<PAGE>
As filed with the Securities and Exchange Commission on July 15, 1999
Registration 333-76985
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
AMENDMENT NO. 6
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
AUDIBLE, INC.
(Exact name of registrant as specified in its charter)
Delaware 7375 22-3407945
(State or other (Primary Standard (I.R.S. Employer
jurisdiction of Industrial Identification Number)
incorporation or Classification Code
organization) Number)
----------------
Andrew J. Huffman
President and Chief Executive Officer
Audible, Inc.
65 Willowbrook Boulevard
Wayne, N.J. 07470
(973) 890-4070
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
----------------
Copies to:
Edwin M. Martin, Jr., Esquire Brian D. Goldstein, Esquire
Nancy A. Spangler, Esquire Testa, Hurwitz & Thibeault, LLP
Piper & Marbury L.L.P. 125 High Street
1200 19th Street, N.W. Boston, MA 02110
Washington, D.C. 20036 (617) 248-7000
(202) 861-3900
Approximate date of commencement of proposed sale to the public: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1933, check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act of 1933, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act of 1933, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
CALCULATION OF REGISTRATION FEE
<TABLE>
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<CAPTION>
Proposed
Proposed Maximum
Title of Each Class Amount Maximum Aggregate Amount of
of Securities To Be To Be Offering Price Offering Registration
Registered Registered Per Unit Price(1) Fee(2)
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<S> <C> <C> <C> <C>
Shares of Common Stock,
par value $.01......... 4,600,000 Shares $10.00 $46,000,000 $0
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</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457(a) under the Securities Act.
(2) A registration fee of $12,788 was paid at the time of the initial filing
of this registration statement based on the estimated aggregate offering
price.
----------------
The registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until this Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell these securities, and it is not soliciting an offer to buy +
+these securities, in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION DATED July 15, 1999
4,000,000 Shares
Common Stock
--------
All of the shares of common stock are being offered by Audible. Prior to this
offering, there has been no public market for the common stock. The initial
public offering price is expected to be between $8.00 and $10.00 per share.
We have granted the underwriters a 30-day option to purchase a maximum of
600,000 additional shares to cover over allotments of shares.
We have applied to list the common stock on the Nasdaq National Market under
the symbol "ADBL."
Investing in the common stock involves risks. See "Risk Factors" starting on
page 7.
<TABLE>
<CAPTION>
Underwriting
Price to Discounts and Proceeds
Public Commissions to Audible
-------- ------------- ----------
<S> <C> <C> <C>
Per Share..................................... $ $ $
Total......................................... $ $ $
</TABLE>
Delivery of the shares of common stock will be made on or about , 1999.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.
Credit Suisse First Boston
J.P. Morgan & Co.
Volpe Brown Whelan & Company
Wit Capital Corporation
The date of this prospectus is , 1999
<PAGE>
Description of Artwork
Inside Front Cover
The headline at the top reads: "Wide Selection of Premium Audio.
Convenient Digital Delivery. Enhanced Listening Experience. Lower Prices."
Below the headline, there are five graphics with the following headings
(clockwise from the top left): "browse, sample & buy," "listen," "entertain &
inform," "publishers" and "content."
Above the heading, "browse, sample & buy," is a screen shot page from
audible.com's Web site, with a picture and description of Stephen King's latest
book, The Girl Who Loved Tom Gordon. The caption below the heading reads:
"Browse audible.com's 7,000 selections to find your favorite authors, radio
shows and news programs. Listen to previews through speakers of your personal
computer. Buy at discounts up to 60% below cassette prices. Download audio
files to your personal computer."
To the right of the heading, "listen," is a picture of a woman walking,
holding a hand-held audio device and wearing headphones. The caption below the
heading reads: "Listen at your computer or when you're on the go by transferring
to any AudibleReady device compatible with the Audible service. Use headphones
or a cassette adapter to listen through your car stereo speakers."
To the left of the heading, "entertain & inform," is a picture of a man
driving a convertible and listening to a handheld device attached to a cassette
adapter with words emerging from the dashboard. The following caption is below
the heading: "Entertain yourself with best sellers you don't have time to read.
Inform yourself with news, investment advice, business and high tech
information."
Above the heading, "publishers," are logos of a selection of content
providers. The caption below the heading reads: "We have digital audio
distribution rights to content from over 100 publishers, new organizations,
radio producers and universities that stock the audible.com store."
Below the heading, "content," are pictures of various book covers, logos
of selected audio titles and programs and the following caption: "Whether you're
looking for mysteries, news, how-to, biographies, comedy, or lectures, you'll
find it at aubible.com."
At the bottom right corner is a picture of the Company's logo.
<PAGE>
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary.................. 3
Risk Factors........................ 7
Use of Proceeds..................... 15
Dividend Policy..................... 15
Capitalization...................... 16
Dilution............................ 17
Selected Historical Financial Data.. 18
Management's Discussion and
Analysis of Financial Condition
and Results of Operations.......... 20
Business............................ 29
</TABLE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
Management............................................................ 41
Related Transactions and Relationships................................ 48
Principal Stockholders................................................ 51
Description of Capital Stock.......................................... 54
Shares Eligible for Future Sale....................................... 58
Underwriting.......................................................... 60
Notice to Canadian Residents.......................................... 63
Validity of the Shares................................................ 64
Experts............................................................... 64
Additional Information................................................ 64
Index to Financial Statements......................................... F-1
</TABLE>
------------
You should rely only on the information contained in this document or to
which we have referred you. We have not authorized anyone to provide you with
information that is different. This document may only be used where it is legal
to sell these securities. The information in this document may only be accurate
on the date of this document.
----------------
Until , 1999, all dealers that effect transactions in these securities,
whether or not participating in this offering, may be required to deliver a
prospectus. This is in addition to the dealer's obligation to deliver a
prospectus when acting as an underwriter and with respect to unsold allotments
or subscriptions.
----------------
We have applied for federal registration of the marks Audible, audible.com,
AudibleReady, AudibleManager and Audible MobilePlayer. Other trademarks and
service marks appearing in this prospectus are the property of their respective
holders.
<PAGE>
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in the prospectus.
The summary is not complete and does not contain all the information you should
consider before buying shares in this offering. You should read the entire
prospectus carefully, especially the risks of investing in our common stock
discussed under "Risk Factors." Except where we state otherwise, we present
information in this prospectus assuming (1) the conversion of all outstanding
shares of convertible preferred stock into an aggregate of 13,400,996 shares of
common stock upon the closing of this offering, (2) our common stock will be
sold at $9.00 per share, which is the mid-point of the range shown on the cover
of this prospectus, (3) the underwriters will not exercise their over-allotment
option and (4) the filing of the amended and restated certificate of
incorporation. All share numbers reflect a three for two stock split effected
as a stock dividend on May 26, 1999.
Audible
We provide premium spoken audio content, such as audio versions of books and
newspapers and radio programs, that is delivered over the Internet and can be
played back on personal computers and hand-held electronic devices. The Audible
service allows consumers to purchase and download content from our Web site,
store it in digital files and play it back on personal computers and electronic
devices. Our Web site, audible.com, contains the largest and most diverse
collection of premium digital spoken audio content available for download on
the Internet, most of which is currently available only through us either
through exclusive arrangements or because, to our knowledge, no one else
currently has digital rights to this content. Visitors to audible.com can
browse through descriptions of audio titles and listen to samples online before
purchasing their selections. A customer can download content immediately or
schedule download for a later time. A customer can also schedule recurring
delivery of many subscription-based periodicals and radio programs. We began
offering our service in October 1997, and thus, we have a limited operating
history with which you can evaluate our business and our future prospects.
More than 15,000 hours of premium audio content are available at
audible.com, including over 3,000 audio versions of books from publishers such
as Bantam Doubleday Dell Publishing and Random House Publishing, each a
division of Random House, Inc., Dove Audio, Harper Audio, Simon & Schuster
Audio and Time Warner AudioBooks. We also have audio versions of periodicals
such as The New York Times, The Wall Street Journal and The Economist, and
radio programs such as Car Talk, Fresh Air, Marketplace and News From Lake
Wobegon.
The market for the Audible service results from the increasing usage of the
Internet and the recent introduction of a variety of hand-held electronic
devices that have audio capabilities. Unlike traditional radio broadcasts, the
Audible service offers customers access to content of their choice and the
ability to listen to what they want, when and where they want--whether
commuting, exercising, relaxing or sitting at their personal computers. Unlike
traditional and online bookstores, which are subject to physical inventory
constraints and shipping delays, we provide a selection that is readily
available in a digital format that can be quickly delivered over the Internet.
In addition, we provide customers with lower priced spoken audio content
because we do not incur the manufacturing and distribution costs of audio
content stored on cassette tapes and compact discs.
Customers use "AudibleReady" devices to access our content. AudibleReady
devices are personal computers and hand-held electronic devices that have a
speaker or an audio output jack and can be enabled to play back our audio
content. Our AudibleManager and AudiblePlayer software enable these devices to
receive and play back Audible content and are available for download from
audible.com at no charge. Recently, several device manufacturers have bundled
the AudibleManager and AudiblePlayer software in the packaging for their
devices. In addition, other device manufacturers plan to adapt their devices to
support the Audible service. The audio output jack of all of these devices can
work with headphones or with a cassette adaptor to enable the content to be
played through a car stereo system.
3
<PAGE>
In order to measure consumer behavior, to demonstrate to content providers
the viability of secure digital distribution of audio content and to test the
potential of our business model, we designed, created and sold the first
AudibleReady device, the Audible MobilePlayer. We have discontinued the
manufacture of the Audible MobilePlayer to focus our efforts on enabling the
Audible service to be used on a variety of electronic devices. We have
historically derived the majority of our revenue from the sale of the Audible
MobilePlayer, and we expect this revenue to decrease and eventually phase out
as we sell our remaining inventory.In the future, we will depend upon others to
manufacture and promote as "AudibleReady" devices which are capable of playing
our content. The first of these AudibleReady devices only became commercially
available in March 1999. We have agreements with Casio, Compaq, Everex and
Philips to bundle our software with their hand-held electronic devices and
promote our service. These devices, which have a variety of personal computer
and electronic organizer functions including personal information management,
calendar, task list, contact list, mail/messaging and information services, may
be available in limited quantities for the next several quarters. We also have
an agreement with Diamond Multimedia to make the next version of its Rio
Internet Music Player compatible with the Audible service.
We help publishers, producers, authors, device manufacturers and our Web
site affiliates to create incremental sources of revenue. We provide a new
source of revenue for publishers of newspapers, magazines, journals,
newsletters, professional publications and business information and producers
of radio broadcasts by creating a new market for content that is too timely for
distribution on cassette tape and too specialized for widely broadcast radio
programs. In addition, our service provides companies that distribute or
promote our service and manufacturers of hand-held audio-enabled electronic
devices with a wide selection of content to offer to their customers. We also
derive revenue from other services, including audio production, hosting
services and software development services to integrate our software with the
software and hardware of others.
We were incorporated in 1995 and commenced commercial operations in October
1997. Our principal executive offices are located at 65 Willowbrook Boulevard,
Wayne, New Jersey 07470, and our telephone number at that location is (973)
890-4070.
4
<PAGE>
The Offering
<TABLE>
<CAPTION>
<C> <S>
Common stock offered......................... 4,000,000 shares.
Common stock to be outstanding after this
offering.................................... 25,003,265 shares
Use of proceeds.............................. We estimate that we will
receive approximately $32.5
million from this offering. We
expect to use the net proceeds
from this offering for
marketing activities, for the
acquisition and production of
new audio content and the
extension and renewal of
existing content licensing
arrangement, for acquisition of
companies or technologies and
for general and corporate
purposes, including obtaining
and extending technology
licensing arrangements,
increasing personnel,
increasing production and
server system capacities, and
to finance operating losses
that we expect to incur as we
expand our customer base.
Proposed Nasdaq National Market symbol....... ADBL
</TABLE>
- --------------------
This table is based on shares outstanding as of March 31, 1999. This table
excludes:
. 9,000,000 shares of common stock we have reserved for issuance under
our 1999 Stock Incentive Plan; and
. 1,769,905 shares of common stock issuable upon exercise of
outstanding warrants.
5
<PAGE>
Summary Financial Data
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three Months
November 3, 1995 Ended
(inception) to Year Ended December 31, March 31,
December 31, ------------------------- ----------------
1995 1996 1997 1998 1998 1999
---------------- ------- ------- ------- ------- -------
(unaudited)
<S> <C> <C> <C> <C> <C> <C>
Statement of operations
data:
Revenue:
Content and services... $ -- $ -- $ 3 $ 132 $ 30 $ 58
Hardware............... -- -- 57 244 90 57
Other.................. -- -- -- -- -- 200
------ ------- ------- ------- ------- -------
Total revenue.......... -- -- 60 376 120 315
------ ------- ------- ------- ------- -------
Operating expenses:
Cost of content and
services revenue...... -- -- 78 372 75 152
Cost of hardware
revenue............... -- -- 252 556 255 63
Production expenses.... -- 684 1,982 1,639 486 495
Research and
development........... 49 1,810 2,672 1,641 389 320
Write-down related to
hardware business..... -- -- -- 952 -- --
Sales and marketing.... -- 256 1,227 1,453 272 396
General and
administrative........ -- 787 1,921 1,838 481 431
------ ------- ------- ------- ------- -------
Total operating
expenses............. 49 3,536 8,133 8,453 1,958 1,857
------ ------- ------- ------- ------- -------
Loss from operations. (49) (3,536) (8,073) (8,076) (1,838) (1,542)
------ ------- ------- ------- ------- -------
Other (income)
expense, net........ -- (27) (44) 62 6 (68)
------ ------- ------- ------- ------- -------
Net loss................ $ (49) $(3,509) $(8,029) $(8,138) $(1,844) $(1,474)
====== ======= ======= ======= ======= =======
Basic and diluted net
loss per common share.. $(0.02) $ (1.10) $ (1.49) $ (1.15) $ (0.28) $ (0.20)
Weighted average shares
outstanding............ 2,250 3,177 5,379 7,097 6,558 7,452
Pro forma basic and
diluted net loss per
common share (1)....... (0.50) (0.07)
Pro forma weighted
average shares
outstanding (1)........ 16,292 20,728
</TABLE>
<TABLE>
<CAPTION>
March 31, 1999
---------------------------------------
Pro Forma
Actual Pro Forma(2) As Adjusted(3)
----------- ------------ --------------
(unaudited)
<S> <C> <C> <C>
Balance sheet data:
Cash and cash equivalents............... $ 9,652 $9,652 $42,132
Total assets............................ 10,991 10,991 43,471
Noncurrent liabilities.................. 377 377 377
Redeemable preferred stock.............. 28,719 -- --
Total stockholders' (deficit) equity ... (20,950) 7,769 40,249
</TABLE>
- --------
(1) The "pro forma" summary statement of operations data for the year ended
December 31, 1998 and the three months ended March 31, 1999 reflects the
conversion of the outstanding shares of preferred stock into 13,400,996
shares of common stock as though this event occurred as of the beginning of
each period.
(2) The "pro forma" summary balance sheet data as of March 31, 1999 reflects
the event described in note 1 as if such event had occurred as of March 31,
1999.
(3) The "pro forma as adjusted" summary balance sheet data as of March 31, 1999
reflects the event described in note 2 and the issuance of our common stock
in this offering and the application of the net proceeds as described in
"Use of Proceeds."
6
<PAGE>
RISK FACTORS
This offering involves a high degree of risk. You should consider carefully
the risks described below and the other information in this prospectus before
deciding to invest in shares of our common stock.
We have a limited operating history with which you can evaluate our business
and our future prospects.
Our limited operating history and small number of customers makes predicting
our future operating results difficult. From the time we were incorporated in
November 1995 until September 1997, we generated no revenue while we developed
our secure delivery system and a prototype audio playback device, created our
audible.com Web site and established relationships with providers of audio
content. Although we began earning limited revenue in October 1997, we have
continued to focus our resources on refining and enhancing our Web site and our
playback and management software and in expanding our content selections and
developing relationships with manufacturers of hand-held electronics devices.
We have limited history of selling content to users of hand-held electronic
devices manufactured by other parties which only recently became AudibleReady.
We have spent only limited resources on promoting and marketing our service to
consumers. We expect to spend significant resources on expanding our service
and promoting our brand name over the next several quarters. As a result, we
have a limited history of operations and a small number of initial customers
upon which you can evaluate our business model and our prospects.
We have limited revenue, we have a history of losses and we may not be
profitable in the future.
Our limited revenue and history of losses makes it uncertain when or if we
will become profitable. Our failure to achieve profitability within the time
frame expected by investors may adversely affect our business and the market
price of our common stock. We had total revenue of $376,000 for the year ended
December 31, 1998 and $315,000 for the three months ended March 31, 1999. 65%
of this revenue during 1998 was derived from sales of hardware, which we expect
to decline as we sell our remaining inventory of the Audible MobilePlayer. This
limited revenue makes it difficult to predict our future quarterly results and
our revenue and operating results can vary significantly quarter to quarter.
Our limited revenue will make relatively minor fluctuations in revenue much
more significant on a percentage basis. Our revenue is dependent on the
availability and sales of AudibleReady devices by third-party manufacturers. We
had content and services revenue of only $132,000 for the year ended December
31, 1998 and $58,000 for the three months ended March 31, 1999. We had
operating expenses of $8.4 million for 1998 and $1.9 million for the three
months ended March 31, 1999. Because most of our expenses, such as employee
compensation and rent, are relatively fixed in the short term, we may be unable
to adjust our spending to compensate for unexpected revenue shortfalls.
Accordingly, any significant shortfall in relation to our expectations could
cause significant declines in our operating results. This would likely affect
the market price of our common stock in a manner which may be unrelated to our
long-term operating performance. As of March 31, 1999, we have incurred net
operating losses of approximately $21.2 million since inception, and we expect
to continue to incur significant losses for the foreseeable future.
The market for our service is uncertain and consumers may not be willing to use
the Internet to purchase spoken audio content.
Downloading of audio content from the Internet is a relatively new method of
distribution and its growth and market acceptance is highly uncertain. Our
success will depend in large part on consumer willingness to purchase and
download spoken audio content over the Internet. Purchasing this content over
the Internet involves changing purchasing habits, and if consumers are not
willing to purchase and download this content over the Internet, our revenue
will be limited and our business will be materially adversely affected. We
believe that acceptance of this method of distribution may be subject to
network capacity constraints, hardware limitations, company computer security
policies, the ability to change user habits and the quality of the audio
content delivered.
7
<PAGE>
We may not be able to license or produce sufficiently compelling audio content
to attract and retain customers and grow our revenue.
If we are unable to obtain licenses from the creators and publishers of
content to have that content available on our Web site on terms acceptable to
us or if a significant number of content providers terminate their agreements
with us, we would have less content available for our customers, which would
limit our revenue growth and materially adversely affect our financial
performance. Our future success depends upon our ability to accumulate and
deliver premium spoken audio content over the Internet. Although we currently
collaborate with the publishers of periodicals and other branded print
materials to convert their written material into original spoken audio content,
the majority of our content originates from producers of audiobooks, radio
broadcasts, conferences, lectures and other forms of spoken audio content.
Although many of our agreements with content providers are for initial terms of
one to three years, our content providers may choose not to renew their
agreements with us or may terminate their agreements early if we do not fulfill
our contractual obligations. We cannot be certain that our content providers
will enter into new agreements with us on the same or similar terms as those
currently in effect or that additional content providers will enter into
agreements on terms acceptable to us.
Manufacturers of electronic devices may not manufacture, make available or sell
a sufficient number of products suitable for our service, which would limit our
revenue growth.
If manufacturers of electronic devices do not manufacture, make available or
sell a sufficient number of devices promoted as AudibleReady, or if these
devices do not achieve sufficient market acceptance, we will not be able to
grow revenue and our business will be materially adversely affected. The Compaq
Aero, the first third party device promoted as AudibleReady, only became
commercially available in March 1999 and is available only in limited
quantities. Compaq and Everex have experienced delays in their delivery
schedule of their electronic devices due to parts shortages. Although the
content we sell can be played on personal computers, we believe that a key to
our future success is the ability to playback this content on hand-held
electronic devices. Because we do not intend to continue to manufacture our own
AudibleReady devices, we depend on manufacturers, such as Philips, Casio,
Everex, Compaq and Diamond Multimedia, to develop and sell their own products
and promote them as AudibleReady.
We must establish, maintain and strengthen our brand names, trademarks and
service marks in order to acquire customers and generate revenue.
If we fail to promote and maintain our brand names, our business, operating
results and financial condition could be materially adversely affected. We
believe that building awareness of the "Audible," "audible.com" and
"AudibleReady" brand names is critical to achieving widespread acceptance of
our service by customers, content providers, device manufacturers and marketing
and distribution companies with which we have business relationships. To
promote our brands, we will need to substantially increase our marketing
expenditures. We have applied for trademark and service mark registrations of
our brand names in the United States. The application for "audible.com" has
been allowed and the applications for "Audible" and "AudibleReady" have
received adverse actions by the Patent and Trademark Office. We are challenging
the adverse actions by filing a request for reconsideration and a notice of
appeal with the Patent and Trademark Office. There can be no assurance that any
of our brand names will be registered as trademarks or that we will effectively
protect the use of these names.
Increasing availability of digital audio technologies may increase competition
and reduce our gross margins, market share and profitability.
If we do not continue to enhance our service and adapt to new technology, we
will not be able to compete with new and existing distributors of spoken audio,
we will lose market share and our business will be materially adversely
effected. The market for the Audible service is new, rapidly evolving and
intensely competitive. We expect competition to intensify as advances in and
standardization of digital audio distribution,
8
<PAGE>
download, security, management and playback technologies reduce the cost of
starting a digital audio delivery system or a service that gathers audio
content. To remain competitive, we must continue to either license or
internally develop technology that will enhance the features of the Audible
service, our software that manages the downloading and playback of audio
content, our ability to compress audio files for downloading and storage and
our download, security and playback technologies. Increased competition is
likely to result in price reductions, reduced gross margins and loss of market
share, any of which could materially adversely affect our financial
performance.
Our industry is highly competitive and we cannot assure you that we will be
able to compete effectively.
We face competition in all aspects of our business and we cannot assure you
that we will be able to compete effectively. We compete for consumers of audio
content with other Internet-based audio distributors and distributors of audio
on cassette tape or compact disc. We compete with others for relationships with
manufacturers of electronic devices with audio playback capabilities. The
business of providing content over the Internet is experiencing rapid growth
and is characterized by rapid technological changes, changes in consumer habits
and preferences and the emergence of new and established companies. We compete
with (1) traditional and online retail stores, catalogs, clubs and libraries
that sell, rent or loan audiobooks on cassette tape or compact disc, such as
AudioBook Club, Borders, Barnes & Noble and Amazon.com, (2) Web sites that
offer streaming access to spoken audio content using tools such as the
RealPlayer or Windows Media Player, such as Broadcast.com, (3) other companies
offering services similar to ours, such as Audiohighway.com and Command Audio
and (4) on-line and Internet portal companies such as America Online, Inc.,
Yahoo! Inc., Excite, Inc., Lycos Corporation, Infoseek Corporation and
Microsoft Network, with the potential to offer audio content. Many of these
companies have financial, technological, promotional and other resources that
are much greater than those available to us and could use or adapt their
current technology, or could purchase technology, to provide a service directly
competitive with the Audible service.
Capacity constraints and failures, delays or overloads could interrupt our
service and reduce the attractiveness of our service to existing or potential
customers.
Any capacity constraints or sustained failure or delay in using our Web site
could reduce the attractiveness of the Audible service to consumers, which
would materially adversely affect our financial performance. Our success
depends on our ability to electronically distribute spoken audio content
through our Web site to a large number of customers efficiently and with few
interruptions or delays. Accordingly, the performance, reliability and
availability of our Web site, our transaction processing systems and our
network infrastructure are critical to our operating results. We have
experienced periodic systems interruptions including planned system
maintenance, hardware and software failures triggered by high traffic levels,
and network failure in the Internet and our Internet service providers. We
believe the complexities of our software and hardware and the potential
instability of the Internet due to rapid user growth mean that periodic
interruptions to our service are likely to continue. A significant increase in
visitors to our Web site or simultaneous download requests could strain the
capacity of our Web site, software, hardware and telecommunications systems,
which could lead to slower response times or system failures. These
interruptions may make it difficult to download audio content from our Web site
in a timely manner.
We could be liable for substantial damages if there is unauthorized duplication
of the content we sell.
We believe that we are able to license premium audio content in part because
our service has been designed to reduce the risk of unauthorized duplication
and playback of audio files. If these security measures fail, our content may
be vulnerable to unauthorized duplication or playback. If others duplicate the
content we provide without authorization, content providers may terminate their
agreements with us and hold us liable for substantial damages. Although we
maintain general liability insurance, including insurance for errors or
omissions, we cannot assure you that the amount of coverage will be adequate to
compensate us for these losses. Security breaches might also discourage other
content providers from entering into agreements with us. We may be required to
expend substantial money and other resources to protect against the threat of
security breaches or to alleviate problems caused by these breaches.
9
<PAGE>
Errors in our proprietary software, including AudibleManager 2.0, could
discourage potential customers and damage our reputation.
Our proprietary software may contain undetected errors, failures or bugs
which could result in customer dissatisfaction, adverse publicity, loss of
reputation, delay in market acceptance of the AudibleReady format or in legal
claims against us by customers or others. We have in the past discovered
errors, failures and bugs in our software and have experienced customer
dissatisfaction. Version 2.0 of our AudibleManager software is required for
customers to use our service with hand-held electronic devices that use
Microsoft's Windows CE operating system. Version 2.0 has only recently become
commercially available and may contain errors and bugs of which we are unaware.
We do not have a disaster recovery plan or back-up systems, and a disaster
could severely damage our operations.
If our computer systems are damaged or interrupted by a disaster for an
extended period of time, our business, results of operations and financial
condition would be materially adversely affected. We do not have a disaster
recovery plan in effect and do not have fully redundant systems for the Audible
service at an alternate site. Our operations depend upon our ability to
maintain and protect our computer systems, all of which are located in our
headquarters and at a third party, offsite hosting facility, both of which are
located in northern New Jersey. Although we maintain insurance against general
business interruptions, we cannot assure you that the amount of coverage will
be adequate to compensate us for our losses.
Problems associated with the Internet could discourage use of Internet-based
services like ours.
If the Internet fails to develop or develops more slowly than we expect as a
commercial medium, our business may also grow more slowly than we anticipate,
if at all. Our success will depend in large part on increasing use of the
Internet. There are critical issues concerning the commercial use of the
Internet which we expect to affect the development of the market for the
Audible service, including:
. the secure transmission of customer credit card numbers and other
confidential information;
. the reliability and availability of Internet service providers;
. the cost of access to the Internet;
. the availability of sufficient network capacity; and
. the ability to download audio content through computer security measures
employed by businesses.
Our Chief Financial Officer only recently became an employee of Audible which
may affect our ability to successfully manage our operations.
We hired our Chief Financial Officer on June 1, 1999. Accordingly, our
financial team does not have a history of working together. We cannot assure
you that our CFO will be able to work effectively or successfully to manage our
operations. We believe that the successful integration of our CFO with our
management team is critical to our ability to effectively manage our operations
and support our anticipated future growth.
The loss of key employees could jeopardize our growth prospects.
The loss of the services of any of our executive officers or other key
employees could materially adversely affect our business. Our future success
depends on the continued service and performance of our senior management and
other key personnel, particularly Andrew J. Huffman, our President, and Donald
R. Katz, our Founder and Chairman of the Board. We do not have employment
agreements with any of our executive officers or other key employees.
10
<PAGE>
Our inability to hire new employees may hurt our growth prospects.
The failure to hire new personnel could damage our ability to grow and
expand our business. Our future success depends on our ability to attract, hire
and retain highly skilled technical, managerial, editorial, marketing and
customer service personnel, and competition for these individuals is intense.
In particular, we have experienced difficulty in hiring software and Web site
developers. Our failure to hire these technical employees could delay
improvements in, and enhancements to, the Audible service.
We have no experience in acquiring companies or technologies and any
acquisitions of this type may disrupt our business or distract our management,
due to difficulties in assimilating acquired personnel and operations.
We have no experience in acquiring businesses, technologies, services or
products. From time to time, we engage in discussions and negotiations with
companies regarding our acquiring or investing in such companies' businesses,
products, services or technologies. If we acquire or invest in another company,
we could have difficulty in assimilating that company's personnel, operations,
technology and software. In addition, the key personnel of the acquired company
may decide not to work for us. If we make other types of acquisitions, we could
have difficulty in integrating the acquired products, services or technologies
into our operations. These difficulties could disrupt our ongoing business,
distract our management and employees, increase our expenses and adversely
affect our results of operations. Furthermore, we may incur indebtedness or
issue equity securities to pay for any future acquisitions. The issuance of
equity securities would be dilutive to our existing stockholders. As of the
date of this prospectus, we have no agreement to enter into any material
investment or acquisition transaction.
Year 2000 problems could interrupt our service.
Any Year 2000 compliance problem of ours or our vendors or suppliers could
have a material adverse effect on our ability to service our customers, and on
our business, results of operations and financial condition. Virtually every
computer operation will be affected in some way by the rollover of the two
digit year value to 00. It is unclear whether computer systems will properly
recognize date sensitive information when the year changes to 2000. Systems
that do not properly recognize such information could generate erroneous data
or cause a system to fail. In the most reasonably likely worst case scenario,
the Audible service would be inoperable until the problem is corrected and this
correction could take weeks or months. During this period, we may be unable to
bill our customers or deliver subscriptions to our customers, and the
AudibleManager software may not download audio content at the scheduled
intervals. This type of interruption could damage our reputation and cause
customers to lose interest in the Audible service. We are in the process of
reviewing our systems and working with our software and systems suppliers to be
prepared for the year 2000. We have identified changes that we must make in
order to be prepared for the year 2000. For example, we are in the process of
upgrading to more recent versions of software and database applications that
are certified to be ready for the year 2000. We cannot be sure that all
software and hardware components are or will be Year 2000 compliant. Neither
can we accurately estimate the potential costs of achieving Year 2000
compliance or the effects on our operations if we are unsuccessful.
We may not be able to protect our intellectual property.
If we fail to protect our intellectual property, we may be exposed to
expensive litigation or risk jeopardizing our competitive position. The steps
we have taken may be inadequate to protect our technology and other
intellectual property. Our competitors may learn or discover our trade secrets
or may independently develop technologies that are substantially equivalent or
superior to ours. We rely on a combination of patents, licenses,
confidentiality agreements and other contracts to establish and protect our
technology and other intellectual property rights. We have one patent and have
filed eight patent applications. We also rely on unpatented trade secrets and
know-how to maintain our competitive position. We may have to litigate to
enforce our intellectual property rights, to protect our trade secrets or to
determine the validity and scope of the proprietary rights of others. This
litigation could result in substantial costs and the diversion of our
management and technical resources which would harm our business.
11
<PAGE>
Other companies may claim that we infringe their copyrights or patents.
If the Audible service violates the proprietary rights of others, we may be
required to redesign our software, and re-encode the Audible content, or seek
to obtain licenses from others to continue offering the Audible service without
substantial redesign and such efforts may not be successful. We do not conduct
comprehensive patent searches to determine whether our technology infringes
patents held by others. In addition, software development is inherently
uncertain in a rapidly evolving technological environment in which there may be
numerous patent applications pending, many of which are confidential when
filed, with regard to similar technologies. Any claim of infringement could
cause us to incur substantial costs defending against the claim, even if the
claim is invalid, and could distract our management from our business. A party
making a claim could secure a judgment that requires us to pay substantial
damages. A judgment could also include an injunction or other court order that
could prevent us from offering the Audible service. Any of these events could
have a material adverse effect on our business, operating results and financial
condition.
We could be sued for content that we distribute over the Internet.
A lawsuit based on the content we distribute could be expensive and damaging
to our business. Our service involves delivering spoken audio content to our
customers. As a distributor and publisher of content over the Internet, we may
be liable for copyright, trademark infringement, unlawful duplication,
negligence, defamation, indecency and other claims based on the nature and
content of the materials that we publish or distribute to customers. Although
we generally require that our content providers indemnify us for liability
based on their content and we carry general liability insurance, the indemnity
and the insurance may not cover claims of these types or may not be adequate to
protect us from the full amount of the liability. If we are found liable in
excess of the amount of indemnity or of our insurance coverage, we could be
liable for substantial damages and our reputation and business may suffer.
Future government regulations may increase our cost of doing business on the
Internet.
Laws and regulations applicable to the Internet covering issues such as user
privacy, pricing and copyrights are becoming more prevalent. The adoption or
modification of laws or regulations relating to the Internet could force us to
modify the Audible service in ways that could adversely affect our business.
We may become subject to sales and other taxes for direct sales over the
Internet.
Increased tax burden could make our service too expensive to be competitive.
We do not currently collect sales or other similar taxes for download of
content into states other than in New Jersey and Texas. Nevertheless, one or
more local, state or foreign jurisdictions may require that companies located
in other states collect sales taxes when engaging in online commerce in those
states. If we open facilities in other states, our sales into such states may
be taxable. If one or more states or any foreign country successfully asserts
that we should collect sales or other taxes on the sale of our content, the
increased cost to our customers could discourage them from purchasing our
services, which would materially adversely affect our business.
Our executive officers and directors will continue to control approximately 43%
of our common stock.
After this offering, our executive officers and directors will continue to
control approximately 43% of our common stock and will exercise significant
influence over stockholder voting matters which will limit the influence of our
new stockholders. If our officers and directors act together, they will be able
to influence the composition of our board of directors, and will continue to
have significant influence over our affairs in general.
12
<PAGE>
Our contractual obligations, charter and by-laws could discourage an
acquisition of our company that would benefit our stockholders.
Provisions of our agreement with Microsoft and of our certificate of
incorporation and bylaws may make it more difficult for a third party to
acquire control of our company, even if a change in control would benefit our
stockholders. These provisions include:
. prior to discussing with anyone the sale of our company, we must notify
Microsoft and Microsoft has a right to negotiate exclusively with us for
21 days to acquire our company. We are not obligated to accept any offer
from Microsoft. If we do not reach agreement during this period, we may
discuss with others the sale of our company;
. our board of directors, without stockholder approval, may issue
preferred stock on terms that they determine. This preferred stock could
be issued quickly with terms that delay or prevent the change in control
of our company or make removal of management more difficult. Also, the
issuance of preferred stock may cause the market price of our common
stock to decrease;
. our board of directors is "staggered" so that only a portion of its
members are elected each year;
. only our board of directors, our chairman of the board, our president or
stockholders holding a majority of our stock can call special
stockholder meetings; and
. special procedures which must be followed in order for stockholders to
present proposals at stockholder meetings.
These provisions could have the effect of delaying, deterring or preventing
a change in the control of our company, could deprive our stockholders of an
opportunity to receive a premium for their common stock as part of a sale of
our company, or may otherwise discourage a potential acquirer from attempting
to obtain control of us, which in turn could materially adversely affect the
market price of our common stock.
There is no prior market for our common stock and the price may decline after
this offering.
Our common stock has not been traded in the public market before this
offering. We have applied to the Nasdaq National Market to list our common
stock, but we do not know whether active trading in our common stock will
develop or continue after this offering. If active trading does not develop, it
could cause the market price of our common stock to decrease. We will determine
the price you will pay for our common stock through negotiations with the
underwriters. You may not be able to resell your shares at or above the price
you will pay for our common stock.
Future sales of our common stock may lower our stock price.
If our existing stockholders sell a large number of shares of our common
stock, the market price of the common stock could decline significantly. The
perception in the public market that our existing stockholders might sell
shares of common stock could depress our market price. Immediately after this
offering, approximately 25,003,265 shares of our common stock will be
outstanding. Of these shares, 4,000,000 of the shares included in this offering
will be available for immediate resale in the public market. The remaining 84%,
or 21,003,265 shares of our total outstanding shares, will become available for
resale in the public market as shown on the chart below. All of these remaining
21,003,265 shares are subject to lock-up agreements restricting the sale of
such shares for 180 days from the date of this prospectus. However, the
underwriters can waive this restriction and allow these stockholders to sell
their shares at any time.
<TABLE>
<CAPTION>
Number of Shares/
% of Outstanding Date of First Availability for Resale
- ----------------- -------------------------------------------------------------------
<S> <C>
1,633,650/6.5% Immediately after the date of this prospectus, all of which shares
are subject to lock-up agreements
19,048,098/76.2% 90 days after the date of this prospectus, all of which shares are
subject to lock-up agreements
321,517/1.3% At various times between 90 days and 180 days after the date of the
prospectus, all of which shares are subject to lock-up agreements
</TABLE>
13
<PAGE>
After this offering, the holders of 13,400,996 shares of common stock and
holders of warrants to purchase an aggregate of 1,575,001 shares of our common
stock and warrants to purchase 55,261 shares of our preferred stock, which
preferred stock warrants will be exercisable for 82,891 shares of common stock
following this offering, will have the right to require us to register the sale
of their shares, subject to limitations and the lock-up agreements with the
underwriters. These holders also have the right to require us to include their
shares in any future public offerings of our equity securities. Within
approximately 180 days after this offering, we intend to file one or more
registration statements under the Securities Act to register 9,000,000 shares
of common stock reserved for issuance under our stock plan, subject to the
lock-up agreements.
Investors will experience immediate and substantial dilution of $7.39 in the
book value of their investment.
If you purchase shares of our common stock in this offering, you will
experience immediate dilution of $7.39 per share because the price that you pay
will be substantially greater than the net tangible book value per share of the
shares you acquire. This dilution is due in large part to the fact that our
earlier investors paid substantially less than the public offering price when
they purchased their shares. You will experience additional dilution upon the
exercise of stock options or warrants to purchase common stock.
We will have broad discretion in using the proceeds from this offering.
We have not identified specific uses for $21.5 million of the proceeds from
this offering, and we will have broad discretion in how we use them independent
of what the stockholders might believe is best for our company. We are unable
to determine how much of the proceeds will be used for any identified purpose
because circumstances regarding our planned uses of the proceeds may change.
You will not have the opportunity to evaluate the economic, financial or other
information on which we base our decisions on how to use the proceeds.
14
<PAGE>
USE OF PROCEEDS
We estimate that we will receive approximately $32.5 million in net proceeds
from the offering (approximately $37.5 million if the underwriters' exercise
their over-allotment in full), based upon an assumed initial public offering
price of $9.00 per share, after deducting estimated underwriting discounts and
commissions and offering expenses.
We expect to use the net proceeds from this offering as follows:
. approximately $6.0 million for marketing activities, including the
promotion of our service and brand name;
. approximately $5.0 million for the acquisition and production of new
audio content, and extending existing content licensing arrangements;
and
. approximately $21.5 million for working capital and general corporate
purposes, including obtaining and extending technology licensing
arrangements, increasing personnel, increasing production and server
system capacities, and to finance operating losses that we expect to
incur as we expand our customer base. A portion of the proceeds may also
be used for acquisition of companies or technologies.
However, changing business conditions and unforeseen circumstances could cause
the actual amounts used for these purposes to vary from these estimates.
Pending such uses, we will invest the proceeds of this offering in short-
term, interest-bearing, investment-grade securities, certificates of deposit or
direct or guaranteed obligations of the United States.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our capital stock. We
currently expect to retain future earnings, if any, for use in the operation
and expansion of our business and do not anticipate paying any cash dividends
in the foreseeable future.
15
<PAGE>
CAPITALIZATION
The following table sets forth our capitalization as of March 31, 1999:
. on an actual basis;
. on a pro forma basis giving effect to the conversion of all outstanding
shares of convertible preferred stock into common stock; and
. on a pro forma as adjusted capitalization to give effect to the sale of
4,000,000 shares of common stock offered hereby at an assumed initial
public offering price of $9.00 per share in this offering, after
deducting estimated underwriting discounts and commissions and estimated
offering expenses.
This information should be read in conjunction with our financial statements
and notes thereto appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
March 31, 1999
-------------------------------------------------------
Pro Forma
Actual Pro Forma As Adjusted
---------------- ---------------- ------------------
(in thousands, except share and per share data)
<S> <C> <C> <C>
Lease obligations, long-
term portion........... $ 188 $ 188 $ 188
Redeemable convertible
preferred stock (non-
cumulative), $.01 par
value per share;
9,843,000 shares
authorized: 8,934,000
shares issued and
outstanding, actual; no
shares issued and
outstanding, pro forma
and pro forma as
adjusted............... 28,719 -- --
Stockholders' deficit:
Preferred stock, $.01
par value per share:
none authorized,
issued and outstanding
actual; 10,000,000
authorized,
none issued and
outstanding, pro forma
and pro forma as
adjusted.............. -- -- --
Common stock, par value
$.01 per share:
50,000,000 shares
authorized, 7,602,269
shares issued and
outstanding actual;
21,003,265 shares
issued and
outstanding, pro forma
and 25,003,265 shares
issued and outstanding
pro forma as adjusted. 76 210 250
Additional paid-in
capital............... 1,236 29,821 62,261
Notes due from
stockholders for
common stock.......... (1,063) (1,063) (1,063)
Deficit accumulated
during the development
stage................. (21,199) (21,199) (21,199)
---------------- ---------------- ---------------
Total stockholders'
equity (deficit)... (20,950) 7,769 40,249
---------------- ---------------- ---------------
Total
capitalization..... $ 7,957 $ 7,957 $ 40,437
================ ================ ===============
</TABLE>
16
<PAGE>
DILUTION
Our pro forma net tangible book value at March 31, 1999 was $7,769,185 or
$0.37 per common share. Pro forma net tangible book value is the amount of
total tangible assets less total liabilities. Pro forma net tangible book value
per common share is net tangible book value divided by the pro forma number of
shares of common stock outstanding as of March 31, 1999. Net pro forma as
adjusted tangible book value per common share is determined by dividing our net
tangible book value as adjusted by the number of shares of our common stock
outstanding after giving effect to this offering. Assuming no changes in our
net tangible book value, other than to give effect to the sale of the common
stock offered by this prospectus at an assumed initial public offering price of
$9.00 per share, the mid-point of the range on the cover of this prospectus,
and the application of the net offering proceeds as described under "Use of
Proceeds," our pro forma as adjusted net tangible book value at March 31, 1999
would have been $40,249,185, or $1.61 per common share.
This represents an immediate increase in pro forma net tangible book value
of $1.24 per common share to existing stockholders, and an immediate dilution
in pro forma net tangible book value of $7.39 per common share to new investors
purchasing our common stock in this offering. The following table illustrates
this per share dilution.
<TABLE>
<CAPTION>
<S> <C> <C>
Assumed initial public offering price per common share........... $9.00
Pro forma net tangible book value per common share at March 31,
1999........................................................... $0.37
Increase per share attributable to new investors................ 1.24
-----
Pro forma as adjusted net tangible book value per common share
after this offering............................................. 1.61
-----
Dilution per common share to new investors....................... $7.39
=====
</TABLE>
The following table summarizes at March 31, 1999:
. the number of shares of our common stock purchased by existing
stockholders, the total consideration and the average price per share
paid to us for these shares;
. the number of shares of our common stock purchased by new investors, the
total consideration and the price per share paid by them for these
shares; and
. the percentage of shares purchased by the existing stockholders and new
investors and the percentages of consideration paid to us for these
shares.
This table assumes that none of the warrants outstanding upon the closing of
this offering will be exercised.
<TABLE>
<CAPTION>
Shares Purchased Total Consideration Average
------------------ ------------------- Price Per
Number Percent Amount Percent Common Share
---------- ------- ----------- ------- ------------
<S> <C> <C> <C> <C> <C>
Existing stockholders.... 21,003,265 84.0% $30,175,301 46.0% $1.44
New Investors............ 4,000,000 16.0 36,000,000 54.0 $9.00
---------- ----- ----------- -----
Total................... 25,003,265 100.0% $66,175,301 100.0% $2.65
========== ===== =========== =====
</TABLE>
17
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA
The selected financial data set forth below should be read in conjunction
with the financial statements and related notes thereto and "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
other financial information appearing elsewhere in this prospectus. The
selected financial data set forth below as of December 31, 1997 and 1998 and
for the years ended December 31, 1996, 1997 and 1998, are derived from, and are
qualified by reference to, our audited financial statements included elsewhere
in this prospectus. The balance sheet data as of December 31, 1995 and 1996 and
the statement of operations data for the period from November 3, 1995, the date
of inception, through December 31, 1995 are derived from our audited financial
statements not included elsewhere in this prospectus. The selected historical
financial data as of March 31, 1999 and for the three month periods ended March
31, 1998 and 1999 have been derived from our unaudited financial statements
included elsewhere in this prospectus. In the opinion of our management, such
unaudited financial statements have been prepared on a basis consistent with
the audited financial statements and include all adjustments, consisting of
normal recurring adjustments, necessary for a fair presentation of the results
for these periods and as of such date. The selected financial data set forth
below for the three months ended March 31, 1999 are not necessarily indicative
of our future results of operations or financial performance.
<TABLE>
<CAPTION>
Period
November 3,
1995
(date of Three
inception) Months Ended
to Year Ended December 31, March 31,
December 31, ------------------------- ----------------
1995 1996 1997 1998 1998 1999
------------ ------- ------- ------- ------- -------
(unaudited)
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C>
Statement of operations
data:
Revenue:
Content and services... $ -- $ -- $ 3 $ 132 $ 30 $ 58
Hardware............... -- -- 57 244 90 57
Other.................. -- -- -- -- -- 200
------ ------- ------- ------- ------- -------
Total revenue......... -- -- 60 376 120 315
------ ------- ------- ------- ------- -------
Operating expenses:
Cost of content and
services revenue...... -- -- 78 372 75 152
Cost of hardware
revenue............... -- -- 252 556 255 63
Production expenses.... -- 684 1,982 1,639 486 495
Research and
development........... 49 1,810 2,672 1,641 389 320
Write-down related to
hardware business..... -- -- -- 952 -- --
Sales and marketing.... -- 256 1,227 1,453 272 396
General and
administrative........ -- 787 1,921 1,838 481 431
------ ------- ------- ------- ------- -------
Total operating
expenses............. 49 3,536 8,133 8,453 1,958 1,857
------ ------- ------- ------- ------- -------
Loss from operations. (49) (3,536) (8,073) (8,076) (1,838) (1,542)
------ ------- ------- ------- ------- -------
Other (income)
expense, net........ -- (27) (44) 62 6 (68)
------ ------- ------- ------- ------- -------
Net loss................ $ (49) $(3,509) $(8,029) $(8,138) $(1,844) $(1,474)
====== ======= ======= ======= ======= =======
Basic and diluted net
loss per common share.. $(0.02) $ (1.10) $ (1.49) $ (1.15) $ (0.28) $ (0.20)
Weighted average shares
outstanding............ 2,250 3,177 5,379 7,097 6,558 7,452
Pro forma basic and
diluted net loss per
common share (1)....... (.50) (.07)
Pro forma weighted
average shares
outstanding (1)........ 16,292 20,728
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
December 31, March 31, 1999
---------------------------------- ------------------------
1995 1996 1997 1998 Actual Pro Forma(2)
------- ------- ------- ------- ----------- ------------
(unaudited)
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance sheet data:
Cash and cash
equivalents............ $ 388 $ 758 $ 646 $10,526 $ 9,652 $ 9,652
Total assets............ 435 1,036 3,013 11,600 10,991 10,991
Noncurrent liabilities.. -- 128 842 478 377 377
Redeemable preferred
stock.................. 389 3,430 12,378 27,725 28,719 --
Total stockholders'
(deficit) equity....... (19) (3,488) (11,427) (19,529) (20,950) 7,769
</TABLE>
- --------
(1) The "pro forma" selected statement of operations data for the year ended
December 31, 1998 and the three months ended March 31, 1999 reflects the
conversion of the outstanding shares of preferred stock into 13,400,996
shares of common stock as though this event occurred as of the beginning of
each period.
(2) The "pro forma" selected balance sheet data as of March 31, 1999 reflects
the event described in note 1 as if such event occurred as of March 31,
1999.
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results
of operations should be read in conjunction with "Selected Historical Financial
Data" and our financial statements and notes thereto appearing elsewhere in
this prospectus. This discussion and analysis contains forward-looking
statements that involve risks and uncertainties. Our actual results may differ
materially from those anticipated in these forward-looking statements as a
result of a number of factors, including, but not limited to, those set forth
under "Risk Factors" and elsewhere in this prospectus.
This prospectus contains forward-looking statements and information relating
to our company. We generally identify forward-looking statements in this
prospectus using words like "believe," "intend," "will," "expect," "may,"
"should," "plan," "project," "contemplate," "anticipate," "seek" or similar
terminology. These statements are based on our beliefs as well as assumptions
we made using information currently available to us. Because these statements
reflect our current views concerning future events, these statements involve
risks, uncertainties and assumptions. Actual results may differ significantly
from the results discussed in these forward-looking statements.
Overview
We provide Internet-delivered premium spoken audio content for playback on
personal computers and hand-held electronic devices. We have the largest and
most diverse collection of premium digital spoken audio content available for
purchase and download from the Internet, most of which is currently available
only through us. We were incorporated in 1995, commenced commercial operations
in October 1997, and through March 31, 1999, we were in the development stage
for financial reporting purposes. Subsequent to March 31, 1999, we
substantially completed our development efforts in establishing our business
and accordingly no longer consider ourselves a development stage company.
In order to test consumer behavior, demonstrate to content providers the
viability of digital distribution of audio content and test our business model,
we designed, created and sold limited numbers of our own Internet-enabled
mobile audio playback device, the Audible MobilePlayer. We have historically
derived the majority of our revenue through the sale of this device. Sales of
the MobilePlayer accounted for 95% of our revenue in 1997, 65% of our revenue
in 1998 and 18% of our revenue for the three months ended March 31, 1999. We
expect this revenue to decrease and eventually phase out because we
discontinued the production of the player in April 1999 and expect to sell the
majority of our remaining inventory by the end of 1999. Our primary focus is
the aggregation and delivery of digital spoken audio content, and, in the
future, we will depend upon computer and consumer electronics companies to
manufacture and sell devices that are promoted as AudibleReady. The first of
these devices became commercially available in March 1999. Revenue from the
sale of audio content through our Web site has increased in each of the last
four quarters. We expect that trend to continue and, over the next several
quarters, sales of audio content will increase and eventually account for the
majority of our revenue. As of March 31, 1999, more than 3,900 customers had
purchased content from our Web site.
Although we have experienced revenue growth in our content sales in recent
periods, there can be no assurance that such growth rates are sustainable, and
therefore such growth rates should not be considered indicative of future
operating results. There can also be no assurance that we will be able to
continue to increase our revenue or attain profitability or, if increases in
revenue and profitability are achieved, that they can be sustained. We believe
that period-to-period comparisons of our historical operating results are not
meaningful and should not be relied upon as an indication of future
performance.
We recognize revenue from content sales in the period when content is
downloaded. Typically, we pay our content providers a 12% royalty based upon
net sales of the content downloaded by our customers. Some of our content
agreements require us to make advance royalty payments for minimum guarantees
which are amortized on a straight-line basis over the term of the agreement or
are expensed as royalties are earned, whichever is sooner.
We recognize revenue from subscriptions pro rata over the subscription term.
Royalty expense on subscriptions is currently accrued on the full subscription
price in the month the subscription is purchased. We
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plan to implement a financial reporting system that will allow us to pro rate
the accrual on the subscription royalty over the term of the subscription.
We recognize revenue from sales of the Audible MobilePlayer upon shipment.
We recognize revenue from audio production and hosting services which we
provide to corporations as the services are performed.
In November 1998, we entered into an agreement with Microsoft, one of our
stockholders, to integrate some of our products, grant various rights and
licenses and provide for Microsoft to be paid future royalties for content
distributed as a result of the customized software developed under the
agreement. Microsoft committed a minimum of $2.0 million in payments to us over
the course of the five-year term of the agreement to integrate products and
acquire various rights and licenses. $200,000 of these payments related to
technology integration services which have been performed and therefore the
related revenue was recognized as other revenue in the quarter ended March 31,
1999. $1.5 million of these payments relates to a fee paid by Microsoft for the
right to distribute software on electronic books that will enable electronic
book customers to purchase and access Audible content in conjunction with text
which we do not provide. This payment was advanced in the three months ended
December 31, 1998, and will be recognized as revenue on a straight line basis
over the initial term of the agreement which runs through the second quarter of
2001, beginning in the quarter ended June 30, 1999. Also under the agreement,
we will deliver a license for technology rights in exchange for $250,000, for
which revenue will be recognized upon acceptance, and we will deliver 300
Audible MobilePlayers in exchange for $50,000, for which revenue will be
recognized when shipped. In addition, Microsoft will be paid a royalty on
content licensed and distributed by Audible to each end user that accesses its
content using the developed software. Microsoft has options under the agreement
to acquire additional rights and licenses and extend the term of the agreement
for additional financial consideration.
We are party to several joint marketing agreements, including ones with
device manufacturers such as Casio, Compaq, Diamond Multimedia, Everex and
Philips. Under these agreements, our device manufacturers may receive a portion
of the revenue generated over a specified period of time by each new Audible
customer referred by them through the purchase of a new device. For example, a
purchaser of Compaq's hand-held electronic device known as Aero will be able to
use the device and our AudibleManager software to access audible.com and
download content. Compaq will receive a percentage of the revenue related to
content downloaded by this purchaser. These revenue sharing arrangements
typically last one or two years from the date the device user becomes an
Audible customer.
We have only a limited operating history with which to evaluate our business
and prospects. Our limited operating history and emerging nature of the market
for Internet-delivered audio content makes predicting our future operating
results difficult. In addition, our prospects must be considered in light of
the risks and uncertainties encountered by companies in the early stages of
development in new and rapidly evolving markets, specifically the rapidly
evolving market for delivery of audio content over the Internet. These risks
include our ability to:
. acquire and retain customers;
. build awareness and acceptance of audible.com, the AudibleReady format
and AudibleReady devices;
. extend existing and acquire new content provider relationships; and
. manage growth to stay competitive and fulfill customer demand.
If we fail to manage these risks successfully, it would materially adversely
affect our financial performance.
As of March 31, 1999, we had not entered into any derivative financial
instruments, other financial instruments or derivative commodity investments
that expose us to material market risk. We currently do not and do not plan to
engage in derivative instruments or hedging activities.
We have incurred significant losses since inception, and as of March 31,
1999, we had an accumulated deficit of approximately $21.2 million. We believe
that our success will depend largely on our ability to extend our leadership
position as a provider of premium digital spoken audio content over the
Internet. Accordingly, we plan to invest heavily in sales and marketing and
content acquisition and production over the next several quarters, to add
additional personnel and to make capital expenditures to upgrade our systems
capacity.
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Results of Operations
The following table sets forth certain financial data for the periods
indicated as a percentage of total revenue during 1997, 1998 and for the three
months ended March 31, 1998 and 1999. We had no revenue in 1996.
<TABLE>
<CAPTION>
Three Months
Year Ended Ended
December 31, March 31,
---------------- --------------
1997 1998 1998 1999
------- ------ ------ -----
(unaudited)
<S> <C> <C> <C> <C>
Revenue:
Content and services...... 5% 35% 25% 18%
Hardware.................. 95 65 75 18
Other..................... -- -- -- 64
------- ------ ------ -----
Total revenue........... 100% 100% 100% 100%
------- ------ ------ -----
Operating expenses:
Cost of content and
services revenue......... 130 99 63 48
Cost of hardware revenue.. 418 148 212 20
Production expenses....... 3,289 436 403 157
Research and development . 4,433 437 323 102
Write-down related to
hardware business........ -- 253 -- --
Sales and marketing....... 2,037 386 226 126
General and
administrative........... 3,187 489 399 136
------- ------ ------ -----
Total operating
expenses............... 13,494 2,248 1,626 589
------- ------ ------ -----
Loss from operations........ (13,394) (2,148) (1,526) (489)
------- ------ ------ -----
Other (income) expense:
Interest income........... (251) (14) (9) (26)
Interest expense.......... 178 30 14 5
------- ------ ------ -----
Total other (income)
expense................ (73) 16 5 (21)
------- ------ ------ -----
Net loss.................... (13,321)% (2,164)% (1,531)% (468)%
======= ====== ====== =====
</TABLE>
Three months ended March 31, 1999 and 1998
Total revenue. Total revenue for the three months ended March 31, 1999, was
$315,000, as compared to $120,000 for the three months ended March 31, 1998, an
increase of $195,000, or 162%.
Content and services. Content and services revenue for the three months
ended March 31, 1999, was $58,000, as compared to $30,000 for the three months
ended March 31, 1998, an increase of $28,000, or 92%. Content and services
revenue increased primarily as a result of our increased customer base.
Hardware. Hardware revenue for the three months ended March 31, 1999, was
$57,000, as compared to $90,000 for the three months ended March 31, 1998, a
decrease of $33,000, or 37%. Hardware revenue decreased as we de-emphasize the
sale of the Audible MobilePlayer in anticipation of the adoption of mobile
devices produced by other manufacturers. Hardware revenue also decreased due to
the sale of the MobilePlayer at a reduced introductory price with a minimum
monthly content purchase commitment.
Other. Other revenue for the three months ended March 31, 1999, was
$200,000, as compared to no other revenue for the three months ended March 31,
1998. Other revenue consisted of services provided to create an AudibleReady
software player for Microsoft's Windows CE product.
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Operating expenses.
Cost of content and services revenue. Cost of content and services revenue
consists primarily of amortized minimum guarantees and royalties earned in
excess of the amortized minimum guarantees. These amortized amounts consist of
advance royalties paid or guaranteed to be paid to our content providers
regardless of the amount of content used by us during that period. These
amounts are amortized on a straight-line basis over the terms of the content
agreements or are expensed as royalties when earned, whichever is sooner. Cost
of content and services revenue was $152,000, or 262% of content and services
revenue, for the three months ended March 31, 1999, as compared to $75,000, or
250% of content and services revenue, for the three months ended March 31,
1998. This increase was primarily due to the acquisition of additional content
licenses and resulting amortization of new content agreement guarantees. Earned
royalties were $11,000, or 19% of content and services revenue, for the three
months ended March 31, 1999, and $4,000, or 13% of content and services
revenue, for the three months ended March 31, 1998. Amortization of minimum
guarantees was $141,000 for the three months ended March 31, 1999, and $72,000
for the three months ended March 31, 1998.
Cost of hardware revenue. Cost of hardware revenue consists primarily of the
cost of manufacturing the Audible MobilePlayers sold, write-down of
MobilePlayers in inventory to their estimated net realizable value prior to
September 30, 1998, packaging and collateral material, and fulfillment and
shipping costs. Cost of hardware revenue was $63,000, or 110% of hardware
revenue, for the three months ended March 31, 1999, as compared to $255,000, or
283% of hardware revenue, for the three months ended March 31, 1998. This
decrease was primarily due to write-downs of inventory units to their net
realizable value.
Production expenses. Production expenses consist primarily of personnel and
outsourced costs to support our infrastructure and systems including our Web
site, internal data communications, audio production activities and acquisition
of content. Production expenses were $495,000 for the three months ended March
31, 1999, as compared to $486,000 for the three months ended March 31, 1998, an
increase of $9,000, or 2%. This increase was primarily due to increased audio
production.
