (including reasonable
attorney's fees) arising out of any claim that Customer has not obtained such
permissions.
<PAGE>
TI/Liquid Audio
Agreement # 15907
Page 8 of 11
02/02/99
(c) CUSTOMER ACKNOWLEDGES THAT IN ORDER TO PURCHASE CONTENT, AND TO ACCESS
AND PLAY THE SAME, INCLUDING CONTENT PREVIOUSLY PURCHASED BY CUSTOMER, CUSTOMER
MUST BE AUTHORIZED BY A VALID TIME-LIMITED "PASSPORT" ISSUED PERIODICALLY BY
LIQUID AUDIO IN ACCORDANCE WITH LIQUID AUDIO'S THEN-CURRENT PASSPORT POLICY.
(d) Customer acknowledges that the Passport contains Customer's personal and
confidential information, including credit card information, and that it is
essential to keep the Passport, and the password to the Passport confidential,
both to protect Customer's personal information, and to prevent third-parties
from using Customer's Passport to illegally download, copy, distribute or play
content. Customer agrees to keep his or her Passport confidential, and any
failure of Customer to do so shall be deemed a material breach of this
Agreement. Customer will at its expense defend and indemnify Liquid Audio
against all liabilities, damages, claims, fines and expenses (including
reasonable attorneys' fees) arising out of Customer's breach of this provision.
(e) Customer may be liable for the unauthorized use of Customer's credit
card. Customer is advised to consult the terms and conditions imposed by its
credit card issuer for notification requirements and limitations on Customer's
liability for loss, theft or unauthorized use of Customer's credit card. LIQUID
AUDIO DISCLAIMS ANY LIABILITY FOR ANY USE OF CUSTOMER'S PASSPORT OR CREDIT CARD,
INCLUDING ANY LOSS, THEFT OR UNAUTHORIZED USE THEREOF.
7. TERMINATION. Liquid Audio will have the right to terminate this Agreement if
Customer breaches any material term or condition of this Agreement (including,
if applicable, failure to pay any portion of the License Fee when due as
provided in Liquid Audio's invoice(s) therefor) and fail to cure such breach
within ten (10) days of written notice from Liquid Audio. Upon termination of
this Agreement, the rights and licenses granted to Customer under this Agreement
shall automatically terminate. Within five (5) days after termination, Customer
will return or destroy all copies of the Software and documentation in
Customer's possession. Upon request, Customer will certify to Liquid Audio that
all copies of the Software have been returned to Liquid Audio or destroyed. The
exercise by Liquid Audio of any remedies under this Agreement will be without
prejudice to its other remedies under this Agreement or otherwise. The rights
and obligations of the parties under Sections 2, 4, 5, 6, 7 and 10 will survive
the expiration or termination of this Agreement.
8. GOVERNMENT LICENSEE. If the Software is licensed by or for any unit or
agency of the United States Government, then the Software shall be classified as
"commercial computer software", as that term is defined in the applicable
provisions of the Federal Acquisition Regulation (the "FAR") and supplements
thereto, including the Department of Defense ("DoD") FAR Supplement (the
"DFARS"). Liquid Audio represents that the Software was developed entirely at
private expense, and that no part of the Software was first produced in the
performance of a United States Government contract. If the Software is supplied
for use by DoD, the Software is delivered subject to the terms of this Agreement
and either (i) in accordance with DFARS 227.7202-1(a) and 227.7202-3(a), or (ii)
with restricted rights in accordance with DFARS 252.227-7013(c)(1)(ii) (OCT
1988), as applicable. If the Software is supplied for use by a Federal agency
other than DoD, the Software is restricted computer software delivered subject
to the terms of this Agreement and (i) FAR 12.212(a); (ii) FAR 52.227-19; or
(iii) FAR 52.227-14(ALT III), as applicable.
9. EXPORT CONTROL. Customer agrees to comply with all export laws and
restrictions and regulations of the United States Department of Commerce or
other United States or other sovereign agency or authority, and not to export,
or allow the export or re-export of any technical data or any Software in
violation of any such restrictions, laws or regulations, or unless and until all
required licenses and authorizations are obtained to the countries specified in
the applicable U.S. Export Administration Regulations (or any successor
supplement or regulations).
10. GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of California, excluding its conflicts of
law principles. The parties agree that the United Nations Convention on
Contracts for the International Sale of Goods will not apply to this Agreement.
Except for disputes as to the ownership of intellectual property rights in the
Software, all disputes arising out of or relating to this Agreement or its
<PAGE>
TI/Liquid Audio
Agreement # 15907
Page 9 of 11
02/02/99
interpretation shall be finally settled by binding arbitration in Redwood City,
California pursuant to the Commercial Arbitration rules of the American
Arbitration Association by one arbitrator. All arbitrators will have knowledge
of and experience regarding the computer industry. Requests for equitable
relief shall be first submitted to the arbitrator. The arbitration award may be
enforced in any court of competent jurisdiction. Customer hereby consents to
the personal and exclusive jurisdiction and venue of the state and federal
courts located in San Mateo County of the State of California.
11. MISCELLANEOUS. This Agreement constitutes the entire agreement between the
parties with respect to its subject matter, and supersedes any and all written
or oral agreements previously existing between the parties with respect to such
subject matter. Any modifications of this Agreement must be in writing. This
Agreement will bind and inure to the benefit of each party's successors and
assigns, provided that Customer may not assign this Agreement, in whole or in
part, without Liquid Audio's prior written consent. If any provision of this
Agreement is found illegal or unenforceable, it will be enforced to the maximum
extent permissible, and the legality and enforceability of the other provisions
of this Agreement will not be affected. No failure of either party to exercise
or enforce any of its rights under this Agreement will act as a waiver of such
rights. No purchase order, invoice or similar document will by its terms amend
or supplement the terms and conditions of this Agreement, even if accepted or
signed by the receiving party. Performance of this Agreement may be suspended
due to any force majeure event.
CUSTOMER ACKNOWLEDGES THAT IT HAS READ THIS AGREEMENT, UNDERSTANDS IT AND AGREES
TO BE BOUND BY ITS TERMS AND CONDITIONS.
THE SOFTWARE AND THE ACCOMPANYING DOCUMENTATION ARE PROTECTED BY UNITED STATES
COPYRIGHT LAW AND INTERNATIONAL TREATY. UNAUTHORIZED REPRODUCTION OR
DISTRIBUTION IS SUBJECT TO CIVIL AND CRIMINAL PENALTIES.
Rev. ___.
<PAGE>
TI/Liquid Audio
Agreement # 15907
Page 10 of 11
02/02/99
EXHIBIT 2
Liquid Audio OEM Sublicense Terms and Conditions
1. License Grant. Subject to the terms and conditions of this Agreement, TI
grants to you a world-wide, non-exclusive, non-transferable right and
license to reproduce and distribute LA Software for use with the Hardware
Design as well as digital signal processors manufactured by TI and not
devices manufactured by a party other than TI.
2. Ownership Rights. TI and its third party suppliers retains all right, title
and interest in and to the LA Software, including all copyrights, patents,
trade secret rights, trademarks and other intellectual property rights
therein. You agree that any copies of the LA Software will contain the same
proprietary notices, which appear on and in the LA Software. All rights not
expressly set forth hereunder are reserved by TI and its third party
suppliers.
3. Termination. When this Agreement terminates, you must (a) discontinue
marketing and reproduction of the LA Software; (b) destroy all copies of
the LA Software reproduced hereunder and not yet distributed; and (c)
provide a certificate of destruction to TI signed by a duly authorized
representative of your company.
4. Restrictions. You may not copy, rent, lease, loan or resell the LA Software
except as specifically permitted in Section 1 above. You may not permit
third parties, other than end-customers of the OEM Products, to benefit
from the use or functionality of the LA Software, including via
timesharing, service bureau or other arrangement. You may not transfer any
of the rights granted to you under this Agreement. You may not reverse
engineer, decompile, or disassemble the LA Software, or attempt to do so,
except to the extent the foregoing restriction is expressly prohibited by
applicable law. You may not modify or create derivative works based upon
the LA Software in whole or in part.
5. Warranty and Disclaimer. To the maximum extent permitted by applicable law,
and except for the limited warranties set forth herein, THE LA SOFTWARE IS
PROVIDED ON AN "AS IS" BASIS WITHOUT WARRANTY OF ANY KIND, EXPRESS OR
IMPLIED. WITHOUT LIMITING THE FOREGOING, YOU ASSUME RESPONSIBILITY FOR
SELECTION OF THE LA SOFTWARE TO ACHIEVE YOUR INTENDED RESULTS, AND FOR THE
INSTALLATION OF, USE OF, AND RESULTS OBTAINED FROM THE LA SOFTWARE. WITHOUT
LIMITING THE FOREGOING PROVISIONS, TI AND ITS THIRD PARTY SUPPLIERS MAKE NO
WARRANTY THAT THE LA SOFTWARE WILL BE ERROR-FREE OR FREE FROM INTERRUPTIONS
OR OTHER FAILURES OR THAT THE LA SOFTWARE WILL MEET YOUR REQUIREMENTS. TO
THE MAXIMUM EXTENT PERMITTED BY APPLICABLE LAW, TI AND ITS THIRD PARTY
SUPPLIERS DISCLAIM ALL WARRANTIES, EITHER EXPRESS OR IMPLIED, INCLUDING BUT
NOT LIMITED TO IMPLIED WARRANTIES OF MERCHANTABILITY, FITNESS FOR A
PARTICULAR PURPOSE, AND NONINFRINGEMENT WITH RESPECT TO THE LA SOFTWARE.
8. Limitation of Liability. UNDER NO CIRCUMSTANCES AND UNDER NO LEGAL THEORY,
TORT, CONTRACT, OR OTHERWISE, SHALL TI OR ITS THIRD PARTY SUPPLIERS BE
LIABLE TO YOU OR TO ANY OTHER PERSON FOR ANY INDIRECT, SPECIAL, INCIDENTAL,
OR CONSEQUENTIAL DAMAGES OF ANY CHARACTER INCLUDING, WITHOUT LIMITATION,
DAMAGES FOR LOSS OF GOODWILL, WORK STOPPAGE, COMPUTER FAILURE OR
MALFUNCTION, OR ANY AND ALL OTHER DAMAGES OR LOSSESEVEN IF TI AND ITS THIRD
PARTY SUPPLIERS HAVE BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES. THIS
LIMITATION OF LIABILITY SHALL NOT APPLY TO LIABILITY FOR DEATH OR PERSONAL
INJURY TO THE EXTENT THAT APPLICABLE LAW PROHIBITS SUCH LIMITATION. The
foregoing provisions shall be enforceable to the maximum extent permitted
by applicable law.
<PAGE>
TI/Liquid Audio
Agreement # 15907
Page 11 of 11
02/02/99
9. United States Government. The LA Software is deemed to be "commercial
computer software" and "commercial computer software documentation,"
respectively, pursuant to DFAR Section 227.7202 and FAR Section 12.212, as
applicable. Any use, modification, reproduction, release, performance,
display or disclosure of the LA Software and any accompanying documentation
by the United States Government shall be governed solely by the terms of
this Agreement and shall be prohibited except to the extent expressly
permitted by the terms of this Agreement.
10. Export Controls. You agree to comply with all export law and restrictions
of the United States Department of Commerce or other United States or other
sovereign agency or authority, and not to export, or allow the export or
re-export of any technical data or any LA Software in violation of any such
restrictions, laws, or regulations, or unless and until all required
licenses and authorizations are obtained to the countries specified in the
applicable U.S. Export Administration Regulations (or successor supplement
or regulations).
<PAGE>
EXHIBIT 10.45
OEM AGREEMENT
-------------
WHEREAS Liquid Audio, Inc., a California corporation, with offices at 810
Winslow Street, Redwood City, California 94063 (hereinafter referred to as
"Liquid Audio") has developed a specification (referred herein as the "Secured
Portable Player Protocol" or "SP-3") to download audio to be written to and
playable on consumer electronics devices; and
WHEREAS Toshiba Corporation, a Japanese corporation with offices at 1-1,
Shibaura 1-chome, Minato-ku, Tokyo 105-8001, Japan, hereinafter referred to as
"OEM", wishes to build a consumer electronics device utilizing the Secured
Portable Player Protocol;
NOW THEREFORE THE PARTIES HEREBY AGREE AS OF THIS _____ DAY OF __________
1999 ("EFFECTIVE DATE") AS FOLLOWS:
DELIVERABLES: Described in Attachment 2
DELIVERABLE SCHEDULE: Described in Attachment 2
EFFECTIVE DATE: _______________
TERM: Two years from Effective Date
OEM PRODUCTS: Described in Attachment 3
ROYALTY FEE: [***]
NRE FEE: [***]
SHIP DATE OF DEVICE: September 1999
This Agreement (the "Agreement") consists of this cover page and
Attachments 1, 2, 3, 4 and 5 hereto and all Schedules thereto.
IN WITNESS THEREOF, the parties hereto have executed this Agreement as of
the date first above written.
FOR LIQUID AUDIO, INC.: FOR Toshiba Corporation:
BY: /s/ Robert Flynn BY: /s/ Masao Suga
------------------------- -------------------------
Mr. Robert Flynn Mr. Masao Suga
TITLE: Vice President TITLE: General Manager
Home Digital Products Division
Digital Media Equipment
and Services Company
DATE: June 9, 1999 DATE: June 7, 1999
------------------------- -------------------------
* Some Material in this Exhibit has been omitted pursuant to a request for
confidential treatment. Such material has been filed separately with the
Securities and Exchange Commission.
<PAGE>
Confidential
Dear Partner,
Liquid Audio values its partner relationship with you and would like to include
a mention of your company as a working with Liquid Audio in our prospectus
filing with the SEC for going public and in our company brochure. Can we please
get your approval by Friday June 11th for this?
Brochure
- --------
We are producing a high-level company brochure about our company titled: "Liquid
Audio, the pipeline for Internet music." We would like to include your company
logo on the partner page. The only text on this page is: "The best mix. Liquid
Audio has forged strategic relationships with a variety of partners."
