<PAGE>
As filed with the Securities and Exchange Commission on May 4, 1999
Registration No. 333-
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM S-1
REGISTRATION STATEMENT
Under The Securities Act of 1933
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LIQUID AUDIO, INC.
(Exact name of Registrant as specified in its charter)
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<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)
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Please send copies of all communications to:
HANK V. BARRY, ESQ. LAIRD H. SIMONS, III, ESQ.
ISSAC J. VAUGHN, ESQ. ROBERT A. FREEDMAN, ESQ.
KELLY AMES MOREHEAD, ESQ. SCOTT J. LEICHTNER, ESQ.
Wilson Sonsini Goodrich & Rosati, Fenwick & West LLP
P.C. Two Palo Alto Square
650 Page Mill Road Palo Alto, CA 94306
Palo Alto, CA 94304 (650) 494-0600
(650) 493-9300
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Approximate date of commencement of proposed sale to the public:
As soon as practicable after the effective date of this Registration Statement.
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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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CALCULATION OF REGISTRATION FEE
<TABLE>
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<CAPTION>
Proposed Maximum
Title of Each Class of Securities to be Aggregate Offering Amount of
Registered Price(1) Registration Fee
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<S> <C> <C>
Common stock, $0.001 par value........ $60,000,000 $16,680
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</TABLE>
(1) Estimated solely for the purpose of computing the amount of the
registration fee pursuant to Rule 457(c) under the Securities Act of 1933.
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 May 4, 1999
PROSPECTUS
Shares
[Liquid Audio Logo]
Common Stock
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This is our initial public offering of shares of common stock. We are offering
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 $ to $ per share.
Investing in the shares involves risks. Risk Factors begin on page 6.
<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
additional shares of common stock on the same terms and conditions as set forth
above solely to cover over-allotments, if any.
Up to 5% of the common stock offered in this prospectus may be reserved for
employees, directors and friends of Liquid Audio. See "Underwriting".
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, on behalf of the underwriters, expects to deliver the shares
on or about , 1999.
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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....................................................... 2
Risk Factors............................................................. 6
Use of Proceeds.......................................................... 17
Dividend Policy.......................................................... 17
Capitalization........................................................... 18
Dilution................................................................. 19
Selected Financial Data.................................................. 20
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 21
Business................................................................. 31
Management............................................................... 47
Related Party Transactions............................................... 54
Principal Stockholders................................................... 55
Description of Capital Stock............................................. 57
Shares Available for Future Sale......................................... 60
Underwriting............................................................. 61
Legal Matters............................................................ 64
Experts.................................................................. 64
Available Information.................................................... 64
Index to Financial Statements............................................ F-1
</TABLE>
ABOUT THIS PROSPECTUS
You should only rely 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.
1
<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."
Our Company
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 and retailer website affiliates, we help artists and
record companies promote and sell their recorded music. Consumers can preview
and purchase digital music from our growing catalog of syndicated 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
architecture that is designed to support leading digital music formats,
including mp3 and Dolby AC-3. Numerous recording artists and record companies
have used our platform to promote music releases including BMG North America,
Capitol Records, Columbia House, Dreamworks Records, EMI Classics, Bruce
Hornsby, The Dave Matthews Band, Sarah McLachlan and Rounder Records.
The recorded music industry, which was approximately $38.1 billion worldwide
in 1997, represents one of the largest opportunities for online digital
distribution and commerce. The growing popularity of music on the Internet
combined with recent technology advances have made the Internet a compelling
platform for digital music delivery. Forrester Research estimates that sales of
recorded music through digital transmission will reach 7% of all recorded music
sales in the United States by 2003.
We believe we are the first company to offer a complete end-to-end solution
for the digital delivery of music over the Internet. 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 solution protects against piracy by offering
copyright management and copy protection for songs distributed through
our platform. 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, websites and retailers a range of
products and services for creating, syndicating and selling music digitally
over the Internet.
. Create Music. Our Liquifier Pro software product "encodes" 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.
2
<PAGE>
. Syndicate Music. We help artists reach more consumers and sell more music
by syndicating their music through our growing network of LMN website
affiliates. Our syndicated music catalog is also offered for sale through
online retailers through our Remote Inventory Fulfillment System (RIFFS)
service.
. 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. Our Liquid Music Network now encompasses over
200 website affiliates that will make our syndicated music available for
promotion and sale to end users. When we launch our RIFFS service in the second
half of 1999, our syndicated music will be available through retailer websites.
Many independent record labels have chosen to use our solution for promotion
and sale of their music, including Beggars Banquet, Rounder Records, Rykodisk,
Sub Pop Records and Twin Tone Records. We have increased the number of these
syndicated music recordings from approximately 5,000 at the beginning of 1999
to over 45,000 as of April 30, 1999.
We have established strategic 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; Fraunhofer Group; Intel; Iomega; Muze; RealNetworks; and Texas
Instruments. 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.
We incorporated in California in January 1996 and reincorporated in Delaware
in April 1999. References in this prospectus to "Liquid Audio", "we", "our",
and "us" refer to Liquid Audio, Inc., a Delaware corporation, and its
predecessor, Liquid Audio, Inc., a California corporation. 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.
3
<PAGE>
The Offering
<TABLE>
<C> <S>
Common stock offered by Liquid Audio.. shares
Common stock outstanding after the
offering............................. shares
Use of proceeds....................... We estimate that we will receive net
proceeds from this offering of
approximately $ or $ 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 shares of common stock to be outstanding after
the offering, we may issue additional shares of common stock under the
following plans and arrangements:
. 2,769,550 shares issuable upon the exercise of options under our 1996 Equity
Incentive Plan consisting of:
. 1,049,496 shares underlying options outstanding at a weighted average
exercise price of $0.89 per share, of which 1,039,496 were exercisable as
of March 31, 1999;
. 1,720,054 shares underlying options available for future grants after this
offering;
. 68,710 shares issuable upon the exercise of warrants outstanding at a
weighted average exercise price of $5.21 per share; and
. 500,000 shares available for issuance under our 1999 Employee Stock Purchase
Plan.
4
<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."
<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
---------------- --------- ---------- --------- ----------
(unaudited)
(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 shares of common
stock in this offering at an assumed initial public offering price of $
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
-------------------------------
Actual Pro Forma As Adjusted
-------- --------- -----------
(in thousands, unaudited)
<S> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents..................... $ 15,497 $15,497
Working capital............................... 11,708 11,708
Total assets.................................. 17,729 17,729
Long-term debt................................ 1,519 1,519
Mandatorily redeemable convertible preferred
stock and warrants........................... 29,801 --
Total stockholders' equity (deficit).......... (17,851) 11,950
</TABLE>
5
<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 may 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.
The Risks Associated With Starting a New Business in a New Market May
Negatively Affect Our Results
We incorporated in January 1996. We did not start generating revenues until
the second quarter of 1997. At the end of 1998, we began to place greater
emphasis on 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. In addition, we compete in a relatively new
market of digital delivery of recorded music over the Internet. Because we
operate in a new market, we must educate and convince potential customers and
partners of the benefits of the digital delivery of music. We may fail in these
efforts. Any future growth in our business will depend upon our ability to meet
the challenges described in the risk factors below.
Our Quarterly Operating Results Are Volatile and May Cause Our Stock Price to
Fluctuate
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. Our revenue and results of operations depend on a variety of factors.
These factors include the following:
. dependence on market adoption and growth of sales of digitally downloaded
recorded music over the Internet;
.competition for consumers from traditional retailers as well as providers
of online music services;
.the introduction of new products and services by us and our competitors;
.our ability to attract significant numbers of music recordings to be
syndicated in our format;
.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;
.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;
.variability and length of the sales cycle associated with our product and
service offerings;
.the price and mix of products and services we offer;
.changes in pricing policies by our competitors; and
.general economic and market conditions.
6
<PAGE>
We Have a History of Losses and Anticipate Continued Losses
Our accumulated deficit as of March 31, 1999 was approximately $20.2 million.
We had a net loss of approximately $8.5 million in 1998 and $4.1 million in the
first quarter of 1999. We have not achieved profitability and, 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 do
achieve profitability, we may not be able to sustain or increase profitability
on a quarterly or annual basis in the future. If our revenue grows 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 may be harmed.
If We Cannot Offer Compelling Syndicated Music Content, Our Business May Be
Harmed
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 may 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
the 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, they will not allow the digital distribution
of their recorded music. If we cannot offer a sufficient amount and variety of
digital recorded music available for syndication, our business may be harmed.
Because record companies and artists provide their recorded music content to
us for syndication at little or no charge, we depend on our good relations with
the record companies and artists. Our ability to maintain our existing
relationships with content providers and to build new relationships with
additional content providers is critical to the success of our business. We
have no long-term contracts with any of the record companies or artists, and
they may not continue to make their recorded music content available to us on
reasonable terms or at all. If record companies or artists begin to charge
significant fees for their recorded music or discontinue their relationships
with us, we may not have sufficient recorded music content to attract websites
and consumers, and our business would be harmed.
7
<PAGE>
If Consumers Do Not Accept Our Platform, Our Business May Be Harmed
Our success will depend on growth in the consumer acceptance of our platform
as a method for digital delivery of recorded music over the Internet. Our
platform is a new means of delivering digital recorded music, and its growth
and market acceptance are highly uncertain and subject to a number of risks.
Factors that will influence market acceptance of our system include the
following:
. 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 traditional
recordings available through physical delivery;
. 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 in Which We Operate Is Highly Competitive
Competition among companies in the business of delivering digital music over
the Internet is intense. Increased competition could result in price
reductions, reduced margins or loss of market share, any of which could harm
our business. We compete against a number of technology companies who are
offering or plan to offer products, services or technologies for the digital
delivery of 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.
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.
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 could be harmed. See "Business--Competition."
If Standards for the Secure Digital Delivery of Recorded Music Are Not Adopted,
Our Business May Be Harmed
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"
8
<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 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 may 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 may 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, and Our Business May Be Harmed
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 may not use our platform to digitally
deliver their recorded music, and our business may be harmed.
Our Business May 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 may be harmed.
Our Business May Be Harmed If Relationships Are Terminated or Not Extended
We derive a portion of our revenues from business development fees generated
by 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 revenue
in a given period, does not generate a similar amount of revenue, or any, in
subsequent periods, then our business could be harmed. In addition, an existing
customer may not continue to do business with us in the future. As a
consequence, our revenues are not recurring from period-to-period, which may
result in unpredictability of our revenues in any period.
We Depend on a Limited Number of Customers for Our Revenues
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 each quarter of 1998 represented
approximately 81%, 96%, 89%, and 88%, respectively, of our total net revenues.
The loss of any significant customer or any significant reduction of total net
revenues generated by a significant customer 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 may harm our business.
Insufficient System Capacity Would Harm Our Business
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 may not be able to do so
9
<PAGE>
successfully. In addition, we may 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.
Our Business Will Be Harmed if We Fail 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:
.effectively use leading technologies;
.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.
We Depend on the Development and Adoption of Consumer Devices That Will Play
Downloaded Digital 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 may be harmed. In addition,
digital music can be transferred to a compact disc that 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 the CD-R or our products and services are incompatible
with CD-Rs, our business may be harmed.
We Depend on 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 our delivery services
business, as well as our software licensing business. If we fail to develop
these or other business models successfully, this may harm our business.
10
<PAGE>
We May 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 may harm our business.
Our Products and Services May 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 with 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 may harm our business.
We May 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 on other grounds.
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.
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 occurred. 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 May Hinder E-
Commerce
We do not collect sales and other taxes in respect of our products and
services sold over the Internet. One or more states, however, 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. Such 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
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 may be harmed.
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
moratium would allow various states to impose taxes on e-commerce, which may
harm our business.
Many of Our Customers Have Had Limited Operating Histories, Are Unprofitable
and May Have Difficulty Meeting Their Payment Obligations to Us
Many of our significant customers to date have had limited operating
histories and have not achieved profitability. 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, particularly in
11
<PAGE>
the evolving market for the digital delivery of music. Some of our customers
have failed to pay for our products and services on a timely basis or at all.
If one or more of our customers is unable to pay for our services, or pays more
slowly than we anticipate, our business may be harmed.
System Failures or Delays May 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 require, 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 may 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 may not be sufficient to cover any serious or prolonged emergencies, and our
business may be harmed.
Demand For Our Products and Services May 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:
.actual or perceived lack of security of information, such as credit card
numbers;
.lack of access and ease of use;
.congestion of traffic on the Internet;
.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 will be harmed.
We May Be Unable to License or Acquire Technology
We rely on certain technologies that we license or acquire from third
parties, including software that is integrated with our internally developed
software and used in our products, to perform key functions and to enhance the
value of our platform. These third-party licenses or acquisitions may not
continue to be available to us on commercially reasonable terms or at all. Any
inability to acquire such licenses or software on commercially reasonable terms
may 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 effectively work together. Our executive officers
12
<PAGE>
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. 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 May 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 such
trademarks, our use of these trademarks would be restricted unless we enter
into arrangements with the third-party owners, which may not be possible on
commercially reasonable terms or at all.
We generally enter into confidentiality or license agreements with our
employees, consultants and corporate partners, and generally control access to
and distribution of our technologies, documentation and other proprietary
information. Despite our efforts to protect our proprietary rights from
unauthorized use or disclosure, parties may attempt to disclose, obtain or use
our solutions or technologies. The steps we have taken may not prevent
misappropriation of our solutions or technologies, particularly in foreign
countries where laws or law enforcement practices may not protect our
proprietary rights as fully as in the United States. See "Business--
Intellectual Property."
We have licensed, and we may license in the future, certain proprietary
rights to third parties. While we attempt to ensure that the quality of our
brand is maintained by our business partners, they may take actions that could
impair the value of our proprietary rights or our reputation. In addition,
these business partners may not take the same steps we have taken to prevent
misappropriation of our solutions or technologies.
We May Face Intellectual Property Infringement Claims That May Be Costly To
Resolve
Although we do not believe we infringe the proprietary rights of any third
parties, we cannot assure you that third parties will not assert such claims
against us in the future or that such 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 relating to proprietary technology
or information against us, we may seek licenses to this intellectual property.
We may not be able to obtain licenses on commercially reasonable terms, or at
all. The failure to obtain the necessary licenses or other rights may harm our
business.
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<PAGE>
Government Regulation of the Internet May 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
may 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:
.unexpected changes in regulatory requirements;
.export restrictions;
.export controls relating to encryption technology;
.tariffs and other trade barriers;
.difficulties in staffing and managing international operations;
.longer payment cycles;
.problems in collecting accounts receivable;
.political and economic instability;
.differences in music rights reporting structures;
. seasonal reductions in business activity; and
. potentially adverse tax consequences that could adversely impact the
success of our international operations.
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 May Need Additional Capital in the Future and Additional Financing May 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 12 months.
Our resources may not be sufficient for our 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;
14
<PAGE>
.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 may 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 Factor"
section. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
Potential Year 2000 Risks May 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
revenue does not grow or grows more slowly than we anticipate, or if operating
or capital expenditures exceed our expectations and cannot be adjusted
accordingly, or if some other event adversely affects us, the market price of
our common stock could fall. 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 may 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 May 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 plan to file an application for the quotation of our common stock on The
Nasdaq National Market. 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 May 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
15
<PAGE>
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 % of our
outstanding common stock following the completion of this offering. As a
result, these stockholders may 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 May 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 determine our use of these net proceeds of the offering, 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 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 April 30, 1999, upon
completion of this offering we will have outstanding shares of common
stock, assuming no exercise of the underwriters' over-allotment option. Of
these shares, only the shares of common stock sold in this offering will be
freely tradeable, without restriction, in the public market. After the lockup
agreements pertaining to this offering expire, 180 days from the date of this
prospectus, an additional shares will be eligible for sale in the
public market.
In addition, 1,143,206 shares subject to outstanding options and warrants and
2,203,197 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 $ . 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."
16
<PAGE>
USE OF PROCEEDS
We estimate the net proceeds from the offering to be approximately $ or
$ if the underwriters exercise their over-allotment option in full,
assuming an initial public offering price of $ 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 shares of common stock offered in
the offering at an assumed initial public offering price of $ 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 $
======== ======== ====
Long-term debt, less current portion........... $ 1,519 $ 1,519 $
Mandatorily redeemable convertible preferred
stock, $0.001 par value; 10,905,000 shares
authorized, 9,744,199 shares issued and
outstanding, actual; none authorized or issued
and outstanding, pro forma and pro forma as
adjusted...................................... 29,801 --
Stockholders' equity:
Preferred stock, $0.001 par value; 5,000,000
shares authorized; none issued and
outstanding, pro forma and 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 outstanding, pro
forma as adjusted............................ 4 14
Additional paid-in capital.................... 4,450 34,241
Unearned compensation......................... (2,143) (2,143)
Accumulated deficit........................... (20,162) (20,162)
-------- -------- ----
Total stockholders' equity (deficit)......... (17,851) 11,950
-------- -------- ----
Total capitalization........................ $ 13,469 $ 13,469 $
======== ======== ====
</TABLE>
We expect there to be 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:
. 2,769,550 shares issuable upon the exercise of options under our 1996
Equity Incentive Plan consisting of:
. 1,049,496 shares underlying options outstanding at a weighted average
exercise price of $0.89 per share, of which 1,039,496 are exercisable
as of March 31, 1999;
. 1,720,054 shares underlying options available for future grants after
this offering;
. 68,710 shares issuable upon the exercise of warrants outstanding at a
weighted average exercise price of $5.21 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," "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 pro forma 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 shares offered in the offering at an assumed
initial public offering price of $ per share after deducting the estimated
underwriting discount and offering expenses, would have been approximately
$ per share. This represents an immediate increase of $ per share to
existing stockholders and an immediate dilution of $ per share to new
investors. The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share................... $
Pro forma net tangible book value per share as of March 31,
1999............................................................ $0.88
Increase per share attributable to new investors.................
-----
Pro forma net tangible book value per share after the offering....
------
Dilution per share to new investors............................... $
======
</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 $ 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 % $29,862,000 % $2.19
New investors.............
---------- --- ----------- --- -----
Total.................... 100% $ 100% $
========== === =========== === =====
</TABLE>
We expect there to be 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:
. 2,769,550 shares issuable upon the exercise of options under our 1996
Equity Incentive Plan consisting of:
. 1,049,496 shares underlying options outstanding at a weighted average
exercise price of $0.89 per share, of which 1,039,496 are exercisable
as of March 31, 1999;
.1,720,054 shares underlying options available for future grants after
this offering;
. 68,710 shares issuable upon the exercise of warrants outstanding at a
weighted average exercise price of $5.21 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 each of the years in
the two-year period ended December 31, 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 each of 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 December Three Months Ended
Through 31, March 31,
December 31, ----------------------- -----------------------
1996 1997 1998 1998 1999
------------ ---------- ----------- ---------- -----------
(unaudited)
(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
------ ------ ------- -----------
(unaudited)
(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
Long-term obligations.................... 103 218 969 1,519
Total assets............................. 1,086 3,335 20,026 17,729
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>
20
<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
musicians, record companies and retailers to create, syndicate and sell digital
recorded music over the Internet. Our products and services are based on an
open architecture that supports 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 second 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 websites.
In the beginning of 1999, we began to place greater emphasis on developing
and marketing our digital music delivery services. Since that time, we have
invested significant resources toward increasing our distribution reach through
expanding the LMN, building the 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 fees.
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 estimated 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. Revenue from our music delivery services will include transaction
fees from sales of digital recorded music through our LMN and RIFFS 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, non-refundable fees are based upon
agreements where the strategic partners are contractually obligated to pay us a
fixed fee for the opportunity to develop business in various countries using
our proprietary technology. We recognize the fees as they are earned; the
specific timing of which 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 between achievement of technological feasibility, which
we define as the establishment of a working model until the
21
<PAGE>
general availability of this software to customers, have been short and
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 such 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 from $224,000 for the three months ended March
31, 1998 to $531,000 for the three months ended March 31, 1999.
22
<PAGE>
License. License revenues increased 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 as described above.
Services. Services revenues increased 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 in
March 31, 1998 to $183,000 in 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 which 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. Cost of
license revenues remained relatively constant because we decided not to renew
certain third-party software licenses, 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 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, ISP connectivity charges for supporting our service 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 from
$942,000 for the three months ended March 31, 1998 to $2.3 million for the
three months ended March 31, 1999. The increase was primarily due to increases
in sales and marketing personnel, the write-off of our investment in Liquid
Audio Japan, due to substantial doubt regarding recoverability of our
investment and significant losses which 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
23
<PAGE>
revenues in future periods due to expanded efforts to market and promote our
products and services both domestically and internationally.
Research and Development. Research and development expenses consist primarily
of compensation for our research and development personnel and payments to
outside contractors and, to a lesser extent, depreciation on equipment used for
research and development and an allocation of our occupancy costs and other
overhead. Research and development expenses increased from $569,000 for the
three months ended March 31, 1998 to $1.2 million for the three months ended
March 31, 1999. The increase was primarily due to increased personnel and
outside contractors to enhance our existing software products, development and
enhancement of online services and research and development of 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 from $278,000 for the
three months ended March 31, 1998 to $502,000 for the three months ended March
31, 1999. The increase was primarily due to increases in the number of
personnel and outside contractors 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. Compensation expense is based on the
difference between the fair market value of our stock and the exercise price 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
$4.3 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
compensation expense for the three months ended March 31, 1998 and 1999. We
expect quarterly amortization declining from $375,000 to $265,000 per quarter
during 1999, between $205,000 and $135,000 during 2000 and annual amortization
of $340,000 during 2001 and $100,000 during 2002 related to those options. The
future compensation charges are subject to reduction for any employee who
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, when held. 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. The 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, bridge
loans and capital lease obligations. Interest expense increased from $20,000
for the three months ended March 31, 1998 to $51,000 for the three months ended
March 31, 1999. The increase was primarily due to higher average financing
obligation balances resulting from additional capital leases and borrowings
under the equipment line of credit during 1998.
24
<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 from $256,000 for the year ended December 31, 1997
to $2.8 million for the year ended December 31, 1998.
License. License revenues increased from $246,000 in 1997 to $1.2 million in
1998. This increase was due to higher sales of software products, 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 revenue 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 in 1998. 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 from $393,000 for the year ended
December 31, 1997 to $769,000 for the year ended December 31, 1998.
License. Cost of license revenues was $302,000 for 1997 and $312,000 for
1998. Cost of license revenues remained relatively constant because we decided
not to renew certain third-party software licenses, 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.
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 service 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 year to year 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 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 year to year were primarily due to
increased personnel and outside contractors to enhance our existing software
products, development and enhancement of online services and research and
development of new products and services.
25
<PAGE>
General and Administrative. General and administrative expenses increased
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 year to year were primarily due to
increases in the number of personnel and outside contractors, professional
services 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 compensation expense for the period from January 30, 1996 (inception)
through December 31, 1996 and the years ended December 31, 1997 and 1998,
respectively.
Interest Income. Interest income increased 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 year to year 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 in 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 bridge loans 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.
26
<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, include 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
products and sales expansion to 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 distribution services business. The
increases in services revenues through the two quarters ended September 30,
1998 included consulting fees from non-recurring projects. The decrease in
services revenues from September 30, 1998 to March 31, 1999 were due to
decreases in software maintenance revenues. Business development revenues
fluctuated 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 technology
vendors. 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 service business.
27
<PAGE>
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 Quarterly Operating Results Are Volatile and May
Cause Our Stock Price to Fluctuate" and "The Risks Associated With Starting a
New Business in a New Market May Negatively Affect Our Results."
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 bridge 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.
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 computer software and hardware, the purchase of short-term
investments in 1998 and the sale of short-term investments in 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 quarter ended March 31, 1999.
We have a bank revolving line of credit for up to $1.0 million based on
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
all of our assets. We have a bank equipment loan facility for $3.0 million 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 borrowed amounts
28
<PAGE>
totaling $1.3 million through March 31, 1999. We also have lease financing
agreements that provide for the lease of computers and office equipment of up
to $1.0 million. As of March 31, 1999, we had borrowed $737,000 under the lease
financing agreements. Our other significant commitments consist of obligations
under operating leases.
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, will be sufficient to meet our anticipated cash
needs for working capital and capital expenditures for at least the next 12
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 fixed income
securities excluding those classified as cash and cash equivalents 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 bears interest at 3.1% at March 31,
1999. 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 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 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
97-2 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.
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. We do not expect that the adoption
of SFAS No. 133 will have a material effect on our 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
in order 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. We believe that the total cost of our year 2000 program will not
be material.
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BUSINESS
The Company
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 and retailer website affiliates, we help artists and
record companies promote and sell their recorded music. Consumers can preview
and purchase digital music from our growing catalog of syndicated 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
architecture that is designed to support leading digital music formats,
including mp3 and Dolby AC-3. Numerous recording artists and record companies
have used our platform to promote music releases including BMG North America,
Capitol Records, Columbia House, Dreamworks Records, EMI Classics, Bruce
Hornsby, The Dave Matthews Band, Sarah McLachlan and Rounder Records.
Industry Background
The Recorded Music Industry
The recorded music industry represents one of the largest opportunities for
online digital delivery and commerce. According to the International Federation
of the Phonographic Industry (IFPI), worldwide recorded music sales represented
a $38.1 billion market in 1997. 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 consumer. 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 their 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, 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 Beggar's Banquet, Platinum Entertainment,
Rounder Records and Rykodisc. These independent labels account for a large
portion of the number of 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;
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<PAGE>
. they have limited capital resources available for recording, production
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 the consumer. 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 and
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 more than 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 recorded music.
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 by 2003. These online retailers generally do not take
physical custody of recordings, but refer their orders to fulfillment houses
that are responsible for shipping the compact discs to customers. The
popularity of online buying is 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, to date most of this digital music has been song samples
used by online retailers to allow shoppers to preview music. More recently,
many websites have begun offering "full length", three to four minute, single
music recordings for transmission and storage in compressed formats. Several
compression standards are currently used, including AAC, AC3 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 to hear recorded music in real time on
their computers and 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 companies, have expressed concerns about unauthorized copying or
"pirating" of copyrighted sound recordings. For example, 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 in limited efforts to sell
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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 besides 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.
. Copyright Protection and Rights 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, 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 architecture that supports all
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]
<TABLE>
<CAPTION>
<S> <C> <C>
CREATE MUSIC SYNDICATE MUSIC SELL MUSIC
Music is encoded using Music is syndicated Consumers preview,
our Liquifier Pro software over the Internet through purchase and download
and is published to Liquid music delivery services, music to their computers
Servers through multiple the Liquid Music Network using our Liquid Player
data centers. and, in the future, to software. Music can be
online retailers through transferred to a
RIFFS. 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.
</TABLE>
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 services, the Liquid Music Network and Remote Inventory
Fulfillment System (RIFFS), make 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 to 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 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 intend 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 the greatest number 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 over 200 websites
today. We will be launching our RIFFS service to target online retail websites
in the second half of 1999. We will continue to broaden this effort to music-
related and other websites who use our technology for digital distribution to
enhance our ability to attract more music content. We also have agreements with
strategic partners to bundle our Liquid Player with their products, including
Adaptec Inc., Intel Corporation and Iomega Corporation.
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 over 500,000 individual songs and song
samples that have been encoded using our technology available through our
Liquid Music Network platform 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 Partners and 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 partnerships and 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;
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. 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
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 strategic relationships in four principal areas: music
syndication; player distribution; technology and international.
Music Syndication Relationships. We plan to continue to build strategic
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. We are collaborating with Amazon.com on event-based
promotions using our digital distribution services. In April 1999, two
new Sarah McLachlan recordings were made exclusively available on
Amazon.com for downloading using our technology. This promotion increased
consumer interest for her upcoming album.
. 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 over one million
sample audio clips in our format to enhance the promotion and sale of
music. We intend to launch the Liquid Muze Previews service in the third
quarter of 1999.
[Graphic of screen shot from websites of Amazon.com website]
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In addition, many independent record labels have chosen to make their
catalogs available using our solution, including the following: Beggars
Banquet; Del-Fi Records; Rounder Records; Sub Pop Records; Twin Tone Records;
and Vanguard Records. As of April 30, 1999, record labels have chosen to
promote and sell over 45,000 digital music recordings through our Liquid Music
Network and, once available, to RIFFS affiliates. 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 the Liquid Player on a bundled basis
include Adaptec Inc., Intel Corporation and Iomega Corporation.
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
AC3 and Fraunhofer's AAC and mp3 compression technologies. These
technologies are used in our Liquifier Pro and Liquid Player products.
. RealNetworks Inc. We have developed a software "plug-in" that enables
RealNetwork's G2 RealPlayer software to play music encoded in our format.
The plug-in, which will be distributed by RealNetworks, also facilitates
the downloading of our Liquid Player for G2 RealPlayer users.
. Texas Instruments Inc. We are collaborating with Texas Instruments to
develop a reference design specification that will enable future flash
memory-based consumer electronics devices to be compatible with our
platform.
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
include 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. 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
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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<PAGE>
Products and Services
Our platform includes a suite of software products and services that enable
the secure digital delivery and commerce of recorded music over the Internet.
Our products and services can be represented graphically as follows:
[GRAPHIC DEPICTING OUR PRODUCTS AND SERVICES.]
<TABLE>
<CAPTION>
<S> <C> <C> <C>
CREATE AND PUBLISH SYNDICATE PROMOTE AND SELL
Target Market Major Record Labels Retail Distributors Consumers
Independent Labels Websites
Amateur Artists Major Record Labels
Independent Labels
Amateur Artists
Products LIQUIFIER PRO
Enables artists and labels to
encode their music for
distribution over the Internet
LIQUID SERVER
Hosts, distributes and delivers
encoded music files over the
Internet
Services ENCODING LMN DELIVERY
Transforming music into a digital Provides websites with the Digital download of music
format which can be distributed ability to sell music
over the Internet LIQUID PROMOTIONS
[RIFFS The ability to preview music
Enables existing Internet until a date set by the artist
merchants to sell digital
music] [KIOSKS
The physical delivery and sale
of digital music]
[LIQUID MUZE PREVIEWS
The ability to preview music
before purchasing it]
Liquid Operations Center
A security and copyright management center.
[Shaded areas denote future services.]]
</TABLE>
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 the consumer. 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 liner notes, graphics, such as compact disc cover art, and copyright
information to the music file. We offer the Liquifier Pro software for sale in
packaged form for a list price of $295. We also bundle this software with our
Liquid Server music software and include it 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 extensive 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 Artists 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, over
1,000 artists have used our hosting services. These artists have made 5,000
songs available for downloading through the LMN and their own websites,.
Syndicate
Liquid Music Network (LMN). The LMN, launched in July 1998, is a distributed
music network of more than 200 websites. The LMN provides these sites 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 hyper links to their home page to begin selling digital music. Our LMN
website affiliates include The Ultimate Band List and Tunes.com.
Liquid Remote Inventory Fulfillment System (RIFFS). Our RIFFS service,
expected to be introduced in the second half of 1999, will allow e-commerce
retailers to integrate downloadable music sales with the existing branding and
consumer experience of their commerce websites. RIFFS affiliates will be able
to access the same music database as LMN affiliates, but will be able to choose
which tracks they want to sell. To activate the service, retailers will
integrate the RIFFS service into their websites.
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.
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.
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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 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.
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
collected 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 Protocal (SP3). Our SP3 initiative is intended to
provide an open platform and reference specification for portable digital music
playback devices that satisfy music industry and technology industry
requirements. Any SP3-compatible digital music can be played on any compliant
device while unauthorized copies cannot 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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<PAGE>
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 communications, 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, processing and rights reporting. Our content syndication
services encompass RIFFS, 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, for 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
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<PAGE>
operate in conjunction with compression technologies. This digital
information is useful for identifying and tracking audio usage and cannot
be removed without destroying the audio.
. 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 extension to other
media types such as video. The container is optimized for music
distribution and includes multiple images that can be used for preview
and purchase of 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 system 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 server and content creation tools for publishing, the
server and 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 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 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.
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. 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.
. 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 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 which embeds unique identification
information in the audio.
. Automated Production and Publication. We have created technologies that
improve the efficiency of online music distribution and minimize
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 the services that are necessary
for content creators to publish and manage their content such as account
creation. 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 LMN and RIFFS affiliates. We sell
our products and services to artists, record companies, websites and online
retailers through a 32-person sales and marketing organization. These employees
are located in Redwood City, Los Angeles, New York and the United Kingdom. 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
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<PAGE>
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.
We currently have 17 patents pending in the United States relating to our
product architecture and technology and hold one patent. 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 U.S.
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 may not be able to obtain licenses to continue offering
these products without substantial reengineering, effort to undertake this
reengineering may not be successful, licenses may be unavailable on
commercially reasonable terms, if at all, and litigation may 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
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<PAGE>
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 service redevelopment
costs and delays, all of which could harm our business.
Competition
Competition among companies in the business of delivering digital music over
the Internet is intense. We compete against a number of technology companies
who 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 in Which We Operate is Highly Competitive."
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 Corp., 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, Inc.,
Infoseek Corporation, Lycos, Inc. and Yahoo! Inc.; 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.
Employees
As of March 31, 1999, we had 76 full-time employees including 32 in sales and
marketing, 25 in research and development, 11 in general and administrative,
and eight 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 renewal extensions, 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 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.
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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 April 30, 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
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, 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 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. 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 board 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 company and the parent company of Metromedia International Group, Inc.,
Kluge & Company, Metromedia Fiber Network, Inc., Big City Radio, Inc. and
Metromedia Restaurants Group. 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 on the board 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 worked for Vulcan Northwest, Inc., the holding
company that manages all personal and business interests for
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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 board 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 amended and 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 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 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 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 upon certain corporate transactions, as
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described in their individual Founders Restricted Stock Purchase Agreements and
the amendments to those agreements. We have also granted options to purchase
common stock to Gary J. Iwatani and Kevin M. Malone. The shares underlying the
options are subject to a vesting schedule that accelerates upon certain
corporate transactions, as described in their individual option grants.
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 Long-Term
Compensation Compensation Awards
------------------- ---------------------
Securities Underlying
Name and Principal Position Salary Bonus Options
- ------------------------------------ -------- ------- ---------------------
<S> <C> <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.
Option Grants in Last Fiscal Year
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.
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
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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
lesser of (1) 1,500,000 shares, (2) 5% of the outstanding shares on that date,
or (3) a lesser amount determined by the board.
The 1996 Plan may be administered by the board of directors or a committee of
the board, which committee shall, 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 and SPR is exercisable during the lifetime of
the optionee only by such 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 such optionee's termination by
death or disability, but in no event later than the expiration of the option's
10 year term. In the case of SPRs, unless the administrator determines
otherwise, the restricted stock purchase agreement shall 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 shall 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
shall 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 at least be 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
term of all other options granted under the 1996 Plan may not exceed 10 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 shall 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 is subject to stockholder
approval. A total of 500,000 shares of common stock have been reserved for
issuance under the 1999 Purchase Plan, plus annual increases on January 1st of
each year equal to the lesser of (1) 750,000 shares, (2) 3% of the outstanding
shares on that date, or (3) a lesser amount determined by the board.
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
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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 which 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
such 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' interest 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 such contributions, are not
currently taxable to participants. All such contributions are tax deductible by
us.
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;
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. unlawful payments of dividends or unlawful stock repurchases or
redemptions; or
. 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 intend to enter 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 by these directors and executive officers in any
action or proceeding, including any action by or on our behalf arising out of
their services as one of our directors, officers, employees, agents or
fiduciaries, 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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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 exceeds $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 completion 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 include the following entities, which
are 5% stockholders or 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 Partner 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 named in the Summary Compensation Table;
.each of our directors; and
.all executive officers and directors as a group.
Except as otherwise noted, the address of each person 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 April 30, 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 13,632,766 shares of common stock
outstanding as of April 30, 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 19.8%
Two South Park, Second Floor
San Francisco, CA 94107
Intel Corporation....................... 2,515,708 18.5
2200 Mission College Boulevard
Santa Clara, CA 95052
Vulcan Ventures, Inc.................... 998,803 7.3
110 110th Avenue NE, Suite 500
Bellevue, WA 98004
Metromedia Company...................... 977,198 7.2
1 Meadowlands Plaza East
Rutherford, NJ 07073
Gerald W. Kearby........................ 937,500 6.9
Philip R. Wiser......................... 843,750 6.2
The Phoenix Partners(2)................. 800,622 5.9
1000 Second Avenue, Suite 3600
Seattle, WA 98104
Robert G. Flynn......................... 750,000 5.5
Gary J. Iwatani(3)...................... 150,000 1.1
Kevin M. Malone(4)...................... 112,500 *
Richard W. Wingate(5)................... 86,000 *
Mathieu Prevost(6)...................... 40,000 *
Sanford R. Climan(7).................... 20,000 *
Ann Winblad(1).......................... 2,699,631 19.8
Silvia Kessel(8)........................ -- *
Eric P. Robison(9)...................... -- *
All executive officers and directors as
a group (11 persons)(10)............... 5,639,381 40.2
</TABLE>
55
<PAGE>
- --------
* Less than 1%
(1) Consists of common stock issued upon automatic conversion of 2,594,411
shares of preferred stock owned by Hummer Winblad Venture Partners II, LP,
89,023 shares of preferred stock owned by Hummer Winblad Technology Fund
II, LP and 16,197 shares of preferred stock owned by Hummer Winblad
Technology Fund IIA, LP. 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 issued 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.
(3) Consists of 150,000 shares of common stock issuable upon the exercise of
options exercisable within 60 days of April 30, 1999.
(4) Consists of 112,500 shares of common stock issuable upon the exercise of
options exercisable within 60 days of April 30, 1999.
(5) Consists of 86,000 shares of common stock issuable upon the exercise of
options exercisable within 60 days of April 30, 1999.
(6) Consists of 40,000 shares of common stock issuable upon the exercise of
options exercisable within 60 days of April 30, 1999.
(7) Consists of 20,000 shares of common stock issuable upon the exercise of
stock options exercisable within 60 days of April 30, 1999.
(8) Silvia Kessel is Senior Vice President of Metromedia Company. Ms. Kessel
disclaims beneficial ownership of shares held by Metromedia Company.
(9) Eric P. Robison is a business development associate of Vulcan Ventures,
Inc. Mr. Robison disclaims beneficial ownership of shares held by Vulcan
Ventures, Inc.
(10) Includes 408,500 shares of common stock issuable upon the exercise of
stock options exercisable within 60 days of April 30, 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
April 30, 1999, 3,888,567 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 April 30, 1999, we had 53 stockholders.
Common Stock
Each holder of common stock will be entitled to one vote for each share on
all matters to be voted upon by the stockholders and there will be 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. Please 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, which 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, $0.001 par value 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 shall be
determined by the board of directors. The rights of the holders of common stock
will be subject to, and may be adversely affected by, the rights of holders of
any preferred stock that may be issued in the future. 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 April 30, 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 and warrants to purchase a
total of 53,404 shares of common stock at an exercise price of $6.14 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, the holders of
approximately 9,812,909 shares of common stock, 9,744,199
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<PAGE>
shares of which are issuable upon conversion of an aggregate of 9,744,199
shares of preferred stock and 68,710 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 six months 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 such 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.
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 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:
. classify our board of directors into three classes with each class
serving a staggered term;
. 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. Our restated certificate of incorporation
eliminates the right of stockholders to act by written consent without a
meeting and our bylaws eliminate the right of stockholders to call special
meetings of stockholders. The restated certificate of incorporation and bylaws
do not provide for cumulative voting in the election of directors. The
authorization of undesignated preferred stock makes it possible for the board
of directors to issue preferred stock with voting or other rights or
preferences that could impede the success of any attempt to change control of
us. These provisions may have the effect of deferring hostile takeovers or
delaying changes in our control or management. The amendment of any of these
provisions would require approval by holders of at least 66 2/3% of the
outstanding common stock.
These provisions may make it more difficult for stockholders to take certain
corporate actions and could have the effect of delaying or preventing a change
in our control. 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
which resulted in the stockholder becoming an interested stockholder;
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<PAGE>
. upon completion of the transaction which resulted in the stockholder
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 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
which 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.
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<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 shares to be outstanding after the offering, assuming
that the underwriters do not exercise their overallotment option, only the
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 two years, including an "affiliate," is
entitled to sell, within any three-month period, a number of shares that does
not exceed the greater of:
. one percent of the then outstanding shares of our common stock
(approximately 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 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, sale
provisions or public information requirements.
In addition, as of April 30, 1999, there were outstanding warrants to
purchase 68,710 shares of preferred stock and options to purchase 1,074,496
shares of common stock, of which 376,347 options were fully vested. An
additional 1,695,054 shares are reserved for issuance under our 1996 Equity
Incentive Plan. We intend to register the shares of common stock issued,
issuable or reserved for issuance under the plan as soon as practicable
following the date of this prospectus.
Holders of warrants to purchase 68,710 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 such 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 the prior written consent of Lehman Brothers.
60
<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.............................................................
====
</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, then all of the shares of common stock which 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 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 additional shares of common stock, exercisable solely to cover over-
allotments, if any, at the public offering price less the underwriting
discounts and commissions 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 which may be converted into or exchanged for any
such 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 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 the prior written consent of Lehman Brothers, they will not,
directly or indirectly, offer, sell or otherwise dispose of any shares of
common stock or any securities which may be converted into or exchanged for any
such shares for the period ending 180 days after the date of this prospectus.
See "Shares Eligible for Future Sale."
61
<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 consideration of 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 underwriters have informed us that they do not intend to confirm
sales to discretionary accounts that exceed 5% of the total number of shares of
common stock offered by them.
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 who 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
of this prospectus.
62
<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 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.
63
<PAGE>
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, 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 and schedule 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 to, 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. Each statement shall be
deemed incorporated by that reference.
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.C.,
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.
64
<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 April 28, 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
------- -------- -------- -------------
(unaudited)
Assets
<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' (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... -- -- 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)
Common stock repurchased
in connection with
restricted founder's
stock and stock
purchased through
exercise of stock
options................ (112,087) -- (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)
Common stock repurchased
in connection with
restricted stock and
stock purchased through
exercise of stock
options (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............... -- 55 176 6 63
Changes in assets and
liabilities:
Accounts receivable..... -- (139) (468) (177) 276
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 bridge
loan.................... -- 400 1,330 -- --
Payments on bridge 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 which
enable the secure distribution 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, 1998 and 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 and money market funds 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:
US Government bonds................................. $ -- $ 3,001 $ --
====== ======= =======
</TABLE>
All short-term investments have 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 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 net revenue 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, debt and capital
lease obligations, are carried at cost, which approximates their fair value
because of the short-term maturity of these instruments.
Property and equipment
Property and equipment, including leasehold improvements, are stated at
historical cost. Depreciation and amortization is computed using the straight-
line method over the estimated useful lives of the assets, generally three
years, or 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 the net book value of the asset may not be recoverable. An impairment loss
is recognized if the sum of the expected future cash flows (undiscounted and
before interest) from the use of the asset is less than the net book value of
the asset. The amount of the impairment loss will generally be measured as the
difference between net book value of the assets and the estimated fair value of
the related assets. Based on its most recent analysis, the Company believes
that no impairment of long-lived assets existed at December 31, 1998 and March
31, 1999.
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 US
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 between 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 software development costs qualifying for capitalization
have been insignificant. Accordingly, the Company has not capitalized any
software development costs as of December 31, 1998 and 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" ("FIN No.
28"), 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 law; 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 and shares issuable upon conversion of the Series A,
Series B and Series C mandatorily redeemable convertible preferred stock and
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, 1996 December Three Months
(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 67 15 69
Unvested common shares subject
to repurchase.................. 2,203 2,426 1,517 1,965 753
Common stock options............ 103 629 665 770 751
----- ----- ----- ------- --------
4,022 7,973 9,920 8,987 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 to 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 Segment 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. 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 year 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 owns 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 substantial doubt regarding recoverability and the
significant losses that are expected to be incurred during LAK's initial
operating periods. 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 LAK or any other party for those losses. If LAK generates sufficient
profits to recoup its initial operating losses, the Company will re-instate its
investment in LAK before recording its share of LAK's net operating profits.
Investment in Liquid Audio Japan
The Company signed an agreement in April 1998 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 and retains the option to purchase an additional 2% of the capital of
LAJ from the strategic partner, at the then fair market value of LAJ's shares,
expiring on December 31, 2003. The Company also has a put option whereby the
Company can require the strategic partner to purchase their 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 is recorded at zero due to substantial doubt regarding
recoverability and the significant losses which are expected to be incurred
during LAJ's initial operating periods. 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. If LAJ
generates sufficient profits to recoup its initial operating losses, the
Company will re-instate its investment in LAJ before recording its share of
LAJ's net operating profits.
Other transactions
During the year ended December 31, 1998 and the three months ended March 31,
1999, the Company recorded business development revenue 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 revenue:
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 revenue was $917,000 (unaudited). This amount is classified as
deferred revenue on the balance sheet and will be recognized 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 assets 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:
Line 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.
Advances 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 are
collateralized by substantially all of the Company's assets. No advances have
been obtained throughout the life of 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.
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>
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 its 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 have been declared or paid.
Liquidation
In the event of any liquidation, dissolution, winding up, or consolidation or
merger of the Company resulting in an ownership change of greater than 50
percent, 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
F-16
<PAGE>
LIQUID AUDIO, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
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 will be distributed ratably, as
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, 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 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 shall 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 shall 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 in aggregate, or on the date upon which the
Corporation obtains the consent of the holders of 2/3 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 of then outstanding Series A, Series B and Series C mandatorily
redeemable convertible preferred stock, the Company shall 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 bridge loans received by the Company in 1997 and
1998, 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. The
warrants expire on the earlier of 2002 and 2005, respectively, or within two
years of 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.
Marketing agreement
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.
F-17
<PAGE>
LIQUID AUDIO, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
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 Series C preferred
stock at $6.14 per share. The warrant expires on January 1, 2001. The Company
accrued $107,000 for the estimated fair value of the warrant based on the
Black-Scholes option pricing model to be issued under the agreement during the
year ended December 31, 1997.
NOTE 6--COMMON STOCK:
In April 1999, the Company's Certificate of Incorporation was amended and
restated to authorize the issue 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. At December 31, 1998, and March 31, 1999 approximately 2,481,000 and
2,680,000 (unaudited) shares had vested.
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
Options under Stock Option Plan............................. 1,138
------
10,902
======
</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 Stock Option Plan
(the "Plan") which provides for the granting of up to 1,144,000 incentive stock
options and nonqualified stock options. In August 1997 and October 1998, an
additional 441,000 and 88,000 shares, respectively, were authorized for grants
under the Plan. Under the Plan, incentive stock options may be granted to
employees, officers and directors 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 generally vest over
four years, are for periods not to exceed ten years, and must be issued at
prices not less than 100% and 85%, for
F-18
<PAGE>
LIQUID AUDIO, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
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 are 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 tables summaries 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
Exercised shares repurchased and
additional options authorized............ 112 -- --
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
Exercised shares repurchased (unaudited).. 29 -- --
Options granted (unaudited)............... (111) 111 3.22
Options exercised (unaudited)............. -- (5) 0.34
Options canceled (unaudited).............. 123 (123) 0.10
------ -----
Balance at March 31, 1999 (unaudited)..... 112 1,050 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 month period ended March 31, 1999 (unaudited), the Company granted
options 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 options to be $142,000, based on the Black-Scholes option
pricing model of which $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 --
----- ---
1,067 248
===== ===
</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............. 328 9.52 1.930 46 2.500
5.00.................. 32 9.93 5.000 -- --
----- ---
1,050 359
===== ===
</TABLE>
Fair value disclosures
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, Year
1996 Ended Three Months
(inception) December Ended
Through 31, March 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>
The compensation expense associated with the Company's stock-based
compensation plans, determined using the minimum value method prescribed by
SFAS No. 123, did not result in a material difference from the reported net
income for the period from January 30, 1996 (inception) through December 31,
1996, the years ended December 31, 1997 and 1998 and the three month periods
ended March 31, 1998 (unaudited) and 1999 (unaudited).
F-20
<PAGE>
LIQUID AUDIO, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Unearned stock-based compensation
In connection with certain stock option grants, the Company recognized
unearned compensation costs, which is being amortized over the vesting period
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. The future compensation charges are subject to reduction for any
employee who terminates employment prior to the expiration of such employee's
option vesting period.
The following table sets forth earned and unearned compensation costs and the
amortization of such costs (in thousands):
<TABLE>
<CAPTION>
Period From
January 30,
1996 Three Months
(inception) Year Ended Ended
Through December 31, December 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 $13.0 million and $16.8 million (unaudited) of
federal and $12.9 million and $16.6 million (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 expire in varying amounts
beginning in 2011 and indefinitely, respectively. 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 which cause limitations in
the amount of net operating losses 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. Subsequent to 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 $7.5 million
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>
F-21
<PAGE>
LIQUID AUDIO, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
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 net deferred tax assets at December 31, 1997
and 1998 and March 31, 1999 (unaudited).
NOTE 9--COMMITMENTS AND CONTINGENCIES:
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 are 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 operating and capital
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's Board of Directors authorized the
reincorporation of the Company in the State of Delaware. All share information
included in these financial statements have been adjusted to reflect this
reincorporation.
F-22
<PAGE>
LIQUID AUDIO, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
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 is subject to stockholder approval.
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 the price quotation 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, and 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 Stock Option Plan
("Option Plan") by an additional 1,600,000 shares. The Option 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.
F-23
<PAGE>
Shares
[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 discounts, 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/NMS 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...................................................... 156,820
Total............................................................ $850,000
========
</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, to become effective upon the closing of
this offering, we intend to enter into Indemnification Agreements (Exhibit 10.1
hereto) with our officers and directors. 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 line of credit 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 Series C
mandatorily redeemable convertible preferred stock (Series C) 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 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 line of credit 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. Since our incorporation, we have issued options to purchase an
aggregate of 2,174,708 shares of common stock with exercise prices ranging
from $0.0667 to $8.00 per share. Since our incorporation, we have issued
563,509 shares of common stock pursuant to stock option exercises for an
aggregate consideration of $38,933.80.
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(9) 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(10) 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
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
</TABLE>
II-2
<PAGE>
<TABLE>
<C> <S>
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
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
</TABLE>
II-3
<PAGE>
<TABLE>
<S> <C>
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
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>
- --------
* to be filed by amendment
+confidential treatment requested
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes to provide to the underwriters
at the closing specified in the underwriting agreements certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer, or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Palo Alto, State of
California on May 4, 1999.
/s/ Gerald W. Kearby
By:__________________________________
Gerald W. Kearby
Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below hereby constitutes and appoints, jointly and severally, Gerald W. Kearby
and Gary J. Iwatani, and each of them, as his or her attorney-in-fact, with
full power of substitution, for him or her in any and all capacities, to sign
any and all amendments to this registration statement, including post-effective
amendments, and any and all registration statements filed pursuant to Rule 462
under the Securities Act of 1933 in connection with or related to the offering
contemplated by this registration statement and its amendments, if any, and to
file the same, with exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, hereby ratifying and
confirming his or her signatures as they may be signed by his or her said
attorney to any and all amendments to said registration statement.
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
DATES INDICATED:
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Gerald W. Kearby President, Chief Executive May 4, 1999
____________________________________ Officer and Director
Gerald W. Kearby (Principal Executive
Officer)
/s/ Gary J. Iwatani Chief Financial Officer May 4, 1999
____________________________________ (Principal Financial and
Gary J. Iwatani Accounting Officer)
/s/ Philip Wiser Vice President of May 4, 1999
____________________________________ Engineering, Chief
Philip Wiser Technical Officer and
Director
/s/ Ann Winbald Director May 4, 1999
____________________________________
Ann Winblad
/s/ Silvia Kessel Director May 4, 1999
____________________________________
Silvia Kessel
/s/ Sanford R. Climan Director May 4, 1999
____________________________________
Sanford R. Climan
/s/ Eric Robison Director May 4, 1999
____________________________________
Eric P. Robison
</TABLE>
II-5
<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
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>
- --------
* to be filed by amendment
+confidential treatment requested
<PAGE>
EXHIBIT 3.1
CERTIFICATE OF INCORPORATION
OF LIQUID AUDIO, INC.
ARTICLE I
The name of this corporation is Liquid Audio, Inc.
ARTICLE II
The address of the corporation's registered office in the State of
Delaware is Corporation Trust Center, 1209 Orange Street, in the City of
Wilmington, County of New Castle, Zip Code 19801. The name of its registered
agent at such address is The Corporation Trust Company.
ARTICLE III
The purpose of the corporation is to engage in any lawful act or
activity for which a corporation may be organized under the General Corporation
Law of Delaware.
ARTICLE IV
This corporation is authorized to issue two classes of stock to be
designated, respectively, "Common Stock" and "Preferred Stock." The total
number of shares which the corporation is authorized to issue is 36,783,489
shares. 25,878,000 shares shall be Common Stock with a par value of $0.001.
10,905,489 shares shall be Preferred Stock with a par value of $0.001, 3,049,989
of which shall be designated as Series A Preferred Stock, 3,355,500 of which
shall be designated as Series B Preferred Stock and 4,500,000 of which shall be
designated as Series C Preferred Stock.
ARTICLE V
The rights, preferences, privileges, and restrictions granted to and
imposed on the Series A Preferred, the Series B Preferred and the Series C
Preferred (collectively, the "PREFERRED STOCK"), are as set forth below in this
Article III(B).
1. Dividend Provisions
-------------------
(a) The holders of shares of Series A Preferred, Series B Preferred
and Series C Preferred shall be entitled to receive dividends, out of any assets
legally available therefor, prior and in preference to any declaration or
payment of any dividend payable (other than in Common Stock or other securities
and rights convertible into or entitling the holder thereof to receive, directly
or indirectly, additional shares of Common Stock of this corporation) on the
Common Stock of this
<PAGE>
corporation, at the Dividend Rate per annum (as adjusted to reflect stock
dividends, stock splits or other recapitalizations with respect to the
appropriate series of Preferred Stock), payable when, as and if declared by the
Board of Directors of this corporation The "DIVIDEND RATE" shall mean $0.059 per
share per annum for the Series A Preferred, $0.176 per share per annum for the
Series B Preferred and $0.5526 per share per annum for the Series C Preferred.
Such dividends shall not be cumulative. The aggregate dividend payable to each
holder in each case shall be rounded to the nearest whole cent. In the event any
dividend is declared on one series of Preferred Stock, then the Board of
Directors shall declare a dividend on the other series of Preferred Stock in an
amount equal to the same percentage of the Dividend Rate for such other series
of Preferred Stock as the percentage of the Dividend Rate for the series of
Preferred Stock as to which the Board of Directors initially declared such a
dividend.
(b) If, after dividends in the full preferential amount specified in
this Section 1 for the Preferred Stock have been paid or declared and set apart
in any calendar year of this corporation, the Board of Directors shall declare
additional dividends out of funds legally available therefor in that calendar
year, then such additional dividends shall be declared pro rata on the Common
Stock and the Preferred Stock according to the number of shares of Common Stock
held by such holders, where each holder of shares of Series A Preferred, Series
B Preferred and/or Series C Preferred, respectively, is to be treated for this
purpose as holding the greatest whole number of shares of Common Stock then
issuable upon conversion of all shares of Series A Preferred, Series B Preferred
and/or Series C Preferred, respectively, held by such holder pursuant to Section
3.
2. Liquidation Preference
----------------------
(a) In the event of any liquidation, dissolution or winding up of
this corporation, either voluntary or involuntary, the holders of Preferred
Stock shall be entitled to receive, prior and in preference to any distribution
of any of the assets of this corporation to the holders of Common Stock by
reason of their ownership thereof, an amount per share equal to the sum of: (i)
the Original Issue Price for each such series of Preferred Stock (as adjusted to
reflect stock dividends, stock splits or other recapitalizations with respect to
such series of Preferred Stock); and (ii) any declared but unpaid dividends on
such share. The "ORIGINAL ISSUE PRICE" shall mean $0.656 per share for the
Series A Preferred, $1.96 per share for the Series B Preferred and $6.14 per
share for the Series C Preferred. The aggregate amount payable to each holder
shall be rounded to the nearest whole cent. If upon the occurrence of such
event, the assets and funds thus distributed among the holders of the Preferred
Stock shall be insufficient to permit the payment to such holders of the full
aforesaid preferential amounts, then the entire assets and funds of the
corporation legally available for distribution shall be distributed ratably, as
between the shares of the Series A Preferred, Series B Preferred and Series C
Preferred, on a pari passu basis, according to the respective liquidation
preferences of each such 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 each such holder.
(b) If there are any assets remaining after the payment or
distribution (or the setting aside for payment or distribution) to the holders
of the Preferred Stock of their full preferential amounts described in Section
2(a) above, then all such remaining assets shall be
-2-
<PAGE>
distributed among the holders of the then outstanding Common Stock, Series A
Preferred, Series B Preferred and Series C Preferred pro rata according to the
number of shares of Common Stock held by such holders (where, for this purpose,
holders of shares of Preferred Stock will be deemed to hold (in lieu of their
Preferred Stock) the greatest whole number of shares of Common Stock then
issuable upon conversion in full of such shares of Preferred Stock pursuant to
Section 3) until: (i) with respect to the holders of Series A Preferred and
Series B Preferred, such holders shall have received $3. 936 per share
(excluding amounts paid pursuant to Section 2(a) above); and (ii) with respect
to the holders of Series C Preferred, such holders shall have received $8.18 per
share (excluding amounts paid pursuant to Section 2(a) above); thereafter,
subject to the rights of series of Preferred Stock that may from time to time
come into existence, if assets remain in this corporation, the holders of the
Common Stock of this corporation shall receive all of the remaining assets of
this corporation pro rata based on the number of shares of Common Stock held by
each such holder.
(c) (i) A reorganization, consolidation or merger of this corporation
with or into any other corporation or corporations, or a sale, conveyance or
disposition of all or substantially all of the assets of this corporation or the
effectuation by this corporation of a transaction or series of related
transactions in which more than fifty percent (50%) of the voting power of the
corporation is disposed of, shall be deemed to be a liquidation, dissolution or
winding up within the meaning of this Section 2, unless the stockholders of this
corporation immediately prior to such transaction own, immediately following the
consummation of such transaction by virtue of their shares in this corporation
and/or securities received in exchange for their shares in this corporation in
connection with such transaction, at least fifty percent (50%) of the voting
power of the surviving or purchasing entity.
(ii) In any of such events, if the consideration received by this
corporation is other than cash, its value will be deemed its fair market value
as mutually determined in good faith by the Board of Directors and the holders
of at least a majority of the voting power of all then outstanding shares of
Preferred Stock or at the request of any member of the Board of Directors, by an
outside appraiser paid for by this corporation. Such appraiser shall be mutually
agreed upon by the Board of Directors and the holders of at least a majority of
the voting power of all then outstanding shares of Preferred Stock. Any
securities shall be valued as follows:
(A) Securities not subject to investment letter or other similar
restrictions on free marketability:
(1) If traded on a securities exchange or through NASDAQ-
NMS or similar national quotation system, the value shall be deemed to be
the average of the closing prices of the securities on such exchange or
system over the thirty (30) day period ending three (3) days prior to the
closing;
(2) If actively traded over-the-counter, the value shall be
deemed to be the average of the closing bid or sale prices (whichever is
applicable) over the thirty (30) day period ending three (3) days prior to
the closing; and
-3-
<PAGE>
(3) If there is no active public market, the value shall be
the fair market value thereof, as mutually determined in good faith by the
Board of Directors and the holders of at least a majority of the voting
power of all then outstanding shares of Preferred Stock or at the request
of any member of the Board of Directors, by an outside appraiser paid for
by this corporation. Such appraiser shall be mutually agreed upon by the
Board of Directors and the holders of at least a majority of the voting
power of all then outstanding shares of Preferred Stock.
(B) The method of valuation of securities subject to investment
letter or other restrictions on free marketability (other than restrictions
arising solely by virtue of a stockholder's status as an affiliate or
former affiliate) shall be to make a customary discount from the market
value determined as above in (A)(1), (2) or (3) to reflect the approximate
fair market value thereof, by an outside appraiser paid for by this
corporation. Such appraiser shall be mutually agreed upon by the Board of
Directors and the holders of at least a majority of the voting power of all
then outstanding shares of Preferred Stock.
3. Conversion. The holders of the Preferred Stock shall have conversion
----------
rights as follows (the "CONVERSION RIGHTS"):
(a) Right to Convert.
----------------
(i) Subject to subsection (c), each share of Preferred Stock
shall be convertible, at the option of the holder thereof, at any time after the
date of issuance of such share, at the office of this corporation or any
transfer agent for the Preferred Stock, into such number of fully paid and
nonassessable shares of Common Stock as is determined by dividing the Original
Issue Price for such series of Preferred Stock by the Conversion Price (as
defined below) at the time in effect for such share. The initial "CONVERSION
PRICE" per share for shares of each series of Preferred Stock shall be the
Original Issue Price for such series of Preferred Stock; provided, however, that
-------- -------
the Conversion Price for each series of Preferred Stock shall be subject to
adjustment as set forth in subsection 3(c).
(ii) Each share of Preferred Stock shall automatically be
converted into shares of Common Stock at the Conversion Price then in effect for
such series of Preferred Stock immediately upon the earlier of: (A) the closing
of the corporation's sale of its Common Stock in a bona fide, firm commitment
underwriting pursuant to a registration statement on Form S-1 under the
Securities Act of 1933, as amended (the "SECURITIES ACT"), the public offering
price of which was not less than $8.33 per share (as adjusted to reflect stock
dividends, stock splits or other recapitalizations) and in excess of $15,000,000
in the aggregate; or (B) the date upon which the corporation obtains the consent
of the holders of at least two-thirds (2/3) of the then outstanding shares of
Preferred Stock.
(b) Mechanics of Conversion. Before any holder of Preferred Stock
-----------------------
shall be entitled to convert the same into shares of Common Stock, he shall
surrender the certificate or certificates therefor, duly endorsed, at the office
of this corporation or of any transfer agent for the Preferred Stock, and shall
give written notice by mail, postage prepaid, to this corporation at its
principal corporate office, of the election to convert the same and shall state
therein the name or
-4-
<PAGE>
names in which the certificate or certificates for shares of Common Stock are to
be issued. This corporation shall, as soon as practicable thereafter, issue and
deliver at such office to such holder of Preferred Stock, or to the nominee or
nominees of such holder, a certificate or certificates for the number of shares
of Common Stock to which such holder shall be entitled as aforesaid. Such
conversion shall be deemed to have been made immediately prior to the close of
business on the date of such surrender of the shares of Preferred Stock to be
converted, and the person or persons entitled to receive the shares of Common
Stock issuable upon such conversion shall be treated for all purposes as the
record holder or holders of such shares of Common Stock as of such date. If the
conversion is in connection with an underwritten offer of securities registered
pursuant to the Securities Act, the conversion may, at the option of any holder
tendering Preferred Stock for conversion, be conditioned upon the closing with
the underwriter of the sale of securities pursuant to such offering, in which
event the person(s) entitled to receive the Common Stock issuable upon such
conversion of the Preferred Stock shall not be deemed to have converted such
Preferred Stock until immediately prior to the closing of such sale of
securities.
(c) Conversion Price Adjustments of Preferred Stock. In the event the
-----------------------------------------------
corporation at any time or from time to time effects a split, subdivision or
combination of its outstanding Common Stock into a greater or lesser number of
shares without a proportionate and corresponding split, subdivision or
combination of its outstanding Preferred Stock, then, and in each such event,
the Series A Conversion Price, the Series B Conversion Price and the Series C
Conversion Price shall be subject to adjustment from time to time as follows:
(i) (A) If the corporation shall issue any Additional Stock (as
defined below) without consideration or for a consideration per share less than
the Conversion Price for the Series A Preferred, Series B Preferred and/or
Series C Preferred, respectively, in effect immediately prior to the issuance of
such Additional Stock, the Conversion Price for the Series A Preferred, Series B
Preferred and/or Series C Preferred, respectively, in effect immediately prior
to each such issuance shall forthwith (except as otherwise provided in this
clause (i)) be adjusted to a price determined by multiplying such Conversion
Price by a fraction, the numerator of which shall be the number of shares of
Common Stock outstanding immediately prior to such issuance plus the number of
shares of Common Stock which the aggregate consideration received by the
corporation for the total number of shares of Additional Stock so issued would
purchase at such Conversion Price; and the denominator of which shall be the
number of shares of Common Stock outstanding immediately prior to such issuance
plus the number of shares of Additional Stock so issued. The number of shares of
Common Stock outstanding immediately prior to such issuance shall be calculated
on a fully diluted basis, as if all shares of Preferred Stock and all
Convertible Securities (as defined below) had been fully converted into shares
of Common Stock immediately prior to such issuance and any outstanding Options
(as defined below) had been fully exercised immediately prior to such issuance
(and the resulting securities fully converted into shares of Common Stock, if so
convertible) as of such date, but not including in such calculation any
additional shares of Common Stock issuable with respect to shares of Preferred
Stock, Convertible Securities or Options, solely as a result of the adjustment
of the Conversion Price resulting from the issuance of Additional Stock causing
such adjustment. "OPTIONS" shall mean rights, options or warrants to subscribe
for, purchase or otherwise acquire either Common Stock or Convertible
Securities. "CONVERTIBLE
-5-
<PAGE>
SECURITIES" shall mean any evidences of indebtedness, shares or other securities
convertible into or exchangeable for Common Stock.
(B) No adjustment of the Conversion Price for any series of
Preferred Stock shall be made in an amount less than one cent ($0.01) per share,
provided that any adjustments which are not required to be made by reason of
this sentence shall be carried forward and shall be either taken into account in
any subsequent adjustment made prior to three (3) years from the date of the
event giving rise to the adjustment being carried forward, or shall be made at
the end of three (3) years from the date of the event giving rise to the
adjustment being carried forward. Except to the limited extent provided for in
subsections (E)(3) and (E)(4), no adjustment of such Conversion Price pursuant
to this subsection 3(c)(i) shall have the effect of increasing the Conversion
Price above the Conversion Price in effect immediately prior to such adjustment.
(C) In the case of the issuance of Common Stock for cash,
the consideration shall be deemed to be the amount of cash paid therefor before
deducting any reasonable discounts, commissions or other expenses allowed, paid
or incurred by this corporation for any underwriting or otherwise in connection
with the issuance and sale thereof.
(D) In the case of the issuance of the Common Stock for a
consideration in whole or in part other than cash, the consideration other than
cash shall be deemed to be the fair value thereof as determined by the Board of
Directors irrespective of any accounting treatment.
(E) In the case of the issuance of options to purchase or
rights to subscribe for Common Stock, securities by their terms convertible into
or exchangeable for Common Stock or options to purchase or rights to subscribe
for such convertible or exchangeable securities, the following provisions shall
apply for all purposes of this subsection 3(c)(i) and subsection 3(c)(ii):
(1) The aggregate maximum number of shares of Common
Stock deliverable upon exercise (assuming the satisfaction of any conditions to
exercisability, including without limitation, the passage of time, but without
taking into account potential antidilution adjustments) of such options to
purchase or rights to subscribe for Common Stock shall be deemed to have been
issued at the time such options or rights were issued and for a consideration
equal to the consideration (determined in the manner provided in subsections
3(c)(i)(C) and 3(c)(i)(D)), if any, received by the corporation upon the
issuance of such options or rights plus the minimum exercise price provided in
such options or rights for the Common Stock covered thereby.
(2) The aggregate maximum number of shares of Common
Stock deliverable upon conversion of or in exchange (assuming the satisfaction
of any conditions to convertibility or exchangeability, including, without
limitation, the passage of time, but without taking into account potential
antidilution adjustments) for any such convertible or exchangeable securities or
upon the exercise of options to purchase or rights to subscribe for such
convertible or exchangeable securities and subsequent conversion or exchange
thereof shall be deemed to have been issued at the time such securities were
issued or such options or rights were issued and for a consideration equal to
the consideration, if any, received by the corporation for any such securities
-6-
<PAGE>
and related options or rights, plus the minimum additional consideration, if
any, to be received by the corporation upon the conversion or exchange of such
securities or the exercise of any related options or rights (the consideration
in each case to be determined in the manner provided in subsections 3(c)(i)(C)
and 3(c)(i)(D)).
(3) In the event of any change in the number of shares
of Common Stock deliverable or in the consideration payable to this corporation
upon exercise of such options or rights or upon conversion of or in exchange for
such convertible or exchangeable securities, including, but not limited to, a
change resulting from the antidilution provisions thereof, the Conversion Price
of each series of Preferred Stock, to the extent in any way affected by or
computed using such options, rights or securities, shall be recomputed to
reflect such change, but no further adjustment shall be made for the actual
issuance of Common Stock or any payment of such consideration upon the exercise
of any such options or rights or the conversion or exchange of such securities.
(4) Upon the expiration of any such options or rights,
the termination of any such rights to convert or exchange or the expiration of
any options or rights related to such convertible or exchangeable securities,
the Conversion Price of each series of Preferred Stock, to the extent in any way
affected by or computed using such options, rights or securities or options or
rights related to such securities, shall be recomputed to reflect the issuance
of only the number of shares of Common Stock (and convertible or exchangeable
securities which remain in effect) actually issued upon the exercise of such
options or rights, upon the conversion or exchange of such securities or upon
the exercise of the options or rights related to such securities.
(5) The number of shares of Common Stock deemed issued
and the consideration deemed paid therefor pursuant to subsections 3(c)(i)(E)(1)
and (2) shall be appropriately adjusted to reflect any change, termination or
expiration of the type described in either subsection 3(c)(i)(E)(3) or (4).
(ii) "ADDITIONAL STOCK" shall mean any shares of Common Stock
issued (or deemed to have been issued pursuant to subsection 3(c)(i)(E)) by this
corporation after the date of the initial issuance of shares of Series A
Preferred (the "PURCHASE DATE"), other than
(A) Common Stock issued pursuant to a transaction described
in subsection 3(c)(iii) hereof.
(B) Up to 1,672,354 shares of Common Stock issued (or deemed
to have been issued pursuant to subsection 3(c)(i)(E)) to directors, officers,
employees and/or consultants of this corporation pursuant to arrangements
approved by the Board of Directors of this corporation, provided that the
foregoing number of shares shall be adjusted to reflect stock dividends, stock
splits or other recapitalizations and increased by the number of shares of
Common Stock: (i) outstanding as of the Purchase Date, which shares are
repurchased by this corporation upon termination of the holder's employment or
service relationship with this corporation or upon exercise of this
corporation's right of first refusal; (ii) sold to directors, officers,
employees and/or consultants after the Purchase Date and subsequently
repurchased by this corporation upon
-7-
<PAGE>
termination of the holder's employment or service relationship with this
corporation or upon exercise of this corporation's right of first refusal;
and/or (iii) made subject to warrants, rights or options in favor of directors,
officers, employees and/or consultants after the Purchase Date to the extent the
same expire or terminate before exercise.
(C) Shares of Common Stock issued to one or more of
this corporation's licensees or resellers, or issued pursuant to other strategic
transactions, as approved by the Board of Directors.
(D) Common Stock issued (or deemed to have been issued
pursuant to subsection 3(c)(i)(E)) on conversion of Preferred Stock.
(iii) In the event the corporation should at any time or from
time to time fix a record date for the effectuation of a split or subdivision of
the outstanding shares of Common Stock or the determination of holders of Common
Stock entitled to receive a dividend or other distribution payable in additional
shares of Common Stock or other securities or rights convertible into, or
entitling the holder thereof to receive directly or indirectly, additional
shares of Common Stock (hereinafter referred to as "COMMON STOCK EQUIVALENTS")
without payment of any consideration by such holder for the additional shares of
Common Stock or the Common Stock Equivalents (including the additional shares of
Common Stock issuable upon conversion or exercise thereof), then, as of such
record date (or the date of such dividend distribution, split or subdivision if
no record date is fixed), the Conversion Price of each series of Preferred Stock
shall be appropriately decreased so that the number of shares of Common Stock
issuable on conversion of each share of such series shall be increased in
proportion to such increase of the aggregate of shares of Common Stock
outstanding and those issuable with respect to such Common Stock Equivalents.
(iv) If the number of shares of Common Stock outstanding at any
time after the Purchase Date is decreased by a combination of the outstanding
shares of Common Stock, then, as of the record date of such combination (or the
date of such combination if no record date is fixed), the Conversion Price for
each series of Preferred Stock shall be appropriately increased so that the
number of shares of Common Stock issuable on conversion of each share of such
series shall be decreased in proportion to such decrease in outstanding shares.
(d) Other Distributions. In the event this corporation shall declare a
-------------------
distribution payable in securities of other persons, evidences of indebtedness
issued by this corporation or other persons, assets (excluding cash dividends)
or options or rights not referred to in subsection 3(c)(i), then, in each such
case for the purpose of this subsection 3(d), the holders of the Preferred Stock
shall be entitled to a proportionate share of any such distribution as though
they were the holders of the number of shares of Common Stock of the corporation
into which their shares of Preferred Stock are convertible as of the record date
fixed for the determination of the holders of Common Stock of the corporation
entitled to receive such distribution.
(e) Recapitalizations. If at any time, or from time to time, there
-----------------
shall be a recapitalization of the Common Stock (other than a stock split,
subdivision, dividend, distribution or combination provided for elsewhere in
this Section 3), provision shall be made so that the holders of
-8-
<PAGE>
the Preferred Stock shall thereafter be entitled to receive upon conversion of
the Preferred Stock the number of shares of stock or other securities or
property of the corporation or otherwise, to which a holder of Common Stock
deliverable upon conversion would have been entitled on such recapitalization.
In any such case, appropriate adjustment shall be made in the application of the
provisions of this Section 3, with respect to the rights of the holders of the
Preferred Stock after the recapitalization, to the end that the provisions of
this Section 3 (including adjustment of the Conversion Price then in effect and
the number of shares purchasable upon conversion of each series of Preferred
Stock) shall be applicable, after that event, as nearly equivalent as may be
practicable.
(f) No Impairment. This corporation will not, by amendment of its
-------------
Restated Articles or through any reorganization, recapitalization, transfer of
assets, consolidation, merger, dissolution, issue or sale of securities or any
other voluntary action, avoid or seek to avoid the observance or performance of
any of the terms to be observed or performed hereunder by this corporation, but
will at all times in good faith assist in the carrying out of all the provisions
of this Section 3 and in the taking of all such action as may be necessary or
appropriate in order to protect the Conversion Rights of the holders of the
Preferred Stock against impairment.
(g) No Fractional Shares and Certificate as to Adjustments.
------------------------------------------------------
(i) No fractional shares shall be issued upon conversion of the
Preferred Stock and the number of shares of Common Stock to be issued shall be
rounded to the nearest whole share. The number of shares of Common Stock
issuable upon such conversion shall be determined on the basis of the total
number of shares of Preferred Stock the holder is at the time converting into
Common Stock and the number of shares of Common Stock issuable upon such
aggregate conversion.
(ii) Upon the occurrence of each adjustment or readjustment of the
Conversion Price of each series of Preferred Stock pursuant to this Section 3,
this corporation, at its expense, shall promptly compute such adjustment or
readjustment in accordance with the terms hereof and prepare and furnish to each
holder of Preferred Stock a certificate setting forth such adjustment or
readjustment and showing in detail the facts upon which such adjustment or
readjustment is based. This corporation shall, upon the written request at any
time of any holder of Preferred Stock, furnish or cause to be furnished to such
holder a like certificate setting forth: (A) such adjustment and readjustment;
(B) the Conversion Price for each series of Preferred Stock at the time in
effect; and (C) the number of shares of Common Stock and the amount, if any, of
other property which at the time would be received upon the conversion of a
share of each series of Preferred Stock.
(h) Notices of Record Date. In the event of any taking by this
----------------------
corporation of a record of the holders of any class of securities for the
purpose of determining the holders thereof who are entitled to receive any
dividend (other than a cash dividend) or other distribution, any right to
subscribe for, purchase or otherwise acquire any shares of stock of any class or
any other securities or property, or to receive any other right, this
corporation shall mail to each holder of Preferred Stock, at least twenty (20)
days prior to the date specified therein, a notice specifying the date on
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<PAGE>
which any such record is to be taken for the purpose of such dividend,
distribution or right, and the amount and character of such dividend,
distribution or right.
(i) Reservation of Stock Issuable Upon Conversion. This corporation
---------------------------------------------
shall at all times reserve and keep available out of its authorized but unissued
shares of Common Stock solely for the purpose of effecting the conversion of the
shares of the Preferred Stock such number of its shares of Common Stock as shall
from time to time be sufficient to effect the conversion of all outstanding
shares of the Preferred Stock; and if at any time the number of authorized but
unissued shares of Common Stock shall not be sufficient to effect the conversion
of all then outstanding shares of the Preferred Stock, in addition to such other
remedies as shall be available to the holder of such Preferred Stock this
corporation will take such corporate action as may, in the opinion of its
counsel, be necessary to increase its authorized but unissued shares of Common
Stock to such number of shares as shall be sufficient for such purposes.
(j) Notices. Any notice required by the provisions of this Section 3
-------
to be given to the holders of shares of Preferred Stock shall be deemed given if
deposited in the United States mail, postage prepaid, and addressed to each
holder of record at the address appearing on the books of this corporation.
4. Redemption.
----------
(a) Subject to the rights of series of Preferred Stock which may from
time to time come into existence, at any time after the sixth (6th) anniversary
of the date of first issuance of Series C Preferred, but within thirty (30) days
(the "REDEMPTION DATE") after receipt by this corporation of a written request
from the holders of not less than two-thirds (2/3) of the then outstanding
Preferred Stock that all or some of such holders' shares be redeemed, and
concurrently with surrender by such holders of the certificates representing
such shares, this corporation shall, to the extent it may lawfully do so, redeem
the shares specified in such request by paying in cash therefor a sum per share
equal to the Original Issue Price for each series of Preferred Stock (as
adjusted for any stock dividends, combinations or splits with respect to such
shares) plus all declared but unpaid dividends on such shares (the "REDEMPTION
PRICE"). The Redemption Price shall be paid by this corporation in three (3)
equal annual installments commencing on the Redemption Date and continuing
thereafter on each one (1) year anniversary after the Redemption Date. Each
aggregate amount payable to each holder shall be rounded to the nearest whole
cent.
(b) Subject to the rights of series of Preferred Stock which may from
time to time come into existence, if the funds of the corporation legally
available for redemption of shares of Preferred Stock on any Redemption Date are
insufficient to redeem the total number of shares of Preferred Stock to be
redeemed on such date, those funds which are legally available will be used to
redeem the maximum possible number of such shares ratably, as between the shares
of Series A Preferred, Series B Preferred and Series C Preferred, on a pari
passu basis, according to the respective liquidation preferences of each such
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 each such holder.
The shares of Preferred Stock not redeemed shall remain outstanding and entitled
to all the
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<PAGE>
rights and preferences provided herein. Subject to the rights of series of
Preferred Stock which may from time to time come into existence, at any time
thereafter when additional funds of the corporation are legally available for
the redemption of shares of Preferred Stock, such funds will immediately be used
to redeem the balance of the shares which the corporation has become obligated
to redeem on any Redemption Date, but which it has not redeemed.
5. Voting Rights. The holder of each share of Series A Preferred, Series B
-------------
Preferred and Series C Preferred, respectively, shall have the right to one (1)
vote for each share of Common Stock into which such share of Series A Preferred,
Series B Preferred or Series C Preferred, respectively, could then be converted
(with any fractional share determined on an aggregate conversion basis being
rounded to the nearest whole share), and with respect to such vote, such holder
shall have full voting rights and powers equal (except as otherwise provided
below) to the voting rights and powers of the holders of Common Stock, and shall
be entitled, notwithstanding any provision hereof but subject to Section 6(b)
below, to notice of any stockholders' meeting in accordance with the Bylaws of
this corporation, and shall be entitled to vote, together with holders of Common
Stock, with respect to any question upon which holders of Common Stock have the
right to vote.
6. Board of Directors.
------------------
(a) Board Size. The authorized number of directors of the
----------
corporation's Board of Directors shall be eight (8). The corporation shall not
alter the authorized number of directors in these Restated Articles, its Bylaws
or otherwise, without first obtaining the written consent, or affirmative vote
at a meeting, of the holders of a majority of the then outstanding shares of the
Preferred Stock, consenting or voting (as the case may be) separately as a
class.
(b) Election. Members of the Board of Directors shall be elected by
--------
the following holders of the corporation's capital stock: (i) the holders of the
Series A Preferred, voting as a separate series, shall be entitled to elect one
(1) director of the corporation; (ii) the holders of the Series B Preferred,
voting as a separate series, shall be entitled to elect one (1) director of the
corporation; (iii) the holders of the Series C Preferred, voting as a separate
series, shall be entitled to elect two (2) directors of the corporation; (iv)
the holders of the Common Stock, voting as a separate class, shall be entitled
to elect two (2) directors of the corporation; and (v) any directors of the
corporation remaining to be elected after the elections made pursuant to the
preceding subsections (i), (ii), (iii) and (iv) shall be elected by the holders
of the outstanding shares of Preferred Stock and the outstanding shares of
Common Stock, voting together as a single class.
(c) Procedures. Any meeting of the stockholders, and any action taken
by the stockholders by written consent without a meeting, in order to elect or
remove a director under this Section 6, shall be held in accordance with the
procedures and provisions of the corporation's Bylaws, the California
Corporations Code and applicable law regarding stockholder meetings and
stockholder actions by written consent, as such are then in effect (including
but not limited to procedures and provisions for determining the record date for
shares entitled to vote).
(d) Termination. Notwithstanding anything in this Section 6 to the
-----------
contrary, the provisions of this Section 6 shall cease to be of any further
force or effect upon the earliest of: (i) a
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<PAGE>
consolidation or merger of this corporation with or into any other corporation
or corporations, or a sale, conveyance or disposition of all or substantially
all of the assets of this corporation or the effectuation by this corporation of
a transaction or series of related transactions in which more than fifty percent
(50%) of the voting power of the corporation is disposed of, unless the
stockholders of this corporation immediately prior to such transaction own,
immediately following the consummation of such transaction by virtue of their
shares in this corporation and/or securities received in exchange for their
shares in this corporation in connection with such transaction, at least fifty
percent (50%) of the voting power of the surviving or purchasing entity; and
(ii) the first date that (A) the total number of outstanding shares of Series A
Preferred is less than 762,497 (as adjusted to reflect stock dividends, stock
splits or other recapitalizations), (B) the total number of outstanding shares
of Series B Preferred is less than 838,875 (as adjusted to reflect stock
dividends, stock splits or other recapitalizations) and (C) the total number of
outstanding shares of Series C Preferred is less than 1,125,000 (as adjusted to
reflect stock dividends, stock splits or other recapitalizations).
Notwithstanding Section 6(b): (i) the right of the holders of the Series A
Preferred, voting as a separate series, to elect one (1) director of the
corporation shall cease to be of any further force or effect upon the first date
that the total number of outstanding shares of Series A Preferred is less than
762,497 (as adjusted to reflect stock dividends, stock splits and other
recapitalizations) and in such event such director shall thereafter be elected
pursuant to Section 6(b)(v); (ii) the right of the holders of the Series B
Preferred, voting as a separate series, to elect one (1) director of the
corporation shall cease to be of any further force or effect upon the first date
that the total number of outstanding shares of Series B Preferred is less than
838,875 (as adjusted to reflect stock dividends, stock splits and other
recapitalizations) and in such event such director shall thereafter be elected
pursuant to Section 6(b)(v); and (iii) the right of the holders of the Series C
Preferred, voting as a separate series, to elect one (1) director of the
corporation shall cease to be of any further force or effect upon the first date
that the total number of outstanding shares of Series C Preferred is less than
1,125,000 (as adjusted to reflect stock dividends, stock splits and other
recapitalizations) and in such event such director shall thereafter be elected
pursuant to Section 6(b)(v).
7. Restrictions and Limitations. So long as at least 762,497 shares (as
----------------------------
adjusted to reflect stock dividends, stock splits or other recapitalizations) of
Series A Preferred, at least 838,875 shares (as adjusted to reflect stock
dividends, stock splits or other recapitalizations) of Series B Preferred, or at
least 1,125,000 shares (as adjusted to reflect stock dividends, stock splits or
other recapitalizations) of Series C Preferred remain outstanding, the
corporation shall not, without the approval, by vote or written consent, of the
holders of a majority of the Preferred Stock then outstanding, voting as a
separate class:
(1) amend these Restated Articles so as to change or
adversely affect any right or preference or the authorized number of shares of
Preferred Stock;
(2) reclassify any outstanding shares of securities of the
corporation into shares having rights, preferences or privileges senior to or on
a parity with the Preferred Stock;
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<PAGE>
(3) authorize any other stock having rights or preferences
senior to or on a parity with the Preferred Stock;
(4) effectuate a consolidation or merger of this
corporation with or into any other corporation or corporations, or a transaction
or series of related transactions in which more than fifty percent (50%) of the
voting power of the corporation is disposed of, unless the stockholders of this
corporation immediately prior to such transaction own, immediately following the
consummation of such transaction by virtue of their shares in this corporation
and/or securities received in exchange for their shares in this corporation in
connection with such transaction, at least fifty percent (50%) of the voting
power of the surviving or purchasing entity;
(5) sell all or substantially all the corporation's assets
in a single transaction or series of related transactions;
(6) liquidate or dissolve;
(7) declare or pay any dividends (other than dividends
payable solely in shares of its own Common Stock) on or declare or make any
other distribution, directly or indirectly, on account of any shares of Common
Stock now or hereafter outstanding;
(8) amend any stock option or purchase plan to modify the
number of shares covered thereby;
(9) transfer or grant any rights in the corporation's
technology other than rights transferred or granted through the limited licenses
that are incidental to sales of the corporation's products in the ordinary
course of business; or
(10) redeem or acquire any shares of its Common Stock or
Preferred Stock; provided, however, that this restriction shall not apply to the
-------- -------
mandatory redemption under Section 4 or the repurchase of shares of Common Stock
held by employees, officers, directors, consultants or other persons performing
services for this corporation pursuant to arrangements approved by the Board of
Directors under which this corporation has the option to repurchase such shares
upon the occurrence of certain events, such as the termination of employment.
ARTICLE VI
The following is applicable to the Common Stock:
8. Dividend Rights. Subject to the prior rights of holders of all classes
---------------
of stock at the time outstanding having prior rights as to dividends, the
holders of the Common Stock shall be entitled to receive, when and as declared
by the Board of Directors, out of any assets of the corporation legally
available therefor, such dividends as may be declared from time to time by the
Board of Directors.
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<PAGE>
9. Liquidation Rights. Upon the liquidation, dissolution or winding up of
------------------
the corporation, the assets of the corporation shall be distributed as provided
in Section 2 of Article Four hereof.
10. Redemption. The Common Stock is not redeemable.
----------
11. Voting Rights. The holder of each share of Common Stock shall have the
-------------
right to one vote, and shall be entitled to notice of any stockholders' meeting
in accordance with the Bylaws of the corporation, and shall be entitled to vote
upon such matters and in such manner as may be provided by law. The right to
vote for directors shall be subject to Section 6 of Article Four hereof.
ARTICLE VII
The corporation is to have perpetual existence.
ARTICLE VIII
In furtherance and not in limitation of the powers conferred by statute,
the Board of Directors is expressly authorized to make, alter, amend or repeal
the Bylaws of the Corporation.
ARTICLE IX
The election of directors need not be by written ballot unless the Bylaws
of the corporation shall so provide.
ARTICLE X
To the fullest extent permitted by the Delaware General Corporation Law as
the same exists or as may hereafter be amended, a director of the corporation
shall not be personally liable to the corporation or its stockholders for
monetary damages for breach of fiduciary duty as a director. The corporation
shall indemnify to the fullest extent permitted by the law, any person made or
threatened to be made a party, to any action or proceeding, whether criminal,
civil, administrative or investigative, by reason of the fact the he or she, or
his or her testator or intestate, is or was a director or officer of the
corporation or any predecessor of the corporation, or serves or served at any
other enterprise as a director or officer at the request of the corporation or
any predecessor to the corporation. Neither any amendment nor repeal of this
Article, nor the adoption of any provision of this Certificate of Incorporation
inconsistent with this Article, shall eliminate or reduce the effect of this
Article in respect of any matter occurring, or any cause of action, suit or
claim that, but for this Article, would accrue or arise, prior to such
amendment, repeal or adoption of an inconsistent provision.
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<PAGE>
ARTICLE XI
The corporation reserves the right to amend, alter, change or repeal any
provision contained in this Certificate of Incorporation, in the manner now or
hereafter prescribed by statute, and all rights conferred upon stockholders
herein are granted subject to this reservation.
ARTICLE XII
The name and mailing address of the incorporator are:
Gerald W. Kearby
810 Winslow Street
Redwood City, CA 94063
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<PAGE>
I, THE UNDERSIGNED, being the incorporator hereinbefore named, for the
purpose of forming a corporation pursuant to the General Corporation Law of the
State of Delaware, do make this certificate, hereby declaring and certifying,
under penalties of perjury, that this is my act and deed and the facts herein
stated are true, and accordingly have hereunto set my hand this ____ day of
April, 1999.
______________________________
Gerald W. Kearby, Incorporator
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<PAGE>
EXHIBIT 3.2
RESTATED CERTIFICATE OF INCORPORATION
OF
LIQUID AUDIO, INC.
Liquid Audio, Inc., a corporation organized and existing under the laws of
the State of Delaware, hereby certifies as follows:
A. The name of the corporation is Liquid Audio, Inc. The corporation was
originally incorporated under the same name, and the original Certificate of
Incorporation was filed with the Secretary of State of the State of Delaware
on April 22, 1999.
B. Pursuant to Sections 242 and 245 of the General Corporation Law of the
State of Delaware, this Restated Certificate of Incorporation restates and
amends the provisions of the Certificate of Incorporation of the corporation.
C. The text of the Certificate of Incorporation is hereby amended and
restated in its entirety to read as follows:
ARTICLE I
The name of this corporation is Liquid Audio, Inc.
ARTICLE II
The address of the corporation's registered office in the State of Delaware
is 1209 Orange Street, City of Wilmington, County of New Castle, Delaware 19801.
The name of its registered agent at such address is The Corporation Trust
Company.
ARTICLE III
The purpose of the corporation is to engage in any lawful act or activity
for which a corporation may be organized under the General Corporation Law of
Delaware.
ARTICLE IV
The corporation is authorized to issue two classes of shares of stock to be
designated, respectively, Common Stock, $0.001 par value, and Preferred Stock,
$0.001 par value. The total number of shares that the corporation is authorized
to issue is 55,000,000 shares. The number of
<PAGE>
shares of Common Stock authorized is 50,000,000. The number of shares of
Preferred authorized is 5,000,000.
The Preferred Stock may be issued from time to time in one or more series
pursuant to a resolution or resolutions providing for such issue duly adopted by
the board of directors (authority to do so being hereby expressly vested in the
board). The board of directors is further authorized to determine or alter the
rights, preferences, privileges and restrictions granted to or imposed upon any
wholly unissued series of Preferred Stock and to fix the number of shares of any
series of Preferred Stock and the designation of any such series of Preferred
Stock. The board of directors, within the limits and restrictions stated in any
resolution or resolutions of the board of directors originally fixing the number
of shares constituting any series, may increase or decrease (but not below the
number of shares in any such series then outstanding) the number of shares of
any series subsequent to the issue of shares of that series.
The authority of the board of directors with respect to each such class or
series shall include, without limitation of the foregoing, the right to
determine and fix:
(a) the distinctive designation of such class or series and the
number of shares to constitute such class or series;
(b) the rate at which dividends on the shares of such class or series
shall be declared and paid, or set aside for payment, whether dividends at the
rate so determined shall be cumulative or accruing, and whether the shares of
such class or series shall be entitled to any participating or other dividends
in addition to dividends at the rate so determined, and if so, on what terms;
(c) the right or obligation, if any, of the corporation to redeem
shares of the particular class or series of Preferred Stock and, if redeemable,
the price, terms and manner of such redemption;
(d) the special and relative rights and preferences, if any, and the
amount or amounts per share, which the shares of such class or series of
Preferred Stock shall be entitled to receive upon any voluntary or involuntary
liquidation, dissolution or winding up of the corporation;
(e) the terms and conditions, if any, upon which shares of such class
or series shall be convertible into, or exchangeable for, shares of capital
stock of any other class or series, including the price or prices or the rate or
rates of conversion or exchange and the terms of adjustment, if any;
(f) the obligation, if any, of the corporation to retire, redeem or
purchase shares of such class or series pursuant to a sinking fund or fund of a
similar nature or otherwise, and the terms and conditions of such obligation;
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<PAGE>
(g) voting rights, if any, on the issuance of additional shares of
such class or series or any shares of any other class or series of Preferred
Stock;
(h) limitations, if any, on the issuance of additional shares of such
class or series or any shares of any other class or series of Preferred Stock;
and
(i) such other preferences, powers, qualifications, special or
relative rights and privileges thereof as the board of directors of the
corporation, acting in accordance with this Restated Certificate of
Incorporation, may deem advisable and are not inconsistent with law and the
provisions of this Restated Certificate of Incorporation.
ARTICLE V
The corporation reserves the right to amend, alter, change, or repeal any
provision contained in this Certificate of Incorporation, in the manner now or
hereafter prescribed by statute, and all rights conferred upon the stockholders
herein are granted subject to this right.
ARTICLE VI
The corporation is to have perpetual existence.
ARTICLE VII
1. Limitation of Liability. To the fullest extent permitted by the
-----------------------
General Corporation Law of the State of Delaware as the same exists or as may
hereafter be amended, a director of the corporation shall not be personally
liable to the corporation or its stockholders for monetary damages for breach of
fiduciary duty as a director.
2. Indemnification. The corporation may indemnify to the fullest extent
---------------
permitted by law any person made or threatened to be made a party to an action
or proceeding, whether criminal, civil, administrative or investigative, by
reason of the fact that such person or his or her testator or intestate is or
was a director, officer or employee of the corporation, or any predecessor of
the corporation, or serves or served at any other enterprise as a director,
officer or employee at the request of the corporation or any predecessor to the
corporation.
3. Amendments. Neither any amendment nor repeal of this Article VII, nor
----------
the adoption of any provision of the corporation's Certificate of Incorporation
inconsistent with this Article VII, shall eliminate or reduce the effect of this
Article VII, in respect of any matter occurring, or any action or proceeding
accruing or arising or that, but for this Article VII, would accrue or arise,
prior to such amendment, repeal, or adoption of an inconsistent provision.
-3-
<PAGE>
ARTICLE VIII
In the event any shares of Preferred Stock shall be redeemed or converted
pursuant to the terms hereof, the shares so converted or redeemed shall not
revert to the status of authorized but unissued shares, but instead shall be
canceled and shall not be re-issuable by the corporation.
ARTICLE IX
Holders of stock of any class or series of the corporation shall not be
entitled to cumulate their votes for the election of directors or any other
matter submitted to a vote of the stockholders, unless such cumulative voting is
required pursuant to Sections 2115 or 301.5 of the California General
Corporation Law, in which event each such holder shall be entitled to as many
votes as shall equal the number of votes which (except for this provision as to
cumulative voting) such holder would be entitled to cast for the election of
directors with respect to his shares of stock multiplied by the number of
directors to be elected by him, and the holder may cast all of such votes for a
single director or may distribute them among the number of directors to be voted
for, or for any two or more of them as such holder may see fit, so long as the
name of the candidate for director shall have been placed in nomination prior to
the voting and the stockholder, or any other holder of the same class or series
of stock, has given notice at the meeting prior to the voting of the intention
to cumulate votes.
1. Number of Directors. The number of directors which constitutes the
-------------------
whole Board of Directors of the corporation shall be designated in the Amended
and Restated Bylaws of the corporation. The directors shall be divided into
three classes with the term of office of the first class (Class I) to expire at
the annual meeting of stockholders held in 2000; the term of office of the
second class (Class II) to expire at the annual meeting of stockholders held in
2001; the term of office of the third class (Class III) to expire at the annual
meeting of stockholders held in 2002; and thereafter for each such term to
expire at each third succeeding annual meeting of stockholders after such
election.
2. Election of Directors. Elections of directors need not be by written
---------------------
ballot unless the Restated Bylaws of the corporation shall so provide.
ARTICLE X
In furtherance and not in limitation of the powers conferred by statute,
the Board of Directors is expressly authorized to make, alter, amend or repeal
the Restated Bylaws of the corporation.
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<PAGE>
ARTICLE XI
No action shall be taken by the stockholders of the corporation except at
an annual or special meeting of the stockholders called in accordance with the
Restated Bylaws and no action shall be taken by the stockholders by written
consent. The affirmative vote of sixty-six and two-thirds percent (66 2/3%) of
the then outstanding voting securities of the corporation, voting together as a
single class, shall be required for the amendment, repeal or modification of the
provisions of Article IX, Article X or Article XII of this Restated Certificate
of Incorporation or Sections 2.3 (Special Meeting), 2.4 (Notice of Stockholders'
Meeting), 2.5 (Advanced Notice of Stockholder Nominees and Stockholder
Business), 2.10 (Voting), or 2.12 (Stockholder Action by Written Consent Without
a Meeting), or 3.2 (Number of Directors) of the corporation's Amended and
Restated Bylaws.
ARTICLE XII
Meetings of stockholders may be held within or without the State of
Delaware, as the Restated Bylaws may provide. The books of the corporation may
be kept (subject to any provision contained in the statutes) outside of the
State of Delaware at such place or places as may be designated from time to time
by the Board of Directors or in the Restated Bylaws of the corporation.
-5-
<PAGE>
IN WITNESS WHEREOF, Liquid Audio, Inc. has caused this certificate to be
signed by Gerald W. Kearby, its President and Chief Executive Officer, this
_________ day of______, 1999.
__________________________________
Gerald W. Kearby, President and
Chief Executive Officer
<PAGE>
EXHIBIT 3.3
BYLAWS
OF
LIQUID AUDIO, INC.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
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<S> <C>
ARTICLE I CORPORATE OFFICES.............................................. 1
1.1 REGISTERED OFFICE.............................................. 1
1.2 OTHER OFFICES.................................................. 1
ARTICLE II MEETINGS OF STOCKHOLDERS........................................ 1
2.1 PLACE OF MEETINGS.............................................. 1
2.2 ANNUAL MEETING................................................. 1
2.3 SPECIAL MEETING................................................ 2
2.4 NOTICE OF STOCKHOLDERS' MEETINGS............................... 2
2.5 ADVANCE NOTICE OF STOCKHOLDER NOMINEES AND STOCKHOLDER BUSINESS 2
2.6 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE................... 3
2.7 QUORUM......................................................... 4
2.8 ADJOURNED MEETING; NOTICE...................................... 4
2.9 CONDUCT OF BUSINESS............................................ 4
2.10 VOTING......................................................... 4
2.11 WAIVER OF NOTICE............................................... 5
2.12 STOCKHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING........ 5
2.13 RECORD DATE FOR STOCKHOLDER NOTICE; VOTING; GIVING CONSENTS.... 5
2.14 PROXIES........................................................ 6
2.15 LIST OF STOCKHOLDERS ENTITLED TO VOTE.......................... 6
ARTICLE III DIRECTORS...................................................... 7
3.1 POWERS......................................................... 7
3.2 NUMBER OF DIRECTORS............................................ 7
3.3 ELECTION, QUALIFICATION AND TERM OF OFFICE OF DIRECTORS........ 7
3.4 RESIGNATION AND VACANCIES...................................... 7
3.5 PLACE OF MEETINGS; MEETINGS BY TELEPHONE....................... 8
3.6 REGULAR MEETINGS............................................... 8
3.7 SPECIAL MEETINGS; NOTICE....................................... 9
3.8 QUORUM......................................................... 9
3.9 WAIVER OF NOTICE............................................... 9
3.10 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING.............. 10
3.11 FEES AND COMPENSATION OF DIRECTORS............................. 10
3.12 APPROVAL OF LOANS TO OFFICERS.................................. 10
3.13 REMOVAL OF DIRECTORS........................................... 10
ARTICLE IV COMMITTEES...................................................... 11
4.1 COMMITTEES OF DIRECTORS........................................ 11
</TABLE>
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<TABLE>
<S> <C>
4.2 COMMITTEE MINUTES.............................................. 11
4.3 MEETINGS AND ACTION OF COMMITTEES.............................. 11
ARTICLE V OFFICERS......................................................... 12
5.1 OFFICERS....................................................... 12
5.2 APPOINTMENT OF OFFICERS........................................ 12
5.3 SUBORDINATE OFFICERS........................................... 12
5.4 REMOVAL AND RESIGNATION OF OFFICERS; FILLING VACANCIES......... 12
5.5 CHAIRMAN OF THE BOARD.......................................... 13
5.6 CHIEF EXECUTIVE OFFICER........................................ 13
5.7 PRESIDENT...................................................... 13
5.8 VICE PRESIDENTS................................................ 13
5.9 SECRETARY...................................................... 13
5.10 CHIEF FINANCIAL OFFICER........................................ 14
5.11 ASSISTANT SECRETARY............................................ 14
5.12 ASSISTANT TREASURER............................................ 15
5.13 REPRESENTATION OF SHARES OF OTHER CORPORATIONS................. 15
5.14 AUTHORITY AND DUTIES OF OFFICERS............................... 15
ARTICLE VIINDEMNITY........................................................ 15
6.1 THIRD PARTY ACTIONS............................................ 15
6.2 ACTIONS BY OR IN THE RIGHT OF THE CORPORATION.................. 16
6.3 SUCCESSFUL DEFENSE............................................. 16
6.4 DETERMINATION OF CONDUCT....................................... 16
6.5 PAYMENT OF EXPENSES IN ADVANCE................................. 17
6.6 INDEMNITY NOT EXCLUSIVE........................................ 17
6.7 INSURANCE INDEMNIFICATION...................................... 17
6.8 THE CORPORATION................................................ 17
6.9 EMPLOYEE BENEFIT PLANS......................................... 18
6.10 CONTINUATION OF INDEMNIFICATION AND ADVANCEMENT OF EXPENSES.... 18
ARTICLE VII RECORDS AND REPORTS............................................. 18
7.1 MAINTENANCE AND INSPECTION OF RECORDS.......................... 18
7.2 INSPECTION BY DIRECTORS........................................ 19
7.3 ANNUAL STATEMENT TO STOCKHOLDERS............................... 19
ARTICLE VIII GENERAL MATTERS............................................... 19
8.1 CHECKS......................................................... 19
8.2 EXECUTION OF CORPORATE CONTRACTS AND INSTRUMENTS............... 20
8.3 STOCK CERTIFICATES; PARTLY PAID SHARES......................... 20
8.4 SPECIAL DESIGNATION ON CERTIFICATES............................ 20
8.5 LOST CERTIFICATES.............................................. 21
8.6 CONSTRUCTION; DEFINITIONS...................................... 21
</TABLE>
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<PAGE>
<TABLE>
<S> <C>
8.7 DIVIDENDS...................................................... 21
8.8 FISCAL YEAR.................................................... 21
8.9 SEAL........................................................... 21
8.10 TRANSFER OF STOCK.............................................. 22
8.11 STOCK TRANSFER AGREEMENTS...................................... 22
8.12 REGISTERED STOCKHOLDERS........................................ 22
ARTICLE IX AMENDMENTS...................................................... 22
</TABLE>
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<PAGE>
BYLAWS
OF
LIQUID AUDIO, INC.
ARTICLE I
CORPORATE OFFICES
-----------------
1.1 REGISTERED OFFICE
-----------------
The registered office of the corporation shall be in the City of
Wilmington, County of New Castle, State of Delaware. The name of the registered
agent of the corporation at such location is The Corporation Trust Company.
1.2 OTHER OFFICES
-------------
The board of directors may at any time establish other offices at any place
or places where the corporation is qualified to do business.
ARTICLE II
MEETINGS OF STOCKHOLDERS
------------------------
2.1 PLACE OF MEETINGS
-----------------
Meetings of stockholders shall be held at any place, either within or
without the State of Delaware, as may be designated by the board of directors or
in the manner provided in these bylaws. In the absence of any such designation,
stockholders' meetings shall be held at the registered office of the corporation
in the State of Delaware.
2.2 ANNUAL MEETING
--------------
The annual meeting of stockholders shall be held each year on a date and at
a time designated by the board of directors. In the absence of such
designation, the annual meeting of stockholders shall be held on the second
Tuesday of May of each year at 10:00 a.m. However, if such day falls on a legal
holiday, then the meeting shall be held at the same time and place on the next
succeeding
<PAGE>
business day. At the meeting, directors shall be elected and any other proper
business may be transacted.
2.3 SPECIAL MEETING
---------------
A special meeting of the stockholders may be called at any time by the
board of directors, or by the chairman of the board, or by the president, or by
one or more stockholders holding shares in the aggregate entitled to cast not
less than ten percent of the votes at that meeting.
If a special meeting is called by any person or persons other than the
board of directors, the request shall be in writing, specifying the time of such
meeting and the general nature of the business proposed to be transacted, and
shall be delivered personally or sent by registered mail or by telegraphic or
other facsimile transmission to the chairman of the board, the president or the
secretary of the corporation. No business may be transacted at such special
meeting otherwise than specified in such notice. The officer receiving the
request shall cause notice to be promptly given to the stockholders entitled to
vote, in accordance with the provisions of Sections 2.4 and 2.5 of this Article
II, that a meeting will be held at the time requested by the person or persons
calling the meeting, not less than ten (10) nor more than sixty (60) days after
the receipt of the request. Nothing contained in this paragraph of this Section
2.3 shall be construed as limiting, fixing, or affecting the time when a meeting
of stockholders called by action of the board of directors may be held.
2.4 NOTICE OF STOCKHOLDERS' MEETINGS
--------------------------------
All notices of meetings with stockholders shall be in writing and shall be
sent or otherwise given in accordance with Section 2.5 of these bylaws not less
than ten (10) nor more than sixty (60) days before the date of the meeting to
each stockholder entitled to vote at such meeting. The notice shall specify the
place, date, and hour of the meeting, and, in the case of a special meeting, the
purpose or purposes for which the meeting is called.
2.5 ADVANCE NOTICE OF STOCKHOLDER NOMINEES AND STOCKHOLDER BUSINESS
---------------------------------------------------------------
Subject to the rights of holders of any class or series of stock having a
preference over the Common Stock as to dividends or upon liquidation,
(i) nominations for the election of directors, and
(ii) business proposed to be brought before any stockholder meeting
may be made by the board of directors or proxy committee appointed by the board
of directors or by any stockholder entitled to vote in the election of directors
generally if such nomination or business proposed is otherwise proper business
before such meeting. However, any such stockholder may nominate one or more
persons for election as directors at a meeting or propose business to be brought
before a meeting, or both, only if such stockholder has given timely notice in
proper written form of their intent to make such nomination or nominations or to
propose such business. To be
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<PAGE>
timely, such stockholder's notice must be delivered to or mailed and received at
the principal executive offices of the corporation not less than one hundred
twenty (120) calendar days in advance of the first anniversary date of mailing
of the corporation's proxy statement released to stockholders in connection with
the previous year's annual meeting of stockholders; provided, however, that in
the event that no annual meeting was held in the previous year or the date of
the annual meeting has been changed by more than thirty (30) days from the date
contemplated at the time of the previous year's proxy statement, notice by the
stockholder to be timely must be so received a reasonable time before the
solicitation is made. To be in proper form, a stockholder's notice to the
secretary shall set forth:
(a) the name and address of the stockholder who intends to make
the nominations or propose the business and, as the case may be, of the
person or persons to be nominated or of the business to be proposed;
(b) a representation that the stockholder is a holder of record
of stock of the corporation entitled to vote at such meeting and, if
applicable, intends to appear in person or by proxy at the meeting to
nominate the person or persons specified in the notice;
(c) if applicable, a description of all arrangements or
understandings between the stockholder and each nominee and any other
person or persons (naming such person or persons) pursuant to which the
nomination or nominations are to be made by the stockholder;
(d) such other information regarding each nominee or each matter
of business to be proposed by such stockholder as would be required to be
included in a proxy statement filed pursuant to the proxy rules of the
Securities and Exchange Commission had the nominee been nominated, or
intended to be nominated, or the matter been proposed, or intended to be
proposed by the board of directors; and
(e) if applicable, the consent of each nominee to serve as
director of the corporation if so elected.
The chairman of the meeting shall refuse to acknowledge the nomination of
any person or the proposal of any business not made in compliance with the
foregoing procedure.
2.6 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE
--------------------------------------------
Written notice of any meeting of stockholders, if mailed, is given when
deposited in the United States mail, postage prepaid, directed to the
stockholder at his address as it appears on the records of the corporation. An
affidavit of the secretary or an assistant secretary or of the transfer agent of
the corporation that the notice has been given shall, in the absence of fraud,
be prima facie evidence of the facts stated therein.
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<PAGE>
2.7 QUORUM
------
The holders of a majority of the stock issued and outstanding and entitled
to vote thereat, present in person or represented by proxy, shall constitute a
quorum at all meetings of the stockholders for the transaction of business
except as otherwise provided by statute or by the certificate of incorporation.
If, however, such quorum is not present or represented at any meeting of the
stockholders, then either (i) the Chairman of the meeting or (ii) the
stockholders entitled to vote thereat, present in person or represented by
proxy, shall have power to adjourn the meeting from time to time, without notice
other than announcement at the meeting, until a quorum is present or
represented. At such adjourned meeting at which a quorum is present or
represented, any business may be transacted that might have been transacted at
the meeting as originally noticed.
2.8 ADJOURNED MEETING; NOTICE
-------------------------
When a meeting is adjourned to another time or place, unless these bylaws
otherwise require, notice need not be given of the adjourned meeting if the time
and place thereof are announced at the meeting at which the adjournment is
taken. At the adjourned meeting the corporation may transact any business that
might have been transacted at the original meeting. If the adjournment is for
more than thirty (30) days, or if after the adjournment a new record date is
fixed for the adjourned meeting, a notice of the adjourned meeting shall be
given to each stockholder of record entitled to vote at the meeting.
2.9 CONDUCT OF BUSINESS
-------------------
The chairman of any meeting of stockholders shall determine the order of
business and the procedure at the meeting, including such regulation of the
manner of voting and the conduct of business.
2.10 VOTING
------
The stockholders entitled to vote at any meeting of stockholders shall be
determined in accordance with the provisions of Section 2.12 of these bylaws,
subject to the provisions of Sections 217 and 218 of the Delaware General
Corporation Law (relating to voting rights of fiduciaries, pledgors and joint
owners of stock and to voting trusts and other voting agreements).
Except as provided in the last paragraph of this Section 2.10, or as may be
otherwise provided in the certificate of incorporation, each stockholder shall
be entitled to one vote for each share of capital stock held by such
stockholder.
At a stockholders' meeting at which directors are to be elected, each
stockholder shall be entitled to cumulate votes (i.e., cast for any candidate a
number of votes greater than the number of votes which such stockholder normally
is entitled to cast) if the candidates' names have been properly placed in
nomination (in accordance with these bylaws) prior to commencement of the voting
and the stockholder requesting cumulative voting or any other stockholder voting
at the meeting in person or by proxy has given notice prior to commencement of
the voting of the
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<PAGE>
stockholder's intention to cumulate votes. If cumulative voting is properly
requested, each holder of stock, or of any class or classes or of a series or
series thereof, who elects to cumulate votes shall be entitled to as many votes
as equals the number of votes which (absent this provision as to cumulative
voting) such person would be entitled to cast for the election of directors with
respect to his shares of stock multiplied by the number of directors to be
elected by such person, and that such person may cast all of such votes for a
single director or may distribute them among the number to be voted for, or for
any two or more of them, as such person may see fit.
2.11 WAIVER OF NOTICE
----------------
Whenever notice is required to be given under any provision of the Delaware
General Corporation Law or of the certificate of incorporation or these bylaws,
a written waiver, signed by the person entitled to notice, whether before or
after the time stated therein, shall be deemed equivalent to notice. Attendance
of a person at a meeting shall constitute a waiver of notice of such meeting,
except when the person attends a meeting for the express purpose of objecting,
at the beginning of the meeting, to the transaction of any business because the
meeting is not lawfully called or convened. Neither the business to be
transacted at, nor the purpose of, any regular or special meeting of the
stockholders, directors, or members of a committee of directors need be
specified in any written waiver of notice unless so required by the certificate
of incorporation or these bylaws.
2.12 STOCKHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING
-------------------------------------------------------
Unless otherwise provided in the certificate of incorporation, any action
required to be taken at any annual or special meeting of stockholders of a
corporation, or any action that may be taken at any annual or special meeting of
such stockholders, may be taken without a meeting, without prior notice and
without a vote, if a consent or consents in writing, setting forth the action so
taken, shall be signed by the holders of outstanding stock having not less than
the minimum number of votes that would be necessary to authorize or take such
action at a meeting at which all shares entitled to vote thereon were present
and voted.
Prompt notice of the taking of the corporate action without a meeting by
less than unanimous written consent shall be given to those stockholders who
have not consented in writing. If the action which is consented to is such as
would have required the filing of a certificate under any section of the
Delaware General Corporation Law if such action had been voted on by
stockholders at a meeting thereof, then the certificate filed under such section
shall state, in lieu of any statement required by such section concerning any
vote of stockholders, that written notice and written consent have been given as
provided in Section 228 of the Delaware General Corporation Law.
2.13 RECORD DATE FOR STOCKHOLDER NOTICE; VOTING; GIVING CONSENTS
-----------------------------------------------------------
In order that the corporation may determine the stockholders entitled to
notice of or to vote at any meeting of stockholders or any adjournment thereof,
or entitled to express consent to corporate action in writing without a meeting,
or entitled to receive payment of any dividend or other distribution or
allotment of any rights, or entitled to exercise any rights in respect of any
change,
-5-
<PAGE>
conversion or exchange of stock or for the purpose of any other lawful action,
the board of directors may fix, in advance, a record date, which shall not be
more than sixty (60) nor less than ten (10) days before the date of such
meeting, nor more than sixty (60) days prior to any other action.
If the board of directors does not so fix a record date:
(i) The record date for determining stockholders entitled to notice
of or to vote at a meeting of stockholders shall be at the close of business on
the day next preceding the day on which notice is given, or, if notice is
waived, at the close of business on the day next preceding the day on which the
meeting is held.
(ii) The record date for determining stockholders entitled to
express consent to corporate action in writing without a meeting, when no prior
action by the board of directors is necessary, shall be the first date on which
a signed written consent is delivered to the corporation.
(iii) The record date for determining stockholders for any other
purpose shall be at the close of business on the day on which the board of
directors adopts the resolution relating thereto.
A determination of stockholders of record entitled to notice of or to vote
at a meeting of stockholders shall apply to any adjournment of the meeting;
provided, however, that the board of directors may fix a new record date for the
adjourned meeting.
2.14 PROXIES
-------
Each stockholder entitled to vote at a meeting of stockholders or to
express consent or dissent to corporate action in writing without a meeting may
authorize another person or persons to act for such stockholder by a written
proxy, signed by such stockholder and filed with the secretary of the
corporation, but no such proxy shall be voted or acted upon after three (3)
years from its date, unless the proxy provides for a longer period. A proxy
shall be deemed signed if such stockholder's name is placed on the proxy by any
reasonable means including, but not limited to, by facsimile signature, manual
signature, typewriting, telegraphic transmission or otherwise, by such
stockholder or such stockholder's attorney-in-fact. The revocability of a proxy
that states on its face that it is irrevocable shall be governed by the
provisions of Section 212(e) of the Delaware General Corporation Law.
2.15 LIST OF STOCKHOLDERS ENTITLED TO VOTE
-------------------------------------
The officer who has charge of the stock ledger of a corporation shall
prepare and make, at least ten (10) days before every meeting of stockholders, a
complete list of the stockholders entitled to vote at the meeting, arranged in
alphabetical order, and showing the address of each stockholder and the number
of shares registered in the name of each stockholder. Such list shall be open
to the examination of any stockholder, for any purpose germane to the meeting,
during ordinary business hours, for a period of at least ten (10) days prior to
the meeting, either at a place within the city where the meeting is to be held,
which place shall be specified in the notice of the meeting, or, if not so
specified, at the place where the meeting is to be held. The list shall also be
produced and kept at
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<PAGE>
the time and place of the meeting during the whole time thereof, and may be
inspected by any stockholder who is present. Such list shall presumptively
determine the identity of the stockholders entitled to vote at the meeting and
the number of shares held by each of them.
ARTICLE III
DIRECTORS
---------
3.1 POWERS
------
Subject to the provisions of the Delaware General Corporation Law and any
limitations in the certificate of incorporation or these bylaws relating to
action required to be approved by the stockholders or by the outstanding shares,
the business and affairs of the corporation shall be managed and all corporate
powers shall be exercised by or under the direction of the board of directors.
3.2 NUMBER OF DIRECTORS
-------------------
The number of directors of the corporation shall be eight (8) until changed
by a bylaw amending this Section 3.2, duly adopted by the board of directors or
by the stockholders.
No reduction of the authorized number of directors shall have the effect of
removing any director before that director's term of office expires.
3.3 ELECTION, QUALIFICATION AND TERM OF OFFICE OF DIRECTORS
-------------------------------------------------------
Except as provided in Section 3.4 of these bylaws, directors shall be
elected at each annual meeting of stockholders to hold office until the next
annual meeting. Directors need not be stockholders unless so required by the
certificate of incorporation or these bylaws, wherein other qualifications for
directors may be prescribed. Each director, including a director elected to
fill a vacancy, shall hold office until his successor is elected and qualified
or until his earlier resignation or removal.
Elections of directors need not be by written ballot.
3.4 RESIGNATION AND VACANCIES
-------------------------
Any director may resign at any time upon written notice to the attention of
the Secretary of the corporation. When one or more directors shall resign from
the board of directors, effective at a future date, a majority of the directors
then in office, including those who have so resigned, shall have power to fill
such vacancy or vacancies, the vote thereon to take effect when such resignation
or resignations shall become effective, and each director so chosen shall hold
office as provided in this section in the filling of other vacancies.
Unless otherwise provided in the certificate of incorporation or these
bylaws:
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<PAGE>
(i) the authorized number of directors elected by all of the
stockholders having the right to vote as a single class may be filled by a
majority of the directors then in office, although less than a quorum, or by a
sole remaining director.
(ii) Whenever the holders of any class or classes of stock or series
thereof are entitled to elect one or more directors by the certificate of
incorporation, vacancies and newly created directorships of such class or
classes or series may be filled by a majority of the directors elected by such
class or classes or series thereof then in office, or by a sole remaining
director so elected.
If at any time, by reason of death or resignation or other cause, the
corporation should have no directors in office, then any officer or any
stockholder or an executor, administrator, trustee or guardian of a stockholder,
or other fiduciary entrusted with like responsibility for the person or estate
of a stockholder, may call a special meeting of stockholders in accordance with
the provisions of the certificate of incorporation or these bylaws, or may apply
to the Court of Chancery for a decree summarily ordering an election as provided
in Section 211 of the Delaware General Corporation Law.
If, at the time of filling any vacancy or any newly created directorship,
the directors then in office constitute less than a majority of the whole board
(as constituted immediately prior to any such increase), then the Court of
Chancery may, upon application of any stockholder or stockholders holding at
least ten (10) percent of the total number of the shares at the time outstanding
having the right to vote for such directors, summarily order an election to be
held to fill any such vacancies or newly created directorships, or to replace
the directors chosen by the directors then in office as aforesaid, which
election shall be governed by the provisions of Section 211 of the Delaware
General Corporation Law as far as applicable.
3.5 PLACE OF MEETINGS; MEETINGS BY TELEPHONE
----------------------------------------
The board of directors of the corporation may hold meetings, both regular
and special, either within or outside the State of Delaware.
Unless otherwise restricted by the certificate of incorporation or these
bylaws, members of the board of directors, or any committee designated by the
board of directors, may participate in a meeting of such board of directors, or
committee by means of conference telephone or similar communications equipment
by means of which all persons participating in the meeting can hear each other,
and such participation in a meeting pursuant to this section shall constitute
presence in person at the meeting.
3.6 REGULAR MEETINGS
----------------
Regular meetings of the board of directors may be held without notice at
such time and at such place as shall from time to time be determined by the
board.
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<PAGE>
3.7 SPECIAL MEETINGS; NOTICE
------------------------
Special meetings of the board of directors for any purpose or purposes may
be called at any time by the chairman of the board, the president, any vice
president, the secretary or any two (2) directors.
Notice of the time and place of special meetings shall be delivered
personally or by telephone to each director or sent by first-class mail or
telegram, charges prepaid, addressed to each director at that director's address
as it is shown on the records of the corporation. If the notice is mailed, it
shall be deposited in the United States mail at least four (4) days before the
time of the holding of the meeting. If the notice is delivered personally or by
telephone or by telegram, it shall be delivered personally or by telephone or to
the telegraph company at least forty-eight (48) hours before the time of the
holding of the meeting. Any oral notice given personally or by telephone may be
communicated either to the director or to a person at the office of the director
who the person giving the notice has reason to believe will promptly communicate
it to the director. The notice need not specify the purpose or the place of the
meeting, if the meeting is to be held at the principal executive office of the
corporation.
3.8 QUORUM
------
At all meetings of the board of directors, a majority of the authorized
number of directors shall constitute a quorum for the transaction of business
and the act of a majority of the directors present at any meeting at which there
is a quorum shall be the act of the board of directors, except as may be
otherwise specifically provided by statute, the certificate of incorporation, or
these bylaws. If a quorum is not present at any meeting of the board of
directors, then the directors present thereat may adjourn the meeting from time
to time, without notice other than announcement at the meeting, until a quorum
is present.
A meeting at which a quorum is initially present may continue to transact
business notwithstanding the withdrawal of directors, if any action taken is
approved by at least a majority of the required quorum for that meeting.
3.9 WAIVER OF NOTICE
----------------
Whenever notice is required to be given under any provision of the Delaware
General Corporation Law, the certificate of incorporation, or these bylaws, a
written waiver thereof, signed by the person entitled to notice, whether before
or after the time stated therein, shall be deemed equivalent to notice.
Attendance of a person at a meeting shall constitute a waiver of notice of such
meeting, except when such person attends a meeting for the express purpose of
objecting, at the beginning of the meeting, to the transaction of any business
because the meeting is not lawfully called or convened. Neither the business to
be transacted at, nor the purpose of, any regular or special meeting of the
directors, or members of a committee of directors, need be specified in any
written waiver of notice unless so required by the certificate of incorporation
or these bylaws.
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<PAGE>
3.10 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING
-------------------------------------------------
Unless otherwise restricted by the certificate of incorporation or these
bylaws, any action required or permitted to be taken at any meeting of the board
of directors, or of any committee thereof may be taken without a meeting if all
members of the board or committee, as the case may be, consent thereto in
writing and the writing or writings are filed with the minutes of proceedings of
the board or committee.
3.11 FEES AND COMPENSATION OF DIRECTORS
----------------------------------
Unless otherwise restricted by the certificate of incorporation or these
bylaws, the board of directors shall have the authority to fix the compensation
of directors.
3.12 APPROVAL OF LOANS TO OFFICERS
-----------------------------
The corporation may lend money to, or guarantee any obligation of, or
otherwise assist any officer or other employee of the corporation or of its
subsidiary, including any officer or employee who is a director of the
corporation or its subsidiary, whenever, in the judgment of the directors, such
loan, guaranty or assistance may reasonably be expected to benefit the
corporation. The loan, guaranty or other assistance may be with or without
interest and may be unsecured, or secured in such manner as the board of
directors shall approve, including, without limitation, a pledge of shares of
stock of the corporation. Nothing contained in this section shall be deemed to
deny, limit or restrict the powers of guaranty or warranty of the corporation at
common law or under any statute.
3.13 REMOVAL OF DIRECTORS
--------------------
Unless otherwise restricted by statute, by the certificate of incorporation
or by these bylaws, any director or the entire board of directors may be
removed, with or without cause, by the holders of a majority of the shares then
entitled to vote at an election of directors; provided, however, that, so long
as stockholders of the corporation are entitled to cumulative voting, if less
than the entire board is to be removed, no director may be removed without cause
if the votes cast against his removal would be sufficient to elect such director
if then cumulatively voted at an election of the entire board of directors or,
if there be classes of directors, at an election of the class of directors of
which such director is a part.
No reduction of the authorized number of directors shall have the effect of
removing any director prior to the expiration of such director's term of office.
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<PAGE>
ARTICLE IV
COMMITTEES
----------
4.1 COMMITTEES OF DIRECTORS
-----------------------
The board of directors may, by resolution passed by a majority of the whole
board, designate one or more committees, with each committee to consist of one
or more of the directors of the corporation. The board may designate one or
more directors as alternate members of any committee, who may replace any absent
or disqualified member at any meeting of the committee. In the absence or
disqualification of a member of a committee, the member or members thereof
present at any meeting and not disqualified from voting, whether or not such
member or members constitute a quorum, may unanimously appoint another member of
the board of directors to act at the meeting in the place of any such absent or
disqualified member. Any such committee, to the extent provided in the
resolution of the board of directors, or in the bylaws of the corporation, shall
have and may exercise all the powers and authority of the board of directors in
the management of the business and affairs of the corporation, and may authorize
the seal of the corporation to be affixed to all papers that may require it; but
no such committee shall have the power or authority (i) approving or adopting
or recommending to the stockholders, any action or matter expressly required by
the Delaware General Corporation Law to be submitted to stockholders for
approval or (ii) adopting, amending, or repealing any bylaws of the corporation;
and, unless the board resolution establishing the committee, the bylaws or the
certificate of incorporation expressly so provide, no such committee shall have
the power or authority to declare a dividend, to authorize the issuance of
stock, or to adopt a certificate of ownership and merger pursuant to Section 253
of the Delaware General Corporation Law.
4.2 COMMITTEE MINUTES
-----------------
Each committee shall keep regular minutes of its meetings and report the
same to the board of directors when required.
4.3 MEETINGS AND ACTION OF COMMITTEES
---------------------------------
Meetings and actions of committees shall be governed by, and held and taken
in accordance with, the provisions of Article III of these bylaws, Section 3.5
(place of meetings and meetings by telephone), Section 3.6 (regular meetings),
Section 3.7 (special meetings and notice), Section 3.8 (quorum), Section 3.9
(waiver of notice), and Section 3.10 (action without a meeting), with such
changes in the context of those bylaws as are necessary to substitute the
committee and its members for the board of directors and its members; provided,
however, that the time of regular meetings of committees may be determined
either by resolution of the board of directors or by resolution of the
committee, that special meetings of committees may also be called by resolution
of the board of directors and that notice of special meetings of committees
shall also be given to all alternate members, who shall have the right to attend
all meetings of the committee. The board of directors
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<PAGE>
may adopt rules for the government of any committee not inconsistent with the
provisions of these bylaws.
ARTICLE V
OFFICERS
--------
5.1 OFFICERS
--------
The officers of the corporation shall be a president, a secretary, and a
chief financial officer. The corporation may also have, at the discretion of
the board of directors, a chairman of the board, one or more vice presidents,
one or more assistant vice presidents, one or more assistant secretaries, one or
more assistant treasurers, and any such other officers as may be appointed in
accordance with the provisions of Section 5.3 of these bylaws. Any number of
offices may be held by the same person.
5.2 APPOINTMENT OF OFFICERS
-----------------------
The officers of the corporation, except such officers as may be appointed
in accordance with the provisions of Sections 5.3 or 5.5 of these bylaws, shall
be appointed by the board of directors, subject to the rights, if any, of an
officer under any contract of employment.
5.3 SUBORDINATE OFFICERS
--------------------
The board of directors may appoint, or empower the president to appoint,
such other officers and agents as the business of the corporation may require,
each of whom shall hold office for such period, have such authority, and perform
such duties as are provided in these bylaws or as the board of directors may
from time to time determine.
5.4 REMOVAL AND RESIGNATION OF OFFICERS; FILLING VACANCIES
------------------------------------------------------
Subject to the rights, if any, of an officer under any contract of
employment, any officer may be removed, either with or without cause, by an
affirmative vote of the majority of the board of directors at any regular or
special meeting of the board or, except in the case of an officer chosen by the
board of directors, by any officer upon whom such power of removal may be
conferred by the board of directors.
Any officer may resign at any time by giving written notice to the
corporation. Any resignation shall take effect at the date of the receipt of
that notice or at any later time specified in that notice; and, unless otherwise
specified in that notice, the acceptance of the resignation shall not be
necessary to make it effective. Any resignation is without prejudice to the
rights, if any, of the corporation under any contract to which the officer is a
party.
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<PAGE>
Any vacancy occurring in any office of the corporation shall be filled by
the board of directors.
5.5 CHAIRMAN OF THE BOARD
---------------------
The chairman of the board, if such an officer be elected, shall, if
present, preside at meetings of the board of directors and exercise and perform
such other powers and duties as may from time to time be assigned to the
chairman of the board by the board of directors or as may be prescribed by these
bylaws. If there is no president and no one has been appointed chief executive
officer, then the chairman of the board shall also be the chief executive
officer of the corporation and shall have the powers and duties prescribed in
Section 5.6 of these bylaws.
5.6 CHIEF EXECUTIVE OFFICER
-----------------------
The board of directors shall select a chief executive officer of the
corporation who shall be subject to the control of the board of directors and
have general supervision, direction and control of the business and the officers
of the corporation. The chief executive officer shall preside at all meetings of
the stockholders and, in the absence or nonexistence of a chairman of the board,
at all meetings of the board of directors.
5.7 PRESIDENT
---------
The president shall have the general powers and duties of management
usually vested in the office of president of a corporation and shall have such
other powers and duties as may be prescribed by the board of directors or these
bylaws. In addition and subject to such supervisory powers, if any, as may be
given by the board of directors to the chairman of the board, if no one has been
appointed chief executive officer, the president shall be the chief executive
officer of the corporation and shall, subject to the control of the board of
directors, have the powers and duties described in Section 5.6.
5.8 VICE PRESIDENTS
---------------
In the absence or disability of the president, the vice presidents, if any,
in order of their rank as fixed by the board of directors or, if not ranked, a
vice president designated by the board of directors, shall perform all the
duties of the president and when so acting shall have all the powers of, and be
subject to all the restrictions upon, the president. The vice presidents shall
have such other powers and perform such other duties as from time to time may be
prescribed for them respectively by the board of directors, these bylaws, the
president or the chairman of the board.
5.9 SECRETARY
---------
The secretary shall keep or cause to be kept, at the principal executive
office of the corporation or such other place as the board of directors may
direct, a book of minutes of all meetings and actions of directors, committees
of directors, and stockholders. The minutes shall show the time and place of
each meeting, whether regular or special (and, if special, how authorized
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and the notice given), the names of those present at directors' meetings or
committee meetings, the number of shares present or represented at stockholders'
meetings, and the proceedings thereof.
The secretary shall keep, or cause to be kept, at the principal executive
office of the corporation or at the office of the corporation's transfer agent
or registrar, as determined by resolution of the board of directors, a share
register, or a duplicate share register, showing the names of all stockholders
and their addresses, the number and classes of shares held by each, the number
and date of certificates evidencing such shares, and the number and date of
cancellation of every certificate surrendered for cancellation.
The secretary shall give, or cause to be given, notice of all meetings of
the stockholders and of the board of directors required to be given by law or by
these bylaws. The secretary shall keep the seal of the corporation, if one be
adopted, in safe custody and shall have such other powers and perform such other
duties as may be prescribed by the board of directors or by these bylaws.
5.10 CHIEF FINANCIAL OFFICER
-----------------------
The chief financial officer shall keep and maintain, or cause to be kept
and maintained, adequate and correct books and records of accounts of the
properties and business transactions of the corporation, including accounts of
its assets, liabilities, receipts, disbursements, gains, losses, capital
retained earnings, and shares. The books of account shall at all reasonable
times be open to inspection by any director.
The chief financial officer shall deposit all moneys and other valuables in
the name and to the credit of the corporation with such depositories as may be
designated by the board of directors. The chief financial officer shall
disburse the funds of the corporation as may be ordered by the board of
directors, shall render to the president and directors, whenever they request
it, an account of all his transactions as chief financial officer and of the
financial condition of the corporation, and shall have other powers and perform
such other duties as may be prescribed by the board of directors or these
bylaws.
The chief financial officer shall be the treasurer of the corporation.
5.11 ASSISTANT SECRETARY
-------------------
The assistant secretary, or, if there is more than one, the assistant
secretaries in the order determined by the stockholders or board of directors
(or if there be no such determination, then in the order of their election)
shall, in the absence of the secretary or in the event of his or her inability
or refusal to act, perform the duties and exercise the powers of the secretary
and shall perform such other duties and have such other powers as may be
prescribed by the board of directors or these bylaws.
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5.12 ASSISTANT TREASURER
-------------------
The assistant treasurer, or, if there is more than one, the assistant
treasurers, in the order determined by the stockholders or board of directors
(or if there be no such determination, then in the order of their election),
shall, in the absence of the chief financial officer or in the event of his or
her inability or refusal to act, perform the duties and exercise the powers of
the chief financial officer and shall perform such other duties and have such
other powers as may be prescribed by the board of directors or these bylaws.
5.13 REPRESENTATION OF SHARES OF OTHER CORPORATIONS
----------------------------------------------
The chairman of the board, the president, any vice president, the chief
financial officer, the secretary or assistant secretary of this corporation, or
any other person authorized by the board of directors or the president or a vice
president, is authorized to vote, represent, and exercise on behalf of this
corporation all rights incident to any and all shares of any other corporation
or corporations standing in the name of this corporation. The authority granted
herein may be exercised either by such person directly or by any other person
authorized to do so by proxy or power of attorney duly executed by such person
having the authority.
5.14 AUTHORITY AND DUTIES OF OFFICERS
--------------------------------
In addition to the foregoing authority and duties, all officers of the
corporation shall respectively have such authority and perform such duties in
the management of the business of the corporation as may be designated from time
to time by the board of directors or the stockholders.
ARTICLE VI
INDEMNITY
---------
6.1 THIRD PARTY ACTIONS
-------------------
The corporation shall indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending, or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
(other than an action by or in the right of the corporation) by reason of the
fact that such person is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture trust or other enterprise, against expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement (if such settlement is approved
in advance by the corporation, which approval shall not be unreasonably
withheld) actually and reasonably incurred by such person in connection with
such action, suit or proceeding if such person acted in good faith and in a
manner such person reasonably believed to be in or not opposed to the best
interests of the corporation, and, with respect to any criminal action or
proceeding, had no reasonable cause to
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believe such person's conduct was unlawful. The termination of any action, suit
or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo
----
contendere or its equivalent, shall not, of itself, create a presumption that
- ----------
the person did not act in good faith and in a manner which the person reasonably
believed to be in or not opposed to the best interest of the corporation, and,
with respect to any criminal action or proceeding, had reasonable cause to
believe that the person's conduct was unlawful.
6.2 ACTIONS BY OR IN THE RIGHT OF THE CORPORATION
---------------------------------------------
The corporation shall indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action or
suit by or in the right of the corporation to procure a judgment in its favor by
reason of the fact that such person is or was a director, officer, employee or
agent of corporation, or is or was serving at the request of the corporation as
a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise against expenses (including attorneys'
fees) and amounts paid in settlement (if such settlement is approved in advance
by the corporation, which approval shall not be unreasonably withheld) actually
and reasonably incurred by such person in connection with the defense or
settlement of such action or suit if such person acted in good faith and in
manner such person reasonably believed to be in or not opposed to the best
interests of the corporation, except that no indemnification shall be made in
respect of any claim, issue or matter as to which such person shall have been
adjudged to be liable to the corporation unless and only to the extent that the
Delaware Court of Chancery or the court in which such action or suit was brought
shall determine upon application that, despite the adjudication of liability but
in view of all the circumstances of the case, such person is fairly and
reasonably entitled to indemnity for such expenses which the Delaware Court of
Chancery or such other court shall deem proper. Notwithstanding any other
provision of this Article VI, no person shall be indemnified hereunder for any
expenses or amounts paid in settlement with respect to any action to recover
short-swing profits under Section 16(b) of the Securities Exchange Act of 1934,
as amended.
6.3 SUCCESSFUL DEFENSE
------------------
To the extent that a director, officer, employee or agent of the
corporation has been successful on the merits or otherwise in defense of any
action, suit or proceeding referred to in Sections 6.1 and 6.2, or in defense of
any claim, issue or matter therein, such person shall be indemnified against
expenses (including attorneys' fees) actually and reasonably incurred by such
person in connection therewith.
6.4 DETERMINATION OF CONDUCT
------------------------
Any indemnification under Sections 6.1 and 6.2 (unless ordered by a court)
shall be made by the corporation only as authorized in the specific case upon a
determination that the indemnification of the director, officer, employee or
agent is proper in the circumstances because such person has met the applicable
standard of conduct set forth in Sections 6.1 and 6.2. Such determination shall
be made (1) by the Board of Directors or the Executive Committee by a majority
vote of a quorum consisting of directors who were not parties to such action,
suit or proceeding or (2) or if such quorum is not obtainable or, even if
obtainable, a quorum of disinterested directors so directs, by
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independent legal counsel in a written opinion, or (3) by the stockholders.
Notwithstanding the foregoing, a director, officer, employee or agent of the
Corporation shall be entitled to contest any determination that the director,
officer, employee or agent has not met the applicable standard of conduct set
forth in Sections 6.1 and 6.2 by petitioning a court of competent jurisdiction.
6.5 PAYMENT OF EXPENSES IN ADVANCE
------------------------------
Expenses incurred in defending a civil or criminal action, suit or
proceeding, by an individual who may be entitled to indemnification pursuant to
Section 6.1 or 6.2, shall be paid by the corporation in advance of the final
disposition of such action, suit or proceeding upon receipt of an undertaking by
or on behalf of the director, officer, employee or agent to repay such amount if
it shall ultimately be determined that such person is not entitled to be
indemnified by the corporation as authorized in this Article VI.
6.6 INDEMNITY NOT EXCLUSIVE
-----------------------
The indemnification and advancement of expenses provided by or granted
pursuant to the other sections of this Article VI shall not be deemed exclusive
of any other rights to which those seeking indemnification or advancement of
expenses may be entitled under any by-law, agreement, vote of stockholders or
disinterested directors or otherwise, both as to action in such person's
official capacity and as to action in another capacity while holding such
office.
6.7 INSURANCE INDEMNIFICATION
-------------------------
The corporation shall have the power to purchase and maintain insurance on
behalf of any person who is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against any liability asserted against such
person and incurred by such person in any such capacity or arising out of such
person's status as such, whether or not the corporation would have the power to
indemnify such person against such liability under the provisions of this
Article VI.
6.8 THE CORPORATION
---------------
For purposes of this Article VI, references to "the corporation" shall
include, in addition to the resulting corporation, any constituent corporation
(including any constituent of a constituent) absorbed in a consolidation or
merger which, if its separate existence had continued, would have had power and
authority to indemnify its directors, officers, and employees or agents, so that
any person who is or was a director, officer, employee or agent of such
constituent corporation, or is or was serving at the request of such constituent
corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, shall stand in the same
position under and subject to the provisions of this Article VI (including,
without limitation the provisions of Section 6.4) with respect to the resulting
or surviving corporation as such person would have with respect to such
constituent corporation if its separate existence had continued.
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6.9 EMPLOYEE BENEFIT PLANS
----------------------
For purposes of this Article VI, references to "other enterprises" shall
include employee benefit plans; references to "fines" shall include any excise
taxes assessed on a person with respect to an employee benefit plan; and
references to "serving at the request of the corporation" shall include any
service as a director, officer, employee or agent of the corporation which
imposes duties on, or involves services by, such director, officer, employee, or
agent with respect to an employee benefit plan, its participants, or
beneficiaries; and a person who acted in good faith and in a manner such person
reasonably believed to be in the interest of the participants and beneficiaries
of an employee benefit plan shall be deemed to have acted in a manner "not
opposed to the best interests of the corporation" as referred to in this Article
VI.
6.10 CONTINUATION OF INDEMNIFICATION AND ADVANCEMENT OF EXPENSES
-----------------------------------------------------------
The indemnification and advancement of expenses provided by, or granted
pursuant to, this Article VI shall, unless otherwise provided when authorized or
ratified, continue as to a person who has ceased to be a director, officer,
employee or agent and shall inure to the benefit of the heirs, executors and
administrators of such a person.
ARTICLE VII
RECORDS AND REPORTS
-------------------
7.1 MAINTENANCE AND INSPECTION OF RECORDS
-------------------------------------
The corporation shall, either at its principal executive officer or at such
place or places as designated by the board of directors, keep a record of its
stockholders listing their names and addresses and the number and class of
shares held by each stockholder, a copy of these bylaws as amended to date,
accounting books, and other records.
Any stockholder of record, in person or by attorney or other agent, shall,
upon written demand under oath stating the purpose thereof, have the right
during the usual hours for business to inspect for any proper purpose the
corporation's stock ledger, a list of its stockholders, and its other books and
records and to make copies or extracts therefrom. A proper purpose shall mean a
purpose reasonably related to such person's interest as a stockholder. In every
instance where an attorney or other agent is the person who seeks the right to
inspection, the demand under oath shall be accompanied by a power of attorney or
such other writing that authorizes the attorney or other agent so to act on
behalf of the stockholder. The demand under oath shall be directed to the
corporation at its registered office in Delaware or at its principal place of
business.
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The officer who has charge of the stock ledger of the corporation shall
prepare and make, at least ten (10) days before every meeting of stockholders, a
complete list of the stockholders entitled to vote at the meeting, arranged in
alphabetical order, showing the address of each stockholder and the number of
shares registered in the name of each stockholder. Such list shall be open to
the examination of any stockholder, for any purpose germane to the meeting,
during ordinary business hours, for a period of at least ten (10) days prior to
the meeting, either at a place within the city where the meeting is to be held,
which place shall be specified in the notice of the meeting, or, if not so
specified, at the place where the meeting is to be held. The list shall also be
produced and kept at the time and place of the meeting during the whole time
thereof, and may be inspected by any stockholder who is present.
7.2 INSPECTION BY DIRECTORS
-----------------------
Any director shall have the right to examine the corporation's stock
ledger, a list of its stockholders, and its other books and records for a
purpose reasonably related to his position as a director. The Court of Chancery
is hereby vested with the exclusive jurisdiction to determine whether a director
is entitled to the inspection sought. The Court may summarily order the
corporation to permit the director to inspect any and all books and records, the
stock ledger, and the stock list and to make copies or extracts therefrom. The
Court may, in its discretion, prescribe any limitations or conditions with
reference to the inspection, or award such other and further relief as the Court
may deem just and proper.
7.3 ANNUAL STATEMENT TO STOCKHOLDERS
--------------------------------
The board of directors shall present at each annual meeting, and at any
special meeting of the stockholders when called for by vote of the stockholders,
a full and clear statement of the business and condition of the corporation.
ARTICLE VIII
GENERAL MATTERS
---------------
8.1 CHECKS
------
From time to time, the board of directors shall determine by resolution
which person or persons may sign or endorse all checks, drafts, other orders for
payment of money, notes or other evidences of indebtedness that are issued in
the name of or payable to the corporation, and only the persons so authorized
shall sign or endorse those instruments.
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8.2 EXECUTION OF CORPORATE CONTRACTS AND INSTRUMENTS
------------------------------------------------
The board of directors, except as otherwise provided in these bylaws, may
authorize any officer or officers, or agent or agents, to enter into any
contract or execute any instrument in the name of and on behalf of the
corporation; such authority may be general or confined to specific instances.
Unless so authorized or ratified by the board of directors or within the agency
power of an officer, no officer, agent or employee shall have any power or
authority to bind the corporation by any contract or engagement or to pledge its
credit or to render it liable for any purpose or for any amount.
8.3 STOCK CERTIFICATES; PARTLY PAID SHARES
--------------------------------------
The shares of the corporation shall be represented by certificates,
provided that the board of directors of the corporation may provide by
resolution or resolutions that some or all of any or all classes or series of
its stock shall be uncertificated shares. Any such resolution shall not apply
to shares represented by a certificate until such certificate is surrendered to
the corporation. Notwithstanding the adoption of such a resolution by the board
of directors, every holder of stock represented by certificates and upon request
every holder of uncertificated shares shall be entitled to have a certificate
signed by, or in the name of the corporation by the chairman or vice-chairman of
the board of directors, or the president or vice-president, and by the chief
financial officer or an assistant treasurer, or the secretary or an assistant
secretary of such corporation representing the number of shares registered in
certificate form. Any or all of the signatures on the certificate may be a
facsimile. In case any officer, transfer agent or registrar who has signed or
whose facsimile signature has been placed upon a certificate has ceased to be
such officer, transfer agent or registrar before such certificate is issued, it
may be issued by the corporation with the same effect as if such person were
such officer, transfer agent or registrar at the date of issue.
The corporation may issue the whole or any part of its shares as partly
paid and subject to call for the remainder of the consideration to be paid
therefor. Upon the face or back of each stock certificate issued to represent
any such partly paid shares, upon the books and records of the corporation in
the case of uncertificated partly paid shares, the total amount of the
consideration to be paid therefor and the amount paid thereon shall be stated.
Upon the declaration of any dividend on fully paid shares, the corporation shall
declare a dividend upon partly paid shares of the same class, but only upon the
basis of the percentage of the consideration actually paid thereon.
8.4 SPECIAL DESIGNATION ON CERTIFICATES
-----------------------------------
If the corporation is authorized to issue more than one class of stock or
more than one series of any class, then the powers, the designations, the
preferences, and the 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 shall be set forth in full or
summarized on the face or back of the certificate that the corporation shall
issue to represent such class or series of stock; provided, however, that,
except as otherwise provided in Section 202 of the General Corporation Law of
Delaware, in lieu of the foregoing requirements there may be set forth on the
face or back of the certificate that the corporation shall issue to represent
such class or series of stock
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a statement that the corporation will furnish without charge to each stockholder
who so requests the powers, the designations, the preferences, and the 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.
8.5 LOST CERTIFICATES
-----------------
Except as provided in this Section 8.5, no new certificates for shares
shall be issued to replace a previously issued certificate unless the latter is
surrendered to the corporation and canceled at the same time. The corporation
may issue a new certificate of stock or uncertificated shares in the place of
any certificate theretofore issued by it, alleged to have been lost, stolen or
destroyed, and the corporation may require the owner of the lost, stolen or
destroyed certificate, or his legal representative, to give the corporation a
bond sufficient to indemnify it against any claim that may be made against it on
account of the alleged loss, theft or destruction of any such certificate or the
issuance of such new certificate or uncertificated shares.
8.6 CONSTRUCTION; DEFINITIONS
-------------------------
Unless the context requires otherwise, the general provisions, rules of
construction, and definitions in the Delaware General Corporation Law shall
govern the construction of these bylaws. Without limiting the generality of
this provision, the singular number includes the plural, the plural number
includes the singular, and the term "person" includes both a corporation and a
natural person.
8.7 DIVIDENDS
---------
The directors of the corporation, subject to any restrictions contained in
(i) the Delaware General Corporation Law or (ii) the certificate of
incorporation, may declare and pay dividends upon the shares of its capital
stock. Dividends may be paid in cash, in property, or in shares of the
corporation's capital stock.
The directors of the corporation may set apart out of any of the funds of
the corporation available for dividends a reserve or reserves for any proper
purpose and may abolish any such reserve. Such purposes shall include but not be
limited to equalizing dividends, repairing or maintaining any property of the
corporation, and meeting contingencies.
8.8 FISCAL YEAR
-----------
The fiscal year of the corporation shall be fixed by resolution of the
board of directors and may be changed by the board of directors.
8.9 SEAL
----
The corporation may adopt a corporate seal, which shall be adopted and
which may be altered by the board of directors, and may use the same by causing
it or a facsimile thereof to be impressed or affixed or in any other manner
reproduced.
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8.10 TRANSFER OF STOCK
-----------------
Upon surrender to the corporation or the transfer agent of the corporation
of a certificate for shares duly endorsed or accompanied by proper evidence of
succession, assignation or authority to transfer, it shall be the duty of the
corporation to issue a new certificate to the person entitled thereto, cancel
the old certificate, and record the transaction in its books.
8.11 STOCK TRANSFER AGREEMENTS
-------------------------
The corporation shall have power to enter into and perform any agreement
with any number of stockholders of any one or more classes of stock of the
corporation to restrict the transfer of shares of stock of the corporation of
any one or more classes owned by such stockholders in any manner not prohibited
by the Delaware General Corporation Law.
8.12 REGISTERED STOCKHOLDERS
-----------------------
The corporation shall be entitled to recognize the exclusive right of a
person registered on its books as the owner of shares to receive dividends and
to vote as such owner, shall be entitled to hold liable for calls and
assessments the person registered on its books as the owner of shares, and shall
not be bound to recognize any equitable or other claim to or interest in such
share or shares on the part of another person, whether or not it shall have
express or other notice thereof, except as otherwise provided by the laws of
Delaware.
ARTICLE IX
AMENDMENTS
----------
The bylaws of the corporation may be adopted, amended or repealed by the
stockholders entitled to vote; provided, however, that the corporation may, in
its certificate of incorporation, confer the power to adopt, amend or repeal
bylaws upon the directors. The fact that such power has been so conferred upon
the directors shall not divest the stockholders of the power, nor limit their
power to adopt, amend or repeal bylaws.
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CERTIFICATE OF ADOPTION OF BYLAWS
OF
LIQUID AUDIO, INC.
Certificate by Secretary
------------------------
The undersigned hereby certifies that he is the duly elected, qualified,
and acting Secretary of Liquid Audio, Inc. and that the foregoing Bylaws,
comprising twenty-two (22) pages, were adopted as the Bylaws of the corporation
on April ___, 1999 by the board of directors of the corporation.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand and affixed
the corporate seal this ___ day of April 1999.
_________________________________
Robert Flynn, Secretary
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EXHIBIT 3.4
RESTATED BYLAWS
OF
LIQUID AUDIO, INC.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
ARTICLE I CORPORATE OFFICES 1
1.1 REGISTERED OFFICE................................................ 1
1.2 OTHER OFFICES.................................................... 1
ARTICLE II MEETINGS OF STOCKHOLDERS 1
2.1 PLACE OF MEETINGS................................................ 1
2.2 ANNUAL MEETING................................................... 1
2.3 SPECIAL MEETING.................................................. 2
2.4 NOTICE OF STOCKHOLDERS' MEETINGS................................. 2
2.5 ADVANCE NOTICE OF STOCKHOLDER NOMINEES AND STOCKHOLDER BUSINESS.. 2
2.6 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE..................... 3
2.7 QUORUM........................................................... 4
2.8 ADJOURNED MEETING; NOTICE........................................ 4
2.9 CONDUCT OF BUSINESS.............................................. 4
2.10 VOTING........................................................... 4
2.11 WAIVER OF NOTICE................................................. 5
2.12 STOCKHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING.......... 5
2.13 RECORD DATE FOR STOCKHOLDER NOTICE; VOTING; GIVING CONSENTS...... 5
2.14 PROXIES.......................................................... 6
2.15 LIST OF STOCKHOLDERS ENTITLED TO VOTE............................ 6
ARTICLE III DIRECTORS 7
3.1 POWERS........................................................... 7
3.2 NUMBER OF DIRECTORS.............................................. 7
3.3 ELECTION, QUALIFICATION AND TERM OF OFFICE OF DIRECTORS.......... 7
3.4 RESIGNATION AND VACANCIES........................................ 8
3.5 PLACE OF MEETINGS; MEETINGS BY TELEPHONE......................... 9
3.6 REGULAR MEETINGS................................................. 9
3.7 SPECIAL MEETINGS; NOTICE......................................... 9
3.8 QUORUM........................................................... 9
3.9 WAIVER OF NOTICE................................................. 10
3.10 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING................ 10
3.11 FEES AND COMPENSATION OF DIRECTORS............................... 10
3.12 APPROVAL OF LOANS TO OFFICERS.................................... 10
3.13 REMOVAL OF DIRECTORS............................................. 11
</TABLE>
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<TABLE>
<S> <C>
ARTICLE IV COMMITTEES 11
4.1 COMMITTEES OF DIRECTORS........................................ 11
4.2 COMMITTEE MINUTES.............................................. 11
4.3 MEETINGS AND ACTION OF COMMITTEES.............................. 12
ARTICLE V OFFICERS 12
5.1 OFFICERS....................................................... 12
5.2 APPOINTMENT OF OFFICERS........................................ 12
5.3 SUBORDINATE OFFICERS........................................... 12
5.4 REMOVAL AND RESIGNATION OF OFFICERS; FILLING VACANCIES......... 13
5.5 CHAIRMAN OF THE BOARD.......................................... 13
5.6 CHIEF EXECUTIVE OFFICER........................................ 13
5.7 PRESIDENT...................................................... 13
5.8 VICE PRESIDENTS................................................ 13
5.9 SECRETARY...................................................... 14
5.10 CHIEF FINANCIAL OFFICER........................................ 14
5.11 ASSISTANT SECRETARY............................................ 15
5.12 ASSISTANT TREASURER............................................ 15
5.13 REPRESENTATION OF SHARES OF OTHER CORPORATIONS................. 15
5.14 AUTHORITY AND DUTIES OF OFFICERS............................... 15
ARTICLE VI INDEMNITY 15
6.1 THIRD PARTY ACTIONS............................................ 15
6.2 ACTIONS BY OR IN THE RIGHT OF THE CORPORATION.................. 16
6.3 SUCCESSFUL DEFENSE............................................. 16
6.4 DETERMINATION OF CONDUCT....................................... 17
6.5 PAYMENT OF EXPENSES IN ADVANCE................................. 17
6.6 INDEMNITY NOT EXCLUSIVE........................................ 17
6.7 INSURANCE INDEMNIFICATION...................................... 17
6.8 THE CORPORATION................................................ 18
6.9 EMPLOYEE BENEFIT PLANS......................................... 18
6.10 CONTINUATION OF INDEMNIFICATION AND ADVANCEMENT OF EXPENSES.... 18
ARTICLE VII RECORDS AND REPORTS 18
7.1 MAINTENANCE AND INSPECTION OF RECORDS.......................... 18
7.2 INSPECTION BY DIRECTORS........................................ 19
7.3 ANNUAL STATEMENT TO STOCKHOLDERS............................... 19
ARTICLE VIII GENERAL MATTERS 20
8.1 CHECKS......................................................... 20
8.2 EXECUTION OF CORPORATE CONTRACTS AND INSTRUMENTS............... 20
</TABLE>
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<TABLE>
<S> <C>
8.3 STOCK CERTIFICATES; PARTLY PAID SHARES......................... 20
8.4 SPECIAL DESIGNATION ON CERTIFICATES............................ 21
8.5 LOST CERTIFICATES.............................................. 21
8.6 CONSTRUCTION; DEFINITIONS...................................... 21
8.7 DIVIDENDS...................................................... 21
8.8 FISCAL YEAR.................................................... 22
8.9 SEAL........................................................... 22
8.10 TRANSFER OF STOCK.............................................. 22
8.11 STOCK TRANSFER AGREEMENTS...................................... 22
8.12 REGISTERED STOCKHOLDERS........................................ 22
ARTICLE IX AMENDMENTS..................................................... 23
</TABLE>
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<PAGE>
RESTATED BYLAWS
OF
LIQUID AUDIO, INC.
ARTICLE I
CORPORATE OFFICES
-----------------
1.1 REGISTERED OFFICE
-----------------
The registered office of the corporation shall be in the City of
Wilmington, County of New Castle, State of Delaware. The name of the registered
agent of the corporation at such location is The Corporation Trust Company.
1.2 OTHER OFFICES
-------------
The board of directors may at any time establish other offices at any place
or places where the corporation is qualified to do business.
ARTICLE II
MEETINGS OF STOCKHOLDERS
------------------------
2.1 PLACE OF MEETINGS
-----------------
Meetings of stockholders shall be held at any place, either within or
without the State of Delaware, as may be designated by the board of directors or
in the manner provided in these bylaws. In the absence of any such designation,
stockholders' meetings shall be held at the registered office of the corporation
in the State of Delaware.
2.2 ANNUAL MEETING
--------------
The annual meeting of stockholders shall be held each year on a date and at
a time designated by the board of directors. In the absence of such
designation, the annual meeting of stockholders shall be held on the second
Tuesday of May of each year at 10:00 a.m. However, if such day falls on
<PAGE>
a legal holiday, then the meeting shall be held at the same time and place on
the next succeeding business day. At the meeting, directors shall be elected and
any other proper business may be transacted.
2.3 SPECIAL MEETING
---------------
A special meeting of the stockholders may be called at any time by the
board of directors, or by the chairman of the board, or by the chief executive
officer, or by the president.
If a special meeting is called by any person or persons other than the
board of directors, the request shall be in writing, specifying the time of such
meeting and the general nature of the business proposed to be transacted, and
shall be delivered personally or sent by registered mail or by telegraphic or
other facsimile transmission to the chairman of the board, the president or the
secretary of the corporation. No business may be transacted at such special
meeting otherwise than specified in such notice. The officer receiving the
request shall cause notice to be promptly given to the stockholders entitled to
vote, in accordance with the provisions of Sections 2.4 and 2.5 of this Article
II, that a meeting will be held at the time requested by the person or persons
calling the meeting, not less than ten (10) nor more than sixty (60) days after
the receipt of the request. Nothing contained in this paragraph of this Section
2.3 shall be construed as limiting, fixing, or affecting the time when a meeting
of stockholders called by action of the board of directors may be held.
2.4 NOTICE OF STOCKHOLDERS' MEETINGS
--------------------------------
All notices of meetings with stockholders shall be in writing and shall be
sent or otherwise given in accordance with Section 2.6 of these bylaws not less
than ten (10) nor more than sixty (60) days before the date of the meeting to
each stockholder entitled to vote at such meeting. The notice shall specify the
place, date, and hour of the meeting, and, in the case of a special meeting, the
purpose or purposes for which the meeting is called.
2.5 ADVANCE NOTICE OF STOCKHOLDER NOMINEES AND STOCKHOLDER BUSINESS
---------------------------------------------------------------
Subject to the rights of holders of any class or series of stock having a
preference over the Common Stock as to dividends or upon liquidation,
(i) nominations for the election of directors, and
(ii) business proposed to be brought before any stockholder meeting
may be made by the board of directors or proxy committee appointed by the board
of directors or by any stockholder entitled to vote in the election of directors
generally if such nomination or business proposed is otherwise proper business
before such meeting. However, any such stockholder may nominate one or more
persons for election as directors at a meeting or propose business to be brought
before a meeting, or both, only if such stockholder has given timely notice in
proper written
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<PAGE>
form of their intent to make such nomination or nominations or to propose such
business. To be timely, such stockholder's notice must be delivered to or mailed
and received at the principal executive offices of the corporation not less than
one hundred twenty (120) calendar days in advance of the first anniversary date
of mailing of the corporation's proxy statement released to stockholders in
connection with the previous year's annual meeting of stockholders; provided,
however, that in the event that no annual meeting was held in the previous year
or the date of the annual meeting has been changed by more than thirty (30) days
from the date contemplated at the time of the previous year's proxy statement,
notice by the stockholder to be timely must be so received a reasonable time
before the solicitation is made. To be in proper form, a stockholder's notice to
the secretary shall set forth:
(a) the name and address of the stockholder who intends to make
the nominations or propose the business and, as the case may be, of the
person or persons to be nominated or of the business to be proposed;
(b) a representation that the stockholder is a holder of record
of stock of the corporation entitled to vote at such meeting and, if
applicable, intends to appear in person or by proxy at the meeting to
nominate the person or persons specified in the notice;
(c) if applicable, a description of all arrangements or
understandings between the stockholder and each nominee and any other
person or persons (naming such person or persons) pursuant to which the
nomination or nominations are to be made by the stockholder;
(d) such other information regarding each nominee or each matter
of business to be proposed by such stockholder as would be required to be
included in a proxy statement filed pursuant to the proxy rules of the
Securities and Exchange Commission had the nominee been nominated, or
intended to be nominated, or the matter been proposed, or intended to be
proposed by the board of directors; and
(e) if applicable, the consent of each nominee to serve as
director of the corporation if so elected.
The chairman of the meeting shall refuse to acknowledge the nomination of
any person or the proposal of any business not made in compliance with the
foregoing procedure.
2.6 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE
--------------------------------------------
Written notice of any meeting of stockholders, if mailed, is given when
deposited in the United States mail, postage prepaid, directed to the
stockholder at his address as it appears on the records of the corporation. An
affidavit of the secretary or an assistant secretary or of the transfer agent of
the corporation that the notice has been given shall, in the absence of fraud,
be prima facie evidence of the facts stated therein.
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<PAGE>
2.7 QUORUM
------
The holders of a majority of the stock issued and outstanding and entitled
to vote thereat, present in person or represented by proxy, shall constitute a
quorum at all meetings of the stockholders for the transaction of business
except as otherwise provided by statute or by the certificate of incorporation.
If, however, such quorum is not present or represented at any meeting of the
stockholders, then either (i) the Chairman of the meeting or (ii) the
stockholders entitled to vote thereat, present in person or represented by
proxy, shall have power to adjourn the meeting from time to time, without notice
other than announcement at the meeting, until a quorum is present or
represented. At such adjourned meeting at which a quorum is present or
represented, any business may be transacted that might have been transacted at
the meeting as originally noticed.
2.8 ADJOURNED MEETING; NOTICE
-------------------------
When a meeting is adjourned to another time or place, unless these bylaws
otherwise require, notice need not be given of the adjourned meeting if the time
and place thereof are announced at the meeting at which the adjournment is
taken. At the adjourned meeting the corporation may transact any business that
might have been transacted at the original meeting. If the adjournment is for
more than thirty (30) days, or if after the adjournment a new record date is
fixed for the adjourned meeting, a notice of the adjourned meeting shall be
given to each stockholder of record entitled to vote at the meeting.
2.9 CONDUCT OF BUSINESS
-------------------
The chairman of any meeting of stockholders shall determine the order of
business and the procedure at the meeting, including such regulation of the
manner of voting and the conduct of business.
2.10 VOTING
------
The stockholders entitled to vote at any meeting of stockholders shall be
determined in accordance with the provisions of Section 2.13 of these bylaws,
subject to the provisions of Sections 217 and 218 of the Delaware General
Corporation Law (relating to voting rights of fiduciaries, pledgors and joint
owners of stock and to voting trusts and other voting agreements).
Except as may be otherwise provided in the certificate of incorporation,
each stockholder shall be entitled to one vote for each share of capital stock
held by such stockholder.
Notwithstanding the foregoing, if the stockholders of the corporation are
entitled, pursuant to Sections 2115 and 301.5 of the California Corporations
Code, to cumulate their votes in the election of directors, each such
stockholder shall be entitled to cumulate votes (i.e., cast for any candidate a
number of votes greater than the number of votes that such stockholder normally
is entitled to cast) only if the candidates' names have been properly placed in
nomination (in accordance with these restated Bylaws) prior to commencement of
the voting, and the stockholder requesting cumulative
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<PAGE>
voting has given notice prior to commencement of the voting of the stockholder's
intention to cumulate votes. If cumulative voting is properly requested, each
holder of stock, or of any class or classes or of a series or series thereof,
who elects to cumulate votes shall be entitled to as many votes as equals the
number of votes that (absent this provision as to cumulative voting) he or she
would be entitled to cast for the election of directors with respect to his or
her shares of stock multiplied by the number of directors to be elected by him,
and he or she may cast all of such votes for single director or may distribute
them among the number to be voted for, or for any two or more of them, as he or
she may see fit.
2.11 WAIVER OF NOTICE
----------------
Whenever notice is required to be given under any provision of the Delaware
General Corporation Law or of the certificate of incorporation or these bylaws,
a written waiver, signed by the person entitled to notice, whether before or
after the time stated therein, shall be deemed equivalent to notice. Attendance
of a person at a meeting shall constitute a waiver of notice of such meeting,
except when the person attends a meeting for the express purpose of objecting,
at the beginning of the meeting, to the transaction of any business because the
meeting is not lawfully called or convened. Neither the business to be
transacted at, nor the purpose of, any regular or special meeting of the
stockholders, directors, or members of a committee of directors need be
specified in any written waiver of notice unless so required by the certificate
of incorporation or these bylaws.
2.12 STOCKHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING
-------------------------------------------------------
Unless otherwise provided in the certificate of incorporation, any action
required to be taken at any annual or special meeting of stockholders of a
corporation, or any action that may be taken at any annual or special meeting of
such stockholders, may be taken without a meeting, without prior notice and
without a vote, if a consent or consents in writing, setting forth the action so
taken, shall be signed by the holders of outstanding stock having not less than
the minimum number of votes that would be necessary to authorize or take such
action at a meeting at which all shares entitled to vote thereon were present
and voted.
Prompt notice of the taking of the corporate action without a meeting by
less than unanimous written consent shall be given to those stockholders who
have not consented in writing. If the action which is consented to is such as
would have required the filing of a certificate under any section of the
Delaware General Corporation Law if such action had been voted on by
stockholders at a meeting thereof, then the certificate filed under such section
shall state, in lieu of any statement required by such section concerning any
vote of stockholders, that written notice and written consent have been given as
provided in Section 228 of the Delaware General Corporation Law.
2.13 RECORD DATE FOR STOCKHOLDER NOTICE; VOTING; GIVING CONSENTS
-----------------------------------------------------------
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<PAGE>
In order that the corporation may determine the stockholders entitled to
notice of or to vote at any meeting of stockholders or any adjournment thereof,
or entitled to express consent to corporate action in writing without a meeting,
or entitled to receive payment of any dividend or other distribution or
allotment of any rights, or entitled to exercise any rights in respect of any
change, conversion or exchange of stock or for the purpose of any other lawful
action, the board of directors may fix, in advance, a record date, which shall
not be more than sixty (60) nor less than ten (10) days before the date of such
meeting, nor more than sixty (60) days prior to any other action.
If the board of directors does not so fix a record date:
(i) The record date for determining stockholders entitled to notice
of or to vote at a meeting of stockholders shall be at the close of business on
the day next preceding the day on which notice is given, or, if notice is
waived, at the close of business on the day next preceding the day on which the
meeting is held.
(ii) The record date for determining stockholders entitled to express
consent to corporate action in writing without a meeting, when no prior action
by the board of directors is necessary, shall be the first date on which a
signed written consent is delivered to the corporation.
(iii) The record date for determining stockholders for any other
purpose shall be at the close of business on the day on which the board of
directors adopts the resolution relating thereto.
A determination of stockholders of record entitled to notice of or to vote
at a meeting of stockholders shall apply to any adjournment of the meeting;
provided, however, that the board of directors may fix a new record date for the
adjourned meeting.
2.14 PROXIES
-------
Each stockholder entitled to vote at a meeting of stockholders or to
express consent or dissent to corporate action in writing without a meeting may
authorize another person or persons to act for such stockholder by a written
proxy, signed by such stockholder and filed with the secretary of the
corporation, but no such proxy shall be voted or acted upon after three (3)
years from its date, unless the proxy provides for a longer period. A proxy
shall be deemed signed if such stockholder's name is placed on the proxy by any
reasonable means including, but not limited to, by facsimile signature, manual
signature, typewriting, telegraphic transmission or otherwise, by such
stockholder or such stockholder's attorney-in-fact. The revocability of a proxy
that states on its face that it is irrevocable shall be governed by the
provisions of Section 212(e) of the Delaware General Corporation Law.
2.15 LIST OF STOCKHOLDERS ENTITLED TO VOTE
-------------------------------------
The officer who has charge of the stock ledger of a corporation shall
prepare and make, at least ten (10) days before every meeting of stockholders, a
complete list of the stockholders entitled to vote at the meeting, arranged in
alphabetical order, and showing the address of each stockholder
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<PAGE>
and the number of shares registered in the name of each stockholder. Such list
shall be open to the examination of any stockholder, for any purpose germane to
the meeting, during ordinary business hours, for a period of at least ten (10)
days prior to the meeting, either at a place within the city where the meeting
is to be held, which place shall be specified in the notice of the meeting, or,
if not so specified, at the place where the meeting is to be held. The list
shall also be produced and kept at the time and place of the meeting during the
whole time thereof, and may be inspected by any stockholder who is present. Such
list shall presumptively determine the identity of the stockholders entitled to
vote at the meeting and the number of shares held by each of them.
ARTICLE III
DIRECTORS
---------
3.1 POWERS
------
Subject to the provisions of the Delaware General Corporation Law and any
limitations in the certificate of incorporation or these bylaws relating to
action required to be approved by the stockholders or by the outstanding shares,
the business and affairs of the corporation shall be managed and all corporate
powers shall be exercised by or under the direction of the board of directors.
3.2 NUMBER OF DIRECTORS
-------------------
The board of directors shall consist of six (6) members. The number of
directors may be changed by an amendment to this bylaw, duly adopted by the
board of directors or by the stockholders, or by a duly adopted amendment to the
certificate of incorporation. Upon the closing of the first sale of the
corporation's common stock pursuant to a firmly underwritten registered public
offering (the "IPO"), the directors shall be divided into three classes, with
the term of office of the first class, which class shall initially consist of
two directors, to expire at the first annual meeting of stockholders held after
the IPO; the term of office of the second class, which shall initially consist
of two directors, to expire at the second annual meeting of stockholders held
after the IPO; the term of office of the third class, which class shall
initially consist of two directors, to expire at the third annual meeting of
stockholders held after the IPO; and thereafter for each such term to expire at
each third succeeding annual meeting of stockholders held after such election.
No reduction of the authorized number of directors shall have the effect of
removing any director before that director's term of office expires.
3.3 ELECTION, QUALIFICATION AND TERM OF OFFICE OF DIRECTORS
-------------------------------------------------------
Except as provided in Section 3.4 of these bylaws, directors shall be
elected at each annual meeting of stockholders to hold office until the next
annual meeting. Directors need not be
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<PAGE>
stockholders unless so required by the certificate of incorporation or these
bylaws, wherein other qualifications for directors may be prescribed. Each
director, including a director elected to fill a vacancy, shall hold office
until his successor is elected and qualified or until his earlier resignation or
removal.
Elections of directors need not be by written ballot.
3.4 RESIGNATION AND VACANCIES
-------------------------
Any director may resign at any time upon written notice to the attention of
the Secretary of the corporation. When one or more directors shall resign from
the board of directors, effective at a future date, a majority of the directors
then in office, including those who have so resigned, shall have power to fill
such vacancy or vacancies, the vote thereon to take effect when such resignation
or resignations shall become effective, and each director so chosen shall hold
office as provided in this section in the filling of other vacancies.
Unless otherwise provided in the certificate of incorporation or these
bylaws:
(i) Vacancies and newly created directorships resulting from any
increase in the authorized number of directors elected by all of the
stockholders having the right to vote as a single class may be filled by a
majority of the directors then in office, although less than a quorum, or by a
sole remaining director.
(ii) Whenever the holders of any class or classes of stock or series
thereof are entitled to elect one or more directors by the certificate of
incorporation, vacancies and newly created directorships of such class or
classes or series may be filled by a majority of the directors elected by such
class or classes or series thereof then in office, or by a sole remaining
director so elected.
If at any time, by reason of death or resignation or other cause, the
corporation should have no directors in office, then any officer or any
stockholder or an executor, administrator, trustee or guardian of a stockholder,
or other fiduciary entrusted with like responsibility for the person or estate
of a stockholder, may call a special meeting of stockholders in accordance with
the provisions of the certificate of incorporation or these bylaws, or may apply
to the Court of Chancery for a decree summarily ordering an election as provided
in Section 211 of the Delaware General Corporation Law.
If, at the time of filling any vacancy or any newly created directorship,
the directors then in office constitute less than a majority of the whole board
(as constituted immediately prior to any such increase), then the Court of
Chancery may, upon application of any stockholder or stockholders holding at
least ten (10) percent of the total number of the shares at the time outstanding
having the right to vote for such directors, summarily order an election to be
held to fill any such vacancies or newly created directorships, or to replace
the directors chosen by the directors then in office as
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<PAGE>
aforesaid, which election shall be governed by the provisions of Section 211 of
the Delaware General Corporation Law as far as applicable.
3.5 PLACE OF MEETINGS; MEETINGS BY TELEPHONE
----------------------------------------
The board of directors of the corporation may hold meetings, both regular
and special, either within or outside the State of Delaware.
Unless otherwise restricted by the certificate of incorporation or these
bylaws, members of the board of directors, or any committee designated by the
board of directors, may participate in a meeting of such board of directors, or
committee by means of conference telephone or similar communications equipment
by means of which all persons participating in the meeting can hear each other,
and such participation in a meeting pursuant to this section shall constitute
presence in person at the meeting.
3.6 REGULAR MEETINGS
----------------
Regular meetings of the board of directors may be held without notice at
such time and at such place as shall from time to time be determined by the
board.
3.7 SPECIAL MEETINGS; NOTICE
------------------------
Special meetings of the board of directors for any purpose or purposes may
be called at any time by the chairman of the board, the president, any vice
president, the secretary or any two (2) directors.
Notice of the time and place of special meetings shall be delivered
personally or by telephone to each director or sent by first-class mail or
telegram, charges prepaid, addressed to each director at that director's address
as it is shown on the records of the corporation. If the notice is mailed, it
shall be deposited in the United States mail at least four (4) days before the
time of the holding of the meeting. If the notice is delivered personally or by
telephone or by telegram, it shall be delivered personally or by telephone or to
the telegraph company at least forty-eight (48) hours before the time of the
holding of the meeting. Any oral notice given personally or by telephone may be
communicated either to the director or to a person at the office of the director
who the person giving the notice has reason to believe will promptly communicate
it to the director. The notice need not specify the purpose or the place of the
meeting, if the meeting is to be held at the principal executive office of the
corporation.
3.8 QUORUM
------
At all meetings of the board of directors, a majority of the authorized
number of directors shall constitute a quorum for the transaction of business
and the act of a majority of the directors present at any meeting at which there
is a quorum shall be the act of the board of directors, except as may be
otherwise specifically provided by statute, the certificate of incorporation, or
these bylaws.
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If a quorum is not present at any meeting of the board of directors, then the
directors present thereat may adjourn the meeting from time to time, without
notice other than announcement at the meeting, until a quorum is present.
A meeting at which a quorum is initially present may continue to transact
business notwithstanding the withdrawal of directors, if any action taken is
approved by at least a majority of the required quorum for that meeting.
3.9 WAIVER OF NOTICE
----------------
Whenever notice is required to be given under any provision of the Delaware
General Corporation Law, the certificate of incorporation, or these bylaws, a
written waiver thereof, signed by the person entitled to notice, whether before
or after the time stated therein, shall be deemed equivalent to notice.
Attendance of a person at a meeting shall constitute a waiver of notice of such
meeting, except when such person attends a meeting for the express purpose of
objecting, at the beginning of the meeting, to the transaction of any business
because the meeting is not lawfully called or convened. Neither the business to
be transacted at, nor the purpose of, any regular or special meeting of the
directors, or members of a committee of directors, need be specified in any
written waiver of notice unless so required by the certificate of incorporation
or these bylaws.
3.10 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING
-------------------------------------------------
Unless otherwise restricted by the certificate of incorporation or these
bylaws, any action required or permitted to be taken at any meeting of the board
of directors, or of any committee thereof may be taken without a meeting if all
members of the board or committee, as the case may be, consent thereto in
writing and the writing or writings are filed with the minutes of proceedings of
the board or committee.
3.11 FEES AND COMPENSATION OF DIRECTORS
----------------------------------
Unless otherwise restricted by the certificate of incorporation or these
bylaws, the board of directors shall have the authority to fix the compensation
of directors.
3.12 APPROVAL OF LOANS TO OFFICERS
-----------------------------
The corporation may lend money to, or guarantee any obligation of, or
otherwise assist any officer or other employee of the corporation or of its
subsidiary, including any officer or employee who is a director of the
corporation or its subsidiary, whenever, in the judgment of the directors, such
loan, guaranty or assistance may reasonably be expected to benefit the
corporation. The loan, guaranty or other assistance may be with or without
interest and may be unsecured, or secured in such manner as the board of
directors shall approve, including, without limitation, a pledge of shares of
stock of the corporation. Nothing contained in this section shall be deemed to
deny, limit or restrict the powers of guaranty or warranty of the corporation at
common law or under any statute.
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<PAGE>
3.13 REMOVAL OF DIRECTORS
--------------------
Unless otherwise restricted by statute, by the certificate of incorporation
or by these bylaws, any director or the entire board of directors may be
removed, with or without cause, by the holders of a majority of the shares then
entitled to vote at an election of directors; provided, however, that, so long
as stockholders of the corporation are entitled to cumulative voting, if less
than the entire board is to be removed, no director may be removed without cause
if the votes cast against his removal would be sufficient to elect such director
if then cumulatively voted at an election of the entire board of directors or,
if there be classes of directors, at an election of the class of directors of
which such director is a part.
No reduction of the authorized number of directors shall have the effect of
removing any director prior to the expiration of such director's term of office.
ARTICLE IV
COMMITTEES
----------
4.1 COMMITTEES OF DIRECTORS
-----------------------
The board of directors may, by resolution passed by a majority of the whole
board, designate one or more committees, with each committee to consist of one
or more of the directors of the corporation. The board may designate one or
more directors as alternate members of any committee, who may replace any absent
or disqualified member at any meeting of the committee. In the absence or
disqualification of a member of a committee, the member or members thereof
present at any meeting and not disqualified from voting, whether or not such
member or members constitute a quorum, may unanimously appoint another member of
the board of directors to act at the meeting in the place of any such absent or
disqualified member. Any such committee, to the extent provided in the
resolution of the board of directors, or in the bylaws of the corporation, shall
have and may exercise all the powers and authority of the board of directors in
the management of the business and affairs of the corporation, and may authorize
the seal of the corporation to be affixed to all papers that may require it; but
no such committee shall have the power or authority (i) approving or adopting
or recommending to the stockholders, any action or matter expressly required by
the Delaware General Corporation Law to be submitted to stockholders for
approval or (ii) adopting, amending, or repealing any bylaws of the corporation;
and, unless the board resolution establishing the committee, the bylaws or the
certificate of incorporation expressly so provide, no such committee shall have
the power or authority to declare a dividend, to authorize the issuance of
stock, or to adopt a certificate of ownership and merger pursuant to Section 253
of the Delaware General Corporation Law.
4.2 COMMITTEE MINUTES
-----------------
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Each committee shall keep regular minutes of its meetings and report the
same to the board of directors when required.
4.3 MEETINGS AND ACTION OF COMMITTEES
---------------------------------
Meetings and actions of committees shall be governed by, and held and taken
in accordance with, the provisions of Article III of these bylaws, Section 3.5
(place of meetings and meetings by telephone), Section 3.6 (regular meetings),
Section 3.7 (special meetings and notice), Section 3.8 (quorum), Section 3.9
(waiver of notice), and Section 3.10 (action without a meeting), with such
changes in the context of those bylaws as are necessary to substitute the
committee and its members for the board of directors and its members; provided,
however, that the time of regular meetings of committees may be determined
either by resolution of the board of directors or by resolution of the
committee, that special meetings of committees may also be called by resolution
of the board of directors and that notice of special meetings of committees
shall also be given to all alternate members, who shall have the right to attend
all meetings of the committee. The board of directors may adopt rules for the
government of any committee not inconsistent with the provisions of these
bylaws.
ARTICLE V
OFFICERS
--------
5.1 OFFICERS
--------
The officers of the corporation shall be a president, a secretary, and a
chief financial officer. The corporation may also have, at the discretion of
the board of directors, a chairman of the board, one or more vice presidents,
one or more assistant vice presidents, one or more assistant secretaries, one or
more assistant treasurers, and any such other officers as may be appointed in
accordance with the provisions of Section 5.3 of these bylaws. Any number of
offices may be held by the same person.
5.2 APPOINTMENT OF OFFICERS
-----------------------
The officers of the corporation, except such officers as may be appointed
in accordance with the provisions of Sections 5.3 or 5.5 of these bylaws, shall
be appointed by the board of directors, subject to the rights, if any, of an
officer under any contract of employment.
5.3 SUBORDINATE OFFICERS
--------------------
The board of directors may appoint, or empower the president to appoint,
such other officers and agents as the business of the corporation may require,
each of whom shall hold office for such period, have such authority, and perform
such duties as are provided in these bylaws or as the board of directors may
from time to time determine.
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5.4 REMOVAL AND RESIGNATION OF OFFICERS; FILLING VACANCIES
------------------------------------------------------
Subject to the rights, if any, of an officer under any contract of
employment, any officer may be removed, either with or without cause, by an
affirmative vote of the majority of the board of directors at any regular or
special meeting of the board or, except in the case of an officer chosen by the
board of directors, by any officer upon whom such power of removal may be
conferred by the board of directors.
Any officer may resign at any time by giving written notice to the
corporation. Any resignation shall take effect at the date of the receipt of
that notice or at any later time specified in that notice; and, unless otherwise
specified in that notice, the acceptance of the resignation shall not be
necessary to make it effective. Any resignation is without prejudice to the
rights, if any, of the corporation under any contract to which the officer is a
party.
Any vacancy occurring in any office of the corporation shall be filled by
the board of directors.
5.5 CHAIRMAN OF THE BOARD
---------------------
The chairman of the board, if such an officer be elected, shall, if
present, preside at meetings of the board of directors and exercise and perform
such other powers and duties as may from time to time be assigned to the
chairman of the board by the board of directors or as may be prescribed by these
bylaws. If there is no president and no one has been appointed chief executive
officer, then the chairman of the board shall also be the chief executive
officer of the corporation and shall have the powers and duties prescribed in
Section 5.6 of these bylaws.
5.6 CHIEF EXECUTIVE OFFICER
-----------------------
The board of directors shall select a chief executive officer of the
corporation who shall be subject to the control of the board of directors and
have general supervision, direction and control of the business and the officers
of the corporation. The chief executive officer shall preside at all meetings of
the stockholders and, in the absence or nonexistence of a chairman of the board,
at all meetings of the board of directors.
5.7 PRESIDENT
---------
The president shall have the general powers and duties of management
usually vested in the office of president of a corporation and shall have such
other powers and duties as may be prescribed by the board of directors or these
bylaws. In addition and subject to such supervisory powers, if any, as may be
given by the board of directors to the chairman of the board, if no one has been
appointed chief executive officer, the president shall be the chief executive
officer of the corporation and shall, subject to the control of the board of
directors, have the powers and duties described in Section 5.6.
5.8 VICE PRESIDENTS
---------------
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<PAGE>
In the absence or disability of the president, the vice presidents, if any,
in order of their rank as fixed by the board of directors or, if not ranked, a
vice president designated by the board of directors, shall perform all the
duties of the president and when so acting shall have all the powers of, and be
subject to all the restrictions upon, the president. The vice presidents shall
have such other powers and perform such other duties as from time to time may be
prescribed for them respectively by the board of directors, these bylaws, the
president or the chairman of the board.
5.9 SECRETARY
---------
The secretary shall keep or cause to be kept, at the principal executive
office of the corporation or such other place as the board of directors may
direct, a book of minutes of all meetings and actions of directors, committees
of directors, and stockholders. The minutes shall show the time and place of
each meeting, whether regular or special (and, if special, how authorized and
the notice given), the names of those present at directors' meetings or
committee meetings, the number of shares present or represented at stockholders'
meetings, and the proceedings thereof.
The secretary shall keep, or cause to be kept, at the principal executive
office of the corporation or at the office of the corporation's transfer agent
or registrar, as determined by resolution of the board of directors, a share
register, or a duplicate share register, showing the names of all stockholders
and their addresses, the number and classes of shares held by each, the number
and date of certificates evidencing such shares, and the number and date of
cancellation of every certificate surrendered for cancellation.
The secretary shall give, or cause to be given, notice of all meetings of
the stockholders and of the board of directors required to be given by law or by
these bylaws. The secretary shall keep the seal of the corporation, if one be
adopted, in safe custody and shall have such other powers and perform such other
duties as may be prescribed by the board of directors or by these bylaws.
5.10 CHIEF FINANCIAL OFFICER
-----------------------
The chief financial officer shall keep and maintain, or cause to be kept
and maintained, adequate and correct books and records of accounts of the
properties and business transactions of the corporation, including accounts of
its assets, liabilities, receipts, disbursements, gains, losses, capital
retained earnings, and shares. The books of account shall at all reasonable
times be open to inspection by any director.
The chief financial officer shall deposit all moneys and other valuables in
the name and to the credit of the corporation with such depositories as may be
designated by the board of directors. The chief financial officer shall
disburse the funds of the corporation as may be ordered by the board of
directors, shall render to the president and directors, whenever they request
it, an account of all his transactions as chief financial officer and of the
financial condition of the corporation, and shall have other powers and perform
such other duties as may be prescribed by the board of directors or these
bylaws.
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<PAGE>
The chief financial officer shall be the treasurer of the corporation.
5.11 ASSISTANT SECRETARY
-------------------
The assistant secretary, or, if there is more than one, the assistant
secretaries in the order determined by the stockholders or board of directors
(or if there be no such determination, then in the order of their election)
shall, in the absence of the secretary or in the event of his or her inability
or refusal to act, perform the duties and exercise the powers of the secretary
and shall perform such other duties and have such other powers as may be
prescribed by the board of directors or these bylaws.
5.12 ASSISTANT TREASURER
-------------------
The assistant treasurer, or, if there is more than one, the assistant
treasurers, in the order determined by the stockholders or board of directors
(or if there be no such determination, then in the order of their election),
shall, in the absence of the chief financial officer or in the event of his or
her inability or refusal to act, perform the duties and exercise the powers of
the chief financial officer and shall perform such other duties and have such
other powers as may be prescribed by the board of directors or these bylaws.
5.13 REPRESENTATION OF SHARES OF OTHER CORPORATIONS
----------------------------------------------
The chairman of the board, the president, any vice president, the chief
financial officer, the secretary or assistant secretary of this corporation, or
any other person authorized by the board of directors or the president or a vice
president, is authorized to vote, represent, and exercise on behalf of this
corporation all rights incident to any and all shares of any other corporation
or corporations standing in the name of this corporation. The authority granted
herein may be exercised either by such person directly or by any other person
authorized to do so by proxy or power of attorney duly executed by such person
having the authority.
5.14 AUTHORITY AND DUTIES OF OFFICERS
--------------------------------
In addition to the foregoing authority and duties, all officers of the
corporation shall respectively have such authority and perform such duties in
the management of the business of the corporation as may be designated from time
to time by the board of directors or the stockholders.
ARTICLE VI
INDEMNITY
---------
6.1 THIRD PARTY ACTIONS
-------------------
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<PAGE>
The corporation shall indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending, or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
(other than an action by or in the right of the corporation) by reason of the
fact that such person is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture trust or other enterprise, against expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement (if such settlement is approved
in advance by the corporation, which approval shall not be unreasonably
withheld) actually and reasonably incurred by such person in connection with
such action, suit or proceeding if such person acted in good faith and in a
manner such person reasonably believed to be in or not opposed to the best
interests of the corporation, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe such person's conduct was
unlawful. The termination of any action, suit or proceeding by judgment, order,
settlement, conviction, or upon a plea of nolo contendere or its equivalent,
---- ----------
shall not, of itself, create a presumption that the person did not act in good
faith and in a manner which the person reasonably believed to be in or not
opposed to the best interest of the corporation, and, with respect to any
criminal action or proceeding, had reasonable cause to believe that the person's
conduct was unlawful.
6.2 ACTIONS BY OR IN THE RIGHT OF THE CORPORATION
---------------------------------------------
The corporation shall indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action or
suit by or in the right of the corporation to procure a judgment in its favor by
reason of the fact that such person is or was a director, officer, employee or
agent of corporation, or is or was serving at the request of the corporation as
a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise against expenses (including attorneys'
fees) and amounts paid in settlement (if such settlement is approved in advance
by the corporation, which approval shall not be unreasonably withheld) actually
and reasonably incurred by such person in connection with the defense or
settlement of such action or suit if such person acted in good faith and in
manner such person reasonably believed to be in or not opposed to the best
interests of the corporation, except that no indemnification shall be made in
respect of any claim, issue or matter as to which such person shall have been
adjudged to be liable to the corporation unless and only to the extent that the
Delaware Court of Chancery or the court in which such action or suit was brought
shall determine upon application that, despite the adjudication of liability but
in view of all the circumstances of the case, such person is fairly and
reasonably entitled to indemnity for such expenses which the Delaware Court of
Chancery or such other court shall deem proper. Notwithstanding any other
provision of this Article VI, no person shall be indemnified hereunder for any
expenses or amounts paid in settlement with respect to any action to recover
short-swing profits under Section 16(b) of the Securities Exchange Act of 1934,
as amended.
6.3 SUCCESSFUL DEFENSE
------------------
To the extent that a director, officer, employee or agent of the
corporation has been successful on the merits or otherwise in defense of any
action, suit or proceeding referred to in
-16-
<PAGE>
Sections 6.1 and 6.2, or in defense of any claim, issue or matter therein, such
person shall be indemnified against expenses (including attorneys' fees)
actually and reasonably incurred by such person in connection therewith.
6.4 DETERMINATION OF CONDUCT
------------------------
Any indemnification under Sections 6.1 and 6.2 (unless ordered by a court)
shall be made by the corporation only as authorized in the specific case upon a
determination that the indemnification of the director, officer, employee or
agent is proper in the circumstances because such person has met the applicable
standard of conduct set forth in Sections 6.1 and 6.2. Such determination shall
be made (1) by the Board of Directors or the Executive Committee by a majority
vote of a quorum consisting of directors who were not parties to such action,
suit or proceeding or (2) or if such quorum is not obtainable or, even if
obtainable, a quorum of disinterested directors so directs, by independent legal
counsel in a written opinion, or (3) by the stockholders. Notwithstanding the
foregoing, a director, officer, employee or agent of the Corporation shall be
entitled to contest any determination that the director, officer, employee or
agent has not met the applicable standard of conduct set forth in Sections 6.1
and 6.2 by petitioning a court of competent jurisdiction.
6.5 PAYMENT OF EXPENSES IN ADVANCE
------------------------------
Expenses incurred in defending a civil or criminal action, suit or
proceeding, by an individual who may be entitled to indemnification pursuant to
Section 6.1 or 6.2, shall be paid by the corporation in advance of the final
disposition of such action, suit or proceeding upon receipt of an undertaking by
or on behalf of the director, officer, employee or agent to repay such amount if
it shall ultimately be determined that such person is not entitled to be
indemnified by the corporation as authorized in this Article VI.
6.6 INDEMNITY NOT EXCLUSIVE
-----------------------
The indemnification and advancement of expenses provided by or granted
pursuant to the other sections of this Article VI shall not be deemed exclusive
of any other rights to which those seeking indemnification or advancement of
expenses may be entitled under any by-law, agreement, vote of stockholders or
disinterested directors or otherwise, both as to action in such person's
official capacity and as to action in another capacity while holding such
office.
6.7 INSURANCE INDEMNIFICATION
-------------------------
The corporation shall have the power to purchase and maintain insurance on
behalf of any person who is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against any liability asserted against such
person and incurred by such person in any such capacity or arising out of such
person's status as such,
-17-
<PAGE>
whether or not the corporation would have the power to indemnify such person
against such liability under the provisions of this Article VI.
6.8 THE CORPORATION
---------------
For purposes of this Article VI, references to "the corporation" shall
include, in addition to the resulting corporation, any constituent corporation
(including any constituent of a constituent) absorbed in a consolidation or
merger which, if its separate existence had continued, would have had power and
authority to indemnify its directors, officers, and employees or agents, so that
any person who is or was a director, officer, employee or agent of such
constituent corporation, or is or was serving at the request of such constituent
corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, shall stand in the same
position under and subject to the provisions of this Article VI (including,
without limitation the provisions of Section 6.4) with respect to the resulting
or surviving corporation as such person would have with respect to such
constituent corporation if its separate existence had continued.
6.9 EMPLOYEE BENEFIT PLANS
----------------------
For purposes of this Article VI, references to "other enterprises" shall
include employee benefit plans; references to "fines" shall include any excise
taxes assessed on a person with respect to an employee benefit plan; and
references to "serving at the request of the corporation" shall include any
service as a director, officer, employee or agent of the corporation which
imposes duties on, or involves services by, such director, officer, employee, or
agent with respect to an employee benefit plan, its participants, or
beneficiaries; and a person who acted in good faith and in a manner such person
reasonably believed to be in the interest of the participants and beneficiaries
of an employee benefit plan shall be deemed to have acted in a manner "not
opposed to the best interests of the corporation" as referred to in this Article
VI.
6.10 CONTINUATION OF INDEMNIFICATION AND ADVANCEMENT OF EXPENSES
-----------------------------------------------------------
The indemnification and advancement of expenses provided by, or granted
pursuant to, this Article VI shall, unless otherwise provided when authorized or
ratified, continue as to a person who has ceased to be a director, officer,
employee or agent and shall inure to the benefit of the heirs, executors and
administrators of such a person.
ARTICLE VII
RECORDS AND REPORTS
-------------------
7.1 MAINTENANCE AND INSPECTION OF RECORDS
-------------------------------------
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<PAGE>
The corporation shall, either at its principal executive officer or at such
place or places as designated by the board of directors, keep a record of its
stockholders listing their names and addresses and the number and class of
shares held by each stockholder, a copy of these bylaws as amended to date,
accounting books, and other records.
Any stockholder of record, in person or by attorney or other agent, shall,
upon written demand under oath stating the purpose thereof, have the right
during the usual hours for business to inspect for any proper purpose the
corporation's stock ledger, a list of its stockholders, and its other books and
records and to make copies or extracts therefrom. A proper purpose shall mean a
purpose reasonably related to such person's interest as a stockholder. In every
instance where an attorney or other agent is the person who seeks the right to
inspection, the demand under oath shall be accompanied by a power of attorney or
such other writing that authorizes the attorney or other agent so to act on
behalf of the stockholder. The demand under oath shall be directed to the
corporation at its registered office in Delaware or at its principal place of
business.
The officer who has charge of the stock ledger of the corporation shall
prepare and make, at least ten (10) days before every meeting of stockholders, a
complete list of the stockholders entitled to vote at the meeting, arranged in
alphabetical order, showing the address of each stockholder and the number of
shares registered in the name of each stockholder. Such list shall be open to
the examination of any stockholder, for any purpose germane to the meeting,
during ordinary business hours, for a period of at least ten (10) days prior to
the meeting, either at a place within the city where the meeting is to be held,
which place shall be specified in the notice of the meeting, or, if not so
specified, at the place where the meeting is to be held. The list shall also be
produced and kept at the time and place of the meeting during the whole time
thereof, and may be inspected by any stockholder who is present.
7.2 INSPECTION BY DIRECTORS
-----------------------
Any director shall have the right to examine the corporation's stock
ledger, a list of its stockholders, and its other books and records for a
purpose reasonably related to his position as a director. The Court of Chancery
is hereby vested with the exclusive jurisdiction to determine whether a director
is entitled to the inspection sought. The Court may summarily order the
corporation to permit the director to inspect any and all books and records, the
stock ledger, and the stock list and to make copies or extracts therefrom. The
Court may, in its discretion, prescribe any limitations or conditions with
reference to the inspection, or award such other and further relief as the Court
may deem just and proper.
7.3 ANNUAL STATEMENT TO STOCKHOLDERS
--------------------------------
The board of directors shall present at each annual meeting, and at any
special meeting of the stockholders when called for by vote of the stockholders,
a full and clear statement of the business and condition of the corporation.
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<PAGE>
ARTICLE VIII
GENERAL MATTERS
---------------
8.1 CHECKS
------
From time to time, the board of directors shall determine by resolution
which person or persons may sign or endorse all checks, drafts, other orders for
payment of money, notes or other evidences of indebtedness that are issued in
the name of or payable to the corporation, and only the persons so authorized
shall sign or endorse those instruments.
8.2 EXECUTION OF CORPORATE CONTRACTS AND INSTRUMENTS
------------------------------------------------
The board of directors, except as otherwise provided in these bylaws, may
authorize any officer or officers, or agent or agents, to enter into any
contract or execute any instrument in the name of and on behalf of the
corporation; such authority may be general or confined to specific instances.
Unless so authorized or ratified by the board of directors or within the agency
power of an officer, no officer, agent or employee shall have any power or
authority to bind the corporation by any contract or engagement or to pledge its
credit or to render it liable for any purpose or for any amount.
8.3 STOCK CERTIFICATES; PARTLY PAID SHARES
--------------------------------------
The shares of the corporation shall be represented by certificates,
provided that the board of directors of the corporation may provide by
resolution or resolutions that some or all of any or all classes or series of
its stock shall be uncertificated shares. Any such resolution shall not apply
to shares represented by a certificate until such certificate is surrendered to
the corporation. Notwithstanding the adoption of such a resolution by the board
of directors, every holder of stock represented by certificates and upon request
every holder of uncertificated shares shall be entitled to have a certificate
signed by, or in the name of the corporation by the chairman or vice-chairman of
the board of directors, or the president or vice-president, and by the chief
financial officer or an assistant treasurer, or the secretary or an assistant
secretary of such corporation representing the number of shares registered in
certificate form. Any or all of the signatures on the certificate may be a
facsimile. In case any officer, transfer agent or registrar who has signed or
whose facsimile signature has been placed upon a certificate has ceased to be
such officer, transfer agent or registrar before such certificate is issued, it
may be issued by the corporation with the same effect as if such person were
such officer, transfer agent or registrar at the date of issue.
The corporation may issue the whole or any part of its shares as partly
paid and subject to call for the remainder of the consideration to be paid
therefor. Upon the face or back of each stock
-20-
<PAGE>
certificate issued to represent any such partly paid shares, upon the books and
records of the corporation in the case of uncertificated partly paid shares, the
total amount of the consideration to be paid therefor and the amount paid
thereon shall be stated. Upon the declaration of any dividend on fully paid
shares, the corporation shall declare a dividend upon partly paid shares of the
same class, but only upon the basis of the percentage of the consideration
actually paid thereon.
8.4 SPECIAL DESIGNATION ON CERTIFICATES
-----------------------------------
If the corporation is authorized to issue more than one class of stock or
more than one series of any class, then the powers, the designations, the
preferences, and the 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 shall be set forth in full or
summarized on the face or back of the certificate that the corporation shall
issue to represent such class or series of stock; provided, however, that,
except as otherwise provided in Section 202 of the General Corporation Law of
Delaware, in lieu of the foregoing requirements there may be set forth on the
face or back of the certificate that the corporation shall issue to represent
such class or series of stock a statement that the corporation will furnish
without charge to each stockholder who so requests the powers, the designations,
the preferences, and the 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.
8.5 LOST CERTIFICATES
-----------------
Except as provided in this Section 8.5, no new certificates for shares
shall be issued to replace a previously issued certificate unless the latter is
surrendered to the corporation and canceled at the same time. The corporation
may issue a new certificate of stock or uncertificated shares in the place of
any certificate theretofore issued by it, alleged to have been lost, stolen or
destroyed, and the corporation may require the owner of the lost, stolen or
destroyed certificate, or his legal representative, to give the corporation a
bond sufficient to indemnify it against any claim that may be made against it on
account of the alleged loss, theft or destruction of any such certificate or the
issuance of such new certificate or uncertificated shares.
8.6 CONSTRUCTION; DEFINITIONS
-------------------------
Unless the context requires otherwise, the general provisions, rules of
construction, and definitions in the Delaware General Corporation Law shall
govern the construction of these bylaws. Without limiting the generality of
this provision, the singular number includes the plural, the plural number
includes the singular, and the term "person" includes both a corporation and a
natural person.
8.7 DIVIDENDS
---------
The directors of the corporation, subject to any restrictions contained in
(i) the Delaware General Corporation Law or (ii) the certificate of
incorporation, may declare and pay dividends upon
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<PAGE>
the shares of its capital stock. Dividends may be paid in cash, in property, or
in shares of the corporation's capital stock.
The directors of the corporation may set apart out of any of the funds of
the corporation available for dividends a reserve or reserves for any proper
purpose and may abolish any such reserve. Such purposes shall include but not be
limited to equalizing dividends, repairing or maintaining any property of the
corporation, and meeting contingencies.
8.8 FISCAL YEAR
-----------
The fiscal year of the corporation shall be fixed by resolution of the
board of directors and may be changed by the board of directors.
8.9 SEAL
----
The corporation may adopt a corporate seal, which shall be adopted and
which may be altered by the board of directors, and may use the same by causing
it or a facsimile thereof to be impressed or affixed or in any other manner
reproduced.
8.10 TRANSFER OF STOCK
-----------------
Upon surrender to the corporation or the transfer agent of the corporation
of a certificate for shares duly endorsed or accompanied by proper evidence of
succession, assignation or authority to transfer, it shall be the duty of the
corporation to issue a new certificate to the person entitled thereto, cancel
the old certificate, and record the transaction in its books.
8.11 STOCK TRANSFER AGREEMENTS
-------------------------
The corporation shall have power to enter into and perform any agreement
with any number of stockholders of any one or more classes of stock of the
corporation to restrict the transfer of shares of stock of the corporation of
any one or more classes owned by such stockholders in any manner not prohibited
by the Delaware General Corporation Law.
8.12 REGISTERED STOCKHOLDERS
-----------------------
The corporation shall be entitled to recognize the exclusive right of a
person registered on its books as the owner of shares to receive dividends and
to vote as such owner, shall be entitled to hold liable for calls and
assessments the person registered on its books as the owner of shares, and shall
not be bound to recognize any equitable or other claim to or interest in such
share or shares on the part of another person, whether or not it shall have
express or other notice thereof, except as otherwise provided by the laws of
Delaware.
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<PAGE>
ARTICLE IX
AMENDMENTS
----------
The bylaws of the corporation may be adopted, amended or repealed by the
stockholders entitled to vote; provided, however, that the corporation may, in
its certificate of incorporation, confer the power to adopt, amend or repeal
bylaws upon the directors. The fact that such power has been so conferred upon
the directors shall not divest the stockholders of the power, nor limit their
power to adopt, amend or repeal bylaws.
-23-
<PAGE>
CERTIFICATE OF ADOPTION OF
RESTATED BYLAWS
OF
LIQUID AUDIO, INC.
Certificate by Secretary
------------------------
The undersigned hereby certifies that he is the duly elected, qualified,
and acting Secretary of Liquid Audio, Inc. and that the foregoing Restated
Bylaws, comprising twenty-two (22) pages, were adopted as the Restated Bylaws of
the corporation on __________, 1999 by the board of directors of the
corporation.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand and affixed
the corporate seal this ____ day of _________ 1999.
________________________________
Robert G. Flynn, Secretary
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<PAGE>
EXHIBIT 4.2
LIQUID AUDIO, INC.
SECOND AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT
This Second Amended and Restated Investor Rights Agreement (the
"AGREEMENT") is made as of July 31, 1998 by and among Liquid Audio, Inc., a
California corporation (the "COMPANY"), and the persons and entities listed on
Exhibit A hereto (each individually an "INVESTOR", and collectively, the
- ---------
"INVESTORS").
RECITALS
--------
A. The Company issued shares of its Series A Preferred Stock (the "SERIES
A PREFERRED") pursuant to that certain Series A Preferred Stock Purchase
Agreement dated May 31, 1996 (the "SERIES A PURCHASE AGREEMENT") and shares of
its Series B Preferred Stock (the "SERIES B PREFERRED") pursuant to that certain
Series B Preferred Stock Purchase Agreement dated May 23, 1997 (the "SERIES B
PURCHASE AGREEMENT"), by and among the Company and certain of the Investors that
are parties thereto (the "PRIOR INVESTORS") and granted to the Prior Investors
certain registration and information rights and rights of first offer under that
certain First Amended and Restated Investor Rights Agreement by and among the
Company and the Prior Investors dated as of May 23, 1997 (the "PRIOR RIGHTS
AGREEMENT").
B. The Company has granted to Silicon Valley Bank (the "SERIES B WARRANT
HOLDER") a warrant to purchase up to an aggregate of 15,306 shares of Series B
Preferred (the "SERIES B WARRANT"), which Series B Warrant provides, or will
provide, for the grant of certain registration rights to the Series B Warrant
Holder.
C. The Company has agreed to grant to N2K, Inc. and Silicon Valley Bank
(the "SERIES C WARRANT HOLDERS") warrants to purchase up to an aggregate of
53,403 shares of Series C Preferred as defined below (the "SERIES C WARRANTS",
together with the Series B Warrants, the "WARRANTS"), which Series C Warrants
provide, or will provide, for the grant of certain registration rights to the
Series C Warrant Holders.
D. The Company has agreed to issue shares of the Company's Series C
Preferred Stock (the "SERIES C PREFERRED") pursuant to that certain Series C
Preferred Stock Purchase Agreement, dated as of even date herewith (the "SERIES
C PURCHASE AGREEMENT") by and among the Company and certain of the Investors
(the "SERIES C INVESTORS"). The Series C Purchase Agreement provides that, as a
condition to the Series C Investors' purchase of Series C Preferred thereunder,
the Company will enter into this Agreement and the Series C Investors will be
granted the rights set forth herein.
E. The Company and the Prior Investors desire for the Series C Investors
to purchase the Series C Preferred Stock and, to induce such purchase and to
grant such rights, desire to enter into
<PAGE>
this Agreement in order to amend, restate and replace their rights and
obligations under the Prior Rights Agreement with the rights and obligations set
forth in this Agreement.
F. Section 15(b) of the Prior Rights Agreement provides that holders of a
majority of the Preferred Stock and Conversion Stock (as such terms are defined
in the Prior Rights Agreement) may, with the prior written consent of the
Company, waive, modify or amend, on behalf of all of the Prior Investors, any
provisions of the Prior Rights Agreement, provided the effect thereof will be
that all such persons will be treated in the same manner. The undersigned
parties to this Agreement hold at least a majority of such Preferred Stock and
Conversion Stock and the modifications to the Prior Rights Agreement provided
for herein have such effect.
NOW, THEREFORE, in consideration of the mutual promises and covenants
hereinafter set forth, all parties hereto agree as follows:
1. CERTAIN DEFINITIONS. All capitalized terms used and not otherwise
-------------------
defined herein shall have the meanings given them in the Series C Purchase
Agreement. As used in this Agreement, the following terms shall have the
following respective meanings:
"COMMISSION" shall mean the Securities and Exchange Commission or any
other federal agency at the time administering the Securities Act.
"COMMON STOCK" shall mean the Common Stock of the Company.
"CONVERSION STOCK" means the Common Stock issued or issuable upon:
(i) the conversion of any shares of (A) Series A Preferred issued under the
Series A Purchase Agreement; (B) Series B Preferred issued under the Series B
Purchase Agreement; (C) Series B Preferred issued or issuable upon exercise of
the Series B Warrant; (D) Series C Preferred issued under the Series C Purchase
Agreement; and/or (E) Series C Preferred issued or issuable upon exercise of the
Series C Warrants.
"HOLDER(S)" shall mean: (i) any Investor holding Registrable
Securities; and (ii) any person holding Registrable Securities to whom the
rights under this Agreement have been transferred in accordance with Section
5.10 hereof; provided, however, that for the purposes of Sections 8 and 9 of
-------- -------
this Agreement: (a) the holder of the Warrants issued to Silicon Valley Bank
shall not be a Holder, and (b) the holder of the Series C Warrant issued to N2K,
Inc. shall not be a Holder until exercise of such Series C Warrant, in each case
arising solely from the ownership of such Warrants.
"INITIATING HOLDERS" shall mean any Holders who in the aggregate hold
not less than forty percent (40%) of the outstanding Registrable Securities.
"PREFERRED STOCK" shall mean the Series A Preferred, the Series B
Preferred and the Series C Preferred.
"REGISTRABLE SECURITIES" means the Conversion Stock and any Common
Stock of the Company issued or issuable in respect of the Conversion Stock upon
any stock split, stock dividend,
-2-
<PAGE>
recapitalization or similar event, or any Common Stock otherwise issuable with
respect to the Conversion Stock; provided, however, that shares of Conversion
-------- -------
Stock or other securities shall be treated as Registrable Securities only if and
so long as they have not been sold to or through a broker or dealer or
underwriter in a public distribution or a public securities transaction and,
provided further, that notwithstanding anything herein to the contrary, the
- -------- -------
Conversion Stock issued or issuable upon conversion of Series B Preferred and/or
Series C Preferred issued or issuable upon exercise of the Series B Warrant
and/or the Series C Warrant, respectively, issued to Silicon Valley Bank, shall
not constitute Registrable Securities for the purposes of Sections 5.1, 5.3, 5.4
or 15 of this Agreement.
The terms "REGISTER", "REGISTERED" and "REGISTRATION" refer to a
registration effected by preparing and filing a registration statement in
compliance with the Securities Act, and the declaration or ordering of the
effectiveness of such registration statement.
"REGISTRATION EXPENSES" shall mean all expenses, except as otherwise
stated below, incurred by the Company in complying with Sections 5.1, 5.2 and
5.3 hereof, including, without limitation, all registration, qualification and
filing fees, printing expenses, escrow fees, fees and disbursements of counsel
for the Company, blue sky fees and expenses, the expense of any special audits
incident to or required by any such registration (but excluding the compensation
of regular employees of the Company, which shall be paid in any event by the
Company) and the reasonable fees and disbursements of one counsel for all
Holders.
"RESTRICTED SECURITIES" shall mean the securities of the Company
required to bear the legend set forth in Section 3 hereof.
"SECURITIES ACT" shall mean the Securities Act of 1933, as amended, or
any similar federal statute, and the rules and regulations of the Commission
thereunder, all as the same shall be in effect at the time.
"EXCHANGE ACT" shall mean the Securities Exchange Act of 1934, as
amended, or any similar federal statute, and the rules and regulations of the
Commission thereunder, all as the same shall be in effect at the time.
"SELLING EXPENSES" shall mean all underwriting discounts, selling
commissions and stock transfer taxes applicable to the securities registered by
the Holders and, except as set forth under "Registration Expenses", all fees and
disbursements of counsel for any Holder.
2. RESTRICTIONS ON TRANSFERABILITY. The Preferred Stock, the Conversion
-------------------------------
Stock and any other securities issued in respect of the Preferred Stock or the
Conversion Stock upon any stock split, stock dividend, recapitalization, merger,
consolidation or similar event shall not be sold, assigned, transferred or
pledged except upon the conditions specified in this Agreement, which conditions
are intended to ensure compliance with the provisions of the Securities Act. The
Investors will cause any proposed purchaser, assignee, transferee, or pledgee of
any such shares held by the Investors to agree to take and hold such securities
subject to the provisions and upon the conditions specified in this Agreement.
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<PAGE>
3. RESTRICTIVE LEGEND. Each certificate representing: (i) the Preferred
------------------
Stock, (ii) the Conversion Stock, and (iii) any other securities issued in
respect of the Preferred Stock or the Conversion Stock upon any stock split,
stock dividend, recapitalization, merger, consolidation or similar event, shall
(unless otherwise permitted by the provisions of Section 4 below) be stamped or
otherwise imprinted with a legend in substantially the following form (in
addition to any legend required under applicable state securities laws):
THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED, AND HAVE BEEN ACQUIRED FOR
INVESTMENT AND NOT WITH A VIEW TO, OR IN CONNECTION WITH, THE SALE OR
DISTRIBUTION THEREOF. SUCH SHARES MAY NOT BE SOLD OR TRANSFERRED IN THE
ABSENCE OF SUCH REGISTRATION UNLESS THE COMPANY RECEIVES AN OPINION OF
COUNSEL REASONABLY ACCEPTABLE TO IT STATING THAT SUCH SALE OR TRANSFER IS
EXEMPT FROM THE REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS OF SAID
ACT. COPIES OF THE AGREEMENTS COVERING THE PURCHASE OF THESE SHARES AND
RESTRICTING THEIR TRANSFER MAY BE OBTAINED AT NO COST BY WRITTEN REQUEST
MADE BY THE HOLDER OF RECORD OF THIS CERTIFICATE TO THE SECRETARY OF THE
CORPORATION AT THE PRINCIPAL EXECUTIVE OFFICES OF THE CORPORATION.
Each Investor and/or Holder consents to the Company making a notation on its
records and giving instructions to any transfer agent of the Preferred Stock or
the Common Stock in order to implement the restrictions on transfer established
in this Agreement.
4. NOTICE OF PROPOSED TRANSFERS. The holder of each certificate
----------------------------
representing Restricted Securities by acceptance thereof agrees to comply in all
respects with the provisions of this Section 4. Prior to any proposed sale,
assignment, transfer or pledge of any Restricted Securities (other than: (i) a
transfer not involving a change in beneficial ownership; (ii) in transactions
involving the distribution without consideration of Restricted Securities by the
Investor to any of its partners, or retired partners, or to the estate of any of
its partners or retired partners; (iii) in transactions involving the transfer
without consideration of Restricted Securities by the Investor during his
lifetime by way of gift or on death by will or intestacy; (iv) in transactions
involving the transfer or distribution of Restricted Securities by a corporation
to any subsidiary, parent or affiliated corporation of such corporation; or (v)
in transactions in compliance with Rule 144 (provided that the holder provides a
statement of circumstances to indicate that Rule 144 is applicable)), unless
there is in effect a registration statement under the Securities Act covering
the proposed transfer, the holder thereof shall give written notice to the
Company of such holder's intention to effect such transfer, sale, assignment or
pledge. Each such notice shall describe the manner and circumstances of the
proposed transfer, sale, assignment or pledge in sufficient detail and shall be
accompanied, at such holder's expense, by either: (i) an unqualified written
opinion of legal counsel who shall be, and whose legal opinion shall be,
reasonably satisfactory to the Company addressed to the Company, to the effect
that the proposed transfer of the Restricted Securities may be effected without
registration under the Securities Act; or (ii) a "no action" letter from the
Commission to the effect
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<PAGE>
that the transfer of such securities without registration will not result in a
recommendation by the staff of the Commission that action be taken with respect
thereto, whereupon the holder of such Restricted Securities shall be entitled to
transfer such Restricted Securities in accordance with the terms of the notice
delivered by the holder to the Company. Each certificate evidencing the
Restricted Securities transferred as above provided shall bear the appropriate
restrictive legend set forth in Section 3 above, except that such certificate
shall not bear such restrictive legend if: (i) in the opinion of counsel for
such holder and the Company, such legend is not required in order to establish
compliance with any provision of the Securities Act; (ii) such transfer is made
pursuant to Rule 144(k); or (iii) such transfer is otherwise made pursuant to
Rule 144 and counsel for the Company does not deem it necessary to require such
legend.
