<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000
or
[_] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from _________________ to
_____________________.
Commission File Number 000-25977
__________________
LIQUID AUDIO, INC.
(Exact name of registrant as specified in its charter)
Delaware 77-0421089
--------------------------------- ---------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2221 Broadway, Redwood City, CA 94063
- ----------------------------------------- ---------------------
(Address of principal executive offices) (Zip Code)
(650) 549-2000
----------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) had been subject to such filing
requirements for the past 90 days. X Yes _____ No
-----
As of April 28, 2000, there were 22,067,780 shares of registrant's Common Stock
outstanding.
1
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LIQUID AUDIO, INC.
INDEX
<TABLE>
<CAPTION>
<S> <C>
PART I. FINANCIAL INFORMATION..................................................................... 3
ITEM 1. FINANCIAL STATEMENTS................................................................... 3
Condensed Balance Sheet as of March 31, 2000 and December 31, 1999
Condensed Statement of Operations for the three months ended March 31, 2000 and 1999
Condensed Statement of Cash Flows for the three months ended March 31, 2000 and 1999
Notes To Condensed Financial Statements
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS................................................................. 9
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK............................. 23
PART II. OTHER INFORMATION......................................................................... 24
ITEM 1. LEGAL PROCEEDINGS...................................................................... 24
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.............................................. 25
ITEM 3. DEFAULTS UPON SENIOR SECURITIES........................................................ 25
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.................................... 25
ITEM 5. OTHER INFORMATION...................................................................... 25
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K....................................................... 25
SIGNATURES......................................................................................... 26
INDEX TO EXHIBITS FOR FORM 10-Q.................................................................... 27
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LIQUID AUDIO, INC.
CONDENSED BALANCE SHEET
(in thousands)
<TABLE>
March 31, December 31,
2000 1999
----------- --------------
Assets (unaudited) (audited)
<S> <C> <C>
Current assets:
Cash and cash equivalents........................................ $ 46,206 $138,692
Short-term investments........................................... 106,211 19,157
Accounts receivable, net......................................... 548 316
Receivables from related parties................................. 435 435
Other current assets............................................. 604 638
---------- -------------
Total current assets.......................................... 154,004 159,238
---------- -------------
Investment in related party........................................ 1,743 1,959
Property and equipment, net........................................ 6,316 4,857
Other assets....................................................... 216 220
---------- -------------
Total assets................................................ $162,279 $166,274
========== =============
Liabilities and stockholders' equity
Current liabilities:
Accounts payable................................................. $ 2,689 $ 1,952
Accrued expenses and other current liabilities................... 4,550 2,901
Deferred revenue................................................. 1,277 1,572
Capital lease obligations, current portion....................... 172 194
Equipment loan, current portion.................................. 589 589
---------- -------------
Total current liabilities..................................... 9,277 7,208
---------- -------------
Capital lease obligations, non-current portion..................... 119 149
Equipment loan, non-current portion................................ 585 731
Note payable to related party...................................... 426 441
---------- -------------
Total liabilities........................................... 10,407 8,529
---------- -------------
Stockholders' equity:
Common stock..................................................... 22 22
Additional paid-in capital....................................... 199,527 198,973
Unearned compensation............................................ (874) (1,097)
Accumulated deficit.............................................. (46,749) (40,225)
Accumulated other comprehensive income........................... (54) 72
---------- -------------
Total stockholders' equity.................................. 151,872 157,745
Total liabilities and stockholders' equity.................. $162,279 $166,274
========== =============
</TABLE>
See accompanying notes to condensed financial statements
3
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LIQUID AUDIO, INC.
CONDENSED STATEMENT OF OPERATIONS
(in thousands, except per share amounts; unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------------------------------
2000 1999
------------ ------------
<S> <C> <C>
Net revenues:
License........................................................... $ 231 $ 259
Services.......................................................... 401 89
Business development (related party).............................. 2,363 183
-------- --------
Total net revenues.......................................... 2,995 531
-------- --------
Cost of net revenues:
License........................................................... 18 46
Services.......................................................... 661 153
Business development (related party).............................. -- 2
-------- --------
Total cost of net revenues.................................. 679 201
-------- --------
Gross profit....................................................... 2,316 330
Operating expenses:
Sales and marketing............................................... 3,403 2,119
Research and development.......................................... 4,920 1,560
General and administrative........................................ 1,862 502
Strategic marketing--equity instruments........................... 561 --
Stock compensation expense........................................ 192 425
-------- --------
Total operating expenses.................................... 10,938 4,606
-------- --------
Loss from operations............................................... (8,622) (4,276)
Other income (expense), net........................................ 2,314 133
Minority interest in loss of related party......................... (216) --
-------- --------
Net loss.......................................................... $ (6,524) $ (4,143)
======== ========
Net loss per share:
Basic and diluted................................................. $ (0.30) $ (1.39)
======== ========
Weighted average shares........................................... 21,918 2,972
======== ========
</TABLE>
See accompanying notes to condensed financial statements
4
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LIQUID AUDIO, INC.
CONDENSED STATEMENT OF CASH FLOWS
(in thousands; unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31,
-----------------------------------
2000 1999
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net loss......................................................... $ (6,524) $ (4,143)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization................................. 573 168
Amortization of unearned compensation......................... 192 425
Allowance for doubtful accounts............................... 9 93
Equity investment losses...................................... 216 378
Strategic marketing-equity instruments........................ 561 --
Other......................................................... (14) --
Changes in assets and liabilities:
Accounts receivable......................................... (241) 246
Receivables from related parties............................ -- 438
Other assets................................................ 38 37
Accounts payable............................................ 737 (284)
Accrued expenses and other current liabilities.............. 1,649 405
Deferred revenue............................................ (295) 596
-------- --------
Net cash used in operating activities....................... (3,099) (1,641)
-------- --------
Cash flows from investing activities:
Acquisition of property and equipment............................ (2,032) (324)
Sales (purchases) of short-term investments, net................. (87,180) 3,001
-------- --------
Net cash provided by (used in) investing activities......... (89,212) 2,677
-------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock........................... 23 --
Payments made under capital leases............................... (52) (31)
Proceeds from equipment loan..................................... -- 401
Payments made under equipment loan............................... (146) (52)
-------- --------
Net cash provided by (used in) financing activities......... (175) 318
-------- --------
Net increase (decrease) in cash and cash equivalents............... (92,486) 1,354
Cash and cash equivalents at beginning of period................... 138,692 14,143
-------- --------
Cash and cash equivalents at end of period......................... $ 46,206 $ 15,497
======== ========
Supplemental disclosures:
Cash paid for interest........................................... $ 45 $ 51
Non-cash investing and financing activities:
Acquisition of property and equipment through capital leases..... $ -- $ 8
Equity investment with note payable.............................. -- 378
</TABLE>
See accompanying notes to condensed financial statements
5
<PAGE>
LIQUID AUDIO, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(unaudited)
NOTE 1 - THE COMPANY AND BASIS OF PRESENTATION:
Liquid Audio, Inc. (the "Company") was incorporated in California in January
1996 and reincorporated in Delaware in April 1999 with the goal of becoming the
premier provider of software applications and services that enable the secure
delivery and sale of digital music over the Internet. To this end, the Company
has developed an end-to-end solution for promoting and distributing music over
the Internet. The Company's solutions enable the secure distribution of high
quality music files while providing consumers with the ability to access,
preview and purchase that music via the Internet.
The accompanying unaudited condensed financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
adjustments) considered necessary for a fair presentation have been included.
Certain reclassifications have been made to the prior periods' financial
statements to conform to the current period presentation. The reclassifications
had no effect on net loss, stockholders' equity or cash flows.
NOTE 2 - BALANCE SHEET COMPONENTS (IN THOUSANDS):
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
------------- ----------------
<S> <C> <C>
Accounts receivable, net:
Accounts receivable.......................................... $ 673 $ 468
Less: Allowance for doubtful accounts........................ (125) (152)
------- -------
$ 548 $ 316
======= =======
</TABLE>
Write-offs against the allowance for doubtful accounts were $36,000 and
$129,000 for the three months ended March 31, 2000 and the year ended December
31, 1999, respectively
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
------------- ----------------
<S> <C> <C>
Property and equipment:
Computer equipment and purchased software.................... $ 7,484 $ 5,614
Furniture and fixtures....................................... 699 544
Leasehold improvements....................................... 455 448
------- -------
8,638 6,606
Less: accumulated depreciation and amortization............. (2,322) (1,749)
------- -------
$ 6,316 $ 4,857
======= =======
</TABLE>
Property and equipment includes $784,000 of equipment under capital leases at
March 31, 2000 and December 31, 1999. Accumulated depreciation and amortization
for equipment under capital leases was $627,000 and $581,000 at March 31, 2000
and December 31, 1999, respectively.
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
------------- ----------------
<S> <C> <C>
Accrued expenses and other current liabilities:
Compensation and benefits..................................... $1,933 $1,305
Consulting and professional services.......................... 1,127 418
Accrued marketing expenses.................................... 354 282
Other......................................................... 1,136 896
------ ------
$4,550 $2,901
====== ======
</TABLE>
6
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NOTE 3 - RELATED PARTIES:
In April 1998, the Company signed an agreement with a 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.
The Company owns 6.92% of the outstanding common stock of LAJ and is accounting
for its investment in LAJ using the equity method of accounting. In December
1998, the company signed an agreement with another strategic partner to
establish a Korean corporation, Liquid Audio Korea ("LAK"), to develop a local
business to enable the digital delivery of music to customers in Korea using the
Company's technology and products. The Company owns 40% of the outstanding
common stock of LAK and is accounting for its investment in LAK using the equity
method of accounting.
Business development revenues are as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------------------
2000 1999
----------- -----------
<S> <C> <C>
Business development revenues:
License fees and other............................................ $2,018 $ 100
Consulting and other services..................................... 345 83
------ -----
$2,363 $ 183
====== =====
</TABLE>
At March 31, 2000, fees received in advance of recognition as business
development revenues were $929,000. This amount is classified as deferred
revenue on the balance sheet.
NOTE 4 - NET LOSS PER SHARE:
Basic and diluted net loss per share is computed by dividing the net loss
available to common stockholders for the period by the weighted average number
of common shares outstanding during the period. The calculation of diluted net
loss per share excludes potential common shares if the effect is anti-dilutive.
Potential common shares consist of unvested restricted common stock, incremental
common shares issuable upon the exercise of stock options, shares issuable upon
conversion of the Series A, Series B and Series C mandatorily redeemable
convertible preferred stock and common shares issuable upon the exercise of
common and mandatorily redeemable convertible preferred stock warrants.
The following table sets forth the computation of basic and diluted net loss
per share for the periods indicated (in thousands, except per share amounts):
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------------------
2000 1999
----------- -----------
<S> <C> <C>
Numerator:
Net loss.................................................................... $(6,524) $(4,143)
======= =======
Denominator:
Weighted average shares..................................................... 21,941 3,725
Weighted average unvested common shares subject to repurchase............... (23) (753)
------- -------
Denominator for basic and diluted calculation............................... 21,918 2,972
======= =======
Net loss per share:
Basic and diluted........................................................... $ (0.30) $ (1.39)
======= =======
</TABLE>
7
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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>
March 31,
--------------------------
2000 1999
---------- ----------
<S> <C> <C>
Series A mandatorily redeemable convertible preferred stock................ -- 3,050
Series B mandatorily redeemable convertible preferred stock................ -- 3,187
Series C mandatorily redeemable convertible preferred stock................ -- 3,507
Mandatorily redeemable convertible preferred stock warrants................ -- 20
Common stock options....................................................... 1,670 1,051
Common stock warrants...................................................... 609 49
</TABLE>
NOTE 5 - STRATEGIC MARKETING -- EQUITY AGREEMENTS:
In June 1999, the Company signed an Advertising Agreement with Amazon.com,
Inc. ("Amazon.com") to collaborate on event-based advertising using the
Company's digital delivery services. In connection with this agreement, the
Company issued a fully vested warrant to purchase approximately 254,000 shares
of common stock to Amazon.com. The warrant has been valued at approximately
$2.0 million and is being recognized ratably over the one-year term of the
agreement; as a result, $506,000 has been recognized as strategic marketing-
equity instruments expense in the three months ended March 31, 2000. Under the
Advertising Agreement with Amazon.com, an additional warrant to purchase
approximately 127,000 shares of common stock will be granted to Amazon.com and
will vest over a 12-month period, if and when the Company signs a definitive
agreement with Amazon.com to utilize the Company's technology for a specific
business program. These shares will be valued at the then fair market value of
the Company's common stock, if and when a commitment for performance by
Amazon.com has been reached, or at a date when Amazon.com has performed its
contractual obligations under the agreement.