In addition, we would like to include the following bullet about our
partnership:
. We're working with Toshiba Corporation and the Recording Industry of America
to bring secure digital music to the next generation of portable music
devices.
Prospectus
- ----------
Liquid Audio is in the process of filing with the SEC for our initial public
offering. We plan to disclose information about our work with your company in
this document. In conjunction with that, we would like to include your logo in
that printed document. Can we please have your permission to use your logo for
this by Friday June 11?
To do this, we need you to sign the form below and fax it back to the attention
of Jessica Olson.
In addition, we will need a high-quality digital image of your logo in Adobe
Illustator format for best printed impact. Please email image to
[email protected].
The Form to Sign -- Please Fax to 650-549-2092fx
- ------------------------------------------------
The undersigned acknowledges that Liquid Audio intends to make mention of the
undersigned in the text of Liquid Audio's proposed S-1 initial public offering
statement to be filed with the SEC and distributed to the public in connection
with the offering.
Such mention may include the undersigned's logo, subject to usage guidelines.
Very truly yours,
Robert Flynn
----------------------------
Toshiba Corporation
Masao Suga
----------------------------
Print Name
/s/ Masao Suga
----------------------------
Authorized Signatory
June 9, 1999
----------------------------
Date
<PAGE>
OEM AGREEMENT
-------------
WHEREAS Liquid Audio, Inc., a California corporation, with offices at 810
Winslow Street, Redwood City, California 94063 (hereinafter referred to as
"Liquid Audio") has developed a specification (referred herein as the "Secured
Portable Player Protocol" or "SP-3") to download audio to be written to and
playable on consumer electronics devices; and
WHEREAS Toshiba Corporation, a Japanese corporation with offices at 1-1,
Shibaura 1-chome, Minato-ku, Tokyo 105-8001, Japan, hereinafter referred to as
"OEM", wishes to build a consumer electronics device utilizing the Secured
Portable Player Protocol;
NOW THEREFORE THE PARTIES HEREBY AGREE AS OF THIS _____ DAY OF __________
1999 ("EFFECTIVE DATE") AS FOLLOWS:
DELIVERABLES: Described in Attachment 2
DELIVERABLE SCHEDULE: Described in Attachment 2
EFFECTIVE DATE: _______________
TERM: Two years from Effective Date
OEM PRODUCTS: Described in Attachment 3
ROYALTY FEE: Waived
NRE FEE: Waived
SHIP DATE OF DEVICE: September 1999
This Agreement (the "Agreement") consists of this cover page and
Attachments 1, 2, 3, 4 and 5 hereto and all Schedules thereto.
IN WITNESS THEREOF, the parties hereto have executed this Agreement as of
the date first above written.
FOR LIQUID AUDIO, INC.: FOR Toshiba Corporation:
BY: BY:
------------------------- -------------------------
Mr. Robert Flynn Mr. Tetsuya Mizoguchi
TITLE: Vice President TITLE: President and CEO
Digital Media Equipment and
Services Company
DATE: DATE:
------------------------- -------------------------
<PAGE>
ATTACHMENT 1
------------
OEM AGREEMENT TERMS AND CONDITIONS
-----------------------------------
Annexed to and made part of that certain OEM Agreement ("Agreement") dated as
of __________________, 1999, between Liquid Audio, Inc. ("Liquid Audio") and
_______________________________________ ("OEM").
I. Definitions
------------
"Deliverables" means Liquid Audio deliverables referred to in the cover page of
this Agreement.
"Devices" means a consumer electronic product developed based on Hardware
Designs incorporating OEM Software into the OEM Products.
"Hardware Designs" means the designs, specifications and compliance test bench
that will be used to build and manufacture the Device.
"Invention" means any innovation or feature, whether or not patentable or
registerable, made by or on behalf of either or both of the parties hereto,
which is made in the course of the performance of this Agreement and which
directly results from or directly arises out of the work pursuant to this
Agreement.
"Liquid Audio Products" means the Liquid Audio Player Software and Liquid Audio
Reference Software.
"Liquid Audio Player Software" means the object code version of Liquid Audio's
then current Player Software that Liquid Audio distributes to Liquid Audio's
customers.
"Liquid Audio Reference Software" means the specifications and/or the C level
source and object code version of Liquid Audio's SP-3 device module software
that enables interface protocol for authentication and data transfer, file
format parsing and content decryption.
"Patent Right" means any patent, utility model, registration, and/or design
patent, excluding trademarks, trade names, or copyrights, for any innovation,
discovery, improvement or feature issued in any country and/or filed prior to
one (1) year after termination or expiration of this Agreement.
"OEM Reference Design" means the Hardware Design and OEM Software.
"OEM Products" means OEM's consumer electronic products referred to on the cover
page of this Agreement.
"OEM Software" means versions of Liquid Audio Reference Software as modified for
OEM Products.
"Territory" means all countries and territories worldwide.
"Tools" means OEM's tools necessary or desirable to enable Liquid Audio to
provide technical engineering assistance to OEM hereunder.
II. Software License
-----------------
(a) Liquid Audio License Grant. Subject to all the terms and conditions of this
-----------------------------
Agreement, Liquid Audio hereby grants to OEM under Liquid Audio's patents,
copyrights, and trade secrets, during the Term, a non-exclusive, royalty-free,
nontransferable, non-sublicensable license in the Territory: (i) to use, copy,
modify, have modified, make and have made derivative works of Liquid Audio
Reference Software, including source code thereof, to develop the OEM software;
(ii) to incorporate OEM Software, in object code only, into OEM Products to
create Devices; (iii) to copy Liquid Audio Player Software; (iv) to copy OEM
Software, by embedding it in Devices; and (v) to distribute in the Territory the
Liquid Audio Player Software and the OEM Software only on a bundled basis in
connection with OEM's distribution of Devices in the ordinary course of OEM's
business.
(b) Limitations. Notwithstanding any other provision of this Agreement, OEM
-----------
shall not reproduce or have reproduced the OEM Software except in connection
with the production of Devices, nor shall OEM distribute any OEM Software except
as part of a Device or Liquid Audio Player Software except in connection with
the distribution of Devices.
(c) Reservation of Rights. Liquid Audio hereby reserves to itself all rights
---------------------
to the Liquid Audio Products not expressly granted to OEM herein. OEM shall have
no rights in or to the Liquid Audio Products except as expressly granted herein.
(d) Player End-User License Agreements. OEM shall distribute each Device with
----------------------------------
an end-user license agreement substantially in the form attached hereto as
Attachment 4.
(e) No Reverse Engineering. OEM shall not, and shall not permit any third party
----------------------
to, alter, modify, adapt, translate, prepare derivative works from, decompile,
reverse engineer, disassemble, or otherwise attempt to derive computer source
code from, as applicable, the Liquid Audio Products, except as may be expressly
permitted by applicable local law or Section II(a) herein.
(f) Licensing Relationship. The Liquid Audio Products are licensed, not sold,
----------------------
by Liquid Audio to OEM and distributed by OEM to its customers, and nothing in
this Agreement shall be interpreted or construed as a sale or purchase of the
Liquid Audio Products.
<PAGE>
(g) Proprietary Rights Notices. OEM shall neither alter nor remove any
--------------------------
copyright notice or other proprietary rights notices which may appear on any
Liquid Audio Product. In addition, OEM agrees that any reproduction of any
Liquid Audio Product (or any portion thereof) authorized by Liquid Audio shall
include such copyright and other proprietary rights notices as are currently
contained on each such Liquid Audio Product or as may be reasonably specified
from time to time by Liquid Audio. All promotional material relating to any
Device shall also contain a reference, in such form as Liquid Audio shall
reasonably prescribe, to Liquid Audio's proprietary rights in the Liquid Audio
Products.
(h) Best Efforts. OEM shall use its best efforts to promote the marketing and
------------
distribution of Devices to realize the maximum sales potential for the Devices
in the Territory. OEM agrees that it will bundle the Liquid Audio Player
Software with Device for so long as Devices incorporate the OEM software. OEM
agrees that it will make the Liquid Audio Player Software available for download
from all appropriate Web sites that it operates or controls.
(i) OEM-branded Liquid Audio Player Software. OEM may provide graphics for a
-----------------------------------------
co-branded faceplate to be included with the Liquid Audio Player Software to be
distributed hereunder with the Device. OEM hereby grants to Liquid Audio a non-
exclusive, non-sublicensable, non-assignable license to use trademarks provided
by OEM on such faceplate.
(j) Ownership of Derivative Works. OEM will retain all rights to the
-----------------------------
modifications and other derivative works of the Liquid Audio Reference Software
created by OEM under Section II(a)(i) subject to Liquid Audio's underlying
rights in the Liquid Audio Reference Software.
III. Use of Liquid Audio Trademarks and Liquid Audio Trademark License
-----------------------------------------------------------------
(a) Grant. Liquid Audio hereby grants to OEM a non-exclusive, non-
-----
sublicensable, non-assignable, royalty free license to use the Licensed
Trademarks in the Territory during the Term solely in connection with the
packaging, labeling, promotion, advertising, and distribution of Devices. All
such use shall be strictly in accordance with any trademark guidelines that may
be supplied by Liquid Audio from time to time.
(b) Other Marks. OEM shall not use any mark confusingly similar to any of the
-----------
Licensed Trademarks at any time.
(c) Quality Control. OEM shall deliver to Liquid Audio, at no cost to Liquid
---------------
Audio, from time to time as reasonably requested by them, representative samples
of any and all items bearing any of the Licensed Trademarks. If, at any time,
any item made or assembled by OEM and bearing any of the Licensed Trademarks
shall, in the sole opinion of Liquid Audio, fail to conform to the standards of
quality set by Liquid Audio, OEM immediately shall take such steps as are
necessary to conform all such items to Liquid Audio's standard of quality.
(d) Policing. OEM shall aid Liquid Audio in policing the use of the Licensed
--------
Trademarks and shall otherwise provide Liquid Audio with all reasonable
cooperation in protecting the Licensed Trademarks. OEM shall immediately notify
Liquid Audio of any apparent infringement of any of the Licensed Trademarks that
comes to OEMs attention.
(e) Branding. OEM shall place the Licensed Trademark (or otherwise provided by
--------
Liquid Audio) in a placement and prominence reasonably approved by Liquid
Audio on the product chassis and packaging for all Devices sold by OEM.
IV. Development and Delivery
------------------------
(a) Liquid Audio Deliverables. Liquid Audio will use reasonable commercial
-------------------------
efforts to deliver Deliverables to OEM promptly after development thereof in
accordance with the Deliverable Schedule set forth in Attachment 2 hereof.
(b) Title to Liquid Audio Deliverables. Title to Deliverables shall not pass
----------------------------------
from Liquid Audio to OEM or third parties, and Deliverables shall at all
times remain the sole and exclusive property of Liquid Audio.
(c) Delivery of Tools. OEM shall deliver three (3) copies of Tools to Liquid
-----------------
Audio within thirty (30) days of the Effective Date.
(d) Title to Tools. Title to the Tools shall not pass from OEM to Liquid
--------------
Audio, and the Tools shall at all times remain the sole and exclusive
property of OEM.
(e) Engineering Support. OEM will develop the OEM Reference Design for the
-------------------
Device. Except as otherwise provided in this Agreement, each party will bear its
own expenses in connection with carrying out the development and any other
obligation set forth in this Agreement. During the development of Deliverables,
OEM shall evaluate the Deliverables and shall provide reasonable feedback to
Liquid Audio. Liquid Audio shall provide reasonable engineering support to OEM
in connection with OEM's development of the OEM Software. OEM will use
reasonable commercial efforts to commence sale of the Devices in commercial
quantities in accordance with the product launch date set forth in the cover
page of this Agreement.
V. Compensation and Reporting
---------------------------
(a) Compensation. The Parties' sole compensation under this Agreement shall be
------------
the mutual benefit derived from offering the OEM Software on the Device and each
party shall retain all revenues derived from their respective activities.
(b) Licensing Statement. On or before the thirtieth (30th) day following the
-------------------
end of every calendar quarter, OEM shall deliver to Liquid Audio a written
statement showing the number of Devices distributed by OEM during the
immediately preceding
<PAGE>
calendar quarter.
VI. Support
-------
(a) End User Support. As between the parties, OEM will have the sole
----------------
responsibility to provide end user technical support to customers of Devices.
VII. Marketing and Production Costs
------------------------------
(a) Joint Marketing of Device. Liquid Audio and OEM will collaborate on a joint
-------------------------
press release and launch plan including appropriate marketing promotions and
program, including, without limitation, press release, promotion with major
content providers, coupons, direct marketing to OEM customer base, and any other
appropriate promotions. All of Liquid Audio's promotions regarding devices
incorporating SP3 device module software shall describe OEM as one of Liquid
Audio's preferred partners for consumer products utilizing the Liquid Audio
Reference Software. All OEM's marketing promotion of the Device will refer to
Liquid Audio and SP-3 as one of the OEM's preferred technology partners. OEM
will aggressively promote (using its full complement of advertising/promotional
means) the Device and Liquid Audio's involvement therein.
(b) Production Costs. OEM shall be solely responsible for the cost of (i)
----------------
reproduction of the Liquid Audio Player Software and OEM Software, including the
cost for the media onto which such software is reproduced; (ii) manufacture of
any packaging or labeling in connection with the distribution of the Device; and
(iii) any other marketing and distribution costs related to its sale of Devices.
(c) Press Release. Liquid Audio and OEM will collaborate to issue a joint
-------------
press release announcing the relationship contemplated by this Agreement.
VIII. Miscellaneous Terms
-------------------
(a) Liquid Music Network(TM) Agreement. During the Term of this Agreement,
----------------------------------
Liquid Audio, at OEM's option, shall license OEM as a syndication affiliate of
the Liquid Music Network(TM) subject to the Liquid Music Network(TM) Syndication
License Agreement to be negotiated and mutually agreed upon by Liquid Audio and
OEM.