5. REGISTRATION.
------------
5.1 Requested Registration.
----------------------
(a) Requested Registration. In case the Company shall receive
----------------------
from Initiating Holders a written request that the Company effect any
registration, qualification or compliance with respect to not less than twenty-
five percent (25%) of the outstanding shares of the Registrable Securities, or
any lesser number of shares if the anticipated aggregate offering price, before
underwriting discounts and commissions, would exceed five million dollars
($5,000,000), the Company will:
(i) promptly give written notice of the proposed
registration, qualification or compliance to all other Holders; and
(ii) as soon as practicable, use its best efforts to
effect such registration, qualification or compliance (including, without
limitation, appropriate qualification under applicable blue sky or other state
securities laws and appropriate compliance with applicable regulations issued
under the Securities Act and any other governmental requirements or regulations)
as may be so requested and as would permit or facilitate the sale and
distribution of all or such portion of such Registrable Securities as are
specified in such request, together with all or such portion of the Registrable
Securities of any Holder or Holders joining in such request as are specified in
a written request received by the Company within twenty (20) days after receipt
of such written notice from the Company; provided, however, that the Company
shall not be obligated to take any action to effect any such registration,
qualification or compliance pursuant to this Section 5.1:
(A) In any particular jurisdiction in which the
Company would be required to execute a general consent to service of process in
effecting such registration, qualification or compliance unless the Company is
already subject to service in such jurisdiction and except as may be required by
the Securities Act;
(B) Prior to the earlier of May 31, 1999 or one
hundred eighty (180) days after the effective date of the Company's first
registered pubic offering of its stock;
-5-
<PAGE>
(C) If the Company, within ten (10) days of the
receipt of the request of the Initiating Holders, gives notice of its bona fide
intention to effect the filing of a registration statement with the Commission
within ninety (90) days of receipt of such request (other than a registration of
securities in a Rule 145 transaction or with respect to an employee benefit
plan);
(D) During the period starting with the date of
filing of, and ending on the date one hundred eighty (180) days immediately
following the effective date of, any registration statement pertaining to
securities of the Company (other than a registration of securities in a Rule 145
transaction or with respect to an employee benefit plan), provided that the
Company is actively employing in good faith all reasonable efforts to cause such
registration statement to become effective;
(E) After the Company has effected two (2) such
registrations pursuant to this Section 5.1(a), and such registrations have been
declared or ordered effective; or
(F) If the Company shall furnish to such Initiating
Holders a certificate signed by the President of the Company stating that in the
good faith judgment of the Board of Directors of the Company it would be
seriously detrimental to the Company or its shareholders for a registration
statement to be filed in the near future, in which case the Company's obligation
to use its best efforts to register, qualify or comply under this Section 5.1
shall be deferred for a period not to exceed ninety (90) days from the date of
receipt of written request from the Initiating Holders, provided that the
Company may not exercise this deferral right more than once per twelve (12)
month period.
Subject to the foregoing clauses (A) through (F), the Company shall file a
registration statement covering the Registrable Securities so requested to be
registered as soon as practicable after receipt of the request or requests of
the Initiating Holders.
(b) Underwriting. In the event that a registration pursuant to
------------
Section 5.1 is for a public offering involving an underwriting, the Company
shall so advise the Holders as part of the notice given pursuant to Section
5.1(a)(i), that the right of any Holder to registration pursuant to Section 5.1
shall be conditioned upon such Holder's participation in such underwriting
arrangements, and the inclusion of such Holder's Registrable Securities in the
underwriting to the extent requested shall be limited to the extent provided
herein.
The Company shall (together with all Holders proposing to distribute their
securities through such underwriting) enter into an underwriting agreement in
customary form with the managing underwriter selected for such underwriting by a
majority in interest of the Initiating Holders, but subject to the Company's
reasonable approval. Notwithstanding any other provision of this Section 5.1,
if the managing underwriter advises the Initiating Holders in writing that
marketing factors require a limitation of the number of shares to be
underwritten, then the Company shall so advise all Holders of Registrable
Securities, and the number of shares of Registrable Securities that may be
included in the registration and underwriting shall be allocated among all
Holders requesting
-6-
<PAGE>
registration in proportion, as nearly as practicable, to the respective amounts
of Registrable Securities held by such Holders at the time of filing the
registration statement; provided, however, that the number of shares of
-------- -------
Registrable Securities to be included in such underwriting and registration
shall not be reduced unless all other securities of the Company are first
entirely excluded from the underwriting and registration. No Registrable
Securities excluded from the underwriting by reason of the underwriter's
marketing limitation shall be included in such registration. To facilitate the
allocation of shares in accordance with the above provisions, the Company or the
underwriters may round the number of shares allocated to any Holder to the
nearest one hundred (100) shares.
If any Holder of Registrable Securities disapproves of the terms of the
underwriting, such person may elect to withdraw therefrom by written notice to
the Company, the managing underwriter and the Initiating Holders. The
Registrable Securities and/or other securities so withdrawn shall also be
withdrawn from registration, and such Registrable Securities shall not be
transferred in a public distribution prior to one hundred eighty (180) days
after the effective date of such registration, or such other shorter period of
time as the underwriters may require.
5.2 Company Registration.
--------------------
(a) Notice of Registration. If at any time or from time to time
----------------------
the Company shall determine to register any of its equity securities, either for
its own account or for the account of a security holder or holders, other than
(A) a registration relating solely to employee benefit plans, or (B) a
registration relating solely to a Rule 145 transaction, the Company will:
(i) promptly give to each Holder written notice thereof;
and
(ii) include in such registration (and any related
qualification under blue sky laws or other compliance), and in any underwriting
involved therein, all the Registrable Securities specified in a written request
or requests, made within thirty (30) days after receipt of such written notice
from the Company, by any Holder.
(b) Underwriting. If the registration of which the Company
------------
gives notice is for a registered public offering involving an underwriting, the
Company shall so advise the Holders as a part of the written notice given
pursuant to Section 5.2(a)(i). In such event, the right of any Holder to
registration pursuant to Section 5.2 shall be conditioned upon such Holder's
participation in such underwriting and the inclusion of Registrable Securities
in the underwriting shall be limited to the extent provided herein.
All Holders proposing to distribute their securities through such
underwriting shall (together with the Company and the other holders distributing
their securities through such underwriting) enter into an underwriting agreement
in customary form with the managing underwriter selected for such underwriting
by the Company. Notwithstanding any other provision of this Section 5.2, if the
managing underwriter determines that marketing factors require a limitation of
the number of shares to be underwritten, the managing underwriter may limit the
Registrable Securities to be included in such registration: (i) in the case of
the Company's initial public offering, to zero; and (ii) in the case of any
other offering, to an amount no less than twenty-five percent (25%) of all
shares to be
-7-
<PAGE>
included in such offering; provided, however, that (x) any such limitation or
-------- -------
"cut-back" shall be first applied to all shares proposed to be sold in such
offering other than for the account of the Company which are not Registrable
Securities, and (y) notwithstanding clause (x), in no event shall any shares
being sold by a shareholder exercising a demand registration right similar to
that granted in Section 5.1 be excluded from such offering. The Company shall so
advise all Holders and other holders distributing their securities through such
underwriting, that the number of shares of Registrable Securities or other
securities that may be included in the registration and underwriting shall be
first allocated among all the Holders in proportion, as nearly as practicable,
to the respective amounts of Registrable Securities held by such Holder at the
time of filing the Registration Statement. To facilitate the allocation of
shares in accordance with the above provisions, the Company may round the number
of shares allocated to any Holder to the nearest one hundred (100) shares.
If any Holder or holder disapproves of the terms of any such underwriting,
he may elect to withdraw therefrom by written notice to the Company and the
managing underwriter. Any securities excluded or withdrawn from such
underwriting shall be withdrawn from such registration and shall not be
transferred in a public distribution prior to one hundred eighty (180) days
after the effective date of the registration statement relating thereto, or such
other shorter period of time as the underwriters may require.
(c) Right to Terminate Registration. The Company shall have the
-------------------------------
right to terminate or withdraw any registration initiated by it under this
Section 5.2 prior to the effectiveness of such registration, whether or not any
Holder has elected to include securities in such registration.
5.3 Registration on Form S-3.
------------------------
(a) If any Holder or Holders who in the aggregate hold not less
than twenty percent (20%) of the outstanding Registrable Securities request that
the Company file a registration statement on Form S-3 (or any successor form to
Form S-3) for a public offering of shares of the Registrable Securities, the
reasonably anticipated aggregate price to the public of which would equal or
exceed five hundred thousand dollars ($500,000), and the Company is a registrant
entitled to use Form S-3 to register the Registrable Securities for such an
offering, the Company shall use its best efforts to cause such Registrable
Securities to be registered for the offering on such form and to cause such
Registrable Securities to be qualified in such jurisdictions as such Holder or
Holders may reasonably request; provided, however, that the Company shall not be
-------- -------
required to effect more than two (2) registrations pursuant to this Section 5.3
in any twelve (12) month period. The Company shall inform other Holders of the
proposed registration and offer them the opportunity to participate. In the
event the registration is proposed to be part of a firm commitment underwritten
public offering, the substantive provisions of Section 5.1(b) shall be
applicable to each such registration initiated under this Section 5.3.
(b) Notwithstanding the foregoing, the Company shall not be
obligated to take any action pursuant to this Section 5.3:
-8-
<PAGE>
(i) in any particular jurisdiction in which the Company
would be required to execute a general consent to service of process in
effecting such registration, qualification or compliance unless the Company is
already subject to service in such jurisdiction and except as may be required by
the Securities Act;
(ii) if the Company, within ten (10) days of receipt of
the request of the Initiating Holders, gives notice of its bona fide intention
to effect the filing of a registration statement with the Commission within
ninety (90) days of receipt of such request (other than a registration of
securities in a Rule 145 transaction or with respect to an employee benefit
plan);
(iii) during the period starting with the date of filing
of, and ending on the date one hundred eighty (180) days immediately following
the effective date of, any registration statement pertaining to securities of
the Company (other than a registration of securities in a Rule 145 transaction
or with respect to an employee benefit plan), provided that the Company is
actively employing in good faith all reasonable efforts to cause such
registration statement to become effective; or
(iv) if the Company shall furnish to such Holder or
Holders a certificate signed by the President of the Company stating that in the
good faith judgment of the Board of Directors of the Company it would be
seriously detrimental to the Company or its shareholders for registration
statements to be filed in the near future, in which case the Company's
obligation to use its best efforts to file a registration statement shall be
deferred for a period not to exceed ninety (90) days from receipt of the request
to file such registration by such Holder or Holders, provided that the Company
may not exercise this deferral right more than once per twelve (12) month
period.
5.4 Limitations on Subsequent Registration Rights. From and after
---------------------------------------------
the Closing Date, the Company shall not enter into any agreement granting any
holder, or prospective holder of any securities of the Company, registration
rights with respect to such securities without the written consent of the
holders of a majority of the Registrable Securities then outstanding, unless:
(i) such other registration rights are subordinate to the registration rights
granted to the Holders hereunder; and (ii) the holders of such rights are
subject to market standoff obligations no more favorable to such persons than
those contained herein.
5.5 Expenses of Registration. All Registration Expenses incurred in
------------------------
connection with: (i) two (2) registrations pursuant to Section 5.1; (ii) all
registrations pursuant to Section 5.2; and (iii) all registrations pursuant to
Section 5.3, shall be borne by the Company. Unless otherwise stated, all Selling
Expenses relating to securities registered on behalf of the Holders shall be
borne by the Holders of such securities pro rata on the basis of the number of
shares so registered.
5.6 Registration Procedures. In the case of each registration,
-----------------------
qualification or compliance effected by the Company pursuant to this Agreement,
the Company will keep each Holder advised in writing as to the initiation of
each registration, qualification and compliance and as to the completion
thereof. At its expense the Company will:
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<PAGE>
(a) Prepare and file with the Commission a registration
statement with respect to such securities and use its best efforts to cause such
registration statement to become and remain effective for at least one hundred
twenty (120) days or until the distribution described in the registration
statement has been completed, whichever occurs first;
(b) Furnish to the Holders participating in such registration
and to the underwriters of the securities being registered, such reasonable
number of copies of the registration statement, preliminary prospectus, final
prospectus and such other documents as such Holders and underwriters may
reasonably request in order to facilitate the public offering of such
securities;
(c) Use its best efforts to register and qualify the securities
covered by such registration statement under such other securities or blue sky
laws of such jurisdictions as shall be reasonably requested by the Holders,
provided that the Company shall not be required in connection therewith, or as a
condition thereto, to qualify to do business or to file a general consent to
service of process in any such states or jurisdictions;
(d) In the event of any underwritten public offering, enter into
and perform its obligations under an underwriting agreement, in usual and
customary form, with the managing underwriters of such offering; each Holder
participating in such underwriting shall also enter into and perform its
obligations under such an agreement;
(e) Notify each Holder of Registrable Securities covered by such
registration statement, at any time when a prospectus relating thereto is
required to be delivered under the Securities Act, of the happening of any event
as a result of which the prospectus included in such registration statement, as
then in effect, includes an untrue statement of a material fact or omits to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading in light of the circumstances then existing;
and
(f) Furnish, at the request of any Holder requesting
registration of Registrable Securities, on the date that such Registrable
Securities are delivered to the underwriters for sale, if such securities are
being sold through underwriters, or, if such securities are not being sold
through underwriters, on the date that the registration statement with respect
to such securities become effective: (i) an opinion, dated as of such date, of
the counsel representing the Company for the purposes of such registration, in
form and substance as is customarily given to underwriters in an underwritten
public offering and reasonably satisfactory to a majority in interest of the
Holders requesting registration, addressed to the underwriters, if any, and to
the Holders requesting registration of Registrable Securities; and (ii) a
"comfort" letter dated as of such date, from the independent certified public
accountants of the Company, in form and substance as is customarily given by
independent certified public accountants to underwriters in an underwritten
public offering and reasonably satisfactory to a majority in interest of the
Holders requesting registration, addressed to the underwriters, if any, and to
the Holders requesting registration of Registrable Securities.
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<PAGE>
5.7 Indemnification.
(a) The Company will indemnify each Holder of Registrable
Securities included in a registration pursuant to this Agreement, each of its
officers and directors and partners, and each person controlling such Holder
within the meaning of Section 15 of the Securities Act, with respect to which
registration, qualification or compliance has been effected pursuant to this
Agreement, and each underwriter, if any, and each person who controls any
underwriter within the meaning of Section 15 of the Securities Act, against all
expenses, claims, losses, damages or liabilities (or actions in respect
thereof), including any of the foregoing incurred in settlement of any
litigation, commenced or threatened, arising out of or based on any untrue
statement (or alleged untrue statement) of a material fact contained in any
registration statement, prospectus, offering circular or other document, or any
amendment or supplement thereto, incident to any such registration,
qualification or compliance, or based on any omission (or alleged omission) to
state therein a material fact required to be stated therein or necessary to make
the statements therein not misleading, or any violation by the Company of the
Securities Act, the Exchange Act, state securities law or any rule or regulation
promulgated under such laws applicable to the Company in connection with any
such registration, qualification or compliance, and the Company will reimburse
each such Holder, each of its officers, directors and partners, and each person
controlling such Holder, each such underwriter and each person who controls any
such underwriter, for any legal and any other expenses reasonably incurred, as
such expenses are incurred, in connection with investigating, preparing or
defending any such claim, loss, damage, liability or action, provided that the
Company will not be liable in any such case to the extent that any such claim,
loss, damage, liability or expense arises out of or is based on any untrue
statement or omission or alleged untrue statement or omission, made in reliance
upon and in conformity with written information furnished to the Company by an
instrument duly executed by any Holder, controlling person or underwriter and
stated to be specifically for use therein; provided, however, that the foregoing
-------- -------
indemnity agreement is subject to the condition that, insofar as it relates to
any such untrue statement, alleged untrue statement, omission or alleged
omission made in a preliminary prospectus on file with the Commission at the
time the registration statement becomes effective or the amended prospectus
filed with the Commission pursuant to Rule 424(b) (the "FINAL PROSPECTUS"), such
indemnity agreement shall not inure to the benefit of any underwriter, if a copy
of the Final Prospectus was not furnished to the person asserting the loss,
liability, claim or damage at or prior to the time such action is required by
the Securities Act, and if the Final Prospectus would have cured the defect
giving rise to the loss, liability, claim or damage.
(b) Each Holder will, if the Registrable Securities held by such
Holder are included in the securities as to which such registration,
qualification or compliance is being effected, indemnify the Company, each of
its directors and officers, each underwriter, if any, of the Company's
securities covered by such a registration statement, each person who controls
the Company or such underwriter within the meaning of Section 15 of the
Securities Act, and each other such Holder, each of its officers, directors and
partners and each person controlling such Holder within the meaning of Section
15 of the Securities Act, against all expenses, claims, losses, damages and
liabilities (or actions in respect thereof) arising out of or based on any
untrue statement (or alleged untrue statement) of a material fact contained in
any such registration statement, prospectus,
-11-
<PAGE>
offering circular or other document, or any omission (or alleged omission) to
state therein a material fact required to be stated therein or necessary to make
the statements therein not misleading, and will reimburse the Company, such
Holders, such directors, officers, partners, persons, underwriters or
controlling persons for any legal or any other expenses reasonably incurred, as
such expenses are incurred, in connection with investigating, preparing or
defending any such claim, loss, damage, liability or action, in each case to the
extent, but only to the extent, that such untrue statement (or alleged untrue
statement) or omission (or alleged omission) is made in such registration
statement, prospectus, offering circular or other document in reliance upon and
in conformity with written information furnished to the Company by an instrument
duly executed by such Holder and stated to be specifically for use therein.
Notwithstanding the foregoing, the liability of each Holder under this Section
5.7(b) shall be limited in an amount equal to the net proceeds of the shares
sold by such Holder.
(c) Each party entitled to indemnification under this Section
5.7 (the "INDEMNIFIED PARTY") shall give notice to the party required to provide
indemnification (the "INDEMNIFYING PARTY") promptly after such Indemnified Party
has actual knowledge of any claim as to which indemnity may be sought, and shall
permit the Indemnifying Party to assume the defense of any such claim or any
litigation resulting therefrom, provided that counsel for the Indemnifying
Party, who shall conduct the defense of such claim or litigation, shall be
approved by the Indemnified Party (whose approval shall not unreasonably be
withheld), and the Indemnified Party may participate in such defense at such
party's expense, and provided further that the failure of any Indemnified Party
to give notice as provided herein shall not relieve the Indemnifying Party of
its obligations under this Section 5.7 unless the failure to give such notice is
materially prejudicial to an Indemnifying Party's ability to defend such action,
in which case the Indemnifying Party shall be relieved of its obligations under
this Section 5.7 to the extent of such prejudice, and provided further that the
Indemnifying Party shall not assume the defense for matters as to which
representation of both the Indemnifying Party and the Indemnified Party by the
same counsel would be inappropriate due to actual or potential differing
interests between them, but shall instead in such event pay the fees and costs
of separate counsel for the Indemnified Party. No Indemnifying Party, in the
defense of any such claim or litigation, shall, except with the consent of each
Indemnified Party, consent to entry of any judgment or enter into any settlement
which does not include, as an unconditional term thereof, the giving by the
claimant or plaintiff to such Indemnified Party of a release from all liability
with respect to such claim or litigation.
(d) If the indemnification provided for in this Section 5.7 is
held by a court of competent jurisdiction to be unavailable to an Indemnified
Party with respect to any loss, liability, claim, damage, or expense referred to
herein, then the Indemnifying Party, in lieu of indemnifying such Indemnified
Party hereunder, shall contribute to the amount paid or payable by such
Indemnified Party as a result of such loss, liability, claim, damage, or expense
in such proportion as is appropriate to reflect the relative fault of the
Indemnifying Party on the one hand and of the Indemnified Party on the other in
connection with the statements or omissions that resulted in such loss,
liability, claim, damage, or expense as well as any other relevant equitable
considerations. The relative fault of the Indemnifying Party and of the
Indemnified Party shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement of a
-12-
<PAGE>
material fact or the omission to state a material fact relates to information
supplied by the Indemnifying Party or by the Indemnified Party and the parties'
relevant intent, knowledge, access to information, and opportunity to correct or
prevent such statement or omission; provided, however, that, in any such case,
-------- -------
(i) no such Holder will be required to contribute any amount in excess of the
public offering price of all such Registrable Securities offered and sold by
such Holder pursuant to such registration statement; and (ii) no person or
entity guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Securities Act) will be entitled to contribution from any person or
entity who was not guilty of such fraudulent misrepresentation.
5.8 Information by Holder. The Holder or Holders of Registrable
---------------------
Securities included in any registration shall furnish to the Company such
information regarding such Holder or Holders, the Registrable Securities held by
them and the distribution proposed by such Holder or Holders as the Company may
request in writing and as shall be required in connection with any registration,
qualification or compliance referred to in this Agreement.
5.9 Rule 144 Reporting. With a view to making available the
------------------
benefits of certain rules and regulations of the Commission which may at any
time permit the sale of the Restricted Securities to the public without
registration, after such time as a public market exists for the Common Stock of
the Company, the Company agrees to use its best efforts to:
(a) Make and keep public information available, as those terms
are understood and defined in Rule 144 under the Securities Act, at all times
after the effective date that the Company becomes subject to the reporting
requirements of the Securities Act or the Exchange Act;
(b) File with the Commission in a timely manner all reports and
other documents required of the Company under the Securities Act and the
Exchange Act (at any time after it has become subject to such reporting
requirements); and
(c) So long as a Holder owns any Restricted Securities, to
furnish to such Holder forthwith upon request: (i) a written statement by the
Company as to its compliance with the reporting requirements of said Rule 144
(at any time after ninety (90) days following the effective date of the first
registration statement filed by the Company for an offering of its securities to
the general public) and of the Securities Act and the Exchange Act (at any time
after it has become subject to such reporting requirements); (ii) a copy of the
most recent annual or quarterly report of the Company; and (iii) such other
reports and documents of the Company and other information in the possession of
or reasonably obtainable by the Company as the Holder may reasonably request in
availing itself of any rule or regulation of the Commission allowing the Holder
to sell any such securities without registration (at any time after the Company
has become subject to the reporting requirements of the Exchange Act).
5.10 Transfer of Registration Rights. The rights to cause the
-------------------------------
Company to register securities granted to Investors under Sections 5.1, 5.2 and
5.3 may be assigned to a transferee or assignee in connection with any transfer
or assignment of Preferred Stock or Registrable Securities by the Investor
provided that: (i) such transfer may otherwise be effected in accordance with
-13-
<PAGE>
applicable securities law; (ii) such assignee or transferee acquires at least
one hundred thousand (100,000) shares of Preferred Stock and/or Conversion Stock
held by the assignor or transferor (as adjusted for recapitalizations, stock
splits and the like) or such lesser number, if it constitutes all such shares
held by the assignor or transferor; (iii) written notice is promptly given to
the Company; and (iv) such transferee agrees to be bound by the provisions of
this Agreement. Notwithstanding the foregoing, the rights to cause the Company
to register securities may be assigned to: (A) any affiliated partnership or
constituent partner or retired partner of an Investor which is a partnership;
(B) an officer, director or shareholder or a subsidiary, parent or affiliated
corporation of an Investor which is a corporation; or (C) a spouse, lineal
descendant or ancestor or trust for the benefit of an Investor who is an
individual, without compliance with item (ii) above, provided that written
--------
notice thereof is promptly given to the Company and the transferee agrees to be
bound by the provisions of this Agreement.
5.11 Termination of Registration Rights. The rights granted pursuant
----------------------------------
to Sections 5.1, 5.2 and 5.3 of this Agreement shall terminate as to any Holder
upon the earliest of: (i) such time as such Holder can sell all of its
Registrable Securities pursuant to Rule 144(k) promulgated under the Securities
Act; or (ii) five (5) years after the effective date of the Company's first
registered public offering of its stock (other than a registration of securities
in a Rule 145 transaction or with respect to any employee benefit plan).
6. FINANCIAL INFORMATION.
---------------------
6.1 The Company will provide the following reports to each holder of
shares of Preferred Stock and/or Conversion Stock:
(a) As soon as practicable after the end of each fiscal year,
and in any event within ninety (90) days thereafter, consolidated balance sheets
of the Company and its subsidiaries, if any, as of the end of such fiscal year,
and consolidated statements of operations and of cash flow and shareholders'
equity of the Company and its subsidiaries, if any, for such year, prepared in
accordance with generally accepted accounting principles and setting forth, in
each case in comparative form, the figures for the previous fiscal year, all in
reasonable detail and audited by independent public accountants of national
standing selected by the Company, and a capitalization table in reasonable
detail for such fiscal year.
(b) As soon as practicable after the end of the first, second
and third quarterly accounting periods in each fiscal year of the Company, and
in any event within forty-five (45) days thereafter, a consolidated balance
sheet of the Company and its subsidiaries, if any, as of the end of each such
quarterly period, and consolidated statements of operations and of cash flows of
the Company and its subsidiaries for such period and for the current fiscal year
to date, prepared in accordance with generally accepted accounting principles
(other than for accompanying notes), subject to changes resulting from year-end
audit adjustments, in reasonable detail and signed by the principal financial or
accounting officer of the Company, and a capitalization table in reasonable
detail for such quarterly period.
-14-
<PAGE>
6.2 The Company will provide the following reports to each holder of
at least one hundred fifty thousand (150,000) shares of Preferred Stock and/or
Conversion Stock (as adjusted for recapitalizations, stock splits and the like):
(a) At least thirty (30) days after the beginning of each fiscal
year, a budget adopted by the Company's Board of Directors for the fiscal year,
prepared on a monthly basis, and, as soon as prepared, any other budgets or
revised budgets prepared by the Company;
(b) Within thirty (30) days after the end of the first and
second monthly accounting period in each quarter, a consolidated condensed
balance sheet of the Company and its subsidiaries, if any, as of the end of each
such monthly period, and consolidated condensed statement of operations of the
Company and its subsidiaries for such period and for the current fiscal year to
date, prepared in accordance with generally accepted accounting principles
(other than for accompanying notes), subject to changes resulting from year end
audit adjustments, together with a statement of the chief financial or
accounting officer of the Company explaining any differences from the budget for
such monthly accounting period, and signed by the principal financial or
accounting officer of the Company.
7. VISITATION AND INSPECTION.
-------------------------
7.1 The Company will afford to each holder of at least five hundred
thousand (500,000) shares of Preferred Stock and/or Conversion Stock (as
adjusted for recapitalizations, stock splits and the like) (each such holder
referred to herein as a "QUALIFIED INVESTOR") the right to have a non-voting
representative attend all meetings of the Company's Board of Directors (the
"BOARD"), subject to the Company's right to request in good faith that such
representative excuse himself from executive sessions of the Board where a
conflict of interest might be present and from any Board meeting or any part
thereof if such exclusion is reasonably necessary to preserve the attorney-
client privilege, and, upon request, to receive copies of all notices for and
materials distributed at such meetings, as well as any proposed written actions
by the Board concurrently with the distribution of such items to the Board.
7.2 The Company will afford to each Qualified Investor the right,
upon twenty (20) days advance notice, to meet periodically with the Company's
principal executive officer or chief financial officer during normal business
hours to discuss and make recommendations regarding the conduct of the Company's
business and affairs.
8. RIGHT OF FIRST OFFER.
--------------------
8.1 The Company hereby grants to each Holder, the right of first
offer to purchase its Pro Rata Share of New Securities (as defined in this
Section 8) which the Company may, from time to time, propose to sell and issue.
For purposes of this right of first offer, "PRO RATA SHARE" shall mean the ratio
that: (i) the sum of the number of shares of Common Stock then held by such
Holder and the number of shares of Common Stock issuable upon conversion of the
Preferred Stock then held by such Holder or the Preferred Stock issuable upon
exercise of the Warrants held by such Holder, bears to (ii) the sum of the total
number of shares of Common Stock then outstanding and
-15-
<PAGE>
the number of shares of Common Stock issuable upon exercise or conversion of all
the then outstanding securities exercisable for or convertible into, directly or
indirectly, Common Stock.
8.2 Except as set forth below, "NEW SECURITIES" shall mean any shares
of capital stock of the Company, including Common Stock and any series of
Preferred Stock, whether now authorized or not, and rights, options or warrants
to purchase said shares of Common Stock or Preferred Stock, and securities of
any type whatsoever that are, or may become, convertible into or exchangeable
for said shares of Common Stock or Preferred Stock. Notwithstanding the
foregoing, "NEW SECURITIES" does not include: (i) the Conversion Stock; (ii)
Common Stock offered to the public generally pursuant to a registration
statement under the Securities Act; (iii) securities issued pursuant to the
acquisition of another corporation or entity by the Company by merger, purchase
of all or substantially all of the assets, or other reorganizations whereby the
Company acquires substantially all the assets of such other corporation or
entity, or the Company or its stockholders own more than fifty percent (50%) of
the voting power of the surviving or successor corporation; (iv) up to 1,584,486
shares (as adjusted for recapitalizations, stock splits and the like, and net of
any repurchases of stock or terminations or expirations of options, warrants or
other rights) of the Company's Common Stock or related options, warrants or
other rights to purchase such Common Stock issued to employees, officers and
directors of, and consultants to, the Company, pursuant to arrangements approved
by the Board of Directors of the Company; (v) stock issued pursuant to any
rights, agreements or convertible securities, including without limitation
options and warrants, provided that (x) such rights, agreements or convertible
securities were outstanding prior to the date of this Agreement, or (y) the
rights of first offer established by this Section 8 applied with respect to the
initial sale or grant by the Company of such rights, agreements or convertible
securities; (vi) stock issued in connection with any stock split, stock dividend
or other recapitalization by the Company; (vii) the issuance of stock or
warrants in connection with customary commercial leasing or lending transactions
wherein such issuances in the aggregate do not exceed one percent (1%) of the
then outstanding Common Stock of the Company in any calendar year; (viii) the
issuance of the Series C Warrants to N2K, Inc. and Silicon Valley Bank and the
Series C Preferred issuable upon exercise of the Series C Warrants; or (ix) the
issuance of Series A Preferred pursuant to the Series A Purchase Agreement,
Series B Preferred pursuant to the Series B Purchase Agreement and/or Series C
Preferred pursuant to the Series C Purchase Agreement.
8.3 In the event the Company proposes to undertake an issuance of New
Securities, it shall give each Holder written notice of its intention,
describing the amount and type of New Securities, and the price and terms upon
which the Company proposes to issue the same. Each Holder shall have twenty (20)
days from the date of receipt of any such notice to agree to purchase up to its
respective Pro Rata Share of such New Securities for the price and upon the
terms specified in the notice by giving written notice of the Company and
stating therein the quantity of New Securities to be purchased.
8.4 In the event all of the New Securities are not elected to be
purchased by the Holder pursuant to Section 8(c) above, the Company shall have
one hundred and twenty (120) days thereafter to sell the New Securities not
elected to be purchased by Holders at the price and upon the terms no more
favorable to the purchasers of such securities than specified in the Company's
notice.
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<PAGE>
In the event the Company has not sold the New Securities within said one hundred
and twenty (120) day period, the Company shall not thereafter issue or sell any
New Securities without first offering such securities in the manner provided
above.
9. ISSUANCES TO EMPLOYEES AND CONSULTANTS. Unless otherwise determined
--------------------------------------
by the Board of Directors, following the Closing (as defined in the Series C
Purchase Agreement), the Company shall not issue shares of Common Stock or other
securities of the Company or any option, warrant or right to acquire such shares
to any of its employees, officers, directors or consultants which vest on a
schedule other than twenty-five percent (25%) vesting at the end of the first
year of the holder's employment or services with the Company and the remaining
seventy-five percent (75%) vesting on a monthly basis over the following thirty-
six (36) months, with unvested shares repurchasable by the Company or its
assignee, at cost, upon termination of the holder's employment or services with
the Company for any reason. No shares of Common Stock or other securities of the
Company issued to employees, officers, directors and consultants of the Company
shall be transferable other than to the Company or the Holders prior to vesting,
and all such shares shall be subject to market standoff agreements at least as
restrictive as those set forth in Section 11 hereof in connection with the
initial public offering of the Company's securities. All such shares shall be
subject to a right of first refusal held, initially, by the Company and,
secondarily if the Company does not exercise its right, by the Holders, pro rata
in proportion to the number of shares of Preferred Stock and Conversion Stock
held by each.
10. TERMINATION OF COVENANTS. The covenants set forth in Sections 6, 7,
------------------------
8, 9 and 13 shall terminate and be of no further force or effect upon the
consummation of a firm commitment underwritten public offering or at such time
as the Company (or if the Company is acquired, the survivor) is required to file
reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934,
as amended, whichever shall occur first.
11. STANDOFF AGREEMENT. In connection with the initial public offering of
------------------
the Company's securities, each Investor and Holder agrees, upon request of the
Company or the underwriters managing any underwritten offering of the Company's
securities, not to sell, make any short sale of, loan, grant any option for the
purchase of, or otherwise dispose of any securities of the Company (other than
those included in the registration) without the prior written consent of the
Company or such underwriters, as the case may be, for such period of time (not
to exceed one hundred eighty (180) days) from the effective date of such
registration, as may be requested by the underwriters, provided that all
officers and directors of the Company who own stock of, or hold options to
purchase stock of, the Company and all other persons who hold one percent (1%)
or more of the then outstanding capital stock of the Company also agree to such
restrictions. The Investors and Holders agree that the Company may instruct its
transfer agent to place stop-transfer notations in its records to enforce the
provisions of this Section 11.
12. DETERMINATION OF SHARE AMOUNTS AND PERCENTAGES. For the purpose of
----------------------------------------------
determining the minimum holdings set forth in this Agreement, including without
limitation the minimum holdings pursuant to Sections 5.10, 6(b), 7(a) and 15(b),
the following rules shall govern:
-17-
<PAGE>
12.1 All shares held by entities affiliated with the holder shall be
deemed held by such holder, and any holder which is a partnership shall be
deemed to hold any shares of Preferred Stock and/or Conversion Stock originally
purchased by such holder and subsequently distributed to partners of such
holder, but which have not been resold by such partners.
12.2 When shares of Preferred Stock are counted together with shares
of Conversion Stock or shares of Common Stock, shares of Preferred Stock shall
be counted on an as converted into Common Stock basis, and the term "CONVERSION
STOCK" shall mean only the shares of Common Stock which have been issued
pursuant to conversion of Preferred Stock.
13. CERTAIN TRANSACTIONS. The Company shall not enter into any: (i)
--------------------
material agreement or transaction with any affiliate of the Company (as defined
in Rule 144 promulgated under the Securities Act), other than a Series A
Investor under the Series A Purchase Agreement, a Series B Investor under the
Series B Purchase Agreement, or a Series C Investor under the Series C Purchase
Agreement; (ii) sale or exclusive license, to any third party, of any
intellectual property material to the Company; or (iii) repurchase of its Common
Stock above cost, unless the Company, in addition to all consents and approvals
that may be required by the Company's Bylaws and Restated Articles, also obtains
the approval of a majority of the members of the Board of Directors of the
Company who have been elected by the holders of Preferred Stock (either as a
single class or together with the holders of Common Stock).
14. YEAR 2000 COMPUTER ISSUES. The Company will use all commercially
-------------------------
reasonable efforts: (a) to assure that any software, hardware, or firmware
product, including, without limitation, embedded microcontrollers ("COMPUTER
SYSTEMS") it currently uses and will use in the future are Year 2000 Compliant;
and (b) to seek assurances that the Computer Systems of third parties on which
the Company's business is dependent or with which the Company has a significant
business relationship (including, without limitation, vendors, service
providers, landlords, and strategic relationship co-parties) are Year 2000
Compliant (and take appropriate action if any Computer Systems of such third
parties may not be Year 2000 Compliant), except to the extent that the failure
of any such Computer Systems to be Year 2000 Compliant would not have a material
adverse affect on the Company or its business, financial condition or prospects.
For purposes of this Section 14, "YEAR 2000 COMPLIANT" shall mean that the
applicable Computer System accurately processes date/time data, including, but
not limited to, recording, storing, calculating, functioning, operating,
sorting, comparing, and presenting calendar dates (including Leap Year dates and
dates that may also be interpreted as so-called "magic numbers", such as "9999"
instead of September 9, 1999) falling before, on, during and after (and, if
applicable, spans of time including) January 1, 2000. "YEAR 2000 COMPLIANT"
shall also mean that the applicable Computer System will process any information
depending on or relating to such dates without loss of functionality, data
integrity, or performance.
15. AMENDMENT.
---------
15.1 Any provision of Section 5 of this Agreement may be amended or
the observance thereof may be waived (either generally or in a particular
instance and either retroactively or prospectively), only with the written
consent of the Company and the holders of a
-18-
<PAGE>
majority of the Registrable Securities then outstanding or deemed to be
outstanding. Any amendment or waiver effected in accordance with this Section
15(a) shall be binding upon each Investor and each Holder of Registrable
Securities at the time outstanding or deemed to be outstanding (including
securities into which such securities are convertible), each future holder of
all such securities, and the Company.
15.2 Except as expressly provided herein, no other Section of this
Agreement may be amended, waived, discharged or terminated other than by a
written instrument signed by the party against whom enforcement of any such
amendment, waiver, discharge or termination is sought; provided, however, that
-------- -------
holders of a majority of the Preferred Stock and Conversion Stock may, with the
Company's prior written consent, waive, modify or amend on behalf of all holders
any provisions hereof so long as the effect thereof will be that all such
persons will be treated in the same manner.
15.3 Notwithstanding the foregoing, any party who becomes a party to
the Series C Purchase Agreement as a "PURCHASER" pursuant to Section 2.2 of the
Series C Purchase Agreement shall become a party to this Agreement, as an
Investor hereunder, by signing a signature page to this Agreement, without the
need for any further consents, approval or signature of any party to this
Agreement.
16. GOVERNING LAW. This Agreement and the legal relations between the
-------------
parties arising hereunder shall be governed by and interpreted in accordance
with the laws of the State of California. The parties hereto agree to submit to
the jurisdiction of the federal and state courts of the State of California with
respect to the breach or interpretation of this Agreement or the enforcement of
any and all rights, duties, liabilities, obligations, powers, and other
relations between the parties arising under this Agreement.
17. ENTIRE AGREEMENT. This Agreement constitutes the full and entire
----------------
understanding and agreement between the parties regarding the matters set forth
herein and supersedes the Prior Rights Agreement in its entirety. Except as
otherwise expressly provided herein, the provisions hereof shall inure to the
benefit of, and be binding upon the successors, assigns, heirs, executors and
administrators of the parties hereto.
18. NOTICES, ETC. All notices and other communications required or
------------
permitted hereunder shall be in writing and shall be deemed effectively given
upon personal delivery to the party to be notified twenty-four (24) hours after
confirmed transmission of a facsimile, one (1) business day after deposit with a
recognized overnight courier and four (4) business days after deposit in the
U.S. mail, certified or registered, return receipt requested, addressed: (a) if
to an Investor, at such Investor's address as set forth in Exhibit A attached
---------
hereto, or at such other address as such Investor shall have furnished to the
Company in writing in accordance with this Section 20, with a copy to special
counsel to the Investors; (b) if to any other holder of Preferred Stock or
Conversion Stock, at such address as such holder shall have furnished to the
Company in writing in accordance with this Section 18, or, until any such holder
so furnishes an address to the Company, then to and at the address of the last
holder thereof who has so furnished an address to the Company; or (c) if to the
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<PAGE>
Company, at its principal office with a copy to Wilson Sonsini Goodrich &
Rosati, 650 Page Mill Road, Palo Alto, CA 94304, Attn: Hank V. Barry, Esq.
19. COUNTERPARTS. This Agreement may be executed in any number of
------------
counterparts, each of which shall be an original, but all of which together
shall constitute one instrument.
20. ATTORNEY'S FEES. In the event of any action to enforce any of the
---------------
terms of this Agreement, the prevailing party shall be entitled to reimbursement
from the non-prevailing party of its costs and expenses (including reasonable
attorney's fees) incurred in connection therewith, in addition to all other
remedies and relief to which such prevailing party is entitled.
-20-
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed and delivered as of the day and year first written above.
The Company: LIQUID AUDIO, INC.
By:_________________________________________
Gerald Kearby, President
The Investors: INVESTOR:
By:_________________________________________
(signature)
Name:_______________________________________
(please print)
Title:______________________________________
(if applicable)
[LIQUID AUDIO, INC. - SECOND AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT]
-21-
<PAGE>
EXHIBIT A
SCHEDULE OF INVESTORS
---------------------
<TABLE>
<CAPTION>
Series A Series B Series C
For Notices: Preferred Preferred Preferred
Name of Investor Send Copies To: Shares Shares Shares
- ------------------------------------------- ----------------------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Intel Corporation Intel Corporation 763,398 612,245 1,140,065
2200 Mission College Blvd. 2200 Mission College Blvd.
Santa Clara, CA 95052 Santa Clara, CA 95052
Attn: Jim McCall Attn: Terri Remillard
Fax: (408) 765-6038 Fax: (408) 765-7636
Metromedia Company Kluge & Company -- -- 977,198
1 Meadowlands Plaza 215 East 67th Street
East Rutherford, NJ 07073 New York, NY 10021
Attn: Hadley Feldman Attn: Vincent Santillo
Fax: (201) 531-2803
Vulcan Ventures, Inc. -- 510,204 488,599
110 110th Avenue NE
Suite 500
Bellevue, WA 98004
Attn: Ralph Derrickson
MediaOne Interactive Services, Inc. MediaOne Group -- -- 325,732
9000 East Nichols Avenue, Ste 100 5613 DTC Parkway, Ste 700
Englewood, CO 80112 Englewood, CO 80111
Attn: Natalie Egleston Attn: Jim Zerefos
The Phoenix Partners III -- 318,878 81,433
1000 Second Avenue, Suite 3600
Seattle, WA 98104
Attn: David Johnston
The Phoenix Partners IV -- 318,878 81,433
1000 Second Avenue, Suite 3600
Seattle, WA 98104
Attn: David Johnston
Presidio Venture Partners, LLC -- -- 130,293
One California Street, Suite 2300
San Francisco, CA 94111
Attn: Eva Boswell
Sumitomo Corporation -- -- 32,573
2-2 Hitotsubashi 1-chome
Chiyoda-ku, Tokyo 100
Japan
Attn: Kazuyuki Inoue
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Series A Series B Series C
For Notices: Preferred Preferred Preferred
Name of Investor Send Copies To: Shares Shares Shares
- ------------------------------------------- ----------------------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Trans Cosmos USA, Inc. -- -- 162,866
777 108th Avenue NE
Bellevue, WA 98004
Attn: Steve Clemons
Hummer Winblad Venture Partners II, LP 1,756,098 757,370 80,943
2 South Park, Second Floor
San Francisco, CA 94107
Attn: Ann Winblad
Hummer Winblad Technology Fund II, LP 62,198 26,825 --
2 South Park, Second Floor
San Francisco, CA 94107
Attn: Ann Winblad
Hummer Winblad Technology Fund IIA, LP 10,976 4,733 488
2 South Park, Second Floor
San Francisco, CA 94107
Attn: Ann Winblad
WS Investment Company 98A -- -- 3,867
c/o Wilson Sonsini Goodrich & Rosati
650 Page Mill Road
Palo Alto, CA 94304-1050
Dr. Yagyensh Pati -- -- 1,628
c/o Numerical Technologies
2630 Walsh Avenue
Santa Clara, CA 95051
Hank V. Barry -- -- 204
c/o Wilson Sonsini Goodrich & Rosati
650 Page Mill Road
Palo Alto, CA 94304-1050
Itochu Corporation -- 459,183 --
S-1, Kita-Aoyama 2-chome
Minata-ku
Tokyo 107-8077
Japan
Attn: Takeyuki Takada
Itochu Technology, Inc. -- 51,021 --
3100 Patrick Henry Drive
Santa Clara, CA 95054
Attn: Takayuki Fukuhara
Steven R. Holtzman 205,800 -- --
25 Roan Place
Woodside, CA 94062
</TABLE>
-2-
<PAGE>
<TABLE>
<CAPTION>
Series A Series B Series C
For Notices: Preferred Preferred Preferred
Name of Investor Send Copies To: Shares Shares Shares
- ------------------------------------------- ----------------------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Michael Boich 152,438 -- --
300 Stanford Avenue
Menlo Park, CA 94025
Platinum Venture Partners II, L.P. -- 127,551 --
555 Twin Dolphin Drive
Redwood City, CA 94065
Attn: Michael Santer
Jacob Weil 76,218 -- --
744 Ramona Street
Palo Alto, CA 94301
F&W Investments 1996 22,863 -- --
c/o Fenwick & West LLP
Two Palo Alto Square, Suite 300
Palo Alto, CA 94306
Attn: Gordon K. Davidson
</TABLE>
<TABLE>
<CAPTION>
No. of Shares of No. of Shares of
Series B Preferred Series C Preferred
Stock issuable upon Stock issuable upon
exercise of Series B exercise of Series C
Warrant Holders Warrants Warrants
- ------------------------------------------------------- ---------------------------- -----------------------------
<S> <C> <C>
Silicon Valley Bank 15,306 4,544
1731 Embarcadero Road, Suite 220
Palo Alto, CA 94303
Attn: Kathleen Borie
N2K, Inc. -- 48,859
55 Broad Street, 10th Floor
New York, NY 10004
</TABLE>
-3-
<PAGE>
EXHIBIT 5.1
Wilson Sonsini Goodrich & Rosati
PROFESSIONAL CORPORATION
650 PAGE MILL ROAD
PALO ALTO, CALIFORNIA 94304-1050
TELEPHONE 650-493-9300 FACSIMICLE 650-493-6811
WWW.WSGR.COM
May 4, 1999
Liquid Audio, Inc.
810 Winslow Street
Redwood City, CA 94063
RE: REGISTRATION STATEMENT ON FORM S-1
Ladies and Gentlemen:
We have examined the Registration Statement on Form S-1 (File No. 333-____)
filed with the Securities and Exchange Commission on May 4, 1999 such may be
amended or supplemented, the "REGISTRATION STATEMENT"), in connection with the
registration under the Securities Act of 1933, as amended, of shares of Common
Stock of Liquid Audio, Inc. (the "SHARES"). The Shares, which include shares of
Common Stock issuable pursuant to an over-allotment option granted to the
underwriters, are to be sold to the underwriters as described in such
Registration Statement for the sale to the public or issued to the
representatives of the underwriters. As your counsel in connection with this
transaction, we have examined the proceedings proposed to be taken in connection
with said sale and issuance of the Shares.
It is our opinion that, upon approval by the pricing committee duly
authorized by the Company's Board of Directors, the Shares, when issued and sold
in the manner referred to in the Registration Statement, will be legally and
validly issued, fully paid and nonassessable.
We consent to the use of this opinion as an exhibit to the Registration
Statement, and further consent to the use of our name wherever appearing in the
Registration Statement, including the prospectus constituting a part hereof, and
any amendment thereto.
Very truly yours,
/s/ Wilson Sonsini Goodrich & Rosati
WILSON SONSINI GOODRICH & ROSATI
Professional Corporation
<PAGE>
EXHIBIT 10.1
LIQUID AUDIO, INC.
FORM OF
INDEMNIFICATION AGREEMENT
This Indemnification Agreement ("Agreement") is effective as of
_______________, 1999 by and between Liquid Audio, Inc., a Delaware corporation
(the "Company"), and {NAME} ("Indemnitee").
WHEREAS, effective as of the date hereof, Liquid Audio, Inc., a California
corporation, is reincorporating into Delaware;
WHEREAS, the Company desires to attract and retain the services of highly
qualified individuals, such as Indemnitee, to serve the Company and its related
entities;
WHEREAS, in order to induce Indemnitee to continue to provide services to
the Company, the Company wishes to provide for the indemnification of, and the
advancement of expenses to, Indemnitee to the maximum extent permitted by law;
WHEREAS, the Company and Indemnitee recognize the continued difficulty in
obtaining liability insurance for the Company's directors, officers, employees,
agents and fiduciaries, the significant increases in the cost of such insurance
and the general reductions in the coverage of such insurance;
WHEREAS, the Company and Indemnitee further recognize the substantial
increase in corporate litigation in general, subjecting directors, officers,
employees, agents and fiduciaries to expensive litigation risks at the same time
as the availability and coverage of liability insurance has been severely
limited; and
WHEREAS, in connection with the Company's reincorporation, the Company and
Indemnitee desire to continue to have in place the additional protection
provided by an indemnification agreement, with such changes as are required to
conform the existing agreement to Delaware law and to provide indemnification
and advancement of expenses to the Indemnitee to the maximum extent permitted by
Delaware law;
WHEREAS, in view of the considerations set forth above, the Company desires
that Indemnitee shall be indemnified and advanced expenses by the Company as set
forth herein;
NOW, THEREFORE, the Company and Indemnitee hereby agree as set forth below.
1. Certain Definitions.
-------------------
a. "Change in Control" shall mean, and shall be deemed to have occurred
if, on or after the date of this Agreement, (i) any "person" (as such term is
used in Sections 13(d) and 14(d)
<PAGE>
of the Securities Exchange Act of 1934, as amended), other than a trustee or
other fiduciary holding securities under an employee benefit plan of the Company
acting in such capacity or a corporation owned directly or indirectly by the
stockholders of the Company in substantially the same proportions as their
ownership of stock of the Company, becomes the "beneficial owner" (as defined in
Rule 13d-3 under said Act), directly or indirectly, of securities of the Company
representing more than 50% of the total voting power represented by the
Company's then outstanding Voting Securities, (ii) during any period of two
consecutive years, individuals who at the beginning of such period constitute
the Board of Directors of the Company and any new director whose election by the
Board of Directors or nomination for election by the Company's stockholders was
approved by a vote of at least two thirds (2/3) of the directors then still in
office who either were directors at the beginning of the period or whose
election or nomination for election was previously so approved, cease for any
reason to constitute a majority thereof, (iii) the stockholders of the Company
approve a merger or consolidation of the Company with any other corporation
other than a merger or consolidation which would result in the Voting Securities
of the Company outstanding immediately prior thereto continuing to represent
(either by remaining outstanding or by being converted into Voting Securities of
the surviving entity) at least 80% of the total voting power represented by the
Voting Securities of the Company or such surviving entity outstanding
immediately after such merger or consolidation, or (iv) the stockholders of the
Company approve a plan of complete liquidation of the Company or an agreement
for the sale or disposition by the Company of (in one transaction or a series of
related transactions) all or substantially all of the Company's assets.
b. "Claim" shall mean with respect to a Covered Event: any
threatened, pending or completed action, suit, proceeding or alternative dispute
resolution mechanism, or any hearing, inquiry or investigation that Indemnitee
in good faith believes might lead to the institution of any such action, suit,
proceeding or alternative dispute resolution mechanism, whether civil, criminal,
administrative, investigative or other.
c. References to the "Company" shall include, in addition to Liquid
Audio, Inc., any constituent corporation (including any constituent of a
constituent) absorbed in a consolidation or merger to which Liquid Audio, Inc.
(or any of its wholly owned subsidiaries) is a party which, if its separate
existence had continued, would have had power and authority to indemnify its
directors, officers, employees, agents or fiduciaries, so that if Indemnitee is
or was a director, officer, employee, agent or fiduciary of such constituent
corporation, or is or was serving at the request of such constituent corporation
as a director, officer, employee, agent or fiduciary of another corporation,
partnership, joint venture, employee benefit plan, trust or other enterprise,
Indemnitee shall stand in the same position under the provisions of this
Agreement with respect to the resulting or surviving corporation as Indemnitee
would have with respect to such constituent corporation if its separate
existence had continued.
d. "Covered Event" shall mean any event or occurrence related to the
fact that Indemnitee is or was a director, officer, employee, agent or fiduciary
of the Company, or any subsidiary of the Company, or is or was serving at the
request of the Company as a director, officer, employee, agent or fiduciary of
another corporation, partnership, joint venture, trust or other
-2-
<PAGE>
enterprise, or by reason of any action or inaction on the part of Indemnitee
while serving in such capacity.
e. "Expenses" shall mean any and all expenses (including attorneys'
fees and all other costs, expenses and obligations incurred in connection with
investigating, defending, being a witness in or participating in (including on
appeal), or preparing to defend, to be a witness in or to participate in, any
action, suit, proceeding, alternative dispute resolution mechanism, hearing,
inquiry or investigation), judgments, fines, penalties and amounts paid in
settlement (if such settlement is approved in advance by the Company, which
approval shall not be unreasonably withheld) of any Claim and any federal,
state, local or foreign taxes imposed on the Indemnitee as a result of the
actual or deemed receipt of any payments under this Agreement.
f. "Expense Advance" shall mean a payment to Indemnitee pursuant to
Section 3 of Expenses in advance of the settlement of or final judgement in any
action, suit, proceeding or alternative dispute resolution mechanism, hearing,
inquiry or investigation which constitutes a Claim.
g. "Independent Legal Counsel" shall mean an attorney or firm of
attorneys, selected in accordance with the provisions of Section 2(d) hereof,
who shall not have otherwise performed services for the Company or Indemnitee
within the last three years (other than with respect to matters concerning the
rights of Indemnitee under this Agreement, or of other Indemnitees under similar
indemnity agreements).
h. References to "other enterprises" shall include employee benefit
plans; references to "fines" shall include any excise taxes assessed on
Indemnitee with respect to an employee benefit plan; and references to "serving
at the request of the Company" shall include any service as a director, officer,
employee, agent or fiduciary of the Company which imposes duties on, or involves
services by, such director, officer, employee, agent or fiduciary with respect
to an employee benefit plan, its participants or its beneficiaries; and if
Indemnitee acted in good faith and in a manner Indemnitee reasonably believed to
be in the interest of the participants and beneficiaries of an employee benefit
plan, Indemnitee shall be deemed to have acted in a manner "not opposed to the
best interests of the Company" as referred to in this Agreement.
i. "Reviewing Party" shall mean, subject to the provisions of Section
2(d), any person or body appointed by the Board of Directors in accordance with
applicable law to review the Company's obligations hereunder and under
applicable law, which may include a member or members of the Company's Board of
Directors, Independent Legal Counsel or any other person or body not a party to
the particular Claim for which Indemnitee is seeking indemnification.
j. "Section" refers to a section of this Agreement unless otherwise
indicated.
k. "Voting Securities" shall mean any securities of the Company that
vote generally in the election of directors.
-3-
<PAGE>
2. Indemnification.
---------------
a. Indemnification of Expenses. Subject to the provisions of Section
---------------------------
2(b) below, the Company shall indemnify Indemnitee for Expenses to the fullest
extent permitted by law if Indemnitee was or is or becomes a party to or witness
or other participant in, or is threatened to be made a party to or witness or
other participant in, any Claim (whether by reason of or arising in part out of
a Covered Event), including all interest, assessments and other charges paid or
payable in connection with or in respect of such Expenses.
b. Review of Indemnification Obligations. Notwithstanding the
-------------------------------------
foregoing, in the event any Reviewing Party shall have determined (in a written
opinion, in any case in which Independent Legal Counsel is the Reviewing Party)
that Indemnitee is not entitled to be indemnified hereunder under applicable
law, (i) the Company shall have no further obligation under Section 2(a) to make
any payments to Indemnitee not made prior to such determination by such
Reviewing Party, and (ii) the Company shall be entitled to be reimbursed by
Indemnitee (who hereby agrees to reimburse the Company) for all Expenses
theretofore paid to Indemnitee to which Indemnitee is not entitled hereunder
under applicable law; provided, however, that if Indemnitee has commenced or
-------- -------
thereafter commences legal proceedings in a court of competent jurisdiction to
secure a determination that Indemnitee is entitled to be indemnified hereunder
under applicable law, any determination made by any Reviewing Party that
Indemnitee is not entitled to be indemnified hereunder under applicable law
shall not be binding and Indemnitee shall not be required to reimburse the
Company for any Expenses theretofore paid in indemnifying Indemnitee until a
final judicial determination is made with respect thereto (as to which all
rights of appeal therefrom have been exhausted or lapsed). Indemnitee's
obligation to reimburse the Company for any Expenses shall be unsecured and no
interest shall be charged thereon.
c. Indemnitee Rights on Unfavorable Determination; Binding Effect.
--------------------------------------------------------------
If any Reviewing Party determines that Indemnitee substantively is not entitled
to be indemnified hereunder in whole or in part under applicable law, Indemnitee
shall have the right to commence litigation seeking an initial determination by
the court or challenging any such determination by such Reviewing Party or any
aspect thereof, including the legal or factual bases therefor, and, subject to
the provisions of Section 15, the Company hereby consents to service of process
and to appear in any such proceeding. Absent such litigation, any determination
by any Reviewing Party shall be conclusive and binding on the Company and
Indemnitee.
d. Selection of Reviewing Party; Change in Control. If there has
-----------------------------------------------
not been a Change in Control, any Reviewing Party shall be selected by the Board
of Directors, and if there has been such a Change in Control (other than a
Change in Control which has been approved by a majority of the Company's Board
of Directors who were directors immediately prior to such Change in Control),
any Reviewing Party with respect to all matters thereafter arising concerning
the rights of Indemnitee to indemnification of Expenses under this Agreement or
any other agreement or under the Company's Certificate of Incorporation or
Bylaws as now or hereafter in effect, or under any other applicable law, if
desired by Indemnitee, shall be Independent Legal Counsel selected by Indemnitee
and approved by the Company (which approval shall not be unreasonably withheld).
-4-
<PAGE>
Such counsel, among other things, shall render its written opinion to the
Company and Indemnitee as to whether and to what extent Indemnitee would be
entitled to be indemnified hereunder under applicable law and the Company agrees
to abide by such opinion. The Company agrees to pay the reasonable fees of the
Independent Legal Counsel referred to above and to indemnify fully such counsel
against any and all expenses (including attorneys' fees), claims, liabilities
and damages arising out of or relating to this Agreement or its engagement
pursuant hereto. Notwithstanding any other provision of this Agreement, the
Company shall not be required to pay Expenses of more than one Independent Legal
Counsel in connection with all matters concerning a single Indemnitee, and such
Independent Legal Counsel shall be the Independent Legal Counsel for any or all
other Indemnitees unless (i) the employment of separate counsel by one or more
Indemnitees has been previously authorized by the Company in writing, or (ii) an
Indemnitee shall have provided to the Company a written statement that such
Indemnitee has reasonably concluded that there may be a conflict of interest
between such Indemnitee and the other Indemnitees with respect to the matters
arising under this Agreement.
e. Mandatory Payment of Expenses. Notwithstanding any other
-----------------------------
provision of this Agreement other than Section 10 hereof, to the extent that
Indemnitee has been successful on the merits or otherwise, including, without
limitation, the dismissal of an action without prejudice, in defense of any
Claim, Indemnitee shall be indemnified against all Expenses incurred by
Indemnitee in connection therewith.
3. Expense Advances.
----------------
a. Obligation to Make Expense Advances. Upon receipt of a written
-----------------------------------
undertaking by or on behalf of the Indemnitee to repay such amounts if it shall
ultimately be determined that the Indemnitee is not entitled to be indemnified
therefore by the Company hereunder under applicable law, the Company shall make
Expense Advances to Indemnitee.
b. Form of Undertaking. Any obligation to repay any Expense
-------------------
Advances hereunder pursuant to a written undertaking by the Indemnitee shall be
unsecured and no interest shall be charged thereon.
c. Determination of Reasonable Expense Advances. The parties agree
--------------------------------------------
that for the purposes of any Expense Advance for which Indemnitee has made
written demand to the Company in accordance with this Agreement, all Expenses
included in such Expense Advance that are certified by affidavit of Indemnitee's
counsel as being reasonable shall be presumed conclusively to be reasonable.
4. Procedures for Indemnification and Expense Advances.
---------------------------------------------------
a. Timing of Payments. All payments of Expenses (including without
------------------
limitation Expense Advances) by the Company to the Indemnitee pursuant to this
Agreement shall be made to the fullest extent permitted by law as soon as
practicable after written demand by Indemnitee therefor is presented to the
Company, but in no event later than thirty (30) business days after such
-5-
<PAGE>
written demand by Indemnitee is presented to the Company, except in the case of
Expense Advances, which shall be made no later than ten (10) business days after
such written demand by Indemnitee is presented to the Company.
b. Notice/Cooperation by Indemnitee. Indemnitee shall, as a
--------------------------------
condition precedent to Indemnitee's right to be indemnified or Indemnitee's
right to receive Expense Advances under this Agreement, give the Company notice
in writing as soon as practicable of any Claim made against Indemnitee for which
indemnification will or could be sought under this Agreement. Notice to the
Company shall be directed to the Chief Executive Officer of the Company at the
address shown on the signature page of this Agreement (or such other address as
the Company shall designate in writing to Indemnitee). In addition, Indemnitee
shall give the Company such information and cooperation as it may reasonably
require and as shall be within Indemnitee's power.
c. No Presumptions; Burden of Proof. For purposes of this Agreement,
--------------------------------
the termination of any Claim by judgment, order, settlement (whether with or
without court approval) or conviction, or upon a plea of nolo contendere, or its
---------------
equivalent, shall not create a presumption that Indemnitee did not meet any
particular standard of conduct or have any particular belief or that a court has
determined that indemnification is not permitted by this Agreement or applicable
law. In addition, neither the failure of any Reviewing Party to have made a
determination as to whether Indemnitee has met any particular standard of
conduct or had any particular belief, nor an actual determination by any
Reviewing Party that Indemnitee has not met such standard of conduct or did not
have such belief, prior to the commencement of legal proceedings by Indemnitee
to secure a judicial determination that Indemnitee should be indemnified under
this Agreement under applicable law, shall be a defense to Indemnitee's claim or
create a presumption that Indemnitee has not met any particular standard of
conduct or did not have any particular belief. In connection with any
determination by any Reviewing Party or otherwise as to whether the Indemnitee
is entitled to be indemnified hereunder under applicable law, the burden of
proof shall be on the Company to establish that Indemnitee is not so entitled.
d. Notice to Insurers. If, at the time of the receipt by the
------------------
Company of a notice of a Claim pursuant to Section 4(b) hereof, the Company has
liability insurance in effect which may cover such Claim, the Company shall give
prompt notice of the commencement of such Claim to the insurers in accordance
with the procedures set forth in the respective policies. The Company shall
thereafter take all necessary or desirable action to cause such insurers to pay,
on behalf of the Indemnitee, all amounts payable as a result of such Claim in
accordance with the terms of such policies.
e. Selection of Counsel. In the event the Company shall be
--------------------
obligated hereunder to provide indemnification for or make any Expense Advances
with respect to the Expenses of any Claim, the Company, if appropriate, shall be
entitled to assume the defense of such Claim with counsel approved by Indemnitee
(which approval shall not be unreasonably withheld) upon the delivery to
Indemnitee of written notice of the Company's election to do so. After delivery
of such notice, approval of such counsel by Indemnitee and the retention of such
counsel by the Company, the Company will not be liable to Indemnitee under this
Agreement for any fees or expenses of
-6-
<PAGE>
separate counsel subsequently retained by or on behalf of Indemnitee with
respect to the same Claim; provided that, (i) Indemnitee shall have the right to
employ Indemnitee's separate counsel in any such Claim at Indemnitee's expense
and (ii) if (A) the employment of separate counsel by Indemnitee has been
previously authorized by the Company, (B) Indemnitee shall have reasonably
concluded that there may be a conflict of interest between the Company and
Indemnitee in the conduct of any such defense, or (C) the Company shall not
continue to retain such counsel to defend such Claim, then the fees and expenses
of Indemnitee's separate counsel shall be Expenses for which Indemnitee may
receive indemnification or Expense Advances hereunder.
5. Additional Indemnification Rights; Nonexclusivity.
-------------------------------------------------
a. Scope. The Company hereby agrees to indemnify the Indemnitee to
-----
the fullest extent permitted by law, notwithstanding that such indemnification
is not specifically authorized by the other provisions of this Agreement, the
Company's Certificate of Incorporation, the Company's Bylaws or by statute. In
the event of any change after the date of this Agreement in any applicable law,
statute or rule which expands the right of a Delaware corporation to indemnify a
member of its board of directors or an officer, employee, agent or fiduciary, it
is the intent of the parties hereto that Indemnitee shall enjoy by this
Agreement the greater benefits afforded by such change. In the event of any
change in any applicable law, statute or rule which narrows the right of a
Delaware corporation to indemnify a member of its board of directors or an
officer, employee, agent or fiduciary, such change, to the extent not otherwise
required by such law, statute or rule to be applied to this Agreement, shall
have no effect on this Agreement or the parties' rights and obligations
hereunder except as set forth in Section 10(a) hereof.
b. Nonexclusivity. The indemnification and the payment of Expense
--------------
Advances provided by this Agreement shall be in addition to any rights to which
Indemnitee may be entitled under the Company's Certificate of Incorporation, its
Bylaws, any other agreement, any vote of stockholders or disinterested
directors, the General Corporation Law of the State of Delaware, or otherwise.
The indemnification and the payment of Expense Advances provided under this
Agreement shall continue as to Indemnitee for any action taken or not taken
while serving in an indemnified capacity even though subsequent thereto
Indemnitee may have ceased to serve in such capacity.
6. No Duplication of Payments. The Company shall not be liable under this
--------------------------
Agreement to make any payment in connection with any Claim made against
Indemnitee to the extent Indemnitee has otherwise actually received payment
(under any insurance policy, provision of the Company's Certificate of
Incorporation, Bylaws or otherwise) of the amounts otherwise payable hereunder.
7. Partial Indemnification. If Indemnitee is entitled under any
-----------------------
provision of this Agreement to indemnification by the Company for some or a
portion of Expenses incurred in connection with any Claim, but not, however, for
all of the total amount thereof, the Company shall nevertheless indemnify
Indemnitee for the portion of such Expenses to which Indemnitee is entitled.
-7-
<PAGE>
8. Mutual Acknowledgment. Both the Company and Indemnitee acknowledge
---------------------
that in certain instances, federal law or applicable public policy may prohibit
the Company from indemnifying its directors, officers, employees, agents or
fiduciaries under this Agreement or otherwise. Indemnitee understands and
acknowledges that the Company has undertaken or may be required in the future to
undertake with the Securities and Exchange Commission to submit the question of
indemnification to a court in certain circumstances for a determination of the
Company's right under public policy to indemnify Indemnitee.
9. Liability Insurance. To the extent the Company maintains liability
-------------------
insurance applicable to directors, officers, employees, agents or fiduciaries,
Indemnitee shall be covered by such policies in such a manner as to provide
Indemnitee the same rights and benefits as are provided to the most favorably
insured of the Company's directors, if Indemnitee is a director; or of the
Company's officers, if Indemnitee is not a director of the Company but is an
officer; or of the Company's key employees, agents or fiduciaries, if Indemnitee
is not an officer or director but is a key employee, agent or fiduciary.
10. Exceptions. Notwithstanding any other provision of this Agreement,
----------
the Company shall not be obligated pursuant to the terms of this Agreement:
a. Excluded Actions or Omissions. To indemnify or make Expense
-----------------------------
Advances to Indemnitee with respect to Claims arising out of acts, omissions or
transactions for which Indemnitee is prohibited from receiving indemnification
under applicable law.
b. Claims Initiated by Indemnitee. To indemnify or make Expense
------------------------------
Advances to Indemnitee with respect to Claims initiated or brought voluntarily
by Indemnitee and not by way of defense, counterclaim or crossclaim, except (i)
with respect to actions or proceedings brought to establish or enforce a right
to indemnification under this Agreement or any other agreement or insurance
policy or under the Company's Certificate of Incorporation or Bylaws now or
hereafter in effect relating to Claims for Covered Events, (ii) in specific
cases if the Board of Directors has approved the initiation or bringing of such
Claim, or (iii) as otherwise required under Section 145 of the Delaware General
Corporation Law, regardless of whether Indemnitee ultimately is determined to be
entitled to such indemnification, Expense Advances, or insurance recovery, as
the case may be.
c. Lack of Good Faith. To indemnify Indemnitee for any Expenses
------------------
incurred by the Indemnitee with respect to any action instituted (i) by
Indemnitee to enforce or interpret this Agreement, if a court having
jurisdiction over such action determines as provided in Section 13 that each of
the material assertions made by the Indemnitee as a basis for such action was
not made in good faith or was frivolous, or (ii) by or in the name of the
Company to enforce or interpret this Agreement, if a court having jurisdiction
over such action determines as provided in Section 13 that each of the material
defenses asserted by Indemnitee in such action was made in bad faith or was
frivolous.
-8-
<PAGE>
d. Claims Under Section 16(b). To indemnify Indemnitee for Expenses
--------------------------
and thepayment of profits arising from the purchase and sale by Indemnitee of
securities in violation of Section 16(b) of the Securities Exchange Act of 1934,
as amended, or any similar successor statute.
11. Counterparts. This Agreement may be executed in one or more
------------
counterparts, each of which shall constitute an original.
12. Binding Effect; Successors and Assigns. This Agreement shall be
--------------------------------------
binding upon and inure to the benefit of and be enforceable by the parties
hereto and their respective successors, assigns (including any direct or
indirect successor by purchase, merger, consolidation or otherwise to all or
substantially all of the business or assets of the Company), spouses, heirs and
personal and legal representatives. The Company shall require and cause any
successor (whether direct or indirect, and whether by purchase, merger,
consolidation or otherwise) to all, substantially all, or a substantial part, of
the business or assets of the Company, by written agreement in form and
substance satisfactory to Indemnitee, expressly to assume and agree to perform
this Agreement in the same manner and to the same extent that the Company would
be required to perform if no such succession had taken place. This Agreement
shall continue in effect regardless of whether Indemnitee continues to serve as
a director, officer, employee, agent or fiduciary (as applicable) of the Company
or of any other enterprise at the Company's request.
13. Expenses Incurred in Action Relating to Enforcement or Interpretation.
---------------------------------------------------------------------
In the event that any action is instituted by Indemnitee under this Agreement or
under any liability insurance policies maintained by the Company to enforce or
interpret any of the terms hereof or thereof, Indemnitee shall be entitled to be
indemnified for all Expenses incurred by Indemnitee with respect to such action
(including without limitation attorneys' fees), regardless of whether Indemnitee
is ultimately successful in such action, unless as a part of such action a court
having jurisdiction over such action makes a final judicial determination (as to
which all rights of appeal therefrom have been exhausted or lapsed) that each of
the material assertions made by Indemnitee as a basis for such action was not
made in good faith or was frivolous; provided, however, that until such final
judicial determination is made, Indemnitee shall be entitled under Section 3 to
receive payment of Expense Advances hereunder with respect to such action. In
the event of an action instituted by or in the name of the Company under this
Agreement to enforce or interpret any of the terms of this Agreement, Indemnitee
shall be entitled to be indemnified for all Expenses incurred by Indemnitee in
defense of such action (including without limitation costs and expenses incurred
with respect to Indemnitee's counterclaims and cross-claims made in such
action), unless as a part of such action a court having jurisdiction over such
action makes a final judicial determination (as to which all rights of appeal
therefrom have been exhausted or lapsed) that each of the material defenses
asserted by Indemnitee in such action was made in bad faith or was frivolous;
provided, however, that until such final judicial determination is made,
Indemnitee shall be entitled under Section 3 to receive payment of Expense
Advances hereunder with respect to such action.
14. Period of Limitations. No legal action shall be brought and no cause
---------------------
of action shall be asserted by or in the right of the Company against
Indemnitee, Indemnitee's estate, spouse, heirs, executors or personal or legal
representatives after the expiration of two years from the date of
-9-
<PAGE>
accrual of such cause of action, and any claim or cause of action of the Company
shall be extinguished and deemed released unless asserted by the timely filing
of a legal action within such two year period; provided, however, that if any
-------- -------
shorter period of limitations is otherwise applicable to any such cause of
action, such shorter period shall govern.
15. Notice. All notices, requests, demands and other communications
------
under this Agreement shall be in writing and shall be deemed duly given (i) if
delive this red by hand and signed for by the party addressed, on the date of
such delivery, or (ii) if mailed by domestic certified or registered mail with
postage prepaid, on the third business day after the date postmarked. Addresses
for notice to either party are as shown on the signature page of this Agreement,
or as subsequently modified by written notice.
16. Consent to Jurisdiction. The Company and Indemnitee each hereby
-----------------------
irrevocably consent to the jurisdiction of the courts of the State of Delaware
for all purposes in connection with any action or proceeding which arises out of
or relates to this Agreement and agree that any action instituted under this
Agreement shall be commenced, prosecuted and continued only in the Court of
Chancery of the State of Delaware in and for New Castle County, which shall be
the exclusive and only proper forum for adjudicating such a claim.
17. Severability. The provisions of this Agreement shall be severable in
------------
the event that any of the provisions hereof (including any provision within a
single section, paragraph or sentence) are held by a court of competent
jurisdiction to be invalid, void or otherwise unenforceable, and the remaining
provisions shall remain enforceable to the fullest extent permitted by law.
Furthermore, to the fullest extent possible, the provisions of this Agreement
(including without limitation each portion of this Agreement containing any
provision held to be invalid, void or otherwise unenforceable, that is not
itself invalid, void or unenforceable) shall be construed so as to give effect
to the intent manifested by the provision held invalid, illegal or
unenforceable.
18. Choice of Law. This Agreement, and all rights, remedies, liabilities,
-------------
powers and duties of the parties to this Agreement, shall be governed by and
construed in accordance with the laws of the State of Delaware as applied to
contracts between Delaware residents entered into and to be performed entirely
in the State of Delaware without regard to principles of conflicts of laws.
19. Subrogation. In the event of payment under this Agreement, the
-----------
Company shall be subrogated to the extent of such payment to all of the rights
of recovery of Indemnitee, who shall execute all documents required and shall do
all acts that may be necessary to secure such rights and to enable the Company
effectively to bring suit to enforce such rights.
20. Amendment and Termination. No amendment, modification, termination or
-------------------------
cancellation of this Agreement shall be effective unless it is in writing signed
by both the parties hereto. No waiver of any of the provisions of this
Agreement shall be deemed to be or shall constitute a waiver of any other
provisions hereof (whether or not similar), nor shall such waiver constitute a
continuing waiver.
-10-
<PAGE>
21. Integration and Entire Agreement. This Agreement sets forth the
--------------------------------
entire understanding between the parties hereto and supersedes and merges all
previous written and oral negotiations, commitments, understandings and
agreements relating to the subject matter hereof between the parties hereto.
22. No Construction as Employment Agreement. Nothing contained in this
---------------------------------------
Agreement shall be construed as giving Indemnitee any right to be retained in
the employ of the Company or any of its subsidiaries or affiliated entities.
-11-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Indemnification
Agreement as of the date first above written.
LIQUID AUDIO, INC.
By:_____________________________
Name:___________________________
Title:__________________________
Address: 810 Winslow Street
Redwood City, CA 94063
AGREED TO AND ACCEPTED
INDEMNITEE:
__________________________________________
(Signature)
{NAME}
------------------------------------------
Name
__________________________________________
Address
__________________________________________
<PAGE>
EXHIBIT 10.2
LIQUID AUDIO, INC.
1996 EQUITY INCENTIVE PLAN
(AS AMENDED AND RESTATED _______, 1999)
1. PURPOSES OF THE PLAN. The purposes of this 1996 Equity Incentive Plan
--------------------
are:
. to attract and retain the best available personnel for positions
of substantial responsibility,
. to provide additional incentive to Employees, Directors and
Consultants, and
. to promote the success of the Company's business.
Options granted under the Plan may be Incentive Stock Options or
Nonstatutory Stock Options, as determined by the Administrator at the time of
grant. Stock Purchases Rights may also be granted under the Plan.
2. DEFINITIONS. As used herein, the following definitions shall apply:
-----------
(a) "Administrator" means the Board or any of its Committees as shall
-------------
be administering the Plan, in accordance with Section 4 of the Plan.
(b) "Applicable Laws" means the requirements relating to the
---------------
administration of stock option plans under U.S. state laws, U.S. federal and
state securities laws, the Code, and stock exchange or quotation system on
which the Common Stock is listed or quoted and the applicable laws of any
foreign country or jurisdiction where Options or Stock Purchase Rights are, or
will be, granted under the Plan.
(c) "Board" means the Board of Directors of the Company.
-----
(d) "Code" means the Internal Revenue Code of 1986, as amended.
----
(e) "Committee" means a committee of Directors appointed by the Board
---------
in accordance with Section 4 of the Plan.
(f) "Common Stock" means the common stock of the Company.
------------
(g) "Company" means Liquid Audio, Inc., a Delaware corporation.
-------
(h) "Consultant" means any person, including an advisor, engaged by
the Company or a Parent Subsidiary to render services to such entity.
(i) "Director" means a member of the Board.
--------
<PAGE>
(j) "Disability" means total and permanent disability as defined in
----------
Section 22(e)(3) of the Code.
(k) "Employee" means any person, including Officers and Directors,
--------
employed by the Company or any Parent or Subsidiary of the Company. A Service
Provider shall not cease to be an Employee in the case of (i) any leave of
absence approved by the Company or (ii) transfers between locations of the
Company or between the Company, its Parent, any Subsidiary, or any successor.
For purposes of Incentive Stock Options, no such leave may exceed ninety days,
unless reemployment upon expiration of such leave is guaranteed by statute or
contract. If reemployment upon expiration of a leave of absence approved by the
Company is not so guaranteed, on the 181st day of such leave any Incentive Stock
Option held by the Optionee shall cease to be treated as an Incentive Stock
Option and shall be treated for tax purposes as a Nonstatutory Stock Option.
Neither service as a Director nor payment of a director's fee by the Company
shall be sufficient to constitute "employment" by the Company.
(l) "Exchange Act" means the Securities Exchange Act of 1934, as
------------
amended.
(m) "Fair Market Value" means, as of any date, the value of Common
-----------------
Stock determined as follows:
(i) If the Common Stock is listed on any established stock
exchange or a national market system, including without limitation the Nasdaq
National Market or The Nasdaq SmallCap Market of The Nasdaq Stock Market, its
Fair Market Value shall be the closing sales price for such stock (or the
closing bid, if no sales were reported) as quoted on such exchange or system for
the last market trading day prior to the time of determination, as reported in
The Wall Street Journal or such other source as the Administrator deems
reliable;
(ii) If the Common Stock is regularly quoted by a recognized
securities dealer but selling prices are not reported, the Fair Market Value of
a Share of Common Stock shall be the mean between the high bid and low asked
prices for the Common Stock on the last market trading day prior to the day of
determination, as reported in The Wall Street Journal or such other source as
the Administrator deems reliable; or
(iii) In the absence of an established market for the Common
Stock, the Fair Market Value shall be determined in good faith by the
Administrator.
(n) "Incentive Stock Option" means an Option intended to qualify as an
----------------------
incentive stock option within the meaning of Section 422 of the Code and the
regulations promulgated thereunder.
(o) "Nonstatutory Stock Option" means an Option not intended to
-------------------------
qualify as an Incentive Stock Option.
(p) "Notice of Grant" means a written or electronic notice evidencing
---------------
certain terms and conditions of an individual Option or Stock Purchase Right
grant. The Notice of Grant is part of the Option Agreement.
<PAGE>
(q) "Officer" means a person who is an officer of the Company within
-------
the meaning of Section 16 of the Exchange Act and the rules and
regulations promulgated thereunder.
(r) "Option" means a stock option granted pursuant to the Plan.
------
(s) "Option Agreement" means an agreement between the Company and an
----------------
Optionee evidencing the terms and conditions of an individual Option grant. The
Option Agreement is subject to the terms and conditions of the Plan.
(t) "Option Exchange Program" means a program whereby outstanding
-----------------------
Options are surrendered in exchange for Options with a lower exercise price.
(u) "Optioned Stock" means the Common Stock subject to an Option or
--------------
Stock Purchase Right.
(v) "Optionee" means the holder of an outstanding Option or Stock
--------
Purchase Right granted under the Plan.
(w) "Parent" means a "parent corporation," whether now or hereafter
------
existing, as defined in Section 424(e) of the Code.
(x) "Plan" means this 1996 Equity Incentive Plan.
----
(y) "Restricted Stock" means shares of Common Stock acquired pursuant
----------------
to a grant of Stock Purchase Rights under Section 11 of the Plan.
(z) "Restricted Stock Purchase Agreement" means a written agreement
-----------------------------------
between the Company and the Optionee evidencing the terms and restrictions
applying to stock purchased under a Stock Purchase Right. The Restricted Stock
Purchase Agreement is subject to the terms and conditions of the Plan and the
Notice of Grant.
(aa) "Rule 16b-3" means Rule 16b-3 of the Exchange Act or any
----------
successor to Rule 16b-3, as in effect when discretion is being exercised with
respect to the Plan.
(bb) "Section 16(b) " means Section 16(b) of the Exchange Act.
-------------
(cc) "Service Provider" means an Employee, Director or Consultant.
----------------
(dd) "Share" means a share of the Common Stock, as adjusted in
-----
accordance with Section 13 of the Plan.
(ee) "Stock Purchase Right" means the right to purchase Common Stock
--------------------
pursuant to Section 11 of the Plan, as evidenced by a Notice of Grant.
(ff) "Subsidiary" means a "subsidiary corporation", whether now or
----------
hereafter existing, as defined in Section 424(f) of the Code.
<PAGE>
3. Stock Subject to the Plan. Subject to the provisions of Section 13 of
-------------------------
the Plan, the maximum aggregate number of Shares which may be optioned and sold
under the Plan is [___________] Shares, plus an annual increase to be added on
the first day of the Company's fiscal year beginning in 2000 equal to the lesser
of (i) [___________] Shares, (ii) [__]% of the outstanding shares on such date
or (iii) a lesser amount determined by the Board. The Shares may be authorized,
but unissued, or reacquired Common Stock.
If an Option or Stock Purchase Right expires or becomes unexercisable
without having been exercised in full, or is surrendered pursuant to an Option
Exchange Program, the unpurchased Shares which were subject thereto shall become
available for future grant or sale under the Plan (unless the Plan has
terminated); provided, however, that Shares that have actually been issued under
--------
the Plan, whether upon exercise of an Option or Right, shall not be returned to
the Plan and shall not become available for future distribution under the Plan,
except that if Shares of Restricted Stock are repurchased by the Company at
their original purchase price, such Shares shall become available for future
grant under the Plan.
4. Administration of the Plan.
--------------------------
(a) Procedure.
---------
(i) Multiple Administrative Bodies. The Plan may be administered
------------------------------
by different Committees with respect to different groups of Service Providers.
(ii) Section 162(m). To the extent that the Administrator
--------------
determines it to be desirable to qualify Options granted hereunder as
"performance-based compensation" within the meaning of Section 162(m) of the
Code, the Plan shall be administered by a Committee of two or more "outside
directors" within the meaning of Section 162(m) of the Code.
(iii) Rule 16b-3. To the extent desirable to qualify transactions
hereunder as exempt under Rule 16b-3, the transactions contemplated hereunder
shall be structured to satisfy the requirements for exemption under Rule 16b-3.
(iv) Other Administration. Other than as provided above, the Plan
--------------------
shall be administered by (A) the Board or (B) a Committee, which committee shall
be constituted to satisfy Applicable Laws.
(b) Powers of the Administrator. Subject to the provisions of the
---------------------------
Plan, and in the case of a Committee, subject to the specific duties delegated
by the Board to such Committee, the Administrator shall have the authority, in
its discretion:
(i) to determine the Fair Market Value;
(ii) to select the Service Providers to whom Options and Stock
Purchase Rights may be granted hereunder;
(iii) to determine the number of shares of Common Stock to be
covered by each Option and Stock Purchase Right granted hereunder;
<PAGE>
(iv) to approve forms of agreement for use under the Plan;
(v) to determine the terms and conditions, not inconsistent
with the terms of the Plan, of any Option or Stock Purchase Right granted
hereunder. Such terms and conditions include, but are not limited to, the
exercise price, the time or times when Options or Stock Purchase Rights may be
exercised (which may be based on performance criteria), any vesting acceleration
or waiver of forfeiture restrictions, and any restriction or limitation
regarding any Option or Stock Purchase Right or the shares of Common Stock
relating thereto, based in each case on such factors as the Administrator, in
its sole discretion, shall determine;
(vi) to reduce the exercise price of any Option or Stock
Purchase Right to the then current Fair Market Value if the Fair Market Value of
the Common Stock covered by such Option or Stock Purchase Right shall have
declined since the date the Option or Stock Purchase Right was granted;
(vii) to institute an Option Exchange Program;
(viii) to construe and interpret the terms of the Plan and awards
granted pursuant to the Plan;
(ix) to prescribe, amend and rescind rules and regulations
relating to the Plan, including rules and regulations relating to sub-plans
established for the purpose of qualifying for preferred tax treatment under
foreign tax laws;
(x) to modify or amend each Option or Stock Purchase Right
(subject to Section 15(c) of the Plan), including the discretionary authority to
extend the post-termination exercisability period of Options longer than is
otherwise provided for in the Plan;
(xi) to allow Optionees to satisfy withholding tax obligations
by electing to have the Company withhold from the Shares to be issued upon
exercise of an Option or Stock Purchase Right that number of Shares having a
Fair Market Value equal to the amount required to be withheld. The Fair Market
Value of the Shares to be withheld shall be determined on the date that the
amount of tax to be withheld is to be determined. All elections by an Optionee
to have Shares withheld for this purpose shall be made in such form and under
such conditions as the Administrator may deem necessary or advisable;
(xii) to authorize any person to execute on behalf of the
Company any instrument required to effect the grant of an Option or Stock
Purchase Right previously granted by the Administrator;
(xiii) to make all other determinations deemed necessary or
advisable for administering the Plan .
(c) Effect of Administrator's Decision. The Administrator's
----------------------------------
decisions, determinations and interpretations shall be final and binding on all
Optionees and any other holders of Options or Stock Purchase Rights.
<PAGE>
5. Eligibility. Nonstatutory Stock Options and Stock Purchase Rights may
-----------
be granted to Service Providers. Incentive Stock Options may be granted only to
Employees.
6. Limitations.
-----------
(a) Each Option shall be designated in the Option Agreement as either
an Incentive Stock Option or a Nonstatutory Stock Option. However,
notwithstanding such designation, to the extent that the aggregate Fair Market
Value of the Shares with respect to which Incentive Stock Options are
exercisable for the first time by the Optionee during any calendar year (under
all plans of the Company and any Parent or Subsidiary) exceeds $100,000, such
Options shall be treated as Nonstatutory Stock Options. For purposes of this
Section 6(a), Incentive Stock Options shall be taken into account in the order
in which they were granted. The Fair Market Value of the Shares shall be
determined as of the time the Option with respect to such Shares is granted.
(b) Neither the Plan nor any Option or Stock Purchase Right shall
confer upon an Optionee any right with respect to continuing the Optionee's
relationship as a Service Provider with the Company, nor shall they interfere in
any way with the Optionee's right or the Company's right to terminate such
relationship at any time, with or without cause.
(c) The following limitations shall apply to grants of Options:
(i) No Service Provider shall be granted, in any fiscal year of
the Company, Options to purchase more than [__________] Shares.
(ii) In connection with his or her initial service, a Service
Provider may be granted Options to purchase up to an additional [____________]
Shares which shall not count against the limit set forth in subsection (i)
above.
(iii) The foregoing limitations shall be adjusted proportionately
in connection with any change in the Company's capitalization as described in
Section 13.
(iv) If an Option is cancelled in the same fiscal year of the
Company in which it was granted (other than in connection with a transaction
described in Section 13), the cancelled Option will be counted against the
limits set forth in subsections (i) and (ii) above. For this purpose, if the
exercise price of an Option is reduced, the transaction will be treated as a
cancellation of the Option and the grant of a new Option.
7. Term of Plan. Subject to Section 19 of the Plan, the Plan shall become
------------
effective upon its adoption by the Board. It shall continue in effect for a
term of ten (10) years unless terminated earlier under Section 15 of the Plan.
8. Term of Option. The term of each Option shall be stated in the Option
--------------
Agreement. In the case of an Incentive Stock Option, the term shall be ten (10)
years from the date of grant or such shorter term as may be provided in the
Option Agreement. Moreover, in the case of an Incentive Stock Option granted to
an Optionee who, at the time the Incentive Stock Option is granted, owns stock
representing more than ten percent (10%) of the total combined voting power of
all classes of stock of the Company or any Parent or Subsidiary, the term of the
Incentive Stock Option shall be
<PAGE>
five (5) years from the date of grant or such shorter term as may be provided in
the Option Agreement.
9. Option Exercise Price and Consideration.
---------------------------------------
(a) Exercise Price. The per share exercise price for the Shares to be
--------------
issued pursuant to exercise of an Option shall be determined by the
Administrator, subject to the following:
(i) In the case of an Incentive Stock Option
(A) granted to an Employee who, at the time the Incentive
Stock Option is granted, owns stock representing more than ten percent (10%) of
the voting power of all classes of stock of the Company or any Parent or
Subsidiary, the per Share exercise price shall be no less than 110% of the Fair
Market Value per Share on the date of grant.
(B) granted to any Employee other than an Employee
described in paragraph (A) immediately above, the per Share exercise price shall
be no less than 100% of the Fair Market Value per Share on the date of grant.
(ii) In the case of a Nonstatutory Stock Option, the per Share
exercise price shall be determined by the Administrator. In the case of a
Nonstatutory Stock Option intended to qualify as "performance-based
compensation" within the meaning of Section 162(m) of the Code, the per Share
exercise price shall be no less than 100% of the Fair Market Value per Share on
the date of grant.
(iii) Notwithstanding the foregoing, Options may be granted with a
per Share exercise price of less than 100% of the Fair Market Value per Share on
the date of grant pursuant to a merger or other corporate transaction.
(b) Waiting Period and Exercise Dates. At the time an Option is
---------------------------------
granted, the Administrator shall fix the period within which the Option may be
exercised and shall determine any conditions which must be satisfied before the
Option may be exercised.
(c) Form of Consideration. The Administrator shall determine the
---------------------
acceptable form of consideration for exercising an Option, including the method
of payment. In the case of an Incentive Stock Option, the Administrator shall
determine the acceptable form of consideration at the time of grant. Such
consideration may consist entirely of:
(i) cash;
(ii) check;
(iii) promissory note;
(iv) other Shares which (A) in the case of Shares acquired upon
exercise of an option, have been owned by the Optionee for more than six months
on the date of surrender, and
<PAGE>
(B) have a Fair Market Value on the date of surrender equal to the aggregate
exercise price of the Shares as to which said Option shall be exercised;
(v) consideration received by the Company under a cashless
exercise program implemented by the Company in connection with the Plan;
(vi) a reduction in the amount of any Company liability to the
Optionee, including any liability attributable to the Optionee's participation
in any Company-sponsored deferred compensation program or arrangement;
(vii) any combination of the foregoing methods of payment; or
(viii) such other consideration and method of payment for the
issuance of Shares to the extent permitted by Applicable Laws.
10. Exercise of Option.
------------------
(a) Procedure for Exercise; Rights as a Shareholder. Any Option
-----------------------------------------------
granted hereunder shall be exercisable according to the terms of the Plan and at
such times and under such conditions as determined by the Administrator and set
forth in the Option Agreement. Unless the Administrator provides otherwise,
vesting of Options granted hereunder shall be tolled during any unpaid leave of
absence. An Option may not be exercised for a fraction of a Share.
An Option shall be deemed exercised when the Company receives: (i) written
or electronic notice of exercise (in accordance with the Option Agreement) from
the person entitled to exercise the Option, and (ii) full payment for the Shares
with respect to which the Option is exercised. Full payment may consist of any
consideration and method of payment authorized by the Administrator and
permitted by the Option Agreement and the Plan. Shares issued upon exercise of
an Option shall be issued in the name of the Optionee or, if requested by the
Optionee, in the name of the Optionee and his or her spouse. Until the Shares
are issued (as evidenced by the appropriate entry on the books of the Company or
of a duly authorized transfer agent of the Company), no right to vote or receive
dividends or any other rights as a shareholder shall exist with respect to the
Optioned Stock, notwithstanding the exercise of the Option. The Company shall
issue (or cause to be issued) such Shares promptly after the Option is
exercised. No adjustment will be made for a dividend or other right for which
the record date is prior to the date the Shares are issued, except as provided
in Section 13 of the Plan.
Exercising an Option in any manner shall decrease the number of Shares
thereafter available, both for purposes of the Plan and for sale under the
Option, by the number of Shares as to which the Option is exercised.
(b) Termination of Relationship as a Service Provider. If an Optionee
-------------------------------------------------
ceases to be a Service Provider, other than upon the Optionee's death or
Disability, the Optionee may exercise his or her Option within such period of
time as is specified in the Option Agreement to the extent that the Option is
vested on the date of termination (but in no event later than the expiration of
the term of such Option as set forth in the Option Agreement). In the absence of
a specified time in the Option Agreement, the Option shall remain exercisable
for three (3) months following the Optionee's
<PAGE>
termination. If, on the date of termination, the Optionee is not vested as to
his or her entire Option, the Shares covered by the unvested portion of the
Option shall revert to the Plan. If, after termination, the Optionee does not
exercise his or her Option within the time specified by the Administrator, the
Option shall terminate, and the Shares covered by such Option shall revert to
the Plan.
(c) Disability of Optionee. If an Optionee ceases to be a Service
----------------------
Provider as a result of the Optionee's Disability, the Optionee may exercise his
or her Option within such period of time as is specified in the Option Agreement
to the extent the Option is vested on the date of termination (but in no event
later than the expiration of the term of such Option as set forth in the Option
Agreement). In the absence of a specified time in the Option Agreement, the
Option shall remain exercisable for twelve (12) months following the Optionee's
termination. If, on the date of termination, the Optionee is not vested as to
his or her entire Option, the Shares covered by the unvested portion of the
Option shall revert to the Plan. If, after termination, the Optionee does not
exercise his or her Option within the time specified herein, the Option shall
terminate, and the Shares covered by such Option shall revert to the Plan.
(d) Death of Optionee. If an Optionee dies while a Service Provider,
-----------------
the Option may be exercised within such period of time as is specified in the
Option Agreement (but in no event later than the expiration of the term of such
Option as set forth in the Notice of Grant), by the Optionee's estate or by a
person who acquires the right to exercise the Option by bequest or inheritance,
but only to the extent that the Option is vested on the date of death. In the
absence of a specified time in the Option Agreement, the Option shall remain
exercisable for twelve (12) months following the Optionee's termination. If, at
the time of death, the Optionee is not vested as to his or her entire Option,
the Shares covered by the unvested portion of the Option shall immediately
revert to the Plan. The Option may be exercised by the executor or administrator
of the Optionee's estate or, if none, by the person(s) entitled to exercise the
Option under the Optionee's will or the laws of descent or distribution. If the
Option is not so exercised within the time specified herein, the Option shall
terminate, and the Shares covered by such Option shall revert to the Plan.
(e) Buyout Provisions. The Administrator may at any time offer to
-----------------
buy out for a payment in cash or Shares an Option previously granted based on
such terms and conditions as the Administrator shall establish and communicate
to the Optionee at the time that such offer is made.
11. Stock Purchase Rights.
---------------------
(a) Rights to Purchase. Stock Purchase Rights may be issued either
------------------
alone, in addition to, or in tandem with other awards granted under the Plan
and/or cash awards made outside of the Plan. After the Administrator determines
that it will offer Stock Purchase Rights under the Plan, it shall advise the
offeree in writing or electronically, by means of a Notice of Grant, of the
terms, conditions and restrictions related to the offer, including the number of
Shares that the offeree shall be entitled to purchase, the price to be paid, and
the time within which the offeree must accept such offer. The offer shall be
accepted by execution of a Restricted Stock Purchase Agreement in the form
determined by the Administrator.
<PAGE>
(b) Repurchase Option. Unless the Administrator determines
-----------------
otherwise, the Restricted Stock Purchase Agreement shall grant the Company a
repurchase option exercisable upon the voluntary or involuntary termination of
the purchaser's service with the Company for any reason (including death or
Disability). The purchase price for Shares repurchased pursuant to the
Restricted Stock Purchase Agreement shall be the original price paid by the
purchaser and may be paid by cancellation of any indebtedness of the purchaser
to the Company. The repurchase option shall lapse at a rate determined by the
Administrator.
(c) Other Provisions. The Restricted Stock Purchase Agreement shall
----------------
contain such other terms, provisions and conditions not inconsistent with the
Plan as may be determined by the Administrator in its sole discretion.
(d) Rights as a Shareholder. Once the Stock Purchase Right is
-----------------------
exercised, the purchaser shall have the rights equivalent to those of a
shareholder, and shall be a shareholder when his or her purchase is entered upon
the records of the duly authorized transfer agent of the Company. No adjustment
will be made for a dividend or other right for which the record date is prior to
the date the Stock Purchase Right is exercised, except as provided in Section 13
of the Plan.
12. Non-Transferability of Options and Stock Purchase Rights. Unless
--------------------------------------------------------
determined otherwise by the Administrator, an Option or Stock Purchase Right may
not be sold, pledged, assigned, hypothecated, transferred, or disposed of in any
manner other than by will or by the laws of descent or distribution and may be
exercised, during the lifetime of the Optionee, only by the Optionee. If the
Administrator makes an Option or Stock Purchase Right transferable, such Option
or Stock Purchase Right shall contain such additional terms and conditions as
the Administrator deems appropriate.
13. Adjustments Upon Changes in Capitalization, Dissolution, Merger or
------------------------------------------------------------------
Asset Sale.
- ----------
(a) Changes in Capitalization. Subject to any required action by the
-------------------------
shareholders of the Company, the number of shares of Common Stock covered by
each outstanding Option and Stock Purchase Right, and the number of shares of
Common Stock which have been authorized for issuance under the Plan but as to
which no Options or Stock Purchase Rights have yet been granted or which have
been returned to the Plan upon cancellation or expiration of an Option or Stock
Purchase Right, as well as the price per share of Common Stock covered by each
such outstanding Option or Stock Purchase Right, shall be proportionately
adjusted for any increase or decrease in the number of issued shares of Common
Stock resulting from a stock split, reverse stock split, stock dividend,
combination or reclassification of the Common Stock, or any other increase or
decrease in the number of issued shares of Common Stock effected without receipt
of consideration by the Company; provided, however, that conversion of any
convertible securities of the Company shall not be deemed to have been "effected
without receipt of consideration." Such adjustment shall be made by the Board,
whose determination in that respect shall be final, binding and conclusive.
Except as expressly provided herein, no issuance by the Company of shares of
stock of any class, or securities convertible into shares of stock of any class,
shall affect, and no adjustment by reason thereof shall be made with respect to,
the number or price of shares of Common Stock subject to an Option or Stock
Purchase Right.
<PAGE>
(b) Dissolution or Liquidation. In the event of the proposed
--------------------------
dissolution or liquidation of the Company, the Administrator shall notify each
Optionee as soon as practicable prior to the effective date of such proposed
transaction. The Administrator in its discretion may provide for an Optionee to
have the right to exercise his or her Option until fifteen (15) days prior to
such transaction as to all of the Optioned Stock covered thereby, including
Shares as to which the Option would not otherwise be exercisable. In addition,
the Administrator may provide that any Company repurchase option applicable to
any Shares purchased upon exercise of an Option or Stock Purchase Right shall
lapse as to all such Shares, provided the proposed dissolution or liquidation
takes place at the time and in the manner contemplated. To the extent it has not
been previously exercised, an Option or Stock Purchase Right will terminate
immediately prior to the consummation of such proposed action.
(c) Merger or Asset Sale. In the event of a merger of the Company
--------------------
with or into another corporation, or the sale of substantially all of the assets
of the Company, each outstanding Option and Stock Purchase Right shall be
assumed or an equivalent option or right substituted by the successor
corporation or a Parent or Subsidiary of the successor corporation. In the event
that the successor corporation refuses to assume or substitute for the Option or
Stock Purchase Right, the Optionee shall fully vest in and have the right to
exercise the Option or Stock Purchase Right as to all of the Optioned Stock,
including Shares as to which it would not otherwise be vested or exercisable. If
an Option or Stock Purchase Right becomes fully vested and exercisable in lieu
of assumption or substitution in the event of a merger or sale of assets, the
Administrator shall notify the Optionee in writing or electronically that the
Option or Stock Purchase Right shall be fully vested and exercisable for a
period of fifteen (15) days from the date of such notice, and the Option or
Stock Purchase Right shall terminate upon the expiration of such period. For the
purposes of this paragraph, the Option or Stock Purchase Right shall be
considered assumed if, following the merger or sale of assets, the option or
right confers the right to purchase or receive, for each Share of Optioned Stock
subject to the Option or Stock Purchase Right immediately prior to the merger or
sale of assets, the consideration (whether stock, cash, or other securities or
property) received in the merger or sale of assets by holders of Common Stock
for each Share held on the effective date of the transaction (and if holders
were offered a choice of consideration, the type of consideration chosen by the
holders of a majority of the outstanding Shares); provided, however, that if
such consideration received in the merger or sale of assets is not solely common
stock of the successor corporation or its Parent, the Administrator may, with
the consent of the successor corporation, provide for the consideration to be
received upon the exercise of the Option or Stock Purchase Right, for each Share
of Optioned Stock subject to the Option or Stock Purchase Right, to be solely
common stock of the successor corporation or its Parent equal in fair market
value to the per share consideration received by holders of Common Stock in the
merger or sale of assets.
14. Date of Grant. The date of grant of an Option or Stock Purchase Right
-------------
shall be, for all purposes, the date on which the Administrator makes the
determination granting such Option or Stock Purchase Right, or such other later
date as is determined by the Administrator. Notice of the determination shall
be provided to each Optionee within a reasonable time after the date of such
grant.
15. Amendment and Termination of the Plan.
-------------------------------------
(a) Amendment and Termination. The Board may at any time amend,
-------------------------
alter, suspend or terminate the Plan.
(b) Shareholder Approval. The Company shall obtain shareholder
--------------------
approval of any Plan amendment to the extent necessary and desirable to comply
with Applicable Laws.
(c) Effect of Amendment or Termination. No amendment, alteration,
----------------------------------
suspension or termination of the Plan shall impair the rights of any Optionee,
unless mutually agreed otherwise between the Optionee and the Administrator,
which agreement must be in writing and signed by the Optionee and the Company.
Termination of the Plan shall not affect the Administrator's ability to
<PAGE>
exercise the powers granted to it hereunder with respect to Options granted
under the Plan prior to the date of such termination.
16. Conditions Upon Issuance of Shares.
----------------------------------
(a) Legal Compliance. Shares shall not be issued pursuant to the
----------------
exercise of an Option or Stock Purchase Right unless the exercise of such Option
or Stock Purchase Right and the issuance and delivery of such Shares shall
comply with Applicable Laws and shall be further subject to the approval of
counsel for the Company with respect to such compliance.
(b) Investment Representations. As a condition to the exercise of an
--------------------------
Option or Stock Purchase Right, the Company may require the person exercising
such Option or Stock Purchase Right to represent and warrant at the time of any
such exercise that the Shares are being purchased only for investment and
without any present intention to sell or distribute such Shares if, in the
opinion of counsel for the Company, such a representation is required.
17. Inability to Obtain Authority. The inability of the Company to obtain
-----------------------------
authority from any regulatory body having jurisdiction, which authority is
deemed by the Company's counsel to be necessary to the lawful issuance and sale
of any Shares hereunder, shall relieve the Company of any liability in respect
of the failure to issue or sell such Shares as to which such requisite authority
shall not have been obtained.
18. Reservation of Shares. The Company, during the term of this Plan,
---------------------
will at all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan.
19. Shareholder Approval. The Plan shall be subject to approval by the
--------------------
shareholders of the Company within twelve (12) months after the date the Plan is
adopted. Such shareholder approval shall be obtained in the manner and to the
degree required under Applicable Laws.
<PAGE>
1996 EQUITY INCENTIVE PLAN
STOCK OPTION AGREEMENT
Unless otherwise defined herein, the terms defined in the Plan shall have
the same defined meanings in this Option Agreement.
I. NOTICE OF STOCK OPTION GRANT
----------------------------
[Optionee's Name and Address]
You have been granted an option to purchase Common Stock of the Company,
subject to the terms and conditions of the Plan and this Option Agreement, as
follows:
Grant Number ______________________________
Date of Grant ______________________________
Vesting Commencement Date ______________________________
Exercise Price per Share $_____________________________
Total Number of Shares Granted ______________________________
Total Exercise Price $_____________________________
Type of Option: ___ Incentive Stock Option
___ Nonstatutory Stock Option
Term/Expiration Date: ______________________________
Vesting Schedule:
- ----------------
This Option may be exercised, in whole or in part, in accordance with the
following schedule:
[25% OF THE SHARES SUBJECT TO THE OPTION SHALL VEST TWELVE MONTHS AFTER THE
VESTING COMMENCEMENT DATE, AND 1/48 OF THE SHARES SUBJECT TO THE OPTION SHALL
VEST EACH MONTH THEREAFTER, SUBJECT TO THE OPTIONEE CONTINUING TO BE A SERVICE
PROVIDER ON SUCH DATES].
<PAGE>
Termination Period:
------------------
This Option may be exercised for three (3) months after Optionee ceases to
be a Service Provider. Upon the death or Disability of the Optionee, this Option
may be exercised for one year after Optionee ceases to be a Service Provider. In
no event shall this Option be exercised later than the Term/Expiration Date as
provided above.
II. AGREEMENT
---------
A. Grant of Option.
---------------
The Plan Administrator of the Company hereby grants to the Optionee named
in the Notice of Grant attached as Part I of this Agreement (the "Optionee") an
option (the "Option") to purchase the number of Shares, as set forth in the
Notice of Grant, at the exercise price per share set forth in the Notice of
Grant (the "Exercise Price"), subject to the terms and conditions of the Plan,
which is incorporated herein by reference. Subject to Section 15(c) of the Plan,
in the event of a conflict between the terms and conditions of the Plan and the
terms and conditions of this Option Agreement, the terms and conditions of the
Plan shall prevail.
If designated in the Notice of Grant as an Incentive Stock Option ("ISO"),
this Option is intended to qualify as an Incentive Stock Option under Section
422 of the Code. However, if this Option is intended to be an Incentive Stock
Option, to the extent that it exceeds the $100,000 rule of Code Section 422(d)
it shall be treated as a Nonstatutory Stock Option ("NSO").
B. Exercise of Option.
------------------
(a) Right to Exercise. This Option is exercisable during its term in
-----------------
accordance with the Vesting Schedule set out in the Notice of Grant and the
applicable provisions of the Plan and this Option Agreement.
(b) Method of Exercise. This Option is exercisable by delivery of
------------------
an exercise notice, in the form attached as Exhibit A (the "Exercise Notice"),
which shall state the election to exercise the Option, the number of Shares in
respect of which the Option is being exercised (the "Exercised Shares"), and
such other representations and agreements as may be required by the Company
pursuant to the provisions of the Plan. The Exercise Notice shall be completed
by the Optionee and delivered to [TITLE] of the Company. The Exercise Notice
shall be accompanied by payment of the aggregate Exercise Price as to all
Exercised Shares. This Option shall be deemed to be exercised upon receipt by
the Company of such fully executed Exercise Notice accompanied by such aggregate
Exercise Price.
No Shares shall be issued pursuant to the exercise of this Option
unless such issuance and exercise complies with Applicable Laws. Assuming such
compliance, for income tax purposes the Exercised Shares shall be considered
transferred to the Optionee on the date the Option is exercised with respect to
such Exercised Shares.
-2-
<PAGE>
C. Method of Payment.
-----------------
Payment of the aggregate Exercise Price shall be by any of the following,
or a combination thereof, at the election of the Optionee:
1. cash; or
2. check; or
3. consideration received by the Company under a cashless exercise
program implemented by the Company in connection with the Plan; or
4. surrender of other Shares which (i) in the case of Shares
acquired upon exercise of an option, have been owned by the Optionee for more
than six (6) months on the date of surrender, and (ii) have a Fair Market Value
on the date of surrender equal to the aggregate Exercise Price of the Exercised
Shares; or
5. with the Administrator's consent, delivery of Optionee's
promissory note (the "Note") in the form attached hereto as Exhibit C, in the
amount of the aggregate Exercise Price of the Exercised Shares together with the
execution and delivery by the Optionee of the Security Agreement attached hereto
as Exhibit B. The Note shall bear interest at the "applicable federal rate"
prescribed under the Code and its regulations at time of purchase, and shall be
secured by a pledge of the Shares purchased by the Note pursuant to the Security
Agreement.
D. Non-Transferability of Option.
-----------------------------
This Option may not be transferred in any manner otherwise than by will or
by the laws of descent or distribution and may be exercised during the lifetime
of Optionee only by the Optionee. The terms of the Plan and this Option
Agreement shall be binding upon the executors, administrators, heirs, successors
and assigns of the Optionee.
E. Term of Option.
--------------
This Option may be exercised only within the term set out in the Notice of
Grant, and may be exercised during such term only in accordance with the Plan
and the terms of this Option Agreement.
F. Tax Consequences.
----------------
Some of the federal tax consequences relating to this Option, as of the
date of this Option, are set forth below. THIS SUMMARY IS NECESSARILY
INCOMPLETE, AND THE TAX LAWS AND REGULATIONS ARE SUBJECT TO CHANGE. THE OPTIONEE
SHOULD CONSULT A TAX ADVISER BEFORE EXERCISING THIS OPTION OR DISPOSING OF THE
SHARES.
-3-
<PAGE>
G. Exercising the Option.
---------------------
1. Nonstatutory Stock Option. The Optionee may incur regular
-------------------------
federal income tax liability upon exercise of a NSO. The Optionee 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 Exercised
Shares on the date of exercise over their aggregate Exercise Price. If the
Optionee is an Employee or a former Employee, the Company will be required to
withhold from his or her compensation or collect from Optionee and pay to the
applicable taxing authorities an amount in cash equal to a percentage of this
compensation income at the time of exercise, and may refuse to honor the
exercise and refuse to deliver Shares if such withholding amounts are not
delivered at the time of exercise.
2. Incentive Stock Option. If this Option qualifies as an ISO,
----------------------
the Optionee will have no regular federal income tax liability upon its
exercise, although the excess, if any, of the Fair Market Value of the Exercised
Shares on the date of exercise over their aggregate Exercise Price will be
treated as an adjustment to alternative minimum taxable income for federal tax
purposes and may subject the Optionee to alternative minimum tax in the year of
exercise. In the event that the Optionee ceases to be an Employee but remains a
Service Provider, any Incentive Stock Option of the Optionee that remains
unexercised shall cease to qualify as an Incentive Stock Option and will be
treated for tax purposes as a Nonstatutory Stock Option on the date three (3)
months and one (1) day following such change of status.
3. Disposition of Shares.
---------------------
(a) NSO. If the Optionee holds NSO Shares for at least one
---
year, any gain realized on disposition of the Shares will be treated as long-
term capital gain for federal income tax purposes.
(b) ISO. If the Optionee holds ISO Shares for at least one
---
year after exercise and two years after the grant date, any gain realized on
disposition of the Shares will be treated as long-term capital gain for federal
income tax purposes. If the Optionee disposes of ISO Shares within one year
after exercise or two years after the grant date, 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 lesser of (A) the difference
between the Fair Market Value of the Shares acquired on the date of exercise and
the aggregate Exercise Price, or (B) the difference between the sale price of
such Shares and the aggregate Exercise Price. Any additional gain will be taxed
as capital gain, short-term or long-term depending on the period that the ISO
Shares were held.
(c) Notice of Disqualifying Disposition of ISO Shares. If the
-------------------------------------------------
Optionee sells or otherwise disposes of any of the Shares acquired pursuant to
an ISO on or before the later of (i) two years after the grant date, or (ii) one
year after the exercise date, the Optionee shall immediately notify the Company
in writing of such disposition. The Optionee agrees that he or she may be
subject to income tax withholding by the Company on the compensation income
recognized
-4-
<PAGE>
from such early disposition of ISO Shares by payment in cash or out of the
current earnings paid to the Optionee.
H. Entire Agreement; Governing Law.
-------------------------------
The Plan is incorporated herein by reference. The Plan and this Option
Agreement constitute the entire agreement of the parties with respect to the
subject matter hereof and supersede in their entirety all prior undertakings and
agreements of the Company and Optionee with respect to the subject matter
hereof, and may not be modified adversely to the Optionee's interest except by
means of a writing signed by the Company and Optionee. This agreement is
governed by the internal substantive laws, but not the choice of law rules, of
California.
I. NO GUARANTEE OF CONTINUED SERVICE.
---------------------------------
OPTIONEE ACKNOWLEDGES AND AGREES THAT THE VESTING OF SHARES PURSUANT TO THE
VESTING SCHEDULE HEREOF IS EARNED ONLY BY CONTINUING AS A SERVICE PROVIDER AT
THE WILL OF THE COMPANY (AND NOT THROUGH THE ACT OF BEING HIRED, BEING GRANTED
AN OPTION OR PURCHASING SHARES HEREUNDER). OPTIONEE FURTHER ACKNOWLEDGES AND
AGREES THAT THIS AGREEMENT, THE TRANSACTIONS CONTEMPLATED HEREUNDER AND THE
VESTING SCHEDULE SET FORTH HEREIN DO NOT CONSTITUTE AN EXPRESS OR IMPLIED
PROMISE OF CONTINUED ENGAGEMENT AS A SERVICE PROVIDER FOR THE VESTING PERIOD,
FOR ANY PERIOD, OR AT ALL, AND SHALL NOT INTERFERE WITH OPTIONEE'S RIGHT OR THE
COMPANY'S RIGHT TO TERMINATE OPTIONEE'S RELATIONSHIP AS A SERVICE PROVIDER AT
ANY TIME, WITH OR WITHOUT CAUSE.
-5-
<PAGE>
By your signature and the signature of the Company's representative below,
you and the Company agree that this Option is granted under and governed by the
terms and conditions of the Plan and this Option Agreement. Optionee has
reviewed the Plan and this Option Agreement in their entirety, has had an
opportunity to obtain the advice of counsel prior to executing this Option
Agreement and fully understands all provisions of the Plan and Option Agreement.
Optionee hereby agrees to accept as binding, conclusive and final all decisions
or interpretations of the Administrator upon any questions relating to the Plan
and Option Agreement. Optionee further agrees to notify the Company upon any
change in the residence address indicated below.
OPTIONEE: LIQUID AUDIO, INC.
_____________________________ ________________________________
Signature By
_____________________________ ________________________________
Print Name Title
_____________________________
Residence Address
_____________________________
-6-
<PAGE>
CONSENT OF SPOUSE
-----------------
The undersigned spouse of Optionee has read and hereby approves the terms
and conditions of the Plan and this Option Agreement. In consideration of the
Company's granting his or her spouse the right to purchase Shares as set forth
in the Plan and this Option Agreement, the undersigned hereby agrees to be
irrevocably bound by the terms and conditions of the Plan and this Option
Agreement and further agrees that any community property interest shall be
similarly bound. The undersigned hereby appoints the undersigned's spouse as
attorney-in-fact for the undersigned with respect to any amendment or exercise
of rights under the Plan or this Option Agreement.
_____________________________
Spouse of Optionee
<PAGE>
EXHIBIT A
---------
1996 EQUITY INCENTIVE PLAN
EXERCISE NOTICE
Liquid Audio, Inc.
810 Winslow Street
Redwood City, California 94063
Attention: [Title]
1. Exercise of Option. Effective as of today, ________________, _____,
------------------
the undersigned ("Purchaser") hereby elects to purchase ______________ shares
(the "Shares") of the Common Stock of Liquid Audio, Inc. (the "Company") under
and pursuant to the 1996 Equity Incentive Plan (the "Plan") and the Stock Option
Agreement dated ____________, _____ (the "Option Agreement"). The purchase
price for the Shares shall be $_______, as required by the Option Agreement.
2. Delivery of Payment. Purchaser herewith delivers to the Company the
-------------------
full purchase price for the Shares.
3. Representations of Purchaser. Purchaser acknowledges that Purchaser
----------------------------
has received, read and understood the Plan and the Option Agreement and agrees
to abide by and be bound by their terms and conditions.
4. Rights as Shareholder. Until the issuance (as evidenced by the
---------------------
appropriate entry on the books of the Company or of a duly authorized transfer
agent of the Company) of the Shares, no right to vote or receive dividends or
any other rights as a shareholder shall exist with respect to the Optioned
Stock, notwithstanding the exercise of the Option. The Shares so acquired shall
be issued to the Optionee as soon as practicable after exercise of the Option.
No adjustment will be made for a dividend or other right for which the record
date is prior to the date of issuance, except as provided in Section 13 of the
Plan.
5. Tax Consultation. Purchaser understands that Purchaser may suffer
----------------
adverse tax consequences as a result of Purchaser's purchase or disposition of
the Shares. Purchaser represents that Purchaser has consulted with any tax
consultants Purchaser deems advisable in connection with the purchase or
disposition of the Shares and that Purchaser is not relying on the Company for
any tax advice.
6. Entire Agreement; Governing Law. The Plan and Option Agreement are
-------------------------------
incorporated herein by reference. This Agreement, the Plan and the Option
Agreement constitute the entire agreement of the parties with respect to the
subject matter hereof and supersede in their entirety all prior undertakings and
agreements of the Company and Purchaser with respect to the subject matter
<PAGE>
hereof, and may not be modified adversely to the Purchaser's interest except by
means of a writing signed by the Company and Purchaser. This agreement is
governed by the internal substantive laws, but not the choice of law rules, of
California.
Submitted by: Accepted by:
PURCHASER: LIQUID AUDIO, INC.
________________________________ ___________________________________
Signature By
________________________________ ___________________________________
Print Name Its
Address: Address:
- ------- -------
________________________________ Liquid Audio, Inc.
________________________________
810 Winslow Street
Redwood City, California 94063
___________________________________
Date Received
-2-
<PAGE>
EXHIBIT B
---------
SECURITY AGREEMENT
This Security Agreement is made as of __________, _____ between Liquid
Audio, Inc., a Delaware corporation ("Pledgee"), and _________________________
("Pledgor").
Recitals
--------
Pursuant to Pledgor's election to purchase Shares under the Option
Agreement dated ________ (the "Option"), between Pledgor and Pledgee under
Pledgee's 1996 Equity Incentive Plan, and Pledgor's election under the terms of
the Option to pay for such shares with his promissory note (the "Note"), Pledgor
has purchased _________ shares of Pledgee's Common Stock (the "Shares") at a
price of $________ per share, for a total purchase price of $__________. The
Note and the obligations thereunder are as set forth in Exhibit C to the Option.
NOW, THEREFORE, it is agreed as follows:
1. Creation and Description of Security Interest. In consideration of the
---------------------------------------------
transfer of the Shares to Pledgor under the Option Agreement, Pledgor, pursuant
to the California Commercial Code, hereby pledges all of such Shares (herein
sometimes referred to as the "Collateral") represented by certificate number
______, duly endorsed in blank or with executed stock powers, and herewith
delivers said certificate to the Secretary of Pledgee ("Pledgeholder"), who
shall hold said certificate subject to the terms and conditions of this Security
Agreement.
The pledged stock (together with an executed blank stock assignment for use
in transferring all or a portion of the Shares to Pledgee if, as and when
required pursuant to this Security Agreement) shall be held by the Pledgeholder
as security for the repayment of the Note, and any extensions or renewals
thereof, to be executed by Pledgor pursuant to the terms of the Option, and the
Pledgeholder shall not encumber or dispose of such Shares except in accordance
with the provisions of this Security Agreement.
2. Pledgor's Representations and Covenants. To induce Pledgee to enter
---------------------------------------
into this Security Agreement, Pledgor represents and covenants to Pledgee, its
successors and assigns, as follows:
(a) Payment of Indebtedness. Pledgor will pay the principal sum of the
-----------------------
Note secured hereby, together with interest thereon, at the time and in the
manner provided in the Note.
(b) Encumbrances. The Shares are free of all other encumbrances,
------------
defenses and liens, and Pledgor will not further encumber the Shares without the
prior written consent of Pledgee.
<PAGE>
(c) Margin Regulations. In the event that Pledgee's Common Stock is
------------------
now or later becomes margin-listed by the Federal Reserve Board and Pledgee is
classified as a "lender" within the meaning of the regulations under Part 207 of
Title 12 of the Code of Federal Regulations ("Regulation G"), Pledgor agrees to
cooperate with Pledgee in making any amendments to the Note or providing any
additional collateral as may be necessary to comply with such regulations.
3. Voting Rights. During the term of this pledge and so long as all
-------------
payments of principal and interest are made as they become due under the terms
of the Note, Pledgor shall have the right to vote all of the Shares pledged
hereunder.
4. Stock Adjustments. In the event that during the term of the pledge any
-----------------
stock dividend, reclassification, readjustment or other changes are declared or
made in the capital structure of Pledgee, all new, substituted and additional
shares or other securities issued by reason of any such change shall be
delivered to and held by the Pledgee under the terms of this Security Agreement
in the same manner as the Shares originally pledged hereunder. In the event of
substitution of such securities, Pledgor, Pledgee and Pledgeholder shall
cooperate and execute such documents as are reasonable so as to provide for the
substitution of such Collateral and, upon such substitution, references to
"Shares" in this Security Agreement shall include the substituted shares of
capital stock of Pledgor as a result thereof.
5. Options and Rights. In the event that, during the term of this pledge,
------------------
subscription Options or other rights or options shall be issued in connection
with the pledged Shares, such rights, Options and options shall be the property
of Pledgor and, if exercised by Pledgor, all new stock or other securities so
acquired by Pledgor as it relates to the pledged Shares then held by
Pledgeholder shall be immediately delivered to Pledgeholder, to be held under
the terms of this Security Agreement in the same manner as the Shares pledged.
6. Default. Pledgor shall be deemed to be in default of the Note and of
-------
this Security Agreement in the event:
(a) Payment of principal or interest on the Note shall be delinquent
for a period of 10 days or more; or
(b) Pledgor fails to perform any of the covenants set forth in the
Option or contained in this Security Agreement for a period of 10 days after
written notice thereof from Pledgee.
In the case of an event of Default, as set forth above, Pledgee shall have
the right to accelerate payment of the Note upon notice to Pledgor, and Pledgee
shall thereafter be entitled to pursue its remedies under the California
Commercial Code.
7. Release of Collateral. Subject to any applicable contrary rules under
---------------------
Regulation G, there shall be released from this pledge a portion of the pledged
Shares held by Pledgeholder hereunder upon payments of the principal of the
Note. The number of the pledged Shares which shall be
-2-
<PAGE>
released shall be that number of full Shares which bears the same proportion to
the initial number of Shares pledged hereunder as the payment of principal bears
to the initial full principal amount of the Note.
8. Withdrawal or Substitution of Collateral. Pledgor shall not sell,
----------------------------------------
withdraw, pledge, substitute or otherwise dispose of all or any part of the
Collateral without the prior written consent of Pledgee.
9. Term. The within pledge of Shares shall continue until the payment of
----
all indebtedness secured hereby, at which time the remaining pledged stock shall
be promptly delivered to Pledgor, subject to the provisions for prior release of
a portion of the Collateral as provided in paragraph 7 above.
10. Insolvency. Pledgor agrees that if a bankruptcy or insolvency
----------
proceeding is instituted by or against it, or if a receiver is appointed for the
property of Pledgor, or if Pledgor makes an assignment for the benefit of
creditors, the entire amount unpaid on the Note shall become immediately due and
payable, and Pledgee may proceed as provided in the case of default.
11. Pledgeholder Liability. In the absence of willful or gross negligence,
----------------------
Pledgeholder shall not be liable to any party for any of his acts, or omissions
to act, as Pledgeholder.
12. Invalidity of Particular Provisions. Pledgor and Pledgee agree that
-----------------------------------
the enforceability or invalidity of any provision or provisions of this Security
Agreement shall not render any other provision or provisions herein contained
unenforceable or invalid.
13. Successors or Assigns. Pledgor and Pledgee agree that all of the terms
---------------------
of this Security Agreement shall be binding on their respective successors and
assigns, and that the term "Pledgor" and the term "Pledgee" as used herein shall
be deemed to include, for all purposes, the respective designees, successors,
assigns, heirs, executors and administrators.
14. Governing Law. This Security Agreement shall be interpreted and
-------------
governed under the internal substantive laws, but not the choice of law rules,
of California.
-3-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first above written.
"PLEDGOR" __________________________________
Signature
__________________________________
Print Name
Address: ___________________________
___________________________
"PLEDGEE" Liquid Audio, Inc.,
a Delaware corporation
__________________________________
Signature
__________________________________
Print Name
__________________________________
Title
"PLEDGEHOLDER" __________________________________
Secretary of Liquid Audio, Inc.
-4-
<PAGE>
EXHIBIT C
---------
NOTE
$________________ [City, State]
______________, _____
FOR VALUE RECEIVED, _______________ promises to pay to Liquid Audio, Inc.,
a Delaware corporation (the "Company"), or order, the principal sum of
_______________________ ($_____________), together with interest on the unpaid
principal hereof from the date hereof at the rate of _______________ percent
(____%) per annum, compounded semiannually.
Principal and interest shall be due and payable on __________, _____.
Payment of principal and interest shall be made in lawful money of the United
States of America.
The undersigned may at any time prepay all or any portion of the principal
or interest owing hereunder.
This Note is subject to the terms of the Option, dated as of
________________. This Note is secured in part by a pledge of the Company's
Common Stock under the terms of a Security Agreement of even date herewith and
is subject to all the provisions thereof.
The holder of this Note shall have full recourse against the undersigned,
and shall not be required to proceed against the collateral securing this Note
in the event of default.
In the event the undersigned shall cease to be an employee, director or
consultant of the Company for any reason, this Note shall, at the option of the
Company, be accelerated, and the whole unpaid balance on this Note of principal
and accrued interest shall be immediately due and payable.
Should any action be instituted for the collection of this Note, the
reasonable costs and attorneys' fees therein of the holder shall be paid by the
undersigned.
_______________________________
_______________________________
<PAGE>
1996 EQUITY INCENTIVE PLAN
NOTICE OF GRANT OF STOCK PURCHASE RIGHT
Unless otherwise defined herein, the terms defined in the Plan shall have
the same defined meanings in this Notice of Grant.
[Grantee's Name and Address]
You have been granted the right to purchase Common Stock of the Company,
subject to the Company's Repurchase Option and your ongoing status as a Service
Provider (as described in the Plan and the attached Restricted Stock Purchase
Agreement), as follows:
Grant Number _______________________
Date of Grant _______________________
Price Per Share $______________________
Total Number of Shares Subject _______________________
to This Stock Purchase Right
Expiration Date: _______________________
YOU MUST EXERCISE THIS STOCK PURCHASE RIGHT BEFORE THE EXPIRATION DATE OR
IT WILL TERMINATE AND YOU WILL HAVE NO FURTHER RIGHT TO PURCHASE THE SHARES. By
your signature and the signature of the Company's representative below, you and
the Company agree that this Stock Purchase Right is granted under and governed
by the terms and conditions of the 1996 Equity Incentive Plan and the Restricted
Stock Purchase Agreement, attached hereto as Exhibit A-1, both of which are made
a part of this document. You further agree to execute the attached Restricted
Stock Purchase Agreement as a condition to purchasing any shares under this
Stock Purchase Right.
GRANTEE: LIQUID AUDIO, INC.
_________________________ __________________________
Signature By
_________________________ __________________________
Print Name Title
<PAGE>
EXHIBIT A-1
-----------
LIQUID AUDIO, INC.
RESTRICTED STOCK PURCHASE AGREEMENT
Unless otherwise defined herein, the terms defined in the Plan shall have
the same defined meanings in this Restricted Stock Purchase Agreement.
WHEREAS the Purchaser named in the Notice of Grant, (the "Purchaser") is a
Service Provider, and the Purchaser's continued participation is considered by
the Company to be important for the Company's continued growth; and
WHEREAS in order to give the Purchaser an opportunity to acquire an equity
interest in the Company as an incentive for the Purchaser to participate in the
affairs of the Company, the Administrator has granted to the Purchaser a Stock
Purchase Right subject to the terms and conditions of the Plan and the Notice of
Grant, which are incorporated herein by reference, and pursuant to this
Restricted Stock Purchase Agreement (the "Agreement").
NOW THEREFORE, the parties agree as follows:
1. Sale of Stock. The Company hereby agrees to sell to the Purchaser and
-------------
the Purchaser hereby agrees to purchase shares of the Company's Common Stock
(the "Shares"), at the per Share purchase price and as otherwise described in
the Notice of Grant.
2. Payment of Purchase Price. The purchase price for the Shares may be
-------------------------
paid by delivery to the Company at the time of execution of this Agreement of
cash, a check, or some combination thereof.
3. Repurchase Option.
-----------------
(a) In the event the Purchaser ceases to be a Service Provider for
any or no reason (including death or disability) before all of the Shares are
released from the Company's Repurchase Option (see Section 4), the Company
shall, upon the date of such termination (as reasonably fixed and determined by
the Company) have an irrevocable, exclusive option (the "Repurchase Option") for
a period of sixty (60) days from such date to repurchase up to that number of
shares which constitute the Unreleased Shares (as defined in Section 4) at the
original purchase price per share (the "Repurchase Price"). The Repurchase
Option shall be exercised by the Company by delivering written notice to the
Purchaser or the Purchaser's executor (with a copy to the Escrow Holder) AND, at
the Company's option, (i) by delivering to the Purchaser or the Purchaser's
executor a check in the amount of the aggregate Repurchase Price, or (ii) by
cancelling an amount of the Purchaser's indebtedness to the Company equal to the
aggregate Repurchase Price, or (iii) by a combination of (i) and (ii) so that
the combined payment and cancellation of indebtedness equals the aggregate
Repurchase Price. Upon delivery of such notice and the payment of the aggregate
Repurchase Price, the Company shall become the legal and beneficial owner of the
Shares being repurchased and all
<PAGE>
rights and interests therein or relating thereto, and the Company shall have the
right to retain and transfer to its own name the number of Shares being
repurchased by the Company.
(b) Whenever the Company shall have the right to repurchase Shares
hereunder, the Company may designate and assign one or more employees, officers,
directors or shareholders of the Company or other persons or organizations to
exercise all or a part of the Company's purchase rights under this Agreement and
purchase all or a part of such Shares. If the Fair Market Value of the Shares to
be repurchased on the date of such designation or assignment (the "Repurchase
FMV") exceeds the aggregate Repurchase Price of such Shares, then each such
designee or assignee shall pay the Company cash equal to the difference between
the Repurchase FMV and the aggregate Repurchase Price of such Shares.
4. Release of Shares From Repurchase Option.
----------------------------------------
(a) _______________________ percent (______%) of the Shares shall be
released from the Company's Repurchase Option [one year] after the Date of Grant
and ________________ percent (______%) of the Shares [at the end of each month
thereafter]; provided that the Purchaser does not cease to be a Service Provider
prior to the date of any such release.
(b) Any of the Shares that have not yet been released from the
Repurchase Option are referred to herein as "Unreleased Shares."
(c) The Shares that have been released from the Repurchase Option
shall be delivered to the Purchaser at the Purchaser's request (see Section 6).
5. Restriction on Transfer. Except for the escrow described in Section 6
-----------------------
or the transfer of the Shares to the Company or its assignees contemplated by
this Agreement, none of the Shares or any beneficial interest therein shall be
transferred, encumbered or otherwise disposed of in any way until such Shares
are released from the Company's Repurchase Option in accordance with the
provisions of this Agreement, other than by will or the laws of descent and
distribution.
6. Escrow of Shares.
----------------
(a) To ensure the availability for delivery of the Purchaser's
Unreleased Shares upon repurchase by the Company pursuant to the Repurchase
Option, the Purchaser shall, upon execution of this Agreement, deliver and
deposit with an escrow holder designated by the Company (the "Escrow Holder")
the share certificates representing the Unreleased Shares, together with the
stock assignment duly endorsed in blank, attached hereto as Exhibit A-2. The
Unreleased Shares and stock assignment shall be held by the Escrow Holder,
pursuant to the Joint Escrow Instructions of the Company and Purchaser attached
hereto as Exhibit A-3, until such time as the Company's Repurchase Option
expires. As a further condition to the Company's obligations under this
Agreement, the Company may require the spouse of Purchaser, if any, to execute
and deliver to the Company the Consent of Spouse attached hereto as Exhibit A-4.
-2-
<PAGE>
(b) The Escrow Holder shall not be liable for any act it may do or
omit to do with respect to holding the Unreleased Shares in escrow while acting
in good faith and in the exercise of its judgment.
(c) If the Company or any assignee exercises the Repurchase Option
hereunder, the Escrow Holder, upon receipt of written notice of such exercise
from the proposed transferee, shall take all steps necessary to accomplish such
transfer.
(d) When the Repurchase Option has been exercised or expires
unexercised or a portion of the Shares has been released from the Repurchase
Option, upon request the Escrow Holder shall promptly cause a new certificate to
be issued for the released Shares and shall deliver the certificate to the
Company or the Purchaser, as the case may be.
(e) Subject to the terms hereof, the Purchaser shall have all the
rights of a shareholder with respect to the Shares while they are held in
escrow, including without limitation, the right to vote the Shares and to
receive any cash dividends declared thereon. If, from time to time during the
term of the Repurchase Option, there is (i) any stock dividend, stock split or
other change in the Shares, or (ii) any merger or sale of all or substantially
all of the assets or other acquisition of the Company, any and all new,
substituted or additional securities to which the Purchaser is entitled by
reason of the Purchaser's ownership of the Shares shall be immediately subject
to this escrow, deposited with the Escrow Holder and included thereafter as
"Shares" for purposes of this Agreement and the Repurchase Option.
7. Legends. The share certificate evidencing the Shares, if any, issued
-------
hereunder shall be endorsed with the following legend (in addition to any legend
required under applicable state securities laws):
THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN
RESTRICTIONS UPON TRANSFER AND RIGHTS OF REPURCHASE AS SET FORTH IN AN AGREEMENT
BETWEEN THE COMPANY AND THE SHAREHOLDER, A COPY OF WHICH IS ON FILE WITH THE
SECRETARY OF THE COMPANY.
8. Adjustment for Stock Split. All references to the number of Shares and
--------------------------
the purchase price of the Shares in this Agreement shall be appropriately
adjusted to reflect any stock split, stock dividend or other change in the
Shares which may be made by the Company after the date of this Agreement.
9. Tax Consequences. The Purchaser has reviewed with the Purchaser's own
----------------
tax advisors the federal, state, local and foreign tax consequences of this
investment and the transactions contemplated by this Agreement. The Purchaser is
relying solely on such advisors and not on any statements or representations of
the Company or any of its agents. The Purchaser understands that the Purchaser
(and not the Company) shall be responsible for the Purchaser's own tax liability
that may arise as a result of the transactions contemplated by this Agreement.
The Purchaser understands that Section 83 of the Internal Revenue Code of 1986,
as amended (the "Code"), taxes as ordinary
-3-
<PAGE>
income the difference between the purchase price for the Shares and the Fair
Market Value of the Shares as of the date any restrictions on the Shares lapse.
In this context, "restriction" includes the right of the Company to buy back the
Shares pursuant to the Repurchase Option. The Purchaser understands that the
Purchaser may elect to be taxed at the time the Shares are purchased rather than
when and as the Repurchase Option expires by filing an election under Section
83(b) of the Code with the IRS within 30 days from the date of purchase. The
form for making this election is attached as Exhibit A-5 hereto.
THE PURCHASER ACKNOWLEDGES THAT IT IS THE PURCHASER'S SOLE
RESPONSIBILITY AND NOT THE COMPANY'S TO FILE TIMELY THE ELECTION UNDER SECTION
83(b), EVEN IF THE PURCHASER REQUESTS THE COMPANY OR ITS REPRESENTATIVES TO MAKE
THIS FILING ON THE PURCHASER'S BEHALF.
10. General Provisions.
------------------
(a) This Agreement shall be governed by the internal substantive
laws, but not the choice of law rules of California. This Agreement, subject to
the terms and conditions of the Plan and the Notice of Grant, represents the
entire agreement between the parties with respect to the purchase of the Shares
by the Purchaser. Subject to Section 15(c) of the Plan, in the event of a
conflict between the terms and conditions of the Plan and the terms and
conditions of this Agreement, the terms and conditions of the Plan shall
prevail. Unless otherwise defined herein, the terms defined in the Plan shall
have the same defined meanings in this Agreement.
(b) Any notice, demand or request required or permitted to be given
by either the Company or the Purchaser pursuant to the terms of this Agreement
shall be in writing and shall be deemed given when delivered personally or
deposited in the U.S. mail, First Class with postage prepaid, and addressed to
the parties at the addresses of the parties set forth at the end of this
Agreement or such other address as a party may request by notifying the other in
writing.
Any notice to the Escrow Holder shall be sent to the Company's address
with a copy to the other party hereto.
(c) The rights of the Company under this Agreement shall be
transferable to any one or more persons or entities, and all covenants and
agreements hereunder shall inure to the benefit of, and be enforceable by the
Company's successors and assigns. The rights and obligations of the Purchaser
under this Agreement may only be assigned with the prior written consent of the
Company.
(d) Either party's failure to enforce any provision of this Agreement
shall not in any way be construed as a waiver of any such provision, nor prevent
that party from thereafter enforcing any other provision of this Agreement. The
rights granted both parties hereunder are cumulative and shall not constitute a
waiver of either party's right to assert any other legal remedy available to it.
-4-
<PAGE>
(e) The Purchaser agrees upon request to execute any further
documents or instruments necessary or desirable to carry out the purposes or
intent of this Agreement.
(f) PURCHASER ACKNOWLEDGES AND AGREES THAT THE VESTING OF SHARES
PURSUANT TO SECTION 4 HEREOF IS EARNED ONLY BY CONTINUING SERVICE AS A SERVICE
PROVIDER AT THE WILL OF THE COMPANY (AND NOT THROUGH THE ACT OF BEING HIRED OR
PURCHASING SHARES HEREUNDER). PURCHASER FURTHER ACKNOWLEDGES AND AGREES THAT
THIS AGREEMENT, THE TRANSACTIONS CONTEMPLATED HEREUNDER AND THE VESTING SCHEDULE
SET FORTH HEREIN DO NOT CONSTITUTE AN EXPRESS OR IMPLIED PROMISE OF CONTINUED
ENGAGEMENT AS A SERVICE PROVIDER FOR THE VESTING PERIOD, FOR ANY PERIOD, OR AT
ALL, AND SHALL NOT INTERFERE WITH PURCHASER'S RIGHT OR THE COMPANY'S RIGHT TO
TERMINATE PURCHASER'S RELATIONSHIP AS A SERVICE PROVIDER AT ANY TIME, WITH OR
WITHOUT CAUSE.
By Purchaser's signature below, Purchaser represents that he or she is
familiar with the terms and provisions of the Plan, and hereby accepts this
Agreement subject to all of the terms and provisions thereof. Purchaser has
reviewed the Plan and this Agreement in their entirety, has had an opportunity
to obtain the advice of counsel prior to executing this Agreement and fully
understands all provisions of this Agreement. Purchaser agrees to accept as
binding, conclusive and final all decisions or interpretations of the
Administrator upon any questions arising under the Plan or this Agreement.
Purchaser further agrees to notify the Company upon any change in the residence
indicated in the Notice of Grant.
DATED:____________________
PURCHASER: LIQUID AUDIO, INC.
__________________________ _____________________________
Signature By
__________________________ _____________________________
Print Name Title
-5-
<PAGE>
EXHIBIT A-2
-----------
ASSIGNMENT SEPARATE FROM CERTIFICATE
FOR VALUE RECEIVED I, __________________________, hereby sell, assign and
transfer unto _________________________________________ (__________) shares of
the Common Stock of Liquid Audio, Inc. standing in my name of the books of said
corporation represented by Certificate No. _____ herewith and do hereby
irrevocably constitute and appoint _____________________ to transfer the said
stock on the books of the within named corporation with full power of
substitution in the premises.
This Stock Assignment may be used only in accordance with the Restricted
Stock Purchase Agreement (the "Agreement") between ________________________ and
the undersigned dated ______________, _____.
Dated: _______________, _____
Signature:_____________________________
INSTRUCTIONS: Please do not fill in any blanks other than the signature line.
The purpose of this assignment is to enable the Company to exercise the
Repurchase Option, as set forth in the Agreement, without requiring additional
signatures on the part of the Purchaser.
<PAGE>
EXHIBIT A-3
-----------
JOINT ESCROW INSTRUCTIONS
__________, ____
Corporate Secretary
Liquid Audio, Inc.
810 Winslow Street
Redwood City, California 94063
Dear __________:
As Escrow Agent for both Liquid Audio, Inc., a Delaware corporation (the
"Company"), and the undersigned purchaser of stock of the Company (the
"Purchaser"), you are hereby authorized and directed to hold the documents
delivered to you pursuant to the terms of that certain Restricted Stock Purchase
Agreement ("Agreement") between the Company and the undersigned, in accordance
with the following instructions:
1. In the event the Company and/or any assignee of the Company (referred
to collectively as the "Company") exercises the Company's Repurchase Option set
forth in the Agreement, the Company shall give to Purchaser and you a written
notice specifying the number of shares of stock to be purchased, the purchase
price, and the time for a closing hereunder at the principal office of the
Company. Purchaser and the Company hereby irrevocably authorize and direct you
to close the transaction contemplated by such notice in accordance with the
terms of said notice.
2. At the closing, you are directed (a) to date the stock assignments
necessary for the transfer in question, (b) to fill in the number of shares
being transferred, and (c) to deliver same, together with the certificate
evidencing the shares of stock to be transferred, to the Company or its
assignee, against the simultaneous delivery to you of the purchase price (by
cash, a check, or some combination thereof) for the number of shares of stock
being purchased pursuant to the exercise of the Company's Repurchase Option.
3. Purchaser irrevocably authorizes the Company to deposit with you any
certificates evidencing shares of stock to be held by you hereunder and any
additions and substitutions to said shares as defined in the Agreement.
Purchaser does hereby irrevocably constitute and appoint you as Purchaser's
attorney-in-fact and agent for the term of this escrow to execute with respect
to such securities all documents necessary or appropriate to make such
securities negotiable and to complete any transaction herein contemplated,
including but not limited to the filing with any applicable state blue sky
authority of any required applications for consent to, or notice of transfer of,
the securities.
<PAGE>
Subject to the provisions of this paragraph 3, Purchaser shall exercise all
rights and privileges of a shareholder of the Company while the stock is held by
you.
4. Upon written request of the Purchaser, but no more than once per
calendar year, unless the Company's Repurchase Option has been exercised, you
shall deliver to Purchaser a certificate or certificates representing so many
shares of stock as are not then subject to the Company's Repurchase Option.
Within 90 days after Purchaser ceases to be a Service Provider, you shall
deliver to Purchaser a certificate or certificates representing the aggregate
number of shares held or issued pursuant to the Agreement and not purchased by
the Company or its assignees pursuant to exercise of the Company's Repurchase
Option.
5. If at the time of termination of this escrow you should have in your
possession any documents, securities, or other property belonging to Purchaser,
you shall deliver all of the same to Purchaser and shall be discharged of all
further obligations hereunder.
6. Your duties hereunder may be altered, amended, modified or revoked
only by a writing signed by all of the parties hereto.
7. You shall be obligated only for the performance of such duties as are
specifically set forth herein and may rely and shall be protected in relying or
refraining from acting on any instrument reasonably believed by you to be
genuine and to have been signed or presented by the proper party or parties. You
shall not be personally liable for any act you may do or omit to do hereunder as
Escrow Agent or as attorney-in-fact for Purchaser while acting in good faith,
and any act done or omitted by you pursuant to the advice of your own attorneys
shall be conclusive evidence of such good faith.
8. You are hereby expressly authorized to disregard any and all warnings
given by any of the parties hereto or by any other person or corporation,
excepting only orders or process of courts of law, and are hereby expressly
authorized to comply with and obey orders, judgments or decrees of any court. In
case you obey or comply with any such order, judgment or decree, you shall not
be liable to any of the parties hereto or to any other person, firm or
corporation by reason of such compliance, notwithstanding any such order,
judgment or decree being subsequently reversed, modified, annulled, set aside,
vacated or found to have been entered without jurisdiction.
9. You shall not be liable in any respect on account of the identity,
authorities or rights of the parties executing or delivering or purporting to
execute or deliver the Agreement or any documents or papers deposited or called
for hereunder.
10. You shall not be liable for the outlawing of any rights under the
statute of limitations with respect to these Joint Escrow Instructions or any
documents deposited with you.
11. You shall be entitled to employ such legal counsel and other experts
as you may deem necessary properly to advise you in connection with your
obligations hereunder, may rely upon the advice of such counsel, and may pay
such counsel reasonable compensation therefor.
-2-
<PAGE>
12. Your responsibilities as Escrow Agent hereunder shall terminate if you
shall cease to be an officer or agent of the Company or if you shall resign by
written notice to each party. In the event of any such termination, the Company
shall appoint a successor Escrow Agent.
13. If you reasonably require other or further instruments in connection
with these Joint Escrow Instructions or obligations in respect hereto, the
necessary parties hereto shall join in furnishing such instruments.
14. It is understood and agreed that should any dispute arise with respect
to the delivery and/or ownership or right of possession of the securities held
by you hereunder, you are authorized and directed to retain in your possession
without liability to anyone all or any part of said securities until such
disputes shall have been settled either by mutual written agreement of the
parties concerned or by a final order, decree or judgment of a court of
competent jurisdiction after the time for appeal has expired and no appeal has
been perfected, but you shall be under no duty whatsoever to institute or defend
any such proceedings.
15. Any notice required or permitted hereunder shall be given in writing
and shall be deemed effectively given upon personal delivery or upon deposit in
the United States Post Office, by registered or certified mail with postage and
fees prepaid, addressed to each of the other parties thereunto entitled at the
following addresses or at such other addresses as a party may designate by ten
days' advance written notice to each of the other parties hereto.
COMPANY: Liquid Audio, Inc.
810 Winslow Street
Redwood City, California 94063
PURCHASER: ______________________________
______________________________
______________________________
ESCROW AGENT: Corporate Secretary
Liquid Audio, Inc.
810 Winslow Street
Redwood City, California 94063
16. By signing these Joint Escrow Instructions, you become a party hereto
only for the purpose of said Joint Escrow Instructions; you do not become a
party to the Agreement.
17. This instrument shall be binding upon and inure to the benefit of the
parties hereto, and their respective successors and permitted assigns.
-3-
<PAGE>
18. These Joint Escrow Instructions shall be governed by, and construed
and enforced in accordance with, the internal substantive laws, but not the
choice of law rules, of California.
Very truly yours,
LIQUID AUDIO, INC.
________________________________________
By
________________________________________
Title
PURCHASER:
________________________________________
Signature
________________________________________
Print Name
ESCROW AGENT:
______________________________
Corporate Secretary
-4-
<PAGE>
EXHIBIT A-4
-----------
CONSENT OF SPOUSE
-----------------
I, ____________________, spouse of ___________________, have read and
approve the foregoing Restricted Stock Purchase Agreement (the "Agreement"). In
consideration of the Company's grant to my spouse of the right to purchase
shares of Liquid Audio, Inc., as set forth in the Agreement, I hereby appoint my
spouse as my attorney-in-fact in respect to the exercise of any rights under the
Agreement and agree to be bound by the provisions of the Agreement insofar as I
may have any rights in said Agreement or any shares issued pursuant thereto
under the community property laws or similar laws relating to marital property
in effect in the state of our residence as of the date of the signing of the
foregoing Agreement.
Dated: _______________, _____
_________________________________________
Signature of Spouse
<PAGE>
EXHIBIT A-5
-----------
ELECTION UNDER SECTION 83(b)
----------------------------
OF THE INTERNAL REVENUE CODE OF 1986
------------------------------------
The undersigned taxpayer hereby elects, pursuant to Section 83(b) of the
Internal Revenue Code of 1986, as amended, to include in taxpayer's gross income
for the current taxable year the amount of any compensation taxable to taxpayer
in connection with his or her receipt of the property described below:
1. The name, address, taxpayer identification number and taxable year of the
undersigned are as follows:
NAME: TAXPAYER: SPOUSE:
ADDRESS:
IDENTIFICATION NO.: TAXPAYER: SPOUSE:
TAXABLE YEAR:
2. The property with respect to which the election is made is described as
follows: ________ shares (the "Shares") of the Common Stock of Liquid
Audio, Inc. (the "Company").
3. The date on which the property was transferred is: ________, ______.
4. The property is subject to the following restrictions:
The Shares may be repurchased by the Company, or its assignee, upon certain
events. This right lapses with regard to a portion of the Shares based on
the continued performance of services by the taxpayer over time.
5. The fair market value at the time of transfer, determined without regard to
any restriction other than a restriction which by its terms will never
lapse, of such property is: $_______________.
6. The amount (if any) paid for such property is:
$_______________.
The undersigned has submitted a copy of this statement to the person for whom
the services were performed in connection with the undersigned's receipt of the
above-described property. The transferee of such property is the person
performing the services in connection with the transfer of said property.
The undersigned understands that the foregoing election may not be revoked
- --------------------------------------------------------------------------
except with the consent of the Commissioner.
- -------------------------------------------
Dated: _______________, ______ ____________________________________________
Taxpayer
The undersigned spouse of taxpayer joins in this election
Dated: _______________, ______ ____________________________________________
Spouse of Taxpayer
<PAGE>
EXHIBIT 10.3
LIQUID AUDIO, INC.
1999 EMPLOYEE STOCK PURCHASE PLAN
The following constitute the provisions of the 1999 Employee Stock Purchase
Plan of Liquid Audio, Inc.
1. Purpose. The purpose of the Plan is to provide employees of the
-------
Company and its Designated Subsidiaries with an opportunity to purchase Common
Stock if the Company through accumulated payroll deductions. It is the intention
of the Company to have the Plan qualify as an "Employee Stock Purchase Plan"
under Section 423 of the Internal Revenue Code of 1986, as amended. The
provisions of the Plan, accordingly, shall be construed so as to extend and
limit participation in a manner consistent with the requirements of that
section of the Code.
2. Definitions.
-----------
(a) "Board" shall mean the Board of Directors of the Company.
-----
(b) "Code" shall mean the Internal Revenue Code of 1986, as amended.
----
(c) "Common Stock" shall mean the common stock of the Company.
------------
(d) "Company" shall mean Liquid Audio, Inc. and any Designated
-------
Subsidiary of the Company.
(e) "Compensation" shall mean all base straight time gross earnings,
------------
bonuses, commissions, payments for overtime, shift premium payments, and other
cash compensation, but exclusive of any non-cash compensation.
(f) "Designated Subsidiary" shall mean any Subsidiary which has been
---------------------
designated by the Board from time to time in its sole discretion as eligible to
participate in the Plan.
(g) "Employee" shall mean any individual who is an Employee of the
--------
Company for tax purposes whose customary employment with the Company is at least
twenty (20) hours per week and more than five (5) months in any calendar year.
For purposes of the Plan, the employment relationship shall be treated as
continuing intact while the individual is on sick leave or other leave of
absence approved by the Company. Where the period of leave exceeds 90 days and
the individual's right to reemployment is not guaranteed either by statute or by
contract, the employment relationship shall be deemed to have terminated on the
91st day of such leave.
(h) "Enrollment Date" shall mean the first Trading Day of each
---------------
Offering Period.
<PAGE>
(i) "Exercise Date" shall mean the last Trading Day of each Purchase
-------------
Period.
(j) "Fair Market Value" shall mean, as of any date, the value of
-----------------
Common Stock determined as follows:
(1) If the Common Stock is listed on any established stock
exchange or a national market system, including without limitation the Nasdaq
National Market or The Nasdaq SmallCap Market of The Nasdaq Stock Market, its
Fair Market Value shall be the closing sales price for such stock (or the
closing bid, if no sales were reported) as quoted on such exchange or system for
the last market trading day prior to the date of determination, as reported in
The Wall Street Journal or such other source as the Board deems reliable;
(2) If the Common Stock is regularly quoted by a recognized
securities dealer but selling prices are not reported, its Fair Market Value
shall be the mean of the closing bid and asked prices for the Common Stock on
the last market trading day prior to the date of determination, as reported in
The Wall Street Journal or such other source as the Board deems reliable;
(3) In the absence of an established market for the Common
Stock, the Fair Market Value thereof shall be determined in good faith by the
Board; or
(4) For purposes of the Enrollment Date of the first Offering
Period under the Plan, the Fair Market Value shall be the initial price to the
public as set forth in the final prospectus included within the registration
statement in Form S-1 filed with the Securities and Exchange Commission for the
initial public offering of the Company's Common Stock (the "Registration
Statement").
(k) "Offering Periods" shall mean the periods of approximately
----------------
twenty-four (24) months during which an option granted pursuant to the Plan may
be exercised, commencing on the first Trading Day on or after June 1 and
December 1 of each year and terminating on the last Trading Day in the periods
ending twenty-four months later; provided, however, that the first Offering
Period under the Plan shall commence with the first Trading Day on or after the
date on which the Securities and Exchange Commission declares the Company's
Registration Statement effective and ending on the last Trading Day on or before
May 31, 2001. The duration and timing of Offering Periods may be changed
pursuant to Section 4 of this Plan.
(l) "Plan" shall mean this 1999 Employee Stock Purchase Plan.
----
(m) "Purchase Period" shall mean the approximately six month period
---------------
commencing after one Exercise Date and ending with the next Exercise Date,
except that the first Purchase Period of any Offering Period shall commence on
the Enrollment Date and end with the next Exercise Date.
<PAGE>
(n) "Purchase Price" shall mean 85% of the Fair Market Value of a
--------------
share of Common Stock on the Enrollment Date or on the Exercise Date, whichever
is lower; provided however, that the Purchase Price may be adjusted by the Board
pursuant to Section 20.
(o) "Reserves" shall mean the number of shares of Common Stock
--------
covered by each option under the Plan which have not yet been exercised and the
number of shares of Common Stock which have been authorized for issuance under
the Plan but not yet placed under option.
(p) "Subsidiary" shall mean a corporation, domestic or foreign, of
----------
which not less than 50% of the voting shares are held by the Company or a
Subsidiary, whether or not such corporation now exists or is hereafter organized
or acquired by the Company or a Subsidiary.
(q) "Trading Day" shall mean a day on which national stock exchanges
-----------
and the Nasdaq System are open for trading.
3. Eligibility.
-----------
(a) Any Employee who shall be employed by the Company on a given
Enrollment Date shall be eligible to participate in the Plan.
(b) Any provisions of the Plan to the contrary notwithstanding, no
Employee shall be granted an option under the Plan (i) to the extent that,
immediately after the grant, such Employee (or any other person whose stock
would be attributed to such Employee pursuant to Section 424(d) of the Code)
would own capital stock of the Company and/or hold outstanding options to
purchase such stock possessing five percent (5%) or more of the total combined
voting power or value of all classes of the capital stock of the Company or of
any Subsidiary, or (ii) to the extent that his or her rights to purchase stock
under all employee stock purchase plans of the Company and its subsidiaries
accrues at a rate which exceeds Twenty-Five Thousand Dollars ($25,000) worth of
stock (determined at the fair market value of the shares at the time such option
is granted) for each calendar year in which such option is outstanding at any
time.
4. Offering Periods. The Plan shall be implemented by consecutive,
----------------
overlapping Offering Periods with a new Offering Period commencing on the first
Trading Day on or after June 1 and December 1 each year, or on such other date
as the Board shall determine, and continuing thereafter until terminated in
accordance with Section 20 hereof; provided, however, that the first Offering
Period under the Plan shall commence with the first Trading Day on or after the
date on which the Securities and Exchange Commission declares the Company's
Registration Statement effective and ending on the last Trading Day on or before
May 31, 2001. The Board shall have the power to change the duration of Offering
Periods (including the commencement dates thereof) with respect to future
offerings without shareholder approval if such change is announced at least five
(5) days prior to the schedule beginning of the first Offering Period to be
affected thereafter.
<PAGE>
5. Participation
-------------
(a) An eligible Employee may become a participant in the Plan by
completing a subscription agreement authorizing payroll deductions in the form
of Exhibit A to this Plan and filing it with the Company's payroll office five
(5) days prior to the applicable Enrollment Date.
(b) Payroll deductions for a participant shall commence on the first
payroll following the Enrollment Date and shall end on the last payroll in the
Offering Period to which such authorization is applicable, unless sooner
terminated by the participant as provided in Section 10 hereof.
6. Payroll Deductions.
------------------
(a) At the time a participant files his or her subscription
agreement, he or she shall elect to have payroll deductions made on each pay day
during the Offering period in an amount not exceeding fifteen 15% of the
Compensation which he or she receives on each pay day during the Offering
Period.
(b) All payroll deductions made for a participant shall be credited
to his or her account under the Plan and shall be withheld in whole percentages
only. A participant may not make any additional payments into such account.
(c) A participant may discontinue his or her participation in the
Plan as provided in Section 10 hereof, or may increase or decrease the rate of
his or her payroll deductions during the Offering Period by completing or filing
with the Company a new subscription agreement authorizing a change in payroll
deduction rate. The Board may, in its discretion, limit the number of
participation rate changes during any Offering Period. The change in rate shall
be effective with the first full payroll period following five (5) business days
after the Company's receipt of the new subscription agreement unless the Company
elects to process a given change in participation more quickly. A participant's
subscription agreement shall remain in effect for successive Offering Periods
unless terminated as provided in Section 10 hereof.
(d) Notwithstanding the foregoing, to the extent necessary to comply
with Section 423(b)(8) of the Code and Section 3(b) hereof, a participant's
payroll deductions may be decreased to zero percent (0%) at any time during a
Purchase Period. Payroll deductions shall recommence at the rate provided in
such participant's subscription agreement at the beginning of the first Purchase
Period which is schedule to end in the following calendar year, unless
terminated by the participant as provided in Section 10 hereof.
(e) At the time the option is exercised, in whole or in part, or at
the time some or all of the Company's Common Stock issued under the Plan is
disposed of, the participant must make adequate provision for the Company's
federal, state, or other tax withholding obligations, if any, which arise upon
the exercise of the option or the disposition of the Common Stock. At any time,
the Company may, but shall not be obligated to, withhold from the participant's
compensation the amount
<PAGE>
necessary for the Company to meet applicable withholding obligations, including
any withholding required to make available to the Company any tax deductions or
benefits attributable to sale or early disposition of Common Stock by the
Employee.
7. Grant of Option. On the Enrollment date of each Offering Period, each
---------------
eligible Employee participating in such Offering Period shall be granted an
option to purchase on each Exercise Date during such Offering Period (at the
applicable Purchase Price) up to a number of shares of the Company's Common
Stock determined by dividing such Employee's payroll deductions accumulated
prior to such Exercise Date and retained in the Participant's account as of the
Exercise Date by the applicable Purchase Price; provided that in no event shall
an Employee be permitted to purchase during each Purchase Period more than 2,500
shares of the Company's Common Stock (subject to any adjustment pursuant to
Section 19), and provided further that such purchase shall be subject to the
limitations set forth in Sections 3(b) and 12 hereof. The Board may, for future
Offering Periods, increase or decrease, in its absolute discretion, the maximum
number of shares of the Company's Common Stock an Employee may purchase during
each Purchase Period of such Offering Period. Exercise of the Option shall occur
as provided in Section 8 hereof, unless the participant has withdrawn pursuant
to Section 10 hereof. The option shall expire on the last day of the Offering
Period.
8. Exercise of Option.
------------------
(a) Unless a participant withdraws from the Plan as provided in
Section 10 hereof, his or her option for the purchase of shares shall be
exercised automatically on the Exercise Date, and the maximum number of full
shares subject to option shall be purchased for such participant at the
applicable Purchase Price with the accumulated payroll deductions in his or her
account. No fractional shares shall be purchased; any payroll deductions
accumulated in a participant's account which are not sufficient to purchase a
full share shall be retained in the participant's account for the subsequent
Purchase Period or Offering Period, subject to earlier withdrawal by the
participant as provided in Section 10 hereof. Any other monies left over in a
participant's account after the Exercise Date shall be returned to the
participant. During a participant's lifetime, a participant's option to purchase
shares hereunder is exercisable only by him or her.
(b) If the Board determines that, on a given Exercise Date, the
number of shares with respect to which options are to be exercised may exceed
(i) the number of shares of Common Stock that were available for sale under the
Plan on the Enrollment Date of the applicable Offering Period, or (ii) the
number of shares available for sale under the Plan on such Exercise Date, the
Board may in its sole discretion (x) provide that the Company shall make a pro
rata allocation of the shares of Common Stock available for purchase on such
Enrollment Date or Exercise Date, as applicable, in as uniform a manner as
shall be practicable and as it shall determine in its sole discretion to be
equitable among all participants exercising options to purchase Common Stock on
such Exercise Date, and continue all Offering Periods then in effect, or (y)
provide that the Company shall make a pro rata allocation of the shares
available for purchase on such Enrollment Date or Exercise Date, as applicable,
in as uniform a manner as shall be practicable and as it shall determine in its
sole discretion
<PAGE>
to be equitable among all participants exercising options to purchase Common
Stock on such Exercise Date, and terminate any or all Offering Periods then in
effect pursuant to Section 20 hereof. The Company may make pro rata allocation
of the shares available on the Enrollment Date of any applicable Offering Period
pursuant to the preceding sentence, notwithstanding any authorization of
additional shares for issuance under the Plan by the Company's shareholders
subsequent to such Enrollment Date.
9. Delivery. As promptly as practicable after each Exercise Date in which
--------
a purchase of shares occurs, the Company shall arrange the delivery to each
participant, as appropriate, of a certificate representing the shares purchased
upon exercise of his or her option.
10. Withdrawal.
----------
(a) A participant may withdraw all but not less than all the payroll
deductions credited to his or her account and not yet used to exercise his or
her option under the Plan at any time by giving written notice to the Company in
the form of Exhibit B to this Plan. All of the participant's payroll deductions
credited to his or her account shall be paid to such participant promptly after
receipt of notice of withdrawal and such participant's option for the Offering
Period shall be automatically terminated, and no further payroll deductions for
the purchase of shares shall be made for such Offering Period. If a participant
withdraws from an Offering Period, payroll deductions shall not resume at the
beginning of the succeeding Offering Period unless the participant delivers to
the Company a new subscription agreement.
(b) A participant's withdrawal from an Offering Period shall not have
any effect upon his or her eligibility to participate in any similar plan which
may hereafter be adopted by the Company or in succeeding Offering Periods which
commence after the termination of the Offering Period from which the participant
withdraws.
11. Termination of Employment.
-------------------------
Upon a participant's ceasing to be an Employee, for any reason, he or
she shall be deemed to have elected to withdraw from the Plan and the payroll
deductions credited to such participant's account during the Offering Period but
not yet used to exercise the option shall be returned to such participant or, in
the case of his or her death, to the person or persons entitled thereto under
Section 15 hereof, and such participant's option shall be automatically
terminated. The preceding sentence notwithstanding, a participant who receives
payment in lieu of notice of termination of employment shall be treated as
continuing to be an Employee for the participant's customary number of hours
per week of employment during the period in which the participant is subject to
such payment in lieu of notice.
12. Interest. No interest shall accrue on the payroll deductions of a
--------
participant in the Plan.
<PAGE>
13. Stock.
-----
(a) Subject to adjustment upon changes in capitalization of the
Company as provided in Section 19 hereof, the maximum number of shares of the
Company's Common Stock which shall be made available for sale under the Plan
shall be 500,000 shares, plus an annual increase to be added on the first day of
the Company's fiscal year beginning in 2000 equal to the lesser of (i) 750,000
shares, (ii) 3% of the outstanding shares on such date or (iii) a lesser amount
determined by the Board.
(b) The participant shall have no interest or voting right in shares
covered by his option until such option has been exercised.
(c) Shares to be delivered to a participant under the Plan shall be
registered in the name of the participant or in the name of the participant and
his or her spouse.
14. Administration. The Plan shall be administered by the Board or a
--------------
committee of members of the Board appointed by the Board. The Board or its
committee shall have full and exclusive discretionary authority to construe,
interpret and apply the terms of the Plan, to determine eligibility and to
adjudicate all disputed claims filed under the Plan. Every finding, decision and
determination made by the Board or its committee shall, to the full extent
permitted by law, be final and binding upon all parties.
15. Designation of Beneficiary.
--------------------------
(a) A participant may file a written designation of a beneficiary who
is to receive any shares and cash, if any, from the participant's account under
the Plan in the event of such participant's death subsequent to an Exercise
Date on which the option is exercised but prior to delivery to such participant
of such shares and cash. In addition, a participant may file a written
designation of a beneficiary who is to receive any cash from the participant's
account under the Plan in the event of such participant's death prior to
exercise of the option. If a participant is married and the designated
beneficiary is not the spouse, spousal consent shall be required for such
designation to be effective.
(b) Such designation of beneficiary may be changed by the participant
at any time by written notice. In the event of the death of a participant and in
the absence of a beneficiary validly designated under the Plan who is living at
the time of such participant's death, the Company shall deliver such shares
and/or cash to the executor or administrator of the estate of the participant,
or if no such executor or administrator has been appointed (to the knowledge of
the Company), the Company, in its discretion, may deliver such shares and/or
cash to the spouse or to any one or more dependents or relatives of the
participant, or if no spouse, dependent or relative is known to the Company,
then to such other person as the Company may designate.
16. Transferability. Neither payroll deduction credited to a participant's
---------------
account nor any rights with regard to the exercise of an option or to receive
shares under the Plan may be assigned, transferred, pledged or otherwise
disposed of in any way (other than by will, the laws of descent and
<PAGE>
distribution or as provided in Section 15 hereof) by the participant. Any such
attempt at assignment, transfer, pledge or other disposition shall be without
effect, except that the Company may treat such act as an election to withdraw
funds from an Offering Period in accordance with Section 10 hereof.
17. Use of Funds. All payroll deductions received or held by the Company
------------
under the Plan may be used by the Company for any corporate purpose, and the
Company shall not be obligated to segregate such payroll deductions.
18. Reports. Individual accounts shall be maintained for each participant
-------
in the Plan. Statements of account shall be given to participating Employees at
least annually, which statements shall set forth the amounts of payroll
deductions, the Purchase Price, the number of shares purchased and the remaining
cash balance, if any.
19. Adjustments Upon Changes in Capitalization, Dissolution, Liquidation,
---------------------------------------------------------------------
Merger or Asset Sale.
--------------------
(a) Changes in Capitalization. Subject to any required action by the
-------------------------
shareholders of the Company, the Reserves, the maximum number of shares each
participant may purchase each Purchase Period (pursuant to Section 7), as well
as the price per share and the number of shares of Common Stock covered by
each option under the Plan which has not yet been exercised shall be
proportionately adjusted for any increase or decrease in the number of issued
shares of Common Stock resulting from a stock split, reverse stock split, stock
dividend, combination or reclassification of the Common Stock, or any other
increase or decrease in the number of shares of Common Stock effected without
receipt of consideration by the Company; provided, however, that conversion of
any convertible securities of the Company shall not be deemed to have been
"effected without receipt of consideration". Such adjustment shall be made by
the Board, whose determination in that respect shall be final, binding and
conclusive. Except as expressly provided herein, no issuance by the Company of
shares of stock of any class, or securities convertible into shares of stock of
any class, shall affect, and no adjustment by reason thereof shall be made with
respect to, the number or price of shares of Common Stock subject to an option.
(b) Dissolution or Liquidation. In the event of the proposed
--------------------------
dissolution or liquidation of the Company, the Offering Period then in progress
shall be shortened by setting a new Exercise Date (the "New Exercise Date"), and
shall terminate immediately prior to the consummation of such proposed
dissolution or liquidation, unless provided otherwise by the Board. The New
Exercise Date shall be before the date of the Company's proposed dissolution or
liquidation. The Board shall notify each participant in writing, at least ten
(10) business days prior to the New Exercise Date, that the Exercise Date for
the participant's option has been changed to the New Exercise Date and that the
participant's option shall be exercised automatically on the New Exercise Date,
unless prior to such date the participant has withdrawn from the Offering Period
as provided in Section 10 hereof.
(c) Merger or Asset Sale. In the event of a proposed sale of all or
--------------------
substantially all of the assets of the Company, or the merger of the Company
with or into another corporation, each
<PAGE>
outstanding option shall be assumed or an equivalent option substituted by the
successor corporation or a Parent or Subsidiary of the successor corporation. In
the event that the successor corporation refuses to assume or substitute for the
option, any Purchase Periods then in progress shall be shortened by setting a
new Exercise Date (the "New Exercise Date") and any Offering Periods then in
progress shall end on the New Exercise Date. The New Exercise Date shall be
before the date of the Company's proposed sale or merger. The Board shall
notify each participant in writing, at least ten (10) business days prior to the
New Exercise Date, that the Exercise Date for the participant's option has been
changed to the New Exercise Date and that the participant's option shall be
exercised automatically on the New Exercise Date, unless prior to such date the
participant has withdrawn from the Offering Period as provided in Section 10
hereof.
20. Amendment or Termination.
------------------------
(a) The Board of Directors of the Company may at any time and for any
reason terminate or amend the Plan. Except as provided in Section 19 hereof, no
such termination can affect options previously granted, provided that an
Offering Period may be terminated by the Board of Directors on any Exercise Date
if the Board determines that the termination of the Offering Period or the Plan
is in the best interests of the Company and its shareholders. Except as provided
in Section 19 and this Section 20 hereof, no amendment may make any change in
any option theretofore granted which adversely affects the rights of any
participant. To the extent necessary to comply with Section 423 of the Code (or
any successor rule or provision or any other applicable law, regulation or stock
exchange rule), the Company shall obtain shareholder approval in such a manner
and to such a degree as required.
(b) Without shareholder consent and without regard to whether any
participant rights may be considered to have been "adversely affected," the
Board (or its committee) shall be entitled to change the Offering Periods, limit
the frequency and/or number of changes in the amount withheld during an Offering
Period, establish the exchange ratio applicable to amounts withheld in a
currency other than U.S. dollars, permit payroll withholding in excess of the
amount designated by a participant in order to adjust for delays or mistakes in
the Company's processing of properly completed withholding elections,
establish reasonable waiting and adjustment periods and/or accounting and
crediting procedures to ensure that amounts applied toward the purchase of
Common Stock for each participant properly correspond with amounts withheld from
the participant's Compensation, and establish such other limitations or
procedures as the Board (or its committee) determines in its sole discretion
advisable which are consistent with the Plan.
(c) In the event the Board determines that the ongoing operation of
the Plan may result in unfavorable financial accounting consequences, the Board
may, in its discretion and, to the extent necessary or desirable, modify or
amend the Plan to reduce or eliminate such accounting consequence including, but
not limited to:
(1) altering the Purchase Price for any Offering Period
including an Offering Period underway at the time of the change in Purchase
Price;
<PAGE>
(2) shortening any Offering Period so that Offering Period ends
on a new Exercise Date, including and Offering Period underway at the time of
the Board action; and
(3) allocating shares.
Such modifications or amendments shall not require stockholder approval or the
consent of any Plan participants.
21. Notices. All notices or other communications by a participant to the
-------
Company under or in connection with the Plan shall be deemed to have been duly
given when received in the form specified by the Company at the location, or by
the person, designated by the Company for the receipt thereof.
22. Conditions Upon Issuance of Shares. Shares shall not be issued with
----------------------------------
respect to an option unless the exercise of such option and the issuance and
delivery of such shares pursuant thereto shall comply with all applicable
provisions of law, domestic or foreign, including, without limitation, the
Securities Act of 1933, as amended, the Securities Exchange Act of 1934, as
amended, the rules and regulations promulgated thereunder, and the requirements
of any stock exchange upon which the shares may then be listed, and shall be
further subject to the approval of counsel for the Company with respect to such
compliance.
As a condition to the exercise of an option, the Company may require
the person exercising such option to represent and warrant at the time of any
such exercise that the shares are being purchased only for investment and
without any present intention to sell or distribute such shares if, in the
opinion of counsel for the Company, such a representation is required by any of
the aforementioned applicable provisions of law.
23. Term of Plan. The Plan shall become effective upon the earlier to
------------
occur of its adoption by the Board of Directors or its approval by the
shareholders of the Company. It shall continue in effect for a term of ten (10)
years unless sooner terminated under Section 20 hereof.
24. Automatic Transfer to Low Price Offering Period. To the extent
-----------------------------------------------
permitted by any applicable laws, regulations, or stock exchange rules if the
Fair Market Value of the Common Stock on any Exercise Date in an Offering Period
is lower than the Fair Market Value of the Common Stock on the Enrollment Date
of such Offering Period, then all participants in such Offering Period shall be
automatically withdrawn from such Offering Period immediately after the exercise
of their option on such Exercise Date and automatically re-enrolled in the
immediately following Offering Period as of the first day thereof.
<PAGE>
EXHIBIT A
---------
LIQUID AUDIO, INC.
1999 EMPLOYEE STOCK PURCHASE PLAN
SUBSCRIPTION AGREEMENT
____ Original Application Enrollment Date: _______________
____ Change in Payroll Deduction Rate
____ Change of Beneficiary(ies)
1. ______________________ hereby elects to participate in the Liquid Audio,
Inc. 1999 Employee Stock Purchase Plan (the "Employee Stock Purchase Plan")
and subscribes to purchase shares of the Company's Common Stock in
accordance with this Subscription Agreement and the Employee Stock Purchase
Plan.
2. I hereby authorize payroll deductions from each paycheck in the amount of
____% of my Compensation on each payday (from 0 to 15%) during the Offering
Period in accordance with the Employee Stock Purchase Plan. (Please note
that no fractional percentages are permitted.)
3. I understand that said payroll deductions shall be accumulated for the
purchase of shares of Common Stock at the applicable Purchase Price
determined in accordance with the Employee Stock Purchase Plan. I
understand that if I do not withdraw from an Offering Period, any
accumulated payroll deductions will be used to automatically exercise my
option.
4. I have received a copy of the complete Employee Stock Purchase Plan. I
understand that my participation in the Employee Stock Purchase Plan is in
all respects subject to the terms of the Plan. I understand that my ability
to exercise the option under this Subscription Agreement is subject to
shareholder approval of the Employee Stock Purchase Plan.
5. Shares purchased for me under the Employee Stock Purchase Plan should be
issued in the name(s) of (Employee or Employee and Spouse only):.
6. I understand that if I dispose of any shares received by me pursuant to the
Plan within 2 years after the Enrollment Date (the first day of the
Offering Period during which I purchased such shares) or one year after the
Exercise Date, I will be treated for federal income tax purposes as having
received ordinary income at the time of such disposition in an amount equal
to the excess of the fair market value of the shares at the time such
shares were purchased by me over the price which I paid for the shares. I
-
hereby agree to notify the Company in writing
---------------------------------------------
A-1
<PAGE>
within 30 days after the date of any disposition of my shares and I will make
- -----------------------------------------------------------------------------
adequate provision for Federal, state or other tax withholding obligations, if
- ------------------------------------------------------------------------------
any, which arise upon the disposition of the Common Stock. The Company may, but
- ---------------------------------------------------------
will not be obligated to, withhold from my compensation the amount necessary to
meet any applicable withholding obligation including any withholding necessary
to make available to the Company any tax deductions or benefits attributable to
sale or early disposition of Common Stock by me. If I dispose of such shares at
any time after the expiration of the 2-year and 1-year holding periods, I
understand that I will be treated for federal income tax purposes as having
received income only at the time of such disposition, and that such income will
be taxed as ordinary income only to the extent of an amount equal to the
lesser of (1) the excess of the fair market value of the shares at the time of
such disposition over the purchase price which I paid for the shares, or (2) 15%
of the fair market value of the shares on the first day of the Offering Period.
The remainder of the gain, if any, recognized on such disposition will be taxed
as capital gain.
7. I hereby agree to be bound by the terms of the Employee Stock Purchase
Plan. The effectiveness of this Subscription Agreement is dependent upon my
eligibility to participate in the Employee Stock Purchase Plan.
8. In the event of my death, I hereby designate the following as my
beneficiary(ies) to receive all payments and shares due me under the
Employee Stock Purchase Plan:
NAME: (Please print) ___________________________________________________________
(First) (Middle) (Last)
__________________________________ _______________________________________
Relationship
_______________________________________
(Address)
A-2
<PAGE>
Employee's Social
Security Number:
________________________________________
Employee's Address:
________________________________________
________________________________________
________________________________________
I UNDERSTAND THAT THIS SUBSCRIPTION AGREEMENT SHALL REMAIN IN EFFECT THROUGHOUT
SUCCESSIVE OFFERING PERIODS UNLESS TERMINATED BY ME.
DATED: ___________________________ ________________________________________
Signature of Employee
________________________________________
Spouse's Signature (If beneficiary other
than spouse)
A-3
<PAGE>
EXHIBIT B
---------
LIQUID AUDIO, INC.
1999 EMPLOYEE STOCK PURCHASE PLAN
NOTICE OF WITHDRAWAL
The undersigned participant in the Offering Period of the Liquid Audio,
Inc. 1999 Employee Stock Purchase Plan which began on __________, ______ (the
"Enrollment Date") hereby notifies the Company that he or she hereby withdraws
from the Offering Period. He or she hereby directs the Company to pay to the
undersigned as promptly as practicable all the payroll deductions credited to
his or her account with respect to such Offering Period. The undersigned
understands and agrees that his or her option for such Offering Period will be
automatically terminated. The undersigned understands further that no further
payroll deductions will be made for the purchase of shares in the current
Offering Period and the undersigned shall be eligible to participate in
succeeding Offering Periods only by delivering to the Company a new Subscription
Agreement.
Name and Address of Participant:
________________________________________
________________________________________
________________________________________
Signature:
________________________________________
Date: __________________________________
B-1
<PAGE>
EXHIBIT 10.4
LIQUID AUDIO
May 21, 1998
Mr. Dan Meyers
Director of Internet Licensing
SESAC
55 Music Square East
Nashville, TN 37203
Re: SESAC/Liquid Audio - Strategic Alliance Agreement (the "Agreement")
Dear Dan:
The following sets out the terms of the Agreement between SESAC and Liquid Audio
with respect to cooperation on issuing SESAC performance license applications to
web sites using Liquid Audio software:
* Liquid Audio will provide SESAC with a list of web sites utilizing Liquid
Audio's transmission technology (the "List"), and shall update the List
monthly. SESAC will advise Liquid Audio which web sites on the List are
licensed by SESAC (the "Licensed Sites") on a calendar quarterly basis.
* Liquid Audio shall make efforts to assist SESAC in securing license
agreements with the web sites on the List, including, for example, by
distributing the SESAC license agreement and supporting material to the
operators of those web sites.
* Liquid Audio will provide SESAC with reports showing all transmissions of
musical works (whether in whole or in part and whether in streaming or
other format) originating from Licensed Sites on the List. The reports
shall include the title, performing artist, writer and music publisher, if
known, for each work, as well as the number of times each work was
transmitted from each Licensed Site on the List, and the file format in
which the transmission occurred (the "Data").
* Liquid Audio will provide SESAC with the Data separately for each licensed
site on the List within 30 days of the end of each calendar quarter for the
performances in that quarter.
* Liquid Audio will deliver the Data electronically in the form of a text
file (.txt).
<PAGE>
* SESAC and Liquid Audio shall each treat the terms of this Agreement and any
and all information exchanged as a result of this Agreement, including the
identity of the web sites on the List, the Licensed Sites, and the Data, as
completely confidential.
* This Agreement commences on June 1, 1998 and ends on May 31, 1999, and
continues
- --
after that for additional terms of twelve months each unless either party
terminates it by giving the other party notice at least thirty days prior
to the end of any such twelve month period.
* Liquid Audio and SESAC will issue a joint public announcement (the
"Announcement") of this Agreement only after both parties have signed the
Agreement and approved the language and the release date of the
Announcement.
If this letter sets forth our Agreement, as you understand it, please so
indicate by countersigning and returning one fully executed copy to me for my
files.
Sincerely,
Robert Flynn
Vice President of Business Development
Liquid Audio
Accepted and Agreed to by:
/s/ Dan Meyer Date: June 1, 1998
- ---------------------------------- --------------------------
Dan Meyer
Manager of Internet Licensing
/s/ [SIGNATURE ILLEGIBLE] Date: July 8, 1998
- ---------------------------------- --------------------------
Liquid Audio
<PAGE>
EXHIBIT 10.5
SOFTWARE CROSS LICENSE AGREEMENT
Terms and Conditions
This SOFTWARE CROSS LICENSE AGREEMENT ("Agreement") is entered into by and
between Liquid Audio, having its principal place of business at 810 Winslow
Street Redwood City, CA 94063 ("Liquid Audio") and Adaptec, Inc., which includes
its wholly-owned subsidiaries and having its principal place of business at 691
South Milpitas Boulevard, Milpitas, CA 95035 ("Adaptec") and is effective the
12th day of June, ("Effective Date") 1998.
RECITALS
A. Liquid Audio is the developer and owner of the Liquid Music Player
CD software ("Player").
B. Adaptec is the developer and owner of Easy CD Creator version 4.x
and Toast version 4.x ("CD Software").
C. Adaptec wishes to obtain and Liquid Audio wishes to grant to
Adaptec the right to combine Player with CD Software as a commercial product
package for distribution, and to distribute an upgrade to CD Software that will
include Player.
D. Liquid Audio wishes to obtain and Adaptec wishes to grant to
Liquid Audio the right to distribute a subset of CD Software as an upgrade to
Player.
NOW, THEREFORE, for the mutual promises contained herein and for other
valuable consideration, the parties agree as follows.
1. LICENSE
-------
1.1 To Adaptec.
----------
1.1.1 License Grant. Liquid Audio grants to Adaptec a perpetual,
-------------
worldwide license to copy or have copied by a manufacturing contractor, Player,
and to distribute it to its customers, directly or through its distribution
network as part of a package which will include at minimum Player and CD
Software "(Bundle"). Liquid Audio also grants to Adaptec a perpetual, worldwide
license to copy or have copied by a manufacturing contractor, Player and to
distribute it to its customers, directly or through its distribution network as
part of a package which is an upgrade to CD Software ("CD Software Upgrade").
1.1.2 Exclusive License. During the term of the Agreement,
-----------------
Liquid Audio will not license Player to any other party to include in a Bundle
containing such third party's product. During the term of the Agreement, Liquid
Audio will not
Initials: /s/ [SIGNATURE ILLEGIBLE]
---------------------------
<PAGE>
enter into any licensing agreement with any manufacturer or distributor of CD
recording software or hardware.
1.1.3 Sub-license. Liquid Audio grants to Adaptec the right to
-----------
sub-license Player, as part of a Bundle, to its OEMs.
1.1.4 Limitation. This license is limited to a Bundle or CD
----------
Software Upgrade that is connected to the current version of CD Software, and
does not include any subsequent versions of CD Software.
1.2 To Liquid Audio
---------------
1.2.1 License Grant. Adaptec grants to Liquid Audio a perpetual,
worldwide, non-exclusive license to copy or have copied by a manufacturing
contractor, and without the right to sub-license, a subset of CD Software, which
is defined by the file listing indicated on Exhibit A ("Subset"), and to
---------
distribute the Subset to its customers, directly or through its distribution
network as part of Player.
2. ROYALTIES
---------
2.1 Royalties to Liquid Audio. In payment for the license for Player,
-------------------------
Adaptec shall pay to Liquid Audio a one-time royalty fee covering all rights
described above of [*] payable as follows. There will be [*] the first payable
upon execution of this Agreement, the second payable upon delivery to Adaptec of
the Player code, is defined by the file listing indicated on Exhibit B, by
---------
Liquid Audio, and the third payable six (6) months after the delivery of Player
to Adaptec.
2.2 Royalties to Adaptec. In payment for the license for the Subset,
--------------------
Liquid Audio shall pay to Adaptec a per-unit fee of [*] on each copy of the
Player that is sold at a price of less than [*] Such royalties will be due and
owing in the end of each calendar quarter. Adaptec reserves the right to charge
Liquid Audio the lesser of one and one-half percent (1 1/2%) per month, or the
maximum amount permissible under law, on any royalties not paid within forty-
five (45) days after the end of the calendar quarter in which such royalties
accrued.
2.3 Reports to Adaptec. Within forty-five (45) days after the end of
------------------
each calendar quarter, Liquid Audio will deliver to Adaptec a written report
("Report") stating the (i) number of copies of the Subset made by Liquid Audio
during that calendar quarter; (ii) the number of units of Player shipped by
Liquid Audio incorporating the Subset during the calendar quarter; and (iii)
such other information as Adaptec may from time to time require. Reports will be
signed by a corporate officer of Liquid Audio, and will be sent to the following
address:
Initials: /s/ [SIGNATURE ILLEGIBLE]
---------------------------
* Certain information in this Exhibit has been omitted and filed separately
with the Commission. Confidential treatment has been requested with respect
to the omitted portions.
2
<PAGE>
Revenue Accounting Manager
Adaptec, Inc.
691 South Milpitas Blvd.
Milpitas, CA 95035
Liquid Audio will deliver a Report for each calendar quarter, even if no
royalties were incurred during that calendar quarter.
2.4 Reports to Liquid Audio. Within forty-five (45) days after the
-----------------------
end of each calendar quarter, Adaptec will deliver to Liquid Audio a written
report stating the (i) number or copies of Player made by Adaptec during the
calendar quarter; (ii) the number of units of Bundle or CD Software Upgrade
which included Player distributed or sold during the calendar quarter; and (iii)
such other information as Liquid Audio may from time to time require.
3. AUDIT: TAXES
------------
3.1 Audit. Liquid Audio will maintain at Liquid Audio's principal
-----
office such accurate books and records relating to the Subset as will be
sufficient to confirm Liquid Audio's compliance with this Agreement. Liquid
Audio will permit Adaptec and/or Adaptec's representatives to audit such books
and records as may reasonably be required to verify compliance with this
Agreement, at such times as Adaptec may reasonably request, upon reasonable
written notice. Adaptec will pay the cost of audits unless (i) the number of
actual copies of the Player sold by Liquid Audio subject to a royalty under
Section 2.2 exceeds the number of units of Player reported shipped during the
audit period by five percent (5%), or (ii) the number of copies of Subset made
exceeds by more than five percent (5%) the number of copies of Player containing
Subset that were shipped; in which event Liquid Audio will reimburse Adaptec for
the cost of such audits in addition to all other amounts to which Adaptec may be
legally entitled as a result of such under reported copies. Audits will not
unreasonably interfere with Liquid Audio's business activities.
3.2 Taxes. Each party shall be responsible for the payment of all
-----
export, excise, sales, use, property and other taxes based upon the transactions
under this Agreement or the fees paid hereunder, other than taxes imposed upon
or measured by net income.
4. PROPRIETARY OWNERSHIP RIGHTS
----------------------------
4.1 Adaptec Ownership. Adaptec will retain all ownership, right,
----------------
title and interest in and to all current and hereafter existing versions of and
modifications to CD Software, including all copies made hereunder and the
trademarks.
Initials: /s/ [SIGNATURE ILLEGIBLE]
---------------------------
3
<PAGE>
4.2 Liquid Audio Ownership. Liquid Audio will retain all ownership,
----------------------
right, title and interest in and to all current and hereafter existing versions
of and modifications to Player, including all copies made hereunder.
5. WARRANTY
--------
5.1 Warranty Exclusion. NEITHER PARTY MAKES ANY WARRANTY OF ANY KIND
------------------
WITH REGARD TO THE SOFTWARE. EACH PARTY EXPRESSLY DISCLAIMS ANY OTHER
WARRANTIES, EXPRESS OR IMPLIED, INCLUDING ANY IMPLIED WARRANTIES OF
MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE, WHETHER ARISING IN LAW,
CUSTOM, CONDUCT OR OTHERWISE.
5.2 Support. Adaptec shall be responsible for all technical support
-------
for products sold by Adaptec. Liquid Audio shall be responsible for all
technical support for products sold by Liquid Audio. Adaptec will provide to
Liquid Audio such support as is necessary to integrate Player into CD Software.
6. LIMITATION OF LIABILITY
-----------------------
6.1 Limitation. IN NO EVENT WILL EITHER PARTY BE LIABLE FOR ANY LOSS
----------
OF PROFITS, LOSS OF USE, CONSEQUENTIAL, SPECIAL OR INCIDENTAL DAMAGES ARISING
UNDER THIS AGREEMENT, EVEN IF THE OTHER PARTY HAS BEEN ADVISED OF THE
POSSIBILITY OF SUCH DAMAGES. IN NO EVENT WILL ANY DAMAGES ATTRIBUTABLE TO
ADAPTEC EXCEED THE AMOUNT OF PAYMENTS MADE TO ADAPTEC UNDER THIS AGREEMENT.
6.2 Force Majeure. Except for payment of monies due under this
-------------
Agreement, nonperformance of either party will be excused to the extent that
performance is rendered impossible by fire, earthquake, flood, governmental acts
or orders or restrictions, failure of suppliers, or any other reason where
failure to perform is beyond the control and not caused by the negligence of the
nonperforming party.
7. PROPRIETARY RIGHTS INDEMNIFICATION
----------------------------------
7.1 Adaptec Indemnity. Adaptec agrees to defend, or at Adaptec's
-----------------
option settle, at Adaptec's own expense and under Adaptec's sole control, any
claim, suit or proceeding brought against Liquid Audio on the issue of
infringement of any United States patent, copyright or trade secret by the
Subset, subject to the limitations herein. Adaptec will be relieved of the
foregoing obligations unless Liquid Audio (i) notifies Adaptec promptly in
writing of such claim, suit or proceeding, and (ii) gives Adaptec information
and assistance to any such claim, suit or proceeding. If the Subset, or any
Initials: /s/ [SIGNATURE ILLEGIBLE]
---------------------------
4
<PAGE>
part thereof, is finally adjudicatively determined to be, or in Adaptec's sole
opinion may become, the subject of any claim, suit or proceeding for
infringement of any United States patent, copyright or trade secret or if the
distribution or use of the Subset, or any part thereof, is enjoined, then
Adaptec will, at Adaptec's option and expense, and as Liquid Audio's sole
remedy: (i) procedure for Liquid Audio and its customers the right to distribute
or use the Subset under such proprietary rights; or (ii) replace the Subset with
other suitable software; or (iii) suitably modify the Subset; or (iv) if the use
of the Subset is prevented by injunction, remove the Subset, and refund the fees
paid therefor by Liquid Audio. Adaptec will not be liable for any costs or
expense incurred without Adaptec's prior written authorization.
7.2 Liquid Audio Indemnity. Liquid Audio agrees to defend, or at
----------------------
Liquid Audio's option settle, at Liquid Audio's own expense and under Liquid
Audio's sole control, any claim, suit or proceeding brought against Adaptec on
the issue of infringement of any United States patent, copyright or trade secret
by Player, subject to the limitations herein. Liquid Audio will be relieved of
the foregoing obligations unless Adaptec (i) notifies Liquid Audio promptly in
writing of such claim, suit or proceeding, and (ii) gives Liquid Audio
information and assistance to any such claim, suit or proceeding. If Player, or
any part thereof, is finally adjudicatively determined to be, or in Liquid
Audio's sole opinion may become, the subject of any claim, suit or proceeding
for infringement of any United States patent, copyright or trade secret or if
the distribution or use of Player, or any part thereof, is enjoined, then Liquid
Audio will, at Liquid Audio's option and expense, and as Adaptec's sole remedy:
(i) procure for Adaptec and its customers the right to distribute or use the
Software under such proprietary rights; or (ii) replace Player with other
suitable software; or (iii) suitably modify Player; or (iv) if the use of Player
is prevented by injunction, remove Player, and refund the fees paid therefor by
Adaptec. Liquid Audio will not be liable for any costs or expense incurred
without Liquid Audio's prior written authorization.
7.3 Exclusive Remedy. THE-FOREGOING PROVISIONS OF THIS SECTION 7
----------------
STATE THE ENTIRE LIABILITY AND OBLIGATION OF EACH PARTY AND THE EXCLUSIVE REMEDY
OF EACH PARTY WITH RESPECT TO ANY ALLEGED INTELLECTUAL PROPERTY RIGHTS
INFRINGEMENT BY PLAYER OR CD SOFTWARE.
8. CONFIDENTIALITY. All disclosures of Confidential Information by and
---------------
between the parties shall be governed by that certain Master Mutual
Nondisclosure Agreement signed by the parties on February 9, 1998, a copy of
which is attached hereto as Exhibit C.
---------
9. TERM: TERMINATION
-----------------
9.1 Term. This Agreement will commence on the Effective Date and
----
continue for eighteen (18) months after such date, unless earlier terminated
under this
Initials: /s/ [SIGNATURE ILLEGIBLE]
---------------------------
5
<PAGE>
Section 9. The term of this Agreement may be extended for additional terms upon
written agreement of both parties.
9.2 Termination for Cause. If either party defaults in the
---------------------
performance of any material provision of this Agreement, then the non-defaulting
party may give written notice to the defaulting party that if the default is not
cured within thirty (30) days, then the Agreement will automatically terminate
at the end of such period. Any breach of the provisions in Sections 1, 4, or 8
shall be considered breaches which cannot be cured and may be the basis for the
immediate termination of this Agreement.
9.3 Bankruptcy. If Liquid Audio files a petition in bankruptcy or is
----------
adjudicated a bankrupt, or if a petition in bankruptcy is filed against Liquid
Audio and such petition is not discharged within sixty (60) days of such filing,
or if Liquid Audio becomes insolvent, or makes an assignment for the benefit of
creditors or an arrangement pursuant to any bankruptcy law, or if Liquid Audio
discontinues its business or if a receiver is appointed for it or its business,
this Agreement will automatically terminate without any notice whatsoever being
necessary.
9.4 Acquisition. This Agreement will automatically terminate upon
-----------
notice in the event either party merges with another or is acquired, such that
the resulting entity is not directly controlled by the original party.
9.5 Survival. The obligations under Sections 4, 5, 6, 7, and 8, and
--------
the relevant portions of Sections 9 and 10, will survive any termination of this
Agreement. Unless this Agreement is terminated for cause in Section 9.2, the
obligations under Section 2 will survive termination of this Agreement.
9.6 Termination Effect. Within thirty (30) days after the termination
------------------
of this Agreement, each party will return to the other party any item embodying
any Confidential Information of the other party which may be entrusted to or
created by such party, and the master copy of Player or CD Software
(collectively, "Software") as was delivered to the other party. Unless this
Agreement was terminated for cause under Section 9.2, each party may dispose of
any Software in its inventory on the effective date of termination within a
period of ninety (90) days after such date. In the event either party owns
copies of the Software for its internal use, all such copies will be returned to
the other party upon termination of this Agreement. Termination of this
Agreement for any reason will not affect the rights of any end user to use the
Software under any license granted in accordance with this Agreement.
9.7 Additional Remedies. Except as expressly limited by this
-------------------
Agreement, termination of this Agreement will be without prejudice to any other
remedy which may be available to a party due to default of this Agreement.
Violation of obligations under this Agreement may cause irreparable harm and
damage which may not be recovered at law, and remedies for breach of this
Agreement may be awarded in equity through injunctive relief.
Initials: /s/ [SIGNATURE ILLEGIBLE]
---------------------------
6
<PAGE>
9.8 Right to Renew. At the end of the term of this agreement, unless
--------------
terminated for convenience or cause, Adaptec shall have the right to renew with
the following terms.
(i) Adaptec shall pay Liquid Audio [*] as an advance against
royalties, in three payments of [*] each, the first payment due upon execution
of the amendment to this Agreement renewing the license, subsequent payments in
six month intervals thereafter.
(ii) The per-unit royalty amount paid by Adaptec to Liquid Audio
shall be calculated by dividing the royalty payable under this Agreement, which
is [*] by the number of units sold by Adaptec during the term of this Agreement.
(iii) Royalty accounting shall be per standard procedures.
(iv) The limitation on the version number of CD Software, as
specified in Section 1.1.4 herein may be modified.
10. MISCELLANEOUS
-------------
10.1 Relationship. The relationship between the parties will be that
------------
of independent contractors. Nothing contained herein will be construed to imply
a joint venture, principal or agent relationship, or other joint relationship,
and neither party will have the rights, power or authority to create any
obligation, express or implied, on behalf of the other.
10.2 Governing Law. This Agreement will be governed in all respects
-------------
by the substantive laws of the State of California, United States of America,
exclusive of its conflicts of laws rules, as applied to agreements entered into
in California between California residents.
10.3 Jurisdiction; Venue. The parties expressly stipulate that all
-------------------
litigation under this Agreement will be brought in the state courts of the
County of Santa Clara, California, or in the U.S. District Court of the Northern
District of California.
10.4 Attorneys' Fees. In the event of any litigation by the parties
---------------
under this Agreement, the prevailing party will be entitled to costs and
reasonable attorneys' fees.
10.5 Assignment. Neither party will assign or otherwise transfer any
----------
of its rights, obligations or licenses hereunder without the prior written
consent of the other party, which shall not be unreasonably withheld. Subject to
the foregoing, the provisions
Initials: /s/ [SIGNATURE ILLEGIBLE]
---------------------------
* Certain information in this Exhibit has been omitted and filed separately
with the Commission. Confidential treatment has been requested with respect
to the omitted portions.
7
<PAGE>
of this Agreement will apply to and bind the successors and permitted assigns of
the parties.
10.6 Waiver. Failure by any party to enforce any of its rights under
------
this Agreement will not be deemed a waiver of any right which that party has
under this Agreement.
10.7 Notices. All notices, requests, consents and other
-------
communications hereunder will be in writing and delivered personally, by mail or
by facsimile (with facsimiles to be promptly confirmed in writing) or overnight
courier. All such written communications delivered by mail will be mailed,
postage prepaid, either by certified or registered, first-class mail or
overnight courier to the parties at their respective addresses as set forth on
the facing page of this Agreement, subject to the right of either party to
change its address by delivering written notice to the other. Such notices will
be deemed to be effective upon two (2) days following the date of mailing or
upon receipt if by facsimile or personal delivery.
10.8 Severability. Should any provisions of this Agreement contravene
------------
any law or valid regulation of any government having jurisdiction over the
parties, then such provision will be automatically terminated and performance
thereof by the parties waived, and all other provisions of this Agreement will
continue in full force and effect.
10.9 Export Compliance. Neither party will export, directly or
-----------------
indirectly, any Software to any country for which United States' laws or
regulations require an export license or other governmental approval, without
first obtaining such license or approval. Each party hereby agrees to indemnify
and hold the other party harmless from and against any losses, damages,
penalties or causes of action resulting from a violation of this Section.
10.10 Government Restricted Rights. The Software is subject to
----------------------------
restricted rights as follows. If the Software is acquired under the terms of a
GSA contract: use, reproduction or disclosure is subject to the restrictions set
forth in the applicable ADP Schedule contract. If the Software is acquired under
the terms of a DoD or civilian agency contract, use, duplication or disclosure
by the Government is subject to the restrictions of this Agreement in accordance
with 48 C.F.R. 12.212 of the Federal Acquisition Regulations and its successors
and 49 C.F.R. 227.7202-1 of the DoD FAR Supplement and its successors.
10.11 Entire Agreement; Amendment. This Agreement (including the
---------------------------
facing page and all Exhibits) reflects the entire agreement of the parties
regarding the subject matter hereof, and supersedes all prior and
contemporaneous agreements between the parties regarding such subject matter,
whether written or oral. This Agreement may not be amended, altered or changed
except by a writing signed by both parties. This Agreement is executed in the
English language.
Initials: /s/ [SIGNATURE ILLEGIBLE]
---------------------------
8
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
by their duly authorized representatives on the date(s) shown below.
ADAPTEC, INC. LIQUID AUDIO
/s/ [SIGNATURE ILLEGIBLE]
- ---------------------------
(Signature)
/s/ [SIGNATURE ILLEGIBLE]
- ---------------------------
(Print Name)
/s/ [SIGNATURE ILLEGIBLE]
- ---------------------------
(Title)
June 12, 1998
- ---------------------------
(Date)
9
<PAGE>
EXHIBIT A
---------
CD SOFTWARE SUBSET
------------------
Engine.DLL
Drivers.DLL
Easy CD Creator 4.0 API Version 1.0
Toast Lite Version 4.0 Engine
Initials: /s/ [SIGNATURE ILLEGIBLE]
---------------------------
10
<PAGE>
EXHIBIT B
---------
PLAYER SOFTWARE
---------------
Liquid Player API for Windows and Macintosh
LMPSETUP.EXE
LMPINSTALL.EXE
LIQUIDAUDIO.LIB
LTAENGINE.DLL
Initials: /s/ [SIGNATURE ILLEGIBLE]
---------------------------
11
<PAGE>
EXHIBIT C
---------
MASTER MUTUAL NONDISCLOSURE AGREEMENT
-------------------------------------
(ATTACHED)
Initials: /s/ [SIGNATURE ILLEGIBLE]
---------------------------
12
<PAGE>
ADAPTEC
NDA#6841
----
MASTER MUTUAL NONDISCLOSURE AGREEMENT
THIS AGREEMENT is made on Feb 9th 1998 between Adaptec, Inc. ("Adaptec"),
and LIQUID AUDIO ("Company"). This Agreement will apply to all divisions or
locations of Adaptec and Company, unless specified to the contrary in writing by
either party.
1. Purpose. The parties wish to explore potential business opportunities,
-------
under which each may disclose Confidential Information to the other. The
receiving party agrees not to use the Confidential Information of the other for
any purpose other than that set forth in writing. The parties further agree not
to copy, alter, modify, disassemble, reverse engineer or decompile any of the
Confidential Information unless permitted in writing by the disclosing party.
Nothing herein shall be deemed to restrict the disclosing party's use of its own
Confidential Information.
2. Definition. "Confidential Information" means any information, data or
----------
know-how of either party considered confidential or proprietary by the
disclosing party, disclosed, in writing, orally, or by access to the disclosing
party's premises, which is designated in writing as confidential, or if given
orally, is confirmed promptly in writing as confidential. Confidential
Information includes, without limitation, information identified on a
Confidential Information Transmittal Record (a "CITR") signed by the parties.
Confidential Information does not include that which (i) is in the receiving
party's possession at the time of disclosure, (ii) is or becomes part of the
public knowledge or literature, not as a result of any action or inaction of the
receiving party, (iii) is approved for release by written authorization of the
disclosing party, or (iv) is independently developed by the receiving party
without access to the Confidential Information.
3. Non-Disclosure. Each party will only disclose Confidential Information
--------------
to those employees who have a need to know such Confidential Information and who
are bound to retain the confidentiality under provisions similar to this
Agreement. Neither party will disclose Confidential Information to any third
parties. Each party will maintain the Confidential Information with at least the
same degree of care it uses to protect its own proprietary information, but no
less than reasonable care under the circumstances. Any copies of the
Confidential Information authorized to be made in writing will be identified as
belonging to the disclosing party and prominently marked "Confidential". In the
event the receiving party is required to disclose Confidential Information
pursuant to a judicial or governmental order, such party will promptly notify
the disclosing party to allow intervention in response to such order. Each party
will advise the other party in writing of any misappropriation or misuse of the
Confidential Information of which the notifying party becomes aware.
4. No License, No Warranty. No license is granted to either party under
-----------------------
any patents, copyrights, mask work rights, trademarks or other proprietary
rights of the other. All information provided hereunder is "AS IS" and without
warranty. Title and right to possess Confidential Information will remain in the
disclosing party.
5. Injunctive Relief. If the receiving party fails to comply with any of
-----------------
its obligations under this Agreement, the disclosing party will suffer
immediate, irreparable harm due to the unique nature of the Confidential
Information. Monetary damages will be inadequate to compensate the disclosing
party for any such breach, and the disclosing party may enforce this Agreement
by seeking injunctive or other equitable remedies in addition to any available
legal remedies.
6. Term. This Agreement will become effective as of the date written above
----
and will continue for a period of five (5) years unless earlier terminated.
Either party may terminate this Agreement at any time without cause upon written
notice to the other; however, the confidentiality obligation will survive
expiration or termination of this Agreement for a period of three years from the
date of the disclosure of each particular item.
7. Attorneys' Fees; Jurisdiction. In the event of a litigation between the
-----------------------------
parties, the prevailing party will be entitled to reasonable attorneys' fees and
all costs incurred in enforcing this Agreement. The parties agree that this
Agreement and the transactions hereunder will be governed by California law,
excluding its conflict of laws rules. The parties stipulate that litigation
under this Agreement will be brought in the state courts of Santa Clara County,
California or, for matters involving federal jurisdiction, in the United States
District Court for the Northern District of California.
8. General. This Agreement, and any CITRs executed from time to time
-------
hereunder, sets forth the entire understanding and agreement of the parties with
respect to the subject matter hereof and supersedes all other oral or written
representations and understandings. The failure to enforce any right not be
deemed a waiver of such or any other right, including the right to end a
subsequent breach of the same obligation. This Agreement may be amended
modified only by a writing signed by the parties. This Agreement will not
construed as a teaming agreement, joint venture or other business relationship
This Agreement will be binding upon the successors and assigns of both parties.
The undersigned represent and warrant that they have the authorization to
enter into this Agreement on behalf of the person, entity or corporation
above their name.
ADAPTEC, INC.
By: /s/ DAVID ULMER
-------------------------------------------------
(Signature)
Print Name: DAVID ULMER
-----------------------------------------
Title: Acting General Manager
----------------------------------------------
691 South Milpitas Boulevard
Milpitas, CA 95035
LIQUID AUDIO
- ----------------------------------------------------
COMPANY
By: /s/ ROBERT FLYNN
-------------------------------------------------
(Signature)
Print Name: ROBERT FLYNN
-----------------------------------------
Title: VP, Business Development
Address: 810 Winslow Street
--------------------------------------------
Redwood City, CA 94063
ADAPTEC LEGAL COPY
<PAGE>
EXHIBIT 10.6
LIQUID MUSIC NETWORK
--------------------
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
LICENSED WEB SITES: [insert Licensee URLs]
LICENSE PERIOD: One year from Effective Date
LICENSE GRANTED: Web site redistribution
ANNUAL SYNDICATION FEE: $ 0
ADVERTISING REVENUE: 100% retention of Licensee Advertising.
DIGITAL MUSIC COMMERCE REVENUE: Licensee receives Net Revenue from sales.
CD/TANGIBLE MUSIC COMMERCE REVENUE: 50% of any referral fees received.
MUSICPLAYER & MUSICPLAYER CD: 10% of Music Player CD net revenue.
LOGO/ICON LICENSE: Yes
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:_________________________
1
<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 and advertising 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 will promote Licensee by
------------------------------
including a logo and copy in a high profile location on Liquid Audio's web site,
and Licensee will promote Liquid Audio by including a logo and copy in a high
profile location on Licensee's web site. Liquid Audio and Licensee will each
promote the other and the relationship described within the agreement
2
<PAGE>
at any appropriate trade shows. Liquid Audio and Licensee will joint 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 will 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.
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.
3
<PAGE>
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, 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 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
4
<PAGE>
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.
(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
------------------------
5
<PAGE>
(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 Licensee 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.
6
<PAGE>
(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.
(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.
7
<PAGE>
SCHEDULE "B"
------------
LMN Programming Syndication Categories License Fees
- -------------------------------------- ------------
All Categories $ 0
8
<PAGE>
EXHIBIT 10.7
COMPAQ
May 20, 1998
Robert Flynn
Vice President, Business Development
2421 Broadway, 2/nd/ Floor
Redwood City, CA 94063
Re: Letter of Agreement
-------------------
Mr. Flynn,
Enclosed please find a final executed Letter of Agreement for your records.
If you have any questions, please feel free to call Eric Federman at
650.742.8734.
Regards,
/s/ GAYLIA D. MALONEY
COMPAQ COMPUTER CORPORATION
Gaylia D. Maloney
GM/Id
Cc: R. Mihalik
<PAGE>
Compaq Computer Corporation
20555 SH 249
Houston, TX 77070-2698
Tel 713-370-0670
March 23, 1998
Liquid Audio, Inc.
Attention: Robert Flynn
Vice President, Business Development
2421 Broadway, 2/nd/ Floor LETTER OF AGREEMENT
-------------------
Redwood City, CA 94063 via Federal Express
Mr. Flynn,
This Letter Of Agreement ("AGREEMENT") expresses the understanding of Liquid
Audio, Inc. ("Liquid Audio") to license Compaq Computer Corporation ("COMPAQ")
to incorporate, market and distribute Liquid Audio's Liquid MusicPlayer
("LICENSED SOFTWARE") to end-users ("CUSTOMERS") with the following terms and
conditions:
1. DESCRIPTION OF LICENSED SOFTWARE:
TITLE Royalties
---------------------------------------------------------------------------
Liquid MusicPlayer [*]
2. PERIOD: Option to bundle Licensed Software for two years (2) commencing
March 1, 1998 and automatically renew for 1 year increments unless
otherwise notified in writing.
3. LICENSE GRANT: Subject to integration, compatibility testing, LICENSED
SOFTWARE preview and approval by Compaq, Liquid Audio grants to COMPAQ a
non-exclusive, non-transferable, worldwide license to use the LICENSED
SOFTWARE and URL internally and to market, sublicense and distribute the
LICENSED SOFTWARE and URL. As used herein, the term "use" includes the
right to make, have made, copy, reproduce, perform, display, and internally
distribute the LICENSED SOFTWARE and URL for the purposes of this
Agreement.
Subject to the terms and conditions of this Agreement, Liquid Audio hereby
grants to COMPAQ a non-exclusive right and license to (a) advertise,
promote or display the inclusion of the LICENSED SOFTWARE and URL in
packaging of Products subject to reasonable approval by Liquid Audio; (b)
reveal and display the names or likeness of the actors and artists whose
performances are embodied in the LICENSED SOFTWARE and URL through the use
of the LICENSED SOFTWARE; (c) reveal and display the titles of the songs
and or the names of the artists promoted within the LICENSED SOFTWARE and
URL through the use of the LICENSED SOFTWARE. In addition, COMPAQ shall not
assign a retail value to the APPLICATION and URL. COMPAQ acknowledges that
its use of the trademarks and other intellectual property referenced in the
paragraph is limited to the use licensed in this AGREEMENT and that COMPAQ
has not acquired, and will not acquire, any ownership rights therein.
* Certain information in this Exhibit has been omitted and filed separately
with the Commission. Confidential treatment has been requested with respect
to the omitted portions.
Page 1 of 4
<PAGE>
4. DELIVERY OF LICENSED PRODUCTS: Liquid Audio will communicate a resolution
(fix or otherwise) to COMPAQ within three (3) working days after
notification of defects in LICENSED SOFTWARE. For all fixed LICENSED
SOFTWARE, Liquid Audio will deliver updates to COMPAQ no later than five
(5) calendar days after such notification. The foregoing procedure shall be
repeated until COMPAQ either accepts the LICENSED SOFTWARE or, at its sole
discretion, eliminates the LICENSED SOFTWARE from the current bundle.
Elimination from the bundle shall not automatically terminate this
agreement.
5. DISTRIBUTION: COMPAQ agrees that distribution is limited to the following
methods of bundling or preinstalling with the PRODUCT: (a) include LICENSED
SOFTWARE and URL with selected internet access capable desktop and/or
portable computers; (b) bundle with other hardware via CD-ROM or DVD-ROM
media which includes LICENSED SOFTWARE and URL; (c) provide a CD-ROM or
DVD-ROM media which includes LICENSED SOFTWARE and URL; or (d) make
available a downloadable version of LICENSED SOFTWARE from the Compaq
Internet World Wide Web site.
6. REVENUE SHARING: Liquid Audio will pay to COMPAQ an amount equal to [*]
of any of Liquid Audio's revenues received (less actual taxes and actual
credits) with respect to the purchase of any LICENSED SOFTWARE upgrade by
any end user who has a copy of the LICENSED SOFTWARE bundled on the PRODUCT
for the term of this AGREEMENT. Liquid Audio will track sales attributed to
COMPAQ through a uniform resource locator and provide quarterly reports of
such sales to Compaq. Liquid Audio shall pay COMPAQ on a quarterly basis
with payments to be made to COMPAQ within 30 days from the end of each
quarter. Payment shall be made payable to Compaq Computer Corporation,
Attn: Patsy Koetting, PO Box 692000, MS 130705, Houston TX 77269-2000.
7. AUTHORIZED SUBCONTRACTORS: Liquid Audio agrees that all COMPAQ sites,
subsidiaries, affiliated companies and subcontractors shall be entitled to
copy, manufacture and distribute the LICENSED SOFTWARE and URL under this
AGREEMENT.