In August 1999, the Company signed a Digital Audio Co-Marketing and
Distribution Agreement with Yahoo! to promote the distribution of digital music
on its web site. In connection with this agreement, the Company granted Yahoo!
three warrants totaling 250,000 shares of common stock. The first warrant for
83,334 shares vested immediately and was valued at $903,000 and is being
recognized ratably over the one-year term of the agreement. The second warrant
for 83,333 shares vests in August 2000, and is being remeasured each quarter
until a commitment for performance has been reached or the warrant vests, based
on the fair market value at the end of each period. At March 31, 2000, this
warrant is valued at $423,000, which is being recognized ratably over the one-
year term of the agreement. For the three months ended March 31, 2000, $223,000
and $(168,000) were recognized as strategic marketing-equity instruments expense
for the first and second warrants, respectively. The third warrant for 83,333
shares, which may be issued if the relationship with Yahoo! is extended beyond
the first year, would begin to vest in August 2000, at which time the warrant
will be valued if a commitment for performance has been reached.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following Management's Discussion and Analysis contains forward-looking
statements within the meaning of Federal securities laws. You can identify these
statements because they use forward-looking terminology such as "may," "will,"
"expect," "anticipate," "estimate," "continue," "believe," "intend," or other
similar words. These words, however, are not the exclusive means by which you
can identify these statements. You can also identify forward-looking statements
because they discuss future expectations, contain projections of results of
operations or of financial conditions, characterize future events or
circumstances or state other forward-looking information. We have based all
forward-looking statements included in Management's Discussion and Analysis on
information currently available to us, and we assume no obligation to update any
such forward-looking statements. Although we believe that the expectations
reflected in such forward-looking statements are based on reasonable
assumptions, actual results could differ materially from those projected in the
forward-looking statements. Potential risks and uncertainty include, among
others, those set forth under the caption "Additional Factors Affecting Future
Results" included in this "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and in the "Company Risk Factors" section
of our 1999 Form 10-K.
While we believe that the discussion and analysis in this report is adequate
for a fair presentation of the information, we recommend that you read this
discussion and analysis with "Management's Discussion and Analysis" included in
our 1999 Form 10-K.
Overview
- --------
We are a leading provider of software products and services that enable
artists, record companies and retailers to create, syndicate and sell music
digitally over the Internet. Our products and services are based on an open
technical architecture that is designed to support a variety of digital music
formats. From our inception in January 1996 through early 1997, we devoted
substantially all of our efforts to product development, raising capital and
recruiting personnel. We first generated revenues in the first quarter of 1997
through the licensing of our Liquifier Pro, Liquid Server and Liquid Player
software products. In November 1997, we introduced a subscription-based hosting
service for digital recorded music utilizing our technology. In July 1998, to
enhance consumer access to the music we were hosting, we launched the Liquid
Music Network (LMN), a syndicated network that currently links over 750
affiliated music-related and music retailer websites.
In early 1999, we began to place greater emphasis on developing and marketing
our digital music delivery services. Since that time, we have invested
significant resources to increase our distribution reach by expanding the LMN,
building our syndicated music catalog available for sale, actively participating
in standards initiatives and establishing our international presence. We also
have established international initiatives within the Pacific Rim to lay the
groundwork for offering digital music download services to consumers in these
markets. As a provider of digital music delivery services, we expect our
revenue sources to expand beyond software license sales to include sales of
digital recorded music and hosting service fees. Revenues from digital music
sales and transaction fees from our music delivery services represented less
than 1%, 4% and 6% of total net revenues in 1998, 1999 and the first quarter of
2000. Our Liquid Music Network began offering syndicated music through music
retailer websites in the third quarter of 1999.
To date, we have derived our revenues principally from the licensing of
software products and service fees associated with business development
contracts. We license our software products to record companies, artists and
websites. Software license revenues, net of a provision for estimated sales
returns, are recognized upon shipment of the product to the customer. We also
generate services revenues from maintenance fees related to our licensed
software products and hosting fees from record companies and artists. We defer
and recognize maintenance and hosting fees as service revenue ratably over the
life of the related contract, which is typically one year. We intend to increase
our services revenues by significantly expanding our hosting and music delivery
services. Revenue derived from hosting services include subscription fees from
artists for encoding and storing music files, e-commerce services and
transaction reporting. Music delivery services revenue includes transaction fees
from sales of digital recorded music through our LMN website affiliates and fees
from music retailers and websites related to the Liquid Muze Previews service
for sample music clips. Business development revenues primarily consist of fees
from agreements under which we assist strategic related 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 under which the strategic related partners are contractually
obligated to pay us consulting service fees and software license fees related to
the establishment of businesses in various countries. We recognize the fees as
they are earned; the specific timing of this recognition depends on the terms
and conditions of the particular contractual arrangements. We bear full credit
risk with respect to substantially all sales.
9
<PAGE>
We expense all research and development as incurred. Development costs
incurred in the period from achievement of technological feasibility, which we
define as the establishment of a working model, until the general availability
of this software to customers, have been short, and therefore software
development costs qualifying for capitalization have been insignificant.
Accordingly, we have not capitalized any software development costs to date.
We have a limited operating history upon which investors may evaluate our
business and prospects. Since inception we have incurred significant losses, and
as of March 31, 2000 we had an accumulated deficit of approximately $46.7
million. We intend to continue to expend significant financial and management
resources on the development of additional products and services, sales and
marketing, improved technology and expanded operations. As a result, we expect
to incur additional losses and continued negative cash flow from operations
through at least 2002. Our revenues may not increase or even continue at their
current levels or we may not achieve or maintain profitability or generate cash
from operations in future periods. Our prospects must be considered in light of
the risks, expenses and difficulties frequently encountered by companies in
their early stages of development, particularly companies in new and rapidly
evolving markets such as the digital delivery of recorded music. We may not be
successful in addressing these risks, and our failure to do so would harm our
business.
10
<PAGE>
Results of Operations
- ----------------------
The following table sets forth, for the periods presented, certain data
derived from our unaudited condensed statement of operations as a percentage of
total net revenues. The operating results in any period are not necessarily
indicative of the results that may be expected for any future period.
<TABLE>
<CAPTION>
Three Months Ended
March 31,
2000 1999
---------- ----------
<S> <C> <C>
Net revenues:
License........................................................................ 8% 49%
Services....................................................................... 13 17
Business development (related party)........................................... 79 34
----- -----
Total net revenues........................................................... 100 100
----- -----
Cost of net revenues:
License........................................................................ 1 9
Services....................................................................... 22 29
Business development (related party)........................................... -- --
----- -----
Total cost of net revenues................................................... 23 38
----- -----
Gross profit.................................................................... 77 62
----- -----
Operating expenses:
Sales and marketing............................................................ 114 399
Research and development....................................................... 164 293
General and administrative..................................................... 62 95
Strategic marketing-equity instruments......................................... 19 --
Stock compensation expense..................................................... 6 80
----- -----
Total operating expenses..................................................... 365 867
----- -----
Loss from operations............................................................ (288) (805)
Other income (expense), net..................................................... 77 25
Minority interest in loss of related party...................................... (7) --
----- -----
Net loss........................................................................ (218)% (780)%
===== =====
</TABLE>
Three Months Ended March 31, 2000 and 1999
Total Net Revenues
Total net revenues increased 464% to $3.0 million for the three months ended
March 31, 2000 from $531,000 in the comparable period of 1999.
License. License revenues decreased 11% to $231,000 for the three months
ended March 31, 2000 from $259,000 in the comparable period of 1999. This
decrease partially relates to Liquid Player license fees received under an
agreement with a customer that ended on December 31, 1999. Under this agreement
we received total fees of $1.5 million over a 14-month period. These fees were
recognized as license revenue over the license period, which ended December 31,
1999. Additionally, due to our shift in marketing emphasis from software
licensing to the delivery of digital music services, revenues from licensing of
our Liquifier Pro and Liquid Server software decreased in the 2000 period from
the 1999 period. These declines were partially offset with revenues from
licensing our Secure Portable Player Protocol (SP3) technical architecture and
reference specification.
Services. Services revenues increased 351% to $401,000 for the three months
ended March 31, 2000 from $89,000 in the comparable period of 1999. This
increase was due to new revenues from Liquid Muze Previews service and promotion
and advertising services and an increase in hosting revenues and music sales in
the 2000 period.
11
<PAGE>
Business Development (Related Party). Business development revenues
increased 1,191% to $2.4 million for the three months ended March 31, 2000 from
$183,000 in the comparable period of 1999. The increase was due to software
licensing and related maintenance revenues recognized under a software license
contract with Liquid Audio Japan, Inc.
In the three months ended March 31, 2000, approximately 73% of total net
revenues came from sales to one customer, Liquid Audio Japan. In the comparable
period of 1999, approximately 75% of total net revenues came from sales to three
customers, Adaptec, Inc., Liquid Audio Japan, and Super Stage, Inc.
International revenues represented approximately 79% and 36% of total net
revenues for the three months ended March 31, 2000 and 1999, respectively.
Total Cost of Net Revenues
Our gross profit increased to approximately 77% of total net revenues for the
three months ended March 31, 2000 from approximately 62% of total net revenues
in the comparable period of 1999. Total cost of net revenues increased 238% to
$679,000 in the 2000 period from $201,000 in the 1999 period.
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 $18,000 for the three months ended
March 31, 2000 and $46,000 in the comparable period of 1999, a decrease of 61%.
Cost of license revenues decreased due to product mix differences.
Services. Cost of services revenues primarily consists of compensation for
customer service and encoding personnel and an allocation of our occupancy costs
and other overhead. Cost of services revenues increased 332% to $661,000 for
the three months ended March 31, 2000 from $153,000 in the comparable period of
1999. The increase in cost of services revenues was due primarily to the
addition of encoding and customer service personnel.
Business Development (Related Party). Cost of business development revenues
primarily consists of equipment and royalties paid to third-party technology
vendors. Cost of business development revenues were $0 for the three months
ended March 31, 2000 and $2,000 for the comparable period of 1999.
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 61%
to $3.4 million for the three months ended March 31, 2000 from $2.1 million in
the comparable period of 1999. This increase was primarily due to increases in
the number of sales and marketing personnel, advertising and promotional
programs. We expect that sales and marketing expenses will increase both in
absolute dollars and as a percentage of total net revenues in future periods due
to expanded efforts to market and promote our products and services both
domestically and internationally.
Research and Development. Research and development expenses consist
primarily of compensation for our research and development, network operations
and product management personnel, 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 215% to $4.9 million for the three months ended
March 31, 2000 from $1.6 million in the comparable period of 1999. This increase
was primarily due to increases in the number of personnel and outside
contractors needed to enhance our existing software products, develop and
enhance our online services, develop new products and services and build our
external network and computer data center infrastructure. 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 271% to $1.9 million for
the three months ended March 31, 2000 from $502,000 in the comparable period of
1999. This increase was primarily due to increases in the number of personnel
and outside contractors needed to support the growth of our business and
professional fees and in the 2000 period, an one-time non-cash charge of
$465,000 related to the issuance of common stock in the settlement of the
lawsuit with Arne
12
<PAGE>
Frager and Rose G. Frager (see Part II, Item 1 "Legal Proceedings"). We expect
that general and administrative expenses, exclusive of the lawsuit settlement
expense, will increase in absolute dollars as we hire additional personnel and
incur additional expenses relating to the anticipated growth of our business,
such as costs associated with increased infrastructure and our public company
status.
Strategic Marketing-Equity Instruments. Strategic-marketing-equity
instruments expense consists of expenses associated with the value of common
stock and warrants issued to partners as part of our strategic marketing
agreements. Common stock expense is based on the fair value of the stock at the
time it was issued. Warrant expense is based on the estimated fair value of the
warrants based on the Black-Scholes option pricing model and the provisions of
EITF 96-18. Strategic marketing-equity instruments expense was $561,000 for the
three months ended March 31, 2000 and $0 in the comparable period of 1999. In
June 1999, we signed an Advertising Agreement with Amazon.com to collaborate on
event-based advertising using our digital delivery services. In connection with
this agreement, we issued a fully vested warrant to purchase approximately
254,000 shares of common stock to Amazon.com. The warrant has been valued at
approximately $2.0 million and is being recognized ratably over the one-year
term of the agreement; as a result, $506,000 has been recognized as strategic
marketing-equity instruments expense in the three months ended March 31, 2000.
Under the Advertising Agreement with Amazon.com, an additional warrant to
purchase approximately 127,000 shares of common stock will be granted to
Amazon.com and will vest over a 12-month period, if and when we sign a
definitive agreement with Amazon.com to utilize our technology for a specific
business program. These shares will be valued at the then fair market value of
our common stock, if and when a commitment for performance by Amazon.com has
been reached, or at a date when Amazon.com has performed its contractual
obligations under the agreement. In August 1999, we signed a Digital Audio Co-
Marketing and Distribution Agreement with Yahoo! to promote the distribution of
digital music on its web site. In connection with this agreement, we granted
Yahoo! three warrants totaling 250,000 shares of common stock. The first
warrant for 83,334 shares vested immediately and was valued at $903,000 and is
being recognized ratably over the one-year term of the agreement. The second
warrant for 83,333 shares vests in August 2000, and is being remeasured each
quarter until a commitment for performance has been reached or the warrant
vests, based on the fair market value at the end of each period. At March 31,
2000, this warrant is valued at $423,000, which is being recognized ratably over
the one-year term of the agreement. For the three months ended March 31, 2000,
$223,000 and $(168,000) were recognized as strategic marketing-equity
instruments expense for the first and second warrants, respectively. The third
warrant for 83,333 shares, which may be issued if the relationship with Yahoo!
is extended beyond the first year, would begin to vest in August 2000, at which
time the warrant will be valued if a commitment for performance has been
reached.