(b) Major Music Providers. Liquid Audio will collaborate with OEM to access
---------------------
the major global providers of musical content to provide content for sale from
designated Web Sites using the Device. If any such content is procured, Liquid
Audio will use reasonable efforts to license any required software to OEM.
IX. Representations, Warranties, Disclaimers and Indemnity.
-------------------------------------------------------
(a) Representations and Warranties. Liquid Audio represents and warrants that
------------------------------
(i) Liquid Audio has full rights, power and authority to grant to OEM the rights
and licenses granted hereunder and (ii) the Liquid Audio Products in unmodified
form do not infringe or misappropriate any patent existing as of the date of
this Agreement in Japan or the United States or any copyright, trade secret or
other intellectual property right of any third party in Japan or the United
States. OEM represents and warrants that OEM has full rights, power and
authority to enter into and perform this Agreement, and (ii) the OEM Software,
Devices, Reference Design and OEM Products (apart from the Liquid Audio
Products) do not infringe or misappropriate any copyright, trade secret or other
intellectual property right, except patents of any third party in Japan or the
United States.
(b) Indemnity. Each party shall defend, indemnify and hold the other party
harmless from and against any losses, liabilities, damages, claims, expenses,
including reasonable attorneys' fees, arising out of or related to any third-
party claim that is inconsistent with such party's representations and
warranties hereunder. The indemnifying party's obligations shall be conditioned
upon (i) timely notice of any such third-party claim; (ii) sole control of the
settlement or defense thereof; and (iii) reasonable assistance and cooperation
from the other party, at the indemnifying party's expense. In the event that the
Liquid Audio Products are subject to any third-party claim, or in Liquid Audio's
sole opinion, are likely to become the subject thereof, Liquid Audio shall have
the right to replace the Liquid Audio Product with non-infringing software,
procure a license from such third-party, or terminate the license granted
hereunder if the foregoing options are not feasible or available on commercially
reasonable terms. In the event that any such license requires the payment of
royalties, Liquid Audio and OEM agree to negotiate in good faith regarding such
license in the event that the OEM desires to continue to exercise the license
granted hereunder. The sole liability of each party and the sole remedy of the
other party for any breach of the representations and warranties set forth in
subsection (a) above shall be as set forth in this subsection (b).
Notwithstanding the foregoing, neither party shall have any liability under this
Section IX with respect to any patent infringement claims covering any
combination, method or process in which such party's software or other products
may be used but but not covering the software or other product when used alone,
regardless of whether such software or other product may be necessary to the use
of any product of the other party hereunder or of any third party.
(c) Warranty Disclaimer. EXCEPT AS SET FORTH IN SUBSECTION (A) ABOVE, THE
-------------------
LIQUID AUDIO PRODUCTS, AND ANY OTHER ITEMS OR GOODS LICENSED OR DELIVERED TO OEM
HEREUNDER ARE LICENSED OR DELIVERED TO OEM "AS IS," AND WITHOUT WARRANTY OF ANY
KIND. LIQUID AUDIO HEREBY EXPRESSLY DISCLAIMS ALL WARRANTIES IN
<PAGE>
CONNECTION WITH THE LIQUID AUDIO PRODUCTS AND THIS AGREEMENT, INCLUDING, WITHOUT
LIMITATION, THE IMPLIED WARRANTIES OF NON-INFRINGEMENT, MERCHANTABILITY, AND
FITNESS FOR A PARTICULAR PURPOSE. LIQUID AUDIO MAKES NO, AND HEREBY EXPRESSLY
DISCLAIMS ANY, WARRANTY (1) OF CONTINUOUS OR UNINTERRUPTED OPERATION OF LIQUID
AUDIO PRODUCTS, (2) THAT THE LIQUID AUDIO PRODUCTS WILL RUN PROPERLY ON ALL
HARDWARE OR COMBINATIONS THEREOF, OR (3) THAT THE LIQUID AUDIO PRODUCTS WILL
MEET OEM'S REQUIREMENTS OR THE REQUIREMENTS OF ANY OF OEM'S CUSTOMERS.
X. Limitation of Liability
-----------------------
(a) Total Liability. EXCEPT FOR BREACH OF WARRANTY AND INDEMNIFICATION
---------------
OBLIGATIONS UNDER SECTION IX, LIQUID AUDIO'S TOTAL LIABILITY TO OEM FOR ANY KIND
OF LOSS, EXPENSE, COST, CLAIM OR DAMAGE ARISING UNDER OR IN CONNECTION WITH THIS
AGREEMENT, UNDER ANY THEORY OF LIABILITY, SHALL BE LIMITED TO THE AMOUNTS PAID
TO LIQUID AUDIO BY OEM UNDER THIS AGREEMENT AND THE LIQUID AUDIO MUSIC NETWORK
AGREEMENT, IF ANY, IN THE TWELVE (12)-MONTH PERIOD IMMEDIATELY PRECEDING THE
EVENT TO WHICH SUCH LOSS OR DAMAGE RELATES.
(b) Exclusion of Damages. IN NO EVENT SHALL LIQUID AUDIO BE LIABLE TO OEM FOR
--------------------
ANY INDIRECT, SPECIAL, INCIDENTAL OR CONSEQUENTIAL DAMAGES, WHETHER BASED ON
BREACH OF CONTRACT, TORT (INCLUDING NEGLIGENCE), PRODUCT LIABILITY, OR
OTHERWISE, AND WHETHER OR NOT LIQUID AUDIO HAS BEEN ADVISED OF THE POSSIBILITY
OF SUCH DAMAGE. [EXCEPT WITH RESPECT TO OR IN CONNECTION WITH ANY PROPRIETARY OR
INTELLECTUAL PROPERTY RIGHT OF LIQUID AUDIO, OEM SHALL NOT BE LIABLE TO LIQUID
AUDIO FOR ANY INDIRECT, SPECIAL, INCIDENTAL OR CONSEQUENTIAL DAMAGES, WHETHER
BASED ON BREACH OF CONTRACT, TORT (INCLUDING NEGLIGENCE), PRODUCT LIABILITY, OR
OTHERWISE, AND WHETHER OR NOT OEM HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH
DAMAGE.]
XI. Term and Termination
--------------------
(a) Term. This Agreement shall commence on the Effective Date and shall
----
continue for the period set forth in the Main Agreement unless otherwise
terminated earlier in accordance with the terms of this Section XI.
(b) Events of Default. Any of the following events shall be an "Event of
-----------------
Default" for purposes of this Section XI:
(i) Insolvency Events: Either party shall cease conducting business in the
-----------------
normal course; become insolvent or become unable to meet its obligations as they
become due; make a general assignment for the benefit of creditors; petition,
apply for, suffer or permit with or without its consent the appointment of a
custodian, receiver, trustee in bankruptcy or similar officer for all or any
substantial part of its business or assets; avail itself or become subject to
any proceeding under the U.S. Bankruptcy Code or any similar state, federal or
foreign statute relating to bankruptcy, insolvency, reorganization,
receivership, arrangement, adjustment of debts, dissolution or liquidation,
which proceeding is not dismissed within one hundred twenty (120) days of
commencement thereof; or
(ii) Material Defaults: Default shall be made by either party in the
-----------------
observance or performance of any material term, warranty, representation,
covenant or agreement contained in this Agreement for a period of thirty (30)
days from the date of receipt of written notice from the other party advising of
such default and the defaulting party has not cured such default and so notified
the other party within such thirty (30) day period.
(c) Termination Upon Event of Default. In any Event of Default, the party which
---------------------------------
is not in default, upon written notice any time to the other party, may
terminate this Agreement.
(d) Effect of Termination. Upon any expiration or termination of this
---------------------
Agreement, (a) all rights and licenses granted to OEM under this Agreement shall
terminate. Not withstanding the foregoing, unless this agreement is terminated
by Liquid Audio pursuant to Section XI (b), for a period of ninety days (90)
from termination, OEM may dispose of copies of the OEM software incorporated
into OEM products as of the effective date of termination, in accordance with
OEM's other obligations under this agreement. OEM has the right to use one copy
of OEM Software to support and maintain existing OEM customers. Termination and
expiration shall not affect the end user license agreements between Liquid Audio
and end users. Except as expressly provided herein, all of Liquid Audio's
proprietary rights and confidential information, if any, shall be promptly
returned to Liquid Audio or destroyed by OEM, and certification of destruction
shall be made in writing to Liquid Audio within ten (10) days after such return
or destruction.
(e) Nonexclusive Remedies. The rights and remedies provided to the parties in
---------------------
this Section X shall not be exclusive and are in addition to all other rights
and remedies provided by this Agreement or any other relevant written agreement
or available by law or in equity.
(f) Survival. Notwithstanding anything to the contrary contained in this
--------
Agreement, Sections I, II (except Section II(a), (h) and (I)), V, VI, X,
IX, X, XI, XII and XIII shall survive any expiration or termination of this
Agreement.
XII. Confidential Information
-------------------------
(a) Each party acknowledges that by reason of its relationship to the other
party under this Agreement it will have
<PAGE>
access to certain information and materials concerning the other party's
business, plans, customers, technology and products that are confidential and of
substantial value to such party (referred to in this Section XII as
"Confidential Information"), which value would be impaired if such Confidential
information were disclosed to third parties. The terms of this Agreement shall
be deemed to constitute the Confidential Information of Liquid Audio. Each party
agrees to maintain all Confidential Information received from the other, both
orally and in writing, in confidence and agrees not to disclose or otherwise
make available such Confidential Information to any third party without the
prior written consent of the disclosing party. Each party further agrees to use
the Confidential Information only for the purpose of performing this Agreement.
No Confidential Information shall be deemed confidential unless so marked if
given in writing or, if given orally, identified as confidential orally prior to
disclosure and confirmed in writing within thirty (30) days; provided, however,
that OEM agrees that any Confidential Information in whatever form relating to
the design, functionality, operational methods or coding of Liquid Audio
software, including but not limited to any complete or partial source or object
code versions of such software, shall be deemed Confidential Information of
Liquid Audio regardless of the presence or absence of any confidential markings
or identification.
(b) The parties' obligations under this Section XII shall not apply to
Confidential Information which: (i) is or becomes a matter of public knowledge
though no fault of or action by the receiving party; (ii) was rightfully in the
receiving party's possession prior to disclosure by the disclosing party; (iii)
subsequent to disclosure, is rightfully obtained by the receiving party from a
third party who is lawfully in possession of such Confidential Information
without restriction; (iv) is independently developed by the receiving party
without resort to the disclosing party's Confidential Information; or (v) is
required by law or judicial order, provided that prior written notice of such
required disclosure is furnished to the disclosing party as soon as practicable
in order to afford the disclosing party an opportunity to seek a protective
order and that if such order cannot be obtained disclosure may be made without
liability. Whenever requested by a disclosing party, a receiving party shall
immediately return to the disclosing party all manifestations of the
Confidential Information or, at the disclosing party's option, shall destroy all
such Confidential Information as the disclosing party may designate. The
receiving party's obligation of confidentiality shall survive this Agreement for
a period of three (3) years from the date of its termination, and thereafter
shall terminate and be of no further force or effect.
XIII. Other Provisions
----------------
(a) Amendments. This Agreement may not in any way be modified, changed or
----------
amended except by a written instrument duly executed by the parties hereto.
This Agreement, when executed, constitutes the entire, final, complete and
exclusive agreement between the parties and supersedes any prior negotiations,
understanding or agreements, whether oral or in writing, concerning the subject
matter hereof.
(b) Governing Law. THIS AGREEMENT IS MADE IN ACCORDANCE WITH AND SHALL BE
-------------
GOVERNED AND CONSTRUED UNDER THE LAWS OF THE STATE OF CALIFORNIA, WITHOUT
REFERENCE TO CONFLICTS OF LAWS PRINCIPLES. IN NO EVENT SHALL THIS AGREEMENT BE
GOVERNED BY THE UNITED NATIONS CONVENTION ON CONTRACTS FOR THE INTERNATIONAL
SALE OF GOODS.
(c) Jurisdiction. The State and federal courts in Santa Clara County,
------------
California shall have exclusive jurisdiction and venue over all controversies in
connection herewith, and each party hereby irrevocably consents to such
exclusive and personal jurisdiction and venue.
(d) Injunctive Relief. In the event of any breach of Section II, III, VII or
-----------------
XII, either party may at any time apply to a court of competent jurisdiction for
relief in the form of a temporary restraining order, preliminary injunction, or
other provisional remedy.
(e) Assignments. OEM may not assign this Agreement or any right or obligation
-----------
hereunder, directly, indirectly, by operation of law or otherwise, without
Liquid Audio's prior written consent, and any attempt to do so shall be void and
of no force or effect. Any change of control of OEM shall be considered an
assignment. Notwithstanding the foregoing, this Agreement shall be binding upon
and inure to the benefit of the permitted successors and assigns of each party.
(f) Severability. If any provision of this Agreement is held to be illegal,
------------
unenforceable or invalid, no other provision of this Agreement shall be affected
thereby, and the remaining provisions of this Agreement shall be construed and
reformed and shall continue with the same effect as if such illegal,
unenforceable or invalid provision was not a part hereof; provided that,
--------
notwithstanding any other provision of this Agreement, if any limitation on the
grant of any license to OEM hereunder is found to be illegal, unenforceable, or
invalid, such license shall immediately terminate. The parties agree to
renegotiate in good faith any term held illegal, unenforceable or invalid and to
be bound by any mutually agreed substitute provision.
(g) Waiver. Any waiver (express or implied) by either party of any default or
------
breach of this Agreement shall not constitute a waiver of any other or
subsequent default or breach.
(h) Notices. All notices or other communications required or permitted to be
-------
given pursuant to this Agreement shall be in writing and shall be considered
properly given or made if hand delivered, mailed first class mail, postage
prepaid, sent by prepaid telegram (or telex or other facsimile transmission) or
sent by express overnight courier service to the relevant addresses above or to
such other address as either party hereto may designate by like notice sent to
the other party hereto. All notices
<PAGE>
shall be deemed given when received. A mandatory copy of all notices delivered
or sent to Liquid Audio shall be sent to Wilson Sonsini Goodrich & Rosati, 650
Page Mill Road, Palo Alto, California 94303-1050, Attention: Hank Barry, Esq.