Research and development. Research and development expenses are expensed as
incurred and consist of costs incurred in the development of our Web site and
AudibleManager, the software that enables customers to download and manage our
audio content. In 1998, research and development costs consisted primarily of
costs incurred under agreements for the continued design and manufacture of the
Audible MobilePlayer. Research and development costs were $320,000 for the
three months ended March 31, 1999, as compared to $389,000 for the three months
ended March 31, 1998, a decrease of $69,000, or 18%. This decrease was
primarily due to reduced costs resulting from discontinuing the design of the
Audible MobilePlayer, offset by increased personnel and outsourced costs in the
development of new AudibleReady formats.
Sales and marketing. Sales and marketing expenses consist primarily of
personnel costs, advertising, travel, promotional materials, tradeshows and
public relations. Sales and marketing expenses were $396,000 for the three
months ended March 31, 1999, as compared to $272,000 for the three months ended
March 31, 1998, an increase of $124,000, or 46%. This increase was primarily
due to an increase in personnel and advertising costs.
General and administrative. General and administrative expense consists
primarily of administrative and business development personnel costs, legal and
accounting fees, recruiting costs and facility costs. General and
administrative expense was $431,000 for the three months ended March 31, 1999,
as compared to $481,000 for the three months ended March 31, 1998, a decrease
of $50,000, or 10%. This decrease was primarily due to reduced administrative
personnel costs as a result of lower headcount.
Interest income. Interest income, consists primarily of interest income
earned on our cash and cash equivalents balances. Interest income was $83,000
for the three months ended March 31, 1999, as compared to $11,000 for the three
months ended March 31, 1998, an increase of $72,000. This increase was
primarily due to additional interest income resulting from a higher average
cash and cash equivalent balance during the three months ended March 31, 1999.
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Interest expense. Interest expense consists of interest paid in connection
with our capital equipment lease line. Interest expense was $15,000 for the
three months ended March 31, 1999, as compared to $17,000 for the three months
ended March 31, 1998, a decrease of $2,000. This decrease was primarily due to
the lower principal balance on our capital equipment lease line.
Years ended December 31, 1998 and 1997
Total revenue. Total revenue for the year ended December 31, 1998, was
$376,000, as compared to $60,000 for the year ended December 31, 1997, an
increase of $316,000, or 524%.
Content and services. Content and services revenue for the year ended
December 31, 1998, was $132,000, as compared to $3,000 for the year ended
December 31, 1997, an increase of $129,000. Content and services revenue
increased as a result of our increased customer base.
Hardware. Hardware revenue for the year ended December 31, 1998, was
$244,000, as compared to $57,000 for the year ended December 31, 1997, an
increase of $186,000, or 324%. Hardware revenue increased as the number of
MobilePlayers sold increased which was partly offset by a reduction in their
price.
Operating expenses.
Cost of content and services revenue. Cost of content sales and services
revenue was $372,000, or 281% of content and services revenue, for the year
ended December 31, 1998, as compared to $78,000, for the year ended December
31, 1997. This increase was primarily due to the acquisition of additional
content and resulting amortization of minimum guarantees of new content
contract. Earned royalties were $24,000, or 18% of content and services
revenue, for the year ended December 31, 1998, and $2,000, or 82% of content
and services revenue, for the year ended December 31, 1997. Amortization of
contract guarantees was $349,000 for the year ended December 31, 1998, and
$76,000 for the year ended December 31, 1997.
Cost of hardware revenue. Cost of hardware revenue was $556,000, or 228% of
hardware revenue, for the year ended December 31, 1998, as compared to $252,000
for the year ended December 31, 1997, an increase of $304,000, or 120%. This
increase was primarily due to the increase in the total number of MobilePlayers
sold.
Production expenses. Production expenses were $1.6 million for the year
ended December 31, 1998, as compared to $2.0 million for the year ended
December 31, 1997, a decrease of $343,000, or 17%. This decrease was primarily
due to the reduction of personnel and outsourced costs following the completion
and launch of our Web site and the production of our initial audio content in
1997.
Research and development. Research and development expenses were $1.6
million for the year ended December 31, 1998, as compared to $2.7 million for
the year ended December 31, 1997, a decrease of $1.0 million, or 39%. This
decrease was primarily due to completion of the development in 1997 of the
Audible MobilePlayer, the completion of our Web site and of Version 1.0 of the
AudibleManager software.
Write-down related to hardware business. Write-down related to hardware
business was $952,000 for the year ended December 31, 1998. This charge
comprises a reduction of $370,000 in the carrying value of the remaining
inventory of Audible MobilePlayers, the impairment loss of $181,000 on
MobilePlayer molds and manufacturing equipment and a charge of $401,000 to
satisfy any remaining purchase commitments under the agreement.
Sales and marketing. Sales and marketing expenses were $1.5 million for the
year ended December 31, 1998, as compared to $1.2 million for the year ended
December 31, 1997, an increase of $226,000, or 18%. This increase was primarily
due to increased personnel and advertising costs.
General and administrative. General and administrative expense was $1.8
million for the year ended December 31, 1998, as compared to $1.9 million for
the year ended December 31, 1997, a decrease of $83,000, or 4%. This decrease
was primarily due to a reduction in administrative personnel costs.
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Interest income. Interest income was $53,000 for the year ended December 31,
1998, as compared to $151,000 for the year ended December 31, 1997, a decrease
of $98,000, or 65%. This decrease was primarily due to a lower average cash and
cash equivalent balance during the year ended December 31, 1998.
Interest expense. Interest expense was $115,000 for the year ended December
31, 1998, as compared to $107,000 for the year ended December 31, 1997, an
increase of $8,000, or 7%. This increase was primarily due to additional
interest expense resulting from increased obligations under our capital
equipment lease line during 1998.
Years ended December 31, 1997 and 1996
Total revenue. Total revenue for the year ended December 31, 1997 was
$60,000 primarily from the sale of Audible MobilePlayers, and we had no revenue
for the year ended December 31, 1996.
Operating expenses.
Production expenses. Production expenses were $2.0 million for the year
ended December 31, 1997, as compared to $684,000 for the year ended December
31, 1996, an increase of $1.3 million, or 190%. This increase was primarily due
to increased personnel in connection with audio production, content acquisition
and Web site development and outsourced costs in preparation for the launch of
the Audible service in late 1997.
Research and development. Research and development expenses were $2.7
million for the year ended December 31, 1997, as compared to $1.8 million for
the year ended December 31, 1996, an increase of $862,000, or 48%. This
increase was primarily due to increased personnel in connection with the
development of the Audible MobilePlayers and outsourced development costs in
preparation for the launch of the Audible service in late 1997.
Sales and marketing. Sales and marketing expenses were $1.2 million for the
year ended December 31, 1997, as compared to $256,000 for the year ended
December 31, 1996, an increase of $971,000, or 379%. This increase was
primarily due to increased personnel as we commenced our sales and marketing
activities and other marketing costs in preparation for the launch of the
Audible service in late 1997.
General and administrative. General and administrative expense was $1.9
million for the year ended December 31, 1997, as compared to $787,000 for the
year ended December 31, 1996, an increase of $1.1 million or 144%. This
increase was primarily due to increased personnel and facility costs in
preparation for the launch of the Audible service in late 1997.
Interest income. Interest income was $151,000 for the year ended December
31, 1997, as compared to $28,000 for the year ended December 31, 1996, an
increase of $123,000, or 435%. This increase was primarily due to the interest
income resulting from a higher average cash and cash equivalent balance during
1997.
Interest expense. Interest expense was $107,000 for the year ended December
31, 1997, as compared to $750 for the year ended December 31, 1996. This
increase was primarily due to additional interest expense resulting from the
origination of obligations under our lease line which was used to purchase
capital equipment during 1997.
Factors Affecting Operating Results
Our operating results have varied on a quarterly basis during our short
operating history and may fluctuate significantly in the future as a result of
a variety of factors, many of which are outside of our control. Factors that
may affect our quarterly operating results include but are not limited to: (1)
the demand for the Audible service; (2) the availability of premium audio
content; (3) sales and consumer usage of AudibleReady devices; (4) the
introduction of new products or services by a competitor; (5) the cost and
availability of acquiring sufficient web site capacity to meet our customers'
needs; (6) technical difficulties with our computer system or the Internet or
system downtime; (7) the cost of acquiring audio content; (8) the amount and
timing
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of capital expenditures and other costs relating to the expansion of our
operations; and (9) general economic conditions and economic conditions
specific to electronic commerce and online media. In the past, we experienced
fluctuations in demand for the Audible service based on the level of marketing
expenditures, the occurrence of external publicity and the quality of our
software and Website. Any one of these factors could cause our revenue and
operating results to vary significantly in the future. In addition, as a
strategic response to changes in the competitive environment, we may from time
to time make pricing, service or marketing decisions or acquisitions that could
cause significant declines in our quarterly operating revenue.
Our limited operating history and the emerging nature of our market make
prediction of future revenue difficult. We have no assurance that we will be
able to predict our future revenue accurately. Because we have a number of
fixed expenses, we may be unable to adjust our spending in a timely manner to
compensate for unexpected revenue shortfalls. Accordingly, any significant
shortfall in relation to our expectations could cause significant declines in
our operating results. We believe that our quarterly revenue, expenses and
operating results could vary significantly in the future, and that period-to-
period comparisons should not be relied upon as indications of future
performance. Due to the foregoing factors, it is likely that in some future
quarters our operating results will fall below the expectations of securities
analysts and investors, which could have a material adverse effect on the
trading price of our common stock.
Liquidity and Capital Resources
From inception, we have financed our operations through private sales of our
redeemable convertible preferred stock and warrants. Net proceeds from
inception to March 31, 1999 are approximately $28.7 million. At March 31, 1999,
our principal source of liquidity was approximately $9.6 million of cash and
cash equivalents. At March 31, 1999, our principal commitments consisted of
obligations under our capital lease line, which allows us to purchase up to
$1.8 million of equipment, operating lease commitments, contractual commitments
with content providers and revenue sharing commitments pursuant to agreements
with device manufacturers. At March 31, 1999, we had leased approximately $1.2
million in equipment on this line and had an outstanding balance of
approximately $659,000. Our cash and cash equivalents and capital lease line
will support our liquidity needs in the short-term.
Net cash used in operating activities was $2.6 million for 1996, $8.6
million for 1997, $5.0 million for 1998 and $1.7 million for the three months
ended March 31, 1999. Net cash used in all such periods was primarily
attributable to increases in inventory, offset in part by increases in
advances, accounts payable and accrued liabilities.
Net cash used in investing activities was $56,000 for 1996, $276,000 for
1997, $4,000 for 1998 and $97,000 for the three months ended March 31, 1999.
Net cash used in investing activities in all such periods were primarily
related to purchases of property and equipment and during 1997, we invested
$100,000 in an interest bearing note issued to a stockholder.
Net cash provided by financing activities was $3.0 million for 1996, $8.8
million for 1997, $14.9 million for 1998 and $908,000 for the three months
ended March 31, 1999. During 1998, we had a $1.0 million bank agreement to
provide letters of credit which expired in April 1999 and under which we did
not draw any amounts. During 1997, we had a $500,000 bank line of credit
agreement under which we drew the full amount. This line expired in December
31, 1997 and prior to such time, the balance had been paid in full. Net cash
provided by financing activities resulted primarily from the issuance of our
redeemable convertible preferred stock offset by capital lease payments.
As of December 31, 1998, we had available net operating loss carryforwards
totaling $10.7 million, which expire beginning in 2010. The Tax Reform Act of
1986 imposes limitations on our use of net operating loss carryforwards because
certain stock ownership changes have occurred.
We believe the net proceeds from this offering, together with our current
cash and cash equivalents, will be sufficient to meet our anticipated cash
requirements for at least the next 12 months. We plan to use the
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proceeds of this offering to increase our sales and marketing efforts, acquire
new content, extend our arrangements with our current content providers, add
additional personnel and make capital expenditures to upgrade our systems
capacity. Our current plans provide that approximately $21.5 million of the
proceeds from this offering will be available for use by us at the discretion
of our management. In the future, we may need to raise additional funds
through public or private financing, or other arrangements. We have no
assurance that such additional financing, if needed, will be available on
terms favorable to us or to our stockholders.
Year 2000 Readiness
General
Many of the world's computer systems (including those in non-information
technology equipment and systems) currently record years in a two-digit
format. If not addressed, these computer systems will be unable to properly
interpret dates beyond the year 1999, which could lead to business
disruptions. The potential costs and uncertainties associated with the Year
2000 issue will depend on a number of factors, including software, hardware
and the nature of the industry in which a company operates.
We have instituted a company-wide project for addressing the Year 2000
issue. We are integrating this project with a project involving the upgrade of
our Web site. The Year 2000 project is divided into two parts--System
Infrastructure Upgrades and Vendor Compliance. These sections are discussed
separately below. The project is on schedule for completion by the end of the
third quarter 1999.
System Infrastructure Upgrades
We intend to achieve Year 2000 compliance for our internal systems by the
end of the third quarter of 1999. Our limited number of personal computers and
application systems are anticipated to facilitate rapid progress toward full
Year 2000 compliance. We are in the process of upgrading to more recent
versions of operating systems software that are certified to be ready for the
Year 2000.
We intend to continue to work to achieve Year 2000 compliance for our
systems using a methodology that incorporates the following steps:
. update the inventory of computer hardware, software and miscellaneous
network components,
. evaluate application development environment compliance,
. conduct overall assessment of systems infrastructure compliance,
. complete business risk analysis,
. take remedial actions (upgrade, repair, replace, retire or retain),
and
. develop appropriate contingency plans, and develop and implement
regimes to test Year 2000 compliance for mission-critical systems.
We are at the remedial action stage, and we currently anticipate completion
of this process by the end of the third quarter 1999 in order to avoid Year
2000 impact on our systems.
Vendor Compliance
This section includes the process of identifying and prioritizing critical
suppliers of technology and communicating with them about their plans and
progress in addressing the Year 2000 problem. This process will include not
only manufacturers with which we have agreements, but also providers of
insurance, financial and other services.
Our vendor compliance program will include the following steps:
. catalog and classify all vendors,
. on-site review and testing of out-sourced services or systems,
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. review responses from vendors to determine the level of compliance,
. determine the timing, method and cost of vendor solutions,
. assess vendor Year 2000 compliance and business risks, and
. develop remedial actions or contingency plans, as necessary.
We are at the remedial action stage of this program. Achievement of vendor
Year 2000 compliance is anticipated to be an on-going effort during 1999. The
current target to achieve compliance or complete contingency plans is by the
end of the third quarter 1999.
Costs
The estimated cost to compete the Year 2000 compliance project is
approximately $100,000, not including software and hardware upgrades already
budgeted as part of our next generation Web site. These costs are expected to
be incurred throughout 1999. These costs will be incurred primarily for the use
of outside consultants, setting up Year 2000 testing environments and the
replacement of existing software and hardware.
Risks
The failure to correct a material Year 2000 problem could result in an
interruption in, or a failure of, our Web site and some of our normal business
activities or operations. Such failures could materially and adversely affect
our business, financial condition and results of operations. Moreover, even if
we successfully remediate our Year 2000 issues, we can be materially and
adversely affected by failures of our vendors to remediate their own Year 2000
issues. The failure of our vendors with which we have financial or operational
relationships to remediate their computer and non-information technology
systems issues in a timely manner could result in a material financial risk to
us. Due to the general uncertainty inherent in the Year 2000 problem, resulting
in part from the uncertainty of the Year 2000 readiness of vendors, we are
unable to determine at this time whether the consequences of Year 2000 failures
will have a material impact on our business, financial condition and results of
operations. Accordingly, we may experience business interruption or shutdown,
financial loss, damage to our reputation and legal liability. We believe that,
with the implementation of new business systems and completion of the project
as scheduled, the possibility of significant interruptions of normal operations
should be reduced.
Our expectations about future costs and the timely completion of our Year
2000 project are subject to uncertainties that could cause actual results to
differ materially from what has been discussed above. Factors that could
influence the amount of future costs and the effective timing of remediation
efforts include our success in identifying computer programs and non-
information technology systems that contain two-digit year codes, the nature
and amount of programming and testing required to upgrade or replace each of
the affected programs and systems, the rate and magnitude of related labor and
consulting costs, and the success of our vendors in addressing the Year 2000
issue.
In addition, we cannot assure you that Internet access companies, utility
companies and telecommunications providers will be Year 2000 compliant. The
failure by these companies to be Year 2000 compliant could result in a
systematic failure beyond our control, such as a prolonged Internet,
telecommunications or electrical failure, which could prevent us from
delivering the Audible service to our customers, decrease the use of the
Internet or prevent users from accessing audible.com, would have a material
adverse effect on our business, results of operations and financial condition.
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BUSINESS
We provide premium spoken audio content, such as audio versions of books and
newspapers and radio programs, that is delivered over the Internet and played
back on personal computers and hand-held electronic devices. The Audible
service allows consumers to purchase and download our content from our Web
site, store it in digital files and play it back on personal computers and
electronic devices. More than 15,000 hours of audio content are available on
our Web site, including audio versions of books, periodicals and radio
programs. Several manufacturers have agreed to support and promote the playback
of our content on their hand-held audio-enabled electronic devices.
The market for the Audible service results from the increasing usage of the
Internet and the recent introduction of hand-held electronic devices that have
audio capabilities. In contrast to traditional radio broadcasts, the Audible
service offers customers access to content of their choice and the ability to
listen to what they want, when and where they want--whether commuting,
exercising, relaxing or sitting at their personal computers. Unlike traditional
and online bookstores which are subject to physical inventory constraints and
shipping delays, we provide a selection that is readily available in digital
format that can be quickly delivered over the Internet directly to our
customers.
We help publishers, producers, authors, device manufacturers and our Web
site affiliates create incremental sources of revenue. We provide new sources
of revenue for publishers of newspapers, magazines, journals, newsletters,
professional publications and business information and producers of radio
broadcasts. In addition, our service provides companies that distribute or
promote our service and manufacturers of hand-held audio-enabled electronic
devices with a wide selection of content to offer to their customers.
Industry Overview
Public demand for entertainment, information and educational media continues
to grow as sources for this content proliferate. Veronis, Suhler & Associates
estimates that the communications industry exceeded $300 billion in revenues in
1997, increasing from less than $60 billion in 1977. During 1997, Americans on
average spent more than 3,300 hours reading, watching or listening to media
content from a large number of disparate sources. We believe that many
consumers seek a better way to manage this content.
Listening is a way for individuals to consume this content at times when
they are unable to read, such as when they are driving. A 1996 market study by
the Yankee Group indicates that 87% of automobile commuters listened to the
radio an average of 50 minutes a day while commuting. According to the
Department of Transportation, in 1990, 84 million people drove to and from work
alone, an increase of 35% from 1980. As individuals look to use their commuting
time more efficiently and manage an increasing amount of available content,
audiobooks have emerged as a personalized "pay-to-listen" alternative to radio,
which does not allow listeners to control when they listen to a particular
program. Americans spent $2.2 billion on spoken word audio tapes in 1998, an
increase from $1.6 billion in 1996. This increasing usage of audiobooks exists
despite limited types of content, high prices and the limitations of cassette
tape players. For instance, the audiobook market does not address timely print
content such as newspapers, newsletters, magazines and journals.
Recently, the Internet has emerged as a significant global communications
medium enabling millions of people to access and share information. Through the
Internet, users have the ability to quickly receive information in various
forms, from text and multimedia to newer technologies such as streaming audio.
Jupiter Communications estimates that over 33% of all Internet users listen to
Internet-delivered audio on their personal computers. However, the current
audio environment available on the Internet generally restricts consumers to
listening at their personal computers. Consumer electronics and computer
manufacturers are addressing this constraint by developing a new generation of
mobile devices that are capable of playing back downloaded audio content.
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IDC estimates that shipments of hand-held companion devices exceeded 4.5
million units worldwide in 1998 and will increase to over 14 million worldwide
by 2002. We believe seven million of these mobile devices will be audio-enabled
by the year 2002. This estimate does not include the recent appearance of
Internet-connected music players. According to Forrester Research, the
installed base of Internet-connected music players are estimated to reach one
million units in 1999 and 17 million units in 2002.
The confluence of the Internet as an increasingly accepted media
distribution channel, the widespread adoption of audio-enabled mobile devices
and the continuing growth in consumer demand for content in a variety of
formats, has resulted in new challenges for the media industry. These
challenges include creating a system that takes advantage of revenue
opportunities by making content readily accessible through the Internet while
compensating publishers and other content creators and preventing unauthorized
duplication and distribution. This creates an opportunity for a provider who
can establish a secure system for Internet delivery of premium audio content.
Our Solution
We have created the Audible service to give consumers the ability to
download spoken audio content of their choice from the Internet and to listen
to this audio when, where and how they want. The Audible service addresses the
market opportunity created by consumer demand for audio content and the
emergence of the Internet and hand-held audio-enabled electronic devices. We
have created the first service for secure delivery of premium digital spoken
audio content over the Internet for playback on personal computers and these
devices. Our service allows customers to program their listening time with
personalized selections from a wide collection of spoken audio content
available on audible.com, our Web site, including entertainment, news,
education and business information. We have assembled the largest and most
diverse collection of premium spoken audio content available for download on
the Internet for playback on personal computers and hand-held electronic
devices in most cases, currently available only through us and, in many cases,
pursuant to exclusive license rights. We have more than 15,000 hours of audio
content available on our Web site, including audio versions of books and
periodicals such as The New York Times, The Wall Street Journal and The
Economist, and radio programs such as Car Talk, Fresh Air, Marketplace and News
From Lake Wobegon. We provide over 3,000 audio versions of books from
publishers, including Bantam Doubleday Dell Audio Publishing and Random House
Audio Publishing, each a division of Random House, Inc., Dove Audio, Harper
Audio, Simon & Schuster Audio and Time Warner AudioBooks, and written by
authors such as Dave Barry, John Grisham, Stephen King, Sidney Sheldon and Amy
Tan. We believe that our extensive audio content collection and our secure
delivery system provide benefits to our customers, content providers,
manufacturers of AudibleReady hand-held electronic devices and other companies
which distribute or promote our service.
Benefits to Customers:
Unlike the traditional ways consumers select, organize and consume audio
content, Audible customers can access content of their choice and listen when,
where and how they want--whether commuting, exercising, relaxing or sitting at
their personal computers.
Selection. At our Web site, audible.com, customers can browse and purchase
from a large and diverse collection of readily available premium spoken audio
content, most of which is currently available only through us in digital format
for Internet distribution either pursuant to exclusive arrangements or because,
to our knowledge, no one else currently has these rights. Our collection
includes over 3,000 digital audiobooks in a wide variety of categories from
more than 1,500 authors. We are the only source of timely digital audio
editions of leading newspapers and selected periodicals. We also offer popular
and special interest radio programming, including interviews, commentaries and
talk radio. Our collection also contains selections that are difficult to find
or may not otherwise be readily or conveniently available to customers, such as
lectures and speeches. We have over 4,400 of these other audio selections in
addition to our audiobooks.
Convenience. audible.com provides customers with one-stop shopping for their
premium digital spoken audio needs. Our customers can browse and sample spoken
audio selections through our easy to navigate Web site. Our customers can
purchase bundled packages of selected audio content and choose automated
delivery of
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timely audio content on a subscription basis. Unlike traditional and online
bookstores, which are subject to physical inventory constraints and shipping
delays, we provide a selection that is readily available in digital format that
can be quickly delivered over the Internet directly to our customers.
Listening Experience. Unlike radio, which offers limited programming and no
ability for the listener to control broadcast times, our service enables
customers to take greater control of the listening experience. Customers decide
to listen to what they want, when and where they want. Our service allows
customers to skip between selections or individual articles or chapters within
selections. Customers can pause and resume listening where they left off and
can "bookmark" multiple sections of content, rather than be constrained by the
rewind and fast forward functions of cassette tape players.
Lower Prices. We provide customers with lower priced spoken audio content
because we do not incur the costs of traditional audio content manufacture and
distribution. For example, on June 15, 1999, the unabridged digital audio
version of Stephen King's new novel, The Girl Who Loved Tom Gordon, sold for
$10.95 on audible.com compared to the cassette version price of $23.96 plus
shipping through Amazon.com. By comparison, the manufacturer's suggested retail
price for the same title was $29.95 for cassette tape and $32.00 for compact
disc.
Benefits to Business Affiliates:
We help content creators, device manufacturers and other companies which
distribute or promote our service to their customers to create incremental
sources of revenue by aggregating premium audio content and providing a widely-
accepted system for digital spoken audio distribution.
Content creators. We provide a new source of revenue for publishers of
newspapers, magazines, journals, newsletters, professional publications and
business information and producers of radio broadcasts by creating a new market
for content that is too timely for distribution on cassette tape and too
specialized for widely-broadcast radio programs. Additionally, our electronic
delivery service offers publishers of audiobooks a new distribution channel for
their existing audiobook content. Older publications, including archived or
out-of-print content, when converted to digital audio form, can also provide
additional revenue while incurring relatively low costs for storing and
delivering electronic inventory. Our solution has the benefit of reducing the
risk of audio files being copied without authorization by employing a system
designed to limit playback of audio files to specifically identified personal
computers and hand-held electronic devices.
Device manufacturers. Major manufacturers of hand-held audio-enabled
devices, such as Casio, Compaq, Everex and Philips, have agreed to support and
promote the playback of our content on their devices. Diamond Multimedia has
agreed to promote our service after we jointly make its next version of its Rio
Internet Music Player compatible with our service. Our service provides these
manufacturers with an attractive application that takes advantage of the audio
capability of their devices, which may, in turn, increase their sales. In most
cases, these manufacturers also receive a percentage of the revenue generated
over a specified period of time by each new Audible customer referred by them
through the purchase of a new device. For example, a purchaser of a Philips
"Nino 510" palm-size device using our software can purchase and download
content from audible.com. Philips will receive a percentage of the revenue
related to content downloaded by this purchaser.
Companies which distribute or promote our service. We have entered into
marketing agreements with Microsoft, MP3.com, RioPort, RealNetworks, SOFTBANK
Content Services, Broadcast.com, The New York Times and The Wall Street Journal
to promote our content to their customers, either directly or indirectly. In
return, we have access to additional distribution outlets. We have agreed with
some of these companies to share a portion of revenue from sales of our content
to their customers.
Our Strategy
Our objective is to enhance our position as a leading provider of Internet-
delivered premium spoken audio content. Key elements of our strategy to achieve
this goal include:
Increase brand awareness. We seek to make "Audible" a recognizable brand. We
intend to use the AudibleReady brand to signify that a device is enabled to
play back Audible content. We plan to enhance brand
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awareness of the Audible service and increase visitors to our Web site by
expanding our marketing efforts through online initiatives, such as affiliate
programs, sponsorships, direct e-mail solicitations and banner advertisements.
We will augment this effort with offline initiatives, such as print
advertisements, direct mail, radio advertisements and billboards. Our co-
marketing agreements with AudibleReady device manufacturers, which include
bundling our software and marketing materials with these electronic devices,
are key elements of our plans to make potential customers aware of, and to
encourage them to try, our service. As an incentive for potential customers, we
plan to work with our content providers to offer a selection of free and
discounted content samples. In addition, we seek to enter into agreements with
content providers as well as owners of Internet portals, destinations and
commerce sites to promote co-branded services to Internet users.
Expand content collection. We plan to acquire more Internet distribution
rights to digital audio versions of books, newspapers, radio broadcasts,
magazines, journals, newsletters, conferences, seminars, performances,
lectures, speeches and television audio tracks. With selected content
providers, we plan to create additional timely digital audio editions of
newspapers, periodicals and other written content not otherwise available to
consumers in audio format. We also intend to differentiate our service by
expanding our collection of original and topic-specific content, building a
collection unconstrained by traditional physical inventory concerns.
Enable additional electronic devices and systems to be AudibleReady. We
intend to continue to work with the manufacturers of hand-held electronic
devices to support and promote the playback of Audible content on their
devices. In addition to our agreements with Casio, Compaq, Everex and Philips,
we also seek to make AudibleReady future generations of audio players that use
the MP3 audio format, a digital compression format which is currently used
primarily for music playback. For instance, we have an agreement with Diamond
Multimedia to integrate the Audible format and security into future versions of
the Rio, Diamond Multimedia's music player that plays music which can be
downloaded from the Internet. We are a member of the Secure Digital Music
Initiative consortium, or SDMI, and intend to support it in the future. The
stated goal of the SDMI consortium is to bring together the worldwide recording
industry and technology companies to develop an open technology for digital
music security. We are also seeking to expand the AudibleReady program to
include other mobile devices, such as smart phones, other hand-held computing
devices as they become audio-enabled and automobile-based personal computers.
Continue to improve the customer experience. We intend to make the Audible
service increasingly easy for customers to use and personalize. We intend to
take advantage of the flexibility of our online distribution system to offer a
variety of pricing and subscription models designed to maximize customer
satisfaction and to generate recurring revenue. We intend to enhance
audible.com to make it easier for customers to find specific selections and to
actively suggest selections that might be of interest to them based on their
prior purchasing patterns. We also intend to enhance our AudibleManager
software to make it simpler for customers to manage their personal audio
content selections and automate downloads and transfers of content to mobile
devices. In addition, we plan to improve the Audible system to improve the
clarity and fidelity of the sound and to play music and sound effects.
The Audible Service
Audible's integrated spoken audio delivery service includes four components:
(1) our Web site, audible.com; (2) our collection of digital audio content; (3)
our software for downloading, managing, scheduling and playing audio
selections; and (4) a variety of AudibleReady devices.
audible.com
Our Web site, audible.com, delivers through the Internet a large and diverse
selection of premium digital spoken audio content in a secure format. At
audible.com, visitors can browse, sample, purchase, subscribe, schedule and
download digital audio content. One hour of spoken audio, requiring about two
megabytes of storage, takes approximately 15 minutes to download to a personal
computer using a 28 kbps modem, approximately eight minutes using a 56 kbps
modem or approximately ten seconds using a high speed Internet connection, and
approximately six minutes to transfer the content from the personal computer to
an AudibleReady device.
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Digital audio content
We currently offer more than 3,000 digital audiobooks and more than 4,400
other audio selections comprising 15,000 hours of digital spoken audio content,
segmented in four categories:
. Audiobooks. We offer a wide selection of audiobooks from more than 1,500
authors. We offer both abridged (usually three to ten hours long) and
unabridged (usually five to 20 hours long) versions of original works,
read either by the authors or by professional narrators.
. Timely audio editions of print publications. Our service enables the
timely distribution of audio editions of newspapers and periodicals
previously available only in print. We offer a 40-minute daily audio
edition of The New York Times and a twice-daily audio version of The
Wall Street Journal. We also offer audio editions of The Harvard
Business Review, The Economist and numerous technology and investment
newsletters.
. Radio broadcasts. We offer popular and special-interest radio programs
shortly after they are originally broadcast so our customers have the
flexibility to listen to these programs when and where they want.
. Lectures, speeches, performances and other audio. We offer a broad
selection of lectures, speeches, dramatic and comedic performances,
educational and self-improvement materials, religious and spiritual
content, television audio tracks and other forms of spoken audio, many
of which are difficult to find from any other source. We also offer
specialty content created exclusively for audible.com. For example, we
recently entered into an agreement with the comedian and actor Robin
Williams to create original comedy and other programming for Internet
distribution exclusively through audible.com on a weekly basis.
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Following are examples drawn from the Audible collection, including prices
as of April 15, 1999:
Audiobooks
John Grisham: The Testament-- $9.95 (6 hours); $18.95 (unabridged 13 hours)
Stephen King: Bag of Bones--$10.95
John Berendt: Midnight in the Garden of Good and Evil--$6.95
Frank McCourt: Angela's Ashes--$8.95 (4 hours); $9.95 (unabridged 15 hours)
John Gray: Men Are From Mars, Women Are From Venus--$5.95
Margaret Atwood: Alias Grace--$9.95
Stephen W. Hawking: A Brief History of Time--$9.95
James McBride: The Color of Water--$6.95
Neale Donald Walsch: Conversations With God--$6.95
Scott Adams: The Dilbert Principle--$3.95
Geoffrey Moore: Inside the Tornado--$6.95
David Gardner and Tom Gardner: The Motley Fool's Rule Breakers, Rule Makers:
The Foolish Guide to Picking Stocks--$6.95
Michael Dell: Direct from Dell--$6.95
Jewel: A Night Without Armor--$3.95
James Patterson: When the Wind Blows-- $9.95
Amy Tan: The Joy Luck Club--$6.95
Robert Ludlum: The Bourne Identity--$5.95
Phillip Roth: American Pastoral--$9.95
Edward L. Fritsch and Nathan P. Rosenblatt: The Art and Skill of Conversation--
$5.95
Terry Pratchett: The Colour of Magic--$9.95
Dave Barry: Dave Barry Is from Mars and Venus--$8.95
Rebecca Wells: Divine Secrets of the Ya-Ya Sisterhood--$6.95
Douglas Adams: The Hitchhiker's Guide to the Galaxy--$8.95
Wally Lamb: I Know This Much Is True--$9.95
Dante Alighieri (translated by Robert Pinsky): The Inferno of Dante--$6.95
Eric Tyson: Investing for Dummies--$5.95
C.S. Lewis: The Screwtape Letters--$6.95
Timely Audio Summaries of Print Publications
The New York Times Audio Digest (The New York Times News Services, a Division
of the New York Times Company)--$.95 per daily issue; $49.95 for a 1-year
subscription
The Wall Street Journal on audible.com (Dow Jones & Company Inc.)--$.95 per
twice daily issue; $49.95 for a 1-year subscription
The Economist Audio Digest (The Economist Newspaper NA Inc.)--$4.95 per monthly
edition; $14.95 for a 1-year subscription
Mitch Ratcliffe's Adventures in Technology (Internet/Media Strategies Inc)--
$2.95 per monthly edition; $14.95 for a 1-year subscription
Harvard Management Update (Harvard Business School Publishing)--$2.95 per
monthly edition; $14.95 for a 1-year subscription
The Harvard Business Review (Harvard Business School Publishing)--$2.95 per
article
James K. Glassman on Wall Street (James K. Glassman)--$2.95 per monthly column;
$14.95 for a 1-year subscription
Chris Shipley's DemoLetter (IDG Conference Management Company)--$1.95 per
monthly issue
Internet Business Report (Jupiter Communications)--$2.95 per monthly report
Radio and TV Broadcasts
Fresh Air (WHYY-FM)--$1.95 per daily broadcast; $49.95 for a 1-year
subscription
Marketplace (Marketplace Productions Inc.)--$.95 per daily broadcast; $49.95
for a 1-year subscription
Car Talk (Tapet Brothers Associates d/b/a Dewey, Cheetham & Howe)--$1.95 per
weekly broadcast; $15.95 for a 1-year subscription
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Science Friday (Samanna Productions, Inc)--$2.95 per weekly broadcast; $15.95
for a 1-year subscription
To the Best of Our Knowledge (Wisconsin Public Radio)--$1.95 per weekly
broadcast; $15.95 for a 1-year subscription
Sound Money (Minnesota Public Radio)--$1.95 per weekly broadcast; $15.95 for a
1-year subscription
News from Lake Wobegon (Minnesota Public Radio)--$.95 per weekly broadcast;
$15.95 for a 1-year subscription
Lectures, Speeches, Performances and Other Audio
Gartner Group: The Euro--$1.95
Winston Churchill: Churchill in His Own Voice--$5.95
William J. Clinton: Historic Presidential Speeches, Volume 6--$2.95
Scott McNealy: Technology, Java and Pizza--$2.95
Bill Gates: Where Does Microsoft Go Next?--$1.95
William Shakespeare: Hamlet--$8.95
Bob & Ray: A Night of Two Stars--$5.95
Time Warner AudioBooks: Egypt: Journey to the Land of the Pharaohs--$5.95
We have licensed Internet distribution rights to audio content from more
than 100 publishers, producers of radio content and other content creators. Our
license agreements are typically for terms of one to three years, and many
provide us with exclusive Internet distribution rights. Under most licensing
arrangements, we pay the content creator a portion of the revenue we receive,
typically a 12% royalty. In some cases, we also pay a guaranteed advance
against the content creator's revenue share.
In most cases, we license audio recordings from publishers and content
creators. In other cases, such as with The New York Times, the morning read of
The Wall Street Journal, The Economist and The Harvard Business Review, we
create audio versions from the print publication. In all cases, we convert the
audio into our compressed, digital format.
Some of our content providers include:
Audio Literature CNBC/Dow Jones Business Video
Bantam Doubleday Dell Audio
Publishing, a division of Random House, Inc.
The Economist
Gartner Group
Blackstone Audiobooks Harvard Business School
Books on Tape Industry Standard
Dove Audio Marketplace Productions
Harper Audio/Caedmon Harper Audio The New York Times
New World Library The Wall Street Journal
Random House AudioBooks, a division of Random
House, Inc.
The Teaching Company
Sounds True
Simon & Schuster Audio Stanford Audio
Time Warner AudioBooks Penguin Audiobooks
Audible software
Our software consists of AudibleManager and AudiblePlayer for downloading,
managing, scheduling and playing audio selections.
The second generation of our AudibleManager software was recently made
available on our Web site to be downloaded for use on personal computers.
AudibleManager enables our customers to download and listen to digital spoken
audio content and transfer it to an AudibleReady device for mobile playback.
AudibleManager can also be used to organize individual selections, to specify
listening preferences and to manage delivery options for subscriptions.
Selections that exceed playback time limitations on a customer's hand-held
electronic device can be listened to over successive sessions by reconnecting
the device to the customer's personal computer and initiating a synchronization
command that automatically replaces the sections that have been
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played with new content.
Our AudiblePlayer software enables users of Windows CE-based hand-held
devices to control and customize their listening experience. Unlike cassette
tape or compact disk players, AudibleReady devices allow fast navigation of the
content through section markers and bookmarks that can be set by the user.
Users can skip between selections, individual articles or chapters, effectively
allowing them to control the listening experience.
AudibleReady devices
AudibleReady devices are personal computers and other hand-held electronic
devices that have a speaker or an audio output jack and can be enabled to play
back our audio content. The AudibleManager and AudiblePlayer software enable
these devices to receive and play back Audible content and are available for
download from audible.com. Recently, several device manufacturers have bundled
the AudibleManager and AudiblePlayer software in the packaging for their
devices. In addition, some device manufacturers plan to adapt their devices to
support the Audible service. The audio output jack of all of these devices can
work with headphones or a cassette adaptor to enable the content to be played
through a car stereo system.
We have formed co-marketing relationships with a number of consumer
electronics and computer companies to promote AudibleReady hand-held electronic
devices and our content to consumers. The device manufacturers are generally
required to promote the Audible service through a variety of means, which may
include (1) displaying the AudibleReady logo on their devices, (2) displaying
the AudibleReady logo on the outside of the device package, (3) including our
brochures inside the device package and (4) referring to Audible and
AudibleReady in their brochures and manuals. In most cases, the device
manufacturers receive a percentage of the revenue related to the content
downloaded by the purchasers of their AudibleReady devices. These revenue
sharing arrangements typically last one to two years from the date the device
user becomes an Audible customer.
We have agreements with Casio, Compaq, Everex and Philips to bundle
AudibleManager and AudiblePlayer with their palm-size, electronic devices
running the Microsoft Windows CE operating system. Devices manufactured by
these companies include:
<TABLE>
<CAPTION>
Selected AudibleReady
Device Price(1) Software Status
- ------ -------- -------------------------
<S> <C> <C>
Casio E-11................................... $299.95 Download from audible.com
Casio E-15................................... 389.95 Bundled
Casio E-100.................................. 499.95 Bundled
Compaq Aero 2110............................. 449.95 Bundled
Compaq Aero 2130............................. 499.95 Bundled
Compaq Aero 2150............................. 549.95 Bundled
Everex Freestyle A-15........................ 249.95 Download from audible.com
Everex Freestyle A-15 16MB................... 349.95 Download from audible.com
Everex Freestyle A-20........................ 449.95 Download from audible.com
Everex Freestyle A-20 16 MB.................. 399.95 Download from audible.com
Philips Nino 510............................. 449.95 Bundled
</TABLE>
- --------
(1) Prices available through Web-based retailers as of June 15, 1999. Actual
prices paid by a consumer may vary.
Both Compaq and Everex have announced that they have experienced delays in the
delivery schedule of their electronic devices due to parts shortages.
We also have an agreement with Diamond Multimedia, and are in discussions
with Creative Labs, to make future versions of their portable devices
AudibleReady. We seek to enter into agreements with other palm-size device
manufacturers.
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In order to measure consumer behavior, to demonstrate to content providers
the viability of secure digital distribution of audio content and to test the
potential of our business model, we designed, created and sold the first
AudibleReady device, the Audible MobilePlayer. We have sold approximately 2,650
MobilePlayers, which currently list for $149 each and store up to two hours of
spoken audio content, and approximately 480 MobilePlayer PLUS's, which
currently list for $299 each and store up to seven hours of spoken audio
content. We have discontinued designing and manufacturing the MobilePlayer and
MobilePlayer PLUS because we do not believe that there is significant market
potential for a device such as the MobilePlayer that is limited to playing back
only our audio when other multi-functional devices made by well-know
electronics companies are commercially available. Instead, we are focusing on
enabling the Audible service to be played on a variety of devices sold by a
number of manufacturers. We will continue to sell our devices until our
remaining inventory is sold. These devices will continue to work with the
Audible service.
Other services
We also provide audio production and hosting services to corporations that
enable them to deliver in digital audio format training, analysis, marketing
and other information to their employees, suppliers and customers.
Technology
Our solution provides for the distribution of compressed digital spoken
audio files for playback on a personal computer or AudibleReady device. Our
solution is designed to facilitate the secure distribution and playback of
digital audio files to personal computers and hand-held electronic devices in
order to reduce the risk of audio files being copied without authorization.
Audio files are compressed in order to reduce download time and storage space,
are scrambled and targeted to a customer's personal computer or mobile device
where they are decompressed as they are played back.
Most of the Audible content is encoded using a compression-decompression
technology that we have licensed and to which we have made proprietary
extensions to enable the security features of the system. We intend to support
other compression-decompression technologies in the future, which will offer
customers the flexibility to choose higher fidelity sound in exchange for
increased download time and increased storage requirements. We have designed an
audio production process to record, edit, encode, segment, categorize, secure
and upload content to our Web site. Our Web site, hosted by QWEST, runs on a
Sun server.
As of June 15, 1999, our research and development team consisted of
approximately ten developers and engineers, as well as several outside
contractors, who develop and upgrade the AudibleManager software, interfaces to
AudibleReady devices, audible.com and the system architecture. Our production
team comprises business developers, professional readers, audio editors, copy
editors, merchandisers and Web authors and editors. As of June 15, 1999, we had
14 employees and several contractors involved in audio production who regularly
produce new audio for the site.
Development and Marketing Relationships
In addition to our agreements with Casio, Compaq, Everex and Philips to
bundle our software with their hand-held electronic devices and our agreements
with Broadcast.com, The New York Times, The Wall Street Journal, RioPort,
MP3.com and SOFTBANK Content Services to promote our content, we have entered
into development and marketing arrangements with Microsoft, RealNetworks and
Diamond Multimedia for joint software development projects to integrate our
software and content with the products of these vendors.
Microsoft. Our agreement with Microsoft includes the following development
projects: Windows CE, Microsoft's designation for a special version of its
Windows operating system included in hand-held electronic devices; Digital
Rights Management; Microsoft's electronic books initiative; Microsoft's AutoPC
platform; and Windows Media Player, Microsoft's streaming media playback
software. Microsoft has committed to pay up to $2.0 million in fees over the
next five years for technology development, technology licensing and content
licensing. We have created and licensed a Windows CE software program that
enables Windows CE devices, which have less computing power and memory than a
typical personal computer, to be AudibleReady and play
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back Audible content. Under the Digital Rights Management project, we will
incorporate parts of our security software inside a Microsoft platform. We have
also given Microsoft the right to distribute AudibleReady software with
Microsoft's electronic books so that readers of these books can also listen to
them. We are also working with Microsoft to develop its Auto PC platform to be
AudibleReady. We are creating a software program that will allow use of the
Windows Media Player to stream audio through the Internet for listening at a
personal computer with speakers. We have also agreed to share a portion of the
revenue generated over a specified period of time by each new Audible customer
referred by Microsoft through the purchase of a Microsoft device or through the
Microsoft Web site. Microsoft has made a minority investment in our company and
immediately prior to the offering owns approximately 9.4% of our company.
RealNetworks. Our agreement with RealNetworks has a variety of components.
RealNetworks' personal computer playback software, RealPlayer, enables audio to
stream through the Internet for listening at a personal computer with speakers.
We plan to work with RealNetworks to develop software that will allow users of
RealNetworks' RealPlayer to access, purchase and listen to Audible content. We
also plan to cooperatively distribute portions of Audible content through
RealNetworks' e-commerce initiatives, and we plan to advertise on various
RealNetworks' Web sites.
Diamond Multimedia. Under the terms of our development and marketing
agreement with Diamond Multimedia, we will collaborate to make the next version
of its Rio Internet Music Player AudibleReady. Our collaboration will
facilitate access to the entire collection of Audible content using our
security, management and playback system. We plan to actively promote the
Audible/Rio service in joint marketing activities, including promotion of
Audible content at RioPort.com, Diamond Multimedia's music Web portal. We and
Diamond Multimedia will share revenue for referring customers to each other. In
addition, we will collaborate to integrate a future release of the
AudibleManager software with a future release of the Rio Manager software.
Sales and Marketing
Since our inception, we have focused on building our content collection,
developing the Audible service and working with manufacturers to make their
devices AudibleReady. Until recently, we have limited our marketing activities
primarily to public relations and test marketing initiatives. With the
commercial release of Version 2.0 of the AudibleManager software and the
release of new AudibleReady devices, we plan to increase the level and breadth
of our sales and marketing activities. We intend to initially focus our
marketing efforts primarily on commuters and mobile professionals. We intend to
use a combination of online and traditional media methods for sales, marketing
and promotional purposes, including the following:
Advertising. We plan to use a combination of advertising techniques to
enhance the Audible brand and attract customers to our service. Online
techniques may include free content offers, affiliate programs, sponsorships,
direct e-mail solicitations and banner advertisements. Offline techniques may
include print advertisements, direct mail, radio advertisements, billboards and
retail store promotions.
Co-marketing. We intend to work with our device manufacturers to promote the
AudibleReady program. We plan to cooperate with content providers to promote
specific Audible content to their customers on a co-branded basis. We plan to
cooperate with RealNetworks to promote Audible content bundles to users of the
RealPlayer and with Microsoft to provide Audible content bundles to users of
Windows Media Player. In addition, we plan to work with portable personal
computer manufacturers to pre-load our AudibleManager software with sample
content and sign-up offers.
Membership programs. We plan to offer membership programs including volume
discounts at various monthly commitment levels. We may use free and discounted
content offers to encourage our customers to sign up for our new membership
programs. We believe that these new membership programs will improve customer
adoption and retention.
Personalized marketing. We plan to analyze customers' stated preferences and
observed buying patterns. We will use this information to suggest selections
and to enhance the customers' purchasing and listening experience.
38
<PAGE>
Competition
The market for the sale and delivery of spoken audio is highly competitive
and rapidly changing. Principal competitive factors in the spoken audio market
include:
. selection;
. price;
. speed of delivery;
. protection of intellectual property;
. timeliness;
. convenience; and
. sound quality.
Although we believe that we currently compete favorably with respect to these
factors, we cannot be sure that we can maintain our competitive position
against current or new competitors, especially those with longer operating
histories, greater name recognition and substantially greater financial,
technical, marketing, management, service, support and other resources.
We compete with (1) traditional and online retail stores, catalogs, clubs
and libraries that sell, rent or loan audiobooks on cassette tape or compact
disc, (2) Web sites that offer streaming access to spoken audio content using
tools such as the RealPlayer or Windows Media Player and (3) other companies
offering services similar to ours.
Audiobooks on cassette tape or compact disc have been available from a
variety of sources for a number of years. Traditional book stores, such as
Borders and Barnes & Noble, and online book stores, such as barnesandnoble.com
and Amazon.com, offer a variety of audiobooks. The AudioBook Club offers
discounted audiobooks by mail order. Rental services, such as Books on Tape,
offer low pricing for time-limited usage of audiobooks, and libraries loan a
limited selection of audiobooks. One or more of these competitors might develop
a competing electronic service for delivering audio content.
Competition from Web sites that provide streaming audio content is intense
and is expected to increase significantly in the future. Broadcast.com, which
recently announced plans to be acquired by Yahoo!, and RealNetworks offer a
wide selection of streaming audio content. These companies and other portal
companies including America Online, Excite, Lycos and Infoseek may compete
directly with us by selling premium audio content for download.
Audiohighway.com also offers downloaded digital audio content for playback
on personal computers. Command Audio has announced plans to deliver audio
content through FM radio frequency for mobile playback.
Our content providers and other media companies may choose to provide
digital audio content directly to consumers. In addition, a small number of
companies control primary or secondary access to a significant percentage of
Internet users and therefore have a competitive advantage in marketing to those
users. These providers could use or adapt their current technology, or could
purchase technology, to provide a service directly competitive with the Audible
service.
Many of these companies have significantly greater brand recognition and
financial, technical, marketing and other resources than we do. We also expect
competition to intensify and the number of competitors to increase
significantly in the future as technology advances provide alternative methods
of delivering digital audio content through the Internet, satellite, wireless
data, FM radio frequency or other means.
Intellectual Property and Proprietary Rights
We regard our patents, copyrights, service marks, trademarks, trade dress,
trade secrets and similar intellectual property as critical to our success. To
protect our proprietary rights, we rely on a combination of patent, trademark
and copyright law, trade secret protection and confidentiality and license
agreements with our
39
<PAGE>
employees, customers, business affiliates and others. Notwithstanding these
precautions, others may be able to use our intellectual property or trade
secrets without our authorization. If we are unable to adequately protect our
intellectual property, it could materially affect our financial performance. In
addition, potential competitors may be able to develop technologies or services
similar to ours without infringing our patents.
We hold one patent and have filed eight patent applications for some aspects
of the Audible system, two of which have been allowed. We do not know if the
other pending patents will ever be issued and, if issued, if they will survive
legal challenges. Legal challenges to our patents, whether successful or not,
may be very expensive to defend.
We have applied for registration in the United States of several of our
trademarks and service marks, including "Audible", "audible.com" and
"AudibleReady". "audible.com" has been allowed and "Audible" and "AudibleReady"
have received adverse actions by the Patent and Trademark Office. We do not
know if these marks will be registered or that we will effectively protect the
use of these names. In addition, we have not taken affirmative steps to protect
our trademarks outside of the United States and effective trademark, service
mark, and copyright protection is not necessarily available in every country in
which our services are available online.
We also license some of our intellectual property to others, including our
AudibleReady technology and various trademarks and copyrighted material. While
we attempt to ensure that the quality of our brand is maintained, others might
take actions that materially harm the value of either these proprietary rights
or our reputation.
We license technology from others, including our compression-decompression
technology, that we incorporate into the Audible system. If these technologies
become unavailable to us, we would need to license other technology which would
require us to redesign our system and recode our content. Although we are
generally indemnified against claims that technology licensed by us infringes
the intellectual property rights of others, such indemnification is not always
available for all types of intellectual property and proprietary rights and in
some cases the scope of such indemnification is limited. Even if we receive
broad indemnification, third party indemnitors may not have the financial
resources to fully indemnify us in the event of infringement, resulting in
substantial exposure to us. We cannot assure you that infringement or
invalidity claims arising from the incorporation of this technology, resulting
from these claims, will not be asserted or prosecuted against us. These claims,
even if not meritorious, could result in the expenditure of significant
financial and managerial resources in addition to potential redevelopment costs
and delays, all of which could materially adversely effect our business,
operating results and financial condition.
We attempt to avoid infringing the proprietary rights of others, although we
have not done an exhaustive patent search. Our competitors may claim that we
are infringing their intellectual property and, if they are successful, we may
be unable to obtain a license or similar agreement to use the technology we
need to conduct our business.
Employees
As of June 15, 1999, Audible had a total of 41 full-time employees -- ten in
research and development, 12 in sales and marketing, 14 in production and five
in general and administrative.
Facilities
Our headquarters is in Wayne, New Jersey, where we lease approximately
14,000 square feet housing all our full-time employees. We house our server in
a secure facility in Weehawken, New Jersey.
Legal Proceedings
We are not currently subject to any material legal proceedings. We may from
time to time become a party to various legal proceedings arising in the
ordinary course of its business. Any such proceeding against us, even if not
meritorious, could result in the expenditure of significant financial and
managerial resources.
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<PAGE>
MANAGEMENT
Our Directors and Executive Officers
The following table shows information about our directors and executive
officers:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Andrew J. Huffman....... 39 President, Chief Executive Officer and Director
Donald R. Katz.......... 47 Chairman of the Board of Directors
Brian M. Fielding....... 45 Vice President, Business and Legal Affairs
Matthew Fine............ 38 Vice President, Content Production
J. Travis Millman....... 31 Vice President, Business Development
Foy C. Sperring, Jr..... 39 Vice President, Marketing
Guy Story, Jr........... 47 Vice President, Technology
Andrew P. Kaplan........ 45 Vice President, Finance and Administration
and Chief Financial Officer
Richard Brass........... 47 Director
R. Bradford
Burnham (1)(2)......... 44 Director
W. Bingham Gordon (2)... 49 Director
Thomas P.
Hirschfeld (1)......... 36 Director
Winthrop
Knowlton (1)(2)........ 68 Director
Timothy Mott............ 50 Director
</TABLE>
- --------
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
Andrew J. Huffman has been our Chief Executive Officer, President and a
director since joining us in February 1998. From July 1997 to February 1998,
Mr. Huffman consulted with a number of technology companies. From April 1995 to
July 1997, Mr. Huffman was President and Chief Executive Officer of Aimtech
Corporation, an Internet and multimedia software tools company. From July 1993
to March 1995, Mr. Huffman was Vice President of Novell, Inc.'s Enterprise
Solutions Division, where he was responsible for Novell's worldwide consulting,
developer relations, and systems integrator relations. From November 1991 to
July 1993, Mr. Huffman was Vice President and General Manager of the
Distributed Computing Business Group at Unix System Laboratories, a software
company.
Donald R. Katz has been Chairman of the Board of Directors since April 1999
and a director since co-founding Audible in November 1995. From November 1995
to March 1998, Mr. Katz served as our President and Chief Executive Officer.
Prior to co-founding Audible, Mr. Katz was an author, business journalist and
media consultant for over fifteen years.
Brian Fielding has been our Vice President, Business and Legal Affairs since
January 1999. From April 1997 to January 1999, Mr. Fielding was our Managing
Director, Business and Legal Affairs. From March 1988 to April 1997, Mr.
Fielding held various positions at CBS Sports, a division of CBS, Inc., and was
most recently the Vice President, Business Affairs.
Matthew Fine has been our Vice President, Programming Production since
January 1999. From May 1998 to January 1999, Mr. Fine was our Director of Sales
and, from April 1997 to May 1998, our Director of Business Programming. He has
also managed our telesales group and enterprise sales efforts. From January
1997 to April 1997, Mr. Fine was Special Projects Manager at Dow Jones
Newswires, and, from December 1993 to January 1997, National Sales Manager at
Dow Jones Investor Network.
J. Travis Millman has been our Vice President, Business Development since
October 1997, after serving briefly as an executive consultant to Audible from
August to October 1997. From September 1996 to August 1997, Mr. Millman was
Director of Business Development at OnLive! Technologies, Inc., an Internet
41
<PAGE>
communications software company, and, from June 1994 to September 1996, Manager
of Business Development at Interplay Entertainment Corporation, an
entertainment software developer. Mr. Millman started his career in the
Engineering & Manufacturing Division of Sony Corporation of America.
Foy C. Sperring, Jr. has been our Vice President, Marketing since June 1998.
From September 1997 to June 1998, Mr. Sperring was Vice President of Product
Development at Interleaf Inc., a publishing software service company. From
November 1996 to September 1997, he was Vice President of Sales and Marketing
for Aimtech. From October 1995 to November 1996, Mr. Sperring was Vice
President of Marketing for Forman Interactive, an Internet software tools and
hosting service company. From March 1994 to October 1995, he was Vice President
of Electronic Publishing for PaperDirect, Inc., a personalized communication
materials company.
Guy Story, Jr. has been our Vice President, Technology since June 1996. From
September 1994 to June 1996, Mr. Story was Director of Multimedia Software
Application Architectures at the Lucent Network Systems division of Lucent
Technologies. From October 1985 to September 1994, he was a member of the
technical staff at Lucent Bell Laboratories.
Andrew P. Kaplan has been our Vice President, Finance and Administration and
Chief Financial Officer since June 1, 1999. From June 1997 to May 1999, Mr.
Kaplan was Chief Financial Officer of Thomson Corporation Publishing
International, a division of The Thomson Corporation. From September 1995 to
May 1997, Mr. Kaplan was Senior Vice President and Chief Financial Officer for
T.C. Advertising, an advertising services company. From March 1989 to August
1995, Mr. Kaplan was Vice President and Chief Financial Officer of Time Life, a
division of Time Warner Inc.
Richard Brass has been a director since April 1999. Since November 1997, Mr.
Brass has been Vice President, Technology Development at Microsoft Corporation.
From 1989 to July 1997, Mr. Brass was Senior Vice President of Oracle
Corporation.
R. Bradford Burnham has been a director since March 1997. Since May 1996,
Mr. Burnham has been a general partner of AT&T Ventures, a group of venture
capital funds. From May 1994 to May 1996, Mr. Burnham was a principal of AT&T
Ventures.
W. Bingham Gordon has been a director since November 1996. Since March 1998,
Mr. Gordon has been Executive Vice President and Chief Creative Officer of
Electronic Arts Inc., an interactive entertainment company. From October 1995
to March 1998, he was Executive Vice President, Marketing. From August 1993 to
October 1995, he served as Executive Vice President of EA Studios.
Thomas Hirschfeld has been a director since July 1996. Since March 1998, Mr.
Hirschfeld has been a managing director of Patricof & Co. Ventures, Inc., where
he was a principal from January 1995 to March 1998. From February 1994 to
December 1995, Mr. Hirschfeld was Assistant to the Mayor of New York City.
Winthrop Knowlton has been a director since November 1996. Since 1989 Mr.
Knowlton has been the Chairman and Chief Executive Officer of Knowlton
Brothers, Inc., a management company for limited partnerships and offshore
funds investing in the United States.
Timothy Mott has been a director since co-founding Audible in December 1995
and was the Chairman of the Board of Directors from December 1995 through April
1999. Mr. Mott has been a partner of Ironwood Capital L.L.C., an investment
company, since he co-founded it in January 1993. From October 1990 to July
1995, he was Chairman of Macromedia Inc., a multimedia software company. Mr.
Mott is a director of Electronic Arts, a company he co-founded in 1982.
Our executive officers are elected by our board of directors and serve at
its discretion. There are no family relationship among our officers and
directors.
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<PAGE>
Classified Board
Our certificate of incorporation and bylaws will provide for a classified
board of directors consisting of three classes of directors, each serving
staggered three-year terms. As a result, a portion of our board of directors
will be elected each year. To implement the classified structure, prior to
consummation of the offering, three of the nominees to the board will be
elected to one-year terms, three will be elected to two-year terms and two will
be elected to three-year terms. Thereafter, directors will be elected for
three-year terms. Messrs. Burnham, Hirschfeld and Mott will be Class I
directors with terms expiring at the 2000 annual meeting of stockholders,
Messrs. Brass, Gordon and Knowlton will be Class II directors, with terms
expiring at the 2001 annual meeting of stockholders, and Messrs. Huffman and
Katz will be Class III directors, with terms expiring at the 2002 annual
meeting of stockholders.