Stock Compensation Expense. Stock compensation expense relates to stock-
based employee compensation arrangements. The total unearned compensation
recorded by us from inception to March 31, 2000 was $4.2 million. We recognized
$192,000 and $425,000 of stock compensation expense for the three months ended
March 31, 2000 and 1999. We expect quarterly amortization related to those
options to be between $180,000 and $120,000 per quarter during 2000 and annual
amortization to be $315,000 during 2001 and $96,000 during 2002. These future
compensation charges would be reduced if any employee terminates employment
prior to the expiration of the employee's option vesting period.
Other Income (Expense), Net. Interest income consists of earnings on our
cash, cash equivalents and short-term investments. Interest expense consists of
expenses related to our financing obligations, which include borrowings under
equipment loans, short-term loans and capital lease obligations. Other income
(expense), net increased to $2.3 million for the three months ended March 31,
2000 from $133,000 in the comparable period of 1999. This increase was primarily
due to interest received on higher average cash and cash equivalent balances
resulting from proceeds of the initial and follow-on public offerings of our
common stock in July 1999 and December 1999, respectively.
Minority Interest in Loss of Related Party. Minority interest in loss of
related party consist of our share of losses from our investment in a related
party using the equity method of accounting under a 3-month lag. Minority
interest in loss of related party was $216,000 and $0 for the three months ended
March 31, 2000 and 1999, respectively. The expense in the 2000 period
represents our share of the loss of Liquid Audio Japan.
Liquidity and Capital Resources
- -------------------------------
Since inception, we have financed our operations primarily through the
initial and follow-on public offerings of common stock, private placements of
our preferred stock, equipment financing, lines of credit and short-term loans.
As of March 31, 2000, we had raised $65.9 million and $93.7 million through our
initial and follow-on public offerings of common stock, respectively, and $29.8
million through the sale of our preferred stock. At March 31, 2000, we have
approximately $152.4 million of cash, cash equivalents and short-term
investments.
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Net cash used in operating activities was $3.1 million and $1.6 million for
the three months ended March 31, 2000 and 1999, respectively. Net cash used for
operating activities in each of these periods was primarily the result of net
losses before non-cash charges, which include strategic marketing-equity
instruments expense in the 2000 period and an equity investment loss in Liquid
Audio Japan in the 1999 period, offset by increases in accounts payable and
accrued expenses and other current liabilities, and decreases in accounts
receivable and deferred revenue.
Net cash used in investing activities was $89.2 million and $2.7 million for
the three months ended March 31, 2000 and 1999, respectively. Net cash used in
investing activities was related to purchases of short-term investments and the
acquisition of property and equipment.
Net cash provided by (used in) financing activities was $(175,000) and
$318,000 for the three months ended March 31, 2000 and 1999, respectively. The
net cash used in financing activities for the first quarter of 2000 was due
primarily to payments made under an equipment loan and capital leases. The net
cash provided by financing activities for the 1999 period was due primarily to
the proceeds from an equipment loan.
We had a bank equipment loan facility that provided 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%. Borrowings are secured by the related
equipment and other assets. Under the equipment loan facility, we had borrowed
amounts totaling $1.8 million through March 31, 2000. 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, 2000, we had borrowed $737,000
under the lease financing agreements. Our other significant commitments consist
of obligations under non-cancelable operating leases, which totaled $291,000 as
of March 31, 2000 and are payable in monthly installments through 2002 and a
note payable to related party in the amount of $426,000 that was issued in
the three months ended March 31, 1999. The note payable to related party was
issued to Super Factory, Inc., an entity affiliated with our Japanese strategic
partner, Super Stage Itochu, and is repayable in Japanese yen and bears interest
at 0.5% above a Japanese bank's prime rate. The principal is due on December 31,
2003, with quarterly interest payments.
Although we have no material commitments for capital expenditures or
strategic investments, 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 our recently completed follow-on public
offering, together with existing cash and cash equivalents and financing
available under lease agreements, will be sufficient to meet our anticipated
cash needs for working capital and capital expenditures for the foreseeable
future, 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
- -----------
At March 31, 2000, we had an investment portfolio of money market funds,
commercial securities and U.S. Government bonds including those classified as
short-term investments of $106.2 million. We had a related party loan
outstanding at March 31, 2000 of $426,000, which was denominated in Japanese yen
and bore interest at 0.5% above a Japanese bank's prime rate. These instruments,
like all fixed income instruments, are subject to interest rate risk. The fixed
income portfolio will fall in value and the related party note payable interest
would increase if there were an increase in interest rates. If market interest
rates were to increase immediately and uniformly by 10% from levels as of
December 31, 1999, the decline of the fair value of the fixed income portfolio
and strategic related partner note payable would not be material.
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Additional Factors Affecting Future Results
- -------------------------------------------
Our limited operating history in the new market of digital delivery of music
over the Internet increases the possibility that the value of your investment
will decline
We incorporated in January 1996. We did not start generating revenues until
the first quarter of 1997. In early 1999, we began to place greater emphasis on
developing and marketing our digital music delivery services. Accordingly, we
are still in the early stages of development and have only a limited operating
history upon which you can evaluate our business. You should evaluate our
chances of financial and operational success in light of the risks,
uncertainties, expenses, delays and difficulties associated with starting a new
business, many of which may be beyond our control.
Fluctuations in our quarterly revenues and operating results might lead to
reduced prices for our stock
Our quarterly results of operation have varied in the past, and you should
not rely on quarter-to-quarter comparisons of our results of operations as an
indication of our future performance. In some future periods, our results of
operations are likely to be below the expectations of public market analysts and
investors. In this event, the price of our common stock would likely decline.
Factors that have caused our results to fluctuate in the past and that are
likely to affect us in the future including the following:
. competition for consumers from traditional retailers as well as
providers of online music services;
. the announcement and introduction of new products and services by us
and our competitors;
. our ability to increase the number of websites that will use our
platform for digital music delivery;
. the timing of our partners' introduction of new products and services
for digital music sales; and
. variability and length of the sales cycle associated with our product
and service offerings.
In addition, other factors may also affect us, including:
. market adoption and growth of sales of digitally downloaded recorded
music over the Internet;
. our ability to attract significant numbers of music recordings to be
syndicated in our format;
. our ability to provide reliable and scalable service, including our
ability to avoid potential system failures;
. market acceptance of new and enhanced versions of our products and
services; and
. the price and mix of products and services we offer.
Some of these factors are within our control and others are outside of our
control.
We have a history of losses, we expect losses to continue and we might not
achieve or maintain profitability
Our accumulated deficit as of March 31, 2000 was approximately $46.7 million.
We had net losses of approximately $8.5 million in 1998, $24.2 million in 1999
and $6.5 million in the first three months of 2000. Given the level of our
planned operating and capital expenditures, we expect to continue to incur
losses and negative cash flows through at least 2002. Even if we ultimately do
achieve profitability, we may not be able to sustain or increase profitability
on a quarterly or annual basis. If our revenues grow more slowly than we
anticipate, or if our operating expenses exceed our expectations and cannot be
adjusted accordingly, our business will be harmed.
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;
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. 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. Our increased marketing expenses may not
result in an increase of our brand awareness. Similarly, we may not achieve
increased revenues even if we are successful in increasing our brand awareness.
If we do not increase our revenues as a result of our branding and other
marketing efforts or if we otherwise fail to promote our brand successfully, our
business would be harmed.
If artists and record labels are not satisfied that they can securely digitally
deliver their music over the Internet, we might not have sufficient content to
attract consumers
Our success depends on our ability to aggregate a sufficient amount and
variety of digital recorded music for syndication. In particular, until a
significant number of artists and their record labels adopt a strategy of
digitally delivering music over the Internet, the growth of our business might
be limited. We currently do not create our own content; rather, we rely on
record companies and artists for digital recorded music to be syndicated using
our format. We believe record companies will remain reluctant to distribute
their recorded music digitally unless they are satisfied that the digital
delivery of their music over the Internet will not result in the unauthorized
copying and distribution of that music. If record companies do not believe that
recorded music can be securely delivered over the Internet, they will not allow
the digital distribution of their recorded music and we might not have
sufficient content to attract consumers. If we cannot offer a sufficient amount
and variety of digital recorded music for syndication, our business might be
harmed.
Due to the many factors that influence market acceptance, consumers might not
accept our platform
Our success will depend on growth in consumer acceptance of our platform as a
method for digital delivery of recorded music over the Internet. Factors that
might influence market acceptance of our platform include the following, over
which we have little or no control:
. the availability of sufficient bandwidth on the Internet to enable
consumers to download digital recorded music rapidly and easily;
. the willingness of consumers to invest in computer technology that
facilitates the downloading of digital music;
. the cost of time-based Internet access;
. the number and variety of digital recordings available for purchase
through our system relative to those available through other online
digital delivery companies, digital music websites or through
traditional physical delivery of recordings;
. the availability of portable devices to which digital recorded music
can be transferred;
. the fidelity and quality of the sound of the digital recorded music;
and
. the level of consumer comfort with the process of downloading and
paying for digital music over the Internet, including ease of use and
lack of concern about transaction security.
The market for digital delivery of music over the Internet is highly
competitive, and if we cannot compete effectively, our ability to generate
meaningful revenues would suffer dramatically
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Competition among companies in the business of digital delivery of music over
the Internet is intense. If we do not compete effectively or if we experience
pricing pressures, reduced margins or loss of market share resulting from
increased competition, our business might be harmed.
Competition is likely to increase as new companies enter the market and
current competitors expand their products and services. Many of these potential
competitors are likely to enjoy substantial competitive advantages, including
the following:
. larger audiences;
. larger technical, production and editorial staffs;
. greater brand recognition;
. access to more recorded music content;
. a more established Internet presence;
. a larger advertiser base; and
. substantially greater financial, marketing, technical and other
resources.
If standards for the secure digital delivery of recorded music are not adopted,
the piracy concerns of record companies and artists might not be satisfied, and
they might not use our platform for digital delivery of their music
Because other digital recorded music formats, such as mp3, do not contain
mechanisms for tracking the source or ownership of digital recordings, users are
able to download and distribute unauthorized or "pirated" copies of copyrighted
recorded music over the Internet. This piracy is a significant concern to record
companies and artists, and is the reason many record companies and artists are
reluctant to digitally deliver their recorded music over the Internet. The
Secure Digital Music Initiative (SDMI) is a committee formed by the Recording
Industry Association of America (RIAA) to propose a standard format for the
secure digital delivery and use of recorded music. If a standard format is not
adopted, however, pirated copies of recorded music will continue to be available
on the Internet, and record companies and artists might not permit the digital
delivery of their music. Additionally, as long as pirated recordings are
available, many consumers will choose free pirated recordings rather than paying
for legitimate recordings. Accordingly, if a standard format for the secure
digital delivery of music is not adopted, our business might be harmed.
We have designed our current products to be adaptable to different music
industry and technology standards. Numerous standards in the marketplace,
however, could cause confusion as to whether our products and services are
compatible. If a competitor were to establish the dominant industry standard,
our business would be harmed.
If our platform does not provide sufficient rights reporting information, record
companies and artists are unlikely to digitally deliver their recorded music
using our platform
Record companies and artists must be able to track the number of times their
recorded music is downloaded so that they can make appropriate payments to music
rights organizations, such as the American Society of Composers, Authors and
Publishers, Broadcast Music Incorporated and SESAC, Inc. If our products and
services do not accurately or completely provide this rights reporting
information, record companies and artists might not use our platform to
digitally deliver their recorded music, and our business might be harmed.
Our business might be harmed if we fail to price our products and services
appropriately
The price of Internet products and services is subject to rapid and frequent
change. We may be forced for competitive or technical reasons to reduce or
eliminate prices for certain of our products or services. If this happens, our
business might be harmed.
If our relationships with our international partners terminate, our revenues
might decline
We derive a portion of our revenues from business development fees generated
from relationships with our international partners, Liquid Audio Korea, Liquid
Audio Japan and Super Stage. These relationships vary in size and scope. If one
of these relationships, or any other relationship that accounts for a
significant portion of our revenues in a given period, does not
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generate a similar amount of revenue, or any, in subsequent periods, then our
business could be harmed. As a consequence, our revenues are not recurring from
period-to-period, which might result in unpredictability of our revenues.
Our revenues would be negatively affected by the loss of a significant customer
We have derived, and we believe that we will continue to derive, a
substantial portion of our net revenues from a limited number of customers and
projects. Our ten largest customers for the four quarters of 1999 and the first
quarter of 2000 represented approximately 80%, 97%, 93%, 82% and 90%,
respectively, of our total net revenues. The loss of Liquid Audio Japan, Liquid
Audio Korea, or any other significant customer or any significant reduction of
total net revenues generated by these or other significant customers, without an
increase in revenues from other sources, would harm our business. The volume of
products or services we sell to specific customers is likely to vary year to
year, and a major customer in one year may not use our services in a subsequent
year. A customer's decision not to use our services in a subsequent year might
harm our business.