(i) Headings. The headings and captions contained in this Agreement shall not
--------
be considered to be a part hereof for purposes of interpreting or applying this
Agreement, but are for convenience only.
(j) Import and Export Controls. OEM understands and acknowledges that Liquid
--------------------------
Audio is subject to regulation by agencies of the U.S. government, including the
U.S. Department of Commerce which prohibit export or diversion of certain
products, technology and technical data to certain countries. Any and all
obligations of Liquid Audio to provide the Liquid Audio Product, software,
documentation or any media in which any of the foregoing is contained, as well
as any training or technical assistance shall be subject in all respects to such
United States laws and regulations as shall from time to time govern the license
and delivery of technology, products and technical data abroad by persons
subject to the jurisdiction of the United States, including the Export
Administration Act of 1979, as amended, any successor legislation, and the
Export Administration Regulations issued by the Department of Commerce,
International Trade Administration, and Bureau of Export Administration.
(k) Contingency. Neither party hereto shall be held responsible for any delay
-----------
or failure in performance hereunder caused in whole or in part by fire, strike,
flood, embargo, labor dispute, delay or failure of any subcontract, act of
sabotage, riot, accident, delay of carrier or supplier, voluntary or mandatory
compliance with any governmental act, regulation or request, act of God or by
public enemy, or any act or omission or other cause beyond such party's control.
If any such contingency shall occur, this Agreement shall be deemed extended by
the length of time such contingency continues.
(l) Independent Contractors. The parties hereto are independent contractors
-----------------------
and neither party is an employee, agent, partner or joint venturer of the other.
Neither party shall have the right, nor shall either party attempt, to bind the
other party, whether directly or indirectly, to any agreement with a third party
or to incur any obligation or liability on behalf of such other party, whether
directly or indirectly.
<PAGE>
ATTACHMENT 2
------------
DELIVERABLES AND SCHEDULE
Deliverables
- ------------
SP3 API A set of C function calls enabling a host application to communicate
with an SP3 compliant device.
SPT File Format Documentation describing and reference libraries for parsing
the Secure Portable Track (SPT) file format.
SP3 Security Protocols Documentation describing the SP3 security model and
reference C code/decryption libraries.
Hardware Reference Design documentation describing the basic architecture of an
SP3-compliant device.
Compliance Test Bench Documentation and code enabling the device manufacturer
to test and validate SP3 functionality.
Schedule
- --------
TASK DRAFT BETA FINAL
- ---- ----- ---- -----
SP3 API
Documentation 2/15 5/15 6/1
API 3/15 6/15 6/30
SPT File Format
Documentation 2/15 5/15 6/1
Reference files and code library 3/15 6/1 6/30
SP3 Security Protocols
Documentation 3/1 5/1 6/30
Reference code library 3/15 5/15 6/30
Hardware Reference
Documentation 3/15 5/15 6/30
Compliance Test Bench
Documentation and code 5/15 6/1 6/30
<PAGE>
ATTACHMENT 3
------------
OEM PRODUCTS
[***]
* Material has been omitted pursuant to a request for confidential treatment.
Such material has been filed separately with the Securities and Exchange
Commission.
<PAGE>
ATTACHMENT 4
------------
[Player Products]
END USER LICENSE AGREEMENT
--------------------------
PLEASE READ THIS AGREEMENT CAREFULLY BEFORE ATTEMPTING TO USE
------
THE SOFTWARE AND BEFORE CLICKING ON THE "ACCEPT" BUTTON
------
OR BREAKING THE SEAL OF ANY INSTALLATION DISKS.
LIQUID AUDIO, INC. ("LIQUID AUDIO") IS WILLING TO LICENSE THE SOFTWARE DESCRIBED
ABOVE (THE "SOFTWARE") TO YOU (THE "CUSTOMER") ONLY ON THE CONDITION THAT YOU
ACCEPT ALL OF THE TERMS CONTAINED IN THIS AGREEMENT. PLEASE READ THE TERMS
CAREFULLY BEFORE CLICKING ON THE "ACCEPT" BUTTON OR BREAKING THE SEAL OF ANY
INSTALLATION DISKS, AS CLICKING ON THE "ACCEPT" BUTTON OR BREAKING THE SEAL WILL
INDICATE YOUR AGREEMENT TO THESE TERMS.
IF YOU DO NOT AGREE TO THESE TERMS, THEN LIQUID AUDIO IS UNWILLING TO LICENSE
THE SOFTWARE TO YOU, AND YOU SHOULD CLICK ON THE "DO NOT ACCEPT" BUTTON TO
DISCONTINUE THE INSTALLATION PROCESS OR RETURN THE INSTALLATION DISKS FOR A
REFUND.
1. LICENSE GRANT AND RESTRICTIONS. Liquid Audio grants to Customer a non-
exclusive, non-transferable, revocable license to use the object code copy of
the Software distributed with this Agreement (the "Copy") along with related
documentation during the term of this Agreement on a single CPU, which may be
changed from time to time. Such license shall be perpetual upon the receipt by
Liquid Audio of full payment of the respective License Fee (as described below)
but shall be terminable as provided herein. Customer (a) may not modify,
disassemble, decompile or reverse-engineer the Software; (b) may not rent,
lease, loan, resell, sublicense, distribute or otherwise transfer the Software
to any third party or use the Software to provide time sharing or similar
services to any third party; (c) may not make any copy of the Software except
for a single working copy and a single backup copy; (d) may not circumvent or
disable any technological features or measures in the Software for protection of
intellectual property rights, and (e) may not delete the copyright and other
proprietary rights notices on the Software. Any attempt by Customer to transfer
any of the rights, duties or obligations hereunder except as expressly provided
for in this Agreement is void. This license does not include any rights to
maintenance or updates.
2. DISABLING SOFTWARE. THE SOFTWARE CONTAINS CODE WHICH MAY BE USED TO DISABLE
SUCH SOFTWARE. THIS DISABLING CODE MAY BE USED TO ENSURE THAT THE SOFTWARE IS
NOT USED IN VIOLATION OF THIS AGREEMENT, INCLUDING WITHOUT LIMITATION TO
INFRINGE INTELLECTUAL PROPERTY RIGHTS IN THE SOFTWARE OR ANY CONTENT. CUSTOMER
AGREES AND ACKNOWLEDGES THAT UPON ANY TERMINATION OR EXPIRATION OF THIS
AGREEMENT, AND PROVIDED THAT THE PARTIES HAVE NOT AGREED IN WRITING TO RENEW
THIS AGREEMENT, THE SOFTWARE MAY, AT LIQUID AUDIO'S DISCRETION, CEASE TO
FUNCTION IN SOME OR ALL RESPECTS, AND CUSTOMER MAY LOSE ACCESS TO DATA MADE
WITH, OR STORED USING, THE SOFTWARE. CUSTOMER AGREES TO INDEMNIFY LIQUID AUDIO
FROM ANY LIABILITY, INCLUDING LIABILITY DUE TO THIRD PARTY CLAIMS, RESULTING
FROM SUCH DISABLING OF SUCH SOFTWARE. CUSTOMER AGREES AND ACKNOWLEDGES THAT THE
DISABLING OF THE SOFTWARE IS A KEY FEATURE OF THE LICENSE RIGHTS AND
RESPONSIBILITIES CONVEYED UNDER THIS AGREEMENT.
3. LICENSE FEE. The effectiveness of this Agreement is conditioned on the
receipt by Liquid Audio or its reseller of the License Fee (or any initial
installment thereof) as set forth in Liquid Audio's or its reseller's invoice(s)
therefor. Such payment(s) will be made by Customer on the terms and conditions
specified in such invoice(s).
<PAGE>
4. LIMITED WARRANTY. Liquid Audio warrants for the period of ninety (90) days
from the date of delivery of the Copy of the Software to Customer that:
(i) The Software, unless modified by Customer, will perform substantially
in accordance with the documentation provided by Liquid Audio. Customer's sole
remedy under this warranty is that Liquid Audio will either correct within a
reasonable period of time any "Software Error" (failure of the Software to
perform in accordance with the documentation) reported during the warranty
period or, if Liquid Audio is unable to correct any such Software Error, refund
to Customer the money paid for the Software. Liquid Audio does not warrant that
the Software will meet Customer's requirements that operation of the Software
will be uninterrupted, error-free or secure, or that all Software Errors will be
corrected.
(ii) The medium if any (such as diskette or CD Rom) provided by Liquid
Audio containing the Software will be free from defects in materials and
workmanship under normal use. Liquid Audio will, at its option, replace or
refund the purchase price of a faulty medium at no charge to Customer if the
same is returned to Liquid Audio.
THE ABOVE WARRANTIES ARE EXCLUSIVE AND IN LIEU OF ALL OTHER WARRANTIES,
WHETHER EXPRESS OR IMPLIED, AND LIQUID AUDIO EXPRESSLY DISCLAIMS ALL OTHER
WARRANTIES, INCLUDING THE IMPLIED WARRANTIES OF MERCHANTABILITY, FITNESS FOR A
PARTICULAR PURPOSE AND NONINFRINGEMENT. NO ORAL OR WRITTEN INFORMATION OR
ADVICE GIVEN BY LIQUID AUDIO, ITS EMPLOYEES, RESELLERS OR AGENTS SHALL INCREASE
THE SCOPE OF THE ABOVE WARRANTIES OR CREATE ANY NEW WARRANTIES.
SOME STATES DO NOT ALLOW THE EXCLUSION OF IMPLIED WARRANTIES, SO THE ABOVE
EXCLUSION MAY NOT APPLY TO YOU. IN THAT EVENT, ANY IMPLIED WARRANTIES ARE
LIMITED IN DURATION TO NINETY (90) DAYS FROM THE DATE OF DELIVERY OF THE
SOFTWARE. THIS WARRANTY GIVES YOU SPECIFIC LEGAL RIGHTS. YOU MAY HAVE OTHER
RIGHTS, WHICH VARY FROM STATE TO STATE.
5. LIMITATION OF LIABILITY. IN NO EVENT WILL LIQUID AUDIO BE LIABLE TO CUSTOMER
OR ANY OTHER PARTY FOR DAMAGES OF ANY KIND ARISING FROM USE OF THE COPY AND/OR
THE SOFTWARE EMBODIED THEREIN, WHETHER RESULTING FROM TORT (INCLUDING
NEGLIGENCE), BREACH OF CONTRACT OR OTHER FORM OF ACTION, INCLUDING BUT NOT
LIMITED TO DIRECT, INDIRECT, SPECIAL, INCIDENTAL AND CONSEQUENTIAL DAMAGES
(INCLUDING LOST PROFITS) OF ANY KIND, ARISING IN ANY WAY OUT OF THIS AGREEMENT,
EVEN IF ADVISED OF THE POSSIBILITY OF SUCH DAMAGE. LIQUID AUDIO'S TOTAL
LIABILITY UNDER THIS AGREEMENT WILL BE LIMITED TO THE LICENSE FEE. Customer
expressly assumes all responsibility for any damages, lost data, lost profits
and other consequential damages that may result in any way out of this
Agreement, including without limitation, use of the Software. Customer
expressly agrees that the License Fee has been agreed to based in part upon the
foregoing limitation of Liquid Audio's liability.
6. OWNERSHIP; PERMISSIONS.
(a) Customer agrees that Liquid Audio and/or its suppliers owns all right,
title and interest in and to the Copy and the Software, including without
limitation any and all copyrights, patents, trade secrets, trademarks and other
intellectual property and proprietary rights therein. Customer will not acquire
any additional licenses under any copyrights, patents, trade secrets, trademarks
or other intellectual property rights on account of this Agreement.
(b) Customer will not alter, encode, copy or transmit any audio or other
information using the Software without obtaining all necessary copyright and
other permissions. Any failure to obtain such permissions constitutes a
material breach of this Agreement, shall cause irreparable harm to Liquid Audio,
and shall entitle Liquid Audio to receive equitable relief for such failure.
Customer will at its expense defend and indemnify Liquid Audio against all
liabilities, damages,
<PAGE>
claims, fines and expenses (including reasonable attorney's fees) arising out of
any claim that Customer has not obtained such permissions.
(c) CUSTOMER ACKNOWLEDGES THAT IN ORDER TO PURCHASE CONTENT, AND TO ACCESS
AND PLAY THE SAME, INCLUDING CONTENT PREVIOUSLY PURCHASED BY CUSTOMER, CUSTOMER
MUST BE AUTHORIZED BY A VALID TIME-LIMITED "PASSPORT" ISSUED PERIODICALLY BY
LIQUID AUDIO IN ACCORDANCE WITH LIQUID AUDIO'S THEN-CURRENT PASSPORT POLICY.
(d) Customer acknowledges that the Passport contains Customer's personal and
confidential information, including credit card information, and that it is
essential to keep the Passport, and the password to the Passport confidential,
both to protect Customer's personal information, and to prevent third-parties
from using Customer's Passport to illegally download, copy, distribute or play
content. Customer agrees to keep his or her Passport confidential, and any
failure of Customer to do so shall be deemed a material breach of this
Agreement. Customer will at its expense defend and indemnify Liquid Audio
against all liabilities, damages, claims, fines and expenses (including
reasonable attorneys' fees) arising out of Customer's breach of this provision.
(e) Customer may be liable for the unauthorized use of Customer's credit
card. Customer is advised to consult the terms and conditions imposed by its
credit card issuer for notification requirements and limitations on Customer's
liability for loss, theft or unauthorized use of Customer's credit card. LIQUID
AUDIO DISCLAIMS ANY LIABILITY FOR ANY USE OF CUSTOMER'S PASSPORT OR CREDIT CARD,
INCLUDING ANY LOSS, THEFT OR UNAUTHORIZED USE THEREOF.