8. TERMINATION: The parties agree that should termination of this AGREEMENT be
necessary, notice shall be provided in writing. Additionally, Compaq
reserves the right to immediately terminate access to the LICENSED SOFTWARE
if material on the Liquid Audio's World Wide Web site is deemed
inappropriate by COMPAQ. For so long as necessary for COMPAQ to satisfy its
then existing contractual obligations to CUSTOMERS, COMPAQ shall retain a
limited license to use the LICENSED SOFTWARE and URL in order to satisfy
such obligations and to exhaust its inventory of LICENSED SOFTWARE and URL
existing at expiration or termination unless terminated by Liquid Audio
under section 9 b) below.
9. WARRANTY AND INDEMNIFICATION:
(a) Liquid Audio represents and warrants that:
(i) the LICENSED SOFTWARE and URL does not infringe any copyright,
trademark, patent enforceable or publicity rights under the laws of
any country in which the LICENSED SOFTWARE and URL or its upgrades are
distributed by Liquid Audio; and
(ii) the LICENSED SOFTWARE and URL does not violate the trade secret rights
of a third party; and
* Certain information in this Exhibit has been omitted and filed separately
with the Commission. Confidential treatment has been requested
with respect to the omitted portions.
Page 2 of 4
<PAGE>
(iii) Liquid Audio has the right to grant the rights it has granted under
this AGREEMENT.
Liquid Audio agrees to indemnify, hold harmless, and defend COMPAQ from any
and all damages, costs, and expenses, including reasonable attorney's fees,
incurred in connection with a claim which, if true, would constitute a
breach of warranties set forth in Section 9 (a) (hereinafter claims under
Section 9(a)(i) and Section 9(a)(ii) shall be collectively referred to as
"Infringement Claims"); provided Liquid Audio is notified promptly in
writing of an Infringement Claim and has sole control over its defense or
settlement, and COMPAQ provides reasonable assistance in the defense of
same at Liquid Audio's expense. To the extent that Liquid Audio receives
notice of infringement from a third party and such notice of infringement
relates to LICENSED SOFTWARE and/or URL, Liquid Audio agrees to promptly
notify COMPAQ of such notice. In the event that Liquid Audio is sued by a
third party in connection with a notice of infringement, Liquid Audio
agrees to provide COMPAQ with monthly updates (and updates in event of a
significant development) of such litigation.
(b) Following notices of an Infringement Claim, Liquid Audio may terminate
this AGREEMENT or, at its expense, without obligation to do so, procure for
COMPAQ the right to continue to market, use, and have others use, the
alleged infringing LICENSED SOFTWARE and/or URL or, without obligation to
do so, may replace or modify the LICENSED SOFTWARE and/or URL to make it
non-infringing ("Non-Infringing LICENSED SOFTWARE"). If Liquid Audio elects
to replace or modify the LICENSED SOFTWARE and/or URL, such replacement
shall meet substantially the specifications as provided or referenced in
the applicable LICENSED SOFTWARE and/or URL description provided by Liquid
Audio and shall be subject to the acceptance provisions of this AGREEMENT.
(c) Provided that Liquid Audio has not terminated this AGREEMENT to the
extent that COMPAQ is able to procure a license, on reasonable terms and
conditions, which would permit COMPAQ to continue to offer LICENSED
SOFTWARE, if such LICENSED SOFTWARE is found to be infringing, Liquid Audio
agrees to reimburse COMPAQ for any associated costs that may be incurred in
securing such a license. All remedies set forth in this Section 9(c) shall
not be subject to or limited by in any way the limitation of liability.
10. PRODUCT INDEMNIFICATION: Liquid Audio fully releases and indemnifies Compaq
from any and all product liability claims that may arise from any product
or service provided by Liquid Audio under this Agreement. Liquid Audio
assumes all liability with respect to such product liability claims and
will indemnify, and hold harmless an defend COMPAQ from any and all
damages, costs and expenses, including reasonable attorney's fees, incurred
in connection with such claims.
11. PUBLICITY: Liquid Audio shall not publicize the existence of this AGREEMENT
with COMPAQ, nor refer to COMPAQ in connection with any promotion, press
release or publication without the prior written approval of COMPAQ, which
approval shall not be unreasonably withheld. Additionally, Liquid Audio may
not make any Compaq approved announcement earlier than one week after
Compaq's product announcement.
12. CUSTOMER SUPPORT: During the PERIOD of this AGREEMENT, Liquid Audio shall,
at its expense, provide support for the LICENSED SOFTWARE directly to the
CUSTOMER as part of this AGREEMENT; such support shall be equivalent or
exceed the support offered on the Internet or in the retail channel by
Liquid Audio to its other customers. COMPAQ's customer service organization
may refer all customer service calls relating to the LICENSED SOFTWARE to
the
Page 3 of 4
<PAGE>
Liquid Audio customer support organization. COMPAQ may publish the Liquid
Audio customer support phone number in documentation that may accompany
PRODUCT.
13. SIGNATURES:
If the foregoing correctly states our understandings please sign and return
a copy of this letter.
COMPAQ COMPUTER CORPORATION LIQUID AUDIO, INC.
/s/ Rod Schrock /s/ Robert Flynn
- ------------------------------------- ------------------------------
Name: Rod Schrock Name: Robert Flynn
-------------------------
Title: Vice President & General Manager Title: VP Business Development
------------------------
Consumer Products Group
Date: 5-11-98 Date: May 1, 1998
-------------------------------- -------------------------
Page 4 of 4
<PAGE>
EXHIBIT 10.8
LA AGREEMENT BETWEEN REALNETWORKS AND LIQUID AUDIO
This Agreement is entered into as of April 26, 1998 (the "Effective Date") by
and between Real Networks, Inc., a Washington corporation ("RN"), and Liquid
Audio, Inc. a California corporation ("LA").
WHEREAS, RN has developed and owns all right, title and interest in the
RealMedia Architecture ("RMA", as further defined below), an open platform for
development of streaming media applications and tools, which allows software
developers to build new applications and extend current applications to inter-
operate with a wide variety of datatypes; WHEREAS, LA is a developer of high
quality audio codec and datatypes. LA desires to modify and enhance its products
or develop new products based on RN's Real Media Architecture that are
interoperable with the Licensed Software (as defined below).
NOW, THEREFORE, in consideration of the mutual promises and covenants set forth
herein, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties agree as follows:
1. DEFINITIONS
1.1 "License Key" means the authorization code that is generated by the License
Key Tool and that enables RMA Server Software to stream RealMedia
datatypes. License Keys that generate User-Streams and enable features of a
LA Product are provided to a LA's end-user customers.
1.2 "License Key Tool" means the version of the License Key Tool that is
provided to LA by RN that is specific and unique to the applicable LA
Product. The License Key Tool is used to generate unique License Keys for a
LA Product.
1.3 "Licensed Software" means Real Players, the RealMedia SDK, including
associated RealMedia Libraries, RMA Server Software, whether in object code
or source code form, License Key Tools and License Keys, and related User
Documentation and specifications.
1.4 "New Release" means a new major release of the Licensed Software or the LA
products in which major new functionality has been added in addition to any
complement of bug fixes supplied, and which is designated as a change in
the digit to the left of the decimal point in the product version number
[(x).x.x]. "Update" means a minor release, enhancement, revision,
modification or upgrade of the Licensed Software Software or LA Products,
designated as a change in the tenths digit in the product version number
[x.(x).x], or in the digit to the right of the tenths digit in the product
version number [x.x.(x)]. By way of clarification, if either party markets
a new and distinct product along with and in addition to an existing
program, then such new and distinct product shall be treated as a New
Release, not an Update.
1.5 "LA Product(s)" means the products and applications developed by LA
hereunder incorporating the Licensed Software which are compatible with RMA
Server Software, as further described on Exhibit A hereto. LA Products
shall include:
(a) "LA Client Software," which means software that is incorporated in an
RMA Player and utilizes the RMA application programming interfaces
("APIs") and will not interoperate with any server software, other
than an RMA server, that streams files by any RMA supported protocol;
(b) "LA Tools," which means software tools that may import datatypes and
export datatypes using the RealMedia Libraries; and
(c) "LA Server Applications," which means LA software applications that
interface with RMA Server Software and add datatypes that can be
streamed from RMA Server Software.
<PAGE>
1.6 Reserved.
--------
1.7 "RealMedia Architecture" or "RMA" means the software platform developed by
RN that allows for the development of streaming media products and tools,
and which is designed specifically for the existing infrastructure of the
Internet and corporate intranets. RMA includes the following components:
(a) "Real Players," which are stand-alone applications, or components
embedded in other applications, that play RMA media files.
(b) "RealMedia Datatypes," which are datatypes that can be streamed using
RMA Server Software APIs and played using RMA Player APIs.
(c) "RealMedia Libraries," which are APIs contained in the RealMedia SDK
in object code form.
(d) "RealMedia SDK" or "SDK," which contains the tools and information
needed for software developers to create tools for use in producing
streaming media and to adopt or build applications that stream from
RMA Server Software and play in Players. The SDK contains a Player,
Player APIs, Server APIs, RealMedia Libraries, Sample Source Code and
RealMedia Server Software.
(e) "RMA Server Software" which is software in object code form, which
streams files over networks, and which has the capabilities set forth
on Exhibit B hereto.
(f) "Sample Source Code," which provides an example of how to develop an
RMA application.
1.8 "Term" is defined in Section 8.1.
-----------
1.9 "Territory" means the world, except as otherwise limited by Section 14.7.
------------
1.10 "User Documentation" means RN's user manuals, technical manuals, release
notes including advertisements for RMA Server Software, installation and
operation instructions, and other data and documentation describing the use
of RMA Server Software normally supplied to RN's customers.
1.11 "User-Stream" means the stream of Real Media datatypes from RMA Server
Software to a single end-user client computer. The number of User-Streams
being delivered by a single copy of the RMA Server Software is measured by
counting the number of end-users simultaneously served by User-Streams
originating from the RMA Server Software.
2. LA DEVELOPMENT OF RMA-BASED PRODUCTS AND INTEGRATION; LICENSE TO LA OF RMA
SDK FOR DEVELOPMENT
2.1 License; LA Development and Integration. Subject to the terms and
---------------------------------------
conditions of this Agreement, RN grants to LA a non-exclusive,
nontransferable license to use and install the RealMedia SDK for the sole
purpose of developing and using LA Products that are based upon the RMA
Architecture and interoperate with Licensed Software. Subject to Section
14.9 below, LA agrees that by September 30, 1998, LA shall have developed
commercially shippable versions of the LA Client Software and LA Server
Application. LA shall only use the SDK on a single computer or on a
computer network. LA may make a single copy of the SDK for back-up and
archival purposes only, provided that any copy must contain all proprietary
notices included in the original. LA may download associated online
documentation for purposes of using the SDK, but may not make further
copies of the documentation.
2
<PAGE>
2.2 Limitations.
-----------
(a) The SDK may be used solely to develop and test a LA Product. It may
not be used for any commercial, non-commercial, educational or
internal purpose, and may not be used in any way that allows or causes
the transmission of audio, video or other media files across the
Internet to any computer network without a separate written license
agreement from RN.
(b) LA is expressly prohibited from using, licensing, selling,
transferring or otherwise distributing any LA Product except as
expressly provided in this Agreement.
(c) Except as expressly provided herein, LA shall not copy, modify,
reproduce, display, decompile, reverse engineer, store, translate,
sublicense, assign, sell, lease or otherwise transfer or distribute
the SDK, or any of its rights therein, in whole or in part, nor may LA
use the SDK to clone any client, server or other RN product. All
rights not specifically granted herein to LA are reserved to RN.
(d) Nothing contained in this Agreement shall be deemed or construed to
grant LA the exclusive right to develop, or have distributed by RN, LA
Products for any particular category of datatypes.
3. DISTRIBUTION LICENSES; OBLIGATIONS CONCERNING LA PRODUCTS AND LICENSED
SOFTWARE
3.1 License from RN to LA. Subject to the terms and conditions set forth in
---------------------
this Agreement, RN grants LA the following licenses:
(a) LA Client Software. Except as provided in Section 4.1(b), LA agrees
------------------ -------------
that it shall not, under any circumstances, distribute any LA Client
Software without a separate written license agreement with RN, during
or after the Term. All LA Client Software shall be distributed by RN
in accordance with Section 3.2(a). Notwithstanding the foregoing, LA
--------------
may include a link offering or promoting the LA Client Software from
the LA website to a hidden link on a RN website from which the LA
Client Software will be downloadable, and may promote the LA Client
Software on LA's website.
(b) LA Tools; LA Server Applications. RN grants LA a non-exclusive,
--------------------------------
non-transferable license to market, promote and distribute LA Server
Applications and LA Tools containing any Licensed Software in the
Territory during the Term. RN hereby grants LA the non-exclusive,
royalty-free, non-transferable right and license to use and publicly
display the RMA Server Software and Real Players for internal,
demonstration and marketing purposes. LA shall not modify, decompile,
or reverse engineer the RMA Server Software or Real Players during or
after the Term.
(c) Limitations; Requirements. LA's end-user license agreements for the LA
-------------------------
Products shall prohibit further distribution, independently of the LA
Products, the RMA Libraries, any RMA files or other components of RMA
by LA's end-users.
(ii) LA shall include a prominent and valid copyright notice, in the
form reasonably requested by RN, in LA Products specifying that
components of LA's Products are owned by and used under license
from RN and its suppliers. LA shall not alter or remove any
copyright or trademark notices contained in any Licensed
Software or User Documentation. In addition, LA shall
prominently display RN's "RMA logo" and the words "RMA
Compatible" on the product packaging and all product manuals
and documentation, in accordance with the terms of Section 5.1.
-----------
(iii) LA shall ensure that the LA Products interoperate properly and
are compatible with the RMA Server Software. RN may elect to
test the LA Products or, at RN's option, will have the LA
Products tested by a third party testing lab at RN's expense,
to confirm that the LA Products interoperate properly and are
compatible with the RMA Server Software.
3
<PAGE>
(iv) LA shall promptly deliver to RN all releases, including beta
releases, of its LA Products, for use by RN as set forth in
Section 3.2.
-----------
3.2 Distribution By RN.
------------------
(a) LA Client Software. [*] In the event that RN secures a distribution
------------------
arrangement with an OEM or other distributor that necessitates the LA
Client Software be compiled or "ported" to run on a third-party
platform, the parties will negotiate in good faith and cooperate as
reasonably necessary to enable such arrangement. Notwithstanding the
foregoing, neither party shall be in breach of this Agreement if such
negotiations are unsuccessful. Notwithstanding anything to the
contrary set forth in this Agreement, LA shall have no obligation
hereunder with respect to the LA Client Software after the Term.
(b) LA Tools; LA Server Applications. LA hereby grants RN the non-
--------------------------------
exclusive, non-transferable right and license to market, promote and
distribute, by itself or through authorized distributors, the LA Tools
and LA Server Applications, in the Territory during the Term by any
means and in all channels of distribution, including as follows:
(i) RN will electronically distribute the LA Tools and LA Server
Applications from RN's Real Store, provided that they meet the
requirements for inclusion in the Real Store, and that RN and LA
sign an Electronic Distribution Agreement acceptable to both
parties.
(ii) LA hereby grants RN the non-exclusive, royalty-free, non-
transferable right and license to use and publicly display the LA
Tools and LA Server Applications for internal, demonstration and
marketing purposes., RN shall not modify, decompile, or reverse
engineer the LA Products during or after the Term.
(c) LA shall provide to RN LA's standard end user license agreement
embedded in LA's installation program for distribution by RN and its
Authorized Distributors along with LA's Products. The license granted
in such end-user license agreement shall be between LA and RN's end-
users.
3.3 Source Code Escrow, LA will deposit with Data Securities International,
------------------
Inc. (the "Escrow Agent"), a complete and correct set of the source and
object code version of the LA Client Software (the "Escrow Products") and
shall enter into the Escrow Agent's Master Preferred escrow agreement,
pursuant to which RN shall have the right to require that the Escrow Agent
provide some or all of the Escrow Products to RN or third parties in the
event that LA undertakes or is subject to any of the actions set forth in
Section 8.2(b); or in the event that it is of LA's breach of this Agreement
--------------
(other than a breach of Section 2.1) as determined by an arbitrator
pursuant to Section 14.6 hereof or as adjudicated by a court having
------------
jurisdiction over LA. RN shall pay any required escrow fee directly to the
Escrow Agent. In the event that the source code is released to RN, RN shall
use such source code only to support the LA Client Software then being
distributed by RN, and for no other purpose.
4. DISTRIBUTION OF RMA SERVER SOFTARE.
4.1 Grant of License. Subject to the terms and conditions of this Agreement,
----------------
and payment of the License Fees set forth in Section 6.1, RN grants LA a
-----------
non-exclusive, non-transferable right and license, in the Territory during
the Term, to:
(a) market, license and distribute object code copies of the RMA Server
Software and User Documentation to end-user customers only in
conjunction with both a LA Product and LA's electronic music
distribution and commerce server
* Certain information in this Exhibit has been omitted and filed separately
with the Commission. Confidential treatment has been requested with respect
to the omitted portions.
4
<PAGE>
("Music Server") and only for use in connection with the distribution
of sound recordings to end-user clients for a lee or for promotional
purposes.
(b) license and distribute one copy of the LA Client Software with each
copy of the RMA Server Software distributed to an end-user customer;
(c) generate License Keys with an authorized, RN-provided License Key
Tool, and duplicate, market and distribute License Keys associated
with LA Product to LA's authorized resellers and distributors
("Authorized Distributors") and end-user customers;
(d) sublicense to Authorized Distributors the right to market, license and
distribute object code copies of the RMA Server Software, User
Documentation and License Keys to end-user customers only in
conjunction with both a LA Product and LA's electronic music
distribution and commerce server ("Music Server") and only for use in
connection with the distribution of sound recordings to end-user
clients for a fee or for promotional purposes; and
(e) determine the price at which LA and its Authorized Distributors will
license and distribute the LA Products, RMA Server Software and
License Keys to end-user customers, independent of any License Fee
payable by LA to RN.
4.2 Distribution Requirements.
-------------------------
(a) End User License Agreements. LA shall distribute and shall cause its
---------------------------
Authorized Distributors to distribute to their end-user customers RN's
standard end-user Server Software License Agreement, which is
contained in RN's product packaging. The license granted in such end-
user license agreement shall be between RN and LA's end-users.
Accordingly, LA agrees that it shall promptly provide to RN the names
and addresses of all end-users to whom LA or its Authorized
Distributors distributes an RMA Server Software concurrently with the
provision of monthly reports, as set forth in Section 7.2.
-----------
(b) Fulfillment for RMA Servers Software. LA may either: (i) download RMA
------------------------------------
Servers from a private RN download site; or (ii) place an order with
RN for physical pre-packaged copies of the RMA Server Software. RN
will ship all physical product to LA or LA's authorized designee, by
shipment method specified by LA. All orders are shipped F.O.B. RN's
designated fulfillment location. As a convenience, RN may prepay
freight charges, and such charges will be billed to LA. All risk of
loss or damage in transit will be borne by LA. LA shall inspect the
RMA Server Software upon receipt at the delivery location. Acceptance
shall be deemed to occur unless LA provides RN with notice of non-
acceptance within three (3) days of receipt. A LA may only reject a
copy of RMA Server Software for one of the following reasons: (i)
missing labels or User Documentation, or (ii) defective media.
(c) Trademark Usage. If LA distributes the RMA Server Software as part of
---------------
a bundle, LA shall prominently display RN's "RMA logo" and the words
"RMA Compatible" on the product packaging and all product manuals and
documentation, in accordance with any Section 5.1.
-----------
5. TRADEMARK LICENSE.
5.1 LA shall have the right, but not the obligation except as expressly
provided herein, to use RN's trademarks and logos, royalty-free, in
connection with LA's user interfaces, packaging, collateral material and
website, subject to compliance with RN's Trademark Usage Guidelines, or as
otherwise designated in writing by RN from time to time, provided each such
use is approved by RN in writing in advance as follows: LA shall furnish RN
with samples of any proposed usage of such trademark or logo, and obtain
RN's prior approval for such usage, which approval will not be unreasonably
withheld or delayed.
5
<PAGE>
5.2 RN shall have the right to use LA's "Liquid Audio" trademark and logo in
connection with RN's user interfaces, packaging, collateral material and
website, subject to compliance with LA's Trademark Usage Guidelines, or as
otherwise designated in writing by LA from time to time, provided each such
use is approved by LA in writing in advance as follows: RN shall furnish LA
with samples of any proposed usage of such trademark or logo, and obtain
LA's prior approval for such usage, which approval will not be unreasonably
withheld or delayed.
6. SUPPORT AND UPGRADES.
6.1 Technical Support for LA Products. During the Term, LA shall be solely
---------------------------------
responsible for providing, and agrees that it will provide, all end-user
technical and customer support for the LA Products.
6.2 Technical Support for RMA Server Software. During the Term, LA agrees that
-----------------------------------------
it will provide first-tier technical and customer support, by telephone and
e-mail and in accordance with RN's minimum support requirements, for RMA
Server Software distributed by LA and its Authorized Distributors. RN will
enroll LA, without charge, in a one-day RealMedia technical training
seminar at RN's facilities, to train LA to provide first-line technical
support to its end-user customers for RMA Server Software. LA shall be
responsible for all out-of-pocket costs in incurs to attend such seminar.
RN shall provide second-tier technical support, by telephone and email,
from 8:00 A.M-5:00 P.M. PST Monday through Friday to LA's primary support
contact for RMA Server Software. RN's telephone "hotline" shall be staffed
by technical personnel with a working knowledge of the RMA Server Software.
RN shall not provide technical support to LA's Authorized Distributors or
end-users, unless such customers purchase technical support service from RN
directly.
6.3 LA Updates and New Releases. During the Term, LA shall make available to RN
---------------------------
at no charge, upon release by LA, a copy of all Updates and New Releases to
the LA Products. Each Update or New Release shall, upon release by LA, be
subject to all of the terms and conditions of the Agreement.
6.4 RN Updates and New Releases. During the Term, RN shall make available to LA
---------------------------
at no charge, upon release by RN, a copy of all corresponding Updates on
the RN website. RN shall make available at no charge all New Releases and
all Updates associated with developments of LA Products. Each Update or New
Release shall, upon release to LA, be subject to all of the terms and
conditions of the Agreement.
7. PAYMENT
7.1 License Fee. As consideration for the RMA Server Software distribution
rights granted herein, LA shall pay RN a license fee ("License Fee") of [*]
licensed by LA hereunder. License Fees for User Streams are [*]
7.2 Payment Terms. LA will provide RN with a written report by the 20th day of
-------------
each month for the preceding calendar month setting forth: (a) the number
of RMA Server Software distributed, (b) the names and address to whom the
RMA ServerSoftware was distributed; (c) the number of License Keys
distributed; and (d) the amount due to RN pursuant to Section 7.1 for the
preceding month. The report shall be accompanied by the payment due. All
payments due hereunder shall be made in United States Dollars, without
withholding or offset of any kind. Interest shall accrue on all amounts
past due hereunder at the monthly rate of one and one-half percent (1.5%)
or at the maximum legal rate, whichever is less.
7.3 Books and Records. During the Term and for three (3) years thereafter, LA
-----------------
shall keep books of account with respect to the amounts due and the
calculations required to be made under Section 7.1. Upon RN's reasonable
-----------
written request, and no more than once per year of the Term, RN may audit
and inspect all such books of account, through an independent third party
auditor and during normal business hours, provided that such
* Certain information in this Exhibit has been omitted and filed
seperately with the Commission. Confidential treatment has been
requested with respect to the omitted portions.
6
<PAGE>
auditor is a nationally recognized firm of certified public accountants and
shall undertake in writing to protect the confidentiality of the business
data and records of LA. The cost of any such audit shall be paid by RN.
provided, however, that in the event RN initiates an audit under this
Section 7.3 and it is finally determined that the amount reported and paid
-----------
by LA pursuant to Section 7.1 for the period(s) audited is, in the
-----------
aggregate, less than ninety-five per cent (95%) of the aggregate amount
actually due, then LA shall pay the reasonable costs and expenses of said
audit. If any such audit reveals an underpayment of license fees, LA shall
make any correcting payment within thirty (30) days. Any underpayment shall
be subject to interest of one and one-half percent (1.5%) per month or the
maximum amount allowed by law, whichever is less. LA will maintain the
books and records applicable to each reporting period for at least three
years following the close of such period.
7.4 Audit of Authorized Distributors. During the Term and for three (3) years
--------------------------------
thereafter, For all Authorized Distributors, LA, in its sole discretion,
shall either: (a) retain for itself the right to audit the books and
records of any such Authorized Distributor; or (b) require that the
Authorized Distributor agree in writing to permit, upon the written request
of RN to LA, an independent auditor paid by RN to examine the necessary
books and records of any such Authorized Distributor, provided that such
accountant shall agree to protect the confidentiality of the business data
and records and to disclose to RN only the accuracy or inaccuracy of the
reporting required hereunder. Any such audits shall be arranged through LA.
LA shall require its Authorized Distributors to maintain books and records
applicable to LA's payment obligations hereunder for at least three years
following the close of the applicable reporting period for such
obligations.
8. TERM AND TERMINATION
8.1 Term. This Agreement shall commence as of the Effective Date, and terminate
----
[*] from the Effective Date (the "Term"), unless earlier terminated as
provided herein.
8.2 Termination by Either Party. Either party may terminate this Agreement
---------------------------
immediately upon written notice to the other party in the event of any of
the following:
(a) should the other party fail to perform any material term or condition
of this Agreement, which shall constitute a default of this Agreement,
and such default has not been corrected within thirty (30) days of
notice from the non-breaching party. In the event of a breach of
Section 9 no cure period need be provided.
---------
(b) should the other party (i) make a general assignment for the benefit
of creditors; (ii) institute proceedings to be adjudicated a voluntary
bankrupt, or consent to the filing of a petition of bankruptcy against
it; (iii) be adjudicated by a court of competent jurisdiction as being
bankrupt or insolvent; (iv) seek reorganization under any bankruptcy
act, or consent to the filing of a petition seeking such
reorganization; or (v) have a decree entered against it by a court of
competent jurisdiction appointing a receiver, liquidator, trustee, or
assignee in bankruptcy or in insolvency covering all or substantially
all of such party's property or providing for the liquidation of such
party's property or business affairs, provided such decree is not
dismissed within 45 days.
8.3 Termination by RN or LA. RN may terminate this Agreement immediately upon
-----------------------
written notice to LA in the event of any attempted transfer or assignment
of this Agreement or any right or obligation hereunder (except as provided
in Section 14.3), or any sale, transfer, relinquishment, voluntary or
involuntary, by operation of law or otherwise, of more than a 5% interest
in the direct or indirect ownership or control of LA to an RN Competitor,
without RN's prior written approval. LA may terminate this Agreement
immediately upon written notice to RN in the event of any attempted
transfer or assignment of this Agreement or any right or obligation
hereunder (except as provided in Section 14.3), or any sale, transfer,
relinquishment, voluntary or involuntary, by operation of law or otherwise,
of more than a 5% interest in the direct or indirect ownership or control
of [*] any of the companies identified in Exhibit C hereto. As used herein,
an [*]
* Certain information in this Exhibit has been omitted and filed
separately with the Commission. Confidential treatment has been requested
with respect to the omitted portions.
7
<PAGE>
[*] Any termination right under this Section 8.3 must be exercised within
ten (10) business days after the applicable trigger event or shall be
deemed forever waived For the avoidance of doubt, a termination pursuant to
this Section 8.3 shall not constitute an event that triggers release of the
source code escrow pursuant to Section 3.3 above. An initial public
offering of the common stock of either LA or RN shall not constitute an
event that shall trigger either party's termination right hereunder.
8.4 Effect of Termination. Upon the effective date of termination of this
---------------------
Agreement, the non-perpetual licenses granted hereunder shall terminate
immediately. LA will either immediately return all Licensed Software to RN
or certify in writing to RN that all copies of all Licensed Software have
been destroyed, except that LA may retain one copy of the Licensed Software
for archival purposes and to furnish support services to end-user clients.
Perpetual licenses shall survive unless this Agreement is terminated for
default by the licensing party pursuant to Section 8.2. Notwithstanding
anything to the contrary herein, any licenses to use the Licensed Software
or the LA Products properly granted during the Term to the parties' end
users shall survive any termination of this Agreement.
9. CONFIDENTIALITY
"Confidential Information" means any trade secret information or
information otherwise designated by a party as being confidential relating
to either party's products, product plans, designs, computer code,
technical information, costs, pricing, financing, marketing plans, business
opportunities, personnel, research and development or know-how. All
Confidential Information that is disclosed orally shall be documented in
writing by the disclosing party and delivered to the receiving party within
twenty (20) business days after disclosure. Confidential Information shall
not include information that (i) is or becomes generally known or available
through no fault of the receiving party, (ii) was known by or disclosed to
the receiving party prior to disclosure, (iii) is independently developed
by the receiving party, or (iv) is made generally available by the
disclosing party without any restriction. The parties shall use reasonable
efforts and at least the same care that each uses to protect its own
Confidential Information of like importance, to prevent unauthorized
dissemination or disclosure of the other party's confidential information
during and for three (3) years following the last day of the Term. Neither
party will use the other's Confidential Information for purposes other than
those necessary to directly further the purposes of this Agreement. Neither
party will disclose to third parties the other's Confidential Information
without the prior written consent of the other party, provided, however,
that nothing will preclude a party from making disclosure to a third party
for the purpose of due diligence in a financing transaction, merger,
acquisition, business combination or other similar transaction, or from
making any disclosures to any governmental agency having jurisdiction over
the disclosing party, or unless otherwise required by law, government order
or court proceeding. Each party shall return the Confidential Information
to the other party upon termination of the Agreement or upon the request of
the other party. Except as expressly provided in this Agreement, no
ownership or license right is granted in any Confidential Information.
10. PROPRIETARY RIGHTS
10.1 LA. LA shall retain all right, title and interest in and to the LA
--
Products, including without limitation any copyright, patent, trade secret,
or other intellectual property rights therein, subject to RN's underlying
ownership in any Licensed Software included, therein, all LA trademarks,
and all LA Confidential Information, and any copies thereof, regardless of
the media or form on or in which the LA Products or copies may exist. RN
acknowledges and agrees that the LA Products are proprietary to LA, and are
protected by the copyright laws of the United States and international
copyright treaties. Unauthorized copying of the LA Products, including
modification, merger or inclusion with any other software, is expressly
forbidden. RN shall not be deemed, by anything contained in or done
pursuant to this Agreement, to acquire any right, title or interest in any
trademark, copyright, patent or other intellectual property of LA, and
shall do nothing to prejudice the value or validity of LA's rights therein
or ownership thereof.
* Certain information in this Exhibit has been omitted and filed
separately with the Commission. Confidential treatment has been requested
with respect to the omitted portions.
8
<PAGE>
10.2 RN. RN shall retain all right, title and interest in and to the Licensed
--
Software, including without limitation any copyright, patent, trade secret,
or other intellectual property rights therein, all RN trademarks and all RN
Confidential Information, and any copies thereof, regardless of the media
or form on or in which the Licensed Software or copies may exist. LA
acknowledges and agrees that the Licensed Software is proprietary to RN,
and is protected by the copyright laws of the United States and
international copyright treaties. Unauthorized copying of the Licensed
Software, including modification, merger or inclusion with any other
software, is expressly forbidden. LA shall not be deemed, by anything
contained in or done pursuant to this Agreement, to acquire any right,
title or interest in any trademark, copyright, patent or other intellectual
property of RN, and shall do nothing to prejudice the value or validity of
RN's rights therein or ownership thereof.
10.3 In the event that, during or after the Term, LA is granted a patent on an
invention that was derived from LA's access to RN's SDK or Confidential
Information during development pursuant to Section 2.1 hereunder, LA shall
grant to RN, and hereby grants to RN, a nonexclusive, non-transferable,
perpetual, royalty-free license to exercise the patent rights under the
applicable patent. During and after the Term, RN shall grant to LA, and
hereby grants to LA, a nonexclusive, perpetual, irrevocable, royalty-free,
license to exercise the patent rights under any patents that are granted to
RN that are improvements on the patent(s), if any, licensed by LA under
this Section 10.3. In the event that during the Term either party files a
lawsuit against the other party alleging patent infringement by the other
party, the other party shall have the right to terminate this Agreement
immediately upon written notice to the party that filed the lawsuit. The
parties agree that in any dispute arising out of this Section 10.3, RN will
bear the burden of proof by a preponderance of the evidence.
11. LIMITED WARRANTY
11.1 RN's Limited Warranty.
---------------------
(a) RN warrants, solely for the benefit of LA, that for a period of ninety (90)
days from the date of delivery to LA: (i) the Licensed Software, if
operated as directed, will substantially achieve the functionality
described in the User Documentation, and (ii) that the media containing the
Licensed Software, if provided by RN, is free in material respects from
defects in material and workmanship; provided, however, that the foregoing
warranty is expressly contingent (and shall be otherwise void) upon: (1)
the use of the Licensed Software strictly in accordance with the
instructions and User Documentation therefor; (2) the absence of misuse or
damage thereto; (3) the absence of any alteration or modification thereto;
and (4) LA's acceptance of Licensed Software for distribution with
knowledge that the media upon which the Licensed Software are reproduced
may contain certain defects. RN makes no representation or warranty that
the information or functions contained in the Licensed Software will meet
LA's requirements or that the use or operation of the Licensed Software
will be uninterrupted, error free or secure, or that any Licensed Software
defects are correctable or will be corrected. THE FOREGOING WARRANTY SHALL
NOT APPLY TO THE SAMPLE SOURCE CODE, WHICH IS PROVIDED TO LA AS IS, WITHOUT
WARRANTY OF ANY KIND.
(b) RN's entire liability and LA's exclusive remedy for any breach of the
limited warranty set forth in this Section 11.1 shall be, in RN's sole
------------
discretion: (i) to replace RN's defective media; or (ii) to advise LA how
to achieve substantially the same functionality with the Licensed Software
as described in the User Documentation through a procedure different from
that set forth in the User Documentation. Repaired, corrected or replaced
Licensed Software and User Documentation shall be covered by this limited
warranty for the period remaining under the warranty that covered the
original Software, or if longer, for thirty (30) days after the date RN
either shipped to LA the repaired or replaced Licensed Software or RN
advised LA as to how to operate the Licensed Software so as to achieve the
functionality described in the Documentation, whichever is applicable.
(c) NO OTHER WARRANTIES. TO THE MAXIMUM EXTENT PERMITTED BY APPLICABLE LAW RN
DISCLAIMS ALL OTHER WARRANTIES, EITHER EXPRESS OR IMPLIED, INCLUDING, BUT
NOT LIMITED TO IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A
PARTICULAR
9
<PAGE>
PURPOSE, WHICH ARE EXPRESSLY DISCLAIMED, WITH REGARD TO THE LICENSED
SOFTWARE AND THE USER DOCUMENTATION.
11.2 LA's Limited Warranty.
---------------------
LA warrants, solely for the benefit of RN, that for a period of ninety (90)
days from the date of delivery to RN (i) the LA Client Software, if
operated as directed, will substantially achieve the functionality
described in the documentation for the LA Client Software, and (ii) that
the media containing the LA Client Software, if provided by LA, is free in
material respects from defects in material and workmanship; provided,
however, that the foregoing warranty is expressly contingent (and shall be
otherwise void) upon: (1) the use of the LA Client Software strictly in
accordance with the instructions and user documentation therefor; (2) the
absence of misuse or damage thereto; (3) the absence of any alteration or
modification thereto; and (4) RN's acceptance of LA Client Software for
distribution with knowledge that the media upon which the LA Client
Software are reproduced may contain certain defects. LA makes no
representation or warranty that the information or functions contained in
the LA Client Software will meet RN's requirements or that the use or
operation of the LA Client Software will be uninterrupted, error free or
secure, or that any LA Product defects are correctable or will be
corrected.
(a) LA's entire liability and RN's exclusive remedy for any breach of the
limited warranty set forth in this Section 11.2 shall be, in LA's sole
------------
discretion: (i) to replace LA's defective media; or (ii) to advise RN
how to achieve substantially the same functionality with the LA Client
Software as are described in the user documentation through a
procedure different from that set forth in the user documentation.
Repaired, corrected or replaced LA Client Software and user
documentation shall be covered by this limited warranty for the period
remaining under the warranty that covered the original LA Client
Software, or if longer, for thirty (30) days after the date LA either
shipped to RN the repaired or replaced LA Product or LA advised RN as
to how to operate the LA Product so as to achieve the functionality
described in the documentation, whichever is applicable.
(b) NO OTHER WARRANTIES. TO THE MAXIMUM EXTENT PERMITTED BY APPLICABLE LAW
-------------------
LA DISCLAIMS ALL OTHER WARRANTIES, EITHER EXPRESS OR IMPLIED,
INCLUDING, BUT NOT LIMITED TO IMPLIED WARRANTIES OF MERCHANTABILITY
AND FITNESS FOR A PARTICULAR PURPOSE, WHICH ARE EXPRESSLY DISCLAIMED,
WITH REGARD TO THE LA PRODUCTS AND THE USER DOCUMENTATION.
12. INDEMNIFICATION
12.1 RN's Indemnification. RN shall defend LA and its directors, officers,
--------------------
agents, employees and representatives, in any third party action for
infringement by, or alleged infringement by the Licensed Software of any
trademark, service mark, patent, copyright, or misappropriation of any
trade secret by the Licensed Software, and will pay any final judgments
awarded or settlements entered into in any such action. LA agrees that it
shall notify RN of all threats, claims and proceedings related to any such
suit promptly after such threat, claim or proceeding comes to the attention
of LA. RN shall have sole control of the defense and/or settlement of any
such suit, and LA shall furnish to RN, upon request, information available
to LA for such defense, and shall provide RN with such assistance in
defending such suits as is requested by RN, at RN's expense. If LA's use of
the Licensed Software under the terms of this Agreement is, or in RN's
opinion is likely to be, enjoined due to the type of infringement or
misappropriation specified above, then RN may, at its sole option and
expense, either (i) procure for LA the right to continue using the Licensed
Software under the terms of this Agreement; or (ii) replace or modify the
affected Licensed Software so that it is noninfringing and substantially
equivalent in function to the enjoined Licensed Software. The foregoing
obligation of RN does not apply (i) with respect to versions of the
Licensed Software or portions or components thereof: (a) which are modified
after shipment, if the alleged infringement relates to such modification,
and if such modification was not authorized, expressly permitted or
performed by RN; (b) which are combined with other products, processes or
materials, if the alleged infringement relates to such combination and if
RN did not authorize or expressly permit the combination; or (c) where LA's
use of the Licensed Software is not in accordance with the license granted
under this Agreement; or (ii) for use or distribution of Licensed Software
or otherwise not in accordance with the terms and conditions of this
Agreement.
10
<PAGE>
12.2 LA Indemnification. LA shall defend RN and its directors, officers,
------------------
agents, employees and representatives, in any third party action for
infringement by, or alleged infringement by the LA Products of any
trademark, service mark, patent, copyright, or misappropriation of any
trade secret by the LA Products, and will pay any final judgments awarded
or settlements entered into in any such action. RN agrees that it shall
notify LA of all threats, claims and proceedings related to any such suit
promptly after such threat, claim or proceeding comes to the attention of
RN LA shall have sole control of the defense and/or settlement of any such
suit, and RN shall furnish to LA, upon request, information available to RN
for such defense, and shall provide LA with such assistance in defending
such suits as is requested by LA, at LA's expense. If RN's use of the LA
Products under the terms of this Agreement is, or in LA's opinion is likely
to be, enjoined due to the type of infringement or misappropriation
specified above, then LA may, at its sole option and expense, either (i)
procure for RN the right to continue using the LA Products under the terms
of this Agreement; or (ii) replace or modify the affected LA Products so
that it is noninfringing and substantially equivalent in function to the
enjoined LA Products. The foregoing obligation of LA does not apply (i)
with respect to versions of the LA Products or portions or components
thereof: (a) that are modified after shipment, if the alleged infringement
relates to such modification, and if such modification was not authorized,
expressly permitted or performed by LA; (b) that are combined with other
products, processes or materials, if the alleged infringement relates to
such combination and if LA did not authorize or expressly permit the
combination; or (c) where RN's use of the LA Products is not in accordance
with the license granted under this Agreement; or (ii) for use or
distribution of LA Products or otherwise not in accordance with the terms
and conditions of this Agreement.
13. LIMITATION OF LIABILITY
IN NO EVENT WILL EITHER PARTY BE LIABLE TO THE OTHER FOR ANY SPECIAL,
INDIRECT, INCIDENTAL OR CONSEQUENTIAL DAMAGE OR LOSS OF ANY NATURE (E.G.,
DAMAGE TO PROPERTY, LOSS OF PROFITS, BUSINESS INTERRUPTION, LOST SAVINGS,
LOSS OF USE, LOST OR DAMAGED FILES OR DATA, INJURY TO PERSON, OR ANY CLAIMS
OF THOSE NOT A PARTY TO THE AGREEMENT) WHICH MAY ARISE IN CONNECTION WITH
THE USE, ADAPTATION, MERGER, INCORPORATION, DISTRIBUTION, INSTALLATION,
REMOVAL OR SUPPORT OF THE LICENSED SOFTWARE AND/OR THE LA PRODUCTS PURSUANT
TO THIS AGREEMENT, REGARDLESS OF WHETHER SUCH CLAIMS ARE BASED IN WARRANTY,
CONTRACT, NEGLIGENCE, TORT, PRODUCTS LIABILITY OR OTHERWISE, EVEN IF THE
PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGE OR LOSS.
14. GENERAL.
14.1 Notice. Any notice or other communication permitted or required under this
------
Agreement shall be given in writing and shall be deemed effective upon the
business day after delivery (including courier service), overnight mail
delivery, upon confirmed facsimile transmission, or five (5) days after
deposit, postage prepaid, in the first class mail of the United States
properly addressed to the appropriate party at the address set forth below:
RN: RealNetworks, Inc.
1111 Third Avenue, Suite 2900
Seattle, Washington 98101
Point of contact: Len Jordan, Senior VP, Media Systems
Facsimile No.: 206-674-2305
With a copy to: General Counsel
Facsimile No.: 206-674-2695
LA: Liquid Audio, Inc.
810 Winslow Street
Redwood City, California 94063
Robert Flynn, VP of Business Development Facsimile No. (650) 549-2099
11
<PAGE>
with a copy to: Wilson, Sonsini, Goodrich & Rosati
650 Page Mill Road
Palo Alto, CA 94304
Point of Contact: Hank Barry
Facsimile No. (650) 496-4006
Either party may from time to time change such address by giving the other
party notice of such change in accordance with this section.
14.2 Independent Contractors. RN and LA are independent contractors in all
-----------------------
relationships and actions under and contemplated by the Agreement.
Notwithstanding anything in this Agreement to the contrary, the parties do
not by this Agreement intend to form, nor shall this Agreement be construed
to constitute, a LAship, joint venture, employment, or agency relationship
between them, or to authorize LA to enter into any commitment or agreement
binding on RN or to allow one party to accept service of any legal process
addressed to, or intended for, the other party. LA shall not make any
warranties, guarantees or any other commitments on behalf of RN pursuant to
the Agreement.
14.3 No Assignment. Neither party shall assign, transfer or otherwise dispose of
-------------
this Agreement or any rights or obligations hereunder without the other
party's written consent. This Agreement shall be binding upon and inure to
the benefit of the parties, their successors and permitted assigns.
14.4 Press Releases. Neither party shall issue any press releases relating to
--------------
this Agreement without the approval of the other.
14.5 Survival. The following provisions shall survive the expiration or
--------
termination of this Agreement: 1, 2.2, 7.3, 7.4, 8.4, 9-14, (except for
14.4), and any other terms herein that expressly state that they apply
after the Term.
14.6 Disputes. Any dispute arising out of or relating to this Agreement that is
--------
not resolved by the parties shall be submitted to non-binding mediation to
be held in accordance with the Commercial Mediation Rules of the American
Arbitration Association ("AAA"). The parties agree that their participation
in a mediation and the entire mediation proceeding, including but not
limited to all statements, discussions, conducts, rulings, findings or
determinations in that mediation proceeding will be confidential, will
constitute settlement negotiations under Rule 408 of the Federal Rules of
Evidence. The parties agree to perform whatever steps are necessary to
ensure that each mediation proceeding complies with this paragraph. If not
thus resolved, it shall be referred to a sole arbitrator knowledgeable in
the Internet and software industries in the United States, selected by the
parties within thirty days of mediation or, in the absence of such
selection, to AAA arbitration which shall be governed by the United States
Arbitration Act. The award shall be made within such months of selection of
the arbitrator and may be entered in any court having jurisdiction. The
mediation and arbitration shall be held in Seattle, Washington. The
arbitrator shall determine issues of arbitrability but may not limit,
expand, or otherwise modify the terms of the Agreement nor have authority
to award punitive or other damages in excess of compensatory damages, and
each party irrevocably waives any claim thereto. Each party shall bear its
own expenses but those related to the compensation of the mediator and the
arbitrator shall be divided equally. The parties, their representatives,
other participants and the mediator and arbitrator shall hold the
existence, content and result of mediation and arbitration in confidence.
Notwithstanding anything in this Section 14.6 to the contrary: (i)
------------
disputes relating to intellectual property rights shall not be subject to
mediation or arbitration; and (ii) either party may seek injunctive relief
for breaches of confidentiality or intellectual property rights or to
maintain the status quo pending mediation and arbitration in accordance
with this section.
14.7 U.S. Government Restricted Rights and Export Restriction. The Licensed
--------------------------------------------------------
Software and User Documentation are provided with RESTRICTED RIGHTS. Use,
duplication or disclosure by the Government is subject to restrictions set
forth in subparagraphs (a) through (d) of the Commercial Computer
Software--Restricted Rights at FAR 52.227-19 when applicable, or in
subparagraph (c)(1)(ii) of the Rights in Technical Data and
12
<PAGE>
Computer Software clause at DFARS 252.227-7013, and in similar clauses in
the NASA FAR supplement, as applicable. Manufacturer is RealNetworks,
Inc./1111 Third Avenue, Suite 500/ Seattle, Washington, 98101 LA
acknowledges that none of the Software or underlying information or
technology may be downloaded or otherwise exported or re-exported: (i)
into (or to a national or resident of) Cuba, Iran, Iraq, Libya, North
Korea, Syria, Sudan or Angola or any other country to which the U.S. has
embargoed goods; or (ii) to anyone on the U.S. Treasury Department's list
of Specially Designated Nationals or the U.S. Commerce Department's Table
of Denial Orders. The LA Products are likewise provided hereunder by LA on
the same basis as set forth above with respect to the Licensed Software
provided by RN.
14.8 Miscellaneous. This Agreement, and the Exhibits attached hereto and
-------------
incorporated herein, constitute the complete and exclusive agreement
between RN and LA with respect to the subject matter hereof, and
supersedes all oral or written understandings, communications or
agreements not specifically incorporated herein. If any provision in this
Agreement is held by a court of competent jurisdiction to be invalid, void
or unenforceable, the remaining provisions will continue in full force
without being impaired or invalidated in any way. No waiver, amendment or
modification of any provision of this Agreement shall be effective unless
it is in a document that expressly refers to this Agreement and is signed
by authorized representatives of both parties. Except as specifically
provided herein, failure or delay by either party in exercising any rights
or remedy under this Agreement shall not operate as a waiver of any such
right or remedy. Headings shall not be considered in interpreting this
Agreement. This Agreement shall be governed by the laws of the State of
Washington, without regard to its conflict of law rules. The United
Nations Convention of Contracts for the International Sale of Goods is
expressly excluded. This Agreement may be executed in separate
counterparts, each of which shall be deemed an original, both of which
together shall constitute one and the same instrument.
14.9 Force Majeure. Neither party shall be liable to the other for any delay or
-------------
failure to perform arising out of or related to any causes beyond such
party's reasonable control, including without limitation, acts of God,
wars, embargoes, strikes or labor disputes, failure of suppliers.
14.10 Freedom of Action. This agreement shall not be construed to imply any
-----------------
obligations other than as are expressly set forth herein. Each party may
have similar agreements with others. Subject to the terms of this
Agreement, each party may design, develop, manufacture, acquire or market
competitive products or services and conduct its business in whatever way
it chooses. IN WITNESS WHEREOF, the parties have entered into this
Agreement as of the Effective Date written above.
REAL NETWORKS, INC. LIQUID AUDIO, INC.
By: /s/ Len K. Dorda By: /s/ Robert Flynn
--------------------------- ------------------------------
Name: LEN K. DORDAN Name: Robert Flynn
------------------------- ----------------------------
Title: SUP MS DIV Title: VP Business Development
------------------------ ---------------------------
Date: 5/28/98 Date: April 26, 1998
------------------------- ----------------------------
13
<PAGE>
EXHIBIT A
LA PRODUCTS
-----------
"LA Product(s)" means the products and applications developed by LA hereunder
incorporating the Licensed Software which are compatible with RMA Server
Software, including:
(a) "LA Client Software," which means software that is incorporated in an RMA
Player and utilizes the RMA application programming interfaces ("APIs") and
will not interoperate with any server software, other than an RMA server,
that streams files by any RMA supported protocol;
(b) "LA Tools," which means software tools that may import datatypes and export
datatypes using the RealMedia Libraries; and
(c) "LA Server Applications," which means LA software applications that
interface with RMA Server Software and add datatypes that can be streamed
from RMA Server Software.
14
<PAGE>
Exhibit B
RMA SERVER SOFTWARE CAPABILITIES
--------------------------------
The RMA Server Software includes the following:
1) installer for the appropriate operating system platform
2) operators manual
3) exposed interfaces to plug-in a monitor, administrator, file system,
datatype or broadcast datatype
4) base-level monitoring tool
5) ability to stream a datatype given a file format plug-in or broadcast plug-
in and license key
6) supports the following platforms Windows NT; Solaris
15
<PAGE>
Exhibit C
[*]
---------------
[*]
[*]
[*]
[*]
[*]
[*]
[*]
[*]
[*]
[*]
[*]
* Certain information in this Exhibit has been omitted and filed
separately with the Commission. Confidential treatment has been requested
with respect to the omitted portions.
16
<PAGE>
Exhibit D
[*]
---------------
[*]
[*]
[*]
[*]
* Certain information in this Exhibit has been omitted and filed
separately with the Commission. Confidential treatment has been requested
with respect to the omitted portions.
17
<PAGE>
EXHIBIT 10.9
PRECEPT SOFTWARE, INC. BINARY SOFTWARE LICENSE AGREEMENT
This Binary Software License Agreement (the "Agreement") is entered into by
and between Precept Software, Inc. ("Precept") with offices at 1072 Arastradero
Road, Palo Alto, California 94304 and Liquid Audio, Inc. ("Licensee") with
offices at 2421 Broadway, Redwood City, California 94063.
RECITALS
--------
WHEREAS, Licensee has obtained a license from Precept for software
("Development Software") in object code form that Licensee uses to develop
application programs ("Applications");
WHEREAS, Licensee now wishes to embed the run-time component of the
Development Software in object code form (including all modifications,
enhancements, new releases and new versions thereof on the Windows, UNIX and
Macintosh platforms released by Precept and provided to Licensee under terms of
the Maintenance and Support section of Licensee's SDK Agreement with Licensor),
the "Software") in Applications and distribute the Software embedded in the
Applications; and
WHEREAS, Licensee wishes to obtain a license from Precept to embed the
Software in Applications and distribute the Software with Applications and
Precept wishes to grant such a license to Licensee.
NOW, THEREFORE, in consideration of the mutual promises herein, and other
good and valuable consideration, the adequacy and sufficiency of which is hereby
acknowledged, the parties agree as follows:
AGREEMENT
---------
1. LICENSE.
-------
(a) License Grant. Subject to the terms and conditions of this Agreement,
-------------
Precept hereby grants to Licensee a non-exclusive, non-transferable license for
the term of this Agreement to use, display, perform transmit, copy, have copied
for distribution and distribute the Software solely as embedded with the
Applications on the Windows, UNIX and Macintosh platforms. Licensee agrees that
the distribution rights granted for the Software are conditioned on Licensee's
obligation to add value to the Software in the form of the Applications
developed by Licensee. The Applications shall not provide direct or exposed
access to the development capabilities of the Development Software. Licensee
agrees not to encumber the Software or transfer the Software, or any of
Licensee's rights herein, to any other party without the prior written consent
of Precept.
(b) Sublicense Agreements. Any distribution of the Application or bundling of
---------------------
the Application with any other software or hardware, shall be accomplished under
a written license agreement ("Sublicense Agreement") between Licensee and the
end user, distributor or reseller to whom such distribution is made. Each
Sublicense Agreement shall contain terms and conditions which are consistent
with and substantially as protective of Precept's and Precept's licensors'
proprietary rights and substantially as protective as the terms and conditions
placed on Licensee by Precept in Sections 2 ("Proprietary rights"), 10
("Consequential Damages Waiver") (with no exception for breech of
confidentiality required), 13 ("U.S. Government Restricted Rights") (to the
extent applicable), and 18 ("Export"), and shall include a warranty disclaimer
substantially similar to Section 6(c) ("No Other Warranties"). No Sublicense
Agreement shall give any distributor or reseller the power to make any warranty
on behalf of Precept or its licensors. Upon Precept's request, Licensee shall
provide Precept with a copy of the form of Sublicense Agreements. Licensee shall
use commercially reasonable efforts to enforce each Sublicense Agreement with at
least the same degree of diligence used in enforcing similar agreements
governing end users of Licensee's own products. Licensee shall promptly notify
Precept of any material breach under a Sublicense Agreement that may materially
affect Precept, and will cooperate with Precept and/or Precept's licensors at
their expense in any legal action to prevent or stop unauthorized use,
reproduction, or distribution of the Development Software.
(c) Updates. This Agreement shall apply to any such software or updates
-------
supplied to Licensee by Precept.
2. PROPRIETARY RIGHTS.
------------------
<PAGE>
(a) Ownership of Proprietary Rights. Nothing herein shall be deemed to
-------------------------------
grant Licensee title to the intellectual property in the Software. Licensee
further acknowledges and agrees that title and full ownership rights to the
Software will remain the exclusive property of Precept or its suppliers, and
Licensee will not acquire any rights to the Software except as expressly set
forth above. Licensee shall not copy or alter, and shall take reasonable care to
ensure that others do not copy or alter, the Software or related materials in
whole or in part in any media for any purpose. except as specified in Section
1(a) ("License Grant"). To every such copy (whether in whole or in part) made by
Licensee for the purposes stated above, Licensee shall affix the same copyright
or other proprietary rights notice as was originally affixed to the Software by
Precept.
(b) No Reverse Engineering. Licensee agrees not to attempt, and to use best
----------------------
efforts to prevent Licensee's employees and contractors from attempting, to
reverse engineer, reverse compile, modify, adapt, translate, or disassemble the
Software or any complete or partial copy.
3. ROYALTIES. Licensee agrees to pay Precept a royalty, as described below,
---------
for each unit of the Applications distributed by Licensee or permitted by
Licensee to be distributed by Licensee's distributors, resellers or
sublicensees, less actual returns received by Licensee ("Royalty"). Minimum
Quarterly Payments shall be credited toward actual Royalties due, including for
promotional units of the Applications. No Royalties shall be payable with
respect to copies of the Applications distributed or permitted to be distributed
on a demonstration or evaluation basis, provided that the demonstration or
evaluation copies contain a feature which disables the operation of such copies
no later than sixty (60) days after delivery to the end user. Licensee will pay
Royalties to Precept within thirty (30) days after the end of each calendar
quarter. All payments will be made in United States dollars, free of any
withholding tax, by check or via wire transfer to a bank account designated by
Precept.
Royalty Schedule
----------------
Unlimited Stream Server [*]
Limited Stream Server [*]
Minimum Quarterly Payments for First year (1st Qtr
--------------------------------------------------
Beginning 4/1/97 and Ending 6/30/97)
------------------------------------
[*]
[*]
4. RECORDS AND REPORTS. Licensee shall keep accurate records and accounts in
-------------------
accordance with standard business practices in the software industry and
generally accepted accounting principles. Precept may inspect Licensee's records
on ten (10) days notice to Licensee Such inspections are solely for the purpose
of verifying Licensee's compliance with the provisions of this Agreement and
will be conducted by Precept or its independent accountants or consultants.
Precept's rights hereunder shall remain in effect through the period ending six
(6) months from the termination or expiration of this Agreement. In the event
any inspection of Licensee's records indicates an underpayment of an amount
equal to or greater than the greater of $5,000 or five percent (5%) of any
amounts due hereunder, Licensee shall promptly reimburse Precept for all
reasonable expenses associated with such inspection along with the deficient
amounts.
5. LICENSEE'S RESPONSIBILITIES. Licensee assumes full responsibility for
---------------------------
suitability of the Software to Licensee's needs and specifications and for
suitability of the operating environment (including the training of operating
personnel) in which the Software is to function.
6. WARRANTIES AND DISCLAIMERS.
--------------------------
(a) Limited Warranty. Precept warrants that the Software will substantially
----------------
conform to the documentation delivered with the Development Software, when
executed on the platforms designated in Section 1(a) ("License Grant") during
the ninety (90) day period following the date Licensee first uses the Software
("Warranty Period"). Precept's sole and exclusive obligation under this
warranty, at Precept's sole option, shall be to: (i) use reasonable best efforts
to supply Licensee with a workaround for such error, (ii) use reasonable efforts
to correct such error and integrate such correction into Precept's next
generally available release of the Development Software, or (iii) refund the
amounts paid to Precept by Licensee for the Software. To be covered by this
limited warranty, such errors must be: (i) reported by Licensee during the
Warranty Period and (ii) reproducible by Precept. Precept does not warrant that:
(i) operation of the Software shall be uninterrupted or error free, or (ii)
functions contained in the Software that may be selected for use by Licensee
shall meet Licensee's requirements.
(b) Warranty Exceptions. The warranty set forth above shall not apply to
-------------------
any defects or problems caused in whole or in part by: (i) any defect in any
portion of any hardware or equipment; (ii) the failure of any portion of any
hardware or equipment to function in accordance with applicable manufacturer's
specifications; (iii) any modification or enhancement made to the Software by
Licensee or any third person or entity other than Precept; (iv) any software
program, hardware (other than the
* Certain information in this Exhibit has been omitted and filed
separately with the Commission. Confidential treatment has been
requested with respect to the omitted portions.
<PAGE>
designated platforms), firmware, peripheral or communication device used in
connection with the Software: (v) Licensee's failure or the failure of any third
person or entity to follow the most current instructions provided by Precept
from time to time with respect to proper use of the Software; or (vi) Licensee's
negligence or the negligence of any other third party or entity. In the event
that Precept determines that any warranty claim reported by Licensee falls
within any of the foregoing exceptions, Licensee shall pay Precept for efforts
expended by Precept or an authorized representative at reasonable hourly rates
then in effect.
(c) No Other Warranties. NO PERSON, DISTRIBUTOR, RESELLER, OR COMPANY MAY
-------------------
EXPAND OR ALTER THE WARRANTY IN SECTION 6(a) ("LIMITED WARRANTY"). EXCEPT FOR
THE WARRANTY IN SECTION 6(a) ("LIMITED WARRANTY"), PRECEPT EXPRESSLY EXCLUDES
ALL OTHER WARRANTIES, EXPRESS OR IMPLIED, IN RELATION TO THE SOFTWARE (AND ANY
SERVICES RENDERED TO SUPPORT THE SOFTWARE), INCLUDING, WITHOUT LIMITATION, ANY
WARRANTY OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, OR
NONINFRINGEMENT OF THIRD PARTY RIGHTS. The Software is licensed only to Licensee
and Licensee shall not extend any warranties for or on behalf of Precept or
Precept's licensors to end users, distributors, resellers or any other third
parties.
7. PROPRIETARY RIGHTS INDEMNITY. Precept shall defend at Precept's expense any
----------------------------
claim, suit or proceeding brought against Licensee insofar as it is based on a
claim that the Software constitutes an infringement of a U.S. copyright or U.S.
patent or a misappropriation of a trade secret of a third party. To qualify for
such a defense and payment Licensee must: (i) give Precept prompt written notice
of any such claim; and (ii) allow Precept to control and fully cooperate with
Precept in the defense and all related settlement negotiations. Precept shall
pay reasonable attorney's fees incurred by Licensee before Precept assumes the
defense and all damages finally awarded or paid in compromise to third parties
which Licensee is obligated to pay but shall not be responsible for any
compromise made without its consent. Licensee shall have the right to
participate in the defense using counsel of its own, at its own expense. Upon
notice of a claimed infringement likely to result in an injunction or if in
Precept's opinion such a claim is likely, Precept shall have the right, at its
sole option and expense, to obtain the right to continue licensing the Software,
substitute other computer software with substantially similar operating
capabilities, or modify the Software so that it is no longer infringing. In the
event that none of the above options are reasonably available in Precept's
opinion. Licensee's sole and exclusive remedy shall be to terminate this
Agreement, to return the Software to Precept and to obtain a refund from Precept
of any Royalty paid by Licensee for such Software. PRECEPT SHALL HAVE NO
OBLIGATION TO LICENSEE IF ANY ALLEGED COPYRIGHT OR PATENT INFRINGEMENT OR CLAIM
THEREOF IS BASED UPON THE USE OF THE SOFTWARE IN CONNECTION OR IN COMBINATION
WITH EQUIPMENT, DEVICES, OR SOFTWARE (INCLUDING, WITHOUT LIMITATION, THE
APPLICATIONS) NOT DELIVERED BY PRECEPT (IF SUCH INFRINGEMENT OR CLAIM COULD HAVE
BEEN AVOIDED BY THE USE OF THE SOFTWARE WITH OTHER EQUIPMENT, DEVICES, OR
SOFTWARE) OR THE USE OF THE SOFTWARE IN A MANNER FOR WHICH IT WAS NOT INTENDED
OR USE OF OTHER THAN THE MOST CURRENT RELEASE OF THE DEVELOPMENT SOFTWARE IF
SUCH CLAIM WOULD HAVE BEEN PREVENTED BY THE USE OF SUCH RELEASE. THE FOREGOING
STATES LICENSEE'S SOLE AND EXCLUSIVE REMEDY WITH RESPECT TO CLAIMS OF
INFRINGEMENT OF THIRD PARTY PROPRIETARY RIGHTS OF ANY KIND.
8. INDEMNIFICATION BY LICENSEE. Licensee shall defend, indemnify and hold
---------------------------
harmless Precept from and against any claims by a distributor, reseller, end
user, or other party arising out of (i) the operation or use of the
Applications, (apart from the Software inbedded therein) (ii) Licensee's
failure, to obtain a valid Sublicense Agreement, or (iii) Licensee's
representations or warranties regarding the Software to end users, distributors,
resellers or other third parties.
9. CONFIDENTIALITY
---------------
(a) Definition. The term "Confidential Information" shall mean any
----------
information disclosed by one party to the other party in connection with this
Agreement which is disclosed in writing, orally or by inspection and is
identified as "Confidential" or "Proprietary" or which a party has reason to
believe is treated as confidential by the other party. Any information, in
whatever form, disclosed by Precept that relates to the Software and that is not
publicly known is "Confidential Information."
(b) Obligation. Each party shall treat as confidential all Confidential
----------
Information received from the other party, shall not use such Confidential
Information except as expressly permitted under this Agreement, and shall not
disclose such Confidential Information to any
<PAGE>
third party without the other party's prior written consent. Each party shall
take reasonable measure to prevent the disclosure and unauthorized use of
Confidential Information of the other party.
(c) Exceptions. Notwithstanding the above, the restrictions of this Section
----------
shall not apply to information that:
i. was independently developed by the receiving party without any
use of the Confidential Information of the other party and by employees of
other agents of (or independent contractors hired by) the receiving party
who have not been exposed to the Confidential Information;
iii. becomes known to the receiving party, without restriction, from
a third party without breach of this Agreement and who had a right to
disclose it:
iv. was rightfully known to the receiving party, without
restriction, at the time of disclosure; or
v. is disclosed pursuant to the order or requirement of a court,
administrative agency, or other governmental body; provided, however, that
the receiving party shall provide prompt notice thereof to the other party
and shall use its reasonable best efforts to obtain a protective order or
otherwise prevent public disclosure of such information.
10. CONSEQUENTIAL DAMAGES WAIVER. EXCEPT FOR LICENSEE'S BREACH OF THE
----------------------------
CONFIDENTIALITY PROVISIONS OF SECTION 9 OF THIS AGREEMENT, NEITHER PARTY WILL
HOLD THE OTHER PARTY LIABLE FOR ANY INTERRUPTION OF BUSINESS, LOST PROFITS, OR
CONSEQUENTIAL, INDIRECT OR INCIDENTAL DAMAGES REGARDLESS OF WHETHER SUCH PARTY
HAS BEEN ADVISED OF OR KNOWS OF THE POSSIBILITY OF SUCH POTENTIAL DAMAGES.
11. LIMITATION OF LIABILITY. Licensee acknowledges and agrees that the
-----------------------
Royalties received by Precept for the Software provided under this Agreement
reflect the allocation of risk provided by the limited remedies and limitations
of liability set forth in this Agreement, and that such allocation of risk is a
fundamental benefit of the bargain for each party. NOTWITHSTANDING ANY OTHER
PROVISION OF THIS AGREEMENT, EXCEPT FOR THE PROPRIETARY RIGHTS INDEMNITY IN
SECTION 7, IN NO EVENT WILL PRECEPT'S LIABILITY TO LICENSEE, REGARDLESS OF THE
FORM OF CLAIM OR ACTION, EXCEED A SUM EQUAL TO THE AMOUNTS PAID BY LICENSEE FOR
THE SOFTWARE UNDER THIS AGREEMENT THIS LIMITATION IS CUMULATIVE, WITH ALL
PAYMENTS TO LICENSEE FOR CLAIMS OR DAMAGES BEING AGGREGATED TO DETERMINE
SATISFACTION OF THE LIMIT EXCEPT FOR THE PROPRIETARY RIGHTS INDEMNITY IN SECTION
7
12. HAZARDOUS USES. The Software is not authorized by Precept for Licensee's
--------------
use in any device or application where the failure, malfunction or inaccuracy of
the Software carries a risk of death or serious bodily injury, such as, but not
limited to medical equipment, nuclear facilities, aircraft operation, air
traffic control, life support or other application representing a similar degree
of hazard. Any such use is prohibited without prior written agreement of Precept
under terms intended to allocate the risks of selling the Software for such
uses. Licensee will indemnify, defend and hold Precept harmless from all claims,
losses, damages and expenses, including reasonable attorney's fees, arising from
any prohibited use or application of the Software by Licensee.
13. U.S. GOVERNMENT RESTRICTED RIGHTS. If the Software is being acquired by the
---------------------------------
U.S. Government, the Software and related documentation is commercial computer
software and documentation developed exclusively at private expense, and (a) if
acquired by or on behalf of a civilian agency, shall be subject to the terms of
this computer software license as specified in 48 C.F.R. 12.212 of the Federal
Acquisition Regulations and its successors; and (b) if acquired by or on behalf
of units of the Department of Defense ("DOD") shall be subject to the terms of
this commercial computer software license as specified in 48 C.F.R. 227.7202.2,
DOD FAR supplement and its successors.
14. SOFTWARE SUPPORT. Continuing support for the Software after expiration of
----------------
the Warranty Period may be available from Precept under the terms of a separate
SDK maintenance support agreement at the then-current standard rates.
15. ASSIGNABILITY. This Agreement is not assignable or transferable, in whole
-------------
or in part, by either party, whether voluntary, by operation of law, or
otherwise without the other party's prior written consent, except to the
surviving entity in a merger or consolidation in which it participates or to a
purchaser of all or substantially all of its assets.
16. TERM. Unless canceled pursuant to its terms, this Agreement shall be in
----
effect for the term of Precept's copyright in the Software, so long as Licensee,
or one of Licensee's divisions, rightfully retains possession of the Software as
delivered by Precept.
<PAGE>
17. CANCELLATION.
------------
(a) Cancellation. Licensee may cancel this Agreement on thirty (30) days
------------
written notice to Precept. Precept may cancel this Agreement upon Licensee's
default in any of Licensee's material obligations under this Agreement by
written notice to Licensee stating the nature of the default and that such
cancellation is to be effective thirty (30) days after the date of the notice
unless within such time Licensee cures the default to Precept's satisfaction.
(b) Immediate Cancellation. This Agreement will terminate immediately if
----------------------
Licensee encumbers, transfers the Software except as provided for herein, or if
Licensee becomes insolvent, makes an arrangement for the benefit of creditors,
or becomes subject to bankruptcy proceedings.
(c) Rights Upon Cancellation. Within thirty (30) days after any
------------------------
cancellation or termination of this Agreement, Licensee shall deliver to Precept
all copies of the Software and related materials (whether in whole or in part)
then in its possession other than such copies of the Software and related
materials as are necessary to fill orders placed with Licensee prior to such
cancellation or termination and/or to enable Licensee or its distributors and
resellers to provide continuing support to distributors, resellers and end users
of the Application. Royalty payments due for outstanding orders and support
copies shall survive such cancellation or termination. End user licenses to the
Application outstanding or subject to pending orders shall survive such
cancellation or termination. Regardless of the reason for cancellation or
termination, Licensee shall not be entitled to a refund of any monies previously
paid to Precept or a credit for any sum owed to Precept hereunder.
18. EXPORT. Licensee acknowledges that the laws and regulations of the United
------
States may restrict the export and re-export of certain commodities and
technical data of United States origin, including the Software in any medium.
Licensee agrees that Licensee will not export or re-export the Software in any
form without the appropriate United States and foreign government licenses.
Licensee also agrees that Licensee's obligations pursuant to this Section shall
survive and continue after any termination or expiration of rights under this
Agreement.
20. INJUNCTIVE RELIEF. It is understood and agreed that, notwithstanding any
-----------------
other provisions of this Agreement, breach of the provisions of Sections 1
("License") or 2 ("Proprietary Rights") by Licensee will cause Precept
irreparable damage for which recovery of money damages would be inadequate, and
that Precept shall therefore be entitled to obtain timely injunctive relief to
protect Precept's rights under this Agreement in addition to any and all
remedies available at law.
21. GOVERNING LAW. This Agreement shall be construed in accordance with the
-------------
laws of the State of California as they are applied to agreements between
California residents entered into and to be performed entirely within
California. The United Nations Convention on Contracts for the International
Sale of Goods (1980) is specifically excluded from application to this
Agreement.
22. SEVERABILITY. In the event of invalidity of any provision of this
------------
Agreement, the parties agree that such invalidity shall not affect the validity
of the remaining portions of this Agreement. IT IS EXPRESSLY UNDERSTOOD AND
AGREED THAT EACH AND EVERY PROVISION OF THIS AGREEMENT WHICH PROVIDES FOR A
LIMITATION OF LIABILITY, DISCLAIMER OF WARRANTIES OR EXCLUSION OF DAMAGES, IS
INTENDED BY THE PARTIES TO BE SEVERABLE AND INDEPENDENT OF ANY OTHER PROVISION
AND TO BE ENFORCED AS SUCH.
23. RELATIONSHIP OF THE PARTIES. Nothing contained in this Agreement shall be
---------------------------
construed as creating any agency, partnership, or other form of joint enterprise
between the parties. The relationship between the parties shall at all times be
that of independent contractors. Neither party shall have authority to contract
for or bind the other in any manner whatsoever. This Agreement confers no rights
upon either party except those expressly granted herein.
24. WAIVER. The failure of either party to require performance by the other
------
party of any provision hereof shall not affect the full right to require such
performance at any time thereafter; nor shall the waiver by either party of a
breach of any provision hereof be taken or held to be a waiver of the provision
itself.
25. TAX LIABILITY. Licensee shall be responsible for paying any sales or use
-------------
tax imposed on this transaction at any time.
26. ESCROW. Within 30 days after the execution of this Agreement the parties
------
and an escrow agent mutually acceptable to the parties shall enter into a
software escrow agreement upon terms and conditions mutually agreeable to the
parties which shall provide for the release of the
<PAGE>
source code of the Software to Licensee upon the occurrence of any of the
release conditions described below:
(a) Liquidation proceedings under Chapter 7 of the Bankruptcy Code, or any
other liquidation proceedings or reorganization proceedings under Chapter 11 of
the Bankruptcy Code in which this Agreement is rejected by the bankruptcy
trustee, are instituted by or against Licensor, or any order, judgment or decree
is entered against Licensor decreeing its dissolution; provided, however, that
with respect to an involuntary petition in bankruptcy, such petition has not
been dismissed within sixty (60) days after the filing of such petition;
(b) Licensor admits in writing its inability to pay its debts as they
mature, makes an assignment for the benefit of creditors, applies for or
consents to the appointment of a receiver, liquidator, custodian or trustee for
it or for a substantial part of its property or business (or such a receiver,
liquidator, custodian or trustee otherwise is appointed), or ceases to do
business or institutes any proceedings for the liquidation or winding up of its
business or for the termination of its corporate charter except in connection
with a merger, acquisition or corporate reorganization.
(c) For a period of thirty (30) days, Licensor consistently and materially
fails to provide support and maintenance as required under Licensee's support
and maintenance agreement with Licensor, and does not cure such failure within
thirty (30) days after written notice there of by Licensee.
Licensee shall be responsible for paying licensor's standard, reasonable charge
for the escrow, prorata with all other Licensees of the Software. Licensor shall
update the escrow periodically and promptly with any update to which Licensee is
entitled under its support and maintenance agreement with Licensor.
Restriction on Use. Following a release of the source code of the Software from
the escrow to Licensee, Licensee is hereby granted a license to use and shall
use such source code solely to provide support and maintenance of the
Applications to License's end users, distributors, resellers and sublicensees.
Any derivative works of the Software created by Licensee to provide such support
and maintenance cannot be distributed as independent stand-alone product.
27. HEADINGS. The paragraph headings appearing in this Agreement are inserted
--------
only as a matter of convenience and in no way define, limit, construe, or
describe the scope or extent of such paragraph or in any way affect this
Agreement.
28. ENTIRE AGREEMENT. The provisions of this Agreement, by its terms,
----------------
constitute the entire agreement between the parties and supersede all prior
agreements or representations, oral or written, including terms and conditions
as may be printed on form purchase orders, and all other communications relating
to the subject matter hereof.
29. COUNTERPARTS. This Agreement may be executed in one or more counterparts,
------------
each of which shall be an original, and all of which together shall constitute
one instrument.
IN WITNESS WHEREOF, the duly authorized representations of the parties have
executed this Agreement.
"Precept":
Precept Software, Inc.
/s/ Judith Estrin
- --------------------------------------
Authorized Signature
Judith Estrin
- --------------------------------------
Printed
President & CEO
- --------------------------------------
Title
9/30/97
- --------------------------------------
Date
"Licensee":
LIQUID AUDIO INC
/s/ Robert Fund
- --------------------------------------
Authorized Signature
ROBERT FUND
- --------------------------------------
Printed
VP BUSINESS DEVELOPMENT
- --------------------------------------
Title
September 25, 1997
- --------------------------------------
Date
<PAGE>
EXHIBIT 10.10
PATENT LICENSE AGREEMENT
between
FRAUNHOFER-GESELLSCHAFT, ZUR FORDERUNG DER
ANGEWANDTEN FORSCHUNG E. V.
and
LIQUID AUDIO, INC.
- --------------------------------------------------------------------------------
THIS AGREEMENT DOES NOT BIND OR OBLIGATE EITHER PARTY IN ANY MANNER UNLESS DULY
EXECUTED BY AUTHORIZED REPRESENTATIVES OF BOTH PARTIES
- --------------------------------------------------------------------------------
<PAGE>
FRAUNHOFER-GESELLSCHAFT ZUR FORDERUNG DER ANGEWANDTEN FORSCHUNG E.V.
/s/ DR. M. PAULUS
- --------------------------------- for
By (Sign)
Dr. M. Paulus
- ---------------------------------
Name (Print)
Director of Patent & License Dep.
- ---------------------------------
Title
August 20/1998
- ---------------------------------
Date
LIQUID AUDIO, INC.
/s/ ROBERT FLYNN
- ---------------------------------
By (Sign)
ROBERT FLYNN
- ---------------------------------
Name (Print)
VP Business Development
- ---------------------------------
Title
August 18, 1998
- ---------------------------------
Date
Page 2
<PAGE>
1. INTRODUCTION
This Agreement is made and entered into this 14th DAY OF AUGUST 1998 by and
between FRAUNHOFER-GESELLSCHAFT ZUR FORDERUNG DER ANGEWANDTEN FORSCHUNG e. V., a
non profit organization duly organized and existing under the laws of the
Federal Republic of Germany and having its principal office of LeonrodstraBe 54.
80636 Munchen, Germany, (hereinafter referred to as "FhG"), acting on behalf of
its Fraunhofer-Institut fur Integrierte Schaltungen (IIS) and LIQUID AUDIO,
Inc., a corporation duly organized under the laws of California and having its
principal office at 810 Winslow Avenue, Redwood City, California 94063, USA.
(hereinafter referred to as "LA").
WITNESSETH
WHEREAS, FhG and LA have already agreed on a Letter of Intent of October 22/29.
1997; and
WHEREAS, FhG is willing to enter into a separate agreement with LA to license a
certain software to LA, which is described in said separate software licensing
agreement, provided that the terms of the separate agreement are agreed to by
LA; and
WHEREAS, FhG is the owner of certain technology and wishes to have this
technology utilized by LA; and
WHEREAS, LA wishes to obtain a non-exclusive license to use the technology upon
the terms and conditions hereinafter set forth: and
WHEREAS, FhG Intends this Agreement to confer a license with LA retaining to its
own use all ownership rights in the technology, Including, but not limited to,
patent rights, copyrights, Implementation rights and licensing rights therein,
and further Intends that no license, expressed or implied, for use other than
herein set out shall be transferred hereby; and
WHEREAS, LA knows and accepts that this agreement only holds for an intermediate
time period until either the signing of a further Interim agreement which may
include licensing of content (the "Further Interim Agreement") or of a Patent
License for the technology, which was developed in collaboration between AT&T
Corporation., Dolby Laboratories Licensing Corporation, FhG and Sony Corporation
to create a Joint proposal for an extension of the ISO MPEG-audio standard (IS
13818-3) targeted at a proposed standard (IS 13818-7) for MPEG non-backward
compatible audio coders (the "Main Contract", see Section 10.1)
For and in consideration of the covenants herein contained as well as of other
good and valuable consideration the receipt and sufficiency of which is hereby
acknowledged, it is covenanted and agreed by and between the parties hereto
that:
Page 3
<PAGE>
2. DEFINITIONS
2.1. "AAC Standard" means the specifications and operating parameters
established by the Joint Technical Committee of the International Standards
Organization ISO/IEC IS 13818-7 information technology - Generic coding of
moving pictures and associated audio information - Part 7: Advanced Audio
Coding.
2.2. "FAC Technology" shall mean the technology which is part of the AAC
Standard and which was developed by FhG before and during or after the
collaboration to create a joint proposal for the extension of the MPEG-audio
standard and which is protected by patents and patent applications, which are
owned by FhG or for which FhG has the right to grant licenses.
2.3 "FAC Content" shall mean Content that is encoded in compliance with all or
a portion of the FAC Technology, regardless of whether the date representing
such encoded Content is manipulated or encrypted to protect the security or
privacy of such data after or during the encoding process.
2.4. "Content" shall mean music or any other information in analog or digital
audio form.
2.5. "Effective Date" shall be the date upon which the Parties have signed this
Agreement.
2.6. "Licensed Technology" means all patents now or hereafter owned or licensed
by FhG covering the FAC Technology, including without limitation all the patents
and patent applications scheduled at Appendix A, including any divisional,
continuation, or substitute application and/or reissue based on such patents or
patent applications and all corresponding foreign counterparts to such patents
and patent applications.
2.7. "Field of Use" shall mean the LA software used to store, deliver, serve,
play, encode, decode, convert or otherwise use or manipulate Content and/or FAC
Content.
2.8. "Licensed Product" shall mean any LA product which includes a decoding
and/or encoding device, or software capable of encoding and/or decoding Content
and/or FAC Content, all in compliance with all or a portion of the FAC
Technology, and which LA product infringes a valid claim to the Licensed
Technology but for this license agreement.
2.9. "Licensed Products Revenue" shall mean Licensee's gross revenues that are
actually received and non-refundable from the sale of the Licensed Products.
2.10. "Licensee" means the party identified on the title page of this Agreement
and its Subsidiaries.
2.11. "Licensor" means FhG and their respective successors and assigns.
Page 4
<PAGE>
2.12. "Parties" shall mean Licensor and Licensee.
2.13. "Party" shall mean any one of the Parties.
2.14. "Minimum Royalty" shall mean [*]
2.15. "Subsidiary" of a company means a corporation or other legal entity (a)
the majority of whose shares or other securities entitled to vote for election
of directors (or other managing authority) is now or hereafter controlled by
such company either directly or indirectly; or (b) the majority of the equity
interest in which is now or hereafter owned and controlled by such company
either directly or indirectly; or which does not have outstanding shares or
securities, as may be the case in a partnership, joint venture, or
unincorporated association, but more than 50% of the ownership interest
representing the right to make decisions for such corporation, company, or other
entity which is now or hereafter owned and controlled by such company either
directly or indirectly; but any such corporation or other legal entity shall be
deemed to be a Subsidiary of such company only so long as such control or such
ownership and control exists.
3. GRANTS OF LICENSE
3.1. "Grants of License": Subject to the terms of this Agreement including the
Limitations of Licenses below, the Licensor hereby grants to Licensee under the
Licensed Technology during the Term of this Agreement a non-exclusive, non-
sublicensable), non-transferable, worldwide license to make, have made, use,
sell and offer for sale only as permitted hereunder, import, or otherwise
distribute Licensed Products for use within the Field of Use. Licensee shall be
permitted to distribute the Licensed Products to its end user customers pursuant
to an end user license agreement that permits use of the Licensed Products but
prohibits further redistribution. exploitation, or use of the Licensed Product
by any party other than the end user customer that purchased the end user
license to the Licensed Product.
3.2. "Limitations of Licenses": The limits within this section 3.2 shall
supercede Section 3.1. to any extent they are inconsistent.
3.2.1. The License does not include the right to create, generate,
encode, decode or otherwise modify data or bitstreams using the Licensed
Technology other than for the Field of Use.
3.2.2. Licensee hereby declares and guarantees to inform its purchasers
of the Licensed Products about these restrictions in writing (e.g. in
manuals or end user license agreements).
3.3. The rights granted by Licensor under this Agreement are expressly limited
to the use of the FAC Technology, and no other rights are granted under the
Licensed Technology, any other patents or trade secrets, or to provide any
product or service that is not required by the FAC Technology.
4. ENFORCEMENT
* Certain information in this Exhibit has been omitted and filed
separately with the Commission. Confidential treatment has been
requested with respect to the omitted portions.
Page 5
<PAGE>
4.1. Licensee shall notify Licensor of all suspected or actual Infringements of
the Licensed Technology that come to its attention. Licensor shall have
exclusive authority to act thereon and in connection therewith, Licensee shall
cooperate with Licensor by furnishing evidence, documents, testimony, and the
like as Licensor reasonably requires. Licensor shall reimburse Licensee for out-
of-pocket expenses associated with the cooperation requested by Licensor.
4.2. Licensor shall have the option, but not the obligation, to seek redress
for such infringement at its own expense. Licensee has no right, authority or
standing to bring any action against any third party relating to the third
party's infringement of the Licensed Technology.
5. PUBLICITY
5.1. No party shall make public disclosures inconsistent with the rights and
obligations created hereunder. Any party may require the other party to promptly
supply a copy of any public disclosure it made related to the subject matter
hereof after the public disclosure is made. No party shall disclose the terms of
this Agreement to any third party without the written permission of the other
party, except as may be required by applicable law or regulation.
6. PAYMENTS AND REPORTS
6.1. In consideration of the rights granted herein Licensee shall pay Licensor
a royalty of [*] of the Licensed Products Revenue ("Running
Royalties").
6.2. For the purpose of timing of payments, a Licensed Product shall be
considered sold when Licensed Product Revenues are actually received and non-
refundable.
6.3. If Licensee sells or otherwise transfers Licensed Products to an other
licensee who pays content royalties to Licensor, then no royalties shall be due
on such Licensed Products provided that Licensee is not aware or has no reason
to be aware that such other licensee is re-selling or otherwise re-distributing
such Licensed Products for the purpose of avoiding royalties hereunder.
6.4. Within thirty (30) days after the end of each calendar half year ending on
June 30 or December 31, commencing on the half year containing the Effective
Date, Licensee shall pay Licensor the greater of either (a) the Running
Royalties accrued during such calendar half year or (b) the Minimum Royalty.
Simultaneously with such payment, Licensee shall provide Licensor with a report
certified by Licensee's chief financial officer or the chief financial officer's
designate (the "Royalty Report"), which includes:
6.4.1. the number of sold Licensed Products during the calendar half year
even if this number is zero;
6.4.2. the Running Royalties owed on such sold Licensed Products;
* Certain information in this Exhibit has been omitted and filed
separately with the Commission. Confidential treatment has been requested
with respect to the omitted portions.
Page 6
<PAGE>
6.4.3. the amount of Licensee's payment accompanying the Royalty Report;
6.4.4. any other information that the Licensor and Licensee deem
reasonable to ensure the Licensee is complying with this Agreement.
6.5. Payments to Licensor shall be made by wire transfer to the bank and
account indicated in this Agreement.
6.6. Licensor will credit to Licensee any overpayment of royalties made in
error if such error is identified and fully explained by written notice to
Licensor during the term of this Agreement.
6.7. Time is of the essence with respect to all payments required hereunder.
6.8. All dollar amounts in this Agreement refer to United States dollars unless
otherwise indicated. Any conversion to United States dollars shall be at the
prevalling rate for bank cable transfers as quoted for the last day of such
semiannual period by the Wall Street Journal.
6.9. Overdue payments shall be subject to a late payment charge calculated at
an annual rate of three percent (3%) over the prime rate or successive prime
rates (as posted in the Wall Street Journal) during the delinquency. If the
amount of such charge exceeds the maximum permitted by law, such charge shall be
reduced to such maximum.
7. BOOKS AND RECORDS
7.1. During the Term of this Agreement and for a period of six (6) years
thereafter, Licensee shall keep complete, full, and accurate books and records
of all information which may be required by Licensor in order to confirm the
accuracy of Licensee's reports and payments. Licensor shall have the right to
have a professionally registered accountant inspect such books and records of
Licensee to the extent necessary to verify their accuracy and that of other
statements provided for herein; provided however, that such activity shall be
made during regular business hours upon reasonable notice and Licensee may not
be audited more than once in any calendar year. Any royalty statement that is
not audited and specifically disputed by Licensor within two (2) years after
issuance shall be deemed to be binding and conclusive on Licensor. Such
accountant shall not reveal any information to Licensor other than what is
required to be reported under this Agreement, unless the accountant is ordered
to disclose additional information by a court of competent jurisdiction. The
cost of the examination shall be paid by Licensor unless the inspection reveals
that the total amount owed for the period under audit is greater than five
Percent (5%) of the amounts reported, in which case Licensee shall pay the
reasonable out-of-pocket costs of the inspection and collection.
7.2. Licensee shall be responsible for and shall pay any tax, duty, levy,
customs fee, or similar charge ("Taxes"), including interest and penalties
thereon, however designated, imposed on it as a result of the operation or
existence of this Agreement.
Page 7
<PAGE>
except for withholding and other Taxes based on Licensor's net income, which the
Parties acknowledge that Licensee may be required to withhold or deduct from
payments to Licensor.
8. CONFIDENTIALITY
8.1 "Confidential Information" shall include any information disclosed by one
Party ("Discloser") to the other Party ("Recipient"), and marked as
confidential, proprietary or with similar designation, or confirmed in writing
as such within 30 days after disclosure, including but not limited to Royalty
Reports, source code, specifications, designs, plans, drawings. Inventions,
software, data, prototypes, methods, processes, business and/or technical
information relating to the business of the Parties.
8.2. Recipient shall reproduce Confidential Information only to the extent
necessary to exercise its rights and obligations under this Agreement.
Reproductions of Confidential Information shall include any trade secret
legends, proprietary notices and/or copyright notices present in the
Confidential Information.
8.3. Recipient shall restrict disclosure of Confidential Information to its
employees with a need to know and advise such employees of the obligations
assumed herein, and Recipient shall not disclose Confidential Information to any
third party: provided however, that Recipient may disclose Confidential
Information to consultants and independent contractors which agree in writing to
maintain disclosures in confidence under terms and conditions at least as
restrictive as those herein.
8.4. All Confidential Information that is disclosed for the purpose(s) set
forth in this Agreement shall be subject to these restrictions and may not be
used for any other purpose. The fact that a discussion involving the disclosure
of Confidential Information will occur or has occurred shall be considered
Confidential Information.
8.5 All Confidential Information shall remain the property of Discloser.
Recipient's duty to protect Confidential Information commences upon receipt of
the Confidential Information.
8.6. These restrictions on the use and disclosure of Confidential Information
shall not apply to any Confidential Information:
8.6.1. independently developed by Recipient or lawfully received free of
restriction from another source having the right to furnish the
Confidential Information; or
8.6.2. after it has become generally available to the public without
breach of this Agreement by Recipient; or
8.6.3. that, at the time of disclosure to Recipient, was known to
Recipient free of restriction as evidenced by documentation in Recipient's
possession; or
8.6.4. that Discloser agrees in writing is free of such restrictions; or
Page 8
<PAGE>
8.6.5. that Recipient, on the advice of counsel, is required to disclose
under applicable law or other demand under lawful process. Including a
discovery request in a civil irrigation, if Recipient first gives Discloser
notice of the required disclosure and cooperates with Discloser, at
Discloser's sole expense. In seeking reasonable protective arrangements
with the party requiring disclosure under applicable law or other demand
under lawful process. In no event shall Recipient's cooperation with
Discloser require Recipient to take any action which, on the reasonable
advice of Recipient's counsel, could result in the imposition of any
sanctions or other penalties against Recipient.
8.7. The parties agree that in the case of the breach of any provision of the
section of this Agreement entitled Confidentiality, the aggrieved party shall
suffer immediate and irreparable harm, and that immediate injunctive relief will
therefore be appropriate.
9. REPRESENTATIONS, WARRANTIES AND LIABILITIES
9.1. Licensor represents and warrants that Licensor owns or has all rights
necessary to the Licensed Technology to grant the license to Licensee hereunder.
Licensor makes no representation, covenant, or warranty regarding:
9.2.1. the scope, enforceability, validity or non-infringement of the
Licensed Technology; or
9.2.2. the ongoing maintenance or prosecution of the Licensed Technology;
or
9.2.3. defense of Licensee against actions or suits of any nature brought
by third parties or
9.2.4. the sufficiency or completeness of the Licensed Technology for the
purpose of making, using or selling Licensed Products and/or FAC Content.
9.3. Each Party represents, covenants and warrants that:
9.3.1. this Agreement does not violate any of the Parties' existing
agreements:
9.3.2. it has the authority, power and right to convey the rights or
accept the obligations created hereunder;
9.3.3. the Royalties and Term of this Agreement represents a consideration
of the aggregate relative value of the Licensed Technology, their
expiration dates and the convenience of both Parties, and were selected by
the Parties to avoid the difficulty and expense of implementing a more
complex matrix of multiple rates dependant upon expiration dates and
valuation;
Page 9
<PAGE>
9.3.4. It is not aware (to the best of its knowledge and information) of
any written assertion received by such Party from any third party that
implementation of the FAC Technology infringes or misappropriates the third
party's intellectual property rights other than those written assertions
solicited received and distributed by the ISO in connection with its public
effort to identify rights holders of the AAC Standard.
9.4 LICENSOR MAKES NO WARRANTY OF ANY KIND WHATSOEVER. EXPRESS OR IMPLIED,
EXCEPT THOSE IN THIS SECTION. ANY AND ALL IMPLIED WARRANTIES OF MERCHANTABILITY
AND/OR FITNESS FOR A PARTICULAR PURPOSE AND NON-INFRINGEMENT ARE HEREBY
DISCLAIMED BY LICENSOR AND EXCLUDED.
9.5 In no event shall either party, or their trustees, officers, employees and
affiliates. be liable for any consequential, incidental, special, or indirect
damages, losses, costs, charges, claims, demands, fees, or expenses of any
nature or kind arising out of this Agreement.
9.6 Licensee represents, covenants and warrants that:
9.6.2. Licensee is aware that other entities have asserted to the ISO that
they own or control patents which relate to the FAC Standard and that this
Agreement grants licensee not rights with respect to such patents:
9.6.3. Licensee shall indemnify, and hold Licensor harmless from and
against any claim, loss or damage based in whole or in part on
Licensee's exploitation of Licensed Products in the manner set
forth in Section 9.7 below.
9.7 Licensee shall at all times during the term of this Agreement and
thereafter, Indemnify, defend and hold Licensor, its trustees, officers,
employees and affiliates, harmless against all claims and expenses arising out
of legal claims by third parties, including legal expenses and reasonable
attorneys' fees, arising out of the death of or injury to any person or persons
or out of any damage to property to the extent attributable to the Licensed
Products and against any other third-party claim, proceeding, demand, expense
and liability of any kind whatsoever to the extent attributable to the
production, manufacture, sole, use, lease, consumption or advertisement of the
Licensed Products. Licensee's obligations under this Section 9.7 shall be
conditioned upon prompt notice of such third-party claims from Licensor,
reasonable cooperation and assistance from Licensor at Licensee's expense and
Licensee's sole control of the defense and/or settlement of such action.
Licensee shall not be liable for any expenses incurred by Licensor without
Licensee's prior written consent.
10. TERM AND TERMINATION
10.1. This Agreement terminates when either the Further Interim Agreement
between Licensee and FHG or the Main Contract between Licensee and AT&T, Dolby,
FHG and Sony comes into force. If the Main Contract or Further Interim Agreement
does not
Page 10
<PAGE>
come into force, this Agreement terminates [*]
10.2. Failure to pay or perform any obligation hereunder within the time
prescribed shall constitute an event of default. Failure to cure any default
within sixty days after receipt of notice describing the non-performance (ten
business days with respect to undisputed non-payment of funds) shall entitle the
Party giving such notice to terminate or suspend this Agreement.
10.3. Licensee may terminate this Agreement, at will, subject to payment of all
Royalties due and upon sixty (60) days notice to Licensor.
10.4. Termination shall accelerate Licensee's royalty payment and half year
reporting obligations from "Within thirty (30) days after the end of each
calendar half year" to "Within thirty (30) days of termination".
10.5 The obligations of the Parties under this Agreement which expressly or by
their nature would continue beyond the termination, cancellation or expiration
of this Agreement shall remain in effect and survive termination, cancellation
or expiration of this Agreement, including by way of example only the Sections
pertaining to "Publicity". "Confidentiality" and "Representations, Warranties
and Liabilities". Immediately upon termination of this Agreement (other than for
breach by Licensor), Licensee shall pay to Licensor all royalties due through
the effective date of such termination.
11. GENERAL
11.1. Section Titles. Section titles are Intended only to aid and assist the
--------------
reader as an index device and are not intended to be descriptive of the contents
of the section or to be used for construction or interpretation.
11.2. Entire Agreement. This Agreement, together with its several exhibits and
----------------
appendices, contains the entire agreement between the parties, and supersedes
all other agreements between them relating to the subject matter hereof,
including without limitation the Letter of Intent dated October 22/29, 1997.
11.3. Compliance with U.S. Export Control Regulations. Licensee shall not
-----------------------------------------------
export any data acquired from Licensor under this Agreement, or the direct
product thereof, to any county in contravention of United States law. Nothing in
this Agreement shall be construed as requiring Licensor to export from the
United States any technical data or any commodities to any county in
contravention of United States law.
11.4. Costs. Any covenant requiring a Party to perform or provide an act or
-----
service shall be construed to impose upon such Party the burden of the cost
thereof unless otherwise provided for herein.
11.5. Assertion of Unenforceability. The failure of any provision of this
-----------------------------
Agreement by virtue of its being construed as invalid or otherwise unenforceable
shall render the entire Agreement cancelable at the option of the Party
asserting the enforceability of said provision.
* Certain information in this Exhibit has been omitted and filed
separately with the Commission. Confidential treatment has been
requested with respect to the omitted portions.
Page 11
<PAGE>
11.6 Modification and Waiver. No provision of this Agreement shall be deemed
-----------------------
modified by any action or omission of Licensor, or by failure to object to any
actions of Licensee which may be inconsistent with the terms of this Agreement.
No waiver of a breach committed by either Party in one instance shall constitute
a waiver or license to commit or continue breaches in other or like instances.
11.7 Notices. All notices, reports, payments, consents, approvals, and the like
-------
made hereunder by Licensee to Licensor shall be in written English to the
address or facsimile number below and sent by a secure special delivery service
that provides proof of delivery, or by a properly transmitted facsimile. All
notices, reports, payments, consents, approvals, and the like made hereunder by
Licensor to Licensee shall be in written English, to the address or facsimile
number set forth on the signature page of this Agreement and sent by a secure
special delivery service that provides proof of delivery, or by a properly
transmitted facsimile. Licensee may change its address and bank account
information by providing appropriate notice to Licensor. Upon appropriate notice
by Licensor. Licensor may change its address and back account information, and
may require notices to Licensor to be sent to up to two different addresses and
portions of the royalties to be paid to up to two different bank accounts.
Notices to Licensee shall be sent to:
Liquid Audio, Inc.
810 Winslow Avenue
Redwood City, California 94063
Attention: John Stone
Notices to Licensor shall be sent to:
Fraunhofer-Institut fur Integrierte Schaltungen
Attn.: Mr. Dr. Karlheinz Brandenburg
Arn Weichselgorten 3
91058 Erlangen
Germany
telephone: +49(0)9131/776-3 03
fax: +49(0)9131/776-3 99
Payments to Licensor shall be made by wire transfer to Licensors bank
account as follows:
Postbank Munchen
BLZ 700 100 80
Page 12
<PAGE>
Konto-Nr. 56 255-801
der Fraunhofer-Patentstelle fur dle Deutsche Forschung.
11.8 Announcements. Neither Party shall make public disclosures inconsistent
-------------
with the rights and obligations created hereunder. Either Party may require the
other to promptly supply a copy of any public disclosure related to the subject
matter hereof .
11.9 Dispute Resolution. The Parties agree to submit any dispute or
-------------------
controversy arising out of or relating to this Agreement to arbitration to be
held in accordance with the Commercial Arbitration Rules of the American
Arbitration Association and shall be referred to a sole arbitrator selected by
the Parties. The award shall be made within six (6) months of selection of the
arbitrator and may be entered in any court having competent jurisdiction. The
arbitration shall be held in the State of California and shall be construed
according to the substantive law of the State of New York regardless of conflict
of law rules. The arbitrator shall determine issues of arbitrability but may not
limit, expand or otherwise modify the terms of the Agreement nor have authority
to award punitive or other damages in excess of compensatory damages and each
Party irrevocably waives any claim thereto. Each Party shall bear its own
expenses but those related to the compensation of the arbitrator shall be borne
equally. The Parties, their representatives, other participants and the
arbitrator shall hold the existence, content and result of the arbitration in
confidence. Issues relating to the validity, enforceability, scope or
infringement of intellectual property shall not be subject to mediation or
arbitration. In the event any dispute relates to this Agreement but is not
subject to arbitration, the Parties agree that their choice of forum to resolve
the dispute shall be either the United States Courts in the State of California
or the State Courts of the State of California.
11.10. Assignment. No rights, duties or privileges of Licensee hereunder shall
----------
be transferred or assigned by Licensee, except in connection with Licensee's
merger with or sale of entire business to, another entity, provided that such
entity shall first have agreed in writing with Licensor to perform all
Licensee's obligations and duties hereunder.
11.11. Strict Construction. Regardless of which Party may have drafted this
---------------
Agreement, no rule of strict contract construction shall be applied against
any Party.
11.12 Limitation of Liability. EXCEPT FOR INDEMNIFICATION OBLIGATIONS UNDER
-----------------------
SECTION 9 ABOVE, IN NO EVENT SHALL EITHER PARTY'S AGGREGATE LIABILITY TO
THE OTHER PARTY UNDER THIS AGREEMENT EXCEED THE AMOUNTS PAID BY LICENSEE
HEREUNDER, IN NO EVENT SHALL EITHER PARTY BE LIABLE FOR CONSEQUENTIAL,
INCIDENTAL, SPECIAL, INDIRECT OR RELIANCE DAMAGES ARISING OUT OF OR
RELATING TO THIS AGREEMENT, WHETHER BASED IN CONTRACT, TORT, OR ANY
OTHER LEGAL THEORY, REGARDLESS WHETHER SUCH PARTY HAS BEEN ADVISED OF
THE POSSIBILITY OF SUCH DAMAGES.
Page 13
<PAGE>
Appendix A
<TABLE>
<CAPTION>
==================================================================================================================
ENCODER: FRAUNHOFER GESELLSCHAFF
- ------------------------------------------------------------------------------------------------------------------
?? ?? ?? ?? ?? ??
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Digital Coding Process DE 3629434 C2 Optimal coder DE FhG E
EP 0 287 578 AT, BE, FhG
CH/LI, DE,
FR, GB, IT.
LU, NI, SE
US 07/640,550 US FhG
JP 62-505113 JP FhG
KR 700459/88 KR FhG
Digital Coding Process DE 3912605 Huffman code DE FhG E
EP 0 393 526 AT, BE, CH/ FhG
LI, DE, DK,
ES, FR, GB,
GR, IT, LU,
NI, SE
US 5,579,430 US FhG
JP 2,739,377 JP FhG
=================================================================================================================
</TABLE>
Page 14
<PAGE>
<TABLE>
=================================================================================================================
<S> <C> <C> <C> <C> <C>
NO 913931 NO FHG
==================================================================================================================
==================================================================================================================
FI 914886 FI FhG
KR 701385/91 KR FhG
RU 5010281/24 RU FhG
- ------------------------------------------------------------------------------------------------------------------
Windowing US 08/678,666 window shape US FhG, Dolby E
PCT/EP96/0514 AU, CA, EP. FhG. Dolby
5 JP, KR
WO98/02971
-----------------------------------------------------------------------------------------------------------------
Intensity Stereo DE 19628293 prediction DE FhG, AT&T, Lucent E
WO98/03037 AU, CA, FhG, AT&T, Lucent
CN, EP, JP.
PCT/EP97/0287 KR, NO, RU.
5 UA, US.
Coding Stereo Spectral DE 19628292 side information DE FhG, AT&T, Lucent E
Data
PCT/EP97/0287 AU, CA, FhG, AT&T, Lucent
4 CN, EP, JP,
KR, NO, RU,
WO98/03036 UA, US
Process for Reducing Data DE 4136825 CI Intensity stereo DE FhG O
CA 2,118,916 CA FhG
=================================================================================================================
</TABLE>
Page 15
<PAGE>
<TABLE>
=================================================================================================================
<S> <C> <C> <C> <C> <C>
AU 9227599 AU FhG
EP 0611516 AT, BE, CH/ FhG
LI, DE, DK,
FR, GB, IT,
NL, SE
=================================================================================================================
=================================================================================================================
JP 5-508077 JP FhG
KR KR FhG
700973/1994
NO 940935 NO FhG
RU 94 020 727 UA FhG
UA 94 005 493 UA FhG
US 08/211,547 US FhG
- -----------------------------------------------------------------------------------------------------------------
Interdependent Channels DE 4217276 C1 Intensity stereo DE FhG O
AU 40593/93 AU FhG
CA 2,118,402 CA FhG
EP 0 642 719 AT,BE, CH/ FhG
LL, DE, FR,
GB, NL,
JP 6-500080 JP FhG
KR KR FhG
704089/1994
=================================================================================================================
</TABLE>
Page 16
<PAGE>
<TABLE>
==================================================================================================================
<S> <C> <C> <C> <C>
NO 944285 NO FhG
RU 94 046 112 RU FhG
UA not known UA FhG
US 5,703,999 US FhG
- ------------------------------------------------------------------------------------------------------------------
Selecting Coding Type DE 4331376 C1 similarity DE FhG
measurement
=================================================================================================================
</TABLE>
<TABLE>
==================================================================================================================
<S> <C> <C> <C> <C> <C>
AU 678270 AU FhG
EP 0 719 483 AT,BE,CH/ FhG
LI, DE, DK,
FR, GB, IE,
IT, NL, SE
US 08/557,046 US FhG
- ------------------------------------------------------------------------------------------------------------------
Tonality DE 19505435 tonality via digital DE FhG O
C1 filter
CA not known CA FhG
EP 0 772 764 AT, BE, CH/ FhG
LI, DE, DK,
FR, GB, IE,
IT, NL, SE
==================================================================================================================
</TABLE>
Page 17
<PAGE>
<TABLE>
=================================================================================================================
<S> <C> <C> <C> <C> <C>
JP 8-524642 JP FhG
KR 97-705021 KR FhG
US 08/894.844 US FhG
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
Page 18
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
DECODER: FRAUNHOFER GESELLSCHATT
- ------------------------------------------------------------------------------------------------------------------
?? ?? ?? ?? ?? ??
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Digital Coding Process DE 3629434 C2 optimal coder DE FhG E
EP 0 287 578 AT, BE, FhG
CH/LI, DE,
FR, GB, IT,
LU, NL, SE
US 07/640.550 US FhG
JP 62-505113 JP FhG
KR 700459/88 KR FhG
- ------------------------------------------------------------------------------------------------------------------
Digital Coding Process DE 3912605 Huffman code DE FhG E
EP 0 393 526 AT, BE, FhG
CH/LI, DE,
DK, ES, FR,
GB, GR, IT,
LU, NL, SE
US 5,579,430 US FhG
JP 2,739,377 JP FhG
NO 913931 NO FhG
==================================================================================================================
</TABLE>
Page 19
<PAGE>
<TABLE>
==================================================================================================================
<S> <C> <C> <C> <C> <C>
FI 914886 FI FhG
KR KR FhG
RU 5010281/24 RU FhG
- ------------------------------------------------------------------------------------------------------------------
Windowing US 08/678,666 window shope US FhG, Dolby E
PCT/EP96/0514 AU, CA, FhG
6 EP, JP, KR
- ------------------------------------------------------------------------------------------------------------------
Intensity Stereo DE 19628293 prediction DE FhG, AT&T, Lucent E
PCT/EP97/0287 AU, CA, FhG
5 CN, EP,
JP, KR,
WO98/03037 NO, RU,
UA, US,
- ------------------------------------------------------------------------------------------------------------------
Coding Stereo Spectral DE 19628292 side Information DE FhG, AT&T; Lucent E
Data
PCT/EP97/0287 AU, CA, FhG
4 CN, EP,
KP, KR,
WO98/03036 NO, RU,
UA, US
- ------------------------------------------------------------------------------------------------------------------
Process for the defecting DE 4034017 C2 error detection DE FhG O
of
==================================================================================================================
</TABLE>
Psge 20
<PAGE>
<TABLE>
<S> <C> <C> <C>
============================================================================
US 08/039,478 US FhG
============================================================================
</TABLE>
Page 21
<PAGE>
EXHIBIT 10.11
SOFTWARE LICENSE AGREEMENT
between
FRAUNHOFER-GESELLSCHAFT, ZUR FORDERUNG DER
ANGEWANDTEN FORSCHUNG E. V.
and
LIQUID AUDIO, INC.
_______________________________________________________________________________
THIS AGREEMENT DOES NOT BIND OR OBLIGATE EITHER PARTY IN ANY MANNER UNLESS DULY
EXECUTED BY AUTHORIZED REPRESENTATIVES OF BOTH PARTIES
_______________________________________________________________________________
<PAGE>
FRAUNHOFER-GESELLSCHAFT ZUR FORDERUNG DER ANGEWANDTEN FORSCHUNG E.V.
Signed for /s/ DR. N. PAULUS
- ----------------------------------------
By (Sign)
Dr. N. Paulus
- ----------------------------------------
Name (Print)
Director of Patent & License Dep.
- ----------------------------------------
Title
August 20, 1998
- ----------------------------------------
Date
LIQUID AUDIO, INC.
/s/ ROBERT FLYNN
- ----------------------------------------
By (Sign)
Robert Flynn
- ----------------------------------------
Name (Print)
VP Business Development
- ----------------------------------------
Title
August 18, 1998
- ----------------------------------------
Date
This Agreement is made and entered into this 14TH DAY OF AUGUST 1998 ("Effective
Date") by and between FRAUNHOFER-GESELLSCHAFT ZUR FORDERUNG DER ANGEWANDTEN
FORSCHUNG e. V., a non profit organization duly organized and existing under the
Page 2
<PAGE>
Laws of the Federal Republic of Germany and having its principal office at
LeonrodstraBe 54, 80636 Munchen, Germany, (hereinafter referred to as "FhG"),
acting on behalf of its Fraunhofer-Institut fur Integrierte Schaltungen (IIS)
and LIQUID AUDIO. Inc., a corporation duly organized under the laws of
California and having its principal office at 810 Winslow Street Redwood City,
California 94063, USA, (hereinafter referred to as "Licensee").
WITNESSETH
WHEREAS: FhG and Licensee have already agreed on a Letter of Intent of Oct.
22/29, 1997; and
WHEREAS, FhG is the owner of certain "TECHNOLOGY" (as later defined herein), and
wishes to have this TECHNOLOGY utilized by Licensee; and
WHEREAS, Licensee wishes to obtain a non-exclusive license to use the TECHNOLOGY
upon the terms and conditions hereinafter set forth; and
WHEREAS, FhG Intends this Agreement to confer a license with Licensee, retaining
to its own use all ownership rights in the TECHNOLOGY, including, but not
limited to, patent rights, copyrights, implementation rights and licensing
rights therein, and further intends that no license, expressed or implied, for
use other than herein set out shall be transferred hereby.
WHEREAS, LICENSEE KNOWS AND ACCEPTS THAT LICENSEE NEEDS A PATENT LICENSE BY
DOLBY AND THOMSON MULTIMEDIA, 46 QUAL ALPHONSE LE GELLO, F-92648 BOULEGNE,
FRANCE, AND MAYBE BY OTHER THIRD PARTIES FOR THE EXPLOITATION OF THE LICENSED
PRODUCT(S).
Page 3
<PAGE>
NOW, THEREFORE, In consideration of the foregoing and of the mutual covenants,
terms and conditions herein contained the Parties agree as follows:
1. DEFINITIONS
For the purposes of this Agreement, the following words and phrases shall have
the following meanings:
1.1. "TECHNOLOGY" shall mean the software as described in Appendix A of this
Agreement.
1.2. "LICENSED PRODUCT" means any software, which incorporates, in whole or in
part, any TECHNOLOGY, and but for this license would constitute an
Infringement of such TECHNOLOGY.
1.3. "APIs" means the application programming interfaces for the TECHNOLOGY.
1.4. "SOURCE CODE" means software in human-readable, high-level language form,
which when compiled or assembled, becomes the executable "OBJECT CODE"
(as later defined herein) of a software program. All references to SOURCE
CODE in this Agreement shall include both human readable (listing) and
machine readable (source files) forms and all tools and documentation
needed to build such software, as well as program documentation as it
becomes available. Including flow charts, programmers comments and design
specifications for such software.
1.5. "OBJECT CODE" means machine-executable code in binary format, typically
the result of processing the SOURCE CODE with an assembler or compiler.
1.6. "GROSS REVENUES" shall mean Licensee's gross revenues that are actually
received and non-refundable from the sale of the LICENSED PRODUCT(s).
1.7. "Parties" shall mean FhG and Licensee. "Party" shall mean any one of the
Parties.
2. GRANT, DELIVERY OF TECHNOLOGY, MAINTENANCE, UPDATES, NEW VERSIONS,
ENHANCEMENTS IMPROVEMENTS
2.1.1. Source License Grant. FhG hereby grants to Licensee a non-exclusive,
--------------------
non-transferable,non-assignable (except as set forth in Section 11
below), non-sublicensable, worldwide limited license to use, copy,
display, perform, modify and create derivative works of the TECHNOLOGY in
SOURCE CODE form solely to design, develop, maintain, support and test
LICENSED PRODUCT(s) to enable such products to use TECHNOLOGY.
2.1.2. Distribution Rights - Object Code. FhG hereby grants to Licensee a non-
---------------------------------
exclusive,non-transferable, non-assignable (except as set forth in
Section 1)
Page 4
<PAGE>
below), non-sublicensable, worldwide, limited license to make, copy,
test, market, sell, distribute OBJECT CODE versions of the TECHNOLOGY,
and any derivative works thereof created by Licensee pursuant to Section
2.1.1, solely as part of LICENSED PRODUCT(s) provided that:
(a) Licensee does not expose or publish the APIs for the TECHNOLOGY in a
form in which applications other than LICENSED PRODUCT(s) could call
such APIs:
(b) Licensee does not permit further redistribution of the TECHNOLOGY by
Licensee's end users of LICENSED PRODUCT(s), except as part of
LICENSED PRODUCT(s);
(c) Licensee includes a valid copyright notice on LICENSED PRODUCT(s),
and
(d) Licensee agrees to Indemnify, hold harmless, and defend FhG from and
against any claims or lawsuits, including attorneys' fees, that arise
or result from the use of LICENSED PRODUCT(s) In the manner set forth
in Section 8.1 below.
Licensee shall be permitted to distribute the LICENSED PRODUCTS to its
end user customers pursuant to an end user license agreement that permits
use of the LICENSED PRODUCTS but prohibits further redistribution,
exploitation, or use of the LICENSED PRODUCT by any party other than the
end user customer that purchased the end user license to the LICENSED
PRODUCT.
2.1.3. Ownership. FhG shall retain all right, title and interest in and to the
----------
TECHNOLOGY,subject to the license grants in Sections 2.1.1 and 2.1.2.
Licensee shall be entitled to establish all proprietary rights for itself
in the Intellectual property represented by Licensee-created enhancements
and new features, whether in the nature of trade secrets, copyrights or
patent rights or other rights. FhG shall be entitled to establish all
proprietary rights for itself in the Intellectual property represented by
FhG-created enhancements and new features, whether in the nature of
patent rights or other rights.
2.1.4. No Other Rights. Except as expressly granted in this Agreement, Licensee
----------------
shall have no other rights in the TECHNOLOGY. Under no circumstances will
anything in this Agreement be constructed as granting, by implication,
estoppel or otherwise, a license to any FhG technology other than the
TECHNOLOGY.
2.1.5. Patent License. Licensee understands and accepts that it must execute a
---------------
patent license with the appropriate licensing entity in order to have all
necessary rights to create the LICENSED PRODUCT(s), Licensee will contact
Dolby and Thomson multimedia to get the necessary contracts and will
negotiate in good faith to complete those contracts.
2.2. The TECHNOLOGY has been delivered to Licensee by FhG, Licensee
acknowledges receipt of the TECHNOLOGY deliverables.
2.3.1. FhG will make available to licensee maintenance and updates with respect
to the TECHNOLOGY at no charge for the first year of the license. The
maintenance will provide licensee with access consistent with a most
favored nation status. Maintenance will include resolution of any
nontrivial program errors reported by Licensee within a reasonable
period. Thereafter, in any given year, FhG will make maintenance and
updates available to Licensee for no
Page 5
<PAGE>
charge if the amount of royalty paid to FhG, as defined in Art.5.1.b, in
that year is equal to or greater than [*.] If the royalty amount paid to
FhG is less than [*] then Licensee may pay the difference between [*] and
the amount of royalty paid in order to receive maintenance support and
updates.
2.3.2. The updates to each MPEG-2 AAC (IS 13818-7) and MPEG Layer-3 (IS 11172-3
and 13818-3) will include all improvements made to the TECHNOLOGY as long
as those improvements are part of the respective standard for each source
code.
2.3.3. On a most favored nation basis. FhG shall make available to Licensee all
new versions, enhancements and improvements to the TECHNOLOGY as a beta
testing site. As a beta testing partner Licensee shall be obligated to
provide FhG with feedback on the performance of the new software being
evaluated, FhG will make commercially reasonable efforts to provide
Licensee and any other beta site with at least a one-month period from
the time Licensee receives the specific beta version of the TECHNOLOGY
until the time that the software is made available in a final release
version in OBJECT CODE form.
2.3.4. FhG and Licensee agree to discuss participation with each other in a
technology exchange partnership in which FhG will provide in-depth
updates of developments at FhG. Additionally, this partnership will
attempt to provide interoperability of FhG's MMP technology and the
Licensee MusicOn-Demand system. Neither party will have any liability to
the other for failure to enter into such relationship.
3. CONFIDENTIALITY
3.1. The license grant in Section 2 is expressly conditioned upon Licensee
retaining in confidence all information and know-how transmitted to
Licensee by FhG that FhG has identified as being proprietary and/or
confidential or that, by the nature of the circumstances surrounding the
disclosure, ought in good faith to be treated as proprietary and/or
confidential and is confirmed in writing as such within 30 days after
disclosure (the "Confidential Information"), and will make no use of the
Confidential Information except under the terms and during the existence
of this Agreement. The SOURCE CODE version of the TECHNOLOGY and any
derivative works thereof created by FhG are deemed to be Confidential
Information of FhG. Any derivative works thereof created by Licensee
shall be deemed to be the Confidential Information of Licensee, and
Licensee agrees to protect them as such.
3.2. Licensee shall have no obligation to maintain the confidentially of
Confidential Information that (a) it received rightfully from another
party prior to or after its receipt from FhG, (b) FhG has disclosed to a
third party without any obligation to maintain such information in
confidence; or (c) is independently developed
* Certain information in this Exhibit has been omitted and filed
separately with the Commission. Confidential treatment has been
requested with respect to the omitted portions.
Page 6
<PAGE>
by Licensee: or (d) is publicly available or in the public domain.
Further. Licensee may disclose Confidential Information as required by
governmental or Judicial order, provided Licensee gives FhG prompt notice
of such order and compiles with any protective order (or equivalent)
Imposed on such disclosure.
3.3. Licensee shall not reproduce, duplicate, copy or otherwise disclose,
distribute, or disseminate the Confidential Information in any media,
except on Licensee's premises by Licensee's permanent employees.
3.4. Licensee's obligation under this Section 3 shall survive any termination
or expiration of the Agreement and shall extend to the earlier of such
time as the Confidential Information is in the public domain or five (5)
years following termination or expiration of this Agreement.
4. DUE DILIGENCE
4.1. Licensee shall use its reasonable best efforts (i) to bring LICENSED
PRODUCT(s) in combination with Licensee's related products to market
through a thorough, vigorous and diligent program for exploitation and
(ii) to continue active, diligent marketing efforts for LICENSED
PRODUCT(s) in combination with Licensee's related products throughout the
life of this Agreement.
4.2 Licensee's failure to perform in accordance with Section 4.1 above shall
be grounds for FhG to terminate this Agreement pursuant to Section 13.3
hereof.
5. ROYALTIES, PAYMENTS AND REPORTS
5.1. For the rights and license granted hereunder, Licensee shall pay
royalties and shall make payments to FhG as follows:
a.) A non creditable and non refundable initial payment of [*] shall be
payable in four installments. The first Installment of [*] has already
been paid at the signing of the letter of Intent of Oct. 22/29, 1997. The
second Installment of [*] shall be paid at the signing of this license
agreement. The third and fourth installments of [*] shall be payable at
the time that version 2.0 and 3.0 software deliverables are provided.
b.) A royalty at the rate of [*] of the GROSS REVENUES ("Running
Royalties"). The royalty rate shall be adjusted on a semiannual basis to
be equal to the most favored nation pricing for any source code license
granted to the TECHNOLOGY.
* Certain information in this Exhibit has been omitted and filed separately with
the Commission. Confidential treatment has been requested with respect to the
omitted portions.
Page 7
<PAGE>
5.2. For the purpose of timing of payments, a LICENSED PRODUCT shall be
considered sold when revenues are actually received by Licensee and are
non-refundable.
5.3. Within thirty (30) days after the end of each calendar half year ending
on June 30 or December 31, commencing on the half year containing the
Effective Date. Licensee shall pay FhG the Running Royalties accrued
during such calendar half year. Simultaneously with such payment.
Licensee shall provide FhG with a report certified by Licensee's chief
financial officer or the chief financial officer's designate (the
"Royalty Report"), which Includes:
5.3.1. the number of sold LICENSED PRODUCT(s) during the calendar half
year even if this number is zero;
5.3.2. the Running Royalties owed on such sold LICENSED PRODUCT(s):
5.3.3. the amount of Licensee's payment accompanying the Royalty
Report:
5.3.4. any other information that FhG and Licensee deem reasonable to
ensure the Licensee is complying with this Agreement.
5.4. Payments to FhG shall be made by wire transfer to the bank and account
indicated in this Agreement.
5.5. FhG will credit to Licensee any overpayment of royalties made in error if
such error is identified and fully explained by written notice to FhG
during the term of this Agreement.
5.6. Time is of the essence with respect to all payments required hereunder.
5.7. All dollar amounts in this Agreement refer to United States dollars
unless otherwise indicated. Any conversion to United States dollars shall
be of the prevalling rate for bank cable transfers as quoted for the last
day of such semiannual period by the Wall Street Journal.
5.8. Overdue payments shall be subject to a late payment charge calculated at
an annual rate of three percent (3%) over the prime rate or successive
prime rates (as posted in the Wall Street Journal) during the
delinquency. If the amount of such charge exceeds the maximum permitted
by law, such charge shall be reduced to such maximum.
6. REPORTS AND RECORDS
Page 8
<PAGE>
6.1. During the Term of this Agreement and for a period of six (6) years
thereafter. Licensee shall keep complete, full, and accurate books and
records of all information which may be reasonably required in order to
confirm the accuracy of Licensee's reports and payments. FhG shall have
the right to have a professionally registered accountant inspect of such
books and records of Licensee to the extent necessary to verify their
accuracy and that of other statements provided for herein; provided
however, that such activity shall be made during regular business hours
upon reasonable notice and Licensee may not be audited more than once in
any calendar year, Any royalty statement that is not audited and
specifically disputed by FhG within two (2) years after issuance shall be
deemed to be binding and conclusive on FhG. Such accountant shall not
reveal any information to FhG other than what is required to be reported
under this Agreement, unless the accountant is ordered to disclose
additional information by a court of competent jurisdiction. The cost of
the examination shall be paid by FhG unless the inspection reveals that
the total amount owed for the period under audit is greater than five
Percent (5%) of the amounts reported, in which case Licensee shall pay
the reasonable, out-of-pocket costs of the inspection and collection.
6.2. Licensee shall be responsible for and shall pay any tax, duty, levy,
customs fee, or similar charge ("Taxes"), including interest and
penalties thereon, however designated, imposed on it as a result of the
operation or existence of this Agreement, except for withholding and any
other taxes on FhG's net income, which FhG acknowledges that Licensee may
be required to withhold or deduct from payments to FhG.
7. INTRINGEMENT
7.1. Licensee: shall inform FhG promptly in writing of any alleged
infringement of the TECHNOLOGY by a third party, and of any available
evidence thereof, of which Licensee becomes aware.
7.2. During the term of this Agreement, FhG shall have the right, but shall
not be obligated, to prosecute at its own expense all infringements of
the TECHNOLOGY and, in furtherance of such right. Licensee hereby agrees
that FhG may include Licensee as a party plaintiff in any such suit,
without expense to Licensee, subject to Licensee's prior written consent.
The total cost of any such infringement action commenced or defended
solely by FhG shall be borne by FhG and FhG shall keep any recovery of
damages for past infringement derived therefrom.
7.3. If within six (6) months after having been notified of any alleged
infringement, FhG shall have been unsuccessful in persuading the alleged
infringer to desist and shall not have brought and shall not be
diligently prosecuting an infringement action, or if FhG shall notify
Licensee at any time prior thereto of its intention not to bring suit
against any alleged infringer, then, and in those events
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only, Licensee shall have the right, but shall not be obligated, to
prosecute at its own expense any infringement of the TECHNOLOGY, and
Licensee may, for such purposes, use the name of FhG as party plaintiff.
No settlement consent judgment or other voluntary final disposition of the
suit may be entered into without the consent of FhG, which consent shall
not unreasonably be withheld. Licensee shall indemnify FhG against any
order for costs that may be made against FhG in such proceedings.
7.4. In the event that Licensee shall undertake the enforcement and/or defense
of the TECHNOLOGY by litigation, Licensee may withhold up to fifty percent
(50%) of the payments otherwise thereafter due FhG under Article 5
hereunder and apply the same toward reimbursement of up to half of
Licensee's expenses. Including reasonable attorneys' fees, in connection
therewith. Any recovery of damages by Licensee for each such suit shall be
applied first in satisfaction of any unreimbursed expenses and legal fees
of Licensee relating to such suit, and next toward reimbursement of FhG
for any payments under Paragraph 5 past due or withheld and applied
pursuant to this Article 7. The balance remaining from any such recovery
shall be divided equally between Licensee and FhG.
7.5. In the event that a declaratory judgment action alleging invalidity or
noninfringement of any of the TECHNOLOGY shall be brought against
Licensee, FhG, at its option, shall have the right, within thirty (30)
days after commencement of such action, to intervene and take over the
sole defense of the action at its own expense.
7.6. In any infringement suit as either Party may institute to enforce the
TECHNOLOGY pursuant to this Agreement, the other Party hereto shall, at
the request and expense of the Party initiating such suit, cooperate in
all reasonable respects and, to the extent possible, have its employees
testify when reasonably requested and make available relevant records,
papers, information, samples, specimens, and the like as reasonably
necessary.
8. PRODUCT LIABILITY
8.1. Licensee shall at all times during the term of this Agreement and
thereafter. Indemnify, defend and hold FhG, its trustees, officers,
employees and affiliates, harmless against all claims and expenses arising
from third-party claims, including legal expenses and reasonable
attorneys' fees, arising out of the death of or injury to any person or
persons or out of any damage to property to the extent attributable to the
LICENSED PRODUCTS, and against any other third-party claim, proceeding,
demand, expense and liability of any kind whatsoever to the extent
attributable to the production, manufacture, sale, use, lease. consumption
or advertisement of the LICENSED PRODUCT(s). Licensee's obligations under
this Section 8.1 shall be conditioned upon prompt notice of such third-
party claims from FhG, reasonable cooperation and assistance from
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FhG at Licensee's expense and Licensee's sole control of the defense
and/or settlement of such action. Licensee shall not be liable for any
expenses incurred by FhG without Licensee's prior written consent. In no
event shall either party, its trustees, officers, employees and affiliates
be liable for special, direct, Indirect or consequential damages, losses,
costs, charges, claims, demands, fees or expenses of any nature or kind.
8.2. Licensee shall obtain or carry in full force and effect liability
insurance which shall protect Licensee and FhG in regard to events covered
by Paragraph 8.1 above. Such Insurance shall be written by a reputable
Insurance company authorized to do business in California, shall list FhG
as an additional named insured thereunder and shall require thirty (30)
days written notice to be given to FhG prior to any cancellation or
material change thereof. The limits of such occurrence shall not be less
than one Million Dollars ($1,000,000) per occurrence with an aggregate of
Two Million Dollars ($2,000,000) for property damage, Licensee shall
provide FhG with Certificates of Insurance evidencing the same on January
1 of each calendar year during the duration of this Agreement.
8.3. SUBJECT TO THE TERMS OF THE FIFTH RECITAL TO THIS AGREEMENT SET FORTH
ABOVE, FHG REPRESENTS AND WARRANTS THAT IT OWNS THE TECHNOLOGY OR HAS ALL
RIGHTS NECESSARY TO GRANT THE LICENSE TO LICENSEE HEREUNDER, EXCEPT AS
OTHERWISE EXPRESSLY SET FORTH IN THIS AGREEMENT, FHG MAKES NO
REPRESENTATIONS AND EXTENDS NO WARRANTIES OF ANY KIND, EITHER EXPRESS OR
IMPLIED, INCLUDING BUT NOT LIMITED TO WARRANTIES OF MERCHANTABILITY AND
FITNESS FOR A PARTICULAR PURPOSE, OF THE TECHNOLOGY, NOTHING IN THIS
AGREEMENT SHALL BE CONSTRUED AS A REPRESENTATION MADE OR WARRANTY GIVEN BY
FHG THAT THE PRACTICE BY LICENSEE OF THE LICENSE GRANTED HEREUNDER SHALL
NOT INFRINGE THE KNOW-HOW AND/OR INTELLECTUAL PROPERTY RIGHTS AND/OR OTHER
RIGHTS OF ANY THIRD PARTY.
9. EXPORT CONTROLS
It is understood that FhG is subject to German laws and regulations controlling
the export of technical data, computer software, laboratory prototypes and other
commodities and that its obligations hereunder are contingent on compliance with
applicable German export laws and regulations. The transfer of certain technical
data and commodities may require a license from the cognizant agency of the
German Government and/or written assurances by Licensee that Licensee shall not
export data or commodities to certain foreign countries without prior approval
of such agency. FhG neither represents that a license shall not be required nor
that, if required, it shall be issued.
10. MARKING
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Licensee will give clear reference to Fraunhofer IIS and its technology in any
LICENSED PRODUCT(s) and associated documentation, including a credits text audio
compression technology licensed by Fraunhofer IIS a URL to IIS audio home page,
and IIS logo.
11. ASSIGNMENT
No rights, duties or privileges of Licensee hereunder shall be transferred or
assigned by Licensee, except in connection with Licensee's merger with or sale
or entire business to, another entity, provided that such entity shall first
have agreed in writing with Licensee to perform all of Licensee's obligations
and duties hereunder.
12. DISPUTE RESOLUTION
12.1 The Parties agree to submit any dispute or controversy arising out of or
relating to this Agreement to arbitration to be held in accordance with
the Commercial Arbitration Rules of the American Arbitration Association
and shall be referred to a sole arbitrator selected by the Parties. The
award shall be made within six (6) months of selection of the arbitrator
and may be entered in any court having competent jurisdiction. The
arbitration shall be held in the State of California and shall be
construed according to the substantive law of the State of New York
regardless of conflict of law rules. The arbitrator shall determine issues
of arbitrability but may not limit, expand or otherwise modify the terms
of the Agreement nor have authority to award punitive or other damages in
excess of compensatory damages and each Party irrevocably waives any claim
thereto. Each Party shall bear its own expenses but those related to the
compensation of the arbitrator shall be borne equally. The Parties, their
representatives, other participants and the arbitrator shall hold the
existence, content and result of the arbitration in confidence. Issues
relating to the validity, enforceability, scope or Infringement of
Intellectual property shall not be subject to mediation or arbitration. In
the event any dispute relates to this Agreement but is not subject to
arbitration, the Parties agree that their choice of forum to resolve the
dispute shall be either the United States Courts in the State of
California or the State Courts of the State of California.
12.2 Notwithstanding the foregoing, nothing in this Article shall be construed
to waive any rights or timely performance of any obligations existing
under this Agreement.
13. TERM, TERMINATION
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13.1. The term of this license agreement will be [*] years. Thereafter, Licensee
will have an option to renew this license for an additional[*] years
13.2. If Licensee shall cease to carry on its business, this Agreement shall
terminate upon notice by FhG.
13.3. Failure to pay or perform any obligation hereunder within the time
prescribed shall constitute an event of default. Failure to cure any
default within sixty days after receipt of notice describing the non-
performance (ten business days with respect to undisputed non-payment of
funds) shall entitle the Party giving such notice to terminate or suspend
this Agreement.
13.4. Licensee may terminate this Agreement, at will, subject to payment of all
Royalties due and upon sixty (60) days notice to FhG.
13.5. Termination shall accelerate Licensee's royalty payment and half year
reporting obligations from "Within thirty (30) days after the end of each
calendar half year", to "Within thirty (30) days of termination".
13.6. The obligations of the Parties under this Agreement which expressly or by
their nature would continue beyond the termination, cancellation or
expiration of this Agreement shall remain in effect and survive
termination, cancellation or expiration of this Agreement, Including by
way of example only the Sections 1. 2,1,3,3,8, 11, 12 and 15. Immediately
upon termination of this Agreement (other than for default by FhG),
Licensee shall pay to FhG all royalties due through the effective date of
such termination.
13.7. Licensee may, however, after the effective date of such termination,
exploit all LICENSED PRODUCT(s) in combination with Licensee's related
products, and complete LICENSED PRODUCT(s) In combination with Licensee's
related products in the process of manufacture at the time of such
termination and sell the same, provided that Licensee shall make payments
to FhG of the Running Royalties thereon as required by Article 5 of this
Agreement and shall submit the reports required by Article 5 hereof on the
sales of LICENSED PRODUCT(s).
14. PAYMENTS, NOTICES AND OTHER COMMUNICATIONS
All notices, reports, payments, consents, approvals, and the like made hereunder
by Licensee to FhG shall be in written English, to the address or facsimile
number below and sent by a secure special delivery service that provides proof
of delivery, or by a properly transmitted facsimile. All notices, reports,
payments, consents, approvals, and The like made hereunder by FhG to Licensee
shall be in written English, to the address or facsimile number set forth on the
signature page of this Agreement and sent by a secure special delivery service
that provides proof of delivery, or by a properly transmitted facsimile.
Licensee may change its address and bank account information by providing
appropriate notice to FhG. Upon appropriate notice by FhG,
* Certain information in this Exhibit has been omitted and filed separately with
the Commission. Confidential treatment has been requested with respect to the
omitted portions.
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FhG may change its address and back account Information, and may require notices
to FhG to be sent to up to two different addresses and portions of the royalties
to be paid to up to two different bank accounts.
Notices to Licensee shall be sent to:
Liquid Audio, Inc
810 Winslow Avenue
Redwood City, California 94063
Attention: John Stone
Notices to FhG shall be sent to:
Frounhofer-Institut for Integrierte Schaltungen
Attn.: Mr. Dr. Karlheinz Brandenburg
Arn Welchselgarten 3
91058 Erlangen
Germany
telephone: +49(0)9131/7 76-3 03
fax: +49(0)9131/7 76-3 99
Payments to FhG shall be made by wire transfer to FhG's bank account as
follows:
Postbank Munchen
BLZ 700 100 80
Konto-Nr, 56 255-801
der Frounhofer-Patentstelle for die Deutsche Forschung.
15. GENERAL
15.1. This Agreement shall be construed, governed, Interpreted and applied in
accordance with the laws of the Federal Republic of Germany.
15.2. The Parties hereto acknowledge that this Agreement sets forth the entire
Agreement and understanding of the Parties hereto as to the subject matter
hereof, and supersedes the Letter of Intent of Oct. 22/29 1997 and any
other prior agreements relating to the subject matter hereof. This
Agreement shall not be subject to any change or modification except by the
execution of a written Instrument subscribed to by the Parties hereto.
15.3. The provisions of this Agreement are severable and in the event that any
provisions of this Agreement shall be determined to be Invalid or
unenforceable under any controlling body of the law, such Invalidity or
unenforceability shall
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<PAGE>
not in any way affect the validity or enforceability of the remaining
provisions hereof.
15.4. The failure of either Party to assert a right hereunder or to Insist upon
compliance with any term or condition of this Agreement shall not
constitute a waiver of that right of excuse a similar subsequent failure
to perform any such term or condition by the other Party,
15.5. EXCEPT FOR INDEMNIFICATION OBLIGATIONS UNDER SECTION 8 ABOVE, IN NO EVENT
SHALL EITHER PARTY'S AGGREGATE LIABILITY TO THE OTHER PARTY UNDER THIS AGREEMENT
EXCEED THE AMOUNTS PAID BY LICENSEE HEREUNDER. IN NO EVENT SHALL EITHER PARTY BE
LIABLE FOR CONSEQUENTIAL INCIDENTAL SPECIAL, INDIRECT OR RELIANCE DAMAGES
ARISING OUT OF OR RELATING TO THIS AGREEMENT, WHETHER BASED IN CONTRACT, TORT,
OR ANY OTHER LEGAL THEORY, REGARDLESS WHETHER SUCH PARTY HAS BEEN ADVISED OF THE
POSSIBILITY OF SUCH DAMAGES.
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APPENDIX A
I. DEFINITIONS
I.A. "AAC Standard" means the specifications and operating parameters
established by the Joint Technical Committee of the International
Standards Organization ISO/IEC IS 13818.7 information technology --
Generic coding of moving pictures and associated audio information -- Part
7: Advanced Audio Coding.
I.B. "FAC" shall mean the technology which is part of the AAC Standard and
which was developed by FhG before and during the collaboration to create a
joint proposal for the extension of the MPEG-audio standard and which is
protected by patents and patent applications, which are owned by FhG or
for which FhG has the right to grant licenses
II. DESCRIPTION OF TECHNOLOGY
TECHNOLOGY consists of "FAC Encoder" (as later defined herein), "FAC Decoder"
(as later defined herein). "MPEG Layer-3 Encoder" (as later defined herein) and
"MPEG Layer-3 Decoder" (as later defined herein) in SOURCE CODE format.
II.A. FAC ENCODER
II.A.1. OVERVIEW
"FAC Encoder" is a complete FAC compliant software implementation of the FAC
encoding algorithm in the programming language 'C'.
II.A.2. FEATURES
[*]
* Certain information in this Exhibit has been omitted and filed separately with
the Commission. Confidential treatment has been requested with respect to the
omitted portions.
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II.B. FAC DECODER
II.B.1. OVERVIEW
"FAC Decoder" is a complete FAC compliant software implementation of the FAC
decoding algorithm in the programming language "C++".
II.B.2. FEATURES
[*]
II.C. MPEG LAYER-3 ENCODER
II.C.1. OVERVIEW
"MPEG Layer-3 Encoder" is a complete IS 11172-3 and IS 13818-3 compliant
software implementation of the MPEG Layer-3 encoding algorithm in the
programming language "C". The MPEG Layer-3 Encoder is also compatible with the
proprietary FhG extension for sampling rates of 8, 11.025 and 12 kHz
("MPEG2.5").
II.C.2. FEATURES
[*]
II.D. MPEG LAYER-3 DECODER
II.D.1. OVERVIEW
"MPEG Layer-3 Decoder" is a complete IS 11172-3 and IS 13818-3 compliant
software implementation of the MPEG Layer-3 decoding algorithm in the
programming language "C". The MPEG Layer-3 Decoder is also compatible with the
proprietary FhG extension for sampling rates of 8, 11.025 and 12 kHz
("MPEG2.5").
II.D.2. FEATURES
[*]
* Certain information in this Exhibit has been omitted and filed separately with
the Commission. Confidential treatment has been requested with respect to the
omitted portions.
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<PAGE>
[*]
* Certain information in this Exhibit has been omitted and filed separately with
the Commission. Confidential treatment has been requested with respect to the
omitted portions.
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EXHIBIT 10.12
RSA DATA SECURITY (TM)
OEM MASTER LICENSE AGREEMENT
THIS OEM MASTER LICENSE AGREEMENT ("Agreement"), effective as of the later
date of execution ("Effective Date"), is entered into by and between RSA Data
Security, Inc., a Delaware corporation ("RSA"), having a principal address at
100 Marine Parkway, Suite 500, Redwood City, California 94065, and the entity
named below ("OEM"), having a principal address as set forth below.
OEM:
Liquid Audio, Inc., a California corporation
- -----------------------------------------------------
(Name and jurisdiction of incorporation)
2421 Broadway, 2F
- -----------------------------------------------------
(Address)
Redwood City, CA 94063
- -----------------------------------------------------
OEM Legal Contact:
Harry Boadwee, Esq. (415) 858-7188
------------------------------------------------
(name, telephone and title)
OEM Billing Contact:
Philip Wiser, Vice President of Engineering
------------------------------------------------
(415) 562-0884
------------------------------------------------
(name, telephone and title)
OEM Technical Contact:
Philip Wiser, Vice President of Engineering
------------------------------------------------
(415) 562-0884
------------------------------------------------
(name, telephone and title)
OEM Commercial Contact:
Philip Wiser, Vice President of Engineering
------------------------------------------------
(415) 562-0884
------------------------------------------------
(name, telephone and title)
TERRITORY:
[_] North America (United States and Canada)
[X] Worldwide, subject to Section 10.7.
Separate Maintenance Agreement:
YES [X] NO [_]
1. DEFINITIONS
-----------
The following terms when used in this Agreement shall have the following
meanings:
1.1 "BUNDLED PRODUCT(S)" means one or more of the products or product
groups described on a License/Product Schedule attached hereto and referencing
this Agreement which has been or will be developed by OEM and which incorporates
in the OEM Product in any manner any portion of the RSA Object Code. A Bundled
Product must represent a significant functional and value enhancement to the
Licensed Software such that the primary reason for an End User Customer to
license such Bundled Product is other than the right to receive a license to the
Licensed Software included in the Bundled Product.
1.2 "DISTRIBUTOR" means a dealer or distributor in the business of
reselling Bundled Products to End User Customers, directly or through one or
more Distributors, by virtue of authority of OEM. Bundled Products resold by a
Distributor shall bear OEM's trademarks and service marks and shall not be
privately labeled by such Distributor or other parties. A Distributor shall have
no right to modify any part of the Bundled Product.
1.3 "END USER CUSTOMER" means a person or entity licensing RSA Object Code
as part of a Bundled Product from OEM or a Distributor solely for personal or
internal use and without right to license, assign or otherwise transfer such
Bundled Product to any other person or entity.
1.4 "INTERFACE MODIFICATION" means a modification to the RSA Source Code
constituting and limited to hooks, ports or interfaces and similar modifications
necessary to permit the Licensed Software to operate in accordance with the User
Manual in OEM Products.
1.5 "LICENSE/PRODUCT SCHEDULE" means a schedule substantially in the form
of Exhibit "A" hereto completed and executed with respect to a Bundled Product
and specifying the Licensed Software, Field of Use limitation (if any), license
and maintenance fees, and other matters with respect to such Bundled Product. A
License/Product Schedule can be amended pursuant to Section 10.5 with respect to
a specified Bundled Product; and additional Bundled Products may be added to
this Agreement by executing an additional License/Product Schedule referencing
this Agreement. All such License/Product Schedules are incorporated in this
Agreement by this reference.
1.6 "FIELD OF USE" means a use, method of incorporation or product purpose
limitation with respect to
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<PAGE>
the Licensed Software for a Bundled Product specified on the License/Product
Schedule for such Bundled Product.
1.7 "LICENSED SOFTWARE" means those portions of the RSA Software which
perform the algorithm(s) specified on page 2 of a License/Product Schedule
hereto as having been licensed by OEM with respect to a particular Bundled
Product.
1.8 "NEW RELEASE" means a version of the RSA Software which shall
generally be designated by a new version number which has changed from the prior
number only to the right of the decimal point (e.g., Version 2.2 to Version
2.3).
1.9 "NEW VERSION" means a version of the RSA Software which shall
generally be designated by a new version number which has changed from the prior
number to the left of the decimal point (e.g., Version 2.3 to Version 3.0).
1.10 "OEM PRODUCT" means any product developed by OEM into which the
Licensed Software is to be incorporated to create a Bundled Product.
1.11 "RSA OBJECT CODE" means the Licensed Software in machine-readable,
compiled object code form.
1.12 "RSA SOFTWARE" means RSA proprietary software identified on a
License/Product Schedule hereto and as further described in the User Manuals
associated therewith. "RSA Software" shall also include all modifications and
enhancements (including all New Releases and New Versions) to such programs as
may be provided by RSA to OEM pursuant to this Agreement or a maintenance
agreement between RSA and OEM.
1.13 "RSA SOURCE CODE" means the mnemonic, high level statement versions
of the Licensed Software written in the source language used by programmers.
1.14 "TERRITORY" means those geographic areas specified on page 1.
1.15 "USER MANUAL" means the most current version of the user manual
and/or reference manual customarily supplied by RSA to OEMs who license the RSA
Software.
2. LICENSES
--------
2.1 LICENSE GRANT. During the term and within the Field of Use limitation
-------------
(if any) specified in the applicable License/Product Schedule, RSA hereby grants
OEM a non-exclusive, non-transferable license to:
2.1.1 use, if a source code license is specified in a
License/Product Schedule, a single copy of the RSA Source Code on a single
central processing unit accessed by one user at a time to: (i) modify the RSA
Source Code solely to create Interface Modifications; (ii) compile the RSA
Source Code to create object code; and (iii) maintain Bundled Products and
support End User Customers.
2.1.2 (i) incorporate the RSA Object Code into an OEM Product to
create a Bundled Product; (ii) reproduce and have reproduced the RSA Object Code
as incorporated in a Bundled Product as reasonably needed for inactive backup or
archival purposes and, if an internal use license is specified in a
License/Product Schedule, for distribution in the Territory solely to employees
of OEM and solely for use by such employees for OEM's internal business
purposes; and (iii) reproduce, have reproduced, and license or otherwise
distribute the RSA Object Code as incorporated in a Bundled Product in the
Territory.
2.1.3 (i) use the User Manual to support End User Customers; (ii)
modify and incorporate portions of the User Manual in Bundled Product document;
and (iii) reproduce, have reproduced and distribute in the Territory such
portions of the User Manual as incorporated in Bundled Product documentation.
2.2 LIMITATIONS ON LICENSES. The licenses granted in Section 2.1 are
-----------------------
further limited as follows:
2.2.1 LIMITATION ON DISTRIBUTEES. The RSA Object Code shall be
--------------------------
licensed or otherwise distributed only to (i) Distributors and (ii) End User
Customers.
2.2.2 NO EXPOSURE OF RSA SOFTWARE. The RSA Object Code may only be
---------------------------
accessed by the functionality of the Bundled Product in which it is included,
and a Bundled Product shall not make the RSA Object Code directly accessible to
End User Customers or to products other than the Bundled Product.
2.2.3 NO STANDALONE PRODUCT OR SERVICES. OEM may not in any way
---------------------------------
sell, lease, rent, license, sublicense or otherwise distribute the RSA Software
or any part thereof or the right to use the RSA Software or any part thereof to
any person or entity except as part of a Bundled Product. Unless a specific
grant of rights is included in the applicable License/Product Schedule, neither
OEM nor any Distributor or End User Customer may use the Bundled Product to
operate a service bureau or other revenue-generating service business.
2.2.4 LICENSE RESTRICTED TO LICENSED SOFTWARE AND FIELD OF USE. OEM
--------------------------------------------------------
may use or incorporate into a Bundled Product only that portion of the RSA
Software which is identified as Licensed Software in the applicable
License/Product Schedule. The RSA Object Code must be incorporated in a Bundled
Products, and may only be reproduced, licensed or distributed in accordance with
the Field of Use limitation, if any, specified in the applicable License/Product
Schedule.
2.2.5 PROHIBITED ACTIVITIES. OEM shall not modify (except to create
---------------------
Interface Modifications), translate, reverse engineer, decompile or disassemble
the RSA Software or any part thereof, and shall prohibit Distributors and End
User Customers from doing the same.
2.2.6 RSA ROOT KEYS. OEM may include the RSA/VeriSign, Inc. root
-------------
keys (the "RSA Root Keys") in any Bundled Product in which a hierarchy root key
is utilized or
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<PAGE>
incorporated, provided that any such incorporation must make the, RSA Root Keys
functional within the Bundled Product and as accessible as any other hierarchy
root key within the Bundled Product.
2.3 TITLE.
-----
2.3.1 IN RSA. Except for the limited licenses expressly granted in
------
Section 2.1 and as further limited by Section 2.2, RSA does not by this
Agreement grant to OEM any right, title or ownership interest in and to the RSA
Software or in any related patents, trademarks, copyrights or proprietary or
trade secret rights.
2.3.2 IN OEM. Except as expressly provided below, OEM does not by
------
this Agreement grant to RSA any right, title or ownership interest in and to any
interface Modifications created by OEM as may be authorized hereunder or any
related patents, copyrights or proprietary or trade secret rights of OEM;
provided, however, that OEM hereby agrees that it will not assert against RSA
any of such patents, copyrights or proprietary or trade secret rights with
respect to any ports or interfaces developed by RSA without reference to the
source code of OEM's Interface Modifications.
3. LICENSE FEES
------------
3.1 LICENSE FEES. In consideration of RSA's grant to OEM of the limited
------------
license rights hereunder, OEM shall pay to RSA the amounts set forth below (the
"License Fees"):
3.1.1 SOURCE CODE LICENSE FEES. If RSA is ??anting to OEM RSA Source
------------------------
Code license rights as indicated on a License/Product Schedule, OEM shall pay to
RSA the source code License Fees specified on such License/Product Schedule upon
execution of such License/Product Schedule.
3.1.2 OBJECT CODE LICENSE FEES. In consideration of RSA's grant to
------------------------
OEM of the RSA Object Code license rights for the Bundled Products described in
each License/Product Schedule, OEM shall pay to RSA the object code License Fees
specified on each such License/Product Schedule in accordance with the terms
contained therein.
3.2 TAXES. All taxes, duties, fees and other governmental charges of any
-----
kind (including sales and use taxes, but excluding taxes based on the gross
revenues or net income of RSA) which are imposed by or under the authority of
any government or any political subdivision thereof on the License Fees or any
aspect of this Agreement shall be borne by OEM and shall not be considered a
part of, a deduction from or an offset against License Fees.
3.3 PREPAYMENT OF LICENSE FEES. OEM shall prepay License Fees in the
--------------------------
amount set forth in a License/Product Schedule, if any, upon execution of the
License/Product Schedule. In no event shall such prepayment be refundable. If
OEM has prepaid License Fees with respect to a Bundled Product, all of such
prepaid amounts may be offset against License Fees accrued at a rate of fifty
cents ($0.50) for each dollar ($1.00) of License Fees accrued until the
prepayments are exhausted. OEM shall show the application of prepaid License
Fees in the licensing reports provided to RSA pursuant to Section 3.7.
3.4 USE OF NET SALES PRICE. If a License Fee based on Net Sales Price is
----------------------
specified in a License/Product Schedule, the "Net Sales Price" means the gross
amount of all cash, in-kind or other consideration receivable by OEM at any time
in consideration of the licensing or other distribution of the Bundled Products,
excluding any amounts receivable by OEM for sales and use taxes, shipping,
insurance and duties, and reduced by all discounts, refunds or allowances
granted in the ordinary course of business. For the purposes of determining Net
Sales Price, the amount of in-kind or other non-cash consideration receivable by
OEM shall be deemed to have a dollar value equal to the standard price (as
listed in OEM's published price schedule on the date of the grant of the license
or the sale in question) for such Bundled Product, less all cash paid.
3.5 TERMS OF PAYMENT. Object code License Fees payable on an on-going
----------------
basis shall accrue with respect to Bundled Products licensed or otherwise
distributed by OEM or Distributors, as applicable, upon the date of invoice of
the Bundled Product to an End User Customer or Distributor. License Fees due RSA
hereunder shall be paid by OEM to the attention of the Software Licensing
Department at RSA's address set forth above on or before the thirtieth (30th)
day after the close of the calendar quarter during which the License Fees
accrued. A late payment penalty on any License Fees not paid when due shall be
assessed at the rate of one percent (1%) per thirty (30) days, beginning on the
thirty-first (31st) day after the last day of the calendar quarter to which the
delayed payment relates.
3.6 U.S. CURRENCY. All payments hereunder shall be made in lawful United
-------------
States currency and shall in no case be refundable. If OEM receives payment in
foreign currencies, the amount of its License Fees to RSA shall be calculated
using the closing exchange rate published in The Wall Street Journal, Western
Edition, on the last business day such journal is published in the calendar
quarter immediately preceding the date of payment.
3.7 LICENSING REPORT. A report in reasonably detailed form setting forth
----------------
the calculation of License Fees due from OEM and signed by a responsible officer
of OEM shall be delivered to RSA on or before the thirtieth (30th) day after the
close of each calendar quarter during the term of this Agreement, regardless of
whether License Fee payments are required to be made pursuant to Section 3.5.
The report shall include, at a minimum, the following information (if applicable
to the method of calculating License Fees designated in a License/Product
Schedule) with respect to the relevant quarter: (i) the total number of
copies/units of Bundled Products licensed or otherwise distributed by OEM and
Distributors (indicating the names and versions thereof); (ii) if applicable,
the total Net Sales Price invoiced to Distributors and End User Customers; and
(iii) total License Fees accrued.
<PAGE>
3.8 AUDIT RIGHTS. RSA shall have the right, at its sole cost and expense,
------------
to have an independent certified public accountant conduct during normal
business hours and not more frequently than annually, an audit of the
appropriate records of OEM to verify the number of copies/units of Bundled
Products licensed or otherwise distributed by OEM and OEM's calculation of
License Fees. If the License Fees accrued are different than those reported, OEM
will be invoiced or credited for the difference, as applicable. Any additional
License Fees, along with the late payment penalty assessed in accordance with
Section 3.5, shall be payable within thirty (30) days of such invoice. If the
deficiency in License Fees paid by OEM is greater than five percent (5%) of the
License Fees reported by OEM for any quarter, OEM will pay the reasonable
expenses associated with such audit, in addition to the deficiency.
3.9 EVALUATION COPIES. OEM may deliver copies of Bundled Products to
-----------------
prospective End User Customers on a trial basis for evaluation purposes only
(each, an "Evaluation Copy") provided that each such prospective End User
Customer has received a written or electronic trial license prohibiting the End
User Customer from copying, modifying, reverse engineering, decompiling or
disassembling the RSA Object Code or any part thereof. All Evaluation Copies
licensed shall contain a feature which disables the Evaluation Copy no later
than sixty (60) days after delivery to the prospective End User Customer. No
License Fees shall be reportable or payable with respect to Evaluation Copies
unless and until the Evaluation Copy is replaced with or converted to a standard
Bundled Product or the End User Customer is invoiced for the Bundled Product,
whichever occurs first.
4. LIMITED WARRANTY
----------------
4.1 LIMITED WARRANTY. During the initial ninety (90)-day term of each
----------------
License/Product Schedule RSA warrants that the Licensed Software specified in
such License/Product Schedule will operate in material conformance to RSA's
published specifications for the Licensed Software. RSA does not warrant that
the RSA Software or any portion thereof is error-free. OEM's exclusive remedy,
and RSA's entire liability in tort, contract or otherwise, shall be correction
of any warranted nonconformity as provided in Section 4.2 below. This limited
warranty and any obligations of RSA hereunder shall not apply to any Interface
Modifications or any nonconformities caused thereby and shall terminate
immediately if OEM makes any modification to the RSA Software other than
Interface Modifications.
4.2 ERROR CORRECTION. In the event OEM discovers an error in the Licensed
----------------
Software which causes the Licensed Software not to operate in material
conformance to RSA's published specifications therefor, OEM shall submit to RSA
a written report describing such error in sufficient detail to permit RSA to
reproduce such error. Upon receipt of any such written report, RSA will use its
reasonable business judgment to classify a reported error as either: (i) a
"Level 1 Severity" error, meaning an error that causes the Licensed software to
fail to operate in a material manner or to produce materially incorrect results
and for which there is no work around or only a difficult work around; or (ii) a
"Level 2 Severity" error, meaning an error that produces a situation in which
the Licensed Software is usable but does not function in the most convenient or
expeditious manner, and the use or value of the Licensed Software suffers no
material impact. RSA will acknowledge receipt of a conforming error report
within two (2) business days and (A) will use its continuing best efforts to
provide a correction for any Level 1 Severity error to OEM as early as
practicable; and (B) will use its reasonable efforts to include a correction for
any Level 2 Severity error in the next release of the RSA Software.
4.3 DISCLAIMER. EXCEPT FOR THE EXPRESS LIMITED WARRANTY PROVIDED IN THIS
----------
SECTION 4, THE RSA SOFTWARE IS PROVIDED "AS IS" WITHOUT ANY WARRANTY WHATSOEVER.
RSA DISCLAIMS ALL WARRANTIES, EXPRESS, IMPLIED OR STATUTORY, AS TO ANY MATTER
WHATSOEVER, INCLUDING ALL IMPLIED WARRANTIES OF MERCHANTABILITY, FITNESS FOR A
PARTICULAR PURPOSE AND NON-INFRINGEMENT OF THIRD PARTY RIGHTS. RSA DISCLAIMS ANY
WARRANTY OR REPRESENTATION TO ANY PERSON OTHER THAN OEM WITH RESPECT TO THE RSA
SOFTWARE. OEM SHALL NOT, AND SHALL TAKE ALL MEASURES NECESSARY TO INSURE THAT
ITS AGENTS AND EMPLOYEES DO NOT, MAKE OR PASS THROUGH ANY SUCH WARRANTY ON
BEHALF OF RSA TO ANY DISTRIBUTOR, END USER CUSTOMER OR OTHER THIRD PARTY.
5. ADDITIONAL OBLIGATIONS OF OEM
-----------------------------
5.1 BUNDLED PRODUCT MARKETING. OEM is authorized to represent to
-------------------------
Distributors and End User Customers only such facts about the RSA Software as
RSA states in its published product descriptions, advertising and promotional
materials or as may be stated in other non-confidential written material
furnished by RSA.
5.2 CUSTOMER SUPPORT. OEM shall, at its expense, provide all support for
----------------
the Bundled Products to Distributors and End User Customers.
5.3 LICENSE AGREEMENTS. OEM shall cause to be delivered to each
------------------
Distributor and End User Customer a license agreement which shall contain, at a
minimum, substantially all of the limitations of rights and the protections for
RSA which are contained in Sections 2.2, 5.4, 7, 10.7 and 10.8 of this
Agreement. OEM shall use commercially reasonable efforts to enforce the terms of
such agreements.
5.4 PROPRIETARY RIGHTS.
------------------
5.4.1 COPYRIGHT NOTICES; LICENSEE SEALS. OEM agrees not to remove or
---------------------------------
destroy any proprietary, trademark or copyright markings or notices placed upon
or contained within the RSA Source Code, RSA Object Code, User Manuals or any
related materials or documentation. OEM further agrees to insert and maintain:
(i) within every Bundled Product and any related materials or documentation a
copyright notice in the name of OEM; and (ii) within the splash screens, user
documentation, printed product
Page 4
<PAGE>
collateral, product packaging and advertisements for the Bundled Product, the
RSA "Licensee Seal" from the form attached as Exhibit "B" to this Agreement and
a statement that the Bundled Product contains the RSA Software.
5.4.2 TRADEMARKS. By reason of this Agreement or the performance
----------
hereof, OEM shall acquire no rights of any kind in any RSA trademark, trade
name, logo or product designation under which the RSA Software was or is
marketed and OEM shall not make any use of the same for any reason except as
expressly authorized by this Agreement or otherwise authorized in writing by
RSA. OEM shall cease to use the markings, or any similar markings, in any manner
on the expiration or other termination of this Agreement.
6. CONFIDENTIALITY
---------------
6.1 CONFIDENTIALITY. Each party acknowledges that in its performance of
---------------
its duties hereunder, the other party may communicate to it (or its designees)
certain confidential and proprietary information of such party, including the
RSA Software (in the case of RSA) and know-how, technology, techniques, and
business, product, and marketing plans of each such party (collectively, the
"Know-How"), all of which are confidential and proprietary to, and trade secrets
of, the disclosing party. The receiving party agrees to hold the Know-How
disclosed to it and, in the case of OEM the RSA Software, within its own
organization and shall not, without the specific written consent of the
disclosing party or as expressly authorized herein, utilize in any manner,
publish, communicate, or disclose any part of the disclosing party's Know-How or
the RSA Software (in the case of OEM) to third parties. This Section 6.1 shall
impose no obligations on either party with respect to any Know-How which: (i) is
in the public domain at the time disclosed by the disclosing party; (ii) enters
the public domain after disclosure other than by a breach of the receiving'
party's obligations hereunder or by a breach of another party's confidentiality
obligation; or (iii) is shown by documentary evidence to have been known by the
receiving party prior to its receipt from he disclosing party. Each party will
take such steps as are consistent with its protection of its own confidential
and proprietary information (but will in no event exercise less than reasonable
care) to insure that the provisions of this Section 6.1 are not violated by its
End User Customers, Distributors, employees, agents or any other person.
6.2 SOURCE CODE. OEM acknowledges the extreme importance of the
-----------
confidentiality and trade secret status of the RSA Source Code and OEM agrees,
in addition to complying with the requirements of Section 6.1 as it relates to
the RSA Source Code, to: (i) only use the RSA Source Code at the address set
forth on page 1 hereof or such alternate location specified in the applicable
License/Product Schedule; (ii) inform any employee that is granted access to all
or any portion of the RSA Source Code of the importance of preserving the
confidentiality and trade secret status of the RSA Source Code; and (iii)
maintain a controlled, secure environment for the storage and use of the RSA
Source Code.
6.3 PUBLICITY. Neither party will disclose to third parties, other than
---------
its agents and representatives on a need-to-know basis, the terms of this
Agreement or any exhibits hereto (including without limitation any
License/Product Schedule) without the prior written consent of the other party,
except (i) either party may disclose such terms to the extent required by law;
(ii) either party may disclose the existence of this Agreement; and (iii) RSA
shall have the right to disclose that OEM is an OEM of the RSA Software and that
any publicly-announced Bundled Product incorporates the RSA Software.
7. LIMITATION OF LIABILITY. IN NO EVENT WILL EITHER PARTY BE LIABLE TO THE
-----------------------
OTHER FOR INDIRECT, INCIDENTAL, SPECIAL, CONSEQUENTIAL OR EXEMPLARY DAMAGES
ARISING OUT OF OR RELATED TO THIS AGREEMENT, INCLUDING BUT NOT LIMITED TO LOST
PROFITS, BUSINESS INTERRUPTION OR LOSS OF BUSINESS INFORMATION, EVEN IF SUCH
PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES. REGARDLESS OF WHETHER
ANY ACTION OR CLAIM IS BASED ON WARRANTY, CONTRACT, TORT OR OTHERWISE: (I)
EXCEPT FOR RSA'S OBLIGATIONS ARISING UNDER SECTION 8, UNDER NO CIRCUMSTANCES
SHALL RSA'S TOTAL LIABILITY ARISING OUT OF OR RELATED TO THIS AGREEMENT EXCEED
THE TOTAL AMOUNT PAID BY OEM HEREUNDER, AND (II) EXCEPT FOR OEM'S LIABILITY
RESULTING FROM BREACH OF SECTIONS 2 AND 6, UNDER NO CIRCUMSTANCES SHALL OEM'S
TOTAL LIABILITY ARISING OUT OF OR RELATED TO THIS AGREEMENT EXCEED THREE (3)
TIMES THE TOTAL AMOUNT PAYABLE BY OEM TO RSA HEREUNDER.
8. INTELLECTUAL PROPERTY INDEMNITY
-------------------------------
8.1 DUTY TO DEFEND. RSA agrees that it shall, at its own expense, defend,
--------------
or at its option settle, any action instituted against OEM, and pay any award or
damages assessed or settled upon against OEM resulting from such action, insofar
as the same is based upon a claim that any Licensed Software used within the
terms of this Agreement and the applicable License/Product Schedule infringes
any United States patent, copyright or trade secret or a claim that RSA has no
right to license the Licensed Software hereunder, provided that OEM gives RSA;
(i) prompt notice in writing of such action, (ii) the right to control and
direct the investigation, preparation, defense and settlement of the action; and
(iii) reasonable assistance and information.
8.2 RSA OPTIONS. If, as a result of any binding settlement among the
-----------
parties or a final determination by a court of competent jurisdiction, any of
the Licensed Software is held to infringe and its use is enjoined, or if RSA
reasonably determines in its sole discretion that the Licensed Software may
become subject to an injunction, RSA shall have the option to: (i) obtain the
right to continue use of the Licensed Software; (ii) replace or modify the
Licensed Software so that it is no longer infringing; or (iii) refund the
License Fees paid by OEM hereunder less depreciation for use assuming straight
line depreciation over a five (5)-year useful life and terminate the Agreement.
Page 6
<PAGE>
8.3 EXCLUSIONS. Notwithstanding the foregoing, RSA shall have no liability
----------
under this Section 8 if the alleged infringement arises from (i) the use, in the
manner specified in the relevant User Manual, of other than the current
unaltered (including Interface Modifications) release of the Licensed Software,
or (ii) combination of the Licensed Software with other equipment or software
not provided by RSA, if such action would have been avoided but for such use or
combination.
8.4 EXCLUSIVE REMEDY. NOTWITHSTANDING ANYTHING TO THE CONTRARY IN THIS
----------------
AGREEMENT, THE FOREGOING STATES RSA'S ENTIRE LIABILITY AND OEM'S EXCLUSIVE
REMEDY FOR PROPRIETARY RIGHTS INFRINGEMENT.
9. TERM AND TERMINATION
--------------------
9.1 TERM. The license rights granted hereunder shall be effective with
----
respect to each License/Product Schedule as of the date thereof and shall
continue in full force and effect for each item of Licensed Software for the
period set forth on the applicable License/Product Schedule unless sooner
terminated pursuant to the terms of this Agreement.
9.2 TERMINATION. Either party shall be entitled to terminate this
-----------
Agreement at any time on written notice to the other in the event of a material
default by the other party and a failure to cure such default within a period of
thirty (30) days following receipt of written notice specifying that a default
has occurred.
9.3 INSOLVENCY. Upon (i) the institution of any proceedings by or against
----------
either party seeking relief, reorganization or arrangement under any laws
relating to insolvency, which proceeding are not dismissed within sixty (60)
days; (ii) the assignment for the benefit of creditors, or the appointment of a
receiver, liquidator or trustee, of any of either party's property or assets; or
(iii) the liquidation, dissolution or winding up of either party's business;
then and in any such events this Agreement may immediately be terminated by the
other party upon written notice.
9.4 TERMINATION FOR CONVENIENCE. The parties acknowledge and agree that
---------------------------
OEM may at any time delay, interrupt or cease use of the Licensed Software, but
this Agreement and all the terms and conditions contained herein or any
applicable License/Product Schedule shall continue in full force, including any
obligations to make quarterly reports. OEM may elect to terminate this Agreement
upon ninety (90) days written notice and it is expressly understood that such
termination shall not discharge any payment obligations accrued as of the date
of such termination or entitle OEM to a refund of any amounts previously paid to
RSA.
9.5 EFFECT OF TERMINATION. Upon the expiration or termination of this
---------------------
Agreement (or the license rights under a particular License/Product Schedule),
OEM shall cease making copies of, using or licensing the RSA Software, User
manual and Bundled Products, excepting only such copies of Bundled Products
necessary to fill orders placed with OEM prior to such expiration or
termination. OEM shall destroy all copies of the RSA Software, User Manual and
Bundled Products not subject to any then-effective license agreement with an End
User Customer and all information and documentation provided by RSA to OEM
(including all Know-How), other than such copies of the RSA Object Code, the
User Manual and the Bundled Products as are necessary to enable OEM to perform
its continuing support obligations in accordance with Section 5.2, if any.
Notwithstanding the foregoing, if OEM has licensed RSA Source Code hereunder,
for a period of one (1) year after the date of expiration or termination of the
license rights granted under this Agreement for any reason other than as a
result of default or breach by OEM, OEM may retain one (1) copy of the RSA
Source Code and is hereby licensed for such term to use such copy solely for the
purpose of supporting End User Customers. Upon the expiration of such one (1)-
year period, OEM shall return such single copy of the RSA Source Code to RSA or
certify to RSA that the same has been destroyed. Any expiration or termination
shall not discharge any obligation to pay License Fees which have accrued or are
owing as of the effective date of such expiration or termination.
9.6 SURVIVAL OF CERTAIN TERMS. The following provisions shall survive any
-------------------------
expiration or termination: 2.2, 2.3, 3.8, 4.3, 6, 7, 9 and 10.
10. MISCELLANEOUS PROVISIONS
------------------------
10.1 GOVERNING LAW AND JURISDICTION. This Agreement will be governed by
------------------------------
and construed in accordance with the laws of the State of California,
irrespective of its choice of law principles. All disputes arising out of this
Agreement will be subject to the exclusive jurisdiction and venue of the
California state courts and the United States District Court for the Northern
District of California, and the parties consent to the personal and exclusive
jurisdiction of these courts. The parties agree that the United Nations
Convention on Contracts for the International Sale of Goods shall not apply to
this Agreement.
10.2 BINDING UPON SUCCESSORS AND ASSIGNS. Except as otherwise provided
-----------------------------------
herein, this Agreement shall be binding upon, and inure to the benefit of, the
successors, representatives, administrators and assigns of the parties hereto.
Notwithstanding the generality of the foregoing, this Agreement shall not be
assignable by OEM, by operation of law or otherwise, without the prior written
consent of RSA, which shall not be unreasonably withheld; provided, however,
that RSA may withhold its consent to the assignment of this Agreement with
respect to any License/Product Schedule providing for a paid-up License Fee. Any
such purported assignment or delegation without RSA's written consent shall be
void and of no effect.
10.3 SEVERABILITY. If any provision of this Agreement is found to be
------------
invalid or unenforceable, such provision shall be severed from the Agreement and
the remainder of this Agreement shall be interpreted so as best to reasonably
effect the intent of the parties hereto. It is expressly understood and agreed
that each and every provision of this Agreement is intended by the parties to be
severable and
Page 8
<PAGE>
independent of any other provision and to be enforced as such.
10.4 ENTIRE AGREEMENT. This Agreement and the exhibits and schedules
----------------
hereto constitute the entire understanding and agreement of the parties hereto
with respect to the subject matter hereof and supersede all prior and
contemporaneous agreements, representations and understandings between the
parties.
10.5 AMENDMENT AND WAIVERS. Any term or provision of this Agreement may be
---------------------
amended, and the observance of any term of this Agreement may be waived, only by
a writing signed by the party to be bound.
10.6 NOTICES. Any notice, demand, or request with respect to this
-------
Agreement shall be in writing and shall be effective only if it is delivered by
hand or mailed, certified or registered mail, postage prepaid, return receipt
requested, addressed to the appropriate party at its address set forth on page
1. Such communications shall be effective when they are received by the
addressee; but if sent by certified or registered mail in the manner set forth
above, they shall be effective not later than ten (10) days after being
deposited in the mail. Any party may change its address for such communications
by giving notice to the other party in conformity with this Section.
10.7 EXPORT COMPLIANCE AND FOREIGN RESHIPMENT LIABILITY. THIS AGREEMENT IS
--------------------------------------------------
EXPRESSLY MADE SUBJECT TO ANY LAWS, REGULATIONS, ORDERS OR OTHER RESTRICTIONS ON
THE EXPORT FROM THE UNITED STATES OF AMERICA OF THE RSA SOFTWARE OR BUNDLED
PRODUCTS OR OF INFORMATION ABOUT THE RSA SOFTWARE OR BUNDLED PRODUCTS WHICH MAY
BE IMPOSED FROM TIME TO TIME BY THE GOVERNMENT OF THE UNITED STATES OF AMERICA.
NOTWITHSTANDING ANYTHING CONTAINED IN THIS AGREEMENT. TO THE CONTRARY, OEM SHALL
NOT EXPORT OR REEXPORT, DIRECTLY OR INDIRECTLY, ANY RSA SOFTWARE OR BUNDLED
PRODUCTS OR INFORMATION PERTAINING THERETO TO ANY COUNTRY TO WHICH SUCH EXPORT
OR REEXPORT IS RESTRICTED OR PROHIBITED, OR AS TO WHICH SUCH GOVERNMENT OR ANY
AGENCY THEREOF REQUIRES AN EXPORT LICENSE OR OTHER GOVERNMENTAL APPROVAL AT THE
TIME OF EXPORT OR REEXPORT WITHOUT FIRST OBTAINING SUCH LICENSE OR APPROVAL.
10.8 FEDERAL GOVERNMENT LICENSE. OEM and each of OEM's Distributors shall
--------------------------
in all proposals and agreements with the United States government or any
contractor of the United States government identify and license the Bundled
Product, including the RSA Object Code incorporated therein, as follows: (i) for
acquisition by or on behalf of civilian agencies, as necessary to obtain
protection as "commercial computer software" and related documentation in
accordance with the terms of OEM's or such Distributor's customary license, as
specified in 48 C.F.R. 12.212 of the Federal Acquisition Regulations and its
successor regulations; or (ii) for acquisition by or on behalf of units of ??
Department of Defense, as necessary to obtain ??tection as "commercial computer
software" as defined in 48 C.F.R. 227.7014(a)(1) of the Department of Defense
Federal Acquisition Regulation Supplement (DFARS) and related documentation in
accordance with the terms of OEM's or such Distributor's customary license, as
specified in 48 C.F.R. 227.7202.1 of DFARS and its successor regulations.
10.9 REMEDIES NON-EXCLUSIVE. Except as otherwise expressly provided, any
----------------------
remedy provided for in this Agreement is deemed cumulative with, and not
exclusive of, any other remedy provided for in this Agreement or otherwise
available at law or in equity. The exercise by a party of any remedy shall not
preclude the exercise by such party of any other remedy.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
of the last signature below.
OEM:
LIQUID AUDIO, INC.
By: /s/ PHILIP R. WISER
--------------------------------
Printed Name: Philip R. Wiser
----------------------
Title: V.P. Engineering
-----------------------------
Date: 7/11/97
------------------------------
RSA DATA SECURITY, INC.
By: /s/ D. JAMES BIDZOS
--------------------------------
Printed Name: D. James Bidzos
----------------------
Title: President
-----------------------------
Date: 7/18/97
------------------------------
Page 7
<PAGE>
License/Product Schedule Number: 0797-LIQ-O-LPS-1
----------------
EXHIBIT "A"
LICENSE/PRODUCT SCHEDULE
OEM:
Liquid Audio, Inc.
- ---------------------------------------
OEM Master License Agreement Number:
0797-LIQ-O-MLA-1
- ---------------------------------------
Date of OEM Master License Agreement:
July 11, 1997
- ---------------------------------------
This License/Product Schedule Amends Schedules Dated:
N/A
- ---------------------------------------
Term of Agreement for this Bundled Product:
Perpetual
- ---------------------------------------
Bundled Products:
OEM's software products and successor versions thereof for transmission of audio
over
networks, currently known as:
- ------------------------------
[*]
RSA Software:
[*]
OEM may obtain copies of the RSA Software on other platforms as may be generally
available at RSA's then current published list price, each additional platform
version of which will be covered RSA Software under this License/Product
Schedule.
Delivery of RSA Software to OEM:
- -------------------------------
One (1) copy of each of the RSA Object Code, the RSA Source Code (if licensed
hereunder) and the User Manual for the RSA Software identified above:
[ ] has been received by OEM, or
[X] will be delivered by RSA as soon as practicable, but not later than
ten (10) business days after the date of execution of this License/Product
Schedule.
* Certain information in this Exhibit has been omitted and filed
separately with the Commission. Confidential treatment has been
requested with respect to the omitted portions.
Page 1
<PAGE>
<TABLE>
<CAPTION>
LICENSED SOFTWARE AND FIELD OF USE RESTRICTION FOR THIS BUNDLED PRODUCT
- -----------------------------------------------------------------------
RIGHT TO
INCLUDE
OBJECT
SOURCE CODE IN DESCRIBE
CODE BUNDLED FIELD OF USE FIELD OF USE
LICENSE PRODUCT RESTRICTION RESTRICTION
BSAFE YES NO YES NO YES NO
<S> <C> <C> <C> <C> <C> <C> <C>
RSA Public Key Cryptosystem [_] [X] [X] [_] [X] [_] / */
---
Diffie-Hellman Key Negotiation [_] [X] [X] [_] [X] [_] / */
---
Bloom-Shamir Secret Sharing [_] [X] [_] [_] [_] [_]
Data Encryption Standard (DES) [_] [X] [X] [_] [X] [_]
Extended Data Encryption [_] [X] [_] [_] [_] [_]
Standard (DESX)
Triple DES (3DES) [_] [X] [_] [X] [_] [_]
RC2 Variable-Key Size Symmetric [_] [X] [_] [X] [_] [_]
Block Cipher
RC4 Variable-Key Size Symmetric [_] [X] [X] [_] [X] [_] / */
Stream Cipher ---
RC5 Variable-Key Size Symmetric [_] [X] [X] [_] [X] [_] / */
Block Cipher ---
MD Hashing Algorithm [_] [X] [_] [X] [_] [_]
MD2 Hashing Algorithm [_] [X] [_] [X] [_] [_]
MD5 Hashing Algorithm [_] [X] [X] [_] [X] [_] / */
---
Secure Hashing Algorithm (SHA) [_] [X] [X] [_] [X] [_] / */
---
Digital Signature Algorithm (DSA) [_] [X] [X] [_] [X] [_] / */
---
TIPEM (all set forth below) [_] [X] [_] [X] [_] [_]
RSA Public Key Cryptosystem
Data Encryption Standard (DES)
RC2 Variable Key Size Symmetric
Block Cipher
MD2 Hashing Algorithm
MD5 Hashing Algorithm
BCERT [_] [X] [X] [_] [X] [_] / */
---
- ---------------------------------------------------------------------------------------------------------------------------
_______________________________
/*/ Solely for privacy protection, privacy and authentication within and among the
Bundled Products for (i) transmission and reception of audio over the Internet
or other packet-switched networks, and (ii) transmission and reception of
related content (such as liner notes, attributions, and the like) over the same
channel solely to facilitate the transmission and reception of audio as
described above.
</TABLE>
Page 2
<PAGE>
LICENSE AND MAINTENANCE FEES
- ----------------------------
Source Code License Fee for this License/Product Schedule:
- ---------------------------------------------------------
N/A
Object Code License Fees for this License/Product Schedule:
- ----------------------------------------------------------
A. PERCENTAGE OF NET SALES PRICE LICENSE FEE FOR THE AUTHOR AND SERVER BUNDLED
---------------------------------------------------------------------------
PRODUCTS: In consideration of the rights granted herein, OEM shall pay RSA
- ---------
License Fees as a percentage of the Net Sales Price of the Author and Server
Bundled Products as follows:
* For the Author Bundled Product:
------------------------------
[*]
* For the Server Bundled Product:
------------------------------
[*]
B. ANNUAL LICENSE FEE FOR UNLIMITED DISTRIBUTION OF THE CLIENT BUNDLED
-------------------------------------------------------------------
PRODUCT: In consideration of the rights granted herein, OEM shall pay RSA an
- -------
annual License Fee for unlimited distribution of the Client Bundled Product, in
the amount of [*] payable upon execution of this License/Product Schedule and
every anniversary date thereafter.
Prepayment of License Fees for the Author and Server Bundled Products under this
- --------------------------------------------------------------------------------
License/Product Schedule: [*] payable upon execution of this License/Product
- ------------------------
Schedule
Present Annual Maintenance Fee for this License/Product Schedule:
- ----------------------------------------------------------------
[*]
SPECIAL TERMS AND CONDITIONS
- ----------------------------
The following Special Terms and Conditions shall apply to the Bundled Products
covered by this License/Product Schedule:
1. Co-Branding. Notwithstanding anything to the contrary in Section 1.2 of the
-----------
Agreement, OEM may authorize a Distributor to co-brand the Bundled Products for
redistribution to End User Customers by such Distributor; provided that OEM
indicates in its licensing reports delivered pursuant to Section 3.7 of the
Agreement the identity of any Distributor so authorized and the name of the co-
branded Bundled Products, as well as the number of copies of Bundled Products
which are distributed by all such Distributors and OEM's Net Sales Price with
respect thereto. It is understood and agreed that a Distributor authorized to
co-brand a Bundled Product may not otherwise modify the Bundled Product or
incorporate it into another product for distribution; provided, however, that
this prohibition does not prevent a Distributor authorized to co-brand a Bundled
Product from packaging the co-branded Bundled Product with other products. OEM
may authorize Distributors authorized to co-brand Bundled Products to use the
RSA Licensee Seal, to the extent OEM is authorized to do so in the Agreement, to
meet the requirements in Section 5.4.1 of the Agreement. OEM shall pay RSA
License Fees pursuant to Section 3.5 of the Agreement with respect to co-branded
Bundled Products based on OEM's Net Sales Price to the Distributor and/or number
of copies distributed, as applicable, applying a percentage of such Net Sales
Price of 2.3% and the per copy/unit minimum License Fees referred to above for
the co-branded Bundled Products.
2. End User Customers. Notwithstanding the provisions of Section 1.4 of the
------------------
Agreement to the contrary, an End User Customer shall have the right to assign
or transfer the Bundled Products covered by this License/Product Schedule to
another person or entity, provided that all of such End User Customer's rights
are transferred subject to the applicable license agreement and no rights are
retained by such End User Customer and provided that the End User Customer's
primary purpose in licensing the Bundled Product was its own personal or
internal use of the Bundled Product.
3. Right to Subcontract. Notwithstanding any provision of the Agreement to the
--------------------
contrary, OEM shall be entitled to exercise its rights under the Agreement to
develop and test the Bundled Products covered by this License/Product Schedule
either itself or through third parties performing on behalf of OEM pursuant to a
subcontract arrangement; provided, however, that OEM shall be responsible for
insuring that any such subcontractor complies with the restrictions and duties
imposed by this Agreement upon OEM.
4. No Service Bureau. The second sentence of Section 2.2.3 of the Agreement is
-----------------
amended in its entirety to read as follows:
Neither OEM nor any Distributor or End User Customer may use the Bundled
Product to operate a revenue-generating service business whose purpose is
to provide direct use of the Bundled Product, except where the business
provides a substantial service to third parties other than the use of the
Bundled Product and the Bundled Product is used by third parties solely to
access, retrieve or store data, content, goods, or other information as
part of or related to the services provided.
* Certain information in this Exhibit has been omitted and filed separately
with the Commission. Confidential treatment has been requested with respect
to the omitted portions.
Page 3
<PAGE>
THE PROVISIONS OF THIS LICENSE/PRODUCT SCHEDULE ARE PROVIDED AS A BASIS OF
DISCUSSION BETWEEN OEM AND RSA AND WILL BECOME BINDING UPON THE PARTIES ONLY IF
(1) OEM HAS EXECUTED A OEM MASTER LICENSE AGREEMENT AND HAVE INDICATED THEIR
ACCEPTANCE OF THE TERMS CONTAINED IN THIS LICENSE/PRODUCT SCHEDULE BY THEIR
SIGNATURES BELOW ON OR BEFORE JULY 11, 1997; AND (2) RSA HAS EXECUTED THE OEM
MASTER LICENSE AND THIS LICENSE/PRODUCT SCHEDULE.
OEM:
LIQUID AUDIO, INC.
By: /s/ Philip R. Wiser
--------------------------
Printed Name: Philip R. Wiser
----------------
Title: V.P. Engineering
------------------------
Date: 7/11/97
------------------------
RSA DATA SECURITY, INC.
By: /s/ D. James Bidzos
--------------------------
Printed Name: D. James Bidzos
-----------------
Title: President
-----------------------
Date: 7/18/97
------------------------
Page 4
<PAGE>
EXHIBIT "C"
SPECIAL TERMS AND CONDITIONS
OEM: Liquid Audio, Inc.
--------------------------------------------------------------------
Master License Agreement Number: 0797-LIQ-O-MLA-1
----------------------------------------
Master License Agreement Date: July 11, 1997
------------------------------------------
Exhibit "C" Date: July 11, 1997
-------------------------------------------------------
THE OEM MASTER LICENSE AGREEMENT between RSA Data Security, Inc. and the
OEM set forth above dated as of the date set forth above ("AGREEMENT") is
---------
amended as set forth below.
1. DEFINITIONS. Capitalized terms used and not otherwise defined in this
-----------
Exhibit "C" shall have the meanings designated for such terms in the Agreement.
2. AMENDMENTS TO AGREEMENT. The following provisions of the Agreement,
-----------------------
referenced by the applicable Section numbers in the Agreement, are hereby
amended as follows:
2.1 SECTION 2.1.2. Subpart (iii) of Section 2.1.2 is amended by
-------------
inserting the following language before the word "license": "...market,
display, perform, transmit,...."
2.2 SECTION 2.1.3. Subpart (i) of Section 2.1.3 is amended by
-------------
inserting the following language before the words "End User Customers":
"...Distributors and...." Subpart (ii) of Section 2.13 is amended by inserting
the following language after the words "have reproduced": "...market, display,
perform, transmit...."
2.3 SECTION 3.4. The first sentence of Section 3.4 is amended by
-----------
replacing all of the language beginning with the word "excluding" to the end of
the sentence with the following: "...excluding any amounts receivable by OEM for
sales taxes, value-added taxes and use taxes, shipping, insurance and duties,
and reduced by all discounts, refunds, allowances, price protection and returns
granted in the ordinary course of business."
2.4 SECTION 3.8. The last sentence of Section 3.8 is amended by
-----------
inserting the following language before the words [*]
2.5 SECTION 3.9. The first sentence of Section 3.9 is amended by
-----------
inserting the following language after each occurrence of the words "End User
Customer(s)": "...and Distributor(s)...."
2.6 SECTION 4.1. The first sentence of Section 4.1 is amended by
-----------
adding the following after the word "specifications": "...and/or User
Manual...."
2.7 SECTION 4.2. The first sentence of Section 4.2 is amended by
-----------
adding the following after the word "specifications": "...and/or User
Manual...."
2.8 SECTION 5.2. Section 5.2 is amended by inserting the following
-----------
language after the word "OEM": "...or its Distributors...."
2.9 SECTION 5.3. Section 5.3 is amended by replacing the reference to
-----------
Section 2.2 with a reference to Section 2.2.5, and by adding the following
language after the reference to Section 10.8: "...(if applicable)...."
2.10 SECTION 6.1. The first sentence of Section 6.1 is amended by
-----------
adding the following immediately preceding the definition of the term "Know-
How": "..., and the information provided by OEM pursuant to Sections 3.7 and
3.8...." The third sentence of Section 6.1 is amended by deleting the word "or"
before subpart (iii) thereof and by adding the following at the end thereof:
"...; (iv) to the extent disclosed by the receiving party pursuant to a
requirement of a court order, governmental agency or law, provided that the
receiving party provides prompt written
* Certain information in this Exhibit has been omitted and filed
separately with the Commission. Confidential treatment has been
requested with respect to the omitted portions.
Page 1
<PAGE>
notice of such requirement so as to afford the disclosing party an opportunity
to intervene and prevent or limit the disclosure; or (v) is disclosed or used
for the purpose of enforcement of this Agreement."
2.11 SECTION 6.3. Subpart (iii) of Section 6.3 is amended by
-----------
replacing the first occurrence of the word "RSA" with the words "either party."
2.12 SECTION 7. Subpart (i) of Section 7 is amended by inserting the
---------
following after the word "SECTION": "...6 AND...."
2.13 SECTION 8.1. Section 8.1 is replaced in its entirety with the
-----------
following:
8.1 DUTY TO DEFEND. RSA agrees that it shall, at its own
--------------
expense, defend, or at its option settle, any action or claim
instituted against OEM, and pay any award or damages assessed or
settled upon against OEM resulting from such action or claim, insofar
as the same is based upon a claim that any Licensed Software, User
Manual, or the Licensee Seal used within the terms of this Agreement
and the applicable License/Product Schedule infringes any United
States patent, copyright, trademark or trade secret or a claim that
RSA has no right to license the Licensed Software or User Manual
hereunder, provided that OEM gives RSA: (i) prompt notice in writing
of such action, (ii) the right to control and direct the
investigation, preparation, defense and settlement of the action; and
(iii) reasonable assistance and information. RSA will reimburse OEM's
reasonable out-of-pocket expenses incurred prior to RSA's assuming the
control of the investigation, preparation, defense or settlement of
the action or claim, and in providing requested assistance to RSA, and
responding to subpoenas and discovery notices and orders with respect
to any such action or claim.
2.14 SECTION 8.2. Section 8.2 is amended by inserting the following
-----------
after each occurrence of the words "Licensed Software": "...or User Manual.... "
Section 8.2 is further amended by adding the following at the end of subpart
(ii) thereof: "...and is substantially similar in functionality to the enjoined
Licensed Software or User Manual."
2.15 SECTION 9.5. The first sentence of Section 9.5 is amended by
-----------
inserting the word "affected" before the first occurrence of the words "RSA
Software." The second sentence of Section 9.5 is amended by inserting the words
"or its Distributors" after the words "as are necessary to enable OEM."
2.16 SECTION 9.6. Section 9.6 is amended by including a reference to
-----------
Section 8 of the Agreement as a surviving term.
2.17 SECTION 10.10. A new Section 10.10 is added, as follows:
-------------
10.10 COUNTERPARTS. This Agreement may be signed in one or more
------------
counterparts, each of which shall be an original, and all of which
together shall constitute one instrument .
3. EFFECT OF AMENDMENT. This Exhibit "C" is an amendment to the
-------------------
Agreement. Except as expressly amended above, the Agreement shall remain in full
force and effect.
IN WITNESS WHEREOF, the parties have executed this Exhibit "C" as of the
date set forth above.
OEM:
LIQUID AUDIO, INC. RSA DATA SECURITY, INC.
By: /s/ Philip R. Wiser By: /s/ D. James Bidzos
--------------------------- ---------------------------
Printed Name: Philip R. Wiser Printed Name: D. James Bidzos
----------------- -----------------
Title: V.P. Engineering Title: President
------------------------ ------------------------
Page 2
<PAGE>
RSA DATA SECURITY(TM)
MAINTENANCE AND SUPPORT AGREEMENT
OEM Master License: 0797-LIQ-O-MLA-1 Date: July 11, 1997
----------------------- ------------------------
License/Product Schedule: 0797-LIQ-O-LPS-1 Date: July 11, 1997
------------------ -------------------------
THIS MAINTENANCE AND SUPPORT AGREEMENT ("Agreement"), effective as of the
later date of execution ("Effective Date"), is entered into by and between RSA
Data Security, Inc., a Delaware corporation ("RSA"), having a principal address
at 100 Marine Parkway, Suite 500, Redwood City, California 94065, and the entity
named below ("OEM"), having a principal address as set forth below.
OEM:
Liquid Audio, Inc., a California corporation
- ---------------------------------------------------
(Name and jurisdiction of incorporation)
2421 Broadway, 2F
- ---------------------------------------------------
(Address)
Redwood City, CA 94063
- ---------------------------------------------------
OEM Legal Contact:
Harry Boadwee, Esq. (415) 858-7188
-----------------------------------------------
(name, telephone and title)
OEM Billing Contact:
Philip Wiser, Vice President of Engineering
-----------------------------------------------
(415) 562-0884
-----------------------------------------------
(name, telephone and title)
OEM Technical Contact:
Philip Wiser, Vice President of Engineering
-----------------------------------------------
(415) 562-0884
-----------------------------------------------
(name, telephone and title)
OEM Commercial Contact:
Philip Wiser, Vice President of Engineering
-----------------------------------------------
(415) 562-0884
-----------------------------------------------
(name, telephone and title)
INITIAL ANNUAL MAINTENANCE FEE: [*]
1. DEFINITIONS
-----------
All capitalized terms used in this Agreement shall have the meaning set
forth in the OEM Agreement and License/Product Schedule, unless an alternate
definition is set forth below. In the event of any inconsistency, the
definitions set forth in this Agreement shall be controlling, but only for the
purposes of interpreting or construing this Agreement.
1.1 "LICENSE/PRODUCT SCHEDULE" means the schedule identified and having
the effective date set forth above which specifies the RSA Software, Licensed
Software, use limitations (if any), License Fees, and other matters with respect
to the Bundled Product licensed under such License/Product Schedule.
1.2 "NEW RELEASE" means a version of the RSA Software which shall
generally be designated by a new version number which has changed from the prior
number only to the right of the decimal point (e.g., Version 2.2 to Version
2.3).
1.3 "NEW VERSION" means a version of the RSA Software which shall
generally be designated by a new version number which has changed from the prior
number to the left of the decimal point (e.g., Version 2.3 to Version 3.0).
1.4 "OEM AGREEMENT" means the agreement identified and having the
effective date as set forth above and which specifies the terms and conditions
of license of the RSA Software, as further defined in the License/Product
Schedule.
1.5 "RSA OBJECT CODE" means the Licensed Software in machine-readable,
compiled object code form.
1.6 "RSA SOFTWARE" means RSA proprietary software identified as RSA
Software on the License/Product Schedule.
1.7 "RSA SOURCE CODE" means the mnemonic, high level statement versions of
the Licensed Software written in the source language used by programmers.
* Certain information in this Exhibit has been omitted and filed
separately with the Commission. Confidential treatment has been
requested with respect to the omitted portions.
Page 1
<PAGE>
2. MAINTENANCE AND SUPPORT SERVICES
--------------------------------
2.1 GENERAL. This Agreement sets forth the terms under which RSA will
-------
provide maintenance and support to OEM for the RSA Software licensed to OEM
under the License/Product Schedule identified on the first page hereof, which
use is governed by the terms of the OEM Agreement and such License/Product
Schedule. The use of and license to any software provided to OEM hereunder shall
be governed by the terms of the OEM Agreement and License/Product Schedule.
2.2 SUPPORT AND MAINTENANCE. RSA agrees to provide the maintenance and
-----------------------
support specified in this Agreement and OEM agrees to pay RSA's then-current
annual support and maintenance fee ("Maintenance Fee").
2.3 ADDITIONAL CHARGES. In the event RSA is required to take actions to
------------------
correct a difficulty or defect which is traced to OEM errors, modifications,
enhancements, software or hardware, then OEM shall pay to RSA its time and
materials charges at RSA's rates then in effect. In the event RSA's personnel
must travel to perform maintenance or on-site support, OEM shall reimburse RSA
for any reasonable out-of-pocket expenses incurred, including travel to and from
OEM's sites, lodging, meals and shipping, as may be necessary in connection with
duties performed under this Section 2 by RSA.
2.4 MAINTENANCE PROVIDED BY RSA. For periods for which OEM has paid the
---------------------------
Maintenance Fee, RSA will provide OEM with the following services:
2.4.1 TELEPHONE SUPPORT. RSA will provide telephone support to OEM
-----------------
during RSA's normal business hours. RSA may provide on-site support reasonably
determined to be necessary by RSA at OEM's location specified on page 1 hereof.
RSA shall provide the support specified in this Section 2.4.1 to OEM's employees
responsible for developing Bundled Products, maintaining Bundled Products, and
providing support to End User Customers. No more than two (2) OEM employees may
obtain such support from RSA at any one time. On RSA's request, OEM will provide
a list with the names of the employees designated to receive support from RSA.
OEM may change the names on the list at any time by providing written notice to
RSA.
2.4.2 ERROR CORRECTION. In the event OEM discovers an error in the
----------------
Licensed Software which causes the Licensed Software not to operate in material
conformance to RSA's published specifications therefor, OEM shall submit to RSA
a written report describing such error in sufficient detail to permit RSA to
reproduce such error. Upon receipt of any such written report, RSA will use its
reasonable business judgment to classify a reported error as either: (i) a
"Level 1 Severity" error, meaning an error that causes the Licensed Software to
fail to operate in a material manner or to produce materially incorrect results
and for which there is no workaround or ?? a difficult workaround; or (ii) a
"Level 2 Severity" error, meaning an error that produces a situation in which
the Licensed Software is usable but does not function in the most convenient or
expeditious manner, and the use or value of the Licensed Software suffers no
material impact. RSA will acknowledge receipt of a conforming error report
within two (2) business days and (A) will use its continuing best efforts to
provide a correction for any Level 1 Severity error to OEM as early as
practicable; and (B) will use its reasonable efforts to include a correction for
any Level 2 Severity error in the next release of the RSA Software.
2.4.3 NEW RELEASES AND NEW VERSIONS. RSA will provide OEM information
-----------------------------
relating to New Releases and New Versions of the RSA Software during the term of
this Agreement. New Releases will be provided at no additional charge. New
Versions will be provided at RSA's standard upgrade charges in effect at the
time. Any New Releases or New Versions acquired by OEM shall be governed by all
of the terms and provisions of this Agreement.
2.5 LAPSED MAINTENANCE. If this Agreement has lapsed, OEM may obtain a
------------------
license of a New Release of the applicable RSA Software or any service which is
provided as a part of maintenance and support by becoming current on Maintenance
Fees as provided in Section 3.1 to the date such New Release is licensed or such
service is provided.
3. MAINTENANCE AND SUPPORT FEES
----------------------------
3.1 MAINTENANCE AND SUPPORT FEES. In consideration of RSA's providing the
----------------------------
maintenance and support services described herein, OEM agrees to pay RSA the
initial Maintenance Fee set forth on the first page hereof. Such amount shall be
payable for the first year upon the execution of this Agreement and for each
subsequent year in advance of the commencement of such year. The Maintenance Fee
may be modified by RSA for each renewal term by written notice to OEM at least
ninety (90) days prior to the end of the then-current term. If OEM elects not to
renew this Agreement for successive terms (as provided in Section 6.1 below) OEM
may re-enroll only upon payment of the annual Maintenance Fee for the coming
year and for all Maintenance Fees that would have been paid had OEM not ceased
maintenance and support.
3.2 TAXES. All taxes, duties, fees and other governmental charges of any
-----
kind (including sales and use taxes, but excluding taxes based on the gross
revenues or net income of RSA) which are imposed by or under the authority of
any government or any political subdivision thereof on the Maintenance Fees or
any aspect of this Agreement shall be borne by OEM and shall not be considered a
part of, a deduction from or an offset against Maintenance Fees.
3.3 TERMS OF PAYMENT. Maintenance Fees due RSA hereunder shall be paid by
----------------
OEM to the attention of the Software Licensing Department at RSA's address set
Page 2
<PAGE>
forth above on or before the thirtieth (30th) day after the Effective Date and,
in the case of renewal terms, prior to the each anniversary thereof. A late
payment penalty on any Maintenance Fees not paid when due shall be assessed at
the rate of one percent (1%) per thirty (30) days.
3.4 U.S. CURRENCY. All payments hereunder shall be made in lawful United
-------------
States currency.
4. CONFIDENTIALITY
---------------
The parties agree that all obligations and conditions respecting
confidentiality, use of source code and publicity in Section 5 of the OEM
Agreement shall apply to the parties' performance of this Agreement.
5. USE LIMITATIONS; TITLE; INTELLECTUAL PROPERTY INDEMINITY; LIMITATION OF
-----------------------------------------------------------------------
LIABILITY.
- ----------
Any and all RSA Software provided to OEM pursuant to this Agreement shall
constitute RSA Software under the OEM Master License Agreement. As such, the
parties respective interests and obligations relating to the RSA Software,
including but not limited to license and ownership rights thereto, use
limitations (if any), intellectual property indemnity and limitation of
liability, shall be governed by the terms of the OEM Agreement and the
License/Product Schedule.
6. TERM AND TERMINATION
--------------------
6.1 TERM. This Agreement shall commence on the Effective Date hereof and
----
shall remain in full force and effect for an initial period of one (1) year,
unless sooner terminated in accordance with this Agreement. Upon expiration of
the initial period and each successive period, this Agreement shall
automatically renew for an additional one (1) year period, unless either party
has notified the other of its intent to terminate as set forth in Section 6.2.3
herein.
6.2 TERMINATION.
-----------
6.2.1 Either party shall be entitled to terminate this Agreement at
any time on written notice to the other in the event of a material default by
the other party of this Agreement and a failure to cure such default within a
period of thirty (30) days following receipt of written notice specifying that a
default has occurred.
6.2.2 This Agreement shall automatically terminate in the event that
the OEM Agreement is terminated in accordance with its terms.
6.2.3 This Agreement may also be terminated by OEM for any or no
reason by providing written notice of such intent at least ninety (90) days
prior to the end of the then-current term. RSA may cease to offer support and
maintenance for future maintenance terms by notice delivered to OEM ninety (90)
days or more before the end of the then-current maintenance term.
6.2.4 Upon (i) the institution of any proceedings by or against
either party seeking relief, reorganization or arrangement under any laws
relating to insolvency, which proceedings are not dismissed within sixty (60)
days; (ii) the assignment for the benefit of creditors, or upon the appointment
of a receiver, liquidator or trustee, of any of either party's property or
assets; or (iii) the liquidation, dissolution or winding up of either party's
business, then and in any such events this Agreement may immediately be
terminated by the other party upon written notice.
6.3 SURVIVAL OF CERTAIN TERMS. The following provisions shall survive any
-------------------------
expiration or termination: 2.2, 2.3, 4, 6 and 7.
7. MISCELLANEOUS PROVISIONS
------------------------
This Agreement incorporates by this reference Section 10 of the OEM
Agreement in its entirety.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
of the later signature below.
OEM:
LIQUID AUDIO, INC.
By: /s/ Philip R. Wiser
---------------------------
Printed Name: Philip R. Wiser
------------------
Title: V.P. Engineering
------------------------
Date: 7/11/97
------------------------
RSA DATA SECURITY, INC.
By: /s/ D. James Bidzos
---------------------------
Printed Name: D. James Bidzos
-----------------
Title: President
------------------------
Date: 7/18/97
-------------------------
Page 3
<PAGE>
EXHIBIT "A"
MAINTENANCE AND SUPPORT AGREEMENT
---------------------------------
OEM: Liquid Audio, Inc.
-----------------------------------------------------------------
Maintenance and Support Agreement Date: July 11, 1997
-------------------------------
OEM Master License Agreement Number: 0797-LIQ-O-MLA-1
----------------------------------
Exhibit "A" Date: July 11, 1997
-----------------------------------------------------
THE MAINTENANCE AND SUPPORT AGREEMENT between RSA Data Security, Inc. and
the OEM set forth above dated as of the date set forth above ("AGREEMENT") is
---------
amended as set forth below.
1. DEFINITIONS. Capitalized terms used and not otherwise defined in this
-----------
Exhibit "A" shall have the meanings designated for such terms in the Agreement.
2. AMENDMENTS TO AGREEMENT. The following provisions of the Agreement,
-----------------------
referenced by the applicable Section numbers in the Agreement, are hereby
amended as follows:
2.1 SECTION 1.6. Section 1.6 is amended by adding the following at
-----------
the end thereof: "'RSA Software' shall also include all modifications and
enhancements (including all New Releases and New Versions) to such programs as
may be provided by RSA to OEM pursuant to this Agreement."
2.2 SECTION 2.3. The second sentence of Section 2.3 is amended by
-----------
adding the following after the words "on-site support": "...with OEM's prior
consent, ...." Section 2.3 is further amended by adding the following at the end
thereof: "With respect to any reported error, if OEM does not consent to RSA's
providing on-site support at RSA's request, RSA shall have no further
obligations under this Agreement with respect to such reported error."
2.3 SECTION 2.4.2. The first sentence of Section 2.4.2 is amended by
-------------
adding the following after the word "specifications": "...and/or User
Manual...."
2.4 SECTION 2.4.3. Section 2.4.3 is amended by adding the following
-------------
at the end thereof: "New Releases and New Versions provided to OEM hereunder
shall include related updates to the User Manual, if any."
2.5 SECTION 3.1. The third sentence of Section 3.1 is amended by
-----------
adding the following after the words "renewal term": "...to conform to RSA's
then-current standard annual Maintenance Fee...."
2.6 SECTION 5. Section 5 is amended by inserting the following after
---------
each occurrence of the words "RSA Software": "...and User Manuals...."
Page 1
<PAGE>
2.7 SECTION 6.3. Section 6.3 is amended by deleting the reference
-----------
to Section 2.2 and by adding references to Section 2.5 and 3.1 to the extent
they provide for the reinstatement of lapsed maintenance.
3. EFFECT OF AMENDMENT. This Exhibit "A" is an amendment to the Agreement.
-------------------
Except as expressly amended above, the Agreement shall remain in full force
and effect.
IN WITNESS WHEREOF, the parties have executed this Exhibit "A" as of the
date set forth above.
OEM:
LIQUID AUDIO, INC. RSA DATA SECURITY, INC.
By: /s/ Philip R. Wiser By: /s/ D. James Bidzos
--------------------------- ---------------------------
Printed Name: Philip R. Wiser Printed Name: D. James Bidzos
----------------- -----------------
Title: V.P. Engineering Title: 7/18/97
------------------------ ------------------------
Page 2
<PAGE>
EXHIBIT 10.13
LIQUID AUDIO, INC./N2K INC.
AGREEMENT IN PRINCIPLE
This agreement summarizes the principal terms with respect to the working
relationship between N2K Inc. ("N2K") and Liquid Audio, Inc. ("Liquid Audio").
1. N2K and Liquid Audio will establish a relationship in order to fulfill the
mutual goals of each company through its own line of business to provide
Music-on-Demand. Music-on-Demand is defined to include both the end user's
sampling of musical content by means of the transmission of digitized audio
over the Internet for playback in real time ("streaming") and receiving
over the Internet other related graphical and/or text media for the
purposes of promoting recorded music; and, the end user's purchase of
recorded music by means of ordering compact discs over the Internet with
fulfillment by physical shipment ("Traditional Delivery") and/or the
downloading of digitized audio directly to the end-user over the Internet
("Electronic Delivery"). Liquid Audio is in the business of developing and
marketing technology for the distribution and sale of digitized audio over
the Internet at the user's request, and remains free to market its products
and technology to on-line retailers and record companies, among others. N2K
is in the business of developing and marketing music oriented retail and
entertainment based online sites as well as its own record label, and
through such entities intends to distribute and sell digitized audio
through such online sites. N2K remains free to market and sell such
digitized audio through any technologies without any limitations. Liquid
Audio refers to Music-on-Demand and N2K uses the term e_mod to describe the
complete, end-to-end process which may include Liquid Audio's technology.
The e_mod framework shall be defined herein as a combination of N2K
proprietary and licensed technologies to facilitate the end-to-end process
of recording, encoding, publishing, delivering, selling and tracking the
use of music over a digital network such as the Internet ("e_mod" or
"E_MOD").
2. Liquid Audio and N2K acknowledge that N2K is already Liquid Audio's first
licensee to utilize Liquid Audio's Liquid MusicServer for the delivery of
streaming audio over the Internet. Similarly, Liquid Audio and N2K will
cooperate in good faith in order to assure that N2K is Liquid Audio's first
licensee to utilize version 1.0 of the Liquid Audio Electronic Commercial
Music Distribution system ("ECMD"), when available, for end user purchase
of recorded music by Electronic Delivery. The ECMD will encompass the
elements of Liquid Audio's server software system that includes the
necessary components, as defined by Liquid Audio, to enable the
transactional capability for end user purchases of recorded music over the
Internet by Electronic Delivery. Notwithstanding the foregoing, N2K is not
precluded from using either its own proprietary commerce systems or a third
party commerce system to complete transactions. N2K will use Liquid Audio's
ECMD as the exclusive audio component of its e_mod framework where
transactions are included until at least March 15, 1997.
3. Liquid Audio has created a version of its current standard decoder software
intended for distribution without charge, the alpha version of the Liquid
MusicPlayer, that includes
1
<PAGE>
N2K's brand name and other graphics owned or licensed by N2K, as specified
by N2K Liquid Audio will create beta and version 1.0 versions of its Liquid
MusicPlayer, utilizing the same brand name and graphics supplied above by
N2K. In all other respects, this player software (the "LA/N2K Player") will
have the same specifications and functionality as the corresponding version
of Liquid Audio's Liquid MusicPlayer. At no additional charge, Liquid Audio
will grant to N2K (a) the right to use the LA/N2K Player in connection with
Music-on-Demand pursuant to Liquid Audio's standard end user client license
and (b) the right in connection with Music-on-Demand to distribute to N2K's
end user customers and designees Liquid Audio's standard end user client
license to the LA/N2K Player. N2K agrees to make prominently available the
LA/N2K Player on its Web sites and to promote its usage. The LA/N2K Player
will only be available through N2K and its various Web sites for download
from sites controlled by N2K. N2K shall require its end user customers to
enter into with Liquid Audio such end user client license as a condition of
obtaining and using the LA/N2K Player. N2K shall require its end user
customers to register their names with N2K as a condition of obtaining and
using the LA/N2K Player; and N2K will be responsible for reporting those
names to Liquid Audio N2K will be responsible for making available to its
end user customers the version of the LA/N2K Player which corresponds to
the latest version of the Liquid MusicPlayer currently available. N2K will
be responsible for any costs associated with modifying the Liquid
MusicPlayer to include N2K's brand name and such other graphics and other
graphics changes requested by N2K and agreed to by Liquid Audio. If Liquid
Audio agrees to integrate any of N2K's graphics or graphic changes into the
LA/N2K Player in the future, N2K agrees to pay for Liquid Audio's
engineering time billed at Liquid Audio's internal engineering rate of $100
per hour. The first 100 hours of such time as outlined in the preceding
sentence shall be free of charge to N2K.
4. Liquid Audio will license all beta and release versions of its Liquifier
software to N2K, for its own use (not for resale, rental or sublicense), at
no additional charge for a period of one year after N2K receives its first
copy of version 1.0 of the Liquifier. This software will be licensed
pursuant to Liquid Audio's standard Software Evaluation Agreement and/or
End User License Agreement covering the appropriate product. The term of
these licenses will be in perpetuity. For a period of two years after the
end such one year period, if N2K continues to use the Liquid MusicServer
and the ECMD on its Web sites, Liquid Audio will license to N2K such
versions of its Liquifier software and additional versions of its Liquifier
software for N2K's own use (not for resale, rental or sublicense) at no
additional charge. Version 1.0 is defined as the first version of Liquid
Audio's Liquifier that Liquid Audio generally makes available for license.
5. Liquid Audio will license all beta and release versions of its Liquid
MusicServer software to N2K, for its own use (not for resale, rental or
sublicense), at [*] charge for a period of one year after the installation
date of N2K's first installed copy of version 1.0 of the Liquid
MusicServer. This software will be licensed pursuant to Liquid Audio's
standard Software Evaluation Agreement and/or End User License Agreement
covering the appropriate product. Subject to the limitations in the number
of copies described below, the licenses in such one year period include as
many copies of version 1.0 or any
* Certain information in this Exhibit has been omitted and filed
separately with the Commission. Confidential treatment has been
requested with respect to the omitted portions.
2
<PAGE>
future versions of the Liquid MusicServer [*] (supporting, in total, the
number of streams of streaming audio that N2K desires) in connection with
providing Music-on-Demand to end user customers under this agreement for
such one year period. The term of these licenses will be [*.] For a period
of two years after the end of such one year period if N2K continues to use
Liquid MusicServer and ECMD on its Web sites, additional copies of the
Liquid MusicServer will be available for license by N2K for its own use
(not for resale, rental or sublicense) at no additional charge. Commencing
one year after delivery of each copy of such software, and for as long as
N2K continues to use the Liquid MusicServer and ECMD on its Web sites, such
versions of the Liquid MusicServer would be subject to a maximum
maintenance fee each year for each copy used by N2K equal to [*] of the
then-published list price of each copy of such software, except that for
the one year period beginning two years after the delivery of each copy of
such software, such versions of the Liquid MusicServer would be subject to
a maximum maintenance fee for such period equal to [*] of the then-
published list price of each copy of such software. In total over such
three year period commencing on the installation date of N2K's first
installed copy of such version 1.0, Liquid Audio will license to N2K a
maximum of [*] copies of its Liquid MusicServer software at the terms
described above In addition, Liquid Audio will make available to N2K, at
Liquid Audio's published list price, licenses of "plug-in" software
obtained from third parties for the Liquid MusicServer software. Version
1.0 is defined as the first version of the Liquid MusicServer that Liquid
Audio generally makes available for license.
6. Liquid Audio will license all beta and release versions of its ECMD (and
any other ECMD-based software released by Liquid Audio for Music-on-Demand)
to N2K, for its own use (not for resale, rental or sublicense), at no
additional charge for a period of one year after the installation date of
N2K's first installed copy of version 1.0 of the ECMD. This software will
be licensed pursuant to Liquid Audio's standard Software Evaluation
Agreement and/or End User License Agreement covering the appropriate
product. The licenses in such one year period include as many copies of
version 1.0 or any future versions of the ECMD (and any other ECMD-based
software released by Liquid Audio for Music-on-Demand) [*] in connection
with providing Music-on-Demand to end user customers under this agreement
for such one year period. The term of these licenses will be in perpetuity.
For a period of two years after the end of such one year period, if N2K
continues to use Liquid MusicServer and ECMD on its Web sites, additional
copies of the ECMD (and any other ECMD-based software released by Liquid
Audio for Music-on-Demand) will be available by N2K for its own use (not
for rental, resale or sublicense) at no additional charge. Commencing one
year after delivery of each copy of such software, and for as long as N2K
continues to use the Liquid MusicServer and ECMD on its Web sites, such
versions of the ECMD would be subject to a maximum maintenance fee each
year for each copy used by N2K equal to [*] of the then-published list
price of each copy of such software, except that for the one year period
beginning two years after the delivery of each copy of such software, such
versions of the Liquid MusicServer would be subject to a maximum
maintenance fee for such period equal to [*] of the then-published list
price of each copy of such software. In addition, Liquid Audio will make
available to N2K at Liquid Audio's published list price licenses of "plug-
in" software obtained from
* Certain information in this Exhibit has been omitted and filed
separately with the Commission. Confidential treatment has been
requested with respect to the omitted portions.
3
<PAGE>
third parties for the ECMD (or other ECMD-based software released by Liquid
Audio for Music-on-Demand). Version 1.0 is defined as the first version of
the ECMD that Liquid Audio generally makes available for license.
7. The minimum hardware and software requirements of each of the LA/N2K
Player, Liquifier, Liquid MusicServer and ECMD software licensed under this
agreement are set forth in Exhibit A. Liquid Audio will make reasonable
efforts to deliver a Macintosh version of the LA/N2K Player within 90 days
of the delivery of all appropriate future PC versions.