We might not be able to scale our technology infrastructure to meet demand for
our products and services
Our success will depend on our ability to scale our technology infrastructure
to meet the demand for our products and services. Adding this new capacity will
be expensive, and we might not be able to do so successfully. In addition, we
might not be able to protect our new or existing data centers from unexpected
events as we scale our systems. To the extent that we do not address any
capacity constraints effectively, our business would be harmed.
We might not be successful in our attempts to keep up with rapid technological
change and evolving industry standards
The markets for our products and services are characterized by rapidly
changing technology, evolving industry standards, changes in customer needs,
emerging competition, and frequent new product and service introductions. Our
future success will depend, in part, on our ability to:
. use leading technologies effectively;
. continue to develop our strategic and technical expertise;
. enhance our current products and services;
. develop new products and services that meet changing customer needs;
. advertise and market our products and services; and
. influence and respond to emerging industry standards and other
technological changes.
This must be accomplished in a timely and cost-effective manner. We may not
be successful in effectively using new technologies, developing new products or
services or enhancing our existing products or services on a timely basis. These
new technologies or enhancements may not achieve market acceptance. Our pursuit
of necessary technological advances may require substantial time and expense.
Finally, we may not succeed in adapting our services to new technologies as they
emerge.
Companies might not develop or consumers might not adopt devices that will play
digitally downloaded music
We believe that the market for digital recorded music delivered over the
Internet will not develop significantly until consumers are able to enjoy this
music other than solely through the use of a personal computer. Several consumer
electronics companies have introduced or announced plans to introduce devices
that will allow digital music delivered over the Internet to be played away from
the personal computer. If companies fail to introduce additional devices,
consumers do not adopt these devices or our products and services are
incompatible with these devices, our business would be harmed. In addition,
digital music can be transferred to a compact disc, but that transfer requires a
compact disc recorder (CD-R). Many desktop computer manufacturers offer CD-Rs in
their computers. If companies do not continue to offer CD-Rs in their computers,
consumers do not adopt CD-Rs or our products and services are incompatible with
CD-Rs, our business might be harmed.
We might not be successful in the development and introduction of new products
and services
We depend in part on our ability to develop new or enhanced products and
services in a timely manner and to provide new products and services that
achieve rapid and broad market acceptance. We may fail to identify new product
and service
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opportunities successfully and develop and bring to market new products and
services in a timely manner. In addition, product innovations may not achieve
the market penetration or price stability necessary for profitability.
As the online medium continues to evolve, we plan to leverage our technology
by developing complementary products and services as additional sources of
revenue. Accordingly, we may change our business model to take advantage of new
business opportunities, including business areas in which we do not have
extensive experience. For example, we recently focused on, and will continue to
devote significant resources to, the development of digital music delivery
services, as well as our software licensing business. If we fail to develop
these or other businesses successfully, our business would be harmed.
We might experience delays in the development of new products and services
We must continue to innovate and develop new versions of our software to
remain competitive in the market for digital delivery of recorded music
solutions. Our software products and services development efforts are inherently
difficult to manage and keep on schedule. Our failure to manage and keep those
development projects on schedule might harm our business.
Our products and services might contain errors
We offer complex products and services. They may contain undetected errors
when first introduced or when new versions are released. If we market products
and services that have errors or that do not function properly, then we may
experience negative publicity, loss of or delay in market acceptance, or claims
against us by customers, any of which might harm our business.
We might have liability for the content of the recorded music that we digitally
deliver
Because we digitally deliver recorded music to third parties, we might be
sued for negligence, copyright or trademark infringement or other reasons. These
types of claims have been brought, sometimes successfully, against providers of
online products and services in the past. Others could also sue us for the
content that is accessible from our website through links to other websites.
These claims might include, among others, claims that by hosting, directly or
indirectly, the websites of third parties, we are liable for copyright or
trademark infringement or other wrongful actions by these third parties through
these websites. Our insurance may not adequately protect us against these types
of claims and, even if these claims do not result in liability, we could incur
significant costs in investigating and defending against these claims.
We have taken steps to prevent these claims. For example, we have
arrangements with companies that use our hosting services that will allow us to
delete potentially infringing or misappropriating materials quickly and
securely. We also have put into place indemnification agreements with music
content providers, where practicable. Under the Digital Millenium Copyright Act
of 1999, Internet service providers are insulated from several types of these
claims, upon compliance with the requirement that they appoint an agent to
receive claims relating to their service, and we intend to appoint an agent.
Several of our customers have had limited operating histories, are unprofitable
and might have difficulty meeting their payment obligations to us
Several of our significant customers, including our international partners
Liquid Audio Japan and Liquid Audio Korea, have had limited operating histories
and have not achieved profitability. We believe that this will be true of other
customers in the future. You should evaluate the ability of these companies to
meet their payment obligations to us in light of the risks, expenses and
difficulties encountered by companies with limited operating histories. If one
or more of our customers were unable to pay for our services in the future, or
paid more slowly than we anticipate, our business might be harmed. As of March
31, 2000, 5% of accounts receivable, or $33,000, was more than 30 days past due.
We have provided adequate reserves for past due amounts.
System failures or delays might harm our business
Our operations depend on our ability to protect our computer systems against
damage from fire, water, power loss, telecommunications failures, computer
viruses, vandalism and other malicious acts, and similar unexpected adverse
events. Interruptions or slowdowns in our services have resulted from the
failure of our telecommunications providers to supply the necessary data
communications capacity in the time frame we required, as well as from
deliberate acts. Despite precautions we have taken, unanticipated problems
affecting our systems could in the future cause temporary interruptions or
delays in the
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services we provide. Our customers might become dissatisfied by any system
failure or delay that interrupts our ability to provide service to them or slows
our response time. Sustained or repeated system failures or delays would affect
our reputation, which would harm our business. Slow response time or system
failures could also result from straining the capacity of our software or
hardware due to an increase in the volume of products and services delivered
through our servers. While we carry business interruption insurance, it might
not be sufficient to cover any serious or prolonged emergencies, and our
business might be harmed.
We might be unable to license or acquire technology
We rely on certain technologies that we license or acquire from third
parties, including Dolby Laboratories Licensing Corporation, Fraunhofer Institut
and RSA Data Security, Inc. These technologies are integrated with our
internally-developed software and used in our products, to perform key functions
and to enhance the value of our platform. These third-party licenses or
acquisitions may not continue to be available to us on commercially reasonable
terms or at all. Any inability to acquire such licenses or software on
commercially reasonable terms might harm our business.
Our future success depends on our key personnel
Our future success depends to a significant extent on the continued service
of our key technical, sales and senior management personnel and their ability to
execute our growth strategy. The loss of the services of any of our senior level
management, or certain other key employees, could harm our business. Our future
performance will depend, in part, on the ability of our executive officers to
work together effectively. Our executive officers may not be successful in
carrying out their duties or running our company. Any dissent among executive
officers could impair our ability to make strategic decisions quickly in a
rapidly changing market.
Our future success also depends on our ability to attract, retain and
motivate highly skilled employees. Competition for employees in our industry is
intense. Although we provide compensation packages that include incentive stock
options, cash incentives and other employee benefits, we may be unable to retain
our key employees or to attract, assimilate and retain other highly qualified
employees in the future. We have from time to time in the past experienced, and
we expect to continue to experience in the future, difficulty in hiring and
retaining highly skilled employees with appropriate qualifications.
Our management and internal systems might be inadequate to handle the potential
growth of our personnel
To manage future growth, our management must continue to improve our
operational and financial systems and expand, train, retain and manage our
employee base. Our management may not be able to manage our growth effectively.
If our systems, procedures and controls are inadequate to support our
operations, our expansion would be halted and we could lose our opportunity to
gain significant market share. Any inability to manage growth effectively may
harm our business.
We depend on proprietary rights to develop and protect our technology
Our success and ability to compete substantially depends on our internally
developed technologies and trademarks, which we protect through a combination of
patent, copyright, trade secret and trademark laws. Patent applications or
trademark registrations may not be approved. Even if they are approved, our
patents or trademarks may be successfully challenged by others or invalidated.
If our trademark registrations are not approved because third parties own these
trademarks, our use of these trademarks would be restricted unless we enter into
arrangements with the third-party owners, which might not be possible on
commercially reasonable terms or at all.
The primary forms of intellectual property protection for our products and
services internationally are patents and copyrights. Patent protection
throughout the world is generally established on a country-by-country basis. To
date, we have not applied for any patents outside the United States. We may do
so in the future. Copyrights throughout the world are protected by several
international treaties, including the Berne Convention for the Protection of
Literary and Artistic Works. Despite these international laws, the level of
practical protection for intellectual property varies among countries. In
particular, United States government officials have criticized countries such as
China and Brazil for inadequate intellectual property protection. If our
intellectual property is infringed in any country without a high level of
intellectual property protection, our business could be harmed.
We generally enter into confidentiality or license agreements with our
employees, consultants and corporate partners, and generally control access to
and distribution of our technologies, documentation and other proprietary
information. Despite
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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.
We have licensed, and we may license in the future, certain proprietary
rights to third parties. While we attempt to ensure that the quality of our
brand is maintained by our business partners, they may take actions that could
impair the value of our proprietary rights or our reputation. In addition, these
business partners may not take the same steps we have taken to prevent
misappropriation of our solutions or technologies.
We face and might face intellectual property infringement claims that might be
costly to resolve
From time to time, we receive letters from corporations and other entities
suggesting that we review patents to which they claim rights or claiming that we
infringe their patent rights. Such claims may result in our being involved in
litigation. Although we do not believe we infringe the proprietary rights of any
party, we cannot assure you that parties will not assert additional claims in
the future or that any claims will not be successful. We could incur
substantial costs and diversion of management resources to defend any claims
relating to proprietary rights, which could harm our business. In addition, we
are obligated under certain agreements to indemnify the other party for claims
that we infringe on the proprietary rights of third parties. If we are required
to indemnify parties under these agreements, our business could be harmed. If
someone asserts a claim against us relating to proprietary technology or
information, we might seek licenses to this intellectual property. We might not
be able to obtain licenses on commercially reasonable terms, or at all. The
failure to obtain the necessary licenses or other rights might harm our
business.
Difficulties presented by international economic, political, legal, accounting
and business factors could harm our business in international markets
A key component of our strategy is to expand into international markets. The
following risks are inherent in doing business on an international level and we
have little or no control over them:
. unexpected changes in regulatory requirements;
. export restrictions;
. export controls relating to encryption technology;
. longer payment cycles;
. problems in collecting accounts receivable;
. political and economic instability; and
. potentially adverse tax consequences.
In addition, other factors that may also affect us and over which we have
some control include the following:
. difficulties in staffing and managing international operations;
. differences in music rights reporting structures; and
. seasonal reductions in business activity.
We have entered into individual agreements in Japan and Korea, and we may
enter into similar arrangements in the future in other countries. One or more of
the factors listed above may harm our present or future international operations
and, consequently, our business.
We might need additional capital in the future and additional financing might
not be available
We currently anticipate that our available cash resources and financing
available under existing lease agreements will be sufficient to meet our
anticipated working capital and capital expenditure requirements for the
foreseeable future. However, we may need to raise additional funds through
public or private debt or equity financing in order to:
21
<PAGE>
. take advantage of opportunities, including more rapid international
expansion or acquisitions of complementary businesses or technologies;
. develop new products or services; or
. respond to competitive pressures.
Any additional financing we may need may not be available on terms favorable
to us, or at all. If adequate funds are not available or are not available on
acceptable terms, we might not be able to take advantage of unanticipated
opportunities, develop new products or services, or otherwise respond to
unanticipated competitive pressures, and our business could be harmed. Our
forecast of the period of time through which our financial resources will be
adequate to support our operations is a forward-looking statement that involves
risks and uncertainties, and actual results could vary materially as a result of
a number of factors, including those set forth in this "Additional Factors
Affecting Future Results" section.
Internet security concerns could hinder e-commerce
A significant barrier to e-commerce and communications over the Internet has
been the need for secure transmission of confidential information. Internet
usage may not increase at the rate we expect unless some of those concerns are
adequately addressed and found acceptable by the market. Internet usage could
also decline if any well-publicized compromise of security occurs. We may incur
significant costs to protect against the threat of security breaches or to
alleviate problems caused by these breaches. Protections may not be available at
a reasonable price or at all. If a third person were able to misappropriate a
user's personal information, users could bring claims against us.
Imposition of sales and other taxes on e-commerce transactions might hinder e-
commerce
We do not collect sales and other taxes when we sell our products and
services over the Internet. States or local governments may seek to impose sales
tax collection obligations on out-of-state companies, such as ours, which engage
in or facilitate e-commerce. A number of proposals have been made at the state
and local level that would impose additional taxes on the sale of products and
services through the Internet. These proposals, if adopted, could substantially
impair the growth of e-commerce and could reduce our opportunity to derive
profits from e-commerce. Moreover, if any state or local government or foreign
country were to successfully assert that we should collect sales or other taxes
on the exchange of products and services on our system, our business might be
harmed.
In 1998, Congress passed the Internet Freedom Act, which imposes a three-year
moratorium on state and local taxes on Internet-based transactions. We cannot
assure you that this moratorium will be extended. Failure to renew this
moratorium would allow various states to impose taxes on e-commerce, which might
harm our business.