7. TERMINATION. Liquid Audio will have the right to terminate this Agreement if
Customer breaches any material term or condition of this Agreement (including,
if applicable, failure to pay any portion of the License Fee when due as
provided in Liquid Audio's invoice(s) therefor) and fail to cure such breach
within ten (10) days of written notice from Liquid Audio. Upon termination of
this Agreement, the rights and licenses granted to Customer under this Agreement
shall automatically terminate. Within five (5) days after termination, Customer
will return or destroy all copies of the Software and documentation in
Customer's possession. Upon request, Customer will certify to Liquid Audio that
all copies of the Software have been returned to Liquid Audio or destroyed. The
exercise by Liquid Audio of any remedies under this Agreement will be without
prejudice to its other remedies under this Agreement or otherwise. The rights
and obligations of the parties under Sections 2, 4, 5, 6, 7 and 10 will survive
the expiration or termination of this Agreement.
8. GOVERNMENT LICENSEE. If the Software is licensed by or for any unit or
agency of the United States Government, then the Software shall be classified as
"commercial computer software", as that term is defined in the applicable
provisions of the Federal Acquisition Regulation (the "FAR") and supplements
thereto, including the Department of Defense ("DoD") FAR Supplement (the
"DFARS"). Liquid Audio represents that the Software was developed entirely at
private expense, and that no part of the Software was first produced in the
performance of a United States Government contract. If the Software is supplied
for use by DoD, the Software is delivered subject to the terms of this Agreement
and either (i) in accordance with DFARS 227.7202-1(a) and 227.7202-3(a), or (ii)
with restricted rights in accordance with DFARS 252.227-7013(c)(1)(ii) (OCT
1988), as applicable. If the Software is supplied for use by a Federal agency
other than DoD, the Software is restricted computer software delivered subject
to the terms of this Agreement and (i) FAR 12.212(a); (ii) FAR 52.227-19; or
(iii) FAR 52.227-14(ALT III), as applicable.
9. EXPORT CONTROL. Customer agrees to comply with all export laws and
restrictions and regulations of the United States Department of Commerce or
other United States or other sovereign agency or authority, and not to export,
or allow the export or re-export of any technical data or any Software in
violation of any such restrictions, laws or regulations, or unless and until all
required licenses and authorizations are obtained to the countries specified in
the applicable U.S. Export Administration Regulations (or any successor
supplement or regulations).
<PAGE>
10. GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of California, excluding its conflicts of
law principles. The parties agree that the United Nations Convention on
Contracts for the International Sale of Goods will not apply to this Agreement.
Except for disputes as to the ownership of intellectual property rights in the
Software, all disputes arising out of or relating to this Agreement or its
interpretation shall be finally settled by binding arbitration in Redwood City,
California pursuant to the Commercial Arbitration rules of the American
Arbitration Association by one arbitrator. All arbitrators will have knowledge
of and experience regarding the computer industry. Requests for equitable
relief shall be first submitted to the arbitrator. The arbitration award may be
enforced in any court of competent jurisdiction. Customer hereby consents to
the personal and exclusive jurisdiction and venue of the state and federal
courts located in San Mateo County of the State of California.
11. MISCELLANEOUS. This Agreement constitutes the entire agreement between the
parties with respect to its subject matter, and supersedes any and all written
or oral agreements previously existing between the parties with respect to such
subject matter. Any modifications of this Agreement must be in writing. This
Agreement will bind and inure to the benefit of each party's successors and
assigns, provided that Customer may not assign this Agreement, in whole or in
part, without Liquid Audio's prior written consent. If any provision of this
Agreement is found illegal or unenforceable, it will be enforced to the maximum
extent permissible, and the legality and enforceability of the other provisions
of this Agreement will not be affected. No failure of either party to exercise
or enforce any of its rights under this Agreement will act as a waiver of such
rights. No purchase order, invoice or similar document will by its terms amend
or supplement the terms and conditions of this Agreement, even if accepted or
signed by the receiving party. Performance of this Agreement may be suspended
due to any force majeure event.
CUSTOMER ACKNOWLEDGES THAT IT HAS READ THIS AGREEMENT, UNDERSTANDS IT AND AGREES
TO BE BOUND BY ITS TERMS AND CONDITIONS.
THE SOFTWARE AND THE ACCOMPANYING DOCUMENTATION ARE PROTECTED BY UNITED STATES
COPYRIGHT LAW AND INTERNATIONAL TREATY. UNAUTHORIZED REPRODUCTION OR
DISTRIBUTION IS SUBJECT TO CIVIL AND CRIMINAL PENALTIES.
Rev. ___.
<PAGE>
ATTACHMENT 5
------------
LIQUID MUSIC NETWORK(TM)
------------------------
SYNDICATION LICENSE AGREEMENT
-----------------------------
WHEREAS Liquid Audio, Inc., a California corporation, with offices at 810
Winslow Street, Redwood City, California 94063, hereinafter referred to as
"Liquid Audio," owns and operates the Liquid Music Network (the "LMN"), pursuant
to which Liquid Audio distributes on a syndicated basis an exclusive database of
music programming and other content for public performance and digital delivery
to select Web sites that are licensed as LMN syndication affiliates; and
WHEREAS _______________________, a ____________ corporation with offices
at ______________________, hereinafter referred to as "Licensee", wishes to be
licensed as a syndication affiliate of the Liquid Music Network and receive the
right to carry the LMN programming for distribution through Licensee's Web site
or sites, upon the terms and conditions set forth in Schedule "A" to this
Agreement;
NOW THEREFORE THE PARTIES HEREBY AGREE AS OF THIS _____ DAY OF __________
199__ ("EFFECTIVE DATE") AS FOLLOWS:
PROGRAMMING CATEGORIES: [All or specify per Schedule "B"]
LICENSED WEB SITES: [insert Licensee URLs]
LICENSE PERIOD: One year from Effective Date
LICENSE GRANTED: Web site redistribution
ANNUAL SYNDICATION FEE: [$__________ or Based on Programming Categories, per
Schedule "B"]
ADVERTISING REVENUE: 100% retention of Licensee Advertising.
DIGITAL MUSIC COMMERCE REVENUE: Licensee receives Net Revenue from sales.
CD/TANGIBLE MUSIC COMMERCE REVENUE:
Each pays the other X% of any referral fees they receive from third-party sales.
Licensee pays Liquid Audio a [Y% or $___] referral fee for sales by Licensee.
MUSICPLAYER & MUSICPLAYER CD: Licensee receives fee for Music Player CD sales =
$___
LOGO/ICON LICENSE: Yes
<PAGE>
IN WITNESS THEREOF, the parties hereto have executed this Agreement as of
the date first above written.
FOR LIQUID AUDIO, INC.: FOR LICENSEE:
BY:___________________________ BY:___________________________
TITLE:________________________ TITLE:________________________
DATE:_________________________ DATE:_________________________
<PAGE>
SCHEDULE "A"
------------
LIQUID MUSIC NETWORK
--------------------
SYNDICATION LICENSE STANDARD TERMS AND CONDITIONS
-------------------------------------------------
Annexed to and made part of that certain Syndication License Agreement
("Agreement") dated as of __________________, 199__, between Liquid Audio, Inc.
("Liquid Audio") and _____________________________________
("Licensee").
I. Definitions.
-----------
"Licensed Web Sites" means the Web sites owned or controlled by Licensee as
identified by the URLs listed in the Main Agreement.
"Link(s)" means one or more hyperlinks established from within the Licensed Web
Sites to one or more pages within the LMN Site(s), as designated by Liquid
Audio, to enable an end user of the Licensed Web Site to access the LMN
Programming.
"LMN Logo and Artwork" means the logo(s) for the LMN designated by Liquid Audio,
and all artwork, graphics, and other content provided by Liquid Audio for use in
connection with the Links.
"LMN Programming" means the compilation database owned by Liquid Audio and
marketed as the Liquid Music Network, comprised of sound recordings made
available by Liquid Audio in the Programming Categories identified in Schedule
"B" (including forty-five (45) second or less samples of such sound recordings),
and all other graphics, text, video, and other related content now or hereafter
offered by Liquid Audio in connection with the foregoing.
"LMN Site(s)" means the Web site(s) designated by Liquid Audio which operate
Liquid Audio's server and commerce software to deliver the LMN Programming to
LMN end users via the Licensed Web Sites.
"Music Commerce Transactions" means the purchase by an end user who accesses
the LMN Programming via the Licensed Web Sites of (i) one or more intangible
copies of a sound recording offered via the LMN Programming, with online
fulfillment of such sale by digital delivery and downloading from the LMN Sites
to the end user's computer hard drive; and/or (ii) one or more phonorecords
offered via the LMN Programming, including without limitation on compact disc,
cassette tape or other tangible media, with offline fulfillment of the sale
made online at the LMN Site or using a telephone number made available from the
LMN Site.
II. License Grant. Subject to the payment by Licensee of the syndication
-------------
license fee set forth in Section IX below, Liquid Audio grants and Licensee
accepts a limited, personal, nontransferable, nonexclusive license as an LMN
syndication affiliate (i) to make available, carry, and distribute the LMN
Programming via the Licensed Web Site(s) to end users; and (ii) subject to
compliance with Liquid Audio's branding guidelines and Section VIII below, to
use the LMN Logo and Artwork as an icon to create one or more Links to the LMN
Site.
III.Reservation of Rights. The license herein granted shall be limited to the
---------------------
rights expressly set forth above. All other rights to the LMN Programming are
expressly reserved by Liquid Audio. Without limiting the foregoing, Licensee
may not sublicense or resell the LMN Programming, and Licensee shall impose no
requirements of any kind or character whatsoever for end users to access the LMN
Programming via the Links, including without limitation, any subscription or
access fee or registration requirement to activate the Link to the LMN
Programming.
IV. Joint Promotional Obligations Liquid Audio and Licensee will each
------------------------------
promote the other and the relationship described within this Agreement at any
appropriate trade shows. Liquid Audio and Licensee will jointly release a press
release concerning the relationship described in this Agreement. Both parties
will agree to the language of the press release before it is issued.
V. Liquid Audio Obligations Liquid Audio will include Licensee on the LMN
------------------------
Site in an area in which Liquid Audio describes the LMN, and Liquid Audio will
provide a link from this portion of its site to Licensee's home page. In
connection with the distribution of the LMN Programming via the Licensed Web
Sites, Liquid Audio intends to enable end users (i) to preview a performance of
a sample of one or more sound recordings, (ii) to engage in Music Commerce
Transactions, and (iii) to download a copy of the then-current Liquid Audio
standard player software. Liquid Audio acknowledges that Liquid Audio and its
designees, and not Licensee, will be solely responsible for enabling the
foregoing functionality with Liquid Audio's technology and any third party
technology obtained by Liquid Audio, including without limitation all aspects of
online and offline fulfillment and processing of Music Commerce Transactions.
Notwithstanding the foregoing, where appropriate with respect to physical CD
products, Liquid Audio will consider utilizing any preferred vendor and/or
fulfillment source for these transactions and fulfillment designated by
Licensee, provided that such preferred vendor carries the appropriate inventory
to fulfill orders as reasonably required by Liquid Audio, and subject to
implementation of the appropriate technology within the LMN by Liquid Audio.
Licensee acknowledges that pricing and all other matters relating to Music
Commerce Transactions will be solely determined by Liquid Audio and/or its
licensors.
<PAGE>
VI. Syndication Affiliate Obligations. In consideration of the exclusive
---------------------------------
nature of the LMN Programming offered to Licensee hereunder, the foregoing
license requires that the LMN Programming be featured in a premiere position on
the Licensed Web Sites, which shall include at minimum (i) placement of the LMN
Logo as a Link on the "home page" of the Licensed Web Sites, or if no third-
party content appears on the "home page" then in the first page thereafter that
does so (and/or on other mutually agreed pages of sufficient prominence); (ii)
the most prominent placement on all other guides to content on the Licensed Web
Sites as compared to other music-related programming, including without
limitation on the "What's New" or similar pages, on any topical listing of
content available on such site. Licensee agrees that it will use Liquid Audio's
technology as the exclusive audio downloading and audio commerce technology on
the Licensed Web Sites.
VII. Liquid MusicPlayer and Liquid MusicPlayer CD. Licensee will provide a
--------------------------------------------
download button, in a design consistent with Liquid Audio's branding guidelines,
on the Licensed Web Sites, that enables end users to download the Liquid
MusicPlayer from the Web site. Liquid Audio will license the Liquid MusicPlayer
directly to the end user. Liquid Audio will be responsible for all customer
support of this product. In addition, Licensee will actively promote the sale
of the Liquid MusicPlayer CD on the Licensed Web Sites. Liquid Audio will be
responsible for the fulfillment of the orders of the Liquid MusicPlayer CD from
the Licensed Web Sites as a Music Commerce Transaction under this Agreement.
Liquid Audio will license the Liquid MusicPlayer CD directly to the end user.
Liquid Audio will be responsible for all customer support of this product.
Liquid Audio will provide to Licensee separate Web pages, for inclusion within
the Licensed Web Sites, which explain the relevant aspects of the Liquid Audio
system, and especially the Liquid MusicPlayer and the Liquid MusicPlayer CD.
VIII. Advertising. Upon execution of this Agreement, Licensee agrees to
-----------
commence insertion of banner advertising on the Licensed Web Sites announcing
the coming of the LMN. Liquid Audio will work with Licensee to design these
banner ads. Upon launch of the LMN on the Licensed Web Sites, Licensee may
create and maintain for its own account a frame that surrounds the LMN
Programming for end users who access the LMN via the Licensed Web Sites. With
respect to such frame, Licensee shall have the right to independently sell
advertising for such frame and shall retain for its own account all advertising
revenue derived therefrom. Notwithstanding the foregoing, Liquid Audio will be
responsible for the final approval of the framing space and shall have the right
to finally resolve any advertising booking conflict or to veto any advertising
that is competitive with Liquid Audio or the LMN. With respect to the page(s)
on the Licensed Web Sites which contain the Link(s) to the LMN Programming,
Licensee shall also control all advertising and other content on such page, and
shall retain all revenue derived therefrom, provided that no such advertising or
content shall be placed in direct relation to the Link such as to cause dilution
or consumer confusion with respect to the association of the Link to such
advertising or content. Liquid Audio shall control all other aspects of the LMN
Programming, including without limitation any advertising or promotional
activities contained therein, and shall retain any and all revenue derived from
such advertising and promotional activities. Each party shall be responsible
for serving its own advertising hereunder, and as such, neither party shall be
obligated to report tracking or usage data for advertising purposes hereunder.