Board Committees
Our board has an Audit Committee and a Compensation Committee. The Audit
Committee, among other things, is responsible for:
. recommending to our board of directors the independent auditors to
conduct the annual audit of our books and records;
. reviewing the proposed scope and results of the audit;
. approving the audit fees to be paid;
. reviewing accounting and financial controls with the independent public
accountants and our financial and accounting staff; and
. reviewing and approving transactions between us and our directors,
officers and affiliates.
The members of our Audit Committee are Messrs. Burnham, Hirschfeld and
Knowlton.
The Compensation Committee reviews and recommends the compensation
arrangements for management, including the compensation for our President and
Chief Executive Officer. It establishes and reviews general compensation
policies with the objective to attract and retain superior talent, to reward
individual performance and to achieve our financial goals. It also administers
our Stock Incentive Plan and our restricted stock program. The members of our
Compensation Committee are Messrs. Burnham, Gordon and Knowlton.
Compensation Committee Interlocks and Insider Participation
During 1998, members of our Compensation Committee were Messrs. Huffman,
Burnham and Hirschfeld. None of our executive officers has served as a member
of the compensation committee (or other committee serving an equivalent
function) of any other entity, whose executive officers served as a director of
or member of our Compensation Committee.
Director Compensation
Our directors have received no compensation for serving as directors. We
reimburse our directors for reasonable expenses they incur to attend board and
committee meetings. Our non-employee directors are eligible to receive grants
of options to acquire our common stock under our Stock Incentive Plan. See
"1999 Stock Incentive Plan."
Mr. Mott has been covered under our medical benefits plan since 1998 on the
same terms as our employees.
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<PAGE>
Executive Compensation
The following table summarizes the compensation paid to our chief executive
officer and the other four most highly paid executive officers whose total
salary and bonus exceeded $100,000 during 1998, whom we refer to as our Named
Executive Officers:
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Compensation
------------
Annual Compensation Restricted
------------------------- Stock
Name and Principal Position Salary Bonus(1) Other Sales(2)
- --------------------------- -------- -------- ------- ------------
<S> <C> <C> <C> <C>
Andrew J. Huffman.................... $152,077 $36,250 $ 7,664(3) $ -- (4)
President and Chief Executive
Officer
Donald R. Katz....................... 140,000 30,750 -- --
Chairman of the Board of Directors
Travis Millman....................... 114,125 31,733 11,767(3) -- (5)
Vice President, Business Development
Brian Fielding....................... 110,000 17,750 -- -- (6)
Vice President, Business and Legal
Affairs
Guy Story, Jr........................ 103,542 16,750 -- --
Vice President, Technology
</TABLE>
- --------
(1) Includes amounts earned in 1998 and paid in 1999.
(2) Each Named Executive Officer who purchased shares of our restricted stock
during 1998 paid for the stock by means of a promissory note. The price of
the stock on the date of purchase was equal to the fair market value on the
date of purchase as determined by our board of directors. See the
description of our restricted stock sales in this section regarding vesting
of restricted stock.
(3) Consists of relocation payments.
(4) In February 1998, Mr. Huffman purchased 1,500,000 shares of our restricted
common stock for $400,000. As of December 31, 1998, 300,000 shares had
vested. The remaining shares vest at a rate of 30,000 shares per month and
will be fully vested in April 2002.
(5) In May 1998, Mr. Millman purchased 75,000 shares of our restricted common
stock for $20,000. As of December 31, 1998, 12,000 shares had vested. The
remaining shares vest at a rate of 1,500 per month and will be fully vested
in June 2002.
(6) In May 1998, Mr. Fielding purchased 37,500 shares of our restricted common
stock for $10,000. As of December 31, 1998, 6,000 shares had vested. The
remaining shares vest at a rate of 750 per month and will be fully vested
in June 2002.
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<PAGE>
Fiscal 1998 Year-End Restricted Stock Values
All of our Named Executive Officers own restricted stock. The following
table sets forth, as of December 31, 1998, the total purchases of restricted
stock by each Named Executive Officer and the number and aggregate dollar value
of the vested and unvested shares held by them. There was no public trading
market for our common stock as of December 31, 1998. Accordingly, we have
calculated the aggregate value of the shares based on the difference between an
assumed initial public offering price of $9.00 per share and the purchase price
of each share, multiplied by the number of shares. All these shares were
purchased by the Named Executive Officers at their fair market value, as
determined by our board of directors, and were paid for by promissory note on
the terms described under "Restricted Stock Program."
<TABLE>
<CAPTION>
Aggregate Value Aggregate Value
Of Vested Of Unvested
Name Vested Shares Unvested Shares Shares Shares
---- ------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Andrew J. Huffman....... 300,000 1,200,000 $ 2,619,000 $10,476,000
Donald R. Katz.......... 1,359,356 140,644 12,166,236 1,258,764
Travis Millman.......... 88,500 211,500 772,605 1,846,395
Brian Fielding.......... 53,250 96,750 464,873 844,628
Guy Story, Jr........... 213,000 162,000 1,898,550 1,438,200
</TABLE>
If we are acquired by another company, 50% of each employee's unvested
shares on that date will automatically become vested.
Option Grants
We did not have a stock option plan prior to April 1999. Named Executive
Officers have purchased shares of our common stock through our restricted stock
program as described below. In June 1999, we granted to Mr. Millman an option
to purchase 75,000 shares of our common stock at an exercise price of $8.00 per
share.
Employment Arrangements
We have not entered into formal employment agreements with any of our Named
Executive Officers. Our employment arrangements with our Named Executive
Officers, which are embodied in enforceable offer letters, provide for a base
salary, which may be increased by our board of directors, and an annual bonus.
The following table shows their current annual base salary and annual bonus
potential for 1999.
<TABLE>
<CAPTION>
Maximum
Annual Annual Bonus
Name Base Salary for 1999
---- ----------- ------------
<S> <C> <C>
Andrew J. Huffman................................... $180,000 $90,000
Donald R. Katz...................................... 140,000 42,000
Travis Millman...................................... 120,000 40,000
Brian Fielding...................................... 115,000 23,000
Guy Story, Jr....................................... 110,000 27,500
</TABLE>
Mr. Huffman's employment arrangement provides that we pay him six month
severance if we terminate his employment. Mr. Fielding's employment arrangement
provides that we pay him one month severance if we terminate his employment.
Andrew Kaplan's employment arrangement provides him with a $150,000 annual
base salary, a signing bonus of $15,000, payable within three months of his
employment date, and an annual target bonus of $30,000, payable quarterly. Mr.
Kaplan is entitled to six month severance if we terminate his employment. We
also provide him access to a corporate apartment.
We require all our employees to sign agreements which prohibit the
disclosure of our confidential or proprietary information. Each of these
employees also has agreed to non-competition and non-solicitation provisions
that will be in effect during his employment and for one year thereafter.
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<PAGE>
We have agreed to pay Messrs. Katz, Millman, Fielding and Story bonuses in
the following amounts if they are still employed by us on the following dates:
<TABLE>
<CAPTION>
Name Bonus Date
---- ------- ------------------
<S> <C> <C>
Donald R. Katz.................................... $65,669 June 30, 1999
Travis Millman.................................... 78,753 September 30, 2001
Brian Fielding.................................... 39,488 May 31, 2001
Guy Story, Jr..................................... 22,604 July 31, 2000
</TABLE>
Restricted Stock Program
Since our inception, some of our employees have purchased restricted shares
of our common stock at a price per share equal to the fair market value on the
date of purchase as determined by our board of directors. The number of shares
that each employee purchased varied depending on his or her position. In
general, employees paid for these shares by promissory notes, which are due on
the earlier of 50 months from the date of issuance of the shares or the date
the employee leaves Audible.
In general, we may repurchase a portion of an employee's shares if he or she
ceases to be employed by us. If the employee leaves within six months of
purchasing the restricted stock, we may repurchase all of the employee's
shares. Twelve percent of the employee's shares vest six months after the date
of purchase and thereafter, the remaining shares vest equally over the next 44
months. We may repurchase all unvested shares at the original purchase price.
If we are acquired by another company, 50% of each employee's unvested shares
on that date will automatically become vested.
1999 Stock Incentive Plan
Our 1999 Stock Incentive Plan authorizes the grant of:
. stock options;
. stock appreciation rights;
. stock awards;
. phantom stock; and
. performance awards.
The Compensation Committee administers our Stock Incentive Plan. The
Committee has sole power and authority, consistent with the provisions of our
Stock Incentive Plan, to determine which eligible participants will receive
awards, the form of the awards and the number of shares of our common stock
covered by each award. The Committee may impose terms, limits, restrictions and
conditions upon awards, and may modify, amend, extend or renew awards,
accelerate or change the exercise time of awards or waive any restrictions or
conditions to an award.
As of June 15, 1999, we have issued options to purchase 903,450 shares of
our common stock out of the 9,000,000 shares available under the Stock
Incentive Plan.
Stock Options. We can grant options to purchase shares of our common stock
that either are intended to qualify as incentive stock options under the
Internal Revenue Code or that do not qualify as incentive options. The
Committee can determine the option exercise price, the term of each option, the
time when each option may be exercised and, the period of time, if any, after
retirement, death, disability or termination of employment during which options
may be exercised.
Stock Appreciation Rights. We can grant rights to receive a number of shares
or cash amounts, or a combination of the two that is based on the increase in
the fair market value of the shares underlying the right during a stated period
specified by the Committee.
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<PAGE>
Stock Awards. We can award shares of our common stock at no cost or for a
purchase price. These stock awards may be subject to restrictions at the
Committee's discretion.
Phantom Stock. We can grant stock equivalent rights, or phantom stock, which
entitle the recipient to receive credits which are ultimately payable in the
form of cash, shares of our common stock or a combination of both. Phantom
stock does not entitle the holder to any rights as a stockholder.
Performance Awards. We can grant performance awards to participants
entitling the participants to receive cash, shares of our common stock, or a
combination of both, upon the achievement of performance goals and other
conditions determined by the committee. The performance goals may be based on
our operating income, or on one or more other business criteria selected by the
Committee.
Other Stock-Based Awards. We can grant other stock-based awards. These
stock-based awards may be denominated in cash, in common stock, or other
securities, in stock-equivalent units, in stock appreciation units, in
securities or debentures convertible into common stock, or in any combination
of the foregoing and may be paid in common stock or other securities, in cash,
or in a combination of common stock or other securities and cash, all as
determined in the sole discretion of the Committee.
401(k) Plan
We maintain a 401(k) plan that covers all our employees who satisfy
eligibility requirements relating to minimum age, length of service and hours
worked. We may make an annual contribution for the benefit of eligible
employees in an amount determined by our board of directors. We have not made
any such contribution to date and have no current plans to do so. Eligible
employees may make pretax elective contributions of up to 15% of their
compensation, subject to maximum limits on contributions prescribed by law.
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<PAGE>
RELATED TRANSACTIONS AND RELATIONSHIPS
Organization
In connection with our formation, we issued 1,500,000 shares of common stock
to our founder, Donald R. Katz, in exchange for a $52,500 promissory note and
contribution of patent rights. The rights were valued at $17,500 by Mr. Katz
and us, based upon Mr. Katz's estimated costs of such patent right, and agreed
to by Mr. Mott, a director, prior to the investment in December 1995 by
Ironwood Capital L.L.C., of which Mr. Mott is a managing member.
In December 1995, we issued 534,000 shares of Series A preferred stock at a
price of $0.75 per share and 375,000 shares of common stock at a price of
$0.047 per share to Ironwood.
Sale of Stock
In July 1996, we issued 2,000,000 shares of Series B preferred stock at a
price of $1.50 per share, including 333,334 shares to Ironwood, 833,333 shares
to funds managed by Patricof & Co. Ventures, Inc., of which Mr. Hirschfeld, one
of our directors, is a managing director, and 833,333 shares to Kleiner Perkins
Caufield & Byers and its affiliates.
In November 1996, we issued 25,000 additional shares of Series B preferred
stock at a price of $1.50 per share, to each of Winthrop Knowlton and W.
Bingham Gordon, both of whom are members of our board of directors.
In March 1997, we issued 2,250,000 shares of Series C preferred stock at a
price of $4.00 per share, including 122,917 shares to Ironwood, 6,250 shares to
Mr. Knowlton, 6,250 shares to Mr. Gordon, 307,292 shares to the Patricof group,
307,291 shares to the Kleiner Perkins group and 750,000 shares to AT&T Venture
Fund II, L.P. and its affiliates, of which Mr. Burnham, a member of our board
of directors, is a general partner.
In February 1998, we issued 1,350,000 shares of Series D preferred stock at
a price of $4.00 per share, including 65,228 shares to Ironwood, 117,980 shares
to the Patricof group, 75,000 shares to the Kleiner Perkins group, 77,575
shares to the AT&T group and 750,000 shares to CPQ Holdings, Inc., an affiliate
of Compaq Computer Corporation.
In December 1998, we issued 2,500,000 additional shares of Series D
preferred stock at a price of $4.00 per share, including 81,731 shares to the
Patricof group, 78,926 shares to the Kleiner Perkins group, 53,686 shares to
the AT&T group and 1,250,000 shares to Microsoft Corporation, of which Mr.
Brass, a member of our board of directors, is Vice President of Business
Development.
In connection with the preferred stock financings, we granted registration
rights to the preferred stockholders, among others. Upon exercise of these
registration rights, these stockholders can require us to file registration
statements covering the sale of shares of common stock held by them and may
include the sale of their shares in registration statements covering our sale
of shares to the public. See "Description of Our Capital Stock--Registration
Rights."
Since inception, we have sold to our executive officers and directors the
following shares of restricted common stock at the date and prices listed in
the table. In general, each officer or director paid for his shares by way of
unsecured promissory notes that typically bear interest at 7% or 8% per year
and are payable upon the earlier of the termination of employment or such time
as all shares have vested.
48
<PAGE>
<TABLE>
<CAPTION>
Date Number of Price Aggregate
Name of Issuance Shares Per Share(1) Price(2)
- ---- ----------- --------- ------------ ---------
<S> <C> <C> <C> <C>
W. Bingham Gordon.................. 07/17/96 7,500 $.11 $ 850
W. Bingham Gordon.................. 02/20/97 37,500 .10 3,750
Timothy Mott (3)................... 12/11/95 375,000 .05 17,500
Timothy Mott (3)................... 07/23/96 375,000 .10 37,500
Winthrop Knowlton.................. 01/20/97 37,500 .10 3,750
Brian Fielding..................... 06/17/97 112,500 .27 30,000
Brian Fielding..................... 05/06/98 37,500 .27 10,000
Brian Fielding..................... 03/02/99 112,500 .27 30,000
Matthew Fine....................... 06/17/97 112,500 .27 30,000
Matthew Fine....................... 05/06/98 37,500 .27 10,000
Matthew Fine....................... 03/02/99 75,000 .27 20,000
Andrew Huffman..................... 02/28/98 1,500,000 .27 400,000
Donald Katz (4).................... 12/11/95 1,500,000 .05 70,000
J. Travis Millman.................. 11/03/97 225,000 .27 60,000
J. Travis Millman.................. 05/06/98 75,000 .27 20,000
Anthony Nash....................... 05/08/97 22,500 .10 2,250
Anthony Nash....................... 11/03/97 22,500 .27 6,000
Anthony Nash....................... 09/15/98 30,000 .27 8,000
Foy Sperring....................... 06/15/98 375,000 .27 100,000
Guy Story, Jr. .................... 07/17/96 300,000 .06 17,000
Guy Story, Jr. .................... 07/29/97 75,000 .27 20,000
</TABLE>
- --------
(1) Rounded to the nearest whole cent.
(2) As of December 31, 1998, other than as noted for Mr. Katz, each of these
directors and executive officers was indebted to us in an amount equal to
the aggregate purchase price of his shares of restricted stock plus accrued
interest from the origination date on the promissory notes with which he
purchased the shares.
(3) Ironwood Capital transferred these shares to Mr. Mott in April 1999.
(4) Mr. Katz purchased his stock through a combination of a $52,500 promissory
note and contribution of patent rights valued at $17,500. As of December
31, 1998, Mr. Katz was indebted to us for $52,500 plus accrued interest
from December 11, 1995.
Issuance of Options
On June 1, 1999, we issued Andrew Kaplan an option to purchase 325,000
shares of common stock at an exercise price of $8.00 per share, subject to
vesting over a four year period. On June 1, 1999, we issued Mr. Millman an
option to purchase 75,000 shares of common stock at an exercise price of $8.00
per share, subject to vesting over a four year period.
Issuance of Warrants
In March 1997, in connection with the sale of the Series C preferred stock,
we issued warrants to purchase an aggregate of 675,001 shares of common stock
at an exercise price of $4.00 per share to holders of Series C preferred stock,
including Ironwood, the Kleiner Perkins group, the Patricof group, the AT&T
group and Messrs. Knowlton and Gordon. These warrants may be exercised until
March 31, 2002.
In April 1999, in connection with an amendment to our license agreement with
Microsoft, which owns over 5% of our capital stock, we issued to Microsoft a
warrant to purchase 100,000 shares of common stock at a price per share equal
to the price to the public of our common stock in this offering, or, if this
offering does not occur within 12 months of the date of issuance, such warrant
is exercisable for 100,000 shares of common stock at $6.00 per share. This
warrant may be exercised until November 18, 2003.
49
<PAGE>
Additional Transactions
In March 1997, we loaned Mr. Katz, our Chairman of the Board, $100,000 under
the terms of a promissory note and secured by Mr. Katz's pledge of 37,500
shares of common stock. The promissory note bears interest at the rate of 6%
per annum and is due on the earlier of March 28, 2002 or one year following
this offering. On March 31, 1999, the outstanding balance on the loan was
$100,000 plus $12,000 in accrued interest.
In September 1998, we entered into a software development and licensing
agreement with Compaq Computer Corporation, an affiliate of CPQ Holdings, Inc.,
which owns over 5% of our issued stock.
In November 1998, we entered into a license agreement with Microsoft. Our
agreement includes the following development projects: Windows CE; Windows
Media Player; Digital Rights Management; Microsoft's electronic books
initiative; and Microsoft's Auto PC platform. Microsoft has committed to pay
certain fees over the next five years for technology development, technology
licensing and content licensing. As part of the agreement, we have created and
licensed a Windows CE software program that enables Windows CE devices to play
back Audible content. We are also working with Microsoft to develop its Auto PC
platform to be Audible Ready. We are creating a software program that will
allow use of the Windows Media Player to access our content. Under the Digital
Rights Management project, we will incorporate our security software inside a
Microsoft platform. We have also given Microsoft the right to distribute our
software with Microsoft's electronic books so that readers can listen to the
books. We have also agreed to share a portion of the revenue generated over a
specific period of time by each new Audible customer referred by Microsoft
through the purchase of a Microsoft device or through the Microsoft Web site.
The Microsoft agreement also contains a right of first negotiation if we
receive a proposal from another company that could result in our acquisition.
If we receive an unsolicited proposal, or if our board determines to solicit
proposals or otherwise enter into discussions that would result in a sale of a
controlling interest in our company or other merger, asset sale or other
disposition that effectively results in a change of control of the company, we
are required to give written notice to Microsoft. We are under no obligation to
disclose confidential information related to the unsolicited proposal.
Microsoft then has 7 days to provide notice to us that it desires to negotiate
a potential acquisition of Audible by Microsoft. If Microsoft delivers this
notice to us within 7 days, we will negotiate exclusively and in good faith for
21 days from the date of delivery of our initial notice to Microsoft. We are
under no obligation to accept any offer from Microsoft. If we are unable to
negotiate a transaction with Microsoft within the 21-day negotiation period, we
may negotiate with others for a sale of our company. If we do not enter into a
definitive agreement with another party within 6 months from the date we
initially delivered notice to Microsoft, we must restart the notice and
negotiation process. This right terminates no later than November 4, 2003.
In January 1998, we entered into an agreement with Flextronics International
Ltd. to manufacture the Audible MobilePlayer. The chief executive officer of
Flextronics is a principal of Ironwood, of which Mr. Mott, a director, is also
a principal. As of December 31, 1997, $173,000 was due to Flextronics under the
terms of that agreement, and as of December 31, 1998, $51,000 was due. As part
of our plans to discontinue the design and manufacture of the Audible
MobilePlayer, we plan to terminate this agreement in the second half of 1999.
We believe that all the transactions described above were made on terms no
less favorable to us than if such transactions were with non-affiliates. We
have adopted a policy whereby all future transactions between us and our
officers, directors and affiliates will be on terms no less favorable than
could be obtained from non-affiliates and will be approved by a majority of our
board.
50
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets certain information regarding beneficial ownership
of our common stock as of April 30, 1999, and as adjusted to reflect the sale
of the shares offered hereby, by:
. each person who we know beneficially owns more that 5% of our common
stock;
. each member of our board of directors;
. each of our Named Executive Officers; and
. all directors and executive officers as a group.
Unless otherwise indicated, the address for each stockholder listed is c/o
Audible, Inc., 65 Willowbrook Boulevard, Wayne, New Jersey 07470. Except as
otherwise indicated, each of the persons named in this table has sole voting
and investment power with respect to all the shares indicated.
For purposes of calculating the percentage beneficially owned, 21,003,265
shares of common stock are deemed outstanding before the offering, including
7,602,269 shares of common stock outstanding as of April 30, 1999 and
13,400,996 shares of common stock issuable upon conversion of the preferred
stock. For purposes of calculating the percentage beneficially owned, the
number of shares deemed outstanding after the offering includes: (a) all shares
deemed to be outstanding before the offering and (b) 4,000,000 shares being
sold in this offering, assuming no exercise of the underwriters' over-allotment
option.
In computing the number of shares beneficially owned by a person and the
percentage ownership by that person, shares of common stock which that person
could purchase by exercising outstanding common stock purchase warrants prior
to June 30, 1999, are deemed outstanding. Such shares, however, are not deemed
outstanding for the purpose of computing the percentage ownership of any other
person.
<TABLE>
<CAPTION>
Percent of Common
Number of Stock Outstanding
Shares -----------------
Beneficially Before After
Name of Beneficial Owner Owned Offering Offering
- ------------------------ ------------ -------- --------
<S> <C> <C> <C>
Patricof group (1)............................... 2,102,691 10.0% 8.4%
c/o Patricof & Co. Ventures, Inc.
445 Park Avenue, 11th Floor
New York, NY 10022
Kleiner Perkins group (2)........................ 2,034,011 9.6 8.1
2750 Sand Hill Road
Menlo Park, CA 94025
Microsoft Corporation (3)........................ 1,975,000 9.4 7.9
One Microsoft Way
Redmond, WA 98052-6399
Ironwood Capital L.L.C. (4)...................... 1,620,094 7.7 6.5
2241 Lundy Avenue
San Jose, CA 95131
AT&T group (5)................................... 1,546,891 7.3 6.1
c/o AT&T Ventures
295 North Maple Avenue
Basking Ridge, NJ 07920
CPQ Holdings, Inc. (6)........................... 1,125,000 5.4 4.5
20555 SH 249
Houston, TX 77070
</TABLE>
51
<PAGE>
<TABLE>
<CAPTION>
Percent of Common
Number of Stock Outstanding
Shares -----------------
Beneficially Before After
Name of Beneficial Owner Owned Offering Offering
- ------------------------ ------------ -------- --------
<S> <C> <C> <C>
Richard Brass................................... -- -- --
R. Bradford Burnham (7)......................... 1,546,891 7.3 6.1
W. Bingham Gordon (8)........................... 93,750 * *
Thomas Hirschfeld (9)........................... 2,102,691 10.0 8.4
Winthrop Knowlton (10).......................... 86,250 * *
Timothy Mott (11)............................... 2,370,094 11.3 9.5
Andrew J. Huffman (12).......................... 1,500,000 7.1 6.0
Donald R. Katz (13)............................. 1,500,000 7.1 6.0
Brian Fielding (14)............................. 262,500 1.2 1.0
J. Travis Millman (15).......................... 300,000 1.4 1.2
Guy Story, Jr. (16)............................. 375,000 1.8 1.5
All officers and directors as a group (14
people) (17)................................... 10,812,176 50.6 42.6
</TABLE>
- --------
* Less than 1%.
(1) Represents (i) 1,758,693 shares beneficially owned by APA Excelsior IV,
L.P., including 77,106 shares issuable upon exercise of warrants, (ii)
310,356 shares beneficially owned by APA Excelsior IV/Offshore L.P.,
including 13,607 shares issuable upon exercise of warrants, and (iii)
33,642 shares beneficially owned by Patricof Private Investment Club, L.P.,
including 1,475 shares issuable upon exercise of warrants.
(2) Represents (i) 1,879,576 shares beneficially owned by Kleiner Perkins
Caufield & Byers VIII, including 89,883 shares issuable upon exercise of
warrants, (ii) 50,848 shares beneficially owned by KPCB Information
Sciences Zaibatsu, including 2,304 shares issuable upon exercise of
warrants, and (iii) 103,587 shares beneficially owned by KPCB VIII Founders
Fund.
(3) Includes 100,000 shares issuable upon exercise of a warrant issued in April
1999.
(4) Includes 36,876 shares issuable upon exercise of warrants.
(5) Represents (i) 154,689 shares beneficially owned by Venture Fund I, L.P.,
including 22,500 shares issuable upon exercise of warrants, and (ii)
1,392,202 shares beneficially owned by AT&T Venture Fund II, L.P.,
including 202,500 shares issuable upon exercise of warrants.
(6) An affiliate of Compaq Computer Corporation.
(7) Represents (i) 154,689 shares beneficially owned by Venture Fund I, L.P.,
including 22,500 shares issuable upon exercise of warrants, and (ii)
1,392,202 shares owned by AT&T Venture Fund II, L.P., including 202,500
shares issuable upon exercise of warrants. Mr. Burnham, a director, is a
general partner of the AT&T group partnerships. Mr. Burnham disclaims
beneficial ownership of these shares, except to the extent of his pecuniary
interest. Mr. Burnham's address is c/o AT&T Ventures.
(8) Includes 1,875 shares issuable upon exercise of warrants and 12,750 shares
that are subject to our repurchase option.
(9) Represents 2,102,691 shares beneficially owned by the Patricof group, funds
managed by Patricof & Co. Ventures, Inc., of which Mr. Hirschfeld is a
managing director. Mr. Hirschfeld disclaims beneficial ownership of these
shares, except to the extent of his pecuniary interest. Mr. Hirschfeld's
address is c/o Patricof & Co. Ventures, Inc.
(10) Includes 1,875 shares issuable upon exercise of warrants and 13,500 shares
that are subject to our repurchase option.
(11) Includes 109,375 shares that are subject to our repurchase option.
Includes 1,620,094 shares (including 36,876 shares issuable upon exercise
of warrants) beneficially owned by Ironwood Capital L.L.C., of which Mr.
Mott, a director, is a managing member. Mr. Mott disclaims beneficial
ownership of these 1,620,094 shares, except to the extent of his pecuniary
interest.
52
<PAGE>
(12) Includes 250,000 shares held by the Huffman Family Limited Partnership.
Mr. Huffman is the general partner of the Huffman Family Limited
Partnership and the limited partners are the Andrew J. Huffman Grantor
Retained Annuity Trust and three other trusts for the benefit of each of
Mr. Huffman's three children. Also includes 1,080,000 shares that are
subject to our repurchase option.
(13) Includes 200,000 shares held by the Donald Katz Grantor Retained Annuity
Trust, 46,896 shares that are subject to our repurchase option, 157,500
shares that are pledged to secure private loans and 37,500 shares that are
pledged to secure a $100,000 loan from the Company. See "Related
Transactions and Relationships."
(14) Includes 197,250 shares that are subject to our repurchase option.
(15) Includes 187,500 shares that are subject to our repurchase option.
(16) Includes 132,000 shares that are subject to our repurchase option.
(17) Includes an aggregate of 2,279,221 shares that are subject to our
repurchase option and 357,814 shares issuable upon exercise of warrants.
53
<PAGE>
DESCRIPTION OF OUR CAPITAL STOCK
Our authorized capital stock currently consists of 50,000,000 shares of
common stock, with a par value of $0.01 per share, and 19,843,000 shares of
preferred stock, with a par value of $0.01 per share. As of April 30, 1999,
there were 7,602,269 shares of our common stock outstanding, held of record by
81 stockholders. As of April 30, 1999, we had outstanding an aggregate of
8,934,000 shares of convertible preferred stock consisting of 534,000 shares of
Series A preferred stock, 2,050,000 shares of Series B preferred stock,
2,250,000 shares of Series C preferred stock and 4,100,000 shares of Series D
preferred stock. The Series A, B, C and D preferred stock are held of record by
one, eight, 12 and 26 stockholders, respectively. All outstanding shares of
preferred stock will be automatically converted into an aggregate of 13,400,996
shares of common stock upon the closing of this offering and will no longer be
issued and outstanding. In addition, we currently have outstanding warrants to
purchase up to an aggregate of 775,001 shares of our common stock and 63,270
shares of preferred stock, which warrants will be exercisable for 94,904 shares
of common stock following this offering as described below. After this
offering, we will have outstanding, 25,003,265 shares of common stock if the
underwriters do not exercise their overallotment option, or 25,603,265 shares
of common stock if the underwriters exercise their overallotment option in
full.
The following is a description of our capital stock.
Common Stock
We are authorized to issue 50,000,000 shares of common stock. Holders of
common stock are entitled to one vote for each share of record on all matters
submitted to a vote of stockholders. The holders of common stock are entitled
to receive ratably such lawful dividends as may be declared by the board of
directors. However, such dividends are subject to preferences that may be
applicable to the holders of any outstanding shares of preferred stock. In the
event of a liquidation, dissolution, or winding up of the affairs of our
company, whether voluntary or involuntary, the holders of common stock will be
entitled to receive pro rata all of our remaining assets available for
distribution to stockholders. Any such pro rata distribution would be subject
to the rights of the holders of any outstanding shares of preferred stock. Our
common stock has no preemptive, redemption, conversion or subscription rights.
Piper & Marbury L.L.P., our counsel, will opine that the shares of common stock
to be issued by us in this offering, when issued and sold in the manner
described in the prospectus and in accordance with the resolutions adopted by
the board of directors, will be fully paid and non-assessable. The rights,
powers, preferences and privileges of holders of our common stock are subject
to, and may be adversely affected by, the rights of the holders of shares of
any series of preferred stock that we may designate and issue in the future.
Preferred Stock
At the closing of the offering, our outstanding shares of preferred stock
will be automatically converted into common stock. For a description of this
preferred stock, please see note (4) to the notes to financial statements
included elsewhere in this prospectus. Immediately following the offering, our
board will have the authority to designate and issue up to 10,000,000 shares of
preferred stock, in one or more series. Our board can establish the
preferences, rights and privileges of each series, which may be superior to the
rights of the common stock.
We have no current plans to issue any preferred stock following this
offering. However, if we do so, it could discourage a third party from
attempting to acquire a majority of the our outstanding voting stock.
Warrants
We have outstanding the following warrants to purchase shares of our common
stock, including warrants previously exercisable to purchase shares of
preferred stock but which, upon completion of this offering, will entitle the
holder to purchase shares of common stock: (1) warrants, to purchase 50,372
shares at an exercise price of $1.79 per share, expiring November 19, 2006, (2)
warrant, to purchase 18,750 shares at an exercise price of $2.67 per share,
expiring November 20, 2001, (3) warrant, to purchase 18,282 shares at an
exercise price of $2.67 per share, expiring July 24, 2007, (4) warrant, to
purchase 7,500 shares at an exercise price of
54
<PAGE>
$2.67 per share, expiring April 5, 2003, (5) warrants, to purchase 675,001
shares at an exercise price of $4.00 per share, expiring March 31, 2002, (6)
warrants, to purchase 100,000 shares at an exercise price per share equal to
the price to the public of this offering, expiring November 18, 2003, (7)
warrants to purchase 150,000 shares at an exercise price of $0.01 per share,
expiring June 16, 2009, and (8) warrants to purchase 750,000 shares at an
exercise price of $8.00 per share, subject to vesting, expiring June 16, 2009.
Registration Rights
After this offering, holders of (i) an aggregate of 801,000 shares of common
stock issued upon the conversion of the Series A preferred stock (the "Series A
Registrable Shares"); (ii) 3,139,608 shares of common stock issued upon the
conversion of the Series B preferred stock including 64,609 shares issuable
upon exercise of warrants to purchase Series B preferred stock (the "Series B
Registrable Shares"); (iii) 3,393,280 shares of common stock issued upon the
conversion of the Series C preferred stock including 18,282 shares issuable
upon exercise of warrants to purchase Series C preferred stock and 675,001
shares of common stock issuable upon exercise of outstanding warrants held by
holders of the Series C preferred stock (the "Series C Registrable Shares");
and (iv) 6,149,999 shares of the common stock issued upon conversion of the
Series D preferred stock (the "Series D Registrable Shares") will be entitled
to rights with respect to the registration of such shares under the Securities
Act.
We have an agreement with these stockholders that gives them registration
rights. Subject to limitations provided in the agreement, including those in
lock-up agreements that these stockholders have signed relating to this
offering, these stockholders have the right, after March 31, 2000, upon request
of the holders of at least two-thirds in interest of the Series A Registrable
Shares, Series B Registrable Shares, or upon request of the holders of at least
a majority in interest in the Series C Registrable Shares, or at any time after
this offering, upon request of the holders of no less than 40% of the Series D
Registrable Shares, to require us to register under the Securities Act the sale
of shares having an aggregate offering price of at least $5,000,000 (a "demand
registration"). The number of demand registrations is limited to two for each
group of Registrable Shares. In addition to these demand registration rights
and, subject to conditions and limitations provided in the agreement, these
stockholders may require us to file an unlimited number of registration
statements on Form S-3 under the Securities Act when such form is available for
our use, generally one year after this offering.
If we propose to register our securities under the Securities Act after this
offering, these stockholders will be entitled to notice of the registration and
to include their shares in the registration provided that the underwriters of
the proposed offering will have the right to limit the number of shares
included in the registration. One warrantholder also has the right to include
his shares of common stock issued upon exercise of his warrants in the
registration. We must pay for all expenses in connection with these
registrations, other than underwriters' discounts and commissions.
Anti-Takeover Effects of Our Certificate of Incorporation and Bylaws and
Delaware General Corporation Law; Right of First Negotiation
Our Certificate of Incorporation and Bylaws and Delaware General Corporation
Law. Certain provisions of Delaware law and our certificate of incorporation
and bylaws could make the following more difficult:
. the acquisition of us by means of a tender offer;
. acquisition of us by means of a proxy contest or otherwise; or
. the removal of our incumbent officers and directors.
These provisions, summarized below, are expected to discourage certain types
of coercive takeover practices and inadequate takeover bids. These provisions
are also designed to encourage persons seeking to acquire control of us to
first negotiate with our board. We believe that the benefits of increased
protection of the potential ability to negotiate with the proponent of an
unfriendly or unsolicited proposal to acquire or restructure us outweigh the
disadvantages of discouraging such proposals because negotiation of such
proposals could result in an improvement of their terms.
55
<PAGE>
Election and Removal of Directors
Our board of directors will be divided into three classes. The directors in
each class will serve for a three-year term, one class being elected each year
by our stockholders. This system of electing and removing directors may tend to
discourage a third party from making a tender offer or otherwise attempting to
obtain control of because it generally makes it more difficult for stockholders
to replace a majority of the directors.
In addition, our by-laws will provide that, except as otherwise provided by
law or our certificate of incorporation, newly created directorships resulting
from an increase in the authorized number of directors or vacancies on the
board may be filled only by
. a majority of the directors then in office, though less than a quorum is
then in office; or
. by the sole remaining director.
Stockholder Meetings
Under our certificate of incorporation and bylaws, only the board of
directors, the chairman of the board, the president or the holders of at least
a majority of our outstanding stock may call special meetings of stockholders.
Requirements for Advance Notification of Stockholder Nominations and Proposals
Our bylaws will establish advance notice procedures with respect to
stockholder proposals and the nomination of candidates for election as
directors, other than nominations made by or at the direction of the board of
directors or a committee of the board.
Delaware Anti-Takeover Law
We are subject to Section 203 of the Delaware General Corporation Law, an
anti-takover law. In general, Section 203 prohibits a publicly held Delaware
corporation from engaging in a "business combination" with an "interested
stockholder" for a period of three years following the date the person became
an interested stockholder, unless the "business combination" or the transaction
in which the person became an interested stockholder is approved in a
prescribed manner. Generally, a "business combination" includes a merger, asset
or stock sale, or other transaction resulting in a financial benefit to the
interested stockholder. Generally, an "interested stockholder" is a person who,
together with affiliates and associates, owns or within three years prior to
the determination of interested stockholder status, did own, 15% or more of a
corporation's voting stock. The existence of this provision may have an anti-
takeover effect with respect to transactions not approved in advance by the
board of directors, including discouraging attempts that might result in a
premium over the market price for the shares of common stock held by
stockholders.
Elimination of Stockholder Action By Written Consent
Our certificate of incorporation will eliminate the right of stockholders to
act by written consent without a meeting, unless the consent is unanimous.
No Cumulative Voting
Our certificate of incorporation and bylaws will not provide for cumulative
voting in the election of directors.
Undesignated Preferred Stock
The authorization of undesignated preferred stock will make it possible for
our board of directors to issue preferred stock with voting or other rights or
preferences that could impede the success of any attempt to change control of
Audible. These and other provisions may have the effect of deterring hostile
takeovers or delaying changes in control or our company or management.
56
<PAGE>
Limitation Of Liability
As permitted by the Delaware General Corporation Law, our certificate of
incorporation provides that our directors shall not be personally liable to us
or our stockholders for monetary damages for breach of fiduciary duty as a
director, except for liability:
. for any breach of the director's duty of loyalty to us or our
stockholders;
. for acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law;
. under Section 174 of the Delaware General Corporation Law, relating to
unlawful payment of dividends or unlawful stock purchase or redemption
of stock; or
. for any transaction from which the director derives an improper personal
benefit.
As a result of this provision, we and our stockholders may be unable to
obtain monetary damages from a director for breach of his or her duty of care.
Our certificate of incorporation and bylaws will provide for the
indemnification of our directors and officers to the fullest extent authorized
by the Delaware General Corporation Law. The indemnification provided under our
certificate of incorporation and bylaws includes the right to be paid expenses
in advance of any proceeding for which indemnification may be had, provided
that the payment of these expenses incurred by a director or officer in advance
of the final disposition of a proceeding may be made only upon delivery to us
of an undertaking by or on behalf of the director or officer to repay all
amounts so paid in advance if it is ultimately determined that the director or
officer is not entitled to be indemnified. If we do not pay a claim for
indemnification within 60 days after we have received a written claim, the
claimant may at any time thereafter bring an action to recover the unpaid
amount of the claim and, if successful the director or officer will be entitled
to be paid the expense of prosecuting the action to recover these unpaid
amounts.
Under our bylaws, we will have the power to purchase and maintain insurance
on behalf of any person who is or was one of our directors, officers, employees
or agents, or is or was serving at our request as a director, officer, employee
or agent of another corporation, partnership, joint venture, trust or other
enterprise against any liability asserted against the person or incurred by the
person in any of these capacities, or arising out of the person's fulfilling
one of these capacities, and related expenses, whether or not we would have the
power to indemnify the person against the claim under the provisions of the
Delaware General Corporation Law. We intend to purchase director and officer
liability insurance on behalf of our directors and officers.
Right of First Negotiation. Pursuant to an agreement with Microsoft,
Microsoft has a right of first negotiation if we receive an unsolicited
proposal, or if our board determines to solicit proposals or otherwise enter
into discussions that would result in a sale of a controlling interest in our
company or other merger, asset sale or other disposition that effectively
results in a change of control of the company. For a description of this
agreement, please see "Related Transactions and Relationships--Additional
Transactions." Microsoft's right of first negotiation could have the effect of
delaying or deterring a change of control.
Stock Transfer Agent
The transfer agent and registrar for our common stock is American Stock
Transfer and Trust Company.
57
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
After this offering, we will have 25,003,265 shares of common stock
outstanding. If the underwriters exercise their over-allotment option in full,
we will have 25,603,265 shares of common stock outstanding. 4,000,000 of the
shares we sell in this offering will be freely tradable without restriction or
further registration under the Securities Act, except that any shares purchased
by our affiliates, as that term is defined in Rule 144, may generally only be
sold in compliance with the limitations of Rule 144, which is summarized below.
The remaining 84%, or 21,003,265 shares of common stock outstanding after
this offering, will be restricted shares under the terms of the Securities Act,
all of which shares are subject to lock-up agreements as described below.
Restricted shares may be sold in the public market only if registered or if
they qualify for an exemption from registration under Rules 144, 144(k) or 701
promulgated under the Securities Act, and subject to the lock-up requirements
which rules are summarized below. Subject to the lock-up agreements described
below, these restricted shares will be available for resale in the public
market as follows:
<TABLE>
<CAPTION>
Number of Shares/
% of Outstanding Date of First Availability for Resale
- ----------------- -------------------------------------------------------------------
<S> <C>
1,633,650/6.5% Immediately after the date of this prospectus, all of which shares
are subject to lock-up agreements
19,048,098/76.2% 90 days after the date of this prospectus, all of which shares are
subject to lock-up agreements
321,517/1.3% At various times between 90 days and 180 days after the date of the
prospectus, all of which shares are subject to lock-up agreements
</TABLE>
Before this offering, there has been no public market for our common stock,
and we cannot predict what effect, if any, that market sales of shares of our
common stock or the availability of shares of our common stock for sale will
have on the market price of our common stock prevailing from time to time.
Sales of substantial amounts of our common stock in the public market could
adversely affect prevailing market prices and could impair our future ability
to raise capital through the sale of our equity securities.
Rule 144
In general, under Rule 144, beginning 90 days after the effective date of
the offering, a stockholder who owns restricted shares that have been
outstanding for at least one year is entitled to sell, within any three-month
period, a number of these restricted shares that does not exceed the greater
of:
. one percent of the then outstanding shares of our common stock, or
approximately 250,033 shares immediately after this offering; or
. the average weekly trading volume in our common stock on the Nasdaq
National Market during the four calendar weeks preceding the sale.
In addition, our affiliates must comply with the restrictions and
requirements of Rule 144, other than the one-year holding period requirement,
to sell shares of common stock that are not restricted securities.
Under Rule 144(k), a stockholder who is not currently, and who has not been
for at least three months before the sale, an affiliate of ours who owns
restricted shares that have been outstanding for at least two years may resell
these restricted shares without compliance with the above requirements. The
one- and two-year holding periods described above do not begin to run until the
full purchase price is paid by the person acquiring the restricted shares from
us or an affiliate of ours.
58
<PAGE>
Rule 701
Our employees, officers, directors and consultants who purchased our shares
of common stock pursuant to our restricted stock program are entitled to rely
on the resale provisions of Rule 701 under the Securities Act, which permits
affiliates and non-affiliates to sell their Rule 701 shares without having to
comply with Rule 144's holding period restrictions, in each case commencing 90
days after the date of this prospectus. In addition, non-affiliates may sell
Rule 701 shares without complying with the public information, volume and
notice provisions of Rule 144.
Registration Rights
We have entered into a registration rights agreement with the stockholders
that purchased our preferred stock and warrantholders with which we have
commercial relationships, which holders will own an aggregate of 13,400,996
shares of our common stock, warrants to purchase an aggregate of 1,575,001
shares of our common stock and warrants to purchase 55,261 shares of our
preferred stock, which preferred stock warrants will be exercisable for 82,891
shares of common stock following this offering. These stockholders have
registration rights which, upon exercise, require us to file registration
statements covering the sale of their shares of common stock and to include the
sale of their shares in registration statements covering our sale of shares to
the public. See "Description of our Capital Stock--Registration Rights."
Common Stock and Options Issuable under our Stock Incentive Plan
We intend to file one or more registration statements under the Securities
Act within 180 days after this offering to register up to 9,000,000 shares of
our common stock underlying outstanding stock options or reserved for issuance
under our Stock Incentive Plan. We expect these registration statements will
become effective upon filing, and shares covered by these registration
statements will be eligible for sale in the public market immediately after the
effective dates of these registration statements, subject to the lock-up
agreements described below.
Lock-up Agreements
All of our officers and directors and the holders of all of our capital
stock have agreed that they will not, without the prior written consent of
Credit Suisse First Boston Corporation, offer, sell, pledge or otherwise
dispose of any shares of our capital stock or any securities convertible into
or exercisable or exchangeable for, or any rights to acquire or purchase, any
of our capital stock or publicly announce an intention to effect any of these
transactions, for a period of 180 days from the date of this prospectus.
Credit Suisse First Boston Corporation currently has no plans to release any
portion of the securities subject to lock-up agreements. When determining
whether or not to release any portion of the securities subject to lock-up
agreements, Credit Suisse First Boston Corporation will consider, among other
factors, the stockholder's reasons for requesting the release, the number of
shares for which the release is being requested and market conditions at the
time.
59
<PAGE>
UNDERWRITING
Under the terms and subject to the conditions contained in an underwriting
agreement dated , 1999, the underwriters named below, for whom
Credit Suisse First Boston Corporation, J.P. Morgan Securities Inc., Volpe
Brown Whelan & Company, LLC and Wit Capital Corporation are acting as
representatives, have severally but not jointly agreed to purchase from us the
following respective numbers of shares of common stock:
<TABLE>
<CAPTION>
Number of
Underwriters Shares
------------ ---------
<S> <C>
Credit Suisse First Boston Corporation.............................
J.P. Morgan Securities Inc.........................................
Volpe Brown Whelan & Company, LLC..................................
Wit Capital Corporation............................................
---------
Total............................................................ 4,000,000
=========
</TABLE>
The underwriting agreement provides that the obligations of the underwriters
are subject to certain conditions precedent and that the underwriters will be
obligated to purchase all of the shares of common stock offered in this
offering (other than those shares covered by the over-allotment option
described below) if any are purchased. The underwriting agreement also provides
that if an underwriter defaults, the purchase commitments of non-defaulting
underwriters may be increased or the underwriting agreement may be terminated.
We have granted to the underwriters a 30-day option to purchase on a pro
rata basis up to additional shares of common stock at the initial
public offering price less the underwriting discounts and commissions. This
option may be exercised only to cover over-allotments of common stock.
The underwriters propose to offer the common stock initially at the public
offering price on the cover page of this prospectus and to selling group
members at that price less a concession of $ per share. The underwriters and
the selling group members may allow a discount of $ per share on sales to
other dealers. After the initial public offering, the public offering price and
concession and discount to dealers may be changed by the representatives.
The following table summarizes the compensation and estimated expenses that
we will pay.
<TABLE>
<CAPTION>
Total
-------------------
Without With
Per Over- Over-
Share allotment allotment
----- --------- ---------
<S> <C> <C> <C>
Underwriting discounts and commissions paid by
us.............................................. $ $ $
Expenses payable by us........................... $ $ $
</TABLE>
The underwriters have informed us that they do not expect discretionary
sales by them to exceed 5% of the common stock being offered.
We, our officers and directors and substantially all of our existing
stockholders have agreed not to offer, sell, contract to sell, pledge or
otherwise dispose of, directly or indirectly, or, in our case file with the
Securities
60
<PAGE>
and Exchange Commission a registration statement under the Securities Act
relating to, any additional shares of our common stock or securities
convertible into or exchangeable or exercisable for any shares of our common
stock, or publicly disclose an intention to make any such offer, sale, pledge
or disposal, without the prior written consent of Credit Suisse First Boston
Corporation for a period of 180 days after the date of this prospectus, except
in our case for grants of employee stock options pursuant to the terms of our
plan in effect on the date hereof, issuances of securities pursuant to the
exercise of employee stock options outstanding on the date hereof or the
exercise of any other stock options outstanding on the date hereof.
The underwriters have reserved for sale, at the initial offering price, up
to 200,000 shares of common stock for persons associated with Audible who have
expressed an interest in purchasing common stock in this offering including
employees, key people in companies with which we have content, technology or
marketing agreements and other business relationships and friends and family
members of our employees, board members and investors.
The number of shares of common stock available for sale to the general
public in this offering will be reduced to the extent these persons purchase
the reserved shares. Any reserved shares not so purchased will be offered by
the underwriters to the general public on the same terms as the other shares.
We have agreed to indemnify the underwriters against liabilities, including
civil liabilities under the Securities Act, or to contribute to payments that
the underwriters may be required to make in respect thereof.
We have applied to list the shares of common stock on The Nasdaq National
Market under the symbol "ADBL".
Prior to the offering, there has been no public market for our common stock.
The initial public offering price for the common stock will be determined by
negotiation between us and the representatives.The principal factors to be
considered in determining the initial public offering price include:
. the information set forth in this prospectus and otherwise available to
the representatives;
. market conditions for initial public offerings;
. the history of and prospects for the industry in which we compete;
. our past and present operations;
. our past and present earnings;
. the ability of our management;
. our prospects for future earnings;
. the present state of our development and our current financial
condition;
. the recent market prices of, and the demand for, publicly traded common
stock of companies in businesses similar to ours;
. the general condition of the securities markets at the time of this
offering; and
. other relevant factors.
We can offer no assurances that the initial public offering price will
correspond to the price at which our common stock will trade in the public
market subsequent to the offering or that an active trading market for our
common stock will develop and continue after the offering.
61
<PAGE>
The representatives may engage in over-allotment, stabilizing transactions,
syndicate covering transactions and penalty bids in accordance with Regulation
M under the Securities Exchange Act of 1934. Over-allotment involves syndicate
sales in excess of the offering size, which creates a syndicate short position.
Stabilizing transactions permit bids to purchase shares of the common stock so
long as the stabilizing bids do not exceed a specified maximum. Syndicate
covering transactions involve purchases of the common stock in the open market
after the distribution has been completed in order to cover syndicate short
positions. Penalty bids permit the representatives to reclaim a selling
concession from a syndicate member when the common stock originally sold by
such syndicate member is purchased in a syndicate covering transaction to cover
syndicate short positions, in stabilization transactions or otherwise. The
representatives track such purchases through the initial public offering
tracking system operated by the Depository Trust Company. The representatives
may, at their discretion, reclaim a selling concession from any syndicate
member whose customer purchased shares in the initial public offering and then
promptly resold all or a portion of such shares to a syndicate member. Such
stabilizing transactions, syndicate covering transactions and penalty bids may
cause the price of the common stock to be higher than it would otherwise be in
the absence of such transactions. These transactions may be effected on The
Nasdaq Stock Market's National Market or otherwise and, if commenced, may be
discontinued at any time.
Wit Capital, a member of the National Association of Securities Dealers,
Inc., will participate in this offering as one of the representatives of the
underwriters. The National Association of Securities Dealers, Inc. approved the
membership of Wit Capital on September 4, 1997. Since that time, Wit Capital
has acted as an underwriter, e-manager or selected dealer in over 90 public
offerings.
A prospectus in electronic format is being made available on an Internet Web
site maintained by Wit Capital. In addition, all dealers purchasing shares from
Wit Capital in this offering have agreed to make a prospectus in electronic
format available on Web sites maintained by each of these dealers.
62
<PAGE>
NOTICE TO CANADIAN RESIDENTS
Resale Restrictions
The distribution of the common stock in Canada is being made only on a
private placement basis exempt from the requirement that Audible prepare and
file a prospectus with the securities regulatory authorities in each province
where trades of common stock are effected. Accordingly, any resale of the
common stock in Canada must be made in accordance with applicable securities
laws which will vary depending on the relevant jurisdiction, and which may
require resales to be made in accordance with available statutory exemptions or
pursuant to a discretionary exemption granted by applicable Canadian securities
regulatory authority. Purchasers are advised to seek legal advice prior to any
resale of the common stock.
Representations of Purchasers
Each purchaser of common stock in Canada who receives a purchase
confirmation will be deemed to represent to Audible and the dealer from whom
such purchase confirmation is received that (i) such purchaser is entitled
under applicable provincial securities laws to purchase such common stock
without the benefit of a prospectus qualified under such securities laws, (ii)
where required by law, such purchaser is purchasing as principal and not as
agent, and (iii) such purchaser has reviewed the text above under "Resale
Restrictions."
Rights of Action (Ontario Purchasers)
The securities being offered are those of a foreign issuer and Ontario
purchasers will not receive the contractual right of action prescribed by
section 32 of the Regulation under the Securities Act (Ontario). As a result,
Ontario purchasers must rely on other remedies that may be readily available,
including common law rights of action for damages or recision or rights of
action under the civil liability provisions of the U.S. federal securities
laws.
Enforcement of Legal Rights
All of our directors and officers as well as the experts named herein may be
located outside of Canada and, as a result, it may not be possible for Canadian
purchasers to effect service of process within Canada upon the issuer or such
persons. All or a substantial portion of the assets of the issuer and such
persons may be located outside of Canada and, as a result, it may not be
possible to satisfy a judgment against the issuer or such persons in Canada or
to enforce a judgment obtained in Canadian courts against such issuer or
persons outside of Canada.
Notice to British Columbia Residents
A purchaser of common stock to whom the Securities Act (British Columbia)
applies is advised that such purchaser is required to file with the British
Columbia Securities Commission a report within ten days of the sale of any
common stock acquired by such purchaser pursuant to this offering. Such report
must be in the form attached to British Columbia Securities Commission Blanket
Order BOR #95/17, a copy of which may be obtained from Audible. Only one such
report must be filed in respect of common stock acquired on the same date and
under the same prospectus exemption.
Taxation and Eligibility for Investment
Canadian purchasers of common stock should consult their own legal and tax
advisors with respect to the tax consequences of an investment in the common
stock in their particular circumstances and with respect to the eligibility of
the common stock for investment by the purchaser under relevant Canadian
legislation.
63
<PAGE>
VALIDITY OF THE SHARES
Piper & Marbury L.L.P., Washington, D.C., will pass upon the validity of the
shares of common stock on our behalf. Testa, Hurwitz & Thibeault, LLP, Boston,
Massachusetts, will pass upon legal matters for the underwriters.
EXPERTS
The financial statements of Audible, Inc. as of December 31, 1997 and 1998
and for each of the years in the three year period ended December 31, 1998 and
the period November 3, 1995 (date of inception) to December 31, 1998, have been
included herein and in the registration statement in reliance upon the report
of KPMG LLP, independent certified public accountants, appearing elsewhere
herein and upon the authority of said firm as experts in accounting and
auditing.
ADDITIONAL INFORMATION
We have filed with the SEC a registration statement, including exhibits,
schedules and amendments. This prospectus is a part of the registration
statement and includes all of the information that we believe is material to an
investor considering whether to make an investment in our common stock. We
refer you to the registration statement for additional information about us,
our common stock and this offering, including the full texts of the exhibits,
some of which have been summarized in this prospectus. The registration
statement is available for inspection and copying at the SEC's Public Reference
Room at 450 Fifth Street, N.W., Washington, D.C. 20549. You may obtain
information about the operation of the Public Reference Room by calling the SEC
at 1-800-SEC-0330. In addition, the SEC maintains an Internet site that
contains the registration statement. The address of the SEC's Internet site is
"http://www.sec.gov."
We intend to furnish our stockholders annual reports containing financial
statements audited by our independent accountants.
64
<PAGE>
AUDIBLE, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Independent Auditors' Report................................................ F-2
Balance Sheets.............................................................. F-3
Statements of Operations.................................................... F-4
Statements of Stockholders' Deficit......................................... F-5
Statements of Cash Flows ................................................... F-6
Notes to Financial Statements............................................... F-8
</TABLE>
F-1
<PAGE>
Independent Auditors' Report
Board of Directors and Stockholders
Audible, Inc.:
We have audited the accompanying balance sheets of Audible, Inc. (a
development stage company) as of December 31, 1997 and 1998, and the related
statements of operations, stockholders' deficit, and cash flows for each of the
years in the three-year period ended December 31, 1998 and the period November
3, 1995 (date of inception) to December 31, 1998. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Audible, Inc. (a
development stage company) as of December 31, 1997 and 1998, and the results of
its operations and its cash flows for each of the years in the three-year
period ended December 31, 1998 and the period November 3, 1995 (date of
inception) to December 31, 1998 in conformity with generally accepted
accounting principles.
KPMG LLP
Short Hills, New Jersey
April 14, 1999, except
as to note 15, which is
as of May 26, 1999
F-2
<PAGE>
AUDIBLE, INC.
(A Development Stage Company)
Balance Sheets
<TABLE>
<CAPTION>
December 31, March 31, 1999
------------------------ ------------------------
1997 1998 Actual Pro Forma
Assets ----------- ----------- ----------- -----------
(unaudited) Note 2
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents. $ 646,186 $10,526,299 $ 9,652,493 $ 9,652,493
Accounts receivable, net
of allowance for doubtful
accounts of $4,556,
$21,043 and $7,653 at
December 31, 1997 and
1998 and March 31, 1999,
respectively............. 1,774 8,516 234,863 234,863
Advance royalty payments.. 259,209 228,402 213,464 213,464
Advance to manufacturer... 350,000 -- -- --
Prepaid expenses.......... 119,481 102,916 94,279 94,279
Inventory................. 240,453 129,535 189,667 189,667
----------- ----------- ----------- -----------
Total current assets..... 1,617,103 10,995,668 10,384,766 10,384,766
Property and equipment,
net....................... 1,167,612 397,837 404,536 404,536
Intangible assets, net of
accumulated amortization
of $30,730 at December 31,
1997...................... 15,365 -- -- --
Note receivable due from
stockholder............... 100,000 100,000 100,000 100,000
Other assets............... 113,298 106,153 101,468 101,468
----------- ----------- ----------- -----------
Total assets............. $ 3,013,378 $11,599,658 $10,990,770 $10,990,770
=========== =========== =========== ===========
Liabilities and
Stockholders' Deficit
Current liabilities:
Accounts payable.......... $ 372,786 $ 482,971 $ 429,327 $ 429,327
Accrued expenses.......... 204,439 208,518 176,263 176,263
Accrued compensation...... 211,607 263,235 248,031 248,031
Current maturities of
obligations under capital
leases................... 432,497 471,224 471,224 471,224
Advances.................. -- 1,500,000 1,520,000 1,520,000
----------- ----------- ----------- -----------
Total current
liabilities............. 1,221,329 2,925,948 2,844,845 2,844,845
Deferred compensation...... 129,508 167,318 189,032 189,032
Obligations under capital
leases, net of current
maturities................ 712,348 310,507 187,708 187,708
Redeemable convertible
preferred stock (non-
cumulative):
Series A, par value $.01.
Authorized 1,068,000
shares; 534,000 shares
issued and outstanding at
December 31, 1997, 1998
and March 31, 1999
actual; none issued and
outstanding pro forma
(liquidation value
$504,514; redemption
value $400,500).......... 389,189 389,189 389,189 --
Series B, par value $.01.
Authorized 2,100,000
shares; 2,050,000 shares
issued and outstanding at
December 31, 1997, 1998
and March 31, 1999
actual; none issued and
outstanding pro forma
(liquidation value and
redemption value
$3,075,000).............. 3,040,581 3,040,581 3,040,581 --
Series C, par value $.01.