Demand for our products and services might decrease if growth in the use of the
Internet declines
Our future success substantially depends upon the continued growth in the use
of the Internet. The number of users on the Internet may not increase and
commerce over the Internet may not become more accepted and widespread for a
number of reasons, including the following, over which we have little or no
control:
. actual or perceived lack of security of information, such as credit
card numbers;
. lack of access and ease of use;
. inconsistent quality of service and lack of availability of cost-
effective, high speed service;
. possible outages due to damage to the Internet;
. excessive governmental regulation; and
. uncertainty regarding intellectual property rights.
If the necessary infrastructure, products, services or facilities are not
developed, or if the Internet does not become a viable commercial medium, our
business would be harmed.
22
<PAGE>
Government regulation of the Internet might harm our business
The applicability to the Internet of existing laws governing issues such as
property ownership, libel and personal privacy is uncertain. In addition,
governmental authorities may seek to further regulate the Internet with respect
to issues such as user privacy, pornography, acceptable content, e-commerce,
taxation, and the pricing, characteristics and quality of products and services.
Finally, the global nature of the Internet could subject us to the laws of a
foreign jurisdiction in an unpredictable manner. Any new legislation regulating
the Internet could inhibit the growth of the Internet and decrease the
acceptance of the Internet as a communications and commercial medium, which
might harm our business.
In addition, the growing use of the Internet has burdened the existing
telecommunications infrastructure and has caused interruptions in telephone
service. Telephone carriers have petitioned the government to regulate the
Internet and impose usage fees on Internet service providers. Any regulations of
this type could increase the costs of using the Internet and impede its growth,
which could in turn decrease the demand for our services or otherwise harm our
business.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See "Market Risk" in Part I, Item 2, Management's Discussion and Analysis of
Financial Condition and Results of Operations.
23
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In April 1999, Arne Frager and Rose G. Frager filed a complaint against us
and our president, Gerald Kearby, in the Superior Court of the State of
California for the County of Marin. The case was then transferred to the
Superior Court of California for the County of San Mateo (case number 410103).
The complaint alleged breach of contract, fraud and related claims. In
particular, plaintiffs alleged that in January 1996, in connection with the
formation of Liquid Audio, we agreed to issue Mr. Frager 200,000 shares of
common stock. Adjusted for stock splits, those shares are now equivalent to
750,000 shares. Plaintiffs further alleged that Liquid Audio entered into a
consulting agreement with Mr. Frager under which we allegedly agreed not to
terminate Mr. Frager without good cause. Plaintiffs alleged that we breached
each of these agreements. They sought 587,870 shares of our common stock, the
portion of the 750,000 shares that had not previously been issued. In the
alternative, plaintiffs sought 87,868 shares of common stock, which was the
number of remaining unvested shares that Mr. Frager would have received had he
not been terminated before all of his shares vested. While we believed the suit
was without merit, we reached an out of court settlement with the plaintiffs
whereby we issued 30,000 shares of our common stock to Mr. Frager. As described
above, we recorded an accounting charge in our statement of operations equal to
the fair market value of the shares at the time of issuance.
In May 1999, John Hempe filed a complaint against us, our president, Gerald
W. Kearby, our chief technical officer, Philip R. Wiser, and other defendants
not employed by us, in the San Mateo Superior Court (case number 409032). The
defendants not employed by us have been dismissed. The complaint alleges, among
other things, discrimination under the provisions of the California Fair
Employment and Housing Act, breach of contract and breach of covenant of good
faith and fair dealing, in connection with his termination, and seeks
unspecified damages. While we believed the suit was without merit, we reached an
out of court settlement with the plaintiff whereby we agreed to pay $17,500 to
Mr. Hempe.
In December 1999, one of our former financial advisors informed us that it
believes it is entitled to a fee of $45,000 and warrants equivalent to at least
23,800 shares of our common stock pursuant to an April 1998 agreement we had
with the former advisor. Although no lawsuit has been filed to date, we have
been advised by the former advisor that a lawsuit seeking damages of $4 million
to $10 million will be filed if we do not satisfy its demand. We believe, after
consultation with counsel, that the former advisor's claims are without merit,
and in the event a lawsuit is filed we intend to defend ourselves vigorously.
However, should a lawsuit be filed and decided adversely to us, we may have to
pay damages to the former advisor.
In February 2000, Sightsound, Inc. notified one of our customers that it
intended to add the customer as a party to a pending patent litigation in the
United States District Court for the Eastern District of Pennsylvania
(Pittsburgh). The litigation alleges infringement of unspecified claims of
three patents (United States patent nos. 5,191,573; 5,675,734 and 5,996,440).
Damages have not been specified. Our customer has agreed to be added to the
case, subject to a revision in the trial schedule. Our customer has requested
indemnification (including defense costs) from us, based upon the terms of our
contract with them. Based on this request, we are negotiating an agreement with
our customer under which we would (i) assume control of the defense; (ii) pay
the expenses of the defense; and (iii) reserve certain rights as to
indemnification. During negotiation of this agreement we have agreed to assume
the costs of the defense for our customer. These costs could be significant.
There is no assurance that we will enter into this agreement. If we do not reach
an agreement with our customer and the defense is not successful, our customer
might seek full indemnification from us for the damages (if any). There can be
no assurance regarding the outcome of the litigation. If there is a finding of
infringement, we may be required to indemnify our customer as to the full amount
of the damages.
On March 31, 2000, Intouch Group, Inc. ("Intouch") filed a lawsuit against us
in the Northern District of California alleging patent infringement. On April
26, 2000, Intouch filed an amended complaint, which was served on us shortly
thereafter. The Complaint names us and Amazon.com International, Inc.,
Listen.com, Inc., Entertaindom LLC, Discovermusic.com, Inc. and Muze, Inc. It
alleges that we infringe, or induce infringement of, the claims of U.S. Patent
Nos. 5,237,157 and 5,963,916 by operating a website and/or a kiosk that allows
interactive previewing of pre-recorded music. The Complaint seeks unspecified
damages and injunctive relief. This action has only recently been filed and we
have not yet answered the complaint. We believe that we have meritorious
defenses to Intouch's claims and we intend to vigorously defend against such
claims. However, we cannot assure you that we will be successful in defending
these lawsuits. If there is a finding of infringement, we might be required to
pay substantial damages to Intouch and could be enjoined from selling any of our
products or services that are held to infringe Intouch's patents unless and
until we are able to negotiate a license from them.
24
<PAGE>
From time to time we receive letters from corporations or other business
entities notifying us of alleged infringement of patents held by them or
suggesting that we review patents to which they claim rights. These
corporations or entities often indicate a willingness to discuss licenses to
their patent rights.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
The effective date of our first registration statement, filed on Form S-1
under the Securities Act of 1933 (No. 333-82521) relating to our initial public
offering of common stock, was July 8, 1999. A total of 4,800,000 shares of
common stock were sold at a price of $15.00 per share to an underwriting
syndicate led by Lehman Brothers Inc., BancBoston Robertson Stephens Inc. and
U.S. Bancorp Piper Jaffray Inc. Offering proceeds, net of aggregate expenses of
approximately $6.1 million, were approximately $65.9 million.
The effective date of our second registration statement, filed on Form S-1
under the Securities Act of 1933 (No. 333-91541) relating to our follow-on
public offering of common stock, was December 14, 1999. A total of 2,946,076
shares of Common Stock were sold at a price of $33.63 per share to an
underwriting syndicate led by Lehman Brothers, BancBoston Robertson Stephens
Inc., U.S. Bancorp Piper Jaffray, Dain Rauscher Wessels and Fidelity Capital
Markets. An additional 503,924 shares of Common stock were sold on behalf of
selling stockholders as part of the same offering. Offering proceeds to us, net
of aggregate expenses of approximately $5.4 million, were approximately $93.7
million. Offering proceeds to selling shareholders, net of expenses of
approximately $847,000, were approximately $16.1 million.
From the time of receipt through March 31, 2000, our proceeds were applied
toward general corporate purposes, including the purchase of temporary
investments consisting of cash, cash equivalents and short-term investments,
working capital and capital expenditures, enhancing research and development and
attracting key personnel.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The following exhibits are filed with this report as indicated below:
10.49+ Amended and Restated License Agreement with Liquid Audio Japan, Inc.
dated January 1, 2000
27.1 Financial Data Schedule
- ---------
+ confidential treatment requested
(b) Reports on Form 8-K
None.
25
<PAGE>
LIQUID AUDIO, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DATE: May 15, 2000 LIQUID AUDIO, INC.
/s/ Gerald W. Kearby
------------------------------------------
GERALD W. KEARBY
President, Chief Executive Officer and
Director
/s/ Gary J. Iwatani
------------------------------------------
GARY J. IWATANI
Senior Vice President and Chief Financial
Officer
26
<PAGE>
LIQUID AUDIO, INC.
INDEX TO EXHIBITS FOR FORM 10-Q
FOR QUARTER ENDED MARCH 31, 2000
EXHIBIT NO. EXHIBIT DESCRIPTION
- ----------- -------------------
10.49+ Amended and Restated License Agreement with Liquid Audio Japan,
Inc. dated January 1, 2000
27.1 Financial Data Schedule
- -----------
+ Confidential treatment has been requested with respect to certain portions
of this exhibit. Omitted portions have been filed separately with the
Securities and Exchange Commission.
27
<PAGE>
Exhibit 10.49
AMENDED AND RESTATED LICENSE AGREEMENT
This Agreement is made and entered into as of January 1, 2000 (the
"Effective Date"), by and between Liquid Audio, Inc. ("LA"), a corporation
organized under the laws of the State of Delaware, and Liquid Audio Japan, Inc.
("LAJ"), a corporation organized under the laws of Japan. Capitalized terms not
otherwise defined shall have their meaning as set forth in Section 1 below or
elsewhere herein.
WHEREAS, the parties have entered into a Services Agreement dated as of
______, 1999 (the "Original Agreement");
WHEREAS, the parties wish to clarify and distinguish the revenue streams
for (1) the services and trademark license provided by LA to LAJ under the
Original Agreement, and (2) the software license granted by LA to LAJ under the
Original Agreement;
WHEREAS, in connection with this clarification, the parties wish to amend
and restate the Original Agreement;
NOW, THEREFORE, in consideration of the mutual covenants and agreements set
forth herein, the parties hereby agree as follows:
1. DEFINITIONS.
-----------
a. "Business Procedures" means the procedures set forth in the
Annual Business Plan (as defined in Section 2(g)), and any other procedures for
operating the Local Business that are issued by LA, including all updates or
revisions thereto.
b. "Gross Revenues" means all revenues arising from the Local
Business.
c. "LA Products and Services" means the products and services
detailed in Exhibit A.
d. "LA Software" means the software identified on Exhibit A for use
by LAJ in exercising the appointment hereunder.
e. "LA Trade Secrets" means LA's Business Procedures, application
program interfaces, and certain know-how, techniques, processes, methods and
other trade secrets that may be disclosed by LA to LAJ hereunder.
f. "LMN-J Domain" means www.liquidmusicnetwork.co.jp or the
----------------------------
alternative domain name for the LMN-J that is chosen by mutual agreement of the
parties.
g. "LMN-J" means a localized version of LA's Liquid Music Network
World Wide Web site.
h. "LOC-J" means a localized version of LA's Liquid Operations
Center.
<PAGE>
i. "Local Business" means an internet-based business operated in
the Territory under the Business Procedures that provides the LA Products and
Services. For avoidance of doubt, the Local Business does not include the sale
of products and services of LA that are covered by the Reseller Agreement.
j. "Localized Version" means a modified version of the LA Software
or LA Products or Services translated into Japanese.
k. "LAJ Shareholder Agreement" means that certain agreement among
LA, Super Stage, Inc., and certain investors, pursuant to which LA, Super Stage,
Inc., and certain investors have agreed to management terms for LAJ.
l. "Reseller Agreement" means that certain Software Reseller
Agreement dated August 9, 1998 between LA and LAJ.
m. "Subsidiaries" means all current and future business entities of
which LAJ 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.
n. "Term" means the term of this Agreement commencing upon the
Effective Date and expiring concurrently with the expiration of the Reseller
Agreement (currently December 31, 2003), unless earlier terminated pursuant to
the terms of Section 11 below.
o. "Territory" means Japan.
2. APPOINTMENT AND LICENSE GRANT.
-----------------------------
a. Appointment. LA hereby appoints LAJ, and LAJ hereby accepts the
-----------
appointment, to operate the Local Business, solely on the terms and conditions
detailed herein. This appointment shall be on an exclusive basis during the
Term, except that if LAJ fails to achieve [*] of the revenues specified in the
Annual Business Plan (as defined in Section 2(g)) for a given year, then LA may
terminate this Agreement, effective immediately. Notwithstanding the foregoing,
the parties hereby acknowledge that this appointment shall not preclude LA from
continuing its worldwide efforts to promote and offer the LA Products and
Services; provided that, if LA receives inquiries or orders for LA Products and
Services from individuals or entities located within the Territory who will use
the LA Products and Services within the Territory, LA shall direct such sales
and revenue leads to LAJ in accordance with Section 2(c). Such efforts may
include, without limitation: (a) engaging in activities designed to foster
integration between and amongst LAJ and LA's appointees and business associates
in other territories; and (b) establishing and leveraging relationships with
individuals and entities both inside and outside the Territory (as contemplated
in Section 6(i)) to assist LAJ in maximizing the performance of the Local
Business.
b. License Grant. Subject to the terms and conditions set forth
-------------
herein, LA hereby grants LAJ the nontransferable license in the Territory to use
the LA Software solely to the extent necessary to operate the Local Business.