IX. Payments.
--------
(a) Licensee shall pay Liquid Audio the annual syndication license fees for
the Programming Categories selected by Licensee as set forth in Exhibit "B".
The parties agree that timely payment of all license fees by Licensee is of the
essence of this Agreement, and any failure by Licensee to make such timely
payment shall constitute a material default hereunder. Any payment hereunder
not made within thirty (30) days after due date shall bear interest at the rate
of 1% per month or the maximum rate allowed by law, whichever is less.
(b) With respect to Music Commerce Transactions involving distribution via
digital delivery, Liquid Audio shall pay to Licensee the Net Revenue derived
from sales. "Net Revenue" means the actual retail sales price paid by the
customer for the applicable track(s) sold (if different than list price), less
any sales tax included therein, the wholesale price of the applicable track(s)
sold, Liquid Audio's digital fulfillment fee, bank transaction processing fees,
[and any applicable mechanical rights fees that may not be included within the
wholesale price]. The parties acknowledge that Liquid Audio will determine the
list and actual retail selling price to customers in its sole discretion, unless
otherwise agreed, and that the record label or other content owner will
determine the wholesale price in its sole discretion.
(c) With respect to sales of the Liquid MusicPlayer CD, Liquid Audio shall
pay Licensee a fee for each sale as set forth in the Main Agreement.
(d) With respect to Music Commerce Transactions involving distribution on CDs
and other tangible media, Liquid Audio shall pay to Licensee the following: (i)
where Licensee is not the vendor and does not have a preferred vendor
arrangement, the applicable percentage of Liquid Audio's referral fees, as set
forth in the Main Agreement, received from any preferred vendor arrangement
maintained by Liquid Audio.
(e) With respect to Music Commerce Transactions involving distribution on CDs
and other tangible media, Licensee shall pay to Liquid Audio the following: (i)
where Licensee is the vendor, the applicable referral fee, as set forth in the
Main Agreement, and (ii) where Licensee is not the vendor but has a preferred
vendor arrangement, the applicable percentage of Licensee's referral fees, as
set forth in the Main Agreement, received from such preferred vendor.
(f) Subject to the foregoing, the parties' sole compensation under this
Agreement shall be the mutual benefit derived from
<PAGE>
offering the LMN Programming on the Licensed Web Sites and each party shall
retain all revenues derived from their respective activities, including without
limitation, all advertising revenue derived by each party pursuant to Section
VIII above.
X. Statements. Each party shall provide the other party with a statement of
----------
any amount payable arising from Music Commerce Transactions and shall tender the
appropriate amount due to the other party within thirty (30) days after the end
of each calendar month; provided, however, that any total amount payable that is
less than $100 may be retained until the aggregate amount payable equals or
exceeds $100. The statement shall contain sufficient information for the other
party to accurately verify the amounts due and payable, including (i) the net
amount of any referral fees, the calculation of such net amount, and the source
of any referral fees, and (ii) for direct sales, the sale price, the quantity
sold, the gross receipts generated, and an itemization of the permitted
deductions, if any. Liquid Audio reserves the right to suspend payments to
Licensee hereunder in the event of any delay, failure or incompleteness by
Licensee in its payment or reporting obligations hereunder.
XI. Warranties. Liquid Audio warrants that it is the sole owner of the LMN
----------
Programming compilation database, and except with respect to public performance
of music works which is provided for in Section XII below, it has all rights
necessary to license the LMN Programming as provided herein. Subject to the
performance by Licensee of its obligations hereunder, Liquid Audio will
indemnify Licensee against any damages awarded in any final judgment entered
against Licensee or settlement approved by Liquid Audio, as a result of a breach
of any warranty made by Liquid Audio hereunder or by reason of a claim that the
exercise by Licensee of the rights granted herein infringes the rights of
others, provided, however, prompt detailed notice in writing of such claim is
provided to Liquid Audio. Liquid Audio shall have full control over the defense
and/or settlement of any such claim or litigation including the right to engage
its own counsel and Licensee shall not continue the distribution of such LMN
Programming thereafter without the written consent of Liquid Audio. Licensee
shall cooperate fully with Liquid Audio in the defense or settlement of any such
claim or litigation. Licensee will indemnify Liquid Audio from all claims or
liabilities including without limitation reasonable attorneys' fees arising from
the breach of this Agreement by Licensee or from the distribution of any
material on the Licensed Web Sites other than material contained in the LMN
Programming as delivered by Liquid Audio.
XII. Music Rights. Liquid Audio warrants to the best of its knowledge that the
------------
public performance rights in the musical works contained in the LMN Programming
are (i) controlled by ASCAP, BMI, SESAC or a performing rights society having
jurisdiction, (ii) in the public domain, or (iii) controlled by Liquid Audio or
its licensors. If musical works in category (iii) above are contained in the
LMN Programming, a limited public performance license is deemed to be included
within the scope of the license set forth in Section II above. If musical works
in category (i) above are contained in the LMN Programming, Licensee shall
contact BMI, ASCAP or the appropriate public performing rights organization to
obtain a license covering the uses contemplated by this Agreement, which may
include any preferred rates that may now or hereafter be negotiated by Liquid
Audio on behalf of its syndication licensees. Licensee at its sole cost and
expense shall be responsible for obtaining all licenses necessary to perform
such musical works, and Licensee agrees to indemnify Liquid Audio against any
liability loss or expenses arising form the performance of such musical works
via the Licensed Web Sites without such a license.
XIII. Withdrawal and Substitutions. Liquid Audio may in its absolute
----------------------------
discretion withdraw permanently or temporarily any licensed sound recording or
other content from the LMN Programming if Liquid Audio determines in its sole
discretion that the distribution thereof would or might infringe the rights of
others, violate any law or governmental rule or regulation, interfere with
actual or contemplated use of the particular licensed LMN Programming for any
purpose other than the distribution by Licensee or subject Liquid Audio to any
potential liability or litigation. In the event any part of the LMN Programming
is withdrawn on a temporary basis or permanent basis, Licensee shall be entitled
to delivery of substitute LMN Programming designated by Liquid Audio of
comparable quality.
XIV. Term and Termination.
--------------------
(a) This Agreement will become effective on the Effective Date and shall
continue in effect for the period set forth in the Main Agreement unless
otherwise terminated or canceled as provided herein. This Agreement shall
automatically renew for one or more renewal terms of one (1) year each at the
end of the initial term of any renewal term unless either party tenders written
notice of its intent to terminate at least thirty (30) days prior to the
scheduled expiration date.
(b) Either party hereto may, at is option, and without notice, terminate
this Agreement, effective immediately, should the other party hereto (i) admit
in writing its inability to pay its debts generally as they become due; (ii)
make a general assignment for the benefit of creditors; (iii) institute
proceedings to be adjudicated a voluntary bankrupt, or consent to the filing of
a petition of bankruptcy against it; (iv) be adjudicated by a court of competent
jurisdiction as being bankrupt or insolvent; (v) seek reorganization under any
bankruptcy act, or consent to the filing of a petition seeking such
reorganization; or (vi) 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.
(c) In the event that either party commits a material breach of its obligations
hereunder, the other party may, at its option, terminate this Agreement, by
thirty (30) days written notice of termination, which notice shall identify and
describe the basis for such termination; provided, however, that if, prior to
expiration of such period, the defaulting party cures such default, termination
shall not take place.
<PAGE>
(d) Upon any termination of this Agreement, Sections III and XV shall survive
the termination of this Agreement. Licensee shall immediately return to Liquid
Audio all copies of the LMN Logo and Artwork and all other Liquid Audio
materials in Licensee's possession or control. Licensee shall deactivate all
Links to the LMN Sites and shall not create any links thereto without the prior
consent of Liquid Audio.
XV. Confidential Information
------------------------
(a) Each party acknowledges that by reason of its relationship to the other
party under this Agreement it will have access to certain information and
materials concerning the other party's business, plans, customers, technology
and products that are confidential and of substantial value to such party
(referred to in this Section as "Confidential Information"), which value would
be impaired if such Confidential Information were disclosed to third parties.
The terms of this Agreement shall be deemed to constitute the Confidential
Information of Liquid Audio. Each party agrees to maintain all Confidential
Information received from the other, both orally and in writing, in confidence
and agrees not to disclose or otherwise make available such Confidential
Information to any third party without the prior written consent of the
disclosing party. Each party further agrees to use the Confidential Information
only for the purpose of performing this Agreement. No Confidential Information
shall be deemed confidential unless so marked if given in writing or, if given
orally, identified as confidential orally prior to disclosure and confirmed in
writing within thirty (30) days; provided, however, that Licensor agrees that
any Confidential Information in whatever form relating to the design,
functionality, operational methods or coding of Liquid Audio software, including
but not limited to any complete or partial source or object code versions of
such software, shall be deemed Confidential Information of Liquid Audio
regardless of the presence or absence of any confidential markings or
identification.
(b) The parties' obligations under this Section XV shall not apply to
Confidential Information which: (i) is or becomes a matter of public knowledge
though no fault of or action by the receiving party; (ii) was rightfully in the
receiving party's possession prior to disclosure by the disclosing party; (iii)
subsequent to disclosure, is rightfully obtained by the receiving party from a
third party who is lawfully in possession of such Confidential Information
without restriction; (iv) is independently developed by the receiving party
without resort to the disclosing party's Confidential Information; or (v) is
required by law or judicial order, provided that prior written notice of such
required disclosure is furnished to the disclosing party as soon as practicable
in order to afford the disclosing party an opportunity to seek a protective
order and that if such order cannot be obtained disclosure may be made without
liability. Whenever requested by a disclosing party, a receiving party shall
immediately return to the disclosing party all manifestations of the
Confidential Information or, at the disclosing party's option, shall destroy all
such Confidential Information as the disclosing party may designate. The
receiving party's obligation of confidentiality shall survive this Agreement for
a period of five (5) years from the date of its termination, and thereafter
shall terminate and be of no further force or effect.
XVI. Additional Provisions.
---------------------
(a) Licensee acknowledges that each music offering included in the LMN
Programming category or categories was individually licensed and separately
priced, and that Liquid Audio offered each music offering without
discrimination and without conditioning the licensing of any one music offering
upon the licensing of any other music offering.
(b) Neither party shall be liable to the other for any delay in delivery or
inability to distribute the LMN Programming due to acts of God, failure of
carriers, labor disputes, failure or delay in software encoding, war, public
disaster or any other cause beyond the control of the parties and such
performance shall be excused to the extent of such force majeure event.
(c) Licensee shall pay without imitation any tax, levy or charge whatsoever
by any statute, law, rule or regulation now or hereafter in effect, related to
the license fees payable under this Agreement, it being the intent hereof that
the license fees herein shall be a net amount, free and clear any such taxes,
levy or charges whatsoever, except for any taxes on Liquid Audio's net income.
(d) Neither the license granted to Licensee hereunder nor this Agreement may
be assigned by Licensee without the prior written consent of Liquid Audio, nor
shall Licensee sublicense or relicense any of the LMN Programming licensed
hereunder, or enter into any third-party linking arrangements with respect
thereto without Liquid Audio's prior written consent. Subject to the foregoing,
this Agreement shall be binding upon and inure to the benefit of the parties and
their successors and assigns.
(e) The headings of paragraphs hereof are inserted only for the purpose of
convenient reference; such headings shall not be deemed to govern, limit,
modify, or in any manner affect the scope, meaning or intent of the provisions
of this Agreement or any part or portion thereof; nor shall they otherwise be
given any legal effect.
(f) Nothing herein contained shall constitute a franchise relationship, or
partnership between ,or joint venture by, Licensee and Liquid Audio, or
constitute Licensee or Liquid Audio the agent of the other.
(g) All notices hereunder will be hand delivered or sent by certified or
registered mail to the parties at the addresses set forth above, or to such
other addresses as may be designated by the parties in writing. A mandatory
copy of all notices delivered or sent to Liquid Audio shall be sent to Wilson
Sonsini Goodrich & Rosati, 650 Page Mill Road, Palo Alto, California 94304-1050,
Attention: Hank Barry, Esq.
<PAGE>
(h) This Agreement shall be construed in accordance with the applicable laws
of the State of California with respect to agreements executed and to be fully
performed in that state.
(i) This Agreement represents the entire understanding of the parties and
shall not be amended or modified except in writing signed by both parties
hereto; nor may any provision hereof be waived unless in writing signed by the
party to be charged with such waiver.
(j) If there is a conflict between any provision(s) of this Agreement and
any statute, law or regulation, the statute, law or regulation, shall prevail,
provided, however, that in such event the provision(s) of this Agreement so
affected shall be curtailed and limited only to the minimum extent necessary to
permit compliance with the minimum requirement of such statute, law or
regulation, and no other provisions of this Agreement shall be affected thereby
and all such other provisions shall continue in full force and effect.
(k) Licensee agrees that any litigation, action or proceeding arising out of
or relating to this Agreement shall be instituted in any state or federal court
sitting in the Northern District of California, and Licensee waives any
objection to such venue, irrevocably submits to such jurisdiction and waives any
claim or defense of inconvenient forum.
(l) In no event shall Liquid Audio be liable for consequential, incidental,
special, reliance or indirect damages, however caused, on any theory of
liability, and whether or not Liquid Audio has been advised of the possibility
of such damages.
<PAGE>
SCHEDULE "B"
------------
LMN Programming Syndication Categories License Fees
- -------------------------------------- ------------
All Categories
Pop/R&B
Country
Rock
Jazz
Classical
<PAGE>
Exhibit 10.47
LIQUID AUDIO, INC.