Authorized 2,300,000
shares; 2,250,000 shares
issued and outstanding at
December 31, 1997, 1998
and March 31, 1999
actual; none issued and
outstanding pro forma
(liquidation value and
redemption value
$9,000,000).............. 8,947,875 8,947,875 8,947,875 --
Series D, par value $.01.
Authorized 4,375,000
shares; 3,850,000 shares
issued and outstanding at
December 31, 1998 and
4,100,000 shares at March
31, 1999 actual; none
issued and outstanding
pro forma (liquidation
value and redemption
value $15,400,000 at
December 31, 1998 and
$16,400,000 at March 31,
1999).................... -- 15,347,009 16,341,481 --
Stockholders' deficit:
Common stock, par value
$.01. Authorized
12,000,000, 16,000,000,
16,000,000 and 50,000,000
shares; 6,099,204,
7,394,355, 7,602,269 and
21,003,265 shares issued
and outstanding at
December 31, 1997, 1998,
March 31, 1999 actual and
March 31, 1999 pro forma,
respectively............. 60,992 73,944 76,023 210,033
Additional paid-in
capital.................. 694,832 1,162,420 1,236,568 29,821,684
Notes due from
stockholders for common
stock.................... (596,375) (1,040,158) (1,063,125) (1,063,125)
Deficit accumulated during
the development stage.... (11,586,901) (19,724,975) (21,199,407) (21,199,407)
----------- ----------- ----------- -----------
Total stockholders'
deficit................. (11,427,452) (19,528,769) (20,949,941) 7,769,185
----------- ----------- ----------- -----------
Commitments (note 10)
Total liabilities and
stockholders' deficit... $ 3,013,378 $11,599,658 $10,990,770 $10,990,770
=========== =========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
AUDIBLE, INC.
(A Development Stage Company)
Statements of Operations
<TABLE>
<CAPTION>
Period
November 3, 1995 Three months ended Period
Year ended December 31, (date of inception) March 31, November 3, 1995
------------------------------------- to December 31, ------------------------- (date of inception)
1996 1997 1998 1998 1998 1999 to March 31, 1999
----------- ----------- ----------- ------------------- ------------ ----------- -------------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Content and
services........ $ -- $ 2,834 $ 132,357 $ 135,191 $ 30,178 $ 57,882 $ 193,073
Hardware......... -- 57,440 243,733 301,173 90,288 57,173 358,346
Other............ -- -- -- -- -- 200,000 200,000
----------- ----------- ----------- ------------ ------------ ----------- ------------
Total revenue... -- 60,274 376,090 436,364 120,466 315,055 751,419
----------- ----------- ----------- ------------ ------------ ----------- ------------
Operating
expenses:
Cost of content
and
services revenue
................ -- 78,352 372,114 450,466 75,443 152,182 602,648
Cost of hardware
revenue......... -- 252,010 555,575 807,585 255,426 63,039 870,624
Production
expenses........ 683,652 1,982,098 1,639,420 4,305,170 485,602 494,612 4,799,782
Research and
development..... 1,809,772 2,672,179 1,641,458 6,172,213 389,267 320,434 6,492,647
Write-down
related to
hardware
business........ -- -- 952,389 952,389 -- -- 952,389
Sales and
marketing....... 256,300 1,227,482 1,453,196 2,936,978 272,041 396,098 3,333,076
General and
administrative.. 786,506 1,921,126 1,838,365 4,546,077 480,553 430,567 4,976,644
----------- ----------- ----------- ------------ ------------ ----------- ------------
Total operating
expenses....... 3,536,230 8,133,247 8,452,517 20,170,878 1,958,332 1,856,932 22,027,810
----------- ----------- ----------- ------------ ------------ ----------- ------------
Loss from
operations..... (3,536,230) (8,072,973) (8,076,427) (19,734,514) (1,837,866) (1,541,877) (21,276,391)
Other (income)
expense:
Interest income.. (28,208) (150,998) (53,081) (232,287) (11,020) (82,798) (315,085)
Interest expense. 748 107,272 114,728 222,748 16,924 15,353 238,101
----------- ----------- ----------- ------------ ------------ ----------- ------------
Total other
(income)
expense........ (27,460) (43,726) 61,647 (9,539) 5,904 (67,445) (76,984)
----------- ----------- ----------- ------------ ------------ ----------- ------------
Net loss........ $(3,508,770) $(8,029,247) $(8,138,074) $(19,724,975) $ (1,843,770) $(1,474,432) $(21,199,407)
=========== =========== =========== ============ ============ =========== ============
Basic and diluted
net loss per
common share..... $ (1.10) $ (1.49) $ (1.15) $ (3.84) $ (0.28) $ (0.20) $ (3.99)
=========== =========== =========== ============ ============ =========== ============
Weighted average
shares
outstanding...... 3,176,825 5,379,003 7,096,945 5,137,386 6,558,288 7,452,065 5,310,987
=========== =========== =========== ============ ============ =========== ============
Pro forma basic
and diluted net
loss per common
share............ $ (0.50) $ (0.07)
=========== ===========
Pro forma weighted
average shares
outstanding...... 16,291,695 20,728,065
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
AUDIBLE, INC.
(A Development Stage Company)
Statements of Stockholders' Deficit
Period November 3, 1995 (Date of Inception)
to March 31, 1999
<TABLE>
<CAPTION>
Common stock Additional Notes due from Deficit accumulated Total
--------------------- paid-in stockholders for during the stockholders'
Shares Par value capital common stock development stage deficit
---------- --------- ---------- ---------------- ------------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at November 3,
1995 (date of
inception)............. -- -- -- -- -- --
Common stock issued, net
of issuance costs...... 1,500,000 $15,000 $ 49,646 $ (70,000) $ -- $ (5,354)
Issuance of common stock
in exchange for patent. 750,000 7,500 27,500 -- -- 35,000
Net loss................ -- -- -- -- (48,884) (48,884)
---------- ------- ---------- ----------- ------------ ------------
Balance at December 31,
1995................... 2,250,000 22,500 77,146 (70,000) (48,884) (19,238)
Common stock issued..... 2,577,600 25,776 170,013 (195,789) -- --
Issuance of common stock
for services rendered.. 141,150 1,412 33,814 -- -- 35,226
Payments received on
notes due from
stockholders........... -- -- -- 5,100 -- 5,100
Common stock
repurchased............ (215,100) (2,151) (10,038) 12,189 -- --
Net loss................ -- -- -- -- (3,508,770) (3,508,770)
---------- ------- ---------- ----------- ------------ ------------
Balance at December 31,
1996................... 4,753,650 47,537 270,935 (248,500) (3,557,654) (3,487,682)
Common stock issued..... 1,505,625 15,056 349,818 (364,874) -- --
Issuance of common stock
for services rendered.. 72,984 730 87,154 -- -- 87,884
Payments received on
notes due from
stockholders........... -- -- -- 1,593 -- 1,593
Common stock
repurchased............ (233,055) (2,331) (13,075) 15,406 -- --
Net loss................ -- -- -- -- (8,029,247) (8,029,247)
---------- ------- ---------- ----------- ------------ ------------
Balance at December 31,
1997................... 6,099,204 60,992 694,832 (596,375) (11,586,901) (11,427,452)
Common stock issued..... 2,456,625 24,566 630,238 (654,804) -- --
Issuance of common stock
for services rendered.. 11,250 113 16,137 -- -- 16,250
Payments received on
notes due from
stockholders........... -- -- -- 20,507 -- 20,507
Common stock
repurchased............ (1,172,724) (11,727) (178,787) 190,514 -- --
Net loss................ -- -- -- -- (8,138,074) (8,138,074)
---------- ------- ---------- ----------- ------------ ------------
Balance at December 31,
1998................... 7,394,355 73,944 1,162,420 (1,040,158) (19,724,975) (19,528,769)
Common stock issued
(unaudited)............ 229,500 2,295 58,905 (61,200) -- --
Non-cash compensation
charge (unaudited)..... -- -- 18,144 -- -- 18,144
Cancellation of common
stock issued for
services rendered
(unaudited)............ -- -- (1,250) -- -- (1,250)
Payments received on
notes due from
stockholders
(unaudited)............ -- -- -- 36,366 -- 36,366
Common stock repurchased
(unaudited)............ (21,586) (216) (1,651) 1,867 -- --
Net loss (unaudited).... -- -- -- -- (1,474,432) (1,474,432)
---------- ------- ---------- ----------- ------------ ------------
Balance at March 31,
1999 (unaudited)....... 7,602,269 $76,023 $1,236,568 $(1,063,125) $(21,199,407) $(20,949,941)
========== ======= ========== =========== ============ ============
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
AUDIBLE, INC.
(A Development Stage Company)
Statements of Cash Flows
<TABLE>
<CAPTION>
Period
Period November 3,
November 3, 1995 Three Months 1995 (date of
Year ended December 31, (date of inception) ended March 31, inception) to
------------------------------------- to December 31, ------------------------ March 31,
1996 1997 1998 1998 1998 1999 1999
----------- ----------- ----------- ------------------- ----------- ----------- -------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Cash flows from
operating activities:
Net loss.............. $(3,508,770) $(8,029,247) $(8,138,074) $(19,724,975) $(1,843,770) $(1,474,432) $(21,199,407)
Adjustments to
reconcile net loss to
net cash used in
operating activities:
Depreciation and
amortization........ 44,048 394,688 681,076 1,119,812 169,598 89,911 1,209,723
Services rendered for
common stock........ 35,226 87,884 16,250 139,360 16,250 -- 139,360
Non-cash compensation
charge.............. -- -- -- -- -- 18,144 18,144
Cancellation of
common stock issued
for services
rendered............ -- -- -- -- -- (1,250) (1,250)
Deferred
compensation........ 23,788 105,720 37,810 167,318 (9,376) 21,714 189,032
Write-down of
inventory........... -- 195,317 656,740 852,057 -- -- 852,057
Impairment loss on
equipment........... -- -- 181,151 181,151 -- -- 181,151
Changes in assets and
liabilities:
Increase in accounts
receivable......... -- (1,774) (6,742) (8,516) (8,534) (226,347) (234,863)
Decrease (increase)
in advance royalty
payments........... (53,500) (205,709) 30,807 (228,402) 59,130 14,938 (213,464)
Decrease (increase)
in advance to
manufacturer....... -- (350,000) 350,000 -- -- -- --
Decrease (increase)
in prepaid
expenses........... (24,571) (94,010) 16,565 (102,916) (75,162) 8,637 (94,279)
Increase in
inventory.......... -- (435,770) (545,822) (981,592) (235,052) (60,132) (1,041,724)
Decrease (increase)
in other assets.... -- (113,298) 7,145 (106,153) 113,298 4,685 (101,468)
Increase (decrease)
in accounts
payable............ 12,753 294,545 110,185 482,971 (46,092) (53,644) 429,327
Increase (decrease)
in accrued
expenses........... 759,419 (554,980) 4,079 208,518 (93,624) (32,255) 176,263
Increase (decrease)
in accrued
compensation....... 91,639 119,968 51,628 263,235 (59,348) (15,204) 248,031
Increase in
advances........... -- -- 1,500,000 1,500,000 -- 20,000 1,520,000
----------- ----------- ----------- ------------ ----------- ----------- ------------
Net cash used in
operating
activities........ (2,619,968) (8,586,666) (5,047,202) (16,238,132) (2,012,682) (1,685,235) (17,923,367)
----------- ----------- ----------- ------------ ----------- ----------- ------------
Cash flows from
investing activities:
Purchases of property
and equipment........ (56,171) (176,171) (3,907) (236,249) (17,996) (96,610) (332,859)
Purchase of patent.... -- -- -- (11,095) -- -- (11,095)
Note receivable issued
to stockholder....... -- (100,000) -- (100,000) -- -- (100,000)
----------- ----------- ----------- ------------ ----------- ----------- ------------
Net cash used in
investing
activities........ (56,171) (276,171) (3,907) (347,344) (17,996) (96,610) (443,954)
----------- ----------- ----------- ------------ ----------- ----------- ------------
</TABLE>
F-6
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
Cash flows from
financing activities:
Proceeds from issuance
of Series A redeemable
convertible preferred
stock, net of issuance
costs................. -- -- -- 389,189 -- -- 389,189
Proceeds from issuance
of Series B redeemable
convertible preferred
stock, net of issuance
costs................. 3,040,581 -- -- 3,040,581 -- -- 3,040,581
Proceeds from issuance
of Series C redeemable
convertible preferred
stock, net of issuance
costs................. -- 8,947,875 -- 8,947,875 -- -- 8,947,875
Proceeds from issuance
of Series D redeemable
convertible preferred
stock, net of issuance
costs................. -- -- 15,347,009 15,347,009 3,574,509 994,472 16,341,481
Payment of costs
associated with the
issuance of common
stock................. -- -- -- (5,354) -- -- (5,354)
Payments received on
notes due from
stockholders for
common stock.......... 5,100 1,593 20,507 27,200 2,550 36,366 63,566
Payment of principal on
obligations under
capital leases........ -- (198,431) (436,294) (634,725) (91,630) (122,799) (757,524)
--------- ---------- ----------- ----------- ---------- ---------- ----------
Net cash provided by
financing
activities......... 3,045,681 8,751,037 14,931,222 27,111,775 3,485,429 908,039 28,019,814
--------- ---------- ----------- ----------- ---------- ---------- ----------
Increase (decrease)
in cash and cash
equivalents........ 369,542 (111,800) 9,880,113 10,526,299 1,454,751 (873,806) 9,652,493
Cash and cash
equivalents at
beginning of period.... 388,444 757,986 646,186 -- 646,186 10,526,299 --
--------- ---------- ----------- ----------- ---------- ---------- ----------
Cash and cash
equivalents at end of
period................. $ 757,986 $ 646,186 $10,526,299 $10,526,299 $2,100,937 $9,652,493 $9,652,493
========= ========== =========== =========== ========== ========== ==========
Supplemental disclosures
of cash flow
information:
Cash paid during the
period for interest.... $ 748 $ 107,272 $ 114,728 $ 222,748
========= ========== =========== ===========
Supplemental noncash
investing and financing
activities:
Common stock issued for
notes receivable, net. $ 183,600 $ 349,468 $ 464,290 $ 1,067,358
Common stock issued for
patent................ -- -- -- 35,000
Acquisition of property
and equipment under
capital leases........ $ 140,840 $1,202,436 $ 73,180 $ 1,416,456
========= ========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-7
<PAGE>
AUDIBLE, INC.
(A Development Stage Company)
Notes to Financial Statements
December 31, 1996, 1997 and 1998 and the period November 3, 1995 (Date of
Inception) to December 31, 1998 three months ended March 31, 1998 and 1999 and
the period November 3, 1995 (Date of Inception) to March 31, 1999
(All information for the three months ended March 31, 1998 and subsequent to
December 31, 1998 is unaudited)
(1) Description of Business
Audible, Inc. (Audible or the Company) was incorporated on November 3,
1995 and is currently in the development stage. The Company was formed to
create the Audible service, a solution delivering premium digital spoken
audio content over the Internet for playback on personal computers and
mobile devices. The Company commenced commercial operations in October
1997. Currently, Audible has spoken audio programming available for
download from its Web site, audible.com. Customers can purchase programs
and listen from their personal computers or on the Audible MobilePlayer,
the Company's proprietary playback device.
(2) Summary of Significant Accounting Policies
Basis of Presentation
The Company is currently in the development stage, as revenue generated
from the Company's principal operations is not yet significant.
The accompanying financial statements retroactively reflect the effect
of a 3 for 2 stock split in the form of a stock dividend declared and
payable by the Company effective May 26, 1999 to stockholders of record at
the close of business on May 26, 1999. Accordingly, all share and per share
data has been adjusted to reflect such split (see note 15).
Interim Financial Information
The financial statements as of March 31, 1999 and for the three months
ended March 31, 1999 and 1998 and the period November 3, 1995 (date of
inception) to March 31, 1999 are unaudited but, in the opinion of
management, reflect all adjustments which are of a normal, recurring
nature, necessary for the fair presentation of financial position and
results of operations. Operating results for the three months ended March
31, 1999 are not necessarily indicative of the results that may be expected
for a full year.
Cash Equivalents
The Company considers short-term, highly liquid investments with an
original maturity of three months or less to be cash equivalents. Cash
equivalents at December 31, 1997 and 1998 were $546,577 and $10,294,043,
respectively.
Royalties
Advance royalty payments in the accompanying balance sheets represent
payments made to various content providers pursuant to minimum guarantees
under their royalty agreements. These agreements give the Company the right
to sell digital audio content over the Internet. These payments are being
amortized on a straight-line basis over the term of the royalty agreements
or are expensed as royalties are earned by the content providers under the
agreements, whichever is sooner. Royalty expense is included in cost of
content and services revenue in the accompanying statements of operations
and includes the following
components:
F-8
<PAGE>
AUDIBLE, INC.
(A Development Stage Company)
Notes to Financial Statements
December 31, 1996, 1997 and 1998 and the period November 3, 1995 (Date of
Inception) to December 31, 1998 three months ended March 31, 1998 and 1999 and
the period November 3, 1995 (Date of Inception) to March 31, 1999
(All information for the three months ended March 31, 1998 and subsequent to
December 31, 1998 is unaudited)
<TABLE>
<CAPTION>
Period
Period Three months November 3, 1995
Year ended November 3, 1995 ended (date of
December 31, (date of inception) March 31, inception)
---------------------- to December 31, ---------------- to March 31,
1996 1997 1998 1998 1998 1999 1999
----- ------- -------- ------------------- ------- -------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C>
(unaudited) (unaudited)
Amortization of minimum
guarantees ............ $ -- $76,041 $348,561 $424,602 $71,630 $141,362 $565,964
Earned royalties........ -- 2,311 23,553 25,864 3,813 10,820 36,684
----- ------- -------- -------- ------- -------- -----------
$ -- $78,352 $372,114 $450,466 $75,443 $152,182 $602,648
===== ======= ======== ======== ======= ======== ===========
</TABLE>
Inventory
Inventory is stated at the lower of cost, principally using the first-
in, first-out method, or market (net realizable value). Inventory consists
of Audible MobilePlayers and accessories to the Audible MobilePlayers. The
Company recorded a charge of $195,317 and $286,603 in 1997 and 1998,
respectively, to write down inventory to market value. These charges are
included in cost of hardware revenue in the accompanying statements of
operations. The 1998 write-down is in addition to the write-down discussed
in note 5.
Stock-Based Compensation
The Company applies Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," in accounting for its stock-
based compensation, as permitted by Statement of Financial Accounting
Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation." SFAS
No. 123 establishes a fair value-based method of accounting for stock-based
compensation and requires pro-forma disclosure of net loss and net loss per
common share as if the fair value-based method of accounting for stock-
based compensation, as defined in SFAS No. 123, had been applied. No awards
have been granted under the Company's Stock Incentive Plan to date.
F-9
<PAGE>
AUDIBLE, INC.
(A Development Stage Company)
Notes to Financial Statements
December 31, 1996, 1997 and 1998 and the period November 3, 1995 (Date of
Inception) to December 31, 1998 three months ended March 31, 1998 and 1999 and
the period November 3, 1995 (Date of Inception) to March 31, 1999
(All information for the three months ended March 31, 1998 and subsequent to
December 31, 1998 is unaudited)
Property and Equipment
Property and equipment is stated at cost. Depreciation is calculated
using the straight-line method over the estimated useful lives, which are
three years for computer server and Web site equipment and two years for
office furniture and equipment, studio equipment, and molds and
manufacturing equipment.
Leasehold improvements are amortized on a straight-line basis over the
lease term or the estimated useful life of the improvement, whichever is
shorter.
Maintenance and repairs are expensed as incurred.
Stock Issued for Goods and Services
The Company accounts for stock issued to nonemployees in which goods or
services are the consideration received for the stock issued based on the
fair value of the goods or services received or the fair value of the stock
issued, whichever is more reliably measurable.
Intangible Assets
Intangible assets consist of a patent which is carried at cost and
amortized on a straight-line basis over the estimated useful life of three
years.
Risks and Uncertainties
Inherent in the Company's business are various risks and uncertainties,
including its limited operating history, unproven business model and the
limited history of electronic commerce on the Internet. The Company's
success will depend in part upon the emergence of the Internet as a
communications medium, the availability of spoken audio content, sales of
third party mobile devices and market acceptance of the Audible service.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the
financial statements, and reported amounts of revenues and expenses during
the period. Actual results could differ from those estimates.
Revenue Recognition
Hardware revenue is recognized upon shipment. Content revenue is
recognized in the period when the content is downloaded and the customer's
credit card is processed. Service revenue is recognized as services are
performed and consists of audio production and hosting services.
Other revenue for the three months ended March 31, 1999 and the period
November 3, 1995 (date of inception) to March 31, 1999 relates to fees
billed for services under the agreement with Microsoft Corporation
(Microsoft).
F-10
<PAGE>
AUDIBLE, INC.
(A Development Stage Company)
Notes to Financial Statements
December 31, 1996, 1997 and 1998 and the period November 3, 1995 (Date of
Inception) to December 31, 1998 three months ended March 31, 1998 and 1999 and
the period November 3, 1995 (Date of Inception) to March 31, 1999
(All information for the three months ended March 31, 1998 and subsequent to
December 31, 1998 is unaudited)
Research and Development
Research and development expenses are expensed as incurred. Included in
research and development are costs incurred under an agreement with IDEO
Development Corporation (IDEO), under which IDEO developed the Audible
MobilePlayer, as well as costs incurred in developing the Company's Web
site and the software that enables customers to download content from the
Company's Web site. The Company paid IDEO related costs of $913,244,
$1,044,420, $70,937 and $2,028,601 in 1996, 1997, 1998 and the period
November 3, 1995 (date of inception) to December 31, 1998, respectively.
Production Expenses
Production expenses are expensed as incurred and consist primarily of
personnel and outsourced costs to support the Company's infrastructure and
systems including its Web site, internal data communications, audio
production activities and acquisition of content.
Advertising Expenses
The Company expenses the costs of advertising and promoting its products
and services as incurred. These costs are included in sales and marketing
in the accompanying statements of operations and totaled $0, $91,295,
$310,033 and $401,328 for the years ended December 31, 1996, 1997 and 1998
and for the period November 3, 1995 (date of inception) to December 31,
1998, respectively.
Income Taxes
The Company accounts for income taxes using the asset and liability
method of SFAS No. 109, "Accounting for Income Taxes." Under the asset and
liability method, deferred tax assets and deferred tax liabilities are
recognized for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases and operating loss and tax
credit carryforwards. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled.
The effect on deferred tax assets and liabilities of a change in tax rates
is recognized in results of operations in the period in which the tax
change occurs.
Impairment of Long-Lived Assets
The Company accounts for long-lived assets in accordance with the
provisions of SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of." SFAS No. 121 requires
that long-lived assets and certain identifiable intangibles be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of
assets to be held and used is measured by a comparison of the carrying
amount of an asset to future net cash flows expected to be generated by the
asset. If such assets are considered to be impaired, the impairment to be
recognized is measured as the amount by which the carrying amount of the
assets exceeds the fair value of the assets. Assets to be disposed of are
reported at the lower of the carrying amount or fair value less costs to
sell.
F-11
<PAGE>
AUDIBLE, INC.
(A Development Stage Company)
Notes to Financial Statements
December 31, 1996, 1997 and 1998 and the period November 3, 1995 (Date of
Inception) to December 31, 1998 three months ended March 31, 1998 and 1999 and
the period November 3, 1995 (Date of Inception) to March 31, 1999
(All information for the three months ended March 31, 1998 and subsequent to
December 31, 1998 is unaudited)
Basic and Diluted Net Loss Per Common Share
Basic and diluted net loss per common share is presented in accordance
with the provisions of SFAS No. 128, "Earnings Per Share." Basic net loss
per common share excludes dilution for common stock equivalents and is
computed by dividing net loss available to common stockholders by the
weighted average number of common shares outstanding for the period.
Diluted net loss per common share reflects the potential dilution that
could occur if securities or other contracts to issue common stock were
exercised or converted into common stock and resulted in the issuance of
common stock. Diluted net loss per common share is equal to basic net loss
per common share, since all common stock equivalents are antidilutive for
each of the periods presented.
Diluted net loss per common share for the years ended December 31, 1996,
1997, 1998 and the period November 3, 1995 (date of inception) to December
31, 1998 does not include the effects of warrants to purchase 0, 674,999,
674,999 and 674,999 shares of common stock, respectively; warrants to
purchase 46,082, 58,270, 63,270 and 63,270 shares of preferred stock
warrants, respectively; 2,584,000, 4,834,000, 8,684,000 and 8,684,000
shares of convertible preferred stock on an "as-if" converted basis,
respectively; as the effect of their inclusion is antidilutive during each
period.
Pro Forma Information
Pro forma basic and diluted net loss per common share has been presented
as if the convertible preferred stock were converted into common stock for
all periods presented due to the automatic conversion upon the closing of
the Company's initial public offering.
The March 31, 1999 pro forma unaudited balance sheet has been presented
as if the convertible preferred stock were converted into common stock due
to the automatic conversion upon the closing of the Company's initial
public offering. Since no dividends will be paid on the preferred stock,
there is no pro forma liability reflected for the payment of dividends.
Financial Instruments and Concentration of Risk
Financial instruments that potentially subject the Company to
significant concentrations of credit risk consist of cash and cash
equivalents, accounts receivable, accounts payable and accrued expenses. At
December 31, 1997 and 1998, the fair values of these financial instruments
approximated their carrying value due to the short-term nature of these
instruments.
Recent Accounting Pronouncements
As of January 1, 1998, the Company adopted the provisions of SFAS No.
130, "Reporting Comprehensive Income," which establishes standards for
reporting and displaying comprehensive income and its components in a full
set of general purpose financial statements. The adoption of this standard
has had no impact on the Company's financial statements. Accordingly, the
Company's comprehensive net loss is equal to its net loss for all periods
presented.
In June 1997, the Financial Accounting Standards Board (FASB) issued
SFAS No. 131, "Disclosures About Segments of an Enterprise and Related
Information," which establishes standards for the way that a
F-12
<PAGE>
AUDIBLE, INC.
(A Development Stage Company)
Notes to Financial Statements
December 31, 1996, 1997 and 1998 and the period November 3, 1995 (Date of
Inception) to December 31, 1998 three months ended March 31, 1998 and 1999 and
the period November 3, 1995 (Date of Inception) to March 31, 1999
(All information for the three months ended March 31, 1998 and subsequent to
December 31, 1998 is unaudited)
public enterprise reports information about operating segments in annual
financial statements, and requires that those enterprises report selected
information about operating segments in interim financial reports issued to
shareholders. It also establishes standards for related disclosures about
products and services, geographic areas and major customers. SFAS No. 131
is effective for fiscal years beginning after December 1, 1997. In the
initial year of application, comparative information for earlier years must
be restated. The Company has determined that it does not have any
separately reportable business segments.
In April 1998, the American Institute of Certified Public Accountants
(AICPA) issued Statement of Position 98-1, "Accounting for the Cost of
Computer Software Developed or Obtained for Internal Use" (SOP 98-1), which
provides guidance (i) for determining whether computer software is
internal-use software and (ii) on accounting for the proceeds of computer
software originally developed or obtained for internal use and then
subsequently sold to the public. It also provides guidance on
capitalization of the costs incurred for computer software developed or
obtained for internal use. SOP 98-1 is effective for fiscal years beginning
after December 31, 1998. The Company does not expect the adoption of SOP
98-1 in 1999 to have a material effect on its financial statements.
In April 1998, the AICPA issued Statement of Position 98-5, "Reporting
on the Costs of Start-up Activities" (SOP 98-5). SOP 98-5, which is
effective for fiscal years beginning after December 15, 1998, provides
guidance on the financial reporting of start-up costs and organization
costs. It requires costs of start-up activities and organization costs to
be expensed as incurred. The Company does not expect the adoption of SOP
98-5 in 1999 to have a material effect on its financial statements.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which establishes accounting and
reporting standards for derivative instruments, including derivative
instruments embedded in other contracts, and for hedging activities. SFAS
No. 133 is effective for all fiscal quarters of fiscal years beginning
after June 15, 1999. This statement is not expected to affect the Company,
as it currently does not engage or plan to engage in derivative instruments
or hedging activities.
(3)Stockholders' Equity
Common Stock
In 1997, the Company increased the number of shares of common stock
authorized from 7,000,000 to 12,000,000. In 1998, the Company increased the
number of shares of common stock authorized from 12,000,000 to 16,000,000.
At December 31, 1997 and 1998, the Company had 6,099,204 and 7,394,355,
respectively, common stock shares issued and outstanding and 7,338,405 and
13,120,905 common stock shares, respectively, reserved for conversion of
Series A convertible preferred stock, Series B convertible preferred stock,
Series C convertible preferred stock, Series D convertible preferred stock
and related convertible preferred stock warrants. Additionally, the Company
had 674,999 shares reserved for common stock warrants issued in conjunction
with the Series C convertible preferred stock.
Shares of common stock outstanding were purchased under the Company's
Stock Restriction Agreements, which contain certain restrictions related to
the sale and transfer of the shares and certain vesting and buyback
provisions. Under the Stock Restriction Agreements, shares may be purchased
by employees and consultants of
F-13
<PAGE>
AUDIBLE, INC.
(A Development Stage Company)
Notes to Financial Statements
December 31, 1996, 1997 and 1998 and the period November 3, 1995 (Date of
Inception) to December 31, 1998 three months ended March 31, 1998 and 1999 and
the period November 3, 1995 (Date of Inception) to March 31, 1999
(All information for the three months ended March 31, 1998 and subsequent to
December 31, 1998 is unaudited)
the Company through the issuance of promissory notes (see note 11). In
general, shares sold to employees vest over a 50-month period, with the
Company maintaining an option to repurchase unvested shares. Shares of
common stock are also, on occasion, issued in exchange for services.
A summary of common stock issued under Stock Restriction Agreements
follows:
<TABLE>
<CAPTION>
Number of
shares Weighted average issue price
---------- -------------------------------
<S> <C> <C>
Balance at November 3, 1995
(date of inception)............ -- --
Issued for notes................ 1,500,000 $.05
Issued in exchange for patent... 750,000 Fair value of patent--$35,000
----------
Balance at December 31, 1995.... 2,250,000
Issued for notes................ 2,577,600 $.07
Issued in exchange for services. 141,150 Fair value of services--$35,226
Repurchased..................... (215,100) $.06
----------
Balance at December 31, 1996.... 4,753,650
Issued for notes................ 1,505,625 $.24
Issued in exchange for services. 72,984 Fair value of services--$87,884
Repurchased..................... (233,055) $.07
----------
Balance at December 31, 1997.... 6,099,204
Issued for notes................ 2,456,625 $.27
Issued in exchange for services. 11,250 Fair value of services--$16,250
Repurchased..................... (1,172,734) $.16
----------
Balance at December 31, 1998 (of
which 4,343,913 shares are
vested at December 31, 1998)... 7,394,355
==========
</TABLE>
Warrants
In 1996, the Company issued warrants to purchase 12,500 shares of Series
B convertible preferred stock. The warrants have an exercise price of $4.00
per share and expire on November 20, 2001. Also in 1996, the Company issued
warrants to purchase 33,582 shares of Series B convertible preferred stock.
These warrants have an exercise price of $2.68 and expire on the later of
November 19, 2006 or five years from an initial public offering by the
Company.
In 1997, the Company issued warrants to purchase 12,188 shares of Series
C convertible preferred stock with an exercise price of $4.00 per share.
The warrants expire on the later of July 24, 2007 or five years from an
initial public offering by the Company.
In conjunction with the issuance of the Series C convertible preferred
stock in 1997, the Company issued warrants to purchase 675,001 shares of
common stock at an exercise price of $4.00 per share. Such exercise price
was above the fair value of common stock at the date of grant. The warrants
expire on March 31, 2002.
F-14
<PAGE>
AUDIBLE, INC.
(A Development Stage Company)
Notes to Financial Statements
December 31, 1996, 1997 and 1998 and the period November 3, 1995 (Date of
Inception) to December 31, 1998 three months ended March 31, 1998 and 1999 and
the period November 3, 1995 (Date of Inception) to March 31, 1999
(All information for the three months ended March 31, 1998 and subsequent to
December 31, 1998 is unaudited)
In conjunction with a $1 million line of credit entered into in 1998
(see note 12), the Company issued warrants to purchase 5,000 shares of
Series D convertible preferred stock with an exercise price of $4.00 per
share. The warrants expire on April 5, 2003.
Using a Black-Scholes option model, the fair value of the warrants
issued by the Company was deemed insignificant on the date of grant.
(4) Redeemable Convertible Preferred Stock
Series A
In December 1995, the Company authorized 1,350,000 shares of Series A
convertible preferred stock. In March 1997, the Company decreased the
number of shares of Series A convertible preferred stock authorized from
1,350,000 to 1,068,000. In 1995, the Company issued 534,000 shares of
Series A convertible preferred stock at $.75 per share for net proceeds of
$389,189. Each holder of outstanding shares of Series A convertible
preferred stock has voting rights equal to the number of shares of common
stock into which the shares of Series A convertible preferred stock are
convertible, which is a 3 for 2 share basis, subject to certain adjustments
for antidilution, at the option of the stockholder, as defined in the
Company's Certificate of Incorporation, as amended.
Stockholders of the Series A convertible preferred stock are entitled to
receive dividends, when and if declared by the Board of Directors, at an
annual rate of $.075 per share. Such dividends are not cumulative.
Whenever a dividend or other distribution is declared on any shares of
Series B, Series C or Series D convertible preferred stock, the Board of
Directors must simultaneously declare a dividend or distribution on Series
A convertible preferred stock based on the relative aggregated liquidation
value of the outstanding shares of Series A, Series B, Series C and Series
D convertible preferred stock so that the outstanding shares of Series A,
Series B, Series C and Series D convertible preferred stock will
participate equally with each other.
Series B
In July 1996, the Company authorized 2,000,000 shares of Series B
convertible preferred stock. The number of shares of Series B convertible
preferred stock authorized was increased to 2,200,000 in November 1996. In
March 1997, the Company decreased the number of shares of Series B
convertible preferred stock authorized to 2,100,000 shares. In July and
November 1996, the Company issued an aggregate of 2,050,000 shares of
Series B convertible preferred stock at $1.50 per share for aggregate net
proceeds of $3,040,581. Each holder of outstanding shares of Series B
convertible preferred stock has voting rights equal to the number of shares
of common stock into which the shares of Series B convertible preferred
stock are convertible, which is a 3 for 2 share basis, subject to certain
adjustments for antidilution, at the option of the stockholder, as defined
in the Company's Certificate of Incorporation, as amended.
Stockholders of Series B convertible preferred stock are entitled to
receive dividends, when and if declared by the Board of Directors, at an
annual rate of $.15 per share. Such dividends are not cumulative.
F-15
<PAGE>
AUDIBLE, INC.
(A Development Stage Company)
Notes to Financial Statements
December 31, 1996, 1997 and 1998 and the period November 3, 1995 (Date of
Inception) to December 31, 1998 three months ended March 31, 1998 and 1999 and
the period November 3, 1995 (Date of Inception) to March 31, 1999
(All information for the three months ended March 31, 1998 and subsequent to
December 31, 1998 is unaudited)
Series C
In March 1997, the Company authorized 2,300,000 shares of Series C
convertible preferred stock. In March 1997, the Company issued 2,250,000
shares of Series C convertible preferred stock at $4.00 per share for net
proceeds of $8,947,875. Each holder of outstanding shares of Series C
convertible preferred stock has voting rights equal to the number of shares
of common stock into which the Series C convertible preferred stock are
convertible, which is a 3 for 2 share basis, subject to certain adjustments
for antidilution, at the option of the stockholder, as defined in the
Company's Certificate of Incorporation, as amended.
Stockholders of Series C convertible preferred stock are entitled to
receive dividends, when and if declared by the Board of Directors, at an
annual rate of 10% of the initial Series C convertible preferred stock
value ($4.00 per share). Such dividends are not cumulative.
Series D
In February 1998, the Company authorized 1,375,000 shares of Series D
convertible preferred stock. The number of shares of Series D convertible
preferred stock authorized was increased to 4,375,000 in December 1998. In
February, June and December 1998, the Company issued an aggregate of
3,850,000 shares of Series D convertible preferred stock at $4.00 per share
for aggregate net proceeds of $15,347,009. Each holder of outstanding
shares of Series D convertible preferred stock has voting rights equal to
the number of shares of common stock into which the Series D convertible
preferred stock are convertible, which is a 3 for 2 share basis, subject to
certain adjustments for antidilution, at the option of the stockholder, as
defined in the Company's Certificate of Incorporation, as amended.
Stockholders of Series D convertible preferred stock are entitled to
receive dividends, when and if declared by the Board of Directors, at an
annual rate of 10% of the initial Series D convertible preferred stock
value ($4.00 per share). Such dividends are not cumulative.
On February 9, 1999, the Company issued 250,000 shares of Series D
convertible preferred stock at $4.00 per share, for net proceeds of
$994,472. These shares have the same rights as the Series D convertible
preferred stock shares outstanding as of December 31, 1998.
Automatic Conversion
Upon the closing of a Qualified Offering (as defined below), all of the
then outstanding shares of preferred stock are automatically converted into
shares of common stock at the conversion price at the time in effect for
such preferred stock, and any dividends declared but unpaid are immediately
payable in cash. A "Qualified Offering" is defined as an underwritten
offering by the Company of authorized but unissued shares of common stock
at a price per share which (after deducting underwriting commissions and
offering expenses) is not less than $4.00 per share (adjusted for the 3 for
2 split), subject to adjustment, and resulting in net proceeds to the
Company (after deducting underwriting commissions and offering expenses) of
not less than $15,000,000. An "Underwritten Offering" is defined as a
distribution of common stock in a firm commitment underwritten public
offering to the general public pursuant to a registration statement filed
with and declared effective by the Securities and Exchange Commission
pursuant to the Securities Act of 1933.
F-16
<PAGE>
AUDIBLE, INC.
(A Development Stage Company)
Notes to Financial Statements
December 31, 1996, 1997 and 1998 and the period November 3, 1995 (Date of
Inception) to December 31, 1998 three months ended March 31, 1998 and 1999 and
the period November 3, 1995 (Date of Inception) to March 31, 1999
(All information for the three months ended March 31, 1998 and subsequent to
December 31, 1998 is unaudited)
Liquidation and Dividend Preferences
Upon liquidation, holders of Series A convertible preferred stock are
entitled to $.75 per share of Series A convertible preferred stock
outstanding, plus 8% of the original purchase price of Series A convertible
preferred stock ($.75), compounded annually from the date of issuance, and
any declared but unpaid dividends.
Holders of Series B convertible preferred stock are entitled to the
greater of (a) the sum of $1.50 per share of Series B convertible preferred
stock outstanding (subject to adjustment, as defined in the Company's
Certificate of Incorporation, as amended) plus all declared but unpaid
dividends or (b) the amount that would have been received if all shares of
Series B convertible preferred stock had been converted to common stock
prior to such liquidation.
Holders of Series C convertible preferred stock are entitled to the
greater of (a) the sum of $4.00 per share of Series C convertible preferred
stock outstanding (subject to adjustment as defined in the Company's
Certificate of Incorporation, as amended) plus all declared but unpaid
dividends or (b) the amount that would be received if all shares of Series
C convertible preferred stock had been converted to common stock prior to
such liquidation.
Holders of Series D convertible preferred stock are entitled to the
greater of (a) the sum of $4.00 per share of Series D convertible preferred
stock outstanding (subject to adjustment as defined in the Company's
Certificate of Incorporation, as amended) plus all declared but unpaid
dividends or (b) the amount that would be received if all shares of Series
D convertible preferred stock had been converted to common stock prior to
such liquidation.
Series A, Series B, Series C and Series D convertible preferred stock
rank as to dividends and upon liquidation at parity and senior to common
stock and to all other classes or series issued by the Company. If upon
liquidation the assets remaining in the Company are not sufficient to pay
the holders of Series A, Series B, Series C and Series D convertible
preferred stock the full amount to which the stockholders are entitled, the
holders of the Series A, Series B, Series C and Series D convertible
preferred stock share ratably in the distribution of the remaining assets.
The Company has not declared any dividends.
Redemption Features
The Company is required to redeem, at the option of a majority of the
holders of Series A convertible preferred stock, a maximum number of shares
of Series A convertible preferred stock held by such holders at $.75 per
share on the following dates:
<TABLE>
<CAPTION>
Maximum number
of outstanding
Redemption date shares to be redeemed
--------------- ---------------------
<S> <C>
January 1, 2000........................................ 33.33%
January 1, 2001........................................ 50.00%
January 1, 2002........................................ All remaining shares
</TABLE>
F-17
<PAGE>
AUDIBLE, INC.
(A Development Stage Company)
Notes to Financial Statements
December 31, 1996, 1997 and 1998 and the period November 3, 1995 (Date of
Inception) to December 31, 1998 three months ended March 31, 1998 and 1999 and
the period November 3, 1995 (Date of Inception) to March 31, 1999
(All information for the three months ended March 31, 1998 and subsequent to
December 31, 1998 is unaudited)
The Company is required to redeem, at the option of a majority of the
holders of each series of convertible preferred stock, such shares of such
series of convertible preferred shares outstanding sought to be redeemed by
such holders on the following date, if the Company has not completed an
initial public offering resulting in net proceeds of at least $15,000,000,
or a qualified merger or liquidation. The price at which these shares are
redeemable is the greater of the fair market value of the common stock at
the redemption date or the redemption price, as shown below.
<TABLE>
<CAPTION>
Maximum number Redemption
Redemption date shares to be redeemed price per share
--------------- ---------------------- ---------------
<S> <C> <C> <C>
February 25, 2003..................... Series B 2,050,000 $1.50
Series C 2,250,000 4.00
Series D 3,850,000 4.00
</TABLE>
If funds are not legally available to redeem the Series A, Series B,
Series C and Series D convertible preferred shares outstanding on the
redemption dates specified, the Company will use those funds which are
legally available to redeem the maximum possible number of such shares pro
rata among the preferred stockholders.
(5) Write-down Related to Hardware Business
In 1998, the Company decided to discontinue manufacturing the Audible
MobilePlayer and instead to focus its efforts on developing the technology
to enable third-party hand-held devices to download Audible's content. As a
result, the Company recorded a charge of approximately $370,000 to reduce
the remaining inventory to its net realizable value. The Company also
recorded an impairment loss of approximately $181,000 on certain molds and
manufacturing equipment that were used by Flextronics, Inc. (Flextronics)
in manufacturing the Audible MobilePlayer. The impairment loss was measured
as the difference between the fair value, determined to be zero, and the
carrying value of the molds and manufacturing equipment. In addition, the
Company recorded a charge of $51,000 and agreed to use its $350,000 deposit
with Flextronics to satisfy $401,000 in remaining purchase commitments.
These charges comprise the write-down of approximately $952,000 recorded in
the accompanying 1998 statement of operations.
(6) Property and Equipment
Property and equipment at December 31, 1997 and 1998 consists of the
following:
<TABLE>
<CAPTION>
December 31,
---------------------
1997 1998
---------- ----------
<S> <C> <C>
Construction in progress................................. $ -- $ 16,428
Studio equipment......................................... 155,935 155,935
Computer server and Web site equipment................... 498,856 510,118
Molds and manufacturing equipment........................ 443,257 302,463
Office furniture and equipment........................... 383,741 392,781
Leasehold improvements................................... 93,829 93,829
---------- ----------
1,575,618 1,471,554
Less accumulated depreciation and amortization........... 408,006 1,073,717
---------- ----------
$1,167,612 $ 397,837
========== ==========
</TABLE>
F-18
<PAGE>
AUDIBLE, INC.
(A Development Stage Company)
Notes to Financial Statements
December 31, 1996, 1997 and 1998 and the period November 3, 1995 (Date of
Inception) to December 31, 1998 three months ended March 31, 1998 and 1999 and
the period November 3, 1995 (Date of Inception) to March 31, 1999
(All information for the three months ended March 31, 1998 and subsequent to
December 31, 1998 is unaudited)
Property and equipment includes equipment under capital leases.
Depreciation and amortization expense on property and equipment, including
equipment under capital leases, totaled $28,683, $379,323, $665,711 and
$1,073,717 in 1996, 1997, 1998 and the period November 3, 1995 (date of
inception) to December 31, 1998, respectively.
An impairment loss of approximately $181,000 was recorded on molds and
manufacturing equipment in 1998 to reduce the net book value to zero since
the Company determined that the carrying amount of the molds and
manufacturing equipment was not recoverable.
(7) Microsoft Agreement
In November 1998, the Company entered into a five-year agreement with
Microsoft to develop certain integration of products, grant various rights
and licenses, and provide for Microsoft to be paid future royalties for
content distributed as a result of the software developed in the agreement.
Under the terms of the agreement, Microsoft committed a minimum of $2.0
million in payments to the Company to integrate certain products and
acquire various rights and licenses.
Microsoft advanced Audible $1,500,000 in November 1998 in consideration
of Audible granting Microsoft the right to distribute software enabling
users of Microsoft platforms to access and use Audible content. This
advance will be recognized as revenue on a straight line basis over the
initial term of the agreement which runs through the second quarter of
2001, beginning in the quarter ended June 30, 1999.
Audible will pay Microsoft a royalty on content licensed and distributed
by Audible to each end user that accesses its content using the developed
software. Royalties will be recognized during the period that the related
content revenue is earned. During 1998, Audible had not made any royalty
payments to Microsoft.
Also under the agreement, Audible (i) has performed technology
integration services for which the Company has recognized revenue of
$200,000, (ii) will deliver a license for certain technology rights in
exchange for $250,000 and (iii) will deliver 300 Audible MobilePlayers in
exchange for $50,000. The technology integration services have been
performed and therefore the related revenue has been recognized during the
three months ended March 31, 1999. Revenue for the technology rights will
be recognized when delivered and acceptance has occurred. Revenue from the
sale of Audible MobilePlayers will be recognized when shipped. Microsoft
has options under the agreement to acquire additional rights and licenses
and extend the term of the agreement for additional financial
consideration.
(8) Income Taxes
There is no provision for income tax expense in 1996, 1997 or 1998 or in
the period November 3, 1995 (date of inception) to December 31, 1998 due to
the Company's net losses in each of the years and the cumulative period
since inception. No income tax payments have been made in 1996, 1997, 1998
or the period November 3, 1995 (date of inception) to December 31, 1998.
F-19
<PAGE>
AUDIBLE, INC.
(A Development Stage Company)
Notes to Financial Statements
December 31, 1996, 1997 and 1998 and the period November 3, 1995 (Date of
Inception) to December 31, 1998 three months ended March 31, 1998 and 1999 and
the period November 3, 1995 (Date of Inception) to March 31, 1999
(All information for the three months ended March 31, 1998 and subsequent to
December 31, 1998 is unaudited)
The difference between the actual income tax provision and that computed
by applying the U.S. federal income tax rate of 34% to pretax loss is
summarized below:
<TABLE>
<CAPTION>
Period
November 3, 1995
Year ended December 31, (date of inception)
------------------------------------- to December 31,
1996 1997 1998 1998
----------- ----------- ----------- -------------------
<S> <C> <C> <C> <C>
Computed "expected" tax
benefit................ $(1,192,982) $(2,729,944) $(2,766,945) $(6,706,490)
(Increase) decrease in
tax benefit resulting
from:
Increase in the
valuation allowance... 1,391,121 3,208,000 3,251,000 7,869,000
State and local income
tax benefit, net of
federal benefit....... (208,421) (476,937) (483,401) (1,171,018)
Other, net............. 10,282 (1,119) (654) 8,508
----------- ----------- ----------- -----------
$ -- $ -- $ -- $ --
=========== =========== =========== ===========
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities as of December 31, 1997
and 1998 are as follows:
<TABLE>
<CAPTION>
December 31,
---------------------
1997 1998
---------- ----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards........................ $ 766,000 $4,288,000
Capitalized start-up costs.............................. 891,000 1,115,000
Capitalized research and developmental costs............ 2,751,000 1,876,000
Book depreciation in excess of tax depreciation......... 117,000 229,000
Deferred compensation and accrued vacation.............. 52,000 105,000
Inventory write-down.................................... -- 148,000
Molds and equipment impairment.......................... -- 72,000
Other, net.............................................. 47,000 36,000
---------- ----------
Total deferred tax assets.............................. 4,624,000 7,869,000
Less valuation allowance................................ 4,618,000 7,869,000
---------- ----------
Net deferred taxes..................................... 6,000 --
Deferred tax liability--deductible patent costs.......... 6,000 --
---------- ----------
Net deferred taxes..................................... $ -- $ --
========== ==========
</TABLE>
In assessing the realizability of deferred tax assets, the Company
considers whether it is more likely than not that some portion or all of
the deferred tax assets will not be realized. The ultimate realization of
deferred tax assets is dependent upon the generation of future taxable
income. Based on the Company's historical net losses, management believes
it is more likely than not that the Company will not realize the benefits
of these deferred tax assets, and accordingly, a full valuation allowance
has been recorded on the deferred tax assets as of December 31, 1997 and
1998.
F-20
<PAGE>
AUDIBLE, INC.
(A Development Stage Company)
Notes to Financial Statements
December 31, 1996, 1997 and 1998 and the period November 3, 1995 (Date of
Inception) to December 31, 1998 three months ended March 31, 1998 and 1999 and
the period November 3, 1995 (Date of Inception) to March 31, 1999
(All information for the three months ended March 31, 1998 and subsequent to
December 31, 1998 is unaudited)
As of December 31, 1998, the Company has net operating loss
carryforwards for federal income tax purposes of approximately $10.7
million which expire between 2010 and 2013 if not used to offset future
taxable income. The Company has experienced certain ownership changes
which, under the provisions of Section 382 of the Internal Revenue Code of
1986, as amended, may result in an annual limitation on the Company's
ability to utilize its net operating losses in the future.
(9) Related-party Transactions
The Company has an agreement with Flextronics to manufacture the Audible
MobilePlayer. The chief executive officer of Flextronics is also a
principal of one of the Company's stockholders. Included in accounts
payable is approximately $173,000 and $51,000 which is due to Flextronics
at December 31, 1997 and 1998, respectively. The Company intends to
terminate this agreement in 1999 in connection with the decision to
discontinue manufacturing the Audible MobilePlayer (see note 5).
The note receivable due from stockholder of $100,000 at December 31,
1997 and 1998 bears interest at 6% annually. The principal amount plus
accrued interest is due the earlier of March 28, 2002 or the effective date
of an initial public offering by the Company. The stockholder has pledged
37,500 shares of common stock as security under the promissory note.
In April 1999, the note was amended to extend its maturity date to one
year following the closing of an initial public offering of the Company's
common stock.
(10) Commitments
Lease Obligations
The Company entered into a capital lease line of credit with Comdisco,
Inc. whereby the Company may lease up to $1,750,000 of equipment. The
Company has leased $1,240,585 of equipment under this capital lease line as
of December 31, 1998. The Company has operating leases on its office space
and certain equipment. Future minimum lease obligations under these lease
arrangements are as follows:
<TABLE>
<CAPTION>
Capital Operating
leases leases
-------- ---------
<S> <C> <C>
Year ending December 31:
1999.................................................... $517,051 $206,478
2000.................................................... 276,898 215,571
2001.................................................... 48,271 218,732
2002.................................................... -- 218,732
2003.................................................... -- 19,225
-------- --------
Total future minimum lease payments.................... 842,220 $878,738
========
Less amount representing interest (8% to 11.5%)......... 60,489
--------
Present value of obligation under capital lease........ 781,731
Less current maturities 471,224
--------
Obligation under capital lease, net of current
maturities............................................ $310,507
========
</TABLE>
F-21
<PAGE>
AUDIBLE, INC.
(A Development Stage Company)
Notes to Financial Statements
December 31, 1996, 1997 and 1998 and the period November 3, 1995 (Date of
Inception) to December 31, 1998 three months ended March 31, 1998 and 1999 and
the period November 3, 1995 (Date of Inception) to March 31, 1999
(All information for the three months ended March 31, 1998 and subsequent to
December 31, 1998 is unaudited)
Rent expense of $58,173, $144,914, $209,128 and $412,215 was recorded
for operating leases for the years ended December 31, 1996, 1997 and 1998
and the period November 3, 1995 (date of inception) to December 31, 1998,
respectively.
Equipment under capital leases as of December 31, 1997 and 1998 is
summarized as follows:
<TABLE>
<CAPTION>
December 31,
----------------------
1997 1998
---------- ----------
<S> <C> <C>
Studio equipment..................................... $ 135,855 $ 135,855
Computer server and Web site equipment............... 492,793 504,055
Molds and manufacturing equipment.................... 419,332 301,406
Office furniture and equipment....................... 295,296 299,269
---------- ----------
1,343,276 1,240,585
Less accumulated amortization........................ (351,567) (953,303)
---------- ----------
$ 991,709 $ 287,282
========== ==========
</TABLE>
Content Royalty Agreements
The Company enters into content royalty agreements with various content
providers. Royalties for licensed content are based on a percentage of
content revenue. Minimum royalties of approximately $702,000 are required
to be paid over the next two to three years. Payment dates are based upon
specific terms within each agreement.
Purchase Commitment
Under the Company's manufacturing agreement with Flextronics, the
Company is required to reimburse Flextronics for all purchases of
components in connection with its decision to discontinue manufacturing
Audible MobilePlayers, which amount is approximately $401,000 as of
December 31, 1998. As of December 31, 1998, the parties agreed to use the
Company's $350,000 deposit to satisfy a portion of this commitment and the
Company recorded a charge of $51,000 for the remaining amount (see note 5).
The Company has committed to purchase a limited quantity of enhanced
Audible MobilePlayers for approximately $141,000 in early 1999 which are
expected to be sold at or above cost.
License Agreements
In November 1998, the Company entered into a two-year agreement for
certain joint software development, licensing and marketing. Audible is
required to pay $250,000 in the aggregate at various dates during 1999
under the terms of this agreement, for both royalties, based on future
sales, and advertising costs.
The Company has entered into several other agreements whereby certain
device manufacturers will license software from Audible. Under the terms of
these agreements, the Company would be required to pay the device
manufacturer revenue sharing on content sales by customers referred to the
Company through the efforts of the device manufacturers.
F-22
<PAGE>
AUDIBLE, INC.
(A Development Stage Company)
Notes to Financial Statements
December 31, 1996, 1997 and 1998 and the period November 3, 1995 (Date of
Inception) to December 31, 1998 three months ended March 31, 1998 and 1999 and
the period November 3, 1995 (Date of Inception) to March 31, 1999
(All information for the three months ended March 31, 1998 and subsequent to
December 31, 1998 is unaudited)
Web Hosting Agreement
During 1998, the Company entered into an agreement for Web hosting and
Internet access services effective until May 1999. Future payments by the
Company under this agreement total approximately $33,800, to be paid
monthly.
(11) Notes Due from Stockholders for Common Stock
Notes due from stockholders of $596,375 and $1,040,158 at December 31,
1997 and 1998, respectively, were received by the Company for payment for
shares of common stock purchased by employees and consultants under the
Company's Stock Restriction Agreements (see note 3). These notes have been
reflected as a reduction to stockholders' deficit. The notes are full
recourse promissory notes bearing interest at fixed rates ranging from 7.0%
to 8.5%. The notes mature beginning in the year 2000.
The Company has exercised its right to purchase shares of unvested stock
from employees who were terminated (under the terms of the Company's Stock
Restriction Agreement). During 1996, 1997, 1998 and the period November 3,
1995 (date of inception) to December 31, 1998, the Company repurchased
215,100, 233,055, 1,172,724 and 1,620,879 shares, respectively. The Company
paid for these shares by reducing the indebtedness under the promissory
notes issued to the Company.
Certain Stock Restriction Agreements with employees contain a provision
whereby the employee is awarded a one-time bonus if still employed by the
Company on the due date of the promissory note equal to the amount of the
promissory note. Compensation expense is recognized on a straight-line
basis over the term of the promissory note. Deferred compensation in the
accompanying balance sheets represents the earned, unpaid portion of such
bonuses.
(12) Credit Facilities
The Company had a bank line of credit which provided for borrowings of
up to $500,000. No amounts were outstanding under this line of credit as of
December 31, 1997. This credit facility was secured by interests in various
Company assets. The credit facility expired on December 31, 1997.
In April 1998, the Company entered into a $1,000,000 bank line of credit
agreement. The agreement matures on April 5, 1999 and contains a minimum
tangible net worth covenant, as defined in the agreement, of $1,500,000.
Any loan amount bears interest at a per annum rate equal to one percentage
point above the prime rate (8.75% as of December 31, 1998) and is limited
to a borrowing base formula based on eligible accounts. As of December 31,
1998, the amount available for borrowing under the line of credit was
nominal. The Company did not draw on this line of credit and was in
compliance with the covenant as of December 31, 1998.
In connection with securing the $1,000,000 line of credit, the Company
issued warrants to the bank to purchase 5,000 shares of Series D
convertible preferred stock. These warrants have an exercise price of $4.00
per share and expire on April 5, 2003.
The Company pledged all goods and equipment, including inventory,
accounts receivable, contract rights and intangibles currently owned or
hereafter acquired, as collateral under this loan agreement.
F-23
<PAGE>
AUDIBLE, INC.
(A Development Stage Company)
Notes to Financial Statements
December 31, 1996, 1997 and 1998 and the period November 3, 1995 (Date of
Inception) to December 31, 1998 three months ended March 31, 1998 and 1999 and
the period November 3, 1995 (Date of Inception) to March 31, 1999
(All information for the three months ended March 31, 1998 and subsequent to
December 31, 1998 is unaudited)
The bank line of credit expired as of April 5, 1999 and was not renewed.
(13) Corporate Restructuring
On February 2, 1998, the Company reduced its workforce by 32%,
eliminating 15 full-time positions in a variety of functions. The Company
offered a severance package to all the terminated employees. The total
charge resulting from severance of $44,462 was paid in 1998.
(14) Employee Benefit Plan
On July 1, 1998, the Company adopted and made available to all of its
employees a 401(k) savings plan (the Plan). The Plan is based on
contributions from employees and discretionary Company contributions. The
Company has not contributed to the Plan to date.
(15) Subsequent Events
In April 1999, the Company established the 1999 Stock Incentive Plan
(the "Stock Incentive Plan") and has reserved 9,000,000 shares to be issued
under the Stock Incentive Plan. The Stock Incentive Plan permits the
granting of stock options, stock appreciation rights, restricted or
unrestricted stock awards, phantom stock, performance awards and other
stock-based awards. No awards have been granted under the Stock Incentive
Plan.
In April 1999, the Company increased the number of shares of common
stock authorized from 16,000,000 to 50,000,000 and the number of shares of
preferred stock authorized from 9,843,000 to 19,843,000.
In April 1999, in connection with an amendment to the agreements with
Microsoft, the Company issued to Microsoft a warrant to purchase 100,000
shares of common stock at the initial public offering price, or, if the
initial public offering does not occur within 12 months of the date of
issuance, such warrant is exercisable for 100,000 shares of common stock at
$6.00 per share. Microsoft has a right of first negotiation in the event of
a potential sale of the Company. The fair value of this warrant will be
recognized as an expense on a straight line basis over the same period as
the advance for the distribution right discussed in note 7.
Effective May 26, 1999, the Company declared a 3 for 2 stock split in
the form of a stock dividend payable on May 26, 1999 for stockholders of
record at the close of business on May 26, 1999.