-2-
* 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. Territorial Limitation. LAJ will limit its marketing and
----------------------
distribution efforts to individuals and/or entities, as applicable, that: (a)
are physically located in the Territory, and (b) will use the LA Products and
Services within the Territory. In the event LAJ receives inquiries or orders for
LA Products and Services from individuals or entities located outside the
Territory or who intend to use such LA Products and Services outside the
Territory, LAJ will not respond to such inquiries or fulfill such requests.
Instead, LAJ shall refer all such inquiries to LA. In the event LA receives
inquiries or orders for LA Products and Services from individuals or entities
located within the Territory who will use the LA Products and Services within
the Territory, LA shall direct such sales and revenue leads to LAJ. In addition,
to the extent LA identifies other direct sales or revenue leads that are
appropriate for the Local Business, LA shall refer such leads to LAJ.
d. Additional Restrictions. LAJ may not modify, translate, or
-----------------------
otherwise alter the LA Software or any other materials provided by LA under this
Agreement. LAJ agrees that it will not itself, or through any Subsidiary,
affiliate or other third party: (i) copy, market, sell, distribute, sublicense,
rent, lease, timeshare, or encumber the LA Software; (ii) attempt to decompile,
disassemble or reverse engineer the source code (in whole or in part) for the LA
Software, or otherwise attempt to derive such source code, 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, technology, products, or services based
upon or competitive with the Local Business, LA Products and Services, LA
Software or LA's Confidential Information; 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 LAJ will at its expense
defend, indemnify, and hold harmless LA and its officers, directors, and
employees against all liabilities, damages, claims, fines and expenses arising
out of any claim that LAJ has not obtained such permissions.
e. Reservation of Rights and Ownership. 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. LA retains ownership of the
LA Software and all right, title and interest therein. LAJ acknowledges and
agrees that it is acquiring only the right to use the LA Software in order to
operate the Local Business. 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.
f. Acknowledgement. The parties hereby acknowledge that the
---------------
licenses granted under Sections 2 (Appointment and License Grant), 4
(Trademarks), or elsewhere in this Agreement are not senyo jisshiken or senyo
shiyoken, as applicable. Furthermore: (i) LAJ shall not have the right to
prosecute infringement actions in its own name and (ii) LAJ, its affiliates, and
agents shall not attempt to register any right or license hereunder as a senyo
jisshiken or senyo shiyoken. Any such attempt shall be deemed a breach of this
Agreement that is not amenable to cure within thirty (30) days, and, as a
result, LA may immediately terminate this Agreement.
g. Annual Business Plan. The parties shall meet annually at a
--------------------
mutually agreed upon time and place to prepare a business plan detailing,
without limitation, LA Products and Services to be offered by LAJ and minimum
revenue targets ("Annual Business Plan"), subject to any procedures set forth in
the LAJ Shareholder Agreement. If the parties fail to agree upon an Annual
Business Plan within sixty (60) days after the start of the year to which such
Annual Business Plan
-3-
<PAGE>
relates, then each party shall refer the matter to higher levels of management
for resolution, and such persons shall use their best efforts to resolve the
matter for no less than thirty (30) days. Any matter such persons are unable to
resolve within such period may be submitted to arbitration pursuant to Section
12(a).
h. Milestones. In addition to complying with any milestones or
----------
benchmarks set forth in the Annual Business Plan, LAJ shall: (a) establish the
LMN-J within six (6) months of the Effective Date; and (b) commence operation of
the LOC-J within three (3) months of the Effective Date. LA's Liquid Operations
Center shall be used in place of the LOC-J until the LOC-J is operational. LOC-J
and/or Liquid Operations Center fees payable by licensees of LA's software shall
be paid to LAJ and remitted to LA, provided that the amount of such fees shall
be determined and revised from time to time by agreement of LA and LAJ.
3. OTHER ACTIVITIES. In the event that LAJ desires to: (i) enter into any
----------------
operational activities other than those included in the Local Business, or (ii)
partner with third parties with respect to the same (collectively, "Other
Activities"), LAJ shall notify LA in writing, and LA agrees to negotiate in good
faith with LAJ regarding the expansion of LAJ's appointment hereunder to include
such Other Activities; provided, however, that LA reserves the right not to
negotiate or agree to any proposed Other Activities if LA, in its sole business
discretion, concludes that such proposed Other Activities would materially
affect the core operation of LAJ or LA's Trademarks (as defined in Section 4(a)
below) in an adverse manner. LA shall have no liability to LAJ hereunder
whatsoever in the event LA fails to enter into or negotiate any such agreement
for Other Activities with LAJ. In addition, LAJ acknowledges that this Agreement
is subject to termination by LA pursuant to Section 11 in the event that LAJ
engages in any Other Activities without the prior written consent of LA. To the
extent that LA may provide assistance to LAJ in establishing relationships with
entities engaged in businesses related to these Other Activities, 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 its
obligations under any agreement it is a party to or that would, in LA's sole
determination, have a negative impact on its business, in any way.
4. TRADEMARKS AND TRADE NAMES.
--------------------------
a. Right to Use. During the term of this Agreement, LAJ shall have
------------
the right and shall be required to indicate to the public within the Territory
that it operates the Local Business under the name, "Liquid Audio Japan", and
shall have the right and shall be required to market and distribute the LA
Products and Services under the "Liquid Audio" trademark, 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 Territory
(collectively, "LA's Trademarks"). Notwithstanding the foregoing, any use of
LA's Trademarks on the LMN-J, 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.
b. Restrictions. LAJ 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,
-4-
<PAGE>
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 LAJ any right, title or interest in
LA's Trademarks. All uses of LA's Trademarks hereunder by LAJ shall inure solely
to the benefit of LA. If LAJ, in the course of exercising its rights hereunder,
acquires any goodwill or reputation in the LA Trademarks, all such goodwill or
reputation will automatically vest in LA when and as, on an ongoing basis, such
acquisition of goodwill or reputation occurs, as well as at the expiration or
termination of this Agreement, without any separate payment or other
consideration of any kind to LAJ. At no time during or after the term of this
Agreement shall LAJ challenge or assist others to challenge LA's Trademarks or
the registration thereof or attempt to register any trademarks, marks, trade
names, domain names, URLs or like designations that are confusingly similar to
those of LA.
c. Approval of Representations. All representations of LA's
---------------------------
Trademarks that LAJ 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. LAJ shall not use any of
LA's Trademarks in conjunction with another trademark on or in relation to any
other products or services without LA's prior written approval. All uses shall
be subject to approval by LA to ensure that LA's Trademarks are not used by LAJ
in a manner that is unintended by LA, and notwithstanding any approval by LA,
LAJ is responsible for the contents of such advertising and compliance with all
laws and regulations within the Territory relating thereto.
d. Trademark Registrations in the Territory. LAJ shall advise LA
----------------------------------------
regarding the registrations or filings appropriate to protect the use of the LA
Trademarks in the Territory or to otherwise safeguard LA's interests hereunder.
LA shall make such registrations or filings with the Japan Patent Office or
other appropriate authorities; provided, however, that LAJ shall provide all
assistance reasonably requested by LA in making such registrations or filing,
but LAJ shall not be obligated to pay for such registrations and filings.
e. Infringement Actions. LAJ 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. LAJ shall promptly notify LA of any such infringements or any acts of
unfair competition by third parties that come to LAJ's attention. LA shall have
the exclusive right, exercisable at its discretion, to institute in its own name
and/or LAJ'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. LAJ 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, provided
that LA's consent shall not be unreasonably withheld. LA shall endeavor to
provide LAJ with notice of its consent or lack thereof on an expedited basis in
the event of an emergency that requires LAJ to seek immediate relief in order to
prevent further infringement of the rights licensed hereunder. If, with LA's
consent, LAJ 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. LAJ shall be entitled to recover all reasonable costs and
expenses incurred in any such suit or action handled by LAJ from any financial
recovery awarded or obtained, and the
-5-
<PAGE>
damages LAJ incurred, to the extent compensatory damages were awarded therefor,
and the remainder shall be retained by LA. LA shall incur no liability to LAJ by
reason of LA's failure or refusal to prosecute, or by LA's refusal to permit LAJ
to prosecute, any alleged infringement by third parties, nor by reason of any
settlement to which LA may agree. For instances in which the procedures set
forth in this Section are expressly prohibited by the laws or regulations of the
Territory, the parties shall mutually agree upon alternative procedures.
f. Domain Names. LA shall, prior to the first date LAJ makes the
------------
World Wide Web site for the LMN-J generally available on the World Wide Web,
register the LMN-J Domain name with InterNIC (or its successor Internet name
assignment authority) and/or the Japan Network Information Center (JPNIC). LA
also shall pay the registration fees for one year. Thereafter, LA shall in a
timely fashion renew such registrations with such authorities each time such
registration becomes due during the Term, and LAJ shall promptly reimburse LA
for the cost of such renewal. For instances in which the procedures set forth in
this Section are expressly prohibited by JPNIC's terms and conditions or the
laws and regulations of the Territory the parties shall mutually agree upon
alternative procedures.
5. LOCALIZED VERSIONS, UPDATES AND MAINTENANCE SERVICES.
----------------------------------------------------
a. Localized Versions.
------------------
(i) Costs. LAJ 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 [*] of the total), as
well as the costs of third party contractors and subcontractors who assist in
the production of the Localized Versions. 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. LA will
invoice all development costs monthly and such costs shall be due within thirty
(30) days after the invoice date. In the event that LAJ prepares any Japanese-
language translations or interface modification designs necessary for such
localization, LAJ will be solely responsible for, and shall ensure the accuracy
and correctness, of all such Japanese-language translations and interface
modification designs provided by LAJ.
(ii) Procedures. In the event that LAJ desires the
----------
development of a Localized Version, LAJ 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: (1)
provides sufficient detail, (2) is commercially feasible to develop and
implement; and (3) constitutes a necessary customization of the applicable LA
Products and Services, LA Software, or Business Procedures for use in the
Territory. If LA reasonably determines that the requested localization meets the
foregoing requirements, LA will cooperate with LAJ to develop the requested
localization or to have such localization developed by third parties; 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 LAJ to
participate in the development of the Localized Versions where this
-6-
* 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>
participation is acceptable to LA in its sole discretion. If acceptable to LA in
its sole discretion, this participation in development of the Localized Versions
could include providing source code to LAJ for development purposes. LA shall
have no liability to LAJ 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.
b. Updates and Maintenance Services. During the Term, LA will deliver
--------------------------------
to LAJ any updates, when and if available, to the LA Software on a periodic
basis which LAJ shall promptly implement. LA shall continue to provide such
updates during any Renewal Term; provided that LAJ continues to pay the
quarterly maintenance fee described on Exhibit B. LAJ will be responsible for
all front-line maintenance and support for the LA Products and Services and any
end-user software included in such LA Products and Services.
c. Ownership Rights. 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 LAJ hereunder, and all copyrights and other intellectual
property rights therein and thereto. LAJ 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
proprietary 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 errors reported by LAJ relating to the LA Software will
be corrected.
d. Cooperation by LAJ. In order to facilitate prompt and efficient
------------------
completion of any Localized Versions hereunder, LAJ and its personnel shall
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) LAJ's software systems and facilities, and (iii) officers
and other personnel of LAJ.