1996 EQUITY INCENTIVE PLAN
STOCK OPRION AGREEMENT
This Stock Option Agreement ("Agreement") is made and entered into as of
the date of grant set forth below (the "Date of Grant") by and between Liquid
Audio, Inc., a California corporation (the "Company"), and the participant
named below ("Participant"). Capitalized terms not defined herein shall have
the meaning ascribed to them in the Company's 1996 Equity Incentive Plan, as
amended through November 10, 1997 (the "Plan").
Participant: Gary Iwatani
-------------------------------------------------
Social Security Number:
-------------------------------------------------
Address: 42625 Fern Circle
-------------------------------------------------
Fremont, CA 94538
-------------------------------------------------
Total Option Shares: 100,000
-------------------------------------------------
Exercise Price Per Share: $0.29
-------------------------------------------------
Date of Grant: November 10, 1997
-------------------------------------------------
First Vesting Date: July 21, 1998
-------------------------------------------------
Expiration Date: November 10, 2007
-------------------------------------------------
(unless earlier terminated under Section 3 below)
Type of Stock Option
(Check one): [X] Incentive Stock Option
[_] Nonqualified Stock Option
1. Grant of Option. The Company hereby grants to Participant an
---------------
option (this "Option") to purchase the total number of shares of Common Stock
of the Company set forth above as Total Option Shares (the "Shares") at the
Exercise Price Per Share set forth above (the "Exercise Price"), subject to
all of the terms and conditions of this Agreement and the Plan. If designated
as an Incentive Stock Option above, the Option is intended to qualify as an
"incentive stock option" ("ISO") within the meaning of Section 442 of the
Internal Revenue Code of 1986, as amended (the "Code").
2. Exercise Period.
---------------
2.1 Exercise Period of Option.
-------------------------
(a) This Option is immediately exercisable although the
Shares issued upon exercise of the Option will be subject to the restrictions
on transfer and Repurchase Options set forth in Sections 8, 9 and 10 below.
Provided Participant continues to provide services to the Company or to any
Parent or Subsidiary of the Company, the Shares
<PAGE>
issuable upon exercise of this Option will become vested with respect to
twenty-five percent (25%) of the Shares on July 21, 1998 (the "First Vesting
Date") and thereafter at the end of each full succeeding month after the First
Vesting Date an additional two and eighty-three thousandths percent (2.083%)
of the Shares will become vested until the Shares are vested with respect to
100% of the Shares, provided that if application of the vesting percentage
causes a fractional share, such share shall be rounded down to the nearest
whole share. Notwithstanding any provision in the Plan or this Agreement to
the contrary, Options for Unvested Shares (as defined in Section 2.2 of this
Agreement) will not be exercisable on or after Participant's Termination Date.
(b) Notwithstanding the first two sentences of the preceding
subsection (a), upon the closing of (i) a merger of consolidation in which the
Company is not the surviving corporation (other than a merger or consolidation
with a wholly-owned subsidiary, a reincorporation of the Company in a
different jurisdiction, or other transactions in which there is no substantial
change in the shareholders of the Company or their relative stock holdings),
(ii) a merger in which the Company is the surviving corporation but after
which the shareholders of the Company immediately prior to such merger (other
than any shareholder which merges with the Company in such merger, or which
owns or controls another corporation which merges with the Company in such
merger) cease to own their shares or other equity interests in the Company,
(iii) the sale of substantially all of the assets of the Company, or (iv) the
sale of more than fifty percent (50%) of the Company's voting power from one
or more of the Company's shareholders to new or existing shareholders who are
not affiliated with the transferring shareholder(s) (each an "Acquisition"),
the lesser of (A) the remaining Unvested Shares or (B) an additional number of
Unvested Shares equal to 25% of the Shares, shall immediately become Vested
Shares hereunder. If the Company's securities are not readily tradeable on an
established securities market at the closing of such Acquisition, the Company
shall use reasonable efforts to obtain any required shareholder approval for
such accelerated vesting upon the closing of such Acquisition.
(c) In the event that the accelerated vesting provided for
in the preceding subsection (b) to Participant (i) constitutes "parachute
payments" within the meaning of Section 280G of the Internal Revenue Code of
1986, as amended (the "Code") and (ii) but for this subsection, would be
subject to the excise tax imposed by Section 4999 of the Code, the
Participant's accelerated vesting under the preceding subsection (b) shall be
payable either:
(A) in full, or
(B) as to such lesser amount which would result in no
portion of such accelerated vesting being subject to excise tax under Section
4999 of the Code,
whichever of the foregoing amounts, taking into account the applicable federal,
state and local income taxes and the excise tax imposed by Section 4999, results
in the receipt by Participant on an after-tax basis, of the greatest amount of
accelerated vesting under the preceding subsection (b), notwithstanding that all
or some portion of such accelerated vesting may be taxable under Section 4999 of
the Code. Unless the Company and Participant otherwise agree in writing, any
determination required under this subsection shall be made in writing by
independent public accountants agreed to by the Company and Participant (the
"Accountants"), whose determination shall be conclusive and binding upon
Participant and the Company for all purposes. For purposes of making the
calculations required by this subsection, the Accountants may make reasonable
assumptions and approximations concerning applicable taxes and may rely on
reasonable, good faith interpretations concerning the application of Sections
280G and 4999 of the Code. The Company and Participant shall furnish to the
Accountants such information and documents as the Accountants may reasonably
request in order to make a determination under this subsection. The Company
shall bear all costs the Accountants may reasonably incur in connection with any
calculations contemplated by this subsection.
2.2 Vesting of Options. Shares that are vested pursuant to the
------------------
schedule set forth in Section 2.1 are "Vested Shares." Shares that are not
vested pursuant to the schedule set forth in Section 2.1 are "Unvested
Shares." Unvested Shares may not be sold or otherwise transferred by
Participant without the Company's prior written consent.
-2-
<PAGE>
2.3 Expiration. The Option shall expire on the Expiration Date
----------
set forth above or earlier as provided in Section 3 below.
3. Termination.
-----------
3.1 Termination for Any Reason Except Death, Disability or Cause.
------------------------------------------------------------
If Participant is Terminated for any reason, except death, Disability or for
Cause, the Option, to the extent (and only to the extent) that it would have
been exercisable by Participant on the Termination Date, may be exercised by
Participant no later than three (3) months after the Termination Date, but in
any event no later than the Expiration Date.
3.2 Termination Because of Death or Disability. If Participant is
------------------------------------------
Terminated because of death or Disability of Participant (or Participant dies
within three (3) months of Termination other than because of Participant's
Disability or for Cause), the Option, to the extent that it is exercisable by
Participant on the Termination Date, may be exercised by Participant (or
Participant's legal representative) no later than twelve (12) months after the
Termination Date, but in any event no later than the Expiration Date. Any
exercise beyond (a) three (3) months after the Termination Date when the
Termination is for any reason other than the Participant's death or
disability, within the meaning of Section 22(e)(3) of the Code; or (b) twelve
(12) months after the Termination Date when the termination is for
Participant's disability, within the meaning of Section 22(e)(3) of the Code,
is deemed to be an NQSO.
3.3 Termination for Cause. If Participant is Terminated for
---------------------
Cause, then the Option will expire on Participant's Termination Date, or at
such later time and on such conditions as are determined by the Committee.
3.4 No Obligation to Employ. Nothing in the Plan or this
-----------------------
Agreement shall confer on Participant any right to continue in the employ of,
or other relationship with, the Company or any Parent or Subsidiary of the
Company, or limit in any way the right of the Company or any Parent or
Subsidiary of the Company to terminate Participant's employment or other
relationship at any time, with or without Cause.
4. Manner of Exercise.
------------------
4.1 Stock Option Exercise Agreement. To exercise this Option,
-------------------------------
Participant (or in the case of exercise after Participant's death or incapacity,
Participant's executor, administrator, heir or legatee, as the case may be) must
deliver to the Company an executed stock option exercise agreement in the form
attached hereto as ExhibitA, or in such other form as may be approved by the
--------
Company from time to time (the "Exercise Agreement"), which shall set forth,
inter alia, Participant's election to exercise the Option, the number of Shares
- ----- ----
being purchased, any restrictions imposed on the Shares and any representations,
warranties and agreements regarding Participant's investment intent and access
to information as may be required by the Company to comply with applicable
securities laws. If someone other than Participant exercises the Option, then
such person must submit documentation reasonably acceptable to the Company that
such person has the right to exercise the Option.
4.2 Limitations on Exercise. The Option may not be exercised
-----------------------
unless such exercise is in compliance with all applicable federal and state
securities laws, as they are in effect on the date of exercise. The Option may
not be exercised as to fewer than one hundred (100) Shares unless it is
exercised as to all Shares as to which the Option is then exercisable.
4.3 Payment. The Exercise Agreement shall be accompanied by full
-------
payment of the Exercises Price for the shares being purchased in cash (by
check), or where permitted by law:
(a) by cancellation of indebtedness of the Company to the
Participant;
-3-
<PAGE>
(b) by surrender of shares of the Company's Common Stock
that (1) either (A) have been owned by Participant for more than six (6)
months and have been paid for within the meaning of SEC Rule 144 (and, if such
shares were purchased from the Company by use of a promissory note, such note
has been fully paid with respect to such shares); or (B) were obtained by
Participant in the open public market; and (2) are clear of all liens, claims,
encumbrances or security interests;
(c) by waiver of compensation due or accrued to Participant
for services rendered;
(d) providing that a public market for the Company's stock
exists, (1) through a "same day sale" commitment from Participant and a broker-
dealer that is a member of the National Association of Securities Dealers ( an
"NASD Dealer") whereby Participant irrevocably elects to exercise the Option
and to sell a portion of the Shares so purchased to pay for the Exercise Price
and whereby the NASD Dealer irrevocably commits upon receipt of such Shares to
forward the Exercise Price directly to the Company, or (2) through a "margin"
--
commitment from Participant and an NASD Dealer whereby Participant irrevocably
elects to exercise the Option and to pledge the Shares so purchased to the
NASD Dealer in a margin account as security for a loan from the NASD Dealer in
the amount of the Exercise Price, and whereby the NASD Dealer irrevocably
commits upon receipt of such Shares to forward the Exercise Price directly to
the Company; or
(e) by any combination of the foregoing.
4.4 Tax Withholding. Prior to the issuance of the Shares upon
---------------
exercise of the Option, Participant must pay or provide for any applicable
federal, state and local withholding obligations of the Company. Ith the
Committee permits, Participant may provide for payment of withholding taxes
upon exercise of the Option by requesting that the Company retain Shares with
a Fair Market Value equal to the minimum amount of taxes required to be
withheld. In such case, the Company shall issue the net number of Shares to
the Participant by deducting the Shares retained form the Shares issuable upon
exercise.
4.5 Issuance of Shares. Providing that the Exercise Agreement and
------------------
payment are in form and substance satisfactory to counsel for the Company, the
Company shall issue the Shares registered in the name of Participant,
Participant's authorized assignee, or Participant's legal representative, and
shall deliver certificates representing the Shares with the appropriate
legends affixed thereto.
5. Notice of Disqualifying Disposition of ISO Shares. If the Option
-------------------------------------------------
is an ISO, and if Participant sells or otherwise disposes of any of the Shares
acquired pursuant to the ISO on or before the later of (a) the date two (2)
years after the Date of Grant, and (b) the date one (1) year after transfer of
such Shares to Participant upon exercise of the Option, Participant shall
immediately notify the company in writing of such disposition. Participant
agrees that Participant may be subject to income tax withholding by the
Company on the compensation income recognized by Participant from the early
disposition by payment in cash or out of the current wages or other
compensation payable to Participant.
6. Compliance with Laws and Regulations. The Plan and this Agreement
------------------------------------
are intended to comply with Section 25102(o) of the California Corporations
Code. Any provision of the Agreement which is inconsistent with Section
25102(o) shall, without further act or amendment by the Company or the Board,
be reformed to comply with the requirements of Section 25102(o). The exercise
of the Option and the issuance and transfer of Shares shall be subject to
compliance by the Company and Participant with all applicable requirements of
federal and sate securities laws and with all applicable requirements of any
stock exchange on which the Company's Common Stock may be listed at the time
of such issuance or transfer. Participant understands that the Company is
under no obligation to register or qualify the Shares with the SEC, any state
securities commission or any stock exchange to effect such compliance.
-4-
<PAGE>
7. Nontransferability of Option. The Option may not by transferred
-----------------------------
in any manner other than by will or by the laws of descent and distribution
and may be exercised during the lifetime of Participant only by Participant or
in the event of Participant's incapacity, by Participant's legal
representative. The terms of the Option shall be binding upon the executors,
administrators, successors and assigns of Participant.
8. Company's Repurchase Option for Unvested Shares. The Company , or
-----------------------------------------------
its assignee, shall have the option to repurchase Participant's Unvested
Shares (as defined in Section 2.2 of this Agreement) on the terms and
conditions set forth in the Exercise Agreement (the "Repurchase Option") if
Participant is Terminated (as defined in the Plan) for any reason, or no
reason, including without limitation Participant's death, Disability (as
defined in the Plan), voluntary resignation or termination by the Company with
or without Cause. Notwithstanding the foregoing, the Company shall retain the
Repurchase Option for Unvested Shares only as to that number of Unvested
Shares (whether or not exercised) that exceeds the number of shares which
remain exercisable.
9. Company's Right of First Refusal. Unvested Shares may not be sold
--------------------------------
or otherwise transferred by Participant without the Company's prior written
consent. Before any Vested Shares held by Participant or any transferee of such
Vested Shares may be sold or otherwise transferred (including without limitation
a transfer by gift or operation of law), the Company and/or its assignee(s)
shall have an assignable right of first refusal to purchase the Vested Shares to
be sold or transferred on the terms and conditions set forth in the Exercise
Agreement (the "Right of First Refusal"). The Company's Right of First Refusal
will terminate when the Company's securities become publicly traded.