In June 1999, in connection with a services agreement, the Company
issued a warrant to purchase 150,000 shares of common stock at $0.01 per
share, which is fully vested, and a warrant to purchase 750,000 shares of
common stock at $8.00 per share, which is subject to vesting over a five
year period. The fair value of these warrants will be recorded as an
expense over the initial term of the service agreement, which is three
years.
Subsequent to March 31, 1999, the Company has substantially completed
its development efforts in establishing its business and, accordingly, no
longer considers itself to be a development stage company.
F-24
<PAGE>
Inside Back Cover
The headline at that top reads: "Redefining the Way Audio is Delivered and
Consumed."
Below the headline is a triangle with the following graphics at each corner
and one in the center with the following headings (clockwise from the top):
"content," "AudibleReady Devices," "marketing & distribution relationships" and,
in the center, "internet delivery."
Next to the heading, "content," is a collection of audio titles. The
caption below the heading reads: "More than 7,000 premium audio selections, most
of which are available only through audible.com. 15,000 hours of digital spoken
audio. From over 100 publishers, many of which are under exclusive contract with
Audible."
Below the heading, "AudibleReady devices," is a collection of electronic
devices including a lap-top computer, and Audible MobilePlayer and several other
palm-size electronic devices. The caption below the heading reads: "A variety
of devices can be used to play back Audible content. AudibleManager software can
be downloaded from audible.com or is bundled with the device. Personal
computers with speakers. Microsoft Windows CE devices: Casio, Compaq, Everex,
Phillips. MobilePlayer and MobilePlayer PLUS."
Above the heading, "marketing & distribution relationships," are two screen
shots showing the audible.com Web site and the AudibleManager software. The
caption below the heading reads: "Co-marketing and software bundling
relationships with Compaq, Everex, Casio, Phillips. Development and co-marketing
relationship with Diamond Multimedia to make a future version of the Rio
AudibleReady. Technology and co-marketing relationships with Microsoft and
RealNetworks. Marketing Relationships with Broadcast.com, MP3.com, RioPort, The
Wall Street Journal and The New York Times."
Above the heading, "internet delivery," is a globe circled by rays of
light. The caption below the heading reads: "Eliminate manufacturing costs.
Reduce distribution costs. Eliminate inventory and shelf space costs. Eliminate
shipping delays."
At the bottom right corner is a picture of the Company's logo.
<PAGE>
[Audible logo appears here]
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
13. Other Expenses of Issuance and Distribution
The following table sets forth the various expenses payable by us in
connection with the sale and distribution of the securities offered hereby,
other than underwriting discounts and commissions. All of the amounts shown are
estimated except the Securities and Exchange Commission registration fee, the
National Association Securities Dealers, Inc. filing fee and the Nasdaq
National Market listing fee.
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee.............. $ 12,788
National Association of Securities Dealers, Inc. filing fee...... 5,100
Nasdaq National Market listing fee............................... 95,000
Transfer agent's and registrar's fees............................ 10,000
*Printing expenses................................................ 250,000
*Legal fees and expenses.......................................... 275,000
*Accounting fees and expenses..................................... 250,000
Blue Sky filing fees and expenses................................ 10,000
*Miscellaneous expenses........................................... 92,112
----------
Total........................................................... $1,000,000
==========
</TABLE>
- --------
* estimated.
14. Indemnification of Officers and Directors
Section 145 of the Delaware General Corporation Law ("Section 145") permits
indemnification of directors, officers, agents and controlling persons of a
corporation under certain conditions and subject to certain limitations. Our
bylaws include provisions to require us to indemnify our directors and officers
to the fullest extent permitted by Section 145, including circumstances in
which indemnification is otherwise discretionary. Section 145 also empowers us
to purchase and maintain insurance that protects our officers, directors,
employees and agents against any liabilities incurred in connection with their
service in such positions.
At present, there is no pending litigation or proceeding involving any of
our directors or officers as to which indemnification is being sought nor are
we aware of any threatened litigation that may result in claims for
indemnification by any officer or director.
The form of Underwriting Agreement filed as Exhibit 1.1 to this Registration
Statement provides for indemnification of our directors and officers by the
Underwriters, for certain liabilities arising under the Securities Act.
15. Recent Sales of Unregistered Securities
During the last three years, we have issued unregistered securities in the
transactions described below. These securities were offered and sold by us in
reliance upon the exemptions provided for in Section 4(2) of the Securities
Act, relating to sales not involving any public offering, Rule 506 of the
Securities Act relating to sales to accredited investors and Rule 701 of the
Securities Act relating to a compensatory benefit plan. The sales were made
without the use of an underwriter and the certificates representing the
securities sold contain a restrictive legend that prohibits transfer without
registration or an applicable exemption.
(1) In July 1996, we issued 2,000,000 shares of Series B preferred stock to a
group of accredited investors at a purchase price of $1.50 per share for an
aggregate of $3,000,000.
(2) In November 1996, we issued an additional 50,000 shares of Series B
preferred stock to two accredited investors at a purchase price of $1.50
per share for an aggregate of $75,000.
II-1
<PAGE>
(3) In November 1996, we issued warrants to purchase an aggregate of 46,082
shares of Series B preferred stock in connection with loans made to us.
(4) In March 1997, we issued 2,250,000 shares of Series C preferred stock to a
group of accredited investors at a purchase price of $4.00 per share for an
aggregate of $9,000,000.
(5) In March 1997, we issued warrants to purchase 674,999 shares of common
stock to holders of Series C preferred stock in connection with the Series
C preferred stock financing.
(6) In July 1997, we issued a warrant to purchase 12,188 shares of Series C
preferred stock in connection with a loan made to us.
(7) In February 1998, we issued 1,350,000 shares of Series D preferred stock to
a group of accredited investors at a purchase price of $4.00 per share for
an aggregate of $5,400,000.
(8) In April 1998, we issued a warrant to purchase 5,000 shares of Series D
preferred stock in connection with a loan made to us.
(9) In December 1998, we issued an additional 2,500,000 shares of Series D
preferred stock to a group of accredited investors at a purchase price of
$4.00 per share for an aggregate of $10,000,000.
(10) In February 1999, we issued an additional 250,000 shares of Series D
preferred stock to an accredited investor at a purchase price of $4.00 per
share for an aggregate of $1,000,000.
(11) In April 1999, we issued a warrant to purchase 100,000 shares of common
stock to an accredited investor.
(12) From December 1995 through March 1999, we sold an aggregate of 9,244,734
shares of common stock to employees and consultants at purchase prices
ranging from $.047 to $2.667 per share, for an aggregate of $1,541,384 as
follows:
<TABLE>
<CAPTION>
Number of Price Aggregate
Dates of Sale Shares Per Share Purchase Price
------------- --------- --------- --------------
<S> <C> <C> <C>
December 1995................................ 2,250,000 $0.047 $105,000
June 1996.................................... 112,500 0.100 11,250
June 1996.................................... 7,500 0.057 425
July 1996.................................... 1,425,000 0.057 80,750
July 1996.................................... 67,500 0.113 7,650
July 1996.................................... 48,750 0.667 32,500
August 1996.................................. 22,500 0.667 15,000
September 1996............................... 112,500 0.100 11,250
December 1996................................ 922,500 0.100 92,250
January 1997................................. 37,500 0.100 3,750
February 1997................................ 99,000 0.100 9,900
March 1997................................... 15,000 2.000 30,000
April 1997................................... 18,000 0.667 12,000
May 1997..................................... 83,250 0.100 8,325
June 1997.................................... 323,250 0.267 86,200
July 1997.................................... 553,500 0.267 147,600
September 1997............................... 3,750 0.100 375
October 1997................................. 4,500 2.667 12,000
November 1997................................ 409,125 0.267 109,100
November 1997................................ 17,310 0.333 5,770
December 1997................................ 1,125 0.333 375
December 1997................................ 4,050 0.667 2,700
December 1997................................ 9,249 2.667 24,664
January 1998................................. 7,500 2.000 15,000
January 1998................................. 18,750 0.267 5,000
February 1998................................ 3,750 0.333 1,250
February 1998................................ 1,500,000 0.267 400,000
May 1998..................................... 279,000 0.267 74,400
June 1998.................................... 457,500 0.267 122,000
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
Number of Price Aggregate
Dates of Sale Shares Per Share Purchase Price
------------- --------- --------- --------------
<S> <C> <C> <C>
July 1998.................................... 82,500 0.267 22,000
September 1998............................... 80,250 0.267 21,400
October 1998................................. 38,625 0.267 10,300
March 1999................................... 229,500 0.267 61,200
--------- ----------
Total........................................ 9,244,734 $1,541,384
</TABLE>
(13) In April 1999, we issued options to purchase 3,000 shares of our common
stock for $2.00 per share to one of our employees.
(14) Effective May 26, 1999, we declared a stock dividend of .5 shares for each
outstanding share of common stock.
(15) In June 1999, we issued to an accredited investor in connection with a
business arrangement a warrant to purchase 150,000 shares of common stock
at an exercise price of $0.01 per share and a warrant to purchase 750,000
shares of common stock at an exercise price of $8.00 per share.
(16) In June 1999, we issued options to purchase an aggregate of 900,500 shares
of our common stock for $8.00 per share to employees and consultants.
16. Exhibits and Financial Statement Schedules
(a) Exhibits
Exhibit No. Description
1.1 Form of Underwriting Agreement
3.1 Restated Certificate of Incorporation of Audible, dated March 31,
1997
3.1.1 Certificate of Amendment of Certificate of Incorporation, dated
July 22, 1997
3.1.2 Certificate of Amendment of Certificate of Incorporation, dated
February 25, 1998
3.1.3 Certificate of Amendment of Certificate of Incorporation, dated
December 18, 1998
3.1.3.1 Certificate of Amendment of Certificate of Incorporation, dated
April 23, 1999
3.1.4 Certificate of Amendment of Certificate of Incorporation, dated
June 16, 1999
3.2 Form of Amended and Restated Certificate of Incorporation of
Audible
3.3 Bylaws of Audible
3.3.1 Amendment No. 1 to Audible, Inc. Bylaws, dated March 17, 1998
3.4 Form of Amended and Restated Bylaws of Audible
4.1 Specimen stock certificate for shares of common stock of Audible
5.1 Opinion of Piper & Marbury L.L.P.
10.1+* License Agreement dated November 4, 1998, by and between Microsoft
Corporation and Audible
10.2+* Digital Rights Management Agreement dated November 4, 1998,
between Microsoft Corporation and Audible
10.3+* Development Agreement dated November 12, 1998, by and between
RealNetworks, Inc. and Audible
10.4 RealMedia Architecture Partner Program Internet Agreement dated
November 12, 1998, between RealNetworks, Inc. and Audible
10.5 Master Lease Agreement dated November 19, 1996, by and between
Comdisco, Inc. as lessor, and Audible as lessee
10.5.1 Addendum to Master Lease Agreement dated November 20, 1996, by and
between Comdisco, Inc., as lessor, and Audible, as lessee
(relating to Exhibit 10.5)
II-3
<PAGE>
10.6 Warrant Agreement to purchase 30,573 shares of Series B preferred
stock at a price of $2.68 per share, dated November 19, 1996, and
re-issued as of August 17, 1998, by Audible to Comdisco, Inc.
10.7 Warrant Agreement to purchase 12,188 shares of Series C preferred
stock at a price of $4.00 per share, dated July 24, 1997, issued
by Audible to Comdisco, Inc.
10.8 Loan and Security Agreement dated April 6, 1998, by and between
Silicon Valley Bank, as lender, and Audible, as borrower, for a
revolving line of credit of up to $1,000,000
10.9 Warrant to Purchase Stock issued April 6, 1998, by Audible to
Silicon Valley Bank,
10.10 Security and Loan Agreement dated November 20, 1996, between
Audible, as borrower, and Imperial Bank, as lender, for up to
$500,000
10.11 Warrant Agreement to purchase 12,500 shares of Series B preferred
stock at a price of $3.00 per share, dated November 20, 1996,
issued by Audible to Imperial Bank
10.12 Promissory Note dated March 28, 1997, from Donald Katz in favor of
Audible, in the principal amount of $100,000
10.12.1 Allonge to Note dated April 21, 1999 between Donald Katz and
Audible (relating to Exhibit 10.12.1)
10.13 Security Agreement dated March 28, 1997, by and between Donald
Katz and Audible
10.14 Amended and Restated Registration Rights Agreement dated February
26, 1998, by and among Audible and certain stockholders named
therein
10.14.1 Amendment No. 1 to Amended and Restated Registration Rights
Agreement dated December 18, 1998 (relating to Exhibit 10.14)
10.14.2 Amendment No. 2 to Amended and Restated Registration Rights
Agreement dated June 17, 1999 (relating to Exhibit 10.14)
10.15 1999 Stock Incentive Plan
10.16 Form of Common Stock Warrants issued March 31, 1997 by Audible to
various investors in connection with the Series C preferred stock
financing
10.17 Form of Stock Restriction Agreement by and between Audible and the
Named Executive Officers made in connection with various purchases
and sales of shares of restricted common stock
10.18 Form of Promissory Note made by the Named Executive Officers in
favor of Audible in connection with various purchases and sales of
shares of restricted common stock
10.19 Office Lease dated June 20, 1997, by and between Audible, as
tenant, and Passaic Investment LLC, Sixty-Five Willowbrook
Investment LLC and Wayne Investment LLC, as tenants-in-common, as
landlord
10.20 Sublease Agreement dated July 19, 1996, by and between Audible, as
sublessee, and Painewebber Incorporated, as sublessor
10.21+* Agreement dated April 3, 1999 by and between Audible and Diamond
Multimedia Systems, Inc.
10.22 Common Stock Purchase Warrant, issued April 22, 1999, to Microsoft
Corporation
10.23 Employment Offer Letter from Audible to Guy Story dated June 10,
1996
10.24 Employment Offer Letter from Audible to Matthew Fine dated March
31, 1997
10.25 Employment Offer Letter from Audible to Brian Fielding dated April
25, 1997
10.26 Employment Offer Letter from Audible to Travis Millman dated
September 29, 1997
10.27 Employment Offer Letter from Audible to Foy Sperring dated April
23, 1998
10.28 Employment Offer Letter from Audible to Andrew Huffman dated
February 12, 1998
Employment Offer Letter from Audible to Andrew Kaplan dated May
10.29 25, 1999
10.30 Common Stock Purchase Warrant, W-1, issued June 17, 1999, to Robin
Williams
II-4
<PAGE>
10.31 Common Stock Purchase Warrant, W-2, issued June 17, 1999, to Robin
Williams
11.1 Statement of computation of loss per share
Consent of KPMG LLP
23.1*
23.2 Consent of Piper & Marbury L.L.P. (included as part of Exhibit 5.1
24.1 hereto)
Power of Attorney (included in signature pages)
27 Financial Data Schedule
- --------
+ Portions of this Exhibit were omitted and have been filed separately with
the Secretary of the Commission pursuant to the Registrant's Application
Requesting Confidential Treatment under Rule 406 of the Act.
* Filed herewith.
(b) Financial Statement Schedules:
Schedules have been omitted because the information required to be shown in
the schedules is not applicable or is included elsewhere in our financial
statements or the notes thereto.
17. Undertakings
The undersigned Registrant hereby undertakes to provide to the underwriter
at the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions of its Charter or Bylaws or the Delaware
General Corporation Law or otherwise, the Registrant has been advised that in
the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act,
the information omitted form the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act,
each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Company has duly
caused this Amendment to Registration Statement to be signed on its behalf by
the undersigned, thereunto duly authorized, in the City of Wayne, New Jersey,
on the 15th day of July, 1999.
AUDIBLE, INC.
/s/ Andrew J. Huffman
By: _________________________________
Andrew J. Huffman
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Amendment to Registration Statement has been signed below by the following
persons in the capacities and on the date indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<C> <S> <C>
/s/ Andrew J. Huffman President, Chief Executive July 15, 1999
_________________________________ Officer and Director
Andrew J. Huffman (Principal Executive
Officer)
/s/ Andrew P. Kaplan Vice President, Finance and July 15, 1999
_________________________________ Administration and Chief
Andrew P. Kaplan Financial Officer
(Principal Financial
Officer)
* Chairman of the Board of July 15, 1999
_________________________________ Directors
Donald R. Katz
* Director July 15, 1999
_________________________________
Timothy Mott
* Director July 15, 1999
_________________________________
R. Bradford Burnham
* Director July 15, 1999
_________________________________
Thomas Hirschfeld
* Director July 15, 1999
_________________________________
W. Bingham Gordon
* Director July 15, 1999
_________________________________
Winthrop Knowlton
* Director July 15, 1999
_________________________________
Richard Brass
</TABLE>
*By: /s/ Nancy A. Spangler
-------------------------
Nancy A. Spangler
Attorney-In-Fact
II-6
<PAGE>
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
1.1 Form of Underwriting Agreement
3.1 Restated Certificate of Incorporation of Audible, dated March 31,
1997
3.1.1 Certificate of Amendment of Certificate of Incorporation, dated
July 22, 1997
3.1.2 Certificate of Amendment of Certificate of Incorporation, dated
February 25, 1998
3.1.3 Certificate of Amendment of Certificate of Incorporation, dated
December 18, 1998
3.1.3.1 Certificate of Amendment of Certificate of Incorporation, dated
April 23, 1999
3.1.4 Certificate of Amendment of Certificate of Incorporation, dated
June 16, 1999
3.2 Form of Amended and Restated Certificate of Incorporation of
Audible
3.3 Bylaws of Audible
3.3.1 Amendment No. 1 to Audible, Inc. Bylaws, dated March 17, 1998
3.4 Form of Amended and Restated Bylaws of Audible
4.1 Specimen stock certificate for shares of common stock of Audible
5.1 Opinion of Piper & Marbury L.L.P.
10.1+* License Agreement dated November 4, 1998, by and between Microsoft
Corporation and Audible
10.2+* Digital Rights Management Agreement dated November 4, 1998,
between Microsoft Corporation and Audible
10.3+* Development Agreement dated November 12, 1998, by and between
RealNetworks, Inc. and Audible
10.4 RealMedia Architecture Partner Program Internet Agreement dated
November 12, 1998, between RealNetworks, Inc. and Audible
10.5 Master Lease Agreement dated November 19, 1996, by and between
Comdisco, Inc. as lessor, and Audible as lessee
10.5.1 Addendum to Master Lease Agreement dated November 20, 1996, by and
between Comdisco, Inc., as lessor, and Audible, as lessee
(relating to Exhibit 10.5)
10.6 Warrant Agreement to purchase 30,573 shares of Series B preferred
stock at a price of $2.68 per share, dated November 19, 1996, and
re-issued as of August 17, 1998, by Audible to Comdisco, Inc.
10.7 Warrant Agreement to purchase 12,188 shares of Series C preferred
stock at a price of $4.00 per share, dated July 24, 1997, issued
by Audible to Comdisco, Inc.
10.8 Loan and Security Agreement dated April 6, 1998, by and between
Silicon Valley Bank, as lender, and Audible, as borrower, for a
revolving line of credit of up to $1,000,000
10.9 Warrant to Purchase Stock issued April 6, 1998, by Audible to
Silicon Valley Bank, entitling Silicon Valley Bank to purchase
5,000 shares of common stock at a price of $4.00 per share
10.10 Security and Loan Agreement dated November 20, 1996, between
Audible, as borrower, and Imperial Bank, as lender, for up to
$500,000
10.11 Warrant Agreement to purchase 12,500 shares of Series B preferred
stock at a price of $3.00 per share, dated November 20, 1996,
issued by Audible to Imperial Bank
10.12 Promissory Note dated March 28, 1997, from Donald Katz in favor of
Audible, in the principal amount of $100,000
10.12.1 Allonge to Note dated April 21, 1999 between Donald Katz and
Audible (relating to Exhibit 10.12.1)
<PAGE>
<TABLE>
<S> <C>
10.13 Security Agreement dated March 28, 1997, by and between Donald
Katz and Audible
10.14 Amended and Restated Registration Rights Agreement dated February
26, 1998, by and among Audible and certain stockholders named
therein
10.14.1 Amendment No. 1 to Amended and Restated Registration Rights
Agreement dated December 18, 1998 (relating to Exhibit 10.14)
10.14.2 Amendment No. 2 to Amended and Restated Registration Rights
Agreement dated June 17, 1999 (relating to Exhibit 10.14)
10.15 1999 Stock Incentive Plan
10.16 Form of Common Stock Warrants issued March 31, 1997 by Audible to
various investors in connection with the Series C preferred stock
financing
10.17 Form of Stock Restriction Agreement by and between Audible and the
Named Executive Officers made in connection with various purchases
and sales of shares of restricted common stock
10.18 Form of Promissory Note made by the Named Executive Officers in
favor of Audible in connection with various purchases and sales of
shares of restricted common stock
10.19 Office Lease dated June 20, 1997, by and between Audible, as
tenant, and Passaic Investment LLC, Sixty-Five Willowbrook
Investment LLC and Wayne Investment LLC, as tenants-in-common, as
landlord
10.20 Sublease Agreement dated July 19, 1996, by and between Audible, as
sublessee, and Painewebber Incorporated, as sublessor
10.21+* Agreement dated April 13, 1999 by and between Audible and Diamond
Multimedia Systems, Inc.
10.22 Common Stock Purchase Warrant, issued April 22, 1999, to Microsoft
Corporation
10.23 Employment Offer Letter from Audible to Guy Story dated June 10,
1996
10.24 Employment Offer Letter from Audible to Matthew Fine dated March
31, 1997
10.25 Employment Offer Letter from Audible to Brian Fielding dated April
25, 1997
10.26 Employment Offer Letter from Audible to Travis Millman dated
September 29, 1997
10.27 Employment Offer Letter from Audible to Foy Sperring dated April
23, 1998
10.28 Employment Offer Letter from Audible to Andrew Huffman dated
February 12, 1998
10.29 Employment Offer Letter from Audible to Andrew Kaplan dated May
25, 1999
10.30 Common Stock Purchase Warrant, W-1, issued June 17, 1999, to Robin
Williams
10.31 Common Stock Purchase Warrant, W-2, issued June 17, 1999, to Robin
Williams
11.1 Statement of computation of loss per share
23.1* Consent of KPMG LLP
23.2 Consent of Piper & Marbury L.L.P. (included as part of Exhibit 5.1
hereto)
24.1
Power of Attorney (included in signature pages)
27 Financial Data Schedule
- --------
+ Portions of this Exhibit were omitted and have been filed separately with
the Secretary of the Commission pursuant to the Registrant's Application
Requesting Confidential Treatment under Rule 406 of the Act.
* Filed herewith.
</TABLE>
<PAGE>
EXHIBIT 10.1
A G R E E M E N T
(As Amended)
This Agreement (this "Agreement") is entered into as of November 4, 1998,
(the "Effective Date"), as amended, April 22, 1999 and June 14, 1999, by and
between MICROSOFT CORPORATION, a Washington corporation with principal offices
at One Microsoft Way, Redmond, Washington 98052 (hereinafter "Microsoft"), and
AUDIBLE, INC., a Delaware corporation with principal offices at 65 Willowbrook
Boulevard, Wayne, New Jersey 07040 (hereinafter "Audible").
WHEREAS, Audible is the creator and provider of an Internet-based service
that permits customers to use a computer with an Internet browser to select and
download spoken word audio files consisting of licensed and original literary,
business, and entertainment works and other types of spoken word information in
a secure Audible-proprietary file format, via the World Wide Web (currently
using the URL "http://www.audible.com"), and to play back such Content using
Audible's proprietary software or transfer to other devices (such as the Audible
Mobile Player) for portable playback;
WHEREAS, Microsoft develops, markets and licenses computer software,
including operating systems software and applications;
WHEREAS, Audible and Microsoft both desire for Audible to undertake certain
development work with respect to Audible's proprietary software, pursuant to the
terms and conditions of this Agreement;
WHEREAS, Microsoft desires to license the versions of Audible's software
developed pursuant to this Agreement for inclusion in certain Microsoft
products, and Audible desires to license said software to Microsoft, pursuant to
the terms and conditions of this Agreement;
WHEREAS, Audible and Microsoft both desire that Microsoft shall become an
authorized distributor of said software pursuant to the terms and conditions of
this Agreement; and
WHEREAS, Audible and Microsoft desire to work together to integrate
Audible's Content portfolio and security technology to operate with hardware and
software designed by or for Microsoft for "electronic books" capable of visually
displaying text and simultaneously delivering an audio reading of the displayed
text.
NOW THEREFORE, in consideration of the premises stated above, the mutual
covenants of the parties and other good and valuable consideration the receipt
and sufficiency of which is hereby acknowledged, the parties agree as follows:
DEFINITIONS
-----------
For purposes of this Agreement, in addition to the capitalized terms
defined elsewhere herein, the following terms shall have the meanings described
below:
_______________
*** Confidential information has been omitted and has been filed separately with
the Securities and Exchange Commission.
<PAGE>
Affiliate means (a) an entity that controls, is controlled by, or is under
---------
common control with a party; or (b) an entity that shall purchase or succeed to
all or substantially all of the assets of that party. "Control" means
ownership, directly or indirectly, of more than fifty percent (50%) of the
outstanding shares or securities (representing the right to vote for the
election of directors or other managing authority), or if the entity does not
have outstanding shares or securities, as may be the case in a partnership,
joint venture or unincorporated association, "control" means more than fifty
percent (50%) of the ownership interest representing the right to make the
decisions for such corporation, company or other entity. A corporation, company
or other entity shall be deemed to be an Affiliate only so long as such control.
ASF means Microsoft's Active Streaming Format version 1.0.
---
Audible Software for Windows CE means the version of the Client Software to
-------------------------------
be developed by Audible under Section 1.2 of this Agreement to run on Windows CE
enabling playback of audio content, and which is capable of running as a
component of Windows CE for the Palm-size PC and Windows CE for the AutoPC. The
Audible Software for Windows CE shall include reasonable documentation for such
software, including complete source code and design documentation.
audible.com means the Internet-based service controlled or sponsored by
-----------
Audible which permits customers to use a computer with an Internet browser to
select, download and license copies of Content, for pay, in an Audible-
proprietary file format, via a World Wide Web site currently using the URL
"http://www.audible.com"
Audible Media Player Filter means a Direct Show filter to be developed by
---------------------------
Audible under Section 1.1 of this Agreement to enable the Windows Media Player
on Windows and current Windows NT platforms to access the Content. The Audible
Media Player Filter shall include reasonable documentation for such software,
including complete source code and design documentation.
Audible Mobile Players means the portable playback device available to End
----------------------
Users from Audible for the purpose of downloading Content and playing it under
certain terms and conditions promulgated by Audible.
AudibleReady means the "AudibleReady" mark adopted by Audible to signify
------------
that designated equipment and software may be used to access Audible's Content,
which designated equipment and software must meet the standards promulgated by
Audible.
Windows CE for the AutoPC means the version of Windows CE, including the
-------------------------
user interface and associated applications, developed by Microsoft for a
computing device designed for use specifically in vehicles such as automobiles.
Client Software means Audible's proprietary software that is used as of the
---------------
Effective Date to download and play back the Content.
_____________
***Confidential information has been omitted and has been filed separately with
the Securities and Exchange Commission.
-2-
<PAGE>
CODEC means the software implementation of a compressor/decompressor
-----
algorithm, which enables computing devices to play audio stored in a compatible
compression format.
Confidential Information shall have the meaning set forth in the Non-
------------------------
Disclosure Agreement referenced in Section 15.1.
Content means Spoken Word Audio files consisting of licensed and original
-------
literary, business, and entertainment works and other types of spoken word
information which Audible has the right to distribute via the World Wide Web to
be accessed by computing devices.
Content Payments means (a) payments made by Audible to third parties for
----------------
the use or licensing or other distribution rights for specific Content items
whether (i) calculated on the basis of usage of the specific Content items, or
(ii) on the basis of a flat fee, advance or other sum not derived from usage of
the Content, which shall be attributable to specific items within the Content on
an amortized basis over a reasonable period of time, and (b) costs incurred by
Audible in the creation of original Content directly or through its agents and
contractors.
Customized Software means the Audible Media Player Filter, the Audible
-------------------
Software for Windows CE, and any other software developed by Audible as a result
of or in connection with the Development Work.
Dedicated Reading Machines means a new class of hardware devices under
--------------------------
development by Microsoft and its development partners and by other third parties
that both (a) are designed and marketed to be used mainly for the purpose of
both reading text from and listening to spoken word audio and (b) are capable of
simultaneously displaying the text that corresponds with the audio that is
playing, provided that neither (i) personal computers (PCs), laptop computers
and general-purpose Windows CE based devices which are primarily designed for
other purposes, nor (ii) audio-only devices, such as the Audible Mobile Player,
shall qualify as Dedicated Reading Machines even if such devices satisfy the
requirements of (a) and (b) above.
Development Work means the work to be performed by Audible and its agents
----------------
under Section 1 of this Agreement.
End User means a current or prospective customer to whom Audible or its
--------
distributors offer to license Content for such customer's own use and not for
resale or redistribution.
First Option Payment means the sum of One Million Five Hundred Thousand
--------------------
Dollars to be paid by Microsoft to Audible under Section 7.1 of this Agreement.
Gross Content Revenue means the amount of actual gross cash receipts
---------------------
derived by Audible from the licensing of Content by Audible to End Users who
access the Content through a version of the Customized Software distributed
directly or indirectly by Microsoft.
Integrated E-book Title means a single file that contains both text and
-----------------------
audio renditions of the same work and is readable by a Dedicated Reading
Machine.
_____________
***Confidential information has been omitted and has been filed separately with
the Securities and Exchange Commission.
-3-
<PAGE>
Integration means the combination of a version of the Customized Software with
-----------
Microsoft Products for distribution by Microsoft as permitted under this
Agreement.
Intellectual Property means any copyrights, moral rights, maskworks, patents
---------------------
(including patent improvements), patent applications, patent rights, trade
secrets, trademarks, trade names, service marks or other intellectual property
rights under applicable law of any applicable country.
Manager shall mean someone in the management chain of the applicable party who
-------
is a senior executive in terms of responsibility, and who is familiar with the
administration of this Agreement.
Microsoft Products means computer hardware and/or software products developed,
------------------
licensed, and/or marketed by or for Microsoft.
Net Content Revenue means the Gross Content Revenues, less (a) any Content
-------------------
Payments, (b) Revenue Sharing Payments, (c) sales or use taxes, excise taxes,
value-added taxes, and duties, and (d) any payments made by Audible to Microsoft
for digital rights management, in each case attributable to the licensing of
Content by Audible to End Users who access the Content through a Microsoft-
distributed version of the Customized Software.
Windows NT Media Services means Microsoft's computer software currently titled
-------------------------
"Windows NT Media Services" and its successors, which enables computer servers
to distribute streaming audio and video.
NRE Expenditures means the costs incurred by Audible in connection with
----------------
Audible's development work pursuant to Sections 1.2, 1.3 and 1.4(a)(i) of this
Agreement which shall consist of (a) the time spent by individuals on behalf of
Audible in performing the work at a reasonable labor charge, including any
overtime compensation and including direct program management, (b) an allocation
for Audible's administrative expenses attributable to the implementation and
management of the work, fixed at [* * *]% of labor charges under subsection (a),
(c) the cost of calls, faxes, copying, media, meals and local transportation
outside of regular business hours, and other third party charges incurred by
Audible in relation to the work, (d) the cost of materials, equipment, supplies,
and licenses directly used in connection with the work, (e) reasonable travel
and living expenses of Audible's staff and agents when away from their normal
place of business to perform the work, and (f) other reasonable expenses
incurred by Audible directly to perform the work.
OEMs means Microsoft-approved original equipment manufacturers of computing
----
equipment distributed with Microsoft Products.
Windows CE for Palm-size PC means the version of Windows CE, including the
-------------- ------------
user interface and associated applications, developed by Microsoft for a palm
size computing device.
Plus! means Microsoft's collection of add-on software applications for
-----
Microsoft's Windows 98 operating system and/or Microsoft's Windows NT 5.x
operating system.
_____________
***Confidential information has been omitted and has been filed separately with
the Securities and Exchange Commission.
-4-
<PAGE>
Revenue Sharing Payments means payments (other than Content Payments)
------------------------
made by Audible to third parties with respect to obtaining distribution rights,
OEM rights, promotion, and licensing of Client Software and Content in
conjunction with Microsoft Products.
Sample Windows Media Content means five sample titles or portions of
----------------------------
titles of non-secured promotional Content of Audible's choice in the ASF format
compatible with Windows NT Media Services to be provided by Audible on
audible.com for access and use by End Users.
Secure or secured means encrypted or protected by any other method
-----------------
designed to prevent unauthorized use.
Spoken Word Audio means recorded or broadcast spoken word audio content for
-----------------
sale in the form of audio book distribution, text based audio programming, time
shifted conference proceedings, soundtracks from television broadcasts, audio
business programming, and/or time shifted radio distribution.
SiteBuilder Network means Microsoft's web-based information service to
-------------------
assist web developers located at the URL www.microsoft.com/sitebuilder.
Term means an initial period of five years from the Effective Date and any
----
renewals and extensions of this Agreement.
Update shall mean a significant error correction, maintenance release,
------
major upgrade, improvement, extension and successor or replacement version of a
computer software product. Updates shall be in source code and object code form.
Windows 9x means Microsoft Windows 95 and 98 operating systems.
----------
Windows CE means the 32 bit operating system and successor versions,
----------
designed for use with embedded, portable and mobile computing devices and
designated by Microsoft as the Windows CE operating system.
Windows Media Player means Microsoft's software for the playback of
--------------------
streaming media on Windows 9x and Windows NT-based computers.
Windows NT means Microsoft's Windows NT operating systems for workstations.
----------
1. INTEGRATION OF PRODUCTS - AUDIBLE'S ROLE
----------------------------------------
1.1 The Media Player. Audible, with the assistance and development tools
----------------
from Microsoft described in Article 2 below, shall develop the Audible Media
Player Filter. As part of that effort, Audible shall:
a. develop the Audible Media Player Filter in accordance with written
specifications mutually agreed to by both parties and consistent with
Windows Media Player APIs to download and securely play back Audible
Content on Windows and Windows NT desktops; and
_____________
***Confidential information has been omitted and has been filed separately with
the Securities and Exchange Commission.
-5-
<PAGE>
b. create an HTML-based web page that will, when accessed by a user
of Windows Media Player dynamically assemble an application from Microsoft-
provided components and other software components, which application, when
combined with the Audible Media Player Filter and other required user
interface elements, facilitates Windows Media Player-based playback of
Content. Audible shall use and make secure one or more Microsoft-provided
CODECs, as necessary to decode the Audible Content using the Windows Media
Player through the Web page described in the preceding sentence.
1.2. The Windows CE Platform. Audible, with the assistance and
-----------------------
development tools from Microsoft described in Article 2 below, shall develop the
Audible Software for Windows CE in accordance with written specifications
mutually agreed to by both parties. The Audible Software for Windows CE shall
initially be designed for Windows CE for the Palm-size PC and Windows CE for the
AutoPC. Other versions of Windows CE may be added to this Development Work as
determined by mutual written agreement of Microsoft and Audible, including
agreement regarding any compensation to be paid to Audible for its additional
development effort.
1.3. Synchronize Sound With Text. Audible shall exercise reasonable
---------------------------
efforts, jointly with Microsoft, to evaluate and implement the use of the ASF
file format, or such other formats as agreed to by the parties, to synchronize
sound content with text for use in then-current versions of Windows 9x, Windows
NT and Windows CE. Prior to commencement of Development Work under this Section
1.4, the parties shall agree to a reasonable project statement that will guide
the direction and scope of the efforts. The parties expect that this project
will result in a design document, a specification, and finally an implementation
of the specification, all of which shall be owned by Microsoft (except that any
Intellectual Property of Audible, preexisting as of the commencement of
Development Work under Section 1.3 or created by Audible outside of any
development work for Microsoft, applied in the performance of the work shall
continue to be the property of Audible for all purposes and shall only be deemed
licensed to Microsoft for the purposes of using the work product created under
this Section).
1.4. The Electronic Book Platform. (a) Within one hundred eighty (180)
----------------------------
days of Microsoft requesting a port and providing file format specifications
Audible shall port Content from Audible's portfolio that Audible has rights to
port:
(i) to the ASF file format or, in the alternative, to any such
single file format that Microsoft reasonably determines to utilize for
Electronic Books content;
(ii) at Microsoft's request, to other file formats, provided
Microsoft and Audible shall first agree upon reasonable compensation and
terms for Audible performing such work; and
(iii) at Microsoft's request, to future versions of the ASF file
format released during the Term as mutually agreed to by the parties and,
if mutually agreed, subject to
_____________
***Confidential information has been omitted and has been filed separately with
the Securities and Exchange Commission.
-6-
<PAGE>
Microsoft's payment of reasonable amounts to Audible to reimburse the costs
of porting to such future versions;
In any case stated in (i), (ii) or (iii), as long as such file format reasonably
provides adequate security for Audible's Content and generally meets Audible's
business and technical needs, Audible shall port as much of its Content
portfolio as Microsoft requests and for which Microsoft agrees to pay NRE
Expenditures pursuant to Section 8.3. Audible shall offer such ported Content
to End Users on substantially similar terms and conditions, and through
substantially similar distribution channels (including without limitation
audible.com), as Audible offers its other Content to End Users. If Audible
determines in good faith that, given then-existing Audible resources, the
Microsoft requested porting cannot be finished in one hundred eighty (180)
days, then parties will discuss in good faith whether Microsoft will fund the
acquisition of additional resources as part of the NRE Expenditure
reimbursement, or whether the parties will extend the period for completing the
porting.
(b) Audible shall have no obligation to commence any Development Work
under this Section 1.4 until such time as Microsoft has selected the file format
under Section 1.4(a)(i) and provided Audible with specifications for the
selected file format.
1.5. API Specifications. The Development Work under Section 1.1 shall be
------------------
consistent with Microsoft's Windows Media Player API specification.
1.6 Audible Branding. Audible shall, in a manner to be mutually agreed by
----------------
the parties and in compliance with Section 5.3(d) below, include Audible
branding and promotional information in the Development Work under Sections 1.1
and 1.2.
1.7 Implementation Schedule. Time is of the essence in the performance of
-----------------------
both parties under this Agreement. Audible's timely progress in the Development
Work depends on the timely performance of Microsoft's obligations under this
Agreement.
1.8 Media Player Timing. Audible shall release to the public from
-------------------
audible.com the Audible Media Player Filter for Windows 98 and Windows NT 4.0,
as set forth in this Agreement, no later than the last to occur of (a) [* * *]
days after Audible releases similar software for any product or technology
competitive with the Windows Media Player, or (b) [* * *] days after the
commercial release of the Windows Media Player for Windows 98 and Windows NT
4.0.
1.9 Audible Software for Windows CE Timing. Audible shall provide to
--------------------------------------
Microsoft the Audible Software for Windows CE, as set forth in this Agreement,
on a time schedule indicated by Microsoft and agreed by Audible as necessary for
required testing and modification to be included in the commercial release of
Windows CE for Palm-sized PC device and the AutoPC.
1.10 Non-Exclusivity. Subject to Section 9 below, the Development Work
---------------
will be performed by Audible on a non-exclusive basis and shall not affect the
right of Audible to perform research and development efforts for others or on
its own behalf with respect to the same
_____________
***Confidential information has been omitted and has been filed separately with
the Securities and Exchange Commission.
-7-
<PAGE>
or similar technologies as are the subject of this Agreement, provided that
Audible shall take necessary steps to ensure that no Microsoft Intellectual
Property is used or made available in connection with such other research or
development efforts (unless such Intellectual Property is otherwise licensed for
the use). Except as stated in Sections 7.1, 9, and 16, Audible shall have the
right to use, reproduce, modify and distribute, in its discretion, derivatives
of the Development Work and to use, make, license and sell products based
thereon, during and after the Term of this Agreement. This shall include the
right to permit the installation of the Customized Software or any portion
thereof as an OEM and an after-market product for Windows-based equipment.
Except as otherwise expressly provided herein, this Agreement does not grant to
Microsoft any right or interest in and to any future developments by or on
behalf of Audible or any new products and services offered by Audible.
1.11 Representatives; Meeting. Audible hereby agrees to have at least one
------------------------
Manager designated as the primary contact person on its behalf for matters
relating to this Agreement and its implementation. Audible hereby further
agrees that, at least semi-annually, during the period commencing on the
Effective Date and ending on the termination or expiration of the Term, upon the
written notice by Microsoft, it will meet, at a mutually agreeable time and
location, to confidentially discuss the progress of work under this Agreement,
product trends, implementation issues, areas of collaboration, and other related
items. Audible will bear its own expenses regarding such meetings.
1.12 Sample Windows Media Content. Audible shall create the Sample
----------------------------
Windows Media Content in accordance with written technical specifications
approved in advance by Microsoft, and shall deliver the Sample Windows Media
Content as provided in Section 5.1.
2. INTEGRATION OF PRODUCTS - MICROSOFT'S ROLE
------------------------------------------
2.1. The Media Player. In connection with Audible's Development Work
----------------
under Section 1.1 above, Microsoft shall provide (as an express condition of
such Audible Development Work) [* * *], reasonable design and technical
assistance and development tools to Audible for use solely in connection with
the development of the Audible Media Player Filter for Windows 9x and Windows
NT.
2.2. The Windows CE Platform. In connection with Audible's Development
-----------------------
Work under Section 1.2 above, Microsoft shall provide (as an express condition
of such Audible Development Work) [* * *], reasonable design and technical
assistance and development tools to Audible for use solely in connection with
development of the Audible Software for Windows CE for Windows CE for Palm-size
PC and Windows CE for AutoPC and such other Windows CE-based platforms as
Microsoft and Audible may determine.
2.3. The Electronic Book Platform. In connection with Audible's
----------------------------
development obligations under Sections 1.3 and 1.4 above, Microsoft shall
provide (as an express condition of such Audible Development Work) [* * *],
reasonable design and technical assistance and development tools for use solely
in connection with synchronization of sound with text under Section 1.3 and
porting Content under Section 1.4. Without limitation to the foregoing,
_____________
***Confidential information has been omitted and has been filed separately with
the Securities and Exchange Commission.
-8-
<PAGE>
Microsoft shall, with Audible's assistance, specify the interfaces, APIs, and
other technical specifications necessary to synchronize Content with text
content.
2.4. Other Software. In connection with all Development Work, Microsoft
--------------
shall provide, [* * * ], the Microsoft retail packaged software product set
forth in Exhibit D.
2.5 Test Equipment. Microsoft shall provide to Audible [* * *], to the
--------------
extent available, production models of Auto PC and Palm-sized PC devices for use
to implement the Development Work.
2.6 Representatives; Meeting. Microsoft hereby agrees to have at least
------------------------
one Manager designated as the primary contact person on its behalf for matters
relating to this Agreement and its implementation. Microsoft hereby further
agrees that, at least semi-annually, during the period commencing on the
Effective Date and ending on the termination or expiration of the Term, upon the
written notice by Audible, it will meet, at a mutually agreeable time and
location, to confidentiality discuss the progress of work under this Agreement,
product trends, implementation issues, areas of collaboration, and other related
items. Microsoft party will bear its own expenses regarding such meetings.
2.7 Non-exclusive Relationship. Except as explicitly provided in
--------------------------
Sections 7.1, 9 and 16 (as applicable), nothing in this Agreement will be
construed as restricting Microsoft's or Audible's ability to acquire, license,
develop, manufacture or distribute for itself, or have others acquire, license,
develop, manufacture or distribute for it, similar technology performing the
same or similar functions as the technology contemplated by this Agreement, or
to market and distribute such similar technology in addition to the technology
contemplated by this Agreement.
3. TEST, ACCEPTANCE, UPDATES, AND MAINTENANCE
------------------------------------------
3.1 Testing. Microsoft shall evaluate the final version of each item of
-------
Customized Software and shall submit a written acceptance or rejection to
Audible within [* * *] days after Microsoft's receipt of each such item.
Acceptance shall be in writing, and Microsoft shall not unreasonably withhold or
delay its acceptance.
(a) If Microsoft identifies and documents for Audible errors in the
Development Work during the [* * *] period prior to acceptance, then
Audible shall acknowledge each severity one (critical) error within [* *
*], and correct any substantial or material error within the time specified
in Exhibit C.
(b) If Audible fails to make any error corrections discovered before
acceptance in the correction period specified herein, then Microsoft may,
at its option: (i) accept and retain the Development Work with rights as
set forth in Section 4.1; (ii) extend the correction period; or (iii) only
with respect to the initial delivery of each component of the Customized
Software, terminate this Agreement upon written notice to Audible, with
effects after termination as set forth in Section 14.
_____________
***Confidential information has been omitted and has been filed separately with
the Securities and Exchange Commission.
-9-
<PAGE>
Notwithstanding the above, the individual components of the Development
Work shall be deemed accepted upon commercial distribution of the component in
question, and upon completion of the [* * *] period stated above without any
report of errors. Errors shall mean failure of the deliverable to comply in a
substantial or material way with the agreed upon specifications.
3.2 Updates. During the term of this Agreement, whenever Audible creates
-------
an Update to the functionality of the Client Software that is related to the
Audible Software for Windows CE, Audible shall create a corresponding Update to
the Audible Software for Windows CE and deliver such Audible Software for
Windows CE Update to Microsoft no later than first commercial release of such
Client Software Update. In order to facilitate the simultaneous release of any
particular Client Software Update and the corresponding Audible Software for
Windows CE Update, Audible will cooperate with Microsoft in the development of
such Updates (including, by way of example, providing development assistance and
information on such Updates). Upon receipt of any Update, Microsoft shall
review and test the Update pursuant to Section 3.1. Upon Microsoft's acceptance
of any Update, such Update shall be deemed to be part of the Audible Software
for Windows CE for all purposes of this Agreement. If Microsoft secures
unrestricted source code rights by exercising its option under Section
4.1(d)(ii), and if Microsoft then creates a derivative work of the Audible
Software for Windows CE with substantially similar functionality but which is
not enabled to access Audible Content, or in which access to Audible Content is
afforded less than a parity position when compared to any other Spoken Word
Audio, then Audible shall have the right, upon written notice to Microsoft, to
discontinue its obligation to provide Updates to Microsoft under this Section
3.2.
3.3 Ongoing Assistance. Throughout the term, upon Microsoft's request,
------------------
Audible shall provide reasonable error correction and development assistance
with respect to the Customized Software and derivative works that permit
playback of Audible Content.
4. GRANT OF LICENSES
-----------------
4.1. Audible License Grant. (a) Subject to the terms and conditions of
---------------------
this Agreement and the payment of all required fees, Audible hereby grants to
Microsoft a worldwide, perpetual, irrevocable (except as stated in this
agreement), royalty-free, non-exclusive license as to the Customized Software,
to:
(i) use, reproduce, distribute, import, transmit, broadcast, publicly
perform and display, license, rent, lease and sell in object code form the
Customized Software, as a component of Microsoft Products or on a stand-
alone basis for use with such Microsoft Products;
(ii) use, make modify and create derivative works of the Audible Software
for Windows CE and the Audible Media Player Filter in source code form, and
to distribute such modifications and derivative works pursuant to
subsection (i); and
(iii) to grant to third parties any and all of the foregoing rights under
(i), including the right to license such rights to further third parties.
_____________
***Confidential information has been omitted and has been filed separately with
the Securities and Exchange Commission.
-10-
<PAGE>
(b) Notwithstanding the above, the license granted by Audible to Microsoft
under this Section 4.1 shall not include rights to components of the Client
Software which are licensed by third parties to Audible as follows: [* * *].
Audible hereby agrees that, under the direction of Microsoft and pursuant to
third-party license rights to be obtained by Microsoft for those third-party
components, Audible will provide to Microsoft assistance to integrate those
licensed components into the Customized Software as required. Audible shall
remove from each delivery of Customized Software all software code that Audible
excludes from its license pursuant to this Section 4.1(b).
(c) Source Code License. The license to use source code and related
-------------------
documentation (collectively, the "source code") for the Customized Software as
stated in Section 4.1(a)(i) above shall be subject to the following terms and
conditions. Such source code shall only be used under strict confidentiality
obligations for purposes of:
(i) maintaining, fixing and enhancing the Customized Software for
integration with Microsoft Products, while maintaining substantially similar
functionality of the Customized Software, and
(ii) meeting Microsoft's contractual obligations to third-party
licensees who have a right to request and receive the source code of Microsoft
Products, in which case such disclosure shall be pursuant to the same terms and
conditions applicable to disclosure of the source code of Microsoft's own
programs,
(d) Notwithstanding the foregoing, Microsoft may exercise the license
rights granted hereunder in source code for the Audible Software for Windows CE
free of the scope of use restrictions stated in Section 4.1(c)(i) and (ii), if
and only if: (i) Audible Software for Windows CE is included in a commercial
release of Windows CE for Palm-top devices or AutoPC as a standard module of
such release's functionality and direct successor versions commercially released
for a period of five (5) years, and for so long as Microsoft continues to
promote and enable access to Audible Content via such derivative works for
Audible Software for Windows CE in such versions of Windows CE, or (ii)
Microsoft pays Audible a mutually agreed, one-time license fee [* * *].
(e) Microsoft's obligation to "promote Audible Content" as used in Section
4(d)(i) shall, at a minimum, consist of the following:
(i) Should software that allows browsing of the Internet be included
in the operating system for Windows CE for Palm-top devices or AutoPC, and
should such browsing software have a "Favorites" folder which includes default
URLs for sites other than Microsoft sites, the URL for audible.com shall be
included as a default URL in such "Favorites" folder; and
(ii) The obligation regarding promotion and branding set forth in
Section 5.3.
_____________
***Confidential information has been omitted and has been filed separately with
the Securities and Exchange Commission.
-11-
<PAGE>
(f) Microsoft hereby agrees that the source code and any copies thereof,
as well as all modifications and improvements made to the source code by or for
Audible, are and remain the sole and exclusive property of Audible.
Notwithstanding the foregoing sentence, all modifications, enhancements, and
improvements made to the source code by or for Microsoft shall be the sole and
exclusive property of Microsoft. Microsoft agrees that the source code may not
be used to support a service bureau operation or for the benefit of any party
other than Microsoft or its sublicensees or assignees as allowed herein.
Furthermore, Microsoft agrees it shall only make reasonable number of copies of
the source code in accordance with Microsoft customary product development
practices. Microsoft agrees that it will not (and it will not allow others to)
alter or remove any copyright, trade secret, patent, proprietary and/or other
legal notices contained on or in copies of the source.
4.2 The license rights under Section 4.1 shall be perpetual pursuant to
the terms of this Agreement, provided that this Agreement is not terminated by
Microsoft pursuant to Section 3.1(b) prior to acceptance of any Customized
Software, or by Audible due to the default of Microsoft under the provisions of
this Agreement. (For avoidance of doubt, if Microsoft does not accept only one
of either the Audible Media Player Software or the Audible Software for Windows
CE, then Microsoft's license shall survive only with respect to the accepted
software.) If Microsoft terminates this Agreement pursuant to Section 3.1(b)
without accepting any Customized Software, the license shall terminate upon
termination of this Agreement. If Microsoft has not secured unrestricted source
code rights pursuant to Section 4.1(d)(ii), the license shall terminate with
respect to each Microsoft Product upon the release of a major new version of
said Microsoft Product (i.e., a product with a higher version number to the left
of the decimal point) at least six (6) months after termination of this
Agreement. However, if Microsoft has secured unrestricted source code rights
pursuant to Section 4.1(d)(ii), the license shall continue in perpetuity
pursuant to the terms of this Agreement (without prejudice to Audible's
remedies, other than termination, for Microsoft breach). In any event, existing
sublicenses granted by Microsoft as of the date of notice of termination shall
survive termination for the then-current term of such sublicenses.
4.3 Sublicenses. Sublicenses granted by Microsoft to licensees shall
-----------
comport with the terms of this Agreement and include reasonable terms and
conditions to protect Audible's Intellectual Property and Confidential
Information in the same manner as Microsoft protects its own Intellectual
Property and Confidential Information, and to limit liability to Audible in the
same manner as Microsoft limits its own liability vis a vis the third parties.
4.4 License to Microsoft Data and Software. When Microsoft provides
--------------------------------------
development tools or other software to Audible hereunder, the terms of
Microsoft's standard end user license agreement included therewith shall govern
Audible's use thereof to the extent not inconsistent with the terms hereof.
5. PROMOTION AND DISTRIBUTION OBLIGATIONS
--------------------------------------
5.1 Promotion by Audible. By not later than [* * *] days after beginning
--------------------
the Development Work contemplated in Section 1.4 above, Audible shall provide
the Sample
_____________
***Confidential information has been omitted and has been filed separately with
the Securities and Exchange Commission.
-12-
<PAGE>
Windows Media Content to End Users via a link to audible.com. Audible grants
Microsoft a nonexclusive, worldwide, perpetual, irrevocable license to use,
reproduce, distribute, broadcast, transmit, publicly perform and display,
license, rent, lease and sell the Sample Windows Media Content, and to grant
third parties any or all of the foregoing rights, including the right to grant
further sublicenses. Audible shall make such Sample Windows Media Content
available to users free of charge, subject to the terms and conditions
applicable to End Users' access to the Content and to Audible's right to cancel
or terminate access by an End User to the Content for failure to abide by such
terms and conditions. At the request of Microsoft, Audible shall include in
audible.com in connection with the Sample Windows Media Content a reasonable
amount of Microsoft branding and promotional information, as well as Audible
branding and promotional information.
5.2 Distribution By Microsoft. Microsoft intends to promote and
-------------------------
distribute the Audible Software for Windows CE or derivative works thereof as a
component of a future version of Windows CE for Palm-size PC and a future
version of Windows CE for AutoPC as well as other Windows CE based platforms to
be determined by Microsoft. Furthermore, as long as the Customized Software
meets Microsoft's reasonable quality criteria, Microsoft shall distribute during
the Term the Customized Software, as follows:
a. a version of the Customized Software will be included in a future
release of Plus!, subject to the following conditions: (i) Microsoft has
not finalized plan for future releases of Plus!, and Microsoft reserves the
right to discontinue the product and change its policies regarding the
distribution of third party software within Plus!; and (ii) if Microsoft
continues with future versions of Plus!, Microsoft shall distribute the
free version of the Customized Software in at least one version release of
Plus! (i.e. one version identified by a unique whole number and tenths
digit, such as 2.1 or 2.4). Audible shall make a unique, valuable
commercial promotional offer to Plus! users that will not be available with
any other version of the Customized Software;
b. Microsoft will evaluate other mechanisms to enhance and expand
the distribution of the Customized Software and will consider Audible's
suggestions and recommendations in that regard.
5.3 Promotion by Microsoft. (a) During the Term, Microsoft shall endorse
----------------------
Audible's client/server system, as integrated with Microsoft technologies
pursuant to this Agreement, as a preferred means of publishing and distributing
Spoken Word Audio for Dedicated Reading Machines. Such endorsements shall be
made in press releases and in appropriate consumer messaging on Microsoft web
sites, including but not limited to the website located at the URL
http://www.microsoft.com. Microsoft intends to position audible.com as the
preferred method of distributing Spoken Word Audio content, available via an on-
line store for delivery via electronic transmission, for play back in a mobile
environment; provided, however, if Audible should not port its Content as set
forth in Section 1.4(a), then Microsoft is relieved of its obligation to so
position audible.com.
(b) Microsoft shall promote the Customized Software and the Audible
Content in a prominent location on the website located at the URL
http://www.microsoft.com. for a period of twelve (12) months after
_____________
***Confidential information has been omitted and has been filed separately with
the Securities and Exchange Commission.
-13-
<PAGE>
release to market of the Customized Software. Microsoft will also provide links
from such location to the Audible web site.
(c) Microsoft shall promote the Audible Media Player Filter and make it
available for download in the SiteBuilder Network, for a period of [* * *]
months after Audible's release to market of the Audible Media Player Filter.
(d) Microsoft will display the following Audible mark(s) in connection
with the distribution of the Customized Software, subject to Audible's
reasonable review of such use for trademark quality control purposes.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
PLAYER BRANDING MARK OR SUCCESSOR MARK UNLESS MS
------ -------- --------------------------------
REASONABLY SUSPECTS SUCCESSOR MARK
----------------------------------
INFRINGES A THIRD PARTY MARK
-----------------------------------
- --------------------------------------------------------------------------------------------------------------------
Audible Media Player Yes in User Interface Audible
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CE Client Yes in CE in User Interface: Yes for Audible
a period of one (1) year from its
initial release date if stand alone
application; in addition, and during
the term of this Agreement, Audible
shall be allowed to place an audio
message in the application that will
announce a brief branding message
(the text of which shall be mutually
agreed upon) upon the application's
launch
Not in User Interface, but Yes in
help section if a standard module of
the OS, and indicating, in a mutually AudibleReady
agreed fashion, Audible as the
default or preferred source for
Spoken Word Audio.
------------------------------------
In Dedicated Reading Machine: Not in AudibleReady
User
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
_____________
***Confidential information has been omitted and has been filed separately with
the Securities and Exchange Commission.
-14-
<PAGE>
<TABLE>
<S> <C> <C>
- --------------------------------------------------------------------------------------------------------------------
Interface, but yes in help
section
------------------------------------
If Microsoft exercises option to [* * None (except for appropriate
*] license under Section 4.1(d), no copyright notices where other
branding requirement in derivative such copyright notices are
works of the Audible Software for located)
Windows CE (except for appropriate
copyright notices where other such
copyright notices are located).
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
(e) In the event Microsoft establishes during the Term a technical
methodology for dynamic upgrades by which existing Windows CE-based hardware
product customers and future customers of Windows CE-based hardware products can
be distributed software in the form of upgrades, Microsoft shall promptly
evaluate the Customized Software for distribution through that mechanism to
customers of the versions of Windows CE in which Microsoft then incorporates the
Customized Software. Additionally, as determined by Microsoft in its sole
discretion, Microsoft may include the Audible Media Player Filter and/or the
Audible Software for Windows CE in any OEM marketing programs established by
Microsoft with respect to the technical methodology for dynamic upgrades.
5.4 Level of Efforts. Microsoft's marketing and promotional efforts in
----------------
regards to Audible shall be no less aggressive than Microsoft's efforts on
behalf of other entities situated similarly to Audible that provide software
included in Plus! and running on Windows CE.
5.5 Audio-Out Jack Specifications. As soon as reasonably possible after
-----------------------------
the Effective Date and during the Term, Microsoft will issue to OEMs the
specification for audio-out jacks for mobile playback of audio content as an
optional component in appropriate versions of Windows CE-based products that
make use of the Audible Software for Windows CE for playback of Spoken Word
Audio for which an audio subsystem and built-in speaker are required.
5.6 Promotional Materials. During the Term, each party hereby grants to
---------------------
the other the right to create its own promotional materials to be used in its
distribution and promotion of the Customized Software and audible.com. Once
approved, promotional materials may continue to be used until the party
indicates in writing that further use is disapproved, after a reasonable notice
period. All costs associated with the development, production and delivery of
such promotional materials are the responsibility of the party creating the
materials. In addition, each party grants to the other the right to use the
logos and trademarks of the other party which are listed in Exhibit A hereto,
pursuant to usage guidelines as may be provided from time to time, in
_____________
***Confidential information has been omitted and has been filed separately with
the Securities and Exchange Commission.
-15-
<PAGE>
promotional materials created by that party, for as long as this Agreement is in
force, subject to prior review and approval by the trademark owner for trademark
quality control purposes.