8. Liquid Audio will make available to N2K for its own use (not for resale,
rental or sublicense) maintenance and updates with respect to the latest
code revision of the Liquifier, Liquid MusicServer and ECMD software
licensed under this agreement, respectively, to the extent that Liquid
Audio makes maintenance and updates available to its licensees generally,
(a) [*] for one year from the delivery date of each copy of the respective
software product; and, (b) upon payment by N2K in advance in the first
succeeding yearly period of [*] of Liquid Audio's then-published list price
of each copy of such software under maintenance, for the one year period
commencing one year after such delivery date of the respective software
product; and, (c) upon payment by N2K in advance in the next succeeding
yearly period of [*] of Liquid Audio's then-published list price of each
copy of such software under maintenance, for the one year period commencing
two years after such delivery date of the respective software product; and,
(d) upon payment by N2K in advance in each succeeding yearly period of [*]
of Liquid Audio's then-published list price of each copy of such software
under maintenance, for each succeeding one year period commencing 3 years
after such installation date of the respective software product. [*]
9. Liquid Audio and N2K will reasonably cooperate such that N2K's end user
customers will have the ability to determine whether digitally encoded
audio and any version of the LA/N2K Player are compatible with the versions
of the Liquid MusicServer and ECMD software then in use by N2K. This
requirement shall apply only to the version level of the LA/N2K Player that
corresponds to the related version levels of the Liquid MusicServer and
Liquifier as to which N2K is purchasing maintenance and updates from Liquid
Audio.
10. Liquid Audio will appoint N2K as a non-exclusive U.S. reseller with regard
to Music-on-Demand applications of (a) the Liquifier and (b) upgrades to
the Liquid MusicPlayer that
* Certain information in this Exhibit has been omitted and filed
separately with the Commission. Confidential treatment has been
requested with respect to the omitted portions.
4
<PAGE>
are available for license for a fee, which are intended to enable the end
user to record music that has been downloaded via the Internet to a
commercial audio medium such as cassette tape or compact disc. Accordingly,
N2K will have the right to purchase end user licenses to such products at
[*] from the suggested retail price for resale within the U.S. until
December 31, 1997 with the ability to automatically renew this reseller
status on an annual basis provided that the Liquid MusicServer and ECMD are
being prominently used on N2K's Web sites; provided that N2K may resell
such products only to N2K's end user customers (other than corporations,
resellers or other entities) by means of N2K's Web sites; and, N2K may not
license any subdistributors the right to resell such products. The parties
will negotiate in good faith a definitive reseller agreement incorporating
the foregoing terms and conditions and other standard terms and conditions,
including a reseller license to Liquid Audio's trademarks LIQUID AUDIO and
LIQUIFIER.
11. Liquid Audio will grant to N2K [*] shares of Liquid Audio's common
stock pursuant to Liquid Audio's standard agreement for stock bonuses. This
represents a [*] interest in Liquid Audio's current equity on a fully
diluted basis. This interest will be granted to N2K in consideration for
[*] N2K's future assistance in integrating Liquid Audio's Liquid
MusicServer into N2K's on-line retail operations; and N2K's future
assistance in integrating the ECMD into N2K's on-line retail operations.
Specifically, in order to receive this stock grant, N2K must accomplish the
following: (a) make available the LA/N2K Player on its Web sites and
promote its usage as discussed in Section 3; (b) for thirty days provide
Liquid Audio with exposure on the virtual end caps of N2K's Web sites and
provide linkage through these virtual end caps to Liquid Audio's Web site
as discussed in Section 14; (c) create the E_MOD Audio Room and incorporate
Liquid Audio's Liquid MusicServer and ECMD technology within the E_MOD
Audio Room as discussed in Sections 16 and 17; and, (d) fully connect
Liquid Audio's server system into the N2K database and expose Liquid
Audio's transactional capability to N2K's end user customers.
12. N2K will be granted a warrant to purchase the number and type of shares
sold by Liquid Audio in its next round of financing to outside investors
that is equal to [*] divided by the "exercise price per share". The
"exercise price per share" will be equal to the greater of (a) the per
share sales price of Liquid Audio's equity sold in its next round of
financing to outside investors or (b) the per share sales price of such
financing as if such financing were made at a pre-financing valuation of
Liquid Audio of [*] million. The shares that N2K's warrant allows it to
purchase will have all of the rights negotiated and accepted by the outside
investors who participate in Liquid Audio's next round of financing to
outside investors. The parties will negotiate in good faith a definitive
form of warrant incorporating the foregoing terms and conditions and other
standard terms and conditions.
13. Liquid Audio will provide a link from its Web site to those N2K Web sites
of N2K's choosing. Liquid Audio and N2K will reasonably cooperate to
determine the graphics, art,
* Certain information in this Exhibit has been omitted and filed
separately with the Commission. Confidential treatment has been
requested with respect to the omitted portions.
5
<PAGE>
designs and/or text used to create this link. Liquid Audio will not use any
of N2K's art, graphics, design, or and/or text without written consent and
approval.
14. For thirty days, N2K agrees to provide exposure for Liquid Audio on the
virtual end caps of its Web sites, and enable a link from each of these
virtual end caps to Liquid Audio's Web site. N2K may continue this linkage
after the thirty day period at its sole discretion, however, during the
first three years of the term of this agreement, if N2K continues to
license copies of the Liquifier, Liquid MusicServer and/or ECMD at the
terms described in Sections 4, 5 and 6 respectively, N2K will seek to
provide Liquid Audio with reasonably appropriate on-going promotional
exposure on N2K's Web sites. The "virtual end caps" are defined to include
the first page of each genre of music within Music Boulevard (and its
successors). N2K and Liquid Audio will reasonably cooperate to determine
the graphics, art, designs and/or text used to create this link. N2K will
not use any of Liquid Audio's art, graphics, designs, and/or text without
written consent and approval.
15. N2K has designed and created specific graphic designs of its Web pages for
the Liquid Listening Room and the E_MOD Audio Room. Liquid Audio will not
disclose such graphic designs or N2K's specific technical implementation
until the same have been publicly disclosed without breach of this
agreement. N2K hereby allows Liquid Audio to utilize such graphic concepts
and designs of the Liquid Listening Room on Liquid Audio controlled and/or
owned sites. N2K may not license such graphic concepts and designs of the
Liquid Listening Room to any third party. Liquid Audio may not license such
graphic concepts and designs of the Liquid Listening Room to any third
party.
16. N2K agrees to expose and promote the E_MOD Audio Room project on all of its
Web sites including but not limited to Music Boulevard, Jazz Central
Station, Rocktropolis, Classical Insites and certain sites devoted to
specific artists. N2K agrees to assign and pay for its public relations
firm, Edelman, to write and service a story promoting to the public the
E_MOD project and the involvement of N2K and Liquid Audio. Liquid Audio,
N2K and Edelman will jointly devise this public relations effort. Liquid
Audio and N2K agree to obtain mutual written sign-off approvals on all
drafts of any document intended to be released to the public which mention
both companies and/or products controlled by both companies. Any breach
within the first 180 days of the date of this contract by N2K or Liquid
Audio of the promotional requirements in this Section 16 and in Sections 3
and 14 shall constitute a material breach, permitting the harmed party to
terminate this agreement if such breach is not cured within 30 days of
written notice.
17. N2K agrees to utilize Liquid Audio's Liquid MusicServer and ECMD as an
audio streaming and downloading technology incorporated in the E_MOD Audio
Room and in any other location on N2K's Web sites in which music is
promoted for purchase using Electronic Delivery for a period of at least 12
months from the date of this agreement. N2K reserves the right to use and
test other related technologies as well.
18. N2K will not alter, encode, copy or transmit any audio or other information
using the Liquifier, Liquid MusicServer, or ECMD software products without
obtaining all
6
<PAGE>
necessary copyright and other permissions. N2K will at its expense defend
and indemnify Liquid Audio and its officers, directors and employees
against all liabilities, damages, claims, fines, and expenses (including
reasonable attorney's fees and costs) arising out of any claim that N2K has
not obtained such permissions.
19. Liquid Audio will provide N2K with its standard warranty for the affected
products, the terms of which will be provided to N2K at the time that those
warranties are available UNTIL THAT TIME LIQUID AUDIO MAKES NO WARRANTIES
REGARDING THE LIQUIFIER, THE LIQUID MUSICPLAYER, THE LA/N2K PLAYER, THE
LIQUID MUSICSERVER, OR THE ECMD, OR ANY UPDATES THEREOF, EXPRESS OR
IMPLIED, INCLUDING, BUT NOT LIMITED TO, ANY IMPLIED WARRANTIES OF
MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, AND NONINFRINGEMENT.
20. IN NO EVENT WILL LIQUID AUDIO BE RESPONSIBLE OR LIABLE TO N2K OR ANY OF ITS
SUPPLIERS OR CUSTOMERS FOR DAMAGES OF ANY KIND ARISING FROM THE USE OF THE
LIQUIFIER, THE LIQUID MUSICPLAYER, THE LA/N2K PLAYER, THE LIQUID
MUSICSERVER, OR THE ECMD, OR ANY UPDATES THEREOF, WHETHER RESULTING FROM A
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.
21. N2K acknowledges and agrees that Liquid Audio and/or its suppliers own all
right, title and interest in and to the Liquifier, the Liquid MusicPlayer,
the LA/N2K Player (except for brand name, trademarks, and graphics supplied
by N2K), the Liquid MusicServer, and the ECMD, including without limitation
any and all copyrights, patents, trade secrets, trademarks and other
intellectual property rights therein. N2K will not acquire any rights or
licenses under any copyrights, patents, trade secrets, trademarks or other
intellectual property rights on account of this agreement or N2K's
performance under this agreement, except as specifically stated herein.
22. Liquid Audio and N2K agree to negotiate in good faith one or more
definitive agreements in customary form in order to reflect the material
terms of this agreement. Until such time as such definitive agreement(s) is
(are) executed, this agreement constitutes a binding contract between the
parties. This agreement constitutes the entire agreement and understanding
of the parties with respect to its subject matter and supersedes any and
all prior negotiations, correspondence, agreements, understandings, duties
or obligations between the parties with respect to its subject matter. This
agreement may be amended or waived only in writing executed by both
parties.
23. This agreement shall be governed by and construed in accordance with the
laws of the State of California, excluding its conflicts of law principles.
7
<PAGE>
24. This agreement may not be assigned without the prior written consent of the
other party except (i) as to assignment by Liquid Audio in connection with
the sale of all or substantially all of Liquid Audio's assets or business,
and (ii) as to assignment by N2K (including any indirect transfer by sale
of a majority of the voting power, merger or other operation of law) in
connection with the sale of all or substantially all of N2K's assets or
business, subject to the prior written consent of Liquid Audio, such
consent not to be unreasonably withheld (provided that reasons for
withholding such consent include, but are not limited to any material
increase in the number of copies to be licensed, any decrease in
promotional efforts for Liquid Audio, and any transfer to an actual or
potential competitor and/or major customer of Liquid Audio). Any attempt to
assign without such consent shall be void.
25. This agreement may be executed in one or more counterparts, each of which
shall be an original, and all of which together shall constitute one
agreement.
Agreed to and accepted this 12/th/ day of February, 1997.
/s/ J.J. Rosen /s/ Gerry Kearby
- ----------------------------- -----------------------------
J.J. Rosen Gerry Kearby
Senior Vice President CEO
N2K Inc. Liquid Audio, Inc.
8
<PAGE>
EXHIBIT A
MINIMUM HARDWARE AND SOFTWARE REQUIREMENTS
LIQUID AUDIO PRODUCT HARDWARE REQUIREMENT SOFTWARE REQUIREMENT
- -------------------- -------------------- --------------------
LA/N2K Player Pentium PC, 16Mb RAM, Windows 95
10Mb available on hard disk,
14.4kbps modem
Liquifier 100 MHz Pentium PC, 16Mb Windows 95
RAM, 100Mb available on
hard disk, 14.4kbps modem
Liquid MusicServer Sun SPARC Server, 32Mb Solaris 2.5
RAM, Ethernet 10bt connection,
T1 Internet connection
ECMD Sun SPARC Server, 32Mb Solaris 2.5
RAM, Ethernet 10bt connection,
T1 Internet connection
<PAGE>
EXHIBIT 10.14
[LOGO OF DOLBY LABORATORIES LICENSING CORPORATION]
L3D-ACPE
DIGITAL AUDIO SYSTEM LICENSE AGREEMENT
INTERNET CODERS
PATENT LICENSE
<TABLE>
<CAPTION>
AN AGREEMENT
- ------------
BY AND BETWEEN
- --------------
<S> <C> <C>
Dolby Laboratories Licensing Corporation and Liquid Audio, Inc.
(hereinafter called "LICENSOR") (hereinafter called "LICENSEE")
of 100 Potrero Avenue of 2421 Broadway
San Francisco, CA 94103-4813 Redwood City, CA 94063
Facsimile telephone number of LICENSOR (Sections 4.05 and 8.04): (415) 863-1373
</TABLE>
LICENSOR's bank and account number for wire transfer of royalty payments
(Section 4.05):
Bank: Wells Fargo Bank
Address: 464 California Street, San Francisco, CA 94104 U.S.A.
Account Name: Dolby Laboratories Licensing Corporation
Account Number: 4001-191451
ABA Number: 121000248
Identification of bank with respect to whose prime rate interest is calculated
on overdue royalties (Section 4.06): Wells Fargo Bank
Facsimile telephone number of LICENSEE (Section 8.04): (415) 364-4217
Address of LICENSEE for communications not otherwise specified (Section 8.04):
<TABLE>
<CAPTION>
SIGNATURES:
- -----------
<S> <C> <C>
On behalf of LICENSOR On behalf of LICENSEE
By /s/ [SIGNATURE ILLEGIBLE] By /s/ Gerald W. Kearby
------------------------------- -----------------------------------
Place SAN FRANCISCO Place San Francisco
---------------------------- --------------------------------
Date 3 May 1996 Date 3 May 1996
----------------------------- ---------------------------------
Witnessed By: Witnessed By:
/s/ [SIGNATURE ILLEGIBLE] /s/ [SIGNATURE ILLEGIBLE]
- --------------------------------- -------------------------------------
Effective Date of Agreement: 3 May 1996 Initial Payment: None
------------------
100 Potrero Avenue Wooton Bassett
DOLBY SAN FRANCISCO, CALIFORNIA 94103-4813 WILTSHIRE SN4 8QJ ENGLAND
Telephone 415-558-0200 Telephone 1793-842100
Facsimile 415-863-1373 Facsimile 1793-842101
</TABLE>
Signal Processing and Noise Reduction Systems
<PAGE>
DIGITAL AUDIO SYSTEM LICENSE AGREEMENT
INTERNET CODERS - PATENT LICENSE
INDEX
-----
Preamble
I. DEFINITIONS
Section 1.01 - "LICENSOR"
Section 1.02 - "LICENSEE"
Section 1.03 - "Application"
Section 1.04 - "Patent"
Section 1.05 - "Related Application"
Section 1.06 - "Related Patent"
Section 1.07 - "Scheduled Patents"
Section 1.08 - "AC-3 Digital Audio System Specifications"
Section 1.09 - Section Deleted
Section 1.10 - "Licensed Device"
Section 1.11 - "Licensed Product"
Section 1.12 - "Patent Rights"
Section 1.13 - Section Deleted
Section 1.14 - "Confidential Information"
Section 1.15 - "Non-Patent Country"
Section 1.16 - Section Deleted
Section 1.17 - Licensee's Modified AC-3 Specification
Section 1.18 - Internet
II. LICENSES GRANTED
Section 2.01 - Licenses Granted to LICENSEE
Section 2.02 - Limitation of Licenses Granted
III. OTHER OBLIGATIONS OF THE LICENSEE AND LICENSOR
Section 3.01 - Section Deleted
Section 3.02 - Section Deleted
Section 3.03 - Section Deleted
Section 3.04 - Patent Enforcement
Section 3.05 - Section Deleted
Section 3.06 - Patent Marking
Section 3.07 - Section Deleted
Section 3.08 - Section Deleted
Section 3.09 - License Notice
<PAGE>
IV. PAYMENTS
Section 4.01 - Initial Payment
Section 4.02 - Royalties
Section 4.03 - Section Deleted
Section 4.04 - Royalty Applicability
Section 4.05 - Royalty Payments and Statements
Section 4.06 - Royalties in Non-Patent Country
Section 4.07 - Books and Records
Section 4.08 - Rights of Inspecting Books and Records
V. ARTICLE DELETED
VI. TERMINATION AND EFFECT OF TERMINATION
Section 6.01 - Expiration of Agreement
Section 6.02 - Termination for Cause
Section 6.03 - Option to Terminate in a Non-Patent Country
Section 6.04 - Effect of Termination
VII. LIMITATIONS OF RIGHTS AND AUTHORITY
Section 7.01 - Limitation of Rights
Section 7.02 - Limitation of Authority
Section 7.03 - Disclaimer of Warranties and Liability; Hold Harmless
Section 7.04 - Limitation of Assignment by LICENSEE
Section 7.05 - Compliance with U.S. Export Control Regulations
VIII. MISCELLANEOUS PROVISIONS
Section 8.01 - Language of Agreement; Language of Notices
Section 8.02 - Stability of Agreement
Section 8.03 - Public Announcements
Section 8.04 - Address of LICENSEE and LICENSOR for all
Other Communications
Section 8.05 - Applicable Law
Section 8.06 - Choice of Forum; Attorneys' Fees
Section 8.07 - Construction of Agreement
Section 8.08 - Captions
Section 8.09 - Singular and Plural
Section 8.10 - Complete Agreement
Section 8.11 - Severability
Section 8.12 - No Conflict Representation and Warranty
Section 8.13 - Execution
Appendix A - Scheduled Patents
Appendix B - Dolby AC-3 Digital Audio System
Appendix C - Preliminary Specifications for Dolby AC-3 System
Appendix D - Deleted
Appendix E - Royalty rates
<PAGE>
DIGITAL AUDIO SYSTEM LICENSE AGREEMENT
INTERNET CODERS - PATENT LICENSE
WHEREAS, LICENSOR is engaged in the field of audio signal processing
systems and has developed signal processing systems useful for audio recording
and playback and for other applications;
WHEREAS, LICENSOR's signal processing systems have acquired a reputation
for excellence and LICENSOR's trademarks have acquired valuable goodwill;
WHEREAS, LICENSOR has licensed over 160 companies to make, use and sell
consumer audio hardware incorporating LICENSOR's signal processing systems and
marked with LICENSOR's trademarks; and
WHEREAS, LICENSOR has developed the model AC-3 digital audio system which
uses a new technique for encoding and decoding of audio frequency data in
digital form with a substantially reduced bit-rate while maintaining a high
quality decoded audio signal;
WHEREAS, LICENSOR represents and warrants that it has rights to grant
licenses under LICENSOR's patents and patent applications;
WHEREAS, LICENSEE is engaged in the development, marketing and sale
(including licensing) of software products for the purpose of delivering high
quality audio content over the Internet;
WHEREAS, LICENSEE believes it can develop a substantial demand for software
products marked with LICENSOR's trademarks used to encode or decode audio
signals using a modified version of LICENSOR's model AC-3 digital audio system;
WHEREAS, LICENSEE desires a partially exclusive license to develop, market
and sell professional and consumer encoding and decoding software products using
a modified version of LICENSOR's model AC-3 digital audio system based on
LICENSOR's patents and patent applications; and
WHEREAS, LICENSOR is willing to grant such a license under the terms and
conditions set forth in this Agreement.
NOW, THEREFORE, it is agreed by and between LICENSOR and LICENSEE as
follows:
<PAGE>
ARTICLE I
DEFINITIONS
-----------
Section 1.01 - "LICENSOR" means Dolby Laboratories Licensing Corporation, a
------------------------
corporation of the State of New York, having a place of business as indicated on
the title page of this Agreement, and its successors and assigns.
Section 1.02 - "LICENSEE" means the corporation identified on the title
------------------------
page of this Agreement and any subsidiary thereof of whose ordinary voting
shares more than 50% are controlled directly or indirectly by such corporation,
but only so long as such control exists.
Section 1.03 - "Application" means an application for the protection of an
---------------------------
invention or an industrial design; references to an "Application" shall be
construed as references to applications for patents for inventions, inventors'
certificates, utility certificates, utility models, patents or certificates of
addition, inventors' certificates of addition, utility certificates of addition,
design patents, and industrial design registrations.
Section 1.04 - "Patent" means patents for inventions, inventors'
----------------------
certificates, utility certificates, utility models, patents or certificates of
addition, inventors' certificates of addition, utility certificates of addition,
design patents, and industrial design registrations.
Section 1.05 - "Related Application" means an Application, whether
-----------------------------------
international or in the same or another country or region, which
(1) is substantially the same as (e.g., it does not include any new matter
in the sense of the United States Patent Law) an Application or Patent listed in
Appendix A, entitled "Scheduled Patents and Applications," which is attached
hereto and forms an integral part of this Agreement (for example, without
limiting the foregoing, a continuation Application, a corresponding Application,
an Application to reissue, or a re-filed Application), or
(2) is substantially only a portion of (e.g., it contains less than an
Application or Patent listed in Appendix A and, it does not include any new
matter in the sense of the United States Patent Law) an Application or Patent
listed in Appendix A (for example, a divisional Application, or a corresponding
or re-filed Application in the nature of a divisional Application).
<PAGE>
Section 1.06 - "Related Patent" means:
-------------------------------------
(1) a Patent granted on an Application listed in Appendix A,
(2) a Patent granted on a Related Application,
(3) a reissue of a Patent of Sections 1.06(1) or 1.06(2), and
(4) a reexamination certificate of a Patent of Sections 1.06(1), 1.06(2),
or 1.06(3).
Section 1.07 - "Scheduled Patents" means the Applications and Patents
---------------------------------
listed in Appendix A together with Related Applications and Related Patents.
Applications and Patents which contain not only common subject matter but
also additional subject matter going beyond the disclosure of Applications and
Patents of this Section 1.07 (for example, without limiting the foregoing, a
continuation-in-part Application, or a corresponding or re-filed Application in
the nature of a continuation-in-part Application) shall be deemed to be
Scheduled Patents only with respect to that portion of their subject matter
common to the Applications and Patents of this Section.
Section 1.08 - "AC-3 Digital Audio System Specifications" means the
--------------------------------------------------------
specifications for the AC-3 digital audio system, comprising the claims and
teachings of the Scheduled Patents, the AC-3 Digital Audio System operating
parameters as specified in Appendix B entitled "Dolby AC-3 Digital Audio
System," and the "Preliminary Specifications for Dolby AC-3 System" as specified
in Appendix C, and any applicable modifications, improvements or enhancements
owned or licensable by LICENSOR. Appendices B and C are attached hereto and form
an integral part of this Agreement.
Section 1.09 - Section Deleted
------------
Section 1.10 - "Licensed Device" means a Digital Audio circuit or software
-------------------------------
implementation having AC-3 Digital Audio System Specifications, whether made in
discrete component, integrated circuit, or other forms, for encoding or decoding
one audio channel into a digital AC-3 bit stream. A circuit counts as one
"Licensed Device" for each audio channel it can simultaneously encode or decode.
Section 1.11 - "Licensed Products" shall mean:
---------------------------------
Software products and documentation, which conform to LICENSEE's Modified
AC-3 Specification, and which can be any of the following:
(1) an encoder used to prepare audio content to be sent over the Internet;
(2) a decoder used to decode audio content received from the Internet; or
<PAGE>
(3) a combined encoder/decoder package to prepare and/or decode audio
content to be sent over and/or received from the Internet.
Section 1.12 - "Patent Rights" means:
------------------------------------
(1) the Scheduled Patents; and
(2) such Patents and Applications directed to Licensed Products that
LICENSOR may own or gain rights to license during the term of this Agreement and
which LICENSOR may agree to include in the Patent Rights without payment of
additional compensation by LICENSEE.
The Patent Rights do not include such other Applications and Patents as
LICENSOR does not agree to include in the Patent Rights without payment of
additional compensation by LICENSEE.
Section 1.13 - Section Deleted
------------------------------
Section 1.14 - "Confidential Information" means non-technical proprietary
----------------------------------------
information of LICENSOR or LICENSEE, including, without limiting the foregoing,
marketing information, product plans, business plans, royalty, and sales
information.
Section 1.15 - "Non-Patent Country" means a country in which there do not
----------------------------------
exist, with respect to a Licensed Product, any Scheduled Patents including any
pending Application or unexpired Patent, which, but for the licenses herein
granted, are (or in the case of an Application, would be if it were an issued
Patent) infringed by the manufacture, and/or use, lease or sale of such Licensed
Product.
Section 1.16 - Section Deleted
------------------------------
Section 1.17 - "LICENSEE's Modified AC-3 Specification" shall mean
------------------------------------------------------
modifications, developed by LICENSEE to the AC-3 Digital Audio System
Specifications, to provide for variable data rates.
Section 1.18 - "Internet" shall mean data networks using the "Internet
------------------------
Protocol" (commonly known as "IP")
<PAGE>
ARTICLE II
LICENSES GRANTED
----------------
Section 2.01 - Licenses Granted to LICENSEE
-------------------------------------------
LICENSOR hereby grants to LICENSEE:
a personal, non-transferable, indivisible, and non-exclusive license
throughout the world under the Patent Rights, subject to the conditions set
forth and LICENSEE's performance of its obligations, including paying royalties
due, to make Licensed Products, and to use, lease and sell the same.
Section 2.02 - Limitation of Licenses Granted
---------------------------------------------
Notwithstanding the license granted under Section 2.01:
(1) no license is granted to lease, sell, transfer, or otherwise dispose of
any part of a Licensed Product, including, without limiting the foregoing, a
semiconductor chip specially adapted for use in a Licensed Product, which part
(a) is a material part of an invention which is the subject of a Scheduled
Patent and which part is not a staple article or commodity of commerce suitable
for substantial noninfringing use or (b) is not a spare part solely for the
repair of a Licensed Product manufactured by Licensee under this Agreement;
(2) no license is granted under this Agreement to lease, sell, transfer, or
otherwise dispose of any partially assembled products, products in kit form, and
knocked-down or semi-knocked-down products;
(3) no license is granted under this Agreement to copy any of LICENSOR's
own hardware designs;
(4) no license is granted under this Agreement with respect to LICENSOR's
A-type, B-type, C-type, SR or S-type noise reduction systems;
(5) no license is granted under this Agreement with respect to LICENSOR's
Consumer Surround Decoder Systems;
(6) no license is granted under this Agreement to use any Licensed
Trademark in connection with offering for sale or in advertising and/or
informational material relating to any Licensed Product;
(7) no right is granted with respect to LICENSOR's trade name "Dolby
Laboratories" except with respect to the use of said tradename on and in
connection with Licensed Products in the license notice required by Sections
3.01(6) and 3.09, respectively; and
<PAGE>
(8) no right to grant sublicenses is granted under this Agreement, other
than end-user licenses to the Licensed Products.
ARTICLE III
OTHER OBLIGATIONS OF THE LICENSOR AND LICENSEE
----------------------------------------------
Section 3.01 - Section Deleted
------------------------------
Section 3.02 - Section Deleted
------------------------------
Section 3.03 - Section Deleted
------------------------------
Section 3.04 - Patent Enforcement
---------------------------------
LICENSEE shall immediately inform LICENSOR of all infringements, potential
or actual, which may come to its attention, of the Patent Rights. It shall be
the exclusive responsibility of LICENSOR, at its own expense, to terminate,
compromise, or otherwise act at its discretion with respect to such
infringements. LICENSEE agrees to cooperate with LICENSOR by furnishing, without
charge, except out-of-pocket expenses, such evidence, documents and testimony as
may be required therein.
Section 3.05 - Section Deleted
------------------------------
Section 3.06 - Patent Marking
-----------------------------
LICENSEE shall mark each Licensed Product in the form, manner and location
specified by LICENSOR, with one or more patent numbers of Patents in such
countries under which a license is granted under this Agreement.
Section 3.07 - Section Deleted
------------------------------
Section 3.08 - Section Deleted
------------------------------
Section 3.09 - License Notice
-----------------------------
On all Licensed Products, LICENSEE shall acknowledge that the Licensed
Products are manufactured under license from LICENSOR. The following notice
shall be used by LICENSEE on an exposed surface, such as the back or the bottom,
or if distributed online, in the "About.." (or equivalent) menu of all Licensed
Products: "AC-3 digital audio system manufactured under license from Dolby
Laboratories Licensing Corporation". Such notice shall also be used in all
instruction and servicing
<PAGE>
manuals unless such acknowledgment is clearly and unambiguously given in the
course of any textual descriptions or explanations.
Section 3.10 - Section Deleted
------------------------------
Section 3.11 - Section Deleted
------------------------------
ARTICLE IV
PAYMENTS
--------
Section 4.01 - Initial Payment
------------------------------
LICENSEE shall promptly upon the Effective Date of this Agreement pay
LICENSOR the sum specified on the title page and shall pay all local fees,
taxes, duties, or charges of any kind and shall not deduct them from such sum
due unless such deductions may be offset against LICENSOR's own tax liabilities.
Section 4.02 - Royalties
------------------------
Subject to the provisions of Section 4.05, LICENSEE shall pay to LICENSOR
royalties on Licensed Products which are used, sold, leased, or otherwise
disposed of by LICENSEE, except for Licensed Products returned to LICENSEE by
customers of LICENSEE, other than in exchange for an upgraded product, on which
a credit has been allowed by LICENSEE to said customers. The royalty payable
shall be based on the number of Licensed Devices, hereinbefore defined,
contained in Licensed Products, which are used, sold, leased or otherwise
disposed of by LICENSEE in successive calendar quarters from the effective date
hereof, based on the schedule given in Appendix E of this Agreement.
The royalty payment provisions of this Section shall not be applicable so
long as the royalty payment provisions of the companion license agreement
entitled "Digital Audio System License Agreement - Internet Coders - Source
Code, Trademark and Know-How License", executed concurrently with this
Agreement, are applicable and royalties thereunder are being paid by LICENSEE.
Section 4.03 - Section Deleted
------------------------------
Section 4.04 - Royalty Applicability
------------------------------------
A Licensed Product shall be considered sold under Section 4.02 when
invoiced, or if not invoiced, delivered to another by LICENSEE or otherwise
disposed of or put into use by LICENSEE, except for
<PAGE>
consignment shipments, which will be considered sold when the payment for such
shipments is agreed upon between LICENSEE and customer.
Section 4.05 - Royalty Payments and Statements
----------------------------------------------
LICENSEE shall render statements and royalty payments as follows:
(1) LICENSEE shall deliver to the address shown on the cover sheet of this
Agreement or such place as LICENSOR may from time to time designate, quarterly
reports certified by LICENSEE's chief financial officer or the officer's
designate within 30 days after each calendar quarter ending with the last day of
March, June, September and December. Alternatively, such reports may be
delivered by facsimile by transmitting them to LICENSOR's facsimile telephone
number shown on the cover sheet of this Agreement or such other number as
LICENSOR may from time to time designate. Royalty payments are due for each
quarter at the same time as each quarterly report and shall be made by wire
transfer in United States funds to LICENSOR's bank as identified on the cover
sheet of this Agreement or such other bank as LICENSOR may from time to time
designate. LICENSEE shall pay all local fees, taxes (other than taxes on
LICENSOR's income or profits), duties, or charges of any kind and shall not
deduct them from the royalties due unless such deductions may be offset against
LICENSOR's own tax liabilities.
Each quarterly report shall:
(a) state the number of each model type of Licensed Products leased, sold,
or otherwise disposed of by LICENSEE during the calendar quarter with respect to
which the report is due;
(b) state the number of Licensed Devices in each model type of Licensed
Product; and
(c) contain such other information and be in such form as LICENSOR or its
outside auditors may prescribe. If LICENSEE claims less than full product
royalty (under Section 4.06) or no royalty due (under Section 6.03), LICENSEE
shall specify the country in which such Licensed Products were made, the country
in which such Licensed Products were sold, and the identity of the purchasers of
such Licensed Products.
(2) Any remittance in excess of royalties due with respect to the calendar
quarter for which the report is due shall be applied by LICENSOR to the next
payment due.
(3) LICENSEE's first report shall be for the calendar quarter in which
LICENSEE sells its first Licensed Product.
<PAGE>
(4) LICENSEE shall deliver a final report and payment of royalties to
LICENSOR certified by LICENSEE's chief financial officer or the officer's
designate within 30 days after termination of this Agreement throughout the
world. Such a final report shall include a report of all royalties due with
respect to Licensed Products not previously reported to LICENSOR. Such final
report shall be supplemented at the end of the next and subsequent quarters, in
the same manner as provided for during the term of the Agreement, in the event
that LICENSEE learns of any additional royalties due.
(5) LICENSEE shall pay interest to LICENSOR from the due date to the date
payment is made of any overdue royalties or fees, including the Initial Payment,
at the rate of 2% above the prime rate as is in effect from time to time at the
bank identified on the cover page of this Agreement, or another major bank
agreed to by the LICENSOR and LICENSEE in the event that the identified bank
should cease to exist, provided however, that if the interest rate thus
determined is in excess of rates allowable by any applicable law, the maximum
interest rate allowable by such law shall apply.
Section 4.06 - Royalties in Non-Patent Country
----------------------------------------------
If a Licensed Product is manufactured in a Non-Patent Country and used,
sold, leased or otherwise disposed of in a Non-Patent Country, be it the same or
a different Non-Patent Country, no royalties for the manufacture, use, sale,
lease or other disposal of the Licensed Products in such Non-Patent Country or
Countries shall be payable. This provision shall not apply and full royalties
shall be payable under Section 4.02:
(1) when Licensed Products are manufactured in any country which is not a
Non-Patent Country or are used, sold, leased or otherwise disposed of in any
country which is not a Non-Patent Country, be it the same country as the country
of manufacture or a different country; or
(2) when LICENSEE knows or has reason to know that the Licensed Products
manufactured in a Non-Patent Country and used, sold, leased or otherwise
disposed of in a Non-Patent Country are destined for use or for sale, lease or
other disposal in a country which is not a Non-Patent Country and LICENSOR deems
such sale to be for the purpose of defeating the royalty provisions of this
agreement.
Section 4.07 - Books and Records
--------------------------------
LICENSEE shall keep complete books and records of all sales, leases, uses,
returns, or other disposals by LICENSEE of Licensed Products for three years
after the relevant accounting period.
<PAGE>
Section 4.08 - Rights of Inspecting Books and Records
-----------------------------------------------------
LICENSOR shall have the right, through a professionally registered
accountant at LICENSOR's expense, for three years after the relevant accounting
period, to inspect, examine and make abstracts of the said books and records
insofar as may be necessary to verify the accuracy of the same and of the
statements provided for herein but such inspection and examination shall be made
during business hours upon reasonable notice and not more often than once per
calendar year. LICENSOR agrees not to divulge to third parties any Confidential
Information obtained from the books and records of LICENSEE as a result of such
inspection unless such information (a) was known to LICENSOR prior to its
acquisition by LICENSOR as a result of such inspection; (b) becomes known to
LICENSOR from sources other than directly or indirectly from LICENSEE; or (c)
becomes a matter of public knowledge other than by breach of this Agreement by
LICENSOR.
ARTICLE V
ARTICLE DELETED
---------------
ARTICLE VI
TERMINATION AND EFFECT OF TERMINATION
-------------------------------------
Section 6.01 - Expiration of Agreement
--------------------------------------
Unless this Agreement already has been terminated in accordance with the
provisions of Section 6.02, this Agreement shall terminate with the termination
of the companion license agreement entitled "Digital Audio System License
Agreement - Internet Coders - Source Code, Trademark and Know-How License",
executed concurrently with this Agreement.
Section 6.02 - Termination for Cause
------------------------------------
At the option of LICENSOR, in the event that LICENSEE breaches any of its
material obligations under this Agreement, subject to the conditions of Section
6.04, this Agreement shall terminate upon LICENSOR's giving sixty (60) days
advance notice in writing, effective on dispatch of such notice, of such
termination, giving reasons therefor to LICENSEE, provided however, that, if
LICENSEE, within the sixty (60) day period, remedies the failure or default upon
which such notice is based, then such notice shall not become effective and this
Agreement shall continue in full force and effect. Notwithstanding the
<PAGE>
sixty (60) day cure period provided under the provisions of this Section 6.02,
interest due under Section 4.05 shall remain payable and shall not waive,
diminish, or otherwise affect any of LICENSOR's rights pursuant to this Section
6.02.
Section 6.03 - Option to Terminate in a Non-Patent Country
----------------------------------------------------------
Subject to the provisions of Section 6.04, unless this Agreement already
has been terminated in accordance with the provisions of Section 6.01 or Section
6.02, LICENSEE shall have the option to terminate its license under this
Agreement with respect to a Non-Patent Country at any time after three years
from the Effective Date of this Agreement. Said option to terminate with respect
to such country shall be effective when LICENSOR receives LICENSEE's written
notice of its exercise of such option and shall be prospective only and not
retroactive.
Section 6.04 - Effect of Termination
------------------------------------
Upon termination of the Agreement, as provided in Sections 6.01 or 6.02, or
upon termination of the license under this Agreement with respect to a Non-
Patent Country in accordance with the option set forth in Section 6.03, with
respect to such country only, all licenses granted by LICENSOR to LICENSEE under
this Agreement shall terminate, all rights LICENSOR granted to LICENSEE shall
revest in LICENSOR, and all other rights and obligations of LICENSOR and
LICENSEE under this agreement shall terminate except that the following rights
and obligations of LICENSOR and LICENSEE shall survive to the extent necessary
to permit their complete fulfillment and discharge:
(1) LICENSEE's obligation to deliver a final royalty report and supplements
thereto as required by Section 4.05;
(2) LICENSOR's right to receive and LICENSEE's obligation to pay royalties,
under Article IV, including interest on overdue royalties, accrued or accruable
for payment at the time of termination and interest on overdue royalties
accruing subsequent to termination;
(3) LICENSEE's obligation to maintain books and records and LICENSOR's
right to examine, audit, and copy as provided in Sections 4.07 and 4.08;
(4) any cause of action or claim of either party accrued or to accrue
because of any breach or default by the other party;
(5) LICENSOR's obligations with respect to Confidential Information under
Section 4.08;
<PAGE>
(6) LICENSEE's obligations to cooperate with LICENSOR with respect to
Patent enforcement under Section 3.04, with respect to matters arising before
termination;
(7) LICENSEE's and LICENSOR's obligations regarding public announcements
under Section 8.03; and
(8) LICENSEE shall be entitled to fill orders for Licensed Products already
received and to make or have made for it and to sell Licensed Products for which
commitments to vendors have been made at the time of such termination, subject
to payment of applicable royalties thereon and subject to said Licensed Products
meeting LICENSOR's quality standards, provided that LICENSEE promptly advises
LICENSOR of such commitments upon termination.
The portions of the Agreement specifically identified in the sub-parts of
this Section shall be construed and interpreted in connection with such other
portions of the Agreement as may be required to make them effective.
ARTICLE VII
LIMITATIONS OF RIGHTS AND AUTHORITY
-----------------------------------
Section 7.01 - Limitation of Rights
-----------------------------------
No right or title whatsoever in the Patent Rights is granted by LICENSOR to
LICENSEE or shall be taken or assumed by LICENSEE except as is specifically laid
down in this Agreement.
Section 7.02 - Limitation of Authority
--------------------------------------
Neither party shall in any respect whatsoever be taken to be the agent or
representative of the other party and neither party shall have any authority to
assume any obligation for or to commit the other party in any way.
Section 7.03 - Disclaimer of Warranties and Liability; Hold Harmless
--------------------------------------------------------------------
LICENSOR has provided LICENSEE the rights and privileges contained in this
Agreement in good faith. However, nothing contained in this Agreement shall be
construed as (1) a warranty or representation by LICENSOR as to the validity or
scope of any Patent included in The Patent Rights; (2) a warranty or
representation that the AC-3 Digital Audio System technology, Patent Rights, or
any Licensed Device, Licensed Product, or part thereof embodying any of them
will be free from infringement of
<PAGE>
Patents, copyrights, trademarks, service marks, of other proprietary rights of
third parties; or (3) an agreement to defend LICENSEE against actions or suits
of any nature brought by any third parties.
LICENSOR disclaims all liability and responsibility for property damage,
and personal injury, whether or not foreseeable, that may result from the
manufacture, use, lease, or sale of Licensed Devices, Licensed Products and
parts thereof, and LICENSEE agrees to assume all liability and responsibility
for all such damage and injury.
LICENSEE agrees to indemnify, defend, and hold LICENSOR harmless from and
against all claims (including, without limitation, product liability claims),
suits, losses and damages, including reasonable attorneys' fees and any other
expenses incurred in investigation and defense, arising out of LICENSEE's
manufacture, use, lease, or sale of Licensed Devices, Licensed Products, or
parts thereof, or out of any allegedly unauthorized use of any trademark,
service mark, Patent, copyright, process, idea, method, or device (excepting the
Licensed Patent Rights) by LICENSEE or those acting under its apparent or actual
authority, except for claims that the Licensed Products, or the manufacture,
use, lease or sale thereof, solely to the extent the same incorporate or conform
to the AC-3 Digital Audio System Specifications, infringe any patent, copyright,
trademark, service mark or other proprietary right of third parties.
In no event will either party be liable for any lost profits, lost data, or
any form of incidental, consequential or punitive damages of any kind (whether
or not foreseeable).
Section 7.04 - Limitation of Assignment by LICENSEE
---------------------------------------------------
The rights, duties and privileges of LICENSEE hereunder shall not be
transferred or assigned by it either in part or in whole without prior written
consent of LICENSOR. However, LICENSEE shall have the right to transfer its
rights, duties and privileges under this Agreement in connection with its merger
and consolidation with another firm or the sale of its entire business to
another person or firm, provided that such person or firm shall first have
agreed with LICENSOR to perform the transferring party's obligations and duties
hereunder.
Section 7.05 - Compliance with U.S. Export Control Regulations
--------------------------------------------------------------
(1) LICENSEE agrees not to export any technical data acquired from LICENSOR
under this Agreement, nor the direct product thereof, either directly or
indirectly, to any country in contravention of United States law.
<PAGE>
(2) Nothing in this Agreement shall be construed as requiring LICENSOR to
export from the United States, directly or indirectly, any technical data or any
commodities to any country in contravention of United States law.
ARTICLE VIII
MISCELLANEOUS PROVISIONS
------------------------
Section 8.01 - Language of Agreement; Language of Notices
---------------------------------------------------------
The language of this Agreement is English. If translated into another
language, this English version of the Agreement shall be controlling. Except as
may be agreed by LICENSOR and LICENSEE, all notices, reports, consents, and
approvals required or permitted to be given hereunder shall be written in the
English language.
Section 8.02 - Stability of Agreement
-------------------------------------
No provision of this Agreement shall be deemed modified by any acts of
LICENSOR, its agents or employees or by failure to object to any acts of
LICENSEE which may be inconsistent herewith, or otherwise, except by a
subsequent agreement in writing signed by LICENSOR and LICENSEE. No waiver of a
breach committed by either party in one instance shall constitute a waiver or a
license to commit or continue breaches in other or like instances.
Section 8.03 - Public Announcements
-----------------------------------
Neither party shall at any time heretofore or hereafter publicly state or
imply that the terms specified herein or the relationships between LICENSOR and
LICENSEE are in any way different from those specifically laid down in this
Agreement. LICENSEE shall not at any time publicly state or imply that any
unlicensed products use the AC-3 Digital Audio System Specifications. If
requested by one party, the other party shall promptly supply the first party
with copies of all public statements and of all publicity and promotional
material relating to this Agreement, the AC-3 Digital Audio System
Specifications, and Licensed Products.
Section 8.04 - Address of LICENSEE and LICENSOR for all Other
----------------------------------------------
Communications
- --------------
Except as otherwise specified in this Agreement, all notices, reports,
consents, and approvals required or permitted to be given hereunder shall be in
writing, signed by an officer of LICENSEE or
<PAGE>
LICENSOR, respectively, and sent postage or shipping charges prepaid by
certified or registered mail, return receipt requested showing to whom, when and
where delivered, or by Express mail, or by a secure overnight or one-day
delivery service that provides proof and date of delivery, or by facsimile,
property addressed or transmitted to LICENSEE or LICENSOR, respectively, at the
address or facsimile number set forth on the cover page of this Agreement or to
such other address or facsimile number as may from time to time be designated by
either party to the other in writing. Wire payments from LICENSEE to LICENSOR
shall be made to the bank and account of LICENSOR as set forth on the cover page
of this agreement or to such other bank and account as LICENSOR may from time to
time designate in writing to LICENSEE.
Section 8.05 - Applicable Law
-----------------------------
This Agreement shall be construed in accordance with the substantive laws,
but not the choice of law rules, of the State of California.
Section 8.06 - Choice of Forum; Attorneys' Fees
-----------------------------------------------
To the full extent permitted by law, LICENSOR and LICENSEE agree that their
choice of forum, in the event that any dispute arising under this agreement is
not resolved by mutual agreement, shall be the United States Courts in the State
of California and the State Courts of the State of California.
In the event that any action is brought for any breach or default of any of
the terms of this Agreement, or otherwise in connection with this Agreement, the
prevailing party shall be entitled to recover from the other party all costs and
expenses incurred in that action or any appeal therefrom, including without
limitation, all attorneys' fees and costs actually incurred.
Section 8.07 - Construction of Agreement
----------------------------------------
This Agreement shall not be construed for or against any party based on any
rule of construction concerning who prepared the Agreement or otherwise.
Section 8.08 - Captions
-----------------------
Titles and captions in this Agreement are for convenient reference only and
shall not be considered in construing the intent, meaning, or scope of the
Agreement or any portion thereof.
Section 8.09 - Singular and Plural
----------------------------------
Throughout this Agreement, words in the singular shall be construed as
including the plural and words in the plural shall be construed as including the
singular.
<PAGE>
Section 8.10 - Complete Agreement
---------------------------------
This Agreement contains the entire agreement and understanding between
LICENSOR and LICENSEE with respect to its subject matter and merges all prior or
contemporaneous oral or written communication between them. Neither LICENSOR nor
LICENSEE now is, or shall hereafter be, in any way bound by any prior,
contemporaneous or subsequent oral or written communication except insofar as
the same is expressly set forth in this Agreement or in a subsequent written
agreement duly executed by both LICENSOR and LICENSEE.
Section 8.11 - Severability
---------------------------
Should any portion of this Agreement be declared null and void by operation
of law, or otherwise, the remainder of this Agreement shall remain in full force
and effect.
Section 8.12 - No Conflict Representation and Warranty
------------------------------------------------------
Each party represents and warrants to the other that such first party is
not a party to any agreement, and is not subject to any statutory or other
obligation or restriction, which might prevent or restrict it from performing
all of its obligations and undertakings under this License Agreement, and that
the execution and delivery of this Agreement and the performance by such first
party of its obligations hereunder have been authorized by all necessary action,
corporate or otherwise.
Section 8.13 - Execution
------------------------
IN WITNESS WHEREOF, the said LICENSOR has caused this Agreement to be
executed on the cover page of this Agreement, in the presence of a witness, by
an officer duly authorized and the said LICENSEE has caused the same to be
executed on the cover page of this Agreement, in the presence of a witness, by
an officer duly authorized, in duplicate original copies, as of the date set
forth on said cover page.
<PAGE>
APPENDIX A - SCHEDULED PATENTS
The Scheduled Patents shall mean the following patents and patent applications:
PATENTS
-------
Country Patent Number
------- -------------
Australia 653582
Canada 1,239,701
Canada 2,026,213
Taiwan 52,047
Taiwan 53,726
Taiwan 56,006
United States of America 4,790,016
United States of America 4,914,701
United States of America 5,109,417
United States of America 5,142,656
United States of America 5,230,038
PATENT APPLICATIONS
-------------------
Country Application Number
------- ------------------
Australia 77608/91
Australia 51596/90
Brazil PI9007063
Canada 2,059,141
Canada 2,077,662
Canada 2,077,668
Canada 519,978-6
Canada (Docket 90-3-827)
China 91,102,167.1
Europe 91,102,167.1
Europe 86,900,480.4*
Europe 91,117,397.9*
Europe 90,903,518.0*
Europe 91,102,167.1*
Europe 92,903,819.8*
France 90,903,518.0
Germany 90,903,518.0
Italy 90,903,518.0
Japan 2-503,825
Japan 3-508,357
Japan 4-504,474
Japan 4-503,836
Korea 90-702,194
Luxembourg 90,903,518.0
Netherlands 90,903,518.0
PCT 91/02512
PCT 92/00133
PCT 92/00134
PCT 92/04767
Spain 90,903,518.0
<PAGE>
PATENT APPLICATIONS (continued)
-------------------------------
Country Application Number
------- ------------------
Sweden 90,903,518.0
Switzerland 90,903,518.0
Taiwan 80,101,567
United Kingdom 90,903,518.0
United States of America 07/597,438
United States of America 07/638,896
United States of America 07/710,805
United States of America 07/718,356
United States of America 07/781,262
United States of America 07/927,429
United States of America 07/959,730
United States of America 08/092,269
United States of America 08/102,072
United States of America 08/115,513
United States of America 08/145,975
<PAGE>
APPENDIX B - "DOLBY AC-3 DIGITAL AUDIO SYSTEM"
Compliance with the algorithm description and operating parameters as specified
in ATSC document A/52, the "Dolby AC-3 Licensing Manual", the "Software
Interface Protocol" issued by LICENSOR and any further reasonable specifications
and requirements as LICENSOR may issue from time to time.
<PAGE>
APPENDIX C - PRELIMINARY SPECIFICATIONS FOR DOLBY AC-3 SYSTEM
Dolby AC-3 digital audio system encoding equipment shall comply with the
following specifications in production (when measured through a standard
decoder):
Audio data rate for two channels: 192 kb/sec
Frequency Response: 20 Hz - 20 kHz = 0.2 dB
Dynamic Range: Greater than 85 dB
Distortion: Less than 0.1% at 1 kHz
Less than 0.5%, 20 Hz - 20 kHz
Crosstalk: Less than -80 dB
Level Stability: Better than 0.2 dB
<PAGE>
APPENDIX D - APPENDIX DELETED
<PAGE>
APPENDIX E - ROYALTY SCHEDULE
[*] [*]
* Certain information in this Exhibit has been omitted and filed separately
with the Commission. Confidential treatment has been requested with respect
to the omitted portions.
<PAGE>
[LOGO] DOLBY
DOLBY LABORATORIES INC
DOLBY LABORATORIES LICENSING CORPORATION
Signal Processing and Noise Reduction Systems
100 Potrero Avenue
San Francisco, California 94103-4813
Telephone 415-558-0200
September 18, 1997 Facsimile 415-863-1373
EXHIBIT 10.15
Mr. Gerry Kearby
Co-Founder & CEO
Liquid Audio
2421 Broadway
2d Floor
Redwood City, CA 94063
Mr. Kearby:
[*]
Accordingly:
Dolby agrees to:
1) Change the existing payment schedule in section 4.02 of the Digital Audio
System License Agreement - Source Code, Trademark and Know-How License, dated
May 3, 1996 (the "Agreement"):
-------------------------------
first quarter [*]
-------------------------------
second quarter [*]
-------------------------------
third quarter [*]
-------------------------------
fourth quarter [*]
-------------------------------
fifth quarter [*]
-------------------------------
sixth quarter [*]
-------------------------------
seventh quarter [*]
-------------------------------
eight quarter [*]
-------------------------------
to the following payment schedule:
-------------------------------
first quarter [*]
-------------------------------
second quarter [*]
-------------------------------
third quarter [*]
-------------------------------
fourth quarter [*]
-------------------------------
fifth quarter [*]
-------------------------------
sixth quarter [*]
-------------------------------
seventh quarter [*]
-------------------------------
eighth quarter [*]
-------------------------------
ninth quarter [*]
-------------------------------
tenth quarter [*]
-------------------------------
eleventh quarter [*]
--------------------------------
Confidential Licensee / Licensor Communication
* Certain information in this Exhibit has been omitted and filed
separately with the Commission. Confidential treatment has been
requested with respect to the omitted portions.
<PAGE>
Mr. Gerry Kearby September 18. 1997
Liquid Audio Page 2
2) [*]
3) Provide LA's watermarking partners Solana and Aris access to AC-3
evaluation code and telephone assistance in implementing watermarking with
the LA version of AC-3.
4) Extend the period of exclusivity in Section 2.01 of the Agreement by [*]
with the requirement for additional minimum payments as follows:
--------------------------------
twelfth quarter [*]
--------------------------------
thirteenth quarter [*]
--------------------------------
5) Allow Intel to provide Intel source code for an MMX-optimized Dolby Digital
decoder to LA. This decoder must be modified by LA as per item 1 in the "LA
agrees to" section below. The LA modified MMX-optimized decoder must be
tested and certified by Dolby before deployment.
In exchange for the above items, Liquid Audio agrees to:
[*]
2) Deploy the Modified Decoder, and to cease distribution of current AC-3
decoder, in the first release of version 2.0 and not later 30 NOV 97.
3) Ensure that Phil Wiser is available to interface with the appropriate
technical staff at Dolby to ensure the Dolby Modified Decoder is deployed
by the above date.
[*]
In our view, LA is well positioned to capitalize on the opportunities the
internet provides for the distribution of pre-recorded audio. LA appears to have
an excellent job of preparing and positioning its product, and we look forward
to a long and fruitful partnership. A critical element to both our interests
however, is our continuing ability to exclude third parties from offering for
free the same goods and services our two companies offer for a price.
Time is of the essence. Our intent was to structure this package in a way that
gives LA the ability to accept it immediately. Please indicate your assent to
our proposal by signing below and returning this letter to us by fax.
Sincerely, Agreed
On behalf of Liquid Audio:
/s/ Ed Schummer /s/ Gerry Kearby
/s/ Ed Schummer Gerry Kearby
Dolby Laboratories Licensing Corp. Date
* Certain information in this Exhibit has been omitted and filed
separately with the Commission. Confidential treatment has been
requested with respect to the omitted portions.
<PAGE>
EXHIBIT 10.16
[LOGO OF DOLBY LABORATORIES LICENSING CORPORATION APPEARS HERE]
L3D-INT
DIGITAL AUDIO SYSTEM LICENSE AGREEMENT
INTERNET CODERS
SOURCE CODE, TRADEMARK AND KNOW-HOW LICENSE
AN AGREEMENT
- ------------
BY AND BETWEEN
- --------------
Dolby Laboratories Licensing Corporation and Liquid Audio, Inc.
(hereinafter called "LICENSOR") (hereinafter called "LICENSEE")
of 100 Potrero Avenue of 2421 Broadway
San Francisco, CA 94103-4813 Redwood City, CA 94063
Facsimile telephone number of LICENSOR (Sections 4.05 and 8.04): (415) 863-1373
LICENSOR's bank and account number for wire transfer of royalty payments
(Section 4.05):
Bank: Wells Fargo Bank
Address: 464 California Street, San Francisco, CA 94104 U.S.A.
Account Name: Dolby Laboratories Licensing Corporation
Account Number: 4001-191451
ABA Number: 121000248
Identification of bank with respect to whose prime rate interest is calculated
on overdue royalties (Section 4.06): Wells Fargo Bank
Facsimile telephone number of LICENSEE (Section 8.04): (415) 364-4217
Address of LICENSEE for communications not otherwise specified (Section 8.04):
SIGNATURES:
<TABLE>
<CAPTION>
- -----------
<S> <C>
On behalf of LICENSOR On behalf of LICENSEE
By /s/ [SIGNATURE ILLEGIBLE] By /s/ Gerald Kearby
----------------------------------------- --------------------------------------
Place SAN FRANCISCO Place San Francisco
-------------------------------------- ------------------------------------
Date 3 May 1996 Date 3 May 1996
--------------------------------------- -------------------------------------
Witnessed By: /s/ [SIGNATURE ILLEGIBLE] Witnessed By: /s/ [SIGNATURE ILLEGIBLE]
------------------------------ ----------------------------
Effective Date of Agreement: 3 May 1996 Initial Payment: $10,000
---------------
</TABLE>
DOLBY
100 Potrero Avenue Wooton Bassett
San Francisco, California 94103-4813 Wiltshire SN4 8QJ England
Telephone 415-558-0200 Telephone 1793-842100
Facsimile 415-863-1373 Facsimile 1793-842101
Signal Processing and Noise Reduction Systems.
* Certain information in this Exhibit has been omitted and filed
separately with the Commission. Confidential treatment has been
requested with respect to the omitted portions.
<PAGE>
DIGITAL AUDIO SYSTEM LICENSE AGREEMENT
INTERNET CODERS
INDEX
-----
Preamble
I. DEFINITIONS
Section 1.01 - "LICENSOR"
Section 1.02 - "LICENSEE"
Section 1.03 - "AC-3 Digital Audio System Specifications"
Section 1.04 - "Licensed Trademark"
Section 1.05 - "Licensed Products"
Section 1.06 - "Licensed Copyrighted Works"
Section 1.07 - Section Deleted
Section 1.08 - "LICENSOR Deliverables"
Section 1.09 - "Know-How"
Section 1.10 - "Confidential Information"
Section 1.11 - "Improvements"
Section 1.12 - "LICENSEE's Trade Name and Trademarks"
Section 1.13 - "Other-Trademark Purchaser"
Section 1.14 - Section Deleted
Section 1.15 - The "Effective Date"
Section 1.16 - LICENSEE's Modified AC-3 Specification
Section 1.17 - "Internet"
Section 1.18 - "AC-3 Source Code"
II. LICENSES GRANTED
Section 2.01 - Licenses Granted to LICENSEE
Section 2.02 - Limitation of Licenses Granted
Section 2.03 - Exclusivity Limitation
III. OTHER OBLIGATIONS OF THE LICENSEE AND LICENSOR
Section 3.01 - Use of Licensed Trademarks
Section 3.02 - Ownership of the Licensed Trademarks
Section 3.03 - Maintenance of Trademark Rights
Section 3.04 - Trademark Enforcement
Section 3.05 - Other-Trademark Purchasers
Section 3.06 - Section Deleted
Section 3.07 - Copyright Notice
Section 3.08 - Furnishing of Licensed Copyrighted Works
Section 3.09 - License Notice
Section 3.10 - Furnishing of LICENSOR Deliverables and Know-How
Section 3.11 - Use of Know-How and Confidential Information
Section 3.12 - Best Efforts
<PAGE>
IV. PAYMENTS
Section 4.01 - Initial Payment
Section 4.02 - Royalties
Section 4.03 - Section Deleted
Section 4.04 - Royalty Applicability
Section 4.05 - Royalty Payments and Statements
Section 4.06 - Section Deleted
Section 4.07 - Books and Records
Section 4.08 - Rights of Inspecting Books and Records
V. STANDARDS OF MANUFACTURE AND QUALITY
Section 5.01 - Standardization and Quality
Section 5.02 - Right to Inspect Quality
VI. TERMINATION AND EFFECT OF TERMINATION
Section 6.01 - Expiration of Agreement
Section 6.02 - Termination for Cause
Section 6.03 - Section Deleted
Section 6.04 - Effect of Termination
Section 6.05 - Revision of Terms
VII. LIMITATIONS OF RIGHTS AND AUTHORITY
Section 7.01 - Limitation of Rights
Section 7.02 - Limitation of Authority
Section 7.03 - Disclaimer of Warranties and Liability; Hold Harmless
Section 7.04 - Limitation of Assignment by LICENSEE
Section 7.05 - Compliance with U.S. Export Control Regulations
VIII. MISCELLANEOUS PROVISIONS
Section 8.01 - Language of Agreement; Language of Notices
Section 8.02 - Stability of Agreement
Section 8.03 - Public Announcements
Section 8.04 - Address of LICENSEE and LICENSOR for all
Other Communications
Section 8.05 - Applicable Law
Section 8.06 - Choice of Forum; Attorneys' Fees
Section 8.07 - Construction of Agreement
Section 8.08 - Captions
Section 8.09 - Singular and Plural
Section 8.10 - Complete Agreement
Section 8.11 - Severability
Section 8.12 - No Conflict Representation and Warranty
Section 8.13 - Execution
Appendix A - Appendix Deleted
Appendix B - Dolby AC-3 Digital Audio System
Appendix C - Preliminary Specifications for Dolby AC-3 System
Appendix D - Licensee Information Manual
Appendix E - Royalty Schedule
<PAGE>
DIGITAL AUDIO SYSTEM LICENSE AGREEMENT
WHEREAS, LICENSOR is engaged in the field of audio signal processing
systems and has developed signal processing systems useful for audio recording
and playback and for other applications;
WHEREAS, LICENSOR's signal processing systems have acquired a reputation
for excellence and LICENSOR's trademarks have acquired valuable goodwill;
WHEREAS, LICENSOR has licensed over 160 companies to make, use and sell
consumer audio hardware incorporating LICENSOR's signal processing systems and
marked with LICENSOR's trademarks; and
WHEREAS, LICENSOR has developed the model AC-3 digital audio system which
uses a new technique for encoding and decoding of audio frequency data in
digital form with a substantially reduced bit-rate while maintaining a high
quality decoded audio signal;
WHEREAS, LICENSOR represents and warrants that it has rights to grant
licenses under its copyrights, know-how and trademarks;
WHEREAS, LICENSEE is engaged in the development, marketing and sale
(including licensing) of software products for the purpose of delivering high
quality audio content over the internet;
WHEREAS, LICENSEE believes it can develop a substantial demand for software
products marked with LICENSOR's trademarks used to encode or decode audio
signals using a modified version of LICENSOR's model AC-3 digital audio system;
WHEREAS, LICENSEE desires an [*] as set forth herein, to develop, market
and sell professional and consumer encoding and decoding software products using
a variable bit rate modified version of LICENSOR's model AC-3 digital audio
system based on LICENSOR's source code and using LICENSOR's know-how and trade
secrets and under LICENSOR's trademarks; and
WHEREAS, LICENSOR is willing to grant such a license under the terms and
conditions set forth in this Agreement.
NOW, THEREFORE, it is agreed by and between LICENSOR and LICENSEE as
follows:
* Certain information in this Exhibit has been omitted nad filed
separately with the Commission. Confidential treatment has been
requested with respect to the omitted portions.
<PAGE>
ARTICLE I
DEFINITIONS
-----------
Section 1.01 - "LICENSOR" means Dolby Laboratories Licensing Corporation, a
-------------------------
corporation of the State of New York, having a place of business as indicated on
the title page of this Agreement, and its successors and assigns.
Section 1.02 - "LICENSEE" means the corporation identified on the title
------------------------
page of this Agreement and any subsidiary thereof of whose ordinary voting
shares more than 50% are controlled directly or indirectly by such corporation,
but only so long as such control exists.
Section 1.03 - "AC-3 Digital Audio System Specifications" means the
--------------------------------------------------------
specifications for the AC-3 digital audio system, comprising the claims and
teachings of the Scheduled Patents defined in the Digital Audio System License
Agreement (Patent License), of even date herewith, the AC-3 Digital Audio System
operating parameters as specified in Appendix B entitled "Dolby AC-3 Digital
Audio System," the "Preliminary Specifications for Dolby AC-3 System" as
specified in Appendix C, attached hereto and an integral part of this Agreement,
and any applicable modifications, improvements or enhancements owned or
licensable by LICENSOR.
Section 1.04 - "Licensed Trademark" means one or more of the following: (a)
----------------------------------
the word mark "Dolby", (b) the device mark which is also referred to as the
'Double-D' symbol, and (c) any mark adopted by LICENSOR chiefly associated with
or identifying internet coders using the Dolby AC-3 Digital Audio System, which
LICENSOR may subsequently agree to license under this Agreement.
Section 1.05 - "Licensed Products" shall mean:
---------------------------------
Software products and documentation, which conform to LICENSEE's Modified
AC-3 Specification, and which can be any of the following:
(1) an encoder used to prepare audio content to be sent over the Internet
(2) a decoder used to decode audio content received from the Internet; or
(3) a combined encoder/decoder package to prepare and/or decode audio
content to be sent over and/or received from the Internet.
Section 1.06 - "Licensed Copyrighted Works" shall mean all copyrighted
------------------------------------------
works including the AC-3 Source Code and related documentation, owned by
LICENSOR or owned by others to which LICENSOR
<PAGE>
has the right to sublicense, relating to AC-3 and which are useful for the
development, design, manufacture, sale, license or use of Licensed Products.
Section 1.07 - Section Deleted
------------------------------
Section 1.08 - "LICENSOR Deliverables" shall mean any and all items
-------------------------------------
delivered or to be delivered by LICENSOR to LICENSEE which enable LICENSEE to
develop and test Licensed Products, including:
(1) AC-3 Source Code of the latest revision,
(2) Documentation accompanying said source code,
(3) Test documentation and test vectors to verify bitstream compliance.
Section 1.09 - "Know-How" means all proprietary information, trade secrets,
------------------------
skills, experience, recorded or unrecorded, accumulated by LICENSOR, from time
to time prior to and during the term of this Agreement, or licensable by
LICENSOR, relating to Licensed Products and all designs, drawings, reports,
memoranda, blue-prints, specifications and the like, prepared by LICENSOR or by
others and licensable by LICENSOR, insofar as LICENSOR deems the same to relate
to and be useful for the development, design, manufacture, sale or use of
Licensed Products. Know-How does not include Licensed Copyrighted Works, whether
or not published.
Section 1.10 - "Confidential Information" means non-technical proprietary
----------------------------------------
information of LICENSOR or LICENSEE, including, without limiting the foregoing,
marketing information, product plans, business plans, royalty, and sales
information.
Section 1.11 - Section Deleted
------------------------------
Section 1.12 - "LICENSEE's Trade Name and Trademarks" means any trade name
----------------------------------------------------
or trademark used and owned by LICENSEE.
Section 1.13 - "Other-Trademark Purchaser" means any customer of LICENSEE
-----------------------------------------
who, with LICENSEE's knowledge, intends to resell, use or lease the Licensed
Products under a trademark other than LICENSEE's Trade Name and Trademarks.
Section 1.14 - Section Deleted
------------------------------
Section 1.15 - The "Effective Date" of this Agreement is the date of
----------------------------------
execution hereof by the last party to execute the Agreement, or, if this
Agreement requires validation by any governmental or quasi-governmental body,
the "Effective Date" is the date of validation of this Agreement.
<PAGE>
Section 1.16 - "LICENSEE's Modified AC-3 Specification" shall mean
------------------------------------------------------
modifications developed by LICENSEE to the AC-3 Digital Audio System
Specifications, to provide for variable data rates.
Section 1.17 - "Internet" shall mean data networks using the "Internet
-------------------------
Protocol" (commonly known as "IP").
Section 1.18 - "AC-3 Source Code" shall mean all computer program code
--------------------------------
developed and owned or licensable by LICENSOR implementing the encoder and/or
decoder functions of the AC-3 Digital Audio System in any form including
LICENSEE's Modified AC-3 Specification.
ARTICLE II
LICENSES GRANTED
----------------
Section 2.01 - Licenses Granted to LICENSEE
-------------------------------------------
LICENSOR hereby grants to LICENSEE:
a personal, non-transferable, indivisible license throughout the world,
which shall be [*] whichever occurs first, and non-exclusive thereafter, and
non-exclusive for other purposes, subject to LICENSEE fulfilling its obligations
under this Agreement,
a) to use, copy, display, perform and modify the Licensed Copyrighted
Works (including the AC-3 Source Code), and to use the Know-How, to develop,
prepare, copy and test Licensed Products; and
b) (i) to market, sell, distribute, maintain, and support the Licensed
Products,
(ii) to grant end-user licenses to Licensed Products; provided, that
to the extent the Licensed Products incorporate any portions of the Licensed
Copyrighted Works (including the AC-3 Source Code) or Know-How, such portions
shall be made available and licensed to end-users only in object code form
without the right of such end-users to modify such object code.
* Certain information in this Exhibit has been omitted and filed
separately with the Commission. Confidential treatment has been
requested with respect to the omitted portions.
<PAGE>
(iii) to copy, display and perform the Licensed Products for
execution, backup, and archival purposes and for the purposes in the preceding
clauses (i) and (ii), subject to the conditions set forth in this Agreement and
LICENSEE's performance of its obligations, including the payment of royalties.
Section 2.02 - Limitation of Licenses Granted
---------------------------------------------
Notwithstanding the licenses granted under Section 2.01:
(1) no license is granted under this Agreement to lease, sell, transfer,
or otherwise dispose of any subset or portion of a Licensed Product.
(2) no license is granted under this Agreement to use any Licensed
Trademark in connection with offering for sale or in advertising and/or
informational material relating to any Licensed Product which is not marked with
the mark specified in Section 3.01(1) of this Agreement;
(3) no license is granted under this Agreement with respect to the use of
any Licensed Trademark on or in connection with products other than Licensed
Products;
(4) no right is granted with respect to LICENSOR's trade name "Dolby
Laboratories" except with respect to the use of said tradename on and in
connection with Licensed Products in the trademark acknowledgment and license
notice required by Sections 3.01(6) and 3.09, respectively; and
(5) no right to grant sublicenses other than end-user licenses
specifically allowed under Section 2.01 is granted under this Agreement.
Section 2.03 - Exclusivity Limitation
-------------------------------------
The exclusivity of the License granted in Section 2.01 shall terminate and
such License shall become non-exclusive in the event LICENSEE fails to comply
with either the minimum royalty payment provisions of Section 4.02, or the best
efforts requirements of Section 3.12, and LICENSEE fails to remedy the default
within 14 days of receiving notice of such default from LICENSOR.
ARTICLE III
OTHER OBLIGATIONS OF THE LICENSEE AND LICENSOR
----------------------------------------------
Section 3.01 - Use of Licensed Trademarks
-----------------------------------------
The Licensed Trademarks have acquired a reputation for high quality among
professionals and consumers around the world. The performance capability of the
AC-3 digital audio system is such that
<PAGE>
LICENSOR is willing, by virtue of this Agreement, to allow the use of the
Licensed Trademarks on Licensed Products, or on the user interface to Licensed
Products and in connection with their advertising, marketing and sale, provided
that the quality of such products conforms with the general reputation for high
quality associated with the Licensed Trademarks. LICENSEE's use of the Licensed
Trademarks shall be subject to the obligations of this Agreement as well as
detailed regulations issued from time to time by LICENSOR. Use of Licensed
Trademarks on or in connection with Licensed Products conforming to the
LICENSEE's Modified AC-3 Specification shall be subject to additional specific
certification and approval by LICENSOR prior to any public or non-public
demonstration of such Licensed Product pursuant to (i) bitstream compliance test
adapted by LICENSOR in good faith from LICENSOR's bitstream compliance tests for
the AC-3 Digital Audio System Specifications and (ii) other appropriate tests
developed in good faith by LICENSOR. LICENSEE shall comply with the requirements
of the body of this Agreement and such additional regulations as LICENSOR may
issue and shall ensure that its subsidiaries, agents, distributors, and dealers
throughout the world comply with such requirements:
(1) LICENSEE shall prominently mark the Licensed Product or the user
interface to the Licensed Product in the following way:
[LOGO OF DOLBY DIGITAL APPEARS HERE]
(2) The mark specified in subsection (1) of this Section 3.01, shall also
be used at least once in a prominent manner in all advertising and promotions
for such Licensed Product, except for audio-only advertising and promotion and
mere links to LICENSEE's Internet site(s); such usages shall be no less
prominent and in the same relative size as the most prominent third party
trademark(s) appearing on such Licensed Product or in the advertising and
promotion thereof.
(3) LICENSEE may not use the Licensed Trademarks in advertising and
promotion of a product not marked in accordance with subsection (1) of this
Section 3.01.
(4) In every use of a Licensed Trademark LICENSEE shall give notice to the
public that such Licensed Trademark is a trademark by using the superscript
letters "TM" after the respective trademark, or by use of the trademark
registration symbol "(R)" (the capital letter R enclosed in a circle) as a
<PAGE>
superscript after the respective trademark. LICENSOR shall inform LICENSEE as to
which notice form is to be used.
(5) LICENSEE shall use its best efforts to ensure that the appropriate
trademark notices, as set forth in subsection (4) above, appear in advertising
for such Licensed Products at the retail level.
(6) LICENSOR's ownership of Licensed Trademarks shall be indicated
whenever used by LICENSEE, whether use is on a product or on descriptive,
instructional, advertising, or promotional material, by the most relevant of the
following acknowledgments: "Dolby' is a trademark of Dolby Laboratories
Licensing Corporation", "The 'Double-D' symbol is a trademark of Dolby
Laboratories Licensing Corporation", or "'Dolby' and the 'Double-D' symbol are
trademarks of Dolby Laboratories Licensing Corporation." On Licensed Products
not distributed online such words shall be used on an exposed surface, such as
the back or the bottom, or if distributed online, in the "About..." (or
equivalent) menu of such Licensed Products. LICENSEE shall use its best efforts
to ensure that such an acknowledgment appears in advertising at the retail
level.
(7) Licensed Trademarks shall always be used in accordance with
established United States practices for the protection of trademark and service
mark rights, unless the requirements in the country or jurisdiction in which the
product will be sold are more stringent, in which case the practice of such
country or jurisdiction shall be followed. In no event shall any Licensed
Trademark be used in any way that suggests or connotes that it is a common,
descriptive or generic designation. Whenever the word "Dolby" is used, the
letter D shall be upper-case. The word "Dolby" shall be used only as an
adjective referring to a digital audio product, never as a noun or in any other
usage which may contribute to a generic meaning thereof. In descriptive,
instructional, advertising, or promotional material or media relating to
Licensed Products, LICENSEE must use the Licensed Trademarks and expressions
which include the Licensed Trademark "Dolby" with an appropriate generic or
descriptive term (e.g. "Dolby Digital AC-3 encoder", "Dolby Digital audio
circuit", "Dolby AC-3 transmission" etc.), with reference to Licensed Products
and their use.
(8) All uses of the Licensed Trademarks are subject to approval by
LICENSOR, as set forth in the first paragraph of this Section 3.01. LICENSOR
reserves the right to require LICENSEE to submit proposed uses to LICENSOR for
written approval prior to actual use. Upon request of LICENSOR,
<PAGE>
LICENSEE shall submit to LICENSOR samples of its own usage of the Licensed
Trademarks and usage of the Licensed Trademarks by its subsidiaries, agents,
distributors, and dealers.
(9) Licensed Trademarks shall be used in a manner that distinguishes them
from other trademarks, service marks, symbols or trade names, including
LICENSEE's Trade Name and Trademarks.
(10) LICENSEE may not use the Licensed Trademarks on or in connection with
products that do not meet LICENSOR's quality standards as set forth in the first
paragraph of this Section 3.01.
(11) LICENSEE may not use the Licensed Trademarks on or in connection with
products other than Licensed Products.
Section 3.02 - Ownership of the Licensed Trademarks
---------------------------------------------------
LICENSEE acknowledges the validity and exclusive ownership by LICENSOR of
the Licensed Trademarks.
LICENSEE further acknowledges that it owns no rights in the Licensed
Trademarks nor in the tradename "Dolby Laboratories." LICENSEE acknowledges and
agrees that all rights that it may accrue in the Licensed Trademarks and in the
tradenames "Dolby Laboratories" will inure to the benefit of the owner thereof,
LICENSOR or LICENSOR's parent Dolby Laboratories, Inc.
LICENSEE further agrees that it will not file any application for
registration of the Licensed Trademarks or "Dolby Laboratories" in any country,
region, or under any arrangement or treaty. LICENSEE also agrees that it will
not use nor will it file any application to register in any country, region, or
under any arrangement or treaty any mark, symbol or phrase, in any language,
which is confusingly similar to the Licensed Trademarks or "Dolby Laboratories".
Section 3.03 - Maintenance of Trademark Rights
----------------------------------------------
The expense of obtaining and maintaining Licensed Trademark registrations
shall be borne by LICENSOR. LICENSOR, as it deems necessary, will advise
LICENSEE of the grant of registration of such trademarks. As LICENSOR deems
necessary, LICENSEE and LICENSOR will comply with applicable laws and practices
of the country of registration, including, without limiting the foregoing, the
marking with notice of registration and the recording of LICENSEE as a
registered or licensed user of such trademarks. The expense of registering or
recording LICENSEE as a registered user or otherwise complying with the laws of
any country pertaining to such registration or the recording of trademark
<PAGE>
agreements shall be borne by LICENSEE. LICENSEE shall advise LICENSOR of all
countries where Licensed Products are sold, leased or intended to be used.
Section 3.04 - Trademark Enforcement
------------------------------------
LICENSEE shall immediately inform LICENSOR of all infringements, potential
or actual, which may come to its attention, of the Licensed Trademarks. It shall
be the exclusive responsibility of LICENSOR, at its own expense, to terminate,
compromise, or otherwise act at its discretion with respect to such
infringements. LICENSEE agrees to cooperate with LICENSOR by furnishing, without
charge, except out-of-pocket expenses, such evidence, documents and testimony as
may be required therein.
Section 3.05 - Other-Trademark Purchasers
-----------------------------------------
The following conditions shall apply if LICENSEE sells or leases Licensed
Products on a mass basis to an Other-Trademark Purchaser who does not hold a
license with terms and conditions substantially similar to this Agreement.
LICENSEE shall inform LICENSOR of the name, place of business, trademarks, and
trade names of the Other-Trademark Purchaser before such Other-Trademark
Purchaser sells, leases, or uses Licensed Products. LICENSEE shall obtain
agreement from such Other-Trademark Purchaser not to modify, install, use,
lease, sell, provide written material for or about, advertise, or promote
Licensed Products in any way which is in conflict with any provision of this
Agreement. It shall be the responsibility of LICENSEE to inform the Other-
Trademark Purchaser of the provisions of this Agreement, to notify such Other-
Trademark Purchaser that the provisions of this Agreement shall be applicable,
through LICENSEE, in the same way as if the Licensed Products were sold by
LICENSEE under LICENSEE's Trade Names and Trademarks, to ensure by all
reasonable means that such provisions are adhered to and, if requested by
LICENSOR, to provide to LICENSOR samples on a loan basis of the Other-Trademark
Purchaser's embodiment of the Licensed Products, as well as copies of such
Other-Trademark Purchaser's advertising, public announcements, literature,
instruction manuals, and the like.
Section 3.06 - Section Deleted
------------------------------
Section 3.07 - Copyright Notice
-------------------------------
3.07(1) - Where Applied LICENSEE shall apply the copyright notice
-----------------------
specified in subsection 3.07(2) of this Section 3.07 to all media in which the
Licensed Product is distributed as
<PAGE>
permitted by this Agreement, or if distributed online in the "About..." (or
equivalent) menu of such Licensed Products.
3.07(2) - Form of Notice LICENSEE shall apply the following copyright
------------------------
notice as required in subsection 3.07(1) of this Section 3.07:
"This product contains one or more programs protected under international
and U.S. copyright laws as unpublished works. They are confidential and
proprietary to Dolby Laboratories Licensing Corporation. Their reproduction or
disclosure, in whole or in part, or the production of derivative works therefrom
without the express permission of Dolby Laboratories Licensing Corporation is
prohibited. Copyright 1992-1995 by Dolby Laboratories, Inc. All rights
reserved."
Section 3.08 - Furnishing of Licensed Copyrighted Works
-------------------------------------------------------
Subject to any restrictions under the export control regulations of the
United States or any other applicable restrictions, LICENSOR will promptly after
the Effective Date, furnish to LICENSEE copies of all Licensed Copyrighted Works
including the AC-3 Source Code. LICENSEE agrees to use such Licensed Copyrighted
Works only as specifically laid out in this Agreement.
Upon termination of this Agreement, LICENSEE shall promptly return to
LICENSOR, at LICENSEE's expense, all documents and things supplied to LICENSEE
as Licensed Copyrighted Works, as well as all copies and reproductions thereof.
Section 3.09 - License Notice
-----------------------------
On all Licensed Products, LICENSEE shall acknowledge that the Licensed
Products are manufactured under license from LICENSOR. The following notice
shall be used by LICENSEE on an exposed surface, such as the back or the bottom,
of all Licensed Products or if distributed online in the "About..." (or
equivalent) menu of such Licensed Products: "Manufactured under license from
Dolby Laboratories Licensing Corporation". Such notice shall also be used in all
instruction and servicing manuals.
Section 3.10 - Furnishing of LICENSOR Deliverables and Know-How
---------------------------------------------------------------
Subject to any restrictions under the export control regulations of the
United States or any other applicable restrictions, LICENSOR will promptly after
the Effective Date, furnish to LICENSEE:
(1) The LICENSOR Deliverables and copies of all documents and things
comprising the Know-How; and
<PAGE>
(2) when requested by LICENSEE, provide, as LICENSOR deems reasonable,
consulting services regarding design considerations and general advice relating
to the Licensed Products and the sale and use thereof, for all of which LICENSEE
will reimburse LICENSOR for travel and reasonable per diem expenses.
Section 3.11 - Use of Know-How and Confidential Information
-----------------------------------------------------------
3.11(1) - By LICENSEE
---------------------
LICENSEE shall use all Know-How and Confidential Information obtained
heretofore or hereafter from LICENSOR solely for the purpose of exercising its
license rights under Section 2.01, shall not use such Know-How or Confidential
Information in an unauthorized way, and shall not divulge such Know-How or
Confidential Information or any portion thereof to third parties, unless such
Know-How or Confidential Information (a) was known to LICENSEE prior to its
obtaining the same from LICENSOR; (b) becomes known to LICENSEE from sources
other than either directly or indirectly from LICENSOR; (c) becomes public
knowledge other than by breach of this Agreement by LICENSEE or by another
licensee of LICENSOR; (d) is required by law to be disclosed or (e) is required
to be disclosed to enforce this Agreement. The obligations of this subsection
3.11(1) shall cease three (3) years from the date on which such Know-How or
Confidential Information are acquired by LICENSEE from LICENSOR under this
Agreement.
Upon termination of this Agreement, with respect to Know-How or
Confidential Information subject to the obligations of this subsection 3.11(1),
LICENSEE shall promptly return to LICENSOR, at LICENSEE's expense, all documents
and things supplied to LICENSEE as Know-How, as well as all copies and
reproductions thereof.
3.11(2) - By LICENSOR
---------------------
Except as provided by Article IV of this Agreement, LICENSEE is not
obligated to disclose to LICENSOR any information that it deems proprietary or
confidential. LICENSOR hereby agrees that throughout the term of this Agreement
it shall not divulge to third parties, nor use in an unauthorized way
Confidential Information or trade secrets belonging to LICENSEE unless said
Confidential Information or trade secrets (a) were known to LICENSOR prior to
its receipt of said Confidential Information or trade secrets from LICENSEE; (b)
becomes known to LICENSOR from sources other than either directly or indirectly
from LICENSEE; (c) becomes a matter of public knowledge other than by breach of
this
<PAGE>
Agreement by LICENSOR; (d) is required by law to be disclosed or (e) is required
to be disclosed to enforce this Agreement. The above obligations of LICENSOR
shall in any event cease three (3) years from the date on which such
confidential information or trade secrets have been acquired by LICENSOR from
the LICENSEE under this Agreement.
Section 3.12 - Best Efforts
---------------------------
LICENSEE agrees that it will use its best efforts to bring the first
Licensed Products to market no later than six months from the Effective Date.
During such six-month period LICENSEE shall demonstrate progress toward that
goal by giving LICENSOR regular, brief progress reports every 30 days, and
holding a design review with LICENSOR's technical staff every 60 days.
ARTICLE IV
PAYMENTS
--------
Section 4.01 - Initial Payment
------------------------------
LICENSEE shall promptly upon the Effective Date of this Agreement pay
LICENSOR the sum specified on the title page and shall pay all local fees, taxes
(other than taxes on LICENSOR's income or profits), duties, or charges of any
kind and shall not deduct them from such sum due unless such deductions may be
offset against LICENSOR's own tax liabilities.
Section 4.02 - Royalties
------------------------
Subject to the provisions of Section 4.05, LICENSEE shall pay to LICENSOR
royalties on "net sales" (as defined in Appendix E hereto) of Licensed Products
which are commercially used, sold, leased, or otherwise disposed of by LICENSEE,
except for Licensed Products returned to LICENSEE by customers of LICENSEE,
other than in exchange for an upgraded product, on which a credit has been
allowed by LICENSEE to said customers. The royalty payable is set forth in
Appendix E of this Agreement.
In order for the exclusivity provisions of Section 2.01 to remain in
effect, LICENSEE shall make minimum royalty payments as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
At the end of the first quarter following the Effective Date: [*]
" second quarter " [*]
" third quarter " [*]
" fourth quarter " [*]
</TABLE>
* Certain information in this Exhibit has been omitted and filed
separately with the Commission. Confidential treatment has been
requested with respect to the omitted portions.
<PAGE>
<TABLE>
<S> <C> <C> <C>
" fifth quarter " [*]
" sixth quarter " [*]
" seventh quarter " [*]
" eighth quarter " [*]
</TABLE>
* Certain information in this Exhibit has been omitted and filed
separately with the Commission. Confidential treatment has been
requested with respect to the omitted portions.
<PAGE>
Section 4.03 - Section Deleted
------------------------------
Section 4.04 - Royalty Applicability
------------------------------------
A Licensed Product shall be considered sold under Section 4.02 when
invoiced, or if not invoiced, delivered to another by LICENSEE or otherwise
disposed of or put into commercial use by LICENSEE, except for consignment
shipments, which will be considered sold when the payment for such shipments is
agreed upon between LICENSEE and customer.
Section 4.05 - Royalty Payments and Statements
----------------------------------------------
LICENSEE shall render statements and royalty payments as follows:
(1) LICENSEE shall deliver to the address shown on the cover sheet of this
Agreement or such place as LICENSOR may from time to time designate, quarterly
reports certified by LICENSEE's chief financial officer or the officer's
designate within 30 days after each calendar quarter ending with the last day of
March, June, September and December. Alternatively, such reports may be
delivered by facsimile by transmitting them to LICENSOR's facsimile telephone
number shown on the cover sheet of this Agreement or such other number as
LICENSOR may from time to time designate. Royalty payments are due for each
quarter at the same time as each quarterly report and shall be made by wire
transfer in United States funds to LICENSOR's bank as identified on the cover
sheet of this Agreement or such other bank as LICENSOR may from time to time
designate. LICENSEE shall pay all local fees, taxes (other than taxes on
LICENSOR's income or profits), duties, or charges of any kind and shall not
deduct them from the royalties due unless such deductions may be offset against
LICENSOR's own tax liabilities.
Each quarterly report shall:
(a) state the number of each model type of Licensed Products leased, sold,
or otherwise disposed of by LICENSEE during the calendar quarter with respect to
which the report is due; and
(b) contain such other information and be in such form as LICENSOR or its
outside auditors may prescribe.
(2) Any remittance in excess of royalties due with respect to the calendar
quarter for which the report is due shall be applied by LICENSOR to the next
payment due.
(3) LICENSEE's first report shall be for the calendar quarter in which
LICENSEE sells its first Licensed Product.
<PAGE>
(4) LICENSEE shall deliver a final report and payment of royalties to
LICENSOR certified by LICENSEE's chief financial officer or the officer's
designate within 30 days after termination of this Agreement throughout the
world. Such a final report shall include a report of all royalties due with
respect to Licensed Products not previously reported to LICENSOR. Such final
report shall be supplemented at the end of the next and subsequent quarters, in
the same manner as provided for during the term of the Agreement, in the event
that LICENSEE learns of any additional royalties due.
(5) LICENSEE shall pay interest to LICENSOR from the due date to the date
payment is made of any overdue royalties or fees, including the Initial Payment,
at the rate of 2% above the prime rate as is in effect from time to time at the
bank identified on the cover page of this Agreement, or another major bank
agreed to by the LICENSOR and LICENSEE in the event that the identified bank
should cease to exist, provided however, that if the interest rate thus
determined is in excess of rates allowable by any applicable law, the maximum
interest rate allowable by such law shall apply.
Section 4.06 - Section Deleted
------------------------------
Section 4.07 - Books and Records
--------------------------------
LICENSEE shall keep complete books and records of all sales, leases,
commercial uses, returns, or other disposals by LICENSEE of Licensed Products
for three years after the relevant accounting period.
Section 4.08 - Rights of Inspecting Books and Records
-----------------------------------------------------
LICENSOR shall have the right, through a professionally registered
accountant at LICENSOR's expense for three years after the relevant accounting
period, to inspect, examine and make abstracts of the said books and records
insofar as may be necessary to verify the accuracy of the same and of the
statements provided for herein but such inspection and examination shall be made
during business hours upon reasonable notice and not more often than once per
calendar year. LICENSOR agrees not to divulge to third parties any Confidential
Information obtained from the books and records of LICENSEE as a result of such
inspection unless such information (a) was known to LICENSOR prior to its
acquisition by LICENSOR as a result of such inspection; (b) becomes known to
LICENSOR from sources other than directly or indirectly from LICENSEE; (c)
becomes a matter of public knowledge other than by breach of this Agreement by
LICENSOR; (d) is required by law to be disclosed or (e) is required to be
disclosed to enforce this Agreement.
<PAGE>
ARTICLE V
STANDARDS OF MANUFACTURE AND QUALITY
------------------------------------
Section 5.01 - Standardization and Quality
------------------------------------------
LICENSEE shall abide by the AC-3 Digital Audio System Specifications,
hereto appended in Appendix C and as modified from time to time by LICENSOR as
soon as possible, but no later than 180 days after notice from LICENSOR and by
the modifications reflected in LICENSEE's Modified AC-3 Specifications. All
Licensed Product types are subject to acceptance testing by LICENSOR pursuant to
a bitstream compliance test adapted by LICENSOR in good faith from LICENSOR's
bitstream compliance tests for the AC-3 Digital Audio System Specifications. All
Licensed Products marked with the Licensed Trademarks must additionally comply
with all applicable minimum quality standards issued and modified from time to
time by LICENSOR. On all Licensed Products marked with the Licensed Trademarks
LICENSEE shall abide by reasonable standards of quality and workmanship. Such
quality standards shall apply to all aspects of Licensed Products which
influence or reflect upon the audio quality or performance of the Licensed
Products as perceived by the end user. LICENSEE shall with respect to all
Licensed Products conform to any reasonable new quality standards requirements
as specified by LICENSOR within a period of within 180 days after notice from
LICENSOR and by the modifications reflected in LICENSEE's Modified AC-3
Specifications.
Licensed Products shall not be designed, presented or advertised in any way
which contributes to confusion of the AC-3 digital audio system with any of
LICENSOR's other digital audio systems, audio noise reduction or headroom
extension systems or LICENSOR's motion picture sound system.
Section 5.02 - Right to Inspect Quality
---------------------------------------
LICENSEE shall provide LICENSOR with such non-confidential information
concerning Licensed Products as it may reasonably require in performing its
right to enforce quality standards under this Agreement. LICENSEE will, upon
request, provide on a loan basis to LICENSOR a reasonable number of samples of
Licensed Products for testing, together with instruction and service manuals. In
the event that LICENSOR shall complain that any Licensed Product does not comply
with LICENSOR's quality standards, excepting newly specified standards falling
within the 180 day time limit of Section 5.01, it shall
<PAGE>
promptly so notify LICENSEE by written communication whereupon LICENSEE shall
within ninety (90) days suspend the lease, sale or other disposal of the same.
ARTICLE VI
TERMINATION AND EFFECT OF TERMINATION
-------------------------------------
Section 6.01 - Expiration of Agreement
--------------------------------------
Unless this Agreement already has been terminated in accordance with the
provisions of Section 6.02, this Agreement shall terminate five years from the
Effective Date and thereafter is renewable at LICENSEE's request at terms and
conditions in force at the time of renewal for reasonably comparable licenses of
LICENSOR.
Section 6.02 - Termination for Cause
------------------------------------
At the option of LICENSOR, in the event that LICENSEE breaches any of its
material obligations under this Agreement, subject to the conditions of Section
6.04, this Agreement shall terminate upon LICENSOR's giving sixty (60) days
advance notice in writing, effective on dispatch of such notice, of such
termination, giving reasons therefor to LICENSEE, provided however, that, if
LICENSEE, within the sixty (60) day period, remedies the failure or default upon
which such notice is based, then such notice shall not become effective and this
Agreement shall continue in full force and effect. Notwithstanding the sixty
(60) day cure period provided under the provisions of this Section 6.02,
interest due under Section 4.05 shall remain payable and shall not waive,
diminish, or otherwise affect any of LICENSOR's rights pursuant to this Section
6.02.
Section 6.03 - Section Deleted
------------------------------
Section 6.04 - Effect of Termination
------------------------------------
Upon termination of the Agreement, as provided in Sections 6.01 or 6.02,
all licenses granted by LICENSOR to LICENSEE under this Agreement shall
terminate, all rights LICENSOR granted to LICENSEE shall revest in LICENSOR, and
all other rights and obligations of LICENSOR and LICENSEE under this agreement
shall terminate except that the following rights and obligations of LICENSOR and
LICENSEE shall survive to the extent necessary to permit their complete
fulfillment and discharge:
<PAGE>
(1) LICENSEE's obligation to deliver a final royalty report and supplements
thereto as required by Section 4.05;
(2) LICENSOR's right to receive and LICENSEE's obligation to pay royalties,
under Article IV, including interest on overdue royalties, accrued or accruable
for payment at the time of termination and interest on overdue royalties
accruing subsequent to termination;
(3) LICENSEE's obligation to maintain books and records and LICENSOR's
right to examine, audit, and copy as provided in Sections 4.07 and 4.08;
(4) any cause of action or claim of either party accrued or to accrue
because of any breach or default by the other party;
(5) Both parties' obligations with respect to Know-How and Confidential
Information under Section 3.11 and LICENSOR's obligations with respect to
Confidential Information under Section 4.08;
(6) LICENSEE's obligations to cooperate with LICENSOR with respect to
Trademark Enforcement under Section 3.04, with respect to matters arising before
termination;
(7) LICENSEE's and LICENSOR's obligations regarding Public Announcements
under Section 8.03; and
(8) LICENSEE shall be entitled to fill orders for Licensed Products already
received and to make or have made for it and to sell Licensed Products for which
commitments to vendors have been made at the time of such termination, subject
to payment of applicable royalties thereon and subject to said Licensed Products
meeting LICENSOR's quality standards, provided that LICENSEE promptly advises
LICENSOR of such commitments upon termination.
The portions of the Agreement specifically identified in the sub-parts of
this Section shall be construed and interpreted in connection with such other
portions of the Agreement as may be required to make them effective.
Section 6.05 - Revision of Terms
--------------------------------
If LICENSOR after the termination of license exclusivity grants to another
party a license to make Licensed Products for sale in the market at a royalty
rate which is lower than that granted to LICENSEE, LICENSOR shall so notify
LICENSEE, and LICENSOR, at its own option, either shall grant such lower royalty
rate to LICENSEE on a retroactive basis to the date of such other license or
shall inform LICENSEE of any special conditions related to such other license
which justify said lower royalty rate. In
<PAGE>
the event LICENSEE believes that such special conditions are insufficient to
make the present Agreement equitable to LICENSEE then LICENSEE may inform
LICENSOR of its belief in writing and the reasons for such belief, whereupon the
LICENSEE and LICENSOR shall negotiate in good faith with the view toward
revising this Agreement so as to make its terms reasonably equivalent to those
granted to such other party. In the event LICENSEE and LICENSOR cannot, within
ninety (90) days after LICENSOR has received said written notice from LICENSEE,
resolve this situation, then the parties hereto shall within thirty (30) days
following the end of such ninety (90) day period submit in good faith the
problem for resolution to a group of three disinterested persons, one chosen by
LICENSEE, one chosen by LICENSOR and the third to be chosen jointly by the first
two persons. The majority opinion of this group shall be binding upon the
parties hereto. The expense of such submission shall be borne equally by the
parties.
ARTICLE VII
LIMITATIONS OF RIGHTS AND AUTHORITY
-----------------------------------
Section 7.01 - Limitation of Rights
-----------------------------------
No right or title whatsoever in the Licensed Trademarks is granted by
LICENSOR to LICENSEE or shall be taken or assumed by LICENSEE except as is
specifically laid down in this Agreement.
Section 7.02 - Limitation of Authority
--------------------------------------
Neither party shall in any respect whatsoever be taken to be the agent or
representative of the other party and neither party shall have any authority to
assume any obligation for or to commit the other party in any way.
Section 7.03 - Disclaimer of Warranties and Liability; Hold Harmless
--------------------------------------------------------------------
LICENSOR has provided LICENSEE the rights and privileges contained in this
Agreement in good faith. However, nothing contained in this Agreement shall be
construed as (1) a warranty or representation by LICENSOR that the AC-3 Digital
Audio System technology, Know-How, Licensed Copyrighted Works, the Licensed
Trademarks, or any Licensed Product, or part thereof embodying any of them will
be free from infringement of patents, copyrights, trademarks, service marks, or
other proprietary rights of third parties; or (2) an agreement to defend
LICENSEE against actions or suits of any nature brought by any third parties.
<PAGE>
LICENSOR disclaims all liability and responsibility for property damage,
personal injury, whether or not foreseeable, that may result from the
manufacture, use, lease, or sale of Licensed Products and parts thereof, and
LICENSEE agrees to assume all liability and responsibility for all such damage
and injury.
LICENSEE agrees to indemnify, defend, and hold LICENSOR harmless from and
against all claims (including, without limitation, product liability claims),
suits, losses and damages, including reasonable attorneys' fees and any other
expenses incurred in investigation and defense, arising out of LICENSEE's
manufacture, use, lease, or sale of Licensed Products, or out of any allegedly
unauthorized use of any trademark, service mark, Patent, copyright, process,
idea, method, or device (excepting Licensed Trademarks) by LICENSEE or those
acting under its apparent or actual authority, except for claims that the
Licensed Products, or the manufacture, use, lease or sale thereof, solely to the
extent the same incorporate or conform to the AC-3 Digital Audio System
Specifications, infringe any patent, copyright, trademark, service mark or other
proprietary right of third parties.
In no event will either party be liable for any lost profits, lost data, or
any form of incidental, consequential or punitive damages of any kind (whether
or not foreseeable).
Section 7.04 - Limitation of Assignment by LICENSEE
---------------------------------------------------
The rights, duties and privileges of LICENSEE hereunder shall not be
transferred or assigned by it either in part or in whole without prior written
consent of LICENSOR. However, LICENSEE shall have the right to transfer its
rights, duties and privileges under this Agreement in connection with its merger
and consolidation with another firm or the sale of its entire business to
another person or firm, provided that such person or firm shall first have
agreed with LICENSOR to perform the transferring party's obligations and duties
hereunder.
Section 7.05 - Compliance with U.S. Export Control Regulations
--------------------------------------------------------------
(1) LICENSEE agrees not to export any technical data acquired from LICENSOR
under this Agreement, nor the direct product thereof, either directly or
indirectly, to any country in contravention of United States law.
(2) Nothing in this Agreement shall be construed as requiring LICENSOR to
export from the United States, directly or indirectly, any technical data or any
commodities to any country in contravention of United States law.
<PAGE>
ARTICLE VIII
MISCELLANEOUS PROVISIONS
------------------------
Section 8.01 - Language of Agreement; Language of Notices
---------------------------------------------------------
The language of this Agreement is English. If translated into another
language, this English version of the Agreement shall be controlling. Except as
may be agreed by LICENSOR and LICENSEE, all notices, reports, consents, and
approvals required or permitted to be given hereunder shall be written in the
English language.
Section 8.02 - Stability of Agreement
-------------------------------------
No provision of this Agreement shall be deemed modified by any acts of
LICENSOR, its agents or employees or by failure to object to any acts of
LICENSEE which may be inconsistent herewith, or otherwise, except by a
subsequent agreement in writing signed by LICENSOR and LICENSEE. No waiver of a
breach committed by either party in one instance shall constitute a waiver or a
license to commit or continue breaches in other or like instances.
Section 8.03 - Public Announcements
-----------------------------------
Neither party shall at any time heretofore or hereafter publicly state or
imply that the terms specified herein or the relationships between LICENSOR and
LICENSEE are in any way different from those specifically laid down in this
Agreement. LICENSEE shall not at any time publicly state or imply that any
unlicensed products use the AC-3 Digital Audio System Specifications. If
requested by one party, the other party shall promptly supply the first party
with copies of all public statements and of all publicity and promotional
material relating to this Agreement, the AC-3 Digital Audio System
Specifications, or the Licensed Trademarks.
Section 8.04 - Address of LICENSOR and LICENSEE for all Other
-------------------------------------------------------------
Communications
--------------
Except as otherwise specified in this Agreement, all notices, reports,
consents, and approvals required or permitted to be given hereunder shall be in
writing, signed by an officer of LICENSEE or LICENSOR, respectively, and sent
postage or shipping charges prepaid by certified or registered mail, return
receipt requested showing to whom, when and where delivered, or by Express mail,
or by a secure overnight or one-day delivery service that provides proof and
date of delivery, or by facsimile, properly addressed or transmitted to LICENSEE
or LICENSOR, respectively, at the address or facsimile number
<PAGE>
set forth on the cover page of this Agreement or to such other address or
facsimile number as may from time to time be designated by either party to the
other in writing. Wire payments from LICENSEE to LICENSOR shall be made to the
bank and account of LICENSOR as set forth on the cover page of this agreement or
to such other bank and account as LICENSOR may from time to time designate in
writing to LICENSEE.
Section 8.05 - Applicable Law
-----------------------------
This Agreement shall be construed in accordance with the substantive laws,
but not the choice of law rules, of the State of California.
Section 8.06 - Choice of Forum; Attorneys' Fees
-----------------------------------------------
To the full extent permitted by law, LICENSOR and LICENSEE agree that their
choice of forum, in the event that any dispute arising under this agreement is
not resolved by mutual agreement, shall be the United States Courts in the State
of California and the State Courts of the State of California.
In the event that any action is brought for any breach or default of any of
the terms of this Agreement, or otherwise in connection with this Agreement, the
prevailing party shall be entitled to recover from the other party all costs and
expenses incurred in that action or any appeal therefrom, including without
limitation, all reasonable attorneys' fees and costs actually incurred.
Section 8.07 - Construction of Agreement
----------------------------------------
This Agreement shall not be construed for or against any party based on any
rule of construction concerning who prepared the Agreement or otherwise.
Section 8.08 - Captions
-----------------------
Titles and captions in this Agreement are for convenient reference only and
shall not be considered in construing the intent, meaning, or scope of the
Agreement or any portion thereof.
Section 8.09 - Singular and Plural
----------------------------------
Throughout this Agreement, words in the singular shall be construed as
including the plural and words in the plural shall be construed as including the
singular.
Section 8.10 - Complete Agreement
---------------------------------
This Agreement contains the entire agreement and understanding between
LICENSOR and LICENSEE with respect to its subject matter and merges all prior or
contemporaneous oral or written communication between them. Neither LICENSOR nor
LICENSEE now is, or shall hereafter be, in any
<PAGE>
way bound by any prior, contemporaneous or subsequent oral or written
communication except insofar as the same is expressly set forth in this
Agreement or in a subsequent written agreement duly executed by both LICENSOR
and LICENSEE.
Section 8.11 - Severability
---------------------------
Should any portion of this Agreement be declared null and void by operation
of law, or otherwise, the remainder of this Agreement shall remain in full force
and effect.
Section 8.12 - No Conflict Representation and Warranty
------------------------------------------------------
Each party represents and warrants to the other that such first party is
not a party to any agreement, and is not subject to any statutory or other
obligation or restriction, which might prevent or restrict it from performing
all of its obligations and undertakings under this License Agreement, and that
the execution and delivery of this Agreement and the performance by such first
party of its obligations hereunder have been authorized by all necessary action,
corporate or otherwise.
Section 8.13 - Execution
------------------------
IN WITNESS WHEREOF, the said LICENSOR has caused this Agreement to be
executed on the cover page of this Agreement, in the presence of a witness, by
an officer duly authorized and the said LICENSEE has caused the same to be
executed on the cover page of this Agreement, in the presence of a witness, by
an officer duly authorized, in duplicate original copies, as of the date set
forth on said cover page.
<PAGE>
APPENDIX A - APPENDIX DELETED
<PAGE>
APPENDIX B - "DOLBY AC-3 DIGITAL AUDIO SYSTEM"
Compliance with the algorithm description and operating parameters as specified
in ATSC document A/52, the "Dolby AC-3 Licensing Manual", the "Software
Interface Protocol" issued by LICENSOR and any further reasonable specifications
and requirements as LICENSOR may issue from time to time.
<PAGE>
APPENDIX C - PRELIMINARY SPECIFICATIONS FOR DOLBY AC-3 SYSTEM
Dolby AC-3 digital audio system encoding equipment shall comply with the
following audio specifications in production (when measured through a standard
decoder):
Audio data rate for two channels: 192 kb/sec
Frequency Response: 20 Hz - 20 kHz +/- 0.2 dB
Dynamic Range: Greater than 85 dB
Distortion: Less than 0.1% at 1 kHz
Less than 0.5%, 20 Hz - 20 kHz
Crosstalk: Less than -80 dB
Level Stability: Better than 0.2 dB
<PAGE>
APPENDIX D - LICENSEE INFORMATION MANUAL
<PAGE>
APPENDIX E - ROYALTY SCHEDULE
ROYALTIES ON LICENSED PRODUCTS: [*]
The term "net sales" means revenues of LICENSEE in connection with the
sale, lease or other disposition for cash or other consideration of the Licensed
Products less: (a) prompt payment discounts, quantity discounts, returns (other
than in exchange for an upgraded product, on which a credit has been allowed by
LICENSEE to the customer); (b) sales/distribution commissions and fees; (c) a
reasonable reserve for returns; and (d) price protection actually paid or
credited.
* Certain information in this Exhibit has been omitted and filed
separately with the Commission. Confidential treatment has been
requested with respect to the omitted portions.
<PAGE>
EXHIBIT 10.17
FOUNDER'S RESTRICTED STOCK PURCHASE AGREEMENT
This Agreement is made and entered into as of April 25, 1996 (the
"Effective Date") between Liquid Audio, Inc. (the "Company"), a California
-------------- -------
corporation, and Gerald W. Kearby ("Purchaser").
---------
1. PURCHASE OF SHARES. On the Effective Date and subject to the terms and
------------------
conditions of this Agreement, Purchaser hereby purchases from the Company, and
Company hereby sells to Purchaser, an aggregate of 250,000 shares of the
Company's common stock (the "Shares") at an aggregate purchase price of
$1,250.00 (the "Purchase Price") or $.005 per Share (the "Purchase Price Per
-------------- ------------------
Share"). As used in this Agreement, the term "Shares" refers to the Shares
- -----
purchased under this Agreement and includes all securities received (a) in
replacement of the Shares, (b) as a result of stock dividends or stock splits in
respect of the Shares, and (c) in replacement of the Shares in a
recapitalization, merger, reorganization or the like.
2. CONSIDERATION; CLOSING.
----------------------
(A) CONSIDERATION PROVIDED BY PURCHASER. The consideration hereby
-----------------------------------
provided by Purchaser, in exchange for the Shares and in the amount of the full
Purchase Price, consists of (A) Purchaser's assignment to the Company of
business, financial, marketing, development and other information, documents and
works, and certain technology and related rights owned by Purchaser, such
assignment to be effected by delivery to the Company of an Assignment Agreement
in the form of Exhibit 1 (the "Assignment Agreement"), duly executed by
--------- --------------------
Purchaser, and (B) the value of past services rendered by Purchaser to the
Company. Purchaser also hereby delivers to the Company: (i) two (2) copies of a
blank Stock Power and Assignment Separate from Stock Certificate in the form of
Exhibit 2 attached hereto (the "Stock Powers"), both executed by Purchaser (and
- --------- ------------
Purchaser's spouse, if any), and (ii) if Purchaser is married, a Consent of
Spouse in the form of Exhibit 3 attached hereto (the "Spouse Consent") duly
--------- --------------
executed by Purchaser's spouse.
(B) DELIVERIES BY THE COMPANY. Upon its receipt of all the documents
-------------------------
to be executed and delivered by Purchaser to the Company under Section 2(a), the
Company will issue a duly executed stock certificate evidencing the Shares in
the name of Purchaser as set forth in Section 19, or if not so set forth, as
specified above, with such certificate to be placed in escrow as provided in
Section 8 until expiration or termination of both the Company's Repurchase
Option and Right of First Refusal described in Sections 5 and 6, respectively.
3. REPRESENTATIONS AND WARRANTIES OF PURCHASER. Purchaser represents and
-------------------------------------------
warrants to the Company that:
(A) PURCHASE FOR OWN ACCOUNT FOR INVESTMENT. Purchaser is purchasing
---------------------------------------
the Shares for Purchaser's own account for investment purposes only and not with
a view to, or for sale in connection with, a distribution of the Shares within
the meaning of the Securities Act of 1933, as amended (the "1933 Act").
--------
Purchaser has no present intention of selling or otherwise
<PAGE>
disposing of all or any portion of the Shares and no one other than Purchaser
has any beneficial ownership of any of the Shares.
(B) ACCESS TO INFORMATION. Purchaser has had access to all
---------------------
information regarding the Company and its present and prospective business,
assets, liabilities and financial condition that Purchaser reasonably considers
important in making the decision to purchase the Shares, and Purchaser has had
ample opportunity to ask questions of the Company's representatives concerning
such matters and this investment.
(C) UNDERSTANDING OF RISKS. Purchaser is a founder of the Company and
----------------------
is fully aware of: (i) the highly speculative nature of the investment in the
Shares; (ii) the financial hazards involved; (iii) the lack of liquidity of the
Shares and the restrictions on transferability of the Shares (e.g., that
Purchaser may not be able to sell or dispose of the Shares or use them as
collateral for loans); (iv) the qualifications and backgrounds of the management
of the Company; and (v) the tax consequences of investment in the Shares.
(D) PURCHASER'S QUALIFICATIONS. Purchaser has a preexisting personal
--------------------------
or business relationship with the Company and/or certain of its officers and/or
directors of a nature and duration sufficient to make Purchaser aware of the
character, business acumen and general business and financial circumstances of
the Company and/or such officers and directors. By reason of Purchaser's
business or financial experience, Purchaser is capable of evaluating the merits
and risks of this investment, has the ability to protect Purchaser's own
interests in this transaction and is financially capable of bearing a total loss
of this investment.
(E) NO GENERAL SOLICITATION. At no time was Purchaser presented with
-----------------------
or solicited by any publicly issued or circulated newspaper, mail, radio,
television or other form of general advertising or solicitation in connection
with the offer, sale and purchase of the Shares.
(F) COMPLIANCE WITH SECURITIES LAWS. Purchaser understands and
-------------------------------
acknowledges that, in reliance upon the representations and warranties made by
Purchaser herein, the Shares are not being registered with the Securities and
Exchange Commission ("SEC") under the 1933 Act or being qualified under the
California Corporate Securities Law of 1968, as amended (the "Law"), but instead
are being issued under an exemption or exemptions from the registration and
qualification requirements of the 1933 Act and the Law.
(G) RESTRICTIONS ON TRANSFER. Purchaser understands that Purchaser
------------------------
may not transfer any Shares unless such Shares are registered under the 1933 Act
or qualified under the Law or unless, in the opinion of counsel to the Company,
exemptions from such registration and qualification requirements are available.
Purchaser understands that only the Company may file a registration statement
with the SEC or the California Commissioner of Corporations and that the Company
is under no obligation to do so with respect to the Shares. Purchaser has also
been advised that exemptions from registration and qualification may not be
available or may not permit Purchaser to transfer all or any of the Shares in
the amounts or at the times proposed by Purchaser.
-2-
<PAGE>
(H) RULE 144. In addition, Purchaser has been advised that SEC Rule
--------
144 promulgated under the 1933 Act, which permits certain limited sales of
unregistered securities, is not presently available with respect to the Shares
and, in any event, requires that the Shares be held for a minimum of two years,
and in certain cases three years, after they have been purchased and paid for
(within the meaning of Rule 144), before they may be resold under Rule 144.
4. COMPLIANCE WITH CALIFORNIA SECURITIES LAWS. THE SALE OF THE SECURITIES
------------------------------------------
THAT ARE THE SUBJECT OF THIS AGREEMENT, IF NOT YET QUALIFIED WITH THE CALIFORNIA
COMMISSIONER OF CORPORATIONS AND NOT EXEMPT FROM SUCH QUALIFICATION, IS SUBJECT
TO SUCH QUALIFICATION, AND THE ISSUANCE OF SUCH SECURITIES, AND THE RECEIPT OF
ANY PART OF THE CONSIDERATION THEREFOR PRIOR TO SUCH QUALIFICATION IS UNLAWFUL
UNLESS THE SALE IS EXEMPT. THE RIGHTS OF THE PARTIES TO THIS AGREEMENT ARE
EXPRESSLY CONDITIONED UPON SUCH QUALIFICATION BEING OBTAINED OR AN EXEMPTION
BEING AVAILABLE.
5. COMPANY'S REPURCHASE OPTION. The Company has the option to repurchase
---------------------------
all or a portion of the Unvested Shares (as defined below) on the terms and
conditions set forth in this Section (the "Repurchase Option") if Purchaser
ceases to be employed by the Company (as defined herein) for any reason, or no
reason, including without limitation Purchaser's death, disability, voluntary
resignation or termination by the Company with or without cause.
(A) DEFINITION OF "EMPLOYED BY THE COMPANY": "TERMINATION DATE". For
--------------------------------------
purposes of this Agreement, Purchaser will be considered to be "employed by the
Company" if the Board of Directors of the Company determines that Purchaser is
rendering substantial services as an officer, director, employee, consultant or
independent contractor to the Company or to any parent, subsidiary or affiliate
of the Company. In case of any dispute as to whether Purchaser is employed by
the Company, the Board of Directors of the Company will have discretion to
determine whether Purchaser has ceased to be employed by the Company or any
parent, subsidiary or affiliate of the Company and the effective date on which
Purchaser's employment terminated (the "Termination Date").
----------------
(B) UNVESTED AND VESTED SHARES. Shares that are not Vested Shares (as
--------------------------
defined in this Section) are "Unvested Shares". On the Effective Date 6.25% of
the Shares will be Vested Shares, and 93.75% of the Shares will be Unvested
Shares. If Purchaser has been continuously employed by the Company at all times
from the Effective Date until the first full month has elapsed following the
Effective Date (the "First Monthly Vesting Date"), then on the First Monthly
--------------------------
Vesting Date 2.083% of the Shares will become Vested Shares; and thereafter, for
so long (and only for so long) as Purchaser remains continuously employed by the
Company at all times after the First Monthly Vesting Date, an additional 2.083%
of the Shares will become Vested Shares upon the expiration of each full month
elapsed after the First Monthly Vesting Date.
-3-
<PAGE>
(C) ADJUSTMENTS. The number of Shares that are Vested Shares or
-----------
Unvested Shares will be proportionally adjusted to reflect any stock dividend,
stock split, reverse stock split or recapitalization of the common stock of the
Company occurring after the Effective Date.
(D) EXERCISE OF REPURCHASE OPTION AT ORIGINAL PRICE. At any time
-----------------------------------------------
within thirty (30) days after the Termination Date, the Company may elect to
repurchase any or all of the Unvested Shares by giving Purchaser written notice
of exercise of the Repurchase Option. The Company and/or its assignee(s) will
then have the option to repurchase from Purchaser (or from Purchaser's personal
representative as the case may be) any or all of the Unvested Shares at the
Purchaser's original Purchase Price Per Share (as adjusted to reflect any stock
dividend, stock split, reverse stock split or recapitalization of the common
stock of the Company occurring after the Effective Date).
(E) PAYMENT OF REPURCHASE PRICE. The repurchase price payable to
---------------------------
purchase Unvested Shares upon exercise of the Repurchase Option will be payable,
at the option of the Company or its assignee(s), by check or by cancellation of
all or a portion of any outstanding indebtedness of Purchaser to the Company (or
to such assignee) or by any combination thereof. The repurchase price will be
paid without interest within sixty (60) days after the Termination Date.
(F) TERMINATION UPON CERTAIN CORPORATE TRANSACTIONS. In the event of
(i) a merger or 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), (ii) a dissolution or liquidation of the Company, or (iii) the
sale of substantially all of the assets of the Company, the Company's Repurchase
Option shall immediately terminate.
(G) VESTING UPON INVOLUNTARY TERMINATION. In the event that the
------------------------------------
Company terminates the employment of Purchaser without cause (as defined below)
and without Purchaser's consent, then on the Termination Date the lesser of (A)
an additional number of Unvested Shares equal to 25% of the Shares, or (B) the
remaining Unvested Shares, shall immediately become Vested Shares hereunder. For
the purposes of this Section 5, "cause" shall mean (i) Purchaser's intentional
misconduct which could reasonably be expected to have a material adverse effect
on the business and affairs of the Company, (ii) Purchaser's neglect of his
duties or failure to act which could reasonably be expected to have a material
adverse effect on the business and affairs of the Company, (iii) Purchaser's
commission of an act constituting common law fraud, or a felony or criminal act,
against the Company or any subsidiary or affiliate thereof, (iv) Purchaser's
abuse of alcohol or other drugs or controlled substances, or conviction of a
crime involving moral turpitude or (v) Purchaser's material breach of any of the
agreements contained herein or the Assignment Agreement.
(H) RIGHT OF TERMINATION UNAFFECTED. Nothing in this Agreement will
-------------------------------
be construed to limit or otherwise affect in any manner whatsoever the right or
power of the Company (or any parent, subsidiary or affiliate of the Company) to
terminate Purchaser's employment at any time for any reason or no reason, with
or without cause.
-4-
<PAGE>
6. RIGHT OF FIRST REFUSAL. Unvested Shares may not be sold or otherwise
----------------------
transferred by Purchaser without the Company's prior written consent. Before any
Vested Shares held by Purchaser or any transferee of such Shares (either being
sometimes referred to herein as the "Holder") may be sold or otherwise
------
transferred (including without limitation a transfer by gift or operation of
law), the Company and/or its assignee(s) will have a right of first refusal to
purchase the Shares to be sold or transferred (the "Offered Shares") on the
--------------
terms and conditions set forth in this Section (the "Right of First Refusal").
----------------------
(A) NOTICE OF PROPOSED TRANSFER. The Holder of the Shares will
---------------------------
deliver to the Company a written notice (the "Notice") stating: (i) the Holder's
bona fide intention to sell or otherwise transfer the Offered Shares; (ii) the
name of each proposed purchaser or other transferee ("Proposed Transferee");
-------------------
(iii) the number of Offered Shares to be transferred to each Proposed
Transferee; (iv) the bona fide cash price or other consideration for which the
Holder proposes to transfer the Offered Shares (the "Offered Price"); and (v)
-------------
that the Holder will offer to sell the Offered Shares to the Company and/or
its assignee(s) at the Offered Price as provided in this Section.
(B) EXERCISE OF RIGHT OF FIRST REFUSAL. At any time within thirty
----------------------------------
(30) days after the date of the Notice, the Company and/or its assignee(s) may,
by giving written notice to the Holder, elect to purchase all (but not less than
all) of the Offered Shares proposed to be transferred to any one or more of the
Proposed Transferees named in the Notice, at the purchase price determined in
accordance with subsection (c) below.
(C) PURCHASE PRICE. The purchase price for the Offered Shares
--------------
purchased under this Section will be the Offered Price. If the Offered Price
includes consideration other than cash, then the value of the non-cash
consideration as determined in good faith by the Company's Board of Directors
will conclusively be deemed to be the cash equivalent value of such non-cash
consideration.
(D) PAYMENT. Payment of the purchase price for Offered Shares will be
-------
payable, at the option of the Company and/or its assignee(s) (as applicable), by
check or by cancellation of all or a portion of any outstanding indebtedness of
the Holder to the Company (or to such assignee, in the case of a purchase of
Offered Shares by such assignee) or by any combination thereof. The purchase
price will be paid without interest within sixty (60) days after the Company's
receipt of the Notice, or, at the option of the Company and/or its assignee(s),
in the manner and at the time(s) set forth in the Notice.
(E) HOLDER'S RIGHT TO TRANSFER. If all of the Offered Shares proposed
--------------------------
in the Notice to be transferred to a given Proposed Transferee are not purchased
by the Company and/or its assignee(s) as provided in this Section, then the
--------
Holder may sell or otherwise transfer such Offered Shares to that Proposed
Transferee at the Offered Price or at a higher price, provided that such sale or
other transfer is consummated within 120 days after the date of the Notice, and
provided further, that: (i) any such sale or other transfer is effected in
- ----------------
compliance with all applicable securities laws; and (ii) the Proposed Transferee
agrees in writing that the provisions of this Section will continue to apply to
the Offered Shares in the hands of such Proposed Transferee. If the Offered
Shares described in the Notice are not transferred to the Proposed
-5-
<PAGE>
Transferee within such 120 day period, then a new Notice must be given to the
Company, and the Company will again be offered the Right of First Refusal before
any Shares held by the Holder may be sold or otherwise transferred.
(F) EXEMPT TRANSFERS. Notwithstanding anything to the contrary in
----------------
this Section, the following transfers of Shares will be exempt from the Right of
First Refusal: (i) the transfer of any or all of the Shares during Purchaser's
lifetime by gift or on Purchaser's death by will or intestacy to Purchaser's
"immediate family" (as defined below) or to a trust for the benefit of Purchaser
or Purchaser's immediate family, provided that each transferee or other
recipient agrees in a writing satisfactory to the Company that the provisions of
this Section will continue to apply to the transferred Shares in the hands of
such transferee or other recipient; (ii) any transfer of Shares made pursuant to
a statutory merger or statutory consolidation of the Company with or into
another corporation or corporations (except that the Right of First Refusal will
continue to apply thereafter to such Shares, in which case the surviving
corporation of such merger or consolidation shall succeed to the rights or the
Company under this Section unless the agreement of merger or consolidation
expressly otherwise provides); or (iii) any transfer of Shares pursuant to the
winding up and dissolution of the Company. As used herein, the term "immediate
family" will mean Purchaser's spouse, lineal descendant or antecedent, father,
mother, brother or sister, adopted child or grandchild, or the spouse of any
child, adopted child, grandchild or adopted grandchild of Purchaser.
(G) TERMINATION OF RIGHT OF FIRST REFUSAL. The Right of First Refusal
-------------------------------------
will terminate as to all Shares on the effective date of the first sale of
common stock of the Company to the general public pursuant to a registration
statement filed with and declared effective by the SEC under the 1933 Act (other
than a registration statement relating solely to the issuance of common stock
pursuant to a business combination or an employee incentive or benefit plan).
(H) ENCUMBRANCES ON VESTED SHARES. Purchaser may grant a lien or
-----------------------------
security interest in, or pledge, hypothecate or encumber Vested Shares only if
each party to whom such lien or security interest is granted, or to whom such
pledge, hypothecation or other encumbrance is made, agrees in a writing
satisfactory to the Company that: (i) such lien, security interest, pledge,
hypothecation or encumbrance will not apply to such Vested Shares after they are
acquired by the Company and/or its assignees) under this Section; and (ii) the
provisions of this Section will continue to apply to such Vested Shares in the
hands of such party and any transferee of such party. Purchaser may not grant a
lien or security interest in, or pledge, hypothecate or encumber, any Unvested
Shares.
7. RIGHTS AS SHAREHOLDER. Subject to the terms and conditions of this
---------------------
Agreement, Purchaser will have all of the rights of a shareholder of the Company
with respect to the Shares from and after the date that Purchaser delivers
payment of the Purchase Price until such time as Purchaser disposes of the
Shares or the Company and/or its assignee(s) exercise(s) the Repurchase Option
or Right of First Refusal. Upon an exercise of the Repurchase Option or the
Right of First Refusal, Purchaser will have no further rights as a holder of the
Shares so purchased upon such exercise, except the right to receive payment for
the Shares so purchased in accordance with the provisions of this Agreement, and
Purchaser will promptly surrender the
-6-
<PAGE>
stock certificate(s) evidencing the Shares so purchased to the Company for
transfer or cancellation.
8. ESCROW. As security for Purchaser's faithful performance of this
------
Agreement, Purchaser agrees, immediately upon receipt of the stock
certificate(s) evidencing the Shares, to deliver such certificate(s), together
with the Stock Powers executed by Purchaser and by Purchaser's spouse, if any
(with the date and number of Shares left blank), to the Secretary of the Company
or other designee of the Company ("Escrow Holder"), who is hereby appointed to
-------------
hold such certificate(s) and Stock Powers in escrow and to take all such actions
and to effectuate all such transfers and/or releases of such Shares as are in
accordance with the terms of this Agreement. Purchaser and the Company agree
that Escrow Holder will not be liable to any party to this Agreement (or to any
other party) for any actions or omissions unless Escrow Holder is grossly
negligent or intentionally fraudulent in carrying out the duties of Escrow
Holder under this Section. Escrow Holder may rely upon any letter, notice or
other document executed by any signature purported to be genuine and may rely on
the advice of counsel and obey any order of any court with respect to the
transactions contemplated by this Agreement. The Shares will be released from
escrow upon termination of both the Repurchase Option and the Right of First
Refusal.
9. TAX CONSEQUENCES. Purchaser hereby acknowledges that Purchaser has
----------------
been informed that, unless an election is filed by the Purchaser with the
Internal Revenue Service (and, if necessary, the proper state taxing
authorities), within 30 days of the purchase of the 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 Purchase Price
of the Shares and their fair market value on the date of purchase, there will be
a recognition of taxable income to the Purchaser, measured by the excess, if
any, of the fair market value of the Vested Shares, at the time they cease to be
Unvested Shares, over the purchase price for such Shares. Purchaser represents
that Purchaser has consulted any tax consultant(s) Purchaser deems advisable in
connection with Purchaser's purchase of the Shares and the filing of the
election under Section 83(b) and similar tax provisions. A form of Election
under Section 83(b) is attached hereto as Exhibit 4 for reference. PURCHASER
---------
HEREBY ASSUMES ALL RESPONSIBILITY FOR FILING SUCH ELECTION AND PAYING ANY TAXES
RESULTING FROM SUCH ELECTION OR FOR FAILING TO FILE THE ELECTION AND PAYING
TAXES RESULTING FROM THE LAPSE OF THE REPURCHASE RESTRICTIONS ON THE UNVESTED
SHARES.
10. RESTRICTIVE LEGENDS AND STOP-TRANSFER ORDERS.
--------------------------------------------
(A) LEGENDS. Purchaser understands and agrees that the Company will
-------
place the legends set forth below or similar legends on any stock certificate(s)
evidencing the Shares, together with any other legends that may be required by
state or federal securities laws, the Company's Articles of Incorporation or
Bylaws, any other agreement between Purchaser and the Company or any agreement
between Purchaser and any third party:
THE SECURITIES REPRESENTED HEREBY HAVE
NOT BEEN REGISTERED UNDER THE SECURITIES
-7-
<PAGE>
ACT OF 1933, AS AMENDED (THE "ACT"), OR UNDER THE SECURITIES LAWS
OF CERTAIN STATES. THESE SECURITIES ARE SUBJECT TO RESTRICTIONS
ON TRANSFERABILITY AND RESALE AND MAY NOT BE TRANSFERRED OR
RESOLD EXCEPT AS PERMITTED UNDER THE ACT AND APPLICABLE STATE
SECURITIES LAWS. PURSUANT TO REGISTRATION OR EXEMPTION THEREFROM.
INVESTORS SHOULD BE AWARE THAT THEY MAY BE REQUIRED TO BEAR THE
FINANCIAL RISKS OF THIS INVESTMENT FOR AN INDEFINITE PERIOD OF
TIME. THE ISSUER OF THESE SECURITIES MAY REQUIRE AN OPINION OF
COUNSEL IN FORM AND SUBSTANCE SATISFACTORY TO THE ISSUER TO THE
EFFECT THAT ANY PROPOSED TRANSFER OR RESALE IS IN COMPLIANCE WITH
THE ACT AND ANY APPLICABLE STATE SECURITIES LAWS.
THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN
RESTRICTIONS ON PUBLIC RESALE, TRANSFER, RIGHT OF REPURCHASE AND
RIGHT OF FIRST REFUSAL OPTIONS HELD BY THE ISSUER AND/OR ITS
ASSIGNEE(S) AS SET FORTH IN A FOUNDER'S RESTRICTED STOCK PURCHASE
AGREEMENT BETWEEN THE ISSUER AND THE ORIGINAL HOLDER OF THESE
SHARES, A COPY OF WHICH MAY BE OBTAINED AT THE PRINCIPAL OFFICE
OF THE ISSUER. SUCH PUBLIC SALE AND TRANSFER RESTRICTIONS AND THE
RIGHT OF REPURCHASE AND RIGHT OF FIRST REFUSAL ARE BINDING ON
TRANSFEREES OF THESE SHARES.
(B) STOP-TRANSFER INSTRUCTIONS. Purchaser agrees that, in order to
--------------------------
ensure compliance with the restrictions imposed by this Agreement, the Company
may issue appropriate "stop-transfer" instructions to its transfer agent, if
any, and if the Company transfers its own securities, it may make appropriate
notations to the same effect in its own records.
(C) REFUSAL TO TRANSFER. The Company will not be required (i) to
-------------------
transfer on its books any Shares that have been sold or otherwise transferred in
violation of any of the provisions of this Agreement or (ii) to treat as owner
of such Shares, or to accord the right to vote or pay dividends, to any
purchaser or other transferee to whom such Shares have been so transferred.
-8-
<PAGE>
11. MARKET STANDOFF AGREEMENT. Purchaser agrees in connection with any
-------------------------
registration of the Company's securities under the 1933 Act that, upon the
request of the Company or the underwriters managing any registered public
offering of the Company's securities, Purchaser will not sell or otherwise
dispose of any Shares without the prior written consent of the Company or such
managing underwriters, as the case may be, for a period of time (not to exceed
180 days) after the effective date of such registration requested by such
managing underwriters and subject to all restrictions as the Company or the
managing underwriters may specify for employee-shareholders generally.
12. COMPLIANCE WITH LAWS AND REGULATIONS. The issuance and transfer of the
------------------------------------
Shares will be subject to and conditioned upon compliance by the Company and
Purchaser with all applicable state and federal laws and regulations and with
all applicable requirements of any stock exchange or automated quotation system
on which the Company's common stock may be listed or quoted at the time of such
issuance or transfer.
13. 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 will be binding upon and
inure to the benefit of the successors and assigns of the Company. Subject to
the restrictions on transfer herein set forth, this Agreement will be binding
upon Purchaser and Purchaser's heirs, executors, administrators, successors and
assigns.
14. GOVERNING LAW; SEVERABILITY. This Agreement will be governed by and
---------------------------
construed in accordance with the internal laws of the State of California,
excluding that body of laws pertaining to conflict of laws. 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.
15. NOTICES. Any notice required or permitted hereunder will be given in
-------
writing and will be deemed effectively given 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 its deposit with any
return receipt express courier (prepaid), or one (1) business day after
transmission by telecopier, addressed to the other party at its address (or
facsimile number, in the case of transmission by telecopier) as shown below its
signature to this Agreement, or to such other address as such party may
designate in writing from time to time to the other party.
16. FURTHER INSTRUMENTS. The parties agree to execute such further
-------------------
instruments and to take such further action as may be reasonably necessary to
carry out the purposes and intent of this Agreement.
17. HEADINGS. The captions and headings of this Agreement are included for
--------
ease of reference only and will be disregarded in interpreting or construing
this Agreement. All references herein to Sections will refer to Sections of this
Agreement.
18. ENTIRE AGREEMENT. This Agreement, together with all its Exhibits,
----------------
constitutes the entire agreement and understanding of the parties with respect
to the subject
-9-
<PAGE>
matter of this Agreement, and supersedes all prior understandings and
agreements, whether oral or written, between the parties hereto with respect to
the specific subject matter hereof.
19. TITLE TO SHARES. The exact spelling of the name(s) under which
---------------
Purchaser will take title to the Shares is:
___________________________________________________
___________________________________________________
Purchaser desires to take title to the Shares as follows:
[ ] Individual, as separate property
[X] Husband and wife, as community property
[ ] Joint Tenants
[ ] Alone or with spouse as trustee(s) of the
following trust (including date):___________________________________
____________________________________________________________________
____________________________________________________________________
[ ] Other; please specify: _____________________________________________
____________________________________________________________________
Purchaser's social security number is:________________________________________
IN WITNESS WHEREOF, the Company has caused this Agreement to be executed in
duplicate by its duly authorized representative and Purchaser has executed this
Agreement in duplicate, as of the Effective Date.
LIQUID AUDIO, INC. PURCHASER
By: /s/ Robert Flynn /s/ Gerald W. Kearby
----------------------- -----------------------
Robert Flynn, CFO Gerald W. Kearby
Address: 2421 Broadway Address: c/o 2421 Broadway
Redwood City, CA 94063 Redwood City, CA 94063
Fax: (415) 364-4217 Fax: (415) 364-4217
-10-
<PAGE>
LIST OF EXHIBITS
----------------
Exhibit 1: Assignment Agreement
Exhibit 2: Stock Power and Assignment Separate from Stock Certificate
Exhibit 3: Spousal Consent
Exhibit 4: Election Under Section 83(b) of the Internal Revenue Code
-11-
<PAGE>
ASSIGNMENT AGREEMENT
--------------------
This Assignment Agreement (this "Agreement") is made and entered into
---------
effective as of April 25, 1996 by and between Liquid Audio, Inc., a California
corporation (the "Company"), and Gerald W. Kearby ("Assignor").
------- --------
R E C I T A L S
- - - - - - - -
A. Assignor is the owner of the Assigned Rights (as defined below), and
Assignor desires to assign and transfer to the Company all of Assignor's right,
title and interest in and to the Assigned Rights and other related rights in
partial exchange for the Company's issuance to Assignor of 250,000 shares of the
Company's Common Stock.
B. The parties are entering into this Agreement pursuant to that certain
Founder's Restricted Stock Purchase Agreement by and between the Company and
Assignor dated of even date herewith (the "Stock Purchase Agreement").
------------------------
NOW THEREFORE, the parties hereby agree as follows:
1. CERTAIN DEFINITIONS. As used herein, the following terms will have the
-------------------
meanings set forth below:
1.1 Assigned Rights. The term "Assigned Rights" means all business,
--------------- ---------------
financial, marketing, development and other information, documents and works
created by me prior to the date hereof (a) using equipment, supplies, facilities
or trade secrets or other proprietary rights of the Company, (b) resulting from
work performed by me for the Company or (c) relating to the Company's business
or current or anticipated research and development, and shall include, but not
be limited to, those specifications, technology, algorithms, flow charts,
computer program source code and object code, trade secrets and know-how created
by me for encoding and decoding of audio content in digital form for storage and
retrieval (such as on a CD-ROM) and for transmission over data networks,
including but not limited to the item more fully described in Annex A attached
-------
hereto.
1.2 Derivative. The term "Derivative" means: (a) any derivative work
---------- ----------
of the Assigned Rights (as defined in Section 101 of the U.S. Copyright Act);
(b) all improvements, modifications, alterations, adaptations, enhancements and
new versions of the Assigned Rights ("Assigned Rights Derivatives"); and (c) all
Assigned Rights, inventions, products or other items that, directly or
indirectly, incorporate, or are derived from, any part of the Assigned Rights or
any Assigned Rights Derivative.
1.3 Intellectual Property Rights. The term "Intellectual Property
---------------------------- ---------------------
Rights" means, collectively, all worldwide patents, patent applications
- ------
(including but not limited to those United States patent application listed on
Annex A attached hereto), patent rights, copyrights,
<PAGE>
copyright registrations, moral rights, trade names, trademarks, service marks
and registrations and applications therefor, trade secrets, know-how, mask work
rights, rights in trade dress and packaging, goodwill and all other intellectual
property rights and proprietary rights relating in any way to the Assigned
Rights, any Derivative or any Embodiment, whether arising under the laws of the
United States of America or the laws of any other state, country or
jurisdiction.
1.4 Embodiment. The term "Embodiment" means all documentation,
---------- ----------
drafts, papers, designs, schematics, diagrams, models, prototypes, source and
object code (in any form or format and for all hardware platforms), computer-
stored data, diskettes, manuscripts and other items describing all or any part
of the Assigned Rights, any Derivative, any Intellectual Property Rights or any
information related thereto or in which all of any part of the Assigned Rights,
any Derivative, any Intellectual Property Right or such information is set
forth, embodied, recorded or stored.
1.5 Assigned Assets. The term "Assigned Assets" refers to the
--------------- ---------------
Assigned Rights, all Derivatives, all Intellectual Property Rights and all
Embodiments, collectively.
2. ASSIGNMENT. In partial consideration of the issuance by the Company to
----------
Assignor of 250,000 shares of the Company's Common Stock pursuant to the Stock
Purchase Agreement, receipt of which is hereby acknowledged, Assignor hereby
forever sells, assigns, transfers, releases and conveys to the Company, and its
successors and assigns, Assignor's entire right, title and interest in and to
each and all of the Assigned Assets.
3. DELIVERY. Assignor agrees to deliver all Embodiments of all Assigned
--------
Assets to the Company at a location designated by the Company no later than May
31, 1996.
4. ASSIGNOR WARRANTIES. Assignor represents and warrants to the Company
-------------------
that Assignor is the sole owner, inventor and/or author of, and that Assignor
owns, and can grant exclusive right, title and interest in and to, each of the
Assigned Assets and that none of the Assigned Assets are subject to any dispute,
claim, prior license or other agreement, assignment, lien or rights of any third
party, or any other rights that might interfere with the Company's use, or
exercise of ownership of, any Assigned Assets. Assignor further represents and
warrants to the Company that the Assigned Assets are free of any claim of any
prior employer of Assignor or any school, university or other institution
Assignor attended, and that Assignor is not aware of any claims by any third
party to any rights of any kind in or to any of the Assigned Assets.
5. FURTHER ASSURANCES. Assignor further agrees, promptly upon request of
------------------
the Company, or any of its successors or assigns, to execute and deliver,
without further compensation of any kind, any power of attorney, assignment,
application for copyright, patent or other intellectual property right
protection, or any other papers which may be necessary or desirable to fully
secure to the Company, its successors and assigns, all right, title and interest
in and to each of the Assigned Assets, and to cooperate and assist in the
prosecution of any opposition proceedings involving said rights and any
adjudication of the same. Further, Assignor agrees never to assert any claims,
rights or moral rights in or to any of the Assigned Assets.
-2-
<PAGE>
6. INDEMNITY. Assignor will indemnify and hold the Company harmless from
---------
and against any loss, damages or expense (including without limitation
reasonable attorneys' fees) incurred by the Company in connection with any
claim, suit or other proceeding in which a third party asserts any claim to any
right, title, license or other interest in or to any Assigned Asset, any claim
that any Assigned Asset infringes any patent, copyright, trade secret or other
intellectual property right of such third party, or that, if true, would be
inconsistent with any representation made by Assignor in Section 4 above.
7. COUNTERPARTS; GOVERNING LAW. This Agreement may be executed in any
---------------------------
number of counterparts, each of which will constitute an original, and all of
which will together constitute this one Agreement. This Agreement will be
governed exclusively by the internal laws of the State of California.
8. ENTIRE AGREEMENT. This Agreement and the Stock Purchase Agreement
----------------
constitute the entire understanding and agreement between Assignor and the
Company regarding the subject matter of such agreements, and supersede any and
all other agreements or understandings of the parties regarding such subject
matter.
IN WITNESS WHEREOF, the undersigned have executed this Agreement effective
as of the date and year first above written.
LIQUID AUDIO, INC. ASSIGNOR
By: /s/ Robert Flynn /s/ Gerald W. Kearby
------------------------------ ----------------------------
Robert Flynn, CFO Gerald W. Kearby
- 3 -
<PAGE>
ANNEX A
FURTHER DESCRIPTION OF ASSIGNED RIGHTS
--------------------------------------
1. U.S. Patent Application No. 08/546,438 filed October 20, 1995,
entitled "Method and Apparatus for User Controlled Modulation and Mixing of
Digitally Stored Compressed Data". Joint inventors: Gerald W. Kearby and A.
Robert Modeste.
<PAGE>
CONSENT OF SPOUSE
-----------------
I, the undersigned, am the spouse of Gerald W. Kearby ("Purchaser"). I have
---------
read and hereby consent to and approve all the terms and conditions of: the
Founder's Restricted Stock Purchase Agreement (the "Agreement") dated April __,
---------
1996 between Purchaser and Liquid Audio, Inc., a California corporation (the
"Company"), pursuant to which Purchaser has purchased 250,000 shares of the
-------
Company's common stock (the "Shares") and Assignment Agreement ("Assignment
------ ----------
Agreement") executed by Purchaser in connection with the Agreement.
- ---------
In consideration of the Company granting my spouse the right to purchase
the Shares under the Agreement, I hereby agree to be irrevocably bound by all
the terms and conditions of the Agreement (including but not limited to the
Company's Repurchase Option, the Right of First Refusal and the market standoff
agreements contained therein) and the Assignment Agreement and further agree
that any community property interest I may have in the Shares and all property
assigned by Purchaser to the Company under the Assignment Agreement will be
similarly bound by the Agreement and the Assignment Agreement.
I hereby appoint Purchaser as my attorney-in-fact, to act in my name, place
and stead with respect to any amendment of the Agreement and the Assignment
Agreement and with respect to the making and filing of an election under
Internal Revenue Code Section 83(b) in connection with the purchase of the
Shares.
Dated: ___________, 1996
/s/ Monique L. Waldron
--------------------------------
Signature of Spouse [Sign Here]
MONIQUE L WALDRON
--------------------------------
Name of Spouse [Please Print]
<PAGE>
ELECTION UNDER SECTION 83(B) OF THE
INTERNAL REVENUE CODE
The undersigned Taxpayer hereby elects, pursuant to Section 83(b) of the
Internal Revenue Code. to include in gross income for the Taxpayer's current
taxable year the excess, if any, of the fair market value of the property
described below at the time of transfer over the amount paid for such property,
as compensation for services.
1. TAXPAYER'S NAME: Gerald W. Kearby
TAXPAYER'S ADDRESS: 3002 Waverly Ave
-----------------------------
Redwood City, CA 94063
-----------------------------
SOCIAL SECURITY NUMBER: ###-##-####
-----------------------------
2. The property with respect to which the election is made is described as
follows: 250,000 shares of Common Stock of Liquid Audio, Inc., a California
corporation (the "Company"), which is Taxpayer's employer or the
corporation for whom the Taxpayer performs services.
3. The date on which the shares were transferred was April 25, 1996 and this
election is made for calendar year 1996.
4. The shares are subject to the following restrictions: The Company may
repurchase all or a portion of the shares at the Taxpayer's original
purchase price under certain conditions at the time of Taxpayer's
termination of employment or services.
5. The fair market value of the shares (without regard to restrictions other
than restrictions which by their terms will never lapse) was $0.005 per
share at the time of transfer.
6. The amount paid for such shares was $0.005 per share.
7. The Taxpayer has submitted a copy of this statement to the Company.
THIS ELECTION MUST BE FILED WITH THE INTERNAL REVENUE SERVICE ("IRS"), AT THE
OFFICE WHERE THE TAXPAYER FILES ANNUAL INCOME TAX RETURNS, WITHIN 30 DAYS AFTER
THE DATE OF TRANSFER OF THE PROPERTY, AND MUST ALSO BE FILED WITH THE TAXPAYER'S
INCOME TAX RETURNS FOR THE CALENDAR YEAR. THE ELECTION CANNOT BE REVOKED WITHOUT
THE CONSENT OF THE IRS.
Dated: April 25, 1996 /s/ Gerald W. Kearby
--------------------------
Taxpayer's Signature
<PAGE>
AMENDMENT TO
FOUNDER'S RESTRICTED STOCK PURCHASE AGREEMENT
This Amendment is made and entered into as of May 31, 1996 between Liquid Audio,
Inc., a California corporation (the "Company") and Gerald W. Kearby ("Founder")
RECITALS
WHEREAS, the Company and Founder are parties to that certain Founder's
Restricted Stock Purchase Agreement dated as of April 25, 1996 (the "Founder's
Agreement");
WHEREAS, the Company and the investors listed in the Schedule of Purchasers
(the "Investors") of that certain Series A Preferred Stock Purchase Agreement of
even date herewith (the "Stock Purchase Agreement") are entering into the Stock
Purchase Agreement; and
WHEREAS, in order to induce the Investors to enter into the Stock Purchase
Agreement, the Company and Founder desire to enter into this Amendment, to amend
certain provisions of the Founder's Agreement pertaining to vesting of shares
purchased by Founder pursuant to the Founder's Agreement;
NOW, THEREFORE, in consideration of the mutual promises and covenants
hereinafter set forth, the Company and Founder hereby agree as follows:
1. The Company and Founder hereby consent to and do hereby amend the
Founder's Agreement as follows:
A. Section 5(b) of the Founder's Agreement is amended by deleting it
in its entirety and replacing it as follows:
"(b) UNVESTED AND VESTED SHARES. Shares that are not Vested Shares (as
--------------------------
defined in this Section) are "Unvested Shares." On the Effective Date, 6.25% of
the Shares will be Vested Shares and 93.75% of the Shares will be Unvested
Shares. If Purchaser has been continuously employed by the Company at all times
from the Effective Date until January 30, 1997 (the "First Vesting Date"), then
on the First Vesting Date an additional 18.75% of the Shares will become Vested
Shares; and thereafter for so long (and only so long) as Purchaser remains
continuously employed by the Company at all times after the First Vesting Date,
an additional 2.0833% of the Shares will become Vested Shares upon the
expiration of each full month elapsed after the First Vesting Date."
B. Sections 5(f) and 5(g) of the Founder's Agreement are amended by
deleting them in their entirety.
<PAGE>
2. Except as amended by this Amendment, the Founder's Agreement will
continue in full force and effect.
3. This Amendment shall be considered a part of and construed in
conjunction with the Founder's Agreement.
4. This Amendment may be executed in counterparts.
COMPANY: FOUNDER:
Liquid Audio, Inc.
a California corporation
By: /s/ Robert Flynn By: /s/ Gerald W. Kearby
------------------------- ---------------------------
Gerald W. Kearby
<PAGE>
SECOND AMENDMENT TO
FOUNDER'S RESTRICTED STOCK PURCHASE AGREEMENT
This Amendment is made and entered into as of August 27, 1997 between Liquid
Audio, Inc., a California corporation (the "Company") and Gerald W. Kearby
("Founder").
RECITALS
WHEREAS, the Company and Founder are parties to that certain Founder's
Restricted Stock Purchase Agreement, dated as of April 25, 1996, as amended May
31, 1996 (the "Founder's Agreement"); and
WHEREAS, the Company and Founder desire to enter into this Amendment, to
amend certain provisions of the Founder's Agreement pertaining to vesting of
shares purchased by Founder pursuant to the Founder's Agreement;
NOW, THEREFORE, in consideration of the mutual promises and covenants
hereinafter set forth, the Company and Founder hereby agree as follows:
1. The Company and Founder hereby consent to and do hereby amend the
Founder's Agreement as follows:
A. Sections 5(f) and 5(g) of the Founder's Agreement are added by
inserting the following:
"(f) PARTIAL VESTING UPON CERTAIN CORPORATE TRANSACTIONS. Upon the
closing of (i) a merger or 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
<PAGE>
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.
(g) LIMITATION ON PAYMENTS. In the event that the accelerated vesting
----------------------
provided for in the preceding subsection (f) to Founder (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, then Founder's accelerated vesting under the
preceding subsection (f) 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 Founder on an after-tax basis,
of the greatest amount of accelerated vesting under the preceding
subsection (f), notwithstanding that all or some portion of such
accelerated vesting may be taxable under Section 4999 of the Code.
Unless the Company and Founder 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 Founder
(the "Accountants"), whose determination shall be conclusive and
binding upon Founder 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 Founder shall furnish to the Accountants
such information and documents as the Accountants
- 2 -
<PAGE>
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. Except as amended by this Amendment, the Founder's Agreement will
continue in full force and effect.
3. This Amendment shall be considered a part of and construed in
conjunction with the Founder's Agreement.
4. This Amendment may be executed in counterparts.
COMPANY: FOUNDER:
Liquid Audio, Inc.
a California corporation
By: /s/ Robert Flynn By: /s/ Gerald W. Kearby
------------------------- ---------------------------
Name: Robert Flynn Gerald W. Kearby
Title: SECRETARY
- 3 -
<PAGE>
EXHIBIT 10.18
FOUNDER'S RESTRICTED STOCK PURCHASE AGREEMENT
This Agreement is made and entered into as of April 25, 1996 (the
"Effective Date") between Liquid Audio, Inc. (the "Company"), a California
-------------- -------
corporation, and Philip Wiser ("Purchaser").
---------
1. PURCHASE OF SHARES. On the Effective Date and subject to the terms and
------------------
conditions of this Agreement, Purchaser hereby purchases from the Company, and
Company hereby sells to Purchaser, an aggregate of 225,000 shares of the
Company's common stock (the "Shares") at an aggregate purchase price of
$1,125.00 (the "Purchase Price") or $.005 per Share (the "Purchase Price Per
-------------- ------------------
Share"). As used in this Agreement, the term "Shares" refers to the Shares
- -----
purchased under this Agreement and includes all securities received (a) in
replacement of the Shares, (b) as a result of stock dividends or stock splits in
respect of the Shares, and (c) in replacement of the Shares in a
recapitalization, merger, reorganization or the like.
2. CONSIDERATION; CLOSING.
----------------------
(A) CONSIDERATION PROVIDED BY PURCHASER. The consideration hereby
-----------------------------------
provided by Purchaser, in exchange for the Shares and in the amount of the full
Purchase Price, consists of (A) Purchaser's assignment to the Company of
business, financial, marketing, development and other information, documents and
works, and certain technology and related rights owned by Purchaser, such
assignment to be effected by delivery to the Company of an Assignment Agreement
in the form of Exhibit 1 (the "Assignment Agreement"), duly executed by
--------- --------------------
Purchaser, and (B) the value of past services rendered by Purchaser to the
Company. Purchaser also hereby delivers to the Company: (i) two (2) copies of a
blank Stock Power and Assignment Separate from Stock Certificate in the form of
Exhibit 2 attached hereto (the "Stock Powers"), both executed by Purchaser (and
- --------- ------------
Purchaser's spouse, if any), and (ii) if Purchaser is married, a Consent of
Spouse in the form of Exhibit 3 attached hereto (the "Spouse Consent") duly
--------- --------------
executed by Purchaser's spouse.
(B) DELIVERIES BY THE COMPANY. Upon its receipt of all the documents
-------------------------
to be executed and delivered by Purchaser to the Company under Section 2(a), the
Company will issue a duly executed stock certificate evidencing the Shares in
the name of Purchaser as set forth in Section 19, or if not so set forth, as
specified above, with such certificate to be placed in escrow as provided in
Section 8 until expiration or termination of both the Company's Repurchase
Option and Right of First Refusal described in Sections 5 and 6, respectively.
3. REPRESENTATIONS AND WARRANTIES OF PURCHASER. Purchaser represents and
-------------------------------------------
warrants to the Company that:
(A) PURCHASE FOR OWN ACCOUNT FOR INVESTMENT. Purchaser is purchasing
---------------------------------------
the Shares for Purchaser's own account for investment purposes only and not with
a view to, or for sale in connection with, a distribution of the Shares within
the meaning of the Securities Act of 1933, as amended (the "1933 Act").
--------
Purchaser has no present intention of selling or otherwise
<PAGE>
disposing of all or any portion of the Shares and no one other than Purchaser
has any beneficial ownership of any of the Shares.
(B) ACCESS TO INFORMATION. Purchaser has had access to all
---------------------
information regarding the Company and its present and prospective business,
assets, liabilities and financial condition that Purchaser reasonably considers
important in making the decision to purchase the Shares, and Purchaser has had
ample opportunity to ask questions of the Company's representatives concerning
such matters and this investment.
(C) UNDERSTANDING OF RISKS. Purchaser is a founder of the Company and
----------------------
is fully aware of: (i) the highly speculative nature of the investment in the
Shares; (ii) the financial hazards involved; (iii) the lack of liquidity of the
Shares and the restrictions on transferability of the Shares (e.g., that
Purchaser may not be able to sell or dispose of the Shares or use them as
collateral for loans); (iv) the qualifications and backgrounds of the management
of the Company; and (v) the tax consequences of investment in the Shares.
(D) PURCHASER'S QUALIFICATIONS. Purchaser has a preexisting personal
--------------------------
or business relationship with the Company and/or certain of its officers and/or
directors of a nature and duration sufficient to make Purchaser aware of the
character, business acumen and general business and financial circumstances of
the Company and/or such officers and directors. By reason of Purchaser's
business or financial experience, Purchaser is capable of evaluating the merits
and risks of this investment, has the ability to protect Purchaser's own
interests in this transaction and is financially capable of bearing a total loss
of this investment.
(E) NO GENERAL SOLICITATION. At no time was Purchaser presented with
-----------------------
or solicited by any publicly issued or circulated newspaper, mail, radio,
television or other form of general advertising or solicitation in connection
with the offer, sale and purchase of the Shares.
(F) COMPLIANCE WITH SECURITIES LAWS. Purchaser understands and
-------------------------------
acknowledges that, in reliance upon the representations and warranties made by
Purchaser herein, the Shares are not being registered with the Securities and
Exchange Commission ("SEC") under the 1933 Act or being qualified under the
California Corporate Securities Law of 1968, as amended (the "Law"), but instead
are being issued under an exemption or exemptions from the registration and
qualification requirements of the 1933 Act and the Law.
(G) RESTRICTIONS ON TRANSFER. Purchaser understands that Purchaser
------------------------
may not transfer any Shares unless such Shares are registered under the 1933 Act
or qualified under the Law or unless, in the opinion of counsel to the Company,
exemptions from such registration and qualification requirements are available.
Purchaser understands that only the Company may file a registration statement
with the SEC or the California Commissioner of Corporations and that the Company
is under no obligation to do so with respect to the Shares. Purchaser has also
been advised that exemptions from registration and qualification may not be
available or may not permit Purchaser to transfer all or any of the Shares in
the amounts or at the times proposed by Purchaser.
-2-
<PAGE>
(H) RULE 144. In addition, Purchaser has been advised that SEC Rule
--------
144 promulgated under the 1933 Act, which permits certain limited sales of
unregistered securities, is not presently available with respect to the Shares
and, in any event, requires that the Shares be held for a minimum of two years,
and in certain cases three years, after they have been purchased and paid for
(within the meaning of Rule 144), before they may be resold under Rule 144.
4. COMPLIANCE WITH CALIFORNIA SECURITIES LAWS. THE SALE OF THE SECURITIES
------------------------------------------
THAT ARE THE SUBJECT OF THIS AGREEMENT, IF NOT YET QUALIFIED WITH THE CALIFORNIA
COMMISSIONER OF CORPORATIONS AND NOT EXEMPT FROM SUCH QUALIFICATION, IS SUBJECT
TO SUCH QUALIFICATION, AND THE ISSUANCE OF SUCH SECURITIES, AND THE RECEIPT OF
ANY PART OF THE CONSIDERATION THEREFOR PRIOR TO SUCH QUALIFICATION IS UNLAWFUL
UNLESS THE SALE IS EXEMPT. THE RIGHTS OF THE PARTIES TO THIS AGREEMENT ARE
EXPRESSLY CONDITIONED UPON SUCH QUALIFICATION BEING OBTAINED OR AN EXEMPTION
BEING AVAILABLE.
5. COMPANY'S REPURCHASE OPTION. The Company has the option to repurchase
---------------------------
all or a portion of the Unvested Shares (as defined below) on the terms and
conditions set forth in this Section (the "Repurchase Option") if Purchaser
ceases to be employed by the Company (as defined herein) for any reason, or no
reason, including without limitation Purchaser's death, disability, voluntary
resignation or termination by the Company with or without cause.
(A) DEFINITION OF "EMPLOYED BY THE COMPANY"; "TERMINATION DATE". For
----------------------------------------------------------
purposes of this Agreement, Purchaser will be considered to be "employed by the
---------------
Company" if the Board of Directors of the Company determines that Purchaser is
- -------
rendering substantial services as an officer, director, employee, consultant or
independent contractor to the Company or to any parent, subsidiary or affiliate
of the Company. In case of any dispute as to whether Purchaser is employed by
the Company, the Board of Directors of the Company will have discretion to
determine whether Purchaser has ceased to be employed by the Company or any
parent, subsidiary or affiliate of the Company and the effective date on which
Purchaser's employment terminated (the "Termination Date").
----------------
(B) UNVESTED AND VESTED SHARES. Shares that are not Vested Shares (as
--------------------------
defined in this Section) are "Unvested Shares". On the Effective Date 6.25% of
---------------
the Shares will be Vested Shares, and 93.75% of the Shares will be Unvested
Shares. If Purchaser has been continuously employed by the Company at all times
from the Effective Date until the first full month has elapsed following the
Effective Date (the "First Monthly Vesting Date"), then on the First Monthly
--------------------------
Vesting Date 2.083% of the Shares will become Vested Shares; and thereafter, for
so long (and only for so long) as Purchaser remains continuously employed by the
Company at all times after the First Monthly Vesting Date, an additional 2.083%
of the Shares will become Vested Shares upon the expiration of each full month
elapsed after the First Monthly Vesting Date.
-3-
<PAGE>
(C) ADJUSTMENTS. The number of Shares that are Vested Shares or
-----------
Unvested Shares will be proportionally adjusted to reflect any stock dividend,
stock split, reverse stock split or recapitalization of the common stock of the
Company occurring after the Effective Date.
(D) EXERCISE OF REPURCHASE OPTION AT ORIGINAL PRICE. At any time
-----------------------------------------------
within thirty (30) days after the Termination Date, the Company may elect to
repurchase any or all of the Unvested Shares by giving Purchaser written notice
of exercise of the Repurchase Option. The Company and/or its assignee(s) will
then have the option to repurchase from Purchaser (or from Purchaser's personal
representative as the case may be) any or all of the Unvested Shares at the
Purchaser's original Purchase Price Per Share (as adjusted to reflect any stock
dividend, stock split, reverse stock split or recapitalization of the common
stock of the Company occurring after the Effective Date).
(E) PAYMENT OF REPURCHASE PRICE. The repurchase price payable to
---------------------------
purchase Unvested Shares upon exercise of the Repurchase Option will be payable,
at the option of the Company or its assignee(s), by check or by cancellation of
all or a portion of any outstanding indebtedness of Purchaser to the Company (or
to such assignee) or by any combination thereof. The repurchase price will be
paid without interest within sixty (60) days after the Termination Date.
(F) TERMINATION UPON CERTAIN CORPORATE TRANSACTIONS. In the event of
-----------------------------------------------
(i) a merger or 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), (ii) a dissolution or liquidation of the Company, or (iii) the
sale of substantially all of the assets of the Company, the Company's Repurchase
Option shall immediately terminate.
(G) VESTING UPON INVOLUNTARY TERMINATION. In the event that the
------------------------------------
Company terminates the employment of Purchaser without cause (as defined below)
and without Purchaser's consent, then on the Termination Date the lesser of (A)
an additional number of Unvested Shares equal to 25% of the Shares, or (B) the
remaining Unvested Shares, shall immediately become Vested Shares hereunder. For
the purposes of this Section 5, "cause" shall mean (i) Purchaser's intentional
misconduct which could reasonably be expected to have a material adverse effect
on the business and affairs of the Company, (ii) Purchaser's neglect of his
duties or failure to act which could reasonably be expected to have a material
adverse effect on the business and affairs of the Company, (iii) Purchaser's
commission of an act constituting common law fraud, or a felony or criminal act,
against the Company or any subsidiary or affiliate thereof, (iv) Purchaser's
abuse of alcohol or other drugs or controlled substances, or conviction of a
crime involving moral turpitude or (v) Purchaser's material breach of any of the
agreements contained herein or the Assignment Agreement.
(H) RIGHT OF TERMINATION UNAFFECTED. Nothing in this Agreement will
-------------------------------
be construed to limit or otherwise affect in any manner whatsoever the right or
power of the Company (or any parent, subsidiary or affiliate of the Company) to
terminate Purchaser's employment at any time for any reason or no reason, with
or without cause.
-4-
<PAGE>
6. RIGHT OF FIRST REFUSAL. Unvested Shares may not be sold or otherwise
----------------------
transferred by Purchaser without the Company's prior written consent. Before any
Vested Shares held by Purchaser or any transferee of such Shares (either being
sometimes referred to herein as the "Holder") may be sold or otherwise
------
transferred (including without limitation a transfer by gift or operation of
law), the Company and/or its assignee(s) will have a right of first refusal to
purchase the Shares to be sold or transferred (the "Offered Shares") on the
--------------
terms and conditions set forth in this Section (the "Right of First Refusal").
----------------------
(A) NOTICE OF PROPOSED TRANSFER. The Holder of the Shares will
---------------------------
deliver to the Company a written notice (the "Notice") stating: (i) the Holder's
------
bona fide intention to sell or otherwise transfer the Offered Shares; (ii) the
name of each proposed purchaser or other transferee ("Proposed Transferee");
(iii) the number of Offered Shares to be transferred to each Proposed
--------
Transferee; (iv) the bona fide cash price or other consideration for which the
- ----------
Holder proposes to transfer the Offered Shares (the "Offered Price"); and (v)
-------------
that the Holder will offer to sell the Offered Shares to the Company and/or its
assignee(s) at the Offered Price as provided in this Section.
(B) EXERCISE OF RIGHT OF FIRST REFUSAL. At any time within thirty
----------------------------------
(30) days after the date of the Notice, the Company and/or its assignee(s) may,
by giving written notice to the Holder, elect to purchase all (but not less than
all) of the Offered Shares proposed to be transferred to any one or more of the
Proposed Transferees named in the Notice, at the purchase price determined in
accordance with subsection (c) below.
(C) PURCHASE PRICE. The purchase price for the Offered Shares
--------------
purchased under this Section will be the Offered Price. If the Offered Price
includes consideration other than cash, then the value of the non-cash
consideration as determined in good faith by the Company's Board of Directors
will conclusively be deemed to be the cash equivalent value of such non-cash
consideration.
(D) PAYMENT. Payment of the purchase price for Offered Shares will be
-------
payable, at the option of the Company and/or its assignee(s) (as applicable), by
check or by cancellation of all or a portion of any outstanding indebtedness of
the Holder to the Company (or to such assignee, in the case of a purchase of
Offered Shares by such assignee) or by any combination thereof. The purchase
price will be paid without interest within sixty (60) days after the Company's
receipt of the Notice, or, at the option of the Company and/or its assignee(s),
in the manner and at the time(s) set forth in the Notice.
(E) HOLDER'S RIGHT TO TRANSFER. If all of the Offered Shares proposed
--------------------------
in the Notice to be transferred to a given Proposed Transferee are not purchased
by the Company and/or its assignee(s) as provided in this Section, then the
Holder may sell or otherwise transfer such Offered Shares to that Proposed
Transferee at the Offered Price or at a higher price, provided that such sale or
--------
other transfer is consummated within 120 days after the date of the Notice, and
provided further, that: (i) any such sale or other transfer is effected in
- -------- -------
compliance with all applicable securities laws; and (ii) the Proposed Transferee
agrees in writing that the provisions of this Section will continue to apply to
the Offered Shares in the hands of such Proposed Transferee. If the Offered
Shares described in the Notice are not transferred to the Proposed
-5-
<PAGE>
Transferee within such 120 day period, then a new Notice must be given to the
Company, and the Company will again be offered the Right of First Refusal before
any Shares held by the Holder may be sold or otherwise transferred.
(F) EXEMPT TRANSFERS. Notwithstanding anything to the contrary in
----------------
this Section, the following transfers of Shares will be exempt from the Right of
First Refusal: (i) the transfer of any or all of the Shares during Purchaser's
lifetime by gift or on Purchaser's death by will or intestacy to Purchaser's
"immediate family" (as defined below) or to a trust for the benefit of Purchaser
or Purchaser's immediate family, provided that each transferee or other
recipient agrees in a writing satisfactory to the Company that the provisions of
this Section will continue to apply to the transferred Shares in the hands of
such transferee or other recipient; (ii) any transfer of Shares made pursuant to
a statutory merger or statutory consolidation of the Company with or into
another corporation or corporations (except that the Right of First Refusal will
continue to apply thereafter to such Shares, in which case the surviving
corporation of such merger or consolidation shall succeed to the rights or the
Company under this Section unless the agreement of merger or consolidation
expressly otherwise provides); or (iii) any transfer of Shares pursuant to the
winding up and dissolution of the Company. As used herein, the term "immediate
---------
family" will mean Purchaser's spouse, lineal descendant or antecedent, father,
- ------
mother, brother or sister, adopted child or grandchild, or the spouse of any
child, adopted child, grandchild or adopted grandchild of Purchaser.
(G) TERMINATION OF RIGHT OF FIRST REFUSAL. The Right of First Refusal
-------------------------------------
will terminate as to all Shares on the effective date of the first sale of
common stock of the Company to the general public pursuant to a registration
statement filed with and declared effective by the SEC under the 1933 Act (other
than a registration statement relating solely to the issuance of common stock
pursuant to a business combination or an employee incentive or benefit plan).
(H) ENCUMBRANCES ON VESTED SHARES. Purchaser may grant a lien or
-----------------------------
security interest in, or pledge, hypothecate or encumber Vested Shares only if
each party to whom such lien or security interest is granted, or to whom such
pledge, hypothecation or other encumbrance is made, agrees in a writing
satisfactory to the Company that: (i) such lien, security interest, pledge,
hypothecation or encumbrance will not apply to such Vested Shares after they are
acquired by the Company and/or its assignees) under this Section; and (ii) the
provisions of this Section will continue to apply to such Vested Shares in the
hands of such party and any transferee of such party. Purchaser may not grant a
lien or security interest in, or pledge, hypothecate or encumber, any Unvested
Shares.
7. RIGHTS AS SHAREHOLDER. Subject to the terms and conditions of this
---------------------
Agreement, Purchaser will have all of the rights of a shareholder of the Company
with respect to the Shares from and after the date that Purchaser delivers
payment of the Purchase Price until such time as Purchaser disposes of the
Shares or the Company and/or its assignee(s) exercise(s) the Repurchase Option
or Right of First Refusal. Upon an exercise of the Repurchase Option or the
Right of First Refusal, Purchaser will have no further rights as a holder of the
Shares so purchased upon such exercise, except the right to receive payment for
the Shares so purchased in accordance with the provisions of this Agreement, and
Purchaser will promptly surrender the
-6-
<PAGE>
stock certificate(s) evidencing the Shares so purchased to the Company for
transfer or cancellation.
8. ESCROW. As security for Purchaser's faithful performance of this
------
Agreement. Purchaser agrees, immediately upon receipt of the stock
certificate(s) evidencing the Shares, to deliver such certificate(s), together
with the Stock Powers executed by Purchaser and by Purchaser's spouse, if any
(with the date and number of Shares left blank), to the Secretary of the Company
or other designee of the Company ("Escrow Holder"), who is hereby appointed to
-------------
hold such certificate(s) and Stock Powers in escrow and to take all such actions
and to effectuate all such transfers and/or releases of such Shares as are in
accordance with the terms of this Agreement. Purchaser and the Company agree
that Escrow Holder will not be liable to any party to this Agreement (or to any
other party) for any actions or omissions unless Escrow Holder is grossly
negligent or intentionally fraudulent in carrying out the duties of Escrow
Holder under this Section. Escrow Holder may rely upon any letter, notice or
other document executed by any signature purported to be genuine and may rely on
the advice of counsel and obey any order of any court with respect to the
transactions contemplated by this Agreement. The Shares will be released from
escrow upon termination of both the Repurchase Option and the Right of First
Refusal.
9. TAX CONSEQUENCES. Purchaser hereby acknowledges that Purchaser has
----------------
been informed that, unless an election is filed by the Purchaser with the
Internal Revenue Service (and, if necessary, the proper state taxing
authorities), within 30 days of the purchase of the 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 Purchase Price
of the Shares and their fair market value on the date of purchase, there will be
a recognition of taxable income to the Purchaser, measured by the excess, if
any, of the fair market value of the Vested Shares, at the time they cease to be
Unvested Shares, over the purchase price for such Shares. Purchaser represents
that Purchaser has consulted any tax consultant(s) Purchaser deems advisable in
connection with Purchaser's purchase of the Shares and the filing of the
election under Section 83(b) and similar tax provisions. A form of Election
under Section 83(b) is attached hereto as Exhibit 4 for reference. PURCHASER
---------
HEREBY ASSUMES ALL RESPONSIBILITY FOR FILING SUCH ELECTION AND PAYING ANY TAXES
RESULTING FROM SUCH ELECTION OR FOR FAILING TO FILE THE ELECTION AND PAYING
TAXES RESULTING FROM THE LAPSE OF THE REPURCHASE RESTRICTIONS ON THE UNVESTED
SHARES.
10. RESTRICTIVE LEGENDS AND STOP-TRANSFER ORDERS.
--------------------------------------------
(A) LEGENDS. Purchaser understands and agrees that the Company will
-------
place the legends set forth below or similar legends on any stock certificate(s)
evidencing the Shares, together with any other legends that may be required by
state or federal securities laws, the Company's Articles of Incorporation or
Bylaws, any other agreement between Purchaser and the Company or any agreement
between Purchaser and any third party:
-7-
<PAGE>
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR UNDER THE
SECURITIES LAWS OF CERTAIN STATES. THESE SECURITIES ARE SUBJECT TO
RESTRICTIONS ON TRANSFERABILITY AND RESALE AND MAY NOT BE TRANSFERRED
OR RESOLD EXCEPT AS PERMITTED UNDER THE ACT AND APPLICABLE STATE
SECURITIES LAWS, PURSUANT TO REGISTRATION OR EXEMPTION THEREFROM.
INVESTORS SHOULD BE AWARE THAT THEY MAY BE REQUIRED TO BEAR THE
FINANCIAL RISKS OF THIS INVESTMENT FOR AN INDEFINITE PERIOD OF TIME.
THE ISSUER OF THESE SECURITIES MAY REQUIRE AN OPINION OF COUNSEL IN
FORM AND SUBSTANCE SATISFACTORY TO THE ISSUER TO THE EFFECT THAT ANY
PROPOSED TRANSFER OR RESALE IS IN COMPLIANCE WITH THE ACT AND ANY
APPLICABLE STATE SECURITIES LAWS.
THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN
RESTRICTIONS ON PUBLIC RESALE, TRANSFER, RIGHT OF REPURCHASE AND RIGHT
OF FIRST REFUSAL OPTIONS HELD BY THE ISSUER AND/OR ITS ASSIGNEE(S) AS
SET FORTH IN A FOUNDER'S RESTRICTED STOCK PURCHASE AGREEMENT BETWEEN
THE ISSUER AND THE ORIGINAL HOLDER OF THESE SHARES, A COPY OF WHICH
MAY BE OBTAINED AT THE PRINCIPAL OFFICE OF THE ISSUER. SUCH PUBLIC
SALE AND TRANSFER RESTRICTIONS AND THE RIGHT OF REPURCHASE AND RIGHT
OF FIRST REFUSAL ARE BINDING ON TRANSFEREES OF THESE SHARES.
(B) STOP-TRANSFER INSTRUCTIONS. Purchaser agrees that, in order to
--------------------------
ensure compliance with the restrictions imposed by this Agreement, the Company
may issue appropriate "stop-transfer" instructions to its transfer agent, if
any, and if the Company transfers its own securities, it may make appropriate
notations to the same effect in its own records.
(C) REFUSAL TO TRANSFER. The Company will not be required (i) to
-------------------
transfer on its books any Shares that have been sold or otherwise transferred in
violation of any of the provisions of this Agreement or (ii) to treat as owner
of such Shares, or to accord the right to vote
-8-
<PAGE>
or pay dividends, to any purchaser or other transferee to whom such Shares have
been so transferred.
11. MARKET STANDOFF AGREEMENT. Purchaser agrees in connection with any
-------------------------
registration of the Company's securities under the 1933 Act that, upon the
request of the Company or the underwriters managing any registered public
offering of the Company's securities, Purchaser will not sell or otherwise
dispose of any Shares without the prior written consent of the Company or such
managing underwriters, as the case may be, for a period of time (not to exceed
180 days) after the effective date of such registration requested by such
managing underwriters and subject to all restrictions as the Company or the
managing underwriters may specify for employee-shareholders generally.
12. COMPLIANCE WITH LAWS AND REGULATIONS. The issuance and transfer of the
------------------------------------
Shares will be subject to and conditioned upon compliance by the Company and
Purchaser with all applicable state and federal laws and regulations and with
all applicable requirements of any stock exchange or automated quotation system
on which the Company's common stock may be listed or quoted at the time of such
issuance or transfer.
13. 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 will be binding upon and
inure to the benefit of the successors and assigns of the Company. Subject to
the restrictions on transfer herein set forth, this Agreement will be binding
upon Purchaser and Purchaser's heirs, executors, administrators, successors and
assigns.
14. GOVERNING LAW; SEVERABILITY. This Agreement will be governed by and
---------------------------
construed in accordance with the internal laws of the State of California,
excluding that body of laws pertaining to conflict of laws. 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.
15. NOTICES. Any notice required or permitted hereunder will be given in
-------
writing and will be deemed effectively given 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 its deposit with any
return receipt express courier (prepaid), or one (1) business day after
transmission by telecopier, addressed to the other party at its address (or
facsimile number, in the case of transmission by telecopier) as shown below its
signature to this Agreement, or to such other address as such party may
designate in writing from time to time to the other party.
16. FURTHER INSTRUMENTS. The parties agree to execute such further
-------------------
instruments and to take such further action as may be reasonably necessary to
carry out the purposes and intent of this Agreement.
17. HEADINGS. The captions and headings of this Agreement are included for
--------
ease of reference only and will be disregarded in interpreting or construing
this Agreement. All references herein to Sections will refer to Sections of this
Agreement.
-9-
<PAGE>
18. ENTIRE AGREEMENT. This Agreement, together with all its Exhibits,
----------------
constitutes the entire agreement and understanding of the parties with respect
to the subject matter of this Agreement, and supersedes all prior understandings
and agreements, whether oral or written, between the parties hereto with respect
to the specific subject matter hereof.
19. TITLE TO SHARES. The exact spelling of the name(s) under which
---------------
Purchaser will take title to the Shares is:
--------------------------------------------------
--------------------------------------------------
Purchaser desires to take title to the Shares as follows:
[_] Individual, as separate property
[X] Husband and wife, as community property
[_] Joint Tenants
[_] Alone or with spouse as trustee(s) of the following trust (including
date):______________________________________________________________
____________________________________________________________________
____________________________________________________________________
[_] Other; please specify:_______________________________________________
_____________________________________________________________________
Purchaser's social security number is:_________________________________________
IN WITNESS WHEREOF, the Company has caused this Agreement to be executed in
duplicate by its duly authorized representative and Purchaser has executed this
Agreement in duplicate, as of the Effective Date.
LIQUID AUDIO, INC. PURCHASER
By: /s/ Gerald W. Kearby /s/ Philip Wiser
---------------------------- --------------------------------
Gerald W. Kearby, President Philip Wiser
Address: 2421 Broadway Address: c/o 2421 Broadway
Redwood City, CA 94063 Redwood City, CA 94063
Fax: (415) 364-4217 Fax: (415) 364-4217
-10-
<PAGE>
LIST OF EXHIBITS
----------------
Exhibit 1: Assignment Agreement
Exhibit 2: Stock Power and Assignment Separate from Stock Certificate
Exhibit 3: Spousal Consent
Exhibit 4: Election Under Section 83(b) of the Internal Revenue Code
-11-
<PAGE>
ASSIGNMENT AGREEMENT
--------------------
This Assignment Agreement (this "Agreement") is made and entered into
---------
effective as of April 25, 1996 by and between Liquid Audio, Inc., a California
corporation (the "Company"). and Philip Wiser ("Assignor").
------- --------
RECITALS
--------
A. Assignor is the owner of the Assigned Rights (as defined below), and
Assignor desires to assign and transfer to the Company all of Assignor's right,
title and interest in and to the Assigned Rights and other related rights in
partial exchange for the Company's issuance to Assignor of 225,000 shares of the
Company's Common Stock.
B. The parties are entering into this Agreement pursuant to that certain
Founder's Restricted Stock Purchase Agreement by and between the Company and
Assignor dated of even date herewith (the "Stock Purchase Agreement").
------------------------
NOW THEREFORE, the parties hereby agree as follows:
1. CERTAIN DEFINITIONS. As used herein, the following terms will have the
-------------------
meanings set forth below:
1.1 Assigned Rights. The term "Assigned Rights" means all business,
--------------- ---------------
financial, marketing, development and other information, documents and works
created by me prior to the date hereof (a) using equipment, supplies, facilities
or trade secrets or other proprietary rights of the Company, (b) resulting from
work performed by me for the Company or (c) relating to the Company's business
or current or anticipated research and development, and shall include, but not
be limited to, those specifications, technology, algorithms, flow charts,
computer program source code and object code, trade secrets and know-how created
by me for encoding and decoding of audio content in digital form for storage and
retrieval (such as on a CD-ROM) and for transmission over data networks,
including but not limited to the item more fully described in Annex A attached
hereto.
1.2 Derivative. The term "Derivative" means: (a) any derivative work
---------- ----------
of the Assigned Rights (as defined in Section 101 of the U.S. Copyright Act);
(b) all improvements, modifications, alterations, adaptations, enhancements and
new versions of the Assigned Rights ("Assigned Rights Derivatives"); and (c) all
---------------------------
Assigned Rights, inventions, products or other items that, directly or
indirectly, incorporate, or are derived from, any part of the Assigned Rights or
any Assigned Rights Derivative.
1.3 Intellectual Property Rights. The term "Intellectual Property
---------------------------- ---------------------
Rights" means, collectively, all worldwide patents, patent applications
- ------
(including but not limited to the United States patent application listed on
Annex A attached hereto), patent rights, copyrights,
- -------
<PAGE>
copyright registrations, moral rights, trade names, trademarks, service marks
and registrations and applications therefor, trade secrets, know-how, mask work
rights, rights in trade dress and packaging, goodwill and all other intellectual
property rights and proprietary rights relating in any way to the Assigned
Rights, any Derivative or any Embodiment, whether arising under the laws of the
United States of America or the laws of any other state, country or
jurisdiction.
1.4 Embodiment. The term "Embodiment" means all documentation,
---------- ----------
drafts, papers, designs, schematics, diagrams, models, prototypes, source and
object code (in any form or format and for all hardware platforms), computer-
stored data, diskettes, manuscripts and other items describing all or any part
of the Assigned Rights, any Derivative, any Intellectual Property Rights or any
information related thereto or in which all of any part of the Assigned Rights,
any Derivative, any Intellectual Property Right or such information is set
forth, embodied, recorded or stored.
1.5 Assigned Assets. The term "Assigned Assets" refers to the
--------------- ---------------
Assigned Rights, all Derivatives, all Intellectual Property Rights and all
Embodiments, collectively.
2. ASSIGNMENT. In partial consideration of the issuance by the Company to
----------
Assignor of 225,000 shares of the Company's Common Stock pursuant to the Stock
Purchase Agreement, receipt of which is hereby acknowledged, Assignor hereby
forever sells, assigns, transfers, releases and conveys to the Company, and its
successors and assigns, Assignor's entire right, title and interest in and to
each and all of the Assigned Assets.
3. DELIVERY. Assignor agrees to deliver all Embodiments of all Assigned
--------
Assets to the Company at a location designated by the Company no later than May
31, 1996.
4. ASSIGNOR WARRANTIES. Assignor represents and warrants to the Company
-------------------
that Assignor is the sole owner, inventor and/or author of, and that Assignor
owns, and can grant exclusive right, title and interest in and to, each of the
Assigned Assets and that none of the Assigned Assets are subject to any dispute,
claim, prior license or other agreement, assignment, lien or rights of any third
party, or any other rights that might interfere with the Company's use, or
exercise of ownership of, any Assigned Assets. Assignor further represents and
warrants to the Company that the Assigned Assets are free of any claim of any
prior employer of Assignor or any school, university or other institution
Assignor attended, and that Assignor is not aware of any claims by any third
party to any rights of any kind in or to any of the Assigned Assets.
5. FURTHER ASSURANCES. Assignor further agrees, promptly upon request of
------------------
the Company, or any of its successors or assigns, to execute and deliver,
without further compensation of any kind, any power of attorney, assignment,
application for copyright, patent or other intellectual property right
protection, or any other papers which may be necessary or desirable to fully
secure to the Company, its successors and assigns, all right, title and interest
in and to each of the Assigned Assets, and to cooperate and assist in the
prosecution of any opposition proceedings involving said rights and any
adjudication of the same. Further, Assignor agrees never to assert any claims,
rights or moral rights in or to any of the Assigned Assets.
-2-
<PAGE>
6. INDEMNITY. Assignor will indemnify and hold the Company harmless from
---------
and against any loss, damages or expense (including without limitation
reasonable attorneys' fees) incurred by the Company in connection with any
claim, suit or other proceeding in which a third party asserts any claim to any
right, title, license or other interest in or to any Assigned Asset, any claim
that any Assigned Asset infringes any patent, copyright, trade secret or other
intellectual property right of such third party, or that, if true, would be
inconsistent with any representation made by Assignor in Section 4 above.
7. COUNTERPARTS; GOVERNING LAW. This Agreement may be executed in any
number of counterparts, each of which will constitute an original, and all of
which will together constitute this one Agreement. This Agreement will be
governed exclusively by the internal laws of the State of California.
8. ENTIRE AGREEMENT. This Agreement and the Stock Purchase Agreement
----------------
constitute the entire understanding and agreement between Assignor and the
Company regarding the subject matter of such agreements, and supersede any and
all other agreements or understandings of the parties regarding such subject
matter.
IN WITNESS WHEREOF, the undersigned have executed this Agreement effective
as of the date and year first above written.
LIQUID AUDIO, INC. ASSIGNOR
By: /s/ Gerald W. Kearby /s/ Philip Wiser
------------------------ -------------------------
Gerald W. Kearby, President Philip Wiser
-3-
<PAGE>
ANNEX A
FURTHER DESCRIPTION OF ASSIGNED RIGHTS
--------------------------------------
1. That certain patent application relating to Method and Apparatus for
Variable Bit Rate Data Compression and currently being drafted with the
assistance of Fenwick & West LLP is co-owned by Philip Wiser and A. Robert
Modeste.
2. Multitrack CD-ROM Music Interaction System. Compression and interface
design for multi-track (> 2 channels) music preview with control of level and
effects.
<PAGE>
EXHIBIT 2
---------
STOCK POWER AND ASSIGNMENT
SEPARATE FROM CERTIFICATE
FOR VALUE RECEIVED and pursuant to that certain Founder's Restricted Stock
Purchase Agreement dated as of April ___, 1996, (the "Agreement"), the
undersigned hereby sells, assigns and transfers unto ___________________,
___________ shares of the common stock of Liquid Audio, Inc., a California
corporation (the "Company"), standing in the undersigned's name on the books of
the Company represented by Certificate No(s)._____ delivered herewith, and does
hereby irrevocably constitute and appoint the Secretary of the Company as the
undersigned's attorney-in-fact, with full power of substitution, to transfer
said stock on the books of the Company. THIS ASSIGNMENT MAY ONLY BE USED AS
AUTHORIZED BY THE AGREEMENT AND THE EXHIBITS THERETO.
Dated:____________________
PURCHASER
____________________________
(Signature)
____________________________
(Please Print Name)
___________________________
(Spouse's Signature, if any)
___________________________
(Please Print Spouse's Name)
INSTRUCTION: Please do not fill in any blanks other than the signature line.
- -----------
The purpose of this Stock Power and Assignment is to enable the Company and/or
its assignee(s) to acquire the shares upon exercise of its "Repurchase Option"
and/or "Right of First Refusal" set forth in the Agreement without requiring
additional signatures on the part of the Purchaser or Purchaser's Spouse.
<PAGE>
CONSENT OF SPOUSE
-----------------
I, the undersigned, am the spouse of Philip Wiser ("Purchaser"). I have
---------
read and hereby consent to and approve all the terms and conditions of: the
Founder's Restricted Stock Purchase Agreement (the "Agreement") dated April __,
---------
1996 between Purchaser and Liquid Audio, Inc., a California corporation (the
"Company"), pursuant to which Purchaser has purchased 225,000 shares of the
-------
Company's common stock (the "Shares") and Assignment Agreement ("Assignment
------ ----------
Agreement") executed by Purchaser in connection with the Agreement.
- ---------
In consideration of the Company granting my spouse the right to purchase
the Shares under the Agreement, I hereby agree to be irrevocably bound by all
the terms and conditions of the Agreement (including but not limited to the
Company's Repurchase Option, the Right of First Refusal and the market standoff
agreements contained therein) and the Assignment Agreement and further agree
that any community property interest I may have in the Shares and all property
assigned by Purchaser to the Company under the Assignment Agreement will be
similarly bound by the Agreement and the Assignment Agreement.
I hereby appoint Purchaser as my attorney-in-fact, to act in my name, place
and stead with respect to any amendment of the Agreement and the Assignment
Agreement and with respect to the making and filing of an election under
Internal Revenue Code Section 83(b) in connection with the purchase of the
Shares.
Dated: 4/25, 1996
Deborah L. Wiser
--------------------------------
Signature of Spouse [Sign Here]
Deborah L. Wiser
--------------------------------
Name of Spouse [Please Print]
<PAGE>
EXHIBIT 4
---------
ELECTION UNDER SECTION 83(B) OF THE
INTERNAL REVENUE CODE
The undersigned Taxpayer hereby elects, pursuant to Section 83(b) of the
Internal Revenue Code, to include in gross income for the Taxpayer's current
taxable year the excess, if any, of the fair market value of the property
described below at the time of transfer over the amount paid for such property,
as compensation for services.
1. TAXPAYER'S NAME: Philip Wiser
TAXPAYER'S ADDRESS: ___________________________________
TAXPAYER'S ADDRESS: _________________________________
SOCIAL SECURITY NUMBER: ____________________________________
2. The property with respect to which the election is made is described as
follows: 225,000 shares of Common Stock of Liquid Audio, Inc., a California
corporation (the "Company"), which is Taxpayer's employer or the
-------
corporation for whom the Taxpayer performs services.
3. The date on which the shares were transferred was April __, 1996 and this
election is made for calendar year 1996.
4. The shares are subject to the following restrictions: The Company may
repurchase all or a portion of the shares at the Taxpayer's original
purchase price under certain conditions at the time of Taxpayer's
termination of employment or services.
5. The fair market value of the shares (without regard to restrictions other
than restrictions which by their terms will never lapse) was $0.005 per
share at the time of transfer.
6. The amount paid for such shares was $0.005 per share.
7. The Taxpayer has submitted a copy of this statement to the Company.
THIS ELECTION MUST BE FILED WITH THE INTERNAL REVENUE SERVICE ("IRS"), AT THE
OFFICE WHERE THE TAXPAYER FILES ANNUAL INCOME TAX RETURNS, WITHIN 30 DAYS AFTER
--------------
THE DATE OF TRANSFER OF THE PROPERTY, AND MUST ALSO BE FILED WITH THE TAXPAYER'S
INCOME TAX RETURNS FOR THE CALENDAR YEAR. THE ELECTION CANNOT BE REVOKED WITHOUT
THE CONSENT OF THE IRS.
Dated: _________________, 1996 _____________ ___________________________
Taxpayer's Signature
<PAGE>
AMENDMENT TO
FOUNDER'S RESTRICTED STOCK PURCHASE AGREEMENT
This Amendment is made and entered into as of May 31, 1996 between Liquid Audio,
Inc., a California corporation (the "Company") and Philip Wiser ("Founder")
------------
RECITALS
WHEREAS, the Company and Founder are parties to that certain Founder's
Restricted Stock Purchase Agreement dated as of April 25, 1996 (the "Founder's
Agreement");
WHEREAS, the Company and the investors listed in the Schedule of Purchasers
(the "Investors") of that certain Series A Preferred Stock Purchase Agreement of
even date herewith (the "Stock Purchase Agreement") are entering into the Stock
Purchase Agreement; and
WHEREAS, in order to induce the Investors to enter into the Stock Purchase
Agreement, the Company and Founder desire to enter into this Amendment, to amend
certain provisions of the Founder's Agreement pertaining to vesting of shares
purchased by Founder pursuant to the Founder's Agreement;
NOW, THEREFORE, in consideration of the mutual promises and covenants
hereinafter set forth, the Company and Founder hereby agree as follows:
1. The Company and Founder hereby consent to and do hereby amend the
Founder's Agreement as follows:
A. Section 5(b) of the Founder's Agreement is amended by deleting it
in its entirety and replacing it as follows:
"(b) UNVESTED AND VESTED SHARES. Shares that are not Vested Shares (as
--------------------------
defined in this Section) are "Unvested Shares." On the Effective Date, 6.25% of
---------------
the Shares will be Vested Shares and 93.75% of the Shares will be Unvested
Shares. If Purchaser has been continuously employed by the Company at all times
from the Effective Date until January 30, 1997 (the "First Vesting Date"), then
------------------
on the First Vesting Date an additional 18.75% of the Shares will become Vested
Shares; and thereafter for so long (and only so long) as Purchaser remains
continuously employed by the Company at all times after the First Vesting Date,
an additional 2.0833% of the Shares will become Vested Shares upon the
expiration of each full month elapsed after the First Vesting Date."
B. Sections 5(f) and 5(g) of the Founder's Agreement are amended by
deleting them in their entirety.
<PAGE>
2. Except as amended by this Amendment, the Founder's Agreement will
continue in full force and effect.
3. This Amendment shall be considered a part of and construed in
conjunction with the Founder's Agreement.
4. This Amendment may be executed in counterparts.
COMPANY: FOUNDER:
Liquid Audio, Inc.
a California corporation
By: /s/ Gerald W. Kearly By: /s/ Philip Wiser
------------------------- --------------------------
Philip Wiser
<PAGE>
SECOND AMENDMENT TO
FOUNDER'S RESTRICTED STOCK PURCHASE AGREEMENT
This Amendment is made and entered into as of August 27, 1997 between Liquid
Audio, Inc., a California corporation (the "Company") and Philip Wiser
("Founder").
RECITALS
WHEREAS, the Company and Founder are parties to that certain Founder's
Restricted Stock Purchase Agreement, dated as of April 25, 1996, as amended May
31, 1996 (the "Founder's Agreement"); and
WHEREAS, the Company and Founder desire to enter into this Amendment, to
amend certain provisions of the Founder's Agreement pertaining to vesting of
shares purchased by Founder pursuant to the Founder's Agreement;
NOW, THEREFORE, in consideration of the mutual promises and covenants
hereinafter set forth, the Company and Founder hereby agree as follows:
1. The Company and Founder hereby consent to and do hereby amend the
Founder's Agreement as follows:
A. Sections 5(f) and 5(g) of the Founder's Agreement are added by
inserting the following:
"(f) PARTIAL VESTING UPON CERTAIN CORPORATE TRANSACTIONS. Upon the
---------------------------------------------------
closing of (i) a merger or 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
<PAGE>
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.
(g) LIMITATION ON PAYMENTS. In the event that the accelerated vesting
----------------------
provided for in the preceding subsection (f) to Founder (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, then Founder's accelerated vesting under the
preceding subsection (f) 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 Founder on an after-tax basis,
of the greatest amount of accelerated vesting under the preceding
subsection (f), notwithstanding that all or some portion of such
accelerated vesting may be taxable under Section 4999 of the Code.
Unless the Company and Founder 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 Founder
(the "Accountants"), whose determination shall be conclusive and
-----------
binding upon Founder 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 Founder shall furnish to the Accountants
such information and documents as the Accountants
- 2 -
<PAGE>
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. Except as amended by this Amendment, the Founder's Agreement will
continue in full force and effect.
3. This Amendment shall be considered a part of and construed in
conjunction with the Founder's Agreement.
4. This Amendment may be executed in counterparts.
COMPANY: FOUNDER:
Liquid Audio, Inc.
a California corporation
By: /s/ Robert Flynn By: /s/ Philip Wiser
-------------------------------- --------------------------
Name: ROBERT FLYNN Philip Wiser
Title: SECRETARY
- 3 -
<PAGE>
EXHIBIT 10.19
FOUNDER'S RESTRICTED STOCK PURCHASE AGREEMENT
This Agreement is made and entered into as of April 25, 1996 (the
"Effective Date") between Liquid Audio, Inc. (the "Company"), a California
-------------- -------
corporation, and Robert Flynn ("Purchaser").
---------
1. PURCHASE OF SHARES. On the Effective Date and subject to the terms and
------------------
conditions of this Agreement, Purchaser hereby purchases from the Company, and
Company hereby sells to Purchaser, an aggregate of 200,000 shares of the
Company's common stock (the "Shares") at an aggregate purchase price of
$1,000.00 (the "Purchase Price") or $.005 per Share (the "Purchase Price Per
-------------- ------------------
Share"). As used in this Agreement, the term "Shares" refers to the Shares
- -----
purchased under this Agreement and includes all securities received (a) in
replacement of the Shares, (b) as a result of stock dividends or stock splits in
respect of the Shares, and (c) in replacement of the Shares in a
recapitalization, merger, reorganization or the like.
2. CONSIDERATION; CLOSING.
-----------------------
(A) CONSIDERATION PROVIDED BY PURCHASER. The consideration hereby
-----------------------------------
provided by Purchaser, in exchange for the Shares and in the amount of the full
Purchase Price, consists of (A) Purchaser's assignment to the Company of
business, financial, marketing, development and other information, documents and
works, and certain technology and related rights owned by Purchaser, such
assignment to be effected by delivery to the Company of an Assignment Agreement
in the form of Exhibit 1 (the "Assignment Agreement"), duly executed by
--------- --------------------
Purchaser, (B) the value of past services rendered by Purchaser to the Company
and (C) the cancellation of the Company's obligation to reimburse $975.00 of
expenses incurred by Purchaser on behalf of the Company. Purchaser also hereby
delivers to the Company: (i) two (2) copies of a blank Stock Power and
Assignment Separate from Stock Certificate in the form of Exhibit 2 attached
hereto (the "Stock Powers"), both executed by Purchaser (and Purchaser's spouse,
------------
if any), and (ii) if Purchaser is married, a Consent of Spouse in the form of
Exhibit 3 attached hereto (the "Spouse Consent") duly executed by Purchaser's
--------------
spouse.
(B) DELIVERIES BY THE COMPANY. Upon its receipt of all the documents
-------------------------
to be executed and delivered by Purchaser to the Company under Section 2(a), the
Company will issue a duly executed stock certificate evidencing the Shares in
the name of Purchaser as set forth in Section 19, or if not so set forth, as
specified above, with such certificate to be placed in escrow as provided in
Section 8 until expiration or termination of both the Company's Repurchase
Option and Right of First Refusal described in Sections 5 and 6, respectively.
3. REPRESENTATIONS AND WARRANTIES OF PURCHASER. Purchaser
-------------------------------------------
represents and warrants to the Company that:
(A) PURCHASE FOR OWN ACCOUNT FOR INVESTMENT. Purchaser is purchasing
---------------------------------------
the Shares for Purchaser's own account for investment purposes only and not with
a view to, or for sale in connection with, a distribution of the Shares within
the meaning of the Securities Act of
<PAGE>
1933, as amended (the "1933 Act"). Purchaser has no present intention of selling
or otherwise disposing of all or any portion of the Shares and no one other than
Purchaser has any beneficial ownership of any of the Shares.
(B) ACCESS TO INFORMATION. Purchaser has had access to all
---------------------
information regarding the Company and its present and prospective business,
assets, liabilities and financial condition that Purchaser reasonably considers
important in making the decision to purchase the Shares, and Purchaser has had
ample opportunity to ask questions of the Company's representatives concerning
such matters and this investment.
(C) UNDERSTANDING OF RISKS. Purchaser is a founder of the Company and
----------------------
is fully aware of: (i) the highly speculative nature of the investment in the
Shares; (ii) the financial hazards involved; (iii) the lack of liquidity of the
Shares and the restrictions on transferability of the Shares (e.g., that
---
Purchaser may not be able to sell or dispose of the Shares or use them as
collateral for loans); (iv) the qualifications and backgrounds of the management
of the Company; and (v) the tax consequences of investment in the Shares.
(D) PURCHASER'S QUALIFICATIONS. Purchaser has a preexisting personal
--------------------------
or business relationship with the Company and/or certain of its officers and/or
directors of a nature and duration sufficient to make Purchaser aware of the
character, business acumen and general business and financial circumstances of
the Company and/or such officers and directors. By reason of Purchaser's
business or financial experience, Purchaser is capable of evaluating the merits
and risks of this investment, has the ability to protect Purchaser's own
interests in this transaction and is financially capable of bearing a total loss
of this investment.
(E) NO GENERAL SOLICITATION. At no time was Purchaser presented with
-----------------------
or solicited by any publicly issued or circulated newspaper, mail, radio,
television or other form of general advertising or solicitation in connection
with the offer, sale and purchase of the Shares.
(F) COMPLIANCE WITH SECURITIES LAWS. Purchaser understands and
-------------------------------
acknowledges that, in reliance upon the representations and warranties made by
Purchaser herein, the Shares are not being registered with the Securities and
Exchange Commission ("SEC") under the 1933 Act or being qualified under the
California Corporate Securities Law of 1968, as amended (the "Law"), but instead
are being issued under an exemption or exemptions from the registration and
qualification requirements of the 1933 Act and the Law.
(G) RESTRICTIONS ON TRANSFER. Purchaser understands that Purchaser
------------------------
may not transfer any Shares unless such Shares are registered under the 1933 Act
or qualified under the Law or unless, in the opinion of counsel to the Company,
exemptions from such registration and qualification requirements are available.
Purchaser understands that only the Company may file a registration statement
with the SEC or the California Commissioner of Corporations and that the Company
is under no obligation to do so with respect to the Shares. Purchaser has also
been advised that exemptions from registration and qualification may not be
available or may not permit Purchaser to transfer all or any of the Shares in
the amounts or at the times proposed by Purchaser.
-2-
<PAGE>
(H) RULE 144. In addition, Purchaser has been advised that SEC Rule
144 promulgated under the 1933 Act, which permits certain limited sales of
unregistered securities, is not presently available with respect to the Shares
and, in any event, requires that the Shares be held for a minimum of two years,
and in certain cases three years, after they have been purchased and paid for
(within the meaning of Rule 144), before they may be resold under Rule 144.
4. COMPLIANCE WITH CALIFORNIA SECURITIES LAWS. THE SALE OF THE SECURITIES
------------------------------------------
THAT ARE THE SUBJECT OF THIS AGREEMENT, IF NOT YET QUALIFIED WITH THE CALIFORNIA
COMMISSIONER OF CORPORATIONS AND NOT EXEMPT FROM SUCH QUALIFICATION, IS SUBJECT
TO SUCH QUALIFICATION, AND THE ISSUANCE OF SUCH SECURITIES, AND THE RECEIPT OF
ANY PART OF THE CONSIDERATION THEREFOR PRIOR TO SUCH QUALIFICATION IS UNLAWFUL
UNLESS THE SALE IS EXEMPT. THE RIGHTS OF THE PARTIES TO THIS AGREEMENT ARE
EXPRESSLY CONDITIONED UPON SUCH QUALIFICATION BEING OBTAINED OR AN EXEMPTION
BEING AVAILABLE.
5. COMPANY'S REPURCHASE OPTION. The Company has the option to repurchase
---------------------------
all or a portion of the Unvested Shares (as defined below) on the terms and
conditions set forth in this Section (the "Repurchase Option") if Purchaser
ceases to be employed by the Company (as defined herein) for any reason, or no
reason, including without limitation Purchaser's death, disability, voluntary
resignation or termination by the Company with or without cause.
(A) DEFINITION OF "EMPLOYED BY THE COMPANY"; "TERMINATION DATE". For
----------------------------------------------------------
purposes of this Agreement, Purchaser will be considered to be "employed by the
----------------
Company" if the Board of Directors of the Company determines that Purchaser is
- -------
rendering substantial services as an officer, director, employee, consultant or
independent contractor to the Company or to any parent, subsidiary or affiliate
of the Company. In case of any dispute as to whether Purchaser is employed by
the Company, the Board of Directors of the Company will have discretion to
determine whether Purchaser has ceased to be employed by the Company or any
parent, subsidiary or affiliate of the Company and the effective date on which
Purchaser's employment terminated (the "Termination Date").
----------------
(B) UNVESTED AND VESTED SHARES. Shares that are not Vested Shares (as
--------------------------
defined in this Section) are "Unvested Shares". On the Effective Date 6.25% of
---------------
the Shares will be Vested Shares, and 93.75% of the Shares will be Unvested
Shares. If Purchaser has been continuously employed by the Company at all times
from the Effective Date until the first full month has elapsed following the
Effective Date (the "First Monthly Vesting Date"), then on the First Monthly
--------------------------
Vesting Date 2.083% of the Shares will become Vested Shares; and thereafter, for
so long (and only for so long) as Purchaser remains continuously employed by the
Company at all times after the First Monthly Vesting Date, an additional 2.083%
of the Shares will become Vested Shares upon the expiration of each full month
elapsed after the First Monthly Vesting Date.
-3-
<PAGE>
(C) ADJUSTMENTS. The number of Shares that are Vested Shares or
-----------
Unvested Shares will be proportionally adjusted to reflect any stock dividend,
stock split, reverse stock split or recapitalization of the common stock of the
Company occurring after the Effective Date.
(D) EXERCISE OF REPURCHASE OPTION AT ORIGINAL PRICE. At any time
-----------------------------------------------
within thirty (30) days after the Termination Date, the Company may elect to
repurchase any or all of the Unvested Shares by giving Purchaser written notice
of exercise of the Repurchase Option. The Company and/or its assignee(s) will
then have the option to repurchase from Purchaser (or from Purchaser's personal
representative as the case may be) any or all of the Unvested Shares at the
Purchaser's original Purchase Price Per Share (as adjusted to reflect any stock
dividend, stock split, reverse stock split or recapitalization of the common
stock of the Company occurring after the Effective Date).
(E) PAYMENT OF REPURCHASE PRICE. The repurchase price payable to
---------------------------
purchase Unvested Shares upon exercise of the Repurchase Option will be payable,
at the option of the Company or its assignee(s), by check or by cancellation of
all or a portion of any outstanding indebtedness of Purchaser to the Company (or
to such assignee) or by any combination thereof. The repurchase price will be
paid without interest within sixty (60) days after the Termination Date.
(F) TERMINATION UPON CERTAIN CORPORATE TRANSACTIONS. In the event of
-----------------------------------------------
(i) a merger or 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), (ii) a dissolution or liquidation of the Company, or (iii) the
sale of substantially all of the assets of the Company, the Company's Repurchase
Option shall immediately terminate.
(G) VESTING UPON INVOLUNTARY TERMINATION. In the event that the
------------------------------------
Company terminates the employment of Purchaser without cause (as defined below)
and without Purchaser's consent, then on the Termination Date the lesser of (A)
an additional number of Unvested Shares equal to 25% of the Shares, or (B) the
remaining Unvested Shares, shall immediately become Vested Shares hereunder. For
the purposes of this Section 5, "cause" shall mean (i) Purchaser's intentional
misconduct which could reasonably be expected to have a material adverse effect
on the business and affairs of the Company, (ii) Purchaser's neglect of his
duties or failure to act which could reasonably be expected to have a material
adverse effect on the business and affairs of the Company, (iii) Purchaser's
commission of an act constituting common law fraud, or a felony or criminal act,
against the Company or any subsidiary or affiliate thereof, (iv) Purchaser's
abuse of alcohol or other drugs or controlled substances, or conviction of a
crime involving moral turpitude or (v) Purchaser's material breach of any of the
agreements contained herein or the Assignment Agreement.
(H) RIGHT OF TERMINATION UNAFFECTED. Nothing in this Agreement will
-------------------------------
be construed to limit or otherwise affect in any manner whatsoever the right or
power of the Company (or any parent, subsidiary or affiliate of the Company) to
terminate Purchaser's employment at any time for any reason or no reason, with
or without cause.
-4-
<PAGE>
6. RIGHT OF FIRST REFUSAL. Unvested Shares may not be sold or otherwise
----------------------
transferred by Purchaser without the Company's prior written consent. Before any
Vested Shares held by Purchaser or any transferee of such Shares (either being
sometimes referred to herein as the "Holder") may be sold or otherwise
------
transferred (including without limitation a transfer by gift or operation of
law), the Company and/or its assignee(s) will have a right of first refusal to
purchase the Shares to be sold or transferred (the "Offered Shares") on the
--------------
terms and conditions set forth in this Section (the "Right of First Refusal").
----------------------
(A) NOTICE OF PROPOSED TRANSFER. The Holder of the Shares will
---------------------------
deliver to the Company a written notice (the "Notice") stating: (i) the Holder's
------
bona fide intention to sell or otherwise transfer the Offered Shares; (ii) the
name of each proposed purchaser or other transferee ("Proposed Transferee");
-------------------
(iii) the number of Offered Shares to be transferred to each Proposed
Transferee; (iv) the bona fide cash price or other consideration for which the
Holder proposes to transfer the Offered Shares (the "Offered Price"); and (v)
-------------
that the Holder will offer to sell the Offered Shares to the Company and/or its
assignee(s) at the Offered Price as provided in this Section.
(B) EXERCISE OF RIGHT OF FIRST REFUSAL. At any time within thirty
----------------------------------
(30) days after the date of the Notice, the Company and/or its assignee(s) may,
by giving written notice to the Holder, elect to purchase all (but not less than
all) of the Offered Shares proposed to be transferred to any one or more of the
Proposed Transferees named in the Notice, at the purchase price determined in
accordance with subsection (c) below.
(C) PURCHASE PRICE. The purchase price for the Offered Shares
--------------
purchased under this Section will be the Offered Price. If the Offered Price
includes consideration other than cash, then the value of the non-cash
consideration as determined in good faith by the Company's Board of Directors
will conclusively be deemed to be the cash equivalent value of such non-cash
consideration.
(D) PAYMENT. Payment of the purchase price for Offered Shares will be
-------
payable, at the option of the Company and/or its assignee(s) (as applicable), by
check or by cancellation of all or a portion of any outstanding indebtedness of
the Holder to the Company (or to such assignee, in the case of a purchase of
Offered Shares by such assignee) or by any combination thereof. The purchase
price will be paid without interest within sixty (60) days after the Company's
receipt of the Notice, or, at the option of the Company and/or its assignee(s),
in the manner and at the time(s) set forth in the Notice.
(E) HOLDER'S RIGHT TO TRANSFER. If all of the Offered Shares proposed
--------------------------
in the Notice to be transferred to a given Proposed Transferee are not purchased
by the Company and/or its assignee(s) as provided in this Section, then the
Holder may sell or otherwise transfer such Offered Shares to that Proposed
Transferee at the Offered Price or at a higher price, provided that such sale or
--------
other transfer is consummated within 120 days after the date of the Notice, and
provided further, that: (i) any such sale or other transfer is effected in
- -------- -------
compliance with all applicable securities laws; and (ii) the Proposed Transferee
agrees in writing that the provisions of this Section will continue to apply to
the Offered Shares in the hands of such Proposed Transferee. If the Offered
Shares described in the Notice are not transferred to the Proposed
-5-
<PAGE>
Transferee within such 120 day period, then a new Notice must be given to the
Company, and the Company will again be offered the Right of First Refusal before
any Shares held by the Holder may be sold or otherwise transferred.
(F) EXEMPT TRANSFERS. Notwithstanding anything to the contrary in
----------------
this Section, the following transfers of Shares will be exempt from the Right of
First Refusal: (i) the transfer of any or all of the Shares during Purchaser's
lifetime by gift or on Purchaser's death by will or intestacy to Purchaser's
"immediate family" (as defined below) or to a trust for the benefit of Purchaser
or Purchaser's immediate family, provided that each transferee or other
recipient agrees in a writing satisfactory to the Company that the provisions of
this Section will continue to apply to the transferred Shares in the hands of
such transferee or other recipient; (ii) any transfer of Shares made pursuant to
a statutory merger or statutory consolidation of the Company with or into
another corporation or corporations (except that the Right of First Refusal will
continue to apply thereafter to such Shares, in which case the surviving
corporation of such merger or consolidation shall succeed to the rights or the
Company under this Section unless the agreement of merger or consolidation
expressly otherwise provides); or (iii) any transfer of Shares pursuant to the
winding up and dissolution of the Company. As used herein, the term "immediate
---------
family" will mean Purchaser's spouse, lineal descendant or antecedent, father,
- ------
mother, brother or sister, adopted child or grandchild, or the spouse of any
child, adopted child, grandchild or adopted grandchild of Purchaser.
(G) TERMINATION OF RIGHT OF FIRST REFUSAL. The Right of First Refusal
-------------------------------------
will terminate as to all Shares on the effective date of the first sale of
common stock of the Company to the general public pursuant to a registration
statement filed with and declared effective by the SEC under the 1933 Act (other
than a registration statement relating solely to the issuance of common stock
pursuant to a business combination or an employee incentive or benefit plan).
(H) ENCUMBRANCES ON VESTED SHARES. Purchaser may grant a lien or
-----------------------------
security interest in, or pledge, hypothecate or encumber Vested Shares only if
each party to whom such lien or security interest is granted, or to whom such
pledge, hypothecation or other encumbrance is made, agrees in a writing
satisfactory to the Company that: (i) such lien, security interest, pledge,
hypothecation or encumbrance will not apply to such Vested Shares after they are
acquired by the Company and/or its assignees) under this Section; and (ii) the
provisions of this Section will continue to apply to such Vested Shares in the
hands of such party and any transferee of such party. Purchaser may not grant a
lien or security interest in, or pledge, hypothecate or encumber, any Unvested
Shares.
7. RIGHTS AS SHAREHOLDER. Subject to the terms and conditions of this
---------------------
Agreement, Purchaser will have all of the rights of a shareholder of the Company
with respect to the Shares from and after the date that Purchaser delivers
payment of the Purchase Price until such time as Purchaser disposes of the
Shares or the Company and/or its assignee(s) exercise(s) the Repurchase Option
or Right of First Refusal. Upon an exercise of the Repurchase Option or the
Right of First Refusal, Purchaser will have no further rights as a holder of the
Shares so purchased upon such exercise, except the right to receive payment for
the Shares so purchased in accordance with the provisions of this Agreement, and
Purchaser will promptly surrender the
-6-
<PAGE>
stock certificate(s) evidencing the Shares so purchased to the Company for
transfer or cancellation.
8. ESCROW. As security for Purchaser's faithful performance of this
------
Agreement, Purchaser agrees, immediately upon receipt of the stock
certificate(s) evidencing the Shares, to deliver such certificate(s), together
with the Stock Powers executed by Purchaser and by Purchaser's spouse, if any
(with the date and number of Shares left blank), to the Secretary of the Company
or other designee of the Company ("Escrow Holder"), who is hereby appointed to
-------------
hold such certificate(s) and Stock Powers in escrow and to take all such actions
and to effectuate all such transfers and/or releases of such Shares as are in
accordance with the terms of this Agreement. Purchaser and the Company agree
that Escrow Holder will not be liable to any party to this Agreement (or to any
other party) for any actions or omissions unless Escrow Holder is grossly
negligent or intentionally fraudulent in carrying out the duties of Escrow
Holder under this Section. Escrow Holder may rely upon any letter, notice or
other document executed by any signature purported to be genuine and may rely on
the advice of counsel and obey any order of any court with respect to the
transactions contemplated by this Agreement. The Shares will be released from
escrow upon termination of both the Repurchase Option and the Right of First
Refusal.
9. TAX CONSEQUENCES. Purchaser hereby acknowledges that Purchaser has
----------------
been informed that, unless an election is filed by the Purchaser with the
Internal Revenue Service (and, if necessary, the proper state taxing
authorities), within 30 days of the purchase of the 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 Purchase Price
of the Shares and their fair market value on the date of purchase, there will be
a recognition of taxable income to the Purchaser, measured by the excess, if
any, of the fair market value of the Vested Shares, at the time they cease to be
Unvested Shares, over the purchase price for such Shares. Purchaser represents
that Purchaser has consulted any tax consultant(s) Purchaser deems advisable in
connection with Purchaser's purchase of the Shares and the filing of the
election under Section 83(b) and similar tax provisions. A form of Election
under Section 83(b) is attached hereto as Exhibit 4 for reference. PURCHASER
---------
HEREBY ASSUMES ALL RESPONSIBILITY FOR FILING SUCH ELECTION AND PAYING ANY TAXES
RESULTING FROM SUCH ELECTION OR FOR FAILING TO FILE THE ELECTION AND PAYING
TAXES RESULTING FROM THE LAPSE OF THE REPURCHASE RESTRICTIONS ON THE UNVESTED
SHARES.
10. RESTRICTIVE LEGENDS AND STOP-TRANSFER ORDERS.
--------------------------------------------
(A) LEGENDS. Purchaser understands and agrees that the Company will
-------
place the legends set forth below or similar legends on any stock certificate(s)
evidencing the Shares, together with any other legends that may be required by
state or federal securities laws, the Company's Articles of Incorporation or
Bylaws, any other agreement between Purchaser and the Company or any agreement
between Purchaser and any third party:
- 7 -
<PAGE>
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR UNDER THE
SECURITIES LAWS OF CERTAIN STATES. THESE SECURITIES ARE SUBJECT
TO RESTRICTIONS ON TRANSFERABILITY AND RESALE AND MAY NOT BE
TRANSFERRED OR RESOLD EXCEPT AS PERMITTED UNDER THE ACT AND
APPLICABLE STATE SECURITIES LAWS, PURSUANT TO REGISTRATION OR
EXEMPTION THEREFROM. INVESTORS SHOULD BE AWARE THAT THEY MAY BE
REQUIRED TO BEAR THE FINANCIAL RISKS OF THIS INVESTMENT FOR AN
INDEFINITE PERIOD OF TIME. THE ISSUER OF THESE SECURITIES MAY
REQUIRE AN OPINION OF COUNSEL IN FORM AND SUBSTANCE SATISFACTORY
TO THE ISSUER TO THE EFFECT THAT ANY PROPOSED TRANSFER OR RESALE
IS IN COMPLIANCE WITH THE ACT AND ANY APPLICABLE STATE SECURITIES
LAWS.
THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN
RESTRICTIONS ON PUBLIC RESALE, TRANSFER, RIGHT OF REPURCHASE AND
RIGHT OF FIRST REFUSAL OPTIONS HELD BY THE ISSUER AND/OR ITS
ASSIGNEE(S) AS SET FORTH IN A FOUNDER'S RESTRICTED STOCK PURCHASE
AGREEMENT BETWEEN THE ISSUER AND THE ORIGINAL HOLDER OF THESE
SHARES, A COPY OF WHICH MAY BE OBTAINED AT THE PRINCIPAL OFFICE
OF THE ISSUER. SUCH PUBLIC SALE AND TRANSFER RESTRICTIONS AND THE
RIGHT OF REPURCHASE AND RIGHT OF FIRST REFUSAL ARE BINDING ON
TRANSFEREES OF THESE SHARES.
(B) STOP-TRANSFER INSTRUCTIONS. Purchaser agrees that, in order to
--------------------------
ensure compliance with the restrictions imposed by this Agreement, the Company
may issue appropriate "stop-transfer" instructions to its transfer agent, if
any, and if the Company transfers its own securities, it may make appropriate
notations to the same effect in its own records.
(C) REFUSAL TO TRANSFER. The Company will not be required (i) to
-------------------
transfer on its books any Shares that have been sold or otherwise transferred in
violation of any of the provisions of this Agreement or (ii) to treat as owner
of such Shares, or to accord the right to vote
-8-
<PAGE>
or pay dividends, to any purchaser or other transferee to whom such Shares have
been so transferred.
11. MARKET STANDOFF AGREEMENT. Purchaser agrees in connection with any
-------------------------
registration of the Company's securities under the 1933 Act that, upon the
request of the Company or the underwriters managing any registered public
offering of the Company's securities, Purchaser will not sell or otherwise
dispose of any Shares without the prior written consent of the Company or such
managing underwriters, as the case may be, for a period of time (not to exceed
180 days) after the effective date of such registration requested by such
managing underwriters and subject to all restrictions as the Company or the
managing underwriters may specify for employee-shareholders generally.
12. COMPLIANCE WITH LAWS AND REGULATIONS. The issuance and transfer of the
------------------------------------
Shares will be subject to and conditioned upon compliance by the Company and
Purchaser with all applicable state and federal laws and regulations and with
all applicable requirements of any stock exchange or automated quotation system
on which the Company's common stock may be listed or quoted at the time of such
issuance or transfer.
13. 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 will be binding upon and
inure to the benefit of the successors and assigns of the Company. Subject to
the restrictions on transfer herein set forth, this Agreement will be binding
upon Purchaser and Purchaser's heirs, executors, administrators, successors and
assigns.
14. GOVERNING LAW; SEVERABILITY. This Agreement will be governed by and
---------------------------
construed in accordance with the internal laws of the State of California,
excluding that body of laws pertaining to conflict of laws. 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.
15. NOTICES. Any notice required or permitted hereunder will be given in
-------
writing and will be deemed effectively given 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 its deposit with any
return receipt express courier (prepaid), or one (1) business day after
transmission by telecopier, addressed to the other party at its address (or
facsimile number, in the case of transmission by telecopier) as shown below its
signature to this Agreement, or to such other address as such party may
designate in writing from time to time to the other party.
16. FURTHER INSTRUMENTS. The parties agree to execute such further
-------------------
instruments and to take such further action as may be reasonably necessary to
carry out the purposes and intent of this Agreement.
17. HEADINGS. The captions and headings of this Agreement are included for
--------
ease of reference only and will be disregarded in interpreting or construing
this Agreement. All references herein to Sections will refer to Sections of this
Agreement.
-9-
<PAGE>
18. ENTIRE AGREEMENT. This Agreement, together with all its Exhibits,
----------------
constitutes the entire agreement and understanding of the parties with respect
to the subject matter of this Agreement, and supersedes all prior understandings
and agreements, whether oral or written, between the parties hereto with respect
to the specific subject matter hereof.
19. TITLE TO SHARES. The exact spelling of the name(s) under which
---------------
Purchaser will take title to the Shares is:
--------------------------------------------------
--------------------------------------------------
Purchaser desires to take title to the Shares as follows:
[X] Individual, as separate property
[_] Husband and wife, as community property
[_] Joint Tenants
[_] Alone or with spouse as trustee(s) of the
following trust (including date):_____________________________________
______________________________________________________________________
______________________________________________________________________
[_] Other; please specify:________________________________________________
______________________________________________________________________
Purchaser's social security number is:__________________________________________
IN WITNESS WHEREOF, the Company has caused this Agreement to be executed in
duplicate by its duly authorized representative and Purchaser has executed this
Agreement in duplicate, as of the Effective Date.
LIQUID AUDIO, INC. PURCHASER
By: /s/ Gerald W. Kearby /s/ Robert Flynn
-------------------------- ----------------------------------
Gerald W. Kearby, President Robert Flynn
Address: 2421 Broadway Address: c/o 2421 Broadway
Redwood City, CA 94063 Redwood City, CA 94063
Fax: (415) 364-4217 Fax: (415) 364-4217
-10-
<PAGE>
LIST OF EXHIBITS
----------------
Exhibit 1: Assignment Agreement
Exhibit 2: Stock Power and Assignment Separate from Stock Certificate
Exhibit 3: Spousal Consent
Exhibit 4: Election Under Section 83(b) of the Internal Revenue Code
-11-
<PAGE>
ASSIGNMENT AGREEMENT
--------------------
This Assignment Agreement (this "Agreement") is made and entered into
---------
effective as of April 25, 1996 by and between Liquid Audio, Inc., a California
corporation (the "Company"), and Robert Flynn ("Assignor").
------- --------
RECITALS
--------
A. Assignor is the owner of the Assigned Rights (as defined below), and
Assignor desires to assign and transfer to the Company all of Assignor's right,
title and interest in and to the Assigned Rights and other related rights in
partial exchange for the Company's issuance to Assignor of 200,000 shares of the
Company's Common Stock.
B. The parties are entering into this Agreement pursuant to that certain
Founder's Restricted Stock Purchase Agreement by and between the Company and
Assignor dated of even date herewith (the "Stock Purchase Agreement").
------------------------
NOW THEREFORE, the parties hereby agree as follows:
1. CERTAIN DEFINITIONS. As used herein, the following terms will have the
-------------------
meanings set forth below:
1.1 Assigned Rights. The term "Assigned Rights" means all business,
--------------- ---------------
financial, marketing, development and other information, documents and works
created by me prior to the date hereof (a) using equipment, supplies, facilities
or trade secrets or other proprietary rights of the Company, (b) resulting from
work performed by me for the Company or (c) relating to the Company's business
or current or anticipated research and development, and shall include, but not
be limited to, those specifications, technology, algorithms, flow charts,
computer program source code and object code, trade secrets and know-how created
by me for encoding and decoding of audio content in digital form for storage and
retrieval (such as on a CD-ROM) and for transmission over data networks.
1.2 Derivative. The term "Derivative" means: (a) any derivative work
---------- ----------
of the Assigned Rights (as defined in Section 101 of the U.S. Copyright Act);
(b) all improvements, modifications, alterations, adaptations, enhancements and
new versions of the Assigned Rights ("Assigned Rights Derivatives"); and (c) all
---------------------------
Assigned Rights, inventions, products or other items that, directly or
indirectly, incorporate, or are derived from, any part of the Assigned Rights or
any Assigned Rights Derivative.
1.3 Intellectual Property Rights. The term "Intellectual Property
---------------------------- ---------------------
Rights" means, collectively, all worldwide patents, patent applications, patent
- ------
rights, copyrights, copyright registrations, moral rights, trade names,
trademarks, service marks and registrations and applications therefor, trade
secrets, know-how, mask work rights, rights in trade dress and
<PAGE>
packaging, goodwill and all other intellectual property rights and proprietary
rights relating in any way to the Assigned Rights, any Derivative or any
Embodiment, whether arising under the laws of the United States of America or
the laws of any other state, country or jurisdiction.
1.4 Embodiment. The term "Embodiment" means all documentation,
---------- ----------
drafts, papers, designs, schematics, diagrams, models, prototypes, source and
object code (in any form or format and for all hardware platforms), computer-
stored data, diskettes, manuscripts and other items describing all or any part
of the Assigned Rights, any Derivative, any Intellectual Property Rights or any
information related thereto or in which all of any part of the Assigned Rights,
any Derivative, any Intellectual Property Right or such information is set
forth, embodied, recorded or stored.
1.5 Assigned Assets. The term "Assigned Assets" refers to the
--------------- ---------------
Assigned Rights, all Derivatives, all Intellectual Property Rights and all
Embodiments, collectively.
2. ASSIGNMENT. In partial consideration of the issuance by the Company to
----------
Assignor of 200,000 shares of the Company's Common Stock pursuant to the Stock
Purchase Agreement, receipt of which is hereby acknowledged, Assignor hereby
forever sells, assigns, transfers, releases and conveys to the Company, and its
successors and assigns, Assignor's entire right, title and interest in and to
each and all of the Assigned Assets.
3. DELIVERY. Assignor agrees to delivery all Embodiments of all Assigned
--------
Assets to the Company at a location designated by the Company no later than May
31, 1996.
4. ASSIGNOR WARRANTIES. Assignor represents and warrants to the Company
-------------------
that Assignor is the sole owner, inventor and/or author of, and that Assignor
owns, and can grant exclusive right, title and interest in and to, each of the
Assigned Assets and that none of the Assigned Assets are subject to any dispute,
claim, prior license or other agreement, assignment, lien or rights of any third
party, or any other rights that might interfere with the Company's use, or
exercise of ownership of, any Assigned Assets. Assignor further represents and
warrants to the Company that the Assigned Assets are free of any claim of any
prior employer of Assignor or any school, university or other institution
Assignor attended, and that Assignor is not aware of any claims by any third
party to any rights of any kind in or to any of the Assigned Assets.
5. FURTHER ASSURANCES. Assignor further agrees, promptly upon request of
------------------
the Company, or any of its successors or assigns, to execute and deliver,
without further compensation of any kind, any power of attorney, assignment,
application for copyright, patent or other intellectual property right
protection, or any other papers which may be necessary or desirable to fully
secure to the Company, its successors and assigns, all right, title and interest
in and to each of the Assigned Assets, and to cooperate and assist in the
prosecution of any opposition proceedings involving said rights and any
adjudication of the same. Further, Assignor agrees never to assert any claims,
rights or moral rights in or to any of the Assigned Assets.
6. INDEMNITY. Assignor will indemnify and hold the Company harmless from
---------
and against any loss, damages or expense (including without limitation
reasonable attorneys' fees) incurred by the Company in connection with any
claim, suit or other proceeding in which a third
-2-
<PAGE>
party asserts any claim to any right, title, license or other interest in or to
any Assigned Asset, any claim that any Assigned Asset infringes any patent,
copyright, trade secret or other intellectual property right of such third
party, or that, if true, would be inconsistent with any representation made by
Assignor in Section 4 above.
7. COUNTERPARTS; GOVERNING LAW. This Agreement may be executed in any
---------------------------
number of counterparts, each of which will constitute an original, and all of
which will together constitute this one Agreement. This Agreement will be
governed exclusively by the internal laws of the State of California.
8. ENTIRE AGREEMENT. This Agreement and the Stock Purchase Agreement
----------------
constitute the entire understanding and agreement between Assignor and the
Company regarding the subject matter of such agreements, and supersede any and
all other agreements or understandings of the parties regarding such subject
matter.
IN WITNESS WHEREOF, the undersigned have executed this Agreement effective
as of the date and year first above written.
LIQUID AUDIO, INC. ASSIGNOR
By: /s/ Gerald W. Kearby /s/ Robert Flynn
--------------------------- -----------------------
Gerald W. Kearby, President Robert Flynn
-3-
<PAGE>
ELECTION UNDER SECTION 83(B) OF THE
INTERNAL REVENUE CODE
The undersigned Taxpayer hereby elects, pursuant to Section 83(b) of the
Internal Revenue Code, to include in gross income for the Taxpayer's current
taxable year the excess, if any, of the fair market value of the property
described below at the time of transfer over the amount paid for such property,
as compensation for services.
1. TAXPAYER'S NAME: Robert Flynn
TAXPAYER'S ADDRESS: 6430 W. 6th Street
------------------
Los Angles, CA 90648
--------------------
SOCIAL SECURITY NUMBER: ###-##-####
-----------
2. The property with respect to which the election is made is described as
follows: 200,000 shares of Common Stock of Liquid Audio, Inc., a California
corporation (the "Company"), which is Taxpayer's employer or the
-------
corporation for whom the Taxpayer performs services.
3. The date on which the shares were transferred was April 25, 1996 and this
election is made for calendar year 1996.
4. The shares are subject to the following restrictions: The Company may
repurchase all or a portion of the shares at the Taxpayer's original
purchase price under certain conditions at the time of Taxpayer's
termination of employment or services.
5. The fair market value of the shares (without regard to restrictions other
than restrictions which by their terms will never lapse) was $0.005 per
share at the time of transfer.
6. The amount paid for such shares was $0.005 per share.
7. The Taxpayer has submitted a copy of this statement to the Company.
THIS ELECTION MUST BE FILED WITH THE INTERNAL REVENUE SERVICE ("IRS"), AT THE
---
OFFICE WHERE THE TAXPAYER FILES ANNUAL INCOME TAX RETURNS, WITHIN 30 DAYS AFTER
--------------
THE DATE OF TRANSFER OF THE PROPERTY, AND MUST ALSO BE FILED WITH THE TAXPAYER'S
INCOME TAX RETURNS FOR THE CALENDAR YEAR. THE ELECTION CANNOT BE REVOKED WITHOUT
THE CONSENT OF THE IRS.
Dated: April 25, 1996 /s/ [SIGNATURE ILLEGIBLE]
-------- -------------------------------
Taxpayer's Signature
<PAGE>
AMENDMENT TO
FOUNDER'S RESTRICTED STOCK PURCHASE AGREEMENT
This Amendment is made and entered into as of May 31, 1996 between Liquid Audio,
Inc., a California corporation (the "Company") and Robert Flynn ("Founder")
RECITALS
WHEREAS, the Company and Founder are parties to that certain Founder's
Restricted Stock Purchase Agreement dated as of April 25, 1996 (the "Founder's
Agreement");
WHEREAS, the Company and the investors listed in the Schedule of Purchasers
(the "Investors") of that certain Series A Preferred Stock Purchase Agreement of
even date herewith (the "Stock Purchase Agreement") are entering into the Stock
Purchase Agreement; and
WHEREAS, in order to induce the Investors to enter into the Stock Purchase
Agreement, the Company and Founder desire to enter into this Amendment, to amend
certain provisions of the Founder's Agreement pertaining to vesting of shares
purchased by Founder pursuant to the Founder's Agreement;
NOW, THEREFORE, in consideration of the mutual promises and covenants
hereinafter set forth, the Company and Founder hereby agree as follows:
1. The Company and Founder hereby consent to and do hereby amend the
Founder's Agreement as follows:
A. Section 5(b) of the Founder's Agreement is amended by deleting it
in its entirety and replacing it as follows:
"(B) UNVESTED AND VESTED SHARES. Shares that are not Vested Shares (as
--------------------------
defined in this Section) are "Unvested Shares." On the Effective Date, none of
---------------
the Shares will be Vested Shares and all of the Shares will be Unvested Shares.
If Purchaser has been continuously employed by the Company at all times from the
Effective Date until January 30, 1997 (the "First Vesting Date"), then on the
------------------
First Vesting Date twenty-five percent (25%) of the Shares will become Vested
Shares; and thereafter for so long (and only so long) as Purchaser remains
continuously employed by the Company at all times after the First Vesting Date,
an additional 2.0833% of the Shares will become Vested Shares upon the
expiration of each full month elapsed after the First Vesting Date."
B. Sections 5(f) and 5(g) of the Founder's Agreement are amended by
deleting them in their entirety.
2. Except as amended by this Amendment, the Founder's Agreement will
continue in full force and effect.
<PAGE>
3. This Amendment shall be considered a part of and construed in
conjunction with the Founder's Agreement.
4. This Amendment may be executed in counterparts.
COMPANY: FOUNDER:
Liquid Audio, Inc.
a California corporation
By: /s/ Gerald W. Kearby By: /s/ Robert Flynn
-------------------------- --------------------
Robert Flynn
<PAGE>
SECOND AMENDMENT TO
FOUNDER'S RESTRICTED STOCK PURCHASE AGREEMENT
This Amendment is made and entered into as of August 27, 1997 between Liquid
Audio, Inc., a California corporation (the "Company") and Robert Flynn
("Founder").
RECITALS
WHEREAS, the Company and Founder are parties to that certain Founder's
Restricted Stock Purchase Agreement, dated as of April 25, 1996, as amended May
31, 1996 (the "Founder's Agreement"); and
WHEREAS, the Company and Founder desire to enter into this Amendment, to
amend certain provisions of the Founder's Agreement pertaining to vesting of
shares purchased by Founder pursuant to the Founder's Agreement;
NOW, THEREFORE, in consideration of the mutual promises and covenants
hereinafter set forth, the Company and Founder hereby agree as follows:
1. The Company and Founder hereby consent to and do hereby amend the
Founder's Agreement as follows:
A. Sections 5(f) and 5(g) of the Founder's Agreement are added by
inserting the following:
"(f) PARTIAL VESTING UPON CERTAIN CORPORATE TRANSACTIONS.
---------------------------------------------------
Upon the closing of (i) a merger or 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
<PAGE>
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.
(g) LIMITATION ON PAYMENTS. In the event that the
----------------------
accelerated vesting provided for in the preceding subsection
(f) to Founder (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, then Founder's accelerated vesting
under the preceding subsection (f) 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 Founder on an after-tax basis, of the greatest amount of
accelerated vesting under the preceding subsection (f),
notwithstanding that all or some portion of such accelerated
vesting may be taxable under Section 4999 of the Code.
Unless the Company and Founder 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 Founder (the "Accountants"), whose
-----------
determination shall be conclusive and binding upon Founder
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 Founder shall
furnish to the Accountants such information and documents as
the Accountants
-2-
<PAGE>
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. Except as amended by this Amendment, the Founder's Agreement will
continue in full force and effect.
3. This Amendment shall be considered a part of and construed in
conjunction with the Founder's Agreement.
4. This Amendment may be executed in counterparts.
COMPANY: FOUNDER:
Liquid Audio, Inc.
a California corporation
By: /s/ Gerald Kearby By: /s/ Robert Flynn
-------------------- ---------------------
Name: Robert Flynn
Title:
-3-
<PAGE>
EXHIBIT 10.20
[LETTERHEAD APPEARS HERE]
October 2, 1996 2401 Kerner Boulevard
VIA FEDERAL EXPRESS/FACSIMILE San Rafael, California 94901-5329
- ----------------------------- (415) 485-4300
Mr. Robert Flynn
Liquid Audio, Inc.
2421 Broadway
Redwood City, CA. 94063
Re: Master Equipment Lease Agreement No. 0044
and Ancillary Documents
Dear Mr. Flynn:
I enclose for review the following draft documents relating to the Lease
facility that Phoenix Leasing is to extend to Liquid Audio, Inc. described in
our commitment letter dated September 18, 1996.
1. Master Equipment Lease Agreement (the "Lease");
2. Closing Memorandum (Exhibit A to the Lease);
3. Schedule No. 1 to the Lease;
4. Acceptance Notice to Schedule No. 1 of the Lease;
5. Sale Leaseback Addendum with Bill of Sale;
6. Real Property Waiver Documents (required if Equipment is deemed to be
fixtures). Please remit to your landlord ASAP for signature;
7. Officer's Certificate;
8. Corporate Resolution to Lease and;
9. Insurance Request: (Please send to your insurance agent along for
processing.)
You have been, or soon will be, contacted by Sheila Deignan, Contract
Coordinator. Sheila can answer any questions you may have concerning the
equipment to be funded under your lease with PLI. PLI handles its documentation
and equipment funding as parallel procedures. If you wish funding promptly after
signing the lease papers, you should provide Sheila your equipment list and
supporting documentation in tandem with the preparation of this lease. Sheila
can be reached at (415) 485-4784.
I will assist on any questions concerning the enclosed documents and can be
reached directly at (415) 485-4642.
Sincerely,
/s/ M. Peterson
Margaret Peterson
Documentation Manager
Enclosures
cc: Harry Boadwee, ESQ/Fenwick & West
Tom Morrison (w/encl.)
Andrew Ferguson (w/o encl.)
<PAGE>
MASTER EQUIPMENT LEASE NO. 0044
Under this Master Equipment Lease No. 0044 (the "Lease"), dated as of October
15, 1996, PHOENIX LEASING INCORPORATED, a California corporation ("Lessor"),
hereby leases to LIQUID AUDIO, INC., a California corporation ("Lessee"), and
Lessee hereby leases from Lessor, the equipment (herein called "Equipment")
which is described on the schedule attached hereto or any subsequently-executed
schedule entered into by Lessor and Lessee and which incorporates this Lease by
reference. Any such schedules shall hereinafter individually be referred to as a
"Schedule" and collectively be referred to as the "Schedules." Lessor hereby
leases the Equipment to Lessee upon the following terms and conditions:
1. TERM OF AGREEMENT. The term of this Lease begins on the date set forth
above and shall continue thereafter and be in effect so long as and at any time
any Schedule entered into pursuant to this Lease is in effect. The Initial Term
and rent payable with respect to each leased item of Equipment shall be as set
forth in and as stated in the respective Schedule(s). The terms of each Schedule
hereto are subject to all conditions and provisions of this Lease as it may at
any time be amended. Each Schedule shall constitute a separate and independent
lease and contractual obligation of Lessee and shall incorporate the terms and
conditions of this Master Equipment Lease and any additional provisions
contained in such Schedule. In the event of a conflict between the terms and
conditions of this Lease and any additional provisions of such Schedule, the
additional provisions of such Schedule shall prevail with respect to such
Schedule only.
2. NON-CANCELLABLE LEASE. This Lease and any Schedule cannot be cancelled
or terminated except as expressly provided herein. This Lease (including all
Schedules to this Lease) constitutes a net lease and Lessee agrees that its
obligations to pay all rent and other sums payable hereunder (and under any
Schedule) and the rights of Lessor and assignee in and to such rent and other
sums, are absolute and unconditional and are not subject to any abatement,
reduction, setoff, defense, counterclaim or recoupment due or alleged to be due
to, or by reason of, any past, present or future claims which Lessee may have
against Lessor, any assignee, the manufacturer or seller of the Equipment, or
against any person for any reason whatsoever.
3. LESSOR COMMITMENT. So long as no Event of Default or event which with
the giving of notice or passage of time, or both, could become an Event of
Default has occurred or is continuing, Lessor agrees to lease to Lessee the
groups of Equipment described on each Schedule, subject to the following
conditions: (i) that in no event shall Lessor be obligated to lease Equipment to
Lessee hereunder where the aggregate purchase price of all Equipment leased to
Lessee hereunder would exceed $200,000 ("Commitment") of which amount Lessor may
finance soft costs such as installation and delivery costs, purchase tax,
software, tooling and items generally considered fungible or expendable for
lease to Lessee having an aggregate purchase price not exceeding an amount equal
to 10% of the utilized Commitment; (ii) the amount of Equipment purchased by
Lessor at any one time shall be at least equal to $25,000 except for a final
advance which may be less than $25,000; (iii) Lessor shall not be obligated to
purchase Equipment hereunder after June 30, 1997, provided that the funding
period may be extended to July 31, 1997 if Lessor has received and approved in
its sole discretion Lessee's monthly 1997 financial plan; (iv) all Lease
documentation required by Lessor has been executed by Lessee or provided by
Lessee no later than October 31, 1996; (v) the equipment described on the
Schedule is acceptable to Lessor; (vi) with respect to each funding Lessee has
provided to Lessor each of the closing documents and other items described in
Exhibit A hereto (which documents shall be in form and substance acceptable to
Lessor) and which list may be modified for each subsequent funding; (vii) there
is no material adverse change in Lessee's condition, financial or otherwise, as
determined by Lessor, and Lessee so certifies, from
-1-
<PAGE>
(yy) the date of the most recent financial statements delivered by Lessee to
Lessor prior to execution of this Lease, to (zz) the date of the proposed lease
of the Equipment; (viii) at all fundings Lessee is performing according to its
business plan referred to as "Projected Cash Flow Position, Income and Cash
Balance Only" dated September 4, 1996, consisting of 2 pages, as may be amended
from time to time by Lessee's 1997 financial plan, and otherwise in form and
substance acceptable to Lessor (collectively, the "Business Plan"); (ix) Lessor
or its agent has inspected and placed identification labels on the Equipment:
and (x) Lessor has received in form and substance acceptable to Lessor: (a)
Lessee's interim financial statements signed by a financial officer of Lessee;
and (b) hard copy evidence of Lessee's $1,700,000 cash position as of June 30,
1996.
4. NO WARRANTIES BY LESSOR. (a) Lessee has selected both (i) the Equipment
and (ii) the suppliers (herein called "Vendor") from whom Lessor is to purchase
the Equipment. LESSOR MAKES NO WARRANTY EXPRESS OR IMPLIED AS TO ANY MATTER
WHATSOEVER, INCLUDING THE CONDITION OF THE EQUIPMENT, ITS MERCHANTABILITY OR ITS
FITNESS FOR ANY PARTICULAR PURPOSE, AND AS TO LESSOR, LESSEE LEASES THE
EQUIPMENT "AS IS" AND WITH ALL FAULTS. (b) If the Equipment is not properly
installed, does not operate as represented or warranted by Vendor or is
unsatisfactory for any reason, Lessee shall make any claim on account thereof
solely against Vendor and shall, nevertheless, pay Lessor all rent payable under
this Lease, Lessee hereby waiving any such claims as against Lessor. Lessor
hereby agrees to assign to Lessee solely for the purpose of making and
prosecuting any said claim, to the extent assignable, all of the rights which
Lessor has against Vendor for breach of warranty or other representation
respecting the Equipment. Lessor shall have no responsibility for delay or
failure to fill the order. (c) Lessee understands and agrees that neither the
Vendor nor any salesman or other agent of the Vendor is an agent of Lessor. No
salesman or agent of Vendor is authorized to waive or alter any term or
condition of this Lease, and no representations as to the Equipment or any other
matter by the Vendor shall in any way affect Lessee's duty to pay the rent and
perform its others obligations as set forth in this Lease. (d) Lessee hereby
requests Lessor to purchase Equipment from Vendor and to lease Equipment to
Lessee on the terms and conditions of the Lease set forth herein. (e) Lessee
hereby authorizes Lessor to insert in this Lease and each Schedule hereto the
serial numbers and other identification data of the Equipment when determined by
Lessor.
5. LESSEE'S REPRESENTATIONS AND WARRANTIES. Lessee represents and warrants
that (a) it is a corporation in good standing under the laws of the state of its
incorporation, and duly qualified to do business, and will remain duly qualified
during the term of this Lease, in each state where the Equipment will be
located, as specified on each Schedule hereto; (b) it has full authority to
execute and deliver this Lease and perform the terms hereof, and this Lease has
been duly authorized and constitutes valid and binding obligations of Lessee
enforceable in accordance with its terms; (c) this Lease will not contravene any
law, regulation or judgment affecting Lessee or result in any breach of any
agreement or other instrument binding on Lessee; (d) no consent of Lessee's
shareholders or holder of any indebtedness, or filing with, or approval of, any
governmental agency or commission, is a condition to the performance of the
terms hereof; (e) there is no action or proceeding pending or threatened against
Lessee before any court or administrative agency which might have a materially
adverse effect on the business, financial condition or operations of Lessee; (f)
no deed of trust, mortgage or third party interest arising through Lessee will
attach to the Equipment or the Lease; (g) the Equipment will remain at all times
under applicable law, removable personal property, free and clear of any lien or
encumbrance in favor of Lessee or any other person, notwithstanding the manner
in which the Equipment may be attached to any real property; (h) all credit,
financial and any other information submitted to Lessor herewith or any other
time is true and correct; and (i) Lessee has provided, or will provide if
requested, Lessee's tax identification number.
-2-
<PAGE>
6. EQUIPMENT ORDERING. Lessee shall be responsible for all packing,
rigging, transportation and installation charges for the Equipment and Lessor
may separately invoice Lessee for such charges. Lessee has selected the
Equipment itself and shall arrange for delivery of Equipment so that it can be
accepted in accordance with Section 7 hereof. Lessee hereby agrees to indemnify
and hold Lessor harmless from any claims, liabilities, costs and expenses,
including reasonable attorneys' fees, incurred by Lessor arising out of any
purchase orders or assignments executed by Lessor with respect to any Equipment
or services relating thereto.
7. LESSEE ACCEPTANCE. Lessee shall return to Lessor the signed and dated
Acceptance Notice attached to each Schedule hereto (a) acknowledging the
Equipment has been received, installed and is ready for use and (b) accepting it
as satisfactory in all respects for the purposes of this Lease. Lessor is
authorized to fill in the Rent Start Date on each Schedule in accordance with
the foregoing.
8. LOCATION; INSPECTION; LABELS. Equipment shall be delivered to and shall
not be removed from the Equipment "Location" shown on each Schedule without
Lessor's prior written consent, which "Location" shall in all events be within
the United States. Lessor shall have the right to inspect Equipment at any
reasonable time. Lessee shall be responsible for all labor, material and freight
charges incurred in connection with any removal or relocation of such Equipment
which is requested by the Lessee and consented to by Lessor, as well as for any
charges due to the installation or moving of the Equipment. The rental payments
shall continue during any period in which the Equipment is in transit during a
relocation. Lessor or its agent shall mark and label Equipment, which labels
shall state Equipment is owned by Lessor, and Lessee shall keep such labels on
the Equipment as labeled by Lessor or its agent.
9. EQUIPMENT MAINTENANCE. (a) General. Lessee will locate or base each
-------
item of Equipment where designated in an Acceptance Notice and will reasonably
permit Lessor to inspect such item of Equipment and its maintenance records.
Lessee will at its sole expense comply with all applicable laws, rules,
regulations, requirements and orders with respect to the use, maintenance,
repair, condition, storage and operation of each item of Equipment. Except as
required herein, Lessee will not make any addition or improvement to any item of
Equipment that is not readily removable without causing material damage to any
item or impairing its original value or utility. Any addition or improvement
that is so required or cannot be so removed will immediately become the property
of Lessor. (b) Service and Repair. With respect to computer equipment, other
------------------
than personal computers, Lessee has entered into, and will maintain in effect,
Vendor's standard maintenance contract or another contract satisfactory to
Lessor for a period equal to the term of each Schedule and extensions thereto
which provides for the maintenance of the Equipment and repairs and replacement
parts thereof in good condition and working order, all in accordance with the
terms of such maintenance contract. Lessee shall have the Equipment certified
for the Vendor's standard maintenance agreement prior to delivery to Lessor upon
expiration of this Lease. With respect to any other Equipment, Lessee will, at
its sole expense, maintain and service, and repair any damage to, each item of
Equipment in a manner consistent with prudent industry practice and Lessee's own
practice so that such item of Equipment is at all times (i) in the same
condition as when delivered to Lessee, except for ordinary wear and tear, (ii)
in good operating order for the function intended by its manufacturer's
warranties and recommendations.
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<PAGE>
10. LOSS OR DAMAGE. Lessee assumes the entire risk of loss to the
Equipment through use, operation or otherwise. Lessee hereby indemnifies and
holds harmless Lessor from and against all claims, loss of rental payments,
costs, damages, and expenses relating to or resulting from any loss, damage or
destruction of the Equipment, any such occurrence being hereinafter called a
"Casualty Occurrence." On the first rental payment date following such Casualty
Occurrence, or, if there is no such rental payment date, thirty (30) days after
such Casualty Occurrence, Lessee shall (i) repair the Equipment, returning it to
good operating condition or (ii) replace the Equipment with identical equipment
in good condition and repair, the title to which shall vest in Lessor and which
thereafter shall be subject to the terms of this Lease; or (iii) pay to Lessor
(a) any unpaid accrued amounts relating to such Equipment due Lessor under this
Lease up to the date of the Casualty Occurrence, and (b) a sum equal to the
Casualty Value as set forth in the Casualty Value table attached to each
Schedule hereto for such Equipment. Upon the making of such payment, the term of
this Lease as to each unit of Equipment with respect to which the Casualty Value
was paid shall terminate.
11. GENERAL INDEMNITY. Lessee will protect, indemnify and save harmless
Lessor from and against all liabilities, obligations, claims, damages,
penalties, causes of action, costs and expenses, imposed upon or incurred by or
asserted against Lessor or any assignee of Lessor by Lessee or any third party
by reason of the occurrence or existence (or alleged occurrence or existence) of
any act or event relating to or caused by the Equipment, including but not
limited to, consequential or special damages of any kind, or any failure on the
part of Lessee to perform or comply with any of the terms of this Lease. In the
event that any action, suit or proceeding is brought against Lessor by reason of
any such occurrence, Lessee, upon request of Lessor, will at Lessee's expense
resist and defend such action, suit or proceeding or cause the same to be
resisted and defended by counsel designated and approved by Lessor. Lessee's
obligations under this Section 11 shall survive the expiration of this Lease
with respect to acts or events occurring or alleged to have occurred prior to
the return of the Equipment to Lessor at the end of the Lease term.
12. INSURANCE. Lessee at its expense shall keep the Equipment insured for
the entire term and any extensions of this Lease against all risks for at least
the replacement value of such Equipment and shall provide for a loss payable
endorsement to Lessor or any assignee of Lessor. Lessee shall maintain
comprehensive general public liability insurance with respect to loss or damage
for personal injury, death or property damage in an amount not less than
$1,000,000 per occurrence, naming Lessor and Lessor's assignee as additional
insured. Such insurance shall contain insurer's agreement to give thirty (30)
days written notice to Lessor before cancellation or material change of any
policy of insurance. Lessee will provide Lessor and any assignee of Lessor with
a certificate of insurance from the insurer evidencing Lessor's or such
assignee's interest in the policy of insurance. Such insurance shall cover any
Casualty Occurrence to any unit of Equipment. Notwithstanding anything in
Section 10 or this Section 12 to the contrary, this Lease and Lessee's
obligations hereunder and under each Schedule shall remain in full force and
effect with respect to any unit of Equipment which is not subject to a Casualty
Occurrence. If Lessee fails to provide or maintain insurance as required herein,
Lessor shall have the right, but shall not be obligated to obtain such
insurance. In that event, Lessee shall pay to Lessor the cost thereof.
13. TAXES. Lessee agrees to reimburse Lessor for, (or pay directly if
instructed by Lessor), and agrees to indemnify and hold Lessor harmless from,
all fees (including, but not limited to, license, documentation, recording and
registration fees), and all sales, use, gross receipts, personal property,
occupational, value added or other taxes,
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<PAGE>
levies, imposts, duties, assessments, charges, or withholdings of any nature
whatsoever, together with any penalties, fines, additions to tax, or interest
thereon (all of the foregoing being hereafter referred to as "Impositions")
except same as may be attributable to Lessor's income, arising at any time prior
to or during the term of this Lease, or upon termination or early termination of
this Lease and levied or imposed upon Lessor directly or otherwise by any
Federal, state or local government in the United States or by any foreign
country or foreign or international taxing authority upon or with respect to (i)
the Equipment, (ii) the exportation, importation, registration, purchase,
ownership, delivery, leasing, possession, use, operation, storage, maintenance,
repair, return, sale, transfer of title, or other disposition thereof, (iii) the
rentals, receipts, or earnings arising from the Equipment, or any disposition of
the rights to such rentals, receipts, or earnings, (iv) any payment pursuant to
this Lease, and (v) this Lease or the transaction or any part thereof. Lessee's
obligations under this Section 13 shall survive the expiration of this Lease
with respect to acts or events occurring or alleged to have occurred prior to
the return of the Equipment to Lessor at the end of the Lease term.
14. PAYMENT BY LESSOR. If Lessee shall fail to make any payment or perform
any act required hereunder, then Lessor may, but shall not be required to, after
such notice to Lessee as is reasonable under the circumstances, make such
payment or perform such act with the same effect as if made or performed by
Lessee. Lessee will upon demand reimburse Lessor for all sums paid and all costs
and expenses incurred in connection with the performance of any such act.
15. SURRENDER OF EQUIPMENT. Upon termination or expiration of this Lease,
with respect to each group of Equipment, Lessee will forthwith surrender the
Equipment to Lessor delivered in as good order and condition as originally
delivered, reasonable wear and tear excepted. Lessor may, at its sole option,
arrange for removal and transportation of the Equipment provided that Lessee's
obligations under Sections 10, 11 and 12 shall not be released. Lessee shall
bear all expenses of delivering (which include, but are not limited to, the de-
installation, insurance, packaging and transportation of) the Equipment to
Lessor's location or other location within the United States as Lessor may
request. In the event Lessee fails to deliver the Equipment as directed above,
all obligations of Lessee under this Lease, including rental payments, shall
remain in full force and effect until Lessee delivers the Equipment to Lessor.
16. ASSIGNMENT. WITHOUT LESSOR'S PRIOR WRITTEN CONSENT, SUCH CONSENT NOT
TO BE UNREASONABLY WITHHELD, LESSEE SHALL NOT (A) ASSIGN, TRANSFER, PLEDGE,
HYPOTHECATE OR OTHERWISE DISPOSE OF THIS LEASE, EQUIPMENT, OR ANY INTEREST
THEREIN, OR (B) SUBLET OR LEND EQUIPMENT OR PERMIT IT TO BE USED BY ANYONE OTHER
THAN LESSEE OR LESSEE'S EMPLOYEES. LESSOR MAY ASSIGN THIS LEASE OR GRANT A
SECURITY INTEREST IN ANY OR ALL EQUIPMENT, OR BOTH, IN WHOLE OR IN PART TO ONE
OR MORE ASSIGNEES OR SECURED PARTIES WITHOUT NOTICE TO LESSEE. If Lessee is
given notice of such assignment it agrees to acknowledge receipt thereof in
writing and Lessee shall execute such additional documentation as Lessor's
assignee shall require. Each such assignee and/or secured party shall have all
of the rights, but none of the obligations, of Lessor under this Lease, unless
such assignee or secured party expressly agrees to assume such obligations in
writing. Lessee shall not assert against any assignee and/or secured party any
defense, counterclaim or offset that Lessee may have against Lessor.
Notwithstanding any such assignment, and providing no Event of Default has
occurred and is continuing, Lessor, or its assignees, secured parties, or their
agents or assigns, shall not interfere with Lessee's right to quietly enjoy use
of Equipment subject to the terms and conditions of this Lease. Subject to the
foregoing, this Lease inures to the benefit of and is binding upon the
successors and assignees of the parties hereto. Lessee acknowledges that any
such assignment by Lessor
-5-
<PAGE>
will not materially change Lessee's duties or obligations under the Lease or
increase any burden of risk on Lessee.
17. DEFAULT. (a) Event of Default. Any of the following events or
----------------
conditions shall constitute an "Event of Default" hereunder: (i) Lessee's
failure to pay any monies due to Lessor hereunder or under any Schedule beyond
the fifth (5th) day after the same is due; (ii) Lessee's failure to comply with
its obligations under Section 12 or Section 16; (iii) Lessee's failure to comply
with or perform any term, covenant, condition, warranty or representation of
this Lease or any Schedule hereto or under any other agreement between Lessee
and Lessor or under any lease of real property covering the location of
Equipment if such failure to comply or perform is not cured by Lessee within
thirty (30) days of receipt of notice thereof; (iv) seizure of the Equipment
under legal process; (v) the filing by or against Lessee of a petition for
reorganization or liquidation under the Bankruptcy Code or any amendment thereto
or under any other insolvency law providing for the relief of debtors; (vi) the
voluntary or involuntary making of an assignment of a substantial portion of its
assets by Lessee, or any guarantor ("Guarantor") under any guaranty executed in
connection with this Lease ("Guaranty"), for the benefit of its creditors, the
appointment of a receiver or trustee for Lessee or any Guarantor for any of
Lessee's or Guarantor's assets, the institution by or against Lessee or any
Guarantor of any formal or informal proceeding for dissolution, liquidation,
settlement of claims against or winding up of the affairs of Lessee or any
Guarantor, provided that in the case of all such involuntary proceedings, same
--------
are not dismissed within sixty (60) days after commencement; or (vii) the making
by Lessee or any Guarantor of a transfer of all or a material portion of
Lessee's or Guarantor's assets or inventory not in the ordinary course of
business.
(b) Remedies. If any Event of Default shall have occurred:
--------
(i) Lessor may proceed by appropriate court action or actions either at
law or in equity to enforce performance by Lessee, of the applicable covenants
of this Lease, or to recover damages therefor; or
(ii) Lessee will, without demand, on the next rent payment date following
the Event of Default, pay to Lessor as liquidated damages which the parties
agree are fair and reasonable under the circumstances existing at the time this
Lease is entered into, and not as a penalty, an amount equal to the Casualty
Value of the Equipment set forth in Exhibit C together with any rent or other
amounts past due and owing by Lessee hereunder; and
(iii) Lessor may, without notice to or demand upon Lessee;
(a) Take possession of the Equipment and lease or sell the same or
any portion thereof, for such period, amount, and to such entity as Lessor shall
elect. The proceeds of such lease or sale will be applied by Lessor (A) first,
to pay all costs and expenses, including reasonable legal fees and
disbursements, incurred by Lessor as a result of the default and the exercise of
its remedies with respect thereto, (B) second, to pay Lessor an amount equal to
any unpaid rent or other amounts past due and payable plus the Casualty Value,
to the extent not previously paid by Lessee, and (C) third, to reimburse Lessee
for the Casualty Value to the extent previously paid. Any surplus remaining
thereafter will be retained by Lessor.
(b) Take possession of the Equipment and hold and keep idle the same
or any portion thereof.
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<PAGE>
Lessee agrees to pay all internal and out-of-pocket costs of
Lessor related to the exercise of its remedies, including direct costs of its
in-house counsel and out-of-pocket legal fees and expenses. At Lessor's request,
Lessee shall assemble the Equipment and make it available to Lessor at such
location as Lessor may designate. Lessee waives any right it may have to redeem
the Equipment.
Repossession of any or all Equipment shall not terminate this
Lease or any Schedule unless Lessor notifies Lessee in writing. Any amount
required to be paid under this Section shall be increased by a service charge at
the rate of 2.0% per month, or the highest rate of interest permitted by
applicable law, whichever is less, accruing from the date the Casualty Value or
other amounts are payable hereunder until such amounts are paid.
None of the above remedies is intended to be exclusive, but each
is cumulative and in addition to any other remedy available to Lessor, and all
may be enforced separately or concurrently.
18. LATE PAYMENTS. Lessee shall pay to Lessor an amount equal to the
greater of 10% of all amounts owed Lessor by Lessee which are not paid when due
or $100, but in no event an amount greater than the highest rate permitted by
applicable law. If such funds have not been received by Lessor at Lessor's place
of business or by Lessor's designated agent by the date such funds are due under
this Lease, Lessor shall bill Lessee for such charges. Lessee acknowledges that
invoices for rentals due hereunder are sent by Lessor for Lessee's convenience
only. Lessee's non-receipt of an invoice will not relieve Lessee of its
obligation to make rent payments hereunder.
19. LESSOR'S EXPENSE. Lessee shall pay Lessor all costs and expenses
including reasonable attorney's fees and the fees of the collection agencies,
incurred by Lessor in enforcing any of the terms, conditions or provisions
hereof.
20. OWNERSHIP; PERSONAL PROPERTY. The Equipment shall be and remain
personal property of Lessor, and Lessee shall have no right, title or interest
therein or thereto except as expressly set forth in this Lease, notwithstanding
the manner in which it may be attached or affixed to real property, and upon
termination or expiration of the Lease term, Lessee shall have the duty and
Lessor shall have the right to remove the Equipment from the premises where the
same be located whether or not affixed or attached to the real property or any
building, at the cost and expense of Lessee.
21. ALTERATIONS; ATTACHMENTS. No alterations or attachments shall be made
to the Equipment without Lessor's prior written consent, which shall not be
given for changes that will affect the reliability and utility of the Equipment
or which cannot be removed without damage to the Equipment, or which in any way
affect the value of the Equipment for purposes of resale or re-lease.
22. FINANCING STATEMENT. Lessee will execute financing statements pursuant
to the Uniform Commercial Code. Lessee authorizes Lessor to file financing
statements signed only by Lessor (where such authorization is permitted by law)
at all places where Lessor deems necessary.
23. MISCELLANEOUS. (a) Lessee shall provide Lessor with such corporate
resolutions, financial statements and other documents as Lessor shall request
from time to time. (b) Lessee represents that the Equipment is being leased
hereunder for business purposes. (c) Time is of the essence with respect to this
Lease. (d) Lessee shall keep its books and records in accordance with generally
accepted accounting principles and
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<PAGE>
practices consistently applied and shall deliver to Lessor its annual audited
financial statements, unaudited monthly financial statements to include any
financial information given to Lessee's Board of Directors, and signed by an
officer of Lessee and such other unaudited financial statements as may be
reasonably requested by Lessor. (e) Any action by Lessee against Lessor for any
default by Lessor under this Lease, including breach of warranty or indemnity,
shall be commenced within one (1) year after any such cause of action accrues.
24. NOTICES. All notices hereunder shall be in writing, by registered
mail, or reliable messenger or delivery service and shall be directed, as the
case may be, to Lessor at 2401 Kerner Boulevard, San Rafael, California 94901,
Attention: Account Management and to Lessee at 2421 Broadway, Redwood City, CA
94063, Attention: Robert Flynn.
25. ENTIRE AGREEMENT. Lessee acknowledges that Lessee has read this Lease,
understands it and agrees to be bound by its terms, and further agrees that it
and each Schedule constitute the entire agreement between Lessor and Lessee with
respect to the subject matter hereof and supersedes all previous agreements,
promises, or representations. The terms and conditions hereof shall prevail
notwithstanding any variance with the terms of any purchase order submitted by
the Lessee with respect to any Equipment covered hereby.
26. AMENDMENT. This Lease may not be changed, altered or modified except
by an instrument in writing signed by an officer of the Lessor and the Lessee.
27. WAIVER. Any failure of Lessor to require strict performance by Lessee
or any waiver by Lessor of any provision herein shall not be construed as a
consent or waiver of any other breach of the same or any other provision.
28. SEVERABILITY. If any provision of this Lease is held invalid, such
invalidity shall not affect any other provisions hereof.
29. JURISDICTION AND WAIVER OF JURY TRIAL. This Lease shall be governed by
and construed under the laws of the State of California. It is agreed that
exclusive jurisdiction and venue for any legal action between the parties
arising out of this Lease shall be in the Superior Court for Marin County,
California, or, in cases where Federal diversity jurisdiction is available, in
the United States District Court for the Northern District of California.
LESSEE, TO THE EXTENT IT MAY LAWFULLY DO SO, HEREBY WAIVES ITS RIGHT TO TRIAL BY
JURY IN ANY ACTION BROUGHT ON OR WITH RESPECT TO THIS LEASE, ANY SCHEDULE, OR
ANY AGREEMENT EXECUTED IN CONNECTION HEREWITH.
30. NATURE OF TRANSACTION. Lessor makes no representation whatsoever,
express or implied, concerning the legal character of the transaction evidenced
hereby, for tax or any other purpose.
31. SECURITY INTEREST. (a) One executed copy of the Lease will be marked
"Original" and all other counterparts will be duplicates. To the extent, if any,
that this Lease constitutes chattel paper (as such term is defined in the
Uniform Commercial Code as in effect in any applicable jurisdiction) no security
interest in the lease may be created in any documents other than the "Original."
(b) There shall be only one original of each Schedule and it shall be marked
"Original," and all other counterparts will be duplicates. To the extent, if
any, that any Schedule(s) to this Lease constitutes chattel paper (or as such
term is defined in the Uniform Commercial Code as in effect in any
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<PAGE>
applicable jurisdiction) no security interest in any Schedule(s) may be created
in any documents other than the "Original."
32. SUSPENSION OF OBLIGATIONS. The obligations of Lessor hereunder will be
suspended to the extent that it is hindered or prevented from complying
therewith because of labor disturbances, including but not limited to strikes
and lockouts, acts of God, fires, storms, accidents, failure of the manufacturer
to delivery any item of Equipment, governmental regulations or interference, or
any cause whatsoever not within the sole and exclusive control of Lessor.
33. SOFTWARE. For the term of this Lease, and so long as no Event of
Default has occurred and is continuing, Lessor hereby assigns to Lessee all of
Lessor's rights under any License Agreement executed by Lessor in connection
with the Equipment (except for any right of Lessor to be reimbursed for the
License Fee). Lessee agrees to be bound by the provisions of any such License
Agreement and to perform all obligations of Lessor (except Lessor's payment
obligations) thereunder. Lessee acknowledges that all of Lessee's obligations
under the Lease with respect to the Equipment will apply equally to the
software, including but not limited to Lessee's obligation to pay rent to
Lessor.
34. COMMITMENT FEE. Lessee has paid to Lessor a commitment fee ("Fee") of
$10,000. The Fee shall be applied by Lessor first to reimburse Lessor for all
out-of-pocket UCC search costs, inspections and appraisal fees incurred by
Lessor, and then proportionally to the first and last month's rent for each
Schedule hereunder in the proportion that the purchase price of the Equipment
leased pursuant to the Schedule bears to Lessor's entire commitment. However,
the portion of the Fee which is not applied to rental shall be non-refundable
except if Lessor defaults in its obligations pursuant to Section 3.
35. FINANCE LEASE. The parties agree that this lease is a "Finance Lease"
as defined by section 10-103(a)(7) of the California Commercial Code
(Cal.Com.C.). Lessee acknowledges either (a) that Lessee has reviewed and
approved any written Supply Contract (as defined by Cal.Com.C. Section 10-
103(a)(25)) covering Equipment purchased from the "Supplier" (as defined by
Cal.Com.C. Section 10-103(a)(24)) thereof for lease to Lessee or (b) that Lessor
has informed or advised Lessee, in writing, either previously or by this Lease
of the following: (i) the identity of the Supplier; (ii) that the Lessee may
have rights under the Supply Contract; and (iii) that the Lessee may contact the
Supplier for a description of any such rights Lessee may have under the Supply
Contract. Lessee hereby waives any rights and remedies Lessee may have under
Cal.Com.C. Sections 10-508 through 522.
36. PURCHASE OR RENEWAL REQUIREMENT FOR ALL SCHEDULES TO MASTER EQUIPMENT
LEASE. At the expiration of the Initial Term for Schedule No. 1, and
notwithstanding anything to the contrary in the Lease, upon 90 days prior
written notice to Lessor, Lessee shall either:
No. 1
-----
Purchase AS-IS, WHERE-IS all, but not less than all, of the Equipment
covered under all Schedules to this Lease at the expiration of the Initial
Term for each such Schedule for an amount equal to fifteen percent (15%) of
the Equipment's original purchase price, whereupon Lessor shall issue to
Lessee a Bill of Sale for the Equipment transferring it to Lessee without
any representation or warranty whatsoever, or
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No. 2
-----
Extend the Initial Term of all Schedules to this Lease for an additional
twelve (12) months ("Renewal Term") commencing with the end of the Initial
Term of each Schedule at a rate of 1.5% per month of the Equipment's
original purchase price. Upon expiration of each Renewal Term and Lessee's
payment to Lessor of $1. Lessor shall issue to Lessee a Bill of Sale for
the Equipment under the applicable Schedule transferring it to Lessee
without any representation or warranty whatsoever.
In the event Lessee does not provide 90 days prior written notice as specified
above, Lessee shall be deemed to have selected No. 1 above for all Schedules to
the Lease.
Lessee shall be responsible for all applicable taxes in connection with any
purchase of Equipment by Lessee.
IN WITNESS WHEREOF, the parties hereto have executed this Lease.
PHOENIX LEASING INCORPORATED LIQUID AUDIO, INC.
By: /s/ [SIGNATURE ILLEGIBLE] By: /s/ [SIGNATURE ILLEGIBLE]
------------------------------- -----------------------------
Title: Contract Administrator Title: CFO
----------------------------- --------------------------
Headquarters Location:
2421 Broadway
--------------------------------
Street
Redwood City, CA 94063
--------------------------------
City, State Zip Code
San Mateo
--------------------------------
County
Exhibit A - Closing Memorandum
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<PAGE>
Exhibit A
to MASTER EQUIPMENT LEASE
Dated October 15, 1996
CLOSING MEMORANDUM
------------------
1.* Duly executed Master Equipment Lease marked "Original."
2. Duly executed Schedule marked "Original."
3. Duly executed Certificate of Acceptance. [EXECUTE UPON ACCEPTANCE OF
EQUIPMENT]
4. Insurance Certificates.
5.* Resolutions of Lessee's Board of Directors, including an incumbency
certificate.
6.* Copy of Lessee's articles of incorporation including all amendments,
certified by the Secretary of Lessee as being true and complete and in full
force and effect.
7.* Certificate from the Secretary of State of Lessee's state of incorporation,
from the state in which Lessee's chief executive office is located, if
different, and from each state where Lessee is qualified to do business,
stating Lessee is in good standing or is authorized to transact business,
as the case may be, dated not more than thirty days prior to the first
purchase of Equipment.
8. Real Property Waiver.**
9. UCC Financing Statements.
10. Bill of Sale (for Sale-Leaseback Equipment).
11. UCC search.
12. Equipment List, in form and substance satisfactory to Lessor.
13. Lessee's most recent financial statements.
14.* Certificate of Chief Financial Officer stating that no event of default
has occurred, there is no adverse change in the financial condition of
Lessee and that the Equipment is free of any encumbrances.
15. Letter from Software Vendor(s) in the form attached hereto.
16.* California Civil Code Section 3440 Filing and Published Notice.
17. See Section 3 of Master Equipment Lease for additional preconditions to
closing.
* First Schedule Only.
** Required if any Equipment is a fixture, i.e., attached to real property, or
located in certain states.
<PAGE>
CORPORATE RESOLUTION TO LEASE
RESOLVED: That this corporation, Liquid Audio, Inc. lease from Phoenix
Leasing Incorporated, a California corporation, hereinafter referred to as
Lessor, such items of personal property, and upon such terms and conditions, as
the officer or officers hereinafter authorized, in their discretion, may deem
necessary or advisable; provided, however, that the original actual cost of such
items of personal property under the lease shall not exceed the sum of $200,000.
RESOLVED FURTHER: That:
GERALD KEARBY the President /s/ Gerald Kearby
- --------------------- -----------------------
(Print or type name) (specimen signature)
or ROBERT FLYNN CHIEF FINANCIAL OFFICER /s/ Robert Flynn
- --------------------- -------------------------- -----------------------
(Print or type name) Title of Corporate Officer (specimen signature)
of this corporation (this officer or officers authorized to act pursuant hereto
being hereinafter designated as "authorized officers"), be, and they hereby are,
individually authorized, directed and empowered, in the name of this
corporation, to execute and deliver to Lessor, and Lessor is requested to
accept, any lease that may be required by Lessor in connection with such leasing
of personal property.
RESOLVED FURTHER: That the authorized officers be, and they hereby are,
individually authorized, directed and empowered, in the name of this
corporation, to do or cause to be done all such further acts and things as they
shall deem necessary, advisable, convenient, or proper in connection with the
execution and delivery of any such lease and in connection with or incidental to
the carrying of the same into effect, including, without limitation the
execution, acknowledgment, and delivery of any and all instruments and documents
which may reasonably be required by Lessor under or in connection with any such
lease.
RESOLVED FURTHER: That Lessor is authorized to act upon this resolution
until written notice of its revocation is delivered to Lessor, and that the
authority hereby granted shall apply with equal force and effect to the
successors in office of the officers herein named.
I, ROBERT FLYNN, Secretary of Liquid Audio, Inc., a corporation
------------
incorporated under the laws of the State of California do hereby certify that
the foregoing is a full, true and correct copy of resolutions of the Board of
Directors of the said corporation, duly and regularly passed or adopted by the
Board of Directors of said corporation as required by law and by the by-laws of
the said corporation on the 15th day of October, 1994.
I further certify that said resolutions are still in full force and effect
and have not been amended or revoked and that the specimen signatures appearing
above are the signatures of the officers authorized to sign for this corporation
by virtue of the said resolutions.
IN WITNESS WHEREOF, I have hereunto set my hand as such Secretary, and
affixed the corporate seal of the said corporation, this 15th day of October,
1996.
/s/ Signature Illegible
-----------------------
[CORPORATE SEAL] SECRETARY
<PAGE>
AMENDMENT NO. 1 TO MASTER EQUIPMENT LEASE AGREEMENT NO. 0044
THIS AMENDMENT NO. 1 TO MASTER EQUIPMENT LEASE AGREEMENT NO. 0044 ("Amendment")
is dated as of August 15, 1997 by and between LIQUID AUDIO, INC. ("Lessee") and
PHOENIX LEASING INCORPORATED ("Lessor").
RECITALS
--------
WHEREAS, Lessee and Lessor entered into that certain Master Equipment Lease
Agreement No. 0044, dated as of October 15, 1996 (the "Lease"), pursuant to
which Lessee is leasing or intends to lease equipment with an aggregate purchase
price of $200,000 (the "Initial Commitment");
WHEREAS, Lessee has requested that Lessor increase the dollar limit on the
aggregate purchase price of equipment which Lessor is willing to lease to Lessee
under the Lease by an additional $350,000, (such increase hereinafter referred
to as the "Additional Commitment");
WHEREAS, Lessor is willing to provide the Additional Commitment, on the terms
set forth herein and Lessee is willing to agree to such terms; and
WHEREAS, Lessee and Lessor now desire to amend the Lease to provide for the
Additional Commitment, and as otherwise provided in this Amendment;
NOW, THEREFORE, IT IS AGREED THAT:
1. Definitions. Unless otherwise indicated, words and terms which are defined
-----------
in the Lease shall have the same meaning where used herein. Upon execution of
this Amendment, (i) the term "Lease" shall be deemed to include this Amendment,
(ii) the term "Equipment" shall be deemed to include the "Additional Equipment"
and (iii) the term "Schedule(s)" shall be deemed to include any "Additional
Commitment Schedule(s)," as these terms are defined herein.
2. Amendments. The Lease is hereby amended as follows:
----------
(a) Following Section 3, a new Section 3A is added as follows:
3A. LESSOR ADDITIONAL COMMITMENT. So long as no Event of Default or
event which with the giving of notice or passage of time, or both, could become
an Event of Default has occurred or is continuing, upon full funding of the
Initial Commitment, Lessor agrees to provide the Additional Commitment and to
lease to Lessee the groups of equipment (the "Additional Equipment") described
on each schedule created pursuant to the Additional Commitment (each an
"Additional Commitment Schedule"), subject to the following conditions: (i) that
in no event shall Lessor be obligated to lease Additional Equipment to Lessee
pursuant to the Additional Commitment where the aggregate purchase price of all
Additional Equipment leased to Lessee pursuant to the Additional Commitment
would exceed $350,000 but in any event, the Initial Commitment together with the
Additional Commitment shall not exceed $550,000; of which amount Lessor may
finance soft costs such as installation and delivery costs, purchase tax,
software, tooling and items generally considered fungible or expendable for
lease to Lessee having an aggregate purchase price not exceeding an amount equal
to 10% of the utilized Additional Commitment; (ii) the amount of Additional
Equipment purchased by Lessor at any one time shall be at least equal to $25,000
except for a final advance which may be less than $25,000; (iii) Lessor shall
not be obligated to purchase Additional Equipment hereunder after December 31,
1997,
-1-
<PAGE>
provided that the funding period may be extended to May 31, 1998 if Lessor has
received and approved in its sole discretion Lessee's monthly 1998 financial
plan; (iv) all Lease documentation relevant to the Additional Commitment
required by Lessor has been executed by Lessee or provided by Lessee no later
than September 15, 1997; (v) the equipment described on the Additional
Commitment Schedule is acceptable to Lessor; (vi) with respect to each funding
Lessee has provided to Lessor each of the closing documents and other items
described in Exhibit A hereto (which documents shall be in form and substance
acceptable to Lessor) and which list may be modified for each subsequent
funding; (vii) there is no material adverse change in Lessee's condition,
financial or otherwise, as determined by Lessor, and Lessee so certifies, from
(yy) the date of the most recent financial statements delivered by Lessee to
Lessor prior to execution of this Amendment to (zz) the date of Lessor's
purchase of the Additional Equipment; (viii) at all fundings Lessee is
performing according to its business plan referred to as "1997 Operating Plan,
Income & Cash Flow, 2 pages, dated March 13, 1997 and Balance Sheet, fax dated
June 24, 1997, 1 page" as may be amended by Lessee's 1998 financial plan and
otherwise in form and substance acceptable to Lessor (collectively, "Additional
Commitment Business Plan"); (ix) Lessor or its agent has inspected and placed
identification labels on the Additional Equipment; and (x) Lessor has received
in form and substance acceptable to Lessor: (a) Lessee's interim financial
statements signed by a financial officer of Lessee; and (b) hard copy evidence
satisfactory to Lessor of Lessee's receipt of a minimum of $4,000,000 equity.
(b) Following Section 34, a new Section 34A is added as follows:
34A. ADDITIONAL COMMITMENT FEE. Lessee has paid to Lessor a
commitment fee ("Additional Commitment Fee") of $10,000 with respect to the
Additional Commitment. The Additional Commitment Fee shall be applied by Lessor
first to reimburse Lessor for all out-of-pocket UCC search costs, inspections
and appraisal fees incurred by Lessor, and then proportionally to the first and
last months' rent for each Additional Commitment Schedule, in the proportion
that the purchase price of the Additional Equipment leased pursuant to the
Additional Commitment Schedule bears to the Additional Commitment. However, the
portion of the Additional Commitment Fee which is not applied to rental shall be
non-refundable except if Lessor defaults in its obligations pursuant to Section
3A.
(c) The parties agree that Section 36 shall apply to all Additional
Commitment Schedules.
3. Representations and Warranties. Lessee hereby reconfirms as of the date
------------------------------
hereof, its representations and warranties set forth in Section 5 of the Lease.
4. Continued Validity of Lease. Except as amended by this Amendment, the Lease
---------------------------
shall continue in full force and effect as originally constituted and is
ratified and affirmed by the parties hereto. Such Amendment shall not amend or
otherwise affect any of the Schedules executed and delivered by Lessee prior to
the date hereof.
5. Authorization. Each party represents to the other that the individual
-------------
executing this Amendment on its behalf is the duly appointed signatory of such
party to this Amendment and that such individual is authorized to execute this
Amendment by or on behalf of such party and to take all action required by the
terms of this Amendment.
6. When Amendment is Effective. This Amendment shall be binding and deemed
---------------------------
effective when executed by Lessee and accepted and executed by Lessor. Upon such
effectiveness this Amendment shall be deemed to have amended the Lease as
provided herein.
-2-
<PAGE>
7. Captions. Section headings and numbers have been set forth herein for
--------
convenience only. Unless the contrary is compelled by the context, everything
contained in each section applies equally to this entire Amendment.
8. No Novation. This Amendment is not intended to be, and shall not be
-----------
construed to create, a novation or accord and satisfaction, and, except as
otherwise provided herein, the Lease shall remain in full force and effect.
9. Severability. Each provision of this Amendment shall be severable from
------------
every other provision of this Amendment for the purpose of determining the legal
enforceability of any specific provision.
10. Entire Agreement. The Lease as amended by this Amendment constitutes the
----------------
entire agreement between Lessee and Lessor with respect to the subject matter
hereof and supersedes all prior and contemporaneous negotiations,
communications, discussions and agreements concerning such subject matter.
Lessee acknowledges and agrees that Lessor has not made any representation,
warranty or covenant in connection with this Amendment.
11. Conflicts. In the event of any conflict between the terms of this Amendment
---------
and terms of the Master Equipment Lease No. 0044, the terms of this Amendment
shall prevail.
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Amendment as of the date first set forth above.
LESSOR: LESSEE:
PHOENIX LEASING INCORPORATED LIQUID AUDIO, INC.
By:______________________ By: /s/ [SIGNATURE ILLEGIBLE]
---------------------------
Title:____________________ Title: CEO
-------------------------
-3-
<PAGE>
Exhibit A to Amendment No. 1
to MASTER EQUIPMENT LEASE NO. 0044
Dated as of August 15, 1997
CLOSING MEMORANDUM
1.* Duly executed Amendment No. 1 marked "Original."
2. Duly executed Additional Commitment Schedule marked "Original."
3. Duly executed Certificate of Acceptance. [EXECUTE UPON ACCEPTANCE OF
EQUIPMENT]
4. Insurance Certificates.
5.* Resolutions of Lessee's Board of Directors, including an incumbency
certificate.
6. Real Property Waiver.**
7. UCC Financing Statements.
8. Bill of Sale (for Sale-Leaseback Equipment).
9. UCC search.
10.* Payment of Commitment Fee.
11. Equipment List, in form and substance satisfactory to Lessor.
12. Lessee's most recent financial statements.
13. Certificate of Chief Financial Officer stating that no event of default has
occurred, there is no adverse change in the financial condition of Lessee
and that the Additional Equipment is free of any encumbrances.
14. See Section 3A of Amendment No. 1 for additional preconditions to closing.
15. Intercreditor Agreement, if applicable.
* First Schedule Only.
** Required if any Equipment is a fixture, i.e., attached to real property, or
located in certain states.
<PAGE>
CORPORATE RESOLUTION TO LEASE
RESOLVED: That this corporation, Liquid Audio, Inc. lease from Phoenix
Leasing Incorporated, a California corporation, hereinafter referred to as
Lessor, such items of personal property, and upon such terms and conditions, as
the officer or officers hereinafter authorized, in their discretion, may deem
necessary or advisable; provided, however, that the original actual cost of such
items of personal property under the lease shall not exceed the sum of $550.000.
RESOLVED FURTHER: That:
/s/ Gerry Kearby the President /s/ Gerald Kearby
--------------------- ---------------------------
(Print or type name) (specimen signature)
or /s/ Gary Iwatani CEO /s/ [Signature Illegible]
---------------------- ---------------------- ---------------------------
(Print or type name) Title of Corporate Officer (specimen signature)
of this corporation (this officer or officers authorized to act pursuant hereto
being hereinafter designated as "authorized officers"), be, and they hereby are,
individually authorized, directed and empowered, in the name of this
corporation, to execute and deliver to Lessor, and Lessor is requested to
accept, any lease that may be required by Lessor in connection with such leasing
of personal property.
RESOLVED FURTHER: That the authorized officers be, and they hereby are,
individually authorized, directed and empowered, in the name of this
corporation, to do or cause to be done all such further acts and things as they
shall deem necessary, advisable, convenient, or proper in connection with the
execution and delivery of any such lease and in connection with or incidental to
the carrying of the same into effect, including, without limitation the
execution, acknowledgment, and delivery of any and all instruments and documents
which may reasonably be required by Lessor under or in connection with any such
lease.
RESOLVED FURTHER: That Lessor is authorized to act upon this resolution
until written notice of its revocation is delivered to Lessor, and that the
authority hereby granted shall apply with equal force and effect to the
successors in office of the officers herein named.
I. Robert Flynn, Secretary of Liquid Audio, Inc., a corporation
------------
incorporated under the laws of the State of California do hereby certify that
the foregoing is a full, true and correct copy of resolutions of the Board of
Directors of the said corporation, duly and regularly passed or adopted by the
Board of Directors of said corporation as required by law and by the by-laws of
the said corporation on the 10/th/ day of October, 1997.
I further certify that said resolutions are still in full force and effect
and have not been amended or revoked and that the specimen signatures appearing
above are the signatures of the officers authorized to sign for this corporation
by virtue of the said resolutions.
IN WITNESS WHEREOF, I have hereunto set my hand as such Secretary, and
affirmed the corporate seal of the said corporation, this 10th day of October,
1997.
/s/ [SIGNATURE ILLEGIBLE]
---------------------------
[CORPORATE SEAL] SECRETARY
<PAGE>
AMENDMENT NO. 2 TO MASTER EQUIPMENT LEASE AGREEMENT NO. 0044
THIS AMENDMENT NO. 2 TO MASTER EQUIPMENT LEASE AGREEMENT NO. 0044 ("Amendment")
is dated as of September 30, 1998, by and between LIQUID AUDIO, INC ("Lessee")
and PHOEND LEASING INCORPORATED ("Lessor").
RECITALS
--------
WHEREAS, Lessee and Lessor entered into that certain Master Equipment Lease
Agreement No. 0044, dated as of October 15, 1996 as amended by Amendment No. 1
dated August 15, 1997 (the "Lease"), pursuant to which Lessee is leasing or
intends to lease equipment with an aggregate purchase price of Five Hundred
Fifty Thousand Dollars ($550,000), (the "Earlier Commitments");
WHEREAS, Lessee has requested that Lessor increase the dollar limit on the
aggregate purchase price of equipment which Lessor is willing to lease to Lessee
under the Lease by an additional Five Hundred Thousand Dollars ($500,000) and
include $37,871 from the Earlier Commitments for a total of Five Hundred Thirty-
seven Thousand Eight Hundred Seventy-one Dollars ($537,871), (such increase
hereinafter referred to as the "Second Additional Commitment");
WHEREAS, Lessor is willing to provide the Second Additional Commitment, on the
terms set forth herein and Lessee is willing to agree to such terms; and
WHEREAS, Lessee and Lessor now desire to amend the Lease to provide for the
Second Additional Commitment, and as otherwise provided in this Amendment;
NOW, THEREFORE, IT IS AGREED THAT
1. Definitions. Unless otherwise indicated, words and terms which are defined
-----------
in the Lease shall have the same meaning where used herein. Upon execution of
this Amendment, (i) the term "Lease" shall be deemed to include this Amendment,
(ii) the term "Equipment" shall be deemed to include the "Second Additional
Commitment Equipment" and (iii) the term "Schedule(s)" shall be deemed to
include any "Second Additional Commitment Schedule(s)," as these terms are
defined herein.
2. Amendments. The Lease is hereby amended as follows:
----------
(a) Following Section 3A, a new Section 3B is added as follows:
3B. LESSOR SECOND ADDITIONAL COMMITMENT. So long as no Event of
Default or event which with the giving of notice or passage of time,
or both, could become an Event of Default has occurred or is
continuing, upon full funding of the Earlier Commitments, Lessor
agrees to provide the Second Additional Commitment and to lease to
Lessee the groups of equipment (the "Second Additional Commitment
Equipment") described on each schedule created pursuant to the Second
Additional Commitment (each a "Second Additional Commitment
Schedule"), subject to the following conditions: (i) that in no event
shall Lessor be obligated to lease Second Additional Commitment
Equipment to Lessee pursuant to the Second Additional Commitment where
the aggregate purchase price of all Second Additional Commitment
Equipment leased to Lessee pursuant to the Second Additional
Commitment would exceed $500,000 but in any event, the Earlier
Commitments together with the Second Additional Commitment shall not
exceed One Million Fifty Thousand Dollars ($1,050,000); of which
amount Lessor may purchase application software for lease to Lessee
having an aggregate purchase price not exceeding an amount equal to
20% of the utilized Second Additional
1
<PAGE>
Commitment, (ii) the amount of Second Additional Commitment Equipment
purchased by Lesson at any one time shall be at least equal to $
25,000 except for a final advance which may be less than $ 25,000,
(iii) Lessor shall not be obligated to purchase Second Additional
Commitment Equipment hereunder after December 31, 1998, provided that
the funding period may be extended to April 30, 1999 if Lessor has
received by no later than December 31, 1998 and approved in its sole
discretion Lessee's monthly 1999 Financial Plan financial forecasts
and projections; (iv) all Lease documentation relevant to the Second
Additional Commitment required by Lessor has been executed by Lessee
or provided by Lessee no later than October 31, 1998; (v) the
equipment described on the Second Additional Commitment Schedule is
acceptable to Lessor; (vi) with respect to each funding Lessee has
provided to Lessor each of the closing documents and other items
described in Exhibit A hereto (which documents shall be in form and
substance acceptable to Lessor) and which list may be modified for
each subsequent funding; (vii) there is no material adverse change in
Lessee's condition, financial or otherwise, as determined by Lessor,
and Lessee so certifies, from (yy) the date of the most recent
financial statements delivered by Lessee to Lessor prior to execution
of this Amendment to (zz) the date of Lessor's purchase of the Second
Additional Commitment Equipment; (viii) at all fundings Lessee is
performing according to its financial forecasts and projections
referred to as "Financial Forecasts" 3 pages, dated July 31, 1998, as
may be amended from time to time in form and substance acceptable to
Lessor ("Second Additional Commitment Plan"); (ix) Lessor or its agent
has inspected and placed identification labels on the Second
Additional Commitment Equipment; and (x) Lessor has received in form
and substance acceptable to Lessor; (a) Lessee's interim financial
statements signed by a financial officer of Lessee; (b) evidence of
Lessee's receipt of $20,000,000 equity by August 18, 1998 with new
Capitalization Table; and (c) evidence satisfactory to Lessor of
Lessee's $84,000 cash position as of May 31, 1998.
(b) Following Section 34A, a new Section 34B is added as follows:
34B. SECOND ADDITIONAL COMMITMENT FEE. Lessee has paid to Lessor a
commitment fee ("Second Additional Commitment Fee") of Five Thousand
Dollars ($5,000) with respect to the Second Additional Commitment. The
Second Additional Commitment Fee shall be applied by Lessor first to
reimburse Lessor for all out-of-pocket UCC search costs, inspections
and appraisal fees incurred by Lessor, and then proportionally to the
first month's rent for each Second Additional Commitment Schedule, in
the proportion that the purchase price of the Second Additional
Commitment Equipment leased pursuant to the Second Additional
Commitment Schedule bears to the Second Additional Commitment.
However, the portion of the Second Additional Commitment Fee which is
not applied to rental shall be non-refundable except if Lessor
defaults in its obligations pursuant to Section 3A.
(c) The parties agree that Section 36 shall apply to all Second Additional
Commitment Schedules.
3. Representations and Warranties: Lessee hereby reconfirms as of the date
------------------------------
hereof, its representations and warranties set forth in Section 5 of the Lease.
4. Continued Validity of Lease. Except as amended by this Amendment, the Lease
---------------------------
shall continue in full force and effect as originally constituted and is
ratified and affirmed by the parties hereto. Such Amendment shall not amend or
otherwise affect any of the Schedules executed and delivered by Lessee prior to
the date hereof.
5. Authorization. Each party represents to the other that the individual
-------------
executing this Amendment on its behalf is the duly appointed signatory of such
party to this Amendment and that such individual is authorized to execute this
Amendment by or on behalf of such party and to take all action required by the
terms of this Amendment.
2
<PAGE>
6. When Amendment is Effective. This Amendment shall be binding and deemed
---------------------------
effective when executed by Lessee and accepted and executed by Lessor. Upon such
effectiveness this Amendment shall be deemed to have amended the Lease as
provided herein.
7. Captions. Section headings and numbers have been set forth herein for
--------
convenience only. Unless the contrary is compelled by the context, everything
contained in each section applies equally to this entire Amendment.
8 No Novation. This Amendment is not intended to be, and shall not be
-----------
construed to create, a novation or accord and satisfaction, and, except as
otherwise provided herein, the Lease shall remain in full force and effect.
9. Severability. Each provision of this Amendment shall be severable from every
------------
other provision of this Amendment for the purpose of determining the legal
enforceability of any specific provision.
10. Entire Agreement. The Lease as amended by this Amendment constitutes the
-----------------
entire agreement between Lessee and Lessor with respect to the subject matter
hereof and supersedes all prior and contemporaneous negotiations,
communications, discussions and agreements concerning such subject matter.
Lessee acknowledges and agrees that Lessor has not made any representation,
warranty or covenant in connection with this Amendment.
11. Conflicts. In the event of any conflict between the terms of this Amendment
----------
and terms of the Master Equipment Lease Agreement No. 0044, the terms of this
Amendment shall prevail.
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Amendment as of the date first set forth above.
LESSOR: LESSEE:
PHOENIX LEASING INCORPORATED LIQUID AUDIO INC.
By:________________________ By: /s/ [SIGNATURE ILLEGIBLE]
----------------------------
Name:______________________ Name:/s/ [SIGNATURE ILLEGIBLE]
---------------------------
Title:_____________________ Title: [ILLEGIBLE]
--------------------------
3
<PAGE>
Exhibit: A to Amendment No. 2
TO MASTER EQUIPMENT LEASE NO 0044
Dated as of October 15, 1996
CLOSING MEMORANDUM
------------------
1.* Duly executed Amendment No. 2 marked "Original."
2. Duly executed Second Additional Commitment Schedule marked "Original."
3. Duly executed Certificate of Acceptance. [EXECUTE UPON ACCEPTANCE OF
EQUIPMENT]
4. Insurance Certificates.
5.* Resolutions of Lessee's Board of Directors, including an incumbency
certificate.
6. Real Property Waiver.**
7. UCC Financing Statements.
8.* Additional Stock Warrant.
9. Bill of Sale (for Sale-Leaseback Equipment).
10. UCC search.
11.* Payment of Commitment Fee.
12. Equipment List, in form and substance satisfactory to Lessor.
13. Lessee's most recent financial statements.
14. Certificate of Chief Financial Officer stating that no event of default has
occurred, there is no adverse change in the financial condition of Lessee
and that the Second Additional Commitment Equipment is free of any
encumbrances.
15. See Section 3A of Amendment No. 2 for additional preconditions to closing.
16. Intercreditor Agreement, if applicable.
* First Schedule Only.
** Required if any Equipment is a fixture, i.e., attached to real property, or
located in certain states.
<PAGE>
EXHIBIT 10.21
LIQUID AUDIO, INC.
401(K) PLAN
SUMMARY PLAN DESCRIPTION
<PAGE>
TABLE OF CONTENTS
I
INTRODUCTION TO YOUR PLAN
II
GENERAL INFORMATION ABOUT YOUR PLAN
1. General Plan Information 2
2. Employer Information 2
3. Plan Administrator Information 2
4. Plan Trustee Information 3
5. Service of Legal Process 3
III
PARTICIPATION IN YOUR PLAN
1. Eligibility Requirements 3
2. Participation Requirements 3
IV
CONTRIBUTIONS TO YOUR PLAN
1. Employer Contributions to the Plan 4
2. Participant Salary Reduction Election 4
3. Your Share of Employer Contributions 6
4. Compensation 7
5. Forfeitures 7
6. Transfers from Qualified Plans (Rollovers) 7
7. Directed Investments 8
i
<PAGE>
V
BENEFITS UNDER YOUR PLAN
1. Distribution of Benefits Upon Normal Retirement 8
2 Distribution of Benefits Upon Early Retirement 8
3. Distribution of Benefits Upon Late Retirement 8
4. Distribution of Benefits Upon Death 8
5. Distribution of Benefits Upon Disability 9
6. Distribution of Benefits Upon Termination of Employment 9
7. Vesting in Your Plan 10
8. Benefit Payment Method 10
9. Hardship Distribution of Benefits 11
10. Treatment of Distributions from Your Plan 12
11. Domestic Relations Order 13
12. Pension Benefit Guaranty Corporation 13
VI
YEAR OF SERVICE RULES
1. Year of Service and Hours of Service 13
2. One Year Break in Service 14
VII
YOUR PLAN'S "TOP HEAVY RULES"
1. Explanation of "Top Heavy Rules" 14
VIII
LOANS
1. Loan Requirements 15
ii
<PAGE>
IX
CLAIMS BY PARTICIPANTS AND BENEFICIARIES
1. The Claims Review Procedure 17
X
STATEMENT OF ERISA RIGHTS
1. Explanation of Your ERISA Rights 18
XI
AMENDMENT AND TERMINATION OF YOUR PLAN
1. Amendment 20
2. Termination 20
iii
<PAGE>
EXHIBIT 10.21
LIQUID AUDIO, INC.
401(K) PLAN
SUMMARY PLAN DESCRIPTION
________________________________________________________________________________
I
INTRODUCTION TO YOUR PLAN
________________________________________________________________________________
Liquid Audio, Inc. wishes to recognize the efforts its employees have made to
its success and to reward them by adopting a 401(k) Profit Sharing Plan and
Trust. This 401(k) Profit Sharing Plan will be for the exclusive benefit of
eligible employees and their beneficiaries.
Your Plan is a "salary reduction plan." It is also called a "401(k) plan".
Under this type of plan, you may choose to reduce your compensation and have
these amounts contributed to this plan on your behalf.
The purpose of this Plan is to reward eligible employees for long and loyal
service by providing them with retirement benefits.
Between now and your retirement, your Employer intends to make contributions for
you and other eligible employees. When you retire, you will be eligible to
receive the value of the amounts which have accumulated in your account.
Your Employer has the right to submit this Plan to the Internal Revenue Service
for approval. The Internal Revenue Service will issue a "determination letter"
to your Employer approving this Plan as a "qualified" retirement plan, if this
Plan meets specific legal requirements.
This Summary Plan Description is a brief description of your Plan and your
rights, obligations, and benefits under that Plan. Some of the statements made
in this summary Plan Description are dependent upon this Plan being "qualified"
under the provisions of the Internal Revenue Code. This Summary Plan
Description is not meant to interpret, extend, or change the provisions of your
Plan in any way. The provisions of your Plan may only be determined accurately
by reading the actual Plan document.
A copy of your Plan is on file at your Employer's office and may be read by you,
your beneficiaries, or legal representatives at any reasonable time. If you
have any questions regarding either your Plan or this Summary Plan Description,
you should ask your Plan's Administrator. In the event of any discrepancy
between this Summary Plan Description and the actual provisions of the Plan, the
Plan will govern.
<PAGE>
________________________________________________________________________________
II
GENERAL INFORMATION ABOUT YOUR PLAN
________________________________________________________________________________
There is certain general information which you may need to know about your Plan.
This information has been summarized for you in this section.
1. GENERAL PLAN INFORMATION
Liquid Audio, Inc. 401(k) Plan is the name of your Plan. Your Employer has
assigned Plan Number 001 to your Plan. The provisions of your Plan become
effective on March 15, 1996 which is called the Effective Date of the Plan.
Your Plan's records are maintained on a twelve-month period of time. This is
known as the Plan Year. The Plan Year begins on January 1st and ends on
December 31st. The first Plan Year will be a short plan year beginning on
March 15, 1996 and ending on December 31, 1996.
Certain valuations and distributions are made on the Anniversary Date of your
Plan. This is December 31st.
The contributions made to your Plan will be held and invested by the Trustee of
your Plan. Your Plan and Trust will be governed by the Laws of the State of
California.
2. EMPLOYER INFORMATION
Your Employer's name and identification number are:
Liquid Audio, Inc.
810 Winslow Street
Redwood City CA 94063
77-0421089
3. PLAN ADMINISTRATOR INFORMATION
The name, address and business telephone number of your Plan's Administrator
are:
Liquid Audio, Inc.
810 Winslow Street
Redwood City, CA 94063
(650) 549-2000
Your Plan's Administrator keeps the records for the Plan and is responsible for
the administration of the Plan. The Administrator has discretionary authority
to construe the terms of the Plan and make determinations on questions which may
affect your eligibility for benefits. Your Plan's Administrator will also
answer any questions you may have about your Plan.
2
<PAGE>
4. PLAN TRUSTEE INFORMATION
The names, address and business telephone number of your Plan's Trustee is:
Robert Flynn
810 Winslow Street
Redwood City, CA 94063
(650) 549-2000
Your Plan's Trustee has been designated to hold and invest Plan assets for the
benefit of you and other Plan participants. The trust fund, established by the
Plan's Trustee will be the funding medium used for the accumulation of assets
from which benefits will be distributed.
5. SERVICE OF LEGAL PROCESS
The name and address of your Plan's agent for service of legal process are:
Liquid Audio, Inc.
810 Winslow Street
Redwood City, CA 94063
(650) 549-2000
Service of legal process may also be made upon the Trustee.
________________________________________________________________________________
III
PARTICIPATION IN YOUR PLAN
________________________________________________________________________________
Before you become a member or "participant" in the Plan, there are certain
eligibility and participation rules which you must meet. These rules are
explained in this section.
1. ELIGIBILITY REQUIREMENTS
You will be eligible to participate in the Plan upon the date of your
employment with Liquid Audio, Inc.
2. PARTICIPATION REQUIREMENTS
Once you have satisfied your Plan's eligibility requirements, your next step
will be to actually become a member or a "participant" on a specified day of
the Plan Year. This day is called the Effective Date of Participation.
3
<PAGE>
You will become a participant on the first day of the month coinciding
with or next following the date on which you satisfy your Plan's eligibility
requirements.
4
<PAGE>
________________________________________________________________________________
IV
CONTRIBUTIONS TO YOUR PLAN
________________________________________________________________________________
1. EMPLOYER CONTRIBUTIONS TO THE PLAN
Each year your employer will contribute to your Plan the following amounts:
(a) The total amount of the salary reductions you elected to defer. (See
the Section in this Article entitled Participant Salary Reduction
Election.")
(b) A discretionary matching contribution equal to a discretionary
percentage of the amount of the salary reduction you elected to defer,
which percentage will be determined each year by the Employer.
You will share in this matching contribution if you have completed more
than 500 hours of service during the Plan Year prior to termination of
employment.
(c) A discretionary amount determined each year by your Employer.
You will share in any discretionary contributions if you completed more
than 500 hours of service during the Plan Year prior to termination of
employment.
In determining your eligibility to share on contributions for the year,
there are special rules which apply if your employment terminates due to
your Retirement (normal or late) or Total and Permanent Disability or
death.
If the reason your employment terminated is due to your Retirement (normal
or late) Total and Permanent Disability or death then you will be eligible
to share in the contribution for the year without regard to whether you
satisfied the requirements explained above.
2. PARTICIPANT SALARY REDUCTION ELECTION
As a participant, you may elect to defer a percentage of your compensation each
year instead of receiving that amount in cash. However, your total deferrals in
any taxable year may not exceed a dollar limit, which is set by law. The limit
for 1999 is $10,000. This limit may be increased in future years for cost of
living changes. The Administrator will notify you of the maximum percentage you
may defer.
The amount you elect to defer will be deducted from your pay in accordance with
a procedure established by your Employer and Administrator. The procedure will
require that you enter into a written salary reduction agreement after you
satisfy
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the Plan's eligibility requirements. You will be permitted to modify your
elections during the Plan Year. You are also permitted to revoke your election
any time during the Plan Year.
The amount you elect to defer, and any earnings on that amount, will not be
subject to income tax until it is actually distributed to you. This money will,
however, be subject to Social Security taxes at all times.
You should also be aware that the annual dollar limit is an aggregate limit
which applies to all deferrals you may make under this plan or other cash or
deferred arrangements (including tax-sheltered 403(b) annuity contracts,
simplified employee pensions or other 401(k) plans in which you may be
participating). Generally, if your total deferrals under all cash or deferred
arrangements for a calendar year exceed the annual dollar limit, the excess must
be included in your income for the year. For this reason, it is desirable to
request in writing that these excess deferrals be returned to you. If you fail
to request such a return, you may be taxed a second time when the excess
deferral is ultimately distributed from the Plan.
You must decide which plan or arrangement you would like to have return the
excess. If you decide that the excess should be distributed from the plan, you
should communicate this in writing to the Administrator no later than the March
1st following the close of the calendar year in which such excess deferrals were
made. If the entire dollar limit is exceeded in this Plan or any other plan
maintained by the Employer, you will be deemed to have notified the
Administrator of the excess deferral and any earnings to you by April 15th.
In the event you receive a hardship distribution from your deferrals to this
Plan or any other plan maintained by your Employer, you will not be allowed to
make additional salary reductions for a period of twelve (12) months after you
receive the distribution. Furthermore, the dollar limitation set by law with
respect to your taxable year following the year in which you received the
distribution, will be reduced by your salary reductions, if any, for the taxable
year of the distribution.
You will always be 100% vested in the amount you deferred. This means that you
will always be entitled to all of the deferred amount. This money will,
however, be affected by any investment gains or losses. If the Trustee invested
this money and there was a gain, the balance in your account would increase. Of
course, if there was a loss, the balance in your account would decrease. Your
interest in this account cannot be forfeited for any reason.
Distributions from your deferred account are not permitted before age 59 1/2
EXCEPT in the event of:
(a) Death
(b) Disability
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(c) Termination of employment; or
(d) reasons of proven financial hardship (See the Section in the Article
entitled "Hardship Distribution of Benefits").
In addition, if you are a highly compensated employee (generally owners,
officers or individuals receiving wages in excess of certain amounts established
by law), a distribution from your deferred account of certain excess
contributions may be required to comply with the law. The Administrator will
notify you when a distribution is required.
3. YOUR SHARE OF EMPLOYER CONTRIBUTIONS
Your Employer will allocate the amount you elect to defer to an account
maintained by the Trustee on your behalf.
If you are eligible, your Employer will also allocate the matching contribution
made to the Plan on your behalf. (See the Section in this Article entitled
"Employer Contributions to the Plan.")
Your Employer's discretionary contribution will be "allocated" or divided among
participants eligible to share in the contribution for the Plan Year.
Your share of your Employer's discretionary contribution is determined in two
steps. The initial allocation is based on the social security taxable wage
base. Up to 5.7% times the excess of salary for those participants who have
compensation over the taxable wage base. Then by the following fraction:
Employer's Your Compensation
-----------------
Discretionary Contribution X Total Compensation of All
Participants Eligible to
Share
For example: Suppose the Employer's discretionary contribution for the Plan
Year is $20,000. Employee A's compensation for the Plan Year is $25,000. The
total compensation of all eligible participants eligible to share, including
Employee A is $250,000. Employee A's share will be:
$ 25,000
$20,000 X ------- or $2,000
$250,000
In addition to the Employer's contributions made to your account, your account
will be credited annually with a share of the investment earnings or losses of
the trust fund.
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You should also be aware the law imposes certain limits on how much money may be
allocated to your account for a year. These limits are extremely complex but
generally no more than the lesser of $30,000 or 25% of your compensation may be
allocated to you (excluding earnings of losses) in any year. The Administrator
will inform you if these limits have affected you.
4. COMPENSATION
For the purposes of your Plan, compensation has a special meaning. Compensation
is defined as your total compensation during a Plan Year that is subject to
income tax, is reflected on your W-2 Form, and that has been actually paid to
you in the current Plan Year.
For the first year of the Plan your compensation will be recognized for benefit
purposes for the entire Year.
The Plan, by law, cannot recognize compensation in excess of $160,000. This
amount will be adjusted in the future years for cost of living increases. It
will also be applied to certain highly compensated employees and their family
members as if they were a single participant. If you or a member of your family
may be affected by this rule, ask your Administrator for further details. For
any short Plan Year, the adjusted $160,000 limit will be prorated based upon the
number of full months in the short Plan Year.
5. FORFEITURES
Forfeitures are created when participants terminate employment before becoming
entitled to their full benefits under the Plan. These forfeited amounts will be
used to reduce your Employer's contributions to the Plan.
6. TRANSFERS FROM QUALIFIED PLANS (ROLLOVERS)
At the discretion of the Administrator, you may be permitted to deposit into
your Plan distributions you have received from other plans. Such a deposit is
called a "rollover" and may result in tax savings to you. You should consult
qualified council to determine if a rollover is in your best interest.
Your rollover will be placed in a separate account called a "participant's
rollover account." The Administrator may establish rules for investment.
You will always be 100% vested in your "rollover account." This means that you
will always be entitled to all of your rollover contributions. Rollover
contributions will be affected by any investment gains or losses. If the
Trustee invested this money and there was a gain, the balance in your account
would increase. Of course, if there were a loss from an investment, the balance
in your account would decrease.
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7. DIRECTED INVESTMENTS
The Administrator may establish rules for investment of your account balance.
If the Administrator approves, you may direct the Trustee as to the investment
of your account balance.
________________________________________________________________________________
V
BENEFITS UNDER YOUR PLAN
________________________________________________________________________________
1. DISTRIBUTION OF BENEFITS UPON NORMAL RETIREMENT
Your Normal Retirement Date is the first day of the month coinciding with or
next following your Normal Retirement Age.
You will attain your Normal Retirement Age when you reach your 60th birthday.
At your Normal Retirement Age, you will be entitled to 100% of your account
balance.
2. DISTRBUTION OF BENEFITS UPON EARLY RETIREMENT
Your Early Retirement Date is the first day of the month coinciding following
the date you have attained age 59 1/2.
On your Early Retirement Date you will be entitled to 100% of your account
balance. Payment of your Early Retirement benefits will begin as soon as
practicable following your Early Retirement Date if you choose to retire on such
date.
3. DISTRIBUTION OF BENEFITS UPON LATE RETIREMENT
You may remain employed past your Plan's Normal Retirement Date and retire
instead on your Late Retirement Date. Your Late Retirement Date is the first
day of the month coinciding with or next following the date you choose to
retire, after having reached your Normal Retirement Date. On your Late
Retirement Date, you will be entitled to 100% of your Account. Actual benefit
payment will occur as soon as practicable following your Late Retirement Date.
4. DISTRIBUTION OF BENEFITS UPON DEATH
Your beneficiary will be entitled to a single lump-sum distribution of 100% of
your account balance upon your death.
If you are married at the time of your death, your spouse will be the
beneficiary of the death benefit, unless you otherwise elect in writing on a
form to be furnished to you by the Administrator. IF YOU WISH TO DESIGNATE A
BENEFICIARY OTHER THAN YOUR SPOUSE, HOWEVER, YOUR SPOUSE MUST
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IRREVOCABLY CONSENT TO WAIVE ANY RIGHT TO THE DEATH BENEFIT. YOUR SPOUSE'S
CONSENT MUST BE IN WRITING, BE WITNESSED BY A NOTARY OR A PLAN REPRESENTATIVE
AND ACKNOWLEDGE THE SPECIFIC NONSPOUSE BENEFICIARY.
If however,
(a) your spouse has validly waived any right to the death benefit in the
manner outlined above,
(b) your spouse cannot be located; or
(c) you are not married at the time of your death, then your death benefit
will be paid to the beneficiary of your own choosing in a single lump sum.
You may designate the beneficiary on a form to be supplied to you by the
Administrator. If you change your designation, your spouse must again
consent to the change.
Regardless of the method of distribution selected, your entire death benefit
must generally be paid to your beneficiaries within five years after your death
(the "5-year rule"). However, if your designated beneficiary is a person
(instead of your estate or most trusts), then you or your beneficiary may elect
to have minimum distributions begin within one year of your death and it may be
paid over the designated beneficiary's life expectancy (the "1-year rule"). If
your spouse is the beneficiary, then under the "1-year rule", the lump sum
payment may be delayed until the year in which you would have attained age 70
1/2. The election to have death benefits distributed under the "1-year rule"
must be made no later than the time at which minimum distributions must commence
under the "1-year rule" (or in the case of a surviving spouse, the "5-year
rule," if earlier).
Since your spouse has certain rights in the death benefit, you should
immediately report any change in your marital status to the Administrator.
5. DISTRIBUTION OF BENEFITS UPON DISABILITY
Under your Plan, disability is defined as a physical or mental condition
resulting from bodily injury, disease, or mental disorder which renders you
incapable of continuing any gainful occupation with your Employer. This
condition must constitute total disability under the Federal Social Security
Acts.
If you become disabled while a participant, you will be entitled to 100% of
your account balance. Payment of your disability benefits will be made to you
as if you had retired. (See Section in this Article entitled "Benefit Payment
Method").
6. DISTRIBUTION OF BENEFITS UPON TERMINATION OF EMPLOYMENT
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Your Plan is designed to encourage you to stay with your Employer until
retirement. Payment of your account balance under your Plan is only available
upon your death, disability or retirement.
If your employment terminates for reasons other than those listed above, you
will be entitled to receive only your "vested percentage" of your account
balance and the remainder of your account will be forfeited. Only contributions
made by your Employer are subject to forfeiture. (See the Section in this
Article entitled "Vesting in Your Plan").
If you so elect, the Administrator will direct the Trustee to distribute your
vested benefit to you before the date it would normally be distributed (upon
your death, disability or retirement). If your vested benefit under the Plan at
the time of any prior distribution exceeded $3,500 or currently exceeds $3,500,
you must give written consent before the distribution may be made. Amounts of
$3,500 or less will be distributed without the need for consent.
7. VESTING
Vesting Schedule
Years of Service Percentage
---------------- ----------
0-1 25%
2 50
3 75
4 100%
You are always 100% vested in your salary reduction amounts contributed to the
Plan.
8. BENEFIT PAYMENT METHOD
At the time you are entitled to receive a distribution under the Plan, the
Administrator will direct the Trustee to pay your benefits to you in one lump-
sum cash payment.
GENERALLY, WHENEVER A DISTRIBUTION IS TO BE MADE TO YOU ON OR AS OF AN
ANNIVERSARY DATE, IT MAY BE MADE ON SUCH DATE OR AS SOON THEREAFTER AS IS
PRACTICABLE. HOWEVER, UNLESS YOU ELECT IN WRITING TO DEFER THE RECEIPT OF
BENEFITS, DISTRIBUTION MUST OCCUR NO LATER THAN THE 60TH DAY AFTER THE CLOSE OF
THE PLAN YEAR IN WHICH THE LATEST OF THE FOLLOWING EVENTS OCCURS:
(a) The date on which you reach the age of 65 or your Normal Retirement Age;
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<PAGE>
(b) the 10th anniversary of the year in which you became a
participant in the Plan;
(c) the date you terminated employment with your Employer.
Regardless of whether you elect to delay the receipt of benefits, there are
other rules which generally require payment of your benefits to be made no later
than the April 1st following the year in which you reach age 70 1/2. You should
see the Administrator if you feel you may be affected by this rule.
9. HARDSHIP DISTRIBUTION OF BENEFITS
The Administrator may direct the Trustee to distribute up to 100% of your
account balance in the event of immediate and heavy financial need. This
hardship distribution is not in addition to your other benefits and will
therefore reduce the value of the benefits you will receive at Normal
Retirement.
Distribution may only be made from the participant account balance.
Withdrawal will be authorized only if the distribution is to be used for one of
the following purposes:
(a) The payment of expenses for medical care (described in Section 213(d)
of the Internal Revenue Code) previously incurred by you or your
dependent(s) or necessary for you or your dependent(s) to obtain
medical care;
(b) The costs directly related to the purchase of your principal
residence (excluding mortgage payments);
(c) The payment of tuition and related educational fees for the next
twelve (12) months of post-secondary education for yourself, your
spouse or dependent(s);
(d) The payment necessary to prevent your eviction from your principal
residence or foreclosure on the mortgage of your principal residence.
A distribution will be made from your account, but only if you certify and agree
that all of the following conditions are satisfied:
. (a) The distribution is not in excess of the amount of your immediate
and heavy financial need. The amount of your immediate and heavy
financial need may include any amounts necessary to pay any federal,
state, or local income taxes or penalties reasonably anticipated to
result from the distribution;
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<PAGE>
. (b) You have obtained all distributions, other than hardship
distributions, and all non-taxable (at the time of the loan) loans
currently available under all plans maintained by your Employer;
. (c) That your elective contributions and employee contributions will
be suspended for at least twelve (12) months after your receipt
of the hardship distribution; and
. (d) That you will not make elective contributions for your taxable
year immediately following the taxable year of the hardship
distribution, except to the extent permitted by the Plan.
In addition to these rules, there are restrictions placed on hardship
distributions which are made from certain accounts. These accounts are
generally the accounts which receive your salary reduction contributions and
other Employer contributions which are used to satisfy special rules that apply
to 401(k) plans. Any hardship distribution from these accounts will be limited,
as of the date of distribution, to your total salary reduction contributions,
reduced by the amount of any previous distributions made to you from these
accounts. Ask your Administrator if you need further details.
10. TREATMENT OF DISTRIBUTIONS FROM YOUR PLAN
Whenever you receive a distribution from your Plan, it will normally be subject
to income taxes. You may, however, reduce or defer entirely, the tax due on
your distribution through use of one of the following methods:
. (a) The rollover of all or portion of the distribution to an Individual
Retirement Account (IRA) or another qualified employer plan. This will
result in no tax being due until you begin withdrawing funds from the IRA
or other qualified employer plan. The rollover of the distribution,
however, MUST be made within strict time frames (normally, within 60 days
after you receive your distribution). Under certain circumstances all or a
portion of a distribution may not qualify for this rollover treatment. In
addition, most distributions will be subject to mandatory federal income
tax withholding at a rate of 20%. This will reduce the amount you actually
receive. For this reason, if you wish to rollover all or a portion of your
distribution amount, the direct transfer option described in paragraph (b)
below would be the better choice.
. (b) You may request for most distributions that a direct transfer of all or
a portion of your distribution amount be made to either an Individual
Retirement Account (IRA) or another qualified employer plan willing to
accept the transfer. A direct transfer will result in no tax being due
until you withdraw funds from the IRA or other qualified employer plan.
Like the rollover, under certain circumstances all or a portion of the
amount to be distributed may not qualify for this direct transfer. If you
elect to actually receive the distribution rather than request a direct
transfer,
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<PAGE>
then in most cases 20% of the distribution amount will be withheld for
federal income tax purposes.
. (c) The election of favorable income tax treatment under "10-year forward
averaging," "5-year forwarding averaging" or if you qualify, "capital
gains" method of taxation.
WHENEVER YOU RECEIVE A DISTRIBUTION, THE ADMINISTRATOR WILL DELIVER TO YOU A
MORE DETAILED EXPLANATION OF THESE OPTIONS. HOWEVER, THE RULES WHICH DETERMINE
WHETHER YOU QUALIFY FOR FAVORABLE TAX TREATMENT ARE VERY COMPLEX. YOU SHOULD
CONSULT WITH QUALIFIED TAX COUNSEL BEFORE MAKING A CHOICE.
11. DOMESTIC RELATIONS ORDER
As a general rule, your interest in your account, including your "vested
interest," may not be alienated. This means that your interest may not be sold,
used as collateral for a loan, given away or otherwise transferred. In
addition, your creditors may not attach, garnish or otherwise interfere with
your account.
There is an exception, however, to this general rule. The Administrator may be
required by law to recognize obligations you incur as a result of court ordered
child support or alimony payments. The Administrator must honor a "qualified
domestic relations order." A "qualified domestic relations order" is defined as
a decree or order issued by a court that obligates you to pay child support or
alimony, or otherwise allocates a portion of your assets in the Plan to your
spouse, former spouse, child or other dependent. If a qualified domestic
relations order is received by the Administrator, all or portion of your
benefits may be used to satisfy the obligation. The Administrator will
determine the validity of any domestic relations order received.
12. PENSION BENEFIT GUARANTY CORPORATION
Benefits provided by your Plan are NOT insured by the Pension Benefit Guaranty
Corporation (PBGC) under Title IV of the Employee Retirement Income Security Act
of 1974 because the insurance provisions under ERISA are not applicable to your
Plan.
VI
YEAR OF SERVICE RULES
1. YEAR OF SERVICE AND HOURS OF SERVICE
For purposes of determining whether you have completed a Year of Service where
the computation period is based upon a short Plan Year, your Administrator will
notify you of the number of the Hours of Service that are required and the
method of calculating a Year of Service.
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<PAGE>
An "Hour of Service" has special meaning for Plan purposes. You will be
credited with an Hour of Service for:
. (a) each hour for which you are directly or indirectly compensated by
your Employer for the performance of duties during the Plan Year;
. (b) each hour for which you are directly or indirectly compensated by
your Employer for reasons other than performance of duties (such as
vacation, holidays, sickness, disability, lay-off, military duty,
jury duty or leave of absence during the Plan Year); and
. (c) each hour for back pay awarded or agreed to by your Employer.
You will not be credited for the same Hours of Service both under (a) or (b), as
the case may be, and under (c).
2. 1-YEAR BREAK IN SERVICE
A 1-Year Break in Service is a computation period during which you have not
completed more than 500 Hours of Service with your Employer.
A 1-Year Break in Service DOES NOT occur, however, in the computation period in
which you enter or leave the Plan for reasons of:
(a) an authorized leave of absence;
(b) certain maternity or paternity absences.
The Administrator will be required to credit you with Hours of Service for a
maternity or paternity absence. These are absences taken on account of
pregnancy, birth, or adoption of your child. No more than 501 Hours of Service
shall be credited solely to avoid your incurring a 1-Year Break in Service. The
Administrator may require you to furnish proof that your absence qualifies as
maternity or paternity absence.
VII
YOUR PLAN'S "TOP HEAVY RULES"
1. EXPLANATION OF "TOP HEAVY RULES"
A 401(k) Profit Sharing Plan that primarily benefits "key employees" is called a
"Top Heavy Plan." Key employees are certain owners or officers of your
15
<PAGE>
Employer. A Plan is a "Top Heavy Plan" when more than 60% of the contributions
or benefits have been allocated to key employees.
Each year, the Administrator is responsible for determining whether your Plan is
a "Top Heavy Plan".
If your Plan becomes Top Heavy in any Plan Year, then non-key and key employees
will be entitled to certain "Top Heavy minimum benefits," and, other special
rules will apply. Among these Top Heavy rules are the following:
(a) Your Employer may be required to make a contribution equal to 3% of your
compensation to your account;
(b) If you are a participant in more than one Plan, you may not be entitled
to minimum benefits under both Plans.
VIII
LOANS
You may apply to the Administrator for a loan from the Plan. Your application
must be in writing on forms which the Administrator will provide to you. The
administrator may also request that you provide additional information, such as
financial statements, tax returns and credit reports. After considering your
application, the Administrator may, in its discretion, determine that you
qualify for the loan. The Administrator will inform the Trustee that you
qualify. The Trustee may then review the Administrator's determination and make
a loan to you if it is a prudent investment for the Plan.
1. LOAN REQUIREMENTS
There are various rules and requirements that apply for any loan. These rules
are outlined in this section. In addition, your Employer has established a
written loan program which explains these requirements in more detail. You can
request a copy of the loan program from the Administrator. Generally, the rules
for loans include the following:
(a) Loans must be made available to all participants and their beneficiaries
on a uniform and non-discriminatory basis.
(b) All loans must be adequately secured. You may use up to one-half (1/2)
of your vested account balance under the Plan as security for the loan. If
more security is required, your principal residence may be used, if
permitted by State law. The Plan may also require that repayments on the
loan obligation be by payroll deduction.
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<PAGE>
(c) All loans must bear a reasonable rate of interest. The interest rate
must be a bank or other professional lender that would charge for making a
loan in similar circumstances.
(d) All loans must have a definite repayment period which provides for
payments to be made not less frequently than quarterly, and for the loan to
be amortized on a level basis over a reasonable period of time, not to exceed
five (5) years. However, if you use the loan to acquire your principal
residence, you may repay the loan over a reasonable period of time that may
be longer than five (5) years.
(e) All loans will be considered a direct investment from your account under
the Plan. All payments of principal and interest by you and on a loan shall
be credited to your account.
(f) The amount the Plan may loan to you is limited by rules under the
Internal Revenue Code. All loans, when added to the outstanding balance of
all other loans from the Plan, will be limited to the lesser of:
1) $50,000 reduced by the excess, if any, of your highest
outstanding balance of loans from the Plan during the one-year period
prior to the date of the loan over your current outstanding balance
of loans; or
2) the greater of 1/2 of your vested account balance, or $10,000
(g) If you fail to make payments when they are due under the loan, you will
be considered to be "in default." The Trustee would then have authority to
take all reasonable actions to collect the balance owing on the loan. This
could include filing a lawsuit or foreclosing on the security for the loan.
Under certain circumstances, a loan that is in default may be considered a
distribution from the Plan, and could result in taxable income to you. In
any event, your failure to repay a loan will reduce the benefit you would
otherwise be entitled to from the Plan.
IX
CLAIMS BY PARTICIPANTS AND BENEFICIARIES
Benefits will be paid to participants and their beneficiaries without the
necessity of formal claims. You or your beneficiaries, however, may make a
request for any Plan benefits to which you may be entitled. Any such request
must be made in writing, and it should be made to the Administrator. (See the
Article in the Summary entitled "GENERAL INFORMATION ABOUT YOUR PLAN.")
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<PAGE>
Your request for Plan benefits shall be considered a claim for Plan benefits,
and it will be subject to a full and fair review. If your claim is wholly or
partially denied, the Administrator will furnish you with a written notice of
this denial. This written notice must be provided to you within a reasonable
period of time (generally 90 days) after the receipt of your claim by the
Administrator. The written notice must contain the following information:
. (a) The specific reason or reasons for the denial;
. (b) specific reference to those denial is based; Plan provisions on
which the
. (c) a description of any additional necessary to correct your claim such
material or information information or material and an explanation
of why is necessary; and
. (d) appropriate information as to your beneficiary wishes to the steps
to be taken if you or submit your claim for review.
If notice of the denial of a claim is not furnished to you in accordance with
the above within a reasonable period of time, your claim will be deemed denied.
You will then be permitted to proceed to the review stage described in the
following paragraph.
If your claim has been denied, and you wish to submit your claim for review, you
must follow the Claims Review Procedure.
1. THE CLAIMS REVIEW PROCEDURE
(a) Upon the denial of your claim for benefits, you may file your claim for
review, in writing, with the Administrator.
(b) YOU MUST FILE THE CLAIM FOR REVIEW NO LATER THAN 60 DAYS AFTER YOU HAVE
RECEIVED WRITTEN NOTIFICATION OF THE DENIAL OF YOUR CLAIM FOR BENEFITS, OR
IF NO WRITTEN DENIAL OF YOUR CLAIM WAS PROVIDED, NO LATER THAN 60 DAYS AFTER
THE DEEMED DENIAL OF YOUR CLAIM.
(c) You may review all pertinent documents relating to the denial of your
claim and submit any issues and comments, in writing, to the Administrator.
(d) Your claim for review must be given a full and fair review. If your
claim is denied, the Administrator must provide you with written notice of
this denial within 60 days after the Administrator's receipt of your written
claim for review. There may be times when this 60 day period may be
extended. This extension may only be made, however, where there are special
circumstances which are communicated to you in writing within
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<PAGE>
the 60 day period. If there is an extension, a decision shall be made as
soon as possible, but not later than 120 days after receipt by the
Administrator of your claim for review.
(e) The Administrator's decision on your claim for review will be
communicated to you in writing and will include specific references to the
pertinent Plan provisions on which the decision was based.
(f) If the Administrator's decision on review is not furnished to you within
the time limitations described above, your claim will be deemed denied on
review.
(g) If benefits are provided or administered by an insurance company,
insurance service, or other similar organization which is subject to
regulation under the insurance laws, the claims procedure relating to these
benefits may provide for review. If so, that company, service or origination
will be the entity to which claims are addressed. If you have any questions
regarding the proper person or entity to address claims, you should ask the
Administrator.
X
STATEMENT OF ERISA RIGHTS
1. EXPLANATION OF YOUR ERISA RIGHTS
As a participant in this Plan you are entitled to certain rights and
protections under the Employee Retirement Income Security Act of 1974, also
called ERISA. ERISA provides that all Plan participants are entitled to:
(a) Examine, without charge, all Plan documents, including:
(1) Insurance contracts;
(2) collective bargaining agreements; and
(3) copies of all documents filed by the Plan with the US Department
of Labor, such as detailed annual reports and Plan descriptions.
This examination may take place at the Administrator's office and at other
specified employment locations of the Employer. (See the Article in this
Summary entitled "GENERAL INFORMATION ABOUT YOUR PLAN").
(b) obtain copies of all Plan documents and other Plan information upon
written request to the Plan Administrator. The Administrator may make a
reasonable charge for the copies;
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(c) receive a summary of the Plan's annual financial report. The
Administrator is required by law to furnish each participant with a copy of
this summary annual report;
(d) obtain a statement telling you whether you have a right to receive a
retirement benefit at Normal Retirement Age and, if so, what your benefits
would be at Normal Retirement Age if you stop working under
the Plan now. If you do not have a right to a retirement benefit, the
statement will tell you how many years you have to work to get a right to a
retirement benefit, the statement will tell you how many years you have to
work to get a right to a retirement benefit. THIS STATEMENT MUST BE
REQUESTED IN WRITING AND IS NOT REQUIRED TO BE GIVEN MORE THAN ONCE A YEAR.
The Plan must provide the statement free of charge.
In addition to creating rights to Plan participants, ERISA imposes duties
upon the people who are responsible for the operation of the Plan. The
people who operate your plan are called "fiduciaries" of the Plan, have a
duty to do so prudently and in the interest of you and other Plan
participants. No one, including your employer or any other person, may fire
you or otherwise discriminate against you in any way to prevent you from
obtaining a pension benefit or exercising you rights under ERISA.
If your claim for a retirement benefit is denied in whole or in part, you
must receive a written explanation of the reason for the denial. You have
the right to have the Administrator review and reconsider your claim. (See
the Article in this Summary entitled "CLAIMS BY PARTICIPANTS AND
BENEFICIARIES").
Under ERISA, there are steps you can take to enforce the above rights. For
instance, if you request materials from the Plan and do not receive them
within 30 days, you may file suit in a federal court. In such a case, the
court may require the Administrator to provide the materials and pay you up
to $100.00 a day until you receive the materials, unless the materials were
not sent because of reasons beyond the control of the Administrator.
If you have a claim for benefits which is denied or ignored, in whole or in
part, you may file suit in a state or federal court.
If the Plan's fiduciaries misuse the Plan's money, or if you are
discriminated against for asserting your rights, you may seek assistance from
the U.S. Department of Labor, or you may file suit in a federal court. The
court will decide who should pay court costs and legal fees. If you are
successful, the court may order the person you have sued to pay
20
<PAGE>
these costs and fees. If you lose, the court may order you to pay these costs
and fees if, for example, it finds your claim is frivolous.
If you have any questions about this statement, or about your rights under
ERISA, you should contact the nearest Area Office of the U.S. Labor-
Management Services Administration, Department of Labor.
21
<PAGE>
XI
AMENDMENT AND TERMINATION OF YOUR PLAN
1. AMENDMENT
Your Employer has the right to amend your Plan at any time. Any such amendment
shall be adopted by formal action of the Employer's board of directors and
executed by an officer authorized to act on behalf of the Employer. In no
event, however, will any amendment:
(a) authorize or permit any part of Plan's assets to be used for
purposes other than the exclusive benefit of participants or their
beneficiaries; or
(b) cause any reduction in the amount credited to your account.
2. TERMINATION
Your Employer has the right to terminate the Plan at any time. Upon
termination, all amounts credited to your accounts will become 100% vested. A
complete discontinuance of contributions by your Employer will constitute a
termination.
22
<PAGE>
EXHIBIT 10.22
LOAN AND SECURITY AGREEMENT
(Bridge Loan -- Multiple Advance)
This LOAN AND SECURITY AGREEMENT is entered into as of April ___, 1998, by
and between SILICON VALLEY BANK ("Bank") and LIQUID AUDIO, INC, a California
corporation ("Borrower").
The parties agree as follows:
1. DEFINITIONS AND CONSTRUCTION
----------------------------
1.1 Definitions. As used in this Agreement, the following terms shall have
-----------
the following definitions:
"Accounts" means all presently existing and hereafter arising
accounts, contract rights, and all other forms of obligations owing to Borrower
arising out of the sale or lease of goods (including, without limitation, the
licensing of software and other technology) or the rendering of services by
Borrower, whether or not earned by performance, and any and all credit
insurance, guaranties, and other security therefor, as well as all merchandise
returned to or reclaimed by Borrower and Borrower's Books relating to any of the
foregoing.
"Affiliate" means, with respect to any Person, any Person that
controls directly or indirectly such Person, any Person that controls or is
controlled by or is under common control with such Person, and each of such
Person's senior executive officers, directors, partners and, for any Person that
is a limited liability company, such Persons, managers and members. For purposes
of this definition, (x) the term "control" means the possession, directly or
indirectly, of the power to direct or cause the direction of the management and
policies of a Person, whether through ownership of voting securities, by
contract or otherwise and (y) beneficial ownership of 10% or more of the voting
common equity (on a fully diluted basis) or warrants or other rights to purchase
such equity (whether or not currently exercisable) of a Person shall be deemed
to be control of such Person.
"Bank Expenses" means all reasonable costs or expenses (including
reasonable attorneys' fees and expenses) incurred in connection with the
preparation, negotiation, and enforcement of the Loan Documents; and Bank's
reasonable attorneys' fees and expenses incurred in amending, enforcing or
defending the Loan Documents, (including fees and expenses of appeal or review,
or those incurred in any Insolvency Proceeding) whether or not suit is brought.
"Borrower's Books" means all of Borrower's books and records
including, without limitation: ledgers; records concerning Borrower's assets or
liabilities, the Collateral, business operations or financial condition; and all
computer programs, tape files or backup data, and the right of access to
equipment, containing such information.
"Business Day" means any day that is not a Saturday, Sunday, or other
day on which banks in the State of California are authorized or required to
close.
"Closing Date" means the date of this Agreement.
<PAGE>
"Collateral" means the property described on Exhibit A attached
---------
hereto.
"Contingent Obligation" means, as applied to any Person any direct or
indirect liability, contingent or otherwise, of that Person with respect to (i)
any indebtedness, lease, dividend, letter of credit or other obligation of
another, including, without limitation, any such obligation directly or
indirectly guaranteed, endorsed, co-made or discounted or sold with recourse by
that Person, or in respect of which that Person is otherwise directly or
indirectly liable; (ii) any obligations with respect to undrawn letters of
credit issued for the account of that Person; and (iii) all obligations arising
under any interest rate, currency or commodity swap agreement, interest rate cap
agreement, interest rate collar agreement, or other agreement or arrangement
designated to protect a Person against fluctuation in interest rates, currency
exchange rates or commodity prices; provided that the term "Contingent
--------
Obligation" shall not include endorsements for collection or deposit in the
ordinary course of business. The amount of any Contingent Obligation shall be
deemed to be an amount equal to the stated or determined amount of the primary
obligation in respect of which such Contingent Obligation is made or, if not
stated or determinable, the maximum reasonably anticipated liability in respect
thereof as determined by such Person in good faith; provided that such amount
--------
shall not in any event exceed the maximum amount of the obligations under the
guarantee or other support arrangement.
"Copyrights" means any and all copyright rights, copyright
applications, copyright registrations and like protections in each work or
authorship and derivative work thereof, whether published or unpublished and
whether or not the same also constitutes a trade secret, now or hereafter
existing, created, acquired or held.
"Default" means any condition or event which constitutes an Event of
Default or which with the giving of notice or lapse of time or both would,
unless cured or waived, become an Event of Default.
"Equipment" means all present and future machinery, equipment, tenant
improvements, furniture, fixtures, vehicles, tools, parts and attachments in
which Borrower has any interest.
"ERISA" means the Employment Retirement Income Security Act of 1974,
as amended, and the regulations thereunder.
"GAAP" means generally accepted accounting principles as in effect in
the United States from time to time.
"Indebtedness" means (a) all indebtedness for borrowed money or the
deferred purchase price of property or services (except trade accounts payable
arising in the ordinary course of business which are not more than 60 days past
due), including without limitation reimbursement and other obligations with
respect to surety bonds and letters of credit, (b) all obligations evidenced by
notes, bonds, debentures or similar instruments, (c) all capital lease
obligations and (d) all Contingent Obligations.
"Insolvency Proceeding" means any proceeding commenced by or against
any person or entity under any provision of the United States Bankruptcy Code,
as amended, or under any other bankruptcy or insolvency law, including
assignments for the benefit of
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<PAGE>
creditors, formal or informal moratoria, compositions, extension generally with
its creditors, or proceedings seeking reorganization, arrangement, or other
relief
"Intellectual Property Collateral" means all right, title and interest
of Borrower in and to any (a) Copyrights, Trademarks, Patents, and Mask Works;
(b) Any and all trade secrets, and any and all intellectual property rights in
computer software and computer software products now or hereafter existing,
created, acquired or held; (c) Any and all design rights which may be owned or
licensed by Borrower now or hereafter existing, created, acquired or held; (d)
Any and all claims for damages by way of past, present and future infringement
of any of the rights included above, with the right, but not the obligation, to
sue for and collect such damages for said use or infringement of the
intellectual property rights identified above; (e) All licenses or other rights
of Borrower to use any of the Copyrights, Patents, Trademarks, or Mask Works,
and all license fees and royalties arising from such use to the extent permitted
by such license or rights; (f) All amendments, renewals and extensions of any of
the Copyrights, Trademarks, Patents, or Mask Works; and (g) All proceeds and
products of the foregoing, including without limitation all payments under
insurance or any indemnity or warranty payable in respect of any of the
foregoing.
"Inventory" means all present and future inventory in which Borrower
has any interest, including merchandise, raw materials, parts, supplies, packing
and shipping materials, work in process and finished products intended for sale
or lease or to be furnished under a contract of service, of every kind and
description now or at any time hereafter owned by or in the custody or
possession, actual or constructive, of Borrower, including such inventory as is
temporarily out of its custody or possession or in transit and including any
returns upon any accounts or other proceeds, including insurance proceeds,
resulting from the sale or disposition of any of the foregoing and any documents
of title representing any of the above.
"Investment" means any beneficial ownership of (including stock,
partnership interest or other securities) any Person, or any loan, advance or
capital contribution to any Person.
"IRC" means the Internal Revenue Code of 1986, as amended, and the
regulations thereunder.
"Leased Equipment" means the Equipment described in Schedule(s) 1 and
2 to the Master Equipment Lease Agreement, dated October 15, 1996, between
Borrower and Phoenix Leasing Incorporated.
"Lien" means, with respect to any asset, any mortgage, lien, pledge,
charge, security interest, or encumbrance of any kind in respect of such asset
(or any agreement to give any of the foregoing, whether or not contingent on the
occurrence of any future event). For the purposes of this Agreement, Borrower or
any Subsidiary of Borrower shall be deemed to own an asset subject to a Lien
when it has acquired or holds such asset subject to the interest of a vendor or
lessor under any conditional sale agreement, capital lease, or other title
retention agreement relating to such asset.
"Loan" or "Loans" means one or more loans by Bank to Borrower of up to
a total principal amount of $2,400,000 for all such Loans.
-3-
<PAGE>
"Loan Documents" means, collectively, this Agreement, any note or
notes executed by Borrower, and any other present or future agreement entered
into between Borrower and/or for the benefit of Bank in connection with this
Agreement, all as amended, extended or restated from time to time.
"Mask Works" means all mask work or similar rights available for the
protection of semiconductor chips, now owned or hereafter acquired;
"Material Adverse Effect" means a material adverse effect on (i) the
business operations or condition (financial or otherwise) of Borrower and its
Subsidiaries taken as a whole or (ii) the ability of Borrower to repay the
Obligations or otherwise perform its obligations under the Loan Documents.
"Maturity Date" means the first to occur of (a) August 15, 1998, or
(b) the date on which Borrower receives not less than $2,000,000 in cash or
cash equivalents for the issuance of the next round of Borrower's preferred
stock (intended to be designated "Series C").
"Negotiable Collateral" means all of Borrower's present and future
letters of credit of which it is a beneficiary, notes, drafts, instruments,
securities, documents of title, and chattel paper.
"Obligations" means all principal, interest, Bank Expenses and other
amounts owed to Bank by Borrower pursuant to this Agreement or the other Loan
Documents, whether absolute or contingent, due or to become due, now existing or
hereafter arising, including any interest that accrues after the commencement of
an Insolvency Proceeding.
"Patents" means all patents, patent applications and like protections
including without limitation improvements, divisions, continuations, renewals,
reissues, extensions and continuations-in-part of the same.
"Payment Date" means the first calendar day of each month commencing
on the first such date after the Closing Date and ending on the Maturity Date.
"Permitted Indebtedness" means:
(a) Indebtedness of Borrower in favor of Bank arising under this
Agreement or any other Loan Document;
(b) Indebtedness existing on the Closing Date and disclosed in the
Schedule;
(c) Subordinated Debt;
(d) Indebtedness to trade creditors incurred in the ordinary course of
business; and
(e) Other Indebtedness to the extent permitted to be secured by
Permitted Liens.
"Permitted Investment" means:
-4-
<PAGE>
(a) Investments existing on the Closing Date disclosed in the
Schedule;
(b) (1) marketable direct obligations issued or unconditionally
guaranteed by the United States of America or any agency or any State thereof
maturing within one (1) year from the date of acquisition thereof, (ii)
commercial paper maturing no more than one (1) year from the date of creation
thereof and on the date of acquisition having the highest rating obtainable from
either Standard & Poor's Corporation or Moody's Investors Service, Inc., and
(iii) certificates of deposit maturing no more than one (1) year from the date
of investment therein issued by Bank; and
(c) Investments representing the Indebtedness of any person owing as a
result of the sale or license by Borrower or any of its Subsidiaries in the
ordinary course of business of products or services (on customary trade terms).
"Permitted Liens" means the following:
(a) Any Liens (i) existing on the Closing Date and disclosed in the
Schedule or (ii) arising under this Agreement or the other Loan Documents or
otherwise exclusively in favor of Bank;
(b) Liens for taxes, fees, assessments or other governmental charges
or levies, either not delinquent or being contested in good faith by appropriate
proceedings and as to which adequate reserves are maintained on Borrower's Books
in accordance with GAAP, provided the same have no priority over any of Bank's
--------
security interests;
(c) Liens (i) upon or in any Equipment acquired or held by Borrower or
any of its Subsidiaries to secure the purchase price of such Equipment or
indebtedness incurred solely for the purpose of financing the acquisition of
such Equipment, or (ii) existing on such equipment at the time of its
acquisition, provided that the Lien is confined solely to the property so
--------
acquired and improvements thereon, and the proceeds of such equipment;
(d) Leases or subleases and licenses or sublicenses granted to others
in the ordinary course of Borrower's business not interfering in any material
respect with the business of Borrower and its Subsidiaries taken as a whole, and
any interest or title of a lessor, licensor or under any lease or license
provided that such leases, subleases, licenses and sublicenses do not prohibit
- --------
the grant of the security interest granted hereunder;
(e) Liens incurred in connection with the extension, renewal or
refinancing of the indebtedness secured by Liens of the type described in
clauses (a) through (c) above, provided that any extension, renewal or
--------
replacement Lien shall be limited to the property encumbered by the existing
Lien and the principal amount of the indebtedness being extended, renewed or
refinanced does not increase;
(f) Liens or deposits to secure payments of workmen's compensation,
unemployment or other insurance; and
(g) Mechanic's, workmen's, repairmen's or vendors' Liens securing sums
which are not past due or are being contested in good faith.
-5-
<PAGE>
"Person" means any individual, sole proprietorship, partnership,
limited liability company, joint venture, trust, unincorporated organization,
association, corporation, institution, public benefit corporation, firm, joint
stock company, estate, entity or governmental agency
"Prime Rate" means at any time the variable rate of interest, per
annum, most recently announced by Bank as its "prime rate," whether or not such
announced rate is the lowest rate available from Bank.
"Responsible Officer" means each of the Chief Executive Officer, the
President, the Chief Financial Officer and the Controller of Borrower.
"Schedule" means the Schedule of Exceptions attached hereto.
"Subordinated Debt" means any debt incurred by Borrower that is
subordinated to the debt owing by Borrower to Bank on terms acceptable to Bank
(and identified as being such by Borrower and Bank).
"Subsidiary" means with respect to any Person, corporation,
partnership, company association, joint venture, or any other business entity of
which more than 50% of the voting stock or other equity interests is owned or
controlled, directly or indirectly, by such Person or one or more Affiliates of
such Person.
"Trademarks" means any trademark and servicemark rights, whether
registered or not, applications to register and registrations of the same and
like protections, and the entire goodwill of the business connected with and
symbolized by such trademarks.
"UCC" means the California Uniform Commercial Code.
1.2 Accounting and Other Terms. All accounting terms not specifically
--------------------------
defined herein shall be construed in accordance with GAAP and all calculations
and determinations made hereunder shall be made in accordance with GAAP. When
used herein, the term "financial statements" shall include the notes and
schedules thereto. In the computation of periods of time from a specified date
to a later specified date, the word "from" means "from and including" and the
words "to" and "until" each mean "to but excluding." Periods of days referred to
in this Agreement shall be counted in calendar days unless otherwise stated.
References to the plural include the singular and to the singular include the
plural, references to any gender include any other gender, the part includes the
whole, the term "including" is not limiting, and the term "or" has, except where
otherwise indicated, the inclusive meaning represented by the phrase "and/or."
The words "hereof," "herein," "hereby," "hereunder," and similar terms in this
Agreement refer to this Agreement as a whole and not to any particular provision
of this Agreement. Article, section, subsection, clause, exhibit and schedule
references are to this Agreement, unless otherwise specified. All of the
exhibits and schedules attached hereto shall be deemed incorporated herein by
reference. All terms contained in this Agreement which are not otherwise
specifically defined herein (including the term "good faith") shall have the
meanings provided by the UCC to the extent the same are used or defined therein.
1.3 No Presumption Against Any Party. Neither this Agreement nor any other
--------------------------------
Loan Document nor any uncertainty or ambiguity herein or therein shall be
construed or resolved using any presumption against any party hereto or thereto,
whether under any rule of
-6-
<PAGE>
construction or otherwise. On the contrary, this Agreement and the other Loan
Documents have been reviewed by each of the parties and their counsel and, in
the case of any ambiguity or uncertainty, shall be construed and interpreted
according to the ordinary meaning of the words used so as to fairly accomplish
the purposes and intentions of all parties hereto.
2. LOAN AND TERMS OF PAYMENT
-------------------------
2.1 Loans.
-----
(a) Subject to and upon the terms and conditions of this Agreement,
during the period from the Closing Date to the Maturity Date, Bank agrees to
make one or more Loans to Borrower in an total principal amount for all such
Loans not to exceed $2,400,000. The Loans are non-revolving; any Loan once
repaid may not be reborrowered.
(b) Borrower will notify Bank by facsimile transmission or telephone
no later than 3:00 p.m. Pacific time, on the Business Day that a Loan is to be
made. Such notification shall be promptly confirmed by a Payment/Advance Form in
substantially the form of Exhibit B hereto. Bank is authorized to make a Loan
---------
under this Agreement, based upon instructions received from a Responsible
Officer or a designee of a Responsible Officer. Bank shall be entitled to rely
on any telephonic notice given by a person who Bank reasonably believes to be a
Responsible Officer or a designee thereof, and Borrower shall indemnify and hold
Bank harmless for any damages or loss suffered by Bank as a result of such
reliance. Bank will credit the amount of each Loan to Borrower's deposit account
with Bank.
(c) The Loans and other amounts due under this Agreement (except as
otherwise expressly specified herein) shall be immediately due and payable on
the Maturity Date. Borrower promises to pay to the order of Bank on the Maturity
Date, in lawful money of the United States of America, the aggregate unpaid
principal amount of the Loans made by Bank to Borrower hereunder. Borrower shall
also pay interest on the unpaid principal amount of such Loans at rates in
accordance with the terms hereof.
2.2 Interest Rates, Payments, and Calculations.
------------------------------------------
(a) Interest Rate. Except as set forth in Section 2.3(b), each Loan
-------------
shall bear interest, on the average daily balance thereof, at a per annum rate
equal to 0.75 percentage point above the Prime Rate.
(b) Default Rate. All Obligations shall bear interest, from and after
------------
the occurrence and during the continuance of an Event of Default, at a rate
equal to five (5) percentage points above the interest rate applicable
immediately prior to the occurrence of the Event of Default.
(c) Payments. Interest hereunder shall be due and payable on each
--------
Payment Date. Borrower hereby authorizes Bank to debit any accounts with Bank,
including, without limitation, Account Number 3300041101 for payments of
principal and interest due on the Obligations and any other amounts owing by
Borrower to Bank. Bank will notify Borrower of all debits which Bank has made
against Borrower's accounts. Any such debits against Borrower's accounts in no
way shall be deemed a set-off. Any interest not paid when due shall be
compounded by becoming a part of the Obligations, and such interest shall
thereafter accrue
-7-
<PAGE>
interest at the rate then applicable hereunder. Prepayments may be made without
penalty or premium.
(d) Computation. In the event the Prime Rate is changed from time to
-----------
time hereafter, the applicable rate of interest hereunder shall be increased or
decreased effective as of 12:01 a.m. on the day the Prime Rate is changed, by an
amount equal to such change in the Prime Rate. All interest chargeable under the
Loan Documents shall be computed on the basis of a 360 day year for the actual
number of days elapsed.
2.3 Crediting Payments. Bank shall credit a wire transfer of funds, check
------------------
or other item of payment to such deposit account or Obligation as Borrower
specifies; provided that after the occurrence and during the continuance of an
Event of Default, the receipt by Bank of any wire transfer of funds, check, or
other item of payment, whether directed to Borrower's deposit account with Bank
or to the Obligations or otherwise, shall be immediately applied to
conditionally reduce Obligations, but shall not be considered a payment in
respect of the Obligations unless such payment is of immediately available
federal funds or unless and until such check or other item of payment is honored
when presented for payment. Notwithstanding anything to the contrary contained
herein, any wire transfer or payment received by Bank after 12:00 noon Pacific
time shall be deemed to have been received by Bank as of the opening of business
on the immediately following Business Day. Whenever any payment to Bank under
the Loan Documents would otherwise be due (except by reason of acceleration) on
a date that is not a Business Day, such payment shall instead be due on the next
Business Day, and additional fees or interest, as the case may be, shall accrue
and be payable for the period of such extension.
2.4 Fees. Borrower shall pay to Bank the following:
----
(a) Loan Fee. A loan fee equal to 0.50% per annum of the average daily
--------
balance of the amount by which $2,000,000 exceeds the outstanding principal
amount of the Loans, payable at maturity in arrears.
(b) Bank Expenses. Upon demand from Bank, including, without
--------------
limitation, upon the date hereof, all Bank Expenses incurred through the date
hereof, including reasonable attorneys' fees and expenses, and, after the date
hereof, all Bank Expenses, including reasonable attorneys' fees and expenses, as
and when they become due. Total of all such fees and expenses shall not exceed
$1,500.
2.5 Additional Costs. In case any law, regulation, treaty or official
----------------
directive or the interpretation or application thereof by any court or any
governmental authority charged with the administration thereof or the compliance
with any guideline or request of any central bank or other governmental
authority (whether or not having the force of law):
(a) subjects Bank to any tax with respect to payments of principal or
interest or any other amounts payable hereunder by Borrower or otherwise with
respect to the transactions contemplated hereby (except for taxes on the net
income or profits of Bank imposed by the United States of America, any state, or
any political subdivision thereof);
(b) imposes, modifies or deems applicable any deposit insurance,
reserve, special deposit or similar requirement against assets held by, or
deposits in or for the account of, or loans by, Bank; or
-8-
<PAGE>
(c) imposes upon Bank any other condition with respect to its
performance under this Agreement, and the result of any of the foregoing is to
increase the cost to Bank, reduce the income receivable by Bank or impose any
expense upon Bank with respect to any loans and such increase, reduction, or
imposition, as the case may be, has not already been taken into account by Bank
in setting the Prime Rate, Bank shall notify Borrower thereof. Borrower agrees
to pay to Bank the amount of such increase in cost, reduction in income or
additional expense as and when such cost, reduction or expense is incurred or
determined, upon presentation by Bank of a statement of the amount and setting
forth Bank's calculation thereof, all in reasonable detail, which statement
shall be deemed true and correct absent manifest error.
2.6 Term. Except as otherwise set forth herein, this Agreement shall
----
become effective on the Closing Date and, subject to Section 12.7, shall
continue in full force and effect for a term ending on the Maturity Date.
Notwithstanding the foregoing, Bank shall have the right to terminate its
obligation to make the Loans under this Agreement immediately and without notice
upon the occurrence and during the continuance of an Event of Default.
Notwithstanding termination of this Agreement, Bank's lien on the Collateral
shall remain in effect for so long as any Obligations are outstanding.
3 CONDITIONS OF LOANS
-------------------
3.1 Conditions Precedent to Loans. The obligation of Bank to make each
-----------------------------
Loan is subject to the condition precedent that Bank shall have received, in
form and substance satisfactory to Bank, the following:
(a) this Agreement;
(b) a certificate of the Secretary of Borrower with respect to
articles, bylaws, incumbency and resolutions authorizing the execution and
delivery of this Agreement;
(c) financing statements (Forms UCC-1);
(d) an Intellectual Property Security Agreement in the form previously
delivered by Bank to Borrower;
(e) payment of the fees and Bank Expenses then due specified in
Section 2.4 hereof;
(f) a comfort letter addressed, and in form and substance
satisfactory, to Bank by Hummer Winblad Venture Partners concerning additional
equity investment in Borrower, and
(g) such other documents, and completion of such other matters, as
Bank may reasonably deem necessary or appropriate.
3.2 Further Conditions Precedent to the Loan. The obligation of Bank to
----------------------------------------
make each Loan is further subject to the following conditions:
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<PAGE>
(a) timely receipt by Bank of the Payment/Advance Form as provided in
Section 2.1, and
(b) the representations and warranties contained in Section 5 shall be
true and correct in all material respects on and as of the date of such
Payment/Advance Form and on the effective date of the Loan as though made at and
as of each such date, and no Default shall have occurred and be continuing, or
would result from the Loan. The making of the Loan shall be deemed to be a
representation and warranty by Borrower on the date of the Loan as to the
accuracy of the facts referred to in this Section 3.2(b).
4. CREATION OF SECURITY INTEREST
-----------------------------
4.1 Grant of Security Interest. Borrower grants and pledges to Bank a
--------------------------
continuing security interest in all presently existing and hereafter acquired or
arising Collateral in order to secure prompt payment of any and all Obligations
and in order to secure prompt performance by Borrower of each of its covenants
and duties under the Loan Documents. Except as set forth in the Schedule, such
security interest constitutes a valid, first priority security interest in
Collateral presently existing Collateral, and will constitute a valid, first
priority security interest in Collateral acquired after the date hereof.
Borrower acknowledges that upon the occurrence and during the continuance of an
Event of Default Bank may place a "hold" on any Deposit Account pledged as
Collateral to secure the Obligations. Notwithstanding termination of this
Agreement, Bank's Lien on the Collateral shall remain in effect for so long as
any Obligations are outstanding.
4.2 Delivery of Additional Documentation Required. Borrower shall from
---------------------------------------------
time to time execute and deliver to Bank, at the request of Bank, all Negotiable
Collateral, all financing statements and other documents that Bank may
reasonably request, in form reasonably satisfactory to Bank, to perfect and
continue perfected Bank's security interests in the Collateral and in order to
fully consummate all of the transactions contemplated under the Loan Documents.
4.3 Right to Inspect. Bank (through any of its officers, employees, or
----------------
agents) shall have the right, upon reasonable prior notice, from time to time
during Borrower's usual business hours, to inspect Borrower's Books and to make
copies thereof and to check, test, and appraise the Collateral in order to
verify Borrower's financial condition or the amount, condition of, or any other
matter relating to, the Collateral.
5. REPRESENTATIONS AND WARRANTIES
------------------------------
Borrower represents and warrants as follows:
5.1 Due Organization and Qualification. Borrower and each Subsidiary is a
----------------------------------
corporation duly existing and in good standing under the laws of its state of
incorporation and qualified and licensed to do business in, and is in good
standing in, any state in which the conduct of its business or its ownership of
property requires that it be so qualified.
5.2 Due Authorization: No Conflict. The execution, delivery, and
------------------------------
performance of the Loan Documents are within Borrower's corporate powers, have
been duly authorized, and are not in conflict with nor constitute a breach of
any provision contained in Borrower's Articles of Incorporation or Bylaws, nor
will they constitute an event of default under any material agreement to which
Borrower is a party or by which Borrower is bound. Borrower is not in default
under
-10-
<PAGE>
any agreement to which it is a party or by which it is bound, which default
could have a Material Adverse Effect.
5.3 No Prior Encumbrances. Borrower has good title to the Collateral, free
---------------------
and clear of Liens, except for Permitted Liens.
5.4 Intellectual Property. Borrower is the sole owner of or has rights to
---------------------
use the Intellectual Property Collateral, except for non-exclusive licenses
granted by Borrower to its customers in the ordinary course of business and
exclusive and non-exclusive licenses granted to distributors and resellers in
the ordinary course of business. No part of the Intellectual Property Collateral
has been judged invalid or unenforceable, in whole or in part, and no claim has
been made that any part of the Intellectual Property Collateral violates the
rights of any third party where such claim could be reasonably expected to have
a material adverse effect on any material part of the Intellectual Property
Collateral. Except for and upon the filing with the UCC filing division of the
California Secretary of State and with the United States Patent and Trademark
Office with respect to the Patents and Trademarks and the Register of Copyrights
with respect to the Copyrights and Mask Works necessary to perfect the security
interests created hereunder, and except as has been already made or obtained, no
authorization, approval or other action by, and no notice to or filing with, any
United States governmental authority or United States regulatory body is
required either (i) for the grant by Borrower of the security interest granted
hereby or for the execution, delivery or performance of Loan Documents by
Borrower in the United States or (ii) for the perfection in the United States of
such security interest or the exercise by Bank of its rights and remedies
hereunder (except for UCC continuation statements and similar filings which may
in the future be required to be made).
5.5 Name: Location of Chief Executive Office. Except as disclosed in the
----------------------------------------
Schedule, Borrower has not done business and will not without at least 30 days
prior written notice to Bank do business under any name other than that
specified on the signature page hereof. The chief executive office of Borrower
is located at the address indicated in Section 10 hereof.
5.6 Litigation. Except as set forth in the Schedule, there are no actions
----------
or proceedings pending, or, to Borrower's knowledge, threatened by or against
Borrower or any Subsidiary before any court or administrative agency in which an
adverse decision could reasonably be expected to have a Material Adverse Effect
or a material adverse effect on Borrower's interest in any material portion of
the Collateral or Bank's security interest in the Collateral.
5.7 No Material Adverse Change in Financial Statements. All financial
--------------------------------------------------
statements related to Borrower and any Subsidiary that have been delivered by
Borrower to Bank fairly present in all material respects Borrower's consolidated
financial condition as of the date thereof and Borrower's consolidated results
of operations for the period then ended. There has not been a material adverse
change in the consolidated financial condition of Borrower since the date of the
most recent of such financial statements submitted to Bank on or about the
Closing Date (other than the fact that, as a startup company, Borrower has
continued to incur substantial expenses and operating losses in the ordinary
course of business).
5.8 Solvency. Borrower is able to pay its debts (including trade debts) as
--------
they mature.
5.9 Regulatory Compliance. Borrower and each Subsidiary has met the
---------------------
minimum funding requirements of ERISA with respect to any employee benefit plans
subject to ERISA. No event has occurred resulting from Borrower's failure to
comply with ERISA that is reasonably
-11-
<PAGE>
likely to result in Borrower's incurring any liability that could have a
Material Adverse Effect. Borrower is not an "investment company" or a company
"controlled" by an "investment company" within the meaning of the Investment
Company Act of 1940. Borrower is not engaged principally, or as one of its
important activities, in the business of extending credit for the purpose of
purchasing or carrying margin stock (within the meaning of Regulations G, T and
U of the Board of Governors of the Federal Reserve System). Borrower has
complied with all the provisions of the Federal Fair Labor Standards Act.
Borrower has not violated any statutes, laws, ordinances or rules applicable to
it, violation of which could reasonably be expected to have a Material Adverse
Effect.
5.10 Environmental Condition. None of Borrower's or any Subsidiary's
-----------------------
properties or assets has ever been used by Borrower or any Subsidiary or, to the
best of Borrower's knowledge, by previous owners or operators, in the disposal
of, or to produce, store, handle, treat, release, or transport, any hazardous
waste or hazardous substance other than in accordance with applicable law; to
the best of Borrower's knowledge, none of Borrower's properties or assets has
ever been designated or identified in any manner pursuant to any environmental
protection statute as a hazardous waste or hazardous substance disposal site, or
a candidate for closure pursuant to any environmental protection statute; to the
best of Borrower's knowledge, no lien arising under any environmental protection
statute has attached to any revenues or to any real or personal property owned
by Borrower or any Subsidiary; and neither Borrower nor any Subsidiary has
received a summons, citation, notice, or directive from the Environmental
Protection Agency or any other federal, state or other governmental agency
concerning any action or omission by Borrower or any Subsidiary resulting in the
release, or other disposition of hazardous waste or hazardous substances into
the environment.
5.11 Taxes. Borrower and each Subsidiary has filed or caused to be filed
-----
all tax returns required to be filed on a timely basis, and has paid, or has
made adequate provision for the payment of, all taxes reflected therein, except
those being contested in good faith by proper proceedings with adequate reserves
under GAAP.
5.12 Subsidiaries. Borrower does not own any stock, partnership interest
------------
or other equity securities of any Person, except for Permitted Investments.
5.13 Government Consents. Borrower and each Subsidiary has obtained all
-------------------
consents, approvals and authorizations of, made all declarations or filings
with, and given all notices to, all governmental authorities that are necessary
for the continued operation of Borrower's business as currently conducted
noncompliance with which could reasonably be expected to have a Material Adverse
Effect.
5.14 Full Disclosure. The presentations, warranties and other statements
---------------
made by Borrower in this Agreement, in the Schedule and in any certificate or
written statement furnished to Bank, when read together, do not contain any
untrue statement of a material fact or omit to state a material fact necessary
in order to make the statements contained herein or therein, in light of the
circumstances under which they were made, not misleading.
-12-
<PAGE>
6. AFFIRMATIVE COVENANTS
---------------------
Borrower covenants and agrees that, until payment in full of all
outstanding Obligations, and for so long as Bank may have any commitment to make
Loans hereunder, Borrower shall do all of the following:
6.1 Good Standing. Borrower shall maintain its and each of its
-------------
Subsidiaries' corporate existence and good standing in its jurisdiction of
incorporation and maintain qualification in each jurisdiction in which the
failure to so qualify could reasonably be expected to have a Material Adverse
Effect. Borrower shall maintain, and shall cause each of its Subsidiaries to
maintain, to the extent consistent with prudent management of Borrower's
business, in force all licenses, approvals and agreements, the loss of which
could have a Material Adverse Effect.
6.2 Government Compliance. Borrower shall comply, and shall cause each
---------------------
Subsidiary to comply, with all statutes, laws, ordinances and government rules
and regulations to which it is subject, noncompliance with which could
reasonably be expected to have a Material Adverse Effect or a material adverse
effect on the Collateral or the priority of Bank's Lien on the Collateral.
6.3 Financial Statements, Reports, Certificates. Borrower shall deliver to
-------------------------------------------
Bank: (a) as soon as available, but in any event within 30 days after the end of
each month, a company prepared consolidated balance sheet and income statement
covering Borrower's consolidated operations during such period, in a form and
certified by an officer of Borrower reasonably acceptable to Bank; (b) as soon
as available, but in any event within 90 days after the end of Borrower's fiscal
year (or by May 30, 1998, in the case of the 1997 fiscal year), audited
consolidated financial statements of Borrower prepared in accordance with GAAP,
consistently applied, together with an unqualified (except as to any going
concern qualification) opinion on such financial statements of an independent
certified public accounting firm of recognized national standing; (c) within 5
days of filing, copies of all statements, reports and notices sent or made
available generally by Borrower to its security holders or to any holders of
Subordinated Debt and all reports on Form 10-K, 10-Q and 8-K filed with the
Securities and Exchange Commission; (d) promptly upon receipt of notice thereof,
a report of any legal actions pending or threatened against Borrower or any
Subsidiary that could reasonably be expected to result in damages or costs to
Borrower or any Subsidiary of $50,000 or more; (e) prompt notice of any material
change in the composition of the Intellectual Property Collateral, including,
but not limited to, any subsequent ownership right of the Borrower in or to any
Copyright, Patent or Trademark material to Borrower's or any Subsidiary's
business and not specified in any intellectual property security agreement
between Borrower and Bank or any event that could reasonably be expected to
materially adversely affects the value of any material part of the Intellectual
Property Collateral; and (f) such budgets, sales projections, operating plans or
other financial information as Bank may reasonably request from time to time.
Within 30 days after the last day of each month, Borrower shall deliver to
Bank with the monthly financial statements a Compliance Certificate signed by a
Responsible Officer in substantially the form of Exhibit C hereto.
---------
Bank shall have a right from time to time hereafter to audit Borrower's
Accounts at Borrower's expense, provided that such audits will be conducted no
more often than every six (6) months unless an Event of Default has occurred and
is continuing.
-13-
<PAGE>
to Borrower's business, (ii) use commercially reasonable efforts to detect
infringements of such Trademarks, Patents. Copyrights and Mask Works and
promptly advise Bank in writing of material infringements detected which could
reasonably be expected to have a Material Adverse Effect and (iii) not allow any
such Trademarks, Patents, Copyrights, or Mask Works to be abandoned, forfeited
or dedicated to the public without the written consent of Bank, which shall not
be unreasonably withheld, unless Bank determines that reasonable business
practices suggest that abandonment is appropriate.
(c) Bank shall have the right, but not the obligation, to take, at
Borrower's sole expense, any actions that Borrower is required under this
Section to take but which Borrower fails to take, after 15 days' notice to
Borrower. Borrower shall reimburse and indemnify Bank for all reasonable costs
and reasonable expenses incurred in the reasonable exercise of its rights under
this Section.
6.9 Further Assurances. At any time and from time to time Borrower shall
------------------
execute and deliver such further instruments and take such further action as may
reasonably be requested by Bank to effect the purposes of this Agreement.
7. NEGATIVE COVENANTS
------------------
Borrower covenants and agrees that until payment in full of the
outstanding Obligations or for so long as Bank may have any commitment to make
Loans, Borrower will not do any of the following:
7.1 Dispositions. Convey, sell, lease, transfer or otherwise dispose of
------------
(collectively, a "Transfer"), or permit any of its Subsidiaries to Transfer, all
or any part of its property, other than Transfers: (i) of inventory in the
ordinary course of business, (ii) of exclusive and non-exclusive licenses and
similar arrangements for the use of the property of Borrower or its Subsidiaries
in the ordinary course of business; (iii) that constitute payment of normal and
usual operating expenses in the ordinary course of business;; or (iii) of worn-
out or obsolete Equipment.
7.2 Changes in Business, or Management, Business Locations. Engage in any
------------------------------------------------------
business, or permit any of its Subsidiaries to engage in any business, other
than the businesses currently engaged in by Borrower and any business
substantially similar or related thereto (or incidental thereto), or permit a
material change in Borrower's senior management. Borrower will not, without at
least 30 days prior written notification to Bank, relocate its chief executive
office or add any new offices or business locations.
7.3 Mergers or Acquisitions. Merge or consolidate, or permit any of its
-----------------------
Subsidiaries to merge or consolidate, with or into any other business
organization, or acquire, or permit any of its Subsidiaries to acquire, all or
substantially all of the capital stock or property of another Person without
Bank's written consent, which consent shall not be unreasonably withheld.
7.4 Indebtedness. Create, incur, assume or be or remain liable with
------------
respect to any Indebtedness, or permit any Subsidiary so to do, other than
Permitted Indebtedness.
7.5 Encumbrances. Create, incur, assume or suffer to exist any Lien with
------------
respect to any of its property, or assign or otherwise convey any right to
receive income, including the sale of any Accounts, or permit any of its
Subsidiaries so to do, except for (a) in the case of assets
-15-
<PAGE>
other than Intellectual Property Collateral, Permitted Liens and (b) in the case
of Intellectual Property Collateral, liens described in clauses (a), (b), and
(d) of the definition of Permitted Liens.
7.6 Distributions. Pay any dividends or make any other distribution or
-------------
payment on account of or in redemption, retirement or purchase of any capital
stock, other than the repurchase of shares from directors, officers, employees
and/or consultants upon exercise of Borrower's right of repurchase upon
termination of employment or services to Borrower or of rights of first refusal.
7.7 Investments. Directly or indirectly acquire or own, or make any
-----------
Investment in or to any Person, or permit any of its Subsidiaries so to do,
other than Permitted Investments.
7.8 Transactions with Affiliates. Directly or indirectly enter into or
----------------------------
permit to exist any material transaction with any Affiliate of Borrower except
for (a) transactions that are in the ordinary course of Borrower's business,
upon fair and reasonable terms that are no less favorable to Borrower than would
be obtained in an arm's length transaction with a nonaffiliated Person and (b)
transactions listed on the Schedule.
7.9 Intellectual Property Agreements. Borrower shall not permit the
--------------------------------
inclusion in any material contract to which it becomes a party of any provisions
that could reasonably be expected to prevent the creation of a security interest
in Borrower's rights and interests in any property included within the
definition of the Intellectual Property Collateral acquired under such
contracts.
7.10 Subordinated Debt. Make any payment in respect of any Subordinated
-----------------
Debt, or permit any of its Subsidiaries to make any such payment, except in
compliance with the terms of such Subordinated Debt, or amend any provision
contained in any documentation relating to the Subordinated Debt without Bank's
prior written consent.
7.11 Inventory. Store the Inventory with a bailee, warehouseman, or
---------
similar party unless Bank has received a pledge of any warehouse receipt
covering such Inventory. Except for Inventory sold in the ordinary course of
business and except for such other locations as Bank may approve in writing,
Borrower shall keep the Inventory only at the location set forth in Section 10
hereof and such other locations of which Borrower gives Bank prior written
notice and as to which Borrower signs and files a financing statement where
needed to perfect Bank's security interest.
7.12 Compliance. Become an "investment company" or a company controlled by
----------
an "investment company," within the meaning of the Investment Company Act of
1940, or become principally engaged in, or undertake as one of its important
activities, the business of extending credit for the purpose of purchasing or
carrying margin stock, or use the proceeds of any Loan for such purpose; fail to
meet the minimum funding requirements of ERISA; permit a Reportable Event or
Prohibited Transaction, as defined in ERISA, to occur; fail to comply with the
Federal Fair Labor Standards Act or violate any other law or regulation, which
violation could reasonably be expected to have a Material Adverse Effect or a
material adverse effect on any material portion of the Collateral or the
priority of Bank's Lien on the Collateral; or permit any of its Subsidiaries to
do any of the foregoing.
-16-
<PAGE>
8. EVENTS OF DEFAULT
-----------------
Any one or more of the following events shall constitute an Event of
Default by Borrower under this Agreement:
8.1 Payment Default. If Borrower fails to pay, when due, any of the
---------------
Obligations.
8.2 Covenant Default.
----------------
(a) If Borrower fails to perform any obligation under Section 6.1 or
violates any of the covenants contained in Article 7 of this Agreement, or
(b) If Borrower fails or neglects to perform, keep, or observe any
other material term, provision, condition, covenant, or agreement contained in
this Agreement or in any of the Loan Documents and as to any default under such
other term, provision, condition, covenant or agreement that can be cured, has
failed to cure such default within 10 days after written notice from Bank,
provided that if the default cannot by its nature be cured within the 10 day
- --------
period or cannot after diligent attempts by Borrower be cured within such
period, and such default is likely to be cured within a reasonable time, then
Borrower shall have an additional reasonable period (which shall not in any case
exceed 30 days) to attempt to cure such default, and within such reasonable time
period the failure to have cured such default shall not be deemed an Event of
Default (provided that no Loan will be required to be made during such cure
period);
8.3 Material Adverse Change. If there (i) occurs a material adverse change
-----------------------
in the business, operations, or condition (financial or otherwise) of the
Borrower, or (ii) is a material impairment of the prospect of repayment of any
portion of the Obligations or (iii) is a material impairment of the value or
priority of Bank's security interests in any material portion of the Collateral;
8.4 Attachment. If any material portion of Borrower's assets is attached,
----------
seized, subjected to a writ or distress warrant, or is levied upon, or comes
into the possession of any trustee, receiver or person acting in a similar
capacity and such attachment, seizure, writ or distress warrant or levy has not
been removed, discharged or rescinded within 10 days, or if Borrower is
enjoined, restrained, or in any way prevented by court order from continuing to
conduct all or any material part of its business affairs, or if a judgment or
other claim becomes a lien or encumbrance upon any material portion of
Borrower's assets, or if a notice of lien, levy, or assessment is filed of
record with respect to any of Borrower's assets by the United States Government,
or any department, agency, or instrumentality thereof, or by any state, county,
municipal, or governmental agency, and the same is not paid within 10 days after
Borrower receives notice thereof, provided that none of the foregoing shall
constitute an Event of Default where such action or event is stayed or an
adequate bond has been posted pending a good faith contest by Borrower (provided
that no Loan will be required to be made during such cure period);
8.5 Insolvency. If Borrower becomes insolvent, or if an Insolvency
----------
Proceeding is commenced by Borrower, or if an Insolvency Proceeding is commenced
against Borrower and is not dismissed or stayed within 30 days (provided that no
Loan will be made prior to the dismissal of such Insolvency Proceeding);
8.6 Other Agreements. If there is a default in any agreement to which
----------------
Borrower is a party with a third party or parties resulting in a right by such
third party or parties, whether or not
-17-
<PAGE>
exercised, to accelerate the maturity of any Indebtedness in an amount in excess
of $25,000 or that could reasonably be expected to have a Material Adverse
Effect;
8.7 Subordinated Dept. If Borrower makes any payment on account of
-----------------
Subordinated Debt, except to the extent such payment is allowed under any
subordination agreement entered into with Bank;
8.8 Judgments. If a judgment or judgments for the payment of money in an
---------
amount, individually or in the aggregate, of at least $50,000 shall be rendered
against Borrower and shall remain unsatisfied and unstayed for a period of 10
days (provided that no Loan will be made prior to the satisfaction or stay of
such judgment); or
8.9 Misrepresentations. Any warranty or representation made by Borrower in
------------------
Section 5 hereof shall be untrue in any material respect.
9 BANK'S RIGHTS AND REMEDIES
--------------------------
9.1 Rights and Remedies. Upon the occurrence and during the continuance of
-------------------
an Event of Default, Bank may, at its election, without notice of its election
and without demand, do any one or more of the following, all of which are
authorized by Borrower:
(a) Declare all Obligations, whether evidenced by this Agreement, by
any of the other Loan Documents, or otherwise, immediately due and payable
(provided that upon the occurrence of an Event of Default described in Section
8.5 all Obligations shall become immediately due and payable without any action
by Bank);
(b) Cease advancing money or extending credit to or for the benefit of
Borrower under this Agreement;
(c) Settle or adjust disputes and claims directly with account debtors
for amounts, upon terms and in whatever order that Bank reasonably considers
advisable;
(d) Without notice to or demand upon Borrower, make such payments and
do such acts as Bank considers necessary or reasonable to protect its security
interest in the Collateral. Borrower agrees to assemble the Collateral if Bank
so requires, and to make the Collateral available to Bank as Bank may designate.
Borrower authorizes Bank to enter the premises where the Collateral is located,
to take and maintain possession of the Collateral, or any part of it, and to
pay, purchase, contest, or compromise any encumbrance, charge, or lien which in
Bank's determination appears to be prior or superior to its security interest
and to pay all reasonable expenses incurred in connection therewith. With
respect to any of Borrower's premises. Borrower hereby grants Bank a license to
enter such premises and to occupy the same, without charge in order to exercise
any of Bank's rights or remedies provided herein, at law, in equity, or
otherwise;
(e) Without notice to Borrower set off and apply to the Obligations
any and all (i) balances and deposits of Borrower held by Bank, or (ii)
indebtedness at any time owing to or for the credit or the account of Borrower
held by Bank;
(f) Ship, reclaim, recover, store, finish, maintain, repair, prepare
for sale, advertise for sale, and sell (in the manner provided for herein) the
Collateral. Bank is hereby
-18-
<PAGE>
granted a non-exclusive, royalty-free license or other right, solely pursuant to
the provisions of this Section 9.1, to use, without charge, Borrower's labels,
patents, copyrights, mask works, rights of use of any name, trade secrets, trade
names, trademarks, service marks, related goodwill, and advertising matter, or
any property of a similar nature, as it pertains to the Collateral, in
completing production of, advertising for sale, and selling any Collateral and,
in connection with Bank's exercise of its rights under this Section 9.1,
Borrower's rights under all licenses and all franchise agreements shall inure to
Bank's benefit;
(g) Sell the Collateral at either a public or private sale, or both,
by way of one or more contracts or transactions, for cash or on terms, in such
manner and at such places (including Borrower's premises) as Bank determines is
commercially reasonable, and apply the proceeds thereof to the Obligations in
whatever manner or order it deems appropriate;
(h) Bank may credit bid and purchase at any public sale, or at any
private sale as permitted by law; and
(i) Any deficiency that exists after disposition of the Collateral as
provided above will be paid immediately by Borrower.
(j) Bank shall have a non-exclusive, royalty-free license to use the
Intellectual Property Collateral to the extent reasonably necessary to permit
Bank to exercise its rights and remedies upon the occurrence and during the
continuance of an Event of Default.
9.2 Power of Attorney. Effective only upon the occurrence and during the
-----------------
continuance of an Event of Default, Borrower hereby irrevocably appoints Bank
(and any of Bank's designated officers, or employees) as Borrower's true and
lawful attorney to: (a) send requests for verification of Accounts or notify
account debtors of Bank's security interest in the Accounts; (b) endorse
Borrower's name on any checks or other forms of payment or security that may
come into Bank's possession; (c) sign Borrower's name on any invoice or bill of
lading relating to any Account, drafts against account debtors, schedules and
assignments of Accounts, verifications of Accounts, and notices to account
debtors; (d) make, settle, and adjust all claims under and decisions with
respect to Borrower's policies of insurance; and (e) settle and adjust disputes
and claims respecting the accounts directly with account debtors, for amounts
and upon terms which Bank determines to be reasonable; [(f) to modify, in its
sole discretion, any intellectual property security agreement entered into
between Borrower and Bank without first obtaining Borrower's approval of or
signature to such modification by amending Exhibit A, Exhibit B, Exhibit C, and
Exhibit D, thereof, as appropriate, to include reference to any right, title or
interest in any Copyrights, Patents, Trademarks, Mask Works acquired by Borrower
after the execution hereof or to delete any reference to any right, title or
interest in any Copyrights, Patents, Trademarks, or Mask Works in which Borrower
no longer has or claims any right, title or interest; and (g) to file, in its
sole discretion, one or more financing or continuation statements and amendments
thereto, relative to any of the Collateral without the signature of Borrower
where permitted by law; provided that Bank may exercise such power of attorney
--------
to sign the name of Borrower on any of the documents described in Section 4.2
regardless of whether an Event of Default has occurred if Borrower has failed to
execute and deliver to Bank any such document within one business day of Bank's
request therefor. The appointment of Bank as Borrower's attorney in fact, and
each and every one of Bank's rights and powers, being coupled with an interest,
is irrevocable until all of the Obligations have been fully repaid and performed
and Bank's obligation to provide advances hereunder is terminated.
-19-
<PAGE>
9.3 Accounts Collection. Upon the occurrence and during the continuance of
-------------------
an Event of Default, Borrower shall collect all amounts owing to Borrower for
Bank, receive in trust all payments as Bank's trustee, and if requested or
required by Bank, immediately deliver such payments to Bank in their original
form as received from the account debtor, with proper endorsements for deposit.
9.4 Bank Expenses. If Borrower fails to pay any amounts or furnish any
-------------
required proof of payment due to third persons or entities, as required under
the terms of this Agreement, then Bank may do any or all of the following: (a)
make payment of the same or any part thereof; or (b) obtain and maintain
insurance policies of the type discussed in Section 6.6 of this Agreement, and
take any action with respect to such policies as Bank deems prudent. Any amounts
so paid or deposited by Bank shall constitute Bank Expenses, shall be
immediately due and payable, and shall bear interest at the then applicable rate
hereinabove provided, and shall be secured by the Collateral. Any payments made
by Bank shall not constitute an agreement by Bank to make similar payments in
the future or a waiver by Bank of any Event of Default under this Agreement.
9.5 Bank's Liability for Collateral. So long as Bank complies with
-------------------------------
reasonable banking practices, Bank shall not in any way or manner be liable or
responsible for: (a) the safekeeping of the Collateral; (b) any loss or damage
thereto occurring or arising in any manner or fashion from any cause; (c) any
diminution in the value thereof; or (d) any act or default of any carrier,
warehouseman, bailee, forwarding agency, or other person whomsoever. All risk of
loss, damage or destruction of the Collateral shall be borne by Borrower.
9.6 Remedies Cumulative. Bank's rights and remedies under this Agreement
-------------------
and the other Loan Documents shall be cumulative. Bank shall have all other
rights and remedies not expressly set forth herein as provided under the UCC, by
law, or in equity. No exercise by Bank of one right or remedy shall be deemed an
election, and no waiver by Bank of any Event of Default on Borrower's part shall
be deemed a continuing waiver. No delay by Bank shall constitute a waiver,
election, or acquiescence by it. No waiver by Bank shall be effective unless
made in a written document signed on behalf of Bank and then shall be effective
only in the specific instance and for the specific purpose for which it was
given.
9.7 Demand; Protest. Borrower waives demand, protest, notice of protest,
---------------
notice of default or dishonor, notice of payment and nonpayment, notice of any
default, nonpayment at maturity, release, compromise, settlement, extension, or
renewal of accounts, documents, instruments, chattel paper, and guarantees at
any time held by Bank on which Borrower may in any way be liable.
10. NOTICES
-------
Unless otherwise provided in this Agreement, all notices or demands by
any party relating to this Agreement or any other agreement entered into in
connection herewith shall be in writing and (except for financial statements and
other informational documents which may be sent by first-class mail, postage
prepaid) shall be personally delivered or sent by a recognized overnight
delivery service, by certified mail, postage prepaid, return receipt requested,
or by telefacsimile to Borrower or to Bank, as the case may be, at its addresses
set forth below:
-20-
<PAGE>
If to Borrower:
Attn: Chief Financial Officer
810 Winslow Avenue
Redwood City, CA 94063
FAX: (650) 549-2099
TEL. (650) 549-2000
If to Bank Silicon Valley Bank:
Attn: Dan Sanchez
1731 Embarcadero Road, Suite 220
Palo Alto, CA 94303
FAX: (415) 812-0640
TEL: (415) 812-0636
The parties hereto may change the address at which they are to receive
notices hereunder, by notice in writing in the foregoing manner given to the
other.
11. CHOICE OF LAW AND VENUE: WAIVER OF JURY TRIAL
---------------------------------------------
This Agreement and the other Loan Documents shall be governed by, and
construed in accordance with, the internal laws of the State of California,
without regard to principles of conflicts of law. Each of Borrower and Bank
hereby submits to the exclusive jurisdiction of the state and Federal courts
located in the County of Santa Clara, State of California. BORROWER AND BANK
EACH HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE
OF ACTION BASED UPON OR ARISING OUT OF ANY OF THE LOAN DOCUMENTS OR ANY OF THE
TRANSACTIONS CONTEMPLATED THEREIN, INCLUDING CONTRACT CLAIMS, TORT CLAIMS,
BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW OR STATUTORY CLAIMS. EACH PARTY
RECOGNIZES AND AGREES THAT THE FOREGOING WAIVER CONSTITUTES A MATERIAL
INDUCEMENT FOR IT TO ENTER INTO THIS AGREEMENT. EACH PARTY REPRESENTS AND
WARRANTS THAT IT HAS REVIEWED THIS WAIVER WITH ITS LEGAL COUNSEL AND THAT IT
KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION
WITH LEGAL COUNSEL.
12. GENERAL PROVISIONS
------------------
12.1 Successors and Assigns. This Agreement shall bind and inure to the
----------------------
benefit of the respective successors and permitted assigns of each of the
parties, provided that neither this Agreement nor any rights hereunder may be
--------
assigned by Borrower without Bank's prior written consent, which consent may be
granted or withheld in Bank's sole discretion. Bank shall have the right without
the consent of or notice to Borrower to sell, assign, negotiate, grant
participation in, or otherwise transfer all or any part of, or any interest in,
Bank's obligations, rights and benefits hereunder; provided that any payment
--------
made by Borrower to Bank prior to notice to Borrower of such transfer shall
reduce the outstanding Obligations to the same extent as if such transfer had
not be made.
-21-
<PAGE>
12.2 Indemnification. Borrower shall, indemnify, defend, protect and hold
---------------
harmless Bank and its officers, employees, and agents against: (a) all
obligations, demands, claims, and liabilities claimed or asserted by any other
party in connection with the transactions contemplated by the Loan Documents;
and (b) all reasonable costs of defense or Bank Expenses in any way suffered,
incurred, or paid by Bank as a result of or in any way arising out of the
foregoing (including without limitation reasonable attorneys fees and expenses),
except for losses caused by Bank's gross negligence or willful misconduct.
12.3 Time of Essence. Time is of the essence for the performance of all
---------------
obligations set forth in this Agreement.
12.4 Severability of Provisions. Each provision of this Agreement shall be
--------------------------
severable from every other provision of this Agreement for the purpose of
determining the legal enforceability of any specific provision.
12.5 Amendments in Writing, Integration. This Agreement cannot be amended
----------------------------------
or terminated except by a writing signed by Borrower and Bank. All prior
agreements, understandings, representations, warranties, and negotiations
between the parties hereto with respect to the subject matter of this Agreement,
if any, are merged into this Agreement and the other Loan Documents.
12.6 Counterparts. This Agreement may be executed in any number of
------------
counterparts and by different parties on separate counterparts, each of which,
when executed and delivered, shall be deemed to be an original, and all of
which, when taken together, shall constitute but one and the same Agreement.
12.7 Survival. All covenants, representations and warranties made in this
--------
Agreement shall continue in full force and effect so long as any Obligations
remain outstanding. The obligations of Borrower to indemnify Bank with respect
to the expenses, damages, losses, costs and liabilities described in Section
12.2 shall survive until all applicable statute of limitations periods with
respect to actions that may be brought against Bank have run; provided that so
long as the obligations referred to in the first sentence of this Section 12.7
have been satisfied, and Bank has no commitment to make any Loans, Bank shall
release all security interests granted hereunder and redeliver all Collateral
held by it in accordance with applicable law.
12.8 Confidentiality. In handling any confidential information Bank shall
---------------
exercise the same degree of care that it exercises with respect to its own
proprietary information of the same types to maintain the confidentiality of any
non-public information thereby received or received pursuant to this Agreement
except that disclosure of such information may be made (i) to the subsidiaries
or affiliates of Bank in connection with their present or prospective business
relations with Borrower, (ii) to prospective transferees or purchasers of any
interest in the Loans, provided that they have entered into a comparable
confidentiality agreement in favor of Borrower and have delivered a copy to
Borrower, (iii) as required by law, regulations, rule or order, subpoena,
judicial order or similar order, (iv) as may be required in connection with the
examination, audit or similar investigation of Bank, and (v) as Bank may
reasonably deem appropriate in connection with the exercise of any remedies
hereunder. Confidential information hereunder shall not include information that
either; (a) is in the public domain or previously in the knowledge or possession
of Bank when disclosed by Borrower to Bank, or becomes part of the public domain
after disclosure to Bank through no fault of Bank; or (b) is disclosed to Bank
by a third party, provided
-22-
<PAGE>
Bank does not have actual knowledge that such third party is prohibited from
disclosing such information.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the date first above written.
LIQUID AUDIO, INC.
By: /s/ [SIGNATURE ILLEGIBLE]
----------------------------------
Title: Chief Financial Officer
------------------------------
By: _________________________________
Title: ______________________________
SILICON VALLEY BANK
By: /s/ [SIGNATURE ILLEGIBLE]
----------------------------------
Title: V.P.
------------------------------
-23-
<PAGE>
Schedule of Exceptions
----------------------
Permitted Indebtedness (Indebtedness on the Closing Date)
- ----------------------
1. Indebted ness in the form of equipment leases under the Master Equipment
Lease Agreement, dated October 15, 1996, between Borrower and Phoenix Leasing
Incorporated.
2. Indebted ness in the form of equipment leases under the Lease Agreement,
dated January 20, 1998, and amended February 10, 1998, between Borrower and AT&T
Credit Corporation.
3. Indebted ness in the form of equipment leases under the Lease Agreement,
dated February 27, 1998, between Borrower and Tokai Financial Services.
Permitted Investments (Investments on the Closing Date)
- ---------------------
[None]
Permitted Liens (Liens on the Closing Date)
- ---------------
1. Liens on Leased Equipment.
2. [______]
Section 4.1 (Priority Exceptions)
- -----------
1. Any Lien in favor of Bank.
2. The case, In re AEG Acquisition Corp., 161 Bankr. 50 (9th Cir. 1993)
---------------------------
(Bankruptcy Appellate Panel), holds that a security interest in a copyright
under the U.S. Copyright Act cannot be perfected ??ess (a) such copyright is
registered in the U.S. Copyright Office and (b) the grant of such security
interest is ??orded with respect to such registered copyright in the U.S.
Copyright Office. None of the company's copyrights is currently registered in
the U.S. Copyright Office.
Section 5.5 (Trade and Other Names)
- -----------
None.
Section 5.6 (Litigation)
- -----------
Borrower receives inquiries from time to time from various third parties
offering to license or to enter into other business relationships regarding the
use of their technology. Borrower recently met with representatives of a company
purporting to own U.S. Patent No. 5,191,573. Borrower responded that it believes
that it does not need a license to such patent because it believes that the
patent is invalid and that Borrower's products do not infringe such patent.
Borrower currently does not intend to enter into any other agreement with the
patent owner.
Section 7.8 (Transactions with Affiliates)
- -----------
1. Founder's Restricted Stock Purchase Agreements, dated as of April 25,
1996, as amended May 31, 1996, between the Company and each of Gerald W. Kearby,
Philip Wiser, Robert Flynn, Steven R. Holtzman and LeeAnn Heringer (the
"Founders").
--------
-1-
<PAGE>
2. First Amended and Restated Investor Rights Agreement, dated as of May
23, 1997, as amended, among the Company and the Series B Purchasers.
3. First Amended and Restated Co-Sale Agreement, dated as of May 23, 1997,
among the Company, the Series B Purchasers and the other parties thereto.
4. First Amended and Restated Voting Agreement, dated as of May 23, 1997,
as amended, among the Company, the Series B Purchasers and the other parties
thereto.
5. Series A Preferred Stock Purchase Agreement, dated as of May 31, 1996,
among the Company and each of the purchasers of the Company's Series A Preferred
Stock (the "Series A Purchasers").
-------------------
6. Investor Rights Agreement, dated as of May 31, 1996, as amended, among
the Company and the Series A Purchasers.
7. Co-Sale Agreement, dated as of May 31, 1996, among the Company, the
Series A Purchasers and the other parties thereto.
8. Voting Agreement, dated as of May 31, 1996, as amended, among the
Company, the Series A Purchasers and the other parties thereto.
9. Stock Option Agreement, dated as of January 15, 1997, between the
Company and director Jonathan D. Lazarus.
10. Reasonable moving, travel and expense advances and reimbursements to
directors, officers, employees and consultants in the ordinary course of
business.
11. Series B Preferred Stock Purchase Agreement, dated as of May 23, 1997,
among the Company and each of the purchasers of the Company's Series B Preferred
Stock (the "Series B Purchasers").
-------------------
-2-
<PAGE>
EXHIBIT A
- ---------
The Collateral shall consist of all right, title and interest of Borrower
in and to the following.
(a) All goods and equipment, other than Leased Equipment, now owned or
hereafter acquired, including, without limitation, all machinery, fixtures,
vehicles (including motor vehicles and trailers), and any interest in any of the
foregoing, and all attachments, accessories, accessions, replacements,
substitutions, additions, and improvements to any of the foregoing, wherever
located;
(b) All inventory, now owned or hereafter acquired, including, without
limitation, all merchandise, raw materials, parts, supplies, packing and
shipping materials, work in process and finished products including such
inventory as is temporarily out of Borrower's custody or possession or in
transit and including any returns upon any accounts or other proceeds, including
insurance proceeds, resulting from the sale or disposition of any of the
foregoing and any documents of title representing any of the above;
(c) All contract rights and general intangibles now owned or hereafter
acquired, including, without limitation, goodwill, trademarks, servicemarks,
trade styles, trade names, patents, patent applications, leases, license
agreements, franchise agreements, blueprints, drawings, purchase orders,
customer lists, route lists, infringements and other claims, computer programs,
computer discs, computer tapes, literature, reports, catalogs, design rights,
income tax refunds, payments of insurance and rights to payment of any kind;
(d) All now existing and hereafter arising accounts, contract rights,
royalties, license rights and all other forms of obligations owing to Borrower
arising out of the sale or lease of goods, the licensing of technology or the
rendering of services by Borrower, whether or not earned by performance, and any
and all credit insurance, guaranties, and other security therefor, as well as
all merchandise returned to or reclaimed by Borrower;
(e) All documents, cash, deposit accounts, securities, investment property,
letters of credit, certificates of deposit, instruments and chattel paper now
owned or hereafter acquired and Borrower's Books relating to the foregoing;
(f) All copyright rights, copyright applications, copyright registrations
and like protections in each work of authorship and derivative work thereof,
whether published or unpublished, now owned or hereafter acquired, all trade
secret rights, including all rights to unpatented inventions, know-how,
operating manuals, license rights and agreements and confidential information,
now owned or hereafter acquired; all mask work or similar rights available for
the protection of semiconductor chips, now owned or hereafter acquired; all
claims for damages by way of any past, present and future infringement of any of
the foregoing; and
(g) All Borrower's Books relating to the foregoing and any and all claims,
rights and interests in any of the above and all substitutions for, additions
and accessions to and proceeds thereof.
<PAGE>
EXHIBIT B
- ---------
LOAN PAYMENT/ADVANCE TELEPHONE REQUEST FORM
DEADLINE FOR SAME DAY PROCESSING IS 3:00 P.M., P.S.T.
TO: CENTRAL CLIENT SERVICE DIVISION DATE: ________________________________
FAX#: (408) ______________ TIME: ________________________________
FROM:
___________________________________________________________________________
BORROWER'S NAME
FROM: ____________________________________________________________________
AUTHORIZED SIGNER'S NAME
________________________________________________
AUTHORIZED SIGNATURE
PHONE: ______________________________________________________________________
FROM ACCOUNT #__________________________ TO ACCOUNT#________________________
REQUESTED TRANSACTION TYPE REQUEST DOLLAR AMOUNT
- -------------------------- ---------------------
PRINCIPAL INCREASE (ADVANCE) $_____
PRINCIPAL PAYMENT (ONLY) $_____
INTEREST PAYMENT (ONLY) $_____
PRINCIPAL AND INTEREST (PAYMENT) $_____
OTHER INSTRUCTIONS: _____
All representations and warranties of Borrower stated in the Loan and
Security Agreement are true, correct and complete in all material respects as of
the date of the telephone request for the Loan confirmed by this Advance
Request; provided that those representations and warranties expressly referring
--------
to another date shall be true, correct and complete in all material respects as
of such date.
BANK USE ONLY:
TELEPHONE REQUEST:
- -----------------
The following person is authorized to request the loan payment transfer/loan
advance on the advance designated account and is known to me.
____________________________________________
Authorized Requester
______________________________
Authorized Signature (Bank)
Phone #_______________________
<PAGE>
EXHIBIT C
- ---------
COMPLIANCE CERTIFICATE
TO: SILICON VALLEY BANK
FROM LIQUID AUDIO, INC.
The undersigned authorized officer of LIQUID AUDIO, INC. hereby
certifies that in accordance with the terms and conditions of the Loan and
Security Agreement between Borrower and Bank (the "Agreement"), (i) Borrower is
in complete compliance for the period ending __________ with all required
covenants except as noted below and (ii) all representations and warranties of
Borrower stated in the Agreement are true and correct in all material respects
as of the date hereof. Attached herewith are the required documents supporting
the above certification. The Officer further certifies that the attached
financial statements are prepared in accordance with Generally Accepted
Accounting Principles (GAAP) and are consistently applied from one period to the
next except as explained in an accompanying letter or footnotes. The Officer
expressly acknowledges that no borrowings may be requested by the Borrower at
any time or date of determination that Borrower is not in compliance with any of
the terms of the Agreement, and that such compliance is determined not just at
the date this certificate is delivered.
Sincerely,
___________________ Date:____________
SIGNATURE
_________________________
TITLE
BANK USE ONLY
Received By:______________
Date:______________
Reviewed By:__________________
Compliance Status: Yes / No
Comments Regarding Exceptions:
<PAGE>
[LOGO APPEARS HERE]
April 21, 1998
Dan Sanchez
Vice President, Software Capital Practice
1731 Embarcadero Road, Suite 220
Palo Alto, CA 94303
Dear Dan:
Liquid Audio is in the process of raising its Series C equity round in an
approximate amount of $10,000,000. We understand that Silicon Valley Bank is
providing Bridge Financing to the company, which if drawn on will be
extinguished by the upcoming equity round. Hummer Winblad Venture Partners has
been one of Liquid Audio's investors since the first venture capital round.
Regards,
/s/ John Hummer
John Hummer
Partner
cc: Gary Iwatani, Liquid Audio
<PAGE>
ACORD CERTIFICATE OF INSURANCE DATE (MM/DD/YY)
04/27/98
PRODUCER -----------------------------------------------
ABD Technology THIS CERTIFICATE IS ISSUED AS A MATTER OF
AJBURGER BASSO de GROSZ INS. INFORMATION ONLY AND CONFERS NO RIGHTS UPON
AJBURGER Island Parkway #300 THE CERTIFICATE HOLDER. THIS CERTIFICATE DOES
Belmont, CA 94002 NOT AMEND, EXTEND OR ALTER THE COVERAGE
AFFORDED BY THE POLICIES BELOW.
-----------------------------------------------
COMPANIES AFFORDING COVERAGE
-----------------------------------------------
COMPANY
A ST. PAUL FIRE & MARINE
- --------------------------------------------------------------------------------
INSURED COMPANY
Liquid Audio, Inc B
810 Winslow -----------------------------------------------
Redwood City, CA 94063 COMPANY
C
-----------------------------------------------
COMPANY
D
- --------------------------------------------------------------------------------
COVERAGES
THIS IS TO CERTIFY THAT THE POLICIES OF INSURANCE LISTED BELOW HAVE BEEN
ISSUED TO THE INSURED NAMED ABOVE FOR THE POLICY PERIOD INDICATED.
NOTWITHSTANDING ANY REQUIREMENT, TERM OR CONDITION OF ANY CONTRACT OR OTHER
DOCUMENT WITH RESPECT TO WHICH THIS CERTIFICATE MAY BE ISSUED OR MAY PERTAIN.
THE INSURANCE AFFORDED BY THE POLICIES DESCRIBED HEREIN IS SUBJECT TO ALL
THE TERMS, EXCLUSIONS AND CONDITIONS OF SUCH POLICIES. LIMITS SHOWN MAY HAVE
BEEN REDUCED BY PAID CLAIMS.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
CO TYPE OF INSURANCE POLICY NUMBER POLICY EFFECTIVE POLICY EXPIRATION LIMITS
LTR DATE (MM/DD/YY) DATE (MM/DD/YY)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
A GENERAL LIABILITY TE01600478 06/28/97 06/28/98 GENERAL AGGREGATE $2,000,000
-------------------------------------
[X] COMMERCIAL GENERAL LIABILITY PRODUCTS.COMP/OP AGG $2,000,000
-------------------------------------
PERSONAL & ADV INJURY $1,000,000
[ ]CLAIMS MADE [X] OCCUR -------------------------------------
OWNERS & CONTRACTOR'S PROT EACH OCCURRENCE $1,000,000
-------------------------------------
FIRE DAMAGE (Any one fire) $1,000,000
-------------------------------------
MED EXP (Any one person) $ 10,000
- ------------------------------------------------------------------------------------------------------------------------------------
AUTOMOBILE LIABILITY
[ ] ANY AUTO COMBINED SINGLE LIMIT $
-------------------------------------
[ ] ALL OWNED AUTOS BODILY INJURY $
(Per person)
[ ] SCHEDULED AUTOS -------------------------------------
HIRED AUTOS BODILY INJURY
(Per accident) $
-------------------------------------
NON-OWNED AUTOS
PROPERTY DAMAGE $
- ------------------------------------------------------------------------------------------------------------------------------------
GARAGE LIABILITY AUTO ONLY-EA ACCIDENT $
-------------------------------------
OTHER THAN AUTO ONLY
-------------------------------------
[ ] ANY AUTO EACH ACCIDENT $
-------------------------------------
[ ] AGGREGATE $
-------------------------------------
[ ]
----------------------------------------------------------------------------------------------------------------------------------
EXCESS LIABILITY EACH OCCURRENCE $
-------------------------------------
[ ] UMBRELLA FORM AGGREGATE $
-------------------------------------
[ ] OTHER THAN UMBRELLA FORM
- ------------------------------------------------------------------------------------------------------------------------------------
WORKERS COMPENSATION AND STATUTORY LIMITS $
-------------------------------------
EMPLOYERS' LIABILITY EACH ACCIDENT $
-------------------------------------
THE PROPRIETOR/ [ ] INCL DISEASES-POLICY LIMIT $
-------------------------------------
PARTNERS/EXECUTIVE
OFFICERS ARE: [ ] EXCL DISEASE-EACH EMPLOYEE $
- ------------------------------------------------------------------------------------------------------------------------------------
A OTHER Business TE01600478 06/28/97 06/28/98 $1,000 Deductible
- ------------------------------------------------------------------------------------------------------------------------------------
Personal Property $1,000,000 Limit
Spec Form incl Theft
Replacement Cost
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
DESCRIPTION OF OPERATIONS/LOCATIONS/VEHICLES/SPECIAL ITEMS
Certificate Holder is named as Loss Payee and Additional Insured as
respects to business personal property. Form 438BFU NS is attached.
- --------------------------------------------------------------------------------
CERTIFICATE HOLDER CANCELLATION TEN DAY NOTICE FOR
NON-PAYMENT SHOULD ANY OF THE
ABOVE DESCRIBED POLICIES BE
Silicon Valley Bank CANCELLED BEFORE THE EXPIRATION
1731 Embarcadero Road, Suite 220 DATE THEREOF, THE ISSUING COMPANY
Palo Alto, Ca 94303 WILL ENDEAVOR TO MAIL 20 DAYS
Attn: Dan Sanchez WRITTEN NOTICE TO THE CERTIFICATE
Fax (650) 812-0640 HOLDER NAMED TO THE LEFT. BUT
FAILURE TO MAIL SUCH NOTICE SHALL
IMPOSE NO OBLIGATION OR LIABILITY
OF ANY KIND UPON THE COMPANY, ITS
AGENTS OR REPRESENTATIVES.
-------------------------------------
AUTHORIZED REPRESENTATIVE
/s/ Marie Benjamin
ACCORD 26-5 (3/93)1 OF 1 #SB9135/M58308 LIQUIAUDI MAR ACCORD CORPORATION 1983
- --------------------------------------------------------------------------------
<PAGE>
S.F. FORM Form 438BFU NS
(Rev. May 1, 1942) x
LENDER'S LOSS PAYABLE ENDORSEMENT
1. Loss or damage, if any, under this policy, shall be paid to the Payee
named on the first page of this policy, its successors and assigns, hereinafter
referred to as "the Lender", in whatever form or capacity its interests may
appear and whether said interest be vested in said Lender in its individual or
in its disclosed or undisclosed fiduciary or representative capacity, or
otherwise, or vested in a nominee or trustee of said Lender.
2. The insurance under this policy, or any rider or endorsement attached
thereto, as to the interest only of the Lender, its successors and assigns,
shall not be invalidated nor suspended, (a) by any error, omission, or change
respecting the ownership, description, possession, or location of the subject of
the insurance or the interest therein, or the title thereto; (b) by the
commencement of foreclosure proceedings or the giving of notice of sale of any
of the property covered by this policy by virtue of any mortgage or trust deed;
(c) by any breach of warranty, act, omission, neglect, or non-compliance with
any of the prov isions of this policy, including any and all riders now or
hereafter attached thereto, by the named insured, the borrower, mortgagor,
trustor, vendee, owner, tenant, warehouseman, custodian, occupant, or by the
agents of either or any of them or by the happening of any event permitted by
them or either of them, or their agents, or which they failed to prevent,
whether occurring before or after the attachment of this endorsement, or whether
before or after a loss, which under the provisions of this policy of insurance
or of any rider or endorsement attached thereto would invalidate or suspend the
insurance as to the named insured, excluding herefrom, however, any acts or
omissions of the Lender while exercising active control and management of the
property.
3. In the event of failure of the insured to pay any premium or additional
premium which shall be or become due under the terms of this policy or on
account of any change in occupancy or increase in hazard not permitted by this
policy, this Company agrees to give written notice to the Lender of such non-
payment of premium after sixty (60) days from and within one hundred and twenty
(120) days after due date of such premium and it is a condition of the
continuance of the rights of the Lender hereunder that the Lender when so
notified in writing by this Company of the failure of the insured to pay such
premium shall pay or cause to be paid the premium due within ten (10) days
following receipt of the Company's demand in writing therefor. If the Lender
shall decline to pay said premium or additional premium, the rights of the
Lender under this Lender's Loss Payable Endorsement shall not be terminated
before ten (10) ?? after receipt of said written notice by the Lender.
4. Whenever this Company shall pay to the Lender any sum for loss or
damage under this policy and shall claim that as to the ??red no liability
therefor exists, this Company, at its option, may pay to the Lender the whole
principal sum and interest and other indebtedness due or to become due from the
insured, whether secured or unsecured, (with refund of all interest not
accrued), and this Company, to the extent of such payment, shall thereupon
receive a full assignment and transfer, without recourse, of the debt and all
rights and securities held as collateral thereto.
5. If there be any other insurance upon the within described property,
this Company shall be liable under this policy as to the Lender for the
proportion of such loss or damage that the sum hereby insured bears to the
entire insurance of similar character on said property under policies held by,
payable to and expressly consented to by the Lender. Any Contribution Clause
included in any Fallen Building Clause Waiver or any Extended Coverage
Endorsement attached to this contract of insurance is hereby nullified, and also
any Contribution Clause in any other endorsement or rider attached to this
contract of insurance is hereby nullified except Contribution Clauses for the
compliance with which the insured has received reduction in the rate charged or
has received extension of the coverage to include hazards other than fire and
compliance with such Contribution Clause is made a part of the consideration for
insuring such other hazards. The Lender upon the payment to it of the full
amount of its claim, will subrogate this Company (pro rata with all other
insurers contributing to said payment) to all of the Lender's rights of
contribution under said other insurance.
6. This Company reserves the right to cancel this policy at any time, as
provided by its terms, but in such case this policy shall continue in force for
the benefit of the Lender for ten (10) days after written notice of such
cancellation is received by the Lender and shall then cease.
7. This policy shall remain in full force and effect as to the interest of
the Lender for a period of ten (10) days after its expiration unless an
acceptable policy in renewal thereof with loss thereunder payable to the Lender
in accordance with the terms of this Lender's Loss Payable Endorsement shall
have been issued by some insurance company and accepted by the Lender.
8. Should legal title to and beneficial ownership of any of the property
covered under this policy become vested in the Lender or its agents, insurance
under this policy shall continue for the term thereof for the benefit of the
Lender but, in such event, any privileges granted by this Lender's Loss Payable
Endorsement which are not also granted the insured under the terms and
conditions of this policy and/or under other riders or endorsements attached
thereto shall not apply to the insurance hereunder as respects such property.
9. All notices herein provided to be given by the Company to the Lender in
connection with this policy and this Lender's Loss Payable Endorsement shall be
mailed to or delivered to the Lender at its office or branch described on the
first page of the policy.
Approved:
Board of Fire Underwriters of the Pacific.
California Bankers' Association.
Committee on Insurance.
<PAGE>
EXHIBIT 10.23
- --------------------------------------------------------------------------------
LOAN AND SECURITY AGREEMENT
LIQUID AUDIO, INC.
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
1 ACCOUNTING AND OTHER TERMS............................................... 4
--------------------------
2 LOAN AND TERMS OF PAYMENT................................................ 4
-------------------------
2.1 Credit Extensions................................................. 4
2.2 Overadvances...................................................... 6
2.3 Interest Rate, Payments........................................... 6
2.4 Fees.............................................................. 6
3 CONDITIONS OF LOANS...................................................... 7
-------------------
3.1 Conditions Precedent to Initial Credit Extension.................. 7
3.2 Conditions Precedent to Initial Advance........................... 7
3.3 Conditions Precedent to all Credit Extensions..................... 7
4 CREATION OF SECURITY INTEREST............................................ 7
-----------------------------
4.1 Grant of Security Interest........................................ 7
5 REPRESENTATIONS AND WARRANTIES........................................... 7
------------------------------
5.1 Due Organization and Authorization................................ 7
5.2 Collateral........................................................ 7
5.3 Litigation........................................................ 8
5.4 No Material Adverse Change in Financial Statements................ 8
5.5 Solvency.......................................................... 8
5.6 Regulatory Compliance............................................. 8
5.7 Subsidiaries...................................................... 8
5.8 Full Disclosure................................................... 8
6 AFFIRMATIVE COVENANTS.................................................... 9
---------------------
6.1 Government Compliance............................................. 9
6.2 Financial Statements, Reports, Certificates....................... 9
6.3 Inventory; Returns................................................ 9
6.4 Taxes............................................................. 9
6.5 Insurance......................................................... 10
6.6 Primary Accounts.................................................. 10
6.7 Financial Covenants............................................... 10
6.8 Further Assurances................................................ 10
7 NEGATIVE COVENANTS....................................................... 10
------------------
7.1 Dispositions...................................................... 10
7.2 Changes in Business, Ownership, Management or Business Locations.. 10
7.3 Mergers or Acquisitions........................................... 10
7.4 Indebtedness...................................................... 11
7.5 Encumbrance....................................................... 11
7.6 Distributions; Investments........................................ 11
7.7 Transactions with Affiliates...................................... 11
7.8 Subordinated Debt................................................. 11
7.9 Compliance........................................................ 11
8 EVENTS OF DEFAULT........................................................ 11
-----------------
8.1 Payment Default................................................... 11
</TABLE>
2
<PAGE>
<TABLE>
<S> <C>
8.2 Covenant Default......................................... 11
8.3 Material Adverse Change.................................. 12
8.4 Attachment............................................... 12
8.5 Insolvency............................................... 12
8.6 Other Agreements......................................... 12
8.7 Judgments................................................ 12
8.8 Misrepresentations....................................... 12
9 BANK'S RIGHTS AND REMEDIES....................................... 12
--------------------------
9.1 Rights and Remedies...................................... 12
9.2 Power of Attorney........................................ 13
9.3 Accounts Collection...................................... 13
9.4 Bank Expenses............................................ 13
9.5 Bank's Liability for Collateral.......................... 14
9.6 Remedies Cumulative...................................... 14
9.7 Demand Waiver............................................ 14
10 NOTICES.......................................................... 14
-------
11 CHOICE OF LAW, VENUE AND JURY TRIAL WAIVER....................... 14
------------------------------------------
12 GENERAL PROVISIONS............................................... 14
------------------
12.1 Successors and Assigns.................................. 14
12.2 Indemnification......................................... 15
12.3 Time of Essence......................................... 15
12.4 Severability of Provision............................... 15
12.5 Amendments in Writing, Integration...................... 15
12.6 Counterparts............................................ 15
12.7 Survival................................................ 15
12.8 Confidentiality......................................... 15
12.9 Effect of Amendment and Restatement..................... 15
12.10 Attorneys' Fees, Costs and Expenses.................... 16
13 DEFINITIONS...................................................... 16
-----------
13.1 Definitions............................................. 16
</TABLE>
3
<PAGE>
THIS LOAN AND SECURITY AGREEMENT dated November 16, 1998 between SILICON
VALLEY BANK ("Bank"), whose address is 3003 Tasman Drive, Santa Clara,
California 95054 and LIQUID AUDIO, INC ("Borrower"), whose address is 810
Winslow, Redwood City, California 94063
1 ACCOUNTING AND OTHER TERMS
--------------------------
Accounting terms not defined in this Agreement will be construed following
GAAP Calculations and determinations must be made following GAAP. The term
"financial statements" includes the notes and schedules. The terms "including"
and "includes" always mean "including (or includes) without limitation" in this
or any Loan Document. This Agreement shall be construed to impart upon Bank a
duty to act reasonably at all times.
2 LOAN AND TERMS OF PAYMENT
-------------------------
2.1 CREDIT EXTENSIONS.
Borrower will pay Bank the unpaid principal amount of all Credit Extensions
and interest on the unpaid principal amount of the Credit Extensions.
2.1.1 REVOLVING ADVANCES.
(a) Bank will make Advances not exceeding (i) the lesser of (A) the
Committed Revolving Line or (B) the Borrowing Base, whichever is less, minus
(ii) the amount of all outstanding Letters of Credit (including drawn but
unreimbursed Letters of Credit), and minus (iii) the Foreign Exchange Reserve
Amounts borrowed under this Section may be repaid and reborrowed during the term
of this Agreement
(b) To obtain an Advance, Borrower must notify Bank by facsimile or
telephone by 3 00 p m Pacific time on the Business Day the Advance is to be
made. Borrower must promptly confirm the notification by delivering to Bank the
Payment/Advance Form attached as Exhibit B. Bank will credit Advances to
Borrower's deposit account. Bank may make Advances under this Agreement based on
instructions from a Responsible Officer or his or her designee or without
instructions if the Advances are necessary to meet Obligations which have become
due. Bank may rely on any telephone notice given by a person whom Bank believes
is a Responsible Officer or designee. Borrower will indemnify Bank for any loss
Bank suffers due to reliance.
(c) The Committed Revolving Line terminates on the Revolving Maturity Date,
when all Advances and other amounts due under this Agreement are immediately
payable.
2.1.2 LETTERS OF CREDIT.
Bank will issue or have issued Letters of Credit for Borrower's account not
exceeding (i) the lesser of the Committed Revolving Line or the Borrowing Base
minus (ii) the outstanding principal balance of the Advances, minus the Foreign
Exchange Reserve; however, the face amount of outstanding Letters of Credit
(including drawn but unreimbursed Letters of Credit and any Letter of Credit
Reserve) may not exceed $500,000. Each Letter of Credit will have an expiry date
of no later than 180 days after the Revolving Maturity Date, but Borrower's
reimbursement obligation will be secured by cash on terms acceptable to Bank at
any time after the Revolving Maturity Date if the term of this Agreement is not
extended by Bank.
2.1.3 FOREIGN EXCHANGE CONTRACT; FOREIGN EXCHANGE SETTLEMENTS.
Borrower may enter foreign exchange contracts (the "Exchange Contracts")
not exceeding an aggregate amount of $500,000 (the "Contract Limit"), under
which Bank will sell to or purchase from Borrower foreign currency on a spot or
future basis. Borrower may not request any Exchange Contracts if
4
* Certain information in this Exhibit has been omitted and filed
separately with the Commission. Confidential treatment has been
requested with respect to the omitted portions.
<PAGE>
it is out of compliance with any provision of this Agreement. Exchange Contracts
must provide for delivery of settlement on or before the Revolving Maturity
Date. The amount available under the Committed Revolving Line is reduced by the
following (the "Foreign Exchange Reserve") on any given day (the "Determination
Date"): (i) on all outstanding Exchange Contracts on which delivery is to be
effected or settlement allowed more than two business days after the
Determination Date, 10% of the gross amount of the Exchange Contracts; plus (ii)
on all outstanding Exchange Contracts on which delivery is to be effected or
settlement allowed within two business days after the Determination Date. 100%
of the gross amount of the Exchange Contracts.
Bank may terminate the Exchange Contracts if (a) an Event of Default occurs
or (b) there is not sufficient availability under the Committed Revolving Line
and Borrower does not have available funds in its deposit account for the
Foreign Exchange Reserve. If Bank terminates the Exchange Contracts Borrower
will reimburse Bank for all fees, costs and expenses in connection with the
Exchange Contracts
Borrower may not permit the total of all Exchange Contracts on which
delivery is to be effected and settlement allowed in any two business day period
to be more than $500,000 (the "Settlement Limit") nor may Borrower permit the
total of all Exchange Contracts outstanding at any one time, to exceed the
Contract Limit. However, the amount which may be settled in any 2 business day
period may be increased above the Settlement Limit up to, but not above the
Contract Limit if:
(i) there is sufficient availability under the Committed Revolving Line in
the amount of the Foreign Exchange Reserve for each Determination Date,
provided that Bank in advance shall reserve the full amount of the Foreign
Exchange Reserve against the Committed Revolving Line, or
(ii) there is insufficient availability under the Committed Revolving Line
for settlements within any 2 business day period, but Bank: (A) verifies
good funds overseas before crediting Borrower's deposit account (if
Borrower sells foreign currency), or (B) debits Borrower's deposit account
before delivering foreign currency overseas (if Borrower purchases foreign
currency)
If Borrower purchases foreign currency. Borrower in advance must instruct
Bank either to treat the settlement as an advance under the Committed Revolving
Line, or to debit Borrower's account for the amount settled.
Borrower will execute all Bank's standard applications and agreements in
connection with the Exchange Contracts and pay all Bank's standard fees and
charges
Borrower will indemnify Bank and hold it harmless from all claims,
liabilities, demands, obligations, actions, costs and expenses (including
reasonable attorneys' fees) which it incurs arising out of or in any way
relating to any of the Exchange Contracts or any contemplated transactions.
2.1.4 CASH MANAGEMENT SERVICES FACILITY.
Borrower may use up to $300,000 for Bank's Cash Management Services,
which services will include credit card services identified in various cash
management services agreements related to such services (the "Cash Management
Services") The Cash Management Services Facility terminates on the Revolving
Maturity Date, when all amounts due under the Cash Management Services Facility
are immediately due and payable.
2.1.5 EQUIPMENT ADVANCES.
(a) Through November 16, 1999 (the "Equipment Availability End Date"),
Bank will make advances ("Equipment Advance" and, collectively, "Equipment
Advances") not exceeding the Committed Equipment Line. The Equipment Advances
may only be used to finance computer and office Equipment purchased since June
1, 1998 and may not exceed 100% of the equipment invoice excluding taxes.
5
<PAGE>
shipping, warranty charges, freight discounts and installation expense Software,
licenses leasehold improvements and other soft costs may constitute up to 40% of
the aggregate Equipment Advances
(b) Interest accrues from the date of each Equipment Advance at the rate in
Section 2.3(a) and is payable monthly until the Equipment Availability End Date
occurs. At Borrowers option at any time prior to the Equipment Availability End
Date the outstanding Equipment Advances equal $200.000 or more, the outstanding
Equipment Advances may be termed out and be payable in 36 even monthly
installments of principal plus interest beginning the 16th day of the month
following such term-out and all subsequent payments of principal plus interest
are due on the same day of each month thereafter (each an "Early Term-Out"). The
final payment for the Early Term-Out, due the 16th day of the 36th month
following the Early Term-Out, will be for all outstanding principal plus accrued
interest Equipment Advances outstanding on the Equipment Availability End Date
are payable in 36 equal monthly installments of principal, plus accrued
interest, beginning on the 16th day of each month following the Equipment
Availability End Date and ending on November 16, 2002 (the "Equipment Maturity
Date") Equipment Advances when repaid may not be reborrowed.
(c) To obtain an Equipment Advance, Borrower must notify Bank (the notice
is irrevocable) by facsimile no later than 3:00 p.m. Pacific time 1 Business Day
before the day on which the Equipment Advance is to be made. The notice in the
form of Exhibit B (Payment/Advance Form) must be signed by a Responsible Officer
or designee and include a copy of the invoice for the Equipment being financed
2.2 OVERADVANCES.
If Borrower's Obligations under Section 2 1.1, 2.1.2 and 2.1.3 exceed the
lesser of either (i) the Committed Revolving Line or (ii) the Borrowing Base,
Borrower must immediately pay Bank the excess In addition, if Borrower's
Obligations under Sections 2.1.2 and 2.1.3 exceed $500,000 at any one time,
Borrower will immediately pay Bank the excess.
2.3 INTEREST RATE, PAYMENTS.
(a) Interest Rate (i) Advances accrue interest on the outstanding principal
balance at a per annum rate equal to the Prime Rate; and (ii) Equipment Advances
accrue interest on the outstanding principal balance at a per annum rate of 0.25
percentage points above the Prime Rate After an Event of Default, Obligations
accrue interest at 5 percent above the rate effective immediately before the
Event of Default. The interest rate increases or decreases when the Prime Rate
changes. Interest is computed on a 360 day year for the actual number of days
elapsed.
(b) Payments. Interest due on the Committed Revolving Line is payable on
the 16th of each month Interest due on the Equipment Advances is payable on the
16th of each month Bank may debit any of Borrower's deposit accounts including
Account Number _____________ for principal and interest payments or any amounts
Borrower owes Bank. Bank will notify Borrower when it debits Borrower's
accounts. These debits are not a set-off Payments received after 12:00 noon
Pacific time are considered received at the opening of business on the next
Business Day When a payment is due on a day that is not a Business Day, the
payment is due the next Business Day and additional fees or interest accrue
2.4 FEES.
BORROWER WILL PAY:
(a) Facility Fee. A fully earned, non-refundable Facility Fee of $2,500 for
the Committed Revolving Line and the Committed Equipment Line due on the Closing
Date; and
(b) Bank Expenses. All Bank Expenses (including reasonable attorneys' fees
and expenses) incurred through and after the date of this Agreement, are payable
when due.
6
<PAGE>
shipping, warranty charges, freight discounts and installation expense.
Software, licenses, leasehold improvements and other soft costs may constitute
up to 40% of the aggregate Equipment Advances.
(b) Interest accrues from the date of each Equipment Advance at the rate in
Section 2.3(a) and is payable monthly until the Equipment Availability End Date
occurs. At Borrowers option, at any time prior to the Equipment Availability End
Date the outstanding Equipment Advances equal $200,000 or more, the outstanding
Equipment Advances may be termed out and be payable in 36 even monthly
installments of principal plus interest beginning the 16th day of the month
following such term-out and all subsequent payments of principal plus interest
are due on the same day of each month thereafter (each an "Early Term-Out"). The
final payment for the Early Term-Out, due the 16th day of the 36th month
following the Early Term-Out, will be for all outstanding principal plus accrued
interest. Equipment Advances outstanding on the Equipment Availability End Date
are payable in 36 equal monthly installments of principal, plus accrued
interest, beginning on the 16th day of each month following the Equipment
Availability End Date and ending on November 16, 2002 (the "Equipment Maturity
Date") Equipment Advances when repaid may not be reborrowed.
(c) To obtain an Equipment Advance. Borrower must notify Bank (the notice
is irrevocable) by facsimile no later than 3:00 p.m. Pacific time 1 Business Day
before the day on which the Equipment Advance is to be made. The notice in the
form of Exhibit B (Payment/Advance Form) must be signed by a Responsible Officer
or designee and include a copy of the invoice for the Equipment being financed.
2.2 OVERADVANCES.
If Borrower's Obligations under Section 2.1.1, 2.1.2 and 2.1.3 exceed the
lesser of either (i) the Committed Revolving Line or (ii) the Borrowing Base,
Borrower must immediately pay Bank the excess. In addition, if Borrower's
Obligations under Sections 2.1.2 and 2.1.3 exceed $500,000 at any one time,
Borrower will immediately pay Bank the excess.
2.3 INTEREST RATE, PAYMENTS.
(a) Interest Rate. (i) Advances accrue interest on the outstanding
principal balance at a per annum rate equal to the Prime Rate; and (ii)
Equipment Advances accrue interest on the outstanding principal balance at a per
annum rate of 0.25 percentage points above the Prime Rate. After an Event of
Default, Obligations accrue interest at 5 percent above the rate effective
immediately before the Event of Default. The interest rate increases or
decreases when the Prime Rate changes. Interest is computed on a 360 day year
for the actual number of days elapsed.
(b) Payments. Interest due on the Committed Revolving Line is payable on
the 16th of each month. Interest due on the Equipment Advances is payable on the
16th of each month. Bank may debit any of Borrower's deposit accounts including
Account Number _______________ for principal and interest payments or any
amounts Borrower owes Bank. Bank will notify Borrower when it debits Borrower's
accounts. These debits are not a set-off. Payments received after 12:00 noon
Pacific time are considered received at the opening of business on the next
Business Day. When a payment is due on a day that is not a Business Day, the
payment is due the next Business Day and additional fees or interest accrue
2.4 FEES.
Borrower will pay:
(a) Facility Fee. A fully earned, non-refundable Facility Fee of $2,500 for
the Committed Revolving Line and the Committed Equipment Line due on the Closing
Date; and
(b) Bank Expenses. All Bank Expenses (including reasonable attorneys' fees
and expenses) incurred through and after the date of this Agreement, are payable
when due.
6
<PAGE>
3 CONDITIONS OF LOANS
-------------------
3.1 CONDITIONS PRECEDENT TO INITIAL CREDIT EXTENSION.
Bank's obligation to make the initial Credit Extension is subject to the
condition precedent that it receive the agreements, documents and fees it
requires.
3.2 CONDITIONS PRECEDENT TO INITIAL ADVANCE.
Bank shall conduct a satisfactory Collateral audit.
3.3 CONDITIONS PRECEDENT TO ALL CREDIT EXTENSIONS.
Bank's obligations to make each Credit Extension, including the initial
Credit Extension, is to the following:
(a) timely receipt of any Payment/Advance Form; and
(b) the representations and warranties in Section 5 must be materially true
on the date of the Payment/Advance Form and on the effective date of each Credit
Extension and no Event of Default may have occurred and be continuing, or result
from the Credit Extension. Each Credit Extension is Borrower's representation
and warranty on that date that the representations and warranties of Section 5
remain true
4 CREATION OF SECURITY INTEREST
-----------------------------
4.1 GRANT OF SECURITY INTEREST.
Borrower grants Bank a continuing security interest in all presently
existing and later acquired Collateral to secure all Obligations and performance
of each of Borrower's duties under the Loan Documents. Except for Permitted
Liens, any security interest will be a first priority security interest in the
Collateral. Bank may place a "hold" on any deposit account pledged as
Collateral.
5 REPRESENTATIONS AND WARRANTIES
------------------------------
Borrower represents and warrants as follows:
5.1 DUE ORGANIZATION AND AUTHORIZATION.
Borrower and each Subsidiary is duly existing and in good standing in its
state of formation and qualified and licensed to do business in, and in good
standing in, any state in which the conduct of its business or its ownership of
property requires that it be qualified.
The execution, delivery and performance of the Loan Documents have been
duly authorized, and do not conflict with Borrower's formation documents, nor
constitute an event of default under any material agreement by which Borrower is
bound. Borrower is not in default under any agreement to which or by which it is
bound in which the default could cause a Material Adverse Change.
5.2 COLLATERAL.
Borrower has good title to the Collateral, free of Liens except Permitted
Liens. The Accounts are bona fide, existing obligations, and the service or
property has been performed or delivered to the account debtor or its agent for
immediate shipment to and unconditional acceptance by the account debtor
Borrower has no notice of any actual or imminent insolvency Proceeding of any
account debtor whose
7
<PAGE>
3 CONDITIONS OF LOANS
-------------------
3.1 CONDITIONS PRECEDENT TO INITIAL CREDIT EXTENSION.
Bank's obligation to make the initial Credit Extension is subject to the
condition precedent that it receive the agreements, documents and fees it
requires.
3.2 CONDITIONS PRECEDENT TO INITIAL ADVANCE.
Bank shall conduct a satisfactory Collateral audit.
3.3 CONDITIONS PRECEDENT TO ALL CREDIT EXTENSIONS.
Bank's obligations to make each Credit Extension, including the initial
Credit Extension, is subject to the following:
(a) timely receipt of any Payment/Advance Form; and
(b) the representations and warranties in Section 5 must be materially true
on the date of the Payment/Advance Form and on the effective date of each Credit
Extension and no Event of Default may have occurred and be continuing, or result
from the Credit Extension. Each Credit Extension is Borrower's representation
and warranty on that date that the representations and warranties of Section 5
remain true
4 CREATION OF SECURITY INTEREST
-----------------------------
4.1 GRANT OF SECURITY INTEREST.
Borrower grants Bank a continuing security interest in all presently
existing and later acquired Collateral to secure all Obligations and performance
of each of Borrower's duties under the Loan Documents. Except for Permitted
Liens, any security interest will be a first priority security interest in the
Collateral. Bank may place a "hold" on any deposit account pledged as
Collateral.
5 REPRESENTATIONS AND WARRANTIES
------------------------------
Borrower represents and warrants as follows:
5.1 DUE ORGANIZATION AND AUTHORIZATION.
Borrower and each Subsidiary is duly existing and in good standing in its
state of formation and qualified and licensed to do business in, and in good
standing in, any state in which the conduct of its business or its ownership of
property requires that it be qualified
The execution, delivery and performance of the Loan Documents have been
duly authorized, and do not conflict with Borrower's formation documents, nor
constitute an event of default under any material agreement by which Borrower is
bound. Borrower is not in default under any agreement to which or by which it is
bound in which the default could cause a Material Adverse Change.
5.2 COLLATERAL.
Borrower has good title to the Collateral, free of Liens except Permitted
Liens. The Accounts are bona fide, existing obligations, and the service or
property has been performed or delivered to the account debtor or its agent for
immediate shipment to and unconditional acceptance by the account debtor
Borrower has no notice of any actual or imminent Insolvency Proceeding of any
account debtor whose
7
<PAGE>
accounts are an Eligible Account in any Borrowing Base Certificate. All
Inventory is in all material respects of good and marketable quality, free from
material defects.
5.3 LITIGATION.
Except as shown in the Schedule, there are no actions or proceedings
pending or to Borrower's knowledge, threatened by or against Borrower or any
Subsidiary in which an adverse decision could cause a Material Adverse Change.