6. ADDITIONAL OBLIGATIONS OF LAJ AND LA.
------------------------------------
a. Reports. LAJ agrees to provide LA with a quarterly sales and
-------
activity report with contents and format to be determined by LA. This report
must be forwarded to LA within thirty (30) days after the close of each calendar
quarter.
b. Promotional Activities. LAJ shall be entitled to pursue an
----------------------
array of promotional strategies to maximize the performance of the Local
Business. LA will support LAJ's marketing efforts by: (i) continuing to pursue
its current marketing and promotional efforts designed to establish awareness of
the Local Business; (ii) creating and providing appropriate marketing
documentation and other promotional materials; (iii) assisting in the
development of marketing and promotional concepts; and (iv) involving LAJ in
applicable marketing campaigns initiated by LA. In addition, the parties shall
mutually agree on other promotional activities that LAJ will perform to assist
LA in developing its brand identity in the Territory. This may include, without
limitation,
-7-
<PAGE>
mention in LA's press releases and marketing materials. At minimum, LAJ shall,
at its own expense, actively promote the Local Business, including advertising
in trade and other appropriate publications within the Territory, and
participating in appropriate trade shows, seminars, and joint marketing programs
with applicable marketing partners.
c. Finances and Personnel. LAJ shall maintain a net worth and
----------------------
working capital sufficient, in LAJ's reasonable judgment, to enable LAJ to use
its best efforts to perform fully and faithfully its obligations under this
Agreement. LAJ shall devote sufficient financial resources and technically
qualified service personnel to fulfill its responsibilities under this
Agreement, including, without limitation, its payment obligations set forth in
Section 7 below.
d. Customer Relations. LAJ shall, at its own expense: (i) provide
------------------
adequate contact with existing and potential customers of the LA Products and
Services within the Territory on a regular basis, consistent with good business
practice; (ii) assist LA in assessing customer requirements for the LA Products
and Services, 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 Territory; and (iv)
promote the use of the LA Products and Services in the major recording industry
corporate accounts market segments and other appropriate market segments; and
develop and serve major recording industry corporate accounts.
e. Standard of Business Practices. LAJ shall establish and maintain,
------------------------------
and shall cause its employees, consultants and agents to establish and maintain,
a high standard of ethical business practices in connection with its
appointment, including, without limitation, full compliance with Sections 12(o)
and 12(p) below. LAJ shall comply with all laws and regulations relating or
pertaining to its appointment, and shall comply with the regulations and
directives of any regulatory agencies which shall have jurisdiction over this
Agreement, the LA Products and Services, or the LA Software.
f. Representations of LAJ. LAJ represents and warrants on a
----------------------
continuous basis that it is a corporation duly organized and validly existing
under the laws of Japan; 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
or other organizational documents or any other agreement to which it is a party.
g. Representations of LA. LA represents and warrants on a continuous
---------------------
basis that it is a corporation duly organized and validly existing under the
laws of Delaware; 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
-8-
<PAGE>
result in a default or loss of rights under, any provision of its Articles of
Incorporation, Bylaws or other organizational documents or any other agreement
to which it is a party.
h. 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, LA
Products and Services, or LA Trademarks in the Territory. LA shall be
responsible for all fees or expenses incurred in connection with such
intellectual property registrations. LAJ 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. LAJ shall be responsible for all
fees or expenses incurred in connection with obtaining any necessary government
approvals with respect to this Agreement.
i. Additional LA Obligations. LA and LAJ shall cooperate to
-------------------------
integrate appropriate components of the LA Products and Services offered in the
Territory with other products and services offered by LA in the United States
and other territories. LA also shall offer LAJ access to the expertise and know-
how LA has developed for the technical and business implementation of the LA
Products and Services in the Territory, and shall provide general consulting
services to LAJ with respect to the Local Business on an as-needed basis
pursuant to the fee schedule attached as Exhibit C. In addition, LA and LAJ
shall cooperate to leverage LA's strategic partner relations, as appropriate,
for the benefit of LAJ in the Territory. These relations may include internet
companies, major entertainment companies, major music industry companies,
copyright societies, hardware Original Equipment Manufacturers (including
computers and consumer electronics companies), software partners, financial
clearinghouses, systems integrators, and global advertisers and sponsors.
7. COMPENSATION TO LA.
------------------
a. Payment Terms. All payments due hereunder shall be
-------------
calculated, denominated and made in United States Dollars, and LAJ 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 LAJ. All payments hereunder shall be made without set-off of any
amount whatsoever, whether based upon any claimed debt or liability of LA to
LAJ. Any past due amounts shall bear interest at the lesser of 1.5% per month or
the maximum rate permitted by applicable law. LAJ shall pay all of LA's costs
and expenses (including reasonable attorneys' fees) to enforce LA's rights under
this Section 7.
b. Software License Fee. In consideration of the software license
--------------------
granted herein, LAJ shall pay LA the non-refundable license fees specified on
Exhibit B ("Software License Fees") according to the schedule detailed therein.
c. Additional Software License Fees. As additional consideration for
--------------------------------
the software license granted herein, no later than thirty (30) days after the
end of each quarter, LAJ shall make the following payments to LA ("Additional
Software License Fees"): Commencing with the first quarter of 2000, and
continuing during any Renewal Term, LAJ shall pay the percentage of Gross
Revenues earned by LAJ during each quarter as shown in Exhibit B. Commencing
with the first quarter of 2002 and continuing during any Renewal Term, LAJ shall
pay LA an additional [*] of Gross
-9-
* 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>
Revenues (e.g., a total of [*] in the first quarter of 2002) earned by LA during
each quarter. During any Renewal Term, LAJ may credit any maintenance fees paid
for a given quarter against any Additional Software License Fees due under this
Section for such quarter. Notwithstanding the foregoing, LAJ shall be obligated
to pay the maintenance fees specified in Exhibit B during each quarter of any
Renewal Term, and such maintenance fees are due regardless of the amount of
Additional License Fees for any such quarter.
d. Taxes. In addition to the other charges specified above, LAJ
-----
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 LAJ's appointment or any of the amounts
payable by LAJ 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. If
LAJ is legally required to withhold any taxes on any payments made hereunder to
LA, LAJ 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. LAJ 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 LAJ in reporting or payment thereof. LA
agrees that in the event that LA is able to make use of the foreign tax credit,
then, on a prospective basis, LA shall advise LAJ to deduct any tax imposed on
any Additional Software License Fees due hereunder so that such tax may reduce
the amount payable to LA; provided however that: (i) LAJ may not offset any such
taxes against any Software License Fees, maintenance fees, or other fees due
hereunder and (ii) LAJ shall not have the right to recover any prior taxes from
amounts previously paid by LAJ hereunder. If LA gives such advice, then such
Additional Software License Fees (after the deduction of the withholding taxes)
shall be considered the gross amount. When such advice is made, LAJ shall pay
the withheld amount to the relevant tax authorities in the Territory and furnish
an official receipt thereof to LA so that LA may enjoy the benefit of the
foreign tax credit.
e. Accounting and Audit Rights. LAJ shall keep and maintain full and
---------------------------
accurate books of account and records. LA or its designees shall be entitled, at
its expense, to inspect such books and records on a quarterly basis and to audit
such books and records on an annual basis during or after the Term during
reasonable business hours and in each case upon five (5) business days prior
written notice to LAJ, and make copies and summaries of such books and records.
All such books of account and records shall be retained by LAJ for a minimum of
three (3) 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"), LAJ
shall promptly pay such Audit Deficiency to LA and, if such Audit Deficiency is
[*] or more of the payments made to LA pursuant to any statement in such audit
period, LAJ shall promptly pay all costs and expenses incurred by LA in
connection with such audit. If such Audit Deficiency is [*] 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 LAJ; provided that LAJ shall still be obligated
to tender the Audit Deficiency and associated costs and expenses to LA.
-10-
* 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>
8. WARRANTY DISCLAIMER. ALL LA SOFTWARE, LA TRADE SECRETS, LA PRODUCTS
-------------------
AND SERVICES AND OTHER MATERIAL DELIVERED BY LA ARE PROVIDED "AS-IS," AND LA
GRANTS NO WARRANTIES OR CONDITIONS, EXPRESS OR IMPLIED, BY STATUTE OR OTHERWISE,
REGARDING SUCH ITEMS, THEIR FITNESS FOR ANY PURPOSE, THEIR QUALITY, THEIR
MERCHANTABILITY, OR OTHERWISE.
9. INDEMNIFICATION OBLIGATIONS.
----------------------------
a. Indemnification by LA. LAJ 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 LAJ on
the issue of infringement by the LA Software or LA Trademarks of any copyright
or registered patent or trademark, as applicable, issued in the Territory prior
to the Effective Date of this Agreement, or, with respect to updates and
Localized Versions issued in the Territory prior to the date of release to LAJ,
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 LAJ on
such issue in any such suit or proceeding defended by LA. LAJ agrees that LA at
its sole option shall be relieved of the foregoing obligations unless LAJ
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 LAJ will indemnify and hold harmless LA from, all liability
arising from: (i) the combination or use by LAJ 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 LA by LAJ; or (iii) any other action or inaction by LAJ that would result in
the liability contemplated by this provision. If the LA Software, LA
Trademarks, 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 LAJ the right to sell or use, as
appropriate, the LA Software, LA Trademarks, or such part thereof; (ii) replace
the LA Software, LA Trademarks, or portions thereof, with other suitable
technology, trademarks, or portions thereof; (iii) suitably modify the LA
Software, LA Trademarks, or portions thereof; or (iv) if none of the foregoing
is commercially feasible in LA's judgement, terminate this Agreement and LAJ's
license to the LA Software and/or LA Trademarks. LA shall not be liable for any
costs or expenses incurred without its prior written authorization.
b. Limitation. Notwithstanding the provisions of Section 9(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 or
technology belonging to third parties, regardless of whether such software or
technology 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 LAJ 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.
-11-
<PAGE>
c. Entire Liability. The provisions of this Section 9 state the
----------------
entire liability and obligations of LA and the exclusive remedy of LAJ and its
customers, with respect to any alleged infringement of patents, copyrights,
trademarks or other intellectual property rights by the LA Software, LA Products
and Services, or any part thereof.
d. Indemnification by LAJ. Except for LA's indemnification
----------------------
obligations set forth above, LAJ 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 LAJ's
exceeding the scope of its appointment hereunder, the breach or inaccuracy of
any representation, warranty, covenant, agreement, term or condition made by LAJ
hereunder, the distribution of the LA Products and Services (excluding those
claims under Section 9(a) that the distribution of the LA Products and Services
infringe a third party's rights), any suit brought by an end-user or third
party, or use of any audio recordings or other copyrighted material in
connection with the LA Software or LA Products and Services, or the actions or
omissions, including negligence and other tortious conduct, of LAJ, its
employees, officers, agents or contractors.
10. PROPERTY RIGHTS AND CONFIDENTIALITY.
-----------------------------------
a. Property Rights. LAJ agrees that LA owns all rights, title
---------------
and interest in all embodiments of the LA Software, LA Trade Secrets, LA
Products and Services, and LA Trademarks, as well as all underlying copyrights,
patents, trademarks, inventions, know-how, trade secrets, or other proprietary
rights relating thereto. The appointment, licenses, and other rights granted
hereunder transfer to LAJ neither title, nor any other proprietary or
intellectual property rights to the foregoing. The use by LAJ 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" means this Agreement and its
Exhibits, any addenda hereto signed by both parties, all information models,
logic diagrams, information, data, drawings, benchmark tests, documentation,
specifications, trade secrets, structure, sequence and organization, object
code, source code, and any other proprietary information disclosed by one party
(the "Disclosing Party") to the other party (the "Receiving Party") directly or
indirectly (which information is marked as "proprietary" or "confidential" or,
if disclosed orally, is designated as confidential or proprietary at the time of
disclosure) hereunder constitutes the confidential and proprietary information
of the Disclosing Party. LA's Confidential Information includes, but is not
limited to, the LA Software and LA Trade Secrets, object code and source code of
or relating to the LA Software, if disclosed to LAJ hereunder in written,
electronic or verbal form, 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 LAJ by LA hereunder. LAJ 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.
-12-
<PAGE>
c. Nondisclosure Obligations. Each party agrees that it shall
-------------------------
use the Disclosing Party's 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 the
Disclosing Party's prior written consent. Each party agrees to exercise a high
standard of care in protecting the Confidential Information from unauthorized
use and disclosure, but no less than reasonable care. Without limiting the
foregoing, each party 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
exercise such party's rights and perform its obligations in a manner consistent
with this Agreement.
d. Exceptions to Nondisclosure Obligations. 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) 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 form 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.
11. TERM AND TERMINATION. This Agreement shall commence upon the
--------------------
Effective Date and continue until expiration of the Term, unless earlier
terminated in accordance with the provisions of this Agreement. Upon mutual
agreement prior to the expiration of the then-current Term, the parties may
renew this Agreement for an additional term of the same duration as the initial
Term ("Renewal Term"), subject to any terms and conditions issued by LA. LAJ
shall not be obligated to pay a separate renewal fee for such Renewal Term for
the license of LA Software, but will be obligated to pay quarterly maintenance
fees as described on Exhibit B. Notwithstanding the foregoing, upon expiration
of the Term, this Agreement shall automatically renew for the Renewal Term,
provided that LAJ: (a) achieves one hundred percent (100%) of the key
quantitative
-13-
<PAGE>
benchmarks detailed in the then-current Annual Business Plan; and (b) meets any
other benchmarks or milestones set forth therein.
a. Mutual Agreement. This Agreement may be terminated pursuant
----------------
to the mutual, written agreement of the parties.
b. Termination Due to Related Events. LA shall have the right to
---------------------------------
terminate this Agreement, effective immediately, if the Reseller Agreement is
terminated for any reason.
c. Termination for Default by LAJ. 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 30 days the Agreement will be terminated; provided
that the cure period shall be 10 days for payment obligations, and there shall
be no cure period if the nature of the default is not subject to cure. LAJ's
failure to make any payments when due shall be considered a default of a
material provision giving rise to LA's right of termination. 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 such 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 LAJ'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 LAJ's making any basic change in the general
nature or scope of its business, 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(s) from LAJ's board that were nominated by LA, if any;
(iii) upon the sale of any equity of LAJ other than pursuant to LAJ's initial
public offering; (iv) upon the merger or consolidation of LAJ with another
company, or the sale of all or substantially all of the business or assets of
LAJ, or any other change of control of LAJ; (v) upon the establishment by LAJ,
Super Stage, Inc., or any of their investors, of a business relationship with
any direct competitor of LA, including directly or indirectly participating in
any entity that sells, resells or distributes any software, product, or service
that materially competes with the LA Software (as defined in the Reseller
Agreement; hereinafter referred to as the "LA Resale Software"), LA Software, or
the LA Products and Services; (vi) upon the investment by LAJ in any other
business or entity; (vii) upon LAJ's entering into any material transactions not
in the ordinary course of business or between LAJ and a director or shareholder
of LAJ or an affiliate of such a shareholder, other than LAJ Shareholder
Agreement; (viii) upon LAJ's entering into any operational activities (other
than those specified herein or in the Reseller Agreement), partnering with third
parties with respect to the same, or receiving revenues from transactions that
are enabled by the LA Resale Software or LA Software.