5.7 Distribution by Audible. During the term, Audible shall make the
-----------------------
Content available on audible.com such that End Users of the Customized Software
may access and use the Content, in accordance with the audible.com standard
terms and conditions.
6. CONTENT; AUDIBLE MOBILE PLAYERS
-------------------------------
6.1. Expansion Efforts. Audible shall exercise commercially reasonable
-----------------
efforts, to expand its Content in order to support Microsoft's efforts to
provide for a diverse and rich audio offering for its Electronic Books project.
Nothing herein shall be construed as an obligation on the part of Audible to
obtain rights to textual content. Microsoft shall advise and consult with
Audible concerning the acquisition of content that may be relevant to
Microsoft's Electronic Book efforts.
6.2 Purchase of Players. On the Effective Date, Microsoft shall purchase
-------------------
300 Audible Mobile Players at a [* * *], for a total purchase price of $50,000.
6.3 Content Hosting. At Microsoft's option, Audible shall, on financial
---------------
terms agreed to by the parties, produce and/or host Microsoft-specific audio
content on Audible's web site for secure, targeted distribution to the mobile
players described in Section 6.2 above for a fee to be negotiated. Any license
fees required to be paid to third-parties for content that Microsoft wishes to
include in its content package but for which Audible does not have a license,
shall be borne by Microsoft, provided that Audible has advised Microsoft of the
cost and terms for including such Content in advance. Audible shall inform
Microsoft whether Audible has already licensed each item of requested content.
At Microsoft's further option, Audible and Microsoft may negotiate volume
discounts on the licensing of Content for use by Microsoft employees.
6.4 Editorial Control. Audible reserves the right and discretion to
-----------------
determine the information to be available as part of the Content and the
inclusion or deletion of any item as part of Content.
7. ELECTRONIC BOOK LICENSE AND OPTION
----------------------------------
7.1. [ *** ]. In consideration for the payment by Microsoft of the First
-------
Option Payment, Audible grants Microsoft the [* * *] to distribute Client
Software or any other software or hardware permitting End Users to access and
use Content ("Access Technology"), for use in connection with Integrated E-book
Titles or with Dedicated Reading Machines for a period of [* * *] months
commencing on the Effective Date, insofar as Audible [* * *].
7.2 The Option. Audible hereby grants to Microsoft an option to extend
----------
the [* * *] license described in Section 7.1 above, for two further periods,
upon payment of the amounts stated below, as follows:
(a) Months [* * *] - $[* * *], payable no later than the end of month
[* * *];
_____________
***Confidential information has been omitted and has been filed separately with
the Securities and Exchange Commission.
-16-
<PAGE>
(b) Months [* * *] - $[* * *], payable no later than the end of month
[* * *].
7.3 [Intentionally omitted.]
7.4 Content for Electronic Books. Audible agrees to grant access through
----------------------------
its proprietary system to Content, in any format offered by Audible, to
Microsoft or distributors designated by Microsoft for integration into
Integrated E-book Titles at no more than [* * *]% of standard list price for
direct sale to End Users. Audible shall use its reasonable efforts to amend
existing contracts or execute new contracts to permit Audible to sublicense the
distribution of Content to Microsoft and its designated distributors as part of
Integrated E-book Titles.
7.5 Limitations. If Microsoft elects not to exercise any specific [* * *]
-----------
option referenced in Section 7.2 above, Microsoft's right to exercise any
subsequent option referred in Section 7.2 shall be waived. Notwithstanding
anything contained herein to the contrary, the rights and options granted
pursuant to this Section 7 shall be subject in all cases to such [ *** ]
restrictions as may be applicable to Audible's underlying rights to use the
Content.
8. FEES AND ROYALTIES
------------------
8.1 Content Sales Royalty. Audible will pay Microsoft a royalty on
---------------------
Content licensed and distributed by Audible to each End User that activates an
Audible account using a version of the Customized Software (or a derivative work
thereof) distributed directly or indirectly by Microsoft as follows:
(a) the greater of [* * *]% of Net Content Revenues or [* * *]% of
Gross Content Revenues for each customer account following its activation;
(b) the greater of [* * *]% of Net Content Revenues or [* * *]% of
Gross Content Revenues for each customer account following its activation
where the Customized Software is burned into ROM in devices running Windows
CE;
(c) except as otherwise stated in subparagraph (d) below, in the case
of other Content licensed to be used with a Dedicated Reading Machines
and/or Integrated E-book Titles, the royalty will be the greater of [* *
*]% of Net Content Revenues or [* * *]% of Gross Content Revenues for each
such customer account following its activation;
(d) for each period that Microsoft chooses to exercise its option to
renew [ *** ] for Dedicated Reading Machines and/or Integrated E-book
Titles pursuant to Section 7 above, royalty payment obligations by Audible
described in Section 8.1(c) above shall be increased as follows:
(i) in months [* * *], to the greater of [* * *]% of Net Content
Revenues or [* * *]% of Gross Content Revenues; and
_____________
***Confidential information has been omitted and has been filed separately with
the Securities and Exchange Commission.
-17-
<PAGE>
(ii) in months [* * *], to the greater of [* * *]% of Net Content
Revenues or [ *** ] of Gross Content Revenues.
8.2 Duration and Payment. In all cases, these royalties will be paid
--------------------
throughout the Term of the Agreement and cease upon the expiration or
termination of the Agreement. Payments of royalties owed by Audible to
Microsoft shall be made on a yearly basis within 30 days of each anniversary
date of the Effective Date, accompanied by documentation for the calculation of
the royalties due.
8.3 Development Payments. Microsoft shall pay Audible a one-time fee in
--------------------
the amount of $200,000 for the project identified in Section 1.2. Microsoft
acknowledges completion of this project and acceptance in February 1999.
Microsoft shall reimburse Audible the amount of its NRE Expenditures up to a sum
not to exceed $[* * *] for each of the projects identified in Section 1.3. Such
NRE funds shall be non-refundable. Audible shall present to Microsoft an
estimate of the expected NRE Expenditures at the commencement of each project
and shall invoice Microsoft for such sums as are actually incurred on a monthly
basis. If parties agree that Audible will do further development work to
improve the integration of the Client Software with Windows generally, or with
Windows CE-based platforms or successor products, including any platforms and
upgrades of such products, or in connection with other development efforts, then
the parties will negotiate in good faith to agree on the appropriate amount of
Microsoft's compensation to Audible for such work.
8.4 Audit Provisions. Audible shall keep records in accordance with
----------------
generally accepted accounting principles and in sufficient detail to permit a
review of the accuracy of royalty payments to Microsoft and cost reimbursements
claimed by Audible under this Agreement. Such records shall be kept for three
years following the payment date for royalties. Upon Microsoft's written
request for an audit, Audible shall permit independent auditors designated by
Microsoft, paid by Microsoft, and approved by Audible, to examine, during
ordinary business hours, records, and materials of Audible for the purpose of
determining royalties due Microsoft or costs requiring reimbursement by
Microsoft and in such a manner as not to interfere with normal business
activities. The auditor will sign a confidentiality agreement and will only
disclose to Microsoft any amounts overpaid or underpaid for the period examined.
Microsoft's request for an audit will be provided to Audible in writing and will
be made at least sixty (60) days prior to any audit. Such request will not
occur more than once each year. In the event an audit identifies an
underpayment of royalties by Audible, Audible shall pay an amount equal to the
sum of such underpayment, and shall reimburse Microsoft for all costs of the
audit (if the underpayment is more than 5% of amounts due for the period).
8.5 Taxes. All taxes, duties, fees and governmental charges of any kind
-----
(except United States or state taxes based on the net income of Audible) which
are levied, assessed or otherwise imposed by or under the authority of any
government or political subdivision on any royalties payable hereunder, or any
aspect of this Agreement, shall be borne by Microsoft and
_____________
***Confidential information has been omitted and has been filed separately with
the Securities and Exchange Commission.
-18-
<PAGE>
shall not be considered a part of, a deduction from, or an offset against
payments due to Audible hereunder.
8.6 No Set Off. Payments under this Agreement are not subject to set off
----------
except in the event of a good faith payment dispute.
9. NON-INTERFERENCE
----------------
Audible shall not enter into any other agreement that would preclude
integration during the Term of any Audible audio technologies or Content with
Dedicated Reading Machines, Windows Media Player, and/or versions of Windows CE.
Nothing herein, except for [ *** ], shall be deemed a warranty that all Content
is available for use via Microsoft Products based on Windows 95 and 98 and
Windows NT. Audible reserves the right to exclude Content for which Audible may
not possess the required licensed rights, and to acquire individual items of
Content, if it is beneficial to Audible's business in its reasonable opinion,
which may not permit distribution of such Content via all or some Microsoft
Products.
10. INTELLECTUAL PROPERTY RIGHTS
----------------------------
10.1. Audible Property. Notwithstanding any provision of this Agreement
----------------
to the contrary, Microsoft hereby acknowledges and agrees that, as between
Audible and Microsoft, and for all purposes under the laws of all countries,
including Section 117 of the United States Copyright Act, as amended, Audible
owns, will own, and at all times shall continue to own, any and all Intellectual
Property in and to Client Software, audible.com, Content licenses, all material
it creates or provides as part of the Development Work, and all related
documentation and information provided to Microsoft, including without
limitation any updates, upgrades, patches, or other functionality of any
description arising from any of them, and all pre-existing Audible algorithms,
security data, software, and Audible hardware (the "Audible Intellectual
Property").
10.2 Microsoft Property. Notwithstanding any provision of this Agreement
------------------
to the contrary, Audible hereby acknowledges and agrees that, as between Audible
and Microsoft, and for all purposes under the laws of all countries, including
Section 117 of the United States Copyright Act, as amended, Microsoft owns, will
own, and at all times shall continue to own, any and all Intellectual Property
in and to Microsoft Products, Microsoft's Electronic Books development, the
results of the joint project under Section 1.3 hereof, and the Audible Media
Player Filter components contributed by Microsoft, and all related documentation
and information provided to Audible, including without limitation any updates,
upgrades, patches, or other functionality of any description arising from any of
them, and all pre-existing Microsoft algorithms, security data, software, and
Microsoft hardware (the "Microsoft Intellectual Property").
10.3 Notices on Copies. (a) Microsoft shall place notice substantially
-----------------
similar to the following on all tangible media containing copies of any
Customized Software:
(C) 199x by Microsoft Corporation and its suppliers. All rights
reserved..
-19-
<PAGE>
(b) Microsoft shall place the following notice in all distributed copies
of the Customized Software:
Copyright (c) 1998 by
Audible, Inc.
All Rights Reserved
10.4 Trademarks. Microsoft hereby acknowledges that Audible claims
----------
"Audible", "audible.com", "AudibleReady" and all other variations of "Audible"
used by Audible in connection with its products and services as trademarks
belonging to Audible. Audible hereby acknowledges that Microsoft claims the
marks listed as Microsoft trademarks in Exhibit A as trademarks belonging to
Microsoft. The parties hereby agree that the use by it of any trademark of the
other pursuant to rights granted under this Agreement shall not create any
right, title or interest, in or to the other's marks and that any and all
goodwill associated with the trademarks of the other party shall belong to that
party.
10.5 Proprietary Notices. Each party agrees that it will not (and it will
-------------------
not allow others to) alter or remove any copyright, trade secret, patent,
proprietary and/or other legal notices contained on or in copies of the
intellectual property and any other tangible materials provided by one party to
the other. The existence of any copyright notice on software or any written
works shall not be construed as an admission, or be deemed to create a
presumption, that publication of such materials has occurred.
10.6 No Other Rights. Except as expressly provided in this Agreement, no
---------------
license under any patents, copyrights, trademarks, trade secrets or any other
intellectual property rights, express or implied, are granted by either party
under this Agreement.
11. LIMITED WARRANTY
----------------
11.1 Warranty. Audible represents and warrants to Microsoft that, (i) it
--------
has all rights and authority necessary to perform under this Agreement; (ii) the
Client Software and Customized Software, and the Audible marks listed in Exhibit
A do not infringe any patent, copyright, trade secret, trademark, right of
privacy or publicity, or other intellectual property rights of any third party;
and (iii) it will perform all services under this Agreement in a workmanlike
manner, by qualified personnel, in accordance with high professional standards.
Microsoft represents and warrants to Audible that (i) it has all rights and
authority necessary to perform under this Agreement, (ii) the information,
software and tools provided to Audible under Section 2 do not infringe any
patent, copyright, trade secret, trademark or other intellectual property rights
of any third party.
11.2 Disclaimer. THE WARRANTIES CONTAINED IN SECTION 11.1 ABOVE IS A
----------
LIMITED WARRANTY AND ARE THE ONLY WARRANTIES MADE BY THE PARTIES. EACH PARTY
MAKES NO OTHER WARRANTY EXPRESS OR IMPLIED, AND THERE ARE EXPRESSLY EXCLUDED ALL
WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, TITLE, AND NON-
_____________
***Confidential information has been omitted and has been filed separately with
the Securities and Exchange Commission.
-20-
<PAGE>
INFRINGEMENT. NEITHER PARTY PROVIDES A WARRANTY THAT OPERATION OF SOFTWARE WILL
BE UNINTERRUPTED OR ERROR-FREE.
_____________
***Confidential information has been omitted and has been filed separately with
the Securities and Exchange Commission.
-21-
<PAGE>
12. INDEMNIFICATION
---------------
12.1 Defense. Each party (the "indemnifying party") shall, at its expense
-------
and the other party's ("other party") request, defend any claim or action
brought against the other party, and the other party's subsidiaries, affiliates,
directors, officers, and employees, to the extent it is based upon a claim that,
(i) if true, would constitute a breach of the indemnifying party's warranties
under Section 11.1; (ii) is based on any product or service offered by the
indemnifying party, except to the extent arising from the contributions of the
other party; or (iii) is based on damage to property or injury to person caused
by the employees, permittees, or agents of the other party. To the extent the
other party requests that the indemnifying party defend such claim, the party
requesting indemnification shall (i) provide the indemnifying party reasonably
prompt notice in writing of any such claim or action and permit the indemnifying
party, through counsel mutually acceptable to both parties, to answer and defend
such claim or action; and (ii) provide the indemnifying party information,
assistance and authority, at the indemnifying party's expense, to help the
indemnifying party to defend such claim or action. In such event, the other
party will have the right to employ separate counsel at its own cost and
participate in the defense of any claim or action which the indemnifying party
is defending. The indemnifying party may not settle any claim or action under
this Section 12 on the other party's behalf without first obtaining the written
consent of the other party, which permission will not be unreasonably withheld
or delayed.
12.2 Indemnity. Regardless of whether the other party requests the
---------
indemnifying party to defend, the indemnifying party will indemnify and hold the
other party harmless from and against any damages finally awarded against the
other party or agreed pursuant to a settlement, and any costs and fees
(including without limitation, attorneys' fees other than fees for separate
counsel under Section 12.1) reasonably incurred by the other party that are
attributable to such a claim or action; provided, however, that:
(i) the indemnifying party will not be responsible for any settlement
made by the other party without the indemnifying party's written
permission, which permission will not be unreasonably withheld or
delayed,
(ii) if the indemnifying party has replaced or corrected infringing
materials, pursuant to Section 12.4, its indemnity obligation will in
no event include the damages accruing as a result of the other
party's failure to adopt, use and distribute (on a prospective basis
only) such replacement or corrected version as soon as reasonably
possible
(iii) if the indemnifying party is defending a claim pursuant to the other
party's request, and if the other party unreasonably withholds
consent to a settlement proposed by the indemnifying party, the
maximum amount that the indemnifying party will be responsible for
shall be the amount payable under such settlement plus any costs and
fees that the other party would have incurred in connection with such
claim if it had been so settled.
_____________
***Confidential information has been omitted and has been filed separately with
the Securities and Exchange Commission.
-22-
<PAGE>
12.3 Publicity Regarding Settlement. In the event the other party and the
------------------- ----------
indemnifying party agree to settle a claim or action, each party agrees not to
publicize the settlement without first obtaining the written permission of the
other party to this Agreement, which permission will not be unreasonably
withheld.
12.4 Duty to Correct. Should Audible's Client Software or Customized
---------------
Software ("Audible Infringing Materials"), or Microsoft's information, software
and tools provided to Audible under Section 2 or software tools licensed under
Section 4.3 ("Microsoft Infringing Materials"), or any portion thereof, be held
to constitute an infringement in breach of the warranties under Section 11.1 and
use as contemplated by this Agreement be enjoined, the providing party shall
notify the other party and immediately, at the expense of the providing party:
(i) procure for the other party the right to continue use of such Infringing
Materials or portion thereof, as applicable, as licensed in this Agreement; or
(ii) replace or modify the Infringing Materials or portion thereof with a
version that is non-infringing, with equivalent functionality in all material
respects.
12.5 THIS SECTION STATES THE ENTIRE LIABILITY OF THE PARTIES TO EACH OTHER
WITH RESPECT TO THIRD PARTY CLAIMS FOR INFRINGEMENT OR MISAPPROPRIATION.
13. LIABILITY, DAMAGES AND DISCLAIMERS
----------------------------------
13.1 Limitation of Liability. Except in connection with payments due to
-----------------------
third party indemnification under this Agreement and except for claims relating
to the infringement or misappropriation of the intellectual property or
confidential information of a party, IN THE EVENT EITHER PARTY IS FOUND LIABLE
TO THE OTHER FOR ANY MATTER RELATING TO OR ARISING FROM THE TRANSACTIONS
CONTEMPLATED UNDER THIS AGREEMENT, THE TERMINATION OF THIS AGREEMENT, THE
OPERATION OR USE OF SOFTWARE, OR A PARTY'S SERVICES, THAT PARTY'S LIABILITY
THEREFOR SHALL NOT EXCEED THE GREATER OF ONE MILLION DOLLARS OR TWICE THE AMOUNT
PAID BY MICROSOFT HEREUNDER; PROVIDED THAT THIS LIMITATION DOES NOT APPLY TO
OBLIGATIONS ARISING UNDER SECTION 12 OR SECTION 15. THE LIMITATION IN THIS
SECTION IS A MATERIAL TERM IN THE PARTIES' AGREEMENT.
13.2 Limitation of Damages. Except in connection with payments due to
---------------------
third party indemnification under this Agreement and except for claims relating
to the infringement or misappropriation of the intellectual property or
disclosure of confidential information of a party, NEITHER PARTY SHALL BE LIABLE
TO THE OTHER FOR ANY: (A) SPECIAL, INDIRECT, INCIDENTAL, PUNITIVE, OR
CONSEQUENTIAL DAMAGES ARISING FROM OR RELATED TO THE OPERATION OR USE OF
DEVELOPMENT WORK OR SERVICES, INCLUDING SUCH DAMAGES, WITHOUT LIMITATION,
ARISING FROM LOSS OF OR DAMAGE TO DATA OR PROGRAMMING, LOSS OF REVENUE OR
PROFITS, FAILURE TO REALIZE SAVINGS OR OTHER BENEFITS, DAMAGE TO
_____________
***Confidential information has been omitted and has been filed separately with
the Securities and Exchange Commission.
-23-
<PAGE>
EQUIPMENT, AND CLAIMS BY ANY THIRD PERSON, EVEN IF THE PARTIES HAS BEEN ADVISED
OF THE POSSIBILITY OF SUCH DAMAGES; AND (B) CLAIMS MADE A SUBJECT OF A LEGAL
PROCEEDING MORE THAN 24 MONTHS AFTER ANY SUCH CAUSE OF ACTION FIRST AROSE;
PROVIDED THAT THESE LIMITATIONS DO NOT APPLY TO OBLIGATIONS ARISING UNDER
SECTION 12 OR SECTION 15..
13.3 Disclaimer. THE PARTIES HEREBY EXPRESSLY DISCLAIM ANY LIABILITY OR
----------
DAMAGES IN EXCESS OF THE LIMITS PROVIDED FOR ABOVE.
14. TERM
----
14.1. Term. The term of this Agreement shall commence on the Effective
----
Date and continue for an initial period of five years unless terminated earlier
pursuant to Section 14.2. hereof (the "Term"). This Agreement will be
automatically renewed for additional two year periods without notice unless
either party notifies the other party in writing at least 90 days prior to
expiration of the current term that it wishes not to renew this Agreement.
14.2. Termination. This Agreement shall terminate as provided below:
-----------
a. Audible may, at its option, terminate this Agreement upon thirty
(30) days' advance written notice to Microsoft in the event that Microsoft
shall: file for bankruptcy or suffer an involuntary bankruptcy that is not
dismissed within ninety (90) days; or cease to conduct operations in the
ordinary course of business; or fail to comply with any of its material
obligations under this Agreement, which failure to comply shall be
continuing for thirty (30) days following Microsoft's receipt of written
notice from Audible stating the nature of Microsoft's non-compliance;
b. Microsoft may, at its option, terminate this Agreement upon
thirty (30) days' advance written notice to Audible in the event that
Audible shall: file for bankruptcy or suffer an involuntary bankruptcy that
is not dismissed within ninety (90) days; or cease to conduct operations in
the ordinary course of business; or fail to comply with any of its
obligations under this Agreement, which failure to comply shall be
continuing for thirty (30) days following Audible's receipt of written
notice from Microsoft stating the nature of Audible's non-compliance.
14.3. Continuing Liability. The notification by either party of its
--------------------
intent to terminate this Agreement does not relieve either party of any
obligations which have accrued under the terms and conditions of this Agreement,
inclusive of those terms and conditions which extend beyond the date of
termination.
14.4 Effect of Termination. Upon termination of this Agreement for any
---------------------
reason, the rights and obligations hereunder (except obligations for payments)
shall terminate, except that the provisions relating to license rights (to the
extent indicated in Section 4.2 above and provided Microsoft has paid to Audible
all fees payable under this Agreement), proprietary rights, confidentiality, and
indemnification shall remain in effect. Upon a request by any party hereto,
confidential information of one party in the possession of the other shall be
returned except to the
_____________
***Confidential information has been omitted and has been filed separately with
the Securities and Exchange Commission.
-24-
<PAGE>
extent necessary for the receiving party to continue exercising its rights after
the termination or expiration of this Agreement or to protect its legal rights
hereunder. Termination or expiration shall not effect the confidential nature of
such information.
15. CONFIDENTIALITY
---------------
15.1 Obligations. The information and software (including CODECs, source
-----------
code and documentation therefor) exchanged by the parties hereunder, including
the terms and conditions hereof, shall be subject to the Non-Disclosure
Agreement ("NDA") between the parties dated June 5, 1998, which is attached
hereto as Exhibit B. For purposes of this Agreement such NDA shall be read as
(i) applying to information and software disclosed by the parties during the
Term in connection with the transactions contemplated herein, and (ii) with
respect to any particular information, having a term that survives as long as
the applicable information (including without limitation the source code of
either party) remains within the definition of Confidential Information.
15.2 Intellectual Property. Notwithstanding the above, the parties agree
---------------------
that whether or not intellectual property of the parties (including copyrighted
works) is disclosed in confidence, the intellectual property rights of the
parties shall remain in effect in accordance with the laws applicable to the
intellectual property in question. Nothing in this Section is intended to affect
the understandings of the parties elsewhere in this Agreement with respect to
ownership and use of intellectual property.
16. [* * *]
16.1 Microsoft. Microsoft hereby agrees that, during the Term, [* * *]
---------
16.2 Audible. For as long as Microsoft has made the payments under
-------
Sections 7.1 and 7.2 above, Audible hereby agrees that, during the Term, [* *
*].
16.3 General. Each party agrees that, in addition to other remedies
-------
provided at law or in equity, upon a breach by such party of the covenant
contained in this Section 16, the other party shall be entitled to an injunction
against the breaching party, and any third parties in concert with the breaching
party, prohibiting further breach of the covenant contained herein. The parties
agree that it is impossible to measure in money the damages that may accrue to
the nonbreaching party by reason of the breaching party's failure to obey the
covenant stated above. Therefore, in the event of a breach or a threatened
breach by a party of the covenant in this Section 16, the parties agree that
such covenant may be enforced by a court of competent jurisdiction by a decree
for specific performance, in addition to other remedies nonbreaching party may
have.
EACH PARTY HAS CONSULTED WITH COUNSEL, HAS READ THIS SECTION 16, AND AGREES
THAT THE CONSIDERATION PROVIDED HEREUNDER IS FAIR AND REASONABLE AND FURTHER
AGREES THAT [* * *] CONTEMPLATED IN THIS SECTION 16 ARE LIKEWISE FAIR AND
REASONABLE.
_____________
***Confidential information has been omitted and has been filed separately with
the Securities and Exchange Commission.
-25-
<PAGE>
17. GENERAL PROVISIONS
------------------
17.1 Entire Agreement. This Agreement and its schedules constitute the
----------------
entire agreement of the parties on the subject matter of this Agreement and
supersedes all prior agreements and understandings which may exist between the
parties, with respect to the subject matter hereof. All amendments to this
Agreement must be in writing and signed by both parties.
17.2 Assignment. Neither party may assign or transfer this Agreement or
----------
any rights granted to it hereunder without the prior written consent of the
other party, which consent shall not be unreasonably withheld or delayed. For
the purposes of this Agreement, a merger, consolidation, or other corporate
reorganization, or a transfer or sale of a controlling interest in a party's
stock (excluding such transactions with existing shareholders, transfers to
relatives by operation of law, or sale of securities in the public market, none
of which result in a new single entity or affiliated group of entities gaining
control of such party), or of all or substantially all of its assets
(collectively, a "Corporate Transfer") shall be deemed to be an assignment.
(a) In the event Microsoft does not consent to a Corporate Transfer
or consents to a Corporate Transfer with conditions that are not acceptable to
Audible, and if Audible wishes to pursue the Corporate Transfer, then Microsoft
may terminate this Agreement (except for the provisions that survive as stated
elsewhere in this Agreement) as its sole remedy and Audible may continue with
the proposed Corporate Transfer. Such termination shall not result in any
liability from one party to the other except for amounts that were due and
payable on the date of termination. Subject to the preceding two sentences, this
Agreement shall be binding upon and inure to the benefit of the parties hereto
and their successors and assigns.
(b) (i) If, at any time during which Microsoft holds [ *** ] rights
under Section 7, Microsoft shall have the right of first negotiation on any
Corporate Transfer as follows: If Audible receives an unsolicited proposal from
a third party (a "Solicitor") that Audible wishes to pursue (except during the
six (6) month period set forth in the sixth sentence below), or Audible
determines to solicit proposals or otherwise enter into discussions that would
result in a Corporate Transfer, Audible shall give written notice to Microsoft
of such occurrence (a "Corporate Transfer Notice"). Microsoft shall have seven
(7) days after receipt of the Corporate Transfer Notice to provide notice to
Audible in writing (a "Negotiation Notice") of its desire to negotiate in good
faith with Audible regarding a Corporate Transfer involving Microsoft. If
Microsoft does not deliver such Negotiation Notice within 7 days of receipt
receiving the Corporate Transfer Notice, Audible will be free to negotiate with
any third party or parties regarding a Corporate Transfer. If Microsoft
delivers a Negotiation Notice to Audible within 7 days of Microsoft receiving
the Corporate Transfer Notice, then (A) Audible will furnish to Microsoft such
relevant and pertinent information about Audible as may be appropriate to enable
Microsoft to engage in good faith negotiations, and (B) the parties will
negotiate exclusively in good faith regarding a Corporate Transfer until no
later than 21 days from the date Microsoft received the Corporate Transfer
Notice. If, after 21 days, the parties cannot come to terms regarding a
Corporate Transfer of Audible, Audible will be free to negotiate with any third
party or parties regarding a Corporate Transfer. If a definitive agreement for
a Corporate Transfer has not been entered into by Audible and any such third
party
_____________
***Confidential information has been omitted and has been filed separately with
the Securities and Exchange Commission.
-26-
<PAGE>
or parties within six (6) months from the date of a Negotiation Notice delivered
by Audible to Microsoft, then the right of first negotiation process described
above in this Section 17.2(b) will again apply as if no such original
Negotiation Notice had been delivered to Microsoft. No Corporate Transfer that
occurs in violation of the process outlined above shall be valid. If Audible
makes a Corporate Transfer to a third party purchaser in accordance with the
terms of this Section 17.2, this Section 17.2 shall not apply to that third
party purchaser, unless the purpose of the Corporate Transfer was to circumvent
or defeat this Section 17.2. Clause (A) of this subsection (i) will not require
Audible to disclose to Microsoft the name of the Solicitor, or the amount of any
proposal or offer from such Solicitor and the material terms thereof or such
other information as would be reasonably expected to allow Microsoft to derive
the identity of the Solicitor if such information is subject to a non-disclosure
agreement and such information has not been provided by Audible to any other
third party other than professional advisors of Audible.
(ii) During any period in which the provisions of Section
17.2(b)(i) are effective and any representative or affiliate of Microsoft serves
as a member of the Board of Directors of Audible (the "Director"), the Director
shall not participate in any discussions, deliberations or proceedings of the
Board of Directors with respect to its consideration of any Corporate Transfer.
17.3 Internal Dispute Resolution. In the event of any problem, claim, or
---------------------------
dispute arising from, out of, or based upon this Agreement, or the business
relationship between the parties, the aggrieved party shall promptly notify the
other party of the existence of the problem, claim, or dispute, and such other
party shall promptly undertake all reasonable efforts to resolve the matter,
including but not limited to, submitting such problem, claim or dispute for
resolution to a Manager of each party. The Managers shall make a good faith
effort to resolve the dispute as quickly as possible. In the event that the
Managers cannot resolve such dispute within twenty (20) days the matter may at
the option of either party, be submitted for resolution to each party's chief
executive with overall responsibility for the subject matter in dispute for a
period of twenty (20) days.
17.4 Governing Law. This Agreement shall be governed by and construed in
-------------
accordance with the law of the State of Washington applicable to contracts
between residents of the State of Washington, and entered into and performed
entirely in the State of Washington. Any action instituted by either party
arising out of this Agreement shall only be brought, tried and resolved in the
State of Washington.
17.5 Severability. If any provision of this Agreement or the application
------------
thereof to any person or circumstances shall, for any reason and to any extent,
be void or unenforceable, the application of the remainder of this Agreement to
such person or circumstances and the application of such provision to other
persons or circumstances shall be interpreted so as best to reasonably reflect
the intent of the parties hereto. The parties further agree to replace such
void or unenforceable provisions of this Agreement with valid and enforceable
provisions which will achieve, to the extent possible, the economic, business
and other purposes of the void or unenforceable provisions.
_____________
***Confidential information has been omitted and has been filed separately with
the Securities and Exchange Commission.
-27-
<PAGE>
17.6. Relationship. Nothing in this Agreement or in the activities
------------
contemplated by the parties pursuant to this Agreement shall be deemed to create
an agency, partnership, employment or joint venture relationship between the
parties. Each party shall be deemed to be acting solely on its own behalf and,
except as expressly stated, has no authority to pledge the credit of, or incur
obligations or perform any acts or make any statements on behalf of, the other
party. Neither arty shall represent to any person or permit any person to act
upon the belief that it has any such authority from the other party. Neither
party's officers or employees, agents or contractors shall be deemed officers,
employees, agents or contractors of the other party for any purpose.
17.7 Agreement Announcement. The parties agree that upon execution of
----------------------
this Agreement, both parties may announce and/or confirm the existence of this
Agreement to the business, trade and general press, or to any other person or
entity provided that the parties agree on the content, and date of the
announcement, and venue and vehicle for the announcement.
17.8. No Waiver. No waiver of any breach of the Agreement shall be deemed
---------
to be a waiver of any subsequent breach.
17.9 Force Majeure. Neither party will be liable for any failure or delay
--------------
in its performance under this Agreement due to causes, including, but not
limited to, and act of God, an act of civil or military authority, fire,
epidemic, flood, earthquake, riot, war, sabotage, labor shortage or dispute, and
governmental action, which are beyond its reasonable control; provided that the
delayed party: (a) gives the other party written notice of such cause promptly,
and in any event within 15 days of discovery thereof; and (b) uses its
reasonable efforts to correct such failure or delay in its performance.
17.10 Attorneys' Fees. A prevailing party in an action to enforce this
---------------
Agreement shall have the right to collect from the other its reasonable expenses
incurred in enforcing this Agreement including attorneys' fees.
17.11 Construction of Agreement. This Agreement has been negotiated by
-------------------------
the parties hereto, shall be deemed to have been drafted by both parties, and
the language hereof shall be construed neutrally and not for or against any
party. Where appropriate the singular shall include the plural. The headings
of this Agreement are only for convenience and not intended to convey any
substantive meaning. In the event of a conflict between the provisions of the
Agreement and the provisions of any exhibit, the provisions of the exhibits
shall control to the extent of the conflict but otherwise the two shall be read
together as much as possible.
17.12 Notices. All notices, requests or other communication required or
-------
permitted hereunder shall be given or made in writing and shall be (i) delivered
personally (including commercial carrier), (ii) sent by overnight mail service,
postage prepaid or (iii) sent by telecopier with confirmation of receipt and a
copy by regular mail, addressed to the person stated below, at the address noted
at the beginning of this Agreement, or at such other address as may from time to
time be designated by such party to the other in writing.
If to Audible:
_____________
***Confidential information has been omitted and has been filed separately with
the Securities and Exchange Commission.
-28-
<PAGE>
Audible, Inc.
65 Willowbrook Blvd.
Wayne, NJ 07470
Attn: Managing Director, Business/Legal Affairs
Phone: 973-890-4070
Fax: 973-890-2442
With a copy to:
PIPER & MARBURY L.L.P.
1200 19th Street, N.W.
Washington, D.C. 20036
Attention: Edwin M. Martin, Jr., Esq.
If to Microsoft:
Microsoft Corporation
One Microsoft Way
Redmond, WA 98052-6399
Attn.: Vice President, Technology Development
--------------------------------------
Phone: (425) 936-8180
--------------
Fax: (425) 936-7329
--------------
With a copy to:
Law & Corporate Affairs
Fax: (425) 936-7409
Any notice, request or other communication shall be deemed to have been
given and to be effective upon receipt or refusal by the addressee. Any party
may change its address for notices hereunder, effective upon giving of notice of
such change hereunder to the other party.
17.13 Other Remedies. Unless expressly stated to the contrary, subject to
--------------
the appropriate limitations of liability herein contained, any and all remedies
herein expressly conferred upon a party shall be deemed cumulative and not
exclusive of any other remedy conferred hereby or by law, and the exercise of
any one remedy shall not preclude the exercise of any other.
17.14 Counterparts. This Agreement may be executed in two or more
-------------
counterparts, each of which will be deemed an original and all of which together
will constitute one instrument.
17.15 Exports. Each party shall be responsible for its own compliance with
---------
all applicable export laws and regulations in its distribution of the Customized
Software and other Development Work. Upon request, each party shall reasonably
cooperate with the other party to assist with such compliance.
_____________
***Confidential information has been omitted and has been filed separately with
the Securities and Exchange Commission.
-29-
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
by the undersigned, with authority to do so and intending to be legally bound,
as of the date first above written.
WITNESS: AUDIBLE, INC.
/s/ Andrew J. Huffman
_________________________________
Name Name: Andrew J. Huffman
Title: President and CEO
WITNESS: MICROSOFT CORPORATION
/s/ Dick Brass
_________________________________
Name Name: Dick Brass
Title: Vice President
_____________
***Confidential information has been omitted and has been filed separately with
the Securities and Exchange Commission.
-30-
<PAGE>
EXHIBIT 10.2
DIGITAL RIGHTS MANAGEMENT AGREEMENT
This Digital Rights Management Agreement (the "Agreement") is entered into and
effective as of November 4, 1998 (the "Effective Date") by and between MICROSOFT
CORPORATION, a Washington corporation with principal offices at One Microsoft
Way, Redmond, WA 98052 ("Microsoft"), and AUDIBLE, INC., a Delaware corporation
with principal offices at 65 Willowbrook Boulevard, Wayne, New Jersey 07040
("Audible").
Recitals
i. Whereas, Microsoft develops, markets, and licenses computer software,
including operating system software and applications;
ii. Whereas, Audible is the creator and provider of an Internet-based
service that permits customers to use a computer with an Internet browser to
select and download spoken word audio files consisting of licensed and original
literary, business, and entertainment works and other types of spoken word
information in a secure Audible-proprietary file format, via the World Wide Web
(currently using the URL "http://www.audible.com"), and to play back such
Content using Audible's proprietary software or transfer to other devices (such
as the Audible Mobile Player) for portable playback;
iii. Whereas, Microsoft intends to develop a Digital Rights Management
technology, which controls the use of digitized electronic text, audio,
software, or other content so that licensors may limit end users to specifically
licensed uses ("DRM"); and
iv. Whereas, in addition to other business relationships between the
parties, Audible and Microsoft wish to cooperate in Microsoft's DRM project, on
the terms and conditions set forth herein.
Agreement
NOW THEREFORE, the parties agree as follows:
1. Definitions.
-----------
For purposes of this Agreement, in addition to the capitalized terms
defined elsewhere herein, the following terms shall have the meanings described
below:
1.1 "Audible.com" means the Internet-based service controlled or sponsored
by Audible which permits customers to use a computer with an Internet browser to
select, download and license copies of Content, for pay, in an Audible-
proprietary file format, via a World Wide Web site currently using the URL
"http://www.audible.com."
______________________________
*** Confidential information has been omitted and has been filed separately
with the Securities and Exchange Commission.
<PAGE>
1.2 "Audible Mobile Player" means the portable playback device available
to End-Users from Audible for the purpose of downloading Content and playing it
under certain terms and conditions promulgated by Audible.
1.3 "Audible Security Code" means version 1.0 of the computer software
created by or for Audible, in object and source code form, which permits End
Users to use Content they download from the Audible.com only in the manner for
which the Content is licensed to them. Audible Security Code is further
described in Exhibit A.
1.4 "Client Software" means Audible's proprietary software that is used as
of the Effective Date to download and play back the Content from Audible.com.
1.5 "Content" means Spoken Word Audio files consisting of licensed and
original literary, business, and entertainment works and other types of spoken
word information which Audible has the right to distribute via the World Wide
Web to be accessed by computing devices.
1.6 "Development Agreement" means that certain Agreement by and between
the parties dated of even date herewith, by which, among other provisions,
Audible will modify the Client Software and license it to Microsoft for
distribution.
1.7 "Documentation" means any and all documentation, user manuals, service
manuals, database definitions and structures (including identification of each
table and field), reference manuals, specifications, make files which specify
source code modules and forms, sample databases, installation software which
builds installation disk images, installation guides, graphics files and other
files, development plans and notes, materials associated with production of the
"on-line help" feature of the Audible Security Code, flow charts, diagrams,
drawings, maintenance notes, release notes, notes regarding errors, source code
notation, and other notes, memos, spreadsheets and other documentation made by
or for Audible and pertaining to all or any part of the object code or source
code of the Audible Security Code, whether printed on paper or stored in
electronic, optical or other machine readable form, in each case, as in
existence on the date of this Agreement.
1.8 "DRM API" means an application program interface for the DRM,
permitting application software programs to access DRM functionality.
1.9 "Electronic Book" means a single file that contains both text and
audio renditions of the same work (e.g., books, magazines and other such analog
printed content) and is readable by a Dedicated Reading Machine. As used
herein, "Dedicated Reading Machines" means a new class of hardware devices under
development by Microsoft and its development partners and by other third parties
that both (a) are designed and marketed to be used mainly for the purpose of
both reading text from and listening to spoken word audio and (b) are capable of
simultaneously displaying the text that corresponds with the audio that is
playing, provided that neither (i) personal computers (PCs), laptop computers
and general-purpose Windows CE based devices
______________
***Confidential Information has been omitted and has been filed separately with
the Securities and Exchange Commission.
2
<PAGE>
which are primarily designed for other purposes, nor (ii) audio-only devices,
such as the Audible Mobile Player, shall qualify as Dedicated Reading Machines
even if such devices satisfy the requirements of (a) and (b) above.
1.10 "Gross Transaction Revenue" means the actual gross amounts received by
Audible in its capacity as a Clearinghouse, as defined in Section 5.1 of this
Agreement, for confirming the licensing of DRM encoded content pursuant to
Section 5.2.
1.11 "Microsoft Products" means computer hardware and/or software products
developed, licensed, and/or marketed by or for Microsoft.
1.12 "Net Transaction Revenue" means the Gross Transaction Revenues, less
sales or use taxes, excise taxes, value-added taxes, and duties, in each case
attributable to the amounts received by Audible, in its capacity as a
Clearinghouse, as defined in Section 5.1 of this Agreement, for confirming the
licensing of DRM encoded content pursuant to Section 5.2, and less any payments
made by Audible to Microsoft as royalties for use of DRM in its capacity as a
Clearinghouse (other than those set forth in Section 5.2).
1.13 "NRE Expenditures" means the costs incurred by Audible in connection
with Audible's development work under Section 4 of this Agreement, which shall
consist of (a) the time spent by individuals on behalf of Audible in performing
the work at a reasonable labor charge, including any overtime compensation and
expenses and including direct program management, (b) an allocation for
Audible's administrative expenses attributable to the implementation and
management of the work, fixed at [ *** ] of labor charges under subsection (a),
(c) the cost of calls, faxes, copying, media, meals and local transportation
outside of regular business hours, and other third party charges incurred by
Audible in relation to the work, (d) the cost of materials, equipment, supplies,
and licenses used in connection with the work, (e) reasonable travel and living
expenses of Audible's staff and agents when away from their normal place of
business in connection with the work, and (f) other reasonable expenses incurred
by Audible in connection with the work.
1.14 "OEMs" means Microsoft-approved original equipment manufacturers of
computing equipment utilizing Microsoft operating systems, applications, or
other technology.
1.15 "Spoken Word Audio" means spoken word audio content for sale in the
------------------
form of audio book distribution, text based audio programming, time shifted
conference proceedings, soundtracks from television broadcasts, audio business
programming, and/or time shifted radio distribution.
2. Audible Security Code.
---------------------
2.1 Delivery. Within five (5) days after the Effective Date, Audible
--------
shall deliver the Audible Security Code and all Documentation to Microsoft at
the following address: Steve Stone, Microsoft Corporation, One Microsoft Way,
Redmond, Washington 98052. As part of the
______________
***Confidential Information has been omitted and has been filed separately with
the Securities and Exchange Commission.
3
<PAGE>
services to be provided under Section 3 of this Agreement, Audible will provide
one-day, on site consulting services in accordance with industry standards, at
Microsoft's Redmond, Washington campus to explain the deliverables hereunder to
Microsoft's designated technical personnel.
2.2 Acceptance. Microsoft shall evaluate the Audible Security Code within
----------
ten (10) days of receipt to confirm that the delivery is complete. If the
delivery of Audible Security Code and Documentation is not complete in its
contents, Audible agrees to promptly deliver to Microsoft any missing items.
2.3 License. (a) Upon receipt by Microsoft, Audible shall be deemed to
-------
grant to Microsoft a nonexclusive, perpetual, irrevocable (except as stated in
this Agreement), royalty-free, fully paid up, worldwide right and license to:
(i) Use, copy, edit, format, modify, translate and create
derivative works of the source and object code versions of the Audible Security
Code, and the Documentation internally by Microsoft solely for the purpose of
incorporating all or part of the Audible Security Code or derivative works
thereof in Microsoft Products which implement DRM;
(ii) Reproduce, license, rent, lease, transmit, sell or otherwise
distribute, and have reproduced, licensed, rented, leased, transmitted, sold or
otherwise distributed, to and by third parties, (i) source code and/or object
code versions of the Audible Security Code or derivative works thereof, solely
as incorporated in Microsoft Products which implement DRM, and (ii) the
Documentation and derivative works thereof for use in connection with Microsoft
Products which implement DRM; and
(iii) Subject to subsection 2.3(b) below, grant the rights set forth
in this Section 2.3(a)(ii) in the Audible Security Code and the Documentation to
third parties, including the right to license such rights to further third
parties.
(b) Source Code License. The license to use and permit others to
use source code and related documentation (collectively, the "source code") for
the Audible Security Code as stated in subsection 2.3(a) above shall be subject
to the following terms and conditions. Such source code shall only be used and
sublicensed under confidentiality and non-disclosure obligations. Microsoft
hereby agrees that the source code remains the sole and exclusive property of
Audible. Microsoft agrees that the source code may not be used for the benefit
of any party other than Microsoft or its sublicensees or assignees as allowed
herein, and must not be made available publicly or without the restrictions
stated in this Agreement as it may compromise the security of Audible's own
products and services. Microsoft agrees that it will not (and it will not allow
others to) alter or remove any copyright, trade secret, patent, proprietary
and/or other legal notices contained on or in copies of the source code.
Except as noted below, the foregoing license grants include a license under any
current and future patents owned or licensable by Audible to the extent
necessary: (i) to exercise any license right granted herein; and (ii) to
combine the Audible Security Code or derivative works thereof with any Microsoft
Product which implements DRM. Except as expressly licensed to Microsoft
______________
***Confidential Information has been omitted and has been filed separately with
the Securities and Exchange Commission.
4
<PAGE>
in this Agreement, Audible retains all right, title and interest in and to the
Audible Security Code and the Documentation. Subject to the license grant in
Section 2.3 and Audible's ownership of the underlying Audible Security Code and
Documentation, Microsoft shall own all right, title and interest in and to any
derivative works of the Audible Security Code and Documentation created by or
for Microsoft.
Notwithstanding the above, the license granted by Audible to Microsoft under
this subsection 2.3(b) shall not include [ *** ]. Audible hereby agrees that,
under the direction of Microsoft and pursuant to third-party license rights to
be obtained by Microsoft for those third-party components, Audible will provide
to Microsoft assistance to integrate those licensed components into the Audible
Security Code as required. Audible shall remove from each delivery of Audible
Security Code all software code that Audible excludes from its license pursuant
to this subsection 2.3(b).
(c) Notwithstanding any provision of this Agreement, it shall be
Microsoft's responsibility to determine whether Microsoft may export the Audible
Security Code and Documentation from the United States under applicable laws and
regulations and to obtain any necessary permits and licenses which may be
required for such purposes. Audible shall cooperate with Microsoft in any
Microsoft request for such licenses and clearances. Microsoft shall indemnify
and hold harmless Audible and its officers, directors, employees and agents for
any damages, penalties, losses and fines payable by Audible or any officer,
director, employee or agent as a result of Microsoft's exportation of the
Audible Security Code, Documentation or any part thereof in contravention of
law.
2.4 License Fee. In consideration of the license granted to Microsoft
-----------
under Section 2.3, Microsoft shall pay Audible a one-time license fee of Two
Hundred Fifty Thousand Dollars (US$250,000) within thirty (30) days of receipt
of the complete Audible Security Code and Documentation by Microsoft.
2.5 Proprietary Rights in Audible Security Code and Use Restrictions. (a)
----------------------------------------------------------------
The parties acknowledge that the source code for the Audible Security Code is
one of Audible's trade secrets. As between the parties, Audible is and shall
remain the exclusive owner of all proprietary rights embodied in the Audible
Security Code and Documentation, including all copyrights, patent rights, trade
secrets, know how, and the "Audible" trademark . Microsoft agrees that it shall
not distribute the source code for the Audible Security Code, in whole or in
part, to any third party, except as permitted under this Section 2, and only
under license and nondisclosure terms that comport with the terms of this
Agreement and are at least as protective as Microsoft employs for source code of
the Microsoft Products that include the Audible Source Code. Microsoft shall
exercise reasonable efforts to enforce the terms of those third party agreements
as they relate to the Audible Security Code.
(b) Microsoft agrees that it will not (and it will not allow others to)
alter or remove any copyright, trade secret, patent, proprietary and/or other
legal notices contained on or in copies of the Audible Security Code and
Documentation. The existence of any copyright notice on
______________
***Confidential Information has been omitted and has been filed separately with
the Securities and Exchange Commission.
5
<PAGE>
software or any written works shall not be construed as an admission, or be
deemed to create a presumption, that publication of such materials has occurred.
The source code of the Audible Security Code shall be treated indefinitely as
confidential under this Agreement, whether or not it is marked as confidential.
(c) Audible reserves all rights in the Audible Security Code and
Documentation not expressly granted herein. Audible shall have no obligation
under this Agreement to provide any hardware, software or services that are not
expressly provided for herein.
3. DRM Development Assistance. Upon Microsoft's request, Audible shall answer
--------------------------
any Microsoft questions about the Audible Security Code, provide Microsoft with
input, design advice, and technical assistance in the development of DRM, and
advise Microsoft of its reasonable business needs with respect to support of
Content under DRM. Audible shall provide such assistance [ *** ].
4. DRM Implementation.
------------------
4.1 Utilization of DRM. Audible shall implement DRM on a non-exclusive
------------------
basis in the operation of Audible.com as soon as commercially reasonable after
DRM is made available to Audible for the purpose of licensing Audible Content
ported to DRM pursuant to a development agreement between Audible and Microsoft
to Electronic Book customers. Microsoft shall provide the client software to be
used to enable the Audible Content to be accessed by Electronic Book customers.
4.2 Client Software. Microsoft and Audible will evaluate and implement if
---------------
the anticipated development may be completed within the NRE Expenditure limit of
[ *** ] in the future the inclusion of standard DRM APIs into future versions of
the Client Software on non-exclusive basis, i.e. there may be other Content
security and rights-management software included in such future versions of the
Client Software.
4.3 Beta Releases and SDKs. No later than Microsoft provides such
----------------------
materials to any third party with similar input into the development of DRM,
Microsoft shall provide to Audible Microsoft's standard beta program releases
for DRM APIs and Microsoft's externally distributed software development kits
(SDKs) for DRM APIs, if available, for purposes of the work described in section
4.1 above.
4.4 Payments. In connection with Audible's efforts to enable audible.com
--------
to permit access to Content by Electronic Book customers as stated in Section
4.1 above Microsoft hereby agrees to reimburse Audible the amount of its NRE
Expenditures in a total amount not to exceed [ *** ]. Such NRE funds shall be
non-refundable. Audible shall invoice Microsoft for such sums as are actually
incurred on a monthly basis along with supporting materials documenting the NRE
Expenditures.
5. DRM Clearinghouse.
-----------------
______________
***Confidential Information has been omitted and has been filed separately with
the Securities and Exchange Commission.
6
<PAGE>
5.1 Nonexclusive Clearinghouse. (a) Microsoft anticipates that, in
--------------------------
conjunction with the distribution of DRM, it will license other entities
("Clearinghouses") to confirm that text, audio, software, or other content
encoded under DRM is properly licensed for End User use. In that event,
Microsoft shall designate Audible as a nonexclusive Clearinghouse as soon as
such designations are available, on terms at least as favorable as any similarly
situated Clearinghouse, including a license to DRM software necessary for
operating as a Clearinghouse. For that purpose, Microsoft hereby agrees to
deliver to Audible [ *** ], for a period of two years from the commercial
release of DRM, any Microsoft Product for securing electronic audio content with
DRM. Microsoft shall provide a number of copies of such Microsoft Products
sufficient for the operation of Audible.com. Audible's use of each such
Microsoft Product shall be subject to the standard Microsoft end user license
agreement included therewith, provided that such licenses must be perpetual and
must be [ *** ] during the two-year period after commercial release of DRM.
Microsoft shall refer any content providers wishing to secure their Spoken Word
Audio content under DRM to Audible (on a nonexclusive basis). Microsoft
anticipates that it will provide Clearinghouses with a secure publishing toolkit
to redistribute to content providers, to assist in the encoding of content
compatible with DRM or will encourage content providers to license such secure
publishing toolkit from Audible. For a period of two (2) years from the
commercial release of DRM, Microsoft agrees that Audible will be a preferred
Clearinghouse and with regard to major financial terms be treated on a Most
Favored Nations (MFN) basis by Microsoft in the field of secure audio
distribution over the Internet.
(b) After the expiration of said two-year period, Audible shall have
the option to continue as a Clearinghouse, and to acquire DRM-related Microsoft
Products as described above, on terms and pricing no less favorable than the
terms and pricing made available by Microsoft to any third party receiving a DRM
license and Clearinghouse designation.
5.2 Transaction Fees. Audible reserves the right to charge a fee to
----------------
content providers or End Users each time Audible, acting as a Clearinghouse,
confirms the licensing of DRM encoded content. In such event, Audible shall
share any such transaction fee with Microsoft as follows. Microsoft shall not
receive transaction fees under this Agreement on any given Audible revenues to
the extent Audible pays Microsoft transaction fees thereon under the Development
Agreement.
5.2.1 in all cases not covered by Section 5.2.2, the greater of [ ***
] of Net Transaction Revenues or [ *** ] of Gross Transaction Revenues, unless
otherwise provided below;
5.2.2 for each year that Microsoft chooses to exercise its option for
exclusive access rights pursuant to Section 7 of the Development Agreement, the
greater of [ *** ] of Net Transaction Revenues or [ *** ] of Gross Transaction
Revenues.
5.3 Payments. Payments of royalties owed by Audible to Microsoft for a
--------
given calendar month shall be made within thirty (30) days from the end of the
month, accompanied by documentation indicating the calculation of the royalties
due.
______________
***Confidential Information has been omitted and has been filed separately with
the Securities and Exchange Commission.
7
<PAGE>
5.4 Audit Provisions. During the term of this Agreement, Audible agrees to
----------------
keep all usual and proper records and books of account and all usual and proper
entries relating to Gross Transaction Revenues and Net Transaction Revenues.
Microsoft may cause an audit to be made of the applicable records in order to
verify invoices or other statements by Audible, and prompt adjustment shall be
made to compensate for any errors or omissions disclosed by such audit. Any
such audit shall be conducted by an independent certified public accountant
selected by Microsoft (other than on a contingent-fee basis) and shall be
conducted during regular business hours at Audible's offices and in such a
manner as not to interfere with Audible's normal business activities. Any such
audit shall be paid for by Microsoft unless material discrepancies are
disclosed. "Material" shall mean a discrepancy amounting to at least five
percent (5%) of the amount that should have been reported. If material
discrepancies are disclosed, Audible agrees to pay Microsoft for the reasonable
costs associated with the audit. Audible shall pay interest of one percent (1%)
per month on all moneys due Microsoft to remedy material discrepancies more than
six (6) months old at time of audit.
5.5 No Set Off. The payments due under this Agreement are not subject to
----------
any right of set-off except in the event of a good faith payment dispute.
6. Nondisclosure; Public Statements.
--------------------------------
6.1 Nondisclosure.
-------------
(a) The information and software (including source code and documentation
therefor) exchanged by the parties hereunder, including the terms and conditions
hereof, shall be subject to the Non-Disclosure Agreement (NDA) between the
parties dated June 5, 1998, which is attached hereto as Exhibit B. For purposes
of this Agreement such NDA shall be read as (i) applying to information and
software disclosed by the parties during the Term in connection with the
transactions contemplated herein, and (ii) with respect to any particular
information, having a term that survives as long as the applicable information
(including without limitation the source code of either party) remains within
the definition of Confidential Information.
(b) Notwithstanding the above, the parties agree that whether or not
intellectual property of the parties (including copyrighted works) is disclosed
in confidence, the intellectual property rights of the parties shall remain in
effect in accordance with the laws applicable to the intellectual property in
question. Nothing in this Section is intended to affect the understandings of
the parties elsewhere in this Agreement with respect to ownership and use of
intellectual property.
6.2 Press. Microsoft and Audible agree that they will publicly announce
-----
the cooperation of the parties with respect to rights management technology and
technology sharing and that the initial press release or communication to the
press and/or public regarding this Agreement and the parties' relationship shall
be made only after prior consultation with the other party. Subsequent accurate
press releases and other communications to the press and/or public
______________
***Confidential Information has been omitted and has been filed separately with
the Securities and Exchange Commission.
8
<PAGE>
regarding the parties' relationship may be made by either party subject to the
confidentiality obligations set forth in Section 6.1.
7. Term and Termination.
--------------------
7.1 Term. The term of this Agreement shall commence on the Effective Date
----
and unless terminated earlier as provided herein, shall continue for five (5)
years after the Effective Date.
7.2 Termination. In the event either party shall materially fail to
-----------
perform or comply with this Agreement or any provision thereof, and fail to
remedy the default within thirty (30) days after the receipt of notice to that
effect, then the other party shall have the right, at its sole option and upon
written notice to the defaulting party, to terminate this Agreement upon written
notice. Any notice of default hereunder shall be prominently labeled "NOTICE OF
DEFAULT." The rights and remedies provided in this section shall not be
exclusive and are in addition to any other rights and remedies provided by law
or this Agreement.
7.3 Survival. The following provisions shall survive termination of this
--------
Agreement: 2.3, 2.5, 6.1, 7.3, 8, 9 and10. Section 2.3 shall not survive
termination if the termination is due to Microsoft's violation of the terms of
Sections 2.3, 2.5 or 6.1, for failure to accept the Audible Security Code, or
for failure to pay amounts due under this Agreement. Section 9 only survives
termination for a period of two years.
8. Warranties.
----------
8.1 Audible. Audible warrants and represents that:
-------
8.1.1 It has the full power to enter into this Agreement;
8.1.2 It has not previously and will not grant any rights to any
third party that are inconsistent with the rights granted to Microsoft herein;
and
8.1.3 Except as noted in subsection 2.3(b), the Audible Security Code
and the Documentation is original to Audible, the Audible Security Code does not
include any third party software or code, and Microsoft' exercise of rights
granted to Microsoft hereunder in the Audible Security Code and the
Documentation shall not infringe any copyright, trade secret, or, to the best of
Audible's knowledge, any United States patent, trademark, or any other
proprietary or personal right held by any third party (provided that Audible
does not make any representation or warranty with respect to the combination of
the Audible Security Code or Documentation with any other hardware, software or
services not provided by Audible).
8.2 Microsoft. Microsoft warrants and represents that:
---------
8.2.1 It has the full power to enter into this Agreement; and
______________
***Confidential Information has been omitted and has been filed separately with
the Securities and Exchange Commission.
9
<PAGE>
8.2.2 It has not previously and will not grant any rights to any
third party that are inconsistent with the rights granted to Audible herein.
8.3 DISCLAIMER. EXCEPT AS EXPRESSLY STATED IN THIS SECTION 8, AUDIBLE
----------
PROVIDES THE AUDIBLE SECURITY CODE TO MICROSOFT ON AN "AS IS" BASIS AND AUDIBLE
AND MICROSOFT DISCLAIM ALL WARRANTIES UNDER THE APPLICABLE LAWS OF ANY COUNTRY,
EXPRESS OR IMPLIED, REGARDING THE AUDIBLE SECURITY CODE, THE DOCUMENTATION, THE
DRM, AND THE ABILITY OF THE PARTIES TO DEVELOP ANY PRODUCTS OR SERVICES RELATING
TO DRM, INCLUDING ANY IMPLIED WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A
PARTICULAR PURPOSE OR TITLE OR WARRANTY OF NON-INFRINGEMENT OF ANY INTELLECTUAL
PROPERTY OR WARRANTY AGAINST COMPUTER VIRUSES. IT IS THE ULTIMATE
RESPONSIBILITY OF MICROSOFT TO DETERMINE THE SUITABILITY OF THE AUDIBLE SECURITY
CODE FOR ITS NEEDS. AUDIBLE DOES NOT WARRANT THAT OPERATION OF ANY PRODUCTS
DERIVED FROM THE AUDIBLE SECURITY CODE WILL BE UNINTERRUPTED OR ERROR-FREE.