5.4 NO MATERIAL ADVERSE CHANGE IN FINANCIAL STATEMENTS.
All consolidated financial statements for Borrower, and any Subsidiary,
delivered to Bank fairly present in all material respects Borrower's
consolidated financial condition and Borrower's consolidated results of
operations. There has not been any material deterioration in Borrower's
consolidated financial condition since the date of the most recent financial
statements submitted to Bank.
5.5 SOLVENCY.
The fair salable value of Borrower's assets (including goodwill minus
disposition costs) exceeds the fair value of its liabilities; the Borrower is
not left with unreasonably small capital after the transactions in this
Agreement; and Borrower is able to pay its debts (including trade debts) as they
mature.
5.6 REGULATORY COMPLIANCE.
Borrower is not an "investment company" or a company "controlled" by an
"investment company" under the Investment Company Act. Borrower is not engaged
as one of its important activities in extending credit for margin stock (under
Regulations G, T and U of the Federal Reserve Board of Governors). Borrower has
complied with the Federal Fair Labor Standards Act. Borrower has not violated
any laws, ordinances or rules, the violation of which could cause a Material
Adverse Change. None of Borrower's or any Subsidiary's properties or assets has
been used by Borrower or any Subsidiary or, to the best of Borrower's knowledge,
by previous Persons, in disposing, producing, storing, treating, or transporting
any hazardous substance other than legally. Borrower and each Subsidiary has
timely filed all required tax returns and paid, or made adequate provision to
pay, all taxes, except those being contested in good faith with adequate
reserves under GAAP. Borrower and each Subsidiary has obtained all consents,
approvals and authorizations of, made all declarations or filings with, and
given all notices to, all government authorities that are necessary to continue
its business as currently conducted.
5.7 SUBSIDIARIES.
Borrower does not own any stock, partnership interest or other equity
securities except for Permitted Investments.
5.8 FULL DISCLOSURE.
No representation, warranty or other statement of Borrower in any
certificate or written statement given to Bank contains any untrue statement of
a material fact or omits to state a material fact necessary to make the
statements contained in the certificates or statements not misleading.
8
<PAGE>
6. AFFIRMATIVE COVENANTS
---------------------
Borrower will do all of the following
6.1 GOVERNMENT COMPLIANCE.
Borrower will maintain its and all Subsidiaries' legal existence and good
standing in its jurisdiction of formation and maintain qualification in each
jurisdiction in which the failure to so qualify could have a material adverse
effect on Borrower's business or operations. Borrower will comply, and have each
Subsidiary comply, with all laws, ordinances and regulations to which it is
subject noncompliance with which could have a material adverse effect on
Borrower's business or operations or cause a Material Adverse Change.
6.2 FINANCIAL STATEMENTS, REPORTS, CERTIFICATES.
(a) Borrower will deliver to Bank: (i) as soon as available, but no later
than 30 days after the last day of each month, a company prepared consolidated
balance sheet and income statement covering Borrower's consolidated operations
during the period, in a form and certified by a Responsible Officer acceptable
to Bank; (ii) as soon as available, but no later than 120 days after the last
day of Borrower's fiscal year, audited consolidated financial statements
prepared under GAAP, consistently applied, together with an unqualified opinion
on the financial statements from an independent certified public accounting firm
acceptable to Bank; (iii) a prompt report of any legal actions pending or
threatened against Borrower or any Subsidiary that could result in damages or
costs to Borrower or any Subsidiary of $100,000 or more. and (iv) budgets, sales
projections, operating plans or other financial information Bank requests.
(b) Within 30 days after the last day of each month, Borrower will deliver
to Bank a Borrowing Base Certificate signed by a Responsible Officer in the form
of Exhibit C, with aged listings of accounts receivable and accounts payable
prior to an Advance or at such times as outstanding Advances exist, otherwise,
within 30 days after the last day of each month, Borrower will deliver to Bank a
listing of accounts receivable and accounts payable.
(c) Within 30 days after the last day of each month, Borrower will deliver
to Bank with the monthly financial statements a Compliance Certificate signed by
a Responsible Officer in the form of Exhibit D.
(d) Bank has the right to audit Borrower's Collateral at Borrower's
expense, but the audits will be conducted no more often than every year unless
an Event of Default has occurred and is continuing at such times as outstanding
Advances exist. In the event Borrower does not request Advances, no Collateral
audit shall be required.
6.3 INVENTORY; RETURNS.
Borrower will keep all Inventory in good and marketable condition, free
from material defects Returns and allowances between Borrower and its account
debtors will follow Borrower's customary practices as they exist at execution of
this Agreement. Borrower must promptly notify Bank of all returns. recoveries,
disputes and claims, that involve more than $50,000
6.4 TAXES
Borrower will make, and cause each Subsidiary to make, timely payment of
all material federal state, and local taxes or assessments and will deliver to
Bank, on demand, appropriate certificates attesting to the payment.
9
<PAGE>
6.5 INSURANCE.
Borrower will keep its business and the Collateral insured for risks and in
amounts as Bank requests. Insurance policies will be in a form, with companies,
and in amounts that are satisfactory to Bank. All property policies will have a
lender's loss payable endorsement showing Bank as an additional loss payee and
all liability policies will show the Bank as an additional insured and provide
that the insurer must give Bank at least 20 days notice before canceling its
policy. At Bank's request. Borrower will deliver certified copies of policies
and evidence of all premium payments. Proceeds payable under any policy will at
Bank's option, be payable to Bank on account of the Obligations.
6.6 PRIMARY ACCOUNTS.
Borrower will maintain its primary depository and operating accounts with
Bank
6.7 FINANCIAL COVENANTS.
Borrower will maintain as of the last day of each month:
(i) ADJUSTED QUICK RATIO. A ratio of Quick Assets to Current
Liabilities minus Deferred Maintenance Revenue of at least 2.00 to 1.00.
(ii) TANGIBLE NET WORTH. A Tangible Net Worth of at least $5,750,000.
6.8 FURTHER ASSURANCES.
Borrower will execute any further instruments and take further action as
Bank requests to perfect or continue Bank's security interest in the Collateral
or to effect the purposes of this Agreement.
7. NEGATIVE COVENANTS
------------------
Borrower will not do any of the following:
7.1 DISPOSITIONS.
Convey, sell, lease, transfer or otherwise dispose of (collectively
"Transfer"), or permit any of its Subsidiaries to Transfer, all or any part of
its business or property, other than Transfers (i) of Inventory in the ordinary
course of business; (ii) of non-exclusive licenses and similar arrangements for
the use of the property of Borrower or its Subsidiaries in the ordinary course
of business; or (iii) of worn-out or obsolete Equipment.
7.2 CHANGES IN BUSINESS, OWNERSHIP, MANAGEMENT OR BUSINESS LOCATIONS.
Engage in or permit any of its Subsidiaries to engage in any business other
than the businesses currently engaged in by Borrower or have a material change
in its ownership of greater than 25% Borrower will not, without at least 30 days
prior written notice, relocate its chief executive office or add any new offices
or business locations.
7.3 MERGERS OR ACQUISITIONS.
(i) Merge or consolidate, or permit any of its Subsidiaries to merge or
consolidate, with any other Person, or acquire, or permit any of its
Subsidiaries to acquire, all or substantially all of the capital stock or
property of another Person, except (i) where no Event of Default has occurred
and is continuing or would result from such action during the term of this
Agreement and Tangible Net Worth will not decrease by more than 25%; or (ii)
merge or consolidate a Subsidiary into another Subsidiary or into Borrower
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<PAGE>
7.4 INDEBTEDNESS.
Create, incur, assume, or be liable for any Indebtedness, or permit any
Subsidiary to do so other than Permitted Indebtedness.
7.5 ENCUMBRANCE.
Create, incur, or allow any Lien on any of its property, or assign or
convey any right to receive income, including the sale of any Accounts, or
permit any of its Subsidiaries to do so, except for Permitted Liens, or permit
any Collateral not to be subject to the first priority security interest granted
here
7.6 DISTRIBUTIONS; INVESTMENTS.
Directly or indirectly acquire or own any Person, or make any Investment in
any Person, other than Permitted Investments, or permit any of its Subsidiaries
to do so. Pay any dividends or make any distribution or payment or redeem,
retire or purchase any capital stock.
7.7 TRANSACTIONS WITH AFFILIATES.
Directly or indirectly enter or permit any material transaction with any
Affiliate except transactions that are in the ordinary course of Borrower's
business, on terms less favorable to Borrower than would be obtained in an arm's
length transaction with a non-affiliated Person.
7.8 SUBORDINATED DEBT.
Make or permit any payment on any Subordinated Debt, except under the terms
of the Subordinated Debt, or amend any provision in any document relating to the
Subordinated Debt without Bank's prior written consent.
7.9 COMPLIANCE.
Become an "investment company" or a company controlled by an "investment
company," under the Investment Company Act of 1940 or undertake as one of its
important activities extending credit to purchase or carry margin stock, or use
the proceeds of any Advance for that purpose; fail to meet the minimum funding
requirements of ERISA, permit a Reportable Event or Prohibited Transaction, as
defined in ERISA, to occur; fail to comply with the Federal Fair Labor Standards
Act or violate any other law or regulation, if the violation could have a
material adverse effect on Borrower's business or operations or cause a Material
Adverse Change, or permit any of its Subsidiaries to do so.
8. EVENTS OF DEFAULT
-----------------
Any one of the following is an Event of Default:
8.1 PAYMENT DEFAULT.
If Borrower fails to pay any of the Obligations;
8.2 COVENANT DEFAULT.
If Borrower does not perform any obligation in Section 6 or violates any
covenant in Section 7 or does not perform or observe any other material term,
condition or covenant in this Agreement, any Loan Documents, or in any agreement
between Borrower and Bank and as to any default under a term, condition or
covenant that can be cured, has not cured the default within 10 days after it
occurs, or if the
11
<PAGE>
default cannot be cured within 10 days or cannot be cured after Borrower's
attempts within 10 day period and the default may be cured within a reasonable
time, then Borrower has an additional period (of not more than 30 days) to
attempt to cure the default. During the additional time, the failure to cure the
default is not an Event of Default (but no Credit Extensions will be made during
the cure period),
8.3 MATERIAL ADVERSE CHANGE.
(i) If there occurs a material impairment in the perfection or priority of
the Bank's security interest in the Collateral or in the value of such
Collateral which is not covered by adequate insurance or (ii) if the Bank
determines, based upon information available to it and in its reasonable
judgment. that there is a reasonable likelihood that Borrower will fail to
comply with one or more of the financial covenants in Section 6 during the next
succeeding financial reporting period.
8.4 ATTACHMENT.
If any material portion of Borrower's assets is attached, seized, levied
on, or comes into possession of a trustee or receiver and the attachment,
seizure or levy is not removed in 10 days, or if Borrower is enjoined,
restrained, or prevented by court order from conducting a material part of its
business or if a judgment or other claim becomes a Lien on a material portion of
Borrower's assets, or if a notice of lien, levy, or assessment is filed against
any of Borrower's assets by any government agency and not paid within 10 days
after Borrower receives notice. These are not Events of Default if stayed or if
a bond is posted pending contest by Borrower (but no Credit Extensions will be
made during the cure period);
8.5 INSOLVENCY.
If Borrower becomes insolvent or if Borrower begins an Insolvency
Proceeding or an Insolvency Proceeding is begun against Borrower and not
dismissed or stayed within 30 days (but no Credit Extensions will be made before
any Insolvency Proceeding is dismissed);
8.6 OTHER AGREEMENTS.
If there is a default in any agreement between Borrower and a third party
that gives the third party the right to accelerate any Indebtedness exceeding
$100,000 or that could cause a Material Adverse Change.
8.7 JUDGMENTS.
If a money judgment(s) in the aggregate of at least $50,000 is rendered
against Borrower and is unsatisfied and unstayed for 10 days (but no Credit
Extensions will be made before the judgment is stayed or satisfied); or
8.8 MISREPRESENTATIONS.
If Borrower or any Person acting for Borrower makes any material
misrepresentation or material misstatement now or later in any warranty or
representation in this Agreement or in any writing delivered to Bank or to
induce Bank to enter this Agreement or any Loan Document.
9 BANK'S RIGHTS AND REMEDIES
--------------------------
9.1 RIGHTS AND REMEDIES.
When an Event of Default occurs and continues Bank may, without notice or
demand, do any or all of the following:
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(a) Declare all Obligations immediately due and payable (but if an Event of
Default described in Section 8.5 occurs all Obligations are immediately due and
payable without any action by Bank);
(b) Stop advancing money or extending credit for Borrower's benefit under
this Agreement or under any other agreement between Borrower and Bank;
(c) Settle or adjust disputes and claims directly with account debtors for
amounts, on terms and in any order that Bank considers advisable;
(d) Make any payments and do any acts it considers necessary or reasonable
to protect its security interest in the Collateral. Borrower will assemble the
Collateral if Bank requires and make it available as Bank designates. Bank may
enter premises where the Collateral is located, take and maintain possession of
any part of the Collateral, and pay, purchase, contest, or compromise any Lien
which appears to be prior or superior to its security interest and pay all
expenses incurred. Borrower grants Bank a license to enter and occupy any of its
premises, without charge, to exercise any of Bank's rights or remedies;
(e) Apply to the Obligations any (i) balances and deposits of Borrower it
holds, or (ii) any amount held by Bank owing to or for the credit or the account
of Borrower,
(f) Ship, reclaim, recover, store, finish, maintain, repair, prepare for
sale, advertise for sale, and sell the Collateral; and
(g) Dispose of the Collateral according to the Code.
9.2 POWER OF ATTORNEY.
Effective only when an Event of Default occurs and continues. Borrower
irrevocably appoints Bank as its lawful attorney to: (i) endorse Borrower's name
on any checks or other forms of payment or security; (ii) sign Borrower's name
on any invoice or bill of lading for any Account or drafts against account
debtors, (iii) make, settle, and adjust all claims under Borrower's insurance
policies; (iv) settle and adjust disputes and claims about the Accounts directly
with account debtors, for amounts and on terms Bank determines reasonable; and
(v) transfer the Collateral into the name of Bank or a third party as the Code
permits. Bank may exercise the power of attorney to sign Borrower's name on any
documents necessary to perfect or continue the perfection of any security
interest regardless of whether an Event of Default has occurred. Bank's
appointment as Borrower's attorney in fact, and all of Bank's rights and powers,
coupled with an interest, are irrevocable until all Obligations have been fully
repaid and performed and Bank's obligation to provide Credit Extensions
terminates.
9.3 ACCOUNTS COLLECTION.
When an Event of Default occurs and continues, Bank may notify any Person
owing Borrower money of Bank's security interest in the funds and verify the
amount of the Account. Borrower must collect all payments in trust for Bank and,
if requested by Bank, immediately deliver the payments to Bank in the form
received from the account debtor, with proper endorsements for deposit.
9.4 BANK EXPENSES.
If Borrower fails to pay any amount or furnish any required proof of
payment to third persons Bank may make all or part of the payment or obtain
insurance policies required in Section 6.5, and take any action under the
policies Bank deems prudent. Any amounts paid by Bank are Bank Expenses and
immediately due and payable, bearing interest at the then applicable rate and
secured by the Collateral
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(a) Declare all Obligations immediately due and payable (but if an Event of
Default described in Section 8.5 occurs all Obligations are immediately due and
payable without any action by Bank;
(b) Stop advancing money or extending credit for Borrower's benefit under
this Agreement or under any other agreement between Borrower and Bank;
(c) Settle or adjust disputes and claims directly with account debtors for
amounts, on terms and in any order that Bank considers advisable;
(d) Make any payments and do any acts it considers necessary or reasonable
to protect its security interest in the Collateral. Borrower will assemble the
Collateral if Bank requires and make it available as Bank designates. Bank may
enter premises where the Collateral is located take and maintain possession of
any part of the Collateral, and pay, purchase, contest, or compromise any Lien
which appears to be prior or superior to its security interest and pay all
expenses incurred Borrower grants Bank a license to enter and occupy any of its
premises, without charge, to exercise any of Bank's rights or remedies;
(e) Apply to the Obligations any (i) balances and deposits of Borrower it
holds, or (ii) any amount held by Bank owing to or for the credit or the account
of Borrower.
(f) Ship, reclaim, recover, store, finish, maintain, repair, prepare for
sale, advertise for sale, and sell the Collateral; and
(g) Dispose of the Collateral according to the Code.
9.2 POWER OF ATTORNEY.
Effective only when an Event of Default occurs and continues, Borrower
irrevocably appoints Bank as its lawful attorney to. (i) endorse Borrower's name
on any checks or other forms of payment or security; (ii) sign Borrower's name
on any invoice or bill of lading for any Account or drafts against account
debtors, (iii) make, settle, and adjust all claims under Borrower's insurance
policies; (iv) settle and adjust disputes and claims about the Accounts directly
with account debtors, for amounts and on terms Bank determines reasonable; and
(v) transfer the Collateral into the name of Bank or a third party as the Code
permits Bank may exercise the power of attorney to sign Borrower's name on any
documents necessary to perfect or continue the perfection of any security
interest regardless of whether an Event of Default has occurred. Bank's
appointment as Borrower's attorney in fact, and all of Bank's rights and powers,
coupled with an interest, are irrevocable until all Obligations have been fully
repaid and performed and Bank's obligation to provide Credit Extensions
terminates.
9.3 ACCOUNTS COLLECTION.
When an Event of Default occurs and continues, Bank may notify any Person
owing Borrower money of Bank's security interest in the funds and verify the
amount of the Account. Borrower must collect all payments in trust for Bank and,
if requested by Bank, immediately deliver the payments to Bank in the form
received from the account debtor, with proper endorsements for deposit.
9.4 BANK EXPENSES.
If Borrower fails to pay any amount or furnish any required proof of
payment to third persons Bank may make all or part of the payment or obtain
insurance policies required in Section 6.5, and take any action under the
policies Bank deems prudent. Any amounts paid by Bank are Bank Expenses and
immediately due and payable, bearing interest at the then applicable rate and
secured by the Collateral
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No payments by Bank are deemed an agreement to make similar payments in the
future or Bank's waiver of any Event of Default.
9.5 BANK'S LIABILITY FOR COLLATERAL.
If Bank complies with reasonable banking practices it is not liable for:
(a) the safekeeping of the Collateral; (b) any loss or damage to the Collateral;
(c) any diminution in the value of the Collateral or (d) any act or default of
any carrier, warehouseman, bailee, or other person. Borrower bears all risk of
loss damage or destruction of the Collateral.
9.6 REMEDIES CUMULATIVE.
Bank's rights and remedies under this Agreement, the Loan Documents, and
all other agreements are cumulative. Bank has all rights and remedies provided
under the Code, by law, or in equity Bank's exercise of one right or remedy is
not an election, and Bank's waiver of any Event of Default is not a continuing
waiver. Bank's delay is not a waiver, election, or acquiescence. No waiver is
effective unless signed by Bank and then is only effective for the specific
instance and purpose for which it was given
9.7 DEMAND WAIVER.
Borrower waives demand, notice of default or dishonor, notice of payment
and nonpayment, notice of any default, nonpayment at maturity, release,
compromise, settlement, extension, or renewal of accounts, documents,
instruments, chattel paper, and guarantees held by Bank on which Borrower is
liable.
10 NOTICES
-------
All notices or demands by any party about this Agreement or any other
related agreement must be in writing and be personally delivered or sent by an
overnight delivery service, by certified mail postage prepaid, return receipt
requested, or by telefacsimile to the addresses set forth at the beginning of
this Agreement. A Party may change its notice address by giving the other Party
written notice
11 CHOICE OF LAW, VENUE AND JURY TRIAL WAIVER
------------------------------------------
California law governs the Loan Documents without regard to principles of
conflicts of law Borrower and Bank each submit to the exclusive jurisdiction of
the State and Federal courts in Santa Clara County, California.
BORROWER AND BANK EACH WAIVE THEIR RIGHT TO A JURY TRIAL OF ANY CLAIM OR CAUSE
OF ACTION ARISING OUT OF ANY OF THE LOAN DOCUMENTS OR ANY CONTEMPLATED
TRANSACTION, INCLUDING CONTRACT, TORT, BREACH OF DUTY AND ALL OTHER CLAIMS. THIS
WAIVER IS A MATERIAL INDUCEMENT FOR BOTH PARTIES TO ENTER INTO THIS AGREEMENT.
EACH PARTY HAS REVIEWED THIS WAIVER WITH ITS COUNSEL.
12 GENERAL PROVISIONS
------------------
12.1 SUCCESSORS AND ASSIGNS.
This Agreement binds and is for the benefit of the successors and permitted
assigns of each party. Borrower may not assign this Agreement or any rights
under it without Bank's prior written consent which may be granted or withheld
in Bank's discretion. Bank has the right, without the consent of or notice to
Borrower, to sell, transfer, negotiate, or grant participation in all or any
part of, or any interest in, Bank's obligations, rights and benefits under this
Agreement.
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12.2 INDEMNIFICATION.
Borrower will indemnify, defend and hold harmless Bank and its officers,
employees, and agents against: (a) all obligations, demands, claims and
liabilities asserted by any other party in connection with the transactions
contemplated by the Loan Documents; and (b) all losses or Bank Expenses
incurred, or paid by Bank from, following, or consequential to transactions
between Bank and Borrower (including reasonable attorneys fees and expenses),
except for losses caused by Bank's gross negligence or willful misconduct.
12.3 TIME OF ESSANCE.
Time is of the essence for the performance of all obligations in this
Agreement.
12.4 SEVERABILITY OF PROVISION.
Each provision of this Agreement is severable from every other provision in
determining the enforceability of any provision.
12.5 AMENDMENTS IN WRITING, INTEGRATION.
All amendments to this Agreement must be in writing and signed by Borrower
and Bank. This Agreement represents the entire agreement about this subject
matter, and supersedes prior negotiations or agreements. All prior agreements,
understandings, representations, warranties, and negotiations between the
parties about the subject matter of this Agreement merge into this Agreement and
the Loan Documents.
12.6 COUNTERPARTS.
This Agreement may be executed in any number of counterparts and by
different parties separate counterparts, each of which, when executed and
delivered, are an original, and all to together, constitute one agreement.
12.7 SURVIVAL.
All covenants, representations and warranties made in this Agreement
continue in full force while any Obligations remain outstanding. The obligations
of Borrower in Section 12.2 to indemnify Bank will survive until all statutes of
limitations for actions that may be brought against Bank have run.
12.8 CONFIDENTIALITY.
In handling any confidential information, Bank will exercise the same
degree of care that it exercises for its own proprietary information, but
disclosure of information may be made (i) to Bank's subsidiaries or affiliates
in connection with their business with Borrower, (ii) to prospective transferees
or purchasers of any Interest in the Loans, (iii) as required by law,
regulation, subpoena, or other order, (iv) as required in connection with Bank's
examination or audit and (v) as Bank considers appropriate exercising remedies
under this Agreement. Confidential information does not include information that
either: (a) is in the public domain or in Bank's possession when disclosed to
Bank, or becomes part of the public domain after disclosure to Bank; or (b) is
disclosed to Bank by a third party, if Bank does not know that the third party
is prohibited from disclosing the information.
12.9 EFFECT OF AMENDMENT AND RESTATEMENT.
This Agreement is intended to and does completely amend and restate,
without novation, the Original Agreement. All credit extensions or loans
outstanding under the Original Agreement are and shall
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12.2 INDEMNIFICATION.
Borrower will indemnify, defend and hold harmless Bank and its officers,
employees, and agents against: (a) all obligations, demands, claims, and
liabilities asserted by any other party in connection with the transactions
contemplated by the Loan Documents; and (b) all losses or Bank Expenses incurred
or paid by Bank from, following, or consequential to transactions between Bank
and Borrower including reasonable attorneys fees and expenses), except for
losses caused by Bank's gross negligence or willful misconduct.
12.3 TIME OF ESSENCE.
Time is of the essence for the performance of all obligations in this
Agreement
12.4 SEVERABILITY OF PROVISION.
Each provision of this Agreement is severable from every other provision in
determining the enforceability of any provision.
12.5 AMENDMENTS IN WRITING, INTEGRATION.
All amendments to this Agreement must be in writing and signed by Borrower
and Bank. This Agreement represents the entire agreement about this subject
matter, and supersedes prior negotiations or agreements. All prior agreements,
understandings, representations, warranties, and negotiations between the
parties about the subject matter of this Agreement merge into this Agreement and
the Loan Documents.
12.6 COUNTERPARTS.
This Agreement may be executed in any number of counterparts and by
different parties on separate counterparts, each of which, when executed and
delivered, are an original, and all taken together, constitute one agreement.
12.7 SURVIVAL.
All covenants, representations and warranties made in this Agreement
continue in full force while any Obligations remain outstanding. The obligations
of Borrower in Section 12.2 to indemnify Bank will survive until all statutes of
limitations for actions that may be brought against Bank have run
12.8 CONFIDENTIALITY.
In handling any confidential information, Bank will exercise the same
degree of care that it exercises for its own proprietary information, but
disclosure of information may be made (i) to Bank's subsidiaries or affiliates
in connection with their business with Borrower, (ii) to prospective transferees
or purchasers of any interest in the Loans, (iii) as required by law,
regulation, subpoena, or other order, (iv) as required in connection with Bank's
examination or audit and (v) as Bank considers appropriate exercising remedies
under this Agreement. Confidential information does not include information that
either: (a) is in the public domain or in Bank's possession when disclosed to
Bank, or becomes part of the public domain after disclosure to Bank; or (b) is
disclosed to Bank by a third party, if Bank does not know that the third party
is prohibited from disclosing the information.
12.9 EFFECT OF AMENDMENT AND RESTATEMENT.
This Agreement is intended to and does completely amend and restate,
without novation, the Original Agreement. All credit extensions or loans
outstanding under the Original Agreement are and shall
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continue to be outstanding under this Agreement. All security interests granted
under the Original Agreement are hereby confirmed and ratified and shall
continue to secure all Obligations under this Agreement.
12.10 ATTORNEYS' FEES, COSTS AND EXPENSES.
In any action or proceeding between Borrower and Bank arising out of the
Loan Documents the prevailing party will be entitled to recover its reasonable
attorneys' fees and other costs and expenses incurred, in addition to any other
relief to which it may be entitled.
13 DEFINITIONS
-----------
13.1 DEFINITIONS.
In this Agreement:
"ACCOUNTS" are all existing and later arising accounts, contract rights,
and other obligations owed Borrower in connection with its sale or lease of
goods (including licensing software and other technology) or provision of
services, all credit insurance, guaranties, other security and all merchandise
returned or reclaimed by Borrower and Borrower's Books relating to any of the
foregoing.
"ADVANCE" is a loan advance (or advances) under the Committed Revolving
Line.
"AFFILIATE" of a Person is a Person that owns or controls directly or
indirectly the Person, any Person that controls or is controlled by or is under
common control with the Person, and each of that Person's senior executive
officers, directors, partners and, for any Person that is a limited liability
company, that Person's managers and members.
"BANK EXPENSES" are all audit fees and expenses and reasonable costs or
expenses (including reasonable attorneys' fees and expenses) for preparing,
negotiating, administering, defending and enforcing the Loan Documents
(including appeals or Insolvency Proceedings).
"BORROWER'S BOOKS" are all Borrower's books and records including ledgers,
records regarding Borrower's assets or liabilities, the Collateral, business
operations or financial condition and all computer programs or discs or any
equipment containing the information.
"BORROWING BASE" is 80% of Eligible Accounts as determined by Bank from
Borrower's most recent Borrowing Base Certificate.
"BUSINESS DAY" is any day that is not a Saturday, Sunday or a day on which
the Bank is closed
"CASH MANAGEMENT SERVICES FACILITY" is defined in Section 2.1.4.
"CLOSING DATE" is the date of this Agreement.
"CODE" is the California Uniform Commercial Code.
"COLLATERAL" is the property described on Exhibit A.
---------
"COMMITTED EQUIPMENT LINE" is a Credit Extension of up to $3,000,000.
"COMMITTED REVOLVING LINE" is an Advance of up to $1,000,000.
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"CONTINGENT OBLIGATION" is, for any Person, any direct or indirect
liability, contingent or not or that Person for (i) any indebtedness, lease,
dividend, letter of credit or other obligation of another such as an obligation
directly or indirectly guaranteed, endorsed, co-made, discounted or sold with
recourse by that Person, or for which that Person is directly or indirectly
liable, (ii) any obligations for undrawn letters of credit for the account of
that Person; and (iii) all obligations from any interest rate, currency or
commodity swap agreement, interest rate cap or collar agreement, or other
agreement or arrangement designated to protect a Person against fluctuation in
interest rates, currency exchange rates or commodity prices but "Contingent
Obligation" does not include endorsements in the ordinary course of business.
The amount of a Contingent Obligation is the stated or determined amount of the
primary obligation for which the Contingent Obligation is made or, if not
determinable, the maximum reasonably anticipated liability for it determined by
the Person in good faith; but the amount may not exceed the maximum of the
obligations under the guarantee or other support arrangement.
"CREDIT EXTENSION" is each Advance, Equipment Advance, Letter of Credit.
Exchange Contract or any other extension of credit by Bank for Borrower's
benefit.
"CURRENT LIABILITIES" are the aggregate amount of Borrower's Total
Liabilities which mature within one (1) year.
"DEFERRED MAINTENANCE REVENUE" is all amounts received in advance of
performance under maintenance contracts and not yet recognized as revenue.
"ELIGIBLE ACCOUNTS" are Accounts in the ordinary course of Borrower's
business that meet all Borrower's representations and warranties in Section 5,
but Bank may change eligibility standards by giving Borrower notice. Unless Bank
- ---
agrees otherwise in writing, Eligible Accounts will not include
(a) Accounts that the account debtor has not paid within 90 days of invoice
date,
(b) Accounts for an account debtor, 50% or more of whose Accounts have not
been paid within 90 days of invoice date;
(c) Credit balances over 90 days from invoice date;
(d) Accounts for an account debtor, including Affiliates, whose total
obligations to Borrower exceed 25% of all Accounts, for the amounts that
exceed that percentage, unless the Bank approves in writing;
(e) Accounts for which the account debtor does not have its principal place
of business in the United States;
(f) Accounts for which the account debtor is a federal, state or local
government entity or any department, agency, or instrumentality;
(g) Accounts for which Borrower owes the account debtor, but only up to the
amount owed (sometimes called "contra" accounts, accounts payable, customer
deposits or credit accounts),
(h) Accounts for demonstration or promotional equipment, or in which goods
are consigned, sales guaranteed, sale or return, sale on approval, bill and
hold, or other terms if account debtor's payment may be conditional;
(i) Accounts for which the account debtor is Borrower's Affiliate, officer,
employee, or agent,
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(j) Accounts in which the account debtor disputes liability or makes any
claim and Bank believes there may be a basis for dispute (but only up to
the disputed or claimed amount), or if the Account Debtor is subject to an
Insolvency Proceeding, or becomes insolvent, or goes out of business
(k) Accounts for which Bank reasonably determines collection to be doubtful
"EQUIPMENT" is all present and future machinery, equipment, tenant
improvements furniture fixtures, vehicles, tools, parts and attachments in which
Borrower has any interest
"EQUIPMENT ADVANCE" is defined in Section 2.1.5.
"EQUIPMENT AVAILABILITY END DATE" is defined in Section 2.1.5.
"EQUIPMENT MATURITY DATE" is defined in Section 2.1.5.
"ERISA" is the Employment Retirement Income Security Act of 1974, and its
regulations
"EXCHANGE CONTRACT" is defined in Section 2.1.3.
"GAAP" is generally accepted accounting principles.
"INDEBTEDNESS" is (a) indebtedness for borrowed money or the deferred price
of property or services, such as reimbursement and other obligations for surety
bonds and letters of credit, (b) obligations evidenced by notes, bonds,
debentures or similar instruments, (c) capital lease obligations and (d)
Contingent Obligations.
"INSOLVENCY PROCEEDING" are proceedings by or against any Person under the
United States Bankruptcy Code, or any other bankruptcy or insolvency law,
including assignments for the benefit of creditors, compositions, extensions
generally with its creditors, or proceedings seeking reorganization,
arrangement, or other relief.
"INVENTORY" is present and future inventory in which Borrower has any
interest, including merchandise, raw materials, parts, supplies, packing and
shipping materials, work in process and finished products intended for sale or
lease or to be furnished under a contract of service, of every kind and
description now or later owned by or in the custody or possession, actual or
constructive, of Borrower, including inventory temporarily out of its custody or
possession or in transit and including returns on any accounts or other proceeds
(including insurance proceeds) from the sale or disposition of any of the
foregoing and any documents of title.
"INVESTMENT" is any beneficial ownership of (including stock, partnership
interest or other securities) any Person, or any loan, advance or capital
contribution to any Person.
"LETTER OF CREDIT" is defined in Section 2.
"LIEN" is a mortgage, lien, deed of trust, charge, pledge, security
interest or other encumbrance
"LOAN DOCUMENTS" are, collectively, this Agreement, any note, or notes or
guaranties executed by Borrower or Guarantor, and any other present or future
agreement between Borrower and/or for the benefit of Bank in connection with
this Agreement, all as amended, extended or restated.
"MATERIAL ADVERSE CHANGE" is defined in Section 8.3.
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"OBLIGATIONS" are debts, principal, interest. Bank Expenses and other
amounts Borrower owes Bank now or later, including letters of credit and
Exchange Contracts and including interest accruing after Insolvency Proceedings
begin and debts, liabilities, or obligations of Borrower assigned to Bank.
"ORIGINAL AGREEMENT" has the meaning set forth in recital paragraph A
"PERMITTED INDEBTEDNESS" is:
(a) Borrower's indebtedness to Bank under this Agreement or any other Loan
Document
(b) Indebtedness existing on the Closing Date and shown on the Schedule,
(c) Subordinated Debt;
(d) Indebtedness to trade creditors incurred in the ordinary course of
business, and
(e) Indebtedness secured by Permitted Liens.
"PERMITTED INVESTMENTS" are:
(a) Investments shown on the Schedule and existing on the Closing Date;
and
(b) (i) marketable direct obligations issued or unconditionally guaranteed
by the United States or its agency or any State maturing within 1 year from its
acquisition, (ii) commercial paper maturing no more than 1 year after its
creation and having the highest rating from either Standard & Poor's Corporation
or Moody's Investors Service, Inc, and (iii) Bank's certificates of deposit
issued maturing no more than 1 year after issue
"PERMITTED LIENS" are:
(a) Liens existing on the Closing Date and shown on the Schedule or arising
under this Agreement or other Loan Documents;
(b) Liens for taxes, fees, assessments or other government charges or
levies, either not delinquent or being contested in good faith and for which
Borrower maintains adequate reserves on its Books, if they have no priority over
any of Bank's security interests;
- ---
(c) Purchase money Liens (i) on Equipment acquired or held by Borrower or
its Subsidiaries incurred for financing the acquisition of the Equipment, or
(ii) existing on equipment when acquired, if the Lien is confined to the
--
property and improvements and the proceeds of the equipment;
(d) Leases or subleases and licenses or sublicenses granted in the ordinary
course of Borrower's business and any interest or title of a lessor, licensor or
under any lease or license, if the leases, subleases, licenses and sublicenses
--
permit granting Bank a security interest;
(e) Liens incurred in the extension, renewal or refinancing of the
indebtedness secured by Liens described in (a) through (c), but any extension,
---
renewal or replacement Lien must be limited to the property encumbered by the
existing Lien and the principal amount of the indebtedness may not increase
"PERSON" is any individual, sole proprietorship, partnership, limited
liability company, joint venture, company association, trust, unincorporated
organization, association, corporation, institution, public benefit corporation,
firm, joint stock company, estate, entity or government agency.
"PRIME RATE" is Bank's most recently announced "prime rate," even if it is
not Bank's lowest rate
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"QUICK ASSETS" is, on any date, the Borrower's consolidated, unrestricted
cash, cash equivalents plus accounts receivable.
"RESPONSIBLE OFFICER" is each of the Chief Executive Officer, the
President, the Chief Financial Officer and the Controller of Borrower.
"REVOLVING MATURITY DATE" is November 16, 1999
"SCHEDULE" is any attached schedule of exceptions.
"SUBORDINATED DEBT" is debt incurred by Borrower subordinated to Borrower's
debt to Bank (and identified as subordinated by Borrower and Bank).
"SUBSIDIARY" is for any Person, or any other business entity of which more
than 50% of the voting stock or other equity interests is owned or controlled,
directly or indirectly, by the Person or one or more Affiliates of the Person.
"TANGIBLE NET WORTH" is, on any date, the consolidated total assets of
Borrower and its Subsidiaries minus, (i) any amounts attributable to (a)
-----
goodwill, (b) intangible items such as unamortized debt discount and expense,
Patents, trade and service marks and names, Copyrights and research and
development expenses except prepaid expenses, and (c) reserves not already
deducted from assets, and (ii) Total Liabilities plus Subordinated Debt.
---
"TOTAL LIABILITIES" is on any day, obligations that should, under GAAP, be
classified as liabilities on Borrower's consolidated balance sheet, including
all indebtedness, and current portion Subordinated Debt allowed to be paid, but
excluding all other Subordinated Debt.
BORROWER:
Liquid Audio, Inc.
By: /s/ [SIGNATURE ILLEGIBLE]
-----------------------------
Title: CFO
--------------------------
BANK
SILICON VALLEY BANK
By: /s/ [SIGNATURE ILLEGIBLE]
-----------------------------
Title: V.P.
---------------------------
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EXHIBIT A
---------
The Collateral consists of all of Borrower's right, title and interest in
and to the following
All goods and equipment now owned or hereafter acquired, including, without
limitation all machinery, fixtures, vehicles (including motor vehicles and
trailers), and any interest in any of the foregoing, and all attachments,
accessories, accessions, replacements, substitutions, additions and improvements
to any of the foregoing, wherever located.
All inventory, now owned or hereafter acquired, including, without
limitation, all merchandise, raw materials, parts, supplies, packing and
shipping materials, work in process and finished products including such
inventory as is temporarily out of Borrower's custody or possession or in
transit and including any returns upon any accounts or other proceeds, including
insurance proceeds, resulting from the sale or disposition of any of the
foregoing and any documents of title representing any of the above.
All contract rights and general intangibles now owned or hereafter
acquired, including, without limitation, goodwill, trademarks, servicemarks,
trade styles, trade names, patents, patent applications leases, license
agreements, franchise agreements, blueprints, drawings, purchase orders,
customer lists route lists, infringements, claims, computer programs, computer
discs, computer tapes, literature, reports catalogs, design rights, income tax
refunds, payments of insurance and rights to payment of any kind.
All now existing and hereafter arising accounts, contract rights,
royalties, license rights and all other forms of obligations owing to Borrower
arising out of the sale or lease of goods, the licensing of technology or the
rendering of services by Borrower, whether or not earned by performance, and any
and all credit insurance, guaranties, and other security therefor, as well as
all merchandise returned to or reclaimed by Borrower:
All documents, cash, deposit accounts, securities, securities entitlements,
securities accounts investment property, financial assets, letters of credit,
certificates of deposit, instruments and chattel paper now owned or hereafter
acquired and Borrower's Books relating to the foregoing.
All copyright rights, copyright applications, copyright registrations and
like protections in each work of authorship and derivative work thereof, whether
published or unpublished, now owned or hereafter acquired, all trade secret
rights, including all rights to unpatented inventions, know-how, operating
manuals, license rights and agreements and confidential information, now owned
or hereafter acquired, all mask work or similar rights available for the
protection of semiconductor chips, now owned or hereafter acquired, all claims
for damages by way of any past, present and future infringement of any of the
foregoing, and
All Borrower's Books relating to the foregoing and any and all claims, rights
and interests in any of the above and all substitutions for, additions and
accessions to and proceeds thereof.
<PAGE>
EXHIBIT B
---------
LOAN PAYMENT/ADVANCE TELEPHONE REQUEST FORM
DEADLINE FOR SAME DAY PROCESSING IS 3:00 P.M. P.S.T.
TO CENTRAL CLIENT SERVICE DIVISION DATE: _______________________
FAX# (408) 496-2426 TIME: _______________________
- --------------------------------------------------------------------------------
FROM: Liquid Audio, Inc.
--------------------------------------------------------------------------
CLIENT NAME (BORROWER)
REQUESTED BY: __________________________________________________________________
AUTHORIZED SIGNER'S NAME
AUTHORIZED SIGNATURE: __________________________________________________________
PHONE NUMBER: __________________________________________________________________
FROM ACCOUNT #________________ TO ACCOUNT #____________________________________
REQUESTED TRANSACTION TYPE REQUESTED DOLLAR AMOUNT
- -------------------------- -----------------------
PRINCIPAL INCREASE (ADVANCE) $_______________________________________
PRINCIPAL PAYMENT (ONLY) $_______________________________________
INTEREST PAYMENT (ONLY) $_______________________________________
PRINCIPAL AND INTEREST (PAYMENT) $_______________________________________
OTHER INSTRUCTIONS: ____________________________________________________________
- --------------------------------------------------------------------------------
All Borrower's representations and warranties in the Loan and Security Agreement
are true, correct and complete in all material respects on the date of the
telephone request for and Advance confirmed by this Borrowing Certificate, but
those representations and warranties expressly referring to another date shall
be true, correct and complete in all material respects as of that date
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
BANK USE ONLY
TELEPHONE REQUEST:
- -----------------
The following person is authorized to request the loan payment transfer/loan
advance on the advance designated account and is known to me
______________________________________ ____________________________
Authorized Requester Phone #
______________________________________ ____________________________
Received By (Bank) Phone #
___________________________________
Authorized Signature (Bank)
- --------------------------------------------------------------------------------
<PAGE>
EXHIBIT C
BORROWING BASE CERTIFICATE
- --------------------------------------------------------------------------------
Borrower: Liquid Audio, Inc. Lender Silicon Valley Bank
3003 Tasman Drive
Santa Clara, CA 95054
Commitment Amount $1,000,000
- --------------------------------------------------------------------------------
ACCOUNTS RECEIVABLE
1. Accounts Receivable Book Value as of___ $________
2. Additions (please explain on reverse) $________
3. TOTAL ACCOUNTS RECEIVABLE $________
ACCOUNTS RECEIVABLE DEDUCTIONS (without duplication)
4. Amounts over 90 days due $________
5. Balance of 50% over 90 day accounts $________
6. Credit balances $________
7. Concentration Limits $________
8. Foreign Accounts $________
9. Governmental Accounts $________
10. Contra Accounts $________
11. Promotion or Demo Accounts $________
12. Intercompany/Employee Accounts $________
13. Other (please explain on reverse) $________
14. TOTAL ACCOUNTS RECEIVABLE DEDUCTIONS $________
15. Eligible Accounts (3 minus 14) $________
16. LOAN VALUE OF ACCOUNTS (80% of #15) $________
BALANCES
7. Maximum Loan Amount $________
18. Total Funds Available [Lesser of #17 or #16] $________
19. Present balance owing on Line of Credit $________
20. Outstanding under Sublimits (LC or FX) $________
21. RESERVE POSITION (#18 minus #19 and #20) $________
The undersigned represents and warrants that this is true, complete and correct
and that the information in this Borrowing Base Certificate complies with the
representations and warranties in the Loan and Security Agreement between the
undersigned and Silicon Valley Bank.
COMMENTS
-----------------------
BANK USE ONLY
-------------
Rec'd By __________
Auth. Signer
Liquid Audio, Inc. Date __________
Verified:__________
By: _______________________ Auth. Signer
Authorized Signer
Date:__________
-----------------------
<PAGE>
EXHIBIT C
BORROWING BASE CERTIFICATE
- --------------------------------------------------------------------------------
Borrower: Liquid Audio, Inc Lender: Silicon Valley Bank
3003 Tasman Drive
Santa Clara CA 95054
Commitment Amount: $1,000,000
- --------------------------------------------------------------------------------
ACCOUNTS RECEIVABLE
1 Accounts Receivable Book Value as of_______ $_____
2 Additions (please explain on reverse) $_____
3 TOTAL ACCOUNTS RECEIVABLE $_____
ACCOUNTS RECEIVABLE DEDUCTIONS (without duplication)
4 Amounts over 90 days due $________
5 Balance of 50% over 90 day accounts $________
6 Credit balances $________
7 Concentration Limits $________
8 Foreign Accounts $________
9 Governmental Accounts $________
10 Contra Accounts $________
11 Promotion or Demo Accounts $________
12 Intercompany/Employee Accounts $________
13 Other (please explain on reverse) $________
14 TOTAL ACCOUNTS RECEIVABLE DEDUCTIONS $_____
15 Eligible Accounts (#3 minus #14) $_____
16 LOAN VALUE OF ACCOUNTS (80% of #15) $_____
BALANCES
17 Maximum Loan Amount $________
18 Total Funds Available [Lesser of # 17 or #16] $________
19 Present balance owing on Line of Credit $________
20 Outstanding under Sublimits (LC or FX) $_____
21 RESERVE POSITION (#18 minus #19 and #20) $_____
The undersigned represents and warrants that this is true, complete and correct,
and that the information in this Borrowing Base Certificate complies with the
representations and warranties in the Loan and Security Agreement between the
undersigned and Silicon Valley Bank.
COMMENTS
------------------------
BANK USE ONLY
--------------
Rec'd By:_______
Auth. Signer
Liquid Audio, Inc. Date:________
Verified:____________
By _______________________________ Auth. Signer
Authorized Signer Date:________
__________
------------------------
<PAGE>
EXHIBIT D
COMPLIANCE CERTIFICATE
TO: SILICON VALLEY BANK
3003 Tasman Drive
Santa Clara, CA 95054
FROM: LIQUID AUDIO, INC.
The undersigned authorized officer of Liquid Audio, Inc. ("Borrower")
certifies that under the terms and conditions of the Loan and Security Agreement
between Borrower and Bank (the "Agreement"), (i) Borrower is in complete
compliance for the period ending __________ with all required covenants except
as noted below and (ii) all representations and warranties in the Agreement are
true and correct in all material respects on this date. Attached are the
required documents supporting the certification. The Officer certifies that
these are prepared in accordance with Generally Accepted Accounting Principles
(GAAP) consistently applied from one period to the next except as explained in
an accompanying letter or footnotes. The Officer acknowledges that no borrowings
may be requested at any time or date of determination that Borrower is not in
compliance with any of the terms of the Agreement, and that compliance is
determined not just at the date this certificate is delivered.
PLEASE INDICATE COMPLIANCE STATUS BY CIRCLING YES/NO UNDER "COMPLIES" COLUMN.
<TABLE>
<CAPTION>
REPORTING COVENANT REQUIRED COMPLIES
------------------- -------- --------
<S> <C> <C>
Monthly financial statements + CC Monthly within 30 days Yes No
Annual (Audited) FYE within 120 days Yes No
A/R & A/P Agings Monthly within 30 days Yes No
Borrowing Base Certificate* Monthly within 30 days Yes No
*not required when no outstanding Advances exist
<CAPTION>
FINANCIAL COVENANT REQUIRED ACTUAL COMPLIES
------------------ -------- ------ --------
<S> <C> <C> <C>
Maintain on a Monthly Basis:
Adjusted Quick Ratio** 2.00:1.00 _____1.00 Yes No
Minimum Tangible Net Worth $5,750,000 $________ Yes No
</TABLE>
**defined as, cash and cash equivalents plus accounts receivable divided by
current liabilities less deferred revenues.
--------------------------------
COMMENTS REGARDING EXCEPTIONS: See Attached BANK USE ONLY
Received by:__________________
Sincerely, AUTHORIZED SIGNER
Liquid Audio, Inc. Date:_________________________
Verified:_____________________
AUTHORIZED SIGNER
____________________________________
SIGNATURE Date:_________________________
____________________________________ Compliance Status Yes No
TITLE ------------------------------
___________________________________
DATE
<PAGE>
CORPORATE BORROWING RESOLUTION
BORROWER: LIQUID AUDIO, INC. BANK: SILICON VALLEY BANK
810 WINSLOW 3003 TASMAN DRIVE
REDWOOD CITY, CA 94063 SANTA CLARA, CA 95054-1191
I, THE UNDERSIGNED SECRETARY OR ASSISTANT SECRETARY OF LIQUID AUDIO, INC.
("BORROWER"), HEREBY CERTIFY that Borrower is a corporation duly organized and
existing under and by virtue of the laws of the State of California.
I FURTHER CERTIFY that at a meeting of the Directors of Borrower (or by other
duly authorized corporate action in lieu of a meeting), duly called and held, at
which a quorum was present and voting, the following resolutions were adopted.
BE IT RESOLVED, that ANY ONE (1) of the following named officers, employees, or
agents of Borrower whose actual signatures are shown below:
NAMES POSITIONS ACTUAL SIGNATURES
----- --------- -----------------
GARY IWATANI CFO /s/ Gary Iwatani
- ---------------- --------------------- -------------------------
- ---------------- --------------------- -------------------------
- ---------------- --------------------- -------------------------
- ---------------- --------------------- -------------------------
acting for and on behalf of Borrower and as its act and deed be, and they hereby
are, authorized and empowered:
BORROW MONEY. To borrow from time to time from Silicon Valley Bank
("Bank"), on such terms as may be agreed upon between the officers of
Borrower and Bank, such sum or sums of money as in their judgment should be
borrowed.
EXECUTE LOAN DOCUMENTS. To execute and deliver to Bank the loan documents
of Borrower, on Bank's forms, at such rates of interest and on such terms
as may be agreed upon, evidencing the sums of money so borrowed or any
indebtedness of Borrower to Bank, and also to execute and deliver to Bank
one or more renewals, extensions, modifications, refinancings,
consolidations, or substitutions for one or more of the loan documents, or
any portion of the loan documents
GRANT SECURITY. To grant a security interest to Bank in any of Borrower's
assets, which security interest shall secure all of Borrower's obligations
to Bank
NEGOTIATE ITEMS. To draw, endorse, and discount with Bank all drafts, trade
acceptances, promissory notes, or other evidences of indebtedness payable
to or belonging to Borrower or in which Borrower may have an interest, and
either to receive cash for the same or to cause such proceeds to be
credited to the account of Borrower with Bank, or to cause such other
disposition of the proceeds derived therefrom as they may deem advisable.
LETTERS OF CREDIT. To execute letter of credit applications and other
related documents pertaining to Bank's issuance of letters of credit.
<PAGE>
FOREIGN EXCHANGE CONTRACTS. To execute and deliver foreign exchange
contracts, either spot or forward, from time to time, in such amount as, in
the judgment of the officer or officers herein authorized.
ISSUE WARRANTS. To issue warrants to purchase Borrower's capital stock, for
such class, series and number, and on such terms, as an officer of Borrower
shall deem appropriate.
FURTHER ACTS. In the cases of lines of credit, to designate additional or
alternate individuals as being authorized to request advances thereunder,
and in all cases, to do and perform such other acts and things, to pay any
and all fees and costs, and to execute and deliver such other documents and
agreements, including agreements waiving the right to a trial by jury, as
they may in their discretion deem reasonably necessary or proper in order
to carry into effect the provisions of these Resolutions.
BE IT FURTHER RESOLVED, that any and all acts authorized pursuant to these
Resolutions and performed prior to the passage of these resolutions are hereby
ratified and approved, that these Resolutions shall remain in full force and
effect and Bank may rely on these Resolutions until written notice of their
revocation shall have been delivered to and received by Bank. Any such notice
shall not affect any of Borrower's agreements or commitments in effect at the
time notice is given.
I FURTHER CERTIFY that the persons named above are principal officers of the
Borrower and occupy the positions set opposite their respective names; that the
foregoing Resolutions now stand of record on the books of the Borrower; and that
they are in full force and effect and have not been modified or revoked in any
manner whatsoever.
IN WITNESS WHEREOF, I have hereunto set my hand on November 16, 1998 and attest
that the signatures set opposite the names listed above are their genuine
signatures.
CERTIFIED TO AND ATTESTED BY:
X /s/ [SIGNATURE ILLEGIBLE]
----------------------------------------
* Secretary or Assistant Secretary
X ________________________________________
*NOTE. In case the Secretary or other certifying officer is designated by the
foregoing resolutions as one of the signing officers, this resolution should
also be signed by a second Officer or Director of Borrower.
2
<PAGE>
NEGATIVE PLEDGE AGREEMENT
This Negative Pledge Agreement is made as of November 16, 1998 by and
between Liquid Audio Inc ("Borrower") and Silicon Valley Bank ("Bank").
In connection with, among other documents, the Loan and Security Agreement (the
"Loan Documents") being concurrently executed herewith between Borrower and
Bank, Borrower agrees as follows
1. Borrower shall not sell, transfer, assign, mortgage, pledge, lease,
grant a security interest in, or encumber any of Borrower's
intellectual property, including, without limitation the following:
a. Any and all copyright rights, copyright applications, copyright
registrations and like protections in each work or authorship and
derivative work thereof, whether published or unpublished and
whether or not the same also constitutes a trade secret, now or
hereafter existing, created, acquired or held;
b. All mask works or similar rights available for the protection of
semiconductor chips, now owned or hereafter acquired;
c. Any and all trade secrets, and any and all intellectual property
rights in computer software and computer software products now or
hereafter existing, created, acquired or held;
d. Any and all design rights which may be available to Borrower now
or hereafter existing, created, acquired or held;
e. All patents, patent applications and like protections including,
without limitation improvements, divisions, continuations,
renewals, reissues, extensions and continuations-in-part of the
same, including without limitation the patents and patent
applications.
f. Any trademark and servicemark rights, whether registered or not,
applications to register and registrations of the same and like
protections, and the entire goodwill of the business of Borrower
connected with and symbolized by such trademarks, including
without limitation,
g. Any and all claims for damages by way of past, present and future
infringements of any of the rights included above, with the
right, but not the obligation, to sue for and collect such
damages for said use or infringement of the intellectual property
rights identified above;
h. All licenses or other rights to use any of the Copyrights,
Patents, Trademarks or Mask Works, and all license fees and
royalties arising from such use to the extent permitted by such
license or rights; and
i. All amendments, extensions, renewals and extensions of any of the
Copyrights, Trademarks, Patents, or Mask Works; and
j. All proceeds and products of the foregoing, including without
limitation all payments under insurance or any indemnity or
warranty payable in respect of any of the foregoing;
<PAGE>
2. It shall be an event of default under the Loan Documents between
Borrower and Bank, there is a breach of any term of this Negative
Pledge Agreement
3. Capitalized terms used but not otherwise defined herein shall
have the same meaning as in the Loan Documents.
BORROWER:
Liquid Audio, Inc
By: /s/ Gary Iwatani
-------------------------------
Name: GARY IWATANI
----------------------------
Title: CFO
----------------------------
BANK:
SILICON VALLEY BANK
By: /s/ Dan Sanchez
------------------------------
Name: Dan Sanchez
----------------------------
Title V.P.
----------------------------
2
<PAGE>
SILICON VALLEY BANK
PRO FORMA INVOICE FOR LOAN CHARGES
BORROWER: Liquid Audio, Inc.
LOAN OFFICER: Dan Sanchez
DATE: November 16, 1998
Revolving Loan Fee $2,500.00
Credit Report 35.00
UCC Search Fee 60.00
UCC Filing Fee 20.00
Documentation Fee 750.00
TOTAL FEE DUE $3,365.00
=========
Please indicate the method of payment:
(x) A check for the total amount is attached.
( ) Debit DDA # ______________ for the total amount.
( ) Loan proceeds
Borrower:
By: /s/ [SIGNATURE ILLEGIBLE]
----------------------------------
(Authorized Signer)
/s/ [SIGNATURE ILLEGIBLE]
- -------------------------------------
Silicon Valley Bank (Date)
Account Officer's Signature
<PAGE>
This STATEMENT is presented for filing pursuant to the California
Uniform Commercial Code
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1. FILE NO OF ORIG FINANCING STATEMENT 1A. DATE OF FILING OR ORIG FINANCING 1B. DATE OF ORIG FINANCING 1C. PLACE ??? ?????
STATEMENT STATEMENT
9634060062 12/3/95 CALIFORNIA
- ------------------------------------------------------------------------------------------------------------------------------------
2. DEBTOR (LAST NAME FIRST) 2A ?? ??? ??? ???
Liquid Audio, Inc.
- ------------------------------------------------------------------------------------------------------------------------------------
2B. MAILING ADDRESS 2C. CITY, STATE 2D. Zip Code
810 Winslow Redwood City, CA 94063
- ------------------------------------------------------------------------------------------------------------------------------------
3. ADDITIONAL DEBTOR (IF ANY) ( LAST NAME FIRST) 3A. ??? ???? ???? ?
- ------------------------------------------------------------------------------------------------------------------------------------
3B. MAILING ADDRESS 3C. CITY, STATE 3D. Zip Code
- ------------------------------------------------------------------------------------------------------------------------------------
4. SECURED PARTY 4A. ???? ???? ????
NAME SILICON VALLEY BANK
MAILING ADDRESS 3003 Tasman Drive
CITY Santa Clara STATE CA ZIP CODE 95054
- ------------------------------------------------------------------------------------------------------------------------------------
5. ASIGNEE OF SECURED PARTY (IF ANY)
NAME
MAILING ADDRESS
CITY STATE ZIP CODE
- ------------------------------------------------------------------------------------------------------------------------------------
6. A [_] CONTINUATION- The original Financing Statement between the foregoing Debtor and Secured Party bearing the file number and
date shown above is continued. If collateral is crops or timber, check here [_] and insert description of real property on
which growing or to be grown in item 7 below.
-------------------------------------------------------------------------------------------------------------------------------
B [_] RELEASE- From the collateral described in the Financing Statement bearing the file number shown above, the Secured Party
releases the collateral described in Item 7 below.
-------------------------------------------------------------------------------------------------------------------------------
C [_] ASSIGNMENT- The Secured Party certifies that the Secured Party has assigned to the Assignee above named, the Secured
Party's rights under the Financing Statement bearing the file number shown above in the collateral described in Item 7
below.
-------------------------------------------------------------------------------------------------------------------------------
D [_] TERMINATION- The Secured Party certifies that the Secured Party no longer claims a security interest under Financing
Statement bearing the file number shown above.
-------------------------------------------------------------------------------------------------------------------------------
E [x] AMENDMENT- The Financing Statement bearing the file number shown above is amended as set forth in Item 7 below.
(Signature of Debtor required on all amendments.)
-------------------------------------------------------------------------------------------------------------------------------
F [_] OTHER
- ------------------------------------------------------------------------------------------------------------------------------------
7. Replacing exist Collateral description with Exhibit "A" attached hereto and incorporated herein
- ------------------------------------------------------------------------------------------------------------------------------------
8. trans 3945 C 9. This Space Use of filing Officer
Liquid Audio, Inc. (DATE) ___________________ 19___ O (Date, Time, Filing Officer)
D
E
-------
____________________________________________________________________________________ 1
By /s/ [SIGNATURE ILLEGIBLE] CFO 2
----------------------------------------------------------------------------
SIGNATURES(S) OF DEBTORS(S) 113/DXS (TITLE)
SILICON VALLEY BANK 3
_____________________________________________________________________________________
By /s/ Dan Sanchez 4
-----------------------------------------------------------------------------
SIGNATURES(S) OF SECURED PARTY(IES) (TITLE)
- ------------------------------------------------------------------------------------- 5
10. RETURN COPY TO
NAME Data File Services, Inc. 6
ADDRESS P.O. Box 275
CITY AND Van Nuys 7
STATE CA 8
91408-2750
(1) FILING OFFICER COPY 9
</TABLE>
<PAGE>
EXHIBIT A
---------
The Collateral consists of all of Borrower's right, title and interest in
and to the following
All goods and equipment now owned or hereafter acquired, including, without
limitation, all machinery, fixtures, vehicles (including motor vehicles and
trailers), and any interest in any of the foregoing, and all attachments,
accessories, accessions, replacements, substitutions, additions, and
improvements to any of the foregoing, wherever located;
All inventory, now owned or hereafter acquired, including, without
limitation, all merchandise, raw materials, parts, supplies, packing and
shipping materials, work in process and finished products including such
inventory as is temporarily out of Borrower's custody or possession or in
transit and including any returns upon any accounts or other proceeds, including
insurance proceeds, resulting from the sale or disposition of any of the
foregoing and any documents of title representing any of the above;
All contract rights and general intangibles now owned or hereafter
acquired, including, without limitation, goodwill, trademarks, servicemarks,
trade styles, trade names, patents, patent applications, leases, license
agreements, franchise agreements, blueprints, drawings, purchase orders,
customer lists, route lists, infringements, claims, computer programs, computer
discs, computer tapes, literature, reports, catalogs, design rights, income tax
refunds, payments of insurance and rights to payment of any kind;
All now existing and hereafter arising accounts, contract rights,
royalties, license rights and all other forms of obligations owing to Borrower
arising out of the sale or lease of goods, the licensing of technology or the
rendering of services by Borrower, whether or not earned by performance, and any
and all credit insurance, guaranties, and other security therefor, as well as
all merchandise returned to or reclaimed by Borrower;
All documents, cash, deposit accounts, securities, securities entitlements,
securities accounts, investment property, financial assets, letters of credit,
certificates of deposit, instruments and chattel paper now owned or hereafter
acquired and Borrower's Books relating to the foregoing;
All copyright rights, copyright applications, copyright registrations and
like protections in each work of authorship and derivative work thereof, whether
published or unpublished, now owned or hereafter acquired; all trade secret
rights, including all rights to unpatented inventions, know-how, operating
manuals, license rights and agreements and confidential information, now owned
or hereafter acquired; all mask work or similar rights available for the
protection of semiconductor chips, now owned or hereafter acquired; all claims
for damages by way of any past, present and future infringement of any of the
foregoing; and
All Borrower's Books relating to the foregoing and any and all claims, rights
and interests in any of the above and all substitutions for, additions and
accessions to and proceeds thereof.
<PAGE>
EXHIBIT 10.24
MASTER LEASE
DIVISION OF TOKAI FINANCIAL SERVICES, INC.
1055 Westlakes Drive
Berwyn, PA 19312
(800) 767-4996 FAX: (610) 651-5457
LIQUID AUDIO MARCH 05, 1998
2421 BROADWAY
2ND FLOOR
REDWOOD CITY CA 94063
RE: Contract Number: 24248109 Equipment Description: LUCENT PHONE EQUIP
Thank you for choosing MASTER LEASE for your office equipment leasing
requirements. Enclosed please find the executed copy of your contract. Soon you
will receive the invoice for your first payment. PLEASE ENSURE THAT YOUR PAYMENT
ARRIVES BY THE DUE DATE INDICATED ON THE INVOICE TO AVOID ADDITIONAL CHARGES.
As stipulated in your contract, the equipment must be covered by insurance to
protect it against loss or damage. If you are currently insuring the equipment
under your own property insurance policy, please have your carrier send us a
certificate of insurance within the next 60 days, naming MASTER LEASE as the
sole loss payee. The property coverage must be "all-risk" or "special form"
including theft. Please have the certificate sent to the address listed above or
fax a copy of the certificate to (610) 651-5457 to the attention of the
Insurance Department. PROOF OF COVERAGE MUST REFER TO EITHER YOUR REFERENCE
NUMBER, YOUR CUSTOMER NUMBER, OR YOUR PHONE NUMBER IN ORDER TO IDENTIFY WHERE
THE COVERAGE SHOULD BE APPLIED.
As a special service to you, we can add the leased equipment to our insurance
program. Our insurance has no deductible and is an all risk policy covering
direct physical loss or damage and can be provided to you for a minimal charge
$12.92 per month to cover the premium and related service charges. If we do not
receive proof of coverage within 60 days, the insurance charge will
automatically appear on your third monthly invoice.
We appreciate this opportunity to serve you. If you have any questions, please
contact our Insurance Department and refer to the reference number listed above.
For other customer service inquiries, please contact our Account Services
Department at (800)736-0220 or fax to (610)651-5278.
Sincerely,
Insurance Department
(800) 767-4996
(610) 651-5457 FAX NUMBER
<PAGE>
LEASE AGREEMENT
TOKAI FINANCIAL SERVICES, INC. VOICE:(800) 735-3273
FACSIMILE:(800) 776-2329
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
<S> <C>
Full Legal Name Phone Number
Liquid Audio, Inc 650-562-0880
- --------------------------------------------------------------------------------------------------------------
BA Name (if any) Purchase Order Requisition Number
- ---------------------------------------------------------------------------------------------------------------
Mailing Address Send Invoice to Attention of:
2421 Broadway, Redwood Ch, CA 94063
- ----------------------------------------------------------------------------------------------------------------
<CAPTION>
EQUIPMENT INFORMATION
- ----------------------------------------------------------------------------------------------------------------
Equipment Make Model No Serial Number Description (Attach Separate Schedule II Necessary)
<S> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------
Equipment Location (if not same as above)
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
PAYMENT INFORMATION
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
Number of Lease Payments Lease Payment (PLUS) Sales Tax (EQUALS) Total Lease Payment
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------
36 563.45 * 46.48 * 609.93
- ------------------------------------------------------------------------------------------------------------------------
* *
- ------------------------------------------------------------------------------------------------------------------------
* *
- ------------------------------------------------------------------------------------------------------------------------
36 * *
- ------------------------------------------------------------------------------------------------------------------------
Terms of Lease in Months Payment Frequency: [X] Monthly [_] Quarterly [_] Other
End of Lease Option: End of Lessee Purchase Option shall be FMV unless another option is
selected.
[_] FMV [_] 10% [x] 1 [_] Othe
- ------------------------------------------------------------------------------------------------------------------------
Security Deposit (PLUS) First Payment Period (PLUS) Other (EQUALS) Total Payment Enclosed
- ------------------------------------------------------------------------------------------------------------------------
0 * * * 0
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
LESSEE SIGNATURE
- --------------------------------------------------------------------------------
You agree to all of the terms and Conditions contained all such sales of this
Lease, and in any attachments to same (all of which are included by reference
and become part of this Agreement. You acknowledge to have ???) and agreed to
all the terms and Conditions and understand that this is a non-cancelable
Agreement for the full term shown above.
- --------------------------------------------------------------------------------
You acknowledge that the Leased equipment is: [_] NEW [_] USED
- --------------------------------------------------------------------------------
Signature
/s/ Gary Iwatani
- --------------------------------------------------------------------------------
Date
2/27/98
- --------------------------------------------------------------------------------
Print Name
Gary Iwatani
- --------------------------------------------------------------------------------
Title
CFO
- --------------------------------------------------------------------------------
For Legal Name of Corporation or Partnership
Liquid Audio Inc
- --------------------------------------------------------------------------------
(AGREEMENT MUST BE SIGNED BY AUTHORIZED CORPORATE OFFICER, PARTNER OR PROPRETOR)
- --------------------------------------------------------------------------------
TERMS & CONDITIONS
read your copy of this Lease carefully and feel free to ask us any
questions you may have about it. Words "you" and "your" refer to the "Lessee"
and the words "we", "us" and "our" refer to Tokai and Services, Inc., the
"Lessor" of the Equipment.
1. LEASE. We agree to lease to you and you agree to lease from us, the
Equipment listed above (and on any attached schedule) including all replacement
parts, repairs, additions and accessories ("Equipment") on the terms and
conditions on the face of this Lease and on any attached schedule. In order to
maintain our rate of return, you authorize us to adjust the Lease Payments by
not more than fifteen percent (15%) if the cost of the Equipment or taxes is
more or less than the supplier's estimate or if the Lease is not accepted within
thirty (30) days of the date you sign the Lease.
2. TERM. The Lease goes into effect and the term of the Lease begins when it
is signed and accepted by us (the "Commencement Date"). The first Lease Payment
is due on the date we accept the Lease or any later date designated by us.
Subsequent Lease Payments will be due as invoiced by us for successive months
until the balance of the Lease Payments and any additional Lease Payments or
expenses chargeable to you under this Lease are paid in full. Your obligation to
pay the Lease Payments and other Lease obligations is absolute and unconditional
and is not subject to cancellation, reduction, setoff or counterclaim. THIS
AGREEMENT IS NON-CANCELABLE.
3. LATE CHARGES/DOCUMENTATION FEES. WHENEVER ANY LEASE PAYMENT IS NOT MADE
WHEN DUE, YOU AGREE TO PAY US, WITHIN ONE MONTH, A LATE CHARGE OF FIVE PERCENT
(5%) FOR EACH DELAYED PAYMENT, WITH A MINIMUM OF $10.00 AS COMPENSATION FOR OUR
INTERNAL OPERATING EXPENSES ARISING AS A RESULT OF EACH DELAYED PAYMENT, BUT
ONLY TO THE EXTENT PERMITTED BY LAW. YOU AGREE TO PAY US A FEE OF $49.50
(Terms and Conditions continued on the reverse side of this Agreement)
GUARANTY
- --------------------------------------------------------------------------------
To induce us to enter this Lease, the undersigned unconditionally guarantees the
prompt payment of all the Lessee's obligations under the Lease. We are not
required to proceed against the Lessee or the equipment or enforce other
remedies before proceeding against the undersigned. The undersigned waiver
notice of acceptance and all other notices or demand of any kind to which the
undersigned may be entitled. The undersigned consents to any extensions or
modification granted to the Lessee and the release and/or compromise of
any obligations of the Lessee of any other guarantors without releasing the
undersigned from his or her obligations. This is a continuing guarantee and will
remain ?? effect in the event of the death of the undersigned, and will bind the
???, adminstrators, representatives, successors and assigns of undersigned and
may be enclosed by or for the benefit of any assignee or successor of its. This
guaranty is governed by and constituted in accordance with the Laws of the
Commonwealth of Pennsylvania.
================================================================================
Signature Date
- --------------------------------------------------------------------------------
Print Name
- --------------------------------------------------------------------------------
Home Address
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Soc. Sec No. Phone
- --------------------------------------------------------------------------------
Signature Date
- --------------------------------------------------------------------------------
Print Name
- --------------------------------------------------------------------------------
Home Address
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Soc. Sec No. Phone
- --------------------------------------------------------------------------------
ACCEPTANCE
- --------------------------------------------------------------------------------
You acknowledge that the equipment shown above has been received, has been put
in use, is in good working order and is satisfactory and acceptable.
- --------------------------------------------------------------------------------
Signature
/s/ Gary Iwatani Date 2/27/98
- --------------------------------------------------------------------------------
Print Name
Gary Iwatani
- --------------------------------------------------------------------------------
Title
CFO
- --------------------------------------------------------------------------------
For Legal Name of Corporation of Partnership
Liquid Audio, Inc.
- --------------------------------------------------------------------------------
LESSOR
- --------------------------------------------------------------------------------
Lessor Signature Date
/s/ [SIGNATURE ILLEGIBLE] 3/3/98
- --------------------------------------------------------------------------------
Print Name
- --------------------------------------------------------------------------------
Title
- --------------------------------------------------------------------------------
For
TOKAI FINANCIAL SERVICES, INC.
- --------------------------------------------------------------------------------
Lease Number
24248109
- --------------------------------------------------------------------------------
Lease Commencement Date
- --------------------------------------------------------------------------------
Vendor I.D. Number
- --------------------------------------------------------------------------------
<PAGE>
SCHEDULE A
SCHEDULE FORMING PART OF LEASE BETWEEN LESSOR,
Liquid Audio Inc.
AND -------------------------------------------------------------------, LESSEE.
DATE:______________________________LEASE NUMBER:________________________________
________________________________________________________________________________
DESCRIPTION OF EQUIPMENT: ITEM DESCRIPTION QTY
-------------------------------------------------------
1019 AT&T 188B1 BACKBOARD (WI 1
1018 AT&T 110AB2-300FT (WITH 1
2016 LUCENT 630B4H WALL CONN 2
2023 LUCENT MPS100 CAT5-WHITE 94
2057 LUCENT M1BH CAT3-WHITE 60
2336 LUCENT M14A-WHITE FACEPLT 14
3002 LUCENT 1100CAT5PS-48 PORT 2
2340 LUCENT M16A-WHITE FACEPLT 16
8506 MINICOM WHITE BLANK 60
0201 LUCENT 0050/24 CAT3 1010 200
4223 90DEG CORNER JUNCTION KIT 2
5012 PAND WMPVC20 WIRE MNGR 4
5011 PAND WMPVS20 WIRE MNGR 4
5033 PAND WMPH2 WIRE MANAGER 8
545 TOGGLE BOLT-3/8IN 32
228 CADDY FASTENER (1 GANG) 30
447 CEILING EYE LAGS-3X1/4IN 100
446 CEILING WIRE 8FT-100PER 2
140 EMT 4IN CONDUIT (2 1/2FT) 2
353 3M FIRE SEAL PUTTY STICK 2
600 ALUMINUM FLEX CONDUIT 1
4107 GROMMET 3IN-GRAY 6
900 UNISTRUT 10FT X 1 5/8IN 1
229 ANCHOR SLEEVED 5/8 X 3IN 8
0800 LUCENT 0004/24 CAT3 1010 6
0801 LUCENT 0004/24 CAT5 1061 19
P TOUCH 1
TAPE 6
CABLE TIES 100
MISC 3
THIS SCHEDULE SHALL HERE AFTER FORM PART OF THE AFOREMENTIONED LEASE.
---------------LESSEE SIGNATURE---------------
Signature X /s/ Gary Iwatani
------------------------------
(MUST BE SIGNED BY AUTHORIZED CORPORATE
OFFICER, PARTNER OR PROPRIETOR)
Print Name GARY IWATANI
------------------------------
Title CFO Date 2/27/98
--------------- -----------
For_______________________Legal Name of
Corporation or Partnership
----------------------------------------------
----------- ACCEPTED BY LESSOR ---------------
Signature X /s/ GARY IWATANI
-------------------------------
Title Date 3/3/98
---------------- -----------
For _________________________ Legal Name of
Corporation or Partnership
----------------------------------------------
Page 1 of 2 Pages of this Schedule
<PAGE>
SCHEDULE A
Liquid Audio Inc.
AND -------------------------------------------------------------------, LESSEE.
DATE:_____________________________________________LEASE NUMBER: 24248109
-----------------
________________________________________________________________________________
DESCRIPTION OF EQUIPMENT:
Provide and place one (1) Cat 3 and two (2) Cat 5 PVC rated 4pr cables from
the Telco room to each of 14 locations on the ground and mezzanine floors.
Provide and place one (1) Cat 3 and four (4) Cat 5 PVC rated cables from
the Telco room to 16 locations.
Terminate the Cat 5 cables on the new patch panels in the Telco room and
terminate the other end on Cat 5 jacks.
Provide and install horizontal wire managers above and below each patch
panel.
Provide and install vertical wire managers between each rack.
Provide and install Cat 3 jacks at the station end by splitting the 4pr.
The brown pair will be terminated on the second jack.
Provide and install 110 backboard for terminating the voice cables.
Provide and install 110 backboard for terminating the switch cables.
Provide and place one Cat 3 cable for new wall phone in lower level.
Provide and install one 50 pair PVC cable from the Telco room to the Point
of entry. Terminate both ends on 110 type blocks.
Label and test all new cables.
THIS SCHEDULE SHALL HERE AFTER FORM PART OF THE AFOREMENTIONED LEASE
-------------------- LESSEE SIGNATURE ----------------
Signature X /s/ Gary Iwatani
--------------------------------
(MUST BE SIGNED BY AUTHORIZED CORPORATE OFFICER,
PARTNER OR PROPRIETOR)
Print Name GARY IWATANI
---------------------------------
Title CFO Date 2/27/98
------------------ -------------
For _____________________________ Legal Name of
Corporation or Partnership
------------------------------------------------------
----------------- ACCEPTED BY LESSOR -----------------
Signature X /s/ [SIGNATURE ILLEGIBLE]
--------------------------------
Title Date 3/3/98
----------------------- ---------
For _____________________________ Legal Name
of Corporation or Partnership
------------------------------------------------------
Page 2 of 2 pages of this Schedule
<PAGE>
CONTRACT CHANGE ORDER
- -------------------------------------- --------------------------------------
FROM CABLE TECH, INC. DATE 12-24-97 CHANGE # 3
1752A JUNCTION AVENUE
SAN JOSE, CA 95112-1191 JOB NAME LIQUID AUDIO
408-437-1213 FAX 408-437-1191
- -------------------------------------- CONTRACT JOB # 971978
- --------------------------------------
TO TOKAI FINANCIAL SERVICES PREPARED BY MARK TARABANOVIC
1055 WESTLAKES DR.
BERWYN, PA 19312 CLIENT P.O. # SIGNATURE
ATTN. ELIZABETH SMITH
- -------------------------------------- START DATE 12-24-97
COMP. DATE 12-24-97
-------------------------------------
- --------------------------------------------------------------------------------
CHANGE DESCRIPTION
MATERIAL SALE
1 PATCH PANEL
10 CAT 5 JACKS
10 CAT 3 JACKS
TOTAL $430.00
THE WORK COVERED BY THIS CHANGE ORDER SHALL BE PERFORMED UNDER THE SAME
TERMS AND CONDITIONS AS THE ORIGINAL CONTRACT, UNLESS OTHERWISE STATED
- --------------------------------------------------------------------------------
---------------------------------------------
PREVIOUS CONTRACT AMNT $16142.00
THIS CHANGE ORDER AMNT $ 430.00
NEW TOTAL $16572.00
---------------------------------------------
CHANGES APPROVED ORIGINATED /s/ Mark Tarabanovic
- ------------------------------------------ -----------------------------------
BY /s/ [SIGNATURE ILLEGIBLE] DATE 1-7-98 BY MARK TARABANOVIC DATE 12-24-??
- ------------------------------------------ -----------------------------------
TITLE TITLE PROJECT MANAGER
- ------------------------------------------ -----------------------------------
<PAGE>
EXHIBIT 10.25
Standard Industrial/Commercial Single Tenant Lease--Gross
Table of Contents
<TABLE>
<S> <C> <C>
1. BASIC PROVISIONS
- --------------------------------------------------------------------------------
1.1 Parties........................................................... 1
1.2 Premises.......................................................... 1
1.3 Term.............................................................. 1
1.4 Early Possession.................................................. 1
1.5 Base Rent......................................................... 1
1.6 Base Rent Paid Upon Execution..................................... 1
1.7 Security Deposit.................................................. 1
1.8 Agreed Use........................................................ 1
1.9 Insuring Party.................................................... 1
1.10 Real Estate Brokers............................................... 1
(a) Representation........................................... 1
(b) Payment to Brokers....................................... 1
1.11 Guarantor......................................................... 1
1.12 Addenda and Exhibits.............................................. 1
2. PREMISES
- --------------------------------------------------------------------------------
2.1 Letting........................................................... 1
2.2 Condition......................................................... 1
2.3 Compliance........................................................ 1
2.4 Acknowledgments................................................... 2
2.5 Lessee as Prior Owner/Occupant.................................... 2
3 TERM
- --------------------------------------------------------------------------------
3.1 Term.............................................................. 2
3.2 Early Possession.................................................. 2
3.3 Delay in Possession............................................... 2
3.4 Lessee Compliance................................................. 2
4. RENT
- --------------------------------------------------------------------------------
4.1 Rent Defined...................................................... 2
4.2 Payment........................................................... 2
5 SECURITY DEPOSIT.................................................. 2
- --------------------------------------------------------------------------------
6 USE
- --------------------------------------------------------------------------------
6.1 Use............................................................... 2
6.2 Hazardous Substances.............................................. 3
(a) Reportable Uses Require Consent.......................... 3
(b) Duty to Inform Lessor.................................... 3
(c) Lessee Remediation....................................... 3
(d) Lessee Indemnification................................... 3
(e) Lessor Indemnification................................... 3
(f) Investigations and Remediations.......................... 3
(g) Lessor Termination Option................................ 3
6.3 Lessee's Compliance with Applicable
Requirements...................................................... 3
6.4 Inspection; Compliance............................................ 3
7 MAINTENANCE; REPAIRS; UTILITY
INSTALLATIONS; TRADE FIXTURES AND
ALTERATIONS
- --------------------------------------------------------------------------------
7.1 Lessee's Obligations.............................................. 3
(a) In General............................................... 3
(b) Service Contracts........................................ 4
(c) Replacement.............................................. 4
7.2 Lessor's Obligations.............................................. 4
7.3 Utility Installations; Trade Fixtures;
Alterations....................................................... 4
(a) Definitions; Consent Required............................ 4
(b) Consent.................................................. 4
(c) Indemnification.......................................... 4
7.4 Ownership; Removal; Surrender; and
Restoration.............................................. 4
(a) Ownership................................................ 4
(b) Removal.................................................. 4
(c) Surrender/Restoration.................................... 4
8. INSURANCE; INDEMNITY
- --------------------------------------------------------------------------------
8.1 Payment of Premium Increases...................................... 4
8.2 Liability Insurance............................................... 5
(a) Carried by Lessee........................................ 5
(b) Carried by Lessor........................................ 5
8.3 Property Insurance-Building, Improvements
and Rental Value.................................................. 5
(a) Building And Improvements................................ 5
(b) Rental Value............................................. 5
(c) Adjacent Premises........................................ 5
8.4 Lessee's Property/Business Interruption
Insurance......................................................... 5
(a) Property Damage.......................................... 5
(b) Business Interruption.................................... 5
(c) No Representation of Adequate
Coverage................................................. 5
8.5 Insurance Policies................................................ 5
8.6 Waiver of Subrogation............................................. 5
8.7 Indemnity......................................................... 5
8.8 Exemption of Lessor from Liability................................ 5
9. DAMAGE OR DESTRUCTION
- --------------------------------------------------------------------------------
9.1 Definitions....................................................... 6
(a) Premises Partial Damage.................................. 6
(b) Premises Total Destruction............................... 6
(c) Insured Loss............................................. 6
(d) Replacement Cost......................................... 6
(e) Hazardous Substance Condition............................ 6
9.2 Partial Damage-Insured Loss....................................... 6
9.3 Partial Damage-Uninsured Loss..................................... 6
9.4 Total Destruction................................................. 6
9.5 Damage Near End of Term........................................... 6
9.6 Abatement of Rent; Lessee's Remedies.............................. 6
(a) Abatement................................................ 6
(b) Remedies................................................. 6
9.7 Termination-Advance Payments...................................... 6
9.8 Waive Statutes.................................................... 6
10. REAL PROPERTY TAXES
- --------------------------------------------------------------------------------
10.1 Definition of "Real Property Taxes"............................... 6
10.2 (a) Payment of Taxes......................................... 7
(b) Advance Payment.......................................... 7
(c) Additional Improvements.................................. 7
10.3 Joint Assessment.................................................. 7
10.4 Personal Property Taxes........................................... 7
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
11. UTILITIES......................................................... 7
12. ASSIGNMENT AND SUBLETTING
12.1 Lessor's Consent Required......................................... 7
12.2 Terms and Conditions Applicable to
Assignment and Subletting......................................... 7
12.3 Additional Terms and Conditions Applicable
to Subletting..................................................... 7
13. DEFAULT; BREACH; REMEDIES
13.1 Default; Breach................................................... 8
13.2 Remedies.......................................................... 8
13.3 Inducement Recapture.............................................. 9
13.4 Late Charges...................................................... 9
13.5 Interest.......................................................... 9
13.6 Breach by lessor.................................................. 9
(a) Notice of Breach......................................... 9
(b) Performance by Lessee on Behalf of
Lessor................................................... 9
14. CONDEMNATION...................................................... 9
15. BROKER'S FEES
15.1 Additional Commission............................................. 9
15.2 Assumption of Obligations......................................... 9
15.3 Representations and Indemnities of Broker
Relationships..................................................... 9
16. ESTOPPEL CERTIFICATES............................................. 9
17. DEFINITION OF LESSOR.............................................. 10
18. SEVERABILITY...................................................... 10
19. DAYS.............................................................. 10
20. LIMITATION ON LIABILITY........................................... 10
21. TIME OF ESSENCE................................................... 10
22. NO PRIOR OR OTHER AGREEMENTS;
BROKER DISCLAIMER................................................. 10
23. NOTICES........................................................... 10
23.1 Notice Requirements............................................... 10
23.2 Date of Notice.................................................... 10
24. WAIVERS........................................................... 10
25. RECORDING......................................................... 10
26. NO RIGHT TO HOLDOVER.............................................. 10
27. CUMULATIVE REMEDIES............................................... 10
28. COVENANTS AND CONDITIONS;
CONSTRUCTION OF AGREEMENT......................................... 10
29. BINDING EFFECT; CHOICE OF LAW..................................... 10
30. SUBORDINATION; ATTORNMENT;
NON-DISTURBANCE................................................... 10
30.1 Subordination..................................................... 10
30.2 Attornment........................................................ 11
30.3 Non-Disturbance................................................... 11
30.4 Self-Executing.................................................... 11
31. ATTORNEY'S FEES................................................... 11
32. LESSORS' ACCESS; SHOWING
PREMISES; REPAIRS................................................. 11
33. AUCTIONS.......................................................... 11
34. SIGNS............................................................. 11
35. TERMINATION; MERGER............................................... 11
36. CONSENTS.......................................................... 11
37. GUARANTOR
37.1 Execution......................................................... 11
37.2 Default........................................................... 11
38. QUIET POSSESSION.................................................. 11
39. OPTIONS
39.1 Definition........................................................ 11
39.2 Options Personal to Original Lessee............................... 11
39.3 Multiple Options.................................................. 11
39.4 Effect of Default on Options...................................... 11
40. MULTIPLE BUILDINGS................................................ 12
41. SECURITY MEASURES................................................. 12
42. RESERVATIONS...................................................... 12
43. PERFORMANCE UNDER PROTEST......................................... 12
44. AUTHORITY......................................................... 12
45. CONFLICT.......................................................... 12
46. OFFER............................................................. 12
47. AMENDMENTS........................................................ 12
48. MULTIPLE PARTIES.................................................. 12
49. MEDIATION AND ARBITRATION OF
DISPUTES.......................................................... 12
</TABLE>
<PAGE>
[LOGO OF AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION APPEARS HERE]
STANDARD INDUSTRIAL/COMMERCIAL SINGLE-TENANT LEASE - GROSS
(DO NOT USE THIS FORM FOR MULTI-TENANT BUILDINGS)
1. BASIC PROVISIONS ("Basic Provisions")
1.1 PARTIES: This Lease ("Lease"), dated for reference purposes only
February 16, 1999, _____, is made by and between John Anagnostou, Realty &
Michael J Monte ("Lessor") and Liquid Audio, Inc ("Lessee"). (collectively the
"Parties," or individually a "Party").
1.2 PREMISES: That certain real property, including all improvements
therein or to be provided by Lessor under the terms of this Lease, and commonly
known as 2221 Broadway, Redwood City located in the County of San Mateo, State
of California and generally described as (describe briefly the nature of the
property and, if applicable, the "Project", if the property is located within a
Project) The "office space" portion of the property commonly known as The Fox
Theater Building as noted on Exhibit A, Pages 1 - 4 consisting of approximately
11,397 rentable square feet ("Premises"). (See also Paragraph 2)
1.3 TERM: Three years and 0 months ("Original Term") commencing April 15,
1999 ("Commencement Date") and ending April 14, 2002 ("Expiration Date"). (See
also Paragraph 3)
1.4 EARLY POSSESSION: Upon completion of Lessor's Phase I ("Early
Possession Date") (See also Paragraphs 3.2 and 3.3)
1.5 BASE RENT: $ See Rent Sched per month ("Base Rent"), payable on the
First day of each month commencing. (see rent schedule attached) (See also
Paragraph 4) [_] If this box is checked, there are provisions in this Lease for
the Base Rent to be adjusted and/or for common area maintenance charges
1.6 BASE RENT PAID UPON EXECUTION: $ 62,682.00 as Base Rent for the period
To be applied per rent schedule attached
1.7 SECURITY DEPOSIT: $__15,670.00 ___________("Security Deposit"). (See
also Paragraph 5)
1.8 AGREED USE: Computer Software Development, Production, Sales, Delivery
and General Office. (See also Paragraph 6)
1.9 Insuring Party. Lessor is the "Insuring Party". The annual "Base
Premium" is $N/A. (See also Paragraph 8)
1.10 REAL ESTATE BROKERS: (See also Paragraph 15)
(a) REPRESENTATION: The following real estate brokers (collectively,
the "Brokers") and brokerage relationships exist in this transaction (check
applicable boxes):
[X] John Anagnostou, Realty __________________ represents Lessor exclusively
("Lessor's Broker");
[_] ______________________________________________ represents Lessee exclusively
("Lessee's Broker"); or
[_] ______________________________________________ represents both Lessor and
Lessee ("Dual Agency").
(b) PAYMENT TO BROKERS: Upon execution and delivery of this Lease by
both Parties, Lessor shall pay to the Broker the fee agreed to in their separate
written agreement (or if there is no such agreement, the sum of n/a % of the
total Base Rent for the brokerage services rendered by said Broker).
1.11 GUARANTOR. The obligations of the Lessee under this Lease are to be
guaranteed by n/a ("Guarantor"). (See also Paragraph 37)
1.12 ADDENDA AND EXHIBITS. Attached hereto is an Addendum or Addenda
consisting of Paragraphs _______ through _____ and Exhibits_____________________
_____________________________________, all of which constitute a part of this
Lease.
2. PREMISES.
2.1 LETTING. Lessor hereby leases to Lessee, and Lessee hereby leases from
Lessor, the Premises, for the term, at the rental, and upon all of the terms,
covenants and conditions set forth in this Lease. Unless otherwise provided
herein, any statement of size set forth in this Lease, or that may have been
used in calculating rental, is an approximation which the Parties agree is
reasonable and the rental based thereon is not subject to revision whether or
not the actual size is more or less.
2.2 CONDITION. Lessor shall deliver the Premises broom clean and free of
debris on the Commencement Date or the Early Possession Date, whichever first
occurs ("Start Date"), and warrants that the existing electrical, plumbing, fire
sprinkler, lighting, heating, ventilation and air conditioning systems ("HVAC"),
loading doors, if any, and all other such elements of the building. In the
Premises, other than those constructed by Lessee, shall be in good operating
condition on said date and that the surface and structural elements of the roof,
bearing walls and foundation of any buildings on the Premises (the "Building")
shall be free of material defects. If a non-compliance with said warranty exists
as of the Start Date, Lessor shall, except as otherwise provided in this Lease,
promptly after receipt of written notice from Lessee setting forth with
specificity the nature and extent of such non-compliance, rectify same at
Lessor's expense. If, after the Start Date, Lessee does not give Lessor written
notice of any non-compliance with this warranty within (i) six (6) months as to
the HVAC systems or (ii) thirty (30) days as to the remaining systems and other
elements of the Building, correction of such non-compliance shall be the
obligation of Lessee at Lessee's sole cost and expense, except for the roof,
foundations, and bearing walls which are handled as provided in paragraph 7.
2.3 COMPLIANCE. Lessor warrants that the improvements on the Premises
comply with all applicable laws, covenants or restrictions of record, building
codes, regulations and ordinances ("Applicable Requirements") in effect on the
Start Date. Said warranty does not apply to the use to which Lessee will put the
Premises or to any Alterations or Utility Installations (as defined in Paragraph
7.3(a)) made or to be made by Lessee. NOTE: Lessee is responsible for
determining whether or not the zoning is appropriate for Lessee's intended use,
and acknowledges that past uses of the Premises may no longer be allowed. If the
Premises do not comply with said warranty, Lessor shall, except as otherwise
provided, promptly after receipt of written notice from Lessee setting forth
with specificity the nature and extent of such non-compliance, rectify the same
at Lessor's expense. If Lessee does not give Lessor written notice of a non-
compliance with this warranty within six (6) months following the Start Date,
correction of that non-compliance shall be the obligation of Lessee at Lessee's
sole cost and expense. If the Applicable Requirements are hereafter changed (as
opposed to being in existence at the Start Date, which is addressed in Paragraph
6.2(e) below) so as to require during the term of this Lease the construction of
an addition to or an alteration of the Building, the remediation of any
Hazardous Substance, or the reinforcement or other physical modification of the
Building ("Capital Expenditure"). Lessor and Lessee shall allocate the cost of
such work as follows:
(a) Subject to Paragraph 2.3(c) below, if such Capital Expenditures
are required as a result of the specific and unique use of the Premises by
Lessee as compared with uses by tenants in general, Lessee shall be fully
responsible for the cost thereof, provided, however that if such Capital
Expenditure is required during the last two (2) years of this Lease and the cost
thereof exceeds six (6) months' Base Rent, Lessee
Initials /s/ MJM, GI, JA
---------------------------
PAGE 1
<PAGE>
may instead terminate this Lease unless Lessor notifies Lessee, in writing,
within ten (10) days after receipt of Lessee's termination notice that Lessor
has elected to pay the difference between the actual cost thereof and the amount
equal to six (6) months' Base Rent. If Lessee elects termination, Lessee shall
immediately cease the use of the Premises which requires such Capital
Expenditure and deliver to Lessor written notice specifying a termination date
at least ninety (90) days thereafter Such termination date shall, however, in no
event be earlier than the last day that Lessee could legally utilize the
Premises without commencing such Capital Expenditure
(b) If such Capital Expenditure is not the result of the specific and
unique use of the Premises by Lessee (such as, governmentally mandated seismic
modifications), then Lessor and Lessee shall allocate the obligation to pay for
such costs pursuant to the provisions of Paragraph 7.1(c); provided, however,
that if such Capital Expenditure is required during the last two years of this
Lease or if Lessor reasonably determines that it is not economically feasible to
pay its share thereof, Lessor shall have the option to terminate this Lease upon
ninety (90) days prior written notice to Lessee unless Lessee notifies Lessor,
in writing, within ten (10) days after receipt of Lessor's termination notice
that Lessee will pay for such Capital Expenditure If Lessor does not elect to
terminate, and fails to tender its share of any such Capital Expenditure, Lessee
may advance such funds and deduct same, with Interest, from Rent until Lessor's
share of such costs have been fully paid. If Lessee is unable to finance
Lessor's share, or if the balance of the Rent due and payable for the remainder
of this Lease is not sufficient to fully reimburse Lessee on an offset basis,
Lessee shall have the right to terminate this Lease upon thirty (30) days
written notice to Lessor.
(c) Notwithstanding the above, the provisions concerning Capital
Expenditures are intended to apply only to non-voluntary, unexpected, and new
Applicable Requirements. If the Capital Expenditures are instead triggered by
Lessee as a result of an actual or proposed change in use, change in intensity
of use, or modification to the Premises then, and in that event, Lessee shall be
fully responsible for the cost thereof, and Lessee shall not have any right to
terminate this Lease.
2.4 ACKNOWLEDGEMENTS. Lessee acknowledges that: (a) it has been advised by
Lessor and/or Brokers to satisfy itself with respect to the condition of the
Premises (including but not limited to the electrical, HVAC and fire sprinkler
systems, security, environmental aspects, and compliance with Applicable
Requirements), and their suitability for Lessee's intended use; (b) Lessee has
made such investigation as it deems necessary with reference to such matters and
assumes all responsibility therefor as the same relate to its occupancy of the
Premises, and (c) neither Lessor, Lessor's agents, nor any Broker has made any
oral or written representations or warranties with respect to said matters other
than as set forth in this Lease. In addition, Lessor acknowledges that: (a)
Broker has made no representations, promises or warranties concerning Lessee's
ability to honor the Lease or suitability to occupy the Premises; and (b) it is
Lessor's sole responsibility to investigate the financial capability and/or
suitability of all proposed tenants.
2.5 LESSEE AS PRIOR OWNER/OCCUPANT. The warranties made by Lessor in
Paragraph 2 shall be of no force or effect if immediately prior to the Start
Date Lessee was the owner or occupant of the Premises. In such event, Lessee
shall be responsible for any necessary corrective work.
3. TERM.
3.1 TERM. The Commencement Date, Expiration Date and Original Term of this
Lease are as specified in Paragraph 1.3.
3.2 EARLY POSSESSION. If Lessee totally or partially occupies the Premises
prior to the Commencement Date, the obligation to pay Base Rent shall be abated
for the period of such early possession. All other terms of this Lease shall,
however, be in effect during such period Any such early possession shall not
affect the Expiration Date.
3.3 DELAY IN POSSESSION. Lessor agrees to use its best commercially
reasonable efforts to deliver possession of the Premises to Lessee by the
Commencement Date. If, despite said efforts, Lessor is unable to deliver
possession as agreed, Lessor shall not be subject to any liability therefor, nor
shall such failure affect the validity of this Lease. Lessee shall not, however,
be obligated to pay Rent or perform its other obligations until it receives
possession of the Premises. If possession is not delivered within sixty (60)
days after the Commencement Date, Lessee may, at its option, by notice in
writing within ten (10) days after the end of such sixty (60) day period, cancel
this Lease, in which event the Parties shall be discharged from all obligations
hereunder. If such written notice is not received by Lessor within said ten (10)
day period, Lessee's right to cancel shall terminate. Except as otherwise
provided, if possession is not tendered to Lessee by the Start Date and Lessee
does not terminate this Lease, as aforesaid, any period of rent abatement that
Lessee would otherwise have enjoyed shall run from the date of delivery of
possession and continue for a period equal to what Lessee would otherwise have
enjoyed under the terms hereof, but minus any days of delay caused by the acts
or omissions of Lessee. If possession of the Premises is not delivered within
four (4) months after the Commencement Date, this Lease shall terminate unless
other agreements are reached between Lessor and Lessee, in writing.
3.4 LESSEE COMPLIANCE. Lessor shall not be required to tender possession
of the Premises to Lessee until Lessee complies with its obligation to provide
evidence of insurance (Paragraph 8.5). Pending delivery of such evidence, Lessee
shall be required to perform all of its obligations under this Lease from and
after the Start Date, including the payment of Rent, notwithstanding Lessor's
election to withhold possession pending receipt of such evidence of insurance.
Further, if Lessee is required to perform any other conditions prior to or
concurrent with the Start Date, the Start Date shall occur but Lessor may elect
to withhold possession until such conditions are satisfied.
4. RENT.
4.1 RENT DEFINED. All monetary obligations of Lessee to Lessor under the
terms of this Lease (except for the Security Deposit) are deemed to be rent
("Rent").
4.2 PAYMENT. Lessee shall cause payment of Rent to be received by Lessor
in lawful money of the United States, without offset or deduction (except as
specifically permitted in this Lease), on or before the day on which it is due.
Rent for any period during the term hereof which is for less than one (1) full
calendar month shall be prorated based upon the actual number of days of said
month. Payment of Rent shall be made to Lessor at its address stated herein or
to such other persons or place as Lessor may from time to time designate in
writing. Acceptance of a payment which is less than the amount then due shall
not be a waiver of Lessor's rights to the balance of such Rent, regardless of
Lessor's endorsement of any check so stating.
5. SECURITY DEPOSIT. Lessee shall deposit with Lessor upon execution hereof
the Security Deposit as security for Lessee's faithful performance of its
obligations under this Lease. If Lessee fails to pay Rent, or otherwise Defaults
under this Lease, Lessor may use, apply or retain all or any portion of said
Security Deposit for the payment of any amount due Lessor or to reimburse or
compensate Lessor for any liability, expense, loss or damage which Lessor may
suffer or incur by reason thereof. If Lessor uses or applies all or any portion
of said Security Deposit. Lessee shall within ten (10) days after written
request therefor deposit monies with Lessor sufficient to restore said Security
Deposit to the full amount required by this Lease. If the Base Rent increases
during the term of this Lease, Lessee shall, upon written request from Lessor,
deposit additional moneys with Lessor so that the total amount of the Security
Deposit shall at all times bear the same proportion to the increased Base Rent
as the initial Security Deposit bore to the initial Base Rent. Should the Agreed
Use be amended to accommodate a material change in the business of Lessee or to
accommodate a sublessee or assignee, Lessor shall have the right to increase the
Security Deposit to the extent necessary, in Lessor's reasonable judgment, to
account for any increased wear and tear that the Premises may suffer as a result
thereof. If a change in control of Lessee occurs during this Lease and following
such change the financial condition of Lessee is, in Lessor's reasonable
judgment, significantly reduced, Lessee shall deposit such additional monies
with Lessor as shall be sufficient to cause the Security Deposit to be at a
commercially reasonable level based on said change in financial condition.
Lessor shall not be required to keep the Security Deposit separate from its
general accounts. Within fourteen (14) days after the expiration or termination
of this Lease, if Lessor elects to apply the Security Deposit only to unpaid
Rent, and otherwise within thirty (30) days after the Premises have been vacated
pursuant to Paragraph 7.4(c) below, Lessor shall return that portion of the
Security Deposit not used or applied by Lessor. No part of the Security Deposit
shall be considered to be held in trust, to bear interest or to be prepayment
for any monies to be paid by Lessee under this Lease.
6. USE.
6.1 USE. Lessee shall use and occupy the Premises only for the Agreed Use,
or any other legal use which is reasonably comparable thereto, and for no other
purpose. Lessee shall not use or permit the use of the Premises in a manner that
is unlawful, creates damage, waste or a nuisance, or that disturbs owners and/or
occupants of, or causes damage to neighboring properties. Lessor shall not
unreasonably withhold or delay its consent to any written request for a
modification of the Agreed Use, so long as the same will not impair the
structural integrity of the improvements on the Premises or the mechanical or
electrical systems therein, or is not significantly more burdensome to the
Premises. If
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Lessor elects to withhold consent, Lessor shall within five (5) business days
after such request give written notification of same, which notice shall include
an explanation of Lessor's objections to the change in use
6.2 HAZARDOUS SUBSTANCES.
(a) REPORTABLE USES REQUIRE CONSENT. The term "HAZARDOUS SUBSTANCE" as
used in this Lease shall mean any product, substance, or waste whose presence,
use, manufacture, disposal, transportation, or release, either by itself or in
combination with other materials expected to be on the Premises, is either: (i)
potentially injurious to the public health, safety or welfare, the environment
or the Premises, (ii) regulated or monitored by any governmental authority, or
(iii) a basis for potential liability of Lessor to any governmental agency or
third party under any applicable statute or common law theory. Hazardous
Substances shall include, but not be limited to, hydrocarbons, petroleum,
gasoline, and/or crude oil or any products, by-products or fractions thereof.
Lessee shall not engage in any activity in or on the Premises which constitutes
a Reportable Use of Hazardous Substances without the express prior written
consent of Lessor and timely compliance (at Lessee's expense) with all
Applicable Requirements "REPORTABLE USE" shall mean (i) the installation or use
of any above or below ground storage tank, (ii) the generation, possession,
storage, use, transportation, or disposal of a Hazardous Substance that requires
a permit from, or with respect to which a report, notice, registration or
business plan is required to be filed with, any governmental authority, and/or
(iii) the presence at the Premises of a Hazardous Substance with respect to
which any Applicable Requirements requires that a notice be given to persons
entering or occupying the Premises or neighboring properties Notwithstanding the
foregoing, Lessee may use any ordinary and customary materials reasonably
required to be used in the normal course of the Agreed Use, so long as such use
is in compliance with all Applicable Requirements, is not a Reportable Use, and
does not expose the Premises or neighboring property to any meaningful risk of
contamination or damage or expose Lessor to any liability therefor In addition,
Lessor may condition its consent to any Reportable Use upon receiving such
additional assurances as Lessor reasonably deems necessary to protect itself,
the public, the Premises and/or the environment against damage, contamination,
injury and/or liability, including, but not limited to, the installation (and
removal on or before Lease expiration or termination) of protective
modifications (such as concrete encasements) and/or increasing the Security
Deposit.
(b) DUTY TO INFORM LESSOR. If Lessee knows, or has reasonable cause to
believe, that a Hazardous Substance has come to be located in, on, under or
about the Premises, other than as previously consented to by Lessor, Lessee
shall immediately give written notice of such fact to Lessor, and provide Lessor
with a copy of any report, notice, claim or other documentation which it has
concerning the presence of such Hazardous Substance.
(c) LESSEE REMEDIATION. Lessee shall not cause or permit any Hazardous
Substance to be spilled or released in, on, under, or about the Premises
(including through the plumbing or sanitary sewer system) and shall promptly, at
Lessee's expense, take all investigatory and/or remedial action reasonably
recommended, whether or not formally ordered or required, for the cleanup of any
contamination of, and for the maintenance, security and/or monitoring of the
Premises or neighboring properties, that was caused or materially contributed to
by Lessee, or pertaining to or involving any Hazardous Substance brought onto
the Premises during the term of this Lease, by or for Lessee, or any third
party.
(d) LESSEE INDEMNIFICATION. Lessee shall indemnify, defend and hold
Lessor, its agents, employees, lenders and ground lessor, if any, harmless from
and against any and all loss of rents and/or damages, liabilities, judgments,
claims, expenses, penalties, and attorneys' and consultants' fees arising out of
or involving any Hazardous Substance brought onto the Premises by or for Lessee,
or any third party (provided, however, that Lessee shall have no liability under
this Lease with respect to underground migration of any Hazardous Substance
under the Premises from adjacent properties). Lessee's obligations shall
include, but not be limited to, the effects of any contamination or injury to
person, property or the environment created or suffered by Lessee, and the cost
of investigation, removal, remediation, restoration and/or abatement, and shall
survive the expiration or termination of this Lease NO TERMINATION, CANCELLATION
OR RELEASE AGREEMENT ENTERED INTO BY LESSOR AND LESSEE SHALL RELEASE LESSEE FROM
ITS OBLIGATIONS UNDER THIS LEASE WITH RESPECT TO HAZARDOUS SUBSTANCES, UNLESS
SPECIFICALLY SO AGREED BY LESSOR IN WRITING AT THE TIME OF SUCH AGREEMENT.
(e) LESSOR INDEMNIFICATION. Lessor and its successors and assigns
shall indemnify, defend, reimburse and hold Lessee, its employees and lenders,
harmless from and against any and all environmental damages, including the cost
of remediation, which existed as a result of Hazardous Substances on the
Premises prior to the Start Date or which are caused by the gross negligence or
willful misconduct of Lessor, its agents or employees. Lessor's obligations, as
and when required by the Applicable Requirements, shall include, but not be
limited to, the cost of investigation, removal, remediation, restoration and/or
abatement, and shall survive the expiration or termination of this Lease
(f) INVESTIGATIONS AND REMEDIATIONS. Lessor shall retain the
responsibility and pay for any investigations or remediation measures required
by governmental entities having jurisdiction with respect to the existence of
Hazardous Substances on the Premises prior to the Start Date, unless such
remediation measure is required as a result of Lessee's use (including
alterations) of the Premises, in which event Lessee shall be responsible for
such payment. Lessee shall cooperate fully in any such activities at the request
of Lessor, including allowing Lessor and Lessor's agents to have reasonable
access to the Premises at reasonable times in order to carry out Lessor's
investigative and remedial responsibilities.
(g) LESSOR TERMINATION OPTION. If a Hazardous Substance Condition
occurs during the term of this Lease, unless Lessee is legally responsible
therefor (in which case Lessee shall make the investigation and remediation
thereof required by the Applicable Requirements and this Lease shall continue in
full force and effect, but subject to Lessor's rights under Paragraph 6.2(d) and
Paragraph 13), Lessor may, at Lessor's option, either (i) investigate and
remediate such Hazardous Substance Condition, if required, as soon as reasonably
possible at Lessor's expense, in which event this Lease shall continue in full
force and effect, or (ii) if the estimated cost to remediate such condition
exceeds twelve (12) times the then monthly Base Rent or $100,000, whichever is
greater, give written notice to Lessee, within thirty (30) days after receipt by
Lessor of knowledge of the occurrence of such Hazardous Substance Condition, of
Lessor's desire to terminate this Lease as of the date sixty (60) days following
the date of such notice. In the event Lessor elects to give a termination
notice, Lessee may, within ten (10) days thereafter, give written notice to
Lessor of Lessee's commitment to pay the amount by which the cost of the
remediation of such Hazardous Substance Condition exceeds an amount equal to
twelve (12) times the then monthly Base Rent or $100,000, whichever is greater.
Lessee shall provide Lessor with said funds or satisfactory assurance thereof
within thirty (30) days following such commitment. In such event, this Lease
shall continue in full force and effect, and Lessor shall proceed to make such
remediation as soon as reasonably possible after the required funds are
available. If Lessee does not give such notice and provide the required funds or
assurance thereof within the time provided, this Lease shall terminate as of the
date specified in Lessor's notice of termination.
6.3 LESSEE'S COMPLIANCE WITH APPLICABLE REQUIREMENTS. Except as otherwise
provided in this Lease, Lessee shall, at Lessee's sole expense, fully,
diligently and in a timely manner, materially comply with all Applicable
Requirements, the requirements of any applicable fire insurance underwriter or
rating bureau, and the recommendations of Lessor's engineers and/or consultants
which relate in any manner to the Premises, without regard to whether said
requirements are now in effect or become effective after the Start Date. Lessee
shall, within ten (10) days after receipt of Lessor's written request, provide
Lessor with copies of all permits and other documents, and other information
evidencing Lessee's compliance with any Applicable Requirements specified by
Lessor, and shall immediately upon receipt, notify Lessor in writing (with
copies of any documents involved) of any threatened or actual claim, notice,
citation, warning, complaint or report pertaining to or involving the failure of
Lessee or the Premises to comply with any Applicable Requirements.
6.4 INSPECTION; COMPLIANCE. Lessor and Lessor's "Lender" (as defined in
Paragraph 30 below) and consultants shall have the right to enter into Premises
at any time, in the case of an emergency, and otherwise at reasonable times, for
the purpose of inspecting the condition of the Premises and for verifying
compliance by Lessee with this Lease. The cost of any such inspections shall be
paid by Lessor, unless a violation of Applicable Requirements, or a
contamination is found to exist or be imminent, or the inspection is requested
or ordered by a governmental authority. In such case, Lessee shall upon request
reimburse Lessor for the cost of such inspections, so long as such inspection is
reasonably related to the violation or contamination.
7. MAINTENANCE; REPAIRS, UTILITY INSTALLATIONS; TRADE FIXTURES AND
ALTERNATIONS.
7.1 LESSEE'S OBLIGATIONS.
(a) IN GENERAL. Subject to the provisions of Paragraph 2.2
(Condition), 2.3 (Compliance with Covenants, Restrictions and Building Code),
6.3 (Lessee's Compliance with Applicable Requirements), 7.2 (Lessor's
Obligations), 9 (Damage and Destruction), and 14 (Condemnation), Lessee shall,
at Lessee's sole expense, keep the Premises, Utility Installations, and
Alterations in good order, condition and repair (whether or not the portion of
the Premises requiring repairs, or the means of repairing the same, are
reasonably or readily accessible to Lessee, and whether or not the need for such
repairs occurs as a result of Lessee's use, any prior use, the elements or the
age of such portion of the
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Lessor shall keep the surface and structural elements of the roof, foundations,
and bearing walls in good repair (see paragraph 7 2) Lessee, in keeping the
Premises in good order, condition and repair, shall exercise and perform good
maintenance practices. Lessee's obligations shall include restorations,
replacements or renewals when necessary to keep the Premises and all
improvements thereon or a part thereof in good order, condition and state of
repair. Lessee shall, during the term of this Lease, keep the exterior
appearance of the Building in a first-class condition (including, e.g., graffiti
removal) consistent with the exterior appearance of other similar facilities of
comparable age and size in the vicinity, including, when necessary,
(b) SERVICE CONTRACTS. Lessee shall, at Lessee's sole expense, procure
and maintain contracts, with copies to Lessor, in customary form and substance
for, and with contractors specializing and experienced in the maintenance of the
following equipment and improvements ("Basic Elements"), if any, if and when
installed on the Premises: (i) HVAC equipment, (iii) fire extinguishing systems,
and/or smoke detection, and (viii) any other equipment, if reasonably required
by Lessor.
(c) REPLACEMENT. Subject to Lessee's indemnification of Lessor as set
forth in Paragraph 8.7 below, and without relieving Lessee of liability
resulting from Lessee's failure to exercise and perform good maintenance
practices, if the Basic Elements described in Paragraph 7 1(b) cannot be
repaired other than at a cost which is in excess of 50% of the cost of replacing
such Basic Elements, then such Basic Elements shall be replaced by Lessor, and
the cost thereof shall be prorated between the Parties and Lessee shall only be
obligated to pay, each month during the remainder of the term of this Lease, on
the date on which Base Rent is due, an amount equal to the product of
multiplying the cost of such replacement by a fraction, the numerator of which
is one, and the denominator of which is the number of months of the useful life
of such replacement as such useful life is specified pursuant to Federal income
tax regulations or guidelines for depreciation thereof (including interest on
the unamortized balance as is then commercially reasonable in the judgment of
Lessor's accountants), with Lessee reserving the right to prepay its obligation
at any time.
7.2 LESSOR'S OBLIGATIONS. Subject to the provisions of Paragraphs 2.2
(Condition), 2 3 (Compliance with Covenants, Restrictions and Building Code), 9
(Damage or Destruction) and 14 (Condemnation), it is intended by the Parties
hereto that Lessor have no obligation, in any manner whatsoever, to repair and
maintain the Premises, or the equipment therein, all of which obligations are
intended to be that of the Lessee, except for the surface and structural
elements of the roof, foundations and bearing walls, the repair of which shall
be the responsibility of-Lessor upon receipt of written notice that such a
repair is necessary. It is the intention of the Parties that the terms of this
Lease govern the respective obligations of the Parties as to maintenance and
repair of the Premises, and they expressly waive the benefit of any statute now
or hereafter in effect to the extent it is inconsistent with the terms of this
Lease.
7.3 UTILITY INSTALLATIONS; TRADE FIXTURES; ALTERATIONS.
(a) DEFINITIONS; CONSENT REQUIRED. The term "UTILITY INSTALLATIONS"
refers to all floor and window coverings, air lines, power panels, electrical
distribution, security and fire protection systems and signs, communication
systems, lighting fixtures, HVAC equipment, plumbing, and fencing in or on the
Premises. The term "TRADE FIXTURES" shall mean Lessee's machinery and equipment
that can be removed without doing material damage to the Premises. The term
"ALTERATIONS" shall mean any modification of the improvements, other than
Utility Installations or Trade Fixtures, whether by addition or deletion.
"LESSEE OWNED ALTERATIONS AND/OR UTILITY INSTALLATIONS" are defined as
Alterations and/or Utility Installations made by Lessee that are not yet owned
by Lessor pursuant to Paragraph 7.4(a). Lessee shall not make any Alterations or
Utility Installations to the Premises without Lessor's prior written consent.
Lessee may, however, make non-structural Utility Installations to the interior
of the Premises (excluding the roof) without such consent but upon notice to
Lessor, as long as they are not visible from the outside, do not involve
puncturing, relocating or removing the roof or any existing walls, and the
cumulative cost thereof during this Lease as extended does not exceed $50,000 in
the aggregate or $10,000 in any one year.
(b) CONSENT. Any Alterations or Utility Installations that Lessee
shall desire to make and which require the consent of the Lessor shall be
presented to Lessor in written form with detailed plans. Consent shall be deemed
conditioned upon Lessee's: (i) acquiring all applicable governmental permits,
(ii) furnishing Lessor with copies of both the permits and the plans and
specifications prior to commencement of the work, and (iii) compliance with all
conditions of said permits and other Applicable Requirements in a prompt and
expeditious manner. Any Alterations or Utility Installations shall be performed
in a workmanlike manner with good and sufficient materials. Lessee shall
promptly upon completion furnish Lessor with as-built plans and specifications.
For work which costs an amount equal to the greater of one month's Base Rent, or
$10,000, Lessor may condition its consent upon Lessee providing a lien and
completion bond in an amount equal to one and one-half times the estimated cost
of such Alteration or Utility Installation and/or upon Lessee's posting an
additional Security Deposit with Lessor.
(c) INDEMNIFICATION. Lessee shall pay, when due, all claims for labor
or materials furnished or alleged to have been furnished to or for Lessee at or
for use on the Premises, which claims are or may be secured by any mechanic's or
materialmen's lien against the Premises or any interest therein. Lessee shall
give Lessor not less than ten (10) days' notice prior to the commencement of any
work in, on or about the Premises, and Lessor shall have the right to post
notices of non-responsibility. If Lessee shall contest the validity of any such
lien, claim or demand, then Lessee shall, at its sole expense defend and protect
itself, Lessor and the Premises against the same and shall pay and satisfy any
such adverse judgment that may be rendered thereon before the enforcement
thereof. If Lessor shall require, Lessee shall furnish and surety bond in an
amount equal to one and one-half times the amount of such contested lien, claim
or demand, indemnifying Lessor against liability for the same. If Lessor elects
to participate in any such action, Lessee shall pay Lessor's attorneys' fees and
costs.
7.4 OWNERSHIP; REMOVAL; SURRENDER; AND RESTORATION.
(a) OWNERSHIP. Subject to Lessor's right to require removal or elect
ownership as hereinafter provided, all Alterations and Utility Installations
made by Lessee shall be the property of Lessee, but considered a part of the
Premises. Lessor may, at any time, elect in writing to be the owner of all or
any specified part of the Lessee Owned Alterations and Utility Installations.
Unless otherwise instructed per Paragraph 7.4(b) hereof, all Lessee Owned
Alterations and Utility Installations shall, at the expiration or termination of
this Lease, become the property of Lessor and be surrendered by Lessee with the
Premises.
(c) SURRENDER/RESTORATION. Lessee shall surrender the Premises by the
Expiration Date or any earlier termination date, with all of the improvements,
parts and surfaces thereof broom clean and free of debris, and in good operating
order, condition and state of repair, ordinary wear and tear excepted. "Ordinary
wear and tear" shall not include any damage or deterioration that would have
been prevented by good maintenance practice. Lessee shall repair any damage
occasioned by the Installation, maintenance or removal of Trade Fixtures, Lessee
Owned Alterations and/or Utility Installations, furnishings, and equipment as
well as the removal of any storage tank installed by or for Lessee, and the
removal, replacement, or remediation of any soil, material or groundwater
contaminated by Lessee. Trade Fixtures shall remain the property of Lessee and
shall be removed by Lessee. The failure by Lessee to timely vacate the Premises
pursuant to this Paragraph 7.4(c) without the express written consent of Lessor
shall constitute a holdover under the provisions of Paragraph 26 below.
8. INSURANCE; INDEMNITY.
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8.2 LIABILITY INSURANCE.
(a) CARRIED BY LESSEE. Lessee shall obtain and keep in force a
Commercial General Liability Policy of Insurance protecting Lessee and Lessor
against claims for bodily injury, personal injury and property damage based upon
or arising out of the ownership, use, occupancy or maintenance of the Premises
and all areas appurtenant thereto. Such insurance shall be on an occurrence
basis providing single limit coverage in an amount not less than $2,000,000 per
occurrence with an "ADDITIONAL INSURED-MANAGERS OR LESSORS OF PREMISES
ENDORSEMENT" and contain the "AMENDMENT OF THE POLLUTION EXCLUSION ENDORSEMENT"
for damage caused by heat, smoke or fumes from a hostile fire. The Policy shall
not contain any intra-insured exclusions as between insured persons or
organizations, but shall include coverage for liability assumed under this Lease
as an "insured contract" for the performance of Lessee's indemnity obligations
under this Lease. The limits of said insurance shall not, however, limit the
liability of Lessee nor relieve Lessee of any obligation hereunder. All
insurance carried by Lessee shall be primary to and not contributory with any
similar insurance carried by Lessor, whose insurance shall be considered excess
insurance only.
(b) CARRIED BY LESSOR. Lessor shall maintain liability insurance as
described in Paragraph 8.2(a), in addition to, and not in lieu of, the insurance
required to be maintained by Lessee. Lessee shall not be named as an additional
insured therein.
8.3 PROPERTY INSURANCE - BUILDING, IMPROVEMENTS AND RENTAL VALUE.
(a) BUILDING AND IMPROVEMENTS. The Insuring Party shall obtain and
keep in force a policy or policies in the name of Lessor, with loss payable to
Lessor, any groundlessor, and to any Lender(s) insuring loss or damage to the
Premises. The amount of such insurance shall be equal to the full replacement
cost of the Premises, as the same shall exist from time to time, or the amount
required by any Lenders, but in no event more than the commercially reasonable
and available insurable value thereof. If Lessor is the Insuring Party, however,
Lessee Owned Alterations and Utility Installations, Trade Fixtures, and Lessee's
personal property shall be insured by Lessee under Paragraph 8.4 rather than by
Lessor. If the coverage is available and commercially appropriate, such policy
or policies shall insure against all risks of direct physical loss or damage
(except the perils of flood and/or earthquake unless required by a Lender or
included in the Base Premium), including coverage for debris removal and the
enforcement of any Applicable Requirements requiring the upgrading, demolition,
reconstruction or replacement of any portion of the Premises as the result of a
covered loss. Said policy or policies shall also contain an agreed valuation
provision in lieu of any coinsurance clause, waiver of subrogation, and
inflation guard protection causing an increase in the annual property insurance
coverage amount by a factor of not less than the adjusted U.S. Department of
Labor Consumer Price Index for All Urban Consumers for the city nearest to where
the Premises are located.
(b) RENTAL VALUE. The Insuring Party shall obtain and keep in force a
policy or policies in the name of Lessor, with loss payable to Lessor and any
Lender, insuring the loss of the full Rent for one (1) year. Said insurance
shall provide that in the event the Lease is terminated by reason of an insured
loss, the period of indemnity for such coverage shall be extended beyond the
date of the completion of repairs or replacement of the Premises, to provide for
one full year's loss of Rent from the date of any such loss. Said insurance
shall contain an agreed valuation provision in lieu of any coinsurance clause,
and the amount of coverage shall be adjusted annually to reflect the projected
Rent otherwise payable by Lessee, for the next twelve (12) month period.
(c) ADJACENT PREMISES. If the Premises are part of a larger building,
or of a group of buildings owned by Lessor which are adjacent to the Premises,
the Lessee shall pay for any increase in the premiums for the property insurance
of such building or buildings if said increase is caused by Lessee's acts,
omissions, use or occupancy of the Premises.
8.4 LESSEE'S PROPERTY/BUSINESS INTERRUPTION INSURANCE.
(a) PROPERTY DAMAGE. Lessee shall obtain and maintain insurance
coverage on all of Lessee's personal property, Trade Fixtures, and Lessee Owned
Alterations and Utility Installations. Such insurance shall be full replacement
cost coverage with a deductible of not to exceed $1,000 per occurrence. The
proceeds from any such insurance shall be used by Lessee for the replacement of
personal property, Trade Fixtures and Lessee Owned Alterations and Utility
Installations. Lessee shall provide Lessor with written evidence that such
insurance is in force.
(b) BUSINESS INTERRUPTION. Lessee shall obtain and maintain loss of
income and extra expense insurance in amounts as will reimburse Lessee for
direct or indirect loss of earnings attributable to all perils commonly insured
against by prudent lessees in the business of Lessee or attributable to
prevention of access to the Premises as a result of such perils.
(c) NO REPRESENTATION OF ADEQUATE COVERAGE. Lessor makes no
representation that the limits or forms of coverage of insurance specified
herein are adequate to cover Lessee's property, business operations or
obligations under this Lease.
8.5 INSURANCE POLICIES. Insurance required herein shall be by companies
duly licensed or admitted to transact business in the state where the Premises
are located, and maintaining during the policy term a "General Policyholders
Rating" of at least B+, V, as set forth in the most current issue of "Best's
Insurance Guide", or such other rating as may be required by a Lender. Lessee
shall not do or permit to be done anything which invalidates the required
insurance policies. Lessee shall, prior to the Start Date, deliver to Lessor
certified copies of policies of such insurance or certificates evidencing the
existence and amounts of the required insurance. No such policy shall be
cancelable or subject to modification except after thirty (30) days prior
written notice to Lessor Lessee shall, at least thirty (30) days prior to the
expiration of such policies, furnish Lessor with evidence of renewals or
"Insurance binders" evidencing renewal thereof, or Lessor may order such
insurance and charge the cost thereof to Lessee, which amount shall be payable
by Lessee to Lessor upon demand. Such policies shall be for a term of at least
one year, or the length of the remaining term of this Lease, whichever is less.
If either Party shall fail to procure and maintain the insurance required to be
carried by it, the other Party may, but shall not be required to, procure and
maintain the same.
8.6 WAIVER OF SUBROGATION. Without affecting any other rights or remedies,
Lessee and Lessor each hereby release and relieve the other, and waive their
entire right to recover damages against the other, for loss of or damage to its
property arising out of or incident to the perils required to be insured against
herein. The effect of such releases and waivers is not limited by the amount of
insurance carried or required, or by any deductibles applicable hereto. The
Parties agree to have their respective property damage insurance carriers waive
any right to subrogation that such companies may have against Lessor or Lessee,
as the case may be, so long as the insurance is not invalidated thereby
8.7 INDEMNITY. Except for Lessor's gross negligence or willful misconduct,
Lessee shall indemnify, protect, defend and hold harmless the Premises, Lessor
and its agents, Lessor's master or ground lessor, partners and Lenders, from and
against any and all claims, loss of rents and/or damages, liens, judgments,
penalties, attorneys' and consultants' fees, expenses and/or liabilities arising
out of, involving, or in connection with, the use and/or occupancy of the
Premises by Lessee. If any action or proceeding is brought against Lessor by
reason of any of the foregoing matters, Lessee shall upon notice defend the same
at Lessee's expense by counsel reasonably satisfactory to Lessor and Lessor
shall cooperate with Lessee in such defense. Lessor need not have first paid any
such claim in order to be defended or indemnified.
8.8 EXEMPTION OF LESSOR FROM LIABILITY. Lessor shall not be liable for
injury or damage to the person or goods, wares, merchandise or other property of
Lessee, Lessee's employees, contractors, invitees, customers, or any other
person in or about the Premises, whether such damage or injury is caused by or
results from fire, steam, electricity, gas, water or rain, or from the breakage,
leakage, obstruction or other defects of pipes, fire sprinklers, wires,
appliances, plumbing, HVAC or lighting fixtures, or from any other cause,
whether the said injury or damage results from conditions arising upon the
Premises or upon other portions of the Building of which the Premises are a
part, or from other sources or places. Lessor shall not be liable for any
damages arising from any act or neglect of any other tenant of Lessor.
Notwithstanding Lessor's negligence or breach of this Lease, Lessor shall under
no circumstances be liable for injury to Lessee's business or for any loss of
income or profit therefrom.
Initials /s/ MJM, GI, JA
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9. DAMAGE OR DESTRUCTION.
9.1 DEFINITIONS.
(a) "PREMISES PARTIAL DAMAGE" shall mean damage or destruction to the
improvements on the Premises, other than Lessee Owned Alterations, Utility
Installations and Trade Fixtures, which can reasonably be repaired in six (6)
months or less from the date of the damage or destruction. Lessor shall notify
Lessee in writing within thirty (30) days from the date of the damage or
destruction as to whether or not the damage is Partial or Total.
(b) "PREMISES TOTAL DESTRUCTION" shall mean damage or destruction to
the Premises, other than Lessee Owned Alterations and Utility Installations and
Trade Fixtures, which cannot reasonably be repaired in six (6) months or less
from the date of the damage or destruction Lessor shall notify Lessee in writing
within thirty (30) days from the date of the damage or destruction as to whether
or not the damage is Partial or Total.
(c) "INSURED LOSS" shall mean damage or destruction to improvements on
the Premises, other than Lessee Owned Alterations and Utility Installations and
Trade Fixtures, which was caused by an event required to be covered by the
insurance described in Paragraph 8.3(a). irrespective of any deductible amounts
or coverage limits involved.
(d) "REPLACEMENT COST" shall mean the cost to repair or rebuild the
improvements owned by Lessor at the time of the occurrence to their condition
existing immediately prior thereto, including demolition, debris removal and
upgrading required by the operation of Applicable Requirements, and without
deduction for depreciation.
(e) "HAZARDOUS SUBSTANCE CONDITION" shall mean the occurrence or
discovery of a condition involving the presence of, or a contamination by, a
Hazardous Substance as defined in Paragraph 6.2(a), in, on, or under the
Premises.
9.2 PARTIAL DAMAGE - INSURED LOSS. If a Premises Partial Damage that is an
Insured Loss occurs, then Lessor shall, at Lessor's expense, repair such damage
(but not Lessee's Trade Fixtures or Lessee Owned Alterations and Utility
Installations) as soon as reasonably possible and this Lease shall continue in
full force and effect; provided, however, that Lessee shall, at Lessor's
election, make the repair of any damage or destruction the total cost to repair
of which is $10,000 or less, and, in such event, Lessor shall make any
applicable insurance proceeds available to Lessee on a reasonable basis for that
purpose. Notwithstanding the foregoing, if the required insurance was not in
force or the insurance proceeds are not sufficient to effect such repair, the
Insuring Party shall promptly contribute the shortage in proceeds as and when
required to complete said repairs. In the event, however, such shortage was due
to the fact that, by reason of the unique nature of the improvements, full
replacement cost insurance coverage was not commercially reasonable and
available, Lessor shall have no obligation to pay for the shortage in insurance
proceeds or to fully restore the unique aspects of the Premises unless Lessee
provides Lessor with the funds to cover same, or adequate assurance thereof,
within ten (10) days following receipt of written notice of such shortage and
request therefor. If Lessor receives said funds or adequate assurance thereof
within said ten (10) day period, the party responsible for making the repairs
shall complete them as soon as reasonably possible and this Lease shall remain
in full force and effect. If such funds or assurance are not received. Lessor
may nevertheless elect by written notice to Lessee within ten (10) days
thereafter to. (i) make such restoration and repair as is commercially
reasonable with Lessor paying any shortage in proceeds, in which case this Lease
shall remain in full force and effect; or (ii) have this Lease terminate thirty
(30) days thereafter. Lessee shall not be entitled to reimbursement of any funds
contributed by Lessee to repair any such damage or destruction. Premises Partial
Damage due to flood or earthquake shall be subject to Paragraph 9.3,
notwithstanding that there may be some insurance coverage, but the net proceeds
of any such insurance shall be made available for the repairs if made by either
Party.
9.3 PARTIAL DAMAGE - UNINSURED LOSS. If a Premises Partial Damage that is
not an Insured Loss occurs, unless caused by a negligent or willful act of
Lessee (in which event Lessee shall make the repairs at Lessee's expense),
Lessor may either: (i) repair such damage as soon as reasonably possible at
Lessor's expense, in which event this Lease shall continue in full force and
effect, or (ii) terminate this Lease by giving written notice to Lessee within
thirty (30) days after receipt by Lessor of knowledge of the occurrence of such
damage. Such termination shall be effective sixty (60) days following the date
of such notice. In the event Lessor elects to terminate this Lease, Lessee shall
have the right within ten (10) days after receipt of the termination notice to
give written notice to Lessor of Lessee's commitment to pay for the repair of
such damage without reimbursement from Lessor. Lessee shall provide Lessor with
said funds or satisfactory assurance thereof within thirty (30) days after
making such commitment. In such event this Lease shall continue in full force
and effect, and Lessor shall proceed to make such repairs as soon as reasonably
possible after the required funds are available. If Lessee does not make the
required commitment, this Lease shall terminate as of the date specified in the
termination notice.
9.4 TOTAL DESTRUCTION. Notwithstanding any other provision hereof, if a
Premises Total Destruction occurs, this Lease shall terminate sixty (60) days
following such Destruction. If the damage or destruction was caused by the gross
negligence or willful misconduct of Lessee. Lessor shall have the right to
recover Lessor's damages from Lessee, except as provided in Paragraph 8.6.
9.5 DAMAGE NEAR END OF TERM. If at any time during the last six (6) months
of this Lease there is damage for which the cost to repair exceeds one (1)
month's Base Rent, whether or not an Insured Loss, Lessor may terminate this
Lease effective sixty (60) days following the date of occurrence of such damage
by giving a written termination notice to Lessee within thirty (30) days after
the date of occurrence of such damage. Notwithstanding the foregoing, if Lessee
at that time has an exercisable option to extend this Lease or to purchase the
Premises, then Lessee may preserve this Lease by, (a) exercising such option and
(b) providing Lessor with any shortage in insurance proceeds (or adequate
assurance thereof) needed to make the repairs on or before the earlier of (i)
the date which is ten days after Lessee's receipt of Lessor's written notice
purporting to terminate this Lease, or (ii) the day prior to the date upon which
such option expires. If Lessee duly exercises such option during such period and
provides Lessor with funds (or adequate assurance thereof) to cover any shortage
in insurance proceeds, Lessor shall, at Lessor's commercially reasonable
expense, repair such damage as soon as reasonably possible and this Lease shall
continue in full force and effect. If Lessee fails to exercise such option and
provide such funds or assurance during such period, then this Lease shall
terminate on the date specified in the termination notice and Lessee's option
shall be extinguished.
9.6 ABATEMENT OF RENT; LESSEE'S REMEDIES.
(a) ABATEMENT. In the event of Premises Partial Damage or Premises
Total Destruction or a Hazardous Substance Condition for which Lessee is not
responsible under this Lease, the Rent payable by Lessee for the period required
for the repair, remediation or restoration of such damage shall be abated in
proportion to the degree to which Lessee's use of the Premises is impaired, but
not to exceed the proceeds received from the Rental Value insurance. All other
obligations of Lessee hereunder shall be performed by Lessee, and Lessor shall
have no liability for any such damage, destruction, remediation, repair or
restoration except as provided herein.
(b) REMEDIES. If Lessor shall be obligated to repair or restore the
Premises and does not commence, in a substantial and meaningful way, such repair
or restoration within ninety (90) days after such obligation shall accrue,
Lessee may, at any time prior to the commencement of such repair or restoration,
give written notice to Lessor and to any Lenders of which Lessee has actual
notice, of Lessee's election to terminate this Lease on a date not less than
sixty (60) days following the giving of such notice. If Lessee gives such notice
and such repair or restoration is not commenced within thirty (30) days
thereafter, this Lease shall terminate as of the date specified in said notice.
If the repair or restoration is commenced within said thirty (30) days, this
Lease shall continue in full force and effect. "COMMENCE" shall mean either the
unconditional authorization of the preparation of the required plans, or the
beginning of the actual work on the Premises, whichever first occurs.
9.7 TERMINATION-ADVANCE PAYMENTS. Upon termination of this Lease pursuant
to Paragraph 6.2(g) or Paragraph 9, an equitable adjustment shall be made
concerning advance Base Rent and any other advance payments made by Lessee to
Lessor. Lessor shall, in addition, return to Lessee so much of Lessee's Security
Deposit as has not been, or is not then required to be, used by Lessor.
9.8 WAIVE STATUTES. Lessor and Lessee agree that the terms of this Lease
shall govern the effect of any damage to or destruction of the Premises with
respect to the termination of this Lease and hereby waive the provisions of any
present or future statute to the extent inconsistent herewith.
10. REAL PROPERTY TAXES.
10.1 DEFINITION OF "REAL PROPERTY TAXES." As used herein, the term "REAL
PROPERTY TAXES" shall include any form of assessment; real estate, general,
special, ordinary or extraordinary, or rental levy or tax (other than
inheritance, personal income or estate taxes); improvement
Initials /s/ MJM, JA, GI
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bond; and/or license fee imposed upon or levied against any legal or equitable
interest of Lessor in the Premises, Lessor's right to other income therefrom,
and/or Lessor's business of leasing, by any authority having the direct or
indirect power to tax and where the funds are generated with reference to the
Building address and where the proceeds so generated are to be applied by the
city, county or other local taxing authority of a jurisdiction within which the
Premises are located. The term "REAL PROPERTY TAXES" shall also include any tax,
fee, levy, assessment or charge, or any increase therein, imposed by reason of
events occurring during the term of this Lease, including but not limited to, a
change in the ownership of the Premises.
(b) ADVANCE PAYMENT. In the event Lessee incurs a late charge on any
Rent payment, Lessor may, at Lessor's option, estimate the current Real Property
Taxes, and require that the Tax Increase be paid in advance to Lessor by Lessee,
either: (i) in a lump sum amount equal to the amount due, at least twenty (20)
days prior to the applicable delinquency date; or (ii) monthly in advance with
the payment of the Base Rent. If Lessor elects to require payment monthly in
advance, the monthly payment shall be an amount equal to the amount of the
estimated installment of the Tax Increase divided by the number of months
remaining before the month in which said installment becomes delinquent. When
the actual amount of the applicable Tax Increase is known, the amount of such
equal monthly advance payments shall be adjusted as required to provide the
funds needed to pay the applicable Tax Increase. If the amount collected by
Lessor is insufficient to pay the Tax Increase when due, Lessee shall pay
Lessor, upon demand, such additional sums as are necessary to pay such
obligations. All moneys paid to Lessor under this Paragraph may be intermingled
with other moneys of Lessor and shall not bear interest. In the event of a
Breach by Lessee in the performance of its obligations under this Lease, then
any balance of funds paid to Lessor under the provisions of this Paragraph may
at the option of Lessor, be treated as an additional Security Deposit.
10.3 JOINT ASSESSMENT. If the Premises are not separately assessed,
Lessee's liability shall be an equitable proportion of the Tax Increase for all
of the land and improvements included within the tax parcel assessed, such
proportion to be conclusively determined by Lessor from the respective
valuations assigned in the assessor's work sheets or such other information as
may be reasonably available.
10.4 PERSONAL PROPERTY TAXES. Lessee shall pay, prior to delinquency, all
taxes assessed against and levied upon Lessee Owned Alterations, Utility
Installations, Trade Fixtures, furnishings, equipment and all personal property
of Lessee. When possible, Lessee shall cause such property to be assessed and
billed separately from the real property of Lessor. If any of Lessee's said
personal property shall be assessed with Lessor's real property, Lessee shall
pay Lessor the taxes attributable to Lessee's property within ten (10) days
after receipt of a written statement.
11. UTILITIES. Lessee shall pay for all water, gas, heat, light, power,
telephone, trash disposal and other utilities and services supplied to the
Premises, together with any taxes thereon. If any such services are not
separately metered to Lessee, Lessee shall pay a reasonable proportion, to be
determined by Lessor, of all charges jointly metered.
12. ASSIGNMENT AND SUBLETTING.
12.1 LESSOR'S CONSENT REQUIRED.
(a) Lessee shall not voluntarily or by operation of law assign,
transfer, mortgage or encumber (collectively, "ASSIGN OR ASSIGNMENT") or sublet
all or any part of Lessee's interest in this Lease or in the Premises without
Lessor's prior written consent.
(b) A change in the control of Lessee shall constitute an assignment
requiring consent. The transfer, on a cumulative basis, of twenty-five percent
(25%) or more of the voting control of Lessee shall constitute a change in
control for this purpose.
(c) The involvement of Lessee or its assets in any transaction, or
series of transactions (by way of merger, sale, acquisition, financing,
transfer, leveraged buy-out or otherwise), whether or not a formal assignment or
hypothecation of this Lease or Lessee's assets occurs, which results or will
result in a reduction of the Net Worth of Lessee by an amount greater than
twenty-five percent (25%) of such Net Worth as it was represented at the time of
the execution of this Lease or at the time of the most recent assignment to
which Lessor has consented, or as it exists immediately prior to said
transaction or transactions constituting such reduction, whichever was or is
greater, shall be considered an assignment of this Lease to which Lessor may
withhold its consent. "NET WORTH OF LESSEE" shall mean the net worth of Lessee
(excluding any guarantors) established under generally accepted accounting
principles.
(d) An assignment or subletting without consent shall, at Lessor's
option, be a Default curable after notice per Paragraph 13.1(c), or a noncurable
Breach without the necessity of any notice and grace period. If Lessor elects to
treat such unapproved assignment or subletting as a noncurable Breach, Lessor
may either: (i) terminate this Lease, or (ii) upon thirty (30) days written
notice, increase the monthly Base Rent to one hundred ten percent (110%) of the
Base Rent then in effect. Further, in the event of such Breach and rental
adjustment, (i) the purchase price of any option to purchase the Premises held
by Lessee shall be subject to similar adjustment to one hundred ten percent
(110%) of the price previously in effect, and (ii) all fixed and non-fixed
rental adjustments scheduled during the remainder of the Lease term shall be
increased to One Hundred Ten Percent (110%) of the scheduled adjusted rent.
(e) Lessee's remedy for any breach of Paragraph 12.1 by Lessor shall
be limited to compensatory damages and/or injunctive relief
12.2 TERMS AND CONDITIONS APPLICABLE TO ASSIGNMENT AND SUBLETTING.
(a) Regardless of Lessor's consent, any assignment or subletting shall
not: (i) be effective without the express written assumption by such assignee or
sublessee of the obligations of Lessee under this Lease; (ii) release Lessee of
any obligations hereunder; or (iii) after the primary liability of Lessee for
the payment of Rent or for the performance of any other obligations to be
performed by Lessee.
(b) Lessor may accept Rent or performance of Lessee's obligations from
any person other than Lessee pending approval or disapproval of an assignment.
Neither a delay in the approval or disapproval of such assignment nor the
acceptance of Rent or performance shall constitute a waiver or estoppel of
Lessor's right to exercise its remedies for Lessee's Default or Breach.
(c) Lessor's consent to any assignment or subletting shall not
constitute a consent to any subsequent assignment or subletting
(d) In the event of any Default or Breach by Lessee, Lessor may
proceed directly against Lessee, any Guarantors or anyone else responsible for
the performance of Lessee's obligations under this Lease, including any assignee
or sublessee, without first exhausting Lessor's remedies against any other
person or entity responsible therefore to Lessor, or any security held by
Lessor.
(e) Each request for consent to an assignment or subletting shall be
in writing, accompanied by information relevant to Lessor's determination as to
the financial and operational responsibility and appropriateness of the proposed
assignee or sublessee, including but not limited to the intended use and/or
required modification of the Premises, if any, together with a fee of $1,000 or
ten percent (10%) of the current monthly Base Rent applicable to the portion of
the Premises which is the subject of the proposed assignment or sublease,
whichever is greater, as consideration for Lessor's considering and processing
said request. Lessee agrees to provide Lessor with such other or additional
information and/or documentation as may be reasonably requested.
(f) Any assignee of, or sublessee under, this Lease shall, by reason
of accepting such assignment or entering into such sublease, be deemed to have
assumed and agreed to conform and comply with each and every term, covenant,
condition and obligation herein to be observed or performed by Lessee during the
term of said assignment or sublease, other than such obligations as are contrary
to or inconsistent with provisions of an assignment or sublease to which Lessor
has specifically consented to in writing.
12.3 ADDITIONAL TERMS AND CONDITIONS APPLICABLE TO SUBLETTING. The
following terms and conditions shall apply to any subletting by Lessee of all or
any part of the Premises and shall be deemed included in all subleases under
this Lease whether or not expressly incorporated therein:
Initials /s/ MJM, JA, GI
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(a) Lessee hereby assigns and transfers to Lessor all of Lessee's
interest in all Rent payable on any sublease, and Lessor may collect such Rent
and apply same toward Lessee's obligations under this Lease, provided, however,
that until a Breach shall occur in the performance of Lessee's obligations,
Lessee may collect said Rent. Lessor shall not, by reason of the foregoing or
any assignment of such sublease, nor by reason of the collection of Rent, be
deemed liable to the sublessee for any failure of Lessee to perform and comply
with any of Lessee's obligations to such sublessee. Lessee hereby irrevocably
authorizes and directs any such sublessee, upon receipt of a written notice from
Lessor stating that a Breach exists in the performance of Lessee's obligations
under this Lease, to pay to Lessor all Rent due and to become due under the
sublease. Sublessee shall rely upon any such notice from Lessor and shall pay
all Rents to Lessor without any obligation or right to inquire as to whether
such Breach exists, notwithstanding any claim from Lessee to the contrary.
(b) In the event of a Breach by Lessee, Lessor may, at its option,
require sublessee to attorn to Lessor, in which event Lessor shall undertake the
obligations of the sublessor under such sublease from the time of the exercise
of said option to the expiration of such sublease. provided, however, Lessor
shall not be liable for any prepaid rents or security deposit paid by such
sublessee to such sublessor or for any prior Defaults or Breaches of such
sublessor.
(c) Any matter requiring the consent of the sublessor under a sublease
shall also require the consent of Lessor
(d) No sublessee shall further assign or sublet all or any part of the
Premises without Lessor's prior written consent.
(e) Lessor shall deliver a copy of any notice of Default or Breach by
Lessee to the sublessee, who shall have the right to cure the Default of Lessee
within the grace period, if any, specified in such notice. The sublessee shall
have a right of reimbursement and offset from and against Lessee for any such
Defaults cured by the sublessee.
13. DEFAULT: BREACH; REMEDIES.
13.1 DEFAULT; BREACH. A "DEFAULT" is defined as a failure by the Lessee to
comply with or perform any of the terms, covenants, conditions or rules under
this Lease. A "BREACH" is defined as the occurrence of one or more of the
following Defaults, and the failure of Lessee to cure such Default within any
applicable grace period:
(a) The abandonment of the Premises; or the vacating of the Premises
without providing a commercially reasonable level of security, and/or Security
Deposit or where the coverage of the property insurance described in Paragraph
8.3 is jeopardized as a result thereof, or without providing reasonable
assurances to minimize potential vandalism.
(b) The failure of Lessee to make any payment of Rent or any Security
Deposit required to be made by Lessee hereunder, whether to Lessor or to a third
party, when due, to provide reasonable evidence of insurance or surety bond, or
to fulfill any obligation under this Lease which endangers or threatens life or
property, where such failure continues for a period of three (3) business days
following written notice to Lessee.
(c) The failure by Lessee to provide (i) reasonable written evidence
of compliance with Applicable Requirements, (ii) the service contracts, (iii)
the rescission of an unauthorized assignment or subletting, (iv) a Estoppel
Certificate, (v) a requested subordination, (vi) evidence concerning any
guaranty and/or Guarantor, (vii) any document requested under Paragraph 42
(easements), or (viii) any other documentation or information which Lessor may
reasonably require of Lessee under the terms of this Lease, where any such
failure continues for a period of ten (10) days following written notice to
Lessee.
(d) A Default by Lessee as to the terms, covenants, conditions or
provisions of this Lease, or of the rules adopted under Paragraph 40 hereof,
other than those described in subparagraphs 13.1(a), (b) or (c), above, where
such Default continues for a period of thirty (30) days after written notice;
provided, however, that if the nature of Lessee's Default is such that more than
thirty (30) days are reasonably required for its cure, then it shall not be
deemed to be a Breach if Lessee commences such cure within said thirty (30) day
period and thereafter diligently prosecutes such cure to completion.
(e) The occurrence of any of the following events: (i) the making of
any general arrangement or assignment for the benefit of creditors; (ii)
becoming a "DEBTOR" as defined in 11 U.S.C. Section 101 or any successor statute
thereto (unless, in the case of a petition filed against Lessee, the same is
dismissed within sixty (60) days); (iii) the appointment of a trustee or
receiver to take possession of substantially all of Lessee's assets located at
the Premises or of Lessee's interest in this Lease, where possession is not
restored to Lessee within thirty (30) days, or (iv) the attachment, execution or
other judicial seizure of substantially all of Lessee's assets located at the
Premises or of Lessee's interest in this Lease, where such seizure is not
discharged within thirty (30) days; provided, however, in the event that any
provision of this subparagraph (e) is contrary to any applicable law, such
provision shall be of no force or effect, and not affect the validity of the
remaining provisions.
(f) The discovery that any financial statement of Lessee or of any
Guarantor given to Lessor was materially false.
(g) If the performance of Lessee's obligations under this Lease is
guaranteed: (i) the death of a Guarantor; (ii) the termination of a Guarantor's
liability with respect to this Lease other than in accordance with the terms of
such guaranty; (iii) a Guarantor's becoming insolvent or the subject of a
bankruptcy filing; (iv) a Guarantor's refusal to honor the guaranty; or (v) a
Guarantor's breach of its guaranty obligation on an anticipatory basis, and
Lessee's failure, within sixty (60) days following written notice of any such
event, to provide written alternative assurance or security, which, when coupled
with the then existing resources of Lessee, equals or exceeds the combined
financial resources of Lessee and the Guarantors that existed at the time of
execution of this Lease.
13.2 REMEDIES. If Lessee fails to perform any of its affirmative duties or
obligations, within ten (10) days after written notice (or in case of an
emergency, without notice), Lessor may, at its option, perform such duty or
obligation on Lessee's behalf, including but not limited to the obtaining of
reasonably required bonds, insurance policies, or governmental licenses, permits
or approvals. The costs and expenses of any such performance by Lessor shall be
due and payable by Lessee upon receipt of invoice therefor. If any check given
to Lessor by Lessee shall not be honored by the bank upon which it is drawn,
Lessor, at its option, may require all future payments to be made by Lessee to
be by cashier's check. In the event of a Breach, Lessor may, with or without
further notice or demand, and without limiting Lessor in the exercise of any
right or remedy which Lessor may have by reason of such Breach:
(a) Terminate Lessee's right to possession of the Premises by any
lawful means, in which case this Lease shall terminate and Lessee shall
immediately surrender possession to Lessor. In such event Lessor shall be
entitled to recover from Lessee: (i) the unpaid Rent which had been earned at
the time of termination; (ii) the worth at the time of award of the amount by
which the unpaid rent which would have been earned after termination until the
time of award exceeds the amount of such rental loss that the Lessee proves
could have been reasonably avoided; (iii) the worth at the time of award of the
amount by which the unpaid rent for the balance of the term after the time of
award exceeds the amount of such rental loss that the Lessee proves could be
reasonably avoided; and (iv) any other amount necessary to compensate Lessor for
all the detriment proximately caused by the Lessee's failure to perform its
obligations under this Lease or which in the ordinary course of things would be
likely to result therefrom, including but not limited to the cost of recovering
possession of the Premises, expenses of reletting, including necessary
renovation and alteration of the Premises, reasonable attorneys' fees, and that
portion of any leasing commission paid by Lessor in connection with this Lease
applicable to the unexpired term of this Lease. The worth at the time of award
of the amount referred to in provision (iii) of the immediately preceding
sentence shall be computed by discounting such amount at the discount rate of
the Federal Reserve Bank of the District within which the Premises are located
at the time of award plus one percent (1%). Efforts by Lessor to mitigate
damages caused by Lessee's Breach of this Lease shall not waive Lessor's right
to recover damages under Paragraph 12. If termination of this Lease is obtained
through the provisional remedy of unlawful detainer, Lessor shall have the right
to recover in such proceeding any unpaid Rent and damages as are recoverable
therein, or Lessor may reserve the right to recover all or any part thereof in a
separate suit. If a notice and grace period required under Paragraph 13.1 was
not previously given, a notice to pay rent or quit, or to perform or quit given
to Lessee under the unlawful detainer statute shall also constitute the notice
required by Paragraph 13.1. In such case, the applicable grace period required
by Paragraph 13.1 and the unlawful detainer statute shall run concurrently, and
the failure of Lessee to cure the Default within the greater of the two such
grace periods shall constitute both an unlawful detainer and a Breach of this
Lease entitling Lessor to the remedies provided for in this Lease and/or by said
statute.
(b) Continue this Lease and Lessee's right to possession and recover
the Rent as it becomes due, in which event Lessee may sublet
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or assign, subject only to reasonable limitations. Acts of maintenance, efforts
to relet, and/or the appointment of a receiver to protect the Lessor's
interests, shall not constitute a termination of the Lessee's right to
possession.
(c) Pursue any other remedy now or hereafter available under the laws
or judicial decisions of the state wherein the Premises are located. The
expiration or termination of this Lease and/or the termination of Lessee's right
to possession shall not relieve Lessee from liability under any indemnity
provisions of this Lease as to matters occurring or accruing during the term
hereof or by reason of Lessee's occupancy of the Premises.
13.4 LATE CHARGES. Lessee hereby acknowledges that late payment by Lessee
of Rent will cause Lessor to incur costs not contemplated by this Lease, the
exact amount of which will be extremely difficult to ascertain. Such costs
include, but are not limited to, processing and accounting charges, and late
charges which may be imposed upon Lessor by any Lender. Accordingly, if any Rent
shall not be received by Lessor within five (5) days after such amount shall be
due, then, without any requirement for notice to Lessee, Lessee shall pay to
Lessor a one-time late charge equal to five percent of each such overdue amount.
The parties hereby agree that such late charge represents a fair and reasonable
estimate of the costs Lessor will incur by reason of such late payment.
Acceptance of such late charge by Lessor shall in no event constitute a waiver
of Lessee's Default or Breach will respect to such overdue amount, not prevent
the exercise of any of the other rights and remedies granted hereunder. In the
event that a late charge is payable hereunder, whether or not collected, for
three (3) consecutive installments of Base Rent, then notwithstanding any
provision of this Lease to the contrary. Base Rent shall, at Lessor's option,
become due and payable quarterly in advance.
13.5 INTEREST. Any monetary payment due Lessor hereunder, other than late
charges, not received by Lessor, when due as to scheduled payments (such as Base
Rent) or within thirty (30) days following the date on which it was due for non-
scheduled payment, shall bear interest from the date when due, as to scheduled
payments, or the thirty-first (31st) day after it was due as to non-scheduled
payments. The interest ("INTEREST") charged shall be equal to the prime rate
reported in the Wall Street Journal as published closest prior to the date when
due plus 4%, but shall not exceed the maximum rate allowed by law. Interest is
payable in addition to the potential late charge provided for in Paragraph 13.4.
13.6 BREACH BY LESSOR.
(a) NOTICE OF BREACH. Lessor shall not be deemed in breach of this
Lease unless Lessor fails within a reasonable time to perform an obligation
required to be performed by Lessor. For purposes of this Paragraph, a reasonable
time shall in no event be less than thirty (30) days after receipt by Lessor,
and any Lender whose name and address shall have been furnished Lessee in
writing for such purpose, of written notice specifying wherein such obligation
of Lessor has not been performed; provided, however, that if the nature of
Lessor's obligation is such that more than thirty (30) days are reasonably
required for its performance, then Lessor shall not be in breach if performance
is commenced within such thirty (30) day period and thereafter diligently
pursued to completion.
(b) PERFORMANCE BY LESSEE ON BEHALF OF LESSOR. In the event that
neither Lessor nor Lender cures said breach within thirty (30) days after
receipt of said written notice, or if having commenced said cure they do not
diligently pursue it to completion, then Lessee may elect to cure said breach at
Lessee's expense and offset from Rent an amount equal to the greater of one
month's Base Rent or the Security Deposit, and to pay an excess of such expense
under protest, reserving Lessee's right to reimbursement from Lessor. Lessee
shall document the cost of said cure and supply said documentation to Lessor.
14. CONDEMNATION. If the Premises or any portion thereof are taken under the
power of eminent domain or sold under the threat of the exercise of said power
(collectively "CONDEMNATION"), this Lease shall terminate as to the part taken
as of the date the condemning authority takes title or possession, whichever
first occurs. If more than ten percent (10%) of any building portion of the
premises, or more than twenty-five percent (25%) of the land area portion of the
premises not occupied by any building, is taken by Condemnation, Lessee may, at
Lessee's option, to be exercised in writing within ten (10) days after Lessor
shall have given Lessee written notice of such taking (or in the absence of such
notice, within ten (10) days after the condemning authority shall have taken
possession) terminate this Lease as of the date the condemning authority takes
such possession. If Lessee does not terminate this Lease in accordance with the
foregoing, this Lease shall remain in full force and effect as to the portion of
the Premises remaining, except that the Base Rent shall be reduced in proportion
to the reduction in utility of the Premises caused by such Condemnation.
Condemnation awards and/or payments shall be the property of Lessor, whether
such award shall be made as compensation for diminution in value of the
leasehold, the value of the part taken, or for severance damages; provided,
however, that Lessee shall be entitled to any compensation for Lessee's
relocation expenses, loss of business goodwill and/or Trade Fixtures, without
regard to whether or not this Lease is terminated pursuant to the provisions of
this Paragraph. All Alterations and Utility Installations made to the Premises
by Lessee, for purposes of Condemnation only, shall be considered the property
of the Lessee and Lessee shall be entitled to any and all compensation which is
payable therefor. In the event that this Lease is not terminated by reason of
the Condemnation, Lessor shall repair any damage to the Premises caused by such
Condemnation.
15. BROKERS' FEE.
15.1 ADDITIONAL COMMISSION. In addition to the payments owed pursuant to
Paragraph 1.10 above, and unless Lessor and the Brokers otherwise agree in
writing, Lessor agrees that: (a) if Lessee exercises any Option; (b) if Lessee
acquires any rights to the Premises or other premises owned by Lessor and
located within the same Project, if any, within which the Premises is located;
(c) if Lessee remains in possession of the Premises, with the consent of Lessor,
after the expiration of this Lease; or (d) if Base Rent is increased, whether by
agreement or operation of an escalation clause herein, then, Lessor shall pay
Brokers a fee in accordance with the schedule of said Brokers in effect at the
time of the execution of this Lease.
15.2 ASSUMPTION OF OBLIGATIONS. Any buyer or transferee of Lessor's
interest in this Lease shall be deemed to have assumed Lessor's obligation
hereunder. Each Broker shall be a third party beneficiary of the provisions of
Paragraphs 1.10, 15, 22 and 31. If Lessor fails to pay to a Broker any amounts
due as and for commissions pertaining to this Lease when due, then such amounts
shall accrue Interest. In addition, if Lessor fails to pay any amounts to
Lessee's Broker when due, Lessee's Broker may send written notice to Lessor and
Lessee of such failure and if Lessor fails to pay such amounts within ten (10)
days after said notice, Lessee shall pay said monies to its Broker and offset
such amounts against Rent. In addition, Lessee's Broker shall be deemed to be a
third party beneficiary of any commission agreement entered into by and/or
between Lessor and Lessor's Broker.
15.3 REPRESENTATIONS AND INDEMNITIES OF BROKER RELATIONSHIPS. Lessee and
Lessor each represent and warrant to the other that it has had no dealings with
any person, firm, broker or finder (other than the Brokers, if any) in
connection with this Lease, and that no one other than said named Brokers is
entitled to any commission or finder's fee in connection herewith. Lessee and
Lessor do each hereby agree to indemnify, protect, defend and hold the other
harmless from and against liability for compensation or charges which may be
claimed by any such unnamed broker, finder or other similar party by reason of
any dealings or actions of the indemnifying Party, including any costs,
expenses, attorneys' fees reasonably incurred with respect thereto.
16. ESTOPPEL CERTIFICATES.
(a) Each Party (as "RESPONDING PARTY") shall within ten (10) days
after written notice from the other Party (the "REQUESTING PARTY") execute,
acknowledge and deliver to the Requesting Party a statement in writing in form
similar to the then most current "ESTOPPEL CERTIFICATE" form published by the
American Industrial Real Estate Association, plus such additional information,
confirmation and/or statements as may be reasonably requested by the Requesting
Party.
(b) If the Responding Party shall fail to execute or deliver the
Estoppel Certificate within such ten day period the Requesting Party
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may execute an Estoppel Certificate stating that: (i) the Lease is in full force
and effect without modification except as may be represented by the Requesting
Party; (ii) there are no uncured defaults in the Requesting Party's performance,
and (iii) if Lessor is the Requesting Party, not more than one month's rent has
been paid in advance. Prospective purchasers and encumbrancers may rely upon the
Requesting Party's Estoppel Certificate, and the Responding Party shall be
estopped from denying the truth of the facts contained in said Certificate.
(c) If Lessor desires to finance, refinance, or sell the Premises, or
any part thereof, Lessee and all Guarantors shall deliver to any potential
lender or purchaser designated by Lessor such financial statements as may be
reasonably required by such lender or purchaser, including but not limited to
Lessee's financial statements for the past three (3) years. All such financial
statements shall be received by Lessor and such lender or purchaser in
confidence and shall be used only for the purposes herein set forth.
17. DEFINITION OF LESSOR. The term "LESSOR" as used herein shall mean the owner
or owners at the time in question of the fee title to the Premises, or, if this
is a sublease, of the Lessee's interest in the prior lease In the event of a
transfer of Lessor's title or interest in the Premises or this Lease, Lessor
shall deliver to the transferee or assignee (in cash or by credit) any unused
Security Deposit held by Lessor Except as provided in Paragraph 15, upon such
transfer or assignment and delivery of the Security Deposit, as aforesaid, the
prior Lessor shall be relieved of all liability with respect to the obligations
and/or covenants under this Lease thereafter to be performed by the Lessor.
Subject to the foregoing, the obligations and/or covenants in this Lease to be
performed by the Lessor shall be binding only upon the Lessor as hereinabove
defined Notwithstanding the above, and subject to the provisions of Paragraph 20
below, the original Lessor under this Lease, and all subsequent holders of the
Lessor's interest in this Lease shall remain liable and responsible with regard
to the potential duties and liabilities of Lessor pertaining to Hazardous
Substances as outlined in Paragraph 6 above.
18. SEVERABILITY. The invalidity of any provision of this Lease, as determined
by a court of competent jurisdiction, shall in no way affect the validity of any
other provision hereof.
19. DAYS. Unless otherwise specifically indicated to the contrary, the word
"days" as used in this Lease shall mean and refer to calendar days.
21. TIME OF ESSENCE. Time is of the essence with respect to the performance of
all obligations to be performed or observed by the Parties under this Lease.
22. NO PRIOR OR OTHER AGREEMENTS; BROKER DISCLAIMER. This Lease contains all
agreements between the Parties with respect to any matter mentioned herein, and
no other prior or contemporaneous agreement or understanding shall be effective.
Lessor and Lessee each represents and warrants to the Brokers that it has made,
and is relying solely upon, its own investigation as to the nature, quality,
character and financial responsibility of the other Party to this Lease and as
to the nature, quality and character of the Premises. Brokers have no
responsibility with respect thereto or with respect to any default or breach
hereof by either Party. The liability (including court costs and Attorneys'
fees), of any Broker with respect to negotiation, execution, delivery or
performance by either Lessor or Lessee under this Lease or any amendment or
modification hereto shall be limited to an amount up to the fee received by such
Broker pursuant to this Lease; provided, however, that the foregoing limitation
on each Broker's liability shall not be applicable to any gross negligence or
willful misconduct of such Broker.
23. NOTICES.
23.1 NOTICE REQUIREMENTS. All notices required or permitted by this Lease
shall be in writing and may be delivered in person (by hand or by courier) or
may be sent by regular, certified or registered mail or U.S. Postal Service
Express Mail, with postage prepaid, or by facsimile transmission, and shall be
deemed sufficiently given if served in a manner specified in this Paragraph 23.
The addresses noted adjacent to a Party's signature on this Lease shall be that
Party's address for delivery or mailing of notices. Either Party may by written
notice to the other specify a different address for notice, except that upon
Lessee's taking possession of the Premises, the Premises shall constitute
Lessee's address for notice. A copy of all notices to Lessor shall be
concurrently transmitted to such party or parties at such addresses as Lessor
may from time to time hereafter designate in writing.
23.2 DATE OF NOTICE. Any notice sent by registered or certified mail,
return receipt requested, shall be deemed given on the date of delivery shown on
the receipt card, or if no delivery date is shown, the postmark thereon. If sent
by regular mail the notice shall be deemed given forty-eight (48) hours after
the same is addressed as required herein and mailed with postage prepaid.
Notices delivered by United States Express Mail or overnight courier that
guarantee next day delivery shall be deemed given twenty-four (24) hours after
delivery of the same to the Postal Service or courier. Notices transmitted by
facsimile transmission or similar means shall be deemed delivered upon telephone
confirmation of receipt, provided a copy is also delivered via delivery or mail.
If notice is received on a Saturday, Sunday or legal holiday, it shall be deemed
received on the next business day.
24. WAIVERS. No waiver by Lessor of the Default or Breach of any term, covenant
or condition hereof by Lessee, shall be deemed a waiver of any other term,
covenant or condition hereof, or of any subsequent Default or Breach by Lessee
of the same or of any other term, covenant or condition hereof. Lessor's consent
to, or approval of, any act shall not be deemed to render unnecessary the
obtaining of Lessor's consent to, or approval of, any subsequent or similar act
by Lessee, or be construed as the basis of an estoppel to enforce the provision
or provisions of this Lease requiring such consent. The acceptance of Rent by
Lessor shall not be a waiver of any Default or Breach by Lessee. Any payment by
Lessee may be accepted by Lessor on account of moneys or damages due Lessor,
notwithstanding any qualifying statements or conditions made by Lessee in
connection therewith, which such statements and/or conditions shall be of no
force or effect whatsoever unless specifically agreed to in writing by Lessor at
or before the time of deposit of such payment.
25. RECORDING. Either Lessor or Lessee shall, upon request of the other,
execute, acknowledge and deliver to the other a short form memorandum of this
Lease for recording purposes. The Party requesting recordation shall be
responsible for payment of any fees applicable thereto.
26. NO RIGHT TO HOLDOVER. Lessee has no right to retain possession of the
Premises or any part thereof beyond the expiration or termination of this Lease.
In the event that Lessee holds over, then the Base Rent shall be increased to
one hundred fifty percent (150%) of the Base Rent applicable during the month
immediately preceding the expiration or termination Nothing contained herein
shall be construed as consent by Lessor to any holding over by Lessee.
27. CUMULATIVE REMEDIES. No remedy or election hereunder shall be deemed
exclusive but shall, wherever possible, be cumulative with all other remedies at
law or in equity.
28. COVENANTS AND CONDITIONS; CONSTRUCTION OF AGREEMENT. All provisions of this
Lease to be observed or performed by Lessee are both covenants and conditions.
In construing this Lease, all headings and titles are for the convenience of the
parties only and shall not be considered a part of this Lease. Whenever required
by the context, the singular shall include the plural and vice versa. This Lease
shall not be construed as if prepared by one of the parties, but rather
according to its fair meaning as a whole, as if both parties had prepared it.
29. BINDING EFFECT; CHOICE OF LAW. This Lease shall be binding upon the
parties, their personal representatives, successors and assigns and be governed
by the laws of the State in which the Premises are located. Any litigation
between the Parties hereto concerning this Lease shall be initiated in the
county in which the Premises are located.
30. SUBORDINATION; ATTORNMENT; NON-DISTURBANCE.
30.1 SUBORDINATION. This Lease and any Option granted hereby shall be
subject and subordinate to any ground lease, mortgage, deed of trust, or other
hypothecation or security device (collectively, "SECURITY DEVICE"), now or
hereafter placed upon the Premises, to any and all advances made on the security
thereof, and to all renewals, modifications, and extensions thereof. Lessee
agrees that the holders of any such Security Devices (in this Lease together
referred to as "Lender") shall have no liability or obligation to perform any of
the obligations of Lessor under this Lease. Any Lender may elect to have this
Lease and/or any Option granted hereby superior to the lien of its Security
Device by giving written notice thereof to Lessee whereupon this Lease and such
Options shall be deemed prior to such Security Device.
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notwithstanding the relative dates of the documentation or recordation thereof.
30.2 ATTORNMENT. Subject to the non-disturbance provisions of Paragraph
30.3, Lessee agrees to attorn to a Lender or any other party who acquires
ownership of the Premises by reason of a foreclosure of a Security Device, and
that in the event of such foreclosure, such new owner shall not: (i) be liable
for any act or omission of any prior lessor or with respect to events occurring
prior to acquisition of ownership, (ii) be subject to any offsets or defenses
which Lessee might have against any prior lessor; or (iii) be bound by
prepayment of more than one (1) month's rent.
30.3 NON-DISTURBANCE. With respect to Security Devices entered into by
Lessor after the execution of this Lease, Lessee's subordination of this Lease
shall be subject to receiving a commercially reasonable non-disturbance
agreement (a "NON-DISTURBANCE AGREEMENT") from the Lender which Non-Disturbance
Agreement provides that Lessee's possession of the Premises, and this Lease,
including any options to extend the term hereof, will not be disturbed so long
as Lessee is not in Breach hereof and attorns to the record owner of the
Premises. Further, within sixty (60) days after the execution of this Lease,
Lessor shall use its commercially reasonable efforts to obtain a Non-Disturbance
Agreement from the holder of any pre-existing Security Device which is secured
by the Premises. In the event that Lessor is unable to provide the Non-
Disturbance Agreement within said sixty (60) days, then Lessee may, at Lessee's
option, directly contact Lessor's lender and attempt to negotiate for the
execution and delivery of a Non-Disturbance Agreement.
30.4 SELF-EXECUTING. The agreements contained in this Paragraph 30 shall
be effective without the execution of any further documents, provided, however,
that, upon written request from Lessor or a Lender in connection with a sale,
financing or refinancing of the Premises, Lessee and Lessor shall execute such
further writings as may be reasonably required to separately document any
subordination, attornment and/or Non-Disturbance Agreement provided for herein.
31. ATTORNEYS' FEES. If any Party or Broker brings an action or proceeding
involving the Premises to enforce the terms hereof or to declare rights
hereunder, the Prevailing Party (as hereafter defined) in any such proceeding,
action, or appeal thereon, shall be entitled to reasonable attorneys' fees. Such
fees may be awarded in the same suit or recovered in a separate suit, whether or
not such action or proceeding is pursued to decision or judgment. The term,
"PREVAILING PARTY" shall include, without limitation, a Party or Broker who
substantially obtains or defeats the relief sought, as the case may be, whether
by compromise, settlement, judgment, or the abandonment by the other Party or
Broker of its claim or defense. The attorneys' fees award shall not be computed
in accordance with any court fee schedule, but shall be such as to fully
reimburse all attorneys' fees reasonably incurred. In addition, Lessor shall be
entitled to attorneys' fees, costs and expenses incurred in the preparation and
service of notices of Default and consultations in connection therewith, whether
or not a legal action is subsequently commenced in connection with such Default
or resulting Breach.
32. LESSOR'S ACCESS; SHOWING PREMISES; REPAIRS. Lessor and Lessor's agents
shall have the right to enter the Premises at any time, in the case of an
emergency, and otherwise at reasonable times for the purpose of showing the same
to prospective purchasers, lenders, or lessees, and making such alterations,
repairs, improvements or additions to the Premises as Lessor may deem necessary.
All such activities shall be without abatement of rent or liability to Lessee.
Lessor may at any time place on the Premises any ordinary "FOR SALE" signs and
Lessor may during the last six (6) months of the term hereof place on the
Premises any ordinary "FOR LEASE" signs. Lessee may at any time place on or
about the Premises any ordinary "FOR SUBLEASE" sign.
33. AUCTIONS. Lessee shall not conduct, nor permit to be conducted, any auction
upon the Premises without Lessor's prior written consent Lessor shall not be
obligated to exercise any standard of reasonableness in determining whether to
permit an auction.
34. SIGNS. Except for ordinary "For Sublease" signs, Lessee shall not place any
sign upon the Premises without Lessor's prior written consent. All signs must
comply with all Applicable Requirements.
35. TERMINATION; MERGER. Unless specifically stated otherwise in writing by
Lessor, the voluntary or other surrender of this Lease by Lessee, the mutual
termination or cancellation hereof, or a termination hereof by Lessor for Breach
by Lessee, shall automatically terminate any sublease or lesser estate in the
Premises; provided, however, that Lessor may elect to continue any one or all
existing subtenancies. Lessor's failure within ten (10) days following any such
event to elect to the contrary by written notice to the holder of any such
lesser interest, shall constitute Lessor's election to have such event
constitute the termination of such interest.
36. CONSENTS. Except as otherwise provided herein, wherever in this Lease the
consent of a Party is required to an act by or for the other Party, such consent
shall not be unreasonably withheld or delayed. Lessor's actual reasonable costs
and expenses (including but not limited to architects', attorneys', engineers'
and other consultants' fees) incurred in the consideration of, or response to, a
request by Lessee for any Lessor consent, including but not limited to consents
to an assignment, a subletting or the presence or use of a Hazardous Substance,
shall be paid by Lessee upon receipt of an invoice and supporting documentation
therefor. Lessor's consent to any act, assignment or subletting shall not
constitute an acknowledgment that no Default or Breach by Lessee of this Lease
exists, nor shall such consent be deemed a waiver of any then existing Default
or Breach, except as may be otherwise specifically stated in writing by Lessor
at the time of such consent. The failure to specify herein any particular
condition to Lessor's consent shall not preclude the imposition by Lessor at the
time of consent of such further or other conditions as are then reasonable with
reference to the particular matter for which consent is being given. In the
event that either Party disagrees with any determination made by the other
hereunder and reasonably requests the reasons for such determination, the
determining party shall furnish its reasons in writing and in reasonable detail
within ten (10) business days following such request.
37. GUARANTOR.
37.1 EXECUTION. The Guarantors, if any, shall each execute a guaranty in
the form most recently published by the American Industrial Real Estate
Association, and each such Guarantor shall have the same obligations as Lessee
under this Lease.
37.2 DEFAULT. If shall constitute a Default of the Lessee if any Guarantor
fails or refuses, upon request to provide: (a) evidence of the execution of the
guaranty, including the authority of the party signing on Guarantor's behalf to
obligate Guarantor, and in the case of a corporate Guarantor, a certified copy
of a resolution of its board of directors authorizing the making of such
guaranty, (b) current financial statements, (c) a Estoppel Certificate, or (d)
written confirmation that the guaranty is still in effect.
38. QUIET POSSESSION. Subject to payment by Lessee of the Rent and performance
of all of the covenants, conditions and provisions on Lessee's part to be
observed and performed under this Lease, Lessee shall have quiet possession and
quiet enjoyment of the Premises during the term hereof.
39. OPTIONS.
39.1 DEFINITION. "OPTION" shall mean: (a) the right to extend the term of
or renew this Lease or to extend or renew any lease that Lessee has on other
property of Lessor; (b) the right of first refusal or first offer to lease
either the Premises or other property of Lessor; (c) the right purchase or the
right of first refusal to purchase the Premises or other property of Lessor.
39.2 OPTIONS PERSONAL TO ORIGINAL LESSEE. Each Option granted to Lessee in
this Lease is personal to the original Lessee, and cannot be assigned or
exercised by anyone other than said original Lessee and only while the original
Lessee is in full possession of the Premises and, if requested by Lessor, with
Lessee certifying that Lessee has no intention of thereafter assigning or
subletting.
39.3 MULTIPLE OPTIONS. In the event that Lessee has any multiple Options
to extend or renew this Lease, a later Option cannot be exercised unless the
prior Options have been validly exercised.
39.4 EFFECT OF DEFAULT ON OPTIONS.
(a) Lessee shall have no right to exercise an Option: (i) during the
period commencing with the giving of any notice of Default and continuing until
said Default is cured; (ii) during the period of time any Rent is unpaid
(without regard to whether notice thereof is given Lessee). (iii) during the
time Lessee is in Breach of this Lease; or (iv) in the event that Lessee has
been given three (3) or more notices of separate Default, whether or not the
Defaults are cured, during the twelve (12) month period immediately preceding
the exercise of the Option.
(b) The period of time within which an Option may be exercised shall
not be extended or enlarged by reason of Lessee's inability to exercise an
Option because of the provisions of Paragraph 39.4(a).
(c) An Option shall terminate and be of no further force or effect,
notwithstanding Lessee's due and timely exercise of the Option, if, after such
exercise and prior to the commencement of the extended term, (i) Lessee fails to
pay Rent for a period of thirty (30) days after such Rent becomes due (without
any necessity of Lessor to give notice thereof), (ii) Lessor gives to Lessee
three (3) or more notices of separate Default during any twelve (12) month
period, whether or not the Defaults are cured, or (iii) if Lessee commits a
Breach of this Lease.
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40. MULTIPLE BUILDINGS. If the Premises are a part of a group of buildings
controlled by Lessor, Lessee agrees that it will observe all reasonable rules
and regulations which Lessor may make from time to time for the management,
safety, and care of said properties, including the care and cleanliness of the
grounds and including the parking, loading and unloading of vehicles, and that
Lessee will pay its fair share of common expenses incurred in connection
therewith.
41. SECURITY MEASURES. Lessee hereby acknowledges that the rental payable to
Lessor hereunder does not include the cost of guard service or other security
measures, and that Lessor shall have no obligation whatsoever to provide same.
Lessee assumes all responsibility for the protection of the Premises, Lessee,
its agents and invitees and their property from the acts of third parties.
42. RESERVATIONS. Lessor reserves to itself the right, from time to time, to
grant, without the consent or joinder of Lessee, such easements, rights and
dedications that Lessor deems necessary, and to cause the recordation of parcel
maps and restrictions, so long as such easements, rights, dedications, maps and
restrictions do not unreasonably interfere with the use of the Premises by
Lessee. Lessee agrees to sign any documents reasonably requested by Lessor to
effectuate any such easement rights, dedication, map or restrictions.
43. PERFORMANCE UNDER PROTEST. If at any time a dispute shall arise as to any
amount or sum of money to be paid by one Party to the other under the provisions
hereof, the Party against whom the obligation to pay the money is asserted shall
have the right to make payment "under protest" and such payment shall not be
regarded as a voluntary payment and there shall survive the right on the part of
said Party to institute suit for recovery of such sum. If it shall be adjudged
that there was no legal obligation on the part of said Party to pay such sum or
any part thereof, said Party shall be entitled to recover such sum or so much
thereof as it was not legally required to pay.
44. AUTHORITY. If either Party hereto is a corporation, trust, limited
liability company, partnership, or similar entity, each individual executing
this Lease on behalf of such entity represents and warrants that he or she is
duly authorized to execute and deliver this Lease on its behalf Each party
shall, within thirty (30) days after request, deliver to the other party
satisfactory evidence of such authority.
45. CONFLICT. Any conflict between the printed provisions of this Lease and the
typewritten or handwritten provisions shall be controlled by the typewritten or
handwritten provisions.
46. OFFER. Preparation of this Lease by either Party or their agent and
submission of same to the other Party shall not be deemed an offer to lease to
the other Party. This Lease is not intended to be binding until executed and
delivered by all Parties hereto.
47. AMENDMENTS. This Lease may be modified only in writing, signed by the
Parties in interest at the time of the modification. As long as they do not
materially change Lessee's obligations hereunder, Lessee agrees to make such
reasonable non-monetary modifications to this Lease as may be reasonably
required by a Lender in connection with the obtaining of normal financing or
refinancing of the Premises.
48. MULTIPLE PARTIES. If more than one person or entity is named herein as
either Lessor or Lessee, such multiple Parties shall have joint and several
responsibility to comply with the terms of this Lease.
49. MEDIATION AND ARBITRATION OF DISPUTES. An Addendum requiring the Mediation
and/or the Arbitration of all disputes between the Parties and/or Brokers
arising out of this Lease [ ] is [X] is not attached to this Lease.
Included as part of this agreement: Lease Addendum, paragraphs 1 - 11; Exhibit
A, pages 1 - 4; Exhibit B, Option To Extend; Exhibit C; Exhibit D
LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM AND
PROVISION CONTAINED HEREIN, AND BY THE EXECUTION OF THIS LEASE SHOW THEIR
INFORMED AND VOLUNTARY CONSENT THERETO. THE PARTIES HEREBY AGREE THAT, AT THE
TIME THIS LEASE IS EXECUTED, THE TERMS OF THIS LEASE ARE COMMERCIALLY REASONABLE
AND EFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND LESSEE WITH RESPECT TO THE
PREMISES.
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ATTENTION: NO REPRESENTATION OR RECOMMENDATION IS MADE BY THE AMERICAN
- ---------
INDUSTRIAL REAL ESTATE ASSOCIATION OR BY ANY BROKER AS TO THE LEGAL SUFFICIENCY,
LEGAL EFFECT, OR TAX CONSEQUENCES OF THIS LEASE OR THE TRANSACTION TO WHICH IT
RELATES. THE PARTIES ARE URGED TO.
1. SEEK ADVICE OF COUNSEL AS TO THE LEGAL AND TAX CONSEQUENCES OF THIS LEASE.
2. RETAIN APPROPRIATE CONSULTANTS TO REVIEW AND INVESTIGATE THE CONDITION OF
THE PREMISES. SAID INVESTIGATION SHOULD INCLUDE BUT NOT BE LIMITED TO: THE
POSSIBLE PRESENCE OF HAZARDOUS SUBSTANCES, THE ZONING OF THE PREMISES, THE
STRUCTURAL INTEGRITY, THE CONDITION OF THE ROOF AND OPERATING SYSTEMS, AND THE
SUITABILITY OF THE PREMISES FOR LESSEE'S INTENDED USE.
WARNING: IF THE PREMISES IS LOCATED IN A STATE OTHER THAN CALIFORNIA, CERTAIN
- -------
PROVISIONS OF THE LEASE MAY NEED TO BE REVISED TO COMPLY WITH THE LAWS OF THE
STATE IN WHICH THE PREMISES IS LOCATED.
- --------------------------------------------------------------------------------
The parties hereto have executed this Lease at the place and on the dates
specified above their respective signatures.
Executed at: _______________________ Executed at: __________________________
on: ________________________________ on:____________________________________
By LESSOR: By LESSEE:
John Anagnostou Realty Liquid Audio, Inc
/s/ John Anagnostou
- ------------------------------------ _______________________________________
By:_________________________________ By: /s/ GARY IWATANI
-----------------------------------
Name Printed: ______________________ Name Printed: GARY IWATANI
-------------------------
Title: _____________________________ Title: DFD
--------------------------------
By /s/ Michael J Monte By: ___________________________________
---------------------------------
Name Printed: Michael J Monte Name Printed:__________________________
----------------------
Title: _____________________________ Title:_________________________________
Address: ___________________________ Address:_______________________________
____________________________________ ---------------------------------------
Telephone: ( ) ___________________ Telephone: ( ) _______________________
Facsimile: ( ) ___________________ Facsimile: ( ) _____________________
Federal ID No. _____________________ Federal ID No. _______________________
NOTE: These forms are often modified to meet changing requirements of law and
industry needs. Always write or call to make sure you are utilizing the
most current form: AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION, 700 So.
Flower Street, Suite 600. Los Angeles, California 90017. (213) 687-8777.
Fax No. (213) 687-8616
PAGE 12
<PAGE>
LEASE ADDENDUM to the Standard Industrial/Commercial Single Tenant Lease - Gross
by and between, Liquid Audio, Inc, Lessee, and John Anagnostou Realty and
Michael J Monte, Lessors for the premises known as 2221 Broadway, Redwood City,
California.
IN THE EVENT OF CONFLICT BETWEEN THIS ADDENDUM AND THE LEASE AGREEMENT, THIS
ADDENDUM SHALL PREVAIL.
1. ADDITIONAL IMPROVEMENTS: Lessee shall not be responsible for paying
any increase in real property taxes or insurance caused by additional
improvements placed upon the building by other lessees or by Lessor for the
exclusive enjoyment of any other lessee.
2. NEW BUILDING OPTION: In the event Liquid Audio leases 35,000 sq.ft. or
more in the new office building to be built behind the Fox Theatre
building, Liquid Audio may at its option, rescind both existing leases
(2401 Broadway/810 Winslow and 2221 Broadway), at no cost, penalty or
liability to Liquid Audio.
3. TRASH AND JANITORIAL SERVICES: It is understood that Lessee shall be
responsible for janitorial service, including window washing which shall be
done as often as necessary to maintain a clean and neat appearance, and for
trash removal from the premises.
4. LESSEE/BROKER: It is hereby acknowledged that the Lessor is a Licensed
California Real Estate Broker.
5. DELAY IN COMMENCEMENT: In the event of delay in commencement
(paragraph 3.3), all dates shall be adjusted from the date of delivery of
possession to reflect a 3-year lease term.
6. EARLY OCCUPANCY: Paragraph 3.2 of the lease agreement shall be deleted
in its entirety. Lessee agrees and understands that Lessee's rent
obligations commence upon the delivery of the premises and each phase
thereof by Lessor in a condition that materially and substantially complies
with the improvements to be provided by Lessor as noted herein.
/s/ MJM, JA, GI
PAGE 1 OF 3
<PAGE>
7. EXHIBIT A: Exhibit A, attached hereto and made a part hereof
represents the building layout for each phase of the Lessor's work.
First Floor Page 1
Mezzanine/2nd Fl Page 2
Third Floor Page 3
Mezzanine Roof Page 4
8. RENT SCHEDULE AND SCHEDULE OF IMPROVEMENTS:
PHASE I: See exhibit A, pages 1, 2, consisting of approximately 4.312
square feet of rentable space to be delivered to Lessee on or before April
15, 1999.
Phase I base rent: 11,858) per month
PHASE II: See exhibit A, pages 1,2 and 3 consisting of approximately 7035
square feet of rentable space to be delivered to Lessee on or before June
15, 1999.
Phase I base rent: 11,858 per month
Phase II base rent: 19,483 per month
Total base rent Phase I & II: $31,341.00
9. APPLICATION OF PREPAID RENT: Lessee has prepaid rent in the amount of
$62,682.00,. 50% ($31,341.00) of which is to be retained and applied by
Lessor to base rent for the last month of the current lease term. The
balance of the prepaid rent shall be applied to the rent due commencing
upon delivery of the space identified in Phase I and Phase II until said
prepaid amount is exhausted. At the time the prepaid rent has been reduced
to "$0.00" as it is applied to rent due, Lessee agrees to immediately pay
to Lessor the balance of the rent due for the month, if any, over and above
the amount applied from the prepaid rent.
/s/ MJM, JA, GI
PAGE 2 OF 3
<PAGE>
10. IMPROVEMENTS: It is understood that the improvements outlined in this
agreement are the sole responsibility of Lessor.
11. RIGHT TO TERMINATE TENANCY: Lessee shall have the right to terminate
the tenancy on the following terms:
Timing: Anytime during the third year (25th month) of the first
3-year term of this lease.
Notice: Give Lessor no less than six (6) months advance notice in
writing.
Default: Not be in material default under the terms of the lease.
Replacement: Lessor must be able to secure a replacement tenant for no
less than the remaining term of the lease at a rate of
not less than that being paid by lessee.
In the event Lessor is not able to locate a replacement tenant as outlined
herein, Lessee understands that the lease agreement shall remain in full
force and effect for the remainder of the initial 3-year term of the lease
and the early termination date shall not apply.
Lessor: John Anagnostou Realty
/s/ John Anagnostou Date: 2/18/99
- --------------------------- -------
By:
/s/ Micheal J. Monte Date: 2/18/99
- ----------------------- -------
Michael J. Monte
Lessee: Liquid Audio, Inc.
/s/ Gary Iwatani Date: 2/18/99
- --------------------------- -------
By: Gary Iwatani
Its: CFO
<PAGE>
STANDARD OFFICE LEASE
FLOOR PLAN
[LOGO APPEARS HERE]
See Pages 1 through 4
EXHIBIT A
Initials: /s/ MJM, JA, GI
<PAGE>
Fox Theater 02-18-99
[FIRST FLOOR PLAN APPEARS HERE]
<PAGE>
Fox Theater 02-18-99
[SECOND FLOOR PLAN APPEARS HERE]
<PAGE>
Fox Theater 02-18-99
[THIRD FLOOR PLAN APPEARS HERE]
<PAGE>
Fox Theater 02-12-99
[ROOF MEZZANINE APPEARS HERE]
<PAGE>
[LOGO APPEARS HERE]
OPTION(S) TO EXTEND
ADDENDUM TO
STANDARD LEASE
Exhibit B
DATED February 1, 1999
BY AND BETWEEN (LESSOR) John Anagnostou Realty
& Michael J Monte
(LESSEE) Liquid Audio, Inc
PROPERTY ADDRESS: 2221 Broadway, Redwood City, Ca
Paragraph ______
A. OPTION(S) TO EXTEND:
Lessor hereby grants to Lessee the option to extend the term of this
Lease for 1 additional 36 month period(s) commencing when the prior term expires
upon each and all of the following terms and conditions:
(i) Lessee gives to Lessor, and Lessor actually receives on a date which
is prior to the date that the option period would commence (if exercised) by at
least 6 and not more than 12 months, a written notice of the exercise of the
option(s) to extend this Lease for said additional term(s), time being of
essence. If said notification of the exercise of said option(s) is (are) not so
given and received, the option(s) shall automatically expire; said option(s) may
(if more than one) only be exercised consecutively;
(ii) The provisions of paragraph 39, including the provision relating to
default of Lessee set forth in paragraph 39.4 of this Lease are conditions of
this Option;
(iii) All of the terms and conditions of this Lease except where
specifically modified by this option shall apply;
(iv) The monthly rent for each month of the option period shall be
calculated as follows, using the method(s) indicated below:
(Check Method(s) to be Used and Fill in Appropriately)
[_] I. COST OF LIVING ADJUSTMENT(S) (COL)
(a) On (Fill in COL Adjustment Date(s): April 1, 2002, April 1, 2003
and April 1, 2004 the monthly rent payable under paragraph 1.5 ("Base Rent") of
the attached Lease shall be adjusted by the change, if any, from the Base Month
specified below, in the Consumer Price Index of the Bureau of Labor Statistics
of the U.S. Department of Labor for (select one): [_] CPI W (Urban Wage Earners
and Clerical Workers) or [X] CPI U (All Urban Consumers), for (Fill in Urban
Area): San Francisco/Oakland, All items (1982-1984 = 100), herein referred to as
"C.P.I."
(b) The monthly rent payable in accordance with paragraph A1(a) of
this Addendum shall be calculated as follows. the Base Rent set forth in
paragraph 1.5 of the attached Lease, shall be multiplied by a fraction the
numerator of which shall be the C.P.I. of the calendar month 2 (two) months
prior to the month(s) specified in paragraph A1(a) above during which the
adjustment is to take effect, and the denominator of which shall be the C.P.I.
of the calendar month which is two (2) months prior to (select one): [_] the
first month of the term of this Lease as set forth in paragraph 1.3 ("Base
Month") or [X] (Fill in Other "Base Month") January, 2001. The sum so calculated
shall constitute the new monthly rent hereunder, but in no event, shall any such
new monthly rent be less than the rent payable for the month immediately
preceding the date for rent adjustment.
(c) In the event the compilation and/or publication of the C.P.I.
shall be transferred to any other governmental department or bureau or agency or
shall be discontinued, then the index most nearly the same as the C.P.I. shall
be used to make such calculation. In the event that Lessor and Lessee cannot
agree on such alternative index, then the matter shall be submitted for decision
to the American Arbitration Association in accordance with the then rules of
said association and the decision of the arbitrators shall be binding upon the
parties. The cost of said Arbitrators shall be paid equally by Lessor and
Lessee.
[_] II. MARKET RENTAL VALUE ADJUSTMENT(S) (MRV)
(a) On (Fill in MRV Adjustment Date(s):______________________________
________________________________________________________ the monthly rent
payable under paragraph 1.5 ("Base Rent") of the attached Lease shall be
adjusted to the "Market Rental Value" of the property as follows:
1) Four months prior to the Market Rental Value (MRV) Adjustment
Date(s) described above. Lessor and Lessee shall meet to establish an agreed
upon new MRV for the specified term. If agreement cannot be reached, then:
Initials: _________ Initials: /s/ MJM, JA, GI
_________
OPTION(S) TO EXTEND
Page 1 of 2
NOTICE: These forms are often modified to meet changing requirements of law and
industry needs. Always write or call to make sure you are utilizing the
most current form American Industrial Real Estate Association, 345
South Figueroa Street, Suite M-1 Los Angeles, CA 90071 (213) 687-8777
Fax No. (213) 687-8616
<PAGE>
i) Lessor and Lessee shall immediately appoint a mutually acceptable
appraiser or broker to establish the new MRV within the next 30 days. Any
associated costs will be split equally between the parties, or
ii) Both Lessor and Lessee shall each immediately select and pay the
appraiser or broker of their choice to establish a MRV within the next 30 days.
If, for any reason, either one of the appraisals is not completed within the
next 30 days, as stipulated, then the appraisal that is completed at that time
shall automatically become the new MRV. If both appraisals are completed and the
two appraisers/brokers cannot agree on a reasonable average MRV then they shall
immediately select a third mutually acceptable appraiser/broker to establish a
third MRV within the next 30 days. The average of the two appraisals closest in
value shall then become the new MRV. The costs of the third appraisal will be
split equally between the parties.
2) In any event, the new MRV shall not be less than the rent payable
for the month immediately preceding the date for rent adjustment.
(b) Upon the establishment of each New Market Rental Value as
described in paragraph All:
1) the monthly rental sum so calculated for each term as specified in
paragraph All(a) will become the new "Base Rent" for the purpose of calculating
any further Cost of Living Adjustments as specified in paragraph Al(a) above and
2) the first month of each Market Rental Value term as specified in
paragraph All(a) shall become the new "Base Month" for the purpose of
calculating any further Cost of Living Adjustments as specified in paragraph
Al(b).
[_] III. FIXED RENTAL ADJUSTMENT(S) (FRA)
The monthly rent payable under paragraph 1.5 ("Base Rent") of the attached Lease
shall be increased to the following amounts on the dates set forth below:
On (Fill in FRA Adjustment Date(s)): The New Base Rental shall be:
___________________________ $_________________
___________________________ $_________________
___________________________ $_________________
___________________________ $_________________
B. NOTICE: Unless specified otherwise herein, notice of any escalations other
than Fixed Rental Adjustments shall be made as specified in paragraph 23 of the
attached Lease.
C. BROKER'S FEE:
The Real Estate Brokers specified in paragraph 1.10 of the attached Lease
shall be paid a Brokerage Fee for each adjustment specified above in
accordance with paragraph 15 of the attached Lease.
Initials: ________ Initials: /s/ MJM, JA, GI
________
OPTION(S) TO EXTEND
Page 2 of 2
NOTICE: These forms are often modified to meet changing requirements of law and
industry needs. Always write or call to make sure you are utilizing the
most current form American Industrial Real Estate Association, 345
South Figueroa Street, Suite M-1. Los Angeles, CA 90071 (213) 687-8777
Fax No. (213) 687-8616
<PAGE>
EXHIBIT C
1. ALL TENANT IMPROVEMENTS EXCEPT CUSTOM WORK FOR CUBICLES TO BE INCLUDED IN
MONTHLY RENT.
2. NO CONSTRUCTION/DISRUPTION DURING NORMAL BUSINESS HOURS (8AM-6PM) WITHOUT
WRITTEN APPROVAL BY LIQUID AUDIO.
FINISHED BUILD-OUT DETAILS
. Match existing wall finish throughout
. Wood frame glass doors in new offices
. Glass opening as per plans
. Hardware selection to be quality grade finish
. Individual office ceilings to be sheet rock
. Lighting supplied in each office
. All offices to have at least 2 electrical outlets
. Lessee to provide details during construction for need of separate electrical
circuits for computers, etc.
. Lessee to provide its own installation of computer networking, telephone
networking, high speed ISDN lines, etc. Lessor to provide conduit.
. Painting to be of professional quality and colors to be approved by Lessee
. Offices to be furnished with HVAC, complete for all areas leased
. Insulation to be installed between all new offices to help soundproof offices
. New carpet to be installed throughout
. Design (colors for interior walls, carpet selection, door hardware, furniture
color & configuration, exterior and interior lighting) to be done by designer
. Security alarm system to be installed prior to occupancy and cost of system to
be split 50/50 between Lessee and Lessor and not to exceed a total of
$2,000.00 (two-thousand Dollars).
. Upgraded lighting to be done throughout office building.
<PAGE>
EXHIBIT D
MISCELLANEOUS
. Roof top outdoor patio to be made available to Liquid Audio, provided that
Liquid Audio pays cost to improve (relocate electrical, drainage, tile or
decking, etc.) said space. No cost per sq.ft. shall be charged to Liquid
Audio. In the event Liquid Audio wishes that owners shall pay the cost to
remodel said space, a per sq.ft. cost shall be calculated and added to
existing lease. Providing the roof top outdoor patio is not requested to be
enclosed by Liquid Audio, the cost per sq.ft. shall be approx. $1.35 per
sq.ft.
. In addition to the Hazardous Substances Paragraph 6.2 of the lease agreement,
lessor warrants that premises shall be free of any Asbestos.
. Liquid Audio shall have access to server room on or before March 22, 1999.
. Bridge walkway connecting the 2nd floor Mezzanine to the Fox Theatre to be
removed on or before occupancy of said space.
. All equipment, freezers, shelves, netting, junk, etc. to be removed from rear
outdoor area and that space to be cleaned up and painted.
<PAGE>
EXHIBIT 10.26
[LOGO OF ALLIANCE BUSINESS CENTERS APPEARS HERE]
LEASE AND SERVICE AGREEMENT
This Agreement is made this 17th day of August, 1998, by and between Alliance
Lexington L.P. d/b/a ALLIANCE Business Centers ("Lessor") having offices known
-------------------------------
and numbered as Suite 2300 (the "Facility") in the building located at 599
Lexington Avenue, New York, New York 10022 (the "Building") and LIQUID AUDIO,
("Lessee") a(n) (corporation, partnership, individual) with an address of 810
Winslow Street, Redwood City, CA 94063
The parties for themselves, their heirs, legal representatives, successors and
assigns, agree as follows:
1. DEMISE AND DESCRIPTION OF PROPERTY.
----------------------------------
a. Lessor leases to Lessee and Lessee leases from Lessor, the
"Premises" (defined below), being a subpart of Lessor's total leased Facility
space, for the term and subject to the conditions and covenants hereinafter set
forth and to all encumbrances, restrictions, zoning laws, regulations or
statutes affecting the Building, Facility or Premises.
b. The Premises consists of Facility office space number(s) #115 as shown
in the floor plan annexed hereto. Lessor hereby grants Lessee the privilege to
use in common with other lessees and parties that Lessor may designate certain
office amenities located in the Facility; the use of all of which are subject to
such reasonable rules and regulations as Lessor currently has in place and may
adopt from time to time. The amenities are more particularly described in
attached Exhibit "A." "The Operating Standards" as presently in place and
governing the use of the Premises and the Facility are attached in Exhibit "B".
2. USE.
---
a. The Premises shall be used by Lessee solely for general business
purposes and such other normally incident uses and for no other purpose, in
strict accordance with the Operation Standards. Additionally, Lessee shall not
offer at the Premises any services which Lessor provides to its lessees,
including, but not limited to those amenities or services described in attached
Exhibit "A". In the event Lessee breaches any provision of this paragraph,
Lessor shall be entitled to exercise any rights or remedies available to the
Lessor pursuant to this Agreement together with such other rights and remedies
as the Lessor may otherwise have and choose to exercise.
b. Lessee shall not make nor permit to be made any use of the Premises
which would violate any of the terms of this Agreement or which, directly or
indirectly, is forbidden by statute, ordinance or government regulations, which
may be dangerous to life, limb or property, which may invalidate or increase the
premium of any policy of insurance carried on the Building or on the Facility,
which will suffer or permit the Premises to be used in any manner or anything to
be brought into or kept there which, in the sole judgment of Lessor, shall in
any way impair or tend to impair the high quality character, reputation or
appearance of the Building or the Facility, or which may or tend to impair or
interfere with any services performed by Lessor for Lessee or for others.
3. TERM.
----
a. The term of this Agreement shall be for a period of 6 months,
commencing 9:00 a.m. on the 1st day of September, 1998, and ending 5:00 p.m. on
the 28th day of February, 1999, unless renewed as provided in paragraph "3(b)"
herein.
b. Upon the ending term date set forth herein or any extension thereof,
the Agreement shall be extended for the same period of time as the initial term
and upon the same terms and conditions as herein contained except for the amount
of base rental charges, which shall each be increased by seven percent (7%),
unless either party notifies the other in writing by certified or registered
mail, return receipt requested, or delivered by hand that the Agreement shall
not be extended within the period hereinafter specified or automatically
renewed. If Lessee has less than three offices, such notice shall be given at
least 60 days prior to the expiration date of this Agreement. If Lessee has
three or more offices, such notice shall be given at least 90 days prior to the
expiration date of this Agreement.
c. In the event the entire Premises or the Facility are damaged,
destroyed or taken by eminent domain or acquired by private purchase in lieu of
eminent domain so as to render the Premises fully untenantable and unrestorable
in Lessor's sole judgment, then within 90 days thereafter by written notice to
the other party, either party shall be able to terminate this Agreement, which
will terminate as of the date thereof.
4. RENT.
----
a. For and during the term of this Agreement, Lessee shall pay Lessor as
rent for the Premises a total rental of $8,700, payable in equal monthly
installments of $1450, each payable in advance of the first day of each calendar
month after the commencement of the term, or a daily prorated amount for any
partial calendar month during the term. If any payment of rent or other charges
due under this Agreement is not received within five (5) calendar days after its
due date, the Lessee will also pay, as additional rent, a late payment charge
which shall be an amount equal to 10% of any amount owed to Lessor or $50
whichever is greater.
<PAGE>
b. It is additionally specifically covenanted and agreed that the financial
terms of this Agreement are strictly confidential and Lessee agrees not to
knowingly or willfully divulge this information to or any other Lessee or
potential Lessee of Lessor. Any such disclosure by the Lessee of the financial
terms of this Agreement as set forth herein above, shall constitute a material
breach of this Lease.
c. The first such payment of rental as well as the payment of the Deposit
as set forth in below shall be paid by Lessee simultaneously with execution of
this Agreement. Should the Lessee fail to make such payment prior to the
commencement of the term of this Agreement, then, at Lessor's sole option, the
Agreement shall be null and void and of no further effect.
d. The rental payable during the term of this Agreement shall be
increased on the first day of the month following notification of any rental
increase (however designated) which the Lessor might receive from the Lessor's
over-landlord ("Building"). The term "direct expenses" as used herein shall
refer to the same items and costs as are used by the Building in its
determination of expenses and costs passed on to Lessor. Lessor shall
immediately notify Lessee in writing of any such increase, and shall bill Lessee
for its pro rata share thereof, which bill Lessee shall pay promptly upon such
notification for each and every month thereafter for the balance of the term.
e. Rent charges are based on the value of the rental Premises and
services to be used by 1 person(s) only. If more than said number of person(s)
habitually use the Premises or services, the Fixed Monthly Rental Charges will
be increased by a factor of $150 for each additional person who habitually uses
the Premises.
f. If a Lessee check is returned for any reason, Lessee will pay an
additional charge of $100.00 per returned check and, for the purpose of
considering default and/or late charges, it will be as if the payment
represented by the returned check had never been made.
5. SECURITY DEPOSIT.
----------------
a. Lessee shall deposit with Lessor $2900, or the equivalent of two
months rent, in good or certified funds with a domestic bank, as a non-interest
bearing security deposit. Lessor may use the security deposit to cure any
default of Lessee under this Agreement, restore the Premises including any and
all furniture, fixtures and equipment provided by Lessor and vendors at the
Premises to their original condition and configuration, reasonable wear and tear
excepted, to pay for repairs to any damage to the Premises, Executive Suite or
Building, caused by Lessee or Lessee's guests, to pay any rent or other charges
which Lessee owes Lessor at or prior to the expiration of this Agreement, and to
reimburse Lessor for costs or expenses arising from any other obligation of
Lessee which Lessee has failed to perform. If Lessor transfers control or
ownership of the Premises and Lessor transfers the security deposit to such
purchaser, Lessee will look solely to the new Lessor for the return of the
security deposit, and the Lessor named in this Agreement shall be released from
all liability for the return of the security deposit.
b. The security deposit (less any sums used by Lessor in accordance with
the terms and conditions of this Agreement) will be returned within sixty (60)
days after the termination of any services rendered or expiration of the term
hereof. The security deposit shall not under any circumstance be applied in lieu
of be the final payment(s) of Fixed Monthly Rental charges or service charges
under this Agreement.
c. In the event that, by reason of the Lessee's default in its
obligations pursuant to this Agreement or otherwise, including but not limited
to the payment of the Fixed Monthly Rental Charge, any amounts due by reason of
the Lessee's use of additional services hereto and/or by reason of the Lessee's
use of telephone services as supplied pursuant to this Agreement, Lessor shall
be entitled to apply any of the security deposited pursuant to this Agreement to
any outstanding sums due or owing to the Lessor, and Lessor shall have the right
to charge the Lessee, as additional rent, such sums as are necessary to
replenish any and all amounts applied so as to cause the security to be returned
to its entire amount. The failure to pay such amounts as are necessary to
replenish the security shall be considered a breach of this Agreement and shall
entitle the Lessor to exercise any of its rights pursuant to this Agreement or
otherwise.
6. DELIVERY OF POSSESSION.
----------------------
If, for any reason whatsoever, Lessor cannot deliver possession of the
Premises to Lessee at the commencement of the term, this Agreement shall not be
void nor voidable nor shall Lessor be liable to Lessee for any loss or damage
resulting therefrom, but there shall be an abatement of rent for the period
between the stated term commencement and the time when Lessor does deliver
possession of the Premises.
7. SERVICES.
--------
a. So long as Lessee is not in default hereunder, Lessor shall make
available certain amenities to Lessee as more particularly described in Exhibit
"A." Such services shall be offered to Lessee, in conjunction with such services
being offered by Lessor to its other lessees, without charge for the reasonable
use of the same.
b. In addition, provided Lessee is not in default hereunder and provided
the cost thereof does not exceed the Security Deposit, Lessor shall make
available to Lessee certain other services the cost of which shall be billed to
the Lessee as additional rent and the payment of which shall be subject to the
same terms and conditions as those governing the payment of the Fixed Monthly
Rental Charge herein regardless of when such charges are billed to the Lessee.
8. TELEPHONE SERVICES.
------------------
a. Provided Lessee is not in default of any of the terms, covenants,
conditions or provisions of this Agreement, Lessor will make available to
Lessee, a telecommunications package which will consist of some combination of
telephone equipment, numbers, lines, conference calling, voice mail, local, long
distance and international service, and directory listing. All components of the
telecommunications package including any telephone numbers used by Lessee will
remain at all times the property of Lessor and Lessee will acquire no rights in
the components beyond the term specified by Lessor.
b. Upon Lessee's written request, Lessee shall be entitled to appoint
Lessor as its exclusive agent for the sole purpose of procuring and arranging
Lessee's local "white pages" listings. Lessor shall have no involvement nor
responsibility for any "yellow pages" listings desired by Lessee.
c. Lessor shall not be liable for any interruption or error in the
performance of its services to Lessee under this Section.
Lessee waives any recourse as against the Lessor for any claimed liability
arising from the provision of telecommunication services including, but not
limited to; injuries to persons or property arising out of mistakes, omissions,
interruptions, delays, errors or defects in
<PAGE>
transmissions occurring in the course of furnishing telecommunications services
provided same are not caused by the willful acts of the Lessor, as well any
claim for business interruption and for consequential damages.
d. Lessor shall use reasonable efforts to provide Telephone Services to
Lessee in a first-class, professional manner. Telephone service charges shall be
as per Lessor's then scheduled rates for the same, or as the same may be amended
by Lessor from time to time.
e. In the event that any toll fraud is traceable to telecommunications
services employed by Lessee, such toll fraud shall be deemed to be a material
default in the Lessee, obligations hereunder. Lessee further hereby agrees to
indemnify, hold harmless and to reimburse Lessor for all charges associated with
any such toll fraud including, but not limited to, unauthorized use of calling
cards or telephone lines
f. It is expressly acknowledged and agreed that Lessor shall be the sole
and exclusive provider of telecommunication services to Lessee. Lessee hereby
agrees and covenants that it will not use any other telephone service or
telephone carrier to provide it service in the Premises. In the event that
Lessee uses or acquires any other telephone service at the Premises, such use
and/or installation shall constitute a material default in the Lessee's
obligations hereunder.
9. FURNITURE AND FIXTURES.
----------------------
At its own cost and expense, Lessor shall furnish and install furniture,
fixtures and equipment as are in Lessor's sole opinion necessary to provide
suitable office accommodations for Lessee, upon such terms and conditions
routinely applicable to the Facility. All such furniture, fixtures and equipment
shall remain Lessor's property.
10. INSURANCE; WAIVER OF CLAIMS.
---------------------------
a. Lessor has no obligation to and will not carry insurance for Lessee's
benefit. Lessor will not be liable to Lessee or to any other person for damages
on account of loss, damage or theft, to any business or personal property of
Lessee. Lessee hereby waives any claims against Lessor from any loss, cost,
liability or expense (including reasonable attorney's fees) arising from
Lessee's use of the Premises or any common areas made available to Lessee by
Lessor or from the conduct of Lessee's business, or from any activity, work, or
thing done in the Premises or common areas by Lessee or Lessee's agents,
contractors, visitors or employees. To the extent that Lessor has any liability
for any of the forgoing pursuant to any law, ordinance or statute, Lessee shall
seek recovery for such loss(es)/or damage(s) from its own insurance company as
provided for in subparagraph (c) herein prior to making any claims against
Lessor.
b. The Lessor shall not be liable or responsible to the Lessee for any
injury or damage resulting from the acts or omissions of Lessor, its employees,
persons leasing office space or obtaining services from the Lessor, or other
persons occupying any part of the Premises or Building, or for any failure of
services provided such as water, gas or electricity, HVAC or for any injury or
damage to person or property caused by any person except for such loss or damage
arising from the willful or grossly negligent misconduct of the Lessor, its
agents, servants, or employees or from the Lessor's failure to make repairs
which it is obligated to make hereunder. Neither Lessor or any of its agents,
employees, officers or directors shall be responsible for damages resulting from
any error, omission or defect in any work performed or provided as part of the
services rendered, whether uncompensated services or compensated services.
c. Lessee shall provide Lessor with a certificate of insurance evidencing
General/Public Liability coverage with liability limits of not less than One
Million Dollars ($1,000,000) per occurrence for Bodily Injury and/or Property
Damage Liability and One Hundred Thousand Dollars ($100,000) per occurrence for
Fire/Legal Liability. Said insurance coverage shall remain in force during the
term of this Agreement and renewals thereof. The Lessor, Alliance National, Inc,
and Alliance Business Centers, Inc. shall be named as an additional named
insured on each of these policies. Lessee's failure to provide or maintain such
insurance shall not reduce or otherwise alter Lessee's liability or
responsibility to pay any judgment rendered against Lessee for such Liability
and Damages Failure to maintain such insurance and/or to name the Lessor and its
designees, as set forth above, shall constitute a material breach of this
Agreement.
d. Both parties hereby agree to defend, indemnify and hold the other
harmless from and against any and all claims, damages, injury, loss and expenses
to or of any person or property resulting from the acts or negligence of their
agents, employees, invitees and/or licensees while in the Building, Executive
Suite and/or Premises.
e. Any fire and extended risk casualty insurance that Lessee maintains
shall include a waiver of subrogation in favor of Lessor and Building Landlord,
and any fire and extended risk insurance carried on the Facility by Lessor shall
likewise contain a waiver of subrogation in favor of Lessee.
11. WAIVER OF BREACH.
----------------
Should Lessor not insist upon the strict performances of any term or
condition of this Agreement or to exercise any right or remedy available for a
breach thereof, and no acceptance of full or partial payment during the
continuance of any such breach shall constitute a waiver of any such breach or
any such term or condition. No term or condition of this Agreement required to
be performed by Lessee and no breach thereof, shall be waived, altered or
modified, except by a written instrument executed by Lessor. No waiver of any
breach shall affect or alter any term or condition in this Agreement, and each
term or condition shall continue in full force and effect with respect to any
other then existing or subsequent breach thereof.
12. OPERATING STANDARDS.
-------------------
The Operating Standards attached to this Agreement as Exhibit "B" are
hereby made an integral part of this Agreement. Lessee, its employees, agents,
guests, invitees, visitors and/or any other persons caused to be present in and
around the Premises by the Lessee shall perform and abide by the rules and
regulations and any amendments or additions to said rules and regulations as
Lessor may make. In addition, Lessee, its employees and agents shall abide by
all applicable governmental rules, regulations, statutes and ordinances relating
in any way to the Premises or the Facility or Lessee's use or occupancy of the
Premises or the Facility; failing which Lessee shall be in default hereunder and
shall pay any fines or penalties imposed for such violation(s) directly to the
appropriate governmental authority or to Lessor, if Lessor has paid such amount
on behalf of Lessee. Such remedy shall not be exclusive. It is hereby further
explicitly agreed and understood that full compliance with the Operating
Standards as set forth constitutes a material obligation of this Agreement, and
that the failure to so comply shall
<PAGE>
constitute a violation of this Agreement entitling the Lessor to exercise any of
its remedies pursuant to this Agreement or otherwise.
13. EMPLOYMENT OF LESSOR'S EMPLOYEES.
--------------------------------
a. Lessee agrees that it will not, during the term of this Agreement and
any renewals thereof, or for a period of one year after the expiration or sooner
termination of this Agreement, hire or issue an offer to employ any person who
is or has been an employee of Lessor or Lessor's agent without prior consent
from Lessor. If Lessee either hires an employee of Lessor or Lessor's agent; or
hires any person who has been an employee of Lessor or its agent within six
months prior to the time they are hired by Lessee, Lessee will, at Lessors sole
option, be liable to Lessor for liquidated damages equal to six months wages of
the employee, at the rate last paid that employee by Lessor.
b. If Lessor assists in hiring an employee for Lessee, Lessee shall pay
to the Lessor a commission equal to 20% of that employee's annual salary. The
provisions hereof shall survive the expiration or sooner termination of the term
thereof.
14. ALTERATION.
----------
If Lessee requires any special wiring or office alterations for
extraordinary business machines or other purposes not consistent with the
current wiring, extraordinary telephone equipment or computer equipment. Such
alteration shall be done (i) only with the express written permission of the
Lessor, and if said permission is granted, then (ii) by an agent designated by
Lessor at Lessee's cost. The electrical current shall be used for ordinary
lighting purposes only, unless written permission to do otherwise shall first
have been obtained from Lessor at an agreed cost to Lessee. Lessor further
reserves the sole and exclusive right to limit the number and type of ??ines and
telephone equipment Lessee can install in the leased Premises.
15. RE-ENTRY.
--------
Lessor and its agents shall have the right to enter the Premises at any
time for the purpose of making any repairs, alterations, inspections which it
shall deem necessary for the preservation, safety or improvements of said
Premises, without in any way being deemed or held to have committed an eviction
(constructive or otherwise) of or trespass against Lessee.