10. Tax Consequences. Set forth below is a brief summary as of the
----------------
Effective Date of the Plan (as amended) of some of the federal and California
tax consequences of exercise of the Option and disposition of the Shares. THIS
SUMMARY IS NECESSARILY INCOMPLETE, AND THE TAX LAWS AND REGULATIONS ARE
SUBJECT TO CHANGE. PARTICIPANT SHOULD CONSULT A TAX ADVISER BEFORE EXERCISING
THE OPTION OR DISPOSING OF THE SHARES.
10.1 Exercise of ISO. If the Option qualifies as an ISO, there
---------------
will be no regular federal or California income tax liability upon the
exercise of the Option, although the excess, if any, of the Fair Market Value
of the Shares on the date of exercise over the Exercise Price will be treated
as a tax preference item for federal alternative minimum tax purposes and may
subject the Participant to the alternative minimum tax in the year of
exercise.
10.2 Exercise of Nonqualified Stock Option. If the Option does
-------------------------------------
not qualify as an ISO, there may be regular federal and California income tax
liability upon the exercise of the Option. Participant will be treated as
having received compensation income (taxable at ordinary income tax rates)
equal to the excess, if any, of the Fair Market Value of the Shares on the
date of exercise over the Exercise Price. If Participant is a current or
former employee of the Company, the Company may be required to withhold from
Participant's compensation or collect from Participant and pay to the
applicable taxing authorities an amount equal to a percentage of this
compensation income at the time of exercise.
10.3 Disposition of Shares. If the Shares are held for more than
---------------------
one (1) year after the date of the transfer of the Shares pursuant to the
exercise of the Option for Vested Shares (or for more than one (1) year after
the date of transfer of the Shares pursuant to the exercise of an Option for
Unvested Shares for which a Section 83(b) election has been made), and, in the
case of an ISO, are disposed of more than two (2) years after the Date of
Grant, any gain realized on disposition of the Shares will be treated as mid-
term capital gain for U.S. Federal income tax purposes. If the Shares are held
for more than eighteen (18) months after the date of the transfer of the
Shares pursuant to the exercise of the Option for Vested Shares (or for more
than eighteen (18) months after the date of transfer of the Shares pursuant to
the exercise of an Option for Unvested Shares for which a Section 83(b)
election has been made), and, in the case of an ISO, are disposed of more than
two (2) years after the Date of Grant, any gain realized on the disposition of
Shares will be treated as long term capital gain for U.S. Federal income tax
purposes. If Shares purchased under an ISO are disposed of within the
applicable one (1) year or two (2) year period, any gain realized on such
disposition will be treated as compensation income (taxable at ordinary income
rates) to the extent of the excess, if any, of the Fair Market Value of the
Shares on the date of exercise over the
-5-
<PAGE>
Exercise Price. The Company may be required to withhold from Participant's
compensation or collect from Participant and pay to the applicable taxing
authorities an amount equal to a percentage of this compensation income at the
time of exercise.
10.4 Section 83(b) Election for Unvested Shares. With respect to
------------------------------------------
Unvested Shares, which are subject to the Repurchase Option, unless an
election is filed by the Participant with the Internal Revenue Service (and,
if necessary, the proper state taxing authorities), within 30 days of the
--------------
purchase of the Unvested Shares, electing pursuant to Section 83(b) of the
Internal Revenue Code (and similar state tax provisions, if applicable) to be
taxed currently on any difference between the Exercise Price of the Unvested
Shares and their Fair Market Value on the date of purchase, there may be a
recognition of taxable income (including, where applicable, alternative
minimum taxable income) to the Participant, measured by the excess, if any, of
the Fair Market Value of the Unvested Shares at the time they cease to be
Unvested Shares, over the Exercise Price of the Unvested Shares.
11. Privileges of Stock Ownership. Participant shall not have any of
-----------------------------
the rights of a shareholder with respect to any Shares until the Shares are
issued to Participant.
12. Interpretation. Any dispute regarding the interpretation of this
--------------
Agreement shall be submitted by Participant or the Company to the Committee
for review. The resolution of such a dispute by the Committee shall be final
and binding on the Company and Participant.
13. Entire Agreement. The Plan is incorporated herein by reference.
----------------
This Agreement and the Plan constitute the entire agreement of the parties and
supersede all prior undertakings and agreements with respect to the subject
matter hereof.
14. Notices. Any notice required to be given or delivered to the
--------
Company under the terms of this Agreement shall be in writing and addressed to
the Corporate Secretary of the Company at its principal corporate offices. Any
notice required to be given or delivered to Participant shall be in writing
and addressed to Participant at the address indicated above or to such other
address as such party may designate in writing from time to time to the
Company. All notices shall be deemed to have been given or delivered upon:
personal delivery; three (3) days after deposit in the United States mail by
certified or registered mail (return receipt requested); one (1) business day
after deposit with any return receipt express courier (prepaid); or one (1)
business day after transmission by facsimile, rapifax or telecopier.
15. Successors and Assigns. The Company may assign any of its rights
----------------------
under this Agreement, including its rights to repurchase Shares under the
Repurchase Option and the Right of First Refusal. This Agreement shall be
binding upon and inure to the benefit of the successors and assigns of the
Company. Subject to the restrictions on transfer set forth herein, this
Agreement shall be binding upon Participant and Participant's heirs,
executors, administrators, legal representatives, successors and assigns.
16. Governing Law. This Agreement shall be governed by and construed
-------------
in accordance with the laws of the State of California as such laws are
applied to agreements between California residents entered into and to be
performed entirely within California. If any provision of this Agreement is
determined by a court of law to be illegal or unenforceable, then such
provision will be enforced to the maximum extent possible and the other
provisions will remain fully effective and enforceable.
17. Acceptance. Participant hereby acknowledges receipt of a copy of
----------
the Plan and this Agreement. Participant has read and understands the terms and
provisions thereof, and accepts the Option subject to all the terms and
conditions of the Plan and this Agreement. Participant acknowledges that there
may be adverse tax consequences upon exercise of the Option or disposition of
the Shares and that Participant should consult a tax adviser prior to such
exercise or disposition.
-6-
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Agreement to be
executed in triplicate by its duly authorized representative and Participant has
executed this Agreement in triplicate as of the Date of Grant.
LIQUID AUDIO, INC. PARTICIPANT
By: /s/ Robert Flynn /s/ Gary Iwatani
------------------------------ ------------------------------
(Signature)
Robert Flynn Gary Iwatani
- --------------------------------- ------------------------------
(Please print name) (Please print name)
VP Business Development
- ---------------------------------
(Please print title)
[Signature Page to Liquid Audio, Inc. Stock Option Agreement]
-7-
<PAGE>
EXHIBIT 10.48
Virgin Holdings, Inc.
338 North Foothill Road
Beverly Hills, California 90210
June 16, 1999
Liquid Audio, Inc.
810 Winslow Street
Redwood City, CA 94063
Re: Virgin Holdings, Inc./Liquid Audio, Inc.
Ladies and Gentlemen:
This letter sets forth the agreement between Virgin Holdings, Inc.
("Virgin") and Liquid Audio, Inc. ("LQA") as follows:
------ ---
1. Purpose. The purpose of this letter agreement is to facilitate
-------
the future production, sale and distribution of music on the Internet in a
secure digital music format.
2. Grant of Rights. Virgin hereby grants to LQA for the period
---------------
commencing on the date hereof and ending on the third anniversary of the date
hereof (the "Term of the Agreement"), solely in the United States, a non-
---------------------
exclusive right, without the right to sublicense, to create digitally encoded
copies of the Masters (as defined below) solely using either "Liquid Audio,"
------------
"Genuine MP3" or some other format approved by Virgin in its sole discretion,
- ------------
subject to the restrictions set forth herein. "Masters" shall mean those sound
-------
recordings owned by Virgin and/or its affiliates that shall be designated by
Virgin from time to time in its sole discretion during the Term of the
Agreement.
3. Reservation of Rights and Limitations. Virgin reserves all rights
-------------------------------------
not expressly granted herein including, but not limited to, the right to use,
prepare derivative versions of, perform, sell, distribute, broadcast, down load
or transmit in any way now known or later developed, the Masters, whether
embodied in a digital copy created pursuant to this letter agreement or in any
other format now known or later developed. LQA shall not sell, transfer, assign
or encumber in any way the Masters nor any digital copies of the Masters. LQA
shall include all copyright protection and copyright management information
associated with each Master (as specified by Virgin in its sole discretion)
within all digital files embodying the copies of each Master. LQA shall include
on all digital files created pursuant to this letter agreement and any media
carrying such files such copyright, trademark and other notices and credits as
Virgin may from time to time require. Without
<PAGE>
Virgin's prior written consent, LQA may not sublicense, convey or assign the
rights granted herein in any way.
4. Production. LQA shall log each Master upon its delivery to LQA
----------
and create, free of charge, a limited number of finished digital copies promptly
after such delivery. Each digital copy of a Master shall obtain substantially
the same sound quality as the Master itself. Upon the creation of each finished
digital copy of a Master, LQA shall promptly deliver an exact copy of such
digital copy to Virgin on a computer readable medium free of charge; provided,
--------
that if, at the request of Virgin, the digital file is delivered in any format
other than Liquid Audio or Genuine MP3 format, Virgin shall purchase such
digital file from LQA for a price equal to the direct cost incurred by LQA to
create such copy. LQA shall, free of charge, inventory and store all such
digital copies and re-encode all such digital copies as necessary in the event
of technical changes in the Liquid Audio or Genuine MP3 encoding format
specification, such storage conducted in conformance with Section 9 below.
5. Other Agreements. Virgin and LQA agree that in the future they
----------------
may enter into additional agreements, arrangements or understandings with
respect to the rights granted in this letter agreement. Until such time,
however, this letter agreement constitutes the entire agreement between the
parties with respect to the subject matter hereof and supersedes all other prior
agreements and understandings, both written and oral, between the parties,
except for the EMD Agreement described in Section 8 below.
6. Ownership. LQA acknowledges that, as between LQA and Virgin and
---------
its affiliates, all right, title and interest in and to (i) the Masters, (ii)
all digital copies of the Masters created hereunder, (iii) any sound recordings
delivered to LQA pursuant to the EMD Agreement and excerpts thereof, and (iv)
all copyright and equivalent rights embodied therein (the "Owned Property") are,
--------------
shall be and remain the sole and complete property of Virgin and/or its
affiliates. LQA shall not content, or assist others in contesting, Virgin and
its affiliates' rights or interests in the Owned Property or the validity of
such ownership.
7. Common Stock. In consideration of Virgin's entry into this
------------
letter agreement, LQA shall issue and deliver to Virgin 100,000 shares (the
"Shares") of common stock, par value $.001 per share ("Common Stock"),
- ------- ------------
represented by a share certificate or certificates issued by LQA. EMI will not
sell or transfer such stock for one year from the date of issuance. EMI
acknowledges that LQA has filed a preliminary registration statement on Form S-1
with the SEC, and the issuance of the common stock will be subject to all
restrictions and process steps LQA determines to be reasonably necessary to
comply with SEC and underwriter-mandated restrictions, and to successfully
complete its offering.
8. EMD Agreement. LQA acknowledges and agrees that the Hosting and
-------------
Encoding Services Agreement (the "EMD Agreement"), dated November 25, 1998, by
-------------
and between LQA and EMI Music Distribution, a division of Capitol Records, Inc.
("EMD"), shall remain in full force and effect upon the terms and subject to the
---
conditions thereof. LQA hereby acknowledges that EMD shall not
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<PAGE>
exercise its option to provide sound recordings to be copies in their entirety
under the terms of the EMD Agreement. Without limiting the foregoing, in the
event Virgin so requests in writing from time to time, LQA shall include, host
and maintain the digital copies of any Masters listed in any such request and
created pursuant to this letter agreement in the same manner and under the same
terms as the Liquified Content (as that term is defined in the EMD Agreement).
9. Data Security. LQA shall use its best efforts to prevent the
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creation of any unauthorized copies of any Masters, including, but not limited
to, copies created by employees outside the scope of their employment. LQA
agrees that after any finished digital copy is created, provided to Virgin and
inventoried, any digital file residing on any network server, workstation or any
equivalent device shall be deleted and such inventory shall be maintained on
removable media stored in a locked vault with limited access to LQA personnel.
10. Publicity. Except as required by law or regulation, neither of
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the parties shall, and each shall cause their respective affiliates, agents,
representatives and advisors not to, make any public announcement or issue any
press release with respect to the Transactions without the prior written consent
of the other. Any public announcement or press release associated with the
execution of the definitive documents or otherwise required by law or regulation
shall be agreed upon by the parties prior to being issued. On signing of this
agreement, the parties will issue a press release stating that "EMI has selected
Liquid Audio to encode its library in Liquid Audio format as a next step in
EMI's digital distribution strategy."
11. Governing Law. This letter agreement shall be governed by and
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construed in accordance with the laws of the State of New York without regard to
the principles of conflict of laws.
12. Amendments. This letter agreement shall not be amended except
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by written instrument executed by the parties hereto.
13. Expenses. Each party shall bear all of their owns costs and
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expenses in connection with negotiating and executing this letter agreement
including costs and expenses of all legal counsel, brokers, finders, agents,
accountants and other representatives.
14. Third Party Beneficiaries. No third party beneficiary rights
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are granted hereunder.
15. Counterparts. This Agreement may be executed in one or more
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counterparts, each of which shall be deemed an original, and all of which, when
taken together, shall constitute one and the same instrument.
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<PAGE>
Please confirm your agreement with the foregoing by executing this letter
agreement and returning it to Virgin.
Sincerely yours,
VIRGIN HOLDINGS, INC.
By: /s/ Susan Feingold
-----------------------------------
Name: Susan Feingold
Title: Secretary
Agreed as of this 16th day
of June, 1999:
LIQUID AUDIO, INC.
By: /s/ Robert Flynn
------------------------------
Name: Robert Flynn
Title: VP Business Development
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<PAGE>
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 17, 1999