9. Indemnity.
----------
9.1 Indemnification. Each party shall, at its expense and the other
---------------
party's request, defend any claim or action brought against the other party and
its subsidiaries, affiliates, directors, officers, employees, agents and
independent contractors, to the extent it is based upon any product or service
offered by the indemnifying party, including a claim for infringement of any
patent, copyright, trademark, trade secret or other proprietary or personal
right of a third party, except to the extent arising from the contributions of
the other party. The indemnifying party will indemnify and hold the indemnified
party harmless from and against any damages finally awarded against the
indemnified party or agreed pursuant to a settlement in accordance with the
requirements of this Section, and any costs and fees (including without
limitation, attorneys' fees) reasonably incurred by the indemnified party that
are attributable to such a claim. The indemnifying party will not be
responsible for any settlement made by the indemnified party without the
indemnifying party's written permission, which permission will not be
unreasonably withheld. To the extent the indemnified party requests that the
other party defend such claim, the indemnified party shall (i) provide the
indemnifying party reasonably prompt notice in writing of any such claim or
action and permit the indemnifying party, through counsel mutually acceptable to
both parties, to answer and defend such claim or action; and (ii) provide the
indemnifying party information, assistance and authority, at the indemnifying
party's expense, to help to defend such claim or action. The indemnified party
will have the right to employ separate counsel and participate in the defense of
any claim or action which the indemnifying party is defending. The indemnified
party may not settle any claim or action under this Section 9 on the other
party's behalf without first obtaining the written consent of the indemnifying
party, which permission will not be unreasonably withheld.
______________
***Confidential Information has been omitted and has been filed separately with
the Securities and Exchange Commission.
10
<PAGE>
9.2 Settlement. In the event Microsoft and Audible agree to settle a
----------
claim or action under Section 9.1, each party agrees not to publicize the
settlement without first obtaining the written permission of the other party to
this Agreement, which permission will not be unreasonably withheld.
9.3 Duty to Correct. Notwithstanding anything in this Section 9, should
---------------
the Audible Security Code or the Documentation ("Infringing Materials"), or any
portion thereof, be held to constitute an infringement and use as contemplated
by this Agreement be enjoined or be threatened to be enjoined, Audible shall
notify the other party and immediately, at Audible's expense (not to exceed in
any event $250,000), (i) procure for Microsoft the right to continue use of such
Infringing Materials or portion thereof, as applicable, as licensed in this
Agreement; or (ii) replace or modify the Infringing Materials or portion thereof
with a version that is non-infringing, provided that the replacement or modified
version is functionally substantially equivalent.
9.4 Exclusion. The provisions of this Section 9 shall not apply to any
---------
claim of patent infringement against Microsoft or related parties to the extent
based upon the combination of the Audible Security Code or Documentation, or any
portion thereof, with hardware, software or services not provided by Audible.
10. General.
--------
10.1 Governing Law; Venue; Attorneys Fees. This Agreement shall be
------------------------------------
construed and controlled by the laws of the State of Washington, and each party
further consents to jurisdiction by the state or federal courts sitting in the
State of Washington. Process may be served on either party by U.S. Mail,
postage prepaid, certified or registered, return receipt requested, or by such
other method as is authorized by law. If either Microsoft or Audible employs
attorneys to enforce any rights arising out of or relating to this Agreement,
the prevailing party shall be entitled to recover reasonable attorneys' fees and
costs, including expert witness fees.
10.2 Notices; Requests. All notices and requests in connection with this
-----------------
Agreement shall be deemed given as of the day they are (i) deposited in the U.S.
mails, postage prepaid, certified or registered, return receipt requested; or
(ii) sent by overnight courier, charges prepaid, with a confirming fax; and
addressed as follows:
Audible: Audible, Inc.
65 Willowbrook Blvd.
Third Floor
Wayne, New Jersey 07470
Attention: Managing Director, Business & Legal Affairs
Fax: 973 890-2442
------------
Phone: 973 890-4070 x225
-----------------
______________
***Confidential Information has been omitted and has been filed separately with
the Securities and Exchange Commission.
11
<PAGE>
with a cc to: Piper & Marbury, L.L.P.
1200 Nineteenth Street, N.W.
Washington, D.C. 20036-2430
Attention: Edwin M. Martin, Jr.
Phone: 202-861-3900
FAX: 202-223-2085
Microsoft: MICROSOFT CORPORATION
One Microsoft Way
Redmond, WA 98052-6399
Attention: ______________________
with a cc to: MICROSOFT CORPORATION
One Microsoft Way
Redmond, WA 98052-6399
Attention: Vice President, Technology Development
----------------------
Phone: (425) 936-8180
--------------
Fax: (425) 936-7329
--------------
Attention: Law & Corporate Affairs Department
Fax: U.S. Legal Group
(425) 936-7329
or to such other address as the party to receive the notice or request so
designates by written notice to the other.
10.3 Assignment. Audible may not assign this Agreement or any portion
----------
thereof, to any third party unless Microsoft expressly consents to such
assignment in writing. In the event Microsoft does not consent to such
assignment or consents to such assignment with conditions that are not
acceptable to Audible, if Audible wishes to pursue the assignment, then
Microsoft may terminate this Agreement (except for the provisions that survive
as stated in Section 7.3) as its sole remedy and Audible may continue with the
proposed assignment. Such termination shall not result in any liability from
one party to the other except for amounts that were due and payable on the date
of termination. This Agreement will inure to the benefit of and be binding upon
the parties, their successors, administrators, heirs, and permitted assigns.
10.4 Severability. In the event that any provision of this Agreement is
------------
found invalid or unenforceable pursuant to judicial decree or decision, the
remainder of this Agreement shall remain valid and enforceable according to its
terms. The parties intend that the provisions of this Agreement be enforced to
the fullest extent permitted by applicable law. Accordingly, the
______________
***Confidential Information has been omitted and has been filed separately with
the Securities and Exchange Commission.
12
<PAGE>
parties agree that if any provisions are deemed not enforceable, they shall be
deemed modified to the extent necessary to make them enforceable.
10.5 Entire Agreement; Modification; No Offer. The parties hereto agree
----------------------------------------
that this Agreement (and the Microsoft Non-Disclosure Agreement to the extent
incorporated herein) constitutes the entire agreement between the parties with
respect to the subject matter hereof and merges all prior and contemporaneous
communications. It shall not be modified except by a written agreement dated
subsequent hereto signed on behalf of Audible and Microsoft by their duly
authorized representatives. Neither this Agreement nor any written or oral
statements related hereto constitute an offer, and this Agreement shall not be
legally binding until executed by both parties hereto.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
as of the dates indicated below.
MICROSOFT CORPORATION AUDIBLE, INC.
/s/ Dick Brass /s/ Andrew J. Huffman
- -------------------------- -------------------------------------
By (sign) By (sign)
Dick Brass Andrew J. Huffman
- -------------------------- -------------------------------------
Name (Print) Name (Print)
Vice President President and CEO
- -------------------------- -------------------------------------
Title Title
11/04/98 11/04/98
- -------------------------- -------------------------------------
Date Date
______________
***Confidential Information has been omitted and has been filed separately with
the Securities and Exchange Commission.
13
<PAGE>
EXHIBIT 10.3
AGREEMENT
This Agreement is effective as of November 12, 1998 (the "Effective Date"),
between REALNETWORKS, INC., with an address at 1111 Third Avenue, Suite 2900,
Seattle, Washington 98101 ("RN"); and AUDIBLE INC., with an address at 65
Willowbrook Blvd., Wayne, NJ 07470 ("Audible"). In consideration for the
rights and licenses granted below, the parties hereby agree as follows:
WHEREAS, Audible is in the business of licensing, creating, delivering and
offering for playback through the desktop and mobile audio devices digital sound
files over the Internet and corporate intranets;
WHEREAS, RN is in the business of developing and distributing technology and
products to enable the real-time transmission and playback of digital data files
through a server-client system over the Internet and corporate intranets;
WHEREAS, Audible desires to develop certain of its products to be compatible and
interoperable with certain RN products in order to enable the delivery and
desktop playback of Audible-enabled digital sound files through RN's RealPlayer,
as further defined below; and
WHEREAS, RN desires to promote and distribute certain Audible Products, as
further defined below, and desires the RealPlayer G2 (and all future versions of
the RealPlayer which may be developed during the Term) to be a preferred desktop
player for Audible-enabled digital sound files.
NOW, THEREFORE, in consideration of the mutual promises and covenants set forth
herein, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties agree as follows:
1. Definitions.
-----------
1.1 "Active Merchandising" shall mean RN's marketing of Audible Content
Bundles to be sold with RealPlayer Plus, described more fully in Sections 4.2
and 8.
1.2 "Advance" means a non-refundable payment.
1.3 "Audible Content" means spoken word or musical content licensed by
Audible from third party licensors or produced by Audible, which content is
encoded into Audible's file format and is accessible for playback using the
then-current Audible decoder(s) during the Term.
1.4 "Audible Desktop Player" means the Audible software currently used to
play back Audible Content on personal computers (which do not include handheld
computers or other mobile devices not specifically deemed personal computers).
1.5 "Audible Documentation" means End User License Agreements,
instructions, users' guides, manuals, diagrams and other written material,
whether in printed or electronic form and intended for end users and which
describes the installation, functions, use and operation of the Audible
Products.
_________
***Confidential information has been omitted and has been filed separately with
the Securities and Exchange Commission.
1
<PAGE>
1.6 "Audible Plug-in" means the software developed by or on behalf of
Audible that when added to RealPlayer G2 (and to future versions of the
RealPlayer that may be developed during the Term) enables the desktop playback
of Audible Content.
1.7 "Audible Product(s)" means the Audible hardware player ("Audible
MobilePlayer") and Audible's client software ("Audible Client Software"), all as
of the date of execution of this Agreement and solely as they may be modified
during the Term and as further described on Exhibit A hereto, and related
Documentation.
1.8 "Audible Third Party Product" means mobile playback devices utilizing
proprietary functionality licensed by Audible to third parties.
1.9 [* * *].
1.10 "RealPlayer" means the client portion of RN's client-server
RealSystem designed primarily to be used for Internet or intranet-based delivery
of streaming audio, video and other media, and which enables the playback of RN-
formatted media files over the Internet or a corporate intranet on an end user's
personal computer.
1.11 "RN Codecs" means audio compression and decompression software
wholly-owned by RN. Specific RN Codecs are described more fully in attached
Exhibit G.
1.12 [* * *].
1.13 [* * *].
2. RN's Rights and Obligations.
---------------------------
2.1 License. Audible hereby grants RN a non-exclusive, non-transferable,
-------
worldwide license to market, sublicense for distribution and distribute Audible
Products on a stand-alone basis and bundled with other RN products, both in
physical formats and electronically from RN's website, and through RN's
distributors. RN's right to "sublicense for distribution" shall be governed by
the Price List set forth in Exhibit F and as it may be amended during the Term.
2.2 Sales Efforts. RN sale market, promote and sell the audible
-------------
MobilePlays into RN's currant and new Intranet customer accounts and to
consumers from RN's website and other marketing channels. RN will include
pertinent information about the Audible Products in all RN's promotional and
marketing materials targeted for Intranet customers.
2.3 Fair Dealing. In conducting all activities relating to the Audible
------------
Products hereunder, RN agrees to: (i) conduct business in a manner that reflects
favorably at all times on the Audible Products and Audible's good name, goodwill
and reputation; (ii) not employ deceptive, misleading or unethical practices
that are or might be detrimental to the Audible Products, including
disparagement of Audible or the Audible Products; (iii) not make any false or
misleading representations with regard to Audible or the Audible Products; (iv)
not publish or employ any misleading or deceptive advertising material; (v) not
make any representations, warranties or guaranties to anyone with respect to the
specifications, features or capabilities of the Audible Products that are
inconsistent with the literature distributed by Audible, including all
warranties and disclaimers contained in such literature; and (vi) not engage in
illegal or deceptive trade practices with respect to the Audible Products.
_________
***Confidential information has been omitted and has been filed separately with
the Securities and Exchange Commission.
2
<PAGE>
2.4 Mobile Content Site. RN shall maintain a "Mobile Content Site" as
-------------------
part of its Daily Briefing/Timecast sites, and/or successors thereto. RN shall
use its commercially reasonable efforts to retain at all times during the Term
the participation of at least ten Daily Briefing Content providers in the Term
the participation of at least ten Daily Briefing content providers in the Mobile
Content Site(s) [***]. RN acknowledges that the following current Daily Briefing
Content providers constitute Audible's first choices for participation in the
Mobile Content Site and RN shall use its commercially reasonable best efforts to
obtain their participation: [***]. The parties will cooperate to secure the
participation of additional content providers in the Mobile Content Site. In
addition, Audible may supply excerpts of Audible Content for distribution via
the Mobile Content Site. Such excerpts shall be chosen at Audible's discretion
and approved by RN, approval of which will not be unreasonably withheld. Such
excerpts may be updated from time to time upon mutual agreement.
2.5 Mobile Audio Logo. RN shall display a "mobile audio glyph" provided by
-----------------
Audible in accordance with Exhibit B (which may be updated from time to time)
which glyph will be associated with each mobile audio file made available from
RN's Daily Briefing/Timecast web sites.
2.6 Audible.com Link in "Sites". Upon the availability of the public Gold
----------------------------
version of the Audible Plug-in RN will feature Audible.com in the "Sites " pull-
down menu in the next immediate release of the RealPlayer G2 (and in the
comparable menu of future versions of the RealPlayer which may be developed
during the Term) releases and/or on its website(s). Such feature in "Sites" or
its successor shall include "pull-downs" to sub-categories within Audible.com.
2.7 RN Technical Support. RN will make commercially reasonable best
---------------------
efforts to provide technical support to Audible in support of Audible's
Product Development efforts as defined below in Section 3.1.
2.8 RN Codecs
---------
2.8.1 [* * *]
_________
***Confidential information has been omitted and has been filed separately with
the Securities and Exchange Commission.
3
<PAGE>
2.8.2 In consideration for RN's grant to Audible [* * *] Audible
shall pay RN a one-time royalty per Audible MobilePlayer and Audible Third Party
Product which contains any one or more such RN [* * *] actually used by end-
users (net of returns), at the rates set forth in Exhibit H. The royalty shall
be payable as of the "Royalty Commencement Date" as defined in Exhibit H, and
shall be paid in accordance with the terms of Exhibit H. This royalty payment
obligation, and the payment terms of Exhibit H, shall survive the termination of
this Agreement, and shall remain in full force and effect during the five year
period set forth in Section 2.8.1. End users who license, acquire or purchase
Audible Products, Audible Content or Audible Third Party Products containing any
RN Codec or [* * *] during the Term shall have the right to use the same in
perpetuity.
2.8.3 [* * *] Such bundle may, in Audible's discretion,
contain other Audible software.
2.9 Mobile RealAudio Download Functionality.
----------------------------------------
2.9.1 RN will make commercially reasonable efforts to ensure that its
encoding tools present the mobile download option, which may be enabled by end
users of said encoding tools, upon the earlier of the release of the Gold
version of its G2 encoding tools or [* * *] of execution of this Agreement.
2.9.2 RN shall develop a server plug in which will provide
"mobile download server functionality" for mobile Real Audio files ("Server
Plug-in"). RN shall include the Server Plug-in in all Versions of the Real
Server Gold releases immediately subsequent to the availability of the Gold
Version of the Server Plug-in. RN will use its best efforts to develop and make
available for distribution the Server Plug-in within [* * *] of the release of
the public Beta of the RealPlayer G2.
2.9.3 Audible shall develop a client plug-in (at Audible's discretion
part of the Audible Plug-in) to provide "mobile download client functionality"
for Mobile RealAudio files ("Client Plug-in"). The Client Plug-in will present
customers with an "easy-to-use" and seamless content download option. Audible
will use its best efforts to develop and make available for distribution the
Client Plug-in upon the release of the Gold version of its G2 encoding tools, [*
* *] of execution of this Agreement.
3. Audible's Rights and Obligations.
--------------------------------
3.1 Product Development. Audible will use its best efforts to create an
-------------------
Audible Plug-in for RealPlayer G2 [* * *] of execution of this Agreement,
assuming RN has provided commercially reasonable timely and effective support to
Audible in its efforts to develop and deploy the Audible Plug-in. The Audible
Plug-in shall allow the RealPlayer G2 to play back Audible Content. [* * *]. RN
will introduce Audible to outside contractors with whom RN has worked should
Audible desire to obtain their services in connection with the development of
the Audible Plug-in.
3.2 Beta Releases. So that RN will remain fully knowledgeable about the
-------------
Audible Products, Audible will provide RN with private beta releases of the
Audible Products as soon as such releases are available, and with reasonable
notice and access to planned product changes.
3.3 Order Fulfillment. All orders of Audible Products from RN customers
-----------------
will be fulfilled by Audible provided that Audible's standard costs of shipping
& handling will be collected by RN and promptly remitted to Audible. The
parties shall agree on ordering, fulfillment, and billing methods.
_________
***Confidential information has been omitted and has been filed separately with
the Securities and Exchange Commission.
4
<PAGE>
3.4 [* * *].
4. Audible Advances.
----------------
4.1 Total Advance. Audible will pay RN Advances in accordance with
-------------
Sections 4.2 through 4.6, below, totaling $250,000.
4.2 Content Sales Advance. Audible will pay a Content Sales Advance of
---------------------
$[* * *] against RN's revenue share for the joint sale of Audible Content
Bundles. Content Bundles shall consist of approximately [* * *] Audible Content
titles and shall be offered for sale by RN as an optional attachment to all
versions of RealPlayer Plus sales for a minimum of [* * *] days of Active
Merchandising. RN shall commence Active Merchandising promptly after release of
the Audible Plug-in for RealPlayer G2 upon written notice to Audible. All
Content Bundles shall be hosted and delivered from Audible servers in a fashion
that shall be completely transparent to the customer who will only see that the
Content Bundles are originating from the RN web site. RN shall be responsible
for all customer billing associated with the sale of Content Bundles.
By way of example, Content Bundles may be priced at $[* * *] or $[* *
*] and may consist of thematically linked Audible Content titles (e.g. "Comic
Genius", "Great Reads") or the customer may have the option to select a certain
number of Audible Content titles from a broad selection of Audible Content. As
part of RN's obligation to engage in such Active Merchandising, RN shall use
commercially reasonable best efforts to engage in a variety of marketing tests
to determine the most effective marketing program that will result in the
greatest number of sales of Content Bundles. By way of example, such tests
shall include placement of access to the Content Bundles in different areas of
the RealStore, [* * *], tests of advertising methods, co-development of
promotions, and other commercially reasonable efforts to develop the most
effective marketing and sales program. [* * *].
The payment of the Content Sales Advance shall be as follows:
4.2.1 Audible shall pay an Advance of $[* * *], due and payable [* *
*] days after the Effective Date;
4.2.2 Audible shall pay an Advance of $[* * *], due and payable [* *
*] days after commencement of Active Merchandising by RN;
4.2.3 Audible shall pay an Advance of $[* * *], due and payable [* *
*] days after commencement of Active Merchandising by RN.
4.3 Content Sales Revenue Share. The parties' respective revenue shares
---------------------------
from joint sales of Audible Content Bundles shall be as follows:
4.3.1 "Gross Revenue From Content Bundles" from such joint sales
shall mean any and all revenue generated by such sales;
4.3.2 The parties shall be reimbursed from Gross Revenue from
Content Bundles for any reasonable actual out-of-pocket third party obligations
directly attributable to such joint sales. The parties shall provide each other
with a written accounting of all such third party obligations on a monthly
_________
***Confidential information has been omitted and has been filed separately with
the Securities and Exchange Commission.
5
<PAGE>
basis, commencing on the date the Content Bundles are initially offered for sale
and continuing for as long as the Content Bundles are offered for sale;
4.3.3 Any third party obligations directly attributable to such
joint sales which cannot be reimbursed in a sales period because of insufficient
Gross Revenue From Content Bundles shall carry over to subsequent sales periods,
and shall be reimbursed from Gross Revenue From Content Bundles in subsequent
sales periods;
4.3.4 After payment of any such third-party obligations, Audible
shall be entitled to all revenues generated from the sale of Content Bundles
until Audible has fully recouped the Content Sales Advance as set forth in
Section 4.2 above. Immediately upon Audible's full recoupement, the amounts
remaining after such third-party reimbursements shall be [* * *] RN and Audible.
4.3.5 Audible shall provide RN with a detailed statement of account,
together with a check in the amount of any payment due hereunder, on a monthly
net 30 day basis commencing on the date the Content Bundles are initially
offered for sale.
4.4 Royalty Advance for Playback Devices. Audible will pay a Royalty
------------------------------------
Advance of $[* * *] applied to royalties owed by Audible for the first [* * *]
units of Audible-enabled mobile playback devices (referenced in paragraph 2.8.2
above), based upon the royalty rate of $[* * *] per unit. This Royalty Advance
shall be due and payable [* * *] days after the Effective Date [* * *]. The
royalty rates set forth in this section 4.4 are payable per-unit. Audible shall
pay one royalty per Audible-enabled playback device that accesses and plays
RealAudio files or Audible files encoded using the RN [* * *]. The royalty rates
and terms for additional units are set forth in Exhibit H.
4.5 [* * *].
4.5.1 [* * *].
4.5.2 [* * *].
4.5.3 [* * *].
4.5.4 [* * *].
4.6 Banner Advertising Advance. Audible will pay RN a Banner Advertising
--------------------------
Advance of $ [* * *], which RN shall apply, to advertising fees incurred by
Audible for banner advertising on RN web sites. This Banner Advertising Advance
shall be paid in the following manner: RN and Audible shall mutually agree upon
an advertising schedule (including number of impressions and locations of
advertisements) pursuant to which, for example, at the applicable rates,
Audible's fees shall be approximately $[* * *] per month for a [* * *] month
schedule. The applicable rates for such Audible advertising shall be at the most
favorable ratecard offered by RN to third parties for comparable advertising at
the time the schedule is agreed upon by Audible and RN. Advertising fees
incurred by Audible shall be invoiced and shall be payable according to RN's
standard policies. Subject to RN's commercially reasonable best efforts to
deliver on the mutually agreed-up advertising schedule, the full amount of this
$[* * *] Banner Advertising Advance shall be paid by Audible no later than [* *
*].
_________
***Confidential information has been omitted and has been filed separately with
the Securities and Exchange Commission.
6
<PAGE>
5 G2 Plug-In Release.
------------------
5.1 Plug-In Release. Audible shall make best efforts to release a plug-in
---------------
for the RealPlayer G2 enabling the playback of Audible Content, developed
pursuant to the Real Media Architecture Agreement entered into contemporaneously
with this Agreement. RN will make commercially reasonable efforts to provide
timely and effective support to Audible relating to the development and
deployment of this plug-in. Audible shall release this plug-in no later than [*
* *], and shall release a client plug-in enabling mobile RealAudio downloading
as soon as possible thereafter.
5.2 [* * *].
5.3 [* * *].
5.4 [* * *].
6. Support and Maintenance.
-----------------------
6.1 Customer Support. RN will provide first tier Support to its customers
----------------
who purchase less than 1,000 units of the Audible MobilePlayer. Audible shall
provide Support to customers who purchase 1,000 or more units and whom have
requested support directly from the manufacturer. Audible will, in turn,
support RN's customer support staff in a commercially reasonable manner. The
parties will agree on appropriate levels of Support for the Audible Products,
but at a minimum each party will provide Support at the same professional and
customer access levels as such party generally provides its customers for other
of its products. In addition, Audible will designate a salesperson to do one
demonstration of the Audible Products to RN's customers if the parties agree
that it is appropriate.
6.2 Training. As soon as possible after the Effective Date, at its own
--------
expense, Audible will exercise commercially reasonable best efforts to train
RN's customer support personnel to be able to provide Support for the Audible
Products. Such training shall occur at a mutually agreed upon location and
time. Audible will provide RN's customer support personnel with on-going access
to continuing training as reasonably mutually determined to be necessary to
allow RN to meet its Support requirements as set forth in this Agreement.
6.3 Product Marketing Materials. As of the Effective Date, Audible has
---------------------------
supplied RN with background material concerning the nature, operation and
customer benefits of the Audible Products, including but not limited to product
descriptions, target customer segments, ROI analysis for corporate users, and
descriptions of appropriate Audible Content. Within 30 days after the Effective
Date, RN will, at its cost, update web pages, price lists, sales plans and any
other materials/plans required to market and sell the Audible Products in a
professional manner. Audible shall provide RN with updates and additions to such
background material if, as and when available and will promptly reply to any
questions from RN about such background material. RN will make commercially
reasonable efforts to provide marketing and sales support for the Audible
Products in a manner similar to that provided for its own products.
7. [* * *] Development and Licensing Efforts.
---------------------------------
7.1 Audible Security Technology. Audible and RN may work together, if
---------------------------
the parties agree it is commercially reasonable to do so, to adapt the Audible
security technology into marketable server, tool and/or player products. At a
minimum, under the RMA Agreement (see Section 3.1), Audible shall have the right
to sell its RMA-based products incorporating Audible's security technology to
RMA customers, subject to the terms of the RMA Agreement. In addition, and if
RN and Audible agree that the Audible security technology is able to be extended
and enhanced, the parties shall negotiate in good faith a
_________
***Confidential information has been omitted and has been filed separately with
the Securities and Exchange Commission.
7
<PAGE>
mutually acceptable licensing agreement which allows RN to resell such
technology and include it in RN's product line.
7.2 Joint Licensing Efforts. During the Term, Audible and RN agree to make
-----------------------
good faith efforts to pursue joint agreements with hardware companies to license
Audible and RN's respective technologies. The parties are free, however,
separately license their respective technologies.
7.3 IMAS Pilot Program. The parties agree to make commercially reasonable
-------------------
best efforts to have in place at least [* * *] successful corporate reference
deployments (as reasonably determined by the parties in good faith) within [* *
*] days of execution of this Agreement as part of the Pilot Program designed to
illustrate the appeal of the Audible Products. Audible shall make up to a total
of [* * *] Audible MobilePlayers (inclusive of all [* * *] program participants)
available [* * *] or the program participants provided that such qualified
corporate customers are of a mutually agreed upon quality and prominence. RN
shall provide all such program participants with sufficient intranet server
software and [* * *] to participate in the program.
7.4 IMAS Commercial Rollout. [* * *]. Audible agrees to fully cooperate
-----------------------
with RN in support of such a roll-out.
7.5 Music Codec Collaboration. Audible and RN will make commercially
----------------------------
reasonable efforts to select appropriate codecs for music content, taking into
consideration issues including but not limited to performance and cost. If RN
can provide a music codec acceptable to Audible, and Audible desires to use such
codec, RN shall license Audible such codec under the terms and conditions of
Section 2.11 of this Agreement. If Audible uses a music codec other than one
provided by RN, Audible shall make commercially reasonable best efforts to
enable the Audible Plug-in to play streaming and downloaded music content via
the RealPlayer.
8. Marketing Activities. The parties agree to cooperate in good faith on
--------------------
mutually beneficial promotional and marketing activities, including but not
limited to those activities set forth below:
8.1 RN Marketing Programs. RN shall generate marketing programs from time
---------------------
to time which may include but will not necessarily be limited to direct mailing,
advertising, and limited-time promotional bundles. Audible will assist RN in
these marketing programs through mutually agreed to special hardware pricing,
content pricing, or other mutually agreed to considerations. In addition,
Audible will, at RN's reasonable request, will provide RN with marketing
collateral regarding the Audible Products, and assistance with sponsoring agreed
upon marketing events.
8.2 Promotion of Audible. RN shall make marketing and promotional
--------------------
information about the Audible Products and the Audible web site available from
various RN web sites within [* * *] of the Effective Date. Such websites shall
include Real.com, Daily Briefing.com and other similar RN web sites during the
term. Such marketing and promotional information shall include, at a minimum,
displayed web links to the Audible web site in commercially appropiate high
traffic areas.
8.3 [* * *].
8.4 Not for Resale Copies. Audible will provide RN, at no charge, a
---------------------
reasonable number of copies of the Audible Products for internal testing
purposes and for use in providing demonstrations to prospective customers.
8.5 Public Announcements. The parties agree to jointly implement
--------------------
appropriate public relations activities in support of the launch of the Audible
Products. The parties will cooperate on a press release and other activities
intended to generate press coverage for the activities contemplated by this
_________
***Confidential information has been omitted and has been filed separately with
the Securities and Exchange Commission.
8
<PAGE>
Agreement. Each party must obtain the prior written consent of the other party
before publishing or releasing any press release, advertising or other publicity
concerning this Agreement or the relationship. The parties shall not issue any
press release or other publicity concerning the nature of this Agreement until
the Audible plug-in for RealPlayer G2 is released.
8.6 Promotion of RN. Audible shall make sufficient marketing and
---------------
promotional information, subject to RN's approval, about RN and the RealPlayer,
including web links to Real.com, available from the Audible web site within 30
days of the release of the Audible Plug-in.
9. Use of Trademarks.
-----------------
9.1 RN Marks. Audible acknowledges that the marks of RN identified on
--------
Exhibit C and other marks used by RN in connection with the RN Products (the "RN
Marks") are trademarks of RN. RN hereby grants to Audible a non-exclusive, non-
transferable, limited license to use, and Audible agrees that it shall always
use, the RN Marks solely in connection with Audible's advertising, marketing and
distribution of the Audible MobilePlayer and Audible Products which incorporates
RN technology. Audible shall only use such trademarks in the form and manner set
forth in RN's Trademark Usage Guidelines, as set forth on Exhibit C, or as
otherwise prescribed by RN from time to time. Audible agrees to cooperate with
RN in facilitating RN's monitoring and control of the nature and quality of
products and services bearing the RN Marks, and to supply RN with specimens of
Audible's use of the RN Marks upon request. Audible understands and agrees that
the use of any RN Mark in connection with this Agreement shall not create any
right, title or interest, in or to the RN Marks and that all such use and
goodwill associated with the RN Marks will inure to the benefit of RN.
9.2 Audible Marks. RN acknowledges that the marks of Audible identified
-------------
on Exhibit E and other marks used by Audible in connection with the Audible
Products (the "Audible Marks") are trademarks of Audible. Audible hereby grants
to RN a non-exclusive, non-transferable, limited license to use, and RN agrees
that it shall always use, the Audible Marks solely in connection with RN's
advertising, marketing and distribution of the Audible Products. RN shall only
use such trademarks in the form and manner set forth in Audible's Trademark
Usage Guidelines, as set forth on Exhibit E, or as otherwise prescribed by
Audible from time to time. RN agrees to cooperate with Audible in facilitating
Audible's monitoring and control of the nature and quality of products and
services bearing the Audible Marks, and to supply Audible with specimens of RN's
use of the Audible Marks upon request. RN understands and agrees that the use
of any Audible Mark in connection with this Agreement shall not create any
right, title or interest, in or to the Audible Marks and that all such use and
goodwill associated with the Audible Marks will inure to the benefit of Audible.
9.3 Notices. Neither party shall remove or alter any trademark, service
-------
mark, trade name, copyright or other proprietary notices appearing on or in
copies of either party's products referred to herein or any documentation
associated therewith, and shall include the same notices in and on all copies of
any literature or materials made pursuant to this Agreement.
9.4 Except as necessary to comply with Section 9.3, above, no rights in
the trademarks, service marks, trade names, or other identifying names or
symbols of third parties are conferred by this Agreement, [* * *].
10. Limitations on Rights. Except as expressly provided herein, the parties
----------------------
shall not copy, modify, reproduce, display, decompile, reverse engineer,
localize, store, translate, sell, lease or otherwise transfer,
_________
***Confidential information has been omitted and has been filed separately with
the Securities and Exchange Commission.
9
<PAGE>
distribute or use any of the other party's Products or Documentation, in whole
or in part, without the other party's prior written consent. All rights not
specifically granted herein with respect to the RN Products are reserved to RN,
and with respect to the Audible Products are reserved to Audible. Each party
acknowledges that the other party's Products are being licensed, not sold to it,
and that any distribution or delivery of any Products to an End User will be by
license, which the End User will be required to accept prior to being able to
use the Product.
11. Compensation, Pricing and Payment.
---------------------------------
11.1 Audible MobilePlayer. Audible will provide the Audible MobilePlayer
--------------------
and associated Audible Client Software to RN according to the Price List
attached hereto as Exhibit F. The parties agree to review and may agree to
revise the Price List based upon commercially reasonable data every six months
during the Term or as otherwise agreed to in writing by the parties.
11.2 [* * *].
11.3 Payment. RN shall pay Audible for the Audible Products within thirty
-------
(30) days of receipt of an invoice from Audible which reflects the purchase
orders submitted by RN during the invoiced period. Audible shall pay RN
royalties based on sales of hardware players bundled with RN technology in
accordance with Section 2.10 and Exhibit H.
11.4 Taxes.
-----
11.4.1 Audible shall pay all taxes, duties, import and export fees,
and any other charges or assessments which are applicable to Audible's
performance of this Agreement, and shall indemnify and hold RN harmless from any
encumbrance, fine, penalty, or other expense which RN may incur as a result of
Audible's failure to pay any such taxes, duties, fees, charges, or assessments.
All amounts under this Agreement not paid by Audible when due shall accrue
interest at the rate of one and one half-percent (1.5%) per month or the maximum
amount allowed by law, whichever is lower.
11.4.2 RN shall be responsible for paying all sales and RN corporate
income taxes imposed on the sale of the Audible Products by RN. RN shall pay all
taxes, duties, import and export fees, and any other charges or assessments
which are applicable to RN's performance of this Agreement, and shall indemnify
and hold Audible harmless from any encumbrance, fine, penalty, or other expense
which Audible may incur as a result of RN's failure to pay any such taxes,
duties, fees, charges, or assessments. All amounts under this Agreement not paid
by Audible when due shall accrue interest at the rate of one and one half-
percent (1.5%) per month or the maximum amount allowed by law, whichever is
lower.
_________
***Confidential information has been omitted and has been filed separately with
the Securities and Exchange Commission.
10
<PAGE>
12. Proprietary and Confidential Information.
----------------------------------------
12.1 Title. Title to and ownership of all copies of the RealPlayer and
-----
Documentation, whether in machine-readable or printed form, and including,
without limitation, derivative works prepared by Audible (but excluding the
Audible Plug-in) or RN, and all related technical know-how and all rights
therein (including, without limitation, rights in patents, copyrights, and trade
secrets applicable thereto), are and shall remain the exclusive property of RN
and its suppliers. Audible shall not take any action to jeopardise, limit or
interfere in any manner with RN's ownership of and rights with respect thereto.
Title to and ownership of all copies of the Audible Products, the Audible Plug-
in and Documentation, whether in machine-readable or printed form, and
including, without limitation, derivative works prepared by Audible, and all
related technical know-how and all rights therein (including, without
limitation, rights in patents, copyrights, and trade secrets applicable
thereto), are and shall remain the exclusive property of Audible and its
suppliers. RN shall not take any action to jeopardise, limit or interfere in
any manner with Audible's ownership of and rights with respect thereto.
12.2 Reverse Engineering. Except as expressly provided herein, neither
-------------------
party shall reverse engineer, decompile, reverse translate, or in any way
attempt to derive any source code from the other's Products, or authorize or
allow any of the foregoing, without the other party's prior written consent.
12.3 Enforcement Responsibilities. Each party shall take all reasonable
----------------------------
measures to ensure that the other's rights in the Products are not infringed and
that all provisions in the End User License Agreements are honored. In the
event of any violations or suspected violations of such, each party shall
immediately notify the other and shall assist the other party to take whatever
action is appropriate, including litigation to enforce such provisions.
12.4 Confidentiality Each party will keep confidential and will take all
---------------
necessary steps and precautions to cause its agents and employees to keep
confidential the: (i) terms and conditions of this Agreement; and (ii) and any
and all other information, whether disclosed orally or in writing, which is
furnished by one party or which comes to the attention of or is acquired by the
other party, and which is declared confidential, or should reasonably be
construed to be confidential, including, but not limited to, information
pertaining to business activities and operations, reports, ideas, concepts,
techniques, designs, specifications, drawings, diagrams, data, code, customer
lists, financial information, pricing information, business plans, company
goals, expansion plans, or other technical or business information (collectively
"Confidential Information"). Any Confidential Information disclosed in writing
or in some other tangible form shall prominently display the phrase
"Confidential Information." Each party agrees to safeguard the same from
unauthorized disclosure or use. In addition, except as expressly provided
herein, each party agrees not to disassemble, decompile, or otherwise reverse
engineer the Products or technology of the other party or otherwise attempt to
learn the source code, structure or algorithms or ideas underlying such products
or technology or any Confidential Information, without the other party's prior
written consent. The parties' obligations set forth in this section shall
survive any expiration or termination of this Agreement. Upon a party's
request, the other party shall promptly return all Confidential Information and
all copies thereof, if any.
12.5 Limitations on Obligations. The obligations of confidentiality and
--------------------------
non-disclosure imposed under this Section 10 shall not apply to data and
information which: (a) is published or otherwise becomes available to the
general public as part of the public domain without breach of this Agreement;
(b) is furnished to a party by a third person which does not involve a breach of
the third person's obligations to party owning the Confidential Information; (c)
was in a party's possession prior to the
_________
***Confidential information has been omitted and has been filed separately with
the Securities and Exchange Commission.
11
<PAGE>
disclosure by the non-disclosing party in accordance herewith or pursuant to
other Agreements between the parties; (d) a party is required by law, regulation
or judicial process, to disclose; or (e) a party establishes was developed
independently of Confidential Information furnished to it.
13. Warranties.
----------
13.1 Audible hereby represents to RN that: (a) Audible is the exclusive
owner of all rights and interests in the Audible Products (exclusive of those
elements licensed from third parties) and has the right to grant the rights
granted to RN herein; (b) neither the Audible Products nor the marketing or sale
of the Audible Products by RN as authorized by this Agreement infringes any
copyright, patent, trademark, license or other proprietary right of any person
or entity; (c) the Audible Products do not contain any material that is libelous
or defamatory or that discloses private or personal matters concerning any
person, obscene, indecent or pornographic material or any computer "virus" or
other contaminating or destructive feature; and (d) for a period of ninety (90)
days from the date of delivery to the end user, that the Audible Products will
perform in accordance with Audible's specifications and marketing materials
concerning such Audible Products.
13.2 RN hereby represents to Audible that: (a) RN is the exclusive owner of
all rights and interests in the current RealSystem and RealPlayer and as both
may be modified during the Term and has the right to grant the rights granted to
Audible herein; (b) nothing contained in either the current RealSystem and
RealPlayer and as both may be modified during the Term nor the marketing or sale
of such RealSystem and RealPlayer by Audible as authorized by this Agreement
infringes any copyright, patent, trademark, license or other proprietary right
of any person or entity; (c) such RealSystem and RealPlayer do not contain any
material that is libelous or defamatory or that discloses private or personal
matters concerning any person, or computer "virus" or other contaminating or
destructive feature; and (d) for a period of ninety (90) days from the date of
delivery to the end user, that the RealSystem and RealPlayer will perform in
accordance with RN's specifications and marketing materials concerning the
RealPlayer.
13.3 NO WARRANTY, CONDITION, UNDERTAKING OR TERM, EXPRESS OR IMPLIED,
STATUTORY OR OTHERWISE, AS TO THE CONDITION, QUALITY, DURABILITY, PERFORMANCE,
MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OF EITHER PARTY'S RESPECTIVE
PRODUCTS IS GIVEN OR ASSUMED BY EITHER PARTY AND ALL SUCH WARRANTIES,
CONDITIONS, UNDERTAKINGS AND TERMS ARE HEREBY EXCLUDED.
14. Indemnification.
----------------
14.1 Each party (the "Indemnifying Party") agrees to hold harmless,
indemnify and defend the other party (the "Indemnified Party") from and against
any losses, damages, costs and expenses (including reasonable attorneys' fees
and costs) arising out of or relating to any claims that the Indemnifying
Party's products infringes any copyright, patent, trademark, trade secret or
other proprietary right of any third party. The Indemnifying Party shall not be
liable in the event that (i) the indemnified Party continued marketing, sale,
distribution or use of the Indemnifying Party's products after receiving prior
written notice from the Indemnifying Party that the Indemnified Party should
cease such activities due to a third party claim of infringement against
such products; or (ii) the claim of infringement results from the Indemnified
Party's combination or use of the Indemnifying Party's products with any third
party product, program or data not supplied by the Indemnifying Party.
14.2 Conditions of Indemnification. A party's obligation to indemnify the
-----------------------------
other party is expressly conditioned on the Indemnified Party: (i) giving
written notice of the claim promptly to the Indemnifying Party; (ii) giving the
Indemnifying Party sole control of the defense and settlement of the claim;
(iii) providing to the Indemnifying Party all available information and
assistance (at the Indemnifying Party's expense); and (iv) not compromising or
settling such claim.
15. Limitation of Liability. UNDER NO CIRCUMSTANCES AND UNDER NO LEGAL THEORY,
-----------------------
WHETHER IN TORT, CONTRACT OR OTHERWISE, SHALL EITHER PARTY BE LIABLE TO THE
OTHER PARTY OR ANY OTHER PERSON FOR ANY INDIRECT, SPECIAL,
_________
***Confidential information has been omitted and has been filed separately with
the Securities and Exchange Commission.
12
<PAGE>
INCIDENTAL, PUNITIVE OR CONSEQUENTIAL DAMAGES OF ANY CHARACTER INCLUDING,
WITHOUT LIMITATION, DAMAGES FOR LOSS OF GOODWILL, WORK STOPPAGE, COMPUTER
FAILURE OR MALFUNCTION EVEN IF THE PARTY SHALL HAVE BEEN INFORMED OF THE
POSSIBILITY OF SUCH DAMAGES.
16. Term and Termination.
--------------------
16.1 Term. This Agreement shall commence on the Effective Date and shall
----
terminate two (2) years thereafter (the "Term"). This Agreement may only be
renewed or extended pursuant to an agreement in writing that is signed by the
authorized representatives of both parties.
16.2 Termination for Breach. This Agreement may be terminated by either
----------------------
party for cause immediately by written notice upon the occurrence of any of the
following events: (i) if the other ceases to do business, or otherwise
terminates its business, other than by reason of a sale of all or substantially
all of the assets of such party or the merger or consolidation of such party;
(ii) if the other breaches any material provision of this Agreement and fails to
fully cure such breach within thirty (30) days' of written notice describing the
breach; or (iii) if the other becomes insolvent or seeks protection under any
bankruptcy, receivership, trust, deed, creditor's arrangement, or comparable
proceeding, or if any such proceeding is instituted against the other and not
dismissed within thirty (30) days. Either party may cease marketing, selling,
or distributing any product hereunder immediately and without notice if the
other party reasonably believes that such action is necessary in order to avoid
potential liability to third parties or under applicable law.
16.3 Effect of Termination. Upon termination of this Agreement, RN will
---------------------
stop marketing and selling the Audible Products, but RN may distribute its
existing inventory of Audible Products and may distribute Audible Products
electronically or physically as necessary to meet customer commitments in effect
as of the date of termination, in accordance with this Agreement for a period of
up to one hundred eighty (180) days. RN shall continue to pay Audible for all
Audible Products distributed during such 180 period as provided in Sections 2.1,
11.1 and Exhibit F. Upon termination of this Agreement, Audible shall stop
marketing and selling the RealPlayer and shall be under no further obligation to
use the RealPlayer as Audible's desktop player; however, Audible may continue
distributing the RealPlayer as provided herein for a period of up to one hundred
eighty (180) days. Termination by either party will not affect the rights of any
end user under the terms of the End User License Agreement.
16.4 Survival. The provisions of Sections 2.8, Exhibit H, 10, 12, 13, 14,
--------
15, 16.3, 16.4, 17 and 18 shall survive expiration or termination of this
Agreement.
17. Dispute Resolution. Any dispute arising out of or relating to this
------------------
Agreement shall be resolved in accordance with the procedures specified in this
Section 17, which shall be the sole and exclusive procedures for the resolution
of any such dispute.
17.1 Executive Negotiations. The parties shall attempt in good faith to
----------------------
resolve any dispute relating to this Agreement promptly by negotiation between
executives who have authority to settle the controversy. In the event a dispute
cannot be resolved, either party may give the other party written notice of any
dispute not resolved in the normal course of business. Within fifteen (15)
days after delivery of such a notice, the receiving party shall submit to the
other a written response. The notice and response shall include a statement of
each party's position and a summary of arguments supporting that position.
Within thirty (30) days after delivery of the disputing party's notice, the
senior executive
_________
***Confidential information has been omitted and has been filed separately with
the Securities and Exchange Commission.
13
<PAGE>
officers of Audible and RN shall meet at a mutually acceptable time and place,
and thereafter as often as they reasonably deem necessary, to attempt to resolve
the dispute. All reasonable requests for information made by one party to the
other will be honored. All negotiations pursuant to this Section 17.1 are
confidential and shall be treated as compromise and settlement negotiations for
purposes of the Federal Rules of Evidence and state rules of evidence.
17.2 Arbitration. If any dispute relating to this Agreement shall not have
-----------
been resolved through the use of the non-binding procedures specified in Section
17.1 within one hundred (100) days of the initial notice of either party to the
other of a dispute, such dispute shall be settled by binding arbitration;
provided, however, that if one party has requested the other to participate in
the non-binding procedure specified in Section 17.1 and the other has failed to
participate, the requesting party may initiate arbitration before expiration of
the above stated period. Arbitration shall be governed by AAA Rules, with
arbitrators to be mutually agreed upon by the parties. Arbitration shall take
place in King County, Washington. The arbitrators shall not be empowered to
award damages in excess of compensatory damages, and each party hereby
irrevocably waives any right to recover such damages with respect to any dispute
or disagreement resolved by arbitration. Notwithstanding the foregoing, the
prevailing party in any arbitration or other proceeding based on a dispute
arising out of this Agreement or the RMA Agreement shall be entitled to recover
its reasonable attorneys' fees and costs.
17.3 Provisional Remedies. A party, without prejudice to the mandatory
--------------------
procedures of this Section 17, may file a complaint for statute of limitations
or venue reasons, or seek a preliminary injunction or other provisional judicial
relief, if in its sole judgment such action is necessary to avoid irreparable
damage or to preserve the status quo. Notwithstanding such action, the parties
will continue to participate in good faith in the procedures specified in this
Section 17.
18. General.
-------
18.1 Independent Contractor. The relationship created by this Agreement is
----------------------
one of independent contractors, and not partners, franchisees or joint
venturers. No employees, consultants, contractors or agents of one party are
employees, consultants, contractors or agents of the other party, nor do they
have any authority to bind the other party by contract or otherwise to any
obligation, except as expressly set forth herein. They will not represent to
the contrary, either expressly, implicitly or otherwise.
18.2 Notices. All notices and demands under this Agreement will be in
-------
writing and will be delivered by personal service, confirmed fax, confirmed e-
mail, express courier, or certified mail, return receipt requested, to the
address of the receiving party set forth below, or at such different address as
may be designated by such party by written notice to the other party from time
to time. Notice will be effective on receipt. Notices should be addressed to:
_________
***Confidential information has been omitted and has been filed separately with
the Securities and Exchange Commission.
14
<PAGE>
<TABLE>
<CAPTION>
RN: AI:
<S> <C>
Russell Braun Travis Millman
GM, Strategic Products VP, Business Development
RealNetworks, Inc. Audible Inc.
1111 Third Avenue, Suite 2900 65 Willowbrook Blvd.
Seattle, WA 98101 Wayne, NJ 07470
Voice: (206) 674-____ Voice: 973-890-4070, x237
Fax: (206) 674-____ Fax: 973-890-2442
E-mail: [email protected] E-mail: [email protected]
With a copy to: With a copy to:
Kelly Jo MacArthur, VP & General Counsel
Voice: (206) 674-2213 Brian Fielding, Managing Director
Fax: (206) 674-2695 Business & Legal Affairs
E-mail: [email protected] Voice: 973-890-4070, x225
Fax: 973-890-2442
E-mail: [email protected]
</TABLE>
18.3 No Assignment. This Agreement may not be assigned by either party
-------------
without the prior written consent of the other, except pursuant to the sale of
substantially all assets of a party, or a merger or consolidation. This
Agreement shall be binding upon and inure to the benefit of the parties'
permitted successors and assigns.
18.4 Export Licenses. The parties acknowledge that the laws and
---------------
regulations of the United States may restrict the export and re-export of
certain commodities and technical data of United States origin. Each party
agrees that it will not export or re-export the Products in any form without the
appropriate United States or foreign government licenses. In particular but
without limitation, none of the Products, Documentation or underlying
information or technology may be exported or re-exported (i) into (or to a
national or resident of) Cuba, Iraq, Libya, Yugoslavia (Serbia and Montenegro),
North Korea, Iran, Angola, Sudan, Syria or any other country to which the U.S.
has embargoed goods; or (ii) to anyone on the U.S. Treasury Department's list of
Specially Designed Nationals or the U.S. Commerce Department's Table of Deny
Orders.
18.5 U.S. Government Contracts. If either party is acquiring Products and
-------------------------
Documentation on behalf of the U.S. Government, the following provisions apply:
if Products are supplied to the Department of Defense ("DOD"), Products are
subject to "Restricted Rights," including a legend to be affixed to the
Products, as that term is defined in the DOD Supplement to the Federal
Acquisition Regulations ("DFAR") in paragraph 252.227-7013(c)(1). If Products
are supplied to any unit or agency of the U.S. Government other than DOD, the
U.S. Government's rights in the Products will be as defined in paragraph 52.227-
19(c)(2) of the Federal Acquisition Regulations ("FAR").
18.6 Miscellaneous. This Agreement, and the Exhibits attached hereto and
-------------
made a part hereof, together with the RMA Agreement dated as of November 12,
1998, constitutes the complete and exclusive agreement between RN and Audible
with respect to its subject matter, and supersede all prior oral or written
understandings, communications or agreements not specifically incorporated
herein or therein. This Agreement, when executed in combination with the RMA
Agreement dated as of November 12, 1998, supersedes in whole the Bundling
Agreement dated as of July 27, 1997. This Agreement may
_________
***Confidential information has been omitted and has been filed separately with
the Securities and Exchange Commission.
15
<PAGE>
not be modified except in a writing duly signed by an authorized officer of RN
and Audible. The waiver by either party of any breach of this Agreement by the
other party will not waive subsequent defaults by such party of the same or a
different kind. If any provision of this Agreement is held to be unenforceable
for any reason, such provision shall be reformed only to the extent necessary to
make it enforceable, and such decision shall not affect the enforceability of
such provision under other circumstances, or of the remaining provisions hereof
under all circumstances. The failure of any party to enforce any of the
provisions hereof shall not be construed to be a waiver of the right of such
party thereafter to enforce such provisions. Any and all remedies herein
expressly conferred upon a party shall be deemed cumulative and not exclusive of
any other remedy conferred hereby or by law, and the exercise of any one remedy
shall not preclude the exercise of any other. Headings shall not be considered
in interpreting this Agreement.
18.7 [* * *].
18.7.1 [* * *].
18.8 Governing Law. This Agreement shall be governed by the laws of the
-------------
State of Washington, United States of America, excluding that body of law known
as conflicts of law. This Agreement shall not be governed by the United Nations
Convention of Contracts for the International Sale of Goods, the application of
which is hereby expressly excluded.
INTENDING TO BE LEGALLY BOUND, the parties have executed this Agreement by their
duly authorized representatives, to be effective as of the date first written
above.
AUDIBLE INC. REALNETWORKS, INC.
By /s/ Andy Huffman By /s/ Rob Glaser
--------------------------- -----------------------------
Andy Huffman Rob Glaser
President & CEO CEO
Date: 11/12/98 Date: 11/23/98
------------------------ -------------------------
16
<PAGE>
EXHIBIT 10.21
A G R E E M E N T
This Agreement (this "Agreement") is entered into as of April 13, 1999,
(the "Effective Date") by and between DIAMOND MULTIMEDIA SYSTEMS, INC., a
Delaware corporation with principal offices at 2880 Junction Avenue, San Jose,
California 95134 (hereinafter "Diamond"), and AUDIBLE, INC., a Delaware
corporation with principal offices at 65 Willowbrook Boulevard, Wayne, New
Jersey 07470 (hereinafter "Audible").
WHEREAS, Audible(TM) is the creator and provider of an Internet-based
service that permits customers to use a computer with an Internet browser to
select and download spoken word audio files consisting of licensed and original
literary, business, and entertainment works and other types of spoken word
information in a secure Audible-proprietary file format, via the World Wide Web
(currently using the URL "http://www.audible.com"(TM)), and to play back such
content using Audible's proprietary software by means of a personal computer, an
audio-capable personal digital assistant and/or a portable audio devices;
WHEREAS, Diamond is the developer and owner of certain Internet audio MP3-
compatible hardware products, including the Rio family of portable audio
players, and wishes the Rio II portable audio player and follow-on hardware
products thereto to be AudibleReady, as defined below;
WHEREAS, Audible and Diamond both believe it is in their best interests to
enable Audible content on Diamond hardware products and, for that purpose,
desire to undertake certain development work with respect to achieving the goal
of making the Rio Products AudibleReady and Audible's client software compatible
with the Rio Products, pursuant to the terms and conditions of this Agreement;
WHEREAS, Diamond desires to license such developments from Audible for the
purpose of allowing users of the Rio Products to access and play audio content
available through Audible, pursuant to the terms and conditions of this
Agreement; and
WHEREAS, in furtherance of the work described above, Audible and Diamond
both desire to engage in certain promotion and marketing efforts with respect to
both Audible's services and the Rio Products, pursuant to the terms and
conditions of this Agreement.
NOW THEREFORE, in consideration of the premises stated above, the mutual
covenants of the parties and other good and valuable consideration, the receipt
and sufficiency of which is hereby acknowledged, the parties, intending to be
legally bound, agree as follows:
I. DEFINITIONS
-----------
For purposes of this Agreement, in addition to the capitalized terms
defined elsewhere herein, the following terms shall have the meanings described
below:
1.1 Affiliate means (a) an entity that controls, is controlled by, or is under
---------
common control with a party; or (b) an entity that shall purchase or succeed to
all or substantially all of the assets of that party. "Control" means
ownership, directly or indirectly, of more than fifty percent (50%) of the
outstanding shares or securities (representing the right to vote for the
election of directors
__________________
*** Confidential Information has been omitted and filed separately with the
Securities and Exchange Commission.
<PAGE>
or other managing authority), or if the entity does not have outstanding shares
or securities, as may be the case in a partnership, joint venture or
unincorporated association, "control" means more than fifty percent (50%) of the
ownership interest representing the right to make the decisions for such
corporation, company or other entity. A corporation, company or other entity
shall be deemed to be an Affiliate only so long as such control.
1.2 Anticipated Launch Date means the date on which it is anticipated that the
-----------------------
first commercial version of the Rio II will be released, as established by
Diamond from time to time. As of the Effective Date, the Anticipated Launch
Date is [***].
1.3 Audible Development Work means the software development work to be
------------------------
performed by Audible and its agents, as defined in Section 2.2 of this
Agreement.
1.4 Audible Firmware means the computer software to be provided by Audible to
----------------
Diamond, in either source or object code, under this Agreement and which
consists of (i) the CODEC, (ii) a security module with various components
designed to ensure that the Rio Products handle Content in compliance with
Audible's security policies as determined by Audible and (iii) a Content
interpretation and navigation module, and any upgrades, enhancements and
modifications to any of the above from time to time either provided by Audible
to Diamond or developed by Diamond with the permission of Audible.
1.5 Audible Software means the modified version of the Client Software to be
----------------
developed by Audible under Section 2 of this Agreement, for use with the Rio II
and other Rio Products, and any updates, upgrades, and enhancements thereto and
new versions thereof provided to users of Rio Products..
1.6 audible.com means the Internet-based service controlled or sponsored by
-----------
Audible which permits customers to use a computer with an Internet browser to
select, download and license copies of Content, for pay, in an Audible-
proprietary file format, via a World Wide Web site currently using the URL
"http://www.audible.com"(TM)
1.7 AudibleReady means the brand adopted by Audible, as it may be changed from
------------
time to time, to signify that designated equipment and/or software is enabled
for access to, downloading and playback of Audible's Content.
-
1.8 Client Software means Audible's proprietary "AudibleManager" software, that
---------------
is used as of the Effective Date to download and playback Content and transfer
the Content to the portable device.
1.9 CODEC means a decompression algorithm provided by Audible to Diamond
-----
hereunder, that is used to enable compatible computing and/or hardware devices
to playback Content, and any replacement algorithm selected by mutual agreement
of the parties.
1.10 Content means spoken word audio content that is either licensed by Audible
-------
from third parties or produced by or on behalf of Audible (e.g., literary,
business, and entertainment works,
________________
*** Confidential information has been omitted and filed separately with the
Securities and Exchange Commission.
2
<PAGE>
and other types of spoken word content), which content is encoded into Audible's
file format and is accessible for playback using the then-current Audible
decoder(s).
1.11 Diamond Development Work means the software development work to be
------------------------
performed by Diamond and its agents, as defined in Section 2.5 of this
Agreement.
1.12 Integration means the combination during the Term of a version of the
-----------
Audible Firmware (or such other security algorithm as agreed to by the parties)
with the Rio II and other Rio Products, as a core, embedded component thereof,
for distribution by Diamond as part of such Rio Products to enable access to and
downloading of Content by Rio Product users, as permitted under this Agreement.
"Integrated" means that the Diamond Product in question has been enabled to
access and download Content as a core, embedded component of the product.
1.13 Intellectual Property means any copyright, patent, registered design,
---------------------
copyright, design right, topography right, rights in mask works, trade mark,
service mark, application to register any of the aforementioned rights, rights
in the nature of any of the aforementioned rights, moral rights, trade secrets,
rights in unpatented know-how, right of confidence and any other intellectual or
industrial property rights of any nature whatsoever recognized in any part of
the world.
1.14 Manager shall mean a person in the management chain of the applicable
-------
party who is a senior executive in terms of responsibility, and who is familiar
with the administration of this Agreement.
1.15 Rio Products means Diamond's family of portable hardware devices released
------------
by Diamond during the Term for playback of audio content via the Internet,
including content in MP3 format, that Diamond will develop, commencing with the
Rio II product, and any follow-on products thereto, whether such products are
branded with the trademark "RIO" or with other names.
1.16 Rio II means the next major release of the Diamond Rio Internet mobile
------
audio device currently scheduled for commercial availability by the Anticipated
Launch Date.
1.17 Term means the period described in Section 14, herein, commencing on the
----
Effective Date and including any renewals and extensions of this Agreement.
2. DEVELOPMENT AND INTEGRATION OF PRODUCTS
----------------------------------------
2.1 Audible's Commitment. Subject to the terms of this Agreement,
--------------------
including without limitation, the fulfillment by Diamond of its obligations
under this Agreement, Audible hereby agrees to perform the Audible Development
Work as described in Section 2.2.
2.2 Audible Development Work.
------------------------
(a) Development of Audible Software. Audible, with the assistance of
-------------------------------
Diamond as reasonably requested by Audible, shall exercise its reasonable best
efforts to develop Audible Software for use with the Rio II. The Audible
Software, when used with the Rio II and
________________
*** Confidential information has been omitted and filed separately with the
Securities and Exchange Commission.