16. RELOCATION.
----------
a. Lessee agrees that the Lessor may, in its sole discretion, relocate
the lessee from its present Premises to a like or similar office space within
the same facility upon ten (10) days notice to the Lessee. In the event that the
Lessor requires the Lessee to relocate, the Lessor hereby agrees to bear the
reasonable cost of any such relocation, which cost shall be limited to the cost
associated with the physical transfer of the Lessee's property to any different
office, which the Lessor may designate.
b. In the event that any such relocation is effected, the Lessee hereby
acknowledges that, unless otherwise agreed in writing, that all of the terms and
conditions of this Agreement shall remain in full force and effect.
17. ASSIGNMENT AND SUBLETTING.
-------------------------
No assignment or subletting of the Premises, this Agreement or any part
thereof shall be made by Lessee without Lessor's prior written consent, which
consent may be withheld for any or no reason in Lessor's sole discretion.
Neither all nor any part of Lessee's interest in the Premises or this Agreement
shall be encumbered, assigned or transferred, in whole or in part, either by act
of the Lessee or by operation of law
18. SURRENDER.
---------
a. On expiration of the term, any extended term, or sooner termination of
this Agreement, Lessee shall promptly surrender and deliver the Premises to
Lessor, without demand, and in as good condition as when let, ordinary wear and
tear excepted.
b. Upon Lessee serving a notice of cancellation as provided in 3b herein
Lessor shall have the right to show Lessee's Premises during the 60 day period
(for one or two offices) or 90 day period (for three or more offices) as the
case may be.
c. Without prior written approval of Lessor, Lessee shall not remove any
of its property from the Premises upon termination of this Agreement or at any
other time, except during Lessor's normal business hours. In the event Lessor
consents to Lessee's removing property before or after normal business hours,
any expenses incurred by Lessor as a result, including but not limited to
expenses for personnel, security, elevator, utilities and the like shall be paid
by Lessee in advance, to the extent determinable by Lessor, by certified and/or
bank check.
d. If Lessee vacates the Premises and leaves behind any property,
whatsoever, same will be deemed abandoned by Lessee and may be disposed of by
Lessor at Lessee's expense. If Lessee defaults in the payment of sums due to
Lessor, and Lessor changes the locks, removes Lessee's property, or otherwise
denies access to Lessee, Lessor shall not be liable for conversion or partial,
actual and/or constructive eviction.
19. HOLDING OVER.
------------
a. In the event that Lessee, should not renew this Agreement in
accordance with the terms and conditions hereof, and/or fail to surrender the
Premises upon the expiration of the term of the Agreement as provided herein,
Lessee agrees to pay Lessor, as liquidated damages, a sum equal to twice the
monthly rent and all additional charges for services provided by Lessor to
Lessee, for each month that Lessee retains possession of the Premises or any
part thereof; provided, however, that the acceptance of such sums, representing
liquidated damages shall not be deemed to be permission to Lessee to continue in
possession of the Premises.
20. DEFAULT AND REMEDIES.
--------------------
a. If the Lessee shall default in fulfilling any of its terms,
conditions, covenants or provisions of this Agreement, including but not limited
to:
1. Payment of fixed Monthly Rental Charges and/or any other charges
hereunder within ten days of the date such charges become due;
2. Becomes comes insolvent, makes an assignment for benefit of creditors,
or files a voluntary petition under any bankruptcy or insolvency law, or
has filed against it an involuntary petition under any such law;
<PAGE>
3. Defaults in fulfilling any of the terms, conditions, covenants or
provisions of this Agreement including but not limited to the breach of any
of the terms and conditions set forth in the exhibits attached hereto.
4. The abandonment and/or vacatur of the Premises by the Lessee;
then, after five days notice of any such default(s), the Lessor may, at its sole
discretion, terminate this Agreement upon five days notice to the Lessee, and
upon the expiration of such notice period, the Lessee shall quit and surrender
the Premises to the Lessor. In the event that the Lessee fails to quit and
surrender the Premises, the Lessor may re-enter and take possession of the
Premises and remove all persons and property therefrom, as well as disconnect
any telephone lines installed for the benefit of Lessee, without any liability
whatsoever to Lessee. In addition, Lessor may elect concurrently or alternately
to accelerate all of Lessee's obligations hereunder including without limitation
the rental, direct expenses, Schedule B Costs, and Telephone Services costs,
and/or the reletting of the Premises or any part thereof, for all or any part of
the remainder of said term, to a party satisfactory to Lessor, at any monthly
rental rate. Lessor, in its sole discretion, may accept notwithstanding the
foregoing, Lessor shall have no obligation, implied or otherwise, to mitigate
its damage(s) under such circumstances.
b. Should Lessor be unable to re-let the Premises, or should each monthly
re-rental be less than the rental, Lessee is obligated to pay under this
Agreement or any renewal thereof, at Lessor's option Lessee shall pay the amount
of such deficiency, plus the expenses of reletting, immediately in one lump sum
(if allowable under law) to Lessor upon demand and/or as such obligations
accrue.
c. If Lessee shall default in the observance or performance of any term
or covenant on Lessee's part to be observed or performed under or by virtue of
any of the terms or provisions in any article of this lease, then, unless
otherwise provided elsewhere in this lease, Lessor may immediately or at any
time thereafter and with notice perform the obligation of Lessee thereunder, and
if Lessor, in connection therewith or in connection with any default by Lessee
in the covenant to pay rent hereunder, makes any expenditures or incurs any
obligations for the payment of money, including but not limited to attorney's
fees, in instituting, prosecuting or defending any actions or proceeding, such
sums so paid or obligations incurred with interest and costs shall be deemed to
be additional rent hereunder and shall be paid by Lessee to Lessor rendition of
any bill or statement to Lessee therefor, and if Lessee's lease term shall have
expired at the time of making of such expenditures or incurring of such
obligations, such sums shall be recoverable by Lessor as damages.
21. MALL & TELEPHONE FORWARDING.
---------------------------
a. After termination or expiration of the term of this Agreement, Lessee
hereby agrees that it will take all reasonable steps to notify all parties of
Lessee's new address and phone numbers. Lessor shall have no obligation, to
notify any person or entity of Lessee's now address and/or phone numbers, except
as expressly provided herein.
b. Lessor will, unless otherwise instructed by Lessee in writing, forward
mail to Lessee at its new address and give out new telephone number via a voice
mail message for a period of three (3) months at the rate of $150.00 per month,
which sums shall be deducted from any amounts deposited with the Lessor as
security hereunder and paid to the Lessor in advance. In the event that there
is not sufficient security remaining on deposit to pay for the charges set forth
herein, unless the Lessee shall pay the charges set forth herein to the Lessor
in advance, Lessor shall have no obligation to provide the services set forth
herein.
22. NOTICES.
-------
Any notice under this Agreement shall be in writing and shall be either
delivered by hand or by first class mail to the party at the address set forth
below. Lessor hereby designates its address as:
ALLIANCE BUSINESS CENTERS
599 Lexington Avenue, Suite 2300
New York, New York 10022
Attn: Management
with a copy by regular first class mail to:
ALLIANCE Business Centers
122 East 42nd Street, Suite 2707
New York, NY 10168
Attn: Legal Department
Lessee hereby designates its address (which address must be an address within
the United States), as
Liquid Audio
Attn: Mr. Dick Wingate or Finance/Controller
810 Winslow, Redwood City, CA 94063
Phone (650) 549-2000 or 2032
Fax: (650) 549-2099
If such mail is properly addressed and mailed, as above, it shall be deemed
notice for all purposes, given when sent or delivered, even if returned as
undelivered.
23. LANDLORD'S ELECTION UNDER THIS AGREEMENT.
----------------------------------------
Upon early termination of the main Building lease, this Agreement shall
terminate unless the Building Landlord under the main lease elects to have this
Agreement assigned to the Building Landlord or another entity as provided in the
main lease. Upon notice to Lessor of the termination of the main lease and such
election, (i) the Agreement shall be deemed to have been assigned by Lessor to
the Building Landlord or to such other entity as is designated in such notice by
the Building Landlord, (ii) the Building Landlord shall be deemed to be the
Lessor under this Agreement and shall assume all rights and responsibilities of
Lessor under this Agreement, and (iii) Lessee shall be deemed to have attorned
to the Building Landlord as Lessor under this Agreement.
24. TIME OF ESSENCE.
---------------
Time is of the essence as to the performance by Lessee of all covenants,
terms and provisions of this Agreement.
25. SEVERABILITY.
------------
The invalidity of any one or more of the sections, subsections, sentences,
clauses or words contained in this Agreement or the application thereof to any
particular set of circumstances, shall not affect the validity of the remaining
portions of this Agreement or of their valid application to any other set of
circumstances. All of said sections, subsections, sentences, clauses and words
are inserted conditionally on being valid in law, and in
<PAGE>
the event that one or more of the sections, subsections, sentences, clauses or
words contained herein shall be deemed invalid, this Agreement shall be
construed as if such invalid sections, subsections, sentences, clauses or words
had not been inserted. In the event that any part of this Agreement shall be
held to be unenforceable or invalid, the remaining parts of this Agreement shall
nevertheless continue to be valid and enforceable as though the invalid portions
had not been a part hereof. In addition, the parties acknowledge (i) that this
Agreement has been fully negotiated by and between the parties in good faith and
is the result of the joint efforts of both parties, (ii) that both parties have
been provided with the opportunity to consult with legal counsel regarding its
terms, conditions and provisions and (iii) that regardless of whether or not
either party has elected to consult with legal counsel, it is the intent of the
parties that in no event shall the terms, conditions or provisions of this
Agreement be construed against either party as the drafter of this Agreement.
26. EXECUTION BY LESSEE.
-------------------
The party or parties executing this Agreement on behalf of the Lessee
warrant(s) and represent(s): (i) that such executing party (or parties) has (or
have) complete and full authority to execute this Agreement on behalf of Lessee;
(ii) that Lessee shall fully perform its obligations hereunder.
27. ASSUMPTION AGREEMENTS AND COVENANTS.
-----------------------------------
This Agreement is subject and subordinate to the main Building lease
governing the Facility, under which Lessor is bound as tenant; and the
provisions of the main lease, other than as to the payment of rent or other
monies, are incorporated into this Agreement as if completely herein rewritten.
Lessee shall comply with and be bound by all provisions of the main lease except
that the payment of rent shall be governed by the provisions of this Agreement,
and Lessee shall indemnify and hold Lessor harmless from and against any claim
or liability under the main lease of Lessor arising from Lessee's breach of the
Main Lease or this Agreement. Lessor covenants and warrants that the use of the
Premises as a business office is consistent with and does not violate the terms
of the main lease.
28 COVENANT AND CONDITIONS.
----------------------
Each term, provision and obligation of this Agreement to be performed by
Lessee shall be construed as both a covenant and condition.
29. ENTIRE AGREEMENT.
----------------
This Agreement embodies the entire understandings between the parties
relative to its subject matter, and shall not be modified, changed or altered in
any respect except in writing signed by all parties.
30. COUNTERPARTS.
------------
This Agreement may be executed in two or more counterparts, each of which
shall be deemed to be an original, but all of which together shall constitute
one and the same instrument.
IN WITNESS WHEREOF, Lessor and Lessee have executed this Agreement as of
the date first above written.
LESSOR ALLIANCE BUSINESS CENTERS
By: Karen Stagg, General Manager
----------------------------------
LESSEE: LIQUID AUDIO
(If a corporation)
By: /s/ [SIGNATURE ILLEGIBLE]
----------------------------------
Title: CFO
------------------------------
[Corporate Seal]
Tax ID Number 77-0421089
-----------------------
LESSEE:
(If an individual or partnership)
By: _________________________________
By: _________________________________
EXHIBIT "A"
- -----------
. Furnished Private Office
. Furnished, Decorated Reception Room with Professional Receptionist
. Personalized Telephone Answering During Office Hours
. 24 hour Voicemail
. 4 hours of Conference Room or private furnished offices, subject to prior
scheduling and use by other lessees
. Corporate Identity on Lobby Directory where Available
. Complete Mail Room Facility
. Receipt of Mail and Packages
. Complete Kitchen Facilities with Coffee Machine
. Utilities and Maintenance
. HVAC During Normal Business Hours
. Janitorial Services
. 8 hours per month courtesy use of other ALLIANCE Business Centers
affiliated facilities. Locations subject to current affiliation and
availability.
<PAGE>
EXHIBIT "B" OPERATING STANDARDS
- -------------------------------
1. Lessees and their guests will conduct themselves in a businesslike manner,
proper attire will be worn at all times, and the noise level will be kept
to a level so as not to interfere with or annoy other Lessees
2. Lessee shall not provide or offer to provide any services to Lessor's
customers if such services are available from Lessor
3. Lessee will not affix anything to the walls of the Premises without the
prior written consent of the Lessor
4. Lessee will not prop open any corridor doors, exit doors or doors
connecting corridors during or after business hours.
5. Lessees using public areas may only do so with the consent of the Lessor,
and those areas must be kept neat and attractive at all times
6. Lessee will not conduct any activity within the Premises, Executive Suite
or Building, which in the sole judgment of the Landlord will create
excessive traffic or is inappropriate to the executive office suite
environment.
7. Lessee may not conduct business in the corridors or any other areas except
in its designated offices or conference rooms without the written consent
of Lessor.
8. All corridors, halls, elevators and stairways shall not be obstructed by
Lessee or used for any purpose other than normal egress and ingress.
9. No advertisement, identifying signs or other notices shall be inscribed,
painted or affixed on any part of the corridors, doors, or public areas.
10. Without Lessor's specific prior written permission, Lessee is not permitted
to place "mass market", direct mail or advertising (i.e. newspaper,
classified advertisements, yellow pages, billboards) using Lessor's
assigned telephone number or take any such action that would generate a
excessive of incoming calls.
11. Lessee shall not solicit clients of Lessor or and their employees in the
Building without first obtaining Lessor's prior written approval.
12. Immediately following Lessee's use of conference room space and/or
audio/visual equipment, Lessee shall clean up and return the space and
equipment to the state and condition it was in prior to Lessee's use. If
not, Lessor may charge Lessee for any other expenses required to restore
the conference space and/or equipment to its original condition.
13. Lessor must be notified in writing if Lessor desires to utilize the
conference room or other common areas of the Executive Suite during evening
or weekend hours. Lessor may deny the Lessee access if the desired usage is
inappropriate and may disrupt normal operations.
14. Lessee shall not, without Lessor's written consent, store or operate any
computer (except a desktop/laptop computer or fax machine) or any other
large business machines, reproduction equipment, heating equipment, stove,
speaker phones, radios, stereo equipment or other mechanical amplification
equipment, refrigerator or coffee equipment, or conduct a mechanical
business, do any cooking, or use or allow to be used on the Premises oil,
burning fluids, gasoline, kerosene for heating, warming or lighting. No
article deemed extra hazardous on account of fire or any explosives shall
be brought into said Premises or Facility. No offensive gases, odors on
liquids shall be permitted.
15. Lessee will bring no animals into the Premises or Facility except for those
assisting disabled individuals.
16. Lessee shall not remove furniture fixtures or decorative material from
offices or common areas without the written consent of Lessor.
17. Lessee shall not make any additional copies of any Lessor issued keys. All
keys and security cards are the property of Lessor and must be returned
upon request or by the close of the business on the expiration or sooner
termination of the Agreement term. Any lost or unreturned keys or cards
shall incur a $25.00 per item charge and the cost to re-key the office.
18. Lessee shall not smoke nor allow smoking in any area of the Facility,
including the Premises, and shall comply with all governmental regulations
and ordinances concerning smoking.
19. Lessee shall not allow more than three visitors in the reception lobby of
the Premises at any one time.
20. Lessee's parking rights (if any) are defined by Lessor's Agreement with the
owner of the Building. Landlord reserves the right to modify parking
arrangements if required to do so by Building management.
21. Lessee shall cooperate and be courteous with all other occupants of the
Facility and Lessor's staff and personnel.
22. Lessor reserves the right to make such other reasonable rules and
regulations as in its judgment may from time to time be needed for the
safety, care, appropriate operation and cleanliness of the Facility.
<PAGE>
[LOGO OF ALLIANCE BUSINESS CENTERS APPEARS HERE]
LEASE AND SERVICE AGREEMENT
INTERNET T1 ACCESS RIDER
RE: Lease and Service Agreement between Alliance Lexington LP and Liquid audio
---------------------- ------------
("Agreement"). d/b/a alliance Business Centers
DATE: 10-20-98
--------
CENTER: 599 Lexington Ave.
------------------
a. Provided Lessee is not in default of any of the terms of the Agreement
(including, without limitation, the provisions of this Rider) Lessor will
make available to Lessee non-exclusive access to Lessor's dedicated
Internet T1 data line ("Internet Access"). Lessee shall be entitled to use
the Internet Access for web browsing, e-mail, file transfers and general
low bandwidth use of Internet technologies. Lessee's use of the Internet
Access is not to exceed 256 kbps for over 10 hours in any calendar month.
Lessor reserves the right to monitor the average and aggregate usage of the
Internet Access by Lessee. Fees and charges for the Internet Access will be
as per Lessor's scheduled rates for the same, which rates are subject to
change. Lessor reserves the right to charge additional fees and charges for
the provision of services beyond those described above, including, without
limitation, high bandwidth applications, web hosting or other Internet
services, video conferencing, streaming technologies and/or use of the
Internet Access in excess of the allotted amount at Lessor's standard rates
for same.
b. In connection with the provision of Internet Access, Lessor will provide an
Internet router and, at Lessee's request and for customary rates,
connectivity services. Unless otherwise agreed, Lessee will be responsible
for providing workstations and network interface cards. Lessor will provide
limited security in connection with the Internet Access through Network
Address Translation. Any other additional security desired by Lessee shall
be provided at Lessee's sole cost and expense and shall be installed by
Lessee only upon the prior written consent of Lessor.
c. Lessee will be responsible for any software and content displayed and
distributed by Lessee or, if permitted by, Lessee's web hosting customers,
if any. Lessee's (and Lessee's customers') use of the Internet Access will
be subject to all terms and conditions of the Agreement, this Rider and to
applicable law. Lessor reserves the right to discontinue the provision of
Internet Access at any time, without liability to Lessor, if Lessor
determined in its sole discretion that Lessee's (or Lessee's customers')
use of the Internet Access is inappropriate, illegal or otherwise
inconsistent with the provisions of the Agreement and this Rider or with
the rules of proper etiquette of Lessor's Internet services provider,
Lessee will indemnify Lessor for any claims, damages, or expenses suffered
by Lessor arising out of or relating to the improper or illegal use by
Lessee or Lessee's customers' of the Internet Access, including, without
limitation, any such claims, damages, or expenses arising out of or
relating to any termination of Lessor's Internet Access by its internet
services provider. Lessor also may, in its sole discretion and without any
cause or reason whatsoever, terminate the Internet Access upon 30 days'
written notice to Lessee.
d. Lessee waives any recourse as against lessor for any claimed liability or
damage arising from the provision of Internet Access (which for these
purposes shall include the installation by Lessor or its subcontractors of
third party software necessary for the provision of such access) as well as
any claim for business interruption (including loss of data) and for
consequential damages. All other terms of the Agreement will remain in full
force and effect. This agreement is subject and subordinate to the main
"Lease and Services Agreement."
ACCEPTED BY LESSOR: ACCEPTED BY LESSEE:
By: Karen Stagg, General Manager By: Dick Wingate
---------------------------- ------------------------------
Date: 10-20-98 Title: VP Content Development
---------------------------
Date: 10/20/98
----------------------------
<PAGE>
[LOGO OF ALLIANCE BUSINESS CENTERS APPEARS HERE]
LEASE AND SERVICE AGREEMENT
OFFICE RIDER
RE: Lease and Service Agreement between Alliance Lexington LP d/b/a Alliance
Business Centers and LIQUID AUDIO ("Agreement").
DATE: February 1, 1999
CENTER: 599 Lexington Avenue
Paragraph "1b" of the Agreement is hereby modified as follows:
In addition to the current offices occupied by Lessee, Lessee shall now occupy
facility office space number #23.
In modifying Paragraph "4a" of the Agreement, Lessee shall pay Lessor as rent
for office #23 an additional $13,200, payable in equal monthly installments of
$2,200. The lease terms for office #23 shall be for (6) six months, beginning
March 1, 1999 and ending on August 31, 1999.
This notice shall also serve to advise you that pursuant to Paragraph "3a" of
the the Agreement, the term of the Agreement dated August 17, 1998, has been
extended (6) six months, so that said term shall expire on August 31, 1999. Your
new charge for office #115 is $9,300, payable in equal monthly installments of
$1550.
All other terms and conditions of the Agreement shall remain in full force and
effect.
ACCEPTED BY LESSOR: ACCEPTED BY LESSEE:
ALLIANCE BUSINESS CENTERS LIQUID AUDIO
By: /s/ Karen Stagg, General Manager By: /s/ Dick Wingate
--------------------------------- ---------------------------
Date: 2/5/99 Title: VP Content Development
-------------------------------- ------------------------
Date: 2/5/99
-------------------------
<PAGE>
EXHIBIT 10.27
LEASE
THIS AGREEMENT, entered into as of September 1, 1998 by and between Liquid
Audio a corporation having an office and place of business c/o 810 Winslow St,
Redwood City, CA 94063 Connecticut, acting herein by its President hereunto duly
authorized (hereinafter referred to as "Lessee"), and New Retail Concepts Ltd, a
New York corporation, having a place of business at 21 Bridge Square in the Town
of Westport, County of Fairfield and State of Connecticut, acting herein by Dane
Benson, it's President, hereunto duly authorized and (hereinafter referred to as
"Lessor");
WITNESSETH:
WHEREAS, Lessee wishes to lease, rent and hire the premises described
herein from the Lessor and Lessor wishes to lease same to Lessee; and,
NOW, THEREFORE, in consideration of the premises and of the sum of One
($1.00) Dollar by each of the parties hereto to the other in hand paid, receipt
whereof is hereby acknowledged, the parties hereto convenant and agree that
Lessor hereby demises and leases to Lessee, and Lessee hereby hires and takes
from Lessor the premises, which are more particularly described in Article 1 of
this Lease.
1
<PAGE>
TO HAVE AND TO HOLD such premises for the term and upon the terms and
conditions herein provided.
IT IS HEREBY MUTUALLY CONVENANTED AND AGREED by and between Lessor and
Lessee that this Lease is made upon the foregoing and upon the following
agreements, terms; covenants and conditions:
1. PREMISES. The Lessor hereby leases to the Lessee and the Lessee hereby
--------
hires from the Lessor, one office & Shared mailroom/waiting area upon the terms
and conditions set forth herein, those certain premises, known as 21 Bridge
Square, Westport, Connecticut, consisting of approximately Two hundred fifty
(250) square feet* (the "Demised Premises"), in the shopping center located at
Bridge Square and Riverside Avenue, Westport, Connecticut, the entire premises
being described in Exhibit A attached hereto and known as Bridge Square
(hereinafter the "Center"). The Demised Premises are more particularly set forth
on the floor plan, attached hereto as Exhibit B, and incorporated herein by
reference.
2. REPRESENTATIONS. Lessor warrants and represents that it has the full
---------------
right as a bona fide tenant of Mill Pond Farm, power and authority to enter into
this Lease for the term herein granted, and to grant the rights to the Lessee
herein contained. [INSERT RIDER - SEE ATTACHED]
Lessee hereby acknowledges and represents that neither the Lessor nor
Lessor's agents have made any representations or
Square Footage used to indicate approximate size of space Leased and not to
form a critical condition of this Lease.
* Square Footage used to indicate approximate size of space Leased not to
form a critical condition of this Lease.
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<PAGE>
promises with respect to the Demised Premises and/or the Center except as are
herein expressly set forth. Lessee acknowledges that it has examined the Demised
Premises and accepts them in their present condition.
3. USE. Lessee may use and occupy the Demised Premises as an
---
administrative office, and only of the Lessee and for no other purpose or
purposes whatsoever. Lessee shall not use or knowingly permit any part of the
Demised Premises and/or the Center to be used for any unlawful purpose, nor
shall the Lessee use or occupy or permit the Demised Premises and/or the Center
to be used or occupied, nor do or permit anything to be done in or on the
Demised Premises and/or the Center, in a manner which will in any way violate
any certificate of occupancy or ordinance, rule or regulation affecting the
Demised Premises and/or the Center, or make void any insurance then in force
with respect thereto, or which will make
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it impossible to obtain fire or other insurance required to be furnished
hereunder, or which will cause or be reasonably likely to cause structural
damage to the building or any part thereof, or which will constitute a public or
private nuisance, and shall not use or occupy or permit the Demised Premises
and/or the Center to be used or occupied in any manner which will violate any
laws or regulations of any governmental authority.
4. TERM. The term of this Lease shall be 6 months commencing on Sept 1,
----
1998 and terminating at 12:00 o'clock midnight on February 28, 1999.
5. BASE RENT. The total base rent for the term hereof shall be the sum of
---------
Four thousand two hundred dollars (4200.00) plus a pro-rated share of utilities.
4
<PAGE>
DOLLARS in lawful money of the United States. Said rent shall be payable in
monthly installments of: Seven hundred dollars (700.00) plus utilities as
defined on page 4 per month, in advance, upon the first day of each and every
month commencing on Sept 1, 1998 and on the first day of each month thereafter,
through and including February 1, 1998, subject to the increments as provided
hereinbelow.
Said rent shall be payable by the Lessee, to the Lessor, at the Lessor's
offices at 21 BRIDGE SQUARE Westport, Connecticut 06880, or to such other
person, firm or corporation or at such other place or places as the Lessor shall
designate, from time to time, in writing. In the event the Lessee shall fail to
pay the base rent and any additional rent reserved and provided for herein
within ten (10) days after same shall become due, the Lessee shall pay to the
Lessor, as further additional rent, a late fee equal to five (5%) percent of
each base and additional rental installment then due hereunder, in addition to
such base and additional rental installment and other payments then due, which
the parties agree is a reasonable estimate of the sums necessary to cover the
Lessor's additional expenses occasioned by such late payment. In addition to the
late fee rent payments received after the tenth (10th) day after same shall
become due will accrue interest after the first day after same shall become due
at twelve (12) percent per annum.
5
<PAGE>
6. ADDITIONAL RENT. A. In the event of any dispute or action by Lessor
---------------
claiming default by Lessee under any terms of this Lease, Lessee agrees to pay
as additional rent, all expenses, disbursements, outlays, advances, costs and
attorneys' fees plus interest at the rate of twelve (12%) percent per annum and
costs of collection which the Lessor may incur in effecting or enforcing any of
the terms of this Lease or the Lessee's obligations hereunder, whether or not
formal court proceedings are commenced, unless the dispute is resolved in
Lessee's favor. Any such expenses, disbursements outlays, advances and attorneys
fees, together with interest at the rate of twelve (12%) percent per annum,
shall be paid by Lessee to Lessor within ten (10) days of rendition of any bill
or statement to Lessee therefor. In the event the Lessee shall fail to pay the
additional rent as provided for herein within ten (10) days after same shall
become due, the Lessee shall pay to the Lessor, as additional rent, a late fee
equal to five (5%) percent of such additional rent in addition to such
additional rent.
6
<PAGE>
B. In the event that the Lessee shall make any alterations,
modifications, installations, improvements or decorations upon the Demised
Premises which alterations, modifications, installations, improvements or
decorations shall increase or cause to be increased the Center operating costs
and/or real estate taxes and/or sewer assessments, sewer use charges, sewer
interest or other sewer charges, or other municipal, state or other assessments,
the additional rent required to be paid by the Lessee as provided for herein
shall be revised and increased to reflect ?? such increases.
7
<PAGE>
D. Lessor reserves the right to stop the heating, plumbing and electric
systems, when necessary, by reason of accident, or emergency, or for repairs,
alterations, replacements or improvements, in the judgement of Lessor necessary
to be made until said repairs, alterations, replacements or improvements shall
have been completed. Lessor will make an effort to give reasonable notice of
such stoppages except in the event of an accident or emergency or other stoppage
beyond Lessor's control. And Lessor shall have no responsibility or liability
for failure to supply heat, elevator, plumbing and electric service, during said
period or when prevented from so doing by strikes, accidents or by any cause
beyond Lessor's control, or by laws, order or regulations of any federal, state
or municipal authority, or
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failure of oil or other suitable fuel supply, or inability byexercise of
reasonable diligence to obtain oil or other suitable fuel.
E. The parties agree that the heating seasons shall be the periods
between September 15 and the following May 15 and that the cooling seasons shall
be the periods between May 15 and the following September 15. Lessee shall, in
any event, cause and keep entirely unobstructed all of the vents, intakes,
outlets and grilles at all times and shall comply with and observe all
regulations and requirements prescribed by Lessor for the proper functioning of
the heating, ventilating and air-conditioning systems,
7. GARBAGE. All garbage and refuse shall be kept in the kind of container
-------
specified by Lessor and shall be placed outside of the Demised Premises prepared
for collection in the manner and at the times and places specified by Lessor. If
Lessor shall provide or designate a service for picking up refuse and garbage,
Lessee shall use same at Lessee's cost. Lessee shall pay the cost of removal of
any of Lessee's refuse and rubbish.
8. SECURITY. Lessee has deposited with Lessor, in connection with an
--------
existing lease, the sum of seven hundred ($ 700.00) DOLLARS as security. This
security deposit will continue to be
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<PAGE>
held by the Lessor for the faithful performance and observance by Lessee of the
terms, covenants, provisions and conditions of this Lease. It is agreed that in
the event Lessee defaults in respect of any of the terms, covenants, provisions
and conditions of this Lease, including, but not limited to, the payment of base
rent and additional rent, Lessor may use, apply or retain the whole or any part
of the security so deposited to the extent reasonably required for the payment
of any base rent and additional rent or any other sum as to which Lessee is in
default or for any sum which Lessor may expend or may be required to expend by
reason of Lessee's default in respect of any of the terms, covenants and
conditions of this Lease, including but not limited to, any damages or
deficiency in the reletting of the Demised Premises, whether such damages or
deficiency occurred before or after summary proceedings or other re-entry by
Lessor. In the event that Lessee shall fully and faithfully comply with all of
the terms, provisions, covenants and conditions of this Lease, then, and in such
event, upon the expiration hereof, the Lessor shall return to the Lessee said
security, without interest thereon; on such date. In the event of a sale,
transfer or conveyance of the Lessor's entire interest in the premises of which
the Demised Premises form a part, Lessor shall have the right to transfer the
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<PAGE>
security to the Transferee/Purchaser, who shall be bound by the Lessor's
obligations hereunder and Lessor shall thereupon be released by Lessee from all
liability for the return of such security; and Lessee agrees to look to the new
Lessor solely for the return of said security; and it is agreed that the
provisions hereof shall apply to every transfer or assignment made of the
security to a new Lessor. Lessee further convenants that it will not assign or
encumber or attempt to assign or encumber the monies deposited herein as
security and that neither Lessor nor its successors or assigns shall be bound by
any such assignment, encumbrance, attempted assignment or attempted encumbrance.
9. ALTERATIONS. Lessee shall make no alterations decorations,
-----------
installations, additions or improvements in or to the Demised Premises,
including, but not limited to, any air-conditioning or cooling system, unit or
part thereof or other apparatus of like or other nature, without Lessor's prior
written consent, which consent shall not be unreasonably withheld, and then only
by contractors or mechanics approved by Lessor. If Lessor does not give its
written consent within two (2) weeks of its receipt of a request therefor, which
request is accompanied by the plans for such alterations and improvements, such
consent will be deemed to have been given. If any such alterations, additions
11
<PAGE>
or improvements are made without such consent, the Lessor shall have the right
to correct or remove them, and the Lessee shall be liable for any and all
expense incurred by the Lessor in the performance of this work. All such work,
alterations, decorations, installations, additions or improvements shall be done
at Lessee's sole expense. All alterations, decorations, installations, additions
or improvements upon the Demised Premises, made by either party, including all
paneling, decorations, partitions, railings and the like, shall become the
property of the Lessor, without payment therefor by the Lessor, and shall remain
up and be surrendered with, said Demised Premises, as a part thereof, at the end
of the term or any ?? or extension hereof, as the case may be. Nothing contained
herein shall prohibit the Lessee from removing any and all trade fixtures and/or
other items, the removal of which will not cause damage to the premises,
provided the premises are restored to their former condition at Lessee's sole
cost and expense.
Any and all personal property placed or installed in the Demised Premises
by the Lessee which shall continue to remain the property of the Lessee shall be
removed from the Demised Premises upon the expiration of the term hereof. The
Lessee shall not place a load upon any floor of the Demised Premises exceeding
125
12
<PAGE>
pounds per square foot and the Lessor reserves the right to prescribe the weight
and position of all safes and other heavy equipment installed or located in or
upon the Demised Premises by the Lessee.
The Lessee shall not permit any mechanics' or materialmen's liens to be
filed against the Demised Premises or the land and building of which the Demised
Premises form a party nor against the Lessee's leasehold interest in the Demised
Premises. If any such liens are so filed, and not discharged by the Lessee
within sixty (60) days thereafter, the Lessor, at its election, may-pay and
satisfy the same and in such event the sum so paid by the Lessor, together with
interest thereon at the rate of 12% per annum from the date of payment, shall be
deemed to be additional rent, due and payable by the Lessee immediately, without
notice or demand therefor.
Any improvements undertaken by the Lessee shall be at the Lessee's sole
cost and expense. All plans and specifications for such proposed improvements
shall be submitted to the Lessor for prior written approval at the time that
Lessee requests Lessor's consent for such improvements. All such improvements
shall be in conformance with any and all applicable building, safety, fire,
planning, zoning, health, or any and all other required codes,
13
<PAGE>
ordinances, laws, rules and regulations. Lessee shall obtain any required
permits at its cost. Lessee shall be responsible for any and all architectural,
design, construction and related fees or expenses in connection with any such
improvements to the Demised Premises. A violation of this provision shall be
deemed to be a breach of this Lease and a covenant herein.
10. REPAIRS. Lessee shall take good care of the Demised Premises
-------
(including plate glass and all doors) and the fixtures and appurtenances
therein. All damage or injury to the Demised Premises and to its fixtures,
appurtenances and equipment or to the building of which the same form a part
resulting from fire, explosion, air conditioning unit or system, short circuits,
flow or leakage of water, steam, or by frost or by bursting or leaking of pipes
or plumbing works, or any other cause or condition, or any damage or injury
caused by the Lessee in moving in or out of the building, or installing or
removing any of the Lessee's property or fixtures, or from any other cause of
any other kind or nature whatsoever due to carelessness, omission, neglect,
improper conduct or other cause of Lessee, its servants, employees, agents or
licensees shall be repaired and restored promptly by Lessee at its sole cost and
expense to the reasonable satisfaction of Lessor. If Lessee fails to commence
such repairs or restorations
14
<PAGE>
upon twenty (20) days written notice by the Lessor to the Lessee to commence
such repairs, but due allowance shall be made for what are commonly known as
"Labor Troubles" or other causes beyond the control of Lessee, same may be made
by Lessor at the expense of Lessee and collectible as additional rent or
otherwise and shall be paid by Lessee within fifteen (15) days after rendition
of a bill or statement therefor. There shall be no liability on the part of
Lessor by reason of inconvenience, annoyance or injury to business arising from
Lessor, Lessee or others making any repairs, alterations or improvements in or
to any portion of the building of which the Demised Premises form a part, or in
or to fixtures, appurtenances, for equipment thereof, and no ability upon Lessor
for failure of Lessor or others to make any repairs, alterations, additions or
improvements in or to any portion of the building or of the Demised Premises, or
in or to the fixtures, appurtenances or equipment thereof. Lessee shall not
commit or permit to be committed any act or thing contrary to the applicable
state, town and county health, sanitation, safety and building laws and
ordinances, nor shall the Lessee cause or permit any waste, damage or injury to
the Demised Premises.
15
<PAGE>
the Lessee shall maintain upon all of its own equipment, furniture, fixtures,
trade fixtures or other inventory or physical assets upon the demised premises,
full replacement cost insurance in the event of casualty or loss in broad form
casualty, including coverage for malicious mischief and/or vandalism. Said
policies shall be maintained with the prohibition against cancellation without
Notice to the Lessor and the Lessee shall, from time to time, furnish to the
Lessor certificates of the existence of said policies and the payment of
premiums therefor. Any proceeds payable by the insurer to the Lessee pursuant
thereto shall be taken and held by the Lessee, to be used solely for the
replacement of any of the insured articles owned by the Lessee and located on
the demised premises within the demised premises and for no other purpose.
12. DAMAGE AND DESTRUCTION. In the event that the Demised
----------------------
16
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Premises shall be partially damaged by fire or the elements, the Lessee shall
give immediate notice thereof to the Lessor, and the same shall be repaired at
the expense of the Lessor as speedily as possible (but due allowance shall be
made for any delay arising in connection with adjustment of the fire insurance
loss, or from what are known as "Labor Troubles", or other causes beyond the
control of the Lessor) and the rent accruing shall not cease; in the event that
the damage should be so extensive so as to render the Demised Premises
untenantable, the rent shall cease until such time as the Demised Premises shall
again be put in repair, but in the event of the building being damaged by fire
or otherwise to such an extent as to render it necessary in the judgment of the
Lessor to rebuild the same (and whether or not the Demised Premises be
affected), then, at the Lessor's election, upon notice to the Lessee, and from
thenceforth this Lease shall cease and come to an end, and the rent shall be
apportioned and paid up to the date of such damage. If the Demised Premises are
untenantable and if the Lessor shall not have repaired such damage within one
ninety (90) days, or if said damage shall not be repairable within said one
hundred ninety (90) days, from the date of such loss, then in either event, this
Lease shall be
17
<PAGE>
terminable at the option of the Lessee or the Lessor upon written Notice
pursuant to the provisions of this Lease furnished to the other party.
If the Demised Premises shall be partially damaged, the base rent, but not
additional rent, shall be abated to an extent corresponding to the part so
damaged and for the period during which the partially damaged Demised Premises
cannot be reasonably utilized by the Lessee.
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13. COMPLIANCE WITH APPLICABLE LAWS. The Lessee, at its sole expense,
-------------------------------
shall comply with all of the laws, orders and regulations of Federal, State,
County and Municipal Authorities, and with any direction of any public officer
or officers, pursuant to law, which shall impose any violation, order or duty
with respect to the Demised Premises, or the use or occupation thereof. Lessee
shall not do or permit to be done any act or thing upon the Demised Premises,
which will invalidate or be in conflict with fire insurance or liability
insurance policies covering the building of which the Demised Premises form a
part, and fixtures and property therein, and shall not do, or permit to be done,
any act or thing upon the Demised Premises which shall or might ?? subject
Lessor to any liability or responsibility for injury to any person or persons or
to property by reason of any business or operation being carried on upon the
Demised Premises or for any other reason. Lessee, at its sole expense, shall
comply with all rules, orders, regulations or requirements of the Board of Fire
Underwriters, or any other similar body, and shall not do, or permit anything to
be done, in or upon the Demised Premises, or bring or keep anything therein,
except as now or hereafter permitted by the Fire Department, Board of Fire
Underwriters, Fire Insurance Rating Organization or other authority having
19
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jurisdiction and then only in such quantity and manner of storage as not to
increase the rate for fire insurance applicable to the building, or use the
Demised Premises in a manner which shall increase the rate of fire insurance on
the building of which the Demised Premises form a part, or on property located
therein, over that in effect prior to this Lease. If by reason of failure of
Lessee to comply with the provisions of this paragraph, the fire insurance rate
shall be higher than it otherwise would be then Lessee shall reimburse Lessor,
as additional rent hereunder, for that part of all fire insurance premiums
and/or liability insurance premiums thereafter paid by Lessor, which shall have
been charged because of such failure or use by Lessee and shall make such
reimbursement upon the first day of the month following such outlay by Lessor.
14. LIMITATION OF LIABILITY. If Lessor or any successor in interest
-----------------------
thereto, be an individual, joint venture, limited partnership, tenancy in
common, co-partnership, unincorporated association, or other unincorporated
aggregate of individuals (all of which are referred to below individually and
collectively as an "unincorporated landlord") then anything in this Lease to the
contrary notwithstanding; Lessee shall look solely to the estate and property of
the unincorporated landlord in the Demised
20
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Premises for the satisfaction of Lessee's respective remedies for the collection
of a judgment (or other judicial process) requiring the payment of money in the
event of any default or breach with respect to any of the terms, covenants and
conditions of the lease to be observed and/or performed by Lessor, and no other
property or assets of such unincorporated landlord, or any general or limited
partner thereof, shall be subject to levy, execution, deficiency judgment, or
other enforcement procedure for the satisfaction of the remedies of Lessee.
16. SIGNS. The Lessee shall not expose any sign, advertisement,
illumination or
-----
projection of any kind whatsoever in or about windows, or inscribed or affixed
upon any part of the exterior of the Demised Premises, or in the building of
which they form a part, without the written consent and approval of Lessor.
17. MORTGAGE SUBORDINATION. This Lease and all rights of the
----------------------
21
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Lessee hereunder are and shall be subject and subordinate to all security liens,
to lenders or mortgagees, mortgages and deeds of trust which may now or
hereafter affect the Demised Premises or the building in which same are situated
or the land upon which said building is located and to all renewals,
modifications, consolidations, replacements and extensions thereof. This clause
shall be self-operative and no further instrument of subordination shall be
required by any mortgagee. In confirmation of such subordination, Lessee shall
execute promptly any certificate that Lessor may request, and in no event later
than ten (10) days after request by Lessor. The Lessee hereby constitutes and
appoints the Lessor as the Lessee's attorney in fact to execute any such
certificate or certificates for and on behalf of the Lessee if Lessee fails to
execute any such certificate within ten (10) days after request by the Lessor.
Lessor shall use its best efforts to obtain the agreement of any subsequent
mortgage that it will not disturb Lessee's tenancy upon a foreclosure so long as
Lessee is not in default under this Lease.
18. EVENTS OF DEFAULT. In the event that the Lessee shall default in the
-----------------
payment of the base rent or additional rent or shall violate or fail to perform
each and every covenant and provision herein contained, or in the event that the
Lessee shall
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abandon the Demised Premises or leave them vacant for a period of (15) days,
then this Lease, if the Lessor shall so elect, shall terminate ten (10) days
after notice of such election by the Lessor shall have been sent by the Lessor
to the Lessee at the Demised Premises; (except in the case of non-payment of
base or additional rent, for which no notice shall be required), and thereupon
(unless the Lessee shall have completely removed or cured said default) this
Lease shall cease and come to an end as if that were the day originally fixed
herein for the expiration of the term hereof. The Lessee expressly waives
service of a Notice to Quit in an action of summary process brought for non-
payment of rent. Thereupon, said Lessor or Lessor's agents or ?? representatives
may re-enter said Demised Premises either by force or otherwise, dispossess the
Lessee or his legal representatives or any occupant of the Demised Premises by
summary proceedings or otherwise and remove their effects, it being understood
that no demand for rent and no re-entry for condition broken, as at common law
shall be necessary to enable Lessor to recover possession pursuant to the
Summary Process Statute and hereby expressly waives any such demand and re-
entry. If the Lessor so elects, Lessor may re-let the Demised Premises as the
agent for the Lessee or otherwise, and receive the rent therefor, applying the
same
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first to the payment of such expenses as the Lessor may be put to in entering
and letting, and then to the payment of the base and additional rent payable
under this Lease and the fulfillment of the Lessee's covenants hereunder; the
balance (if any) to be paid by the Lessee who shall remain liable for any
deficiency. Suit or suits for the recovery of such deficiency or damage may be
brought by the Lessor, from time to time, at the election of the Lessor and
nothing herein shall be deemed to require the Lessor to await the date whereon
the lease or the demised term would have expired by limitation had there been no
such default by the Lessee.
In the event that the Lessee shall become bankrupt or shall make a
voluntary assignment for the benefit of creditors, or in the event that a
receiver of the Lessee shall be appointed, or in the event of any proceedings
filed by or against the Lessee under the Bankruptcy Code or in State Court
receivership proceedings, then, at the option of the Lessor, and upon ten (10)
days notice to the Lessee of the exercise of such option, this Lease shall cease
and come to an end.
19. CONDEMNATION. If the Demised Premises shall be taken or condemned in
------------
whole or in part for public purposes, then the term of this Lease shall, at the
option of the Lessor, forthwith cease and terminate, the Lessor receiving the
entire award for land and
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building; the current rent, however, shall in such case abate proportionately.
Nothing herein contained shall be deemed or construed to prevent the Lessee from
interposing and prosecuting in any condemnation proceedings a claim for the
value of any fixtures or improvements installed in or made to the Demised
Premises by the Lessee or a claim for moving and relocating expenses.
The use of term "taken or condemned" as used in the Lease shall include any
voluntary conveyance by the Lessor of the demised premises or any interest
therein to any public or quasi-public authority having the power of eminent
domain which voluntary conveyance is made as a result of a negotiation arising
out of a threat or intent to acquire the property by eminent domain proceedings.
The right of the Lessee to recover moving and relocating expenses in the event
of a condemnation shall be limited to those which are recoverable by a tenant
administratively so long as it does not diminish the full amount otherwise
recoverable in such proceeding by the Lessor.
20. HOLD OVER. Lessee shall have no right to hold over after the
---------
expiration of the term granted herein. In the event the Lessee shall, for any
reason, remain in possession after the expiration of the term hereof, such
possession shall be as a
25
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month-to-month tenancy during which time Lessee's base rent for the first month
shall be the monthly rent for the last month of the term hereof, increased by
twenty-five (25%) percent thereabove, and thereafter, for each month the Lessee
may occupy the Demised Premises, Lessee's base rent shall be increased by
twenty-five (25%) percent of the preceding month's rent. In addition, Lessee
shall be liable for the other covenants, terms, and conditions set forth herein.
21. QUIET ENJOYMENT. Lessor covenants that Lessee, upon performing all its
---------------
obligations as contained in this Lease, shall peacefully and quietly have, hold
and enjoy the Demised Premises in its entirety and its appurtenances throughout
the term hereof without hindrance, ejection or molestation by Lessor or any
person lawfully claiming by, from, under or through Lessor.
22. OBLIGATION TO PAY RENT. The obligation of Lessee to pay rent hereunder
----------------------
and perform all of the other covenants and agreements hereunder on part of
Lessee to be performed shall in no way be affected, impaired or excused because
Lessor is unable to fulfill any of its obligations under this Lease or to supply
or is delayed in supplying any service expressly or impliedly to be supplied or
is unable to make or is delayed in making repairs, additions, alterations or
decorations or is unable to supply or is
26
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delayed in supplying any equipment or fixtures.
If any of the aforedefined services are interrupted due to the fault of the
Lessor, or if any of such services are interrupted without fault of the Lessee
which services are an obligation of the Lessor to provide hereunder, the Lessor
convenants and agrees that it will use reasonable commercial efforts to obtain
the re-establishment of such service. In determining whether or not the Lessor
has used reasonable commercial efforts, under the conditions herein defined as
incumbent upon the Lessor, any act outside of the direct control of the Lessor
and generally classified under the provisions of force majeure shall extend the
Lessor's period of time for the re-establishment of any of the aforedefined
services following their interruption.
23. LESSOR'S RIGHT OF ENTRY. Lessor or Lessor's agents shall have the
-----------------------
right to enter the Demised Premises at all reasonable times during business
hours and, except for emergencies, only after having notified Lessee a
reasonable period of time prior thereto, to examine the same, and to show them
to prospective purchasers or lessees of the building, and to make such repairs,
or alternations, as the Lessor may deem necessary or desirable and Lessor shall
be allowed to take all material into and upon said Demised Premises that may be
required therefor without the same
27
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constituting an eviction of Lessee in whole or in part and the rent reserved
shall in no way abate while said repairs, alterations, improvements, or
additions are being made, by reason of loss or interruption of business of
Lessee, or otherwise Lessor will do such work in a timely fashion and with as
little interruption to Lessee's business as is possible under the then existing
circumstances. Nothing herein contained, however, shall be deemed or construed
to impose upon Lessor any obligation, responsibility or liability whatsoever,
for the care, supervision or repair of the Demised Premises or the building or
any part thereof, other than as herein provided.
24. INDEMNIFICATION: The Lessor or its agents shall not be liable for any
---------------
damage to property of Lessee or of others entrusted to employees of the
building, nor for the loss of or damage to any property of the Lessee. Lessor or
its agents shall not be liable for any injury or damage to Lessee or other
persons or property resulting from fire, explosion, falling plaster, steam,
electricity, water, rain or snow or leaks from any part of said building or from
the pipes, appliances or plumbing works or from the roof, street or sub-surface
or from any other place or by dampness or by any other cause of whatsoever
nature, nor shall the Lessor or its agents be liable for any such damage caused
by other
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lessees or persons in said building or caused by operations in construction of
any private, public or quasi public work; nor shall Lessor be liable for any
defects, latent or otherwise, in the Demised Premises or in the building of
which they form a part. Lessee shall reimburse and compensate Lessor as
additional rent within sixty (60) days after rendition of a statement for all
expenditures made by or damages or fines sustained or incurred by, Lessor due to
non-performance or non-compliance with or breach or failure to observe any term,
covenant or condition of this Lease upon Lessee's part to be kept, observed,
performed or complied with. Lessee shall give immediate notice to Lessor in case
of fire or accidents in the Demised Premises or in the building or defects
therein or in any fixtures or equipment. The Lessor further assumes no liability
or responsibility whatsoever with respect to the conduct and operation of the
Lessee's business to be conducted in the Demised Premises nor shall the Lessor
be liable for any accident, damage or injury to any person or persons or
property in or about the Demised Premises which are caused by the conduct and
operation of said business or by virtue of equipment or property of the Lessee
in or upon said premises.
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25. BROKER. This lease is consummated by the Lessor in reliance on the
------
representation of the Lessee that no brokers or agents brought the Demised
Premises to the Lessee's attention or were, in any way, a procuring cause of
this Lease. The Lessor represents to the-Lessee that no brokers or agents have
any exclusive agency listing on the Demised Premises. The Lessee hereby agrees
to indemnify and hold harmless the Lessor against the claim of any brokers or
agents for a commission due by reason of this Lease, where it is alleged that
said brokers or agents
30
<PAGE>
called the Demised Premises to Lessee's attention or interested Lessee therein,
said indemnity to include all costs of defending any such claim, including
reasonable attorneys' fees:
26. NOTICES. Whenever it is provided herein that notice, demand, request
-------
or other communication shall or may be given to or served upon either of the
parties by the other, and whenever either of the parties shall desire to give or
serve upon the other any notice, demand, request or other communication with
respect hereto or the Demised. Premises, each such notice, demand, request or
other communication shall be in writing and, any law or statute to the contrary
notwithstanding, shall not be effective for any purpose unless the same shall be
given or served as follows:
A. If given or served by Lessor, by mailing the same to Lessee by
registered mail or certified mail, postage prepaid, return receipt requested to:
GARY IWATANI LIQUID AUDIO, INC 810 WINSLOW ST. REDWOOD CITY, CA 94063 FAX: (650)
549-2099 such other address as Lessee may from time to time designate by notice
given to Lessor by registered mail or certified mail.
B. If given or served by Lessee, by mailing the same to Lessor by
registered mail or certified mail, postage prepaid, return receipt requested,
addressed to Lessor, New Retail Concepts Inc., 21 Bridge Square Westport,
Connecticut. 06880, or at such other address as Lessor may from time to time
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designate by notice given to Lessee by registered mail or certified mail.
27. DOCUMENTS. Lessor and Lessee shall execute all necessary
---------
afterdocuments required to carry out the terms of this Lease.
28. SUCCESSION. This agreement shall inure to the benefit of and be
----------
binding upon the respective parties hereto and their respective heirs,
successors and, except as otherwise provided in this Lease, assigns.
29. CHANGES AND WAIVER. This lease or any covenants, agreements, or
------------------
conditions contained herein cannot be terminated, altered, waived or modified in
any way on behalf of the Lessor except by an instrument in writing. Receipt of
rent shall not be deemed or construed to be a waiver of any other rent or
charges due or of the rights of the Lessor under a breach of any covenants or
conditions herein contained, nor shall any waiver be claimed as to any
provisions of this Lease unless the same be in writing. Acceptance of the keys
shall not be tantamount to or evidence of a surrender. The failure of Lessor to
seek redress for violation of, or to insist upon the strict performance of, any
covenant or condition of this Lease, or any of the rules and regulations set
forth or hereafter adopted by Lessor, shall not prevent a subsequent act, which
would have originally constituted a
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violation, from having all the force and effect of an original violation.
30. ENTIRE AGREEMENT. This Lease contains the entire agreement between the
----------------
parties and shall not be modified in any manner except by an instrument in
writing executed by the parties. Any correspondence, communications or other
agreement or understanding with respect to this transaction occurring at or
prior to the execution and delivery hereof is superseded by this agreement and
shall be of no affect in interpreting this agreement. If any term or provision
of this Lease or the application thereof to any person or circumstance shall, to
any extent, be invalid or unenforceable, the remainder of this Lease, or the
application of such term or provision to persons or circumstances other than
those as to which it is held invalid or unenforceable, shall not be affected
thereby and each term and provision of this Lease shall be valid and be enforced
to the fullest extent permitted by law.
31. GOVERNING LAW. This lease shall be governed by, construed, and
-------------
enforced in accordance with the laws of the State of Connecticut. Lessor and
Lessee each hereby consent to the jurisdiction of the court for the State of
Connecticut for the purposes of any action between them arising out of this
Lease and
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further consent to service of process in the manner provided for the giving of
notice provided for herein.
32. PARAGRAPH HEADINGS. The paragraph headings appearing in this Lease are
------------------
intended only for the convenience of reference, and are not to be considered in
construing this instrument.
33. RECORDING. Lessee shall not record this Lease without the written
---------
consent of Lessor. However, upon the request of either party hereto the other
party shall join in the execution of a memorandum or so-called "short form"
notice of this Lease for the purposes of recordation. Said memorandum or notice
of this Lease shall describe the parties, the Demised Premises and the term of
this Lease.
34. PARKING AREA. All parking areas located on the premises of the Center
------------
and designated by the Lessor for general use shall be used in common by the
Lessee, during the term hereof, or any renewal or extension hereof, with all
other tenants of the center and their employees and customers. Such use shall be
subject to the reasonable rules and regulations, if any, promulgated, from time
to time, by the Lessor. The Lessor reserves the right to change, alter or
relocate the parking area.
35. YIELD UP. At the expiration of the term hereof, or any renewal or
--------
extension hereof, or earlier termination of this Lease,
34
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Lessee agrees to surrender all keys to the Demised Premises and the building; to
remove all of its personal property on the Demised Premises; and to yield up
said premises (including all installations and improvements made by Lessee
except for trade fixtures), broom-clean and in the same good order and repair in
which Lessee is obligated to keep and maintain said premises by the provisions
of this Lease, reasonable wear and tear and damage by fire or other casualty
excepted. Lessee will repair any and all damages caused by or resulting from any
such removals. Any property not so removed within thirty (30) days after such
expiration or termination date shall be deemed abandoned and may be removed and
disposed of by Lessor in such manner as Lessor shall determine and Lessee shall
pay Lessor the entire cost and expense incurred by it in effecting such removal
and disposition and in making any repairs and replacements to the said premises
resulting from such removal. Lessee shall further indemnify Lessor against all
loss, cost and damage resulting from Lessee's failure and delay in surrendering
said premises as above provided.
36. NO ACCORD AND SATISFACTION. No acceptance by the Lessor of a lesser
--------------------------
sum than the base rent, additional rent or any other charge(s) then due shall be
deemed to be other than on account of the earliest installment of such base
rent, additional rent or
35
<PAGE>
charge(s) due, nor shall any endorsement or statement on any check or any letter
accompanying any check or payment as base rent, additional rent or other
charge(s) be deemed an accord and satisfaction, and Lessor may accept such check
or payment without prejudice to Lessor's right to recover the balance of such
installment or pursue any other remedy provided in this Lease as at law or in
equity.
37. ESTOPPEL CERTIFICATE. Upon not less than ten (10) days prior request,
--------------------
the Lessee agrees, in favor of the Lessor, to execute, acknowledge and deliver a
statement in writing certifying that this Lease is unmodified and in full force
and effect (or, if there have been any modifications that the same are in full
force and effect as modified and stating the modifications), and the dates to
which the rent, additional rent and other charge(s) have been paid and any other
information reasonably requested.
38. LESSEE'S REPRESENTATIONS. A. Lessee is a corporation, duly organized,
------------------------
validly existing and in good standing under the laws of the State of California,
with full power and authority to conduct its business as provided herein and is
duly authorized to enter into this Lease and has taken all action required to
authorize the Lessee to enter into this Lease.
B. The individual executing the Lease on behalf of the Lessee
36
<PAGE>
is duly authorized to execute and deliver the Lease on behalf of the Lessee.
C. Lessee shall furnish Lessor with duplicate original documents
evidencing the actions taken with respect to the above.
D. The business of the Lessee will be conducted at its own expense and in
such a manner as not to create any nuisance nor to interfere with, annoy, or
disturb other tenants or the Lessor in the management of the Center.
E. Lessee shall conduct its business in the Demised Premises in a
dignified manner condition
F. Lessee shall arrange for loading and unloading of goods to be done only
at such times, in such areas, and through such entrances as may be designated
for such purposes by the Lessor.
G. Lessee has examined the Demised Premises before taking possession and
Lessee's entry into possession is conclusive evidence that as of the date
thereof the Demised Premises were in good order and satisfactory condition and
that the Lessee was and
37
<PAGE>
is fully satisfied with their physical condition; subject to
H. Lessee hereby represents to Lessor that Lessee has reviewed Exhibit B
and has received a copy of the floor plan of the Center, all of which relate to
the Demised Premises.
40. RULES AND REGULATIONS. Lessee and Lessee's servants, employees,
---------------------
agents, visitors, and licensees shall observe faithfully, and comply strictly
with such reasonable Rules and Regulations as Lessor or Lessor's agents may,
from time to time, promulgate, adopt, or amend, and which Lessor may deem
desirable
38
<PAGE>
for the safety, care, cleanliness and use of the Demised Premises and/or the
Center, for the comfort and convenience of other tenants, and for the
preservation of good order therein, which rules, when so made and notice thereof
given to the Lessee, shall have the same force and effect as if originally made
a part of this Lease. Such other and further rules shall not, however, be
inconsistent with the proper and rightful enjoyment by the Lessee of the Demised
Premises.
41. NEGATIVE COVENANTS OF LESSEE. The Lessee covenants that it shall not
----------------------------
do any of the following without the prior written consent of the Lessor:
A. Use or operate any machinery that, in the Lessor's opinion is harmful
to the premises or disturbing to other tenants in the premises of which the
Demised Premises are a part, or use any loudspeakers, televisions, phonographs,
radios or other devices in a manner so as to be heard or seen outside of the
Demised Premises, or display merchandise on the exterior of the Demised Premises
either for sale or for promotional purposes.
B. Attach any awning, antenna, or other projection to the roof or the
outside walls of the Demised Premises or the building of which the Demised
Premises are a part.
C. Conduct any auction, fire, bankruptcy, selling out, or
39
<PAGE>
going out of business sale on or about the Demised Premises.
D. Solicit business for itself, or permit its licensees or concessionaires
to solicit business in the parking or other common areas, nor shall any of them
distribute any handbills or other advertising matter in or on automobiles parked
in a parking area or in other common areas.
E. Store or permit boxes, paper, garbage, rubbish or debris to remain in
or around the Demised Premises or the Center except in areas and/or containers
specified by Lessor.
42. PERSONAL PROPERTY. The Lessee agrees that all of its personal
-----------------
property, inventory, fixtures, automobiles, and other property and improvements
kept in the Demised Premises or in the common property area will be kept there
at the sole risk of the Lessee or the owners thereof. Except for Lessor's gross
negligence or willful acts, the Lessee hereby waives any and all claims, of any
kind and nature, it may have against the Lessor for any injury, damage,
destruction, or otherwise to the aforesaid property in the Demised Premises.
Lessee acknowledges that Lessor has advised Lessee to insure the aforesaid
property against losses.
43. TRANSFER OF DEMISED PREMISES. If the Lessor or Lessor's successor or
----------------------------
assigns transfers ownership of the Demised Premises,
40
<PAGE>
the Lessee agrees to look solely to the new owner for the performance of this
Lease from the date of such transfer. The Lessor agrees to give the Lessee
written notice of any transfer. No such transfer by Lessor shall terminate any
obligation or liability to Lessee which accrued prior to such transfer.
44. INTERPRETATIONS. This instrument is executed and designed to be
---------------
performed within the jurisdiction of the State of Connecticut and, therefore,
the laws of the State of Connecticut shall pertain to its interpretation and
enforcement. Each party hereto does hereby irrevocably confer jurisdiction upon
the Courts of the State of Connecticut and consent to be served with civil
process returnable to the said Courts notwithstanding the residence of any of
the parties hereto at the time of such service. The term "Courts of the State of
Connecticut" shall include any federal court exercising jurisdiction within the
State of Connecticut.
45. ARBITRATION. Except for claims or disputes arising out of or by virtue
-----------
of the claim by the Lessor of nonpayment of any rent, tax rent, CAM rent or
additional rental due and payable hereunder, the parties agree to resolve such
other disputes as may arise as between them out of or by virtue of the
provisions of this Lease by arbitration pursuant to the Rules of the American
41
<PAGE>
Arbitration Association under an application for arbitration before that
Association, which arbitration shall be conducted within Fairfield County,
Connecticut. All disputes relating to nonpayment of rent, the amount of rent or
the collection of rent including actions for summary process are hereby
expressly reserved to the judicial process and may be recovered or pursued by
the Lessor pursuant to judicial process before the Courts of the State of
Connecticut. The interpretation of what shall be an issue relating to the
ascertainment of, or the collection of rent or nonpayment of rent, is hereby
expressly removed from the jurisdiction of any arbitrators and is expressly
conferred upon the judicial processes of the Courts of the State of Connecticut.
In the event of any arbitrable dispute, the arbitrators shall determine who
shall bear the costs of arbitration and/or attorney's fees in the course of such
proceeding and whether or not interest may be chargeable upon any amounts
awarded to the successful party in any such arbitration. The ascertainment of
the payment of interest, attorney's fees or costs of any judicial proceedings
permitted hereunder shall be made by the judicial process before which such
proceeding is returned and litigated.
46. COMMERCIAL TRANSACTION. THIS LEASE IS A "COMMERCIAL TRANSACTION" AS
----------------------
DEFINED IN SECTION 52-278a OF THE CONNECTICUT
42
<PAGE>
GENERAL STATUTES ANNOTATED AS SUCH HAS BEEN ADOPTED OR MAY BE AMENDED FROM TIME
TO TIME. THE LESSEE EXPRESSLY WAIVES ALL RIGHTS TO ANY NOTICE OF AN APPLICATION
AND ANY APPLICATION FOR A PREJUDGMENT REMEDY IN THE NATURE OF ANY ATTACHMENT,
GARNISHMENT OR OTHERWISE, AND ANY HEARING THEREON, AND SPECIFICALLY AGREES THAT
THE ATTORNEY FOR THE LESSOR MAY ISSUE A WRIT FOR A PREJUDGMENT REMEDY AND THE
LESSOR SHALL HAVE THE RIGHT TO ATTACH THE PROPERTY OF THE LESSEE AND GARNISHEE
THE DEBTORS OF THE LESSEE WITHOUT SECURING A COURT ORDER THEREFOR IN ANY ACTION
OR ACTIONS BROUGHT BY THE LESSOR IN CONNECTION WITH THIS COMMERCIAL TRANSACTION.
IN WITNESS WHEREOF, we have hereunto set our hands and seals the day and
year first above written.
LESSOR:
________________________ By________________________
________________________
LESSEE:
________________________ By /s/ Signature Illegible
________________________
By_________________________
43
<PAGE>
EXHIBIT A
---------
That certain tract or parcel of land, with the buildings and improvements
thereon, situated in the Town of Westport, County of Fairfield and State of
Connecticut and being shown and designated at Parcel B 0.4396 +/- acres, as
shown and designated on map entitled "Map of Property Prepared for Bridge Square
Property Associates Westport, Conn. Scale 1" = 20' April 28, 1986" which map is
on file in the Westport Town Clerk's Office and numbered 8396, to which map
reference is hereby made for a more particular description thereof.
Said Parcel B is bounded:
NORTHERLY: 146.60 feet by highway Bridge Street so-called;
EASTERLY: 158 feet more or less by the waters of the Saugatuck River;
SOUTHERLY: 143.19 feet by land of the Town of Westport; and
WESTERLY: 107.03 feet by highway Riverside Avenue so-called.
All as shown on said map and all said boundaries being now or formerly.
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EXHIBIT B
---------
BUILDING SKETCH
---------------
Bridge Square East
------------------
[FLOOR PLAN APPEARS HERE]
45
<PAGE>
[FLOOR PLAN APPEARS HERE]
<PAGE>
NEW RETAIL CONCEPTS, LTD. LEASE - LIQUID AUTVI
Section 2 - Rider
Lessor represents to Lessee that it has obtained all rights, permissions and
consents necessary to allow Lessor to enter into this Lease. Lessor further
acknowledges and agrees that if any provisions under this Lease are affected or
impaired due to Lessor's failure to secure such necessary rights, permissions or
consents that a) Lessor shall secure the necessary rights, permissions and
consents to enable Lessee uninterrupted use of the premises or b) Lessee shall
have the option to immediately terminate this Lease and Lessor shall immediately
refund in full to Lessee all deposits and lease payments made. Lessor shall
further indemnify Lessee for any expenses related to Lessor's breach of Section
2.
<PAGE>
EXHIBIT 10.28
COPY COMMERCIAL LEASE
THIS LEASE is made and executed in duplicate this 3rd day of November, 1998
BY AND BETWEEN Jim & Jeannette Beeger hereinafter called "Lessor," and
Liquid Audio hereinafter called "Lessee."
WITNESSETH: That for and in consideration of the sum of $500.00 to Lessor,
paid by Lessee, receipt of which is hereby acknowledged by Lessor, and for the
further consideration of the payment of the rents and the performances of the
covenants contained herein on the part of the Lessee, and in the manner
hereinafter stated, Lessor leases and lets to Lessee, and Lessee hereby leases,
hires, and takes from Lessor, upon the terms and conditions hereinafter set
forth, the following described property, and its appurtenances, situated in the
City of Redwood City, County of San Mateo State of California, particularly
described as follows: Office Suite located at 820 Winslow Street.
TERM.
For the term of month to month commencing on the First day of December,
1998
RENT.
The total rent shall be the sum of $ 500.00 dollars payable monthly in
advance, installments of $500.00 dollars, each in lawful money of the United
States of America, on the First day of each and every calendar month. In the
event Lessee has paid the rental hereunder, as herein provided, and has duly
complied with the terms and provisions hereof, Lessee may occupy and enjoy the
leased premises for the final N/A month of the term, free from obligation to pay
any rental for such N/A months.
This lease is made subject to the following terms and conditions:
Payment of Rent.
1. Lessee agrees to pay rents to Lessor at the time and in the manner
herein provided.
Default and Re-entry.
2. If Lessee breaches the lease and abandons the property before the end
of the term or if his right to possession is terminated by Lessor because of a
breach of the lease, Lessor may recover as damages the worth of the unpaid rent
for the balance of the term plus any other foreseeable damages incurred by
Lessor.
Removal of Property.
Should Lessee fail to pay any part of the rents herein specified, at the
times or in the manner herein provided, or fail faithfully to comply with or
perform any other of the terms, conditions, covenants and agreements of this
lease on the part of Lessee to be performed or complied with, or should Lessee
abandon the leased premises, then and in that event, Lessor, at the sole option
of Lessor may terminate this lease, and Lessor and Lessee shall have all the
rights and remedies as provided in California Civil Code, Section 1951.2. Lessor
may pursue any remedy whatsoever provided for by law, and in any event Lessor
shall be entitled to the possession of the leased premises at the lawful
termination of this lease. Lessor is hereby authorized to remove and store at
Lessee's expense any personal property which Lessee
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<PAGE>
abandons at the leased premises upon vacating those premises. If Lessee has
breached any of the provisions of this lease and has abandoned the leased
premises, Lessor and Lessee shall have all the rights and remedies as provided
by California Civil Code, Section 1951.4, so long as this lease, and Lessee's
rights to the possession of the leased premises, are not terminated by Lessor.
The rights of Lessor under this lease shall be cumulative to all other rights or
remedies given to Lessor by law or by the terms of this lease.
USES AND USES PROHIBITED.
3. That the lease premises shall be used, occupied and conducted
exclusively as and for office and storage and for no other purpose; and shall be
used, occupied and conducted in a thoroughly orderly and respectable manner,
without let, hindrance, annoyance, disturbance, detriment, injury or offense to
Lessor. Lessee shall not maintain or commit, nor suffer to be maintained or
committed any nuisance or waste in or about the leased premises. Lessee shall
not do or permit anything to be done in or about the leased premises, nor bring
or keep anything therein, which will in any way affect fire or other insurance
on the building or any of its contents, or which shall in any way conflict with
any law, ordinance, rule, or regulation affecting the occupancy and use of the
premises which are or may hereafter be enacted or promulgated by any public
authority.
Lessee shall not construct, maintain or permit to be constructed or
maintained, any sign, or billboard on the roof of the building located on the
premises, nor paint, nor hang, nor permit or authorize others to paint, or hang,
any sign on the walls thereof, unless written permission to do so has been
obtained from Lessor.
ASSIGNMENT AND SUBLETTING.
4. Lessee may assign his interest or sublet the property, but only with
the prior written consent of Lessor. Under no other circumstances, and without
prior obtained written consent, neither this lease nor any interest therein
shall be assignable or subject to subletting. Lessor shall not unreasonably
withhold requested written consent.
Lessee further promises and covenants that if the neglects or fails to
perform or observe any of the covenants contained in this lease and continues
this neglect or failure for ten (10) days after notice by Lessor, or if the
estate hereby created shall be taken on execution, and such execution shall not
be satisfied, cancelled or otherwise removed within thirty (30) days after
notice by Lessor, or if the Lessee shall be adjudicated bankrupt or insolvent
according to law, or if any assignment of its property shall be made for the
benefit of creditors, then Lessor may immediately terminate this lease. Lessee
covenants that in case of such termination it will indemnify Lessor against all
loss of rent which Lessor may incur by reason of such termination, during the
residue of the term above specified.
ALTERATIONS AND REPAIRS.
DAMAGE TO PREMISES.
5. Lessee agrees that the leased premises are now in tenantable and good
order and condition and that Lessee shall keep and maintain these premises in
good and sanitary order and condition, and that no damages, alterations, or
change whatever shall be made in or about the leased premises without the
written consent of Lessor. Unless otherwise provided by written agreement, all
alterations, improvements and changes that may be required shall be done by or
under the direction of Lessor but at the cost of Lessee. All alterations,
additions, and improvements made in and to the leased premises shall, unless
otherwise provided by written agreement, be the property of Lessor and shall
remain upon, and be surrendered with the leased premises. Lessee shall not mar
or deface in any manner the walls, woodwork, or any other part of the leased
premises. All damage or injury done to the premises or property of the Lessor by
the Lessee, or by any person who may be in or upon the premises, with the
consent of the Lessee, shall be paid for by the Lessee at the time the damage or
injury is inflicted. Lessee shall, at the termination of the lease, surrender
the leased premises to Lessor in as good order and condition as received, normal
wear and tear excepted.
DELIVERY OF POSSESSION.
6. In the event of the inability of Lessor to deliver possession of the
leased premises at the time herein fixed for the commencement of the term of
this lease, neither Lessor nor the agent of Lessor shall be liable for any
damage caused thereby, nor shall this lease thereby become void or voidable, but
in such event Lessee shall not be liable for any rent until such time as Lessor
can deliver possession.
NOTICE OF SURRENDER.
7. Lessee shall, at least thirty (30) days before the date of expiration
of this lease, give Lessor a written notice of intention to surrender the leased
premises on that date. If such notice is not given, then Lessee shall be liable
for rent of one additional month in the event that he shall have vacated the
leased premises, at the expiration of the term of this lease.
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<PAGE>
HOLDING OVER.
8. If Lessee holds possession of the premises after the expiration of the
term of this lease, Lessee shall become a tenant from month-to-month only upon
the terms herein specified, but at a monthly rental of Five hundred Dollars
($500%) per month payable monthly in advance in lawful money of the United
States on the First day of each month and shall continue to be such tenant until
such tenancy shall be terminated by Lessor, or Lessee by written notice of at
least one month prior to the date of the termination of such monthly tenancy of
the intention to terminate such tenancy.
DESTRUCTION OF PREMISES.
9. If the building or the leased premises shall be destroyed by fire or
other cause or be so damaged that they become untenantable and cannot be
rendered tenantable within ninety (90) days from the date of the injury this
lease may be terminated by Lessor. In case the premises shall be so damaged as
not to require a termination of the lease as above provided, then a
proportionate allowance shall be made to Lessee for the rent hereinbefore
reserved corresponding to the time during which and to the portion of the
premises of which Lessee shall be so deprived. Lessee expressly waives the
provisions of Section 1932 and Subdivision 4 of Section 1933 of the Civil Code
of the State of California. Lessor shall be sole judge as to whether such damage
has caused said building or premises to be untenantable, and as to whether they
can be rendered tenantable within ninety (90) days from the date of injury.
ENTRY AND INSPECTION.
10. Management is given the right to enter into or inspect the premises
for the following purposes:
(a) In case of emergency.
(b) To make necessary or agreed repairs, decorations, alterations or
improvements, supply necessary or agreed services, or exhibit the unit to
prospective or actual purchasers, mortgages, tenants, workmen or contractors.
(c) When the tenant has abandoned or surrendered the premises.
(d) Pursuant to court order.
Except in cases of emergency, when the tenant has abandoned or surrendered
the premises, or if it is impracticable to do so, the Owner shall give the
tenant reasonable notice of his intent to enter and enter only during normal
business hours. Twenty-four (24) hours shall be presumed to be reasonable
notice.
SERVICE CHARGES.
11. Lessee agrees to pay during the term hereof, all charges made against
the premises for water rates, gas, electricity, power, heat, telephone, and
garbage disposal services, and for any other commodities furnished or supplied
or used in or upon or about the premises. Tenants in 822 and 824 Winslow will
Pay Lessee their Prorata share of the water and sewer rates.
ROOF.
12. Lessor agrees to maintain the roof over the demised premises in good
order and repair and repairs to the roof shall be made by and at the expense of
Lessor.
SUBORDINATION.
13. Lessee's interest in this property shall be subject and subordinate at
all times to the lien of any mortgage or trust deed or deeds which may now exist
upon or which may be placed upon the premises or the property of which the
premises are a part and Lessee covenants that it will execute and deliver to
Lessor or the nominee of Lessor proper subordination agreements to this effect
at any time upon the request of Lessor and without payment being made therefor.
BREACH OF CONDITIONS.
14. Each and every covenant and term hereof to be kept and performed by
Lessee is expressly made a condition, upon breach whereof Lessor may terminate
this lease and exercise all rights of entry and re-entry upon the leased
premises, as provided for by law.
NON-WAIVER OF BREACH.
15. The failure or ommission of Lessor to terminate this lease, for any
violation of any of its terms, conditions, or covenants shall in no way be
deemed to be a consent by Lessor to such violation, and shall in no way bar,
estop or prevent Lessor from terminating this lease thereafter, either for such
or for any subsequent violation of any such term, condition or covenant. The
acceptance of rent hereunder shall not be, or be construed to be, a waiver of
any breach of any term, covenant, or condition of this lease.
COSTS OF SUIT.
16. If any legal action or proceeding be brought by either party to
enforce any part of this Agreement, the prevailing party shall recover, in
addition to all other relief, reasonable attorney's fees and costs.
Page 3
<PAGE>
SERVICE OF NOTICE.
17. Notices required under this Agreement may be served upon: Jim &
Jeannette Beeger 26905 Orchard Hill Lane at Los Altos Hills 94022 California.
Said person is authorized to accept legal service on behalf of Lessor. Notice
may be served on Lessee at the address set forth on page 1.
SECURITY.
18. It is further covenanted and agreed by Lessee that nothing herein
contained and no security or guarantee which may now or hereafter be furnished
Lessor for the payment of the rent herein reserved or for the performance by
Lessee of the other terms or covenants of this lease, shall in any way be a bar
or defense to any action in unlawful detainer, or for the recovery of these
premises, or in any action which Lessor may at any time commence for breach of
any part of the terms or covenants of this lease.
LESSOR AND LESSEE DEFINED.
HEIRS, ETC., INCLUDED.
19. The word "Lessor" and the word "Lessee" as used herein include the
plural as well as the singular. The neuter gender when used here, shall include
the masculine and feminine.
20. This lease shall include and inure to and bind the heirs, executors,
administrators, successors and assigns of the respective parties hereto, but
nothing in this paragraph contained shall be construed to modify or impair in
any manner any of the provisions and restrictions of this lease relating to the
assignment of this lease or of any interest therein, or to the subletting or
underletting of the leased premises of any part thereof.
21. Lessee agrees that this instrument contains all of the provisions of
the agreement between the parties hereto, and that no promise or agreement not
contained herein shall be binding on Lessor.
22. Time is the essence of this agreement.
23. Lessee accepts the leased premises subject to all zoning laws,
ordinances, and regulations applicable to and regulating the use of the
premises, and acknowledges that Lessor has made no representations or warranties
as to the suitability of the premises for any particular use.
24. Additional Provisions (Insert here and refer to paragraph 24.):
These parties have executed this lease the day and year first above
written.
This lease in section 8 provides for automatic renewal from month-to-month
if Lessee remains in possession after the expiration of the term of this lease.
........................ .........................
Lessor Lessee
........................ .........................
Lessor Lessee
...................... .........................
Lessor Lessee
........................ .........................
Lessor Lessee
Page 4
<PAGE>
SERVICE OF NOTICE.
17. Notices required under this Agreement may be served upon: Jim +
Jeannette Beeger 26905 Orchard Hill Lane at Los Altos Hills 94022 California.
Said person is authorized to accept legal service on behalf of Lessor. Notice
may be served on Lessee at the address set forth on page 1.
SECURITY.
18. It is further covenanted and agreed by Lessee that nothing herein
contained and no security or guarantee which may now or hereafter be furnished
Lessor for the payment of the rent herein reserved or for the performance by
Lessee of the other terms or covenants of this lease, shall in any way be a bar
or defense to any action in unlawful detainer, or for the recovery of these
premises, or in any action which Lessor may at any time commence for breach of
any part of the terms or covenants of this lease.
LESSOR AND LESSEE DEFINED.
HEIRS, ETC., INCLUDED.
19. The word "Lessor" and the word "Lessee" as used herein include the
plural as well as the singular. The neuter gender when used here, shall include
the masculine and feminine.
20. This lease shall include and inure to and bind the heirs, executors,
administrators, successors and assigns of the respective parties hereto, but
nothing in this paragraph contained shall be construed to modify or impair in
any manner any of the provisions and restrictions of this lease relating to the
assignment of this lease or of any interest therein, or to the subletting or
underletting of the leased premises of any part thereof.
21. Lessee agrees that this instrument contains all of the provisions of
the agreement between the parties hereto, and that no promise or agreement not
contained herein shall be binding on Lessor.
22. Time is the essence of this agreement.
23. Lessee accepts the leased premises subject to all zoning laws,
ordinances, and regulations applicable to and regulating the use of the
premises, and acknowledges that Lessor has made no representations or warranties
as to the suitability of the premises for any particular use.
24. Additional Provisions (Insert here and refer to paragraph 24.):
These parties have executed this lease the day and year first above
written.
This lease in section 8 provides for automatic renewal from month-to-month
if Lessee remains in possession after the expiration of the term of this lease.
/s/Gerald W. Kearby
............................... .........................
Lessor Lessee
6 Nov 98
............................... .........................
Lessor Lessee
............................... .........................
Lessor Lessee
............................... .........................
Lessor Lessee
Page 4
<PAGE>
EXHIBIT 10.29
??ED FROM Liquid Audio, Inc. hereinafter referred to as LESSEE; the sum of $
40,500.00 (Fourty-Thousand-Five Hundred) DOLLARS, ??enced by company check, as
a deposit which, upon acceptance of this lease, shall belong to Lessor and
shall be ?? follows:
<TABLE>
<CAPTION>
TOTAL RECEIVED BALANCE ??
<S> <C> <C> <C>
Rent for the period from 11/15/97 to 12/15/97 $ 19,689.00 $ 19,689.00 $
Security Deposit ____________________ $ 10,000.00 $ 10,000.00 $
-------------------
applied towards last month $ 10,811.00 $ 10,811.00 $ 10/09/97
TO _____________________________________________ $ 40,500.00 $ 40,500.00 $ JOHN A HAS ORIGINAL
</TABLE>
In the event that this lease is not accepted by the Lessor within ____ days, the
total deposit received shall be refunded.
Lessee hereby offers to lease from Lessor the premises situated in the City of
Redwood City County of San Mateo State of California described as 810 Winslow
and Broadwayper Exhibit A attached upon the following TERMS and CONDITIONS:
1. TERM: The term hereof shall commence on 11/15/1997, 1997, and expire on
11/15/2002
2. RENT: The total rent shall be $ 1,141,2580.00, payable as follows: on the
first day of each and every month per attached rent schedule, Exhibit B
All rents shall be paid to Owner or his authorized agent, at the
following address: 1204 Midfield Road Redwood City, CA. 94063, or at such
other places as may be designated by Owner from time to time.
3. USE: The premises are to be used for the operation of Computer Software
Development, Production, Sales, Delivery and General Office, Retail space
on Broadway for sale of Liquid Audio Products. "No parking provided" and
for no other purpose,without written consent of Lessor.
4. USES PROHIBITED: Lessee shall not use any portion of the premises for
purposes other than those specified hereinabove, and no use shall be made
or permitted to be made upon the premises, nor acts done, which will
increase the existing rate of Insurance upon the property, or cause
cancellation of insurance policies covering said property. Lessee shall not
conduct or permit any sale by auction on the premises.
5. ASSIGNMENT AND SUBLETTING: Lessee shall not assign this leases or sublet
any portion of the premises without prior written consent of the Lessor,
which shall not be unreasonably withheld. Any such assignment or subletting
without consent shall be void and, at the option of the Lessor, may
terminate this lease. Any merger, consolidation or other corporate
reorganization shall not constitute an assignment. Sale or transfer of all
or substantially all assets or stock of Lessee may be done so without
Lessor's consent.
6. ORDINANCES AND STATUTES: Lessee shall comply with all statutes, ordinances
and requirements of all municipal, state and federal authorities now in
force, or which may hereafter be in force, pertaining to the premises,
occasioned by or affecting the use thereof by Lessee. The commencement or
pendency of any state or federal court abatement proceeding affecting the
use of the premises shall, at the option of the Lessor, be deemed a breach
hereof.
7. MAINTENANCE, REPAIRS, ALTERATIONS: Lessor warrants and acknowledges that
the premises are in good working condition which shall include but not to
be limited to the HVAC, electrical, plumbing and other systems and
equipment on the premises. Upon acknowledgment that the premises are in
good order the Lessee shall, at his own expense and at all times, maintain
the premises in good and safe condition, including plate glass, electrical
wiring, plumbing and heating installations and any other system or
equipment upon the premises and shall surrender the same, at termination
hereof, in as good condition as received, normal wear and tear excepted.
Lessee shall be responsible for all repairs required, excepting the roof,
exterior walls, structural foundations, and -- No exceptions -- which shall
be maintained by Lessor. Lessee shall also maintain in good condition such
portions adjacent to the premises, such as sidewalks, driveways, lawns and
shrubbery, which would otherwise be required to be maintained by Lessor.
Future ADA compliance (if required) and Fire Sprinkling system is the
responsibility of the Lessor. No improvement or alteration of the premises
shall be made without the written consent of the Lessor. Prior to the
commencement of any substantial repair, improvement, or alteration, Lessee
shall give Lessor at least two (2) days written notice in order that Lessor
may post appropriate notices to avoid any liability for liens. Lessee shall
not commit any waste upon the premises, or any nuisance or act which may
disturb the quiet enjoyment of any tenant in the building.
8. ENTRY AND INSPECTION: Lessor shall provide 24 hour notice to any entry
(except in the case of an emergency) and any such entry shall comply with
all of tenant's reasonable security measures. Upon acceptance of the notice
the Lessee shall permit the Lessor or Lessor's agents to enter upon the
premises at reasonable times and upon reasonable notice, for the purpose of
inspecting the same, and will permit Lessor at any time within sixty (60)
days prior to the expiration of this lease, to place upon the premises any
usual "To Let" or "For Lease" signs, and permit persons desiring to lease
the same to inspect the premises thereafter.
9. INDEMNIFICATION OF LESSOR: Lessor shall not be liable for any damage or
injury to Lessee, or any other person, or any property, occurring on the
demised premises, or any part thereof, except such as is caused solely by
negligence or willful act of Lessor or Lessor's employee negligence,
contractors or agents, or Lessor's breach of this lease.
10. POSSESSION: If Lessor is unable to deliver possession of the premises at
the commencement hereof, Lessor shall not be liable for any damage caused
thereby, nor shall this lease be void or voidable, but Lessee shall not be
liable for any rent until possession is delivered. Lessee may terminate
this lease if possession is not delivered within 30 days of the
--
commencement of the term hereof.
11. INSURANCE: Lessee, at his expense, shall maintain plate glass and public
liability insurance including bodily injury and property damage insuring
Lessee and Lessor with minimum coverage as follows: see Addendum A. Lessee
----------
shall provide Lessor with a Certificate of Insurance showing Lessor as
additional insured. The Certificate shall provide for a ten-day written
notice to Lessor in the event of cancellation or material change of
coverage. To the maximum extent permitted by insurance policies which may
be owned by Lessor or Lessee, Lessee and Lessor, for the benefit of each
other, waive any and all rights of subrogation which might otherwise exist.
12. UTILITIES: Lessee agrees that he shall be responsible for the payment of
all utilities, including water, gas, electricity, heat and other services
delivered to the premises.
13. SIGNS: Lessor reserves the exclusive right to the roof, side and rear walls
of the premises. Lessee shall not construct any projecting sign or awning
without the prior written consent of Lessor which consent shall not be
unreasonably withheld.
14. ABANDONMENT OF PREMISES: Lessee shall not vacate or abandon the premises at
any time during the term hereof, and if Lessee shall abandon or vacate the
premises, or be dispossessed by process of law, or otherwise, any personal
property belonging to Lessee left upon the premises shall be deemed to be
abandoned, at the option of Lessor.
CONDEMNATION: If any part of the premises shall be taken or condemned for
public use, and a part thereof remains which is susceptible of occupation
hereunder, this lease shall, as to the part taken, terminate as of the date
the condemnor acquires possession, and thereafter Lessee shall be required
to pay such proportion of the rent for the remaining term as the value of
the premises remaining bears to the total value of the premises at the date
of condemnation; provided however, that Lessor may at his option, terminate
this lease as of the date the condemnor acquires possession. In the event
that the demised premises are condemned in whole, or that such portion is
condemned that the remainder is not susceptible for use hereunder, this
lease shall terminate upon the date which the condemnor acquires
possession. All sums which may be payable on account of any condemnation
shall belong to the Lessor, and Lessee shall not be entitled to any part
thereof, provided however; that Lessee shall be entitled to recover for
moving costs, loss, of good will, the costs of Lessee's property that
cannot be recovered and the unamortized amount of any improvements
installed by the Lessee.
16. TRADE FIXTURES: Any and all improvements made to the premises during the
term hereof shall belong to the Lessor, except trade fixtures of the
Lessee. Lessee may, upon termination hereof, remove all his trade fixtures,
but shall repair or pay for all repairs necessary for damages to the
premises occasioned by removal.
17. DESTRUCTION OF PREMISES: In the event of a partial destruction of the
premises during the term hereof, from any cause, Lessor shall forthwith
repair the same, provided that such repairs can be made within sixty (60)
days under existing governmental laws and regulations, but such partial
destruction shall not terminate this lease, except that Lessee shall be
entitled to a proportionate reduction of rent while such repairs are being
made, based upon the extent to which the making of such repairs shall
interfere with the business of Lessee on the premises. If such repairs
cannot be made within sixty (60) days, Lessor, at his option, may make the
same with in a reasonable time, this lease continuing in effect with the
rent proportionately abated as aforesaid, and in the event that Lessor
shall not elect to make such repairs which cannot be made within sixty (60)
days, this lease may be terminated at the option of either party. In the
event that the building in which the demised premises may be situated is
destroyed to an extent of not less than one-third of the replacement costs
thereof, Lessor may elect to terminate this lease whether the demised
premises be injured or not. A total destruction of the building in which
the premises may be situated shall terminate this lease. In the event of
any dispute between Lessor and Lessee with respect to the provisions
hereof, the matter shall be settled by arbitration in such manner as the
parties may agree upon, or if they cannot agree, in accordance with the
rules of the American Arbitration Association.
18. HAZARDOUS MATERIALS: Lessee shall not use, store, or dispose of any
hazardous substances upon the premises, except use and storage of such
substances if they are customarily used in Lessee's business, and such use
and storage complies with all environmental laws. Hazardous substances
means any hazardous waste, substance or toxic materials regulated under any
environmental laws or regulations applicable to the property. To the best
knowledge of the Lessor, a) no hazardous material is present on the project
or the soil, surface water or ground water thereof, b) no underground
storage tanks are present on the project, and c) no action, proceeding or
claim is pending or threatened regarding the project concerning any
hazardous material or pursuant to any environmental law.
<PAGE>
Paragraph 19. "Insolvency" is now paragraph 21.
[] ZipForm "Computer Alignment Page 2 of 2 pages
21. INSOLVENCY: In the event a receiver is appointed to take over the business
of Lessee, or in the event Lessee makes a general assignment for the
benefit of creditors or Lessee takes or suffers any action under any
insolvency or bankruptcy act, the same shall constitute breach of this
lease by Lessee.
22. REMEDIES OF OWNER ON DEFAULT: In the event of any breach of this lease by
Lessee, Lessor may, at his option, terminate the lease and recover from
Lessee: (a) the worth at the time of award of the unpaid rent which was
earned at the time of termination; (b) the worth at the time of award of
the amount by which the unpaid rent which would have been earned after
termination until the time of the award exceeds the amount of such rental
loss that the Lessee proves could have been reasonably avoided; (c) the
worth at the time of award of the amount by which the unpaid rent for the
balance of the term after the time of award exceeds the amount of such
rental loss that Lessee proves could be reasonably avoided; and (d) any
other amount necessary to compensate Lessor for all detriment proximately
caused by Lessee's failure to perform his obligations under the lease or
which in the ordinary course of things would be likely to result therefrom.
Lessor may, in the alternative, continue this lease in effect, as long
as Lessor does not terminate Lessee's right to possession, and Lessor may
enforce all his rights and remedies under the lease, including the right to
recover the rent as it becomes due under the lease. If said breach of lease
continues, Lessor may, at any time thereafter, elect to terminate the
lease.
Nothing contained herein shall be deemed to limit any other rights or
remedies which Lessor may have.
23. SECURITY: The security deposit set forth above, if any, shall secure the
performance of the Lessee's obligations hereunder. Lessor may, but shall
not be obligated to apply all or portions of said deposit on account of
Lessee's obligations hereunder. Any balance remaining upon termination
shall be returned to Lessee. Lessee shall not have the right to apply the
Security Deposit in payment of the last month's rent.
24. DEPOSIT REFUNDS: The balance of all deposits shall be refunded within two
weeks from date possession is delivered to Owner or his authorized Agent,
together with a statement showing any charges made against such deposits by
Owner.
25. WAIVER OF RIGHT TO JURY TRIAL: In the event there shall be a dispute
between Lessor and Lessee and either party shall file an action against the
other party to enforce their rights under this lease, to interpret the
Lease terms, or arising out of their relationship as Lessee and Lessor, the
parties agree that the matter shall be tried by the court without a jury
and each party specifically waives the right to a jury trial in any such
action.
26. ATTORNEY'S FEE AND COSTS: In any action or proceeding involving a dispute
Lessor, Lessee and/or Broker, arising out of the execution of this lease,
or to collect commissions, or to enforce the terms and conditions of this
lease, or to recover possession of the premises from Lessee, the prevailing
party shall be entitled to receive from the other party a reasonable
attorney's fee, expert fees, appraisal fees and all other costs incurred in
connection with such action or proceedings, to be determined by the court
or arbitrator(s).
27. WAIVER: No failure of Lessor to enforce any term hereof shall be deemed to
be a waiver.
28. NOTICES: Any notice which either party may or is required to give, shall be
given by mailing the same, postage prepaid, to Lessee at the premises, or
Lessor at the address shown below, or at such other places as may be
designated by the parties from time to time.
29. HOLDING OVER: Any holding over after the expiration of this lease, with the
consent of Lessor, shall be construed as a month-to-month tenancy at a
rental of $ 18,024.00 per month, otherwise in accordance with the terms
hereof, as applicable.
30. TIME: Time is of the essence of this lease.
31. HEIRS, ASSIGNS, SUCCESSORS: This lease is binding upon and inures to the
benefit of the heirs, assigns and successors in interest to the parties.
32. *TAX INCREASE: In the event there is any increase during any year of the
term of this lease in the City, County or State real estate taxes over and
above the amount of such taxes assessed for the tax year during which the
term of this lease commences, whether because of increased rate or
valuation, Lessee shall pay to Lessor upon presentation of paid tax bills
an amount equal to N/A of the increase in taxes upon the land and building
---
in which the leased premises are situated. In the event that such taxes are
?? for a tax year extending beyond the term of the lease, the
obligation of Lessee shall be proportionate to the portion of the lease
term included in such year.
33. COST OF LIVING INCREASE: The rent provided for in paragraph 2 shall be
adjusted effective upon the first day of the month immediately following
the expiration of * months from date of commencement of the term and upon
-
the expiration of each * months thereafter in accordance with changes in
-
the U.S. Consumer Price Index for All Urban Consumers (1982-84 = 100)
hereinafter called the "CPL" The monthly rent shall be increased to an
amount equal to the monthly rent set forth in paragraph 2 multiplied by a
fraction the numerator of which is the CPI for the second calendar month
immediately preceding the adjustment date and the denominator of which is
the CPI for the second calendar month preceding the commencement of the
lease term. Provided, however, in no event shall the monthly rent be less
than the amount set forth in paragraph 2. * See Option to extend, Exhibit F
34. OPTION TO RENEW: Provided that Lessee is not in default in the performance
of this lease, Lessee shall have the option to renew the lease for an
additional term of -- months commencing at the expiration of the initial
lease term. All of the terms and conditions of the lease shall apply during
the renewal term except that the monthly rent shall be the sum of $ -------
which shall be adjusted in accordance with the cost of living increase
provision set forth in paragraph 33.
The option shall be exercised by written notice given to Lessor not
less than_____days prior to the expiration of the initial lease term. If
notice is not given in the manner provided herein within the time
specified, this option shall expire. See Option to extend, Exhibit F
35. LESSOR'S LIABILITY: The term "Lessor," as used in this paragraph, shall
mean only the owner of the real property or a Lessee's interest in a ground
lease of the premises. In the event of any transfer of such title or
interest, the Lessor named herein (or the grantor in case of any subsequent
transfers) shall be relieved of all liability. related to Lessor's
obligations to be performed after such transfer. Provided, however, that
any funds in the hands of Lessor or Grantor at the time of such transfer
shall be delivered to Grantee. Lessor's obligations hereunder shall be
binding upon Lessor's successors and assigns only during their respective
periods of ownership.
36. ESTOPPEL CERTIFICATE:
(a) Lessee shall at any time upon not less than ten (10) days prior
written notice from Lessor execute, acknowledge and deliver to Lessor a
statement in writing [1] certifying that this Lease is unmodified and in
full force and effect (or, if modified, stating the nature of such
modification and certifying that this Lease, as so modified, is in full
force and effect), the amount of any security deposit, and the date to
which the rent and other charges are paid in advance, if any, and [2]
acknowledging that there are not, to Lessee's knowledge, any uncured
defaults on the part of Lessor hereunder, or specifying such defaults if
any are claimed. Any such statement may be conclusively relied upon by any
prospective buyer or encumbrances to the Premises.
(b) At Lessor option, Lessee's failure to deliver such statement
within such time shall be material breach of this Lease or shall be
conclusive upon Lessee [1] that this Lease is in full force and effect,
without modification except as may be represented by Lessor, [2] that there
are no uncured defaults in lessor's performance, and [3] that not more than
one month's rent has been paid in advance or such failure may be considered
by Lessor as a default by Lessee under this Lease.
(c) If Lessor desires to finance, refinance, or sell the Premises, or
any part thereof, Lessee hereby agrees to deliver to any lender or buyer
designated by Lessor such financial statements of Lessee as may be
reasonably required by such lender or buyer. Such statements shall include
the past three years' financial statements of Lessee. All such financial
statements shall be received by Lessor and such lender or buyer in
confidence and shall be used only for the purposes herein set forth.
37.
38. ADDENDUM: An addendum, signed by the parties, [X] is attached, [] is not
attached hereto. See Addendums A & B STIRE AGREEMENT: The foregoing
constitutes the entire agreement between the parties and may be modified
only by a writing signed by both parties. The following exhibits, if any,
have been made a part of this lease before the parties' execution hereof:
Exhibit A, Exhibit B, Exhibit C, Exhibit D, Exhibit E,Exhibit F
---------------------------------------------------------------
DATED: 10/09/97
/s/ [SIGNATURE ILLEGIBLE] Lessor
___________________________ Lessee
___________________________ Address
___________________________ Phone
ACCEPTANCE
The undersigned Lessor hereby acknowledge
receipt of a copy hereof. DATED: 10/09/97
/s/ John Anagnostou Owner's Aothorized Agent
- --------------------------- /s/ John Anagnostou Lessor
___________________________ Address ___________________________ Lessee
___________________________ Phone ___________________________ Address
By 10/9/97 ___________________________ Phone
- ------------------ 10/9/97
---------------------------
[TEXT ILLEGIBLE]
* See Addendum A
<PAGE>
LIQUID AUDIO
EXHIBITS/ADDENDUMS FOR
810 WINSLOW AND BROADWAY:
Made a part of this agreement
are the following:
Addendum A: Insurance Indemnity/Property Taxes
Addendum B: Option to terminate lease
Exhibit A: Floor plans & elevations
Exhibit B: Rent schedule
Exhibit C: Rules and regulations
Exhibit D: Finished build-out details/Work letter
Exhibit E: Additional building improvements for Liquid Audio
Exhibit F: Option to extend
<PAGE>
ADDENDUM A
LEASE ADDENDUM to the Commercial Lease and Deposit Receipt by and between,
Liquid Audio, Inc. Lessee, and John Anagnostou Realty, Lessor for the premises
known as 2401 Broadway, Redwood City, California.
In the event of conflict between this Addendum and the Commercial Lease and
Deposit Receipt, this Addendum shall prevail.
1. INSURANCE; INDEMNITY:
1.1 LIABILITY INSURANCE-LESSEE. Lessee shall, at Lessee's expense, obtain
and keep in force during the term of this Lease a policy of Comprehensive
General Liability insurance utilizing an Insurance Services Office standard
form with Broad Form General Liability Endorsement (GLO404), or equivalent,
in an amount of not less than $1,000,000 per occurrence of bodily injury
and property damage combined or in a greater amount as reasonably
determined by Lessor and shall insure Lessee with Lessor as an additional
insured against liability arising out of the use, occupancy or maintenance
of the Premises. Compliance with the above requirement shall not, however,
limit the liability of Lessee hereunder.
1.2 LIABILITY INSURANCE - LESSOR. Lessor shall obtain and keep in force
during the term of this Lease a policy of Combined Single Limit Bodily
injury and Broad Form Property Damage Insurance, plus coverage against such
other risks Lessor deems advisable from time to time, insuring Lessor, but
not Lessee, against liability arising out of the ownership, use, occupancy
or maintenance of the Office Building Project in an amount not less than
$5,000,000 per occurrence.
1.3. PROPERTY INSURANCE-LESSEE. Lessor shall, at Lessee's expense, obtain
and keep in force during the term of this Lease for the benefit of Lessee,
replacement cost fire and extended coverage insurance, with vandalism and
malicious mischief, sprinkler leakage and earthquake sprinkler leakage
endorsements, in an amount sufficient to cover not less than 100% of the
full replacement cost, as the same may exist from time to time, of all of
Lessee's personal property, fixtures, equipment and tenant improvements.
1.4. PROPERTY INSURANCE-LESSOR. Lessor shall obtain and keep in force
during the term of this Lease a policy or policies of insurance covering
loss or damage to the Office Building Project improvements, but not
Lessee's personal property, fixtures, equipment or tenant improvements, in
the amount of the full replacement cost thereof, as the same may exist from
time to time, utilizing Insurance Services Office standard form, or
equivalent, providing protection against all perils included within the
classification of fire, extended coverage, vandalism, malicious mischief,
plate glass and such other perils as Lessor deems advisable or may be
required by a lender having a lien on the Office Building Project. In
addition, Lessor shall obtain and keep in force, during the term of this
Lease, a policy of rental value insurance covering a period of one year,
with loss payable to Lessor, which insurance shall also cover all Operating
Expenses for said period. Lessee will not be named in any such policies
carried by Lessor and shall have no right to any proceeds therefrom. The
policies required by these paragraphs 1.2 & 1.4 shall contain such
deductibles as Lessor or the aforesaid lender may determine. Lessee shall
not do or permit to be done anything which shall invalidate the insurance
policies carried by Lessor. Lessee shall pay the entirety of any increase
in the property insurance premium for the Office Building Project over what
it was immediately prior to the commencement of the term of this Lease if
the increase is specified by Lessor's insurance carrier as being cause by
the nature of Lessee's occupancy or any act or omission of Lessee.
<PAGE>
ADDENDUM A. PAGE 2
1.5. INSURANCE POLICIES. Lessee shall deliver to Lessor copies of
liability insurance policies required under paragraph 1.1 or certificates
evidencing the existence and amounts of such insurance within seven (7)
days after the Commencement Date of this Lease. No such policy shall be
cancelable or subject to reduction of coverage or other modification except
after thirty (30) days prior written notice to Lessor. Lessee shall, at
least thirty (30) days prior to the expiration of such policies, furnish
Lessor with renewals thereof.
1.6. WAIVER OF SUBROGATION. Lessee and Lessor each hereby release and
believe the other, and waive their entire right of recovery against the
other, for direct or consequential loss or damage arising out of or
incident to the perils covered by property insurance carried by such party,
whether due to the negligence of Lessor or Lessee or their agents,
employees, contractors and/or invitees. If necessary all property insurance
policies required under this Lease shall be endorsed to so provide.
1.7. NO REPRESENTATION OF ADEQUATE COVERAGE. Lessor makes no
representation that the limits or forms of coverage of insurance specified
in this paragraph 1 are adequate to cover Lessee's property are obligations
under this Lease.
2. PROPERTY TAXES-REAL AND PERSONAL: Lessor shall pay the real property
taxes for the property subject to reimbursement by Lessee of Lessee's share
in accordance with the provisions of the Lease and this Addendum.
2.1 ADDITIONAL IMPROVEMENTS: Lessee shall not be responsible for paying
any increase in real property taxes caused by additional improvements
placed upon the building by other lessees or by Lessor for the exclusive
enjoyment of any other Lessee. Lessee shall, however, pay to Lessor the
entirety of any increase in real property tax if assessed solely by reason
of additional improvements placed upon the Premises by Lessee or at
Lessee's request or for the exclusive use and enjoyment of Lessee.
3. DEFINITION OR REAL PROPERTY TAX: Real property tax shall include any
form of real estate tax or assessment, general or special, ordinary or
extraordinary and any license fee, commercial rental tax, improvement bond
of bonds, levy or tax (other than inheritance, personal income or estate
taxes) imposed on the building or any portion thereof by any authority
having the direct or indirect power to tax.
4. PERSONAL PROPERTY TAXES: Lessee. Lessee shall pay prior to
delinquency all taxes assessed against and levied upon trade fixtures,
furnishings, equipment and all other personal property of Lessee contained
in the Premises. If any of Lessee's said personal property shall be
assessed with Lessor's real property, Lessee shall pay to Lessor the taxes
attributable to Lessee within thirty (30) days after receipt of a written
statement setting forth the taxes applicable to Lessee.
5. LESSEE'S PROPERTY TAX AND INSURANCE PAYMENT RESPONSIBILITIES: As
"Additional Rent" Lessee shall pay it's proportionate share of Property
Taxes and Property Insurance paid by Lessor as outlined above. Said amount
shall be payable by Lessee within thirty (30) days after a reasonably
detailed statement of actual expenses is presented to Lessee by Lessor. At
Lessor's option, however, an amount may be estimated by Lessor from time to
time of Lessee's share of annual property taxes and insurance and the same
shall be payable monthly or quarterly, as Lessor's estimate of Lessee's
share as aforesaid. In the event Lessee's payments hereunder exceed the
actual amount paid by Lessor as required herein, said overpayment shall be
a credit towards the next installment(s) as due herein except in the final
year of this lease, unless extended, in which case the overpayment shall be
refunded by Lessor to Lessee within 10-
<PAGE>
ADDENDUM A. PAGE 3
days following the termination of Lessor and Lessee's obligations under the
terms of the lease agreement provided there is no default by Lessee at the
time.
6. PRORATA SHARE: Lessor and Lessee hereby agree that Lessee's prorata
share of property taxes and insurance indicated as Lessor's responsibility
shall be 95.5% of the total amount paid by Lessor. Lessee's liability and
property insurance requirements as of Lessee - 100%. This "prorata share"
shall also apply to Lessee's share of property "Operating Expenses" in the
event they are not separately metered or billed. Said "operating expenses"
may include, but not be limited to common area lighting (interior and
exterior), common area maintenance (interior and exterior), management
fees, trash disposal, common area janitorial services, etc.
7. TRASH AND JANITORIAL SERVICES: It is understood that Lessee shall be
responsible for janitorial service, including window washing which shall be
done as often as necessary to maintain a clean and nest appearance, and for
trash removal from the premises.
8. LESSOR/BROKER: It is hereby acknowledged that the Lessor is a Licensed
California Real Estate Broker.
Lessor:
/s/ John Anagnostou 10/9/97
- --------------------------- ------------
Date
Lessee:
Liquid Audio, Inc.
/s/ John Anagnostou 10/7/97
- --------------------------- ------------
Date
<PAGE>
ADDENDUM B
OPTION TO TERMINATE LEASE
LESSEE SHALL HAVE THE RIGHT TO TERMINATE THIS LEASE AS FOLLOWS:
1. Effective date of lease termination: at the end of the third full year of
the first lease term.
2. Lessee shall give Lessor written notice of its election of this option to
terminate the lease no earlier than the commencement of the 25th month and no
later than the end of the 30th month of the initial term of this lease.
3. This "option to terminate" shall not be valid if Lessee is in default under
the terms of this lease at the time of its written election of this option or at
any time thereafter.
4. As consideration for the exercise of this option, Lessee shall pay to Lessor
a sum equal to an additional 6-months rent, (beyond the termination date). Said
amount shall be due and payable in full no later than 30-days prior to the lease
termination date elected under this option. Failure to pay as required herein
shall nullify the right to cancel and the lease and shall remain in full force
and effect for the full initial lease term.
5. Lessor agrees to use all reasonable efforts to locate a replacement tenant
upon receipt of notification as outlined herein. In the event Lessor locates a
suitable replacement tenant that will occupy the premises within the 6-month
period following the effective date of early termination as outlined herein,
Lessor will refund to Lessee the early termination consideration in the
preceding paragraph, less the following:
a. Any rent lost due to delay in occupancy or rent concessions or
reductions during the balance of the 6-month period.
b. Any out-of-pocket costs incurred by Lessor in locating a replacement
tenant.
Lessee:
/s/ John Anagnostou 10/9/97
- --------------------------- --------------
Date
Lessee:
Liquid Audio, Inc.
/s/ John Anagnostou 10/9/97
- --------------------------- ______________
<PAGE>
EXHIBIT A
TO COMMERCIAL LEASE
AND DEPOSIT RECEIPT
- FLOOR PLAN -
Elevation
Ground Floor
Mezzanine
Lower Level
/s/ John Anagnostou 10/9/97 /s/ [SIGNATURE ILLEGIBLE] 10/9/97
- --------------------------- ---------------------------
Lessor Date Lessee Date
<PAGE>
[PLAN APPEARS HERE]
<PAGE>
[FLOOR PLAN APPEARS HERE]
<PAGE>
[FLOOR PLAN APPEARS HERE]
<PAGE>
[FLOOR PLAN APPEARS HERE]
<PAGE>
EXHIBIT B
RENT SCHEDULE
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
11/15/97 TO 11/15/2000 $19,689.00 Per Month Base Rent
11/16/2000 TO 11/15/2002 $18,024.00 Per Month Base Rent
Total Rent For Lease Term: $1,141,380
</TABLE>
$1,141,380 divided by 60 =
$19,023 straight-line
difference immaterial
<PAGE>
RULES AND REGULATIONS FOR
STANDARD OFFICE LEASE
Dated: October 2, 1997
By And Between John Anagnostou Realty, agent for the partnership and Liquid
Audio, Inc.
GENERAL RULES
1. Lessee shall not suffer or permit the obstruction of any Common Areas,
including driveways, walkways and stairways.
2. Lessor reserves the right to refuse access to any persons Lessor in
good faith judges to be a threat to the safety, reputation, or property of the
Office Building Project and its occupants.
3. Lessee shall not make or permit any noise or odors that annoy or
interfere with other lessees or persons having business within the Office
Building Project.
4. Lessee shall not keep animals or birds within the Office Building
Project, and shall not bring bicycles, motorcycles or other vehicles into areas
not designated as authorized for same.
5. Lessee shall not make, suffer or permit litter except in
appropriate receptacles for that purpose.
6. Lessee shall not alter any lock or install new or additional locks or
bolts.
7. Lessee shall be responsible for the inappropriate use of any toilet
rooms, plumbing or other utilities. No foreign substances of any kind are to be
inserted therein.
8. Lessee shall not deface the walls, partitions or other surfaces of the
Premises or Office Building Project.
9. Lessee shall not suffer or permit any thing in or around the Premises
or Building that causes excessive vibration or floor loading in any part of the
Office Building Project.
10. Furniture, significant freight and equipment shall be moved into or
out of the building only with the Lessor's knowledge and consent, and subject to
such reasonable limitations, techniques and timing, as may be designated by
Lessor. Lessee shall be responsible for any damage to the Office Building
Project arising from any such activity.
11. Lessee shall not employ any service or contractor for services or work
to be performed in the Building, except as approved by Lessor.
12. Lessor reserves the right to close and lock the Building on
Saturdays, Sundays and legal holidays, and on other days between the hours of
_____P.M. and _____A.M. of the following day. If Lessee uses the Premises during
such periods, Lessee shall be responsible for securely locking any doors it may
have opened for entry.
13. Lessee shall return all keys at the termination of its tenancy and
shall be responsible for the cost of replacing any keys that are lost.
14. No window coverings, shades or awnings shall be installed or used by
Lessee.
15. No Lessee, employee or invitee shall go upon the roof of the Building.
16. Lessee shall not suffer or permit smoking or carrying of lighted
cigars or cigarettes in areas reasonably designated by Lessor or by applicable
governmental agencies as non-smoking areas.
17. Lessee shall not use any method of heating or air conditioning other
than as provided by Lessor.
18. Lessee shall not install, maintain or operate any vending machines
upon the Premises without Lessor's written consent.
19. The Premises shall not be used for lodging or manufacturing, cooking
or food preparation.
20. Lessee shall comply with all safety, fire protection and evacuation
regulations established by Lessor or any applicable governmental agency.
21. Lessor reserves the right to waive any one of these rules or
regulations, and/or as to any particular Lessee, and any such waiver shall not
constitute a waiver of any other rule or regulation or any subsequent
application thereof to such Lessee.
22. Lessee assumes all risks from theft or vandalism and agrees to keep
its Premises locked as may be required.
23. Lessor reserves the right to make such other reasonable rules and
regulations as it may from time to time deem necessary for the appropriate
operation and safety of the Office Building Project and its occupants. Lessee
agrees to abide by these and such rules and regulations.
Initials:_____________
_____________
FULL SERVICE-NET
EXHIBIT D
PAGE 1 OF 1 PAGE
<PAGE>
WORK LETTER TO STANDARD OFFICE LEASE
Dated: October 2, 1997
by and between John Anagnostou Realty, agent for the partnership and Liquid
Audio, Inc.
The Premises shall be constructed in accordance with Lessor's Standard
Improvements, as follows:
1. Partitions
2. Wall Surfaces
3. Draperies
4. Carpeting
5. Doors
6. Electrical and Telephone Outlets
see EXHIBIT A: Floor plans & elevations
see EXHIBIT D: Finished build-out details/Work
letter
7. Ceiling
8. Lighting
9. Heating and Air-Conditioning Ducts
10. Sound Proofing
11. Plumbing
Initials:_____________
_____________
FULL SERVICE-NET
EXHIBIT D
PAGE 1 OF 2 PAGES
<PAGE>
EXHIBIT D
(continued)
FINISHED BUILD-OUT DETAILS
* Smooth wall finish throughout
* Wood frame glass doors throughout
* Glass opening in front of all offices
* Hardware selection to be quality grade finish
* Individual office ceilings to be sheet rock or dropped t-bar ceiling
* Lighting supplied in each office
* Hardwood floors to be refinished natural and repaired where necessary
* All offices to have at least 4 electrical outlets
* Lessee to provide details during construction for need of separate
electrical circuits for computers, etc.
* Lessee to provide its own installation of computer networking, telephone
networking, high speed ISDN lines, etc.
* Painting to be of professional quality and colors to be approved by Lessee
* Two (2) new, large skylights to be installed as per plan
* Offices to be furnished with HVAC, complete for all areas leased
* Insulation to be installed between all offices to help soundproof offices
* Lower level area to be painted in 2 colors
* New carpet to be installed in hallway, staircase to mezzanine, mezzanine
and staircase to lower level. Carpet allowance to be $ 25.00 per installed
sq. yard
* Design (colors for interior walls, carpet selection, door hardware,
furniture color & configuration, exterior and interior lighting) to be done
by designer Philip Meyer and costs for design to be split 50/50 between
Lessee and Lessor and not to exceed a total of $ 3,000.00 (three-thousand
Dollars).
* Security alarm system to be installed prior to occupancy and cost of system
to be split 50/50 between Lessee and Lessor and not to exceed a total of $
3,500.00 (three-thousand five hundred Dollars).
<PAGE>
Completion of Improvements
Lessor shall construct and complete the Premises substantially in
accordance with the plans and specifications prepared by Michael Froehlich,
Architect dated September 24, 1997 consisting of sheets 4
15. CONSTRUCTION
If Lessor's cost of constructing the improvements in the Premises exceeds
Lessor's Standard Improvements, Lessee shall pay to Lessor in cash before the
commencement of such construction a sum equal to such excess.
If the final plans and specifications are approved by Lessor and Lessee and
Lessee pays Lessor for such excess, then Lessor shall, at its sole cost and
expense, construct the improvements substantially in accordance with said
approved final plans and specifications and all applicable rules, regulations,
laws or ordinances.
16. COMPLETION.
16.1 Lessor shall obtain a building permit to construct the improvements
as soon as possible.
16.2 Lessor shall complete the construction of the improvements as soon as
reasonably possible after the obtaining of necessary building permits.
16.3 The term "Completion," as used in this Work Letter, is hereby defined
to mean the data the building department of the municipality having jurisdiction
of the Premises shall have made a final inspection of the improvements and
authorized a final release of restrictions on the use of public utilities in
connection therewith and the same are in a broom-clean condition.
16.4 Lessor shall use its best efforts to achieve Completion of the
improvements on or before the Commencement Date set forth in paragraph 10 of the
Basic Lease Provisions or within one hundred eighty (180) days alter Lessor
obtains the building permit from the applicable building department, whichever
is later.
16.5 In the event that the improvements or any portion thereof have not
reached Completion by the Commencement Date, this Lease shall not be invalid,
but rather Lessor shall complete the same as soon thereafter as is possible and
Lessor shall not be liable to Lessee for damages in any respect whatsoever.
16.6 If Lessor shall be delayed at any time in the progress of the
construction of the improvements or any portion thereof by extra work, changes
in construction ordered by Lessee, or by strikes, lockouts, fire, delay in
transportation, unavoidable casualties, rain or weather conditions, governmental
procedures or delay, or by any other cause beyond Lessor's control, then the
Commencement Date established in paragraph 10 of the Lease shall be extended by
the period of such delay.
17. TERM
Upon Completion of the improvements as defined in paragraph 16.3, above,
Lessor and Lessee shall execute an amendment to the Lease setting forth the date
of tender of possession as defined in paragraph 3.2.1 of the Lease or of actual
taking of possession, whichever first occurs, as the Commencement Date of this
Lease.
18. WORK DONE BY LESSEE
Any work done by Lessee shall be done only with Lessor's prior written
consent and in conformity with a valid building permit and all applicable rules,
regulations, laws and ordinances, and be done in a good and workmanlike manner
of good and sufficient materials. All work shall be done only with union labor
and only by contractors approved by Lessor, it being understood that all
plumbing, mechanical, electrical wiring and calling work are to be done only by
contractors designated by Lessor:
19. TAKING OF POSSESSION OF PREMISES
Lessor shall notify Lessee of the Estimated Completion Date at least ten
(10) days before said date. Lessee shall thereafter have the right to enter the
Premises to commence construction of any improvements Lessee is to construct and
to equip and fixturize the Premises, as long as such entry does not interfere
with Lessor's work. Lessee shall take possession of the Premises upon the tender
thereof as provided in paragraph 3.2.1 of the Lease to which this Work Letter is
attached. Any entry by Lessee of the Premises under this paragraph shall be
under all of the terms and provisions of the Lease to which this Work Letter is
attached.
20. ACCEPTANCE OF PREMISES
Lessee shall notify Lessor in writing of any items that Lessee deems
incomplete or incorrect in order for the Premises to be acceptable to Lessee
within ten (10) days following Tender of Possession as set forth in paragraph 10
of the Lease to which this Work Letter is attached. Lessee shall be deemed to
have accepted the Premises and approved construction if Lessee does not deliver
such a list to Lessor within said number of days.
1984 American Industrial Real Estate Association Initials:_________
_________
FULL SERVICE-NET
EXHIBIT D
PAGE 2 OF 2 PAGES
<PAGE>
EXHIBIT E
September 11, 1997
LIST OF BUILDING IMPROVEMENTS FOR LIQUID AUDIO
The following is a list of improvements to 810 Winslow building that are not
included in the building lease. John Anagnostou will provide a quotation by item
to do the improvements.
1. Remodel of existing upper mezzanine to include adding wall for conference
room, doors, frames, minimize size of electrical panel room, half height windows
in wall adjoining mezzanine to bridge, electrical, lighting, texture wall
finishing, paint, etc.
- --- option - add 3 offices (9' X 9' inside dimensions) to upper mezzanine
adjoining wall to bridge walkway, electrical, lighting, texture wall finishing,
paint, HVAC, etc. ($ 9,200.00)
2. Area near stairs on existing upper mezzanine, electrical, lighting, texture
wall finishing, paint. ($ 750.00)
3. Remodel existing ground floor hallway area and open to main floor. This
includes demolition of existing hallway, misc patching, smooth wall finishing,
paint, electrical, replace and match hardware, etc. ($ 2,600.00)
4. Remodel of beauty salon and opening to main floor to add ground floor lunch
room. This includes demolition of separating walls, pouring concrete wall
extension for outside door, replace outside door, install sink with water/drain
to existing plumbing and drains, texture wall finishing, paint, electrical,
HVAC, etc. Eliminate Lower Level kitchenette from lease. ($ 4,500.00)
5. Upgrade electrical. This includes adding a separate panel and circuits for
the upstairs offices, adding panel and circuits for network room, installation
of wall sconces into all offices, replacement of overhead lighting in main area
with incandescent lighting, adding electrical service to cubicles on main floor,
additional conduit for network and telephone (network and telephone installation
to done by tenant contractor), conduit for to entrances for badging system.
Tenant to purchase wall sconce fixtures for all offices. ($ 34,000.00)
<PAGE>
6. Upgrade of door locks. This includes re-keying doors for a hierarchical key
system. This allows for separate tiers of keys for groups of locks and an
overall master key for all locks. ($1,000.00)
7. Upgrade of mezzanine floor with sound board. The area that includes the
mezzanine walkways and offices would have sound board installed on it to dampen
sound. This includes sound board material and installation. ($ 3,500.00)
8. Adding a protective metal cover over the telephone cabling that runs up the
Winslow side of the building. This should go up 10' as per Pacific Bell's
requirement and approval. ($ 1,000.00)
9. Cover main Winslow entrance and add bridge between mezzanine walkways. This
includes adding all structure members to support floor, move lighting to
accommodate new structure, creating conference room, adding railing, carpeting,
HVAC, etc. ($ 9,000.00)
10. Delete conference room in rear wall area of main floor. (N/A)
THE FOLLOWING ARE OPTIONAL CHANGES DEPENDING ON PLANNING APPROVAL OF USE OF
BROADWAY RETAIL SPACE.
11. Create Broadway retail space. One large room only. This includes adding
doors, electrical, lighting, paint, texture wall finish, HVAC, etc. ($ 1,500.00)
12. Remove glass in lower level stairwell in exchange for downstairs lighting.
Details to be determined with help of Philip Meyer, Designer. (No charge)
13. Architectual charges related to the work in this exhibit are to be paid by
Lessee direct to the architect. The outstanding billing at this time is
$2,655.02, which Lessee agrees to pay within 10 days. (see attached invoice)
14. Concurrent with the signing of this lease agreement Lessee agrees to pay to
Lessor the sum of $23,000 for Lessee's portion of these additional improvements.
The balance of the cost of the additional improvements are reflected in the
increase in the rent rate of the initial 36-months of the 60-month lease term as
noted on the "rent schedule".
<PAGE>
Memorandum of Understanding
Regarding the lease dated 10/9/97 by and between John Anagnostou Realty, Agent
for partnership, Lessor, and Liquid Audio, Inc. Lessee for the property located
at 810 Winslow, Redwood City, California, for clarification, the parties
acknowledge the following:
Base Rent Adjustment Upon Exercise of Option and thereafter:
The base rent adjustment specified in Exhibit F (Option To Extend) that will
apply the first year of the option period and annually thereafter shall use as
its base month the month that is two months prior to the first month of the
initial lease term. However, the base rent amount used for adjustment purposes
shall be the base rent in effect the month immediately preceding the end of the
initial lease term due to the fact that the base rent the first three years of
the lease term has been increased to allow the Lessor to recover improvement
costs.
The same will apply to the second option period which will use the same base
month and the same base rent for calculation of increases.
Lessor: /s/ John Anagnostou 10/9/97
------------------------- -------------
Lessee: /s/ [SIGNATURE ILLEGIBLE] 10/9/97
------------------------- -------------
<PAGE>
OPTION(S) TO EXTEND
EXHIBIT F
Dated October 2, 1997
By and Between (Lessor) John Anagnostou Realty, agent for partnership
(Lessee) Liquid Audio, Inc.
Property Address: 810 Winslow and Broadway, Redwood City, CA
A. OPTION(S) TO EXTEND:
Lessor hereby grants to Lessee the option to extend the term of this
Lease for 2 additional 60 month period(s) commencing when the prior term expires
upon each and all of the following terms and conditions:
(i) Lessee gives to Lessor, and Lessor actually receives on a date which is
prior to the date that the option period would commence (if exercised) by at
least 6 and not more than 12 months, a written notice of the exercise of the
option(s) to extend this Lease for said additional term(s), time being of
essence. If said notification of the exercise of said option(s) is (are) not so
given and received, the option(s) shall automatically expire; said option(s) may
(if more than one) only be exercised consecutively;
(ii) The provisions of paragraph 39, including the provision relating to
default of Lessee set forth in paragraph 39.4 of this Lease are conditions of
this Option;
(iii) All of the terms and conditions of this Lease except where specifically
modified by this option shall apply;
(iv) The monthly rent for each month of the option period shall be calculated
as follows, using the method(s) indicated below:
(Check Method(s) to be Used and Fill in Appropriately)
[X] 1. COST OF LIVING ADJUSTMENT(S) (COL)
(a) On (Fill in COL Adjustment Date(s): 11/15/2002 and annually
thereafter the monthly rent payable under Exhibit B of the attached Lease shall
be adjusted by the change, if any, from the Base Month specified below, in the
Consumer Price Index of the Bureau of Labor Statistics of the U.S. Department of
Labor for (select one): [_] CPI W (Urban Wage Earners and Clerical Workers) or
[X] CPI U (All Urban Consumers), for (Fill in Urban Area): San Francisco, All
Items (1982-1984 = 100), herein referred to as "C.P.I."
(b) The monthly rent payable in accordance with paragraph A1(a) of
this Addendum shall be calculated as follows: the Base Rent set forth in Exhibit
B of the attached Lease, shall be multiplied by a fraction the numerator of
which shall be the C.P.I. of the calendar month 2 (two) months prior to the
month(s) specified in paragraph A1(a) above during which the adjustment is to
take effect, and the denominator of which shall be the C.P.I. of the calendar
month which is two (2) months prior to (select one): [X] the first month of the
term of this Lease as set forth in Exhibit B ("Base Month") or [ ] (Fill in
Other "Base Month"): ________________________. The sum so calculated shall
constitute the new monthly rent hereunder; but in no event, shall any such new
monthly rent be less than the rent payable for the month immediately preceding
the date for rent adjustment.
(c) In the event the compilation and/or publication of the C.P.I.
shall be transferred to any other governmental department or bureau or agency or
shall be discontinued, then the index most nearly the same as the C.P.I. shall
be used to make such calculation. In the event that Lessor and Lessee cannot
agree on such alternative index, then the matter shall be submitted for decision
to the American Arbitration Association in accordance with the then rules of
said association and the decision of the arbitrators shall be binding upon the
parties. The cost of said Arbitrators shall be paid equally by Lessor and
Lessee.
[_] II. MARKET RENTAL VALUE ADJUSTMENT(S) (MRV)
(a) On (Fill in MRV Adjustment Date(s):_________________________________
________________________________________________________________________________
___________ the monthly rent payable under paragraph 1.5 ("Base Rent") of the
attached Lease shall be adjusted to the "Market Rental Value" of the property as
follows:
1) Four months prior to the Market Rental Value (MRV) Adjustment
Date(s) described above, Lessor and Lessee shall meet to establish an agreed
upon new MRV for the specified term. If agreement cannot be reached, then:
Initials: ____________ EXHIBIT F Initials: __________
____________ __________
OPTION(S) TO EXTEND
Page 1 of 2
NOTICE: These forms are often modified to meet changing requirements of law and
industry needs. Always write or call to make sure you are utilizing the
most current form: American Industrial Real Estate Association, 345
South Figueroa Street, Suite M-1, Los Angeles, CA 90071, (213) 687-8777.
Fax No. (213) 687-8616.
<PAGE>
i) Lessor and Lessee shall immediately appoint a mutually acceptable
appraiser or broker to establish the new MRV within the next 30 days. Any
associated costs will be split equally between the parties, or
ii) Both Lessor and Lessee shall each immediately select and pay the
appraiser or broker of their choice to establish a MRV within the next 30 days.
If, for any reason, either one of the appraisals is not completed within the
next 30 days, as stipulated, then the appraisal that is completed at that time
shall automatically become the new MRV. If both appraisals are completed and the
two appraisers/brokers cannot agree on a reasonable average MRV then they shall
immediately select a third mutually acceptable appraiser/broker to establish a
third MRV within the next 30 days. The average of the two appraisals closes: in
value shall then become the new MRV. The costs of the third appraisal will be
split equally between the parties.
2) In any event, the new MRV shall not be less than the rent payable
for the month immediately preceding the date for rent adjustment.
(b) Upon the establishment of each New Market Rental Value as described in
paragraph AII:
1) the monthly rental sum so calculated for each term as specified
in paragraph AII(a) will become the new "Base Rent" for the purpose of
calculating any further Cost of Living Adjustments as specified in paragraph
AI(a) above and
2) the first month of each Market Rental Value term as specified in
paragraph AII(a) shall become the new "Base Month" for the purpose of
calculating any further Cost of Living Adjustments as specified in paragraph
AI(b).
[_] III. FIXED RENTAL ADJUSTMENT(S) (FRA)
The monthly rent payable under paragraph Z ("Base Rent") of the attached Lease
shall be increased to the following amounts on the dates set forth below:
On (Fill in FRA Adjustment Date(s)): The New Base Rental shall be:
______________________________________ $______________________________
______________________________________ $______________________________
______________________________________ $______________________________
______________________________________ $______________________________
C. BROKER'S FEE: N/A
Initials: ___________ EXHIBIT F Initials: ________
___________ ________
OPTION(S) TO EXTEND
Page 2 of 2
NOTICE: These forms are often modified to meet changing requirements of law and
industry needs. Always write or call to make sure you are utilizing the
most current form: American Industrial Real Estate Association, 345
South Figueroa Street, Suite M-1, Los Angeles, CA 90071. (213) 687-8777.
Fax No. (213) 687-8616.
<PAGE>
EXHIBIT 10.30
SOFTWARE RESELLER AGREEMENT
This Agreement is made and entered into effective as of August 9, 1998 (the
"Effective Date"), by and between Liquid Audio, Inc. ("LA"), a corporation
organized under the laws of the State of California, and Liquid Audio Japan
("Reseller"), a corporation organized under the laws of Japan. Capitalized terms
not otherwise defined shall have their meaning as set forth in Section 1 below.
WHEREAS, the Reseller desires to be appointed on an exclusive basis to
reproduce and resell Software Copies of the LA Software to End-Users in the
Licensed Territory;
WHEREAS, LA is willing to make such appointment in exchange for the
Reseller's payment obligations to LA hereunder, including certain minimum annual
payment commitments, and certain other promises, as set forth in this Agreement;
WHEREAS, the Reseller desires that the LA Software be localized for use in
the Licensed Territory, and LA is willing to cooperate with the Reseller to
cause certain Localized Versions of the LA Software to be developed; and
NOW, THEREFORE, in consideration of the mutual covenants and agreements set
forth herein, the parties hereby agree as follows:
1. DEFINITIONS
-----------
a. "Dealer-Reseller" shall mean any dealer, reseller or other
third party intermediary which (i) purchases Software Copies from Reseller for
resale solely to End-Users hereunder, and not for further resale and (ii) is
either a Subsidiary of Reseller or has been preapproved in writing by LA. All
Dealer-Resellers shall be identified in Exhibit C hereto, which shall be updated
by addenda thereto signed by both parties.
b. "Documentation" shall mean any instruction manuals or
documentation provided by LA with the LA Software.
c. "End-User" shall mean an end-user customer located within the
Licensed Territory who is licensed to use a Software Copy for its internal
purposes, and not for resale, redistribution, or any other purpose.
d. "End-User License Agreement" shall mean an end user license
agreement pursuant to which the Reseller licenses End-Users to use a Software
Copy, which shall (i) be in a form approved by LA that is at least as protective
of the Software Copy under applicable local law as LA's then-current standard
end user license agreement for the applicable LA Software, (ii) require the End-
Users to register their names and other appropriate information with Reseller as
a condition to obtaining the LA Software and (iii) require the End-Users to
register with LA's Liquid Operations Center before using the LA Software to
purchase downloadable digital music files.
e. "LA Software" shall mean the United States version of the
Liquid Audio software identified in Exhibit A hereto, and any Updates delivered
by LA to Reseller and any
<PAGE>
Localized Versions prepared hereunder. LA may, at any time, amend Exhibit A to
add other software products which shall be available to Reseller under the terms
of this Agreement, and LA shall be under no obligation to continue the
production of any software product, and may delete any discontinued software
products from Exhibit A at any time upon written notice.
f. "LA Trade Secrets" shall mean certain know-how, techniques,
processes, methods, and other trade secrets that may be disclosed by LA to the
Reseller relating to the LA Software.
g. "LAJ Shareholder Agreement" shall mean that certain agreement to
be entered into by and among LA, Super Stage, Inc. and certain investors,
pursuant to which LA, Super Stage, Inc. and certain investors have agreed to
certain terms concerning the management of Reseller.
h. "License Term" means the term of this Agreement commencing upon the
Effective Date and expiring on [*] unless earlier terminated pursuant to the
terms of Section 10 below.
i. "Licensed Territory" means Japan.
j. "Localized Version" shall mean a version of the LA Software and
Documentation that has been localized for use in the Japanese language and has
been (i) requested in writing by the Reseller with a detailed description of the
desired localization changes, (ii) reasonably determined by LA to be
commercially feasible to develop and implement; and (iii) reasonably determined
by LA to constitute a necessary customization of the LA Software for use in the
Licensed Territory.
k. "Maintenance Services" means the sale of maintenance and support
services to End-Users, which may include distribution of Updates, in accordance
with LA's minimum requirements as set forth in Section 4(b) below.
l. "Purchase Price" shall mean the price to Reseller for each
Software Copy, calculated based on LA's then-current international retail list
price for the applicable LA Software or Maintenance Services, subject to the
applicable reseller discount set forth in Exhibit A.
m. "Sale" or "selling" of the LA Software or Software Copies shall
mean the sale of a license to use such LA Software or Software Copies. All
-------
references in this Agreement to the purchase, sale or distribution of LA
Software or Software Copies shall mean the purchase, sale or distribution of a
license to use such LA Software or Software Copy.
- -------
n. "Software Copy" or "Software Copies" shall mean an object code
(machine-readable) copy or copies of the LA Software, together with a copy or
copies of any accompanying Documentation relating thereto that is designated by
LA for distribution to End-Users, along with all related materials required by
LA for distribution of finished goods, including without limitation, duplication
media, envelopes, labels, and packaging. All such copies shall be fixed on CD-
ROM, diskette or other tangible media, except as expressly permitted in Section
2(b) below.
* Certain information in this Exhibit has been omitted and filed separately with
the Commission. Confidential treatment has been requested with respect to the
omitted portions.
2
<PAGE>
o. "Subsidiaries" means all current and future business entities of
which the Reseller owns, directly or indirectly, at least fifty percent (50%) of
the equity securities or other equity interest granting voting rights
exercisable in electing the management of the entities, for so long as such
ownership exists.
p. "Update" means a release or version of the LA Software that is
generally made available at no additional cost to LA's end-user customers who
have purchased support and maintenance services from LA.
2. APPOINTMENT AND AUTHORITY OF RESELLER
-------------------------------------
a. Appointment of Reseller. Subject to the terms and conditions set
-----------------------
forth herein, LA hereby appoints Reseller to resell Software Copies of the LA
Software in the Licensed Territory, including related Maintenance Services, and
Reseller hereby accepts such appointment. Such appointment shall be on an
exclusive basis during the initial [*] of the License Term and shall remain on
an exclusive basis thereafter for the duration of the License Term, unless the
Minimum Annual Payment Obligations set forth in Section 6(e) are not fulfilled,
in which case such appointment shall automatically convert to a nonexclusive
basis. Reseller's sole remuneration for the distribution of the LA Software
shall be the difference between the Purchase Price for each Software Copy and
related Maintenance Services, and Reseller's price to its customers. As a
reseller, Reseller shall have the non-transferable, personal, revocable right
and license to reproduce Software Copies and to market, distribute and resell
such Software Copies to End-Users both directly and indirectly through a resale
network approved by LA of Dealer-Resellers in the Licensed Territory. All
proposed Dealer-Resellers must meet the criteria set forth in Section 1(a) above
and shall be identified in Exhibit C hereto. The Reseller shall contractually
obligate all Dealer-Resellers to comply with the terms of this Agreement, and
the Reseller further guarantees the performance of its Dealer-Resellers under
this Agreement and shall indemnify and hold LA harmless from and against all
losses, costs, liabilities and expenses arising out of or relating to any breach
or default by such Dealer-Resellers of this Agreement. All Software Copies
distributed by the Reseller will be accompanied by a copy of the End User
License Agreement, and the Reseller agrees to enforce the terms and conditions
of the End User License Agreement in the event of any violation by an End-User.
b. Territorial and Other Resale Restrictions. All End-Users shall
-----------------------------------------
have a ship-to address within the Licensed Territory and the End-User License
Agreement shall limit use of the LA Software to within the Licensed Territory.
The Reseller's marketing rights are expressly limited to the marketing of the LA
Software under approved LA Trademarks pursuant to Section 3 below. The
Reseller's distribution license is limited to distribution of Software Copies in
tangible packaged goods media, in the format(s) specified by LA, which may
include without limitation CD-ROM or diskette, and no right or license is
granted to distribute Software Copies via the Internet or any wide area network
(WAN) or otherwise in electronic media, except as stated in the following two
sentences. Reseller may permit downloading of the player software products
identified in Exhibit A from its own Web site, from the Web site of any Dealer-
Reseller, and from any other Web sites as may be approved by LA. Reseller may
distribute and permit the distribution by Dealer-Resellers of the server
software products identified in Exhibit A by FTP (file transfer protocol) to
End-Users with a billing address in the Licensed Territory who certify that they
reside in the Licensed Territory. In addition, the Reseller may not distribute
the LA Software on a bundled or value-added basis, or
* Certain information in this Exhibit has been omitted and filed separately with
the Commission. Confidential treatment has been requested with respect to the
omitted portions.
3
<PAGE>
through original equipment manufacturers without the prior written consent of
LA. The Reseller shall pursue aggressive sales policies and procedures to
realize the maximum sales potential for the Software Copies in the Licensed
Territory. The Reseller shall not advertise, market, distribute, sell, or ship
the Software Copies outside the Licensed Territory. The Reseller shall not sell
or distribute, or permit the sale or distribution by any party, of the LA
Software in any scheme being a lottery, as premiums, give-aways, close-outs, or
discounts, as bundled merchandise, or in conjunction with any co-branded or
other marketing arrangement not approved by LA, or for any other purposes not
expressly contemplated and permitted by this Agreement.
c. Additional Restrictions on the LA Software. Except to the extent
------------------------------------------
permitted in Section 4(a) below with respect to Localized Versions, the Software
Copies may not be modified, translated or otherwise altered by the Reseller. The
Reseller agrees that it will not itself, or through any Subsidiary, affiliate or
other third party: (i) rent, lease, timeshare, or encumber the LA Software; (ii)
attempt to decompile, disassemble or reverse engineer the LA Software in whole
or in part, or otherwise attempt to derive the source code of the LA Software,
or take any other action in derogation of LA's or its suppliers' intellectual
property rights; (iii) market, distribute, sell, develop or cause to be
developed any derivative software or any other software program based upon or
competitive with the LA Software or any LA Trade Secrets or Confidential
Information of LA; or (iv) alter, encode, copy or transmit any audio or other
information using the LA Software without obtaining all necessary copyright and
other permissions, and Reseller will at its expense and indemnify LA and its
officers, directors, and employees against all liabilities, damages, claims,
fines and expenses arising out of any claim that Reseller has not obtained such
permissions.
d. Golden Master and Duplication Requirements. Upon receipt of the
------------------------------------------
advance payment set forth in Section 6(b) below, LA shall deliver to Reseller,
one object code (machine-readable) golden master copy of the LA Software, along
with one (1) copy of the Documentation. Upon completion of any Localized
Versions, LA shall likewise deliver a golden master copy thereof to Reseller.
Reproduction of Software Copies by Reseller shall be solely for the purposes of
reselling such Software Copies pursuant to the terms of this Agreement, and
shall be subject to accounting and payment of the applicable Purchase Price for
all such Software Copies pursuant to Section 6 below. All Software Copies shall
be subject to LA's quality control and related requirements set forth in Section
2(e) below. The Software Copies may not be modified, translated or otherwise
altered by Reseller, and on each Software Copy the Reseller shall reproduce
without alteration, distortion or obfuscation all proprietary, confidential,
copyright or other notices of a similar nature that appear on or in the LA
Software in the same form and location as they appear in the original.
e. Quality Control. Reseller will perform duplication, labeling,
---------------
packaging and all related activities that may be required by LA to prepare the
Software Copies for resale to End-Users. All such activities shall be performed
in accordance with LA's quality standards, as communicated to Reseller from time
to time, it being understood that in order to maintain the value and goodwill
associated with LA's Trademarks, all aspects of the Software Copies in finished
goods form will be subject to the approval of LA. LA will have the right to
monitor all aspects of the foregoing activities, and upon request at any time,
Reseller will provide LA with access to its manufacturing facilities, warehouse
and other facilities in order to perform quality control. Inventory levels of
Software Copies maintained by Reseller shall be subject to the review and
approval of LA. All
4
<PAGE>
subcontractors that may be used by Reseller hereunder shall be subject to the
prior written approval of LA. Reseller shall bear all costs and expenses in
connection with its obligations hereunder, except for those costs and expenses
incurred by LA in connection with its monitoring activities, including without
limitation, LA's traveling and lodging expenses.
f. Reservation of Rights. All rights not expressly granted hereunder
---------------------
are reserved by LA. This Agreement does not authorize or imply any rights other
than as expressly set forth herein. Without limiting the foregoing, LA reserves
the right under all of its intellectual property rights to make, have made,
develop, market, license, sell and distribute within the Licensed Territory any
software products other than the LA Software licensed for resale hereunder, to
distribute the LA Software in the Licensed Territory on a bundled or original
equipment manufacturer basis, and to distribute the LA Software in the Licensed
Territory via the Internet or any wide area network (WAN) or otherwise in
electronic media; provided that LA will not grant a license to any third party
to distribute the Localized Versions in the Licensed Territory via the Internet.
Subject to the foregoing, LA will report to Reseller the contact information for
any potential End-User customer located within the Licensed Territory that
contacts LA directly in regard to the purchase of Software Copies.
g. Other Reseller Activities. In the event that Reseller contemplates
-------------------------
entering into operational activities (other than resale or distribution of the
LA Software and Maintenance Services), partnering with third parties with
respect to the same, or receiving revenues from transactions that are enabled by
the LA Software, LA agrees to negotiate in good faith with Reseller to establish
such operations, if such operations are mutually agreed, under terms to be
negotiated at the appropriate time. Notwithstanding the foregoing, LA reserves
the right not to negotiate contracts with Reseller for these types of
relationships, if LA, in its sole business discretion, concludes that such
activities would materially affect the core reseller operation of Reseller in an
adverse manner, and LA shall have no liability to Reseller hereunder whatsoever
in the event LA fails to enter into or negotiate any such contract with
Reseller. In addition, Reseller acknowledges that this Agreement is subject to
termination by Reseller pursuant to Section 10 in the event that Reseller
engages in any such operational activities without the prior written consent of
LA.
h. Ownership. LA retains ownership of the LA Software and all right,
---------
title and interest therein. The Reseller acknowledges and agrees that it is
acquiring only a limited right to resell certain Software Copies the LA Software
hereunder. All patents, copyrights, trade secrets and other intellectual
property rights in and to the LA Software shall remain the exclusive property of
LA or its suppliers.
3. TRADEMARKS AND TRADE NAMES.
--------------------------
a. Right to Use. During the term of this Agreement, the Reseller
------------
shall have the right and shall be required to indicate to the public within the
Licensed Territory that it is an authorized reseller of the LA Software and to
operates is business under the name "Liquid Audio Japan," and shall have the
right and shall be required to market and advertise the LA Software under the
"Liquid Audio" trade name, and any other trademarks, marks, and trade names that
LA may approve for use in connection therewith in the Licensed Territory
(collectively, "LA's Trademarks").
5
<PAGE>
All rights to use LA's trade names are granted solely to the extent such trade
names are legally protectible in the Licensed Territory. Notwithstanding the
foregoing, any use of LA's Trademarks on Web sites or other postings on the
Internet or in other electronic transmissions via computer networks shall be
subject to the prior written approval of LA. The Reseller shall not use LA's
Trademarks, or any other copyright, trademark, logo or other right of LA in any
manner contrary to public morals, in any manner which is deceptive or
misleading, which is derogatory to LA's Trademarks, or which compromises or
reflects unfavorably upon the goodwill, good name, reputation or image of LA or
LA's Trademarks, or which might jeopardize or limit LA's proprietary interest in
LA's Trademarks. Any such misuse will give rise to LA's rights for immediate
termination of this Agreement. Nothing herein shall grant to the Reseller any
right, title or interest in LA's Trademarks. All uses of LA's Trademarks
hereunder by the Reseller shall inure solely to the benefit of LA. At no time
during or after the term of this Agreement shall the Reseller challenge or
assist other to challenge LA's Trademarks or the registration thereof or attempt
to register any trademarks, marks or trade names confusingly similar to those of
LA.
b. Approval of Representations. All representations of LA's
---------------------------
Trademarks that the Reseller intends to use shall first be submitted to LA for
approval in writing (which shall not be unreasonably withheld) of design, color,
and other details or shall be exact copies of those used by LA. The Reseller
shall not use any of LA's Trademarks in conjunction with another trademark on or
in relation to any other software without LA's prior written approval. All uses
shall be subject to approval by LA to ensure that the LA's Trademarks are not
used by the Reseller in a manner that is unintended by LA, and notwithstanding
any approval by LA, the Reseller is responsible for the contents of such
advertising and compliance with all laws and regulations within the Licensed
Territory relating thereto.
c. Registered User Agreements. LA and the Reseller shall enter into
--------------------------
registered user agreements with respect to LA's Trademarks to the extent now or
hereafter required, if at all, by applicable trademark law requirements in the
Licensed Territory. The Reseller shall be responsible for proper filing of the
registered user agreements, if any, with government authorities within the
Licensed Territory and shall pay all costs or fees associated with such filings.
d. Infringement Actions. Reseller shall cooperate with LA in all
--------------------
respects at LA's reasonable request in connection with any action or proceeding
prosecuted by LA involving LA's Trademarks or other intellectual property
rights. Reseller shall promptly notify LA of any such infringements or any acts
of unfair competition by third parties that come to Reseller's attention. LA
shall have the exclusive right, exercisable at its discretion, to institute in
its own name and/or Reseller's name and to control, all actions against third
parties relating to LA's Trademarks, and other intellectual property rights, at
LA's expense. With respect to any such actions, LA shall employ counsel of its
own choice to direct the handling of the litigation and any settlement thereof.
LA shall be entitled to receive and retain all amounts awarded, if any, as
damages, profits or otherwise in connection with such suits handled by LA.
Reseller shall not, without LA's prior written consent, institute any suit or
take any action on account of such infringements, acts of unfair competition or
unauthorized uses. LA's consent shall not be unreasonably withheld with respect
to any infringement of rights licensed on an exclusive basis hereunder, and LA's
consent may be withheld in its sole discretion with respect to any infringement
of rights licensed on a non-exclusive basis hereunder. LA shall endeavor to
provide Reseller with notice of its consent or lack thereof on
6
<PAGE>
an expedited basis in the event of an emergency that requires Reseller to seek
immediate relief in order to prevent further infringement of rights licensed on
an exclusive basis hereunder. If, with LA's consent, Reseller institutes, at its
sole cost and expense, such a suit or action, the handling of the litigation and
any settlement thereof shall remain subject to LA's approval, which shall not be
unreasonably withheld. Reseller shall be entitled to recover all reasonable
costs and expenses incurred in any such suit or action handled by Reseller from
any financial recovery awarded or obtained, and the damages Reseller incurred,
to the extent compensatory damages were awarded therefor, and the remainder
shall be retained by LA. LA shall incur no liability to Reseller by reason of
LA's failure or refusal to prosecute or by LA's refusal to permit Reseller to
prosecute, any alleged infringement by third parties, nor by reason of any
settlement to which LA may agree.
4. LOCALIZED VERSIONS AND MAINTENANCE SERVICES.
-------------------------------------------
a. Localized Versions. LA will cooperate with Reseller to develop
------------------
Localized Versions pursuant to the terms of this Section 4(a); provided that all
matters relating to the Localized Versions shall remain subject to the final
approval and control of LA. LA will prepare a schedule of the processes to be
accomplished in creating the Localized Versions and will allow Reseller to
participate in the development of the Localized Versions where this
participation is acceptable to LA in its sole discretion. In the event that the
Reseller desires the development of a Localized Version, the Reseller will
submit a localization request to LA that contains a detailed description of the
desired localization, and LA shall evaluate the request and determine whether
the requested localization meets the criteria for a Localized Version as set
forth in Section 1(j) above. If LA reasonably determines that the requested
localization meets the requirements set forth in Section 1(j) above, LA will
cooperate with Reseller to develop the requested localization, which cooperation
may include without limitation (i) using reasonable commercial efforts to
perform any source code modifications that LA determines are necessary for the
Localized Version, (ii) providing any application programming interfaces that LA
determines are necessary for Reseller to complete the Localized Version, and
(iii) providing any other reasonable assistance that LA determines is necessary
for Reseller to complete the Localized Version. LA shall have no liability to
the Reseller in the event that completion of any Localized Version is delayed
for any reason or abandoned due to technical difficulties after a reasonable
level of sustained diligent efforts by LA's personnel. LA's obligations
hereunder with respect to Localized Versions shall continue during the License
Term so long as Reseller's right to resell the LA Software under Section 2 is
exclusive within the Licensed Territory. The Reseller shall bear all costs
associated with the development and on-going production of the Localized
Versions. Development costs shall include without limitation the development
services of LA valued on "cost-plus" basis (i.e., time and materials with time
being computed based on fully-burdened labor costs of the dedicated personnel
plus fifteen percent 15% of the total). On-going production costs include
without limitation the cost of creation and production of any physical media or
materials that are distributed as part of the Localized Versions, including
without limitation, manuals, diskettes, labels and boxes required for the
Software Copies in finished goods form pursuant to Section 2(d) above. In the
event that the Reseller prepares any Japanese-language translations or interface
modification designs necessary for such localization, the Reseller will be
solely responsible for, and shall ensure the accuracy and correctness, of all
such Japanese-language translations and interface modification designs provided
by the Reseller. The scope of the initial Localized Version to be developed
hereunder is set forth in Exhibit D, and the parties intend to
7
<PAGE>
collaborate on the specifications for the development of such initial Localized
Version within a reasonable period following execution of this Agreement.
b. Updates and Maintenance Services. LA will deliver to the Reseller
--------------------------------
any Updates to the LA Software on a periodic basis consistent with LA's general
release practices to its customers. Updates may be resold by Reseller as stand-
alone Updates or as part of Maintenance Services. The Reseller will be
responsible for all front-line maintenance and support for the LA Software for
all End-User customers that purchase Maintenance Services from Reseller, and
Reseller and will ensure a minimum level of support to End-Users consistent with
LA's then-current maintenance services agreement, and the goodwill and
reputation associated with LA's Trademarks.
c. Ownership Rights. All Updates and Localized Versions are included
----------------
in the LA Software licensed to the Reseller hereunder, and LA will own all
right, title and interest in and to the Localized Versions and Updates, all
specifications, designs, inventions, and all related work product in all stages
of development ("Work Product"), including without limitation all translations,
interfaces and other contributions by the Reseller hereunder, and all copyrights
and other intellectual property rights therein and thereto. The Reseller hereby
forever and irrevocably assigns and transfers to LA all right, title and
interest in and to the Work Product, including without limitation, all
copyrights, patents, trade secrets and other intellectual property rights
therein and thereto, and LA shall have the exclusive right to file patents and
other intellectual property registrations with respect thereto. All Updates and
Localized Versions are provided on an AS-IS basis. LA cannot guarantee that
program error reported by the Reseller relating to the LA Software will be
corrected.
d. Cooperation by the Reseller. In order to facilitate prompt and
---------------------------
efficient completion of any Localization Versions hereunder, the Reseller and
its personnel are required to cooperate fully with LA and its personnel in all
respects, including without limitation providing information as to customer
requirements, and providing access to (i) all necessary information relating to
any localization request as requested by LA, (ii) Reseller's software systems
and facilities; and (iii) officers and other personnel of the Reseller.
5. ADDITIONAL OBLIGATIONS OF THE RESELLER.
--------------------------------------
a. Reseller Reports. The Reseller agrees to provide LA with a
----------------
quarterly resale and inventory report for itself and for each Dealer-Reseller,
showing, at a minimum, the number of Software Copies of the LA Software
duplicated and/or distributed during each calendar quarter, and the End-Users'
names and addresses, and the quarter-end inventory position on hand. This report
must be forwarded to LA within forty-five (45) days after the close of each
calendar quarter.
b. Promotional Activities. The parties shall mutually agree on
----------------------
promotional activities that Reseller will perform to assist LA in developing its
brand identity in the Licensed Territory. At minimum, the Reseller shall, at its
own expense, actively promote the distribution of the LA Software, including
advertising in trade and other appropriate publications within the Licensed
Territory, and participating in appropriate trade shows, seminars, and joint
marketing programs with applicable marketing partners as may be designated or
approved by LA.
c. Finances and Personnel. The Reseller shall maintain a net worth
----------------------
and working capital sufficient, in Reseller's reasonable judgment, to enable the
Reseller to use its best efforts to
8
<PAGE>
perform fully and faithfully its obligations under this Agreement. The Reseller
shall devote sufficient financial resources and technically qualified sales and
service personnel to the LA Software to fulfill its responsibilities under this
Agreement, including without limitation its Minimum Annual Payment Obligations
set forth in Section 6(c) below.
d. Customer Relations. The Reseller shall, at its own expense (i)
------------------
provide adequate contact with existing and potential End-Users within the
Licensed Territory on a regular basis, consistent with good business practice;
(ii) assist LA in assessing customer requirements for the LA Software, including
modifications and improvements thereto, in terms of quality, design, functional
capability, and other features; (iii) submit market research information, as
reasonably requested by LA, regarding customer feedback, competition and changes
in the market within the Licensed Territory; and (iv) promote the use of the LA
Software in the major recording industry corporate accounts market segments; and
develop and serve major recording industry corporate accounts.
e. Standard of Business Practices. The Reseller shall establish and
------------------------------
maintain, and shall cause its Dealer-Resellers, employees, consultants and
agents to establish and maintain a high standard of ethical business practices
in connection with its appointment to resell the LA Software hereunder in the
Licensed Territory, including, without limitation, full compliance with Sections
11(o) and (p) below. The Reseller shall comply with all laws and regulations
relating or pertaining to the distribution, sale, advertising or use of the LA
Software in the Licensed Territory, and shall comply with the regulations and
directives of any regulatory agencies which shall have jurisdiction over the LA
Software.
f. Representations of Reseller. The Reseller represents and warrants
---------------------------
on a continuous basis that it is a corporation duly organized and validly
existing under the laws of the country of organization first set forth above; it
has full right, power and authority to enter into this Agreement and to perform
all of its obligation hereunder; its execution, delivery and performance of this
Agreement have been duly and properly authorized by all necessary actions and
this Agreement constitutes its valid and binding obligation, enforceable against
it in accordance with its terms; and its execution, delivery and performance of
this Agreement will not, with or without the giving of notice or passage of
time, or both, conflict with, or result in a default or loss of rights under,
any provision of its Articles of Incorporation, By-Laws or other organizational
documents or any other agreement to which it is a party.
g. Intellectual Property Registrations and Government Approvals. LA
------------------------------------------------------------
shall be responsible for obtaining any copyright, trademark or other
intellectual property rights protection, in LA's name, for the LA Software in
the Licensed Territory. The Reseller shall promptly notify LA in writing of, and
shall be responsible for obtaining, any necessary government approvals that may
be required with respect to this Agreement. LA shall be responsible for all fees
or expenses incurred in connection with such intellectual property registrations
or filings other than registered trademark user filings pursuant to Section 3
above, if any. The Reseller shall be responsible for all fees or expenses
incurred in connection with obtaining any necessary government approvals with
respect to this Agreement.
6. TERMS OF PURCHASE BY RESELLER
-----------------------------
9
<PAGE>
a. Payment Terms. All payments due hereunder shall be made in United
-------------
States Dollars, and the Reseller shall be solely responsible for all costs of
any currency conversion to United States Dollars, and such costs shall not
reduce the amounts due to LA hereunder. All payments required hereunder shall be
made by wire transfer to the account of LA, or in accordance with such other
instructions as LA may from time to time provide to the Reseller. All payments
hereunder shall be made without set-off of any amount whatsoever, whether based
upon any claimed debt or liability of LA to the Reseller. Any past due amounts
shall bear interest at the lesser of 1.5 percent per month or the maximum rate
permitted by applicable law. To secure payments hereunder, LA hereby retains and
Reseller hereby grants to LA a security interest in the LA Software inventory
duplicated by Reseller and all proceeds therefrom. Reseller agrees to promptly
execute documents requested by LA to perfect and protect such security interest.
Reseller shall pay all of LA's costs and expenses (including reasonable
attorneys' fees) to enforce LA's rights under this Subsection 6(a).
b. Initial Advance Payment. Upon execution of this Agreement,
-----------------------
Reseller shall make payment to LA in the amount of [*] which amount shall
constitute a nonrefundable advance payment for the Purchase Price for an initial
inventory of Software Copies to be duplicated by the Reseller hereunder. The
composition of this initial inventory shall be mutually agreed upon by the
parties.
c. Minimum Annual Payment Obligations. The Reseller shall guarantee
----------------------------------
and pay to LA the minimum, nonrefundable, guaranteed amounts during each Annual
Period from resale of Software Copies hereunder (the "Minimum Annual Payment
Obligations") as set forth in Exhibit B hereto. As used herein, "Annual Period"
means the twelve (12) month calendar year period commencing on January 1, 1999,,
and each subsequent twelve-month period thereafter during the License Term.
Payments for Software Copies made in any given Annual Period that are in excess
of the required annual minimum may not be carried backward or forward to meet
the required annual minimums for any other Annual Period. The Minimum Annual
Payment Obligations may only be fulfilled by payment duly made to LA based on
Software Copies resold hereunder during the applicable Annual Period. In the
event that Reseller fails to meet the Minimum Annual Payment Obligation for any
Annual Period, Reseller's appointment shall be automatically converted to a
nonexclusive basis upon the commencement of the next Annual Period.
d. Taxes. In addition to the Purchase Price and other charges
-----
specified above, the Reseller shall pay directly any and all taxes, imposts,
duties or similar charges, including without limitation, sales, use, ad valorem,
value added, franchise, withholding or other taxes, duties, imposts or charges
that may be imposed by any jurisdiction in connection with any of the amounts
payable by the Reseller to LA hereunder, however designated or levied, it being
understood that the amounts payable hereunder are net amounts and may not be
reduced or deducted from with any taxes, duties, imposts or other charges. The
Reseller shall indemnify and hold LA forever harmless from, all such taxes,
customs, duties, levies, impost or any other charges now or hereafter imposed,
including without limitation any penalties, interest or other assessments that
may be incurred due to failure, delay or errors by the Reseller in reporting or
payment thereof.
e. Statements. With respect to all Software Copies duplicated by or
----------
for the Reseller pursuant to Section 2 above, within forty-five (45) days after
the end of each quarterly period during the License Term (commencing with the
first quarter-end during the first Annual
* Certain information in this Exhibit has been omitted and filed separately with
the Commission. Confidential treatment has been requested with respect to the
omitted portions.
10
<PAGE>
Period), the Reseller shall deliver to LA a written statement setting forth an
itemized report for the preceding quarterly period, together with full payment
of the Purchase Price for all Software Copies resold during such period. Each
statement shall contain information on the number and type of Software Copies
duplicated by Reseller, the number and type of such Software Copies held in
inventory, and the number and type resold by Reseller during the applicable
period, names and other information collected by Reseller from End-Users of such
Software Copies, along with such supporting or additional information as LA may
from time to time reasonably request. Acceptance of payment by LA shall not
preclude LA from questioning the correctness of any statement at any time. In
addition to the foregoing, with respect to any of the LA Software for which LA
makes a practice of issuing certificates to End-Users, Reseller shall provide LA
with written notice of the resale of any Software Copies thereof, along with
End-User names and related information, within five (5) business days after
completion of the applicable sale to the End-User.
f. Accounting and Audit Rights. The Reseller shall keep and maintain
---------------------------
full and accurate books of account and records covering all Software Copies
duplicated by Reseller pursuant to Section 2 above. LA or its designees shall be
entitled, at its expense, to audit and inspect such books and records on a
quarterly basis during or after the License Term during reasonable business
hours and in each case upon five business (5) days prior written notice to the
Reseller, and make copies and summaries of such books and records. All such
books of account and records shall be retained by the Reseller for a minimum of
seven (7) years after expiration or termination of this Agreement. If LA or its
duly authorized representative discovers a deficiency in the payments to LA
pursuant to any statement in the period under audit (an "Audit Deficiency"), the
Reseller shall promptly pay such Audit Deficiency to LA and, if such Audit
Deficiency is three percent (3%) or more of the payments made to LA pursuant to
any statement in such audit period, the Reseller shall promptly pay all costs
and expenses incurred by LA in connection with such audit. If such Audit
Deficiency is twenty percent (20%) or more of the amounts paid to LA pursuant to
any statement in the period under audit, then in addition to the above, LA may,
at its sole option, immediately terminate the Agreement upon written notice to
the Reseller, even if the Reseller tenders the Audit Deficiency and associated
costs and expenses to LA.
7. LIMITED WARRANTY.
----------------
a. Standard Limited Warranty to End Users. Reseller shall pass on to
--------------------------------------
end users LA's standard limited warranty and other terms contained in the
applicable End User License Agreement for each Software Copy.
b. No Other Warranty. EXCEPT FOR LA'S STANDARD LIMITED WARRANTY TO
-----------------
END USERS, LA GRANTS NO OTHER WARRANTIES OR CONDITIONS, EXPRESS OR IMPLIED, BY
STATUTE OR OTHERWISE, REGARDING THE LA SOFTWARE, THEIR FITNESS FOR ANY PURPOSE,
THEIR QUALITY, THEIR MERCHANTABILITY, OR OTHERWISE.
8. INDEMNIFICATION OBLIGATIONS
---------------------------
a. Indemnification by LA. The Reseller agrees that LA has the right
---------------------
to defend, or at its option to settle, and LA agrees, at its own expense, to
defend or at its option to settle, any
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<PAGE>
claim, suit or proceeding brought against the Reseller on the issue of
infringement by the LA Software of any registered patent, copyright or trademark
issued in the Licensed Territory prior to the Effective Date of this Agreement,
or, with respect to Updates and Localized Versions, issued in the Licensed
Territory prior to the date of release to Reseller, subject to the limitations
hereinafter set forth. LA shall have sole control of any such action or
settlement negotiations, and LA agrees to pay, subject to the limitations
hereinafter set forth, any final judgment entered against the Reseller on such
issue in any such suit or proceeding defended by LA. The Reseller agrees that LA
at its sole option shall be relieved of the foregoing obligations unless the
Reseller notifies LA promptly in writing of such claim, suit or proceeding and
gives LA authority to proceed as contemplated herein, and, at LA's expense,
gives LA proper and full information and assistance to settle and/or defend any
such claim, suit or proceeding. If the LA Software, or any part thereof, is, or
in the opinion of LA may become, the subject of any claim, suit or proceeding
for infringement of any patent, copyright, or trademark or other intellectual
property right, then LA may, at its option and expense: (i) procure for the
Reseller the right to sell or use, as appropriate, the LA Software or such part
thereof; (ii) replace the LA Software, or portions thereof, with other suitable
LA Software or portions thereof; (iii) suitably modify the LA Software, or
portions thereof; or (iv) if none of the foregoing is commercially feasible in
LA's judgment, terminate this Agreement and the Reseller's license to the LA
Software. LA shall not be liable for any costs or expenses incurred without its
prior written authorization.
b. Limitation. Notwithstanding the provisions of Section 8(a) above,
----------
LA assumes no liability for (i) infringements covering any combination, method
or process in which any of the LA Software may be used but not covering the LA
Software when used alone, including without limitation any use of software
belonging to third parties, regardless of whether such software may be necessary
to the use or modification of, or compatible with, the LA Software, (ii)
infringements involving the modification or servicing of the LA Software, or any
part thereof, unless such modification or servicing was performed by LA, (iii)
failure of the Reseller to implement any Updates to the LA Software, if the
infringement would have been avoided by the use of the Update, (iv) any
trademark infringements involving any marking or branding other than LA's
Trademarks when used alone; or (v) infringements arising from uses of the LA
Software which do not comply with the uses permitted under this Agreement.
c. Entire Liability. The provisions of this Section 8 state the
----------------
entire liability and obligations of LA and the exclusive remedy of the Reseller
and its customers, with respect to any alleged infringement of patents,
copyrights, trademarks or other intellectual property rights by the LA Software
or any part thereof. The provisions of this Section 8 state the entire liability
and obligations of both parties and the exclusive remedy of both parties with
respect to any indemnification obligations, other than as set forth in Section
11(k) below
d. Indemnification by the Reseller. Except for LA's indemnification
-------------------------------
obligations set forth above, the Reseller will indemnify, defend and hold
harmless LA, its parents, subsidiaries, affiliates, and each of their respective
successors and permitted assigns, directors, officers, employees,
representatives, agents, consultants, and contractors in respect of any and all
losses, claims, suits, proceedings, liabilities, causes of action, damages,
costs, expenses (including reasonable attorneys' fees and expenses) arising out
of or relating to the breach or inaccuracy of, or failure to comply with, any of
the representations, warranties, covenants, agreements, terms or
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<PAGE>
conditions made by the Reseller hereunder, the use, operation or distribution of
the LA Software, use of any audio recordings or other copyrighted material in
connection with the LA Software, or the actions or omissions, including
negligence and other tortious conduct, of the Reseller's or its Dealer-
Resellers' employees, officers, agents or contractors.
9. PROPERTY RIGHTS AND CONFIDENTIALITY
-----------------------------------
a. Property Rights. Reseller agrees that LA owns all right, title,
---------------
and interest in the product lines that include the LA Software and in all of
LA's patents, trademarks, trade names, inventions, copyrights, know-how, and
trade secrets relating to the design, manufacture, operation or service of the
LA Software. The use by Reseller of any of these property rights is authorized
only for the purposes herein set forth, and upon termination of this Agreement
for any reason such authorization shall cease.
b. Confidential Information. "Confidential Information" means this
------------------------
Agreement and its Exhibits, any addenda hereto signed by both parties, all LA
Software and Documentation, all information models, logic diagrams, data,
drawings, benchmark tests, specifications, structure, sequence, and
organization, object code and source code of or relating to the LA Software, if
disclosed to Reseller hereunder in written, electronic or verbal form, provided
that any verbal disclosure shall be confirmed in writing within thirty (30)
days, and any adaptations of the aforementioned, all knowledge and know-how
inherent to the LA Software, as well as the knowledge and know-how that is
applied to the configuration of the LA Software, and any other proprietary
information supplied to the Reseller by LA hereunder in written, electronic or
verbal form, provided that any verbal disclosure shall be confirmed in writing
within thirty (30) days. The Reseller acknowledges that LA's proprietary
interest in the Confidential Information includes LA's Trade Secrets, and
acknowledges that any use of the Confidential Information inconsistent with this
Agreement shall constitute an infringement of LA's intellectual property rights,
a misappropriation of LA's Trade Secrets, unfair competition and a breach of
this Agreement. The Reseller further acknowledges that the LA Software is
protected as an unpublished trade secret and embodies LA's copyrights and LA's
Trade Secrets.
c. Nondisclosure Obligations. The Reseller acknowledges that the
-------------------------
Confidential Information constitutes valuable trade secrets of LA and the
Reseller agrees that it shall use the Confidential Information solely in
accordance with the provisions of this Agreement and will not disclose, or
permit to be disclosed, the same, directly or indirectly, to any third party
without LA's prior written consent, except as expressly permitted by this
Agreement pursuant to the distribution of the LA Software; provided that the
End-User License Agreement contains provisions sufficiently protective of the
Confidential Information. The Reseller agrees to exercise a high standard of
care in protecting the Confidential Information from unauthorized use and
disclosure. Without limiting the foregoing, the Reseller shall adopt whatever
measures may be required to limit access to the Confidential Information to
those of its employees that are subject to non-disclosure obligations and who
require such access in order to use the LA Software in a manner consistent with
this Agreement. In addition, the Reseller assumes all responsibility and shall
indemnify LA for the fraudulent use or illegal copying or use of the
Confidential Information by its employees or related third parties.
-13-
<PAGE>
d. Reseller Confidential Information. "Reseller Confidential
---------------------------------
Information" means valuable business and technical information which is not
publicly available and is protected by Reseller as confidential information and
which is disclosed in tangible or intangible form by Reseller to LA in
connection with this Agreement, provided that any verbal disclosure must be
confirmed in writing within thirty (30) days. The Reseller Confidential shall
include, without limitation, all advertising material, price schedules and all
customer, marketing, sales, financial and trading information, relating to the
LA Software or Reseller's business, provided that the foregoing is not publicly
available and is protected by Reseller as confidential information. LA shall
observe the same obligations with respect to the Reseller Confidential
Information as imposed on Reseller above with respect to LA's Confidential
Information.
e. Exceptions to Nondisclosure Obligations. Notwithstanding the
---------------------------------------
above, the receiving party shall have no liability to the disclosing party with
regard to Confidential Information or Reseller Confidential Information which:
(i) was generally known and available in the public domain at
the time it was disclosed or becomes generally known and available in the public
domain through no fault of the receiving party;
(ii) was known to the receiving party at the time of disclosure as
shown by the files of the receiving party in existence at the time of
disclosure;
(iii) is disclosed with the prior written approval of the
disclosing party;
(iv) is independently developed by the receiving party without
any use of Confidential Information and by employees or other agents of the
receiving party who have not been exposed to such Confidential Information:
(v) becomes known to the receiving party from a source other
than the disclosing party without breach of this Agreement by the receiving
party and otherwise not in violation of the disclosing party's rights; or
(vi) is disclosed pursuant to the order or requirement of a
court, administrative agency, or other governmental body; provided, that the
receiving party shall provide prompt, advance notice thereof to enable the
disclosing party to seek a protective order or otherwise prevent such
disclosure, and provided that the receiving party's disclosure is limited to the
extent expressly required by such court, administrative agency or other
governmental body.
10. TERM AND TERMINATION. This Agreement shall commence upon the
--------------------
Effective Date and continue until expiration of the License Term, unless earlier
terminated in accordance with the provisions of this Agreement.
a. Mutual Agreement. This Agreement may be terminated pursuant
----------------
to the mutual, written agreement of the parties.
b. Termination Due to Related Events. This Agreement shall
---------------------------------
terminate automatically if the LAJ Shareholder Agreement is terminated for any
reason.
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<PAGE>
c. Termination for Default by the Reseller. If the Reseller
---------------------------------------
defaults in the performance of any material provision of this Agreement, then LA
may give written notice to the Reseller that if the default is not cured within
thirty (30) days the Agreement will be terminated; provided that the cure period
shall be ten (10) days for payment obligations, and there shall be no cure
period of the nature of the default is not subject to cure. If LA gives such
notice and the default is not cured during the applicable period (if any), then
the Agreement shall automatically terminate at the end of that period.
d. Termination for Insolvency of the Reseller. This Agreement
------------------------------------------
may be terminated by LA, on notice, (i) upon the institution by or against the
Reseller of insolvency, receivership or bankruptcy proceedings or any other
proceedings for the settlement of the Reseller's debts, (ii) upon the Reseller's
making an assignment for the benefit of creditors, or (iii) upon the Reseller's
dissolution, winding up or ceasing to conduct business in the normal course.
e. Termination for Changes in Reseller's Business. This Agreement
----------------------------------------------
may be terminated by LA, upon written notice, upon the occurrence of any of the
following events, unless LA has granted its advance written approval (which
approval shall be deemed to be granted if approved by an LA-nominated director
pursuant to Section 3.3 of the LAJ Shareholder Agreement) in regard to the
applicable event: (i) upon the Reseller's making any basic change in the general
nature or scope of its business (as specified in Section 3.3 of the LAJ
Shareholder Agreement), including without limitation, changes to its articles of
incorporation, including any increase or reduction in authorized share capital
and any changes in the rights of outstanding shares; (ii) upon the removal of
the director from Reseller's board that was nominated by LA, if any; (iii) upon
the sale of any equity of Reseller other than pursuant to the initial formation
thereof as agreed by LA and Super Stage, Inc.; (iv) upon the merger or
consolidation of Reseller with another company, or the sale of all or
substantially all of the business or assets of Reseller, or any other change of
control of Reseller; (v) upon the establishment by Reseller, Super Stage, Inc.,
or any of their investors, of a business relationship with any direct competitor
of LA, including any directly or indirectly participating in any entity that
sells, resells or distributes any software product or service that materially
competes with the LA Software; (vi) upon the investment by Reseller in any other
business or entity; (vii) upon Reseller's entering into any material
transactions not in the ordinary course of business or between Reseller and a
director or shareholder of Reseller or an affiliate of such a shareholder, other
than the LAJ Shareholder Agreement; (viii) upon Reseller's entering into any
operational activities (other than resale or distribution of the LA Software and
related maintenance), partnering with third parties with respect to the same, or
receiving revenues from transactions that are enabled by the Liquid Audio
Software.
f. Legal or Regulatory Prohibitions. If any law or regulation
--------------------------------
applicable to LA or the Reseller prohibits use of the LA Software by the
Reseller in the manner contemplated by this Agreement, or permits the use of the
LA Software by the Reseller in a manner not expressly licensed by this
Agreement, this Agreement may be terminated by LA by giving written notice of
termination to the Reseller, such termination to be immediately effective upon
the giving of such notice.
g. Limitation on Termination Liability. In the event of
-----------------------------------
termination by LA in accordance with any of the provisions of this Agreement, LA
shall not be liable to the Reseller, because of such termination, for
compensation, reimbursement or damages on account of the loss of
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<PAGE>
prospective profits or anticipated sales or on account of expenditures,
inventory, investments, leases or commitments in connection with the business or
goodwill of the Reseller. Termination shall not, however, relieve either party
of obligations incurred prior to the termination.
h. Return of Materials. Pursuant to Section 9(a) above, all
-------------------
trademarks, trade names, patents, copyrights, designs, drawings, formulas,
algorithms, golden masters, translations, artwork or other data, photographs,
samples, literature, and sales aids of every kind relating to the LA Software
shall be and remain the property of LA. Within thirty (30) days after the
expiration or termination of this Agreement, Reseller shall prepare all such
items in its possession for shipment, as LA may direct, at LA's expense.
Reseller shall not make or retain any copies of any confidential items or
information which may have been entrusted to it. Upon expiration of this
Agreement (but not upon any earlier termination hereof), Reseller shall have
limited sell-off rights in a manner consistent with this Agreement for a period
of forty-five (45) days with respect to inventory on hand in an amount not
greater than the immediately preceding quarter's total unit sales amount.
Effective upon the termination of this Agreement, Reseller shall cease to use
all trademarks, marks, and trade names of LA.
i. Survival of Certain Terms. The provisions of Sections 4(c),
-------------------------
6(d), 6(e), 6(f), 7, 8, 9, 10, 11, 12, along with all End-User License
Agreements for Software Copies previously distributed, shall survive the
expiration or termination of this Agreement for any reason. All other rights and
obligations of the parties shall cease upon termination of this Agreement.
11. MISCELLANEOUS PROVISIONS.
------------------------
a. Arbitration of Disputes. Except as otherwise provided in this
-----------------------
Agreement, any dispute, controversy or claim arising out of or relating to this
Agreement or to a breach hereof, including the interpretation, performance or
termination, shall be exclusively and finally resolved by binding arbitration.
Arbitration shall be conducted by the International Chamber of Commerce (the
"ICC") which shall administer the arbitration under its commercial rules (the
"Rules"). Arbitration under this Section 11(a) shall be initiated by a written
demand for arbitration specifying the controversy or claim on which arbitration
is sought, as well as the relief requested. Service of the arbitration demand
shall be effective if made pursuant to the notification provisions contained in
Section 11(e) below. The arbitration shall be conducted by a panel of three (3)
arbitrators chosen in accordance with said Rules within thirty (30) days after
receipt by the respondent of the demand to arbitrate. The arbitration, including
the rendering of the award, shall take place in Palo Alto, California, if
initiated by Reseller, or in Tokyo, Japan, if initiated by LA, as the case may
be, and shall be the exclusive forum for resolving such dispute, controversy or
claim. The arbitration proceedings and all pleadings and rulings shall be
conducted and written in the English language. For the purpose of any
arbitration proceeding, this Agreement shall be governed by the governing law
described in Section 11(c) below. This arbitration agreement is intended by the
parties to be self-executing. The panel shall have sole jurisdiction to
determine whether (i) a claim is subject to arbitration, (ii) the arbitration
may proceed even if one of the parties refuses to attend or participate and
(iii) an award against that party may be ordered pursuant to default or
otherwise by the panel. The parties agree that they will arbitrate all claims
agreed to be arbitrated herein regardless of the existence of any related
dispute, action or special proceeding between any or all of the parties hereto
and/or any third party. The arbitration panel shall render a written arbitration
decision with its
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<PAGE>
award, and the decision of the arbitration panel shall be final and binding upon
the parties hereto, and the parties hereby waive any right of appeal under
applicable law. Judgment upon the award rendered by the arbitration panel may be
entered in any court of competent jurisdiction. The prevailing party shall be
entitled to recover its reasonable attorneys' fees and its share of the costs
including any auditing costs or expenses of expert witnesses.
b. Injunctive Relief. In the event of actual or threatened breach
-----------------
of the provisions of Section 2 or 9 above, the nonbreaching party will have no
adequate remedy at law and will be entitled to immediate and injunctive or other
equitable relief, without bond and without the necessity of showing actual money
damages, and notwithstanding Section 11(a) above, each party shall have the
right to institute judicial proceedings against the other party or anyone acting
by, through or under such other party in order to seek such injunctive or other
equitable relief. The prevailing party in any such legal action for injunctive
or equitable relief shall be entitled, in addition to any other rights and
remedies it may have, to reimbursement for its expenses, including court costs
and reasonable attorneys' fees. With respect to any such legal action for
injunctive or equitable relief, the State courts sitting in Santa Clara County,
California, and the Federal courts for the Northern District of California shall
have nonexclusive jurisdiction, and the parties hereby irrevocably consent to
personal jurisdiction of and venue in such courts in any such matter and waive
any objection thereto.
c. Governing Laws. The validity, construction and enforceability
--------------
of this Agreement shall be governed in all respects by the laws of the State of
California (and applicable United States federal law) applicable to agreements
negotiated, executed and performed in the State of California by California
parties, without reference to conflict of law principles. For the avoidance of
doubt, the rights and obligations of the parties under this Agreement shall not
be governed by the 1980 United Nations Convention on Contracts for the
International Sale of Goods.
d. Disclosure; Publicity. Except as specifically provided herein,
---------------------
nothing in this Agreement shall be deemed to give either party any rights to use
the other party's trademarks or trade names without the other party's specific,
written consent. LA and the Reseller shall consult with each other before
issuing any press releases or otherwise making any public statements with
respect to this Agreement and the transactions contemplated hereby. Neither LA
nor the Reseller shall issue any such press release or make any public statement
without the agreement of the other party, except as may be required by law.
e. Notices. All notices required hereunder shall be in writing
-------
and shall be made by personal delivery, or by legible facsimile or by first
class, registered or certified mail, postage prepaid, or by express courier, to
LA and to the Reseller at the address and telecopier numbers indicated below:
(1) For the Reseller:
Sunfelista Meguro Building
9/th/ Floor, 27-1, Kami-Osaki 2-Chome
Shinagawa-ku, Tokyo 141-0021, Japan
Attention: Masahiro Kuroki
Telecopy: (3)3403-6999
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<PAGE>
With a mandatory copy to:
Nishimura & Partners
Ark Mori Building, 29/th/ Floor
12-32, Akasaka 1-Chome
Minato-Ku, Tokyo, 107-6029, Japan
Attention: Takanobu Takehara, Esq.
Telecopy: (03)5561-9711
(2) For LA:
Liquid Audio, Inc.
810 Winslow Street
Redwood City, California 94063
Attention: Robert Flynn
Telecopy: 650.549.2099
With a mandatory copy to:
Wilson Sonsini Goodrich & Rosati
650 Page Mill Road
Palo Alto, California 94306-1050
Attention: Hank Barry, Esq.
Telecopy: 650.493.6811
or such other address or addresses as may have been furnished in writing to LA
by the Reseller or to the Reseller by LA. Any notice or other communication
required to be given hereunder shall have been duly given five (5) business days
after posting when enclosed in a properly sealed envelope addressed as
aforesaid, registered or certified, and deposited postage prepaid, or if by
legible facsimile, when received or, if by express courier or in person, when
received.
f. Severability. Whenever possible, each provision of this
------------
be interpreted in such manner as to be effective and valid under applicable law,
but if any provision or portion of any provision of this Agreement should be
invalid under applicable law, such provision or portion of such provision shall
be ineffective to the extent of such invalidity, without invalidating the
remainder of such provision or remaining provisions of this Agreement.
g. Waiver. A provision of this Agreement may be waived only by a
------
written instrument executed by the party entitled to the benefit of such
provision. The failure of any party at any time to require performance of any
provision of this Agreement shall in no manner affect such party's right at a
later time to enforce the same. A waiver of any breach of any provision of this
Agreement shall not be construed as a continuing waiver of other breaches of the
same or other provisions of this Agreement.
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<PAGE>
h. Further Assurances. The parties shall each perform such acts,
------------------
execute and deliver such instruments and documents, and do all such other things
as may be reasonably necessary to accomplish the transactions contemplated by
this Agreement. In the event that the Reseller fails to promptly execute any
documents reasonably necessary to confirm or set of record LA's rights to the LA
Software, Updates, Localized Versions or any other Work Product owned by LA
hereunder, the Reseller hereby appoints LA as its attorney-in-fact for the
purpose of executing such documents, which appointment shall be deemed a power
coupled with an interest and shall be irrevocable.
i. Subject Headings; Counterparts. The subject headings of the
------------------------------
sections of this Agreement are included for the purposes of convenience only,
and shall not affect the construction or interpretation of any of its
provisions. This Agreement may be executed in counterparts. Each executed
counterpart may be delivered to the other party by facsimile and copies bearing
the facsimile signature of a party will constitute a valid and binding execution
and delivery of this Agreement.
j. Entire Agreement. This Agreement, including the Exhibits
----------------
attached hereto, constitutes the entire agreement of the parties with respect to
the subject matter hereof and supersedes all prior agreements, communications
and understandings between them with respect thereto. No modification of this
Agreement shall be effective without the mutual written agreement of both
parties. No terms or conditions of any purchase order, acknowledgment or other
business form that the Reseller may use in connection with the acquisition or
licensing of the LA Software will have any effect on the rights and obligations
of the parties hereunder, or otherwise modify this Agreement, regardless of any
failure by LA to object to such terms or conditions.
k. Independent Contractors. The relationship of LA and the Reseller
-----------------------
established by this Agreement is that of independent contractors, and nothing
contained in this Agreement shall be construed to (i) give either party the
power to direct and control the day-to-day activities of the other, (ii)
constitute the parties as partners, co-owners or otherwise as participants in a
joint or common undertaking, or (iii) allow the Reseller to create or assume any
obligation on behalf of LA for any purpose whatsoever. All financial obligations
associated with the Reseller's business are the sole responsibility of the
Reseller. All sales and other agreements between the Reseller and its customers
are the Reseller's exclusive responsibility and shall have no effect on the
Reseller's obligations under this Agreement. The Reseller shall be solely
responsible for, and shall indemnify and hold LA free and harmless from, any and
all claims, damages or lawsuits (including LA's reasonable attorneys' fees)
arising out of the negligence or other tortious conduct of the Reseller, its
employees or its agents in performing Reseller's obligations or exercising
Reseller's rights under this Agreement. LA shall indemnify and hold Reseller
free and harmless from any and all claims, damages or lawsuits (including
Reseller's reasonable attorneys' fees) arising out of the negligence or other
tortious conduct of LA's employees or agents in performing LA's obligations
under this Agreement.
l. Nonassignability and Binding Effect. A mutually agreed
-----------------------------------
consideration for LA's entering into this Agreement is the reputation, business
standing, and goodwill honored and enjoyed by the Reseller under its present
ownership, and, accordingly, the Reseller agrees that its license and other
rights and obligations under this Agreement may not be transferred or assigned
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<PAGE>
directly or indirectly, whether by operation of law or otherwise, without the
prior written consent of LA, and any purported transfer or assignment without
such consent shall be void ab initio. Subject to the foregoing sentence, this
-- ------
Agreement shall be binding upon and inure to the benefit of the parties hereto,
their successors and assigns.
m. Force Majeure. Except for payment obligations hereunder, neither
-------------
party shall incur liability to the other party due to any delay or failure in
performance hereunder caused by reason of any occurrence or contingency beyond
its reasonable control, including but not limited to failure of suppliers,
strikes, lockouts or other labor disputes, riots, acts of war or civil unrest,
earthquake, fire, the elements or acts of God, novelty of product manufacture,
unanticipated product development problems, or governmental restrictions or
other legal requirements; provided, that such party notifies the other party in
writing immediately upon commencement of such event and makes diligent efforts
to resume performance immediately upon cessation of such event. In the event
such events continue for a period of one hundred eighty (180) days in the
aggregate, the other party shall have the right to terminate this Agreement upon
written notice to such party.
n. Language. This Agreement is in the English language only, which
--------
language shall be controlling in all respects, and all versions hereof in any
other language shall not be binding on the parties hereto. All communications
and notices to be made or given pursuant to this Agreement shall be in the
English language.
o. Compliance with Laws. The Reseller shall, at its own expense,
--------------------
pay all import licenses and permits, pay customs charges and duty fees, and take
all other actions required to accomplish the import and use of the LA Software
in the Licensed Territory. The Reseller shall ensure compliance with any
applicable laws relating to its activities under the terms of this Agreement,
and Reseller hereby represents and warrants that no consent, approval or
authorization, or designation, declaration or filing with any governmental
authority in the Licensed Territory is required in connection with the valid
execution, delivery and performance of this Agreement.
p. Government Regulations. The Reseller acknowledges that LA may be
----------------------
subject to regulation by various government agencies having jurisdiction, which
may prohibit use, export, re-export or diversion of certain products and
technology in or to the Licensed Territory. Any and all obligations of LA to
provide the LA Software, Documentation, or any media in which any of the
foregoing is contained, as well as any other technical assistance shall be
subject in all respects to such applicable laws and regulations as shall from
time to time govern the license and delivery of technology and products. The
Reseller agrees to cooperate with LA, including, without limitation, providing
required documentation, in order to obtain any necessary export licenses or
exemptions therefrom. The Reseller warrants that it will use its reasonable
efforts to comply with all such applicable laws and regulations governing use,
exportation and reexportation in effect from time to time.
12. LIMITATION OF LIABILITY. EXCEPT FOR INDEMNIFICATION OBLIGATIONS UNDER
-----------------------
SECTION 8 ABOVE, IN NO EVENT SHALL LA'S AGGREGATE LIABILITY HEREUNDER EXCEED THE
TOTAL AMOUNTS PAID BY THE RESELLER HEREUNDER DURING THE ANNUAL PERIOD(S) IN
WHICH SUCH CLAIM(S) AROSE. IN NO EVENT SHALL LA BE LIABLE TO THE RESELLER OR ANY
OTHER ENTITY FOR ANY
-20-
<PAGE>
SPECIAL, CONSEQUENTIAL, INCIDENTAL, INDIRECT OR RELIANCE DAMAGES, HOWEVER
CAUSED, WHETHER FOR BREACH OF CONTRACT, NEGLIGENCE OR UNDER ANY OTHER LEGAL
THEORY, WHETHER FORESEEABLE OR NOT AND WHETHER OR NOT LA HAS BEEN ADVISED OF THE
POSSIBILITY OF SUCH DAMAGES, AND NOTWITHSTANDING THE FAILURE OF ESSENTIAL
PURPOSE OF ANY LIMITED REMEDY. IN NO EVENT SHALL LA BE LIABLE FOR LOST DATA,
LOST PROFITS, BUSINESS INTERRUPTION, FAILURE OF THE SOFTWARE, OR COSTS OF
PROCUREMENT OF SUBSTITUTE GOODS BY ANYONE. THE RESELLER AGREES THAT THESE
LIMITATIONS OF LIABILITY ARE AGREED ALLOCATIONS OF RISK AND ARE REFLECTED IN THE
ROYALTIES AND FEES AGREED UPON BY THE PARTIES.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed by their respective officers thereunto duly authorized.
LIQUID AUDIO, INC. LIQUID AUDIO JAPAN, INC.
By: /s/ ROBERT FLYNN By:____________________________
--------------------------------- (Signature)
(Signature)
Name: /s/ ROBERT FLYNN Name: ___________________________
------------------------------- (Print or Type)
(Print or Type)
Title: VP BUSINESS DEVELOPMENT Title: __________________________
------------------------------
List of Exhibits:
- -----------------
Exhibit A: LA Software and Discount Schedule
- ----------------------------------------------
Exhibit B: Minimum Annual Payment Obligations
- -----------------------------------------------
Exhibit C: Authorized Dealer-Resellers
- ----------------------------------------
Exhibit D: Scope of Initial Localized Version
- -----------------------------------------------
-21-
<PAGE>
EXHIBIT A
---------
LA SOFTWARE AND DISCOUNT SCHEDULE
---------------------------------
LA Software
- -----------
All current LA client, server and content creation software which LA itself has
the right to license in Japan, including both US versions and Localized Versions
Discount
- --------
[*]
* Certain information in this Exhibit has been omitted and filed separately with
the Commission. Confidential treatment has been requested with respect to the
omitted portions.
-22-
<PAGE>
EXHIBIT B
---------
MINIMUM ANNUAL PAYMENT OBLIGATIONS
----------------------------------
Annual Period (commencing) Minimum Annual Payment Obligation
- -----------------------------------------------------------------------------
1998 [*]
1999 [*]
2000 [*]
2001 [*]
2002 [*]
2003 [*]
* Certain information in this Exhibit has been omitted and filed separately with
the Commission. Confidential treatment has been requested with respect to the
omitted portions.
-23-
<PAGE>
EXHIBIT C
---------
AUTHORIZED DEALER-RESELLERS
---------------------------
None
-24-
<PAGE>
EXHIBIT D
---------
SCOPE OF INITIAL LOCALIZED VERSION
----------------------------------
Development of Localized Version of the interface to the Liquid Music Player
-25-
<PAGE>
EXHIBIT 10.31
SHAREHOLDER AGREEMENT
This Shareholder Agreement ("Agreement") is entered into as of the Effective
Date (as defined below) by Liquid Audio, Inc., a California corporation with its
principal place of business at 810 Winslow Street, Redwood City, California
94063, U.S.A. ("Liquid Audio"), Super Stage, Inc., a Japanese corporation with
its principal place of business at Sunfelista Meguro Building, 9th Floor, 27-1,
Kami-Osaki 2-Chome, Shinagawa-ku, Tokyo 141-0021, Japan ("Super Stage"), Liquid
Audio Japan, Inc., a Japanese corporation with its principal place of business
at Sunfelista Meguro Building, 9th Floor, 27-1, Kami-Osaki 2-Chome, Shinagawa-
ku, Tokyo 141-0021, Japan ("LAJ"), ITOCHU Corporation, a Japanese corporation
with its principal place of business at 5-1, Kita-Aoyama 2-Chome, Minato-ku,
Tokyo 107-8077, Japan ("ITOCHU"), and Hikari Tsushin, Inc., a Japanese
corporation with its principal place of business at Ohtemachi Nomura Building,
22th Floor, 1-1, Ohtemachi 2-Chome, Chiyoda-ku, Tokyo 100-0004, Japan
("Hikari"). The Parties agree as follows:
1. DEFINITIONS
-----------
For the purpose of this Agreement, the following definitions shall apply:
1.1 "Affiliate" means a Person that directly, or indirectly through one or
more intermediaries, controls, or is controlled by, or is in common control
with, the Person specified.
1.2 "Articles" means the Japanese language version of the Articles of
Incorporation of LAJ attached in the English language as Exhibit A, and includes
any amendments.
1.3 "Board" means the board of directors of LAJ.
1.4 "Change in Control" with respect to a Party means (i) a merger of that
Party with or into another Person, or a sale of all or substantially all of a
Party's assets to another Person, if as a result of the merger or asset sale the
holders of a majority of the Party's voting securities before the transaction
hold less than a majority of the voting securities of the surviving entity (or
its parent), or (ii) the acquisition by a Person or a group acting in concert of
a majority of a Party's voting securities.
1.5 "Code" means the Commercial Code of Japan of 1899, as amended.
1.6 "Effective Date" means March 31, 1999, the date on which Liquid
Audio, Super Stage, LAJ and the Investors have executed this Agreement.
1.7 "Holder" means Liquid Audio, Super Stage or each Investor, as
applicable. "Holders" shall mean Liquid Audio, Super Stage and the Investors.
1.8 "Investor" means ITOCHU, or Hikari as applicable. "Investors" shall
mean ITOCHU and Hikari.
1.9 "Party" shall mean Liquid Audio, Super Stage, each Investor or LAJ, as
applicable. "Parties" shall mean Liquid Audio, Super Stage, the Investors and
LAJ.
<PAGE>
1.10 "Person" shall mean a natural individual, partnership, firm, company,
corporation, and any other form of business association.
1.11 "Reseller Agreement" shall mean the Software Reseller Agreement
entered into by Liquid Audio and LAJ in the form attached hereto as Exhibit B.
1.12 "Shares" shall mean shares of common stock of LAJ with a par value of
Yen 50,000 per share.
1.13 "Warrant Bonds" shall have the meaning assigned to such term in
Section 4.2(g).
1.14 "Yen" shall mean Japanese Yen.
2. PURCHASE OF SHARES BY LIQUID AUDIO
----------------------------------
2.1 Incorporation Documentation. Super Stage shall deliver to Liquid Audio
---------------------------
a complete and accurate English translation of (i) the Articles and (ii) the
commercial registration of LAJ as of a recent date.
2.2 Initial Purchase by Liquid Audio. On the Effective Date, Liquid Audio
--------------------------------
shall purchase from Super Stage [*] Shares at a purchase price of Yen [*] per
Share for an aggregate purchase price of Yen [*] in accordance with the terms of
a Share Sale and Purchase and Option Agreement to be entered separately by
Liquid Audio and Super Stage (the "Share Purchase and Option Agreement").
2.3 Liquid Audio Option. Liquid Audio will be granted an option,
-------------------
exercisable at any time before December 31, 2003 by written notice to Super
Stage, whether in one exercise or a series of exercises, to purchase any number
of additional Shares from Super Stage as long as Liquid Audio's percentage of
the outstanding capital stock of LAJ, on a fully diluted basis, immediately
after the exercise of such option is not more than [*] (the "Option"). If Liquid
Audio does not fully exercise its preemptive rights to purchase all of the
additional Shares to which it is entitled at the time of any particular offering
of additional Shares to Holders in accordance with Section 2.4, then the total
number of additional Shares issued to Holders as a result of such particular
offering will not be included in the outstanding capital stock of LAJ for
purposes of calculating the number of Shares subject to the Option (unless all
Holders waive their preemptive rights, in which case the additional Shares will
be included). In no event will the Option be for less than 600 Shares. The terms
of the option, including the price for purchase of Shares thereunder, are set
forth in the Share Purchase and Option Agreement.
2.4 Preemptive Rights. Except for the Shares subscribed under Sections 2.2
-----------------
and 2.3 and the Shares issuable pursuant to the Warrant Bonds, Liquid Audio,
Super Stage and each Investor shall have preemptive rights pursuant to Section
280-5-2 of the Code to subscribe for any Shares to be newly issued by LAJ so
that Liquid Audio, Super Stage and each Investor will retain their respective
percentages of the Shares immediately prior to such new issuance. If necessary
for the purpose of this Section 2.4, the Holders agree to vote their Shares, and
shall cause their Board nominees to vote, in favor of an increase in capital or
the number of authorized Shares.
2.5 Loan to Liquid Audio. Upon the initial purchase of Shares by Liquid
--------------------
Audio from Super Stage pursuant to Section 2.2, Super Stage shall promptly loan
* Certain information in this Exhibit has been omitted and filed
separately with the Commission. Confidential treatment has been
requested with respect to the omitted portions.
<PAGE>
to Liquid Audio the purchase price for such Shares in accordance with the terms
of a loan agreement to be entered separately by Liquid Audio and Super Stage
(the "Loan Agreement"). Upon each subsequent purchase of or subscription for
Shares by Liquid Audio hereunder or in accordance with the Share Purchase and
Option Agreement, Super Stage shall promptly loan to Liquid Audio the purchase
price for such Shares in accordance with the terms of a separate loan agreement
(the "Subsequent Loan Agreement"). The terms of any Subsequent Loan Agreement
will be the same as those of the Loan Agreement, except for the amount of the
loan. The interest rate in any Subsequent Loan Agreement will be negotiated in
good faith by the parties at that time.
3. MANAGEMENT OF LAJ
-----------------
3.1 Board of Directors.
------------------
(a) Director Positions. The Board shall initially have [*] authorized
------------------
positions. Liquid Audio shall have the right to nominate [*] members to the
Board, and Super Stage shall have the right to nominate [*] members to the
Board. The remaining member shall be nominated by mutual agreement of Liquid
Audio and Super Stage. Each Holder shall have the right to request removal of
any director which such Holder is solely entitled to nominate at any time
effective upon notice to LAJ, the director to be removed and to the other
Holders. Each Holder shall vote all of its Shares so as to elect the other
Holders' nominees, remove directors for whom removal has been requested, and
maintain the Board constituency described in this Section 3.1. Any vacancy on
the Board shall be filled pursuant to the nomination procedure described in this
Section 3.1.
(b) Compensation and Expenses. LAJ shall reimburse reasonable travel
-------------------------
costs of any director attending a Board meeting. Directors of LAJ shall be
entitled to compensation in accordance with the Code.
3.2 Quorum of the Board; Approval by Board. Without limiting the Articles,
--------------------------------------
a quorum of the Board shall be deemed present at any duly noticed Board meeting
if a majority of the directors are present. A director may be present at a Board
meeting physically or by video conference (to the extent permitted by the
guidelines issued by the Ministry of Justice of Japan) under the current version
of the Code, and present by telephone or otherwise to the maximum extent as may
be permitted in the future by the Code. Without limiting the Articles and
subject to Section 3.3, any action or determination by the Board shall require
the affirmative vote of a majority of the Board members present at the meeting.
The meetings of the Board shall be held at least quarterly at times and places
to be determined by the Board.
3.3 Decisions by the Board. So long as Liquid Audio (or its Affiliates)
----------------------
and Super Stage (or its Affiliates) are shareholders of LAJ, the following
actions set forth in this Section 3.3 shall require the affirmative vote of [*]
of the Board members present at a duly convened meeting of the Board in addition
to any shareholder action required under the Code or the Articles:
(a) Making any basic change in the general nature or scope of business
of LAJ, which shall initially be only the resale or distribution of software
products of Liquid Audio and related services;
* Certain information in this Exhibit has been omitted and filed
separately with the Commission. Confidential treatment has been
requested with respect to the omitted portions.
<PAGE>
(b) Amending the Articles of LAJ, including, without limitation, any
increase or decrease in the number of authorized shares of LAJ, any change in
the rights, preferences or privileges of the Shares and any increase or decrease
in the authorized number of directors on the Board;
(c) Removing the director nominated by Liquid Audio;
(d) Dissolving or liquidating LAJ;
(e) Issuing any security of LAJ, whether Shares, securities
convertible into Shares or debt securities, other than the issuance of any
Shares in connection with the Warrant Bonds specified in Section 4.2 (g);
(f) Merging or consolidating LAJ with another Person, or selling,
leasing, pledging, mortgaging, encumbering or otherwise disposing by all or
substantially all of the assets of LAJ, whether in one transaction or a series
of transactions;
(g) Establishing a business relationship with any direct competitor
of Liquid Audio;
(h) Investing in any other Person;
(i) Entering into any agreement or material transaction with any
director or shareholder of LAJ or an Affiliate of such director or shareholder
(except this Agreement and the Reseller Agreement);
(j) Entering into operational activities (other than resale or
distribution of software products of Liquid Audio and related services),
partnering with any Person with respect to the same (except as contemplated in
this Agreement or the Reseller Agreement), or receiving revenues from
transactions that are enabled by software products of Liquid Audio;
(k) Amending the business plan of LAJ;
(l) Entering into any material transaction not in the ordinary course
of business;
(m) Terminating the Reseller Agreement;
(n) Selling or transferring any Shares;
(o) Authorizing directors' compensation; and
(p) Declaring dividends.
The Parties agree to amend the Articles promptly after the Effective
Date to reflect each of the requirements set forth in this Section 3.3.
3.4 Board and Shareholder Meetings. All Board and shareholder meetings
------------------------------
shall be conducted in the Japanese language, with simultaneous interpretation
into the English language, by an interpreter of Liquid Audio's choice at LAJ's
expense. The minutes of any such meeting will be prepared in both the Japanese
and
<PAGE>
English languages, and compared for accuracy by the interpreter. In the event of
a conflict in terms, the minutes prepared in the Japanese language shall
control.
3.5 Senior Officers.
---------------
(a) President and Chief Executive Officer of LAJ. Super Stage shall
--------------------------------------------
select the interim President of LAJ, who shall be the Chief Executive Officer.
The interim President shall serve until the next President is elected according
to the provisions of this Section 3.5(a). When the interim President is elected
by the Board of LAJ, Super Stage will submit to Liquid Audio a list of
candidates for the next President of LAJ. Super Stage will provide any
information reasonably requested by Liquid Audio concerning each candidate, and
Liquid Audio will have the opportunity to interview each candidate. The Board
shall elect as the next President the candidate selected by Super Stage and
approved by Liquid Audio, which approval shall not be unreasonably withheld. The
President shall also be the sole representative director of LAJ.
(b) Vice President. Liquid Audio shall select the interim Vice
--------------
President of LAJ, who shall serve until the next Vice President is elected
according to the provisions of this Section 3.5(b). When the interim Vice
President is elected by the Board of LAJ, Liquid Audio will submit to Super
Stage a list of candidates for the next Vice President of LAJ. Liquid Audio will
provide any information reasonably requested by Super Stage concerning each
candidate, and Super Stage will have the opportunity to interview each
candidate. The Board shall elect as the next Vice President the candidate
selected by Liquid Audio and approved by Super Stage, which approval shall not
be unreasonably withheld.
(c) Other Officers; Management Structure. The other officers of LAJ
------------------------------------
shall be selected by the Board.
3.6 Statutory Auditor. Except as required by applicable law, LAJ shall
-----------------
have one statutory auditor. Super Stage shall nominate the statutory auditor,
subject to Liquid Audio's approval, which shall not be unreasonably withheld.
3.7 Financial Statements. LAJ's financial year shall be July 1 through
--------------------
June 30 of the following year. LAJ's auditors shall be an independent accounting
firm acceptable to Super Stage and Liquid Audio. LAJ shall prepare an English
translation of its annual audited financial statements in compliance with U.S.
generally accepted accounting principles. LAJ shall deliver, and Super Stage
shall cause LAJ to deliver, to all Holders (i) such annual audited financial
statements within three (3) months after the end of each financial year and (ii)
other financial and operating reports of LAJ prepared for one or more Holders.
3.8 Employee Matters. Each employee of LAJ, and any employee of another
----------------
entity working for LAJ but not a regular employee of LAJ, shall sign an
agreement reasonably acceptable to the Holders providing for confidentiality of
information disclosed by LAJ and for ownership by LAJ of inventions or original
works of authorship created by such individuals.
3.9 Business Plan. An English translation of the five-year business plan
-------------
for LAJ is attached as Exhibit C (the "Business Plan"). The Board shall discuss
and update the Business Plan at least once a year.
<PAGE>
4. REPRESENTATIONS
---------------
4.1 Liquid Audio. Liquid Audio represents and warrants as follows to the
------------
other Holders as of the date of this Agreement:
(a) Organization and Good Standing of Liquid Audio. Liquid Audio is a
----------------------------------------------
corporation duly organized, validly existing and in good standing under the laws
of the State of California and has the corporate power and authority to enter
into this Agreement and to perform its obligations hereunder.
(b) Authorization. All corporate action on the part of Liquid Audio
and Liquid Audio's officers and directors necessary for the authorization,
execution, delivery and performance of this Agreement has been taken. This
Agreement constitutes a valid, legally binding and enforceable obligation of
Liquid Audio.
(c) Government and Other Consents. Except for approvals contemplated
-----------------------------
by this Agreement, no consent, authorization, license, permit, registration or
approval of any governmental or public body or authority is required in
connection with Liquid Audio's execution and delivery of this Agreement or with
the performance by Liquid Audio of its obligations hereunder.
(d) Effect of Agreement. Liquid Audio's execution and delivery of this
-------------------
Agreement, performance of its obligations hereunder and its consummation of the
transactions contemplated hereby will not, (i) to its knowledge, violate any
provision of any law, statute, rule or regulation to which it is subject; (ii)
violate any judgment, order, writ, injunction or decree of any court applicable
to it; (iii) to its knowledge, have any effect on its compliance with any laws,
statutes, rules, regulations, orders, decrees, licenses, permits or
authorizations which would materially and adversely affect it; (iv) to its
knowledge, result in the breach of, or be in conflict with, any term, covenant,
condition or provision of, or affect the validity, enforceability and
subsistence of any agreement, lease or other commitment to which it is a party
and which would materially and adversely affect it; or (v) to its knowledge,
result in the creation or imposition of any lien, pledge, mortgage, claim,
charge, or encumbrance upon any of its assets.
(e) Brokers, Finders. Other than Mr. Ichiro Roy Fujita, Liquid Audio
----------------
has not retained any person to act on its behalf, nor has any person contended
that such person was so retained, to assist as its broker, finder or agent in
connection with this transaction.
(f) Disclosure. No representation or warranty by Liquid Audio
----------
contained in this Agreement and no writing, certificate, exhibit, list or other
instrument required to be furnished pursuant hereto contains or will contain any
untrue statement of a material fact or omits or will omit any material fact
necessary in order to make the statements and information contained herein or
therein not misleading.
4.2 Super Stage. Super Stage represents and warrants to the other Holders
-----------
as follows as of the date of this Agreement:
(a) Organization and Power of Super Stage. Super Stage is a company
-------------------------------------
duly organized and validly existing under the laws of Japan and has the
corporate power and authority to enter into this Agreement and to perform its
obligations hereunder.
<PAGE>
(b) Authorization. All corporate action on the part of Super Stage and
-------------
its officers and directors necessary for the authorization, execution, delivery
and performance of this Agreement has been taken. This Agreement constitutes a
valid, legally binding and enforceable obligation of Super Stage.
(c) Government and Other Consents. Except for approvals contemplated
-----------------------------
by this Agreement, no consent, authorization, license, permit, registration or
approval of governmental or public body or authority is required in connection
with execution and delivery of this Agreement by Super Stage or with the
performance by Super Stage of any of its respective obligations hereunder.
(d) Effect of Agreement. Super Stage's execution and delivery of this
-------------------
Agreement, performance of its obligations hereunder and its consummation of the
transactions contemplated hereby will not, (i) to its knowledge, violate any
provision of any law, statute, rule or regulation to which it is subject; (ii)
violate any judgment, order, writ, injunction or decree of any court applicable
to it; (iii) to its knowledge, have any effect on its compliance with any laws,
statutes, rules, regulations, orders, decrees, licenses, permits or
authorizations which would materially and adversely affect it; (iv) to its
knowledge, result in the breach of, or be in conflict with, any term, covenant,
condition or provision of, or affect the validity, enforceability and
subsistence of any agreement, lease or other commitment to which it is a party
and which would materially and adversely affect it; or (v) to its knowledge,
result in the creation or imposition of any lien, pledge, mortgage, claim,
charge, or encumbrance upon any of its assets.
(e) Brokers, Finders. Super Stage has not retained any person to act
----------------
on its behalf, nor has any person contended that such person was so retained, to
assist as its broker, finder or agent in connection with this transaction.
(f) Disclosure. No representation or warranty by Super Stage contained
----------
in this Agreement and no writing, certificate, exhibit, list or other instrument
required to be furnished pursuant hereto contains or will contain any untrue
statement of a material fact or omits or will omit any material fact necessary
in order to make the statements and information contained herein or therein not
misleading.
(g) LAJ Capitalization. As of the date hereof, the authorized capital
------------------
stock of LAJ consists of [*] Shares, of which [*] Shares are outstanding
and registered in the names of the Holders as stated in Exhibit D. As of the
date hereof, LAJ has warrant bonds outstanding for the issuance of an additional
[*] Shares to Super Stage, ITOCHU and ITOCHU Finance Corporation at an issue
price of Yen [*] per share (the "Warrant Bonds").
4.3 Investor. Each Investor represents and warrants to the other Holders
--------
as follows as of the date of this Agreement:
(a) Organization and Power. Such Investor is a company duly organized
----------------------
and validly existing under the laws of Japan and has the corporate power and
authority to enter into this Agreement and to perform its obligations hereunder.
(b) Authorization. All corporate action on the part of such Investor
-------------
and its officers and directors necessary for the authorization, execution,
delivery
* Certain information in this Exhibit has been omitted and filed seperately
with the Commission. Confidential treatment has been requested with respect
to the omitted portions.
<PAGE>
and performance of this Agreement has been taken. This Agreement constitutes a
valid, legally binding and enforceable obligation of such Investor.
(c) Government and Other Consents. Except for approvals contemplated
-----------------------------
by this Agreement, no consent, authorization, license, permit, registration or
approval of governmental or public body or authority is required in connection
with execution and delivery of this Agreement by such Investor or with the
performance by such Investor of any of its respective obligations hereunder.
(d) Effect of Agreement. Such Investor's execution and delivery of
-------------------
this Agreement, performance of its obligations hereunder and its consummation of
the transactions contemplated hereby will not, (i) to the best of its knowledge,
violate any provision of any law, statute, rule or regulation to which it is
subject; (ii) violate any judgement, order, writ, injunction or decree of any
court applicable to such Investor; (iii) to the best of its knowledge, have any
effect on the compliance of such Investor with any laws, statutes, rules,
regulations, orders, decrees, licenses, permits or authorizations which would
materially and adversely affect such Investor; (iv) to the best of its
knowledge, result in the breach of, or be in conflict with, any term, covenant,
condition or provision of, or affect the validity, enforceability and
subsistence of any agreement, lease or other commitment to which such Investor
is a party and which would materially and adversely affect such Investor; or (v)
to the best of its knowledge, result in the creation or imposition of any lien,
pledge, mortgage, claim, charge, or encumbrance upon any assets of such
Investor.
(e) Brokers, Finders. Such Investor has not retained any person to act
----------------
on its behalf, nor has any person contended that such person was so retained, to
assist as its broker, finder or agent in connection with this transaction.
(f) Disclosure. No representation or warranty by such Investor
----------
contained in this Agreement and no writing, certificate, exhibit, list or other
instrument required to be furnished pursuant hereto contains or will contain any
untrue statement of a material fact or omits or will omit any material fact
necessary in order to make the statements and information contained herein or
therein not misleading.
5. TERM AND TERMINATION.
--------------------
5.1 Term and Termination. This Agreement shall continue in full force and
--------------------
effect unless and until terminated as provided herein.
(a) Grounds for Termination. This Agreement shall be terminated:
-----------------------
(i) by mutual written agreement of the Parties;
(ii) by a Holder in accordance with this Section 5;
(iii) upon the closing of a purchase of Shares provided in
Section 6 whereby Liquid Audio and its Affiliates cease to be shareholders of
LAJ;
(iv) at such time as only one Holder remains subject to this
Agreement; or
<PAGE>
(v) otherwise by lawful exercise by a Holder of its rights under
applicable laws.
The Parties' respective obligations pursuant to Sections 5, 6, 7 and 8 shall
survive a termination for any reason.
5.2 Termination Upon Bankruptcy or Insolvency of a Holder.
-----------------------------------------------------
(a) Notice of Bankruptcy Event. If any of the following events occurs
with respect to a Holder, such Holder shall immediately notify the other Holders
and LAJ of the occurrence of such event:
(i) Such Holder becomes insolvent or unable to pay any or all of its
debts as they mature or ceases to pay any or all of its debts as they mature in
the ordinary course of business.
(ii) Any application or petition is submitted, by or for such Holder,
for commencement of proceedings of bankruptcy, composition or other similar
proceedings under the applicable law.
(b) Right to Terminate. If the event is not cured within 60 days following
------------------
the event and Liquid Audio is the effected holder, Super Stage or an Investor
shall have the right to terminate this Agreement by giving notice in writing to
all other Holders and LAJ. If the event is not cured within 60 days following
the event and Super Stage is the effected Holder, Liquid Audio shall have the
right to terminate this Agreement by giving notice in writing to all other
Holders and LAJ.
(c) Right to Purchase. After notice of termination described in
-----------------
Section 5.2(b), the Holders shall make a reasonable effort to consult in good
faith for 60 days concerning the disposition of their respective interests in
LAJ and the future operations of LAJ. If the Holders do not sign a written
agreement regarding such matters during such 60 days, then the Holder which gave
notice of termination shall have the option to purchase the Shares of such
bankrupt Holder pursuant to Section 5.6.
(d) Bankruptcy of Investor. If the bankrupt Holder is an Investor and
----------------------
the bankrupt event is not cured within 60 days following such event, the other
Holders shall have the option to purchase their pro rata share of the Shares of
such bankrupt Holder pursuant to Section 5.6.