-14-
<PAGE>
f. Legal or Regulatory Prohibitions. If any law or regulation
--------------------------------
applicable to LA or LAJ prohibits use of the LA Software, LA Trade Secrets, or
LA Trademarks by LAJ in the manner contemplated by this Agreement, or permits
the use of the LA Software, LA Trade Secrets, or LA Trademarks by LAJ in a
manner not expressly licensed by this Agreement, this Agreement may be
terminated by LA by giving written notice of termination to LAJ, 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 LAJ, 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 LAJ. Termination
shall not, however, relieve either party of obligations incurred prior to the
termination.
h. Transition Procedures and Wind-Down. Upon: (i) expiration,
-----------------------------------
or (ii) termination pursuant to Sections 2(a) or 11(a), then: (1) LAJ shall
provide LA with an updated customer list no later than ten (10) days after such
expiration or termination; and (2) LAJ and LA shall cooperate to develop
transition procedures ("Transition Procedures") related to the Local Business.
If the parties fail to agree upon Transition Procedures within sixty (60) days
after such expiration or termination, then each party shall refer the matter to
higher levels of management for resolution, and such persons shall use their
best efforts to resolve the matter for no less than an additional thirty (30)
days. Any matter that such persons are unable to resolve within such period may
be submitted to arbitration pursuant to Section 12(a). Section 11(i) shall be
suspended during the period of such negotiations (the "Wind-Down Period") and
LAJ shall be entitled to continue servicing its existing customer base during
the Wind-Down Period; provided however, that in no event shall such Wind-down
Period exceed one hundred and twenty (120) days. The parties shall cooperate
during such Wind-Down Period to pay highest regard to customers' requests with
regard to continuation of service after expiration or termination of this
Agreement; provided that this provision shall in no way limit the terms of
Section 11(g).
i. Return of Materials. Within 30 days after the expiration or
-------------------
termination of this Agreement, LAJ shall prepare all embodiments of the LA
Products and Services, LA Software, LA Trade Secrets, LA Trademarks, and any
other materials provided by LA hereunder that are in LAJ's possession or control
for shipment, as LA may direct, at LA's expense. LAJ shall not make or retain
any copies of any of LA's Confidential Information which may have been entrusted
to it. Effective upon the termination of this Agreement, LAJ shall cease to use
all LA Trademarks. In this regard, immediately upon the termination of this
Agreement, LAJ shall take all steps, as instructed by LA, to de-register or to
transfer to LA any user rights LAJ may have with respect to LA's Trademarks. In
addition, LAJ shall change its corporate name, trade name, and other aspects of
its corporate identity or otherwise ensure that such names may not be reasonably
confused with the LA Trademarks (or any variation thereof), or the name,
initials, trademark, service mark, domain name, or logo of LA's affiliates (or
any variation thereof).
j. Survival of Certain Terms. The provisions of Sections 2(e)
-------------------------
(Reservation of Rights and Ownership), 4(b) (with respect to restrictions on
registration of trademarks), 5(c) (Ownership Rights), 7(d) (Taxes), 7(e)
(Accounting and Audit Rights), 8 (Warranty Disclaimer),
-15-
<PAGE>
9 (Indemnification Obligations), 10 (Property Rights and Confidentiality), 11(g)
Limitation on Termination Liability, 11(h) (Transition Procedures and Wind-
Down), 11(i) (Return of Materials), 11(j) (Survival of Certain Terms), 12
(Miscellaneous Provisions), and 13 (Limitation of Liability) 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.
12. 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 12(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 12(e) below. The arbitration shall be conducted
by a panel of three (3) arbitrators chosen in accordance with said Rules within
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 LAJ, 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 12(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 2 or 10 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 12(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
-16-
<PAGE>
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 LAJ 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 LAJ 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 LAJ at the address and telecopier numbers indicated below:
(i) For LAJ:
Liquid Audio Japan, Inc.
Shinjuku Mitsui Building 30F, 2-1-1
Nishi-shinjuku, Shinjuku-ku
Tokyo 163-0430, Japan
Attention: Masahiro Kuroki
Telecopy: (03) 3340-4442
With a mandatory copy to:
Nishimura & Partners
Ark Mori Building, 29th Floor
12-32, Akasaka 1-Chome
Minato-Ku, Tokyo, 107-6029, Japan
Attention: Takanobu Takehara, Esq.
Telecopy: (03) 5561-9711
(ii) For LA:
Liquid Audio, Inc.
810 Winslow Street
Redwood City, California 94063
Attention: Robert Flynn
Telecopy: (650) 549-2099
-17-
<PAGE>
With a mandatory copy to:
Wilson Sonsini Goodrich & Rosati
650 Page Mill Road
Palo Alto, California 94304-1050
Attention: Alan Austin, Esq.
Telecopy: (650) 493-6811
or such other address or addresses as may have been furnished in writing to LA
by LAJ or to LAJ 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 LAJ fails to promptly execute
any documents reasonably necessary to confirm, set or record LA's rights to the
LA Software, LA Trademarks, Work Product, or any other material owned by LA
hereunder, LAJ 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, and any Addenda constitute 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
-18-
<PAGE>
form that LAJ may use in connection with the exercise of its appointment or the
licensing of the LA Software from LA 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. In the
event of a conflict between this Agreement and an Addendum, the terms of such
Addendum shall prevail.
k. Independent Contractors. The relationship of LA and LAJ
-----------------------
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 LAJ to create or assume any
obligation on behalf of LA for any purpose whatsoever. All financial obligations
associated with LAJ's business are the sole responsibility of LAJ. All sales and
other agreements between LAJ and its customers are LAJ's exclusive
responsibility and shall have no effect on LAJ's obligations under this
Agreement. LAJ 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 LAJ, its employees or its agents in performing LAJ's obligations or
exercising LAJ's rights under this Agreement. LA shall indemnify and hold LAJ
free and harmless from any and all claims, damages or lawsuits (including LAJ'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 LAJ under its present ownership,
and, accordingly, LAJ 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 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.
-19-
<PAGE>
o. Compliance with Laws. LAJ shall, at its own expense, pay all
--------------------
import licenses and permits, pay customs charges and duty fees, and take all
other actions required to exercise its appointment, accomplish the Services, or
complete any authorized import and use of the LA Software in the Territory. LAJ
shall ensure compliance with any applicable laws relating to its activities
under the terms of this Agreement, and LAJ hereby represents and warrants that
no consent, approval or authorization, or designation, declaration or filing
with any governmental authority in the Territory is required in connection with
the valid execution, delivery and performance of this Agreement.
p. Government Regulations. LAJ 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 Territory. Any and all obligations of LA to provide the
LA Software or other materials 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. LAJ agrees to
cooperate with LA, including, without limitation, providing required
documentation, in order to obtain any necessary export licenses or exemptions
therefrom. LAJ warrants that it will comply with all such applicable laws and
regulations governing use, exportation and re-exportation in effect from time to
time.
13. LIMITATION OF LIABILITY. IN NO EVENT SHALL LA'S AGGREGATE
-----------------------
LIABILITY HEREUNDER EXCEED THE TOTAL AMOUNTS PAID BY LAJ HEREUNDER DURING THE
PERIOD(S) IN WHICH SUCH CLAIM(S) AROSE. IN NO EVENT SHALL LA BE LIABLE TO LAJ 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 LA
SOFTWARE, OR COSTS OF PROCUREMENT OF SUBSTITUTE GOODS BY ANYONE. LAJ AGREES THAT
THESE LIMITATIONS OF LIABILITY ARE AGREED ALLOCATIONS OF RISK AND ARE REFLECTED
IN THE ROYALTIES AND FEES AGREED UPON BY THE PARTIES.
-20-
<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 JAPAN, INC.
By: /s/ Robert Flynn By: /s/ Chiaki Konagai
Name: Robert Flynn Name: Chiaki Konagai
Title: SVP Business Development Title: VP Business Development
-21-
<PAGE>
Exhibit A
LA PRODUCTS & SERVICES:
- -----------------------
Liquid Music Network: This is the music search website, as run by LA US,
that is the basis of the Liquid Affiliate program. The components are: the
search engine and website; the e-commerce channel; database and administration
tools website.
Liquid Operations Center: This is the system for client (player) passport
acquisition
Liquid Distribution: This is the back-end technology for distributing content
independently of e-commerce integration.
Liquid Promotions/Advertising
Remote Inventory Fulfillment System
Liquid Artist Program
Liquid Hosting: This is the system by which content is encoded, quality
tested and published to the partner's Liquid System.
LA SOFTWARE
- -----------
Core System Software:
Player - version 4.0
Liquid Server Internationalized Double-byte - version 4.0
Liquifier - version 4.0
Liquid Music Network: Reference source code that is LMN version 2.5, which
supports the following service components (none are localized):
Liquid Server (license allows use of server for remote inventory fulfillment)
Internationalized Double-byte - version 4.0
LMN database structure
Music search web pages
E-commerce channel connectivity - LAJ to customize to local provider interface
Content administration and QA web tools
Affiliate identification support
Liquid Operations Center: Liquid Passport acquisition website
Liquid Distribution: Inventory Management database schema and descriptions
<PAGE>
Exhibit B
Software License Fees
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
Due Date Quarter Amount Quarter Amount
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
January 1 Q4, 1999 [*]
- ------------------------------------------------------------------------------------------------------
March 1 Q1, 2000 [*] Q1, 2001 [*]
- ------------------------------------------------------------------------------------------------------
June 1 Q2, 2000 [*] Q2, 2001 [*]
- ------------------------------------------------------------------------------------------------------
September 1 Q3, 2000 [*] Q3, 2001 [*]
- ------------------------------------------------------------------------------------------------------
December 1 Q4, 2000 [*] Q4, 2001 [*]
- ------------------------------------------------------------------------------------------------------
</TABLE>
The software license fees above are non-refundable and cannot be offset
with any other fees due under this Agreement or any other agreement between LAJ
and LA.
During any Renewal Term, LAJ will pay to LA a quarterly maintenance fee in
the amount of [*], due on the first business day of each quarter.
Additional Software Licensing Fees
Each quarter as shown below, LAJ will pay to LA the following percentages
of Gross Revenues no later than 30 days after the end of such quarter.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
Quarter Rate Quarter Rate Quarter Rate Quarter Rate
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Q1 2000 [*] Q1 2001 [*] Q1 2002 [*] Q1 2003 [*]
- ----------------------------------------------------------------------------------------------------------------------
Q2 2000 [*] Q2 2001 [*] Q2 2002 [*] Q2 2003 [*]
- ----------------------------------------------------------------------------------------------------------------------
Q3 2000 [*] Q3 2001 [*] Q3 2002 [*] Q3 2003 [*]
- ----------------------------------------------------------------------------------------------------------------------
Q4 2000 [*] Q4 2001 [*] Q4 2002 [*] Q4 2003* [*]
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
* And thereafter during and Renewal Term
-23-
* 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 C
General Business Consulting
LA shall provide general consulting services to LAJ with respect to the
Local Business on an as-needed basis. All consulting services shall be
specified in writing and mutually agreed upon by the parties. The fees charged
by LA for such services shall be as follows:
Senior staff [*]
Staff [*]
LAJ shall reimburse LA for all direct expenses and out-of-pocket costs. LA will
invoice all consulting fees monthly and such fees shall be due within thirty
(30) days after the invoice 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.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-2000 DEC-31-1999
<PERIOD-START> JAN-01-2000 JAN-01-1999
<PERIOD-END> MAR-31-2000 MAR-31-1999
<CASH> 46,206 15,497
<SECURITIES> 106,211 0
<RECEIVABLES> 1,108 508
<ALLOWANCES> 125 294
<INVENTORY> 0 0
<CURRENT-ASSETS> 154,004 15,968
<PP&E> 8,638 2,445
<DEPRECIATION> 2,322 774
<TOTAL-ASSETS> 162,279 17,729
<CURRENT-LIABILITIES> 9,277 4,260
<BONDS> 0 0
0 0
0 0
<COMMON> 22 4
<OTHER-SE> 151,850 (17,855)
<TOTAL-LIABILITY-AND-EQUITY> 162,279 17,729
<SALES> 231 259
<TOTAL-REVENUES> 2,995 531
<CGS> 18 46
<TOTAL-COSTS> 679 201
<OTHER-EXPENSES> 10,938 4,606
<LOSS-PROVISION> 9 93
<INTEREST-EXPENSE> 45 51
<INCOME-PRETAX> (6,524) (4,143)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (6,524) (4,143)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (6,524) (4,143)
<EPS-BASIC> (0.30) (1.39)
<EPS-DILUTED> (0.30) (1.39)
</TABLE>