3
<PAGE>
other required user interface elements, will be designed to facilitate (i) the
downloading of Content from audible.com by users of the Rio II who register with
audible.com directly or indirectly through a Diamond portal, and (ii) transfer
of Content to the Rio II for portable playback of Content. Audible agrees to
commit the necessary resources and management involvement to support this
project and to accomplish the objectives of the project. Audible and Diamond
shall agree in good faith, after the release of the AudibleReady Rio II product,
with respect to further development of the Audible Software required to make
follow-on Rio Products AudibleReady pursuant to the terms of this Agreement.
(b) Modification of Audible Firmware. Audible, with the assistance of
--------------------------------
Diamond as reasonably requested by Audible, shall exercise its reasonable best
efforts to develop and deliver to Diamond modifications to the Audible Firmware
for the successful Integration with the Rio II. Delivery of the Audible
Firmware shall be pursuant to a schedule mutually agreed by the parties, taking
into account the Anticipated Launch Date. Audible agrees to commit the
necessary resources and management involvement to support this project and to
accomplish the objectives of the project. Audible and Diamond shall agree in
good faith, after the release of the AudibleReady Rio II product, with respect
to further modifications to the Audible Firmware required to make follow-on Rio
Products AudibleReady pursuant to the terms of this Agreement.. Audible does
not warrant that the Audible Development Work will permit the successful
Integration with the Rio Products.
(c) Specifications. The Audible Development Work will be conducted in
--------------
accordance with such technical specifications as may be determined by Audible,
in its reasonable discretion, with the assistance of Diamond as reasonably
requested by Audible. Audible's obligation to complete the Audible Development
Work and permit Integration is subject to the ability of the Integrated product
to permit the offering of Content by means of the Audible Software on a secured,
per program and subscription basis as currently done by Audible with its
MobilePlayer, and the availability to Rio Products users of substantially all of
Audible's on-device navigation features and functionality. Audible agrees to
exercise its reasonable best efforts to develop the Audible Software in a manner
that provides for as smooth experience as possible for the user with respect to
account creation with audible.com and downloading of Audible Content Bundles as
described in Section 6 below.
(d) Non-Exclusivity. The Audible Development Work will be performed
---------------
by Audible on a non-exclusive basis and shall not affect the right of Audible to
perform research, development and integration efforts for others or on its own
behalf with respect to the same or similar technologies as are the subject of
this Agreement.
(e) Use of Development Work. Notwithstanding any other provision of
-----------------------
this Agreement, Audible shall have the right to use, reproduce, modify and
distribute, in its discretion, the Audible Development Work (and any portion
thereof), and any deliverables to Diamond in connection therewith, and to use,
make, license and sell products based thereon, during and after the Term of this
Agreement. This shall include the right to permit the installation of Audible
Software and Audible Firmware or any portion thereof as part of an OEM product
or an after-market product for Windows-based personal computers, audio-capable
________________
*** Confidential information has been omitted and filed separately with the
Securities and Exchange Commission.
4
<PAGE>
personal digital assistants, and portable audio devices. This Agreement does not
grant to Diamond any right or interest in and to any future developments by or
on behalf of Audible or any new products and services offered by Audible, except
as expressly provided in this Agreement
2.3 Diamond's Obligations Regarding Audible Development Work. Diamond
--------------------------------------------------------
agrees reasonably to cooperate with Audible in furtherance of successfully
completing the Audible Development Work. As part of this, Diamond agrees to
promptly provide to Audible, [***]:
(a) Access and Assistance. Such access to Diamond's personnel and
---------------------
other resources as Audible may reasonably request in connection with the
performance of the Audible Development Work, including without limitation, such
design, technical assistance, development tools, application program interfaces
("APIs") and software (in source code and object code format, as appropriate) as
are necessary or desirable to enable Audible to perform the Audible Development
Work, and make the Audible Software interoperate with the Rio II; and
(b) Prototypes and Production Models. To the extent available,
--------------------------------
development environments, prototypes and production models of the Rio II as
necessary to implement the Audible Development Work. In the event Diamond does
not have available such hardware, Audible may purchase such hardware as is
needed and the cost thereof shall be paid by Diamond.
2.4 Diamond's Commitment. Subject to the terms of this Agreement,
--------------------
including without limitation, the fulfillment by Audible of its covenants under
this Section 2, Diamond hereby agrees to perform the Diamond Development Work as
described in Section 2.5.
2.5 Diamond Development Work.
------------------------
(a) Diamond Development Work. Diamond, with the assistance of Audible
------------------------
as reasonably requested by Diamond, shall exercise its reasonable best
efforts to Integrate the Audible Firmware as stated above with the Rio II
and to allow users of the Rio II to playback Content. Diamond agrees to
commit the necessary resources and management involvement to support the
Diamond Development Work and to accomplish the objectives of the project.
Diamond and Audible shall agree in good faith, after the release of the
AudibleReady Rio II product, with respect to further Diamond Development
Work required to make follow-on Rio Products AudibleReady pursuant to the
terms of this Agreement. Diamond shall not modify the Audible Firmware for
any purpose except with the prior written approval of Audible.
(b) Specifications. The Diamond Development Work will be conducted in
--------------
accordance with such technical specifications as may be determined by
Diamond, in its reasonable discretion, with the approval of Audible which
shall not be unreasonably denied. Such specifications shall provide that
the Rio II will incorporate the Audible Firmware, and will be compatible
with, and able to interoperate with, the Audible Software, and enable
playback of the Content.
________________
*** Confidential information has been omitted and filed separately with the
Securities and Exchange Commission.
5
<PAGE>
(c) Audible's Obligations Regarding Diamond Development Work. Audible
--------------------------------------------------------
agrees reasonably to cooperate with Diamond in furtherance of successfully
completing the Diamond Development Work. As part of this, Audible agrees
to promptly provide to Diamond, [***], such access to Audible's personnel
and other resources as Diamond may reasonably request in connection with
the performance of the Diamond Development Work, including without
limitation, such design, technical assistance, development tools, and
software [***] as are necessary or desirable to enable Diamond to perform
the Diamond Development Work and make the Audible Software and the Audible
Firmware interoperate with the Rio II.
(d) Non-Exclusivity. The Diamond Development Work will be performed
---------------
by Diamond on a non-exclusive basis and shall not affect the right of
Diamond to perform research, development and integration efforts for others
or on its own behalf with respect to the same or similar technologies as
are the subject of this Agreement.
(e) Updates. Diamond and Audible, with each other's assistance as
--------
reasonably requested by the other party, shall exercise its reasonable best
efforts to Integrate updates, fixes and enhancements to the Audible
Firmware, the Audible Software, the Rio Products and the OEM Rio Products
as defined below, with the approval of the party whose technology it is,
for purposes of maintaining the security features of the Audible Firmware,
and correcting any material errors and bugs affecting any major
functionality of the Audible Software, the Integrated Rio Products and OEM
Rio Products with Audible technology, as such errors and fixes are
documented by instances of data loss or product malfunction..
2.6 Representatives; Meetings. Each party hereby agrees to have at least
-------------------------
one Manager designated as the primary contact person on its behalf for matters
relating to this Agreement and its implementation. Each party hereby further
agrees that, through the end of [***], they will endeavor in good faith to have
once a week a conference call, and monthly a meeting, with the joint technical
and business personnel of the parties to discuss the progress of the development
work and technical and business issues presented by this Agreement. Thereafter,
upon the written request of the other party, the parties will make reasonable
efforts to meet, at a mutually agreeable times and locations, to confidentially
discuss the progress of work under this Agreement, product trends,
implementation issues, areas of collaboration, and other related issues. [***].
Each party further agrees to provide the other with periodic reports regarding
the progress of work under this Agreement.
2.7 Implementation Schedule. The Audible Development Work and the Diamond
-----------------------
Development Work shall be implemented promptly and diligently in accordance with
an implementation schedule to be mutually agreed upon by the parties, taking
into account the Anticipated Launch Date, which schedule shall become a part of
this Agreement upon approval by the parties. Both parties recognize that time
is of the essence to this Agreement with respect to the development work that
needs to be performed by the Anticipated Launch Date and, as it respects their
own development work, the parties agree to exercise their best efforts to permit
the Integrated Rio II that is AudibleReady to be available on the Anticipated
Launch Date.
________________
*** Confidential information has been omitted and filed separately with the
Securities and Exchange Commission.
6
<PAGE>
2.8 Development Costs. [***].
-----------------
2.9 Review Rights. Each party will have the right, in its reasonable
-------------
discretion, to conduct technical reviews of the progress of the other party's
performance of its development work at the facilities of the other party and at
such other locations where any part of the work may be performed. Each party
will provide reasonable cooperation to the other in performing such reviews,
including without limitation, providing that party with access to all work in
progress, documents and other materials, as reasonably requested by the
reviewing party. Each party may perform such reviews at a mutually agreeable
time and date during normal business hours at the location where the work is
being performed by providing the other with advance written notice. In
performing such reviews, each party shall not unduly interfere with the
operation of the other's business activities, and shall comply with the other
party's reasonable safety and security policies and procedures. Diamond hereby
agrees to provide to Audible or its designee the opportunity to review in
detail, prior to release, the code of the Integrated Rio II for purposes of
determining compliance with Audible's security and functional requirements.
2.10 Testing
-------
(a) Goals of Testing. The parties agree to cooperate with each other
----------------
in the testing of the Audible Software and the Integrated Rio II, for the
purposes of determining that: (i) the Audible Firmware has been
successfully Integrated into the Rio II; (ii) the Audible Software and the
Rio II are compatible, interoperable and able to interface with each other
and with Content; (iii) when used with other necessary hardware, software
and interfaces (if any), the Audible Software and the Rio II are
compatible, interoperable and able to interface with audible.com; (iv) the
use of the Audible Software in combination with the Rio II preserves the
functionality of the Rio II without materially degrading its performance
(as described in the applicable specifications); and (v) the use of the Rio
II in combination with the Audible Software preserves the functionality of
the Audible Software without materially degrading its performance (as
described in the applicable specifications) (the foregoing, collectively,
constituting "Testing").
(b) Testing Procedures. Testing and acceptance of the development
------------------
work and resulting products of the parties shall occur in accordance with
such testing plan(s), procedures and schedule(s) as are mutually agreed to
by the parties. In the event defects in the form of non-conformities with
the Testing specifications are discovered during the implementation of the
acceptance plan(s), each party shall exercise prompt and reasonable efforts
to correct and remediate the defect(s), and subsequently thereto the
acceptance plan(s) shall continue. Neither shall unreasonably withhold or
delay its approval of the Testing and the development work.
(c) Third Party Components. Notwithstanding any provision of this
----------------------
Agreement to the contrary, neither party shall be responsible for the
manufacture or performance or failure to perform of hardware, software or
other components provided by third parties and which are used in connection
with the operation of that party's products or services, or for errors or
omissions of the other party's employees and agents.
________________
*** Confidential information has been omitted and filed separately with the
Securities and Exchange Commission.
7
<PAGE>
2.11 Integrated Software
-------------------
The parties agree, commencing by not later than six months after the
Effective Date, to exercise reasonable best efforts to evaluate and document in
good faith the feasibility of and specifications for the design, implementation
and promotion of a client software product that integrates the Diamond client
software for the Rio Products and the Audible Software for distribution by the
parties to end users of Rio Products and OEM Rio Products. If the parties'
efforts result in the design and development of such client software, the
parties will agree at the time on terms regarding the development and
distribution of such client software, the allocation of costs and efforts
attendant thereto, and the parties' respective Intellectual Property rights and
licenses to the joint client software. Notwithstanding the above, development of
the joint client software shall in no event result in the transfer by one party
to another of any right, title or interest in and to that party's Intellectual
Property rights in its underlying software and technology.
3. PRODUCT BRANDING AND INTEGRATION OBLIGATIONS
--------------------------------------------
3.1 By Audible.
----------
(a) Branding. Audible agrees that, at Diamond's request, it will
--------
incorporate appropriate Diamond/Rio II branding into the Audible Software,
thereby creating a co-branded version of the software for the exclusive use
of customers of the Integrated Rio II product. Such Diamond/Rio II
branding shall be subject to Diamond's supplying Audible with high-
resolution digital artwork, logos, and other materials, in appropriate
formats, which Diamond desires to be incorporated into the software. The
placement, form and format of any such branding shall be as mutually agreed
upon by the parties. Nothing herein is intended to preclude Audible from
doing any other type of branding on its products and services. In
addition, Audible agrees to feature prominently the Rio II product on
audible.com by means of placements, banners or other ways that the parties
mutually agree to. The web site shall refer visitors to audible.com who
are interested in acquiring Rio Products back to a Diamond web site.
Diamond shall develop a system for tracking visits to its web sites which
are triggered by a referral from audible.com.
(b) Further Development. Audible agrees that, for as long as Diamond
-------------------
is in compliance with the terms of this Agreement, it shall exercise
reasonable commercial efforts to update, upgrade, and modify the Audible
Software so as to make it interoperable and compatible with follow-on Rio
Products which are manufactured by or for Diamond pursuant to technical
specifications to be agreed to by the parties
3.2 By Diamond.
----------
(a) Branding and Integration. Diamond agrees that, commencing with
------------------------
the Rio II product release, by the Anticipated Launch Date it will
Integrate the Rio Products to make them AudibleReady, and will prominently
brand the Rio Products with the AudibleReady logo (which logo will be
provided by Audible to Diamond) on (i) the Rio II units (as described
below), (ii) the box in which the Rio II is distributed, (iii) Diamond's
in-box materials (e.g., manuals, user guides, inserts, etc.), and (iv) as
appropriate, Rio II-related marketing materials (e.g., print advertising,
Diamond's web site, banner advertisements). The placement, form and format
of such branding shall be as mutually agreed upon by the parties; however,
Diamond agrees that it shall include the AudibleReady logo at least on
either the back and/or side of Rio II and that such branding shall be
legible and reasonably easy to distinguish. The mutually agreed-upon
placement, form and format of the AudibleReady logo to be included on the
Rio II shall be attached to this Agreement as an Exhibit within 15 days of
the Effective Date of this Agreement. Nothing herein is intended to
preclude Diamond from doing any other type of branding on its products. To
the extent that, notwithstanding the parties' development efforts in
accordance with Section 2 above, the Rio II cannot be Integrated by the
Anticipated Launch Date, the parties hereby agree to continue to work
in
________________
*** Confidential information has been omitted and filed separately with the
Securities and Exchange Commission.
8
<PAGE>
good faith to Integrate the Rio Products as promptly as possible, subject
to Audible's rights under Section 12.2(a).
(b) Further Development. Diamond agrees that, for as long as Audible
-------------------
is in compliance with the terms of this Agreement, it shall exercise
reasonable commercial efforts to Integrate the Rio Products that follow the
Rio II in order to enable access by users to audible.com and downloading of
the Content using the Rio Products, pursuant to technical specifications to
be agreed to by the parties.
3.3 Diamond's OEM Obligations. In the event that OEM products based on or
-------------------------
derived from Diamond Rio Products (the "OEM Rio Products") are to be authorized
by Diamond, Diamond agrees to use its good faith efforts to promote and seek to
Integrate Audible technology and AudibleReady branding in such products, and to
participate in Audible co-marketing programs with respect to such products. Such
efforts will include, without limitation, introducing Audible to existing and
prospective OEMs of Diamond. Audible acknowledges and agrees that the decision
whether to include Audible technology, AudibleReady branding and to participate
in Audible co-marketing programs will be in the reasonable discretion of Diamond
and its OEMs. Third party OEMs Integrating Audible's technology in their
products must receive the necessary Intellectual Property licenses directly from
Audible. To the extent that Audible technology, AudibleReady branding and
Audible co-marketing programs are included with Diamond's OEM Rio Products,
revenue sharing between Audible and Diamond with respect to those OEM Rio
Products shall be as described in Section 8.1 of this Agreement, unless
otherwise agreed to by the parties, provided that Audible shall have no
obligation to share revenues to the third-party OEM even if Diamond enters into
such an arrangement with the OEM.
4. DISTRIBUTION AND INSTALLATION OF THE AUDIBLE SOFTWARE.
-----------------------------------------------------
4.1 Provision of the Audible Software. Subject to Diamond's compliance of
---------------------------------
its obligations under Section 2 above, Audible hereby agrees to provide Diamond
with a master copy of the Audible Software prior to the Anticipated Launch Date
to enable the Content on the Rio II.
4.2 Distribution By Diamond. Commencing with the first commercial release
-----------------------
of the Rio II, Diamond hereby agrees to make its best reasonable efforts to ship
the Integrated Rio II, with a copy of the Audible Software in-box with each unit
shipped to Diamond's distributors and customers. Diamond agrees to pay for the
cost of making the required copies of the Audible Software for such purposes.
Diamond further agrees to make its best reasonable efforts during the Term, for
as long as the Audible Software meets Diamond's reasonable quality criteria, to
distribute a version of the Audible Software as a core component of future
releases and natural upgrade path(s) of the Rio Products, subject to Diamond's
right to discontinue the product.
4.3 Installation of the Audible Software. With respect to copies of the
------------------------------------
Audible Software distributed by Diamond with Integrated Rio products, Diamond
agrees that, as part of the initial software installation process for the Rio
II, the Audible Software and registration with audible.com will be a default
part of the installation process which may be deselected at the end user's
option.
________________
*** Confidential information has been omitted and filed separately with the
Securities and Exchange Commission.
9
<PAGE>
5. GRANT OF LICENSES
-----------------
5.1 License to Audible Software.
---------------------------
(a) Subject to the terms and conditions of this Agreement, Audible
hereby grants to Diamond a [***] license to use, reproduce, and make, or
have others make for it, one or more copies of the Audible Software in
object code form only, solely to:
(i) Distribute a copy of the Audible Software in connection
with the sale of Integrated Rio Products to end users, pursuant to non-
exclusive sublicenses thereof, solely for the purpose of the end users'
personal use of the Integrated Rio Products, solely to play Content
using the Integrated Rio Products, and not for redistribution;
(ii) Distribute a copy of the Audible Software to OEMs for
further distribution as part of the sale of OEM Rio Products to end
users or on a standalone basis, pursuant to non-exclusive sublicenses
thereof, solely for the purpose of the end users' personal use, and
solely to play Content using the OEM Rio Products, and not for
redistribution;
(iii) Distribute a copy of the Audible Software to end users on a
standalone basis, pursuant to non-exclusive sublicenses thereof, solely
for the purpose of the end users' personal use, and solely to play
Content.
(iv) Implement Diamond's marketing and promotion obligations
under this Agreement; and
(v) Provide support to recipients of the Integrated Rio
Products from Diamond and OEM Rio Products that include Audible
technology as permitted above.
(b) Scope of Use of Audible Software. No right to modify the Audible
--------------------------------
Software or to use or receive any software created by Audible for a third
party is granted to Diamond hereunder. In addition, Diamond shall not, and
shall not permit any third party to, modify, translate, decompile, nor
create or attempt to create, by reverse engineering or otherwise, the
source code from any object code supplied hereunder, or adapt the Audible
Software in any way or use it to create a derivative work. Portions of the
Audible Software may not be used independently of the Audible Software, but
only in connection with enabling the Integrated Rio Products, OEM Rio
Products and personal computers to access and download Content. Any right
not expressly granted to Diamond by this Agreement is hereby expressly
reserved by Audible. No identifying marks, copyright or proprietary right
notices may be deleted from any copy of the Audible Software or from any
portion thereof. Diamond shall not make to any recipient of the Audible
Software any warranty or representation regarding the Audible Software or
Audible's products and/or services which does not comport with Audible's
written representations to users of its products and services, unless such
warranties and
________________
*** Confidential information has been omitted and filed separately with the
Securities and Exchange Commission.
10
<PAGE>
representations have been approved in writing in advance by Audible after
review thereof. All rights not expressly granted to Diamond are hereby
reserved to Audible.
5.2 License to Audible Firmware. Subject to the terms and conditions of
---------------------------
this Agreement, Audible hereby grants to Diamond a [***] non-exclusive,
worldwide right and license to use and reproduce the Audible Firmware for the
sole purpose of performing the Diamond Development Work and the Integration and
making and selling, or having others make and sell for Diamond, Rio Products so
that users of the Integrated Rio Products can use the Rio Products to playback
the Content therewith. No identifying marks, copyright or proprietary right
notices may be deleted from any copy of the Audible Firmware or from any portion
thereof. Diamond shall not make to any recipient of the Rio Products any
warranty or representation regarding the Audible Firmware unless such warranties
and representations have been approved in writing in advance by Audible after
review thereof. All rights not expressly granted to Diamond are hereby reserved
to Audible. Notwithstanding the above, Audible hereby grants to Diamond for the
Term a [***] non-exclusive right and license to use, reproduce and distribute
(pursuant to an end user software license agreement) [***] contained in the
security module of the Audible Firmware for the sole purpose of [***] to
customers of the Integrated Rio Products.
5.3 License to Diamond Data and Software. Subject to the terms of this
------------------------------------
Agreement, Diamond hereby grants to Audible a [***] non-exclusive, worldwide
right and license to use, reproduce and make one or more copies of, adapt, and
create derivative works based upon, and have others do any of the foregoing for
Audible, the APIs, information, software, and tools to be provided to Audible by
Diamond under this Agreement for purposes of developing, supporting, refreshing,
enhancing, and modifying the Audible Software, the Audible Firmware, the
Integrated Rio Products, the Content and any future derivations therefrom
(collectively, the "Diamond Information"). Furthermore, Diamond hereby grants to
Audible a [***] non-exclusive, worldwide right and license to distribute the
Diamond APIs and related software required to interoperate with the Rio Products
and OEM Rio Products to end users, pursuant to non-exclusive sublicenses
thereof, only for the purpose of using them with the Rio Products or OEM Rio
Products.
5.4 Term. The licenses granted to Diamond under this Section 5 shall
----
commence on the Effective Date and expire upon expiration or earlier termination
of the Term as described below. With respect to units of Integrated Rio
Products sold or otherwise transferred to end users prior to the end of the
Term, the licenses to the Integrated Audible Firmware and any Audible Software
distributed in connection therewith to the users (including any Audible Software
otherwise distributed in connection with OEM Rio Products pursuant to this
Agreement) shall continue for as long as the user uses the Rio unit in
compliance with the applicable terms of the licenses from Diamond and Audible.
Upon termination or earlier expiration of the Term, each party shall retain a
limited, non-exclusive [***] license to use the Audible Software and the
Integrated Audible Firmware, in the case of Diamond, and to the Diamond
Information, in the case of Audible, for the sole purpose of providing any
necessary maintenance and support to that party's customers using the Integrated
Rio Products and OEM Rio Products.
5.5 Sublicensing of the Audible Software and Subdistribution of Audible
-------------------------------------------------------------------
Firmware and Audible Software. (a) Any permitted sublicenses granted by
- -----------------------------
Diamond to end users of the
________________
*** Confidential information has been omitted and filed separately with the
Securities and Exchange Commission.
11
<PAGE>
Audible Software as stated in Section 5.1(a) above shall comport with and be
subject to the terms and conditions generally applicable to users of the Client
Software, as such terms are published on or through audible.com, or as such
terms are otherwise provided by Audible, either by means of a direct license
from Audible to the end user or, if the parties agree, by means of a form of end
user agreement that covers the license terms for both Audible's and Diamond's
products and of which both Audible and Diamond are contractual beneficiaries.
(b) To the extent Diamond wishes to distribute the Audible Firmware and/or
Audible Software to a third-party OEM, wholesaler or retailer for sale by that
third-party under a private label of the third-party or as part of specially
designed hardware for that party, Diamond shall have the right to effect such
distribution subject to the terms of this Agreement and Audible's prior written
approval which shall not be unreasonably withheld.
5.6 Export Approvals. Diamond shall obtain, with Audible's cooperation,
----------------
any licenses or approvals that may, from time-to-time, be required by the United
States Department of Commerce, or by any other agency or department of the U.S.
government, prior to undertaking any export or overseas distribution of any
Integrated Rio Products or any Audible Software or other software and data
resulting from the development work of either Audible or Diamond, and hereby
agrees to indemnify and hold harmless Audible, its affiliates, shareholders,
directors, and officers for any damages, costs, penalties, fines, and attorneys'
fees resulting from the failure or alleged failure to obtain such licenses or
approvals.
5.7 Right to Access Content. The parties agree that, notwithstanding any
-----------------------
other provision of this Agreement, at all times all Content will be served,
controlled and delivered from an Audible server. Diamond acknowledges and
agrees that no provision of this Agreement, including this Section 5.7,
constitutes a sublicense of or to Content itself or the right to use Content as
part of any product or service not controlled and served by Audible. All use of
Content is subject to the terms of the licensing agreements between Audible and
content owners.
5.8 Proprietary Rights Notices. In addition to the other terms of this
--------------------------
Agreement, no identifying marks, copyright or proprietary right notices may be
deleted from any copy of any materials provided by one party to the other
hereunder.
5.9 No Other rights. No right or license is granted under this Agreement
---------------
for the use or other utilization of the parties' Intellectual Property, directly
or indirectly, for the benefit of any person or entity other than the party who
owns such property. In no event shall Diamond use, or allow the use of, the
Audible Software, the Audible Firmware (including any modifications thereto), or
any other materials provided by Audible to Diamond in connection with any
service bureau or timesharing arrangement or for purposes not related to the
Integration. Likewise, in no event shall Audible use, or allow the use of, the
Diamond Information (including any modifications thereto), or any other
materials provided by Diamond to Audible in connection with any service bureau
or timesharing arrangement or for purposes not related to the Integration.
Except as expressly provided in this Agreement, no license under any
Intellectual Property rights, express or implied, are granted by one party to
the other under this Agreement. Audible and
________________
*** Confidential information has been omitted and filed separately with the
Securities and Exchange Commission.
12
<PAGE>
Diamond shall have no obligation under this Agreement to provide any hardware,
services or software that are not expressly provided for herein.
6. PROMOTION AND MARKETING OBLIGATIONS
-----------------------------------
6.1 Promotion in General. The parties agree to promote and market
--------------------
audible.com, the Rio Products and the Audible Software in accordance with this
Section 6 and Schedule A..
6.2 Level of Efforts. In achieving the marketing and promotional goals
----------------
stated in Schedule A, the parties shall exercise their best efforts and their
marketing and promotional efforts shall be no less aggressive than the efforts
they undertake with respect to other entities in similar markets that provide
core applications for audio content for use in connection with mobile hardware.
6.3 Promotional Materials. During the Term, each party hereby grants to
---------------------
the other the right to create its own promotional materials to be used in its
distribution and promotion of the Rio Products, audible.com and the Content, but
reserves the right to reasonably approve any and all such materials prior to
their use. Once approved, promotional materials may not be disapproved for
further use unreasonably. All costs associated with the development, production
and delivery of such promotional materials are the responsibility of the party
creating the materials. In addition, each party grants to the other the right
to use the logos and trademarks of the other party which are listed in Schedule
B hereto in promotional materials created by that party, including business
cards, for as long as this Agreement is in force, subject to prior review and
approval by the trademark owner for trademark quality control purposes.
6.4 Conduct. During the term, in conducting all activities relating to
-------
this Agreement, each of Diamond and Audible agrees to: (i) conduct business in a
manner that reflects favorably at all times on the business of the other party;
(ii) not employ deceptive, misleading or unethical practices that are
detrimental to the parties, their products, and services; (iii) not make any
false or misleading representations with regard to the other party's products
and services; (iv) not publish or employ any misleading or deceptive advertising
material; and (v) not make any representations, warranties or guaranties to
anyone with respect to the specifications, features or capabilities of the other
products that are inconsistent with the literature distributed by the other
party, including all warranties and disclaimers contained in such literature.
7. AUDIBLE CONTENT
---------------
7.1 Editorial Control Over Content. Audible reserves the right and
------------------------------
discretion to determine the information to be available as part of the Content
and the inclusion or deletion of any item as part of Content. In addition,
Audible reserves the right to include or delete any item or part of Content from
any Audible Content Bundle as described in Schedule A in the event Audible no
longer possesses the right to use such Content, in which case Audible will
replace the deleted item with an item of Content of similar value and quality.
________________
*** Confidential information has been omitted and filed separately with the
Securities and Exchange Commission.
13
<PAGE>
8. FEES, REVENUE SHARING AND PAYMENTS
----------------------------------
8.1 Revenue Sharing By Audible In consideration of the covenants of
--------------------------
Diamond under Sections 3 and 4 above, and for as long as Diamond Integrates the
Audible Firmware into the Rio Products and/or OEM Rio Products that incorporate
the Audible technology and incorporates Audible's AudibleReady branding into its
Rio Products and on-box, in-box and other marketing branding requirements
described above, Audible agrees to share with Diamond a percentage of revenue
generated from the sales of Content to end users of Integrated Rio Products
("Fees") as follows:
(i) Audible agrees to pay Diamond a royalty equal to [***] percent
([***]%) of Net Content Revenue.
(ii) "Net Content Revenue" shall mean the amount of (y) actual gross
cash receipts derived from transmission of Content to each individual Audible
account of an end user of an Integrated Rio Product, or to a customer that
establishes an Audible account after clicking through to audible.com directly
from Diamond's RioPort web site, in each case for a rolling period of 12 months
following the creation of each such customer account, less (z) any third party
licensor payments, cash, trade or promotional discounts, sales or use taxes,
excise taxes, value-added taxes, and duties.
8.2 Revenue Sharing by Diamond. In consideration of the covenants of
--------------------------
Audible under Section 3.1(a) above, Diamond agrees to pay Audible a royalty
equal to [***] percent ([***] %) of Net Unit Revenue. "Net Unit Revenue" shall
mean the amount of (y) actual gross cash receipts derived by Diamond from the
sale of Rio Products and OEM Rio Products to customers referred to Diamond from
audible.com, less (z) any cash, trade or promotional discounts, sales or use
taxes, excise taxes, value-added taxes, cost of any third-party bundled items,
and duties.
8.3 Payments. Each party shall pay the fees payable to the other under
--------
this Section 8, in United States Dollars, on a quarterly basis, within 30 days
of the end of each calendar quarter during the Term and for as long thereafter
as the customer events that trigger the payment of fees hereunder take place
(i.e., the sale of Content to new Integrated Rio Products customers and the
- ----
referrals sales from audible.com), provided that, for payments after the Term,
the party entitled to the fees is not in material breach of this Agreement.
Such payments shall be accompanied by documentation of the calculation of the
fees for that quarter. For this purpose, this Section 8 survives expiration or
early termination of this Agreement.
8.4 Audit Provisions. Each party agrees to keep records in accordance
----------------
with generally accepted accounting principles and in sufficient detail to permit
a review of the accuracy of all fees and payments under this Agreement. Such
records shall be kept for three years following the termination or expiration of
this Agreement. Upon a party's written request for an audit, the other party
shall permit independent auditors designated by the requesting party which are
reasonably acceptable to the party being audited (which approval shall not be
unreasonably withheld) to examine, during ordinary business hours, books,
records, and materials of the party
________________
*** Confidential information has been omitted and filed separately with the
Securities and Exchange Commission.
14
<PAGE>
being audited, for the purpose of determining the correctness of payments made
or due for the period examined. The cost of any such audit shall be borne by the
party requesting the audit, and the audit shall be conducted in such a manner as
not to interfere with the audited party's normal business activities. The
auditor will sign a confidentiality agreement and will only disclose to the
party requesting the audit any amounts overpaid or underpaid for the period
examined. All requests for audits will be provided in writing and will be made
at least thirty (30) days prior to any audit. Such request will not occur more
than twice each year. In the event an audit identifies an underpayment to a
party, the party which made the underpayment shall promptly pay an amount equal
to the sum of such underpayment.
8.5 Taxes.
-----
(a) Diamond. All taxes, duties, fees and governmental charges of any
-------
kind (except United States or state taxes based on the net income of
Audible) which are levied, assessed or otherwise imposed by or under the
authority of any government or political subdivision on Diamond on any Fees
payable to Diamond hereunder, or on any aspect of this Agreement, shall be
borne by Diamond, and shall not be considered a part of, a deduction from,
or an offset against payments due to Audible hereunder.
(b) Audible. All taxes, duties, fees and governmental charges of any
-------
kind (except United States or state taxes based on the net income of
Audible) which are levied, assessed or otherwise imposed by or under the
authority of any government or political subdivision on Audible on any Fees
payable to Audible hereunder shall be borne by Audible, and shall not be
considered a part of, a deduction from, or an offset against payments due
to Diamond hereunder.
9. MOST FAVORED PARTY TREATMENT
----------------------------
9.1 By Audible. Audible hereby agrees to feature the Rio II on the
----------
audible.com web site in a manner that is at least as favorable as any other
AudibleReady portable audio player.
9.2 By Diamond. Diamond hereby agrees to feature the Audible spoken audio
----------
content service in a manner at least as favorable as any other content service
incorporating a significant spoken audio element.
9.3 Implementation. The parties shall cooperate in good faith to implement
--------------
the most favored party treatment described in this Section 9 during the Term.
10. INTELLECTUAL PROPERTY RIGHTS
----------------------------
10.1 Audible Property. Notwithstanding any provision of this Agreement to
----------------
the contrary, subject to Diamond's ownership rights set forth in Section 10.2,
Diamond hereby acknowledges and agrees that, as between Audible and Diamond, and
for all purposes under the laws of all countries, including Section 117 of the
United States Copyright Act and all applicable patent laws, Audible owns, will
own, and at all times shall continue to own, any and all Intellectual Property
in and to all proprietary materials of Audible provided to Diamond hereunder or
otherwise made available to Diamond or its customers, including but not limited
to, Audible Software, audible.com, Content licenses, Client Software, and
Audible Firmware and all related documentation and information provided by
Audible to Diamond, including without
________________
*** Confidential information has been omitted and filed separately with the
Securities and Exchange Commission.
15
<PAGE>
limitation any updates, upgrades, enhancements, modifications, derivative works,
customizations, patches, or other functionality or materials of any description
arising from any of them whether made by or for Audible or Diamond, and all pre-
existing Audible algorithms, processes, security data, software, and Audible
hardware (collectively, the "Audible Intellectual Property"). Diamond hereby
assigns to Audible all rights, title and interest it may have or acquire in or
to any Audible Intellectual Property and will execute any documents reasonably
required by Audible to evince such assignment.
10.2 Diamond Property. Notwithstanding any other provision of this
----------------
Agreement, subject to Audible's ownership rights set forth in Section 10.1,
above, Audible hereby acknowledges and agrees that, as between Audible and
Diamond, and for all purposes under the laws of all countries, including Section
117 of the United States Copyright Act and all applicable patent laws, Diamond
owns, will own, and at all times shall continue to own, any and all Intellectual
Property in and to the Rio Products and all related documentation and
information provided to Audible, including without limitation the Diamond
Information, and all pre-existing Diamond algorithms, security data, software,
and Diamond hardware (the "Diamond Intellectual Property"). Audible hereby
assigns to Diamond any rights it may acquire in or to the Diamond Intellectual
Property and will execute any documents reasonably required by Audible to evince
such assignment.
10.3 Notices on Copies.
-----------------
(a) Diamond shall place the following notice on all tangible media
containing copies of any Audible Software:
This software is the property of Audible, Inc. Possession and use of
this software must conform strictly to the license agreement between
Diamond and Audible, Inc., and possession does not convey any right
to disclose, reproduce or permit others to use the software without
the specific written authorization of Audible, Inc.
(b) Diamond shall place the following notice on all distributed
copies of the Audible Software:
Copyright (c) 199_ by
Audible, Inc.
All Rights Reserved
(c) Audible shall place the following notice on all tangible media
containing copies of any Diamond APIs:
This software is the property of Diamond Multimedia Systems, Inc.
(Diamond). Possession and use of this software must conform strictly
to the license agreement between Diamond and Audible, Inc., and
possession
________________
*** Confidential information has been omitted and filed separately with the
Securities and Exchange Commission.
16
<PAGE>
does not convey any right to disclose, reproduce or permit others to
use the software without the specific written authorization of
Diamond.
(d) Audible shall place the following notice on all distributed
copies of the Diamond APIs:
Copyright (c) 199_ by
Diamond Multimedia Systems, Inc.
All Rights Reserved
10.4 Trademarks. Diamond hereby acknowledges and agrees that "Audible",
----------
"audible.com", "AudibleReady" and all other variations of "Audible" used by
Audible in connection with its products and services are trademarks belonging to
Audible. Audible hereby acknowledges and agrees that "Diamond", "Rio",
"RioPort" and "RioPort.com" and all other variations of "Diamond" and "Rio" used
by Diamond in connection with its products and services are trademarks belonging
to Diamond. The parties hereby agree that the use by it of any trademark of the
other pursuant to rights granted under this Agreement shall not create any
right, title or interest, in or to the other's marks and that all goodwill
associated with the trademarks of the other party shall belong to that party.
Each party hereby grants to the other a non-exclusive, limited license to use
and reproduce the trademarks of the other listed in Schedule B for purposes of
fulfilling each party's obligations under this Agreement, subject to the prior
review and approval of such uses by the trademark owner, which approval shall
not be unreasonably withheld or delayed.
10.5 Proprietary Notices. Each party agrees that it will not (and it will
-------------------
not allow others to) alter or remove any copyright, trade secret, patent,
proprietary and/or other legal notices contained on or in copies of the
intellectual property and any other tangible materials provided by one party to
the other. The existence of any copyright notice on software or any written
works shall not be construed as an admission, or be deemed to create a
presumption, that publication of such materials has occurred.
10.6 No Other Rights. Except as expressly provided in this Agreement, no
---------------
license under any patents, copyrights, trademarks, trade secrets or any other
intellectual property rights, express or implied, are granted by either party
under this Agreement.
11. LIMITED WARRANTY
----------------
11.1 Each party represents and warrants to the other that (i) it has all
rights and authority necessary to perform under this Agreement; (ii) it has all
rights, licenses and authority necessary to authorize the other party to
exercise the rights granted to the other party under this Agreement; (iii) it
will perform all services under this Agreement in a workmanlike manner, by
qualified personnel, in accordance with high professional standards; and (iv)
its services and products which are the subject matter of this Agreement are, or
will be by January 1, 2000, Year 2000 compliant in that they will record, store,
process, and present calendar dates falling on or after January 1, 2000, in
substantially the same manner and with substantially the same
________________
*** Confidential information has been omitted and filed separately with the
Securities and Exchange Commission.
17
<PAGE>
functionality, as calendar dates falling on or before December 31, 1999, and
without any ambiguity as to the correct date, including leap year date data.,
and will not provide invalid results or end processing as a result of date data
falling after January 1, 2000.
11.2 THE WARRANTY CONTAINED IN SECTION 11.1 ABOVE IS A LIMITED WARRANTY
AND IS THE ONLY WARRANTY MADE BY THE PARTIES HEREUNDER. EACH PARTY MAKES NO
OTHER WARRANTY, WHETHER EXPRESS OR IMPLIED, AND EXPRESSLY EXCLUDED AND
DISCLAIMED ARE ALL WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR
PURPOSE, TITLE, AND NON-INFRINGEMENT. NEITHER PARTY PROVIDES A WARRANTY THAT
OPERATION OF ANY SOFTWARE WILL BE UNINTERRUPTED OR ERROR-FREE.
12. INDEMNIFICATION
---------------
12.1 General Indemnification. (a) Each party (the "Indemnifying Party")
-----------------------
agrees to indemnify, defend and hold harmless the other, and its respective
officers, directors, employees, agents, successors and assigns (collectively,
the "Indemnified Party"), from any and all losses (including reasonable costs
and expenses and reasonable attorney's fees) arising from or in connection with
any of the following:
(a) Any claim arising out of or based on a breach or alleged breach
of the confidentiality obligations and intellectual property provisions set
forth in this Agreement, by the other party or its employees,
subcontractors, agents or other persons within that party's control;
(b) Any claim by a third party to the extent based on any personal
injuries, death or damage to tangible personal or real property resulting
from any act or omission of the other party, or its employees,
subcontractors or agents (solely in their respective capacities as
employees, subcontractors or agents); and
(c) Any claim by a third party to the extent based on any product or
service or representation by the other party, or its employees,
subcontractors, or agents (solely in their respective capacities as
employees, subcontractors or agents).
The Indemnifying Party's obligations are conditioned upon the Indemnified Party
(a) giving the Indemnifying Party prompt written notice of any claim, action,
suit or proceeding for which the Indemnified Party is seeking indemnity; (b)
granting complete control of the defense and settlement to the indemnifying
party; and (c) provides at the Indemnifying Party's expense reasonable
assistance in the defense or settlement thereof..
________________
*** Confidential information has been omitted and filed separately with the
Securities and Exchange Commission.
18
<PAGE>
12.2 Intellectual Property Indemnification.
-------------------------------------
(a) Each party (the "Indemnifying Party") agrees to hold harmless,
indemnify and defend the other party (the "Indemnified Party") from and
against any losses, damages, costs and expenses (including reasonable
attorneys' fees and costs) arising out of or relating to any claims that
the Indemnifying Party's products infringes any United States, Canadian,
Mexican, Japanese, and European Union countries patent, copyright,
trademark, trade secret or other proprietary right of any third party. The
Indemnifying Party shall not be liable in the event that (i) the
Indemnified Party continues marketing, sale, distribution or use of the
Indemnifying Party's products after receiving prior written notice from the
Indemnifying Party that the Indemnified Party should cease such activities
due to a third party claim of infringement against such products, or (ii)
the claim of infringement results from the Indemnified Party's combination
or use of the Indemnifying Party's products with any third party product,
program or data not supplied by the Indemnifying Party.
(b) The Indemnifying Party will pay all damages awarded by a court of
competent jurisdiction or arbitral panel attributable to such claim or
payable in settlement thereof, provided that the Indemnified Party (i)
gives the Indemnifying Party prompt written notice of any claim, action,
suit or proceeding for which the Indemnified Party is seeking indemnity,
(ii) grants the Indemnifying Party complete control of the defense and
settlement of the claim, and (iii) provides at the Indemnifying Party's
expense reasonable assistance in the defense or settlement thereof. If any
settlement results in any ongoing liability to, or prejudices or
detrimentally impacts the Indemnified Party, and such obligation,
liability, prejudice or impact can reasonably be expected to be material,
then such settlement shall require the Indemnified Party's written consent,
which consent shall not be unreasonably be withheld. The Indemnified Party
shall be permitted to participate in such defense and settlement
proceedings at its own expense.
(c) THE PARTIES AGREE THAT THIS SECTION 10.2 STATES THE ENTIRE
LIABILITY OF THE PARTIES TO EACH OTHER WITH RESPECT TO THIRD PARTY CLAIMS
FOR INFRINGEMENT OR MISAPPROPRIATION.
13. LIABILITY, DAMAGES AND DISCLAIMERS
----------------------------------
13.1 Limitation of Damages. Except in connection with payments due to
---------------------
third party indemnification under this Agreement and except for claims relating
to the infringement or misappropriation of the intellectual property or
confidential information of a party, NEITHER PARTY SHALL BE LIABLE TO THE OTHER
OR TO ANY THIRD PARTY FOR ANY: (A) SPECIAL, INDIRECT, INCIDENTAL, PUNITIVE, OR
CONSEQUENTIAL DAMAGES ARISING FROM OR RELATED TO THIS AGREEMENT, INCLUDING
WITHOUT LIMITATION, THE OPERATION OR USE OF DEVELOPMENT WORK OR SERVICES,
INCLUDING SUCH DAMAGES, WITHOUT LIMITATION, ARISING FROM LOSS OF OR DAMAGE TO
DATA OR PROGRAMMING, LOSS OF REVENUE OR PROFITS, FAILURE TO REALIZE SAVINGS OR
OTHER BENEFITS, DAMAGE TO EQUIPMENT, AND
________________
*** Confidential information has been omitted and filed separately with the
Securities and Exchange Commission.
19
<PAGE>
CLAIMS BY ANY THIRD PERSON, EVEN IF THE PARTIES HAS BEEN ADVISED OF THE
POSSIBILITY OF SUCH DAMAGES; AND (B) CLAIMS MADE A SUBJECT OF A LEGAL PROCEEDING
MORE THAN 24 MONTHS AFTER THE DATE UPON WHICH ANY SUCH CAUSE OF ACTION FIRST
AROSE.
13.2 Disclaimer. THE PARTIES HEREBY EXPRESSLY DISCLAIM ANY DAMAGES
----------
DESCRIBED IN SECTION 13.1..
14. TERM
----
14.1 Term. The term of this Agreement shall commence on the Effective
----
Date and continue for an initial period of three years unless terminated earlier
pursuant to Section 14.2 hereof (the "Term"). This Agreement will be
automatically renewed for additional two year periods without notice unless
either party notifies the other party in writing at least 90 days prior to
expiration of the current term that it wishes not to renew this Agreement.
14.2 Termination. This Agreement shall terminate as provided below:
-----------
(a) Audible may, at its option, terminate this Agreement upon 30
days' advance written notice to Diamond in the event that Diamond: files
for bankruptcy or suffers an involuntary bankruptcy that is not dismissed
within ninety (90) days; or ceases to conduct operations in the ordinary
course of business; or fails to comply with any of its material obligations
under this Agreement, which failure to comply continues for thirty (30)
days following Diamond's receipt of written notice from Audible stating the
nature of Diamond's non-compliance, or in the event Diamond fails to
Integrate the Rio II for its first commercial release and such failure is
not due to Audible's material breach of this Agreement;
(b) Diamond may, at its option, terminate this Agreement upon thirty
(30) days' advance written notice to Audible in the event that Audible:
files for bankruptcy or suffers an involuntary bankruptcy that is not
dismissed within ninety (90) days; or ceases to conduct operations in the
ordinary course of business; or fails to comply with any of its material
obligations under this Agreement, which failure to comply continues for 30
days following Audible's receipt of written notice from Diamond stating the
nature of Audible's non-compliance.
14.3 Continuing Liability. The notification by either party of its intent
--------------------
to terminate this Agreement does not relieve either party of any obligations
which have accrued under the terms and conditions of this Agreement, inclusive
of those terms and conditions which extend beyond the date of termination.
14.4 Effect of Termination. Upon termination of this Agreement for any
---------------------
reason, the rights and obligations hereunder (except obligations for payments
and the limited licenses that survive under Section 5.4) shall terminate, except
that the provisions relating to proprietary rights, confidentiality, and
indemnification shall remain in effect. Upon the termination or expiration of
this Agreement, or upon a request by either party hereto, (i) all confidential
________________
*** Confidential information has been omitted and filed separately with the
Securities and Exchange Commission.
20
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information of one party in the possession of the other shall be returned except
to the extent necessary for the receiving party to continue exercising its
rights after the termination or expiration of this Agreement or to protect its
legal rights hereunder; and (ii) within thirty (30) days following termination,
expiration, or receipt of such request, the party under the obligation to return
the confidential information shall certify in writing the completion of such
steps. Termination or expiration of this Agreement shall not effect the
confidential nature of any such information.
15. CONFIDENTIALITY
---------------
15.1 Obligations.
-----------
(a) Each of Diamond and Audible each agree to hold in strictest
confidence any information and material which is related to the other's
business and products, or which is designated as proprietary and/or
confidential herein by either party. Each party agrees not to make use of
such information and material (or cause or permit others to do so) other
than for the performance of this Agreement. Both parties agree that
proprietary and confidential information (whether or not marked as such)
includes, without limitation, information related to research and
development efforts, security data, CODEC information, software (in both
source code and object code form), the terms of agreements with third
parties, implementation data, cost information, supplier information,
customer lists, salaries and business affairs of the parties to this
Agreement or their clients. The parties' obligations of confidentiality
under this Agreement shall survive termination of this Agreement.
(b) Diamond acknowledges that the Client Software, the Audible
Software, and the Audible Firmware are valuable property of Audible
containing trade secrets of Audible and that, in the course of the
implementation of this Agreement, Diamond will become privy to information
regarding the Client Software, the Audible Software, and the Audible
Firmware that Audible regards as proprietary and confidential. In this
regard, Diamond agrees that neither Diamond nor its employees and agents
shall communicate, disclose or in any manner convey any proprietary or
confidential information regarding the Client Software, the Audible
Software, or the Audible Firmware to any person, organization, company,
institution or business without the prior written consent of Audible.
(c) Audible acknowledges that the Diamond technology embodied in the
Rio Products (excluding Audible Firmware and Audible Software) are valuable
property of Diamond containing trade secrets of Diamond and that, in the
course of the implementation of this Agreement, Audible will become privy
to information regarding the Rio Products technology that Diamond regards
as proprietary and confidential. In this regard, Audible agrees that
neither Audible nor its employees and agents shall communicate, disclose or
in any manner convey any proprietary or confidential information regarding
the Rio Products technology to any person, organization, company,
institution or business without the prior written consent of Diamond.
________________
*** Confidential information has been omitted and filed separately with the
Securities and Exchange Commission.
21
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15.2 Exclusions. The parties' obligations under this Section 15 shall not
----------
apply to (a) information that is or becomes a matter of public knowledge through
no fault of or action by the party receiving it, (b) information that prior to
disclosure was rightfully in the possession of the party receiving it as a
result of disclosure by a third party under no obligation or restriction of
confidentiality, (c) information that, subsequent to disclosure, is rightfully
obtained by the receiving party from a third party under no obligation or
restriction of confidentiality, and (d) information that is independently
developed by the receiving party without resort to information of the other
party that is confidential under this Agreement. The parties acknowledge that
the disclosure of confidential information of the other would cause substantial
harm to that party that could not be remedied by the payment of damages alone.
Accordingly, the parties agree that such party will be entitled to preliminary
and permanent injunctive relief and other equitable relief for any breach of
this Section 15.
15.3 Intellectual Property. Notwithstanding the above, the parties
---------------------
agree that whether or not intellectual property of the parties (including
copyrighted works) is disclosed in confidence, the intellectual property rights
of the parties shall remain in effect in accordance with the laws applicable to
the intellectual property in question. Nothing in this Section is intended to
affect the understandings of the parties elsewhere in this Agreement with
respect to ownership and use of intellectual property.
16. GENERAL PROVISIONS
------------------
16.1 Entire Agreement. This Agreement and its schedules constitute the
----------------
entire agreement of the parties on the subject matter of this Agreement and
supersedes all prior agreements and understandings which may exist between the
parties, with respect to the subject matter hereof. All amendments to this
Agreement must be in writing and signed by both parties.
16.2 Successors and Assigns. Except as otherwise expressly provided
----------------------
herein, this Agreement may not be assigned by Diamond voluntarily or by
operation of law, to any other person, entities, firm, or corporation, in whole
or in part, without the express written approval of Audible. Any attempt to do
so shall be void. This Agreement shall apply to, inure to the benefit of, and
be binding upon, the parties' permitted successors and assigns.
16.3 Internal Dispute Resolution. In the event of any problem, claim, or
---------------------------
dispute arising from, out of, or based upon this Agreement, or the business
relationship between the parties, the aggrieved party shall promptly notify the
other party of the existence of the problem, claim, or dispute, and such other
party shall promptly undertake all reasonable efforts to resolve the matter,
including but not limited to, submitting such problem, claim or dispute for
resolution to a Manager of each party. The Managers shall make a good faith
effort to resolve the dispute as quickly as possible. In the event that the
Managers cannot resolve such dispute within 20 days the matter may at the option
of either party, be submitted for resolution to each party's chief executive
with overall responsibility for the subject matter in dispute for a period of 20
days.
16.4 Governing Law and Arbitration. (a) This Agreement shall be governed
-----------------------------
by and construed in accordance with the law of the State of New Jersey
applicable to contracts between
________________
*** Confidential information has been omitted and filed separately with the
Securities and Exchange Commission.
22
<PAGE>
residents of the State of New Jersey, and entered into and performed entirely in
the State of New Jersey, without giving effect to principles of conflict of
laws. Any action instituted by either party arising out of this Agreement for
interim relief shall only be brought, tried and resolved in the State of New
Jersey or the State of California, at the option of the party bringing the
claim.
(b) Any controversy or claim arising out of or relating to this Agreement
for the breach hereof which cannot be settled by the parties pursuant to Section
16.3, shall be settled by arbitration in accordance with the commercial
arbitration rules of the American Arbitration Association as set forth herein.
Each party may select one (1) arbitrator. Selection shall be completed within
20 days of the receipt of a demand for arbitration. If either party fails to
select an arbitrator within such twenty day period, the one (1) selected shall
act as sole arbitrator. If two (2) arbitrators have been selected, the two (2)
arbitrators selected shall select a third within fifteen (15) days after their
selection. If they fail to do so, the third arbitrator shall be selected by the
American Arbitration Association. The arbitrators shall set a date of hearing
no later than sixty (60) days from the date all arbitrators have been selected
and shall enter a decision within thirty (30) days of the end of the proceeding.
The arbitration shall take place at a location to be agreed upon by the parties.
If the parties are unable to agree, the arbitrators shall select a location in
either New jersey, New York City, or California for the arbitration. In any
such arbitration proceeding the arbitrators shall adopt and apply the provisions
of the Federal Rules of Civil Procedure relating to discovery so that each party
shall allow and may obtain discovery of any matter not privileged which is
relevant to the subject matter involved in the arbitration to the same extent as
if such arbitration were a civil action pending in a United States District
Court; provided, however, that each party shall be entitled to no more than four
-----------------
(4) depositions upon oral examination. The award of any arbitration shall be
final, conclusive and binding on the parties hereto. The arbitrators may award
any legal or equitable remedy. The arbitration award shall include an award of
attorneys' fees, in the amount of such fees, to the prevailing party. Judgment
upon any arbitration award may be entered and enforced in any court of competent
jurisdiction. Either party to an arbitration hereunder may bring an action for
injunctive relief against the other party if such action is necessary to
preserve jurisdiction of the arbitrators or to maintain status quo pending the
arbitrators decision.
16.5 Severability. If any provision of this Agreement or the application
------------
thereof to any person or circumstances shall, for any reason and to any extent,
be void or unenforceable, the application of the remainder of this Agreement to
such person or circumstances and the application of such provision to other
persons or circumstances shall be interpreted so as best to reasonably reflect
the intent of the parties hereto. The parties further agree to replace such
void or unenforceable provisions of this Agreement with valid and enforceable
provisions that will achieve, to the extent possible, the economic, business and
other purposes of the void or unenforceable provisions.
16.6 Relationship. The parties agree that their relationship hereunder is
------------
that of independent contractors. Nothing in this Agreement or in the activities
contemplated by the parties pursuant to this Agreement shall be deemed to create
an agency, partnership, employment or joint venture relationship between the
parties. Each party shall be deemed to be acting solely
________________
*** Confidential information has been omitted and filed separately with the
Securities and Exchange Commission.
23
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on its own behalf and, except as expressly stated, has no authority to pledge
the credit of, or incur obligations or perform any acts or make any statements
on behalf of, the other party. Neither arty shall represent to any person or
permit any person to act upon the belief that it has any such authority from the
other party. Neither party's officers or employees, agents or contractors shall
be deemed officers, employees, agents or contractors of the other party for any
purpose.
16.7 Agreement Announcement. The parties agree that upon execution of
----------------------
this Agreement, both parties may announce and/or confirm the existence of this
Agreement to the business, trade and general press, or to any other person or
entity provided that the parties agree on the content, and date of the
announcement, and venue and vehicle for the announcement.
16.8 No Waiver. No waiver of any breach of the Agreement shall be deemed
---------
to be a waiver of any subsequent breach.
16.9 Force Majeure. Neither party will be liable for any failure or
-------------
delay in its performance under this Agreement due to causes, including, but not
limited to, and act of God, an act of civil or military authority, fire,
epidemic, flood, earthquake, riot, war, sabotage, labor shortage or dispute,
failure of suppliers to perform or failures in supply chains, and governmental
action, which are beyond its reasonable control; provided that the delayed
party: (a) gives the other party written notice of such cause promptly, and in
any event within 15 days of discovery thereof; and (b) uses its reasonable
efforts to correct such failure or delay in its performance.
16.10 Attorneys' Fees. A prevailing party in an action to enforce this
---------------
Agreement shall have the right to collect from the other its reasonable expenses
incurred in enforcing this Agreement including attorneys' fees.
16.11 Construction of Agreement. This Agreement has been negotiated by
-------------------------
the parties hereto, shall be deemed to have been drafted by both parties, and
the language hereof shall be construed neutrally and not for or against any
party. Where appropriate the singular shall include the plural. In the event
of a conflict between the provisions of the Agreement and the provisions of any
exhibit, the provisions of the exhibits shall control to the extent of the
conflict but otherwise the two shall be read together as much as possible
16.12 Notices. All notices, requests or other communication required or
-------
permitted hereunder shall be given or made in writing and shall be (i) delivered
personally (including commercial carrier), (ii) sent by overnight mail service,
postage prepaid, or (iii) sent by telecopier or email with confirmation of
receipt and a copy by regular mail, addressed to the person stated below, at the
address noted at the beginning of this Agreement, or at such other address as
may from time to time be designated by such party to the other in writing.
If to Audible:
Audible, Inc.
65 Willowbrook Boulevard
Wayne, New Jersey 0747
Attention: Travis Millman
________________
*** Confidential information has been omitted and filed separately with the
Securities and Exchange Commission.
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With a copy to:
Audible, Inc.
65 Willowbrook Boulevard
Wayne, New Jersey 0747
Attention: Brian Fielding
and to:
PIPER & MARBURY L.L.P.
1200 19th Street, N.W.
Washington, D.C. 20036
Attention: Edwin M. Martin, Jr., Esq.
If to Diamond:
Diamond Multimedia Systems, Inc
2880 Junction Avenue
San Jose, California 9513
Attention: David Watkins
With a copy to:
Diamond Multimedia Systems, Inc
2880 Junction Avenue
San Jose, California 9513
Attention: General Counsel
Any notice, request or other communication shall be deemed to have been
given and to be effective upon receipt or refusal by the addressee. Any party
may change its address for notices hereunder, effective upon giving of notice of
such change hereunder to the other party.
16.13 Other Remedies. Unless expressly stated to the contrary, subject to
--------------
the appropriate limitations of liability herein contained, any and all remedies
herein expressly conferred upon a party shall be deemed cumulative and not
exclusive of any other remedy conferred hereby or by law, and the exercise of
any one remedy shall not preclude the exercise of any other.
16.14 Counterparts. This Agreement may be executed in two or more
-------------
counterparts, each of which will be deemed an original and all of which together
will constitute one instrument.
________________
*** Confidential information has been omitted and filed separately with the
Securities and Exchange Commission.
25
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16.15 Headings. The titles and headings of the various sections and
--------
paragraphs in this Agreement are intended solely for convenience of reference
and are not intended for any other purpose whatsoever or to explain, modify, or
place any construction on any of the provisions of this Agreement.
16.16 No Waiver. A failure of either party to exercise any right provided
---------
for herein shall not be deemed to be a waiver of any right hereunder.
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
by the undersigned, with authority to do so and intending to be legally bound,
as of the Effective Date.
WITNESS: AUDIBLE, INC.
/s/ Andrew J. Huffman
- ------------------------------ -------------------------------
Name Name: Andrew J. Huffman
-------------------------
Title: President & CEO
------------------------
Date: 05-07-99
-------------------------
WITNESS: DIAMOND MULTIMEDIA, INC.
/s/ David Watkins
- ------------------------------ -------------------------------
Name Name: David Watkins
-------------------------
Title: President RIOPORT
-------------------------
Date: 04-22-99
-------------------------
________________
*** Confidential information has been omitted and filed separately with the
Securities and Exchange Commission.
26
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Exhibit 23.1
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders of Audible, Inc:
We consent to the use of our report included herein and to the reference to
our firm under the heading "Experts" in the Registration Statement and
Prospectus.
KPMG LLP
Short Hills, New Jersey
July 14, 1999