5.3 Termination Upon Bankruptcy or Insolvency of LAJ.
------------------------------------------------
(a) Right to Terminate. If any of the following events occurs with
------------------
respect to LAJ, any Holder shall have the right to terminate the Agreement by
giving notice in writing to all other Holders:
(i) LAJ becomes insolvent or unable to pay any or all of its
debts as they mature or ceases to pay any or all of its debts as they mature in
the ordinary course of business.
(ii) Any application or petition is submitted, by or for LAJ, for
commencement of proceedings of bankruptcy, composition or other similar
proceedings under the applicable law.
<PAGE>
(b) Right to Dissolve. After notice of termination, the Holders shall
-----------------
consult in good faith for 60 days concerning the disposition of their respective
interests in LAJ and the future operations of LAJ. If the Holders do not sign a
written agreement regarding such matters within such 60 days and if any
application or petition is not submitted for the commencement of any proceedings
described in Section 5.3(a)(ii), then each Holder shall have the option to cause
dissolution of LAJ under the Code by giving written notice of dissolution to the
other Holders and LAJ. Upon such notice, each Holder and LAJ shall take all
actions (including voting of Shares in favor for dissolution) required to
dissolve and liquidate LAJ in accordance with applicable laws and regulations.
5.4 Termination Upon Material Breach.
--------------------------------
(a) Right to Terminate. If Super Stage commits a material breach of
------------------
this Agreement and such breach is not cured within 60 days following notice
thereof to Super Stage by Liquid Audio or LAJ, Liquid Audio shall have the right
to terminate this Agreement by giving notice thereof in writing to all other
Holders. If Liquid Audio commits a material breach of this Agreement and such
breach is not cured within 60 days following notice thereof to Liquid Audio by
Super Stage or LAJ, Super Stage or an Investor shall have the right to terminate
this Agreement by giving notice thereof in writing to all other Holders.
(b) Right to Purchase. After notice of termination, the Holders shall
-----------------
consult in good faith for 60 days concerning the disposition of their respective
interests in LAJ and the future operations of LAJ. If the Holders do not resolve
such matters in writing within such 60 days, the Holder that gave notice of
termination shall have the option to purchase the Shares of such breaching
Holder pursuant to Section 5.6. If Super Stage is the breaching Holder and
Liquid Audio is the Holder which gave notice of termination, Liquid Audio shall
also have the right to cause Super Stage to purchase all of the Shares then held
by Liquid Audio pursuant to Section 5.6.
(c) Material Breach by Investor. If an Investor commits a material
---------------------------
breach of this Agreement and such breach is not cured within 60 days following
notice thereof to the breaching Investor by Super Stage, Liquid Audio or LAJ,
Super Stage and Liquid Audio shall have the option to purchase their pro rata
share of the Shares of such breaching Investor pursuant to Section 5.6.
(d) Remedies Not Affected. The foregoing shall not limit the ability
---------------------
of any Party to seek such legal and equitable remedies (including damages not
fully offset by the reduction in purchase price) related to a material breach by
a Party or the failure of a Party to perform any other duty or obligation.
5.5 Change in Control.
-----------------
(a) Right to Terminate. If Super Stage undergoes a Change in Control,
------------------
Liquid Audio shall have the right to terminate this Agreement by giving notice
thereof in writing to all other Holders.
(b) Right to Purchase. After notice of termination, the Holders shall
-----------------
consult in good faith for 60 days concerning the disposition of their respective
interests in LAJ and the future operations of LAJ. If the Holders do not resolve
such matters in writing within such 60 days, Liquid Audio shall have the option
to purchase the Shares of Super Stage pursuant to Section 5.6.
<PAGE>
5.6 Purchase Procedures.
-------------------
(a) The purchase price for the Shares to be sold pursuant to this
Section shall be the "Fair Market Value" of such Shares.
(b) Fair Market Value per Share under this Section 5 shall be
determined as follows:
(i) If the Shares are publicly traded on a national securities
exchange or the Japanese OTC market, the value shall be deemed to be the average
of the closing prices of the Shares on such exchange or market, as the case may
be, over the 30-day period ending three (3) business days prior to the closing
of the purchase of the Shares.
(ii) If there is no active public market for the Shares, the value
shall be the fair market value thereof as determined by a good faith negotiation
between the selling Holder or Holders ("Seller") and the purchasing Holder or
Holders ("Purchaser"). If such negotiation fails to determine the fair market
value within 90 days after the date of the notice of termination, the fair
market value shall be determined as follows:
(A) Seller (as a group if Seller is more than one Holder) and
Purchaser (as a group if Purchaser is more than one Holder) shall each retain at
its expense an appraiser expert in the industry, which appraiser shall be an
international accounting firm or investment bank of good international
reputation. If Seller or Purchaser does not select an appraiser within 30 days
after the end of the 90-day good faith negotiation period referred to in
subsection (ii) above, such Holder or Holders shall not be entitled to retain an
appraiser and shall present whatever materials it has available by the deadline
regarding the valuation of LAJ.
(B) Subject to execution of customary confidentiality
agreements by the appraisers, LAJ shall provide or cause to be provided to each
appraiser all material information, including any material changes in such
information, reasonably necessary to value LAJ or reasonably requested by the
appraisers.
(C) During the 30-day period after both Seller and Purchaser
have selected an appraiser, or the end of the 30-day period in subsection (A)
above if Seller and/or Purchaser does not select an appraiser (the "Negotiation
Period"), Seller, Purchaser and their respective appraisers shall meet on at
least two occasions to present their respective views on valuation and shall
negotiate in good faith to reach a written agreement on the fair market value.
(D) If the fair market value has not been agreed to in
writing by the end of the Negotiation Period, Seller and Purchaser shall each
submit a final valuation proposal with a supporting analysis to the other Holder
or Holders and to the "Arbitrator" within 10 days after the end of the
Negotiation Period. The "Arbitrator" shall be a Person with expertise in valuing
high technology companies, shall not have a material business relationship with
any Party and shall be reasonably acceptable to both Seller and Purchaser.
(E) If Seller or Purchaser does not submit in a timely manner
a final valuation proposal, then the valuation proposal of the other Holder
<PAGE>
or Holders shall be used to establish the fair market value. If the final
proposals differ by less than 5%, then the average of the proposals shall be the
fair market value. If the final proposals differ by 5% or more, then the
Arbitrator shall choose one or the other proposal. The Arbitrator's
determination shall be final and binding on both Seller and Purchase; provided,
however, that the Arbitrator must select one of the final valuation proposals as
submitted.
(c) Each Holder purchasing Shares under this Section 5.6 shall pay in
cash or other immediately available funds the aggregate purchase price for the
Shares to be sold to such Holder upon receipt of the certificate or certificates
for the Shares to be sold to such Holder.
(d) When Holders have the right to purchase their pro rata share of
another Holder's Shares pursuant to this Section 5 and not all of those Holders
exercise their purchase right, the Holders exercising their purchase right shall
also have the right to purchase the pro rata share of the Shares of the Holders
not exercising their purchase right (the "Remaining Shares"). If more than one
Holder elects to exercise its purchase right as to the Remaining Shares, each
Holder who wishes to purchase the Remaining Shares shall be entitled to purchase
that portion of the Remaining Shares as the total number of Shares then owned by
such Holder bears to the total number of Shares then owned by all Holders who
wish to purchase the Remaining Shares.
5.7 Continuation of Business. During any period in which a Holder has the
------------------------
right to purchase or is purchasing the Shares of any other Holder, or in which
Liquid Audio has the right to cause the other Holders to purchase its Shares,
pursuant to this Section 5, until the closing of the purchase of the Shares
thereunder:
(a) LAJ shall continue its business in the ordinary course. All of the
Holders shall use their best efforts to maintain and preserve the business of
LAJ pending the consummation of such purchase.
(b) The Holders shall negotiate in good faith an agreement providing
that employees of such selling Holder working full time for LAJ shall be made
available full time to LAJ for such period as is reasonably required up to 6
months to effect an orderly transition to a new ownership by non-selling
Holders, and each Holder shall use its best efforts to make all such employees
available on this basis.
6. PERMITTED TRANSFERS; RIGHT OF FIRST REFUSAL
-------------------------------------------
6.1 Restrictions. Liquid Audio, Super Stage and the Investors agree to not
sell or transfer in any manner any of such Holder's Shares or any right or
interest therein except as provided in Section 3.3(n). Notwithstanding the
immediately preceding sentence, each Holder may transfer its Shares to an
Affiliate of that Holder or in connection with a merger or sale of all or
substantially all of the assets of the Holder provided that: (i) prior to such
transfer, such Affiliate or transferee agrees in writing to become bound by the
terms and conditions of this Agreement upon transfer of such Shares; (ii) the
transferring Holder notifies all of the other Holders not less than 30 days
prior to any such transfer; and (iii) any such transfer shall not serve to
excuse or terminate any of the obligations of the transferring Holder under this
Agreement.
<PAGE>
6.2 Legend. The instruments representing the Shares shall bear a legend
------
stating that such Shares are not transferable without the Board's written
approval.
7. NONCOMPETITION
--------------
(a) Each of Super Stage and the Investors agrees that as long as such
Holder is a shareholder of LAJ, such Holder will not engage, either directly or
indirectly, as a principal or for its own account or solely or jointly with
others, or as a stockholder in any corporation or joint stock association, in
any entity that sells, resells, or distributes any software product or service
that materially competes with the sale of the Liquid Audio secure music
distribution software carried by LAJ.
(b) If any provision contained in this Section shall for any reason be
held invalid, illegal or unenforceable in any respect, such invalidity,
illegality of unenforceability shall not affect any other provisions of this
Section, but this Section shall be construed as if such invalid, illegal or
unenforceable provision had never been contained herein. It is the intention of
the Parties that if any of the restrictions or covenants contained herein is
held to cover a geographic area or to be for a length of time which is not
permitted by applicable law, or in any way construed to be too broad or to any
extent invalid, such provision shall not be construed to be null, void and of no
effect, but to the extent such provision would be valid or enforceable under
applicable law, a court of competent jurisdiction shall construe and interpret
or reform this Section to provide for a covenant having the maximum enforceable
geographic area, time period and other provisions (not greater than those
contained herein) as shall be valid and enforceable under such applicable law.
(c) Each of Super Stage and the Investors acknowledges that Liquid
Audio would be irreparably harmed by any breach or threatened breach of this
Section and that there would be no adequate remedy at law or in damages to
compensate Liquid Audio for any such breach or threatened breach. In recognition
of this fact, each of Super Stage and the Investors agrees that, in the event of
such a breach or threatened breach, in addition to any remedies at law, Liquid
Audio shall be entitled to obtain equitable relief in the form of specific
performance, temporary restraining order, temporary or permanent injunction or
any other equitable remedy which may then be available, and each of Super Stage
and the Investors consents to the entry thereof.
8. GENERAL PROVISIONS
------------------
8.1 Confidentiality.
---------------
(a) Each Party acknowledges and agrees that certain information it
receives from one or both of the other Parties constitutes the confidential and
proprietary trade secrets of the disclosing Party, and that the receiving
Party's protection thereof is essential to this Agreement and a condition of the
receiving Party's use and possession thereof. Each Party shall retain in strict
confidence any and all such confidential information marked by the disclosing
Party as confidential (collectively "Confidential Information") and use such
Confidential Information only as expressly authorized herein. A Party will under
no circumstances distribute or in any way disseminate Confidential Information
to third parties without the prior written permission of the disclosing Party.
<PAGE>
(b) Notwithstanding the above, the receiving Party shall have no
liability to the disclosing Party with regard to Confidential Information which:
(i) was generally known and available in the public domain at the
time it was disclosed or becomes generally known and available in the public
domain through no fault of the receiving Party;
(ii) was known to the receiving Party at the time of disclosure as
shown by the files of the receiving Party in existence at the time of
disclosure;
(iii) is disclosed with the prior written approval of the disclosing
Party;
(iv) was independently developed by the receiving Party without any
use of Confidential Information and by employees or other agents of the
receiving Party who have not been exposed to such Confidential Information;
(v) becomes known to the receiving Party from a source other than
the disclosing Party without breach of this Agreement by the receiving Party and
otherwise not in violation of the disclosing Party's rights; or
(vi) is disclosed pursuant to the order or requirement of a court,
administrative agency, or other governmental body; provided, that the receiving
Party shall provide prompt, advanced notice thereof to enable the disclosing
Party to seek a protective order or otherwise prevent such disclosure, and
provided that the receiving Party's disclosure is limited to the extent
expressly required by such court, administrative agency or other governmental
body.
(c) Each Party shall cause its senior management employees who will be
given access to the Confidential Information of the other Parties to (i) execute
a confidentially agreement in a form acceptable to the Parties and to protect
such Confidential Information in accordance with such agreement, and (ii) ensure
that any other employees who will be given access to such Confidential
Information will comply with the confidentiality obligations hereunder.
(d) Each Party agrees to notify the other Parties in the event of any
breach of its security under conditions in which it would appear that
Confidential Information was prejudiced or exposed to loss. Each Party shall,
upon request of the disclosing Party, take all other reasonable steps necessary
to recover any compromised Confidential Information disclosed to or placed in
its possession by virtue of this Agreement. The cost of taking such steps shall
be borne solely by the receiving Party.
(e) Each Party acknowledges that any breach of any of its obligations
under this Section 8.1 is likely to cause or threaten irreparable harm to the
other Parties, and, accordingly, each Party agrees that in such event the
disclosing Party shall be entitled to equitable relief to protect its interests,
including but not limited to preliminary and permanent injunctive relief, as
well as money damages.
(f) Each Holder agrees that such Holder shall return, or cause to be
returned, to the disclosing Party, or shall certify to the reasonable
satisfaction of the disclosing Party the destruction of, Confidential
Information disclosed by such disclosing Party promptly after such Holder ceases
to be a shareholder of LAJ.
<PAGE>
8.2 Arbitration; Forum.
-------------------
(a) Except as otherwise provided herein, all disputes, controversies
or claims arising out of or relating to this Agreement, or the breach,
termination or validity thereof, shall be resolved (i) first by good-faith,
face-to-face discussions among the Chief Executive Officers (or such persons
holding a position of equivalent authority) of each affected Party, which
discussions shall be held in Hong Kong, or such other place as the Parties may
mutually agree, within 30 days after receipt of a notice requesting such
discussions, and (ii) failing resolution within 14 days of commencement of such
good faith discussions, by 3 arbitrators under the Rules of Conciliation and
Arbitration of the International Chamber of Commerce as then in effect
("Rules"). The arbitrators shall be chosen in accordance with the Rules within
30 days after receipt by the respondent of the demand to arbitrate, which demand
may be delivered only after the conclusion of the above-mentioned good faith
discussions. The place of arbitration shall be Hong Kong. The language to be
used in the arbitration proceedings shall be English, provided that any party
may submit testimony or documentary evidence in Japanese, and shall, on the
request of any other party, furnish a translation or interpretation into English
of any such testimony or documentary evidence. The arbitrators may be of any
nationality. The arbitral award shall be rendered in writing and state the
reasons for the award. Judgment on any award may be entered by any court of
competent jurisdiction or application may be made to such a court for judicial
acceptance or recognition of the award and any appropriate order including
enforcement.
(b) Notwithstanding the foregoing, each Party may apply to any court
of competent jurisdiction for a temporary restraining order, preliminary
injunction, or other interim or conservatory relief, as necessary, without
breach of this Section, and without any abridgement of the powers of the
arbitrator.
(c) In case of arbitration, the arbitrators shall award reasonable
attorneys' fees and expenses to either party in such manner and to such extent
as the arbitrators deem equitable. In case of a court proceeding arising out of
this Agreement, the prevailing party shall be entitled to recover its reasonable
attorneys' fees and expenses from the other party.
8.3 Governing Law. This Agreement shall be governed by the laws of Japan.
-------------
8.4 Publicity. Prior to issuing any reports, statements, press releases or
---------
other disclosures to third parties regarding this Agreement or the transactions
contemplated herein, the Parties shall exchange copies of such documents and
shall consult with each other regarding their content. Except as otherwise
required by law, no Party shall issue any such disclosure without the prior
approval of the other Parties.
8.5 Notices and Other Communications. Every notice by each Party shall be
--------------------------------
in writing and delivered either by personal delivery, or by express mail or any
similar overnight courier service, or by registered or certified mail, postage
prepaid, or by facsimile, addressed to the Party for whom such notice is
intended at its address set forth above, or at such other address or facsimile
number as the intended recipient previously shall have designated by written
notice to the other Party. All notices delivered in person shall be deemed to
have been delivered to and
<PAGE>
received by the addressee and shall be effective on the date of personal
delivery. All notices delivered by Express Mail or any other similar overnight
courier, or by registered or certified mail, or by facsimile shall be effective
upon receipt.
8.6 Counterparts. This Agreement may be executed in any number of English
------------
language counterparts or duplicate originals, and each such counterpart or
duplicate original shall constitute an original instrument, but all such
separate counterparts or duplicate originals shall constitute one and the same
instrument.
8.7 Written Agreement to Govern. This Agreement sets forth the entire
---------------------------
understanding and supersede all prior and contemporaneous agreements and
discussions among the Parties relating to the subject matter contained herein
and therein, and no Party shall be bound by any definition, condition,
representation, warranty, covenant or provision other than as expressly stated
in or contemplated herein or therein or as subsequently shall be set forth in
writing and executed by a duly authorized representative of the Party to be
bound thereby.
8.8 No Waiver of Rights. All waivers hereunder must be made in writing,
-------------------
and failure at any time to require another Party's performance of any obligation
under this Agreement shall not affect the right subsequently to require
performance of that obligation. No waiver of any breach of any provision of this
Agreement shall be construed as a waiver of any continuing or succeeding breach
of such provision or a waiver or modification of such provision.
8.9 Severability. Whenever possible, each provision of this Agreement
------------
shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement should be prohibited or
invalid under applicable law, such provisions shall be ineffective to the extent
of such prohibition or invalidity without invalidating the remainder of such
provision or the remaining provisions of this Agreement. In such event, the
Parties agree to negotiate, in good faith, a valid, legal and enforceable
substitute provision which most nearly effects the Parties' intent in entering
into this Agreement.
8.10 Subject Headings. The subject headings of the Sections of this
----------------
Agreement are included for the purposes of convenience only, and shall not
affect the construction or interpretations of any of its provisions.
8.11 Further Assurances. The Parties shall each perform such acts, execute
------------------
and deliver such instruments and documents, and do all such other things as may
be reasonably necessary to accomplish the transactions contemplated in this
Agreement.
8.12 Expenses and Finder's Fees. The Parties shall each bear their own
--------------------------
costs and expenses (including attorneys' fees) incurred in connection with the
negotiation and preparation of this Agreement and the consummation of the
transactions contemplated hereby. Each Party shall indemnify the other against
any claim for brokerage or finder's fees arising out of the transactions
contemplated herein by any Person claiming to have been engaged by the
indemnifying Party based upon any action or communication, or any alleged action
or communication, by the indemnifying Party or any of its officers or employees.
8.13 Relationship Between Parties. Each Party will in all matters relating
----------------------------
to this Agreement be and act as an independent contractor. Neither Party will
represent that it has any authority to assume or create any obligation, express
or
<PAGE>
implied, on behalf of the other Party, or to represent the other Party as agent,
employee, or in any other capacity.
8.14 Language. This Agreement is in the English language only, which
--------
language shall be controlling in all respects, and all versions hereof in any
other language shall be for accommodation only and shall not be binding upon the
Parties hereto. All communications and notices to be made or given pursuant to
this Agreement shall be in the English language.
8.15 Assignment. This Agreement shall inure to benefit of, and shall be
----------
binding upon, the Parties and their respective successors and assigns. No Party
may assign or delegate this Agreement or any of its rights or duties under this
Agreement without the prior written consent of the other Parties except as
expressly set forth herein or to a Person into which it has merged or which has
otherwise succeeded to all or substantially all of the assets of the assignor,
and which has assumed in writing or by operation of law the assignor's
obligations under this Agreement.
<PAGE>
EXHIBIT A
[ARTICLES OF INCORPORATION]
<PAGE>
EXHIBIT B
[RESELLER AGREEMENT]
<PAGE>
EXHIBIT C
[FIVE-YEAR BUSINESS PLAN]
<PAGE>
EXHIBIT D
<TABLE>
<CAPTION>
HOLDERS NUMBER OF OUTSTANDING AND REGISTERED SHARES
<S> <C>
Super Stage, Inc. [*]
Liquid Audio, Inc. [*]
ITOCHU Corporation [*]
ITOCHU Finance Corporation [*]
Hikari Tsushin, Inc. [*]
Trans Cosmos Inc. [*]
Happinet Co., Ltd. [*]
TOTAL [*]
</TABLE>
* Certain information in this Exhibit has been omitted and filed seperately
with the Commission. Confidential treatment has been requested with respect
to the omitted portions.
<PAGE>
LIQUID AUDIO, INC. SUPER STAGE, INC.
By: /s/ Robert Flynn By:_________________
------------ Masahiro Kuroki
Robert Flynn
Title: VP Business Development Title: President
----------------------- ---------
Dated: ____________________ Dated: ____________________
ITOCHU CORPORATION HIKARI TSUSHIN, INC.
By: /s/ Eizo Kobayashi By: _______________________
-----------------------
Title: ____________________ Title: ____________________
Dated: ____________________ Dated: ____________________
LIQUID AUDIO JAPAN, INC.
By: ____________________
Title: __________________
Dated: __________________
<PAGE>
LIQUID AUDIO, INC. SUPER STAGE, INC.
By:__________________ By:____________________
Robert Flynn Masahiro Kuroki
Title: VP Business Development Title: President
----------------------- ---------
Dated:_____________________ Dated:_________________
ITOCHU CORPORATION HIKARI TSUSHIN, INC.
By:________________________ By:____________________
Title:_____________________ Title:_________________
Dated:_____________________ Dated:_________________
LIQUID AUDIO JAPAN, INC.
By: /s/ Signature in Japanese
--------------------------
Title:_______________________
Dated:_______________________
<PAGE>
LIQUID AUDIO, INC. SUPER STAGE, INC.
By: _____________________ By: ____________________
Robert Flynn Masahiro Kuroki
Title: VP Business Development Title: President
----------------------- ---------
Dated:___________________ Dated:__________________
ITOCHU CORPORATION HIKARI TSUSHIN, INC.
By:_______________________ By: /s/ Masahiro Kuroki
_____________________
Title: ___________________ Title: Director
--------
Dated:____________________ Dated:_________________
LIQUID AUDIO JAPAN, INC.
By: ______________________
Title: ______________________
Dated: ______________________
<PAGE>
LIQUID AUDIO, INC. SUPER STAGE, INC.
By: _______________________ By: /s/ Signature in Japanese
-------------------------
Robert Flynn Masahiro Kuroki
Title: VP Business Development Title: President
----------------------- ---------
Dated:_____________________ Dated:_______________________
ITOCHU CORPORATION HIKARI TSUSHIN, INC.
By:______________________ By:__________________________
Title:_____________________ Title:_______________________
Dated:____________________ Dated:_________________
LIQUID AUDIO JAPAN, INC.
By: _____________________
Title: _____________________
Dated: ____________________
<PAGE>
EXHIBIT 10.32
LOAN AGREEMENT
This Loan Agreement is made as of March 31, 1999 by and between Super
Factory, Inc., a Japanese corporation with its principal place of business at
Sunfelista Meguro Building, 9th Floor, 27-1 Kami-Osaki 2-Chome, Shinagawa-ku,
Tokyo 141-0021, Japan as lender (the "LENDER"), and Liquid Audio, Inc., a
California corporation with its principal place of business at 810 Winslow
Street, Redwood City, California 94063, U.S.A., as borrower (the "BORROWER").
WHEREAS, the Borrower wishes to obtain a loan in the amount referred to
below from the Lender, and the Lender is willing to make such loan to the
Borrower on the terms and conditions hereinafter set forth.
NOW THEREFORE, in consideration of those premises and mutual covenants
hereinafter contained, it is hereby agreed as follows:
SECTION 1. DEFINITIONS
-----------
Unless the context otherwise requires, the following terms shall have the
meanings set forth below:
1.01 "AGREEMENT" shall mean this Loan Agreement.
1.02 "BUSINESS DAY" shall mean a day, other than a Saturday, Sunday or legal
holiday, on which banks are open for business in Tokyo and Redwood City.
1.03 "EVENT OF DEFAULT" shall have the meaning set forth in Section 8.01
hereof.
1.04 "GOVERNMENTAL APPROVAL" shall mean any consent, authorization, license of,
or filing or registration with, any ministry, department, agency,
instrumentality or other juridical entity of any jurisdiction.
1.05 "INITIAL SHARES" shall have the meaning assigned to such term in the
Purchase Agreement.
1.06 "LAJ" shall mean Liquid Audio Japan, Inc., a Japanese corporation.
1.07 "LOAN" shall mean the aggregate principal amount of the loan of [*] made
by the Lender to the Borrower hereunder or, where the context so requires, the
amount thereof then outstanding.
1.08 "PARTY" shall mean Borrower or Lender, as applicable. "Parties" shall mean
Borrower and Lender.
1.09 "PERSON" shall mean a natural individual, partnership, firm, company,
corporation, and any other form of business association.
1.10 "PURCHASE AGREEMENT" shall mean the Share Sale and Purchase and Option
Agreement, dated March 31, 1999, between Super Stage, Inc. and Liquid Audio,
Inc.
* Certain information in this Exhibit has been omitted and filed
separately with the Commission. Confidential treatment has been
requested with respect to the omitted portions.
<PAGE>
- 2 -
1.11 "REPAYMENT DATE" shall mean [*] provided that if any such date is not a
--------
Business Day, the Repayment Date shall be the immediately preceding Business
Day.
1.12 "SPECIFIED RATE" shall mean the long-term prime rate per annum quoted by
Sumitomo Bank from time to time.
1.13 "YEN" or the sign "Yen " shall mean the lawful currency from time to time
of Japan.
SECTION 2. THE LOAN
--------
2.01 Agreement to Lend
-----------------
Subject to the terms and conditions of this Agreement, the Lender hereby
lends to the Borrower and the Borrower acknowledges the receipt of and agrees to
repay the Loan.
2.02 Purpose of the Loan
-------------------
The Loan shall be used by the Borrower solely for the purpose of
consummating the purchase of the Initial Shares in accordance with the Purchase
Agreement. The Borrower shall not use the Loan for any other purpose.
2.03 Interest
--------
The Loan shall bear simple interest at the per annum rate of 0.5% plus the
Specified Rate. Interest shall accrue on the basis of the actual number of days
elapsed and a year of 365 days.
2.04 Default Interest
----------------
If the Borrower shall fail to make payment when due of any sum hereunder
(whether at its stated maturity, by acceleration or otherwise), the Borrower
shall pay to the Lender default interest on the unpaid amount during the period
from and including such due date to and including the date of the payment of
said sum in full (after as well as before judgment) at the rate of ten percent
(10%) per annum. Such default interest shall accrue on the basis of the actual
number of days elapsed and a year of 365 days and shall be payable on demand of
the Lender.
2.05 Repayment of Loan; Payment of Interest
--------------------------------------
The Borrower shall repay the Loan in full, together with accrued and
unpaid interest thereon in accordance with the terms of this Agreement, to the
Lender on the Repayment Date. During the term of this Agreement on the last day
of each calendar quarter, the Borrower shall pay the interest on the Loan
accrued during the calendar quarter up to and including such last day.
* Certain information in this Exhibit has been omitted and filed
separately with the Commission. Confidential treatment has been
requested with respect to the omitted portions.
<PAGE>
-3-
2.06 Prepayment of Loan
------------------
The Borrower may prepay the outstanding amount of the Loan together with
the accrued interest thereon, with one week prior written notice thereof to the
Lender.
2.07 Payments
--------
(a) All sums payable to the Lender hereunder shall be payable in Yen and
in immediately available funds on the day in question by payment to the Lender
at such account as it shall specify to the Borrower.
(b) Any payments made to the Lender hereunder shall be applied first
against default interest, if any, due to the Lender; then against interest due
on the Loan; and thereafter against the portion of the Loan then due and
payable.
(c) Except as otherwise provided herein, if any date on which a payment
is due hereunder would otherwise fall on a day which is not a Business Day, such
due date shall instead fall on the immediately following Business Day unless
such following Business Day falls in the next calendar month, in which event
such due date shall be the immediately preceding Business Day.
2.08 Loan Account
------------
The Lender shall open and maintain on its books a loan account showing the
Loan, prepayments, repayments, the computation and payment of interest and other
amounts due and sums paid hereunder or under any document provided for
hereunder. The entries made in such loan account shall, in the absence of
manifest error, be the conclusive evidence of the existence and amount of the
obligations of the Borrower.
2.09 Security
--------
To secure its obligations hereunder, the Borrower shall pledge to the
Lender the shares of LAJ common stock it shall purchase pursuant to the Purchase
Agreement with the proceeds of the Loan and tender the share certificates
representing such shares to the Lender.
SECTION 3. YIELD PROTECTION
----------------
3.01 Taxes
-----
(a) All sums payable by the Borrower to the Lender hereunder, whether of
principal, interest or expenses or otherwise, shall be paid in full and without
set-off or counterclaim, free of any deductions or withholdings for or on
account of any present or future tax, assessment, duty or other charge imposed
by any tax authority of any jurisdiction. Should at any time (x) any payment to
be made under this Agreement be required by applicable law to be made subject to
any such tax, assessment, duty or other charge, or (y) the Borrower or any other
person acting on behalf of the Borrower be compelled by applicable law to make
any such deduction or withholding from any such payment for or on account of any
such tax, assessment, duty or other charge:
<PAGE>
-4-
(i) the Borrower shall pay, or procure the payment of, such tax,
assessment, duty or other charge, when due; and
(ii) the Borrower shall on the due date for payment of such payment pay, or
procure that there is paid, to the Lender in respect of such payment
such additional amount as may be necessary to ensure that the Lender
receives an amount equal to the full amount which the Lender should
have received had such payment not been made subject to such tax,
assessment, duty or other charge, or had the relevant deduction or
withholding not been made from such payment for or on account of such
tax, assessment, duty or other charge.
(b) Upon payment by the Borrower of withholding taxes as provided for
herein, the Borrower shall promptly forward to the Lender official receipts or
other documentation issued by the appropriate governmental authority or other
evidence acceptable to the Lender establishing payment of such amounts within 30
days of the due date for payment thereof.
3.02 Currency of Payment
-------------------
This is an international loan transaction in which the specification of Yen
is of the essence and Yen shall be the currency of account and of payment in all
events. The payment obligation under this Agreement and each document provided
for hereunder shall not be discharged by an amount paid in another currency or
in another place whether pursuant to a judgment or otherwise. In the event that
any payment whether pursuant to a judgment or otherwise shall be made in a
currency other than Yen such amount shall be promptly converted to Yen under
normal banking procedures. In the event that such payment does not satisfy the
obligations of the Borrower under this Agreement and each document provided for
hereunder, the Lender shall be entitled to immediate payment of and shall have a
separate cause of action for the Yen deficiency in respect of the payments due
to the Lender.
SECTION 4. EXPENSES
--------
4.01 Expenses
--------
(a) Any costs and expenses (including without limitation any applicable
stamp duties) in connection with the execution and delivery of this Agreement
shall be borne by the Borrower. Each party shall bear its own costs and expenses
in connection with the negotiation and preparation of this Agreement.
(b) The Borrower shall reimburse the Lender promptly after demand for its
reasonable costs and expenses (including, without limitation, reasonable
attorney's fees) incurred in connection with the enforcement of this Agreement
from and after the occurrence of an Event of Default or an event that, with the
giving of notice or the passing of time, or both, would constitute an Event of
Default.
<PAGE>
-5-
SECTION 5. REPRESENTATIONS AND WARRANTIES
------------------------------
The Borrower hereby represents, warrants and covenants to the Lender as
follows:
5.01 Organization and Good Standing.
------------------------------
The Borrower is a corporation duly organized, validly existing and in good
standing under the laws of the State of California and has the corporate power
and authority to enter into this Agreement and to perform its obligations
hereunder.
5.02 Authorization.
-------------
All corporate action on the part of the Borrower and the Borrower's
officers and directors necessary for the authorization, execution, delivery and
performance of this Agreement has been taken. This Agreement constitutes a valid
and legally binding obligation of the Borrower, enforceable against the Borrower
in accordance with its terms except as such enforceability may be limited by
bankruptcy, insolvency, reorganization, moratorium or other laws affecting
generally the rights of creditors.
5.03 Governmental Approvals
----------------------
All Governmental Approvals, if any, required of the Borrower necessary in
connection with the Borrower's execution and delivery of this Agreement and with
the performance by the Borrower of its obligations hereunder, including, without
limitation, any payment to be made hereunder have been obtained, completed or
duly filed and are in full force and effect.
5.04 Effect of Agreement.
-------------------
The Borrower's execution and delivery of this Agreement, performance of its
obligations hereunder and its consummation of the transactions contemplated
hereby will not, (i) to its knowledge, violate any provision of any law,
statute, rule or regulation to which it is subject; (ii) violate any judgment,
order, writ, injunction or decree of any court applicable to it; (iii) to its
knowledge, have any effect on its compliance with any laws, statutes, rules,
regulations, orders, decrees, licenses, permits or authorizations which would
materially and adversely affect it; (iv) to its knowledge, result in the breach
of, or be in conflict with, any term, covenant, condition or provision of, or
affect the validity, enforceability and subsistence of any agreement, lease or
other commitment to which it is a party and which would materially and adversely
affect it; or (v) to its knowledge, result in the creation or imposition of any
lien, pledge, mortgage, claim, charge, or encumbrance upon any of its assets.
5.05 Ranking of Loan
---------------
The obligations of the Borrower hereunder rank and will rank at least pari
passu in priority of payment and in all other respect with all unsecured and
<PAGE>
-6-
unsubordinated indebtedness of the Borrower other than as preferred by
applicable statute.
5.06 Disclosure.
----------
No representation or warranty by the Borrower contained in this Agreement
and no writing, certificate, exhibit, list or other instrument required to be
furnished pursuant hereto contains or will contain any untrue statement of a
material fact or omits or will omit any material fact necessary in order to make
the statements and information contained herein or therein not misleading.
SECTION 6. COVENANTS
---------
In addition to the other undertakings herein contained, the Borrower
hereby covenants to the Lender that, so long as any amount is outstanding under
this Agreement, it shall act as follows and shall perform the following
obligations:
6.01 Information
-----------
The Borrower shall provide the Lender with such information relating to
the Borrower as the Lender may from time to time reasonably request.
6.02 Performance and Notice
----------------------
The Borrower shall promptly give notice to the Lender of the occurrence of
any Event of Default or any event that, with the giving of notice or the passing
of time, or both, would constitute an Event of Default.
6.03 Governmental Approvals
----------------------
The Borrower shall do and cause to be done all things necessary to comply
with applicable laws and shall use its best efforts to obtain all Governmental
Approvals which may at any time be required with respect to the obligations of
the Borrower under this Agreement and shall use its best efforts to take all
necessary and appropriate action to ensure the continuance of all Governmental
Approvals so obtained to the extent necessary for the performance by the
Borrower of such obligations.
6.04 Ranking of Loan
---------------
The Borrower shall ensure that at all times its obligations hereunder
constitute and will constitute direct, unconditional, general obligations of
such Borrower and rank and will rank at least pari passu with all unsecured and
unsubordinated indebtedness of such Borrower, present and future.
6.05 Further Assurances
------------------
The Borrower shall perform all acts, execute and deliver all such
instruments and documents, and do all such other acts and things as the Lender
may reasonably
<PAGE>
-7-
require to carry out the transactions contemplated herein or in the documents
required to be delivered hereunder.
SECTION 7. CONDITIONS OF LOAN
------------------
7.01 Conditions
----------
The obligation of the Lender to make available the Loan is subject to the
fulfillment of the following conditions precedent on or prior to the date of the
drawdown:
(a) Authorizations, Etc. The Lender shall have received:
--------------------
(i) up-to-date certified copies of the Certificate of Incorporation
and the certificate of good standing of the Borrower;
(ii) a certified copy of the resolution of the Borrower, authorizing
the borrowing of the Loan and the execution, delivery and performance of this
Agreement and granting authority to the person(s) executing this Agreement or
other documents to be executed and delivered in connection herewith on behalf of
the Borrower; and
(iii) such other documents as the Lender may reasonably request.
(b) Share Pledge In respect of the Loan, the Lender shall have received
the share certificates representing the shares of LAJ common stock purchased
pursuant to the Purchase Agreement with the proceeds of the Loan.
(c) Promissory Note The Lender shall have received promissory notes
(yakusoku tegata) evidencing such Loan, which shall have been executed by the
Borrower in the form attached hereto as Exhibit A.
(d) Governmental Approvals The Lender shall have received copies of any
----------------------
Governmental Approval, if required, in connection with the execution,
delivery or performance of this Agreement.
SECTION 8. EVENTS OF DEFAULT
-----------------
8.01 Events of Default
-----------------
Each of the following events and occurrences shall constitute an Event of
Default under this Agreement:
(a) The Borrower fails to pay any amount that it is required to pay under
this Agreement on the date on which such amount becomes due and payable.
(b) (i) Any representation or warranty made or deemed to be made by the
Borrower herein proves to have been incorrect or misleading when made or
confirmed.
<PAGE>
-8-
(ii) Any representation or warranty made or deemed to be made by the
Borrower in the Purchase Agreement proves to have been materially incorrect or
materially misleading when made or confirmed.
(c) The Borrower fails to perform or violates any other provision of this
Agreement (other than a default or violation referred to elsewhere in this
Section 8.01) or the Purchase Agreement and such failure or violation is not
remediable or, if remediable, continues unremedied for a period of five (5) days
after notice from the Lender to such Borrower with respect thereto.
(d) Any indebtedness of the Borrower in an aggregate amount exceeding Yen
5,000,000, or its equivalent in any other currency, shall become due and payable
prior to its stated maturity by reason of such Borrower's default in respect
thereof, or is not paid when the same has become due, or within any grace
period.
(e) Bankruptcy, reorganization or other insolvency proceedings are
instituted against or by the Borrower, or the Borrower stops payments or admits
in writing that it is unable to pay its indebtedness.
(f) The Borrower is unable to pay its debts as they fall due, commences
negotiations with any one or more of its creditors with a view to the general
readjustment or rescheduling of its indebtedness or makes a general assignment
for the benefit of or a composition with its creditors.
(g) The Borrower takes any action for the purposes of its dissolution or
liquidation.
8.02 Consequence of Default
----------------------
If an Event of Default shall occur and be continuing, the Lender shall be
entitled (but not obligated) to (i) declare by notice to the Borrower the Loan
together with accrued interest and any other sum payable to the Lender hereunder
to be immediately due and payable and the Loan shall thereupon become due and
payable (together with any accrued interest thereon to and including the date of
such repayment and any other sum payable to the Lender hereunder) without
requirement of a demand, protest or notice of any kind (other than the notice
required by this Section 8.02) all of which are expressly waived by the Borrower
and (ii) acquire the title to the LAJ shares, in which case the initial amount
of the Loan shall be deemed to have been paid by the Borrower in accordance with
Section 2.07(b).
SECTION 9. MISCELLANEOUS
-------------
9.01 Arbitration; Forum.
-------------------
(a) Except as otherwise provided herein, all disputes, controversies or
claims arising out of or relating to this Agreement, or the breach, termination
or validity thereof, shall be resolved (i) first by good-faith, face-to-face
discussions among the Chief Executive Officers (or such persons holding a
position of equivalent authority) of each affected Party, which discussions
shall be held in Hong Kong, or such other place as the Parties may mutually
agree, within 30 days
<PAGE>
-9-
after receipt of a notice requesting such discussions, and (ii) failing
resolution within 14 days of the commencement of such good faith discussions, by
3 arbitrators under the Rules of Conciliation and Arbitration of the
International Chamber of Commerce as then in effect ("Rules"). The arbitrators
shall be chosen in accordance with the Rules within 30 days after receipt by the
respondent of the demand to arbitrate, which demand may be delivered only after
the conclusion of the above-mentioned good faith discussions. The place of
arbitration shall be Hong Kong. The language to be used in the arbitration
proceedings shall be English, provided that any Party may submit testimony or
documentary evidence in Japanese, and shall, on the request of any other Party,
furnish a translation or interpretation into English of any such testimony or
documentary evidence. The arbitrators may be of any nationality. Upon the
request of either Borrower or Lender, any arbitration hereunder shall be
combined or consolidated with arbitration initiated pursuant to Section 9.2 of
the Shareholder Agreement relating to the same or directly related subject
matter. The arbitral award shall be rendered in writing and state the reasons
for the award. Judgment on any award may be entered by any court of competent
jurisdiction or application may be made to such a court for judicial acceptance
or recognition of the award and any appropriate order including enforcement.
(b) Notwithstanding the foregoing, each Party may apply to any court of
competent jurisdiction for a temporary restraining order, preliminary
injunction, or other interim or conservatory relief, as necessary, without
breach of this Section, and without any abridgement of the powers of the
arbitrator.
(c) In case of arbitration, the arbitrators shall award reasonable
attorneys' fees and expenses to either Party in such manner and to such extent
as the arbitrators deem equitable. In case of a court proceeding arising out of
this Agreement, the prevailing Party shall be entitled to recover its reasonable
attorneys' fees and expenses from the other Party.
9.02 Governing Law.
-------------
This Agreement shall be governed by the laws of Japan.
9.03 Publicity.
---------
Prior to issuing any reports, statements, press releases or other
disclosures to third parties regarding this Agreement or the transactions
contemplated herein, the Parties shall exchange copies of such documents and
shall consult with each other regarding their content. Except as otherwise
required by law, neither Party shall issue any such disclosure without the prior
approval of the other Party.
9.04 Notices and Other Communications.
--------------------------------
Every notice by either Party shall be in writing and delivered either by
personal delivery, or by express mail or any similar overnight courier service,
or by registered or certified mail, postage prepaid, or by facsimile, addressed
to the Party for whom such notice intended at its address or facsimile number
set forth below, or at such other address or facsimile number as the intended
recipient previously
<PAGE>
-10-
shall have designated by written notice to the other party. All notices
delivered in person shall be deemed to have been delivered to and received by
the addressee and shall be effective on the date of personal delivery. All
notices delivered by express mail or any other similar overnight courier, or by
registered or certified mail, or by facsimile, shall be effective upon receipt.
If to the Borrower:
Liquid Audio, Inc.
810 Winslow Street, Redwood City
California 94063, U.S.A.
Facsimile No.: 1-650-549-2099
Attention: Mr. Robert Flynn
Vice President
If to the Lender:
Super Factory, Inc.
Sunfelista Meguro Building
Ninth Floor
27-1, Kami-Osaki 2-chome
Shinagawa-Ku, Tokyo 141-0021
Japan
Facsimile No.: 81-5496-4055
Attention: Mr. Masahiro Kuroki
President and CEO
9.05 Counterparts.
------------
This Agreement may be executed in any number of English language
counterparts or duplicate originals, and each such counterpart or duplicate
original shall constitute an original instrument, but all such separate
counterparts or duplicate originals shall constitute one and the same
instrument.
9.06 Written Agreement to Govern.
---------------------------
This Agreement and the documents to be delivered hereunder set forth the
entire understanding and supersede all prior and contemporaneous agreements and
discussions among the Parties relating to the subject matter contained herein
and therein, and no Party shall be bound by any definition, condition,
representation, warranty, covenant or provision other than as expressly stated
in or contemplated herein or therein or as subsequently shall be set forth in
writing and executed by a duly authorized representative of the Party to be
bound thereby.
9.07 No Waiver of Rights.
-------------------
All waivers hereunder must be made in writing, and failure at any time to
require another party's performance of any obligation under this Agreement shall
not affect the right subsequently to require performance of that obligation. No
waiver of any breach of any provision of this Agreement shall be construed as a
<PAGE>
-11-
waiver of any continuing or succeeding breach of such provision or a waiver or
modification of such provision.
9.08 Severability.
------------
Whenever possible, each provision of this Agreement shall be interpreted
in such manner as to be effective and valid under applicable law, but if any
provision of this Agreement should be prohibited or invalid under applicable
law, such provisions shall be ineffective to the extent of such prohibition or
invalidity without invalidating the remainder of such provision or the remaining
provisions of this Agreement. In such event, the Parties agree to negotiate, in
good faith, a valid, legal and enforceable substitute provision which most
nearly effects the Parties' intent in entering into this Agreement.
9.09 Subject Headings.
----------------
The subject headings of the Sections of this Agreement are included for
the purposes of convenience only, and shall not affect the construction or
interpretations of any of its provisions.
9.10 Expenses.
--------
The Parties shall each bear their own costs and expenses (including
attorneys' fees) incurred in connection with the negotiation and preparation of
this Agreement and the consummation of the transactions contemplated hereby.
9.11 Language.
--------
This Agreement is in the English language only, which language shall be
controlling in all respects, and all versions hereof in any other language shall
be for accommodation only and shall not be binding upon the Parties hereto. All
communications and notices to be made or given pursuant to this Agreement shall
be in the English language.
9.12 Assignment.
----------
This Agreement shall inure to benefit of, and shall be binding upon, the
Parties and their respective successors and assigns. No Party may assign or
delegate this Agreement or any of its rights or duties under this Agreement
without the prior written consent of the other Parties or to a Person into which
it has merged or which has otherwise succeeded to all or substantially all of
the assets of the assignor, and which has assumed in writing or by operation of
law the assignor's obligations under this Agreement.
<PAGE>
-12-
IN WITNESS WHEREOF, the Parties hereto have caused this Agreement to be
executed on the day and year first written above.
BORROWER: Liquid Audio, Inc.
By /s/ Robert Flynn
-----------------------------
Name: Robert Flynn
Title: VP Business Department
Date:
Place:
LENDER: Super Factory, Inc.
By /s/ SIGNATURE IN JAPANESE
_____________________________
Name: Masahiro Kuroki
Title: President and C.E.O
Date: March 31, 1999
Title: Tokyo Japan
<PAGE>
Exhibit A
Form of Promissory Note (Yakusoku Tegata)
-----------------------------------------
PROMISSORY NOTE
---------------
To: Super Factory Inc.
Maturity Date: [*]
Place of Payment: Shinagawa-ku, Tokyo
Location of Payment: Super Factory, Inc.
Sum: [*]
We shall pay the above-mentioned sum and the interest thereon at the per annum
rate of 0.5% plus the long-term prime rate per annum quoted by Sumitomo Bank
from time to time from the day of making of the note until the maturity date, to
or to the order of you in exchange for this Promissory Note.
Date: March 31, 1999
Place of Execution: _________________________________________________________
Address of Maker: 810 Winslow Street, Red Wood City, California 94063, U.S.A.
Liquid Audio, Inc.
By ___________________
Name:
Title:
* Certain information in this Exhibit has been omitted and filed
separately with the Commission. Confidential treatment has been
requested with respect to the omitted portions.
<PAGE>
(Back)
Please pay the sum stated on the front of this Promissory Note to or to the
order of the endorsee referred to below.
Non-Payment Certificate Not Required
Date: __________________________________
Address: _______________________________
___________________
(Name of Endorser)
By _____________________________________
Name:
Title:
To: (Name of Endorsee)
Please pay the sum stated on the front of this Promissory Note to or to the
order of the endorsee referred to below.
Non-Payment Certificate Not Required
Date: __________________________________
Address: _______________________________
_____________________
(Name of Endorser)
By _____________________________________
Name:
Title:
To: (Name of Endorsee)
Please pay the sum stated on the front of this Promissory Note to or to the
order of the endorsee referred to below.
Non-Payment Certificate Not Required
Date: __________________________________
Address: _______________________________
_____________________
(Name of Endorser)
By _____________________________________
Name:
Title:
To: (Name of Endorsee)
<PAGE>
EXHIBIT 10.33
SHARE SALE AND PURCHASE AND OPTION AGREEMENT
This Share Sale and Purchase and Option Agreement ("Agreement") is made and
entered into as of March 31, 1999 by and between Super Stage, Inc., a Japanese
company with its principal place of business at Sunfelista Meguro Building, 9th
Floor, 27-1 Kami-Osaki 2-Chome, Shinagawa-ku, Tokyo 141-0021, Japan ("Super
Stage"), and Liquid Audio, Inc., a California corporation with its principal
place of business at 810 Winslow Street, Redwood City, California 94063, U.S.A.
("Liquid Audio").
WITNESSETH:
WHEREAS, Super Stage, Liquid Audio and certain other parties have entered
into a Shareholder Agreement (the "Shareholder Agreement") as of March 31, 1999
with respect to Liquid Audio Japan, Inc., a Japanese company with its principal
place of business at Sunfelista Meguro Building, 9th Floor, 27-1 Kami-Osaki 2-
Chome, Shinagawa-ku, Tokyo 141-0021, Japan ("LAJ");
WHEREAS, the Shareholder Agreement provides that (i) Liquid Audio will
purchase a certain number of Shares from Super Stage in accordance with the
terms and subject to the conditions set forth herein, and (ii) Super Stage will
grant to Liquid Audio an option to purchase additional Shares in an amount, at a
purchase price and upon the terms and subject to the conditions set forth
herein; and
WHEREAS, Super Factory, Inc. ("Super Factory") and Liquid Audio have
entered into a Loan Agreement, dated as of March __, 1999 pursuant to which
Super Factory will loan the Purchase Price (as such term is defined in Section
3.2) to Liquid Audio, which loan will be secured by the Initial Shares (as such
term is defined in Section 3.2);
NOW, THEREFORE, in consideration of the mutual promises, covenants,
representations and warranties made herein and of the mutual benefits to be
derived herefrom, the Parties hereto agree as follows:
ARTICLE I
DEFINITIONS
-----------
For the purposes of this Agreement, the following definitions shall apply:
1.1 "Party" shall mean Liquid Audio or Super Stage, as applicable.
"Parties" shall mean Liquid Audio and Super Stage.
1.2 "Person" shall mean a natural individual, partnership, firm, company,
corporation and any other form of business association.
1.3 "Reseller Agreement" shall have the meaning assigned to such term in
the Shareholder Agreement.
1.4 "Shares" shall mean shares of common stock of LAJ with a par value of
[*] per share.
* Certain information in this Exhibit has been omitted and filed
separately with the Commission. Confidential treatment has been
requested with respect to the omitted portions.
<PAGE>
1.5 "Warrant Bond" shall mean the outstanding warrant bond owned by Super
Stage for the issuance of [*] Shares at an issue price of (Yen) [*] per Share.
1.6 "(Yen) " shall mean Japanese (Yen).
ARTICLE II
SALE AND PURCHASE
-----------------
2.1 Sale and Purchase. On the terms and subject to the conditions
-----------------
contained in this Agreement, Super Stage shall sell, convey, transfer, assign
and deliver to Liquid Audio, and Liquid Audio shall purchase and acquire from
Super Stage, at the Closing (as such term is defined in Section 3.1), all right,
title and interest of Super Stage in and to the Initial Shares (as defined
below).
ARTICLE III
THE CLOSING
-----------
3.1 Place and Date. The closing (the "Closing") of the sale and purchase
--------------
of the Initial Shares shall take place in Tokyo, Japan at the offices of
Nishimura & Partners, at 10 a.m. on March 31, 1999, unless the Parties
otherwise agree in writing (the "Closing Date").
3.2 Purchase Price; Payment. On the terms and subject to the conditions
-----------------------
set forth herein, Super Stage will sell 900 Shares (such Shares, the "Initial
Shares") to Liquid Audio and Liquid Audio will purchase the Initial Shares from
Super Stage at the price of (Yen) [*] per share for an aggregate purchase price
of (Yen) [*] (the "Purchase Price").
--------------
3.3 The Closing. At the Closing (i) on the terms and subject to the
-----------
conditions set forth herein, Super Stage shall deliver to Liquid Audio one or
more stock certificates representing the Initial Shares, free and clear of any
security interests, claims, liens, pledges, charges or other encumbrances or
adverse claims of any nature, and (ii) Liquid Audio shall pay the Purchase
Price.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF SUPER STAGE
---------------------------------------------
4.1 Representations and Warranties of Super Stage. Super Stage hereby
---------------------------------------------
represents and warrants to Liquid Audio as follows:
(a) Organization and Power. Super Stage is a company duly organized and
----------------------
validly existing under the laws of Japan and has corporate power and authority
to enter into this Agreement and to perform its obligations hereunder.
(b) Authorization. All corporate action on the part of Super Stage and its
-------------
officers and directors necessary for the authorization, execution, delivery and
performance of this Agreement has been, or on or before the Closing Date will
be, taken. On the Closing Date, this Agreement will constitute a valid and
legally binding obligation of Super Stage, enforceable against Super Stage in
accordance with its terms, except as such enforceability may be limited by
bankruptcy, insolvency, or other laws affecting generally the enforceability of
creditor's rights.
* Certain information in this Exhibit has been omitted and filed
separately with the Commission. Confidential treatment has been
requested with respect to the omitted portions.
<PAGE>
(c) Government and Other Consents. No consent, authorization, license,
-----------------------------
permit, registration or approval of governmental or public body or authority is
required in connection with execution and delivery of this Agreement by Super
Stage or with the performance by Super Stage of any of its respective
obligations hereunder.
(d) Effect of Agreement. Super Stage's execution and delivery of this
-------------------
Agreement, performance of its obligations hereunder and its consummation of the
transactions contemplated hereby will not, (i) to its knowledge, violate any
provision of any law, statute, rule or regulation to which it is subject; (ii)
violate any judgment, order, writ, injunction or decree of any court applicable
to it; (iii) to its knowledge, have any effect on its compliance with any laws,
statutes, rules, regulations, orders, decrees, licenses, permits or
authorizations which would materially and adversely affect it; (iv) to its
knowledge, result in the breach of, or be in conflict with, any term, covenant,
condition or provision of, or affect the validity, enforceability and
subsistence of any agreement, lease or other commitment to which it is a party
and which would materially and adversely affect it; or (v) to its knowledge,
result in the creation or imposition of any lien, pledge, mortgage, claim,
charge, or encumbrance upon any of its assets.
(e) Brokers, Finders. Super Stage has not retained any person to act on its
----------------
behalf, nor has any person contended that such person was so retained, to assist
as its broker, finder or agent in connection with this transaction.
(f) Capitalization. The authorized capital stock of LAJ consists of [*]
--------------
Shares, of which [*] Shares are issued and outstanding. The Initial Shares have
been duly authorized and validly issued and are fully paid and are not subject
to any preemption or similar rights. Warrant bonds for the issuance of [*]
Shares are outstanding as of the date hereof.
(g) Ownership of Shares. At the Closing, Liquid Audio will acquire good and
-------------------
marketable title to the Initial Shares, free and clear of any liens, charges,
security interests or encumbrances or any other limitation or restriction, other
than those specified in the Shareholder Agreement.
(h) Disclosure. No representation or warranty by Super Stage contained in
----------
this Agreement and no writing, certificate, exhibit, list or other instrument
required to be furnished pursuant hereto contains or will contain any untrue
statement of a material fact or omits or will omit any material fact necessary
in order to make the statements and information contained herein or therein not
misleading.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF LIQUID AUDIO
----------------------------------------------
5.1 Representations and Warranties of Liquid Audio. Liquid Audio hereby
----------------------------------------------
represents and warrants to Super Stage as follows:
(a) Organization and Good Standing of Liquid Audio. Liquid Audio is a
----------------------------------------------
corporation duly organized, validly existing and in good standing under the laws
of the State of California and has the corporate power and authority to enter
into this Agreement and to perform its obligations hereunder.
* Certain information in this Exhibit has been omitted and filed seperately
with the Commission. Confidential treatment has been requested with
respect to the omitted portion.
<PAGE>
(b) Authorization. All corporate action on the part of Liquid Audio and
-------------
Liquid Audio's officers and directors necessary for the authorization,
execution, delivery and performance of this Agreement has been, or on or before
the Closing Date will be, taken. On the Closing Date, this Agreement will
constitute a valid and legally binding obligation of Liquid Audio, enforceable
against Liquid Audio in accordance with its terms, except as such enforceability
may be limited by bankruptcy, insolvency, or other laws affecting generally the
enforceability of creditor's rights.
(c) Government and Other Consents. No consent, authorization, license,
-----------------------------
permit, registration or approval of any governmental or public body or authority
is required in connection with Liquid Audio's execution and delivery of this
Agreement or with the performance by Liquid Audio of its obligations hereunder.
(d) Effect of Agreement. Liquid Audio's execution and delivery of this
-------------------
Agreement, performance of its obligations hereunder and its consummation of the
transactions contemplated hereby will not, (i) to its knowledge, violate any
provision of any law, statute, rule or regulation to which it is subject; (ii)
violate any judgment, order, writ, injunction or decree of any court applicable
to it; (iii) to its knowledge, have any effect on its compliance with any laws,
statutes, rules, regulations, orders, decrees, licenses, permits or
authorizations which would materially and adversely affect it; (iv) to its
knowledge, result in the breach of, or be in conflict with, any term, covenant,
condition or provision of, or affect the validity, enforceability and
subsistence of any agreement, lease or other commitment to which it is a party
and which would materially and adversely affect it; or (v) to its knowledge,
result in the creation or imposition of any lien, pledge, mortgage, claim,
charge, or encumbrance upon any of its assets.
(e) Brokers, Finders. Other than Mr. Ichiro Roy Fujita, Liquid Audio has
----------------
not retained any person to act on its behalf, nor has any person contended that
such person was so retained, to assist as its broker, finder or agent in
connection with this transaction.
(f) Disclosure. No representation or warranty by Liquid Audio contained in
----------
this Agreement and no writing, certificate, exhibit, list or other instrument
required to be furnished pursuant hereto contains or will contain any untrue
statement of a material fact or omits or will omit any material fact necessary
in order to make the statements and information contained herein or therein not
misleading.
ARTICLE VI
CONDITIONS PRECEDENT TO CLOSING
-------------------------------
6.1 Conditions to the Obligations of Both Parties. The obligation of
---------------------------------------------
Liquid Audio to purchase the Initial Shares and for Super Stage to sell the
Initial Shares hereunder is subject to the satisfaction, at or prior to the
Closing Date, of the following conditions:
(a) Government Approvals and Consents. All governmental approvals and third
---------------------------------
party consents required to be made or obtained by any party hereto in connection
with the execution and delivery of this Agreement or the consummation of the
transactions contemplated hereby shall have been made or obtained.
<PAGE>
(b) Absence of Litigation. No order of any court or administrative agency
---------------------
shall be in effect which restrains or prohibits the transactions contemplated by
this Agreement or which would limit or adversely affect Liquid Audio's ownership
of the Initial Shares, and there shall not have been threatened, nor shall there
be pending, any action or proceeding by or before any court or authority
challenging any of the transactions contemplated by this Agreement or seeking
monetary relief by reason of the consummation of such transactions.
(c) LAJ's Board Approval. LAJ's board shall have approved the sale by Super
--------------------
Stage of the Initial Shares to Liquid Audio.
6.2 Conditions to the Obligations of Super Stage. In addition to the
--------------------------------------------
conditions specified in Section 6.1, the obligation of Super Stage to sell the
Initial Shares hereunder is subject to the satisfaction, at or prior to the
Closing Date, of the following condition:
(a) The representations and warranties of Liquid Audio contained in this
Agreement shall be true and correct in all material respects on and as of the
Closing Date as if made on and as of such date and Liquid Audio shall have
performed and complied in all material respects with all agreements required by
this Agreement to be performed or complied with by Liquid Audio at or prior to
the Closing Date, and, if requested by Super Stage, Liquid Audio shall have
delivered to Super Stage a certificate, dated the Closing Date, certifying that
this condition has been satisfied.
6.3 Conditions to the Obligations of Liquid Audio. In addition to the
---------------------------------------------
conditions specified in Section 6.1, the obligation of Liquid Audio to purchase
the Shares hereunder is subject to the satisfaction, at or prior to the Closing
Date, of the following condition:
(a) The representations and warranties of Super Stage contained in this
Agreement shall be true and correct in all material respects on and as of the
Closing Date as if made on and as of such date and Super Stage shall have
performed and complied in all material respects with all agreements required by
this Agreement to be performed or complied with by Super Stage at or prior to
the Closing Date, and, if requested by Liquid Audio, Super Stage shall have
delivered to Liquid Audio a certificate, dated the Closing Date, certifying that
this condition has been satisfied.
ARTICLE VII
LIQUID AUDIO OPTION
-------------------
7.1 Liquid Audio Call Option. (a) Super Stage hereby grants Liquid Audio
an option, exercisable at any time before December 31, 2003 by written notice to
Super Stage, whether in one exercise or a series of exercises, to purchase any
number of Shares at the Relevant Per Share Price from Super Stage as long as the
Pro Rata Share of Liquid Audio immediately after the exercise of such option is
not more than [*] (the "Option Shares"). In no event will the number of Option
Shares be less than [*] Shares. For purposes of this Section 7.1(a), the
following terms shall have the following meanings:
(i) "Relevant Per Share Price" shall mean, with respect to any Option
Share, a purchase price equal to
* Certain information in this Exhibit has been omitted and filed
separately with the Commission. Confidential treatment has been
requested with respect to the omitted portions.
<PAGE>
(A) (Yen) [*] per Share for the number of Option Shares up to
[*] Shares; and
(B) for every additional Option Share thereafter, the per Share
price paid by Super Stage for the then most recent purchase of Shares
by Super Stage.
(ii) "Pro Rata Share of Liquid Audio" shall mean the percentage
interest that Liquid Audio holds in LAJ, on a fully diluted basis, by
virtue of those Shares owned by Liquid Audio; provided, in any event that
(A) The Initial Shares and any previously purchased Option Shares
shall always be deemed to be "owned by Liquid Audio" for purposes of
such calculation, regardless of whether or not such Shares are
subsequently transferred by Liquid Audio at any time after the
Closing; and
(B) If Liquid Audio does not fully exercise its preemptive rights
to purchase all of the Shares to which it is entitled at the time of
any particular offering of Shares to Holders (as defined in the
Shareholder Agreement) in accordance with Section 2.4 of the
Shareholder Agreement, then the total number of additional Shares
issued to Holders as a result of such particular offering will not be
included in calculating the percentage interest that Liquid Audio
holds in LAJ (unless all Holders waive their preemptive rights, in
which case the additional Shares will be included).
(b) Within 10 days after Liquid Audio has sent a written notice of exercise
of its right under Section 7.1(a), Liquid Audio shall pay in cash or other
immediately available funds the aggregate purchase price for the Option Shares,
subject to receiving from Super Stage the certificate or certificates for the
Option Shares. Super Stage represents that Liquid Audio will acquire good and
marketable title to the Option Shares purchased upon the exercise of the option
under Section 7.1 (a), free and clear of any liens, charges, security interests
or encumbrances, or any other limitation or restriction, except for those
specified in the Shareholder Agreement.
7.2 Liquid Audio Put Option. (a) Conversion of Exclusive Rights of
----------------------- ---------------------------------
Distribution. At any time within 180 days after the exclusive rights of
- ------------
distribution granted to LAJ under the Reseller Agreement are converted to a non-
exclusive basis (the "Conversion Date"), Liquid Audio shall have the one-time
right to cause Super Stage to purchase all or a portion of the Shares then held
by Liquid Audio at the "Fair Market Value" (as defined in Section 7.2(b) below)
of such Shares, exercisable by written notice to Super Stage. Such notice shall
state the number of Shares which shall be purchased by Super Stage.
(b) Fair Market Value. Fair Market Value per share under this Section 7.2
-----------------
shall be determined as follows:
(i) If the Shares are publicly traded on a national securities
exchange or the Japanese OTC market, the value shall be deemed to be the average
of the closing prices of the Shares on such exchange or market, as the case may
be,
* Certain information in this Exhibit has been omitted and filed seperately
with the Commission. Confidential treatmenthas been requested with respect
to the omitted portions.
<PAGE>
similar overnight courier service, or by registered or certified mail, postage
prepaid, or by facsimile, addressed to the Party for whom such notice intended
at its address set forth above, or at such other address or facsimile number as
the intended recipient previously shall have designated by written notice to the
other Party. All notices delivered in person shall be deemed to have been
delivered to and received by the addressee and shall be effective on the date of
personal delivery. All notices delivered by express mail or any other similar
overnight courier, or by registered or certified mail, or by facsimile, shall be
effective upon receipt.
8.5 Counterparts. This Agreement may be executed in any number of English
------------
language counterparts or duplicate originals, and each such counterpart or
duplicate original shall constitute an original instrument, but all such
separate counterparts or duplicate originals shall constitute one and the same
instrument.
8.6 Written Agreement to Govern. This Agreement sets forth the entire
---------------------------
understanding and supersede all prior and contemporaneous agreements and
discussions among the Parties relating to the subject matter contained herein
and therein, and no Party shall be bound by any definition, condition,
representation, warranty, covenant or provision other than as expressly stated
in or contemplated herein or therein or as subsequently shall be set forth in
writing and executed by a duly authorized representative of the Party to be
bound thereby.
8.7 No Waiver of Rights. All waivers hereunder must be made in writing,
-------------------
and failure at any time to require another Party's performance of any obligation
under this Agreement shall not affect the right subsequently to require
performance of that obligation. No waiver of any breach of any provision of this
Agreement shall be construed as a waiver of any continuing or succeeding breach
of such provision or a waiver or modification of such provision.
8.8 Severability. Whenever possible, each provision of this Agreement
------------
shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement should be prohibited or
invalid under applicable law, such provisions shall be ineffective to the extent
of such prohibition or invalidity without invalidating the remainder of such
provision or the remaining provisions of this Agreement. In such event, the
Parties agree to negotiate, in good faith, a valid, legal and enforceable
substitute provision which most nearly effects the Parties' intent in entering
into this Agreement.
8.9 Subject Headings. The subject headings of the Sections of this
----------------
Agreement are included for the purposes of convenience only, and shall not
affect the construction or interpretations of any of its provisions.
8.10 Further Assurances. The Parties shall each perform such acts, execute
------------------
and deliver such instruments and documents, and do all such other things as may
be reasonably necessary to accomplish the transactions contemplated in this
Agreement.
8.11 Expenses and Finder's Fees. The Parties shall each bear their own
--------------------------
costs and expenses (including attorneys' fees) incurred in connection with the
negotiation and preparation of this Agreement and the consummation of the
transactions contemplated hereby. Each Party shall indemnify the other against
any claim for brokerage or finder's fees arising out of the transactions
contemplated herein by any Person claiming to have been engaged by the
indemnifying party
<PAGE>
based upon any action or communication, or any alleged action or communication,
by the indemnifying Party or any of its officers or employees.
8.12 Taxes. Super Stage shall be responsible for any securities
-----
transaction taxes, capital gain taxes and any other taxes which may be imposed
by the Japanese Government upon Super Stage in relation to the sale of the
Initial Shares or the Option Shares by Super Stage to Liquid Audio hereunder.
Liquid Audio shall be responsible for any securities transaction taxes, capital
gain taxes and any other taxes which may be imposed by the Japanese Government
upon Liquid Audio in relation to the sale of Shares by Liquid Audio to Super
Stage pursuant to Section 7.2.
8.13 Language. This Agreement is in the English language only, which
--------
language shall be controlling in all respects, and all versions hereof in any
other language shall be for accommodation only and shall not be binding upon the
parties hereto. All communications and notices to be made or given pursuant to
this Agreement shall be in the English language.
8.14 Assignment. This Agreement shall inure to benefit of, and shall be
----------
binding upon the Parties and their respective successors and assigns. No Party
may assign or delegate this Agreement or any of its rights or duties under this
Agreement without the prior written consent of the other Parties or to a Person
into which it has merged or which has otherwise succeeded to all or
substantially all of the assets of the assignor, and which has assumed in
writing or by operation of law the assignor's obligations under this Agreement.
IN WITNESS WHEREOF, Liquid Audio and Super Stage caused this Agreement to
be duly executed in their respective corporate names by their respective
officers, each of whom is duly and validly authorized and empowered, all on and
as of the day and year first above written.
SUPER STAGE, INC.
By: /s/ SIGNATURE IN JAPANESE
___________________________
Name: Masahiro Kuroki
Title: President & CEO
LIQUID AUDIO, INC.
By: /s/ Robert Flynn
-----------------------
Name: Robert Flynn
Title: VP Business Development
<PAGE>
EXHIBIT 10.34
SHAREHOLDERS AGREEMENT
This Shareholders Agreement ("Agreement") is entered into as of December 31,
1998 by Liquid Audio, Inc., a California corporation with its principal place of
business at 810 Winslow Street, Redwood City, California 94063, U.S.A. ("Liquid
Audio"), SKM Limited, a joint-stock company (chusik-hoesa) organized and
existing under the laws of the Republic of Korea ("Korea") with its principal
place of business at HaeSung 1 Building, 5f, 942 Daechi 3-Dong, Kangnam-Gu,
Seoul 135-283, Korea ("SKM"), and Liquid Audio Korea Co. Ltd., a joint-stock
company (chusik-hoesa) organized and existing under the laws of Korea with its
principal place of business at 3f, WonKyung Bldg. 788-16, Yoksam-Dong, Kangnam-
Gu, Seoul, 135-080, Korea ("LAK"). The Parties agree as follows:
1. DEFINITIONS
-----------
For the purpose of this Agreement, the following definitions shall apply:
1.1 "Affiliate" means a Person that directly, or indirectly through one or
more intermediaries, controls, or is controlled by, or is in common control
with, the Person specified. "Control," as used herein, for purposes of defining
an "Affiliate," shall mean the ability to direct the management of a Person,
whether by voting of shares, election of directors, by terms of a contract or
otherwise.
1.2 "Articles" means the Articles of Incorporation of LAK in the form
attached in the English language as Exhibit A, and as hereafter amended. The
Parties agree that among the Parties, the English language version of the
Articles shall be controlling and that if any discrepancies should exist between
the two versions, then the Parties shall take such steps to ensure that the
Korean version of the Articles shall be amended to be in accord with the English
version.
1.3 "Board" means the board of directors of LAK.
1.4 "Change in Control" with respect to a Party means (i) a merger of that
Party with or into another Person, or a sale of all or substantially all of a
Party's assets to another Person, if as a result of the merger or asset sale the
holders of a majority of the Party's voting securities before the transaction
hold less than a majority of the voting securities of the surviving entity (or
its parent), or (ii) the acquisition by a Person or a group acting in concert of
a majority of a Party's voting securities.
1.5 "Code" means the Commercial Code of the Republic of Korea, as amended.
1.6 "Consulting Agreement" means the Consulting Agreement to be entered
into by LAK and Liquid Audio substantially in the form attached hereto as
Exhibit B.
1.7 "Guaranty" means the form of Guaranty to be executed by SKM
substantially in the form attached hereto as Exhibit C.
<PAGE>
1.8 "Holder" means Liquid Audio or SKM or their permitted successors and
assigns, as applicable. "Holders" means Liquid Audio and SKM and their permitted
successors and assigns.
1.9 "Party" means Liquid Audio, SKM or LAK, as applicable. "Parties"
means Liquid Audio, SKM and LAK.
1.10 "Person" means a natural individual, partnership, firm, company,
corporation, and any other form of business association.
1.11 "Pro Rata Share" of a Holder means the percentage interest that the
Holder holds in LAK by virtue of those Shares owned by that Holder, after
assuming conversion or exercise of any warrant, stock option and other equity
securities of LAK.
1.12 "Reseller Agreement" means the Reseller Agreement to be entered into
by Liquid Audio and LAK substantially in the form attached hereto as Exhibit D.
1.13 "Shares" means shares of Common Stock of LAK with a par value of [*]
Won per share.
1.14 "Won" means the Republic of Korea Won.
2. SUBSCRIPTION FOR SHARES
-----------------------
2.1 Company Name. The name of LAK shall be "Liquid Audio Korea Co., Ltd."
------------
in English and "Liquid Audio Korea Chusik Hoesa" in Korean.
2.2 Head Office. The head office of LAK shall be located in Seoul, Korea.
-----------
2.3 Articles of Incorporation. Prior to Liquid Audio's subscription for
-------------------------
Shares as set forth in Section 2.5, SKM shall procure that the current Articles
are amended so that they are substantially the same as Exhibit A. If any
discrepancy is found between this Agreement and the Articles, the terms of this
Agreement shall prevail and the Parties shall amend the Articles so as to be in
accord with this Agreement.
2.4 Authorized Capital. Prior to Liquid Audio's subscription for Shares as
------------------
set forth in Section 2.5, the authorized capital of LAK shall be increased to
[*] Won consisting of one single class of [*] shares of common stock with a par
value of [*] Won each.
2.5 Share Subscription. On the fifth Korean banking day ("Closing Date")
------------------
after Liquid Audio's receipt of confirmation of its foreign investment report
from a foreign exchange bank, designated by Liquid Audio, pursuant to the
Foreign Investment Promotion Act, the Holders shall have subscribed for a total
of [*] Shares in LAK as follows and the paid-in capital of the Company after
such subscription shall be [*] Won:
* Certain information in this Exhibit has been omitted and filed separately
with the Commission. Confidential treatment has been requested with respect
to the omitted portions.
-2-
<PAGE>
(a) SKM and LAK represent and warrant that SKM is currently the sole
shareholder in LAK with [*] Shares, at the aggregate value of [*] Won.
(b) SKM shall subscribe in cash for [*] Shares, the aggregate issue
price of which shall be [*] Won.
(c) Liquid Audio shall subscribe in cash for [*] Shares, the aggregate
issue price of which shall be [*] Won.
2.6 Additional Investment/Loans. SKM shall be responsible for securing any
----------------------------
financing required by LAK beyond that provided for in Section 2.5 hereof. Such
additional financing may be in the form of a third party or shareholder loan,
bearing interest at commercially reasonable rates, or in the form of a capital
investment which shall be in the form of a non-voting, non-participating
preferred stock with a dividend rate equal to the then prevailing rate for
comparable transactions. Notwithstanding the preceding sentence, any such
financing shall require the approval described in Section 3.3(e) hereof.
2.7 Preemptive Rights. Except for the Shares subscribed under Section 2.5,
-----------------
and subject to the pertinent Korean laws, this Agreement and the Articles, each
Holder shall have pre-emptive rights with respect to any new issuance of shares
by LAK in the same ratio as their respective shareholding ratios immediately
prior to such issuance. If any Holder is not permitted by law from exercising
its pre-emptive right to subscribe to new issues of shares, then Holder shall
have the right to transfer its pre-emptive right to a third legally qualified
purchaser who will be able to acquire such Holder's proportion of the new shares
issued by the Company. If any Holder does not wish to exercise its pre-emptive
rights in whole or in part, such Holder shall notify the Board of such intention
within seven (7) days from the day as of which the allocation of the new shares
is to be made. In this case, such Holder shall transfer to the other Holder its
pre-emptive right to such new shares.
2.8 Additional Agreements. Contemporaneously with the execution hereof,
---------------------
SKM and Liquid Audio shall execute and deliver the Guaranty, and LAK and Liquid
Audio shall execute and deliver the Reseller Agreement and Consulting Agreement.
2.9 Covenants. LAK and SKM covenant that from the date of this Agreement
---------
until the Closing Date, (i) LAK shall remain as a dormant company and (ii) no
shares or any other type of securities of LAK shall be issued (other than that
provided under Section 2.5) nor any option or pre-emptive rights be granted to
any party over any shares of LAK.
3. MANAGEMENT OF LAK
-----------------
3.1 Board of Directors.
------------------
(a) Director Positions. The Board shall have [*] authorized
------------------
members. SKM shall have the right to nominate [*] members to the Board, and
Liquid Audio shall have the right to nominate [*] members to the Board. Each
Holder shall have the right to request removal, whether with or without cause,
of any director which such Holder is solely entitled to nominate, at
* Certain information in this Exhibit has been omitted and filed separately
with the Commission. Confidential treatment has been requested with respect
to the omitted portions.
-3-
<PAGE>
any time effective upon notice to LAK, the director to be removed and to the
other Holder, provided, however, that if such dismissal is without cause, the
Holder proposing the dismissal shall indemnify and hold harmless LAK and the
other Holder from any and all damages and other expenses that may arise from
such action. Each Holder shall vote all of its Shares so as to elect the other
Holder's nominees, remove directors for whom removal has been requested, and
maintain the Board constituency described in this Section 3.1. Any vacancy on
the Board shall be filled pursuant to the nomination procedure described in this
Section 3.1.
(b) Compensation and Expenses. LAK shall reimburse reasonable travel
-------------------------
costs of any director attending a Board meeting. No director of LAK shall be
entitled to any additional compensation, unless such director is also serving in
a management capacity with LAK.
3.2 Quorum of the Board; Approval by Board. A quorum of the Board shall be
--------------------------------------
deemed present at any duly noticed Board meeting if a majority of the directors
are present, including at least one (1) director nominated by Liquid Audio and
one (1) director nominated by SKM. A director may be present at a Board meeting
physically or, to the extent subsequently permitted by applicable Korean law, by
telephone or video conference. Any action or determination by the Board shall
require the affirmative vote of a majority of the Board members present at the
meeting. The meetings of the Board shall be held at least quarterly at times and
places to be determined by the Board.
3.3 Liquid Audio's Approval. So long as Liquid Audio is a shareholder of
-----------------------
LAK, the following actions shall not be taken by LAK without prior approval of
Liquid Audio. Such approval of Liquid Audio shall be considered given upon (a) a
special Board resolution approved by three (3) members of the Board of
Directors, or (b) a special shareholder resolution approved by [*] of the
outstanding shares of LAK.
(a) Making any basic change in the general nature or scope of business
of LAK;
(b) Amending the Articles of LAK, including, without limitation, any
increase or decrease in the number of authorized shares of LAK, any change in
the rights, preferences or privileges of the Shares and any increase or decrease
in the authorized number of directors on the Board;
(c) Removing the directors nominated by Liquid Audio;
(d) Dissolving or liquidating LAK;
(e) Issuing any security of LAK, whether shares securities convertible
into shares, other equity securities or debt securities (except that LAK may
issue shares under Section 2.5 without further approval by Liquid Audio);
(f) Merging or consolidating LAK with another Person, or selling,
leasing, pledging, mortgaging, encumbering or otherwise disposing of all or
substantially all of the assets of LAK, whether in one transaction or a series
of transactions;
* Certain information in this Exhibit has been omitted and filed separately
with the Commission. Confidential treatment has been requested with respect
to the omitted portions.
-4-
<PAGE>
(g) Establishing a business relationship with any direct competitor of
Liquid Audio;
(h) Investing in any other Person;
(i) Entering into any agreement or transaction (except this Agreement,
the Reseller Agreement and Consulting Agreement) with or for the benefit of any
director or shareholder of LAK or an Affiliate (or any direct lineal descendent
or ancestor, sibling, spouse, mother-in-law, father-in-law, son-in-law or
daughter-in-law) of such director or shareholder;
(j) Amending the business plan of LAK;
(k) Appointment, employment and compensation decisions and scope of
responsibility for officers of LAK, including salary and wages, cash advances
and relocation expenses;
(l) Capital expenditures for single items of 100,000,000 Won or more;
(m) Entering into contracts that have a term in excess of one year or
that require aggregate payments of 100,000,000 Won or more;
(n) Disposition or transfer to a third party of at least 20% of LAK's
assets;
(o) Authorizing loans by LAK, except for payment terms for trade
credits in the ordinary course of business;
(p) Assuming or incurring any debt, loan, guaranty or liability with
an aggregate value of 500,000,000 Won or more;
(q) Change in the outside accountant to LAK;
(r) Creating any lien on LAK's property, except liens incurred in the
ordinary course of business;
(s) Approving LAK's annual budget;
(t) Changing the strategic direction of LAK and approving LAK's long-
range plans;
(u) Approval of annual financial statements;
(v) Opening or closing an account with a bank or financial house in
Korea or overseas; and
(w) Paying any dividend or making any other distribution;
-5-
<PAGE>
(x) Approving or amending the internal regulations of LAK relating to
important procedures including, but not limited to, employee regulations,
regulations relating to the issuance or transfer of shares and the issuance or
loss of share certificates, Board regulations and regulations governing meetings
of shareholders.
3.4 Board and Shareholder Meetings. All Board and shareholder meetings
------------------------------
shall be conducted in the English language. The minutes of any such meeting will
be prepared in both the Korean and English languages, and compared for accuracy
by the interpreter. In the event of a conflict in terms, the minutes prepared in
the English language shall control.
3.5 Senior Officers.
---------------
(a) President and Chief Executive Officer of LAK. The Board shall
--------------------------------------------
elect as the President and Chief Executive Officer of LAK the candidate selected
by SKM. The President shall also be the sole representative director.
(b) Chief Financial Officer of LAK. The Board shall elect as the Chief
-------------------------------
Financial Officer of LAK the candidate selected by Liquid Audio. The Chief
Financial Officer shall be responsible for oversight of the finance and
accounting functions of LAK.
(c) Other Officers; Management Structure. The other officers of LAK
------------------------------------
shall be selected by the Board.
3.6 Statutory Auditors. Except as required by applicable law, LAK shall
------------------
have two (2) statutory auditors. Liquid Audio shall nominate one (1) statutory
auditor, and SKM shall nominate one (1) statutory auditor.
3.7 Financial Statements. LAK's financial year shall be January 1 through
--------------------
December 31 of the following year. LAK's auditors shall be an independent
accounting firm acceptable to SKM and Liquid Audio, who shall be responsible for
preparing the annual financial statements of LAK in accordance with Korean
generally accepted accounting principles consistently applied, and corresponding
annual financial statements in the English language in compliance with U.S.
generally accepted accounting principles. LAK shall deliver, and SKM shall cause
LAK to deliver, to all Holders (i) such annual audited financial statements
within three (3) months after the end of each financial year and (ii) promptly
after delivery to any other Holder, other financial and operating reports of LAK
prepared for one or more Holders.
3.8 Right of Inspection. During reasonable office hours of LAK, the
-------------------
Holders shall have full access to all properties, books of account, records and
the like of LAK with the right to make copies at the offices of LAK. Any
information obtained by the Holders through exercising this right shall (i) be
used by such Holder only for purposes which are consistent with its status as an
equity holder in LAK and not for the pursuit of business interests outside LAK
(except to the extent such Holder shall otherwise have rights for access to such
information or to the extent used to determine compliance with this Agreement)
and (ii) be subject to the confidentiality provisions of Section 8.1.
-6-
<PAGE>
3.9 Employee Matters. Each employee of LAK, and any employee of another
----------------
entity working for LAK but not a regular employee of LAK, shall sign an
agreement reasonably acceptable to SKM and Liquid Audio providing for
confidentiality of information disclosed by LAK and for ownership by LAK of
inventions or original works of authorship created by such individuals.
3.10 Business Plan. The five-year business plan for LAK has been agreed
-------------
between the Holders and attached as Exhibit E (the "Business Plan"). The Board
-------------
shall discuss and update the Business Plan at least once a year.
4. REPRESENTATIONS
---------------
4.1 Liquid Audio. Liquid Audio represents and warrants as follows to the
------------
other Holders as of the date of this Agreement:
(a) Organization and Good Standing of Liquid Audio. Liquid Audio is a
----------------------------------------------
corporation duly organized, validly existing and in good standing under the laws
of the State of California and has the corporate power and authority to enter
into this Agreement and to perform its obligations hereunder.
(b) Authorization. All corporate action on the part of Liquid Audio
-------------
and Liquid Audio's officers and directors necessary for the authorization,
execution, delivery and performance of this Agreement has been taken. This
Agreement constitutes a valid, legally binding and enforceable obligation of
Liquid Audio, assuming due authorization and delivery hereof by SKM and LAK.
(c) Government and Other Consents. Except for approvals contemplated
-----------------------------
by this Agreement, no consent, authorization, license, permit, registration or
approval of any governmental or public body or authority is required in
connection with Liquid Audio's execution and delivery of this Agreement or with
the performance by Liquid Audio of its obligations hereunder.
(d) Effect of Agreement. Liquid Audio's execution and delivery of this
-------------------
Agreement, performance of its obligations hereunder and its consummation of the
transactions contemplated hereby will not, (i) to its knowledge, violate any
provision of any law, statute, rule or regulation to which it is subject; (ii)
violate any judgment, order, writ, injunction or decree of any court applicable
to it; (iii) to its knowledge, have any effect on its compliance with any laws,
statutes, rules, regulations, orders, decrees, licenses, permits or
authorizations which would materially and adversely affect it; (iv) to its
knowledge, result in the breach of, or be in conflict with, any term, covenant,
condition or provision of, or affect the validity, enforceability and
subsistence of any agreement, lease or other commitment to which it is a party
and which would materially and adversely affect it; or (v) to its knowledge,
result in the creation or imposition of any lien, pledge, mortgage, claim,
charge, or encumbrance upon any of its assets.
(e) Disclosure. No representation or warranty by Liquid Audio
----------
contained in this Agreement and no writing, certificate, exhibit, list or other
instrument required to be furnished pursuant hereto contains or will contain any
untrue statement of a material fact or omits or will omit
-7-
<PAGE>
any material fact necessary in order to make the statements and information
contained therein not misleading.
4.2 SKM. SKM represents and warrants to the other Holders as follows as of
---
the date of this Agreement.
(a) Organization and Good Standing of SKM. SKM is a corporation duly
-------------------------------------
organized, validly existing and in good standing under the laws of the Republic
of Korea and has the corporate power and authority to enter into this Agreement
and to perform its obligations hereunder.
(b) Authorization. All corporate action on the part of SKM and its
-------------
officers and directors necessary for the authorization, execution, delivery an
performance of this Agreement has been taken. This Agreement constitutes a
valid, legally binding and enforceable obligation of SKM, assuming due
authorization, execution and delivery hereof by Liquid Audio and LAK.
(c) Government and Other Consents. Except for approvals contemplated
-----------------------------
by this Agreement no consent, authorization, license, permit, registration or
approval of governmental or public body or authority is required in connection
with execution and delivery of this Agreement by SKM or with the performance by
SKM of any of its respective obligations hereunder.
(d) Effect of Agreement. SKM's execution and delivery of this
-------------------
Agreement, performance of its obligations hereunder and its consummation of the
transactions contemplated hereby will not, (i) to its knowledge, violate any
provision of any law, statute, rule or regulation to which it is subject; (ii)
violate any judgment, order, writ, injunction or decree of any court applicable
to it; (iii) to its knowledge, have any effect on its compliance with any laws,
statutes, rules, regulations, orders, decrees, licenses, permits or
authorizations which would materially and adversely affect it; (iv) to its
knowledge, result in the breach of, or be in conflict with, any term, covenant,
condition or provision of, or affect the validity, enforceability and
subsistence of any agreement, lease or other commitment to which it is a party
and which would materially and adversely affect it; or (v) to its knowledge,
result in the creation or imposition of any lien, pledge, mortgage, claim,
charge, or encumbrance upon any of its assets.
(e) Brokers, Finders. SKM has not retained any person to act on its
----------------
behalf, nor has any person contended that such person was so retained, to assist
as its broker, finder or agent in connection with this transaction.
(f) Disclosure. No representation or warranty by SKM contained in this
----------
Agreement and no writing, certificate, exhibit, list or other instrument
required to be furnished pursuant hereto contains or will contain any untrue
statement of a material fact or omits or will omit any material fact necessary
in order to make the statements and information contained therein not
misleading.
4.3 LAK. LAK and SKM each represent and warrant to Liquid Audio as follows
---
as of the date of this Agreement:
-8-
<PAGE>
(a) Organization and Good Standing of LAK. LAK is a corporation duly
-------------------------------------
organized, validly existing and in good standing under the laws of the Republic
of Korea and has the corporate power and authority to enter into this Agreement
and to perform its obligations hereunder.
(b) Authorization. All corporate action on the part of LAK and its
-------------
officers and directors necessary for the authorization, execution, delivery and
performance of this Agreement has been taken. This Agreement constitutes a
valid, legally binding and enforceable obligation of LAK, assuming due
authorization, execution and delivery hereof by the Holders.
(c) Government and Other Consents. Except for approvals contemplated
-----------------------------
by this Agreement, no consent, authorization, license, permit, registration or
approval of governmental or public body or authority is required in connection
with execution and delivery of this Agreement by LAK or with the performance by
LAK of any of its respective obligations hereunder.
(d) Effect of Agreement. LAK's execution and delivery of this
-------------------
Agreement, performance of its obligations hereunder and its consummation of the
transactions contemplated hereby will not, (i) to its knowledge, violate any
provision of any law, statute, rule or regulation to which it is subject; (ii)
violate any judgment, order, writ, injunction or decree of any court applicable
to it; (iii) to its knowledge, have any effect on its compliance with any laws,
statutes, rules, regulations, orders, decrees, licenses, permits or
authorizations which would materially and adversely affect it; (iv) to its
knowledge, result in the breach of, or be in conflict with, any term, covenant,
condition or provision of, or affect the validity, enforceability and
subsistence of any agreement, lease or other commitment to which it is a party
and which would materially and adversely affect it; or (v) to its knowledge,
result in the creation or imposition of any lien, pledge, mortgage, claim,
charge, or encumbrance upon any of its assets.
(e) Brokers, Finders. LAK has not retained any person to act on its
----------------
behalf, nor has any person contended that such person was so retained, to assist
as its broker, finder or agent in connection with this transaction.
(f) Shares. As of the date of this Agreement and immediately prior to
------
the share subscription set forth in Section 2.5, LAK will have authorized
capital of [*] Won divided into [*] Shares, of which [*] Shares have been duly
issued, fully paid and non-assessable, free of all liens, encumbrances and
restrictions other than those specifically set forth in this Agreement. As of
the Closing Date, the issuance of the Shares under Section 2.5 will have been
duly authorized by LAK and, when delivered and paid for pursuant to this
Agreement, will have been duly and validly issued, fully paid and non-
assessable. As of the date of this Agreement and through the date of share
subscription by Liquid Audio, there are no outstanding securities convertible
into or exchangeable for, or warrants, rights or options to purchase from LAK,
or obligations of LAK to issue (other than those set forth under Section 2.5),
any capital stock.
(g) No Operation of LAK or Outstanding Liabilities. Since its
----------------------------------------------
establishment, LAK has been a dormant company with no business activity, other
than those disclosed to Liquid Audio in writing. As of the date of this
Agreement and through the date of share subscription by Liquid Audio, except as
previously disclosed to Liquid Audio in writing, LAK has no debts or
* Certain information in this Exhibit has been omitted and filed separately
with the Commission. Confidential treatment has been requested with respect
to the omitted portions.
-9-
<PAGE>
liabilities of any kind (including without limitation contingent liabilities)
nor has LAK given any type of Guaranty (including without limitation payment
Guaranties) to any party nor has LAK created or permitted to be created any
charge, lien, pledge, mortgage, or any other encumbrance on its assets nor is
LAK involved in any litigation, arbitration or any quasi-judicial proceeding.
(h) Disclosure. No representation or warranty by LAK contained in this
----------
Agreement and no writing, certificate, exhibit, list or other instrument
required to be furnished pursuant hereto contains or will contain any untrue
statement of a material fact or omits or will omit any material fact necessary
in order to make the statements and information contained therein not
misleading.
5. TERM AND TERMINATION.
--------------------
5.1 Term and Termination. This Agreement shall continue in full force and
--------------------
effect unless and until terminated as provided herein.
(a) Grounds for Termination. This Agreement shall be terminated:
-----------------------
(i) by mutual written agreement of the Parties;
(ii) by a Holder in accordance with this Section 5;
(iii) by Liquid Audio, at its election, effected immediately by
written notice to SKM, upon (A) the permitted termination of the Reseller
Agreement or the Consulting Agreement by Liquid Audio, (B) SKM's failure to pay,
when due, the [*] payable to Liquid Audio pursuant to that certain Consulting
Agreement dated September 30, 1998 between SKM and Liquid Audio, or (C) breach
by SKM of its obligations under the Guaranty;
(iv) by Liquid Audio in the event that any Affiliate of SKM
shall engage in conduct which would, if done by SKM itself, constitute a breach
of Section 7(a) hereof;
(v) at such time as only one Holder remains subject to this
Agreement; or
(vi) otherwise by lawful exercise by a Holder of its rights
under applicable laws.
(vii) by any Party if performance by another party has been
excused pursuant to Section 8.3 by a force majeure condition which has continued
for at least ninety (90) days.
5.2 Termination Upon Bankruptcy or Insolvency of a Holder.
-----------------------------------------------------
(a) Notice of Bankruptcy Event. If any of the following events occurs
--------------------------
with respect to a Holder, such Holder shall immediately notify the other Holders
and LAK of the occurrence of such event:
* Certain information in this Exhibit has been omitted and filed separately
with the Commission. Confidential treatment has been requested with respect
to the omitted portions.
-10-
<PAGE>
(i) Such Holder becomes insolvent or unable to pay any or all of its
debts as they mature or ceases to pay any or all of its debts as they mature in
the ordinary course of business.
(ii) Any application or petition is submitted, by or for such Holder,
for commencement of proceedings of bankruptcy, reorganization, composition or
other similar proceedings under the applicable law.
(b) Right to Terminate. If the event is not cured within sixty (60)
------------------
days following the event, the non-affected Holder shall have the right to
terminate this Agreement by giving notice in writing to all other Holders and
LAK.
(c) Right to Purchase. After notice of termination described in
-----------------
Section 5.3, the Holders shall make a reasonable effort to consult in good faith
for sixty (60) days concerning the disposition of their respective interests in
LAK and the future operations of LAK. If the Holders do not sign a written
agreement regarding such matters during such sixty (60) days, then the Holder
which gave notice of termination shall have the option to purchase the Shares of
such bankrupt Holder pursuant to Section 5.6.
5.3 Termination Upon Bankruptcy or Insolvency of LAK.
------------------------------------------------
(a) Right to Terminate. If any of the following events occurs with
------------------
respect to LAK, any Holder shall have the right to terminate the Agreement by
giving notice in writing to all other Holders:
(i) LAK becomes insolvent or unable to pay any or all of its
debts as they mature or ceases to pay any or all of its debts as they mature in
the ordinary course of business.
(ii) Any application or petition is submitted, by or for LAK,
for commencement of proceedings of bankruptcy, reorganization, composition or
other similar proceedings under the applicable law.
(b) Right to Dissolve. After notice of termination, the Holders
-----------------
shall consult in good faith for sixty (60) days concerning the disposition of
their respective interests in LAK and the future operations of LAK. If the
Holders do not sign a written agreement regarding such matters within such sixty
(60) days and if any application or petition is not submitted for the
commencement of any proceedings described in Section 5.3(a)(ii), then each
Holder shall have the option to cause dissolution of LAK under the Code by
giving written notice of dissolution to the other Holders and LAK. Upon such
notice, each Holder and LAK shall take all actions (including voting of Shares
in favor for dissolution) required to dissolve and liquidate LAK in accordance
with applicable laws and regulations.
5.4 Termination Upon Material Breach.
--------------------------------
(a) Right to Terminate. If a Party commits a material breach of this
------------------
Agreement and such breach is not cured within sixty (60) days following notice
thereof to the breaching Party
-11-
<PAGE>
by any of the other Parties, the Party sending such notice shall have the right
to terminate this Agreement by giving notice thereof in writing to all other
Parties.
(b) Right to Purchase or Sell Shares. After notice of termination, the
--------------------------------
Holders shall consult in good faith for sixty (60) days concerning the
disposition of their respective interests in LAK and the future operations of
LAK. If the Holders do not resolve such matters in writing within such sixty
(60) days, the non-breaching Holder shall have the option to purchase the Shares
of such breaching Holder pursuant to Section 5.6 or to cause the breaching party
to purchase all of the Shares then held by the non-breaching Holder pursuant to
Section 5.6.
(c) Remedies Not Affected. The foregoing shall not limit the ability
---------------------
of any Party to seek such legal and equitable remedies (including damages)
related to a material breach by a Party or the failure of a Party to perform any
other duty or obligation.
5.5 Change in Control.
-----------------
(a) Right to Terminate. If SKM undergoes a Change in Control, Liquid
------------------
Audio shall have the right to terminate this Agreement by giving notice thereof
in writing to all other Holders.
(b) Right to Purchase/Sell. After notice of termination pursuant to
----------------------
Section 5.5(a), the Holders shall consult in good faith for sixty (60) days
concerning the disposition of their respective interests in LAK and the future
operations of LAK. If the Holders do not resolve such matters in writing within
such sixty (60) days, Liquid Audio shall have the option to purchase the Shares
of SKM or to have SKM purchase all of the Shares then held by Liquid Audio,
pursuant to Section 5.6.
5.6 Purchase Procedures.
-------------------
(a) The purchase price for the Shares to be sold pursuant to this
Section shall be the "Fair Market Value" of such Shares.
(b) Fair Market Value per share under this Section 5 shall be
determined as follows:
(i) If the Shares are publicly traded on the Korea Stock Exchange
or KOSDAQ, the Korean OTC market, the value shall be deemed to be the average of
the closing prices of the Shares on such exchange or market, as the case may be,
over the 30-day period ending three (3) business days prior to the closing of
the purchase of the Shares.
(ii) If there is no active public market for the Shares, the value
shall be the fair market value thereof immediately following any act giving rise
to the right to sell or purchase shares under this Section 5, such fair market
value as determined by a good faith negotiation between the Selling Holder or
Holders ("Seller") and the purchasing Holder or Holders ("Purchaser"). If such
negotiation fails to determine the fair market value within forty-five (45) days
after the date of the notice of termination, the fair market value shall be
determined as follows:
-12-
<PAGE>
(A) Seller (as a group if Seller is more than one Holder)
and Purchaser (as a group if Purchaser is more than one Holder) shall each
retain at its expense an investment bank expert in the industry. If Seller or
Purchaser does not select an investment bank within fifteen (15) days after the
end of the 45-day good faith negotiation period (the "Negotiation Period")
referred to in subsection (ii) above, such Holder or Holders shall not be
entitled to retain an investment bank and shall present whatever materials it
has available by the deadline regarding the valuation of LAK.
(B) Subject to execution of customary confidentiality
agreements by the investment banks, LAK shall provide or cause to be provided to
each investment bank all material information, including any material changes in
such information, reasonably necessary to value LAK or reasonably requested by
the investment banks.
(C) During the 15-day period after both Seller and Purchaser
have selected an investment bank, or the end of the Negotiation Period if Seller
and/or Purchaser does not select an investment bank, Seller, Purchaser and their
respective investment banks shall meet on at least two occasions to present
their respective views on valuation and shall negotiate in good faith to reach a
written agreement on the fair market value.
(D) If the fair market value has not been agreed to in
writing by the end of the Negotiation Period, Seller and Purchaser shall each
submit a final valuation proposal with a supporting analysis to the other Holder
or Holders and to the "Arbitrator" within ten (10) days after the end of the
Negotiation Period. The "Arbitrator" shall be a Person with expertise in valuing
high technology companies, shall not have a material business relationship with
any Party and shall be reasonably acceptable to both Seller and Purchaser,
provided however that in the event that the Parties are unable to agree upon the
Arbitrator within ten (10) days of the end of the Negotiation Period, then the
Arbitrator shall be determined within an additional ten (10) days by agreement
of the respective investment banks of the Parties, provided further that (x) if
no such investment bank has been selected by a Party, or if such Party's
investment bank does not recommend an Arbitrator, then the selection of the
other Party shall prevail, and (y) if the investment banks are unable to agree
on an Arbitrator, the valuation shall be determined in accordance with the
dispute resolution provisions of Section 8.2 hereof.
(E) If Seller or Purchaser does not submit in a timely
manner a final valuation proposal, then the valuation proposal of the other
Holder or Holders shall be used to establish the fair market value. If the final
proposals differ by less than 10%, then the average of the proposals shall be
the fair market value. If the final proposals differ by 10% or more, then the
Arbitrator shall choose one or the other proposal. The Arbitrator's
determination shall be final and binding on both Seller and Purchase; provided,
however, that the Arbitrator must select one of the final valuation proposals as
submitted.
(c) Each Holder purchasing Shares under this Section 5.6 shall pay in
cash or other immediately available funds the aggregate purchase price for the
Shares to be sold to such Holder upon receipt of the certificate or certificates
for the Shares to be sold to such Holder.
(d) When Holders have the right to purchase their pro rata share of
another Holder's Shares pursuant to this Section 5 and not all of those Holders
exercise their purchase right,
-13-
<PAGE>
the Holders exercising their purchase right shall also have the right to
purchase the pro rata share of the Shares of the Holders not exercising their
purchase right (the "Remaining Shares"). If more than one Holder elects to
exercise its purchase right as to the Remaining Shares, each Holder who wishes
to purchase the Remaining Shares shall be entitled to purchase that portion of
the Remaining Shares as the total number of Shares then owned by such Holder
bears to the total number of Shares then owned by all Holders who wish to
purchase the Remaining Shares.
5.7 Continuation of Business. During any period in which a Holder has the
------------------------
right to purchase or is purchasing the Shares of any other Holder, or in which
Liquid Audio has the right to cause the other Holders to purchase its Shares,
pursuant to this Section 5, until the closing of the purchase of the Shares
thereunder:
(a) LAK shall continue its business in the ordinary course. All of the
Holders shall use their best efforts to maintain and preserve the business of
LAK pending the consummation of such purchase.
(b) The Holders shall negotiate in good faith an agreement providing
that employees of such selling Holder working full time for LAK shall be made
available full time to LAK for such period as is reasonably required for up to
six (6) months following the closing of such purchase of Shares to effect an
orderly transition to a new ownership by non-selling Holders, and each Holder
shall use its best efforts to make all such employees available on this basis.
6. PERMITTED TRANSFERS; RIGHT OF FIRST REFUSAL
-------------------------------------------
6.1 Restrictions. Each Holder agrees not to sell or transfer in any manner
------------
any of such Holder's Shares or any right or interest therein except as provided
below in this Section:
(a) No Holder may transfer or otherwise dispose of its Shares without
the prior approval of the Board, which shall not be withheld as long as the
requirements of this Section 6 have been satisfied.
(b) For a period of three (3) years after the effective date of the
incorporation of LAK, such Holder may transfer or otherwise dispose of its
Shares only if a Holder or Holders of a majority of Shares owned by all of other
Holders approve in advance in writing such transfer or disposition.
(c) After three (3) years from the effective date of the incorporation
of LAK,
(i) A Holder which wishes to transfer its Shares shall first give
written notice ("Notice") to all of the other Holders stating its bona fide
intention to transfer, the name of the proposed transferee, the number of
offered Shares and the price, terms and conditions of the proposed sale or
transfer.
(ii) Each other, non-offering Holder shall have the right to
purchase that portion of the Shares offered as the total number of Shares then
owned by such Holder bears to the total number of Shares then owned by all of
the non-offering Holders. Such right shall be
-14-
<PAGE>
exercisable by written notice to the offering Holder not later than thirty (30)
days after delivery of the Notice. The price and terms for the non-offering
Holders shall be the price and terms stated in the Notice.
(iii) If all of the non-offering Holders do not exercise their
rights described in paragraph (ii) of Section 6.1(c), the offering Holder shall
so notify in writing ("Second Notice") each Holder which exercised its right
under paragraph (ii) of Section 6.1(c), and each such Holder shall have the
right to purchase all of the remaining Shares offered, which right shall be
exercisable by written notice to the offering Holder within ten (10) days after
delivery of the Second Notice. If more than one Holder elects to purchase such
remaining Shares, each Holder who wishes to purchase such remaining Shares shall
be entitled to purchase that portion of such remaining Shares as the total
number of Shares then owned by such Holder bears to the total number of Shares
then owned by all Holders who wish to purchase such remaining Shares.
(d) The Shares not purchased by the non-offering Holders pursuant to
Section 6.1(c) may, during ninety (90) days beginning on the expiration of the
last applicable right of the non-offering Holders, be transferred to the
transferee named in the Notice; provided that (i) such sale or transfer is not
at a lower price or on terms more favorable to the transferee than those
specified in the Notice; and (ii) prior to such transfer, such transferee agrees
in writing to become bound by the terms and conditions of this Agreement upon
transfer of such Shares.
(e) Notwithstanding any term or condition of this Section 6, each
Holder may transfer its Shares to an Affiliate of that Holder or in connection
with a merger or sale of all or substantially all of the assets of the Holder
provided that: (i) prior to such transfer, such Affiliate or transferee agrees
in writing to become bound by the terms and conditions of this Agreement upon
transfer of such Shares; (ii) the transferring Holder notifies all of the other
Holders not less than thirty (30) days prior to any such transfer; and (iii) any
such transfer shall not serve to excuse or terminate any of the obligations of
the transferring Holder under this Agreement.
(f) Each Holder which has the right to purchase the Shares under
Section 6.1(c) may designate and assign an Affiliate to exercise all or part of
such Holder's rights under Section 6.1(c).
(g) The restrictions and other provisions of this Section 6 shall
apply to any Shares acquired by a Holder during the term of this Agreement.
(h) Since damages arising from a breach of the obligations under this
Section 6.1 may be difficult to determine with precision, the Holders agree that
any Holder found to have breached the terms of Section 6.1 shall pay to the non-
breaching Holders as liquidated damages a sum equivalent to two times the gross
compensation received by the breaching Holder in the transaction whereby the
breach occurred, or two times the aggregate par value of the transferred shares,
whichever is higher. The Parties have understood that such liquidated damages
are fair and reasonable. Application of this liquidated damage provision shall
not prevent a Party from enforcing its rights or augmenting its protection by
such other remedies as may be available.
-15-
<PAGE>
6.2 Legend. The instruments representing the Shares shall bear a legend
------
stating that such Shares are (i) subject to restrictions on transfer and other
provision of this Agreement and (ii) not transferable without the Board's
written approval. Each Holder agrees to cause LAK's Board not to consent to any
transfer or other disposition of any Shares made other than in accordance with
this Agreement.
7. NONCOMPETITION
--------------
(a) SKM agrees that as long as SKM is a shareholder of LAK, SKM will
not engage, either directly or indirectly, as a principal or for its own account
or solely or jointly with others, or as a stockholder in any corporation or
joint stock association (including rights to participate in present or future
profits pursuant to an option or other agreement), in any entity that sells,
resells, or distributes any software product or service that competes with the
sale of the Liquid Audio secure music distribution software carried by LAK, or
in any entity that controls, licenses, distributes or sells pre-recorded music.
(b) If any provision contained in this Section shall for any reason be
held invalid, illegal or unenforceable in any respect, such invalidity,
illegality of unenforceability shall not affect any other provisions of this
Section, but this Section shall be construed as if such invalid, illegal or
unenforceable provision had never been contained herein. It is the intention of
the Parties that if any of the restrictions or covenants contained herein is
held to cover a geographic area or to be for a length of time which is not
permitted by applicable law, or in any way construed to be too broad or to any
extent invalid, such provision shall not be construed to be null, void and of no
effect, but to the extent such provision would be valid or enforceable under
applicable law, a court of competent jurisdiction shall construe and interpret
or reform this Section to provide for a covenant having the maximum enforceable
geographic area, time period and other provisions (not greater than those
contained herein) as shall be valid and enforceable under such applicable law.
(c) SKM acknowledges that Liquid Audio would be irreparably harmed by
any breach or threatened breach of this Section and that there would be no
adequate remedy at law or in damages to compensate Liquid Audio for any such
breach or threatened breach. In recognition of this fact, SKM agrees that, in
the event of such a breach or threatened breach, in addition to any remedies at
law, Liquid Audio, without posting any bond, shall be entitled to obtain
equitable relief in the form of specific performance, temporary restraining
order, temporary or permanent injunction or any other equitable remedy which may
then be available, and SKM consents to the entry thereof.
8. GENERAL PROVISIONS
------------------
8.1 Confidentiality.
---------------
(a) Each Party acknowledges and agrees that certain information it
receives from the other Parties constitutes the confidential and proprietary
trade secrets of the disclosing Party (or of third parties pursuant to
confidentiality agreements between such third parties and the disclosing Party),
and that the receiving Party's protection thereof is essential to this Agreement
and a condition of the receiving Party's use and possession thereof. Each Party
shall retain in strict confidence any and all such confidential information
(collectively "Confidential Information") and use such
-16-
<PAGE>
Confidential Information only as expressly authorized herein. A Party will under
no circumstances distribute or in any way disseminate Confidential Information
to third parties without the prior written permission of the disclosing Party.
(b) Notwithstanding the above, Confidential Information shall not
include information which:
(i) was generally known and available in the public domain at the
time it was disclosed or becomes generally known and available in the public
domain through no fault of the receiving Party;
(ii) was known to the receiving Party at the time of disclosure as
shown by the files of the receiving Party in existence at the time of
disclosure;
(iii) was independently developed by the receiving Party without
any use of Confidential Information and by employees or other agents of the
receiving Party who have not been exposed to such Confidential Information;
(iv) becomes known to the receiving Party from a source other than
the disclosing Party without breach of this Agreement by the receiving Party and
otherwise not in violation of the disclosing Party's rights; or
(v) is disclosed pursuant to the order or requirement of a court,
administrative agency, or other governmental body; provided, that the receiving
Party shall to the extent reasonably practicable, provide prompt, advanced
notice thereof to enable the disclosing Party to seek a protective order or
otherwise prevent such disclosure, and provided that the receiving Party's
disclosure is limited to the extent expressly required by such court,
administrative agency or other governmental body.
(c) Each Party will enter into a confidentiality agreement with each
employee or consultant who is given access to the Confidential Information of
the other Parties which incorporates the protections and restrictions
substantially as set forth herein.
(d) Each Party agrees to notify the other Parties in the event of any
breach of its security under conditions in which it would appear that
Confidential Information was prejudiced or exposed to loss. Each Party shall,
upon request of the disclosing Party, take all other reasonable steps necessary
to recover any compromised Confidential Information disclosed to or placed in
its possession by virtue of this Agreement. The cost of taking such steps shall
be borne solely by the receiving Party.
(e) Each Party acknowledges that any breach of any of its obligations
under this Section 8.1 is likely to cause or threaten irreparable harm to the
other Parties, and, accordingly, each Party agrees that in such event the
disclosing Party shall be entitled to equitable relief to protect its interests,
including but not limited to preliminary and permanent injunctive relief, as
well as money damages.
-17-
<PAGE>
(f) Each Party agrees that such Holder shall return, or cause to be
returned, to the disclosing Party Confidential Information disclosed by such
disclosing Party promptly after such Holder ceases to be a shareholder of LAK.
8.2 Arbitration; Forum.
------------------
(a) Except as otherwise provided herein, all disputes, controversies
or claims arising out of or relating to this Agreement, or the breach,
termination or validity thereof, shall be resolved by one arbitrator under the
Rules of Conciliation and Arbitration of the International Chamber of Commerce
as then in effect ("Rules"). The arbitrator shall be chosen in accordance with
the Rules. The place of arbitration shall be Tokyo, Japan. The language to be
used in the arbitration proceedings shall be English. The arbitrator may be of
any nationality. The arbitral award shall be rendered in writing, state the
reasons for the award and shall be final and binding on the Parties. Judgment on
any award may be entered by any court of competent jurisdiction or application
may be made to such a court for judicial acceptance or recognition of the award
and any appropriate order including enforcement. This arbitration agreement is
intended by the parties to be self-executing. The arbitrator shall have sole
jurisdiction to determine whether (i) a claim is subject to arbitration, (ii)
the arbitration may proceed even if one of the Parties refuses to attend or
participate and (iii) an award against that party may be ordered pursuant to
default or otherwise by the panel. The Parties agree that they will arbitrate
all claims agreed to be arbitrated herein regardless of the existence of any
related dispute, action or special proceeding between any or all of the Parties
hereto and/or any third party.
(b) Notwithstanding the foregoing, each Party may apply to any court
of competent jurisdiction for a temporary restraining order, preliminary
injunction, or other interim or conservatory relief, as necessary, without
breach of this Section, and without any abridgement of the powers of the
arbitrator.
(c) In case of arbitration, the arbitrator shall award reasonable
attorneys' fees and expenses to any of the parties in such manner and to such
extent as the arbitrators deem equitable. In case of a court proceeding arising
out of this Agreement, the prevailing party shall be entitled to recover its
reasonable attorneys' fees and expenses from the other party(ies).
8.3 Force Majeure. If the performance of this Agreement or any obligations
-------------
hereunder is prevented, restricted or interfered with by reason of fire or other
casualty or accident, strikes or labor disputes, war or other violence, any law,
order, proclamation, regulations, ordinance, demand or requirement of any
government agency, or any other act or condition beyond the reasonable control
of the Parties, the Party so affected upon giving prompt notice to the other
Parties shall be excused from such performance during such prevention,
restriction or interference.
8.4 Governing Law. This Agreement shall be governed by the laws of the
-------------
Republic of Korea.
8.5 Publicity. Prior to issuing any reports, statements, press releases or
---------
other disclosures to third parties regarding this Agreement or the transactions
contemplated herein, the Parties shall exchange copies of such documents and
shall consult with each other regarding their content.
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<PAGE>
Except as otherwise required by law, neither Party shall any such disclosure
without the prior approval of the other Party.
8.6 Notices and Other Communications. Every notice by either Party shall
--------------------------------
be in writing and delivered either by personal delivery, or by express mail or
any similar overnight courier service, or by registered or certified mail,
postage prepaid, or by facsimile or electronic mail, addressed to the Party for
whom intended at its address set forth above, or at such other address as the
intended recipient previously shall have designated by written notice to the
other Party. All notices delivered in person shall be deemed to have been
delivered to and received by the addressee and shall be effective on the date of
personal delivery. All notices delivered by express mail or any other similar
overnight courier shall be effective upon the earlier of (i) three days
following the date sent, and (ii) the date received. All notices delivered by
registered or certified mail, or by facsimile or electronic mail, shall be
effective upon receipt.
8.7 Counterparts. This Agreement may be executed in any number of English
------------
language counterparts or duplicate originals, and each such counterpart or
duplicate original shall constitute an original instrument, but all such
separate counterparts or duplicate originals shall constitute one and the same
instrument.
8.8 Written Agreement to Govern. This Agreement sets forth the entire
---------------------------
understanding and supersedes all prior and contemporaneous agreements and
discussions among the Parties relating to the subject matter contained herein
and therein, except for the $850,000 payment obligation of SKM arising pursuant
to that certain Consulting Agreement dated September 30, 1998, between SKM and
Liquid Audio and such agreements as are executed contemporaneously herewith by
the Parties pursuant to the express provisions of this Agreement, and no Party
shall be bound by any definition, condition, representation, warranty, covenant
or provision other than as expressly stated in or contemplated herein or therein
or as subsequently shall be set forth in writing and executed by a duly
authorized representative of the Party to be bound thereby.
8.9 No Waiver of Rights. All waivers hereunder must be made in writing,
-------------------
and failure at any time to require another Party's performance of any obligation
under this Agreement shall not affect the right subsequently to require
performance of that obligation. No waiver of any breach of any provision of this
Agreement shall be construed as a waiver of any continuing or succeeding breach
of such provision or a waiver or modification of such provision.
8.10 Severability. Whenever possible, each provision of this Agreement
------------
shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement should be prohibited or
invalid under applicable law, such provisions shall be ineffective to the extent
of such prohibition or invalidity without invalidating the remainder of such
provision or the remaining provisions of this Agreement. In such event, the
Parties agree to negotiate, in good faith, a valid, legal and enforceable
substitute provision which most nearly effects the Parties' intent in entering
into this Agreement.
8.11 Subject Headings. The subject headings of the Sections of this
----------------
Agreement are included for the purposes of convenience only, and shall not
affect the construction or interpretations of any of its provisions.
-19-
<PAGE>
8.12 Further Assurances. The Parties shall each perform such acts, execute
------------------
and deliver such instruments and documents, and do all such other things as may
be reasonably necessary to accomplish the transactions contemplated in this
Agreement.
8.13 Expenses and Finder's Fees. The Parties shall each bear their own
--------------------------
costs and expenses (including attorneys' fees) incurred in connection with the
negotiation and preparation of this Agreement and the consummation of the
transactions contemplated hereby. Each Party shall indemnify the other against
any claim for brokerage or finder's fees arising out of the transactions
contemplated herein by any Person claiming to have been engaged by the
indemnifying Party based upon any action or communication, or any alleged action
or communication, by the indemnifying Party or any of its officers or employees.
8.14 Relationship Between Parties. Each Party will in all matters relating
----------------------------
to this Agreement be and act as an independent contractor. Neither Party will
represent that it has any authority to assume or create any obligation, express
or implied, on behalf of the other Party, or to represent the other Party as
agent, employee, or in any other capacity.
8.15 Language. This Agreement is in the English language only, which
--------
language shall be controlling in all respects, and all versions hereof in any
other language shall be for accommodation only and shall not be binding upon the
Parties. All communications and notices to be made or given pursuant to this
Agreement shall be in the English language.
8.16 Assignment. This Agreement shall inure to benefit of, and shall be
----------
binding upon, the Parties and their respective successors and assigns. No Party
may assign or delegate this Agreement or any of its rights or duties under this
Agreement without the prior written consent of the other Parties except as
expressly set forth herein or to a Person into which it has merged or which has
otherwise succeeded to all or substantially all of the assets of the assignor,
and which has assumed in writing or by operation of law the assignor's
obligations under this Agreement.
8.17 SURVIVAL. The Parties' respective obligations pursuant to Sections 7
--------
and 8 shall survive a termination for any reason.
LIQUID AUDIO, INC. SKM LIMITED
By: /s/ Robert Flynn By: Kyu Hwa Lee /s/ K H Lee
----------------
Title: VP Business Development Title: Vice President
----------------------- --------------
Dated: 12/31/98 Dated: 12/31/98
-------- --------
LIQUID AUDIO KOREA CO., LTD.
By: Kyu Hwa Lee /s/ K H Lee
-----------
Title: President
---------
Dated: 12/31/98
--------
-20-
<PAGE>
EXHIBIT A
ARTICLES OF INCORPORATION
[ENGLISH LANGUAGE]
<PAGE>
EXHIBIT B
CONSULTING AGREEMENT
<PAGE>
EXHIBIT C
GUARANTY
<PAGE>
EXHIBIT D
RESELLER AGREEMENT
<PAGE>
EXHIBIT E
FIVE YEAR BUSINESS PLAN
<PAGE>
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separately with the Commission. Confidential treatment has been
requested with respect to the omitted portions.
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separately with the Commission. Confidential treatment has been
requested with respect to the omitted portions.
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separately with the Commission. Confidential treatment has been
requested with respect to the omitted portions.
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separately with the Commission. Confidential treatment has been
requested with respect to the omitted portions.
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separately with the Commission. Confidential treatment has been
requested with respect to the omitted portions.
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separately with the Commission. Confidential treatment has been
requested with respect to the omitted portions.
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separately with the Commission. Confidential treatment has been
requested with respect to the omitted portions.
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separately with the Commission. Confidential treatment has been
requested with respect to the omitted portions.
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separately with the Commission. Confidential treatment has been
requested with respect to the omitted portions.
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separately with the Commission. Confidential treatment has been
requested with respect to the omitted portions.
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separately with the Commission. Confidential treatment has been
requested with respect to the omitted portions.
<PAGE>
EXHIBIT 10.35
SOFTWARE RESELLER AND SERVICES AGREEMENT
This Agreement is made and entered into as of December 31, 1998 (the
"Effective Date"), by and between Liquid Audio, Inc. ("LA"), a corporation
organized under the laws of the State of California, and Liquid Audio Korea Co.,
Ltd. ("Reseller"), a corporation organized under the laws of Korea. Capitalized
terms not otherwise defined shall have their meaning as set forth in Section 1
below.
WHEREAS, LA desires Reseller to perform certain services--described in
"Scope of Services" below--to enable the distribution and utilization of Korean
language versions of LA's software products (the "LA Software," as defined
below) in the Licensed Territory.
WHEREAS, Reseller desires: 1) to be appointed to perform such services, 2)
that the LA Software be localized for use in the Licensed Territory, and 3) that
LA cooperate with Reseller to cause certain Localized Versions of the LA
Software to be developed.
WHEREAS, LA is willing to make such appointment and to cooperate in the
development of Localized Versions in exchange for the Reseller's payment
obligations to LA hereunder, including certain minimum annual payment
commitments, and in consideration of the fulfillment of certain preconditions
and certain other promises, as set forth in this Agreement;
NOW, THEREFORE, in consideration of the mutual covenants and agreements set
forth herein, the parties hereby agree as follows:
1. DEFINITIONS
-----------
a. "Dealer-Reseller" shall mean any dealer, reseller or other third
party intermediary which (i) purchases Software Copies from Reseller for resale
solely to End-Users hereunder, and not for further resale and (ii) is either a
Subsidiary of Reseller or has been pre-approved in writing by LA. All Dealer-
Resellers shall be identified in Exhibit C hereto, which shall be updated by
addenda thereto signed by both parties from time to time.
b. "Documentation" shall mean any instruction manuals or
documentation provided by LA with the LA Software.
c. "End-User" shall mean an end-user customer located within the
Licensed Territory who is licensed to use a Software Copy for its internal
purposes, and not for resale, redistribution, or any other purpose.
d. "End-User License Agreement" shall mean an end user license
agreement pursuant to which the Reseller licenses End-Users to use a Software
Copy, which shall (i) be in a form approved by LA that is at least as protective
of the Software Copy under applicable local law as LA's then-current standard
end user license agreement for the applicable LA Software, (ii) require the End-
Users to register their names and other appropriate information with Reseller as
a condition to obtaining the LA Software and (iii) require the End-Users to
register with LA's Liquid Operations Center before using the LA Software to
purchase downloadable digital music files.
* Certain information in this Exhibit has been omitted and filed
separately with the Commission. Confidential treatment has been
requested with respect to the omitted portions.
<PAGE>
e. "Initial Term" means the initial term of this Agreement
commencing upon the Effective Date and expiring on the date that is five (5)
years thereafter.
f. "LA Software" shall mean the United States version of the Liquid
Audio software identified in Exhibit A hereto, and any Updates delivered by LA
to Reseller and any Localized Versions prepared hereunder. LA may, at any time,
amend Exhibit A to add other software products which shall be available to
Reseller under the terms of this Agreement, and LA shall be under no obligation
to continue the release of any software product, and may delete any discontinued
software products from Exhibit A at any time upon written notice, provided
however that, if, upon such written notice Reseller shall within fifteen (15)
days thereof request that a product not be discontinued, LA shall use
commercially reasonable efforts (which shall not result in material harm or cost
to LA), to continue to provide to Reseller a product or products with
substantially similar functionality.
g. "LA Trade Secrets" shall mean certain know-how, techniques,
processes, methods, and other trade secrets that may be disclosed by LA to the
Reseller relating to the LA Software.
h. "LAK Shareholders Agreement" shall mean that certain agreement
dated as of December 31, 1998 between LA and SKM Limited ("SKM"), pursuant to
which LA and SKM have agreed to the formation and management terms for Reseller.
i. "License Term" means the Initial Term, and any Renewal Term,
unless earlier terminated pursuant to the terms of Section 15 below.
j. "Licensed Territory" means the Republic of Korea and the
Democratic People's Republic of Korea as constituted on the Effective Date. The
Licensed Territory may be extended by mutual written agreement to include
additional territories in the Asia Pacific region for additional consideration
payable to LA; provided, however that neither party shall have any obligation to
negotiate or agree upon any such extension.
k. "Localized Version" shall mean a version of the LA Software and
Documentation that has been localized for use in the Korean language and has
been (i) requested in writing by the Reseller with a detailed description of the
desired localization changes, (ii) reasonably determined by LA to be
commercially feasible to develop for resale; and (iii) reasonably determined by
LA to constitute a necessary customization of the LA Software for use in the
Licensed Territory.
l. "Maintenance Services" means the sale of maintenance and support
services to End-Users, which may include distribution of Updates, in accordance
with LA's minimum requirements as set forth in Section 9(b) below.
m. "Purchase Price" shall mean the price to Reseller for each
Software Copy, calculated based on LA's then-current international retail list
price for the applicable LA Software or Maintenance Services, subject to the
applicable reseller discount, which discount shall not be less than [*]
* Certain information in this Exhibit has been omitted and filed seperately
with the Commission. Confidential treatment has been requested with respect
to the omitted portions.
-2-
<PAGE>
n. "Renewal Term" shall mean a renewal term of this Agreement
commencing upon the expiration of the Initial Term and expiring on the date that
is five (5) years thereafter.
o. "Sale" or "selling" of the LA Software or Software Copies shall
mean the sale of a license to use such Software or Software Copies. All
-------
references in this Agreement to the purchase, sale or distribution of Software
or Software Copies shall mean the purchase, sale or distribution of a license to
-------
use such Software or Software Copy.
p. "Software Copy" or "Software Copies" shall mean an object code
(machine-readable) copy or copies of the LA Software, together with a copy or
copies of any accompanying Documentation relating thereto that is designated by
LA for distribution to End-Users, along with all related materials required by
LA for distribution of finished goods, including without limitation, duplication
media, envelopes, labels, and packaging. All such copies shall be fixed on CD-
ROM, diskette or other tangible media, except as expressly permitted in Section
7(a) below.
q. "Subsidiaries" means all current and future business entities of
which the Reseller owns, directly or indirectly, at least fifty percent (50%) of
the equity securities or other equity interest granting voting rights
exercisable in electing the management of the entities, for so long as such
ownership exists.
r. "Update" means a release or version of the LA Software that is
generally made available at no additional cost to LA's end-user customers who
have purchased support and maintenance services from LA.
2. SCOPE OF SERVICES
-----------------
Reseller's services during the License Term in the Licensed Territory
will include: (i) exclusive reselling and/or hosting of the LA Software for
resale, including provision of maintenance and support in connection therewith,
(ii) development of a site on the World Wide Web for a Korean version of LA's
Liquid Music Network ("LMN-K") that is a database of Web pages containing the
content owned by licensees of the LA Software, and (iii) involvement, as
required by LA, in the operation of a Korean version of LA's Liquid Operations
Center ("LOC-K"). In addition, Reseller may, upon prior written approval by LA
pursuant to Section 6 below, engage in other operational activities.
3. RESELLER APPOINTMENT
--------------------
Subject to the terms and conditions set forth herein, LA hereby
appoints Reseller to resell and to host the resale of Software Copies of the LA
Software in the Licensed Territory, including related Maintenance Services, and
Reseller hereby accepts such appointment. Such appointment shall be on an
exclusive basis during the License Term and shall remain on an exclusive basis
thereafter for the duration of the License Term, except as expressly provided to
the contrary in this Agreement. Reseller's sole remuneration for the
distribution of the LA Software shall be the difference between the Purchase
Price for each Software Copy and related Maintenance Services, and Reseller's
price to its customers. As a reseller, Reseller shall have the non-transferable,
personal, revocable right and license to reproduce Software Copies and to
market, distribute and resell such
-3-
<PAGE>
Software Copies to End-Users both directly and indirectly through a resale
network approved by LA of Dealer-Resellers in the Licensed Territory. All
proposed Dealer-Resellers must meet the criteria set forth in Section 1(a) above
and shall be identified in Exhibit C hereto. The Reseller shall contractually
obligate all Dealer-Resellers to comply with the terms of this Agreement, and
the Reseller further guarantees the performance of its Dealer-Resellers under
this Agreement and shall indemnify and hold LA harmless from and against all
losses, costs, liabilities and expenses arising out of or relating to any breach
or default by such Dealer-Resellers of this Agreement. All Software Copies
distributed by the Reseller will be accompanied by a copy of the End User
License Agreement, and the Reseller agrees to enforce the terms and conditions
of the End User License Agreement in the event of any violation by an End-User.
4. LIQUID MUSIC NETWORK--KOREA (LMN-K) APPOINTMENT
-----------------------------------------------
Subject to the terms and conditions set forth herein, LA hereby
appoints Reseller to develop and operate the LMN-K, and Reseller hereby accepts
such appointment. This appointment shall be on an exclusive basis during the
License Term, except as expressly provided to the contrary in this Agreement. LA
shall provide Reseller, within two months of the Effective Date, basic templates
used for the United States version of the LMN. Within six months of the
Effective Date, Reseller shall establish the LMN-K. Reseller shall develop and
operate the LMN-K to the reasonable satisfaction of LA. All matters relating to
the development and operation of the LMN-K shall be subject to LA's approval
rights set forth in Section 8 below and shall be consistent with LA's standard
practices and requirements for the United States version of the LMN, including
without limitation use of LA's standard LMN affiliate artist and related
agreements, provided, however that the LMN-K shall be subject to any variations
specific to the Korean market as reasonably approved or requested by LA.
5. LIQUID OPERATIONS CENTER--KOREA ("LOC-K") APPOINTMENT
-----------------------------------------------------
To the extent required by LA and subject to the terms and conditions
set forth herein, LA hereby appoints Reseller to operate the LOC-K, and Reseller
hereby accepts such appointment. This appointment shall be on an exclusive basis
during the License Term, except as expressly provided to the contrary in this
Agreement. LA shall provide Reseller, within six (6) months of the Effective
Date, a localized version of the software required for the operation of the LOC-
K and such training as reasonably required consistent with LA's customary
practice. Thereafter, and within six (6) months of delivery of the LOC-K
Software, Reseller shall commence operation of the LOC-K, except that upon
deployment of any LA Software within Korea the LOC shall be used in place of the
LOC-K until the LOC-K is operational. LOC and/or LOC-K fees payable by
Reseller's licensees of LA Software shall be retained by Reseller, provided that
the amount of such fees shall be determined and revised from time to time by
agreement of LA and Reseller. Reseller shall operate the LOC-K to the reasonable
satisfaction of LA. All matters relating to the operation of the LOC-K shall be
subject to LA's approval rights set forth in Section 8 below and shall be
consistent with LA's standard practices and requirements for the United States
version of the LOC, including without limitation use of LA's standard LOC
agreements, provided, however that the LOC-K shall be subject to any variations
specific to the Korean market as reasonably approved or requested by LA. Should
LA update the software required for operation of the LOC-K, then LA shall
provide Reseller with a localized version thereof.
-4-
<PAGE>
6. OTHER RESELLER ACTIVITIES
-------------------------
In the event that Reseller desires to: (i) enter into any operational
activities other than resale or distribution of the LA Software and Maintenance
Services as permitted herein, (ii) partner with third parties with respect to
the same, or (iii) receive revenues from transactions that are enabled by the LA
Software ("Expanded Activities"), Reseller shall notify LA in writing, and LA
agrees to negotiate in good faith with Reseller regarding the expansion of
Reseller's appointment hereunder to include such Expanded Activities, provided,
however, that LA reserves the right not to negotiate or agree to any proposed
Expanded Activities if LA, in its sole business discretion, concludes that such
proposed Expanded Activities would materially affect the core reseller operation
of Reseller or LA's Trademarks in an adverse manner. LA shall have no liability
to Reseller hereunder whatsoever in the event LA fails to enter into or
negotiate any such agreement for Expanded Activities with Reseller. In addition,
Reseller acknowledges that this Agreement is subject to termination by LA
pursuant to Section 15 in the event that Reseller engages in any such
operational activities without the prior written consent of LA. To the extent
that LA may provide assistance to Reseller in establishing relationships with
entities engaged in these Extended Activities businesses, LA agrees, in good
faith to do so; provided, however, that LA shall not be obligated to take any
action pursuant to this provision that would be inconsistent with it's
obligations under any agreement it is a party to or that would, in LA's sole
determination, have a negative impact on it's business, in any way.
7. ADDITIONAL LICENSE RESTRICTIONS
-------------------------------
a. Territorial and Other Resale Restrictions. All End-Users
-----------------------------------------
shall have a ship-to address within the Licensed Territory and the End-User
License Agreement shall limit use of the LA Software to within the Licensed
Territory. The Reseller's marketing rights are expressly limited to the
marketing of the LA Software under approved LA Trademarks pursuant to Section 8
below. The Reseller's distribution license is limited to distribution of
Software Copies in tangible packaged goods media, in the format(s) specified by
LA, which may include without limitation CD-ROM or diskette, and no right or
license is granted to distribute Software Copies via the Internet or any wide
area network (WAN) or otherwise in electronic media, except as stated in the
following two sentences. Reseller may permit downloading of the player software
products identified in Exhibit A from its own Web site, from the Web site of any
Dealer-Reseller, and from any other Web sites as may be approved by LA. Reseller
may distribute and permit the distribution by Dealer-Resellers of the server
software products identified in Exhibit A by FTP (file transfer protocol) to
End-Users with a billing address in the Licensed Territory who certify that they
reside in the Licensed Territory. In addition, the Reseller may not distribute
the LA Software on a bundled or value-added basis, or through original equipment
manufacturers without the prior written consent of LA. The Reseller shall pursue
aggressive sales policies and procedures to realize the maximum sales potential
for the Software Copies in the Licensed Territory. The Reseller shall not
advertise, market, distribute, sell, or ship the Software Copies outside the
Licensed Territory. The Reseller shall not sell or distribute, or permit the
sale or distribution by any party, of the LA Software in any scheme being a
lottery, as premiums, give-aways, close-outs, or discounts, as bundled
merchandise, or in conjunction with any co-branded or other marketing
arrangement not approved by LA, or for any other purposes not expressly
contemplated and permitted by this Agreement.
-5-
<PAGE>
b. General Restrictions. Except to the extent permitted in Section
--------------------
9(a) below with respect to Localized Versions, the Software Copies may not be
modified, translated or otherwise altered by the Reseller. The Reseller agrees
that it will not itself, or through any Subsidiary, affiliate or other third
party: (i) rent, lease, timeshare, or encumber the LA Software; (ii) attempt to
decompile, disassemble or reverse engineer the LA Software in whole or in part,
or otherwise attempt to derive the source code of the LA Software, or take any
other action in derogation of LA's or its suppliers' intellectual property
rights; (iii) market, distribute, sell, develop or cause to be developed any
derivative software or any other software program based upon or competitive with
the LA Software or any LA Trade Secrets or Confidential Information of LA; or
(iv) alter, encode, copy or transmit any audio or other information using the LA
Software without obtaining all necessary copyright and other permissions, and
Reseller will at its expense compensate and indemnify LA and its officers,
directors, and employees against all liabilities, damages, claims, fines and
expenses arising out of any claim that Reseller has not obtained such
permissions.
c. Golden Master and Duplication Requirements. Upon receipt of the
------------------------------------------
advance payment set forth in Section 11(b) below, LA shall deliver to Reseller,
one object code (machine-readable) golden master copy of the LA Software, along
with one (1) copy of the Documentation. Upon completion of any Localized
Versions, LA shall likewise deliver a golden master copy thereof to Reseller.
Reproduction of Software Copies by Reseller shall be solely for the purposes of
reselling such Software Copies pursuant to the terms of this Agreement, and
shall be subject to accounting and payment of the applicable Purchase Price for
all such Software Copies pursuant to Section 11 below. All Software Copies shall
be subject to LA's quality control and related requirements set forth in Section
7(d) below. The Software Copies may not be modified, translated or otherwise
altered by Reseller, and on each Software Copy the Reseller shall reproduce
without alteration, distortion or obfuscation all proprietary, confidential,
copyright or other notices of a similar nature that appear on or in the LA
Software in the same form and location as they appear in the original.
d. Quality Control. Reseller will perform duplication, labeling,
---------------
packaging and all related activities that may be required by LA to prepare the
Software Copies for resale to End-Users. All such activities shall be performed
in accordance with LA's quality standards, as communicated to Reseller from time
to time, it being understood that in order to maintain the value and goodwill
associated with LA's Trademarks, all aspects of the Software Copies in finished
goods form will be subject to the approval of LA. LA will have the right to
monitor all aspects of the foregoing activities, and upon request at any time,
Reseller will provide LA with access to its manufacturing facilities, warehouse
and other facilities in order to perform quality control. Inventory levels of
Software Copies maintained by Reseller shall be subject to the review and
approval of LA. All subcontractors that may be used by Reseller hereunder shall
be subject to the prior written approval of LA. Reseller shall bear all costs
and expenses in connection with its obligations hereunder, except for those
costs and expenses incurred by LA in connection with its monitoring activities,
including without limitation, LA's traveling and lodging expenses.
e. Reservation of Rights. All rights not expressly granted hereunder
---------------------
are reserved by LA. This Agreement does not authorize or imply any rights other
than as expressly set forth herein. Without limiting the foregoing, LA reserves
the right under all of its intellectual property rights to make, have made,
develop, market, license, sell and distribute within the Licensed Territory any
-6-
<PAGE>
software products other than the LA Software licensed for resale hereunder, to
distribute the LA Software in the Licensed Territory on a bundled or original
equipment manufacturer basis, and to distribute the LA Software in the Licensed
Territory via the Internet or any wide area network (WAN) or otherwise in
electronic media; provided that LA will not grant a license to any third party
to distribute the Localized Versions in the Licensed Territory via the Internet.
Subject to the foregoing, LA will report to Reseller the contact information for
any potential End-User customer located within the Licensed Territory that
contacts LA directly in regard to the purchase of Software Copies.
f. Ownership. LA retains ownership of the LA Software and all right,
---------
title and interest therein. The Reseller acknowledges and agrees that it is
acquiring only a limited right to resell certain Software Copies of the LA
Software hereunder. All patents, copyrights, trade secrets and other
intellectual property rights in and to the LA Software shall remain the
exclusive property of LA or its suppliers.
8. TRADEMARKS AND TRADE NAMES.
--------------------------
a. Right to Use. During the term of this Agreement, the Reseller
------------
shall have the right and shall be required to indicate to the public within the
Licensed Territory that it is an authorized reseller of the LA Software and that
it operates its business under the name "Liquid Audio Korea," and shall have the
right and shall be required to market and advertise the LA Software under the
"Liquid Audio" trade name, and any other trademarks, marks, trade names, domain
names, and Uniform Resource Locators (URLs) that LA may approve for use in
connection therewith in the Licensed Territory (collectively, "LA's
Trademarks"). All rights to use LA's Trademarks are granted solely to the extent
such trade names are legally protectible in the Licensed Territory.
Notwithstanding the foregoing and except for Reseller's use in conjunction with
the LMN-K, any use of LA's Trademarks on Web sites or other postings on the
Internet or in other electronic transmissions via computer networks shall be
subject to the prior written approval of LA. The Reseller shall not use LA's
Trademarks, or any other copyright, trademark, logo or other right of LA in any
manner contrary to public morals, in any manner which is deceptive or
misleading, which is derogatory to LA's Trademarks, or which compromises or
reflects unfavorably upon the goodwill, good name, reputation or image of LA or
LA's Trademarks, or which might jeopardize or limit LA's proprietary interest in
LA's Trademarks. Any such misuse will give rise to LA's rights for immediate
termination of this Agreement. Nothing herein shall grant to the Reseller any
right, title or interest in LA's Trademarks. All uses of LA's Trademarks
hereunder by the Reseller shall inure solely to the benefit of LA. At no time
during or after the term of this Agreement shall the Reseller challenge or
assist others to challenge LA's Trademarks or the registration thereof or
attempt to register any trademarks, marks, trade names, domain names, Uniform
Resource Locators (URLs), or like designations that are confusingly similar to
those of LA.
b. Approval of Representations. All representations of LA's
---------------------------
Trademarks that the Reseller intends to use shall first be submitted to LA for
approval in writing (which shall not be unreasonably withheld) of design, color,
and other details or shall be exact copies of those used by LA. The Reseller
shall not use any of LA's Trademarks in conjunction with another trademark on or
in relation to any other software without LA's prior written approval. All uses
shall be subject to approval by LA to ensure that the LA's Trademarks are not
used by the Reseller in a manner that is
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unintended by LA, and notwithstanding any approval by LA, the Reseller is
responsible for the contents of such advertising and compliance with all laws
and regulations within the Licensed Territory relating thereto.
c. Registered User Agreements. LA and the Reseller shall enter into
--------------------------
registered user agreements with respect to LA's Trademarks to the extent now or
hereafter required, if at all, by applicable trademark law requirements in the
Licensed Territory. The Reseller shall be responsible for proper filing of the
registered user agreements, if any, with government authorities within the
Licensed Territory and shall pay all costs or fees associated with such filings.
d. Infringement Actions. Reseller shall cooperate with LA in all
--------------------
respects at LA's reasonable request in connection with any action or proceeding
prosecuted by LA involving LA's Trademarks or other intellectual property
rights. Reseller shall promptly notify LA of any such infringements or any acts
of unfair competition by third parties that come to Reseller's attention. LA
shall have the exclusive right, exercisable at its discretion, to institute in
its own name and/or Reseller's name and to control, all actions against third
parties relating to LA's Trademarks, and other intellectual property rights, at
LA's expense. With respect to any such actions, LA shall employ counsel of its
own choice to direct the handling of the litigation and any settlement thereof.
LA shall be entitled to receive and retain all amounts awarded, if any, as
damages profits or otherwise in connection with such suits handled by LA.
Reseller shall not, without LA's prior written consent, institute any suit or
take any action on account of such infringements, acts of unfair competition or
unauthorized uses. LA's consent shall not be unreasonably withheld with respect
to any infringement of rights licensed on an exclusive basis hereunder, and LA's
consent may be withheld in its sole discretion with respect to any infringement
of rights licensed on a non-exclusive basis hereunder. LA shall endeavor to
provide Reseller with notice of its consent or lack thereof on an expedited
basis in the event of an emergency that requires Reseller to seek immediate
relief in order to prevent further infringement of rights licensed on an
exclusive basis hereunder. If, with LA's consent, Reseller institutes, at its
sole cost and expense, such a suit or action, the handling of the litigation and
any settlement thereof shall remain subject to LA's approval, which shall not be
unreasonably withheld. Reseller shall be entitled to recover all reasonable
costs and expenses incurred in any such suit or action handled by Reseller from
any financial recovery awarded or obtained, and the remainder shall be divided
equally between LA and Reseller. LA shall incur no liability to Reseller by
reason of LA's failure or refusal to prosecute or by LA's refusal to permit
Reseller to prosecute, any alleged infringement by third parties, nor by reason
of any settlement to which LA may agree.
9. LOCALIZED VERSIONS AND MAINTENANCE SERVICES.
-------------------------------------------
a. Localized Versions. LA will cooperate with Reseller to develop
------------------
Localized Versions pursuant to the terms of this Section 9(a) and Section 9(b);
provided that all matters relating to the Localized Versions shall remain
subject to the final approval and control of LA. LA will prepare a schedule of
the processes to be accomplished in creating the Localized Versions and will
allow Reseller to participate in the development of the Localized Versions where
this participation is acceptable to LA in its sole discretion. In the event that
the Reseller desires the development of a Localized Version, the Reseller will
submit a localization request to LA that contains a detailed description of the
desired localization, and LA shall evaluate the request and
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determine whether the requested localization meets the criteria for a Localized
Version as set forth in Section 1(k) above. If LA reasonably determines that the
requested localization meets the requirements set forth in Section 1(k) above,
LA will cooperate with Reseller to develop the requested localization, which
cooperation may include without limitation (i) using reasonable commercial
efforts to perform any source code modifications that LA determines are
necessary for the Localized Version, (ii) providing any application programming
interfaces that LA determines are necessary for Reseller to complete the
Localized Version, and (iii) providing any other reasonable assistance that LA
determines is necessary for Reseller to complete the Localized Version. LA shall
have no liability to the Reseller in the event that completion of any Localized
Version is delayed for any reason or abandoned due to technical difficulties
after a reasonable level of sustained diligent efforts by LA's personnel. LA's
obligations hereunder with respect to Localized Versions shall continue during
the License Term so long as Reseller's right to resell the LA Software under
Section 3 is exclusive within the Licensed Territory. The Reseller shall bear
all costs associated with on-going production. On-going production costs include
without limitation the cost of creation and production of any physical media or
materials that are distributed as part of the Localized Versions, including
without limitation, manuals, diskettes, labels and boxes required for the
Software Copies in finished goods form pursuant to Section 7(c) above. In the
event that the Reseller prepares any Korean-language translations or interface
modification designs necessary for such localization, the Reseller will be
solely responsible for, and shall ensure the accuracy and correctness, of all
such Korean-language translations and interface modification designs provided by
the Reseller. The scope of the initial Localized Version to be developed
hereunder is set forth in Exhibit D.
b. Updates and Maintenance Services. LA will deliver to the Reseller
--------------------------------
any Updates to the LA Software on a periodic basis consistent with LA's general
release practices to its customers. Updates may be resold by Reseller as stand-
alone Updates or as part of Maintenance Services. The Reseller will be
responsible for all front-line maintenance and support for the LA Software for
all End-User customers that purchase Maintenance Services from Reseller, and
Reseller will ensure a minimum level of support to End-Users consistent with
LA's then-current maintenance services agreement, and the goodwill and
reputation associated with LA's Trademarks. LA shall provide Reseller with
reasonable training and localization with respect to any major Update (i.e.
version 3.0 or 4.0), within three months of such major Update if reasonably
practicable, but LA shall have no obligation to provide such assistance with any
minor Update (i.e. version 3.1 or 4.1), beta release or other Update.
c. Ownership Rights. All Updates and Localized Versions are included
----------------
in the LA Software licensed to the Reseller hereunder, and LA will own all
right, title and interest in and to the Localized Versions and Updates, all
specifications, designs, inventions, and all related work product in all stages
of development ("Work Product"), including without limitation all translations,
interfaces and other contributions by the Reseller hereunder, and all copyrights
and other intellectual property rights therein and thereto. The Reseller hereby
forever and irrevocably assigns and transfers to LA all right, title and
interest in and to the Work Product, including without limitation, all
copyrights, patents, trade secrets and other intellectual property rights
therein and thereto, and LA shall have the exclusive right to file patents and
other intellectual property registrations with respect thereto. All Updates and
Localized Versions are provided on an AS-IS basis. LA cannot guarantee that
program error reported by the Reseller relating to the LA Software will be
corrected.
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d. Cooperation by the Reseller. In order to facilitate prompt and
---------------------------
efficient completion of any Localized Versions hereunder, the Reseller and its
personnel are required to cooperate fully with LA and its personnel in all
respects, including without limitation providing information as to customer
requirements, and providing access to (i) all necessary information relating to
any localization request as requested by LA, (ii) Reseller's software systems
and facilities; and (iii) officers and other personnel of the Reseller.
10. ADDITIONAL OBLIGATIONS OF THE RESELLER.
--------------------------------------
a. Reseller Reports. The Reseller agrees to provide LA with a
----------------
quarterly resale and inventory report for itself and for each Dealer-Reseller,
showing, at a minimum, the number of Software Copies of the LA Software
duplicated and/or distributed during each calendar quarter, and the End-Users'
names and addresses, and the quarter-end inventory position on hand. This report
must be forwarded to LA within forty-five (45) days after the close of each
calendar quarter.
b. Promotional Activities. The parties shall mutually agree on
----------------------
promotional activities that Reseller will perform to assist LA in developing its
brand identity in the Licensed Territory. At minimum, the Reseller shall, at its
own expense, within the Licensed Territory, actively promote the distribution of
the LA Software, including advertising in trade and other appropriate
publications, and participating in appropriate trade shows, seminars, and joint
marketing programs with applicable marketing partners as may be designated or
approved by LA.
c. Finances and Personnel. The Reseller shall maintain a net worth
----------------------
and working capital sufficient, in Reseller's reasonable judgment, to enable the
Reseller to use its best efforts to perform fully and faithfully its obligations
under this Agreement. The Reseller shall devote sufficient financial resources
and technically qualified sales and service personnel to the LA Software to
fulfill its responsibilities under this Agreement, including without limitation
its Minimum Annual Payment Obligations set forth in Section 11(c) below.
d. Customer Relations. The Reseller shall, at its own expense (i)
------------------
provide adequate contact with existing and potential End-User customers within
the Licensed Territory on a regular basis, consistent with good business
practice; (ii) assist LA in assessing customer requirements for the LA Software,
including modifications and improvements thereto, in terms of quality, design,
functional capability, and other features; (iii) submit market research
information, as reasonably requested by LA, regarding customer feedback,
competition and changes in the market within the Licensed Territory; and (iv)
promote the use of the LA Software in the major recording industry corporate
accounts market segments; and develop and serve major recording industry
corporate accounts.
e. Standard of Business Practices. The Reseller shall establish and
------------------------------
maintain, and shall cause its Dealer-Resellers, employees, consultants and
agents to establish and maintain a high standard of ethical business practices
in connection with its appointment to resell the LA Software hereunder in the
Licensed Territory, including, without limitation, full compliance with Sections
16(o) and (p) below. The Reseller shall comply with all laws and regulations
relating or pertaining to the distribution, sale, advertising or use of the LA
Software in the Licensed Territory, and shall
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comply with the regulations and directives of any regulatory agencies which
shall have jurisdiction over the LA Software.
f. Representations of Reseller. The Reseller represents and warrants
---------------------------
on a continuous basis that it is a corporation duly organized and validly
existing under the laws of the country of organization first set forth above; it
has full right, power and authority to enter into this Agreement and to perform
all of its obligation hereunder; its execution, delivery and performance of this
Agreement have been duly and properly authorized by all necessary actions and
this Agreement constitutes its valid and binding obligation, enforceable against
it in accordance with its terms; and its execution, delivery and performance of
this Agreement will not, with or without the giving of notice or passage of
time, or both, conflict with, or result in a default or loss of rights under,
any provision of its Articles of Incorporation, By-Laws or other organizational
documents or any other agreement to which it is a party.
g. Intellectual Property Registrations and Government Approvals. LA
------------------------------------------------------------
shall be responsible for obtaining any copyright, trademark or other
intellectual property rights protection, in LA's name, for the LA Software in
the Licensed Territory. The Reseller shall promptly notify LA in writing of, and
shall be responsible for obtaining, any necessary government approvals that may
be required with respect to this Agreement. LA shall be responsible for all fees
or expenses incurred in connection with such intellectual property registrations
or filings other than registered trademark user filings pursuant to Section 8
above, if any. The Reseller shall be responsible for all fees or expenses
incurred in connection with obtaining any necessary government approvals with
respect to this Agreement.
11. COMPENSATION TO LA
------------------
a. Payment Terms. All payments due hereunder shall be calculated,
-------------
denominated, and made in United States Dollars, and the Reseller shall be solely
responsible for all costs of any currency conversion to United States Dollars,
and such costs shall not reduce the amounts due to LA hereunder. All payments
required hereunder shall be made by wire transfer to the account of LA, or in
accordance with such other instructions as LA may from time to time provide to
the Reseller. All payments hereunder shall be made without set-off of any amount
whatsoever, whether based upon any claimed debt or liability of LA to the
Reseller. Any past due amounts shall bear interest at the lesser of 1.5 percent
(1.5%) per month or the maximum rate permitted by applicable law. To secure
payments hereunder, LA hereby retains and Reseller hereby grants to LA a
security interest in the LA Software inventory duplicated by Reseller and all
proceeds therefrom. Reseller agrees to promptly execute documents requested by
LA to perfect and protect such security interest. Reseller shall pay all of LA's
costs and expenses (including reasonable attorneys' fees) to enforce LA's rights
under this Subsection 11(a).
b. Initial Advance Payment. Upon execution of this Agreement,
-----------------------
Reseller shall make payment to LA in the amount of [*] which amount shall
constitute a nonrefundable payment for the Purchase Price of LA Software to be
licensed to and used by Reseller for purposes of demonstrating for resale the LA
Software and for enabling the LMN-K.
* Certain information in this Exhibit has been omitted and filed seperately
with the Commission. Confidential treatment has been requested with respect
to the omitted portions.
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<PAGE>
c. Minimum Annual Payment Obligations. The Reseller shall, during
----------------------------------
the License Term, either: (i) have net revenues (as determined in accordance
with U.S. Generally Accepted Accounting Principles) during each Annual Period
greater than or equal to the amounts as set forth in column A of Exhibit B
hereto, or (ii) make payment to LA, within thirty (30) days of the end of each
Annual Period, in an amount equal to the amount set forth in column B of Exhibit
B hereto, less the payments made to LA with respect to the resale of Software
Copies during such Annual Period (such payment in this section 11(c)(ii)
hereafter the "Minimum Annual Payment Obligations"). As used herein, "Annual
Period" means the twelve (12) month period following the commencement of the
License Term, and each subsequent twelve-month period thereafter. Revenues in
any given Annual Period that are in excess of the required annual minimum may
not be carried backward or forward to meet the required annual minimums for any
other Annual Period. LA and Reseller shall, not less than annually during the
License Term, meet and confer with respect to possible adjustment of the Minimum
Annual Payment Obligations for each ensuing year, taking into account prevailing
market conditions and other factors relevant thereto.
d. Taxes. In addition to the Purchase Price and other charges
-----
specified above, the Reseller shall pay directly any and all taxes, imposts,
duties or similar charges, including without limitation, sales, use, ad valorem,
value added, franchise, withholding or other taxes, duties, imposts or charges
that may be imposed by any jurisdiction in connection with any of the amounts
payable by the Reseller to LA hereunder, however designated or levied, it being
understood that the amounts payable hereunder are net amounts and may not be
reduced by any taxes, duties, imposts or other charges. If Reseller is legally
required to withhold any taxes on any payments made hereunder to LA, Reseller
shall withhold and make timely payment of such taxes to the pertinent tax
authorities, provided that the amount of such payments are grossed up to ensure
that LA will receive the full amount payable hereunder. The Reseller shall
indemnify and hold LA forever harmless from all such taxes, customs, duties,
levies, impost or any other charges now or hereafter imposed, including, without
limitation any penalties, interest or other assessments that may be incurred due
to failure, delay or errors by the Reseller in reporting or payment thereof.
e. Statements. With respect to all Software Copies duplicated by or
----------
for the Reseller pursuant to Sections 3 and 7 above, within forty-five (45) days
after the end of each quarterly period during the License Term (commencing with
the first quarter-end during the first Annual Period), the Reseller shall
deliver to LA a written statement setting forth an itemized report for the
preceding quarterly period, together with full payment of the Purchase Price for
all Software Copies resold during such period. Each statement shall contain
information on the number and type of Software Copies duplicated by Reseller,
the number and type of such Software Copies held in inventory, and the number
and type resold by Reseller during the applicable period, names and other
information collected by Reseller from End-Users of such Software Copies, along
with such supporting or additional information as LA may from time to time
reasonably request. Acceptance of payment by LA shall not preclude LA from
questioning the correctness of any statement at any time. In addition to the
foregoing, with respect to any of the LA Software for which LA makes a practice
of issuing certificates to End-Users, Reseller shall provide LA with written
notice of the resale of any Software Copies thereof, along with End-User names
and related information, within five (5) business days after completion of the
applicable sale to the End-User.
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f. Accounting and Audit Rights. The Reseller shall keep and maintain
---------------------------
full and accurate books of account and records covering all Software Copies
duplicated by Reseller pursuant to Sections 3 and 7 above. LA or its designees
shall be entitled, at its expense, to audit and inspect such books and records
on a quarterly basis during or after the License Term at any time during
reasonable business hours, and make copies and summaries of such books and
records. All such books of account and records shall be retained by the Reseller
for a minimum of five (5) years after expiration or termination of this
Agreement. If LA or its duly authorized representative discovers a deficiency in
the payments to LA pursuant to any statement in the period under audit (an
"Audit Deficiency"), the Reseller shall promptly pay such Audit Deficiency to LA
and, if such Audit Deficiency is three percent (3%) or more of the payments made
to LA pursuant to any statement in such audit period, the Reseller shall
promptly pay all costs and expenses incurred by LA in connection with such
audit. If such Audit Deficiency is twenty percent (20%) or more of the amounts
paid to LA pursuant to any statement in the period under audit, then in addition
to the above, LA may, at its sole option, immediately terminate the Agreement
upon written notice to the Reseller, even if the Reseller tenders the Audit
Deficiency and associated costs and expenses to LA.
12. LIMITED WARRANTY.
----------------
a. Standard Limited Warranty to End Users. Reseller shall pass on to
end users LA's standard limited warranty and other terms contained in the
applicable End User License Agreement for each Software Copy.
b. No Other Warranty. EXCEPT FOR LA'S STANDARD LIMITED WARRANTY TO
-----------------
END USERS, LA GRANTS NO OTHER WARRANTIES OR CONDITIONS, EXPRESS OR IMPLIED, BY
STATUTE OR OTHERWISE, REGARDING THE LA SOFTWARE, THEIR FITNESS FOR ANY PURPOSE,
THEIR QUALITY, THEIR MERCHANTABILITY, OR OTHERWISE.
13. INDEMNIFICATION OBLIGATIONS.
---------------------------
a. Indemnification by LA. The Reseller agrees that LA has the right
---------------------
to defend, or at its option to settle, and LA agrees, at its own expense, to
defend or at its option to settle, any claim, suit or proceeding brought against
the Reseller on the issue of infringement by the LA Software of any registered
patent, copyright or trademark issued in the Licensed Territory prior to the
Effective Date of this Agreement, or, with respect to Updates and Localized
Versions, issued in the Licensed Territory prior to the date of release to
Reseller, subject to the limitations hereinafter set forth. LA shall have sole
control of any such action or settlement negotiations, and LA agrees to pay,
subject to the limitations hereinafter set forth, any final judgment entered
against the Reseller on such issue in any such suit or proceeding defended by
LA. The Reseller agrees that LA at its sole option shall be relieved of the
foregoing obligations unless the Reseller notifies LA promptly in writing of
such claim, suit or proceeding and gives LA authority to proceed as contemplated
herein, and, at LA's expense, gives LA proper and full information and
assistance to settle and/or defend any such claim, suit or proceeding.
Notwithstanding the foregoing, LA shall have no liability for, and Reseller will
indemnify and hold harmless LA from, all liability arising from: (i) the
combination or use by Reseller of the LA Software with any materials not
furnished by LA, if such claim would have been avoided by use of the LA Software
alone; (ii) the use or incorporation of any materials supplied to
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LA by Reseller; or (iii) any other action or inaction by Reseller that results
in the liability contemplated by this provision. If the LA Software, or any part
thereof, is, or in the opinion of LA may become, the subject of any claim, suit
or proceeding for infringement of any patent, copyright, or trademark or other
intellectual property right, then LA may, at its option and expense: (i) procure
for the Reseller the right to sell or use, as appropriate, the LA Software or
such part thereof; (ii) replace the LA Software, or portions thereof, with other
suitable LA Software or portions thereof; (iii) suitably modify the LA Software,
or portions thereof; or (iv) if none of the foregoing is commercially feasible
in relation to LA's global business interests, terminate this Agreement and the
Reseller's license to the LA Software. LA shall not be liable for any costs or
expenses incurred without its prior written authorization.
b. Limitation. Notwithstanding the provisions of Section 13(a)
----------
above, LA assumes no liability for (i) infringements covering any combination,
method or process in which any of the LA Software may be used but not covering
the LA Software when used alone, including without limitation any use of
software belonging to third parties, regardless of whether such software may be
necessary to the use or modification of, or compatible with, the LA Software,
(ii) infringements involving the modification or servicing of the LA Software,
or any part thereof, unless such modification or servicing was performed by LA,
(iii) failure of the Reseller to implement any Updates to the LA Software, if
the infringement would have been avoided by the use of the Update, (iv) any
trademark infringements involving any marking or branding other than LA's
Trademarks when used alone; or (v) infringements arising from uses of the LA
Software which do not comply with the uses permitted under this Agreement.
c. Entire Liability. The provisions of this Section 13 state the
----------------
entire liability and obligations of LA and the exclusive remedy of the Reseller
and its customers, with respect to any alleged infringement of patents,
copyrights, trademarks or other intellectual property rights by the LA Software
or any part thereof. The provisions of this Section 13 state the entire
liability and obligations of both parties and the exclusive remedy of both
parties with respect to any indemnification obligations, other than as set forth
in Section 16(k) below.
d. Indemnification by the Reseller. Except for LA's indemnification
-------------------------------
obligations set forth above, the Reseller will indemnify, defend and hold
harmless LA, its parents, subsidiaries, affiliates, and each of their respective
successors and permitted assigns, directors, officers, employees,
representatives, agents, consultants, and contractors in respect of any and all
losses, claims, suits, proceedings, liabilities, causes of action, damages,
costs, expenses (including reasonable attorneys' fees and expenses) arising out
of or relating to the breach or inaccuracy of, or failure to comply with, any of
the representations, warranties, covenants, agreements, terms or conditions made
by the Reseller hereunder, the use, operation or distribution of the LA Software
by the reseller or any of the Dealer-Resellers, use of any audio recordings or
other copyrighted material in connection with the LA Software, or the actions or
omissions, including negligence and other tortious conduct, of the Reseller's or
its Dealer-Resellers' employees, officers, agents or contractors.
Notwithstanding the foregoing, Reseller shall incur no liability under this
provision for action taken at the express request of or under the direction of
LA.
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14. PROPERTY RIGHTS AND CONFIDENTIALITY.
-----------------------------------
a. Property Rights. Reseller agrees that LA owns all rights, title,
---------------
and interest in the product lines that include the LA Software and in all of
LA's patents, LA Trademarks, inventions, copyrights, know-how, and trade secrets
relating to the design, manufacture, operation or service of the LA Software.
The use by Purchaser of any of these property rights is authorized only for the
purposes herein set forth, and upon termination of this Agreement for any reason
such authorization shall cease.
b. Confidential Information. "Confidential Information" means this
------------------------
Agreement and its Exhibits, any addenda hereto signed by both parties, all LA
Software, Documentation and Localized Versions, all information models, logic
diagrams, data, drawings, benchmark tests, specifications, structure, sequence,
and organization, object code and source code of or relating to the LA Software,
if disclosed to Reseller hereunder in written, electronic or verbal form,
provided that any verbal disclosure shall be confirmed in writing within thirty
(30) days, and any adaptations of the aforementioned, all knowledge and know-how
inherent to the LA Software, as well as the knowledge and know-how that is
applied to the configuration of the LA Software, and any other proprietary
information supplied to the Reseller by LA hereunder in written, electronic or
verbal form, provided that any verbal disclosure shall be confirmed in writing
within thirty (30) days. The Reseller acknowledges that LA's proprietary
interest in the Confidential Information includes LA's Trade Secrets, and
acknowledges that any use of the Confidential Information inconsistent with this
Agreement shall constitute an infringement of LA's intellectual property rights,
a misappropriation of LA's Trade Secrets, unfair competition and a breach of
this Agreement. The Reseller further acknowledges that the LA Software is
protected as an unpublished trade secret and embodies LA's copyrights and LA's
Trade Secrets.
c. Nondisclosure Obligations. The Reseller acknowledges that the
-------------------------
Confidential Information constitutes valuable trade secrets of LA and the
Reseller agrees that it shall use the Confidential Information solely in
accordance with the provisions of this Agreement and will not disclose, or
permit to be disclosed, the same, directly or indirectly, to any third party
without LA's prior written consent, except as expressly permitted by this
Agreement pursuant to the distribution of the LA Software; provided that the
End-User License Agreement contains provisions sufficiently protective of the
Confidential Information. The Reseller agrees to exercise a high standard of
care in protecting the Confidential Information from unauthorized use and
disclosure. Without limiting the foregoing, the Reseller shall adopt whatever
measures may be required to limit access to the Confidential Information to
those of its employees that are subject to non-disclosure obligations and who
require such access in order to use the LA Software in a manner consistent with
this Agreement. In addition, the Reseller assumes all responsibility and shall
indemnify LA for the fraudulent use or illegal copying or use of the
Confidential Information by its employees or related third parties. However, the
Reseller bears no responsibility or obligation hereunder with respect to any
information that is publicly available or becomes publicly available without the
fault of Reseller, already in the Reseller's possession and not subject to a
confidentiality obligation, obtained by the Reseller from third parties without
restrictions on disclosure, or required to be disclosed by order of a court or
other governmental entity after opportunity for LA to seek confidential
treatment or a protective order.
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d. Reseller Confidential Information. "Reseller Confidential
---------------------------------
Information" means valuable business and technical information which is not
publicly available and is protected by Reseller as confidential information and
which is disclosed in tangible or intangible form by Reseller to LA in
connection with this Agreement, provided that any verbal disclosure must be
confirmed in writing within thirty (30) days. The Reseller Confidential
Information shall include, without limitation, all advertising material, price
schedules and all customer, marketing, sales, financial and trading information,
relating to the LA Software or Reseller's business, provided that the foregoing
is not publicly available and is protected by Reseller as confidential
information. LA shall observe the same obligations with respect to the Reseller
Confidential Information as imposed on Reseller above with respect to LA's
Confidential Information.
15. TERM AND TERMINATION. Subject to earlier termination as set forth in
--------------------
this Agreement, this Agreement shall commence upon the Effective Date and
continue until expiration of the Initial Term, and shall be subject to automatic
extension for the Renewal Term, provided that Reseller is in compliance with its
obligations hereunder, and provided further that Reseller has met or exceeded
each of the annual revenue targets for the Initial Term, as specified in the
Business Plan of Reseller (a copy of which is attached as Exhibit E to the LAK
Shareholders Agreement), as such Business Plan may be revised from time to time
with the express written consent of LA.
a. Mutual Agreement. This Agreement may be terminated pursuant to
----------------
the mutual, written agreement of the parties.
b. Termination Due to Related Events. This Agreement shall terminate
---------------------------------
automatically if either: (i) the LAK Shareholders Agreement or (ii) that certain
Consulting Agreement entered into between Reseller and LA pursuant to the LAK
Shareholders Agreement is terminated for any reason.
c. Termination for Default. If either party defaults in the
-----------------------
performance of any material provision of this Agreement, then the non-defaulting
party may give written notice to the defaulting party that if the default is not
cured within thirty (30) days the Agreement will be terminated; provided that
the cure period shall be ten (10) days for payment obligations, and there shall
be no cure period if the nature of the default is not subject to cure. If the
non-defaulting party gives such notice and the default is not cured during the
applicable period (if any), then the Agreement shall automatically terminate at
the end of that period.
d. Termination for Insolvency. This Agreement may be terminated by
--------------------------
either party, on notice, (i) upon the institution by or against the other party
of insolvency, receivership, bankruptcy, reorganization or composition
proceedings or any other proceedings for the settlement of the other party's
debts, (ii) upon the other party's making an assignment for the benefit of
creditors, or (iii) upon the other party's dissolution, winding up or ceasing to
conduct business in the normal course.
e. Termination for Changes in Reseller's Business. This Agreement
----------------------------------------------
may be terminated by LA, upon written notice, upon the occurrence of any of the
following events, unless LA has granted its advance written approval in regard
to the applicable event: (i) upon the Reseller's making any basic change in the
general nature or scope of its business, including without
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limitation, changes to its articles of incorporation, including any increase or
reduction in authorized share capital and any changes in the rights of
outstanding shares; (ii) upon the removal of the director(s) from Reseller's
board that were nominated by LA, if any; (iii) upon the sale of any equity of
Reseller other than pursuant to the initial formation thereof pursuant to the
LAK Shareholder Agreement; (iv) upon the merger or consolidation of Reseller
with another company, or the sale of all or substantially all of the business or
assets of Reseller, or any other change of control of Reseller; (v) upon the
establishment by Reseller, SKM Limited, or any of their investors, of a business
relationship with any direct competitor of LA, including direct or indirect
participation in any entity that sells, resells or distributes any software
product or service that materially competes with the LA Software, or supplies
any music products or services; (vi) upon the investment by Reseller in any
other business or entity; (vii) upon Reseller's entering into any material
transactions not in the ordinary course of business or between Reseller and a
director or shareholder of Reseller or an affiliate of such a shareholder, other
than the LAK Shareholders Agreement; (viii) upon Reseller's engaging in, or
preparing to engage in (including without limitation negotiation with third
parties) any Expanded Activities without LA's prior written consent obtained in
each instance pursuant to Section 6 above.
f. Legal or Regulatory Prohibitions. If any law or regulation
--------------------------------
applicable to LA or the Reseller prohibits use of the LA Software by the
Reseller in the manner contemplated by this Agreement, or permits the use of the
LA Software by the Reseller in a manner not expressly licensed by this
Agreement, this Agreement may be terminated by LA by giving written notice of
termination to the Reseller, such termination to be immediately effective upon
the giving of such notice.
g. Limitation on Termination Liability. In the event of termination
-----------------------------------
by LA in accordance with any of the provisions of this Agreement, LA shall not
be liable to the Reseller, because of such termination, for compensation,
reimbursement or damages on account of the loss of prospective profits or
anticipated sales or on account of expenditures, inventory, investments, leases
or commitments in connection with the business or goodwill of the Reseller.
Termination shall not, however, relieve either party of obligations incurred
prior to the termination.
h. Return of Materials. Pursuant to Section 14(a) above, all of LA's
-------------------
Trademarks, patents, copyrights, designs, drawings, formulas, algorithms, golden
masters, translations, artwork or other data, photographs, samples, literature,
and sales aids of every kind relating to the LA Software shall be and remain the
property of LA. Within thirty (30) days after the expiration or termination of
this Agreement, Reseller shall prepare all such items in its possession for
shipment, as LA may direct, at LA's expense. Reseller shall not make or retain
any copies of any confidential items or information which may have been
entrusted to it. Upon expiration of this Agreement (but not upon any earlier
termination hereof), Reseller shall have limited sell-off rights in a manner
consistent with this Agreement for a period of forty-five (45) days with respect
to inventory on hand in an amount not greater than the immediately preceding
quarter's total unit sales amount. Effective upon the termination of this
Agreement, Reseller shall cease to use all LA Trademarks. In this regard,
immediately upon the termination of this Agreement, Reseller shall take all
steps, as instructed by LA, to de-register or to transfer to LA any user rights
LAK may have with respect tot he LA Trademarks.
-17-
<PAGE>
i. Survival of Certain Terms. The provisions of Sections 9(c)
-------------------------
(Ownership Rights), 11(d) (Taxes), 11(e) (Statements), 11(f) (Accounting and
Audit Rights), 12 (Limited Warranty), 13 (Indemnification Obligations), 14
(Property Rights and Confidentiality), 15 (Term and Termination), 16
(Miscellaneous Provisions), 17 (Limitation of Liability), along with all End-
User License Agreements for Software Copies previously distributed, shall
survive the expiration or termination of this Agreement for any reason. All
other rights and obligations of the parties shall cease upon termination of this
Agreement.
16. MISCELLANEOUS PROVISIONS.
------------------------
a. Arbitration of Disputes. Except as otherwise provided in this
-----------------------
Agreement, any dispute, controversy or claim arising out of or relating to this
Agreement or to a breach hereof, including the interpretation, performance or
termination, shall be exclusively and finally resolved by binding arbitration.
Arbitration shall be conducted by the International Chamber of Commerce (the
"ICC") which shall administer the arbitration under its then-current Rules of
Arbitration (the "Rules"). The arbitration shall be conducted by a single
arbitrator chosen in accordance with said Rules. The arbitration, including the
rendering of the award, shall take place in Tokyo, Japan and Tokyo shall be the
exclusive forum for resolving such dispute, controversy or claim. The
arbitration proceedings and all pleadings and rulings shall be conducted and
written in the English language. For the purpose of any arbitration proceeding,
this Agreement shall be governed by the governing law described in Section 16(c)
below. This arbitration agreement is intended by the parties to be self-
executing. The panel shall have sole jurisdiction to determine whether (i) a
claim is subject to arbitration, (ii) the arbitration may proceed even if one of
the parties refuses to attend or participate and (iii) an award against that
party may be ordered pursuant to default or otherwise by the panel. The parties
agree that they will arbitrate all claims agreed to be arbitrated herein
regardless of the existence of any related dispute, action or special proceeding
between any or all of the parties hereto and/or any third party. The arbitration
panel shall render a written arbitration decision with its award, and the
decision of the arbitration panel shall be final and binding upon the parties
hereto, and the parties hereby waive any right of appeal under applicable law.
Judgment upon the award rendered by the arbitration panel may be entered in any
court of competent jurisdiction. The prevailing party shall be entitled to
recover its reasonable attorneys' fees and its share of the costs including any
auditing costs or expenses of expert witnesses.
b. Injunctive Relief. In the event of actual or threatened
-----------------
breach of the provisions of Sections 3 - 7, or 8 above, the nonbreaching party
will have no adequate remedy at law and will be entitled to immediate,
injunctive or other equitable relief, without bond and without the necessity of
showing actual money damages, and notwithstanding Section 16(a) above, each
party shall have the right to institute judicial proceedings against the other
party or anyone acting by, through or under such other party in order to seek
such injunctive or other equitable relief. The prevailing party in any such
legal action for injunctive or equitable relief shall be entitled, in addition
to any other rights and remedies it may have, to reimbursement for its expenses,
including court costs and reasonable attorneys' fees. With respect to any such
legal action for injunctive or equitable relief, the State courts sitting in
Santa Clara County, California, and the Federal courts for the Northern District
of California shall have nonexclusive jurisdiction, and the parties hereby
irrevocably consent to personal jurisdiction of and venue in such courts in any
such matter and waive any objection thereto.
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<PAGE>
c. Governing Laws. The validity, construction and enforceability of
--------------
this Agreement shall be governed in all respects by the laws of the State of
California (and applicable United States federal law) applicable to agreements
negotiated, executed and performed in the State of California by California
parties, without reference to conflict of law principles. For the avoidance of
doubt, the rights and obligations of the parties under this Agreement shall not
be governed by the 1980 United Nations Convention on Contracts for the
International Sale of Goods.
d. Disclosure; Publicity. Except as specifically provided herein,
---------------------
nothing in this Agreement shall be deemed to give either party any rights to use
the other party's trademarks or trade names without the other party's specific,
written consent. LA and the Reseller shall consult with each other before
issuing any press releases or otherwise making any public statements with
respect to this Agreement and the transactions contemplated hereby. Neither LA
nor the Reseller shall issue any such press release or make any public statement
without the agreement of the other party, except as may be required by law.
e. Notices. All notices required hereunder shall be in writing and
-------
shall be made by personal delivery, or by legible facsimile or by first class,
registered or certified mail, postage prepaid, or by express courier, to LA and
to the Reseller at the address and telecopier numbers indicated below:
(1) For the Reseller:
Liquid Audio Korea Co., Ltd.
3f WonKyung Bldg. 788-16
Yoksam-Dong, Kangnam-Gu
Seoul, 135-080, Korea
Attention: ___________________
Telecopy: ____________________
(2) For LA:
Liquid Audio, Inc.
810 Winslow Street
Redwood City, California 94063
Attention: Robert Flynn
Telecopy: 650.549.2099
With a mandatory copy to:
Wilson Sonsini Goodrich & Rosati
650 Page Mill Road
Palo Alto, California 94304-1050
Attention: Hank Barry, Esq.
Telecopy: 650.493.6811
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<PAGE>
or such other address or addresses as may have been furnished in writing to LA
by the Reseller or to the Reseller by LA. Any notice or other communication
required to be given hereunder shall have been duly given five (5) business days
after posting when enclosed in a properly sealed envelope addressed as
aforesaid, registered or certified, and deposited postage prepaid, or if by
legible facsimile, when received or, if by express courier or in person, when
received.
f. Severability. Whenever possible, each provision of this Agreement
------------
shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision or portion of any provision of this
Agreement should be invalid under applicable law, such provision or portion of
such provision shall be ineffective to the extent of such invalidity, without
invalidating the remainder of such provision or remaining provisions of this
Agreement.
g. Waiver. A provision of this Agreement may be waived only by a
------
written instrument executed by the party entitled to the benefit of such
provision. The failure of any party at any time to require performance of any
provision of this Agreement shall in no manner affect such party's right at a
later time to enforce the same. A waiver of any breach of any provision of this
Agreement shall not be construed as a continuing waiver of other breaches of the
same or other provisions of this Agreement.
h. Further Assurances. The parties shall each perform such acts,
------------------
execute and deliver such instruments and documents, and do all such other things
as may be reasonably necessary to accomplish the transactions contemplated by
this Agreement. In the event that the Reseller fails to promptly execute any
documents reasonably necessary to confirm, set or record LA's rights to the LA
Software, Updates, Localized Versions or any other Work Product owned by LA
hereunder, the Reseller hereby appoints LA as its attorney-in-fact for the
purpose of executing such documents, which appointment shall be deemed a power
coupled with an interest and shall be irrevocable.
i. Subject Headings; Counterparts. The subject headings of the
------------------------------
sections of this Agreement are included for the purposes of convenience only,
and shall not affect the construction or interpretation of any of its
provisions. This Agreement may be executed in counterparts. Each executed
counterpart may be delivered to the other party by facsimile and copies bearing
the facsimile signature of a party will constitute a valid and binding execution
and delivery of this Agreement.
j. Entire Agreement. This Agreement, including the Exhibits attached
----------------
hereto, constitutes the entire agreement of the parties with respect to the
subject matter hereof and supersedes all prior agreements, communications and
understandings between them with respect thereto. No modification of this
Agreement shall be effective without the mutual written agreement of both
parties. No terms or conditions of any purchase order, acknowledgment or other
business form that the Reseller may use in connection with the acquisition or
licensing of the LA Software will have any effect on the rights and obligations
of the parties hereunder, or otherwise modify this Agreement, regardless of any
failure by LA to object to such terms or conditions.
k. Independent Contractors. The relationship of LA and the Reseller
-----------------------
established by this Agreement is that of independent contractors, and nothing
contained in this Agreement shall be construed to (i) give either party the
power to direct and control the day-to-day activities of the
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<PAGE>
other, (ii) constitute the parties as partners, co-owners or otherwise as
participants in a joint or common undertaking, or (iii) allow the Reseller to
create or assume any obligation on behalf of LA for any purpose whatsoever. All
financial obligations associated with the Reseller's business are the sole
responsibility of the Reseller. All sales and other agreements between the
Reseller and its customers are the Reseller's exclusive responsibility and shall
have no effect on the Reseller's obligations under this Agreement. The Reseller
shall be solely responsible for, and shall indemnify and hold LA free and
harmless from, any and all claims, damages or lawsuits (including LA's
reasonable attorneys' fees) arising out of the negligence or other tortious
conduct of the Reseller, its employees or its agents in performing Reseller's
obligations or exercising Reseller's rights under this Agreement. LA shall
indemnify and hold Reseller free and harmless from any and all claims, damages
or lawsuits (including Reseller's reasonable attorneys' fees) arising out of the
negligence or other tortious conduct of LA's employees or agents in performing
LA's obligations under this Agreement.
l. Nonassignability and Binding Effect. A mutually agreed
-----------------------------------
consideration for LA's entering into this Agreement is the reputation, business
standing, and goodwill honored and enjoyed by the Reseller under its present
ownership, and, accordingly, the Reseller agrees that its license and other
rights and obligations under this Agreement may not be transferred or assigned
directly or indirectly, whether by operation of law or otherwise, without the
prior written consent of LA, and any purported transfer or assignment without
such consent shall be void ab initio. Subject to the foregoing sentence, this
---------
Agreement shall be binding upon and inure to the benefit of the parties hereto,
their successors and assigns.
m. Force Majeure. Except for payment obligations hereunder,
-------------
neither party shall incur liability to the other party due to any delay or
failure in performance hereunder caused by reason of any occurrence or
contingency beyond its reasonable control, including but not limited to failure
of suppliers, strikes, lockouts or other labor disputes, riots, acts of war or
civil unrest, earthquake, fire, the elements or acts of God, novelty of product
manufacture, unanticipated product development problems, or governmental
restrictions or other legal requirements; provided, that such party notifies the
other party in writing immediately upon commencement of such event and makes
diligent efforts to resume performance immediately upon cessation of such event.
In the event such events continue for a period of one hundred eighty (180) days
in the aggregate, the other party shall have the right to terminate this
Agreement upon written notice to such party.
n. Language. This Agreement is in the English language only,
--------
which language shall be controlling in all respects, and all versions hereof in
any other language shall not be binding on the parties hereto. All
communications and notices to be made or given pursuant to this Agreement shall
be in the English language.
o. Compliance with Laws. The Reseller shall, at its own expense,
--------------------
pay all import licenses and permits, pay customs charges and duty fees, and take
all other actions required to accomplish the import and use of the LA Software
in the Licensed Territory. The Reseller shall ensure compliance with any
applicable laws relating to its activities under the terms of this Agreement,
and Reseller hereby represents and warrants that no consent, approval or
authorization, or designation, declaration or filing with any governmental
authority in the Licensed Territory is required in connection with the valid
execution, delivery and performance of this Agreement.
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<PAGE>
p. Government Regulations. The Reseller acknowledges that LA may
----------------------
be subject to regulation by various government agencies having jurisdiction,
which may prohibit use, export, re-export or diversion of certain products,
technical data, or other technology in or to the Licensed Territory. Any and all
obligations of LA to provide the LA Software, Documentation, or any media in
which any of the foregoing is contained, as well as any other technical
assistance shall be subject in all respects to such applicable laws and
regulations as shall from time to time govern the license and delivery of
technology and products. The Reseller agrees to cooperate with LA, including,
without limitation, providing required documentation, in order to obtain any
necessary export licenses or exemptions therefrom. The Reseller warrants that it
will use its reasonable efforts to comply with all such applicable laws and
regulations governing use, exportation and reexportation in effect from time to
time. In addition, LAK will not trade with North Korea in contravention of any
applicable U.S. laws or regulations. Breach of this obligation will be deemed a
material breach by LAK.
17. LIMITATION OF LIABILITY.
-----------------------
EXCEPT FOR INDEMNIFICATION OBLIGATIONS UNDER SECTION 14 ABOVE, IN NO EVENT
SHALL LA'S AGGREGATE LIABILITY HEREUNDER EXCEED THE TOTAL AMOUNTS PAID BY THE
RESELLER HEREUNDER DURING THE ANNUAL PERIOD(S) IN WHICH SUCH CLAIM(S) AROSE. IN
NO EVENT SHALL LA BE LIABLE TO THE RESELLER OR ANY OTHER ENTITY FOR ANY SPECIAL,
CONSEQUENTIAL, INCIDENTAL, INDIRECT OR RELIANCE DAMAGES, HOWEVER CAUSED, WHETHER
FOR BREACH OF CONTRACT, NEGLIGENCE OR UNDER ANY OTHER LEGAL THEORY, WHETHER
FORESEEABLE OR NOT AND WHETHER OR NOT LA HAS BEEN ADVISED OF THE POSSIBILITY OF
SUCH DAMAGES, AND NOTWITHSTANDING THE FAILURE OF ESSENTIAL PURPOSE OF ANY
LIMITED REMEDY. IN NO EVENT SHALL LA BE LIABLE FOR LOST DATA, LOST PROFITS,
BUSINESS INTERRUPTION, FAILURE OF THE SOFTWARE, OR COSTS OF PROCUREMENT OF
SUBSTITUTE GOODS BY ANYONE. THE RESELLER AGREES THAT THESE LIMITATIONS OF
LIABILITY ARE AGREED ALLOCATIONS OF RISK AND ARE REFLECTED IN THE ROYALTIES AND
FEES AGREED UPON BY THE PARTIES.
-22-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed by their respective officers thereunto duly authorized.
LIQUID AUDIO, INC. LIQUID AUDIO KOREA, INC.
By: /s/ Robert Flynn By: /s/ Kyu Hwa Lee
------------------------- ------------------------
(Signature) (Signature)
Name: Robert Flynn Name: Kyu Hwa Lee
------------------------ ------------------------
(Print or Type) (Print or Type)
Title: VP BUSINESS MANAGEMENT Title: President
----------------------- ----------------------
<PAGE>
EXHIBIT A
LA SOFTWARE
All current Liquid Audio client, server and content creation software that
Liquid Audio itself has the right to license.
-24-
<PAGE>
EXHIBIT B
MINIMUM ANNUAL PAYMENT OBLIGATIONS
Column A Column B
-------- --------
net rev. software copies
[*] [*]
[*] [*]
[*] [*]
[*] [*]
[*] [*]
* Certain information in this Exhibit has been omitted and filed seperately
with the Commission. Confidential treatment has been requested with respect
to the omitted portions.
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<PAGE>
INITIAL CAPITAL INVESTMENT REQUIREMENTS: LAK
Korean Won US Dollars
[*] [*] [*]
* Certain information in this Exhibit has been omitted and filed seperately
with the Commission. Confidential treatment has been requested with respect
to the omitted portions.
<PAGE>
EXHIBIT C
AUTHORIZED DEALER-RESELLERS
-26-
<PAGE>
EXHIBIT D
SCOPE OF INITIAL LOCALIZED VERSION
The Initial Localized Software shall consist of the interface to the Liquid
Audio client software application.
-27-
<PAGE>
EXHIBIT F
SCOPE OF ADDITIONAL LA SERVICES
Pursuant to Section 10 of this Agreement, LA may:
* Provide LAK with technical insight and dialogue on product development.
* Control localization of software products.
* Provide assistance in development of operations that enable LAK activities,
e.g. mass encoding projects.
* Provide assistance in design of hardware/network configuration for
retail/kiosk operation ("LTMC-K").
* Provide assistance in design and execution of the Liquid Music Network -
Korea ("LMN-K").
* Provide assistance in locating global sponsors/advertisers for the LMN-K.
* Provide assistance in accessing non-Korean content for inclusion in the
LMN-K.
* Assist LAK in relationships with Korean operations of major multinational
entertainment companies.
* Provide assistance in the creation of sales materials appropriate for the
Korean marketplace.
* Provide technical support.
* Conduct discussions with multinational OEM's for the bundling of the Korean
version of the free Liquid MusicPlayer with their product sold in Korea.
* Integration of Korean rights reporting societies in the global Liquid Audio
copyright management solution.
* Assistance in discussions and education of the Korean rights reporting
societies.
* Establish and oversee the operations of the local Liquid Operations Center.
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<PAGE>
EXHIBIT 10.36
CONSULTING AGREEMENT
THIS CONSULTING AGREEMENT (the "Agreement") is made an entered into as of
the 31st day of December, 1998 (the "Effective Date"), by and between Liquid
Audio, Inc., a corporation duly incorporated and existing under the laws of the
State of California, U.S.A. with its principal place of business at 810 Winslow
Street, Redwood City, California 94063 U.S.A. ("Liquid Audio") and Liquid Audio
Korea Co., Ltd., a corporation duly incorporated and existing under the laws of
the Republic of Korea with its principal place of business at 3f, WonKyung Bldg.
788-16, Yoksam-Dong, Kangnam-Gu, Seoul, 135-080 Korea ("LAK").
WITNESSETH
----------
WHEREAS, Liquid Audio and SKM Limited, a corporation duly incorporated and
existing under the law of the Republic of Korea ("SKM") have established LAK to
promote certain audio software and related technology of Liquid Audio in the
Republic of Korea, and, to the extent later permitted, in the Democratic
Republic of Korea;
WHEREAS, LAK desires to obtain the benefit of consulting and advisory
services from Liquid Audio, with a focus on the implementation and use of Liquid
Audio's technology; and
WHEREAS, Liquid Audio is willing to render such consulting and advisory
services to LAK; and
WHEREAS, the execution of this Agreement is required under the terms of
that certain Shareholders Agreement (the "Shareholders Agreement") between LAK,
SKM and Liquid Audio, and is necessary to induce SKM and Liquid Audio to
participate in LAK.
NOW THEREFORE, in consideration of the promises and the mutual covenants
and agreements set forth below, it is agreed as follows:
ARTICLE 1. APPOINTMENT
-----------
Subject to the terms and conditions hereinafter set forth, LAK hereby
appoints Liquid Audio as its consultant to provide consulting and advisory
services as described in Article 2 hereunder during the term of this Agreement
as set forth in Article 4 hereof, and Liquid Audio hereby accepts such
appointment.
ARTICLE 2. SCOPE OF SERVICES
-----------------
The consulting and advisory services, further details of which are
described in Exhibit 1 attached hereto, to be provided by Liquid Audio to LAK,
may include, but shall not be limited to: (a) providing technical consulting and
support and (b) providing business consulting and support (collectively, the
"Services").
* Certain information in this Exhibit has been omitted and filed
separately with the Commission. Confidential treatment has been
requested with respect to the omitted portions.
<PAGE>
LAK acknowledges that all Services are provided on an as-is basis without
warranty of any kind, and Liquid Audio disclaims any and all warranties, whether
express or implied. Liquid Audio reserves all ownership rights in and to the
work product and any pre-existing materials delivered or disclosed to LAK
pursuant to the Services (herein, "LA Materials"). LAK may, subject to mutually
agreed upon terms and conditions, have a limited license to use the LA Materials
internally for the purpose of furthering the co-venture between the parties and
for no other purpose. During and after the term of this Agreement, all LA
Materials are and remain the confidential information of Liquid Audio and LAK
agrees to maintain the confidentiality of such materials and not to disclose
such materials to any other party.
ARTICLE 3. CONSULTING FEE
--------------
In consideration of the Services rendered by Liquid Audio under Article 2,
LAK shall make guaranteed, non-refundable payments to Liquid Audio in the
aggregate amount of [*]. These payments are net amounts, and they may not be
reduced by withholding tax or any other charge or deduction. LAK shall pay this
consulting fee to Liquid Audio according to the payment schedule in Exhibit 2,
commencing ten (10) days after the date on which the first Liquid Audio Total
Music Center opens for business. The first payment shall be made on such date;
the remaining payments shall be made every ninety (90) days thereafter by means
of wire transfer to a bank account designated by Liquid Audio. Notwithstanding
the foregoing, in the event that, with respect to the fiscal quarter ending
prior to any payment date: (a) the exchange rate for the Won has, during such
quarter declined by at least 25%; or (b) revenues of LAK during such quarter are
less than 75% of the pro-rata annual revenues projected in the Business Plan for
LAK (in the form attached as Exhibit E to the Shareholders Agreement) then, upon
written notice to Liquid Audio delivered on or prior to the time for delivery of
the applicable payment in accordance with Exhibit 2 and this provision, 50% of
such payment may be deferred provided that: (x) such deferral may be made only
with respect to up to two of the first six such quarterly payments; and (y) in
the event of any such deferral, the amounts payable in quarters seven through
ten shall be increased with respect to each such quarter by an amount equal to
one fourth (1/4) of the prior aggregate deferral of payments.
ARTICLE 4. TERM
----
This Agreement shall remain in effect from the Effective Date until: (a)
the completion of LAK's payment obligations in Quarter Ten (as detailed in
Exhibit 2), (b) termination pursuant to Article 5, or (c) expiration or
termination of the Shareholders Agreement or the Software Reseller and Services
Agreement, whichever comes first; provided, however, that if this Agreement
expires or terminates in accordance with (b) or (c) as a result of breach by
LAK, all remaining payments will be due immediately and such payment obligation
shall survive expiration or termination.
* Certain information in this Exhibit has been omitted and filed seperately
with the Commission. Confidential treatment has been requested with respect
to the omitted portions.
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<PAGE>
ARTICLE 5. TERMINATION
-----------
Liquid Audio may terminate this Agreement by written notice to LAK, should
LAK breach any material term or condition of this Agreement and fail to cure
such material breach within ten (10) business days of receiving notice from
Liquid Audio specifying the particulars thereof. In addition, if LAK fails to
make any scheduled payment when due, or if Liquid Audio, pursuant to the terms
thereof, elects to terminate that certain Stockholders Agreement among Liquid
Audio, SKM and LAK of even date herewith, or that certain Software Reseller and
Services Agreement between Liquid Audio and LAK, then, in each such instance,
Liquid Audio may terminate this Agreement, effective immediately upon notice in
writing to LAK. In the event that LAK shall be adjudicated bankrupt, then, upon
the vote of a majority of the authorized number of members of the Board of
Directors of LAK, LAK may terminate this Agreement upon written notice to Liquid
Audio.
ARTICLE 6. NOTICES
-------
Any notices required or permitted hereunder shall be given to the
appropriate party at the address specified below or at such other address as the
party may specify in writing. Such notice shall be deemed served upon personal
delivery, or if sent by certified or registered mail, postage prepaid, then
shall be deemed served ten (10) days after the date of mailing. Notice by
facsimile shall be deemed served upon receipt; provided that a confirmation copy
is also dispatched immediately thereafter by first-class registered mail.
Liquid Audio: Attn: Mr. Robert Flynn
Liquid Audio, Inc.
810 Winslow Street
Redwood City, California, U.S.A. 94063
Fax: (1-650) 549-2099
LAK: Attn: Mr. Lee, Kyu Hwa
Liquid Audio Korea Co., Ltd.
3f, WonKyung Bldg. 788-16
Yoksam-Dong, Kangnam-Gu
Seoul, 135-080, Korea
Fax: (82-2) 565-6328
ARTICLE 7. MISCELLANEOUS
-------------
7.1 CONDUCT
All Services to be performed by Liquid Audio shall be performed from Liquid
Audio's facilities in the State of California in the United States of America.
Liquid Audio shall at all time conduct its affairs under this Agreement in
accordance with a high
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<PAGE>
standard of business ethics and propriety and in accordance with the laws of the
State of California and the United States of America.
7.2 INDEPENDENT CONTRACTOR
Nothing herein shall be construed to place Liquid Audio and LAK in
relationship of partners, joint ventures or principal and agent. The parties
hereto have negotiated and entered into this Agreement in good faith solely as
independent contractors, and no employer-employee relationship exists, nor shall
be deemed to exist between them.
7.3 EXPENSES
The parties shall bear their respective portions of costs and expenses
arising from, or in connection with, this Agreement.
7.4 GOVERNING LAW
This Agreement shall be governed by the laws of the State of California and
the United States of America without regard to its conflict of laws provisions.
7.5 ENFORCEABILITY
Should any provision of this Agreement be deemed unenforceable in any judicial
proceeding, such determination shall not affect the validity and enforceability
of the balance of the Agreement.
7.6 NO WAIVER
Any waiver by either party of any provision of this Agreement, or of any
breach of this Agreement, shall be effective only if in writing signed by such
party, and such waiver shall not be deemed a continuing waiver of such provision
or a waiver of any subsequent breach of a similar or different nature.
7.7 ARBITRATION
Except as otherwise provided in this Agreement, any dispute, controversy or
claim arising out of or relating to this Agreement or to a breach hereof,
including the interpretation, performance or termination, shall be exclusively
and finally resolved by binding arbitration. Arbitration shall be conducted by
the International Chamber of Commerce (the "ICC") which shall administer the
arbitration under its then-current Rules of Arbitration (the "Rules"). The
arbitration shall be conducted by a single arbitrator chosen in accordance with
said Rules. The arbitration, including the rendering of the award, shall take
place in Tokyo, Japan and Tokyo shall be the exclusive forum for resolving such
dispute, controversy or claim. The arbitration proceedings and all pleadings and
rulings shall be conducted and written in the English language. For the
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<PAGE>
purpose of any arbitration proceeding, this Agreement shall be governed by the
governing law described in Article 7.4 above. This arbitration agreement is
intended by the parties to be self-executing. The panel shall have sole
jurisdiction to determine whether (i) a claim is subject to arbitration, (ii)
the arbitration may proceed even if one of the parties refuses to attend or
participate and (iii) an award against that party may be ordered pursuant to
default or otherwise by the panel. The parties agree that they will arbitrate
all claims agreed to be arbitrated herein regardless of the existence of any
related dispute, action or special proceeding between any or all of the parties
hereto and/or any third party. The arbitration panel shall render a written
arbitration decision with its award, and the decision of the arbitration panel
shall be final and binding upon the parties hereto, and the parties hereby waive
any right of appeal under applicable law. Judgment upon the award rendered by
the arbitration panel may be entered in any court of competent jurisdiction. The
prevailing party shall be entitled to recover its reasonable attorneys' fees and
its share of the costs including any auditing costs or expenses of expert
witnesses.
Notwithstanding the foregoing, in the event of actual or threatened breach
of the provisions respecting confidentiality of the LA Materials, Liquid Audio
will have no adequate remedy at law and will be entitled to immediate,
injunctive or other equitable relief, without bond and without the necessity of
showing actual money damages, shall have the right to institute judicial
proceedings against LAK or anyone acting by, through or under LAK in order to
seek such injunctive or other equitable relief, and in the event that Liquid
Audio prevails in any such proceeding, Liquid Audio shall be entitled, in
addition to any other rights and remedies it may have, to reimbursement for its
expenses, including court costs and reasonable attorneys' fees.
7.8 NO IMPLIED OBLIGATIONS
There shall be no obligations implied by this Agreement, and each party
reserves the right to engage in similar or dissimilar activities independently
or with third parties.
7.9 LIMITATION OF LIABILITY
In no event shall either party be liable for any consequential, incidental,
special, indirect or reliance damages arising out of or relating to this
Agreement, including without limitation any liability for lost profits or lost
business opportunities.
7.10 ENTIRE AGREEMENT
This Agreement constitutes the entire agreement with respect to the subject
matter hereof and may be modified only by a writing signed by both parties.
7.11 COUNTERPARTS
This Agreement may be executed in any number of English language
counterparts or duplicate originals, and each such counterpart or duplicate
original shall constitute an
-5-
<PAGE>
original instrument, but all such separate counterparts or duplicate originals
shall constitute one and the same instrument.
-6-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as
of the date first above written.
LIQUID AUDIO, INC.
/s/ Robert Flynn
- -------------------------
By: Robert Flynn
Title: Vice President of Business Development
Date: 12/31/98
LIQUID AUDIO KOREA, CO., LTD.
/s/ Kyu Hwa Lee
- -------------------------
By: Kyu Hwa Lee
Title: President
Date: 12/31/98
-7-
<PAGE>
EXHIBIT 1
CONSULTING SERVICES
* System design for optimal performance of software used in the co-venture.
* Education regarding Liquid Audio's global business operations.
* Education regarding Liquid Audio's technology and business plan in the
United States.
* Provision of information of worldwide trends: internet and global music
industry.
* Establishment of relationships with representatives of the local music
industry.
* Education regarding the intellectual property rights and royalty reports.
* On-going support in the areas of product development, operation, marketing
support, and copyright management.
* Provide LAK with technical insight and dialogue on product development.
* Control localization of software products.
* Provide assistance in development of operations that enable LAK activities,
e.g. mass encoding projects.
* Provide assistance in design of hardware/network configuration for
retail/kiosk operation ("LTMC-K").
* Provide assistance in design and execution of the Liquid Music Network -
Korea ("LMN-K").
* Provide assistance in locating global sponsors/advertisers for the LMN-K.
* Provide assistance in accessing non-Korean content for inclusion in the
LMN-K.
* Assist LAK in relationships with Korean operations of major multinational
entertainment companies.
* Provide assistance in the creation of sales materials appropriate for the
Korean marketplace.
* Provide technical support.
* Conduct discussions with multinational OEM's for the bundling of the Korean
version of the free Liquid Music Player with their product sold in Korea.
* Integration of Korean rights reporting societies in the global Liquid Audio
copyright management solution.
* Assistance in discussions and education of the Korean rights reporting
societies.
* Establish and oversee the operations of the local Liquid Operations Center.
<PAGE>
EXHIBIT 2
GUARANTEED PAYMENT SCHEDULE
<TABLE>
<CAPTION>
Quarter Payment
------- -------
<S> <C>
One [*]
Two [*]
Three [*]
Four [*]
Five [*]
Six [*]
Seven [*]
Eight [*]
Nine [*]
Ten [*]
</TABLE>
* Certain information in this Exhibit has been omitted and filed seperately
with the Commission. Confidential treatment has been requested with respect
to the omitted portions.
<PAGE>
EXHIBIT 10.37
CONSULTING AGREEMENT
THIS CONSULTING AGREEMENT (the "Agreement") is made an entered into as of
the 31 day of December, 1998 (the "Effective Date"), by and between Liquid
Audio, Inc., a corporation duly incorporated and existing under the laws of the
State of California, U.S.A. with its principal place of business at 2403
Broadway, Redwood City, California 94063 U.S.A. ("Liquid Audio") and SKM
Limited, a corporation duly incorporated and existing under the laws of the
Republic of Korea with its principal place of business at HaeSung 1 Building,
5F, 942 Daechi 3-Dong, Kangnam-Gu, Seoul, 135-283 Korea ("SKM").
WITNESSETH
----------
WHEREAS, Liquid Audio and SKM desire to establish a relationship in order
to form a joint venture company, a.k.a. Liquid Audio Korea ("LAK"), in the
Republic of Korea.
WHEREAS, as one of the efforts made by SKM to form and promote the joint
venture, SKM desires to obtain the benefit of consulting and advisory services
of Liquid Audio, with focus on the technical and business aspects; and
WHEREAS, Liquid Audio is willing to render such consulting and advisory
services to SKM.
NOW THEREFORE, in consideration of the premises and the mutual covenants
and agreements set forth below, it is agreed as follows:
Article 1. Appointment
-----------
Subject to the terms and conditions hereinafter set forth, SKM hereby
appoints Liquid Audio as its consultant to provide consulting and advisory
services as described in Article 2 hereunder during the term of this Agreement
as set forth in Article 4 hereof, and Liquid Audio hereby accepts such
appointment.
Article 2. Scope of Services
-----------------
The consulting and advisory services, further details of which are
described in Exhibits 1 and 2 attached hereto, to be provided by Liquid Audio
for SKM shall mainly include, but shall not be limited to, the following:
1. Providing technical consulting and support, one of the projects being
the creation of a consumer electronic product (including flash memory
music players);
2. Providing business consulting and support;
(collectively, the "Services")
In respect of the Services, SKM acknowledges that the Services have been
provided since 1 October 1998 and that such Services shall continue until 31
December 1998.
* Certain information in this Exhibit has been omitted and filed
separately with the Commission. Confidential treatment has been
requested with respect to the omitted portions.
<PAGE>
SKM acknowledges that all Services are provided on an as-is basis without
warranty of any kind, and Liquid Audio disclaims any and all warranties, whether
express or implied. Liquid Audio reserves all ownership rights in and to the
work product and any pre-existing materials delivered or disclosed to SKM
pursuant to the Services (herein, "LA Materials"). SKM shall have a limited
license to use the LA Materials internally for the purpose of furthering the
contemplated joint venture between the parties in a manner subject to the mutual
approval of both parties, and for no other purpose. During and after the term of
this Agreement, all LA Materials are and remain the confidential information of
Liquid Audio and SKM agrees to maintain the confidentiality of such materials
and not to disclose such materials to any other party.
Article 3. Consulting Fee
--------------
In consideration of the Services rendered by Liquid Audio under Article 2,
SKM shall provide to Liquid Audio the consulting fee of [*] net of any
withholding tax. The consulting fee shall be paid to Liquid Audio within ten
days of the end of the term. The payment shall be made by means of telegraphic
transfer to the bank account designated by Liquid Audio.
Article 4. Term
----
The term of this Agreement shall be from the Effective Date to 31 December
1998.
Article 5. Termination
-----------
Either party may terminate this Agreement by written notice to the other
party, should the other party breach any material term and condition of this
Agreement and fail to cure such material breach within five (5) days of
receiving the written notice of such breach specifying the particulars thereof.
Article 6. Notices
-------
Any notices required or permitted hereunder shall be given to the
appropriate party at the address specified below or at such other address as the
party may specify in writing. Such notice shall be deemed served upon personal
delivery, or if sent by certified or registered mail, postage prepaid, then
shall be deemed served ten (10) days after the date of mailing. Notice by
facsimile shall be deemed served upon receipt; provided that a confirmation copy
is also dispatched immediately thereafter by first-class registered mail.
Liquid Audio: Attn: Robert Flynn
Liquid Audio, Inc.
2403 Broadway, Redwood City
California, 94063 U.S.A.
Fax: (1-650) 549-2099
SKM: Attn: Kyu Hwa Lee
SKM Limited
* Certain information in this Exhibit has been omitted and filed seperately
with the Commission. Confidential treatment has been requested with respect
to the omitted portions.
<PAGE>
HaeSung 1 Building, 5F
942 Daechi 3-Dong, Kangnam-Gu
Seoul, 135-283
Fax: (82-2) 528-3013
Article 7. Miscellaneous
-------------
7.1 Conduct
- ------------
All Services to be performed by Liquid Audio shall be performed from Liquid
Audio's facilities in the State of California in the United States of America.
Liquid Audio shall at all time conduct its affairs under this Agreement in
accordance with a high standard of business ethics and propriety and in
accordance with the laws of the State of California and the United States of
America.
7.2 Independent Contractor
- ---------------------------
Nothing herein shall be construed to place Liquid Audio and SKM in
relationship of partners, joint ventures or principal and agent. The parties
hereto have negotiated and entered into this Agreement in good faith solely as
Independent contractors, and no employer-employee relationship exists, nor shall
be deemed to exist between them.
7.3 Expenses
- -------------
The parties shall bear their respective portions of costs and expenses
arising from, or in connection with, this Agreement.
7.4 Governing Law
- ------------------
This Agreement shall be governed by the laws of the Republic of Korea
without regard to its conflicts of laws provisions.
7.5 Enforceability
- -------------------
Should any provision of this Agreement be deemed unenforceable in any
judicial proceeding, such determination shall not affect the validity and
enforceability of the balance of the Agreement.
7.6 No Waiver
- --------------
Any waiver by either party of any provision of this Agreement, or of any
breach of this Agreement, shall be effective only if in writing signed by such
party, and such waiver shall not be deemed a continuing waiver of such provision
or a waiver of any subsequent breach of a similar or different nature.
7.6 Force Majeure
- ------------------
In the event of any failure or delay in the performance of this Agreement
due to war, civil commotion, fire, natural disaster, or any other similar cause
whatsoever beyond the reasonable control of a party whose performance is
affected thereby, the party so affected shall not be liable for such failure or
delay or the results thereof. Upon
<PAGE>
Exhibit 1
---------
Technical Consulting Services
-----------------------------
1. Technical Support for Player Reference Design
2. Technical Support for the Development of Decoding Chip
3. Technical Recommendation regarding all aspects of development for chipset
configuration and PCB layout, etc.
4. Technical support regarding system design for optimal performance of, (I)
Unauthorized copying prevention system for Liquid Audio's products, and
(II) Identification System.
5. Technical support in Liquid Audio's SP3 initiative.
<PAGE>
Exhibit 2
---------
Business Consulting Services
----------------------------
1. Support for Joint Research and development of business plan for Liquid
Audio Korea (the joint venture company, a.k.a., LAK) and Liquid TMC
Corporation. Including, but not limited to, the following: (i) Research on
music industry. (ii) Research on tax and incentive benefits. (iii) Consumer
market behavior. (iv) Detailed financial projections.
2. Support for education regarding Liquid Audio's global business operations.
3. Support for education regarding Liquid Audio's technology and business plan
in the United States.
4. Provision of information on worldwide trends: internet and global music
industry.
5. Support for establishment of relationship with representatives of the local
music industry.
6. Support for contacting and developing relationships with the intellectual
property (IP - related) governmental agencies in Korea.
7. Support for education regarding the intellectual property rights and
royalty reports.
8. Support for development of the management and organizational structures of
Liquid Audio Korea.
<PAGE>
EXHIBIT 10.38
GUARANTY
THIS GUARANTY ("Guaranty"), dated as of December 31, 1998, is executed and
delivered by SKM Limited, a joint-stock company (chusik-hoesa) organized and
existing under the laws of the Republic of Korea ("Korea") with its principal
place of business at Kwang Hee Building, 1-Ka, 216, Kwang-Hee Dong, Jung-Gu,
Seoul 100-411, Korea ("Guarantor") in favor of Liquid Audio, Inc., a California
corporation with its principal place of business at 810 Winslow Street, Redwood
City, California 94063, U.S.A. ("Liquid Audio"), in light of the following:
WHEREAS, Guarantor and Liquid Audio have established Liquid Audio Korea
Co., Ltd. ("LAK"), a Korean corporation, to promote certain audio software and
related technology of Liquid Audio in the Republic of Korea, and, to the extent
later permitted, in the Democratic People's Republic of Korea ("Joint Venture
Project");
WHEREAS, LAK and Liquid Audio have entered into a Consulting Agreement (the
"Agreement") of same date as this Guaranty pursuant to which LAK will obtain the
benefit of consulting and advisory services from Liquid Audio, with a focus on
the implementation and use of Liquid Audio's technology;
WHEREAS, in order to induce Liquid Audio to enter into the Joint Venture
Project and the Agreement, Guarantor has agreed to guarantee the payment
obligations of LAK under the Agreement ("Guaranteed Obligations").
NOW, THEREFORE, in consideration of the foregoing, Guarantor hereby agrees,
in favor of Liquid Audio, as follows:
1. Guaranteed Obligations. Guarantor hereby irrevocably and unconditionally
----------------------
guarantees to Liquid Audio until final and indefeasible payment thereof has
been made the due and punctual payment of the Guaranteed Obligations, in
each case when as the same shall become due and payable under the Agreement
(including by acceleration); it being the intent of Guarantor that the
guaranty set forth herein shall be guaranty of payment and not a guaranty
of collection.
2. Performance under this Guaranty. If LAK fails to make any payment of any
-------------------------------
Guaranteed Obligations, on or before the due date thereof, Guarantor
immediately shall cause such payment to be made to Liquid Audio.
3. Primary Obligation. This Guaranty is a primary and original obligation of
------------------
Guarantor and is an absolute, unconditional and continuing guaranty of
payment which shall remain in full force without respect to future changes
in conditions, including any change of law or change in the Joint Venture
Project. Guarantor agrees that it is directly liable to Liquid Audio, that
its obligations hereunder are independent of the obligations of LAK and
that a separate action may be brought
<PAGE>
against Guarantor, whether such action is brought against LAK or whether
LAK is joined in such action. Guarantor agrees that its liability hereunder
shall be immediate and shall not be contingent upon the exercise or
enforcement by Liquid Audio of whatever remedies it may have against LAK.
4. Waiver. To the fullest extent permitted by applicable law, Guarantor hereby
------
waives the right by statute or otherwise to require Liquid Audio to
institute suit against LAK or to exhaust any rights and remedies which
Liquid Audio has or may have against LAK. In this regard, Guarantor agrees
that it is bound to the payment of the Guaranteed Obligations as fully as
if such Guaranteed Obligations were directly owing to Liquid Audio by
Guarantor. Guarantor further waives any defense arising by reason of any
disability or other defense (other than the defense that the Guaranteed
Obligations shall have been fully and finally performed and indefeasibly
paid) of LAK or by reason of the cessation from any cause whatsoever of the
liability of LAK in respect thereof.
5. Payments. All payments to be made hereunder shall be made in lawful money
--------
of the United States of America at the time of payment, shall be made in
immediately available funds and shall be made without deduction (whether
for taxes or otherwise) or offset.
6. Attorneys' Fees and Costs. Guarantor agrees to pay, on demand, all
-------------------------
reasonably attorneys' fees and all other reasonable costs and expenses that
may be incurred by Liquid Audio in the enforcement of this Guaranty or in
any way arising out of, or consequential to the protection, assertion, or
enforcement of the Guaranteed Obligations, irrespective of whether suit is
brought.
7. Notices. Every notice by either Party shall be in writing and delivered
-------
either by personal delivery, or by express mail or any similar overnight
courier service, or by registered or certified mail, postage prepaid, or by
facsimile or electronic mail, addressed to the Party for whom intended at
its address set forth above, or at such other address as the intended
recipient previously shall have designated by written notice to the other
Party. All notices delivered in person shall be deemed to have been
delivered to and received by the addressee and shall be effective on the
date of personal delivery. All notices delivered by express mail or any
other similar overnight courier shall be effective upon the earlier of (i)
three days following the date sent, and (ii) the date received. All notices
delivered by registered or certified mail, or by facsimile or electronic
mail, shall be effective upon receipt.
8. Cumulative Remedies. No remedy under this Guaranty or the Agreement is
-------------------
intended to be exclusive of any other remedy, but each and every remedy
shall be cumulative and in addition to any and every other remedy given
under this Guaranty or the Agreement and those provided by law. No delay or
omission by Liquid Audio to exercise any right under this Guaranty shall
impair such right nor be construed to be a waiver thereof.
<PAGE>
9. Governing Law and Venue. This Guaranty shall be governed by the laws of the
-----------------------
Republic of Korea without regard to its conflict of laws provisions. All
disputes arising hereunder shall be subject to the jurisdiction of the
Seoul District Court.
10. Severability of Provisions. Any provision to this Guaranty that is
--------------------------
prohibited or unenforceable under applicable law shall be ineffective to
the extent of such prohibition or unenforceability without invalidating the
remaining provisions hereof.
11. Entire Agreement; Amendments. This Guaranty constitutes the entire
----------------------------
agreement between Guarantor and Liquid Audio pertaining to the subject
matter contained herein. This Guaranty may not be altered, amended, or
modified, nor may any provision hereof be waived or noncompliance therewith
consented to, except by means of a writing executed by both Guarantor and
Liquid Audio. Any such alteration, amendment, modification, waiver, or
consent shall be effective only to the extent specified therein and for the
specific purpose for which given.
IN WITNESS WHEREOF, the undersigned has executed and delivered this Guaranty as
of the 31 day of December 1998.
SKM Limited
By: /s/ Kyu Hwa Lee
- -----------------------
Name: Kyu Hwa Lee
Title: Vice President
<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
May 4, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 14,143
<SECURITIES> 3,001
<RECEIVABLES> 1,222
<ALLOWANCES> 231
<INVENTORY> 0
<CURRENT-ASSETS> 18,449
<PP&E> 2,113
<DEPRECIATION> 606
<TOTAL-ASSETS> 20,026
<CURRENT-LIABILITIES> 3,389
<BONDS> 969
29,801
0
<COMMON> 3,921
<OTHER-SE> (18,054)
<TOTAL-LIABILITY-AND-EQUITY> 20,026
<SALES> 1,235
<TOTAL-REVENUES> 2,803
<CGS> 312
<TOTAL-COSTS> 769
<OTHER-EXPENSES> 10,812
<LOSS-PROVISION> 209
<INTEREST-EXPENSE> 140
<INCOME-PRETAX> (8,539)
<INCOME-TAX> 0
<INCOME-CONTINUING> (8,539)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (8,539)
<EPS-PRIMARY> (3.60)
<EPS-DILUTED> (3.60)
</TABLE>
